Case Compilation OBLICON Civil Law Review 2 (Atty. Uribe)-Part1.pdf

ARELLANO UNIVERSITY SCHOOL OF LAW Taft Avenue Corner Menlo St. Pasay City, Philippines S/Y 2016-2017, 2ND Semester CIVIL LAW REVIEW 2 Atty. Crisostomo A. Uribe

January 20, 2017 CASE COMPILATION PART 1: OBLICON

Contributors:

Glenn Chua Katrina Ongoco Hannah Matti Espinosa Dominick Botor

1.

OBLIGATIONS (Art. 1156-1304) G.R. No. L-47362 December 19, 1940 JUAN F. VILLARROEL, recurrente-apelante, vs. BERNARDINO ESTRADA, recurrido-apelado.

AVANCEÑA, Pres.: On May 9, 1912, Alejandro F. Callao, the mother of the defendant Juan F. Villarroel, obtained from the spouses Mariano Estrada and Severina a loan of P1,000 payable after seven years (Exhibit A). Alejandra died, leaving as sole heir to the defendant. The spouses Mariano Estrada and Severina also died, leaving as sole heir the plaintiff Bernardino Estrada. On August 9, 1930, the defendant signed a document (Exhibit B) by which it declares the applicant to owe the amount of P1,000, with an interest of 12 percent per year. This action deals with the collection of this amount. The Court of First Instance of Laguna, in which this action was filed, ordered the defendant to pay the claimant the claimed amount of P1,000 with his legal interests of 12 percent a year from August 9, 1930 until its full payment. This sentence is appealed. It will be noted that the parties to the present case are, respectively, the sole heirs of the original creditors and debtor. This action is exercised by virtue of the obligation that the defendant as the only child of the original debtor contracted in favor of the plaintiff, sole heir of the primitive creditors. It is admitted that the amount of P1,000 to which this obligation is

contracted is the same debt of the defendant's mother to the parents of the plaintiff. Although the action to recover the original debt has already been prescribed when the claim was filed in this case, the question that arises in this appeal is mainly whether, notwithstanding such a requirement, the action filed. However, the present action is not based on the original obligation contracted by the defendant's mother, which has already been prescribed, but in which the defendant contracted on August 9, 1930 (Exhibit B) upon assuming the fulfillment of that obligation, Already prescribed. Since the defendant is the sole inheritor of the primitive debtor, with the right to succeed in his inheritance, that debt, brought by his mother legally, although it has lost its effectiveness by prescription, is now, however, for a moral obligation, which is consideration Sufficient to create and render effective and enforceable its obligation voluntarily contracted on August 9, 1930 in Exhibit B. The rule that a new promise to pay a pre-paid debt must be made by the same obligated person or by another legally authorized by it, is not applicable to the present case in which it is not required to fulfill the obligation of the obligee originally, but Of which he voluntarily wanted to assume this obligation. The judgment appealed against is upheld, with costs being paid to the appellant. That is how it is commanded. 2. G.R. No. L-13667 April 29, 1960 PRIMITIVO ANSAY, ETC., ET AL., plaintiffs-appellants, vs.

1 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

THE BOARD OF DIRECTORS OF THE NATIONAL DEVELOPMENT COMPANY, ET AL., defendantsappellees. PARAS, C. J.: On July 25, 1956, appellants filed against appellees in the Court of First Instance of Manila a complaint praying for a 20% Christmas bonus for the years 1954 and 1955. The court a quo on appellees' motion to dismiss, issued the following order: Considering the motion to dismiss filed on 15 August, 1956, set for this morning; considering that at the hearing thereof, only respondents appeared thru counsel and there was no appearance for the plaintiffs although the court waited for sometime for them; considering, however, that petitioners have submitted an opposition which the court will consider together with the arguments presented by respondents and the Exhibits marked and presented, namely, Exhibits 1 to 5, at the hearing of the motion to dismiss; considering that the action in brief is one to compel respondents to declare a Christmas bonus for petitioners workers in the National Development Company; considering that the Court does not see how petitioners may have a cause of action to secure such bonus because: (a) A bonus is an act of liberality and the court takes it that it is not within its judicial powers to command respondents to be liberal; (b) Petitioners admit that respondents are not under legal duty to give such bonus but that they had only ask that such bonus be given to them because it is a moral obligation of respondents to give that but as this Court

understands, it has no power to compel a party to comply with a moral obligation (Art. 142, New Civil Code.). IN VIEW WHEREOF, dismissed. No pronouncement as to costs. A motion for reconsideration of the afore-quoted order was denied. Hence this appeal. Appellants contend that there exists a cause of action in their complaint because their claim rests on moral grounds or what in brief is defined by law as a natural obligation. Since appellants admit that appellees are not under legal obligation to give such claimed bonus; that the grant arises only from a moral obligation or the natural obligation that they discussed in their brief, this Court feels it urgent to reproduce at this point, the definition and meaning of natural obligation. Article 1423 of the New Civil Code classifies obligations into civil or natural. "Civil obligations are a right of action to compel their performance. Natural obligations, not being based on positive law but on equity and natural law, do not grant a right of action to enforce their performance, but after voluntary fulfillment by the obligor, they authorize the retention of what has been delivered or rendered by reason thereof". It is thus readily seen that an element of natural obligation before it can be cognizable by the court is voluntary fulfillment by the obligor. Certainly retention can be ordered but only after there has been voluntary performance. But here there has been no voluntary performance. In fact, the court cannot order the performance. At this point, we would like to reiterate what we said in the case of Philippine Education Co. vs. CIR and the Union of Philippine


Education Co., Employees (NUL) (92 Phil., 381; 48 Off. Gaz., 5278) —

THE HONORABLE MIDPAINTAO L. ADIL, Judge of the Second Branch of the Court of First Instance of Iloilo and SPOUSES PATRICIO CONFESOR and JOVITA VILLAFUERTE, respondents.

x x x x x x x x x From the legal point of view a bonus is not a demandable and enforceable obligation. It is so when it is made a part of the wage or salary compensation. And while it is true that the subsequent case of H. E. Heacock vs. National Labor Union, et al., 95 Phil., 553; 50 Off. Gaz., 4253, we stated that: Even if a bonus is not demandable for not forming part of the wage, salary or compensation of an employee, the same may nevertheless, be granted on equitable consideration as when it was given in the past, though withheld in succeeding two years from low salaried employees due to salary increases. still the facts in said Heacock case are not the same as in the instant one, and hence the ruling applied in said case cannot be considered in the present action. Premises considered, the order appealed from is hereby affirmed, without pronouncement as to costs. 3.

G.R. No. L-48889

May 11, 1989

DEVELOPMENT BANK OF THE PHILIPPINES (DBP), petitioner, vs.

GANCAYCO, J.: The issue posed in this petition for review on certiorari is the validity of a promissory note which was executed in consideration of a previous promissory note the enforcement of which had been barred by prescription. On February 10, 1940 spouses Patricio Confesor and Jovita Villafuerte obtained an agricultural loan from the Agricultural and Industrial Bank (AIB), now the Development of the Philippines (DBP), in the sum of P2,000.00, Philippine Currency, as evidenced by a promissory note of said date whereby they bound themselves jointly and severally to pay the account in ten (10) equal yearly amortizations. As the obligation remained outstanding and unpaid even after the lapse of the aforesaid ten-year period, Confesor, who was by then a member of the Congress of the Philippines, executed a second promissory note on April 11, 1961 expressly acknowledging said loan and promising to pay the same on or before June 15, 1961. The new promissory note reads as follows — I hereby promise to pay the amount covered by my promissory note on or before June 15, 1961. Upon my failure to do so, I hereby agree to the foreclosure of my mortgage. It is understood that if I can secure a certificate of indebtedness from the government of my back pay I will be allowed to pay the amount out of it.


Said spouses not having paid the obligation on the specified date, the DBP filed a complaint dated September 11, 1970 in the City Court of Iloilo City against the spouses for the payment of the loan. After trial on the merits a decision was rendered by the inferior court on December 27, 1976, the dispositive part of which reads as follows: WHEREFORE, premises considered, this Court renders judgment, ordering the defendants Patricio Confesor and Jovita Villafuerte Confesor to pay the plaintiff Development Bank of the Philippines, jointly and severally, (a) the sum of P5,760.96 plus additional daily interest of P l.04 from September 17, 1970, the date Complaint was filed, until said amount is paid; (b) the sum of P576.00 equivalent to ten (10%) of the total claim by way of attorney's fees and incidental expenses plus interest at the legal rate as of September 17,1970, until fully paid; and (c) the costs of the suit. Defendants-spouses appealed therefrom to the Court of First Instance of Iloilo wherein in due course a decision was rendered on April 28, 1978 reversing the appealed decision and dismissing the complaint and counter-claim with costs against the plaintiff. A motion for reconsideration of said decision filed by plaintiff was denied in an order of August 10, 1978. Hence this petition wherein petitioner alleges that the decision of respondent judge is contrary to law and runs counter to decisions of this Court when respondent judge (a) refused to recognize the law that the right to prescription may be renounced or waived; and (b) that in signing the second promissory note respondent Patricio Confesor can bind the conjugal partnership; or otherwise said respondent became liable in his personal capacity. The petition is impressed

with merit. The right to prescription may be waived or renounced. Article 1112 of Civil Code provides: Art. 1112. Persons with capacity to alienate property may renounce prescription already obtained, but not the right to prescribe in the future. Prescription is deemed to have been tacitly renounced when the renunciation results from acts which imply the abandonment of the right acquired. There is no doubt that prescription has set in as to the first promissory note of February 10, 1940. However, when respondent Confesor executed the second promissory note on April 11, 1961 whereby he promised to pay the amount covered by the previous promissory note on or before June 15, 1961, and upon failure to do so, agreed to the foreclosure of the mortgage, said respondent thereby effectively and expressly renounced and waived his right to the prescription of the action covering the first promissory note. This Court had ruled in a similar case that – ... when a debt is already barred by prescription, it cannot be enforced by the creditor. But a new contract recognizing and assuming the prescribed debt would be valid and enforceable ... . 1 Thus, it has been held — Where, therefore, a party acknowledges the correctness of a debt and promises to pay it after the same has prescribed and with full knowledge of


the prescription he thereby waives the benefit of prescription. 2 This is not a mere case of acknowledgment of a debt that has prescribed but a new promise to pay the debt. The consideration of the new promissory note is the pre-existing obligation under the first promissory note. The statutory limitation bars the remedy but does not discharge the debt. A new express promise to pay a debt barred ... will take the case from the operation of the statute of limitations as this proceeds upon the ground that as a statutory limitation merely bars the remedy and does not discharge the debt, there is something more than a mere moral obligation to support a promise, to wit a – pre-existing debt which is a sufficient consideration for the new the new promise; upon this sufficient consideration constitutes, in fact, a new cause of action. 3 ... It is this new promise, either made in express terms or deduced from an acknowledgement as a legal implication, which is to be regarded as reanimating the old promise, or as imparting vitality to the remedy (which by lapse of time had become extinct) and thus enabling the creditor to recover upon his original contract. 4 However, the court a quo held that in signing the promissory note alone, respondent Confesor cannot thereby bind his wife, respondent Jovita Villafuerte, citing Article 166 of the New Civil Code which provides: Art. 166. Unless the wife has been declared a non compos mentis or a spend thrift, or is under civil interdiction or is confined in a leprosarium, the

husband cannot alienate or encumber any real property of the conjugal partnership without, the wife's consent. If she ay compel her to refuses unreasonably to give her consent, the court m grant the same. We disagree. Under Article 165 of the Civil Code, the husband is the administrator of the conjugal partnership. As such administrator, all debts and obligations contracted by the husband for the benefit of the conjugal partnership, are chargeable to the conjugal partnership. 5 No doubt, in this case, respondent Confesor signed the second promissory note for the benefit of the conjugal partnership. Hence the conjugal partnership is liable for this obligation. WHEREFORE, the decision subject of the petition is reversed and set aside and another decision is hereby rendered reinstating the decision of the City Court of Iloilo City of December 27, 1976, without pronouncement as to costs in this instance. This decision is immediately executory and no motion for extension of time to file motion for reconsideration shall be granted. 4.

G.R. No. L-3756 June 30, 1952 SAGRADA ORDEN DE PREDICADORES DEL SANTISMO ROSARIO DE FILIPINAS, plaintiff-appellee, vs. NATIONAL COCONUT CORPORATION, defendantappellant. First Assistant Corporate Counsel Federico C. Alikpala and Assistant Attorney Augusto Kalaw for appellant.


Ramirez and Ortigas for appellee. LABRADOR, J.: This is an action to recover the possession of a piece of real property (land and warehouses) situated in Pandacan Manila, and the rentals for its occupation and use. The land belongs to the plaintiff, in whose name the title was registered before the war. On January 4, 1943, during the Japanese military occupation, the land was acquired by a Japanese corporation by the name of Taiwan Tekkosho for the sum of P140,00, and thereupon title thereto issued in its name (transfer certificate of title No. 64330, Register of Deeds, Manila). After liberation, more specifically on April 4, 1946, the Alien Property Custodian of the United States of America took possession, control, and custody thereof under section 12 of the Trading with the Enemy Act, 40 Stat., 411, for the reason that it belonged to an enemy national. During the year 1946 the property was occupied by the Copra Export Management Company under a custodianship agreement with United States Alien Property Custodian (Exhibit G), and when it vacated the property it was occupied by the defendant herein. The Philippine Government made representations with the Office Alien Property Custodian for the use of property by the Government (see Exhibits 2, 2-A, 2-B, and 1). On March 31, 1947, the defendant was authorized to repair the warehouse on the land, and actually spent thereon the repairs the sum of P26,898.27. In 1948, defendant leased one-third of the warehouse to one Dioscoro Sarile at a monthly rental of P500, which was later raised to P1,000 a month. Sarile did not pay the rents, so action was brought against him. It is not shown, however, if the judgment was ever executed. Plaintiff made claim to the property before the Alien Property Custodian of the United States, but as this was denied, it brought an action in court (Court of First Instance of Manila, civil case No. 5007, entitled "La Sagrada Orden Predicadores de la Provinicia

del Santisimo Rosario de Filipinas," vs. Philippine Alien Property Administrator, defendant, Republic of the Philippines, intervenor) to annul the sale of property of Taiwan Tekkosho, and recover its possession. The Republic of the Philippines was allowed to intervene in the action. The case did not come for trial because the parties presented a joint petition in which it is claimed by plaintiff that the sale in favor of the Taiwan Tekkosho was null and void because it was executed under threats, duress, and intimidation, and it was agreed that the title issued in the name of the Taiwan Tekkosho be cancelled and the original title of plaintiff re-issued; that the claims, rights, title, and interest of the Alien Property Custodian be cancelled and held for naught; that the occupant National Coconut Corporation has until February 28, 1949, to recover its equipment from the property and vacate the premises; that plaintiff, upon entry of judgment, pay to the Philippine Alien Property Administration the sum of P140,000; and that the Philippine Alien Property Administration be free from responsibility or liability for any act of the National Coconut Corporation, etc. Pursuant to the agreement the court rendered judgment releasing the defendant and the intervenor from liability, but reversing to the plaintiff the right to recover from the National Coconut Corporation reasonable rentals for the use and occupation of the premises. (Exhibit A-1.) The present action is to recover the reasonable rentals from August, 1946, the date when the defendant began to occupy the premises, to the date it vacated it. The defendant does not contest its liability for the rentals at the rate of P3,000 per month from February 28, 1949 (the date specified in the judgment in civil case No. 5007), but resists the claim therefor prior to this date. It interposes the defense that it occupied the property in good faith, under no obligation whatsoever to pay rentals for the use and occupation of the warehouse. Judgment was rendered for the plaintiff to recover from the defendant the sum of P3,000 a month, as reasonable rentals, from August, 1946, to the date the defendant vacates the premises. The judgment declares that


plaintiff has always been the owner, as the sale of Japanese purchaser was void ab initio; that the Alien Property Administration never acquired any right to the property, but that it held the same in trust until the determination as to whether or not the owner is an enemy citizen. The trial court further declares that defendant can not claim any better rights than its predecessor, the Alien Property Administration, and that as defendant has used the property and had subleased portion thereof, it must pay reasonable rentals for its occupation. Against this judgment this appeal has been interposed, the following assignment of error having been made on defendantappellant's behalf: The trial court erred in holding the defendant liable for rentals or compensation for the use and occupation of the property from the middle of August, 1946, to December 14, 1948. 1. Want to "ownership rights" of the Philippine Alien Property Administration did not render illegal or invalidate its grant to the defendant of the free use of property. 2. the decision of the Court of First Instance of Manila declaring the sale by the plaintiff to the Japanese purchaser null and void ab initio and that the plaintiff was and has remained as the legal owner of the property, without legal interruption, is not conclusive. 3. Reservation to the plaintiff of the right to recover from the defendant corporation not binding on the later; 4. Use of the property for commercial purposes in itself alone does not justify payment of rentals. 5. Defendant's possession was in good faith.

6. Defendant's possession in the nature of usufruct. In reply, plaintiff-appellee's counsel contends that the Philippine Allien Property Administration (PAPA) was a mere administrator of the owner (who ultimately was decided to be plaintiff), and that as defendant has used it for commercial purposes and has leased portion of it, it should be responsible therefore to the owner, who had been deprived of the possession for so many years. (Appellee's brief, pp. 20, 23.) We can not understand how the trial court, from the mere fact that plaintiff-appellee was the owner of the property and the defendant-appellant the occupant, which used for its own benefit but by the express permission of the Alien Property Custodian of the United States, so easily jumped to the conclusion that the occupant is liable for the value of such use and occupation. If defendant-appellant is liable at all, its obligations, must arise from any of the four sources of obligations, namley, law, contract or quasi-contract, crime, or negligence. (Article 1089, Spanish Civil Code.) Defendant-appellant is not guilty of any offense at all, because it entered the premises and occupied it with the permission of the entity which had the legal control and administration thereof, the Allien Property Administration. Neither was there any negligence on its part. There was also no privity (of contract or obligation) between the Alien Property Custodian and the Taiwan Tekkosho, which had secured the possession of the property from the plaintiff-appellee by the use of duress, such that the Alien Property Custodian or its permittee (defendant-appellant) may be held responsible for the supposed illegality of the occupation of the property by the said Taiwan Tekkosho. The Allien Property Administration had the control and administration of the property not as successor to the interests of the enemy holder of the title, the Taiwan Tekkosho, but by express provision of law (Trading with the Enemy Act of the United States, 40 Stat., 411; 50 U.S.C.A., 189). Neither is it a trustee of the former owner, the plaintiff-appellee herein, but a


trustee of then Government of the United States (32 Op. Atty. Gen. 249; 50 U.S.C.A. 283), in its own right, to the exclusion of, and against the claim or title of, the enemy owner. (Youghioheny & Ohio Coal Co. vs. Lasevich [1920], 179 N.W., 355; 171 Wis., 347; U.S.C.A., 282-283.) From August, 1946, when defendant-appellant took possession, to the late of judgment on February 28, 1948, Allien Property Administration had the absolute control of the property as trustee of the Government of the United States, with power to dispose of it by sale or otherwise, as though it were the absolute owner. (U.S vs. Chemical Foundation [C.C.A. Del. 1925], 5 F. [2d], 191; 50 U.S.C.A., 283.) Therefore, even if defendantappellant were liable to the Allien Property Administration for rentals, these would not accrue to the benefit of the plaintiffappellee, the owner, but to the United States Government. But there is another ground why the claim or rentals can not be made against defendant-appellant. There was no agreement between the Alien Property Custodian and the defendantappellant for the latter to pay rentals on the property. The existence of an implied agreement to that effect is contrary to the circumstances. The copra Export Management Company, which preceded the defendant-appellant, in the possession and use of the property, does not appear to have paid rentals therefor, as it occupied it by what the parties denominated a "custodianship agreement," and there is no provision therein for the payment of rentals or of any compensation for its custody and or occupation and the use. The Trading with the Enemy Act, as originally enacted, was purely a measure of conversation, hence, it is very unlikely that rentals were demanded for the use of the property. When the National coconut Corporation succeeded the Copra Export Management Company in the possession and use of the property, it must have been also free from payment of rentals, especially as it was Government corporation, and steps where then being taken by the Philippine Government to secure the property for the National Coconut Corporation. So that the circumstances do not justify the finding that there was an implied

agreement that the defendant-appellant was to pay for the use and occupation of the premises at all. The above considerations show that plaintiff-appellee's claim for rentals before it obtained the judgment annulling the sale of the Taiwan Tekkosho may not be predicated on any negligence or offense of the defendant-appellant, or any contract, express or implied, because the Allien Property Administration was neither a trustee of plaintiff-appellee, nor a privy to the obligations of the Taiwan Tekkosho, its title being based by legal provision of the seizure of enemy property. We have also tried in vain to find a law or provision thereof, or any principle in quasi contracts or equity, upon which the claim can be supported. On the contrary, as defendant-appellant entered into possession without any expectation of liability for such use and occupation, it is only fair and just that it may not be held liable therefor. And as to the rents it collected from its lessee, the same should accrue to it as a possessor in good faith, as this Court has already expressly held. (Resolution, National Coconut Corporation vs. Geronimo, 83 Phil. 467.) Lastly, the reservation of this action may not be considered as vesting a new right; if no right to claim for rentals existed at the time of the reservation, no rights can arise or accrue from such reservation alone. Wherefore, the part of the judgment appealed from, which sentences defendant-appellant to pay rentals from August, 1946, to February 28, 1949, is hereby reversed. In all other respects the judgment is affirmed. Costs of this appeal shall be against the plaintiff-appellee. 5. G.R. No. 183204 January 13, 2014


THE METROPOLITAN BANK AND TRUST COMPANY, Petitioner, vs. ANA GRACE ROSALES AND YO YUK TO, Respondents.

D E C I S I O N 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 Certiorari3 under Rule 45 of the Rules of Court assails the April 2, 2008 Decision4 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 Account10 with petitioner’s Pritil-Tondo Branch.11 As of August 4, 2004, respondents’ Joint Peso Account showed a balance of P2,515,693.52.12 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 PritilTondo Branch a Joint Dollar Account15 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.20 Petitioner 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$11,800.00 were the same as those 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, 2003.28 Neither 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 Complaint44 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$75,000.0050 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 Decision55 finding petitioner liable for damages for breach of contract.56 The 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 P50,000.00, moral damages of P50,000.00, exemplary damages of P30,000.00 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. 04110895 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.74 Respondents 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.75 Furthermore, 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. x x x x JOINT ACCOUNT x x x x


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 Petitioner’s reliance on the "Hold Out" clause in the Application and Agreement for Deposit Account is misplaced. The "Hold Out" clause applies only if there is a valid and existing obligation arising from any of the sources of obligation enumerated in Article 115779 of the Civil Code, to wit: law, contracts, quasi-contracts, 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 222985 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. 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. WHEREFORE, the Petition is hereby DENIED. The assailed April 2, 2008 Decision and the May 30, 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 89086 are hereby AFFIRMED. SO ORDERED. 6. G.R. No. 179337 April 30, 2008 JOSEPH SALUDAGA, petitioner, vs. FAR EASTERN UNIVERSITY and EDILBERTO C. DE JESUS in his capacity as President of FEU, respondents. D E C I S I O N YNARES-SANTIAGO, J.: This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court assails the June 29, 2007 Decision2 of the Court of

Appeals in CA-G.R. CV No. 87050, nullifying and setting aside the November 10, 2004 Decision3 of the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 and dismissing the complaint filed by petitioner; as well as its August 23, 2007 Resolution4 denying the Motion for Reconsideration.5 The antecedent facts are as follows: Petitioner Joseph Saludaga was a sophomore law student of respondent Far Eastern University (FEU) when he was shot by Alejandro Rosete (Rosete), one of the security guards on duty at the school premises on August 18, 1996. Petitioner was rushed to FEU-Dr. Nicanor Reyes Medical Foundation (FEU-NRMF) due to the wound he sustained.6 Meanwhile, Rosete was brought to the police station where he explained that the shooting was accidental. He was eventually released considering that no formal complaint was filed against him. Petitioner thereafter filed a complaint for damages against respondents on the ground that they breached their obligation to provide students with a safe and secure environment and an atmosphere conducive to learning. Respondents, in turn, filed a Third-Party Complaint7 against Galaxy Development and Management Corporation (Galaxy), the agency contracted by respondent FEU to provide security services within its premises and Mariano D. Imperial (Imperial), Galaxy's President, to indemnify them for whatever would be adjudged in favor of petitioner, if any; and to pay attorney's fees and cost of the suit. On the other hand, Galaxy and Imperial filed a Fourth-Party Complaint against AFP General Insurance.8 On November 10, 2004, the trial court rendered a decision in favor of petitioner, the dispositive portion of which reads: WHEREFORE, from the foregoing, judgment is hereby rendered ordering:


1. FEU and Edilberto de Jesus, in his capacity as president of FEU to pay jointly and severally Joseph Saludaga the amount of P35,298.25 for actual damages with 12% interest per annum from the filing of the complaint until fully paid; moral damages of P300,000.00, exemplary damages of P500,000.00, attorney's fees of P100,000.00 and cost of the suit; 2. Galaxy Management and Development Corp. and its president, Col. Mariano Imperial to indemnify jointly and severally 3rd party plaintiffs (FEU and Edilberto de Jesus in his capacity as President of FEU) for the above-mentioned amounts; 3. And the 4th party complaint is dismissed for lack of cause of action. No pronouncement as to costs. SO ORDERED.9 Respondents appealed to the Court of Appeals which rendered the assailed Decision, the decretal portion of which provides, viz: WHEREFORE, the appeal is hereby GRANTED. The Decision dated November 10, 2004 is hereby REVERSED and SET ASIDE. The complaint filed by Joseph Saludaga against appellant Far Eastern University and its President in Civil Case No. 98-89483 is DISMISSED. SO ORDERED.10 Petitioner filed a Motion for Reconsideration which was denied; hence, the instant petition based on the following grounds: THE COURT OF APPEALS SERIOUSLY ERRED IN MANNER CONTRARY TO LAW AND JURISPRUDENCE IN RULING THAT: 5.1. THE SHOOTING INCIDENT IS A FORTUITOUS EVENT;

5.2. RESPONDENTS ARE NOT LIABLE FOR DAMAGES FOR THE INJURY RESULTING FROM A GUNSHOT WOUND SUFFERED BY THE PETITIONER FROM THE HANDS OF NO LESS THAN THEIR OWN SECURITY GUARD IN VIOLATION OF THEIR BUILT-IN CONTRACTUAL OBLIGATION TO PETITIONER, BEING THEIR LAW STUDENT AT THAT TIME, TO PROVIDE HIM WITH A SAFE AND SECURE EDUCATIONAL ENVIRONMENT; 5.3. SECURITY GAURD, ALEJANDRO ROSETE, WHO SHOT PETITIONER WHILE HE WAS WALKING ON HIS WAY TO THE LAW LIBRARY OF RESPONDENT FEU IS NOT THEIR EMPLOYEE BY VIRTUE OF THE CONTRACT FOR SECURITY SERVICES BETWEEN GALAXY AND FEU NOTWITHSTANDING THE FACT THAT PETITIONER, NOT BEING A PARTY TO IT, IS NOT BOUND BY THE SAME UNDER THE PRINCIPLE OF RELATIVITY OF CONTRACTS; and 5.4. RESPONDENT EXERCISED DUE DILIGENCE IN SELECTING GALAXY AS THE AGENCY WHICH WOULD PROVIDE SECURITY SERVICES WITHIN THE PREMISES OF RESPONDENT FEU.11 Petitioner is suing respondents for damages based on the alleged breach of student-school contract for a safe learning environment. The pertinent portions of petitioner's Complaint read: 6.0. At the time of plaintiff's confinement, the defendants or any of their representative did not bother to visit and inquire about his condition. This abject indifference on the part of the defendants continued even after plaintiff was discharged from the hospital when not even a word of consolation was heard from them. Plaintiff waited for more than one (1) year for the defendants to perform their moral obligation but the wait was fruitless. This indifference and total lack of concern of defendants served to exacerbate plaintiff's miserable condition.


x x x x 11.0. Defendants are responsible for ensuring the safety of its students while the latter are within the University premises. And that should anything untoward happens to any of its students while they are within the University's premises shall be the responsibility of the defendants. In this case, defendants, despite being legally and morally bound, miserably failed to protect plaintiff from injury and thereafter, to mitigate and compensate plaintiff for said injury; 12.0. When plaintiff enrolled with defendant FEU, a contract was entered into between them. Under this contract, defendants are supposed to ensure that adequate steps are taken to provide an atmosphere conducive to study and ensure the safety of the plaintiff while inside defendant FEU's premises. In the instant case, the latter breached this contract when defendant allowed harm to befall upon the plaintiff when he was shot at by, of all people, their security guard who was tasked to maintain peace inside the campus.12 In Philippine School of Business Administration v. Court of Appeals,13 we held that: 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. 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.14 It is undisputed that petitioner was enrolled as a sophomore law student in respondent FEU. As such, there was created a contractual obligation between the two parties. On petitioner's part, he was obliged to comply with the rules and regulations of the school. On the other hand, respondent FEU, as a learning institution is mandated to impart knowledge and equip its students with the necessary skills to pursue higher education or a profession. At the same time, it is obliged to ensure and take adequate steps to maintain peace and order within the campus. It is settled that in culpa contractual, the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief.15 In the instant case, we find that, when petitioner was shot inside the campus by no less the security guard who was hired to maintain peace and secure the premises, there is a prima facie showing that respondents failed to comply with its obligation to provide a safe and secure environment to its students. In order to avoid liability, however, respondents aver that the shooting incident was a fortuitous event because they could not have reasonably foreseen nor avoided the accident caused by Rosete as he was not their employee;16 and that they complied with their obligation to ensure a safe learning environment for


their students by having exercised due diligence in selecting the security services of Galaxy. After a thorough review of the records, we find that respondents failed to discharge the burden of proving that they exercised due diligence in providing a safe learning environment for their students. They failed to prove that they ensured that the guards assigned in the campus met the requirements stipulated in the Security Service Agreement. Indeed, certain documents about Galaxy were presented during trial; however, no evidence as to the qualifications of Rosete as a security guard for the university was offered. Respondents also failed to show that they undertook steps to ascertain and confirm that the security guards assigned to them actually possess the qualifications required in the Security Service Agreement. It was not proven that they examined the clearances, psychiatric test results, 201 files, and other vital documents enumerated in its contract with Galaxy. Total reliance on the security agency about these matters or failure to check the papers stating the qualifications of the guards is negligence on the part of respondents. A learning institution should not be allowed to completely relinquish or abdicate security matters in its premises to the security agency it hired. To do so would result to contracting away its inherent obligation to ensure a safe learning environment for its students. Consequently, respondents' defense of force majeure must fail. In order for force majeure to be considered, respondents must show that no negligence or misconduct was committed that may have occasioned the loss. An act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not

exempt one from liability. When the effect is found to be partly the result of a person's participation - whether by active intervention, neglect or failure to act - the whole occurrence is humanized and removed from the rules applicable to acts of God.17 Article 1170 of the Civil Code provides that those who are negligent in the performance of their obligations are liable for damages. Accordingly, for breach of contract due to negligence in providing a safe learning environment, respondent FEU is liable to petitioner for damages. It is essential in the award of damages that the claimant must have satisfactorily proven during the trial the existence of the factual basis of the damages and its causal connection to defendant's acts.18 In the instant case, it was established that petitioner spent P35,298.25 for his hospitalization and other medical expenses.19 While the trial court correctly imposed interest on said amount, however, the case at bar involves an obligation arising from a contract and not a loan or forbearance of money. As such, the proper rate of legal interest is six percent (6%) per annum of the amount demanded. Such interest shall continue to run from the filing of the complaint until the finality of this Decision.20 After this Decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction. The other expenses being claimed by petitioner, such as transportation expenses and those incurred in hiring a personal assistant while recuperating were however not duly supported by receipts.21 In the absence thereof, no actual damages may be awarded. Nonetheless, temperate damages under Art. 2224 of the Civil Code may be recovered where it has been shown that the claimant suffered some pecuniary loss but the amount thereof cannot be proved with certainty. Hence, the amount of P20,000.00 as temperate damages is awarded to petitioner.


As regards the award of moral damages, there is no hard and fast rule in the determination of what would be a fair amount of moral damages since each case must be governed by its own peculiar circumstances.22 The testimony of petitioner about his physical suffering, mental anguish, fright, serious anxiety, and moral shock resulting from the shooting incident23 justify the award of moral damages. However, moral damages are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer. The award is not meant to enrich the complainant at the expense of the defendant, but to enable the injured party to obtain means, diversion, or amusements that will serve to obviate the moral suffering he has undergone. It is aimed at the restoration, within the limits of the possible, of the spiritual status quo ante, and should be proportionate to the suffering inflicted. Trial courts must then guard against the award of exorbitant damages; they should exercise balanced restrained and measured objectivity to avoid suspicion that it was due to passion, prejudice, or corruption on the part of the trial court.24 We deem it just and reasonable under the circumstances to award petitioner moral damages in the amount of P100,000.00. Likewise, attorney's fees and litigation expenses in the amount of P50,000.00 as part of damages is reasonable in view of Article 2208 of the Civil Code.25 However, the award of exemplary damages is deleted considering the absence of proof that respondents acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. We note that the trial court held respondent De Jesus solidarily liable with respondent FEU. In Powton Conglomerate, Inc. v. Agcolicol,26 we held that: [A] corporation is invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions, corporate officers who entered into

contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter. Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when - (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made by a specific provision of law personally answerable for his corporate action.27 None of the foregoing exceptions was established in the instant case; hence, respondent De Jesus should not be held solidarily liable with respondent FEU. Incidentally, although the main cause of action in the instant case is the breach of the school-student contract, petitioner, in the alternative, also holds respondents vicariously liable under Article 2180 of the Civil Code, which provides: Art. 2180. The obligation imposed by Article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible. x x x x Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry. x x x x


The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage. We agree with the findings of the Court of Appeals that respondents cannot be held liable for damages under Art. 2180 of the Civil Code because respondents are not the employers of Rosete. The latter was employed by Galaxy. The instructions issued by respondents' Security Consultant to Galaxy and its security guards are ordinarily no more than requests commonly envisaged in the contract for services entered into by a principal and a security agency. They cannot be construed as the element of control as to treat respondents as the employers of Rosete.28 As held in Mercury Drug Corporation v. Libunao:29 In Soliman, Jr. v. Tuazon,30 we held that where the security agency recruits, hires and assigns the works of its watchmen or security guards to a client, the employer of such guards or watchmen is such agency, and not the client, since the latter has no hand in selecting the security guards. Thus, the duty to observe the diligence of a good father of a family cannot be demanded from the said client: … [I]t is settled in our jurisdiction that where the security agency, as here, recruits, hires and assigns the work of its watchmen or security guards, the agency is the employer of such guards or watchmen. Liability for illegal or harmful acts committed by the security guards attaches to the employer agency, and not to the clients or customers of such agency. As a general rule, a client or customer of a security agency has no hand in selecting who among the pool of security guards or watchmen employed by the agency shall be assigned to it; the duty to observe the diligence of a good father of a family in the selection of the guards cannot, in

the ordinary course of events, be demanded from the client whose premises or property are protected by the security guards. x x x x The fact that a client company may give instructions or directions to the security guards assigned to it, does not, by itself, render the client responsible as an employer of the security guards concerned and liable for their wrongful acts or omissions.31 We now come to respondents' Third Party Claim against Galaxy. In Firestone Tire and Rubber Company of the Philippines v. Tempengko,32 we held that: The third-party complaint is, therefore, a procedural device whereby a 'third party' who is neither a party nor privy to the act or deed complained of by the plaintiff, may be brought into the case with leave of court, by the defendant, who acts as third-party plaintiff to enforce against such third-party defendant a right for contribution, indemnity, subrogation or any other relief, in respect of the plaintiff's claim. The third-party complaint is actually independent of and separate and distinct from the plaintiff's complaint. Were it not for this provision of the Rules of Court, it would have to be filed independently and separately from the original complaint by the defendant against the thirdparty. But the Rules permit defendant to bring in a third-party defendant or so to speak, to litigate his separate cause of action in respect of plaintiff's claim against a third-party in the original and principal case with the object of avoiding circuitry of action and unnecessary proliferation of law suits and of disposing expeditiously in one litigation the entire subject matter arising from one particular set of facts.33 Respondents and Galaxy were able to litigate their respective claims and defenses in the course of the trial of petitioner's complaint. Evidence duly supports the findings of the trial court


that Galaxy is negligent not only in the selection of its employees but also in their supervision. Indeed, no administrative sanction was imposed against Rosete despite the shooting incident; moreover, he was even allowed to go on leave of absence which led eventually to his disappearance.34 Galaxy also failed to monitor petitioner's condition or extend the necessary assistance, other than the P5,000.00 initially given to petitioner. Galaxy and Imperial failed to make good their pledge to reimburse petitioner's medical expenses. For these acts of negligence and for having supplied respondent FEU with an unqualified security guard, which resulted to the latter's breach of obligation to petitioner, it is proper to hold Galaxy liable to respondent FEU for such damages equivalent to the above-mentioned amounts awarded to petitioner. Unlike respondent De Jesus, we deem Imperial to be solidarily liable with Galaxy for being grossly negligent in directing the affairs of the security agency. It was Imperial who assured petitioner that his medical expenses will be shouldered by Galaxy but said representations were not fulfilled because they presumed that petitioner and his family were no longer interested in filing a formal complaint against them.35 WHEREFORE, the petition is GRANTED. The June 29, 2007 Decision of the Court of Appeals in CA-G.R. CV No. 87050 nullifying the Decision of the trial court and dismissing the complaint as well as the August 23, 2007 Resolution denying the Motion for Reconsideration are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Manila, Branch 2, in Civil Case No. 98-89483 finding respondent FEU liable for damages for breach of its obligation to provide students with a safe and secure learning atmosphere, is AFFIRMED with the following MODIFICATIONS:

a. respondent Far Eastern University (FEU) is ORDERED to pay petitioner actual damages in the amount of P35,298.25, plus 6% interest per annum from the filing of the complaint until the finality of this Decision. After this decision becomes final and executory, the applicable rate shall be twelve percent (12%) per annum until its satisfaction; b. respondent FEU is also ORDERED to pay petitioner temperate damages in the amount of P20,000.00; moral damages in the amount of P100,000.00; and attorney's fees and litigation expenses in the amount of P50,000.00; c. the award of exemplary damages is DELETED. The Complaint against respondent Edilberto C. De Jesus is DISMISSED. The counterclaims of respondents are likewise DISMISSED. Galaxy Development and Management Corporation (Galaxy) and its president, Mariano D. Imperial are ORDERED to jointly and severally pay respondent FEU damages equivalent to the abovementioned amounts awarded to petitioner. 7. G.R. No. L-36840 May 22, 1973 PEOPLE'S CAR INC., plaintiff-appellant, vs. COMMANDO SECURITY SERVICE AGENCY, defendantappellee. TEEHANKEE, J.:


In this appeal from the adverse judgment of the Davao court of first instance limiting plaintiff-appellant's recovery under its complaint to the sum of P1,000.00 instead of the actual damages of P8,489.10 claimed and suffered by it as a direct result of the wrongful acts of defendant security agency's guard assigned at plaintiff's premises in pursuance of their "Guard Service Contract", the Court finds merit in the appeal and accordingly reverses the trial court's judgment. The appeal was certified to this Court by a special division of the Court of Appeals on a four-to-one vote as per its resolution of April 14, 1973 that "Since the case was submitted to the court a quo for decision on the strength of the stipulation of facts, only questions of law can be involved in the present appeal." The Court has accepted such certification and docketed this appeal on the strength of its own finding from the records that plaintiff's notice of appeal was expressly to this Court (not to the appellate court)" on pure questions of law" 1 and its record on appeal accordingly prayed that" the corresponding records be certified and forwarded to the Honorable Supreme Court." 2 The trial court so approved the same 3 on July 3, 1971 instead of having required the filing of a petition for review of the judgment sought to be appealed from directly with this Court, in accordance with the provisions of Republic Act 5440. By some unexplained and hitherto undiscovered error of the clerk of court, furthermore, the record on appeal was erroneously forwarded to the appellate court rather than to this Court. The parties submitted the case for judgment on a stipulation of facts. There is thus no dispute as to the factual bases of plaintiff's complaint for recovery of actual damages against defendant, to wit, that under the subsisting "Guard Service Contract" between the parties, defendant-appellee as a duly licensed security service agency undertook in consideration of the payments made by plaintiff to safeguard and protect the business premises of

(plaintiff) from theft, pilferage, robbery, vandalism and all other unlawful acts of any person or person prejudicial to the interest of (plaintiff)." 4 On April 5, 1970 at around 1:00 A.M., however, defendant's security guard on duty at plaintiff's premises, "without any authority, consent, approval, knowledge or orders of the plaintiff and/or defendant brought out of the compound of the plaintiff a car belonging to its customer, and drove said car for a place or places unknown, abandoning his post as such security guard on duty inside the plaintiff's compound, and while so driving said car in one of the City streets lost control of said car, causing the same to fall into a ditch along J.P. Laurel St., Davao City by reason of which the plaintiff's complaint for qualified theft against said driver, was blottered in the office of the Davao City Police Department." 5 As a result of these wrongful acts of defendant's security guard, the car of plaintiff's customer, Joseph Luy, which had been left with plaintiff for servicing and maintenance, "suffered extensive damage in the total amount of P7,079." 6 besides the car rental value "chargeable to defendant" in the sum of P1,410.00 for a car that plaintiff had to rent and make available to its said customer to enable him to pursue his business and occupation for the period of forty-seven (47) days (from April 25 to June 10, 1970) that it took plaintiff to repair the damaged car, 7 or total actual damages incurred by plaintiff in the sum of P8,489.10. Plaintiff claimed that defendant was liable for the entire amount under paragraph 5 of their contract whereunder defendant assumed "sole responsibility for the acts done during their watch hours" by its guards, whereas defendant contended, without questioning the amount of the actual damages incurred by plaintiff, that its liability "shall not exceed one thousand (P1,000.00) pesos per guard post" under paragraph 4 of their contract.


The parties thus likewise stipulated on this sole issue submitted by them for adjudication, as follows: Interpretation of the contract, as to the extent of the liability of the defendant to the plaintiff by reason of the acts of the employees of the defendant is the only issue to be resolved. The defendant relies on Par. 4 of the contract to support its contention while the plaintiff relies on Par. 5 of the same contract in support of its claims against the defendant. For ready reference they are quoted hereunder: 'Par. 4. — Party of the Second Part (defendant) through the negligence of its guards, after an investigation has been conducted by the Party of the First Part (plaintiff) wherein the Party of the Second Part has been duly represented shall assume full responsibilities for any loss or damages that may occur to any property of the Party of the First Part for which it is accountable, during the watch hours of the Party of the Second Part, provided the same is reported to the Party of the Second Part within twenty-four (24) hours of the occurrence, except where such loss or damage is due to force majeure, provided however that after the proper investigation to be made thereof that the guard on post is found negligent and that the amount of the loss shall not exceed ONE THOUSAND (P1,000.00) PESOS per guard post.' 'Par. 5 — The party of the Second Part assumes the responsibility for the proper performance by the guards employed, of their duties and (shall) be solely responsible for the acts done during their watch hours, the Party of the First Part being specifically released from any and all liabilities to the former's employee or to the third parties arising from the acts or omissions done by the guard during their tour of duty.' ... 8

The trial court, misreading the above-quoted contractual provisions, held that "the liability of the defendant in favor of the plaintiff falls under paragraph 4 of the Guard Service Contract" and rendered judgment "finding the defendant liable to the plaintiff in the amount of P1,000.00 with costs." Hence, this appeal, which, as already indicated, is meritorious and must be granted. Paragraph 4 of the contract, which limits defendant's liability for the amount of loss or damage to any property of plaintiff to "P1,000.00 per guard post," is by its own terms applicable only for loss or damage 'through the negligence of its guards ... during the watch hours" provided that the same is duly reported by plaintiff within 24 hours of the occurrence and the guard's negligence is verified after proper investigation with the attendance of both contracting parties. Said paragraph is manifestly inapplicable to the stipulated facts of record, which involve neither property of plaintiff that has been lost or damaged at its premises nor mere negligence of defendant's security guard on duty. Here, instead of defendant, through its assigned security guards, complying with its contractual undertaking 'to safeguard and protect the business premises of (plaintiff) from theft, robbery, vandalism and all other unlawful acts of any person or persons," defendant's own guard on duty unlawfully and wrongfully drove out of plaintiffs premises a customer's car, lost control of it on the highway causing it to fall into a ditch, thereby directly causing plaintiff to incur actual damages in the total amount of P8,489.10. Defendant is therefore undoubtedly liable to indemnify plaintiff for the entire damages thus incurred, since under paragraph 5 of their contract it "assumed the responsibility for the proper performance by the guards employed of their duties and (contracted to) be solely responsible for the acts done during


their watch hours" and "specifically released (plaintiff) from any and all liabilities ... to the third parties arising from the acts or omissions done by the guards during their tour of duty." As plaintiff had duly discharged its liability to the third party, its customer, Joseph Luy, for the undisputed damages of P8,489.10 caused said customer, due to the wanton and unlawful act of defendant's guard, defendant in turn was clearly liable under the terms of paragraph 5 of their contract to indemnify plaintiff in the same amount. The trial court's approach that "had plaintiff understood the liability of the defendant to fall under paragraph 5, it should have told Joseph Luy, owner of the car, that under the Guard Service Contract, it was not liable for the damage but the defendant and had Luy insisted on the liability of the plaintiff, the latter should have challenged him to bring the matter to court. If Luy accepted the challenge and instituted an action against the plaintiff, it should have filed a third-party complaint against the Commando Security Service Agency. But if Luy instituted the action against the plaintiff and the defendant, the plaintiff should have filed a crossclaim against the latter," 9 was unduly technical and unrealistic and untenable. Plaintiff was in law liable to its customer for the damages caused the customer's car, which had been entrusted into its custody. Plaintiff therefore was in law justified in making good such damages and relying in turn on defendant to honor its contract and indemnify it for such undisputed damages, which had been caused directly by the unlawful and wrongful acts of defendant's security guard in breach of their contract. As ordained in Article 1159, Civil Code, "obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." Plaintiff in law could not tell its customer, as per the trial court's view, that "under the Guard Service Contract it was not liable for

the damage but the defendant" — since the customer could not hold defendant to account for the damages as he had no privity of contract with defendant. Such an approach of telling the adverse party to go to court, notwithstanding his plainly valid claim, aside from its ethical deficiency among others, could hardly create any goodwill for plaintiff's business, in the same way that defendant's baseless attempt to evade fully discharging its contractual liability to plaintiff cannot be expected to have brought it more business. Worse, the administration of justice is prejudiced, since the court dockets are unduly burdened with unnecessary litigation. ACCORDINGLY, the judgment appealed from is hereby reversed and judgment is hereby rendered sentencing defendant-appellee to pay plaintiff-appellant the sum of P8,489.10 as and by way of reimbursement of the stipulated actual damages and expenses, as well as the costs of suit in both instances. It is so ordered. 8. G.R. No. L-23749 April 29, 1977 FAUSTINO CRUZ, plaintiff-appellant, vs. J. M. TUASON & COMPANY, INC., and GREGORIO ARANETA, INC., defendants-appellees. BARREDO, J.: Appeal from the order dated August 13, 1964 of the Court of First Instance of Quezon City in Civil Case No. Q-7751, Faustino Cruz vs. J.M. Tuason & Co., Inc., and Gregorio Araneta, Inc., dismissing the complaint of appellant Cruz for the recovery of improvements


he has made on appellees' land and to compel appellees to convey to him 3,000 square meters of land on three grounds: (1) failure of the complaint to state a cause of action; (2) the cause of action of plaintiff is unenforceable under the Statute of Frauds; and (3) the action of the plaintiff has already prescribed. Actually, a perusal of plaintiff-appellant's complaint below shows that he alleged two separate causes of action, namely: (1) that upon request of the Deudors (the family of Telesforo Deudor who laid claim on the land in question on the strength of an "informacion posesoria" ) plaintiff made permanent improvements valued at P30,400.00 on said land having an area of more or less 20 quinones and for which he also incurred expenses in the amount of P7,781.74, and since defendantsappellees are being benefited by said improvements, he is entitled to reimbursement from them of said amounts and (2) that in 1952, defendants availed of plaintiff's services as an intermediary with the Deudors to work for the amicable settlement of Civil Case No. Q-135, then pending also in the Court of First Instance of Quezon City, and involving 50 quinones of land, of Which the 20 quinones aforementioned form part, and notwithstanding his having performed his services, as in fact, a compromise agreement entered into on March 16, 1963 between the Deudors and the defendants was approved by the court, the latter have refused to convey to him the 3,000 square meters of land occupied by him, (a part of the 20 quinones above) which said defendants had promised to do "within ten years from and after date of signing of the compromise agreement", as consideration for his services. Within the Period allowed by the rules, the defendants filed separate motions to dismiss alleging three Identical grounds: (1) As regards that improvements made by plaintiff, that the complaint states no cause of action, the agreement regarding the same having been made by plaintiff with the Deudors and not with the defendants, hence the theory of plaintiff based on Article

2142 of the Code on unjust enrichment is untenable; and (2) anent the alleged agreement about plaintiffs services as intermediary in consideration of which, defendants promised to convey to him 3,000 square meters of land, that the same is unenforceable under the Statute of Frauds, there being nothing in writing about it, and, in any event, (3) that the action of plaintiff to compel such conveyance has already prescribed. Plaintiff opposed the motion, insisting that Article 2142 of the applicable to his case; that the Statute of Frauds cannot be invoked by defendants, not only because Article 1403 of the Civil Code refers only to "sale of real property or of an interest therein" and not to promises to convey real property like the one supposedly promised by defendants to him, but also because, he, the plaintiff has already performed his part of the agreement, hence the agreement has already been partly executed and not merely executory within the contemplation of the Statute; and that his action has not prescribed for the reason that defendants had ten years to comply and only after the said ten years did his cause of action accrue, that is, ten years after March 16, 1963, the date of the approval of the compromise agreement, and his complaint was filed on January 24, 1964. Ruling on the motion to dismiss, the trial court issued the herein impugned order of August 13, 1964: In the motion, dated January 31, 1964, defendant Gregorio Araneta, Inc. prayed that the complaint against it be dismissed on the ground that (1) the claim on which the action is founded is unenforceable under the provision of the Statute of Frauds; and (2) the plaintiff's action, if any has already prescribed. In the other motion of February 11, 1964, defendant J. M. Tuason & Co., Inc. sought the dismissal of the plaintiffs complaint on the ground that it states no cause of action and on the Identical grounds stated in the motion to dismiss of defendant Gregorio Araneta, Inc. The said motions are duly opposed by the plaintiff.


From the allegations of the complaint, it appears that, by virtue of an agreement arrived at in 1948 by the plaintiff and the Deudors, the former assisted the latter in clearing, improving, subdividing and selling the large tract of land consisting of 50 quinones covered by the informacion posesoria in the name of the late Telesforo Deudor and incurred expenses, which are valued approximately at P38,400.00 and P7,781.74, respectively; and, for the reasons that said improvements are being used and enjoyed by the defendants, the plaintiff is seeking the reimbursement for the services and expenses stated above from the defendants. Defendant J. M. Tuason & Co., Inc. claimed that, insofar as the plaintiffs claim for the reimbursement of the amounts of P38,400.00 and P7,781.74 is concerned, it is not a privy to the plaintiff's agreement to assist the Deudors n improving the 50 quinones. On the other hand, the plaintiff countered that, by holding and utilizing the improvements introduced by him, the defendants are unjustly enriching and benefiting at the expense of the plaintiff; and that said improvements constitute a lien or charge of the property itself On the issue that the complaint insofar as it claims the reimbursement for the services rendered and expenses incurred by the plaintiff, states no cause of action, the Court is of the opinion that the same is well-founded. It is found that the defendants are not parties to the supposed express contract entered into by and between the plaintiff and the Deudors for the clearing and improvement of the 50 quinones. Furthermore in order that the alleged improvement may be considered a lien or charge on the property, the same should have been made in good faith and under the mistake as to the title. The Court can take judicial notice of the fact that the tract of land supposedly improved by the plaintiff had been registered way back in 1914 in the name of the predecessors-in-interest of defendant J. M.

Tuason & Co., Inc. This fact is confirmed in the decision rendered by the Supreme Court on July 31, 1956 in Case G. R. No. L-5079 entitled J.M. Tuason & Co. Inc. vs. Geronimo Santiago, et al., Such being the case, the plaintiff cannot claim good faith and mistake as to the title of the land. On the issue of statute of fraud, the Court believes that same is applicable to the instant case. The allegation in par. 12 of the complaint states that the defendants promised and agreed to cede, transfer and convey unto the plaintiff the 3,000 square meters of land in consideration of certain services to be rendered then. it is clear that the alleged agreement involves an interest in real property. Under the provisions of See. 2(e) of Article 1403 of the Civil Code, such agreement is not enforceable as it is not in writing and subscribed by the party charged. On the issue of statute of limitations, the Court holds that the plaintiff's action has prescribed. It is alleged in par. 11 of the complaint that, sometime in 1952, the defendants approached the plaintiff to prevail upon the Deudors to enter to a compromise agreement in Civil Case No. Q-135 and allied cases. Furthermore, par. 13 and 14 of the complaint alleged that the plaintiff acted as emissary of both parties in conveying their respective proposals and couter-proposals until the final settlement was effected on March 16, 1953 and approved by Court on April 11, 1953. In the present action, which was instituted on January 24, 1964, the plaintiff is seeking to enforce the supposed agreement entered into between him and the defendants in 1952, which was already prescribed. WHEREFORE, the plaintiffs complaint is hereby ordered DISMISSED without pronouncement as to costs. SO ORDERED. (Pp. 65-69, Rec. on Appeal,)


On August 22, 1964, plaintiff's counsel filed a motion for reconsideration dated August 20, 1964 as follows: Plaintiff through undersigned counsel and to this Honorable Court, respectfully moves to reconsider its Order bearing date of 13 August 1964, on the following grounds: 1. THAT THE COMPLAINT STATES A SUFFICIENT CAUSE OF ACTION AGAINST DEFENDANTS IN SO FAR AS PLAINTIFF'S CLAIM PAYMENT OF SERVICES AND REIMBURSEMENT OF HIS EXPENSES, IS CONCERNED; II. THAT REGARDING PLAINTIFF'S CLAIM OVER THE 3,000 SQ. MS., THE SAME HAS NOT PRESCRIBED AND THE STATUTE OF FRAUDS IS NOT APPLICABLE THERETO; A R G U M E N T Plaintiff's complaint contains two (2) causes of action — the first being an action for sum of money in the amount of P7,781.74 representing actual expenses and P38,400.00 as reasonable compensation for services in improving the 50 quinones now in the possession of defendants. The second cause of action deals with the 3,000 sq. ms. which defendants have agreed to transfer into Plaintiff for services rendered in effecting the compromise between the Deudors and defendants; Under its order of August 3, 1964, this Honorable Court dismissed the claim for sum of money on the ground that the complaint does not state a cause of action against defendants. We respectfully submit: 1. THAT THE COMPLAINT STATES A SUFFICIENT CAUSE OF ACTION AGAINST DEFENDANTS IN SO FAR AS PLAINTIFF'S CLAIM FOR PAYMENT OF SERVICES AND REIMBURSEMENT OF HIS EXPENSES IS CONCERNED.

Said this Honorable Court (at p. 2, Order): O R D E R xxx xxx xxx On the issue that the complaint, in so far as it claims the reimbursement for the services rendered and expenses incurred by the plaintiff, states no cause of action, the Court is of the opinion that the same is well-founded. It is found that the defendants are not parties to the supposed express contract entered into by and between the plaintiff and the Deudors for the clearing and improvement of the 50 quinones. Furthermore, in order that the alleged improvement may he considered a lien or charge on the property, the same should have been made in good faith and under the mistake as to title. The Court can take judicial notice of the fact that the tract of land supposedly improved by the plaintiff had been registered way back in 1914 in the name of the predecessors-in-interest of defendant J. M. Tuason & Co., Inc. This fact is confirmed in the decision rendered by the Supreme Court on July 31, 1956 in case G. R. No. L-5079 entitled 'J M. Tuason & Co., Inc. vs, Geronimo Santiago, et al.' Such being the case, the plaintiff cannot claim good faith and mistake as to the title of the land. The position of this Honorable Court (supra) is that the complaint does not state a cause of action in so far as the claim for services and expenses is concerned because the contract for the improvement of the properties was solely between the Deudors and plaintiff, and defendants are not privies to it. Now, plaintiff's theory is that defendants are nonetheless liable since they are utilizing and enjoying the benefit's of said improvements. Thus under paragraph 16 of "he complaint, it is alleged:


(16) That the services and personal expenses of plaintiff mentioned in paragraph 7 hereof were rendered and in fact paid by him to improve, as they in fact resulted in considerable improvement of the 50 quinones, and defendants being now in possession of and utilizing said improvements should reimburse and pay plaintiff for such services and expenses. Plaintiff's cause of action is premised inter alia, on the theory of unjust enrichment under Article 2142 of the civil Code: ART. 2142. Certain lawful voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shill be unjustly enriched or benefited at the expense of another. In like vein, Article 19 of the same Code enjoins that: ART. 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give every-one his due and observe honesty and good faith. We respectfully draw the attention of this Honorable Court to the fact that ARTICLE 2142 (SUPRA) DEALS WITH QUASICONTRACTS or situations WHERE THERE IS NO CONTRACT BETWEEN THE PARTIES TO THE ACTION. Further, as we can readily see from the title thereof (Title XVII), that the Same bears the designation 'EXTRA CONTRACTUAL OBLIGATIONS' or obligations which do not arise from contracts. While it is true that there was no agreement between plaintiff and defendants herein for the improvement of the 50 quinones since the latter are presently enjoying and utilizing the benefits brought about through plaintiff's labor and expenses, defendants should pay and reimburse him therefor under the principle that 'no one may enrich himself at the expense of another.' In this posture, the complaint states a cause of action against the defendants.

II. THAT REGARDING PLAINTIFF'S CLAIM OVER THE 3,000 SQ. MS. THE SAME HAS NOT PRESCRIBED AND THE STATUTE OF FRAUDS IS NOT APPLICABLE THERETO. The Statute of Frauds is CLEARLY inapplicable to this case: At page 2 of this Honorable Court's order dated 13 August 1964, the Court ruled as follows: O R D E R xxx xxx xxx On the issue of statute of fraud, the Court believes that same is applicable to the instant Case, The allegation in par. 12 of the complaint states that the defendants promised and agree to cede, transfer and convey unto the plaintiff, 3,000 square meters of land in consideration of certain services to be rendered then. It is clear that the alleged agreement involves an interest in real property. Under the provisions of Sec. 2(e) of Article 1403 of the Civil Code, such agreement is not enforceable as it is not in writing and subscribed by the party charged. To bring this issue in sharper focus, shall reproduce not only paragraph 12 of the complaint but also the other pertinent paragraphs therein contained. Paragraph 12 states thus: C O M P L A I N T xxx xxx xxx 12). That plaintiff conferred with the aforesaid representatives of defendants several times and on these occasions, the latter promised and agreed to cede, transfer and convey unto plaintiff the 3,000 sq. ms. (now known as Lots 16-B, 17 and 18) which


plaintiff was then occupying and continues to occupy as of this writing, for and in consideration of the following conditions: (a) That plaintiff succeed in convincing the DEUDORS to enter into a compromise agreement and that such agreement be actually entered into by and between the DEUDORS and defendant companies; (b) That as of date of signing the compromise agreement, plaintiff shall be the owner of the 3,000 sq. ms. but the documents evidencing his title over this property shall be executed and delivered by defendants to plaintiff within ten (10) years from and after date of signing of the compromise agreement; (c) That plaintiff shall, without any monetary expense of his part, assist in clearing the 20 quinones of its occupants; 13). That in order to effect a compromise between the parties. plaintiff not only as well acted as emissary of both parties in conveying their respective proposals and counter- proposals until succeeded in convinzing the DEUDORS to settle with defendants amicably. Thus, on March 16, 1953, a Compromise Agreement was entered into by and between the DEUDORS and the defendant companies; and on April 11, 1953, this agreement was approved by this Honorable Court; 14). That in order to comply with his other obligations under his agreement with defendant companies, plaintiff had to confer with the occupants of the property, exposing himself to physical harm, convincing said occupants to leave the premises and to refrain from resorting to physical violence in resisting defendants' demands to vacate; That plaintiff further assisted defendants' employees in the actual demolition and transfer of all the houses within the perimeter of the 20 quinones until the end of 1955, when said

area was totally cleared and the houses transferred to another area designated by the defendants as 'Capt. Cruz Block' in Masambong, Quezon City. (Pars. 12, 13 and 14, Complaint; Emphasis supplied) From the foregoing, it is clear then the agreement between the parties mentioned in paragraph 12 (supra) of the complaint has already been fully EXECUTED ON ONE PART, namely by the plaintiff. Regarding the applicability of the statute of frauds (Art. 1403, Civil Code), it has been uniformly held that the statute of frauds IS APPLICABLE ONLY TO EXECUTORY CONTRACTS BUT NOT WHERE THE CONTRACT HAS BEEN PARTLY EXECUTED: SAME ACTION TO ENFORCE. — The statute of frauds has been uniformly interpreted to be applicable to executory and not to completed or contracts. Performance of the contracts takes it out of the operation of the statute. ... The statute of the frauds is not applicable to contracts which are either totally or partially performed, on the theory that there is a wide field for the commission of frauds in executory contracts which can only be prevented by requiring them to be in writing, a facts which is reduced to a minimum in executed contracts because the intention of the parties becomes apparent buy their execution and execution, in mots cases, concluded the right the parties. ... The partial performance may be proved by either documentary or oral evidence. (At pp. 564-565, Tolentino's Civil Code of the Philippines, Vol. IV, 1962 Ed.; Emphasis supplied). Authorities in support of the foregoing rule are legion. Thus Mr. Justice Moran in his 'Comments on the Rules of Court', Vol. III, 1974 Ed., at p. 167, states: 2 THE STATUTE OF FRAUDS IS APPLICABLE ONLY TO EXECUTORY CONTRACTS: CONTRACTS WHICH ARE EITHER TOTALLY OR PARTIALLY PERFORMED ARE WITHOUT THE


STATUE. The statute of frauds is applicable only to executory contracts. It is neither applicable to executed contracts nor to contracts partially performed. The reason is simple. In executory contracts there is a wide field for fraud because unless they be in writing there is no palpable evidence of the intention of the contracting parties. The statute has been enacted to prevent fraud. On the other hand the commission of fraud in executed contracts is reduced to minimum in executed contracts because (1) the intention of the parties is made apparent by the execution and (2) execution concludes, in most cases, the rights of the parties. (Emphasis supplied) Under paragraphs 13 and 14 of the complaint (supra) one can readily see that the plaintiff has fulfilled ALL his obligation under the agreement between him defendants concerning the 3,000 sq. ms. over which the latter had agreed to execute the proper documents of transfer. This fact is further projected in paragraph 15 of the complaint where plaintiff states; 15). That in or about the middle of 1963, after all the conditions stated in paragraph 12 hereof had been fulfilled and fully complied with, plaintiff demanded of said defendants that they execute the Deed of Conveyance in his favor and deliver the title certificate in his name, over the 3,000 sq. ms. but defendants failed and refused and continue to fail and refuse to heed his demands. (par. 15, complaint; Emphasis supplied). In view of the foregoing, we respectfully submit that this Honorable court erred in holding that the statute of frauds is applicable to plaintiff's claim over the 3,000 sq. ms. There having been full performance of the contract on plaintiff's part, the same takes this case out of the context of said statute. Plaintiff's Cause of Action had NOT Prescribed:

With all due respect to this Honorable court, we also submit that the Court committed error in holding that this action has prescribed: O R D E R xxx xxx xxx On the issue of the statute of limitations, the Court holds that the plaintiff's action has prescribed. It is alleged in par. III of the complaint that, sometime in 1952, the defendants approached the plaintiff to prevail upon the Deudors to enter into a compromise agreement in Civil Case No. Q-135 and allied cases. Furthermore, pars. 13 and 14 of the complaint alleged that plaintiff acted as emissary of both parties in conveying their respective proposals and counter-proposals until the final settlement was affected on March 16, 1953 and approved by the Court on April 11, 1953. In the present actin, which was instituted on January 24, 1964, the plaintiff is seeking to enforce the supposed agreement entered into between him and the defendants in 1952, which has already proscribed. (at p. 3, Order). The present action has not prescribed, especially when we consider carefully the terms of the agreement between plaintiff and the defendants. First, we must draw the attention of this Honorable Court to the fact that this is an action to compel defendants to execute a Deed of Conveyance over the 3,000 sq. ms. subject of their agreement. In paragraph 12 of the complaint, the terms and conditions of the contract between the parties are spelled out. Paragraph 12 (b) of the complaint states: (b) That as of date of signing the compromise agreement, plaintiff shall be the owner of the 3,000 sq. ms. but the documents evidencing his title over this property shall be executed and delivered by defendants to plaintiff within ten (10) years from


and after date of signing of the compromise agreement. (Emphasis supplied). The compromise agreement between defendants and the Deudors which was conclude through the efforts of plaintiff, was signed on 16 March 1953. Therefore, the defendants had ten (10) years signed on 16 March 1953. Therefore, the defendants had ten (10) years from said date within which to execute the deed of conveyance in favor of plaintiff over the 3,000 sq. ms. As long as the 10 years period has not expired, plaintiff had no right to compel defendants to execute the document and the latter were under no obligation to do so. Now, this 10-year period elapsed on March 16, 1963. THEN and ONLY THEN does plaintiff's cause of action plaintiff on March 17, 1963. Thus, under paragraph 15, of the complaint (supra) plaintiff made demands upon defendants for the execution of the deed 'in or about the middle of 1963. Since the contract now sought to be enforced was not reduced to writing, plaintiff's cause of action expires on March 16, 1969 or six years from March 16, 1963 WHEN THE CAUSE OF ACTION ACCRUED (Art. 1145, Civil Code). In this posture, we gain respectfully submit that this Honorable Court erred in holding that plaintiff's action has prescribed. P R A Y E R WHEREFORE, it is respectfully prayed that " Honorable Court reconsider its Order dated August 13, 1964; and issue another order denying the motions to dismiss of defendants G. Araneta, Inc. and J. M. Tuason Co. Inc. for lack of merit. (Pp. 70-85, Record on Appeal.) Defendants filed an opposition on the main ground that "the arguments adduced by the plaintiff are merely reiterations of his arguments contained in his Rejoinder to Reply and Opposition,

which have not only been refuted in herein defendant's Motion to Dismiss and Reply but already passed upon by this Honorable Court." On September 7, 1964, the trial court denied the motion for reconsiderations thus: After considering the plaintiff's Motion for Reconsideration of August 20, 1964 and it appearing that the grounds relied upon in said motion are mere repetition of those already resolved and discussed by this Court in the order of August 13, 1964, the instant motion is hereby denied and the findings and conclusions arrived at by the Court in its order of August 13, 1964 are hereby reiterated and affirmed. SO ORDERED. (Page 90, Rec. on Appeal.) Under date of September 24, 1964, plaintiff filed his record on appeal. In his brief, appellant poses and discusses the following assignments of error: I. THAT THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT ON THE GROUND THAT APPELLANT'S CLAIM OVER THE 3,000 SQ. MS. IS ALLEGEDLY UNENFORCEABLE UNDER THE STATUTE OF FRAUDS; II. THAT THE COURT A QUO FURTHER COMMITTED ERROR IN DISMISSING APPELLANT'S COMPLAINT ON THE GROUND THAT HIS CLAIM OVER THE 3,000 SQ. MS. IS ALLEGEDLY BARRED BY THE STATUTE OF LIMITATIONS; and III. THAT THE LOWER COURT ERRED IN DISMISSING THE COMPLAINT FOR FAILURE TO STATE A CAUSE OF ACTION IN SO FAR AS APPELLANT'S CLAIM FOR REIMBURSEMENT OF


EXPENSES AND FOR SERVICES RENDERED IN THE IMPROVEMENT OF THE FIFTY (50) QUINONES IS CONCERNED. We agree with appellant that the Statute of Frauds was erroneously applied by the trial court. It is elementary that the Statute refers to specific kinds of transactions and that it cannot apply to any that is not enumerated therein. And the only agreements or contracts covered thereby are the following: (1) Those entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers; (2) Those do not comply with the Statute of Frauds as set forth in this number, In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: (a) An agreement that by its terms is not to be performed within a year from the making thereof; (b) A special promise to answer for the debt, default, or miscarriage of another; (c) An agreement made in consideration of marriage, other than a mutual promise to marry; (d) An agreement for the sale of goods, chattels or things in action, at a price not less than five hundred pesos, unless the buyer accept and receive part of such goods and chattels, or the evidences, or some of them of such things in action, or pay at the time some part of the purchase money; but when a sale is made by auction and entry is made by the auctioneer in his sales book,

at the time of the sale, of the amount and kind of property sold, terms of sale, price, names of the purchasers and person on whose account the sale is made, it is a sufficient memorandum: (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein: (f) a representation as to the credit of a third person. (3) Those where both parties are incapable of giving consent to a contract. (Art. 1403, civil Code.) In the instant case, what appellant is trying to enforce is the delivery to him of 3,000 square meters of land which he claims defendants promised to do in consideration of his services as mediator or intermediary in effecting a compromise of the civil action, Civil Case No. 135, between the defendants and the Deudors. In no sense may such alleged contract be considered as being a "sale of real property or of any interest therein." Indeed, not all dealings involving interest in real property come under the Statute. Moreover, appellant's complaint clearly alleges that he has already fulfilled his part of the bargains to induce the Deudors to amicably settle their differences with defendants as, in fact, on March 16, 1963, through his efforts, a compromise agreement between these parties was approved by the court. In other words, the agreement in question has already been partially consummated, and is no longer merely executory. And it is likewise a fundamental principle governing the application of the Statute that the contract in dispute should be purely executory on the part of both parties thereto. We cannot, however, escape taking judicial notice, in relation to the compromise agreement relied upon by appellant, that in several cases We have decided, We have declared the same


rescinded and of no effect. In J. M. Tuason & Co., Inc. vs. Bienvenido Sanvictores, 4 SCRA 123, the Court held: It is also worthy of note that the compromise between Deudors and Tuason, upon which Sanvictores predicates his right to buy the lot he occupies, has been validly rescinded and set aside, as recognized by this Court in its decision in G.R. No. L-13768, Deudor vs. Tuason, promulgated on May 30, 1961. We repeated this observation in J.M. Tuason & Co., Inc. vs. Teodosio Macalindong, 6 SCRA 938. Thus, viewed from what would be the ultimate conclusion of appellant's case, We entertain grave doubts as to whether or not he can successfully maintain his alleged cause of action against defendants, considering that the compromise agreement that he invokes did not actually materialize and defendants have not benefited therefrom, not to mention the undisputed fact that, as pointed out by appellees, appellant's other attempt to secure the same 3,000 square meters via the judicial enforcement of the compromise agreement in which they were supposed to be reserved for him has already been repudiated by the courts. (pp. 5-7. Brief of Appellee Gregorio Araneta, Inc.) As regards appellant's third assignment of error, We hold that the allegations in his complaint do not sufficiently Appellants' reliance. on Article 2142 of Civil Code is misplaced. Said article provides: Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end that no one shall be unjustly enriched or benefited at the expense of another. From the very language of this provision, it is obvious that a presumed qauasi-contract cannot emerge as against one party when the subject mater thereof is already covered by an existing contract with another party. Predicated on the principle that no

one should be allowed to unjustly enrich himself at the expense of another, Article 2124 creates the legal fiction of a quasicontract precisely because of the absence of any actual agreement between the parties concerned. Corollarily, if the one who claims having enriched somebody has done so pursuant to a contract with a third party, his cause of action should be against the latter, who in turn may, if there is any ground therefor, seek relief against the party benefited. It is essential that the act by which the defendant is benefited must have been voluntary and unilateral on the part of the plaintiff. As one distinguished civilian puts it, "The act is voluntary. because the actor in quasi-contracts is not bound by any pre-existing obligation to act. It is unilateral, because it arises from the sole will of the actor who is not previously bound by any reciprocal or bilateral agreement. The reason why the law creates a juridical relations and imposes certain obligation is to prevent a situation where a person is able to benefit or take advantage of such lawful, voluntary and unilateral acts at the expense of said actor." (Ambrosio Padilla, Civil Law, Vol. VI, p. 748, 1969 ed.) In the case at bar, since appellant has a clearer and more direct recourse against the Deudors with whom he had entered into an agreement regarding the improvements and expenditures made by him on the land of appellees. it Cannot be said, in the sense contemplated in Article 2142, that appellees have been enriched at the expense of appellant. In the ultimate. therefore, Our holding above that appellant's first two assignments of error are well taken cannot save the day for him. Aside from his having no cause of action against appellees, there is one plain error of omission. We have found in the order of the trial court which is as good a ground as any other for Us to terminate this case favorably to appellees. In said order Which We have quoted in full earlier in this opinion, the trial court ruled that "the grounds relied upon in said motion are mere repetitions of those already resolved and discussed by this Court in the order of August 13, 1964", an observation which We fully share.


Virtually, therefore. appellant's motion for reconsideration was ruled to be pro-forma. Indeed, a cursory reading of the record on appeal reveals that appellant's motion for reconsideration abovequoted contained exactly the same arguments and manner of discussion as his February 6, 1964 "Opposition to Motion to Dismiss" of defendant Gregorio Araneta, Inc. ((pp. 17-25, Rec. on Appeal) as well as his February 17, 1964 "Opposition to Motion to Dismiss of Defendant J. M. Tuason & Co." (pp. 33-45, Rec. on Appeal and his February 29, 1964 "Rejoinder to Reply Oil Defendant J. M. Tuason & Co." (pp. 52-64, Rec. on Appeal) We cannot see anything in said motion for reconsideration that is substantially different from the above oppositions and rejoinder he had previously submitted and which the trial court had already considered when it rendered its main order of dismissal. Consequently, appellant's motion for reconsideration did not suspend his period for appeal. (Estrada vs. Sto. Domingo, 28 SCRA 890, 905-6.) And as this point was covered by appellees' "Opposition to Motion for Reconsideration" (pp. 8689), hence, within the frame of the issues below, it is within the ambit of Our authority as the Supreme Court to consider the same here even if it is not discussed in the briefs of the parties. (Insular Life Assurance Co., Ltd. Employees Association-NATU vs. Insular Life Assurance Co., Ltd. [Resolution en banc of March 10, 1977 in G. R. No. L-25291). Now, the impugned main order was issued on August 13, 1964, while the appeal was made on September 24, 1964 or 42 days later. Clearly, this is beyond the 30-day reglementary period for appeal. Hence, the subject order of dismissal was already final and executory when appellant filed his appeal. WHEREFORE, the appeal of Faustino Cruz in this case is dismissed. No costs.

9.

G.R. No. L-9188

December 4, 1914

GUTIERREZ HERMANOS, plaintiff-appellee, vs. ENGRACIO ORENSE, defendant-appellant. William A. Kincaid, Thos. L. Hartigan, and Ceferino M. Villareal for appellant. Rafael de la Sierra for appellee.

TORRES, J.: Appeal through bill of exceptions filed by counsel for the appellant from the judgment on April 14, 1913, by the Honorable P. M. Moir, judge, wherein he sentenced the defendant to make immediate delivery of the property in question, through a public instrument, by transferring and conveying to the plaintiff all his rights in the property described in the complaint and to pay it the sum of P780, as damages, and the costs of the suit. On March 5, 1913, counsel for Gutierrez Hermanos filed a complaint, afterwards amended, in the Court of First Instance of Albay against Engacio Orense, in which he set forth that on and before February 14, 1907, the defendant Orense had been the owner of a parcel of land, with the buildings and improvements thereon, situated in the pueblo of Guinobatan, Albay, the location, area and boundaries of which were specified in the complaint; that the said property has up to date been recorded in the new property registry in the name of the said Orense, according to certificate No. 5, with the boundaries therein given; that, on February 14, 1907, Jose Duran, a nephew of the defendant, with the latter's knowledge and consent, executed before a notary a public instrument whereby he sold and conveyed to the plaintiff company, for P1,500, the aforementioned property, the vendor Duran reserving to himself the right to repurchase it for the same


price within a period of four years from the date of the said instrument; that the plaintiff company had not entered into possession of the purchased property, owing to its continued occupancy by the defendant and his nephew, Jose Duran, by virtue of a contract of lease executed by the plaintiff to Duran, which contract was in force up to February 14, 1911; that the said instrument of sale of the property, executed by Jose Duran, was publicly and freely confirmed and ratified by the defendant Orense; that, in order to perfect the title to the said property, but that the defendant Orense refused to do so, without any justifiable cause or reason, wherefore he should be compelled to execute the said deed by an express order of the court, for Jose Duran is notoriously insolvent and cannot reimburse the plaintiff company for the price of the sale which he received, nor pay any sum whatever for the losses and damages occasioned by the said sale, aside from the fact that the plaintiff had suffered damage by losing the present value of the property, which was worth P3,000; that, unless such deed of final conveyance were executed in behalf of the plaintiff company, it would be injured by the fraud perpetrated by the vendor, Duran, in connivance with the defendant; that the latter had been occupying the said property since February 14, 1911, and refused to pay the rental thereof, notwithstanding the demand made upon him for its payment at the rate of P30 per month, the just and reasonable value for the occupancy of the said property, the possession of which the defendant likewise refused to deliver to the plaintiff company, in spite of the continuous demands made upon him, the defendant, with bad faith and to the prejudice of the firm of Gutierrez Hermanos, claiming to have rights of ownership and possession in the said property. Therefore it was prayed that judgment be rendered by holding that the land and improvements in question belong legitimately and exclusively to the plaintiff, and ordering the defendant to execute in the plaintiff's behalf the said instrument of transfer and conveyance of the property and of all the right, interest, title and share which the defendant has therein; that the defendant be sentenced to pay P30 per month

for damages and rental of the property from February 14, 1911, and that, in case these remedies were not granted to the plaintiff, the defendant be sentenced to pay to it the sum of P3,000 as damages, together with interest thereon since the date of the institution of this suit, and to pay the costs and other legal expenses. The demurrer filed to the amended complaint was overruled, with exception on the part of the defendant, whose counsel made a general denial of the allegations contained in the complaint, excepting those that were admitted, and specifically denied paragraph 4 thereof to the effect that on February 14, 1907, Jose Duran executed the deed of sale of the property in favor of the plaintiff with the defendant's knowledge and consent.1awphil.net As the first special defense, counsel for the defendant alleged that the facts set forth in the complaint with respect to the execution of the deed did not constitute a cause of action, nor did those alleged in the other form of action for the collection of P3,000, the value of the realty. As the second special defense, he alleged that the defendant was the lawful owner of the property claimed in the complaint, as his ownership was recorded in the property registry, and that, since his title had been registered under the proceedings in rem prescribed by Act No. 496, it was conclusive against the plaintiff and the pretended rights alleged to have been acquired by Jose Duran prior to such registration could not now prevail; that the defendant had not executed any written power of attorney nor given any verbal authority to Jose Duran in order that the latter might, in his name and representation, sell the said property to the plaintiff company; that the defendant's knowledge of the said sale was acquired long after the execution of the contract of sale between Duran and Gutierrez Hermanos, and that prior thereto the defendant did not intentionally and deliberately perform any act such as might have induced the plaintiff to believe that Duran


was empowered and authorized by the defendant and which would warrant him in acting to his own detriment, under the influence of that belief. Counsel therefore prayed that the defendant be absolved from the complaint and that the plaintiff be sentenced to pay the costs and to hold his peace forever. After the hearing of the case and an examination of the evidence introduced by both parties, the court rendered the judgment aforementioned, to which counsel for the defendant excepted and moved for a new trial. This motion was denied, an exception was taken by the defendant and, upon presentation of the proper bill of exceptions, the same was approved, certified and forwarded to the clerk of his court. This suit involves the validity and efficacy of the sale under right of redemption of a parcel of land and a masonry house with the nipa roof erected thereon, effected by Jose Duran, a nephew of the owner of the property, Engracio Orense, for the sum of P1,500 by means of a notarial instrument executed and ratified on February 14, 1907. After the lapse of the four years stipulated for the redemption, the defendant refused to deliver the property to the purchaser, the firm of Gutierrez Hermanos, and to pay the rental thereof at the rate of P30 per month for its use and occupation since February 14, 1911, when the period for its repurchase terminated. His refusal was based on the allegations that he had been and was then the owner of the said property, which was registered in his name in the property registry; that he had not executed any written power of attorney to Jose Duran, nor had he given the latter any verbal authorization to sell the said property to the plaintiff firm in his name; and that, prior to the execution of the deed of sale, the defendant performed no act such as might have induced the plaintiff to believe that Jose Duran was empowered and authorized by the defendant to effect the said sale.

The plaintiff firm, therefore, charged Jose Duran, in the Court of First Instance of the said province, with estafa, for having represented himself in the said deed of sale to be the absolute owner of the aforesaid land and improvements, whereas in reality they did not belong to him, but to the defendant Orense. However, at the trial of the case Engracio Orense, called as a witness, being interrogated by the fiscal as to whether he and consented to Duran's selling the said property under right of redemption to the firm of Gutierrez Hermanos, replied that he had. In view of this statement by the defendant, the court acquitted Jose Duran of the charge of estafa. As a result of the acquittal of Jose Duran, based on the explicit testimony of his uncle, Engacio Orense, the owner of the property, to the effect that he had consented to his nephew Duran's selling the property under right of repurchase to Gutierrez Hermanos, counsel for this firm filed a complainant praying, among other remedies, that the defendant Orense be compelled to execute a deed for the transfer and conveyance to the plaintiff company of all the right, title and interest with Orense had in the property sold, and to pay to the same the rental of the property due from February 14, 1911.itc-alf Notwithstanding the allegations of the defendant, the record in this case shows that he did give his consent in order that his nephew, Jose Duran, might sell the property in question to Gutierrez Hermanos, and that he did thereafter confirm and ratify the sale by means of a public instrument executed before a notary. It having been proven at the trial that he gave his consent to the said sale, it follows that the defendant conferred verbal, or at least implied, power of agency upon his nephew Duran, who accepted it in the same way by selling the said property. The principal must therefore fulfill all the obligations contracted by


the agent, who acted within the scope of his authority. (Civil Code, arts. 1709, 1710 and 1727.) Even should it be held that the said consent was granted subsequently to the sale, it is unquestionable that the defendant, the owner of the property, approved the action of his nephew, who in this case acted as the manager of his uncle's business, and Orense'r ratification produced the effect of an express authorization to make the said sale. (Civil Code, arts. 1888 and 1892.) Article 1259 of the Civil Code prescribes: "No one can contract in the name of another without being authorized by him or without his legal representation according to law. A contract executed in the name of another by one who has neither his authorization nor legal representation shall be void, unless it should be ratified by the person in whose name it was executed before being revoked by the other contracting party. The sworn statement made by the defendant, Orense, while testifying as a witness at the trial of Duran for estafa, virtually confirms and ratifies the sale of his property effected by his nephew, Duran, and, pursuant to article 1313 of the Civil Code, remedies all defects which the contract may have contained from the moment of its execution. The sale of the said property made by Duran to Gutierrez Hermanos was indeed null and void in the beginning, but afterwards became perfectly valid and cured of the defect of nullity it bore at its execution by the confirmation solemnly made by the said owner upon his stating under oath to the judge that he himself consented to his nephew Jose Duran's making the said sale. Moreover, pursuant to article 1309 of the Code, the right of action for nullification that could have been brought became legally extinguished from the moment the contract was validly

confirmed and ratified, and, in the present case, it is unquestionable that the defendant did confirm the said contract of sale and consent to its execution. On the testimony given by Engacio Orense at the trial of Duran for estafa, the latter was acquitted, and it would not be just that the said testimony, expressive of his consent to the sale of his property, which determined the acquittal of his nephew, Jose Duran, who then acted as his business manager, and which testimony wiped out the deception that in the beginning appeared to have been practiced by the said Duran, should not now serve in passing upon the conduct of Engracio Orense in relation to the firm of Gutierrez Hermanos in order to prove his consent to the sale of his property, for, had it not been for the consent admitted by the defendant Orense, the plaintiff would have been the victim of estafa. If the defendant Orense acknowledged and admitted under oath that he had consented to Jose Duran's selling the property in litigation to Gutierrez Hermanos, it is not just nor is it permissible for him afterward to deny that admission, to the prejudice of the purchaser, who gave P1,500 for the said property. The contract of sale of the said property contained in the notarial instrument of February 14, 1907, is alleged to be invalid, null and void under the provisions of paragraph 5 of section 335 of the Code of Civil Procedure, because the authority which Orense may have given to Duran to make the said contract of sale is not shown to have been in writing and signed by Orense, but the record discloses satisfactory and conclusive proof that the defendant Orense gave his consent to the contract of sale executed in a public instrument by his nephew Jose Duran. Such consent was proven in a criminal action by the sworn testimony of the principal and presented in this civil suit by other sworn testimony of the same principal and by other evidence to which


the defendant made no objection. Therefore the principal is bound to abide by the consequences of his agency as though it had actually been given in writing (Conlu vs. Araneta and Guanko, 15 Phil. Rep., 387; Gallemit vs. Tabiliran, 20 Phil. Rep., 241; Kuenzle & Streiff vs. Jiongco, 22 Phil. Rep., 110.) The repeated and successive statements made by the defendant Orense in two actions, wherein he affirmed that he had given his consent to the sale of his property, meet the requirements of the law and legally excuse the lack of written authority, and, as they are a full ratification of the acts executed by his nephew Jose Duran, they produce the effects of an express power of agency. The judgment appealed from in harmony with the law and the merits of the case, and the errors assigned thereto have been duly refuted by the foregoing considerations, so it should be affirmed. The judgment appealed from is hereby affirmed, with the costs against the appellant. 10. G.R. No. L-44546 January 29, 1988 RUSTICO ADILLE, petitioner, vs. THE HONORABLE COURT OF APPEALS, EMETERIA ASEJO, TEODORICA ASEJO, DOMINGO ASEJO, JOSEFA ASEJO and SANTIAGO ASEJO, respondents. SARMIENTO, J.: In issue herein are property and property rights, a familiar subject of controversy and a wellspring of enormous conflict that

has led not only to protracted legal entanglements but to even more bitter consequences, like strained relationships and even the forfeiture of lives. It is a question that likewise reflects a tragic commentary on prevailing social and cultural values and institutions, where, as one observer notes, wealth and its accumulation are the basis of self-fulfillment and where property is held as sacred as life itself. "It is in the defense of his property," says this modern thinker, that one "will mobilize his deepest protective devices, and anybody that threatens his possessions will arouse his most passionate enmity." 1 The task of this Court, however, is not to judge the wisdom of values; the burden of reconstructing the social order is shouldered by the political leadership-and the people themselves. The parties have come to this Court for relief and accordingly, our responsibility is to give them that relief pursuant to the decree of law. The antecedent facts are quoted from the decision 2 appealed from: xxx xxx xxx ... [T]he land in question Lot 14694 of Cadastral Survey of Albay located in Legaspi City with an area of some 11,325 sq. m. originally belonged to one Felisa Alzul as her own private property; she married twice in her lifetime; the first, with one Bernabe Adille, with whom she had as an only child, herein defendant Rustico Adille; in her second marriage with one Procopio Asejo, her children were herein plaintiffs, — now, sometime in 1939, said Felisa sold the property in pacto de retro to certain 3rd persons, period of repurchase being 3 years, but she died in 1942 without being able to redeem and after her death, but during the period of redemption, herein defendant


repurchased, by himself alone, and after that, he executed a deed of extra-judicial partition representing himself to be the only heir and child of his mother Felisa with the consequence that he was able to secure title in his name alone also, so that OCT. No. 21137 in the name of his mother was transferred to his name, that was in 1955; that was why after some efforts of compromise had failed, his half-brothers and sisters, herein plaintiffs, filed present case for partition with accounting on the position that he was only a trustee on an implied trust when he redeemed,-and this is the evidence, but as it also turned out that one of plaintiffs, Emeteria Asejo was occupying a portion, defendant counterclaimed for her to vacate that, — Well then, after hearing the evidence, trial Judge sustained defendant in his position that he was and became absolute owner, he was not a trustee, and therefore, dismissed case and also condemned plaintiff occupant, Emeteria to vacate; it is because of this that plaintiffs have come here and contend that trial court erred in: I. ... declaring the defendant absolute owner of the property; II. ... not ordering the partition of the property; and III. ... ordering one of the plaintiffs who is in possession of the portion of the property to vacate the land, p. 1 Appellant's brief. which can be reduced to simple question of whether or not on the basis of evidence and law, judgment appealed from should be maintained. 3 xxx xxx xxx The respondent Court of appeals reversed the trial Court, 4 and ruled for the plaintiffs-appellants, the private respondents

herein. The petitioner now appeals, by way of certiorari, from the Court's decision. We required the private respondents to file a comment and thereafter, having given due course to the petition, directed the parties to file their briefs. Only the petitioner, however, filed a brief, and the private respondents having failed to file one, we declared the case submitted for decision. The petition raises a purely legal issue: May a co-owner acquire exclusive ownership over the property held in common? Essentially, it is the petitioner's contention that the property subject of dispute devolved upon him upon the failure of his coheirs to join him in its redemption within the period required by law. He relies on the provisions of Article 1515 of the old Civil Article 1613 of the present Code, giving the vendee a retro the right to demand redemption of the entire property. There is no merit in this petition. The right of repurchase may be exercised by a co-owner with aspect to his share alone. 5 While the records show that the petitioner redeemed the property in its entirety, shouldering the expenses therefor, that did not make him the owner of all of it. In other words, it did not put to end the existing state of coownership. Necessary expenses may be incurred by one co-owner, subject to his right to collect reimbursement from the remaining co-owners. 6 There is no doubt that redemption of property entails a necessary expense. Under the Civil Code: ART. 488. Each co-owner shall have a right to compel the other co-owners to contribute to the expenses of preservation of the thing or right owned in common and to the taxes. Any one of the


latter may exempt himself from this obligation by renouncing so much of his undivided interest as may be equivalent to his share of the expenses and taxes. No such waiver shall be made if it is prejudicial to the co-ownership. The result is that the property remains to be in a condition of coownership. While a vendee a retro, under Article 1613 of the Code, "may not be compelled to consent to a partial redemption," the redemption by one co-heir or co-owner of the property in its totality does not vest in him ownership over it. Failure on the part of all the co-owners to redeem it entitles the vendee a retro to retain the property and consolidate title thereto in his name. 7 But the provision does not give to the redeeming co-owner the right to the entire property. It does not provide for a mode of terminating a co-ownership. Neither does the fact that the petitioner had succeeded in securing title over the parcel in his name terminate the existing co-ownership. While his half-brothers and sisters are, as we said, liable to him for reimbursement as and for their shares in redemption expenses, he cannot claim exclusive right to the property owned in common. Registration of property is not a means of acquiring ownership. It operates as a mere notice of existing title, that is, if there is one. The petitioner must then be said to be a trustee of the property on behalf of the private respondents. The Civil Code states: ART. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. We agree with the respondent Court of Appeals that fraud attended the registration of the property. The petitioner's pretension that he was the sole heir to the land in the affidavit of

extrajudicial settlement he executed preliminary to the registration thereof betrays a clear effort on his part to defraud his brothers and sisters and to exercise sole dominion over the property. The aforequoted provision therefore applies. It is the view of the respondent Court that the petitioner, in taking over the property, did so either on behalf of his co-heirs, in which event, he had constituted himself a negotiorum gestor under Article 2144 of the Civil Code, or for his exclusive benefit, in which case, he is guilty of fraud, and must act as trustee, the private respondents being the beneficiaries, under the Article 1456. The evidence, of course, points to the second alternative the petitioner having asserted claims of exclusive ownership over the property and having acted in fraud of his co-heirs. He cannot therefore be said to have assume the mere management of the property abandoned by his co-heirs, the situation Article 2144 of the Code contemplates. In any case, as the respondent Court itself affirms, the result would be the same whether it is one or the other. The petitioner would remain liable to the Private respondents, his co-heirs. This Court is not unaware of the well-established principle that prescription bars any demand on property (owned in common) held by another (co-owner) following the required number of years. In that event, the party in possession acquires title to the property and the state of co-ownership is ended . 8 In the case at bar, the property was registered in 1955 by the petitioner, solely in his name, while the claim of the private respondents was presented in 1974. Has prescription then, set in? We hold in the negative. Prescription, as a mode of terminating a relation of co-ownership, must have been preceded by repudiation (of the co-ownership). The act of repudiation, in turn is subject to certain conditions: (1) a co-owner repudiates the coownership; (2) such an act of repudiation is clearly made known to the other co-owners; (3) the evidence thereon is clear and


conclusive, and (4) he has been in possession through open, continuous, exclusive, and notorious possession of the property for the period required by law. 9 The instant case shows that the petitioner had not complied with these requisites. We are not convinced that he had repudiated the co-ownership; on the contrary, he had deliberately kept the private respondents in the dark by feigning sole heirship over the estate under dispute. He cannot therefore be said to have "made known" his efforts to deny the co-ownership. Moreover, one of the private respondents, Emeteria Asejo, is occupying a portion of the land up to the present, yet, the petitioner has not taken pains to eject her therefrom. As a matter of fact, he sought to recover possession of that portion Emeteria is occupying only as a counterclaim, and only after the private respondents had first sought judicial relief. It is true that registration under the Torrens system is constructive notice of title, 10 but it has likewise been our holding that the Torrens title does not furnish a shield for fraud. 11 It is therefore no argument to say that the act of registration is equivalent to notice of repudiation, assuming there was one, notwithstanding the long-standing rule that registration operates as a universal notice of title. For the same reason, we cannot dismiss the private respondents' claims commenced in 1974 over the estate registered in 1955. While actions to enforce a constructive trust prescribes in ten years, 12 reckoned from the date of the registration of the property, 13 we, as we said, are not prepared to count the period from such a date in this case. We note the petitioner's sub rosa efforts to get hold of the property exclusively for himself beginning with his fraudulent misrepresentation in his unilateral affidavit of extrajudicial settlement that he is "the only heir and child of his mother Feliza with the consequence that he was able to secure title in his name also." 14 Accordingly, we hold that the

right of the private respondents commenced from the time they actually discovered the petitioner's act of defraudation. 15 According to the respondent Court of Appeals, they "came to know [of it] apparently only during the progress of the litigation." 16 Hence, prescription is not a bar. Moreover, and as a rule, prescription is an affirmative defense that must be pleaded either in a motion to dismiss or in the answer otherwise it is deemed waived, 17 and here, the petitioner never raised that defense. 18 There are recognized exceptions to this rule, but the petitioner has not shown why they apply. WHEREFORE, there being no reversible error committed by the respondent Court of Appeals, the petition is DENIED. The Decision sought to be reviewed is hereby AFFIRMED in toto. No pronouncement as to costs. 11. G.R. No. 82670 September 15, 1989 DOMETILA M. ANDRES, doing business under the name and style "IRENE'S WEARING APPAREL," petitioner, vs. MANUFACTURERS HANOVER & TRUST CORPORATION and COURT OF APPEALS, respondents. Roque A. Tamayo for petitioner. Romulo, Mabanta, Buenaventura, Sayoc & De los Angeles for private respondent.


CORTES, J.: Assailed in this petition for review on certiorari is the judgment of the Court of Appeals, which, applying the doctrine of solutio indebiti, reversed the decision of the Regional Trial Court, Branch CV, Quezon City by deciding in favor of private respondent. Petitioner, using the business name "Irene's Wearing Apparel," was engaged in the manufacture of ladies garments, children's wear, men's apparel and linens for local and foreign buyers. Among its foreign buyers was Facets Funwear, Inc. (hereinafter referred to as FACETS) of the United States. In the course of the business transaction between the two, FACETS from time to time remitted certain amounts of money to petitioner in payment for the items it had purchased. Sometime in August 1980, FACETS instructed the First National State Bank of New Jersey, Newark, New Jersey, U.S.A. (hereinafter referred to as FNSB) to transfer $10,000.00 to petitioner via Philippine National Bank, Sta. Cruz Branch, Manila (hereinafter referred to as PNB). Acting on said instruction, FNSB instructed private respondent Manufacturers Hanover and Trust Corporation to effect the above- mentioned transfer through its facilities and to charge the amount to the account of FNSB with private respondent. Although private respondent was able to send a telex to PNB to pay petitioner $10,000.00 through the Pilipinas Bank, where petitioner had an account, the payment was not effected immediately because the payee designated in the telex was only "Wearing Apparel." Upon query by PNB, private respondent sent PNB another telex dated August 27, 1980 stating that the payment was to be made to "Irene's Wearing Apparel." On August 28, 1980, petitioner received the remittance of $10,000.00 through Demand Draft No. 225654 of the PNB.

Meanwhile, on August 25, 1980, after learning about the delay in the remittance of the money to petitioner, FACETS informed FNSB about the situation. On September 8, 1980, unaware that petitioner had already received the remittance, FACETS informed private respondent about the delay and at the same time amended its instruction by asking it to effect the payment through the Philippine Commercial and Industrial Bank (hereinafter referred to as PCIB) instead of PNB. Accordingly, private respondent, which was also unaware that petitioner had already received the remittance of $10,000.00 from PNB instructed the PCIB to pay $10,000.00 to petitioner. Hence, on September 11, 1980, petitioner received a second $10,000.00 remittance. Private respondent debited the account of FNSB for the second $10,000.00 remittance effected through PCIB. However, when FNSB discovered that private respondent had made a duplication of the remittance, it asked for a recredit of its account in the amount of $10,000.00. Private respondent complied with the request. Private respondent asked petitioner for the return of the second remittance of $10,000.00 but the latter refused to pay. On May 12, 1982 a complaint was filed with the Regional Trial Court, Branch CV, Quezon City which was decided in favor of petitioner as defendant. The trial court ruled that Art. 2154 of the New Civil Code is not applicable to the case because the second remittance was made not by mistake but by negligence and petitioner was not unjustly enriched by virtue thereof [Record, p. 234]. On appeal, the Court of Appeals held that Art. 2154 is applicable and reversed the RTC decision. The dispositive portion of the Court of Appeals' decision reads as follows: WHEREFORE, the appealed decision is hereby REVERSED and SET ASIDE and another one entered in favor of plaintiff-appellant


and against defendant-appellee Domelita (sic) M. Andres, doing business under the name and style "Irene's Wearing Apparel" to reimburse and/or return to plaintiff-appellant the amount of $10,000.00, its equivalent in Philippine currency, with interests at the legal rate from the filing of the complaint on May 12, 1982 until the whole amount is fully paid, plus twenty percent (20%) of the amount due as attomey's fees; and to pay the costs. With costs against defendant-appellee. SO ORDERED. [Rollo, pp. 29-30.] Thereafter, this petition was filed. The sole issue in this case is whether or not the private respondent has the right to recover the second $10,000.00 remittance it had delivered to petitioner. The resolution of this issue would hinge on the applicability of Art. 2154 of the New Civil Code which provides that: Art. 2154. If something received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. This provision is taken from Art. 1895 of the Spanish Civil Code which provided that: Art. 1895. If a thing is received when there was no right to claim it and which, through an error, has been unduly delivered, an obligation to restore it arises. In Velez v. Balzarza, 73 Phil. 630 (1942), the Court, speaking through Mr. Justice Bocobo explained the nature of this article thus: Article 1895 [now Article 2154] of the Civil Code abovequoted, is therefore applicable. This legal provision, which determines the quasi-contract of solution indebiti, is one of the concrete

manifestations of the ancient principle that no one shall enrich himself unjustly at the expense of another. In the Roman Law Digest the maxim was formulated thus: "Jure naturae acquum est, neminem cum alterius detrimento et injuria fieri locupletiorem." And the Partidas declared: "Ninguno non deue enriquecerse tortizeramente con dano de otro." Such axiom has grown through the centuries in legislation, in the science of law and in court decisions. The lawmaker has found it one of the helpful guides in framing statutes and codes. Thus, it is unfolded in many articles scattered in the Spanish Civil Code. (See for example, articles, 360, 361, 464, 647, 648, 797, 1158, 1163, 1295, 1303, 1304, 1893 and 1895, Civil Code.) This time-honored aphorism has also been adopted by jurists in their study of the conflict of rights. It has been accepted by the courts, which have not hesitated to apply it when the exigencies of right and equity demanded its assertion. It is a part of that affluent reservoir of justice upon which judicial discretion draws whenever the statutory laws are inadequate because they do not speak or do so with a confused voice. [at p. 632.] For this article to apply the following requisites must concur: "(1) that he who paid was not under obligation to do so; and, (2) that payment was made by reason of an essential mistake of fact" [City of Cebu v. Piccio, 110 Phil. 558, 563 (1960)]. It is undisputed that private respondent delivered the second $10,000.00 remittance. However, petitioner contends that the doctrine of solutio indebiti, does not apply because its requisites are absent. First, it is argued that petitioner had the right to demand and therefore to retain the second $10,000.00 remittance. It is alleged that even after the two $10,000.00 remittances are credited to petitioner's receivables from FACETS, the latter allegedly still had a balance of $49,324.00. Hence, it is argued that the last


$10,000.00 remittance being in payment of a pre-existing debt, petitioner was not thereby unjustly enriched. The contention is without merit. The contract of petitioner, as regards the sale of garments and other textile products, was with FACETS. It was the latter and not private respondent which was indebted to petitioner. On the other hand, the contract for the transmittal of dollars from the United States to petitioner was entered into by private respondent with FNSB. Petitioner, although named as the payee was not privy to the contract of remittance of dollars. Neither was private respondent a party to the contract of sale between petitioner and FACETS. There being no contractual relation between them, petitioner has no right to apply the second $10,000.00 remittance delivered by mistake by private respondent to the outstanding account of FACETS. Petitioner next contends that the payment by respondent bank of the second $10,000.00 remittance was not made by mistake but was the result of negligence of its employees. In connection with this the Court of Appeals made the following finding of facts: The fact that Facets sent only one remittance of $10,000.00 is not disputed. In the written interrogatories sent to the First National State Bank of New Jersey through the Consulate General of the Philippines in New York, Adelaide C. Schachel, the investigation and reconciliation clerk in the said bank testified that a request to remit a payment for Facet Funwear Inc. was made in August, 1980. The total amount which the First National State Bank of New Jersey actually requested the plaintiff-appellant Manufacturers Hanover & Trust Corporation to remit to Irene's Wearing Apparel was US $10,000.00. Only one remittance was requested by First National State Bank of New Jersey as per instruction of Facets Funwear (Exhibit "J", pp. 4-5).

That there was a mistake in the second remittance of US $10,000.00 is borne out by the fact that both remittances have the same reference invoice number which is 263 80. (Exhibits "A1- Deposition of Mr. Stanley Panasow" and "A-2-Deposition of Mr. Stanley Panasow"). Plaintiff-appellant made the second remittance on the wrong assumption that defendant-appellee did not receive the first remittance of US $10,000.00. [Rollo, pp. 26-27.] It is evident that the claim of petitioner is anchored on the appreciation of the attendant facts which petitioner would have this Court review. The Court holds that the finding by the Court of Appeals that the second $10,000.00 remittance was made by mistake, being based on substantial evidence, is final and conclusive. The rule regarding questions of fact being raised with this Court in a petition for certiorari under Rule 45 of the Revised Rules of Court has been stated in Remalante v. Tibe, G.R. No. 59514, February 25, 1988, 158 SCRA 138, thus: The rule in this jurisdiction is that only questions of law may be raised in a petition for certiorari under Rule 45 of the Revised Rules of Court. "The jurisdiction of the Supreme Court in cases brought to it from the Court of Appeals is limited to reviewing and revising the errors of law imputed to it, its findings of fact being conclusive" [Chan v. Court of Appeals, G.R. No. L-27488, June 30, 1970, 33 SCRA 737, reiterating a long line of decisions]. This Court has emphatically declared that "it is not the function of the Supreme Court to analyze or weigh such evidence all over again, its jurisdiction being limited to reviewing errors of law that might have been committed by the lower court" [Tiongco v. De la Merced, G.R. No. L-24426, July 25, 1974, 58 SCRA 89; Corona v. Court of Appeals, G.R. No. L-62482, April 28, 1983, 121 SCRA 865; Baniqued v. Court of Appeals, G. R. No. L-47531, February 20, 1984, 127 SCRA 596]. "Barring, therefore, a showing that the findings complained of are totally devoid of


support in the record, or that they are so glaringly erroneous as to constitute serious abuse of discretion, such findings must stand, for this Court is not expected or required to examine or contrast the oral and documentary evidence submitted by the parties" [Santa Ana, Jr. v. Hernandez, G.R. No. L-16394, December 17, 1966, 18 SCRA 9731. [at pp. 144-145.] Petitioner invokes the equitable principle that when one of two innocent persons must suffer by the wrongful act of a third person, the loss must be borne by the one whose negligence was the proximate cause of the loss. The rule is that principles of equity cannot be applied if there is a provision of law specifically applicable to a case [Phil. Rabbit Bus Lines, Inc. v. Arciaga, G.R. No. L-29701, March 16, 1987,148 SCRA 433; Zabat, Jr. v. Court of Appeals, G.R. No. L36958, July 10, 1986, 142 SCRA 587; Rural Bank of Paranaque, Inc. v. Remolado, G.R. No. 62051, March 18, 1985, 135 SCRA 409; Cruz v. Pahati, 98 Phil. 788 (1956)]. Hence, the Court in the case of De Garcia v. Court of Appeals, G.R. No. L-20264, January 30, 1971, 37 SCRA 129, citing Aznar v. Yapdiangco, G.R. No. L-18536, March 31, 1965, 13 SCRA 486, held: ... The common law principle that where one of two innocent persons must suffer by a fraud perpetrated by another, the law imposes the loss upon the party who, by his misplaced confidence, has enabled the fraud to be committed, cannot be applied in a case which is covered by an express provision of the new Civil Code, specifically Article 559. Between a common law principle and a statutory provision, the latter must prevail in this jurisdiction. [at p. 135.] Having shown that Art. 2154 of the Civil Code, which embodies the doctrine of solutio indebiti, applies in the case at bar, the Court must reject the common law principle invoked by petitioner.

Finally, in her attempt to defeat private respondent's claim, petitioner makes much of the fact that from the time the second $10,000.00 remittance was made, five hundred and ten days had elapsed before private respondent demanded the return thereof. Needless to say, private respondent instituted the complaint for recovery of the second $10,000.00 remittance well within the six years prescriptive period for actions based upon a quasi-contract [Art. 1145 of the New Civil Code]. WHEREFORE, the petition is DENIED and the decision of the Court of Appeals is hereby AFFIRMED. 12. G.R. No. L-17447 April 30, 1963 GONZALO PUYAT & SONS, INC., plaintiff-appelle, vs. CITY OF MANILA AND MARCELO SARMIENTO, as City Treasurer of Manila, defendants-appellants Feria, Manglapus & Associates for plainttiffappelle.Asst. City Fiscal Manuel T. Reyes for defendantsappellants. PAREDES, J.: This is an appeal from the judgment of the CFI of Manila, the dispostive portion of which reads: "xxx Of the payments made by the plaintiff, only that made on October 25, 1950 in the amount of P1,250.00 has prescribed Payments made in 1951 and thereafter are still recoverable since


the extra-judicial demand made on October 30, 1956 was well within the six-year prescriptive period of the New CivilCode. In view of the foregoing considerations, judgment is hereby rendered in favor of the plaintiff, ordering the defendants to refund the amount of P29,824.00, without interest. No costs. Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët Defendants' counterclaim is hereby dismissed for not having been substantiated." On August 11, 1958, the plaintiff Gonzalo Puyat & Sons, Inc., filed an action for refund of Retail Dealerls Taxes paid by it, corresponding to the first Quarter of 1950 up to the third Quarter of 1956, amounting to P33,785.00, against the City of Manila and its City Treasurer. The case was submitted on the following stipulation of facts, to wit-- "1. That the plaintiff is a corporation duly organized and existing according to the laws of the Philippines, with offices at Manila; while defendant City Manila is a Municipal Corporation duly organized in accordance with the laws of the Philippines, and defendant Marcelino Sarmiento is the dulyqualified incumbent City Treasurer of Manila; "2. That plaintiff is engaged in the business of manufacturing and selling all kinds of furniture at its factory at 190 Rodriguez-Arias, San Miguel, Manila, and has a display room located at 604-606 Rizal Avenue, Manila, wherein it displays the various kind of furniture manufactured by it and sells some goods imported by it, such as billiard balls, bowling balls and other accessories; "3. That acting pursuant to the provisions of Sec. 1. group II, of Ordinance No. 3364, defendant City Treasurer of Manila assessed from plaintiff retail dealer's tax corresponding to the quarters hereunder stated on the sales of furniture manufactured and sold by it at its factory site, all of which assessments plaintiff paid

without protest in the erroneous belief that it was liable therefor, on the dates and in the amount enumerated herein below: Period

Date Paid

O.R. No.

Amount Assessed and Paid.

First Quarter 1950

Jan. 25, 1950

436271X

P1,255.00

Second Quarter 1950

Apr. 25, 1950

215895X

1,250.00

Third Quarter 1950

Jul. 25, 1950

243321X

1,250.00

Fourth Quarter 1950

Oct. 25, 1950

271165X

1,250.00

(Follows the assessment for different quarters in 1951, 1952, 1953, 1954 and 1955, fixing the same amount quarterly.) x x x.. First Quarter 1956

Jan. 25, 1956

823047X

1,250.00

Second Quarter 1956

Apr. 25, 1956

855949X

1,250.00

Third Quarter 1956

Jul. 25, 1956

880789X

1,250.00


T O T A L . . . . . . . . . . . . .

P33,785.00 ===========

"4. That plaintiff, being a manufacturer of various kinds of furniture, is exempt from the payment of taxes imposed under the provisions of Sec. 1, Group II, of Ordinance No. 3364,which took effect on September 24, 1956, on the sale of the various kinds of furniture manufactured by it pursuant to the provisions of Sec. 18(n) of Republic Act No. 409 (Revised Charter of Manila), as restated in Section 1 of Ordinance No.3816. "5. That, however, plaintiff, is liable for the payment of taxes prescribed in Section 1, Group II or Ordinance No. 3364mas amended by Sec. 1, Group II of Ordinance No. 3816, which took effect on September 24, 1956, on the sales of imported billiard balls, bowling balls and other accessories at its display room. The taxes paid by the plaintiff on the sales of said article are as follows: x x x x x x x x x "6. That on October 30, 1956, the plaintiff filed with defendant City Treasurer of Manila, a formal request for refund of the retail dealer's taxes unduly paid by it as aforestated in paragraph 3, hereof. "7. That on July 24, 1958, the defendant City Treasurer of Manila definitely denied said request for refund. "8. Hence on August 21, 1958, plaintiff filed the present complaint. "9. Based on the above stipulation of facts, the legal issues to be resolved by this Honorable Court are: (1) the period of prescription applicable in matters of refund of municipal taxes erroneously paid by a taxpayer and (2) refund of taxes not paid under protest. x x x." Said judgment was directly appealed to this Court on two dominant issues to wit: (1) Whether or not the amounts paid by plaintiff-appelle, as retail dealer's taxes under Ordinance 1925, as amended by Ordinance No. 3364of the City of Manila, without

protest, are refundable;(2) Assuming arguendo, that plaintiffappellee is entitled to the refund of the retail taxes in question, whether or not the claim for refund filed in October 1956, in so far as said claim refers to taxes paid from 1950 to 1952 has already prescribed. . Under the first issue, defendants-appellants contend tht the taxes in question were voluntarily paid by appellee company and since, in this jurisdiction, in order that a legal basis arise for claim of refund of taxes erroneously assessed, payment thereof must be made under protest, and this being a condition sine qua non, and no protest having been made, -- verbally or in writing, thereby indicating that the payment was voluntary, the action must fail. Cited in support of the above contention, are the cases of Zaragoza vs. Alfonso, 46 Phil. 160-161, and Gavino v. Municipality of Calapan, 71 Phil. 438.. In refutation of the above stand of appellants, appellee avers tht the payments could not have been voluntary. At most, they were paid "mistakenly and in good faith" and "without protest in the erroneous belief that it was liable thereof." Voluntariness is incompatible with protest and mistake. It submits that this is a simple case of "solutio indebiti".. Appellants do not dispute the fact that appellee-company is exempted from the payment of the tax in question. This is manifest from the reply of appellant City Treasurer stating that sales of manufactured products at the factory site are not taxable either under the Wholesalers Ordinance or under the Retailers' Ordinance. With this admission, it would seem clear that the taxes collected from appellee were paid, thru an error or mistake, which places said act of payment within the pale of the new Civil Code provision on solutio indebiti. The appellant City of Manila, at the very start, notwithstanding the Ordinance imposing the Retailer's Tax, had no right to demand payment thereof.. "If something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises" (Art. 2154, NCC)..


Appelle categorically stated that the payment was not voluntarily made, (a fact found also by the lower court),but on the erroneous belief, that they were due. Under this circumstance, the amount paid, even without protest is recoverable. "If the payer was in doubt whether the debt was due, he may recover if he proves that it was not due" (Art. 2156, NCC). Appellee had duly proved that taxes were not lawfully due. There is, therefore, no doubt that the provisions of solutio indebtiti, the new Civil Code, apply to the admitted facts of the case.. With all, appellant quoted Manresa as saying: "x x x Of the same opinion are Mr. Sanchez Roman and Mr. Galcon, and which states that if the payment was made by mistake of law, nor does the quasi-contract exist nor is it bound to the refund that I collect, although it should not be What was paid" (Manresa, Tomo 12, paginas 611-612). This opinion, however, has already lost its persuasiveness, in view of the provisions of the Civil Code, recognizing "error de derecho" as a basis for the quasi-contract, of solutio indebiti. . "Payment by reason of a mistake in the contruction or application of a doubtful or difficult question of law may come within the scope of the preceding article" (Art. 21555).. There is no gainsaying the fact that the payments made by appellee was due to a mistake in the construction of a doubtful question of law. The reason underlying similar provisions, as applied to illegal taxation, in the United States, is expressed in the case of Newport v. Ringo, 37 Ky. 635, 636; 10 S.W. 2, in the following manner:. "It is too well settled in this state to need the citation of authority that if money be paid through a clear mistake of law or fact, essentially affecting the rights of the parties, and which in law or conscience was not payable, and should not be retained by the party receiving it, it may be recovered. Both law and sound morality so dictate. Especially should this be the rule as to illegal

taxation. The taxpayer has no voice in the imposition of the burden. He has the right to presume that the taxing power has been lawfully exercised. He should not be required to know more than those in authority over him, nor should he suffer loss by complying with what he bona fide believe to be his duty as a good citizen. Upon the contrary, he should be promoted to its ready performance by refunding to him any legal exaction paid by him in ignorance of its illegality; and, certainly, in such a case, if be subject to a penalty for nonpayment, his compliance under belief of its legality, and without awaiting a resort to judicial proceedings should not be regarded in law as so far voluntary as to affect his right of recovery.". "Every person who through an act or performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal grounds, shall return the same to him"(Art. 22, Civil Code). It would seems unedifying for the government, (here the City of Manila), that knowing it has no right at all to collect or to receive money for alleged taxes paid by mistake, it would be reluctant to return the same. No one should enrich itself unjustly at the expense of another (Art. 2125, Civil Code).. Admittedly, plaintiff-appellee paid the tax without protest.Equally admitted is the fact that section 76 of the Charter of Manila provides that "No court shall entertain any suit assailing the validity of tax assessed under this article until the taxpayer shall have paid, under protest the taxes assessed against him, xx". It should be noted, however, that the article referred to in said section is Article XXI, entitled Department of Assessment and the sections thereunder manifestly show that said article and its sections relate to asseessment, collection and recovery of real estate taxes only. Said section 76, therefor, is not applicable to the case at bar, which relates to the recover of retail dealer taxes.. In the opinion of the Secretary of Justice (Op. 90,Series of 1957, in a question similar to the case at bar, it was held that the


requiredment of protest refers only to the payment of taxes which are directly imposed by the charter itself, that is, real estate taxes, which view was sustained by judicial and administrative precedents, one of which is the case of Medina, et al., v. City of Baguio, G.R. No. L-4269, Aug. 29, 1952. In other words, protest is not necessary for the recovery of retail dealer's taxes, like the present, because they are not directly imposed by the charter. In the Medina case, the Charter of Baguio (Chap. 61, Revised Adm. Code), provides that "no court shall entertain any suit assailing the validity of a tax assessed unde this charter until the tax-payer shall have paid, under protest, the taxes assessed against him (sec.25474[b], Rev. Adm. Code), a proviso similar to section 76 of the Manila Charter. The refund of specific taxes paid under a void ordinance was ordered, although it did not appear that payment thereof was made under protest.. In a recent case, We said: "The appellants argue that the sum the refund of which is sought by the appellee, was not paid under protest and hence is not refundable. Again, the trial court correctly held that being unauthorized, it is not a tax assessed under the Charter of the Appellant City of Davao and for that reason, no protest is necessary for a claim or demand for its refund" (Citing the Medina case, supra; East Asiatic Co., Ltd. v. City of Davao, G.R. No. L-16253, Aug. 21, 1962). Lastly, being a case of solutio indebiti, protest is not required as a condition sine qua non for its application.. The next issue in discussion is that of prescription. Appellants maintain that article 1146 (NCC), which provides for a period of four (4) years (upon injury to the rights of the plaintiff), apply to the case. On the other hand, appellee contends that provisions of Act 190 (Code of Civ. Procedure) should apply, insofar as payments made before the effectivity of the New Civil Code on August 30, 1950, the period of which is ten (10) years, (Sec. 40,Act No. 190; Osorio v. Tan Jongko, 51 O.G. 6211) and article 1145 (NCC), for payments made after said effectivity, providing

for a period of six (6) years (upon quasi-contracts like solutio indebiti). Even if the provisionsof Act No. 190 should apply to those payments made before the effectivity of the new Civil Code, because "prescription already runnig before the effectivity of this Code shall be governed by laws previously in force x x x" (art. 1116, NCC), for payments made after said effectivity,providing for a period of six (6) years (upon quasi-contracts like solutio indebiti). Even if the provisions of Act No. 190should apply to those payments made before the effectivity of the new Civil Code, because "prescription already running before the effectivity of of this Code shall be govern by laws previously in force xxx " (Art. 1116, NCC), Still payments made before August 30, 1950 are no longer recoverable in view of the second paragraph of said article (1116), which provides:"but if since the time this Code took effect the entire period herein required for prescription should elapse the present Code shall be applicable even though by the former laws a longer period might be required". Anent the payments made after August 30, 1950, it is abvious that the action has prescribed with respect to those made before October 30, 1950 only, considering the fact that the prescription of action is interrupted xxx when is a writteen extra-judicial demand x x x" (Art. 1155, NCC), and the written demand in the case at bar was made on October 30, 1956 (Stipulation of Facts).MODIFIED in the sense that only payments made on or after October 30, 1950 should be refunded, the decision appealed from is affirmed, in all other respects. No costs. . 13.

G.R. Nos. 198729-30 January 15, 2014 CBK POWER COMPANY LIMITED, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.


D E C I S I O N SERENO, CJ: This is a Petition for Review on Certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure filed by CBK Power Company Limited (petitioner). The Petition assails the Decision2 dated 27 June 2011 and Resolution3 dated 16 September 2011 of the Court of Tax Appeals En Banc (CTA En Banc in C.T.A. EB Nos. 658 and 659. The assailed Decision and Resolution reversed and set aside the Decision4 dated 3 March 2010 and Resolution5 dated 6 July 2010 rendered by the CTA Special Second Division in C.T.A. Case No. 7621, which partly granted the claim of petitioner for the issuance of a tax credit certificate representing the latter's alleged unutilized input taxes on local purchases of goods and services attributable to effectively zero-rated sales to National Power Corporation (NPC) for the second and third quarters of 2005. The Facts Petitioner is engaged, among others, in the operation, maintenance, and management of the Kalayaan II pumpedstorage hydroelectric power plant, the new Caliraya Spillway, Caliraya, Botocan; and the Kalayaan I hydroelectric power plants and their related facilities located in the Province of Laguna.6 On 29 December 2004, petitioner filed an Application for VAT Zero-Rate with the Bureau of Internal Revenue (BIR) in accordance with Section 108(B)(3) of the National Internal Revenue Code (NIRC) of 1997, as amended. The application was duly approved by the BIR. Thus, petitioner ’s sale of electr icity to the NPC from 1 January 2005 to 31 October 2005 was declared to be entitled to the benefit of effectively zero-rated value added tax (VAT).7

Petitioner filed its administrative claims for the issuance of tax credit certificates for its alleged unutilized input taxes on its purchase of capital goods and alleged unutilized input taxes on its local purchases and/or importation of goods and services, other than capital goods, pursuant to Sections 112(A) and (B) of the NIRC of 1997, as amended, with BIR Revenue District Office (RDO) No. 55 of Laguna, as follows:8 Period Covered

Date Of Filing

1st quarter of 2005

30-Jun-05

2nd quarter of 2005

15-Sep-05

3rd quarter of 2005

28-Oct-05

Alleging inaction of the Commissioner of Internal Revenue (CIR), petitioner filed a Petition for Review with the CTA on 18 April 2007. THE CTA SPECIAL SECOND DIVISION RULING After trial on the merits, the CTA Special Second Division rendered a Decision on 3 March 2010. Applying Commissioner of Internal Revenue v. Mirant Pagbilao Corporation (Mirant),9 the court a quo ruled that petitioner had until the following dates within which to file both administrative and judicial claims: Taxable Quarter 2005

Close of the quarter

Last Day File Claim Refund

1st quarter

31-Mar-05

31-Mar-07


to for

2nd quarter

30-Jun-05

30-Jun-07

3rd quarter

30-Sep-05

30-Sep-07

Accordingly, petitioner timely filed its administrative claims for the three quarters of 2005. However, considering that the judicial claim was filed on 18 April 2007, the CTA Division denied the claim for the first quarter of 2005 for having been filed out of time. After an evaluation of petitioner’s claim for the second and third quarters of 2005, the court a quo partly granted the claim and ordered the issuance of a tax credit certificate in favor of petitioner in the reduced amount of P27,170,123.36. The parties filed their respective Motions for Partial Reconsideration, which were both denied by the CTA Division. THE CTA EN BANC RULING On appeal, relying on Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi),10 the CTA En Banc ruled that petitioner’s judicial claim for the first, second, and third quarters of 2005 were belatedly filed. The CTA Special Second Division Decision and Resolution were reversed and set aside, and the Petition for Review filed in CTA Case No. 7621 was dismissed. Petitioner’s Motion for Reconsideration was likewise denied for lack of merit. Hence, this Petition.ISSUE Petitioner’s assigned errors boil down to the principal issue of the applicable prescriptive period on its claim for refund of unutilized input VAT for the first to third quarters of 2005.11

THE COURT’S RULING The pertinent provision of the NIRC at the time when petitioner filed its claim for refund provides: SEC. 112. Refunds or Tax Credits of Input Tax. – (A) Zero-rated or Effectively Zero-rated Sales. - Any VATregistered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1),(2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively zerorated sale and also in taxable or exempt sale of goods or properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales. x x x x (D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents


in support of the application filed in accordance with Subsections (A) and (B) hereof. In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals. Petitioner’s sales to NPC are effectively zero-rated As aptly ruled by the CTA Special Second Division, petitioner’s sales to NPC are effectively subject to zero percent (0%) VAT. The NPC is an entity with a special charter, which categorically exempts it from the payment of any tax, whether direct or indirect, including VAT. Thus, services rendered to NPC by a VATregistered entity are effectively zero-rated. In fact, the BIR itself approved the application for zero-rating on 29 December 2004, filed by petitioner for its sales to NPC covering January to October 2005.12 As a consequence, petitioner claims for the refund of the alleged excess input tax attributable to its effectively zero-rated sales to NPC. In Panasonic Communications Imaging Corporation of the Philippines v. Commissioner of Internal Revenue,13 this Court ruled: Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes equal to the input taxes that his suppliers passed on to him, no payment is required of him. It is when his output taxes exceed his input taxes that he has to pay the excess to the BIR. If the input taxes exceed the output taxes, however, the excess payment shall be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated

or effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output taxes shall instead be refunded to the taxpayer. The crux of the controversy arose from the proper application of the prescriptive periods set forth in Section 112 of the NIRC of 1997, as amended, and the interpretation of the applicable jurisprudence. Although the ponente in this case expressed a different view on the mandatory application of the 120+30 day period as prescribed in Section 112, with the finality of the Court’s pronouncement on the consolidated tax cases Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v. Commissioner of Internal Revenue14 (hereby collectively referred as San Roque), we are constrained to apply the dispositions therein to the facts herein which are similar. Administrative Claim Section 112(A) provides that after the close of the taxable quarter when the sales were made, there is a two-year prescriptive period within which a VAT-registered person whose sales are zero-rated or effectively zero-rated may apply for the issuance of a tax credit certificate or refund of creditable input tax. Our VAT Law provides for a mechanism that would allow VATregistered persons to recover the excess input taxes over the output taxes they had paid in relation to their sales. For the refund or credit of excess or unutilized input tax, Section 112 is the governing law. Given the distinctive nature of creditable input tax, the law under Section 112 (A) provides for a different reckoning point for the two-year prescriptive period, specifically for the refund or credit of that tax only.


We agree with petitioner that Mirant was not yet in existence when their administrative claim was filed in 2005; thus, it should not retroactively be applied to the instant case. However, the fact remains that Section 112 is the controlling provision for the refund or credit of input tax during the time that petitioner filed its claim with which they ought to comply. It must be emphasized that the Court merely clarified in Mirant that Sections 204 and 229, which prescribed a different starting point for the two-year prescriptive limit for filing a claim for a refund or credit of excess input tax, were not applicable. Input tax is neither an erroneously paid nor an illegally collected internal revenue tax.15 Section 112(A) is clear that for VAT-registered persons whose sales are zero-rated or effectively zero-rated, a claim for the refund or credit of creditable input tax that is due or paid, and that is attributable to zero-rated or effectively zero-rated sales, must be filed within two years after the close of the taxable quarter when such sales were made. The reckoning frame would always be the end of the quarter when the pertinent sale or transactions were made, regardless of when the input VAT was paid.16

2nd quarter 30-Jun2005 05

30-Jun-07

15-Sep-05

3rd quarter 30-Sep2005 05

30-Sep-07

28-Oct-05

Judicial Claim Section 112(D) further provides that the CIR has to decide on an administrative claim within one hundred twenty (120) days from the date of submission of complete documents in support thereof. Bearing in mind that the burden to prove entitlement to a tax refund is on the taxpayer, it is presumed that in order to discharge its burden, petitioner had attached complete supporting documents necessary to prove its entitlement to a refund in its application, absent any evidence to the contrary. Thereafter, the taxpayer affected by the CIR’s decision or inaction may appeal to the CTA within 30 days from the receipt of the decision or from the expiration of the 120-day period within which the claim has not been acted upon.

Pursuant to Section 112(A), petitioner’s administrative claims were filed well within the two-year period from the close of the taxable quarter when the effectively zero-rated sales were made, to wit:

Considering further that the 30-day period to appeal to the CTA is dependent on the 120-day period, compliance with both periods is jurisdictional. The period of 120 days is a prerequisite for the commencement of the 30-day period to appeal to the CTA.

Period Covered

Prescinding from San Roque in the consolidated case Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue and Mindanao I Geothermal Partnership v. Commissioner of Internal Revenue,17 this Court has ruled thus:

Close of Last day to the Administrative Taxable Claim Quarter

File Date Filing

of

Notwithstanding a strict construction of any claim for tax exemption or refund, the Court in San Roque recognized that BIR Ruling No. DA-489-03 constitutes equitable estoppel in favor of 52 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

1st quarter 31-Mar2005 05

31-Mar-07

30-Jun-05

taxpayers. BIR Ruling No. DA-489-03 expressly states that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with the CTA by way of Petition for Review." This Court discussed BIR Ruling No. DA489-03 and its effect on taxpayers, thus: Taxpayers should not be prejudiced by an erroneous interpretation by the Commissioner, particularly on a difficult question of law. The abandonment of the Atlas doctrine by Mirant and Aichi is proof that the reckoning of the prescriptive periods for input VAT tax refund or credit is a difficult question of law. The abandonment of the Atlas doctrine did not result in Atlas, or other taxpayers similarly situated, being made to return the tax refund or credit they received or could have received under Atlas prior to its abandonment. This Court is applying Mirant and Aichi prospectively. Absent fraud, bad faith or misrepresentation, the reversal by this Court of a general interpretative rule issued by the Commissioner, like the reversal of a specific BIR ruling under Section 246, should also apply prospectively. x x x. x x x x Thus, the only issue is whether BIR Ruling No. DA-489-03 is a general interpretative rule applicable to all taxpayers or a specific ruling applicable only to a particular taxpayer. BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a query made, not by a particular taxpayer, but by a government agency asked with processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit and Drawback Center of the Department of Finance. This government agency is also the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this government agency mentions in its query to the Commissioner the administrative claim of Lazi Bay Resources Development, Inc., the agency was in fact asking the Commissioner what to do in cases like the tax

claim of Lazi Bay Resources Development, Inc., where the taxpayer did not wait for the lapse of the 120-day period. Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.1âwphi1 Thus, all taxpayers can rely on BIR Ruling No. DA489-03 from the time of its issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the 120+30 day periods are mandatory and jurisdictional. (Emphasis supplied) In applying the foregoing to the instant case, we consider the following pertinent dates: 1âwphi1 Period Covered

Administrative Expiration Last day Judicial Claim Filed of 120- to file Claim days Judicial Filed Claim

1st quarter 2005

30-Jun-05

28-Oct-05 27-Nov05

2nd quarter 2005

15-Sep-05

13-Jan-06

3rd quarter 2005

28-Oct-05

26-Feb-06 28-Mar06

18-Apr07

13-Feb06

It must be emphasized that this is not a case of premature filing of a judicial claim. Although petitioner did not file its judicial claim with the CTA prior to the expiration of the 120-day waiting period, it failed to observe the 30-day prescriptive period to appeal to the CTA counted from the lapse of the 120-day period.


Petitioner is similarly situated as Philex in the same case, San Roque,18 in which this Court ruled: Unlike San Roque and Taganito, Philex’s case is not one of premature filing but of late filing. Philex did not file any petition with the CTA within the 120-day period. Philex did not also file any petition with the CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after the expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any event, whether governed by jurisprudence before, during, or after the Atlas case, Philex’s judicial claim will have to be rejected because of late filing. Whether the two-year prescriptive period is counted from the date of payment of the output VAT following the Atlas doctrine, or from the close of the taxable quarter when the sales attributable to the input VAT were made following the Mirant and Aichi doctrines, Philex’s judicial claim was indisputably filed late. The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the Commissioner on Philex’s claim during the 120-day period is, by express provision of law, "deemed a denial" of Philex’s claim. Philex had 30 days from the expiration of the 120-day period to file its judicial claim with the CTA. Philex’s failure to do so rendered the "deemed a denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA from a decision or "deemed a denial" decision of the Commissioner is merely a statutory privilege, not a constitutional right. The exercise of such statutory privilege requires strict compliance with the conditions attached by the statute for its exercise. Philex failed to comply with the statutory conditions and must thus bear the consequences. (Emphases in the original) Likewise, while petitioner filed its administrative and judicial claims during the period of applicability of BIR Ruling No. DA-

489-03, it cannot claim the benefit of the exception period as it did not file its judicial claim prematurely, but did so long after the lapse of the 30-day period following the expiration of the 120day period. Again, BIR Ruling No. DA-489-03 allowed premature filing of a judicial claim, which means non-exhaustion of the 120day period for the Commissioner to act on an administrative claim,19 but not its late filing. As this Court enunciated in San Roque , petitioner cannot rely on Atlas either, since the latter case was promulgated only on 8 June 2007. Moreover, the doctrine in Atlas which reckons the twoyear period from the date of filing of the return and payment of the tax, does not interpret − expressly or impliedly − the 120+30 day periods.20 Simply stated, Atlas referred only to the reckoning of the prescriptive period for filing an administrative claim. For failure of petitioner to comply with the 120+30 day mandatory and jurisdictional period, petitioner lost its right to claim a refund or credit of its alleged excess input VAT. With regard to petitioner’s argument that Aichi should not be applied retroactively, we reiterate that even without that ruling, the law is explicit on the mandatory and jurisdictional nature of the 120+30 day period. Also devoid of merit is the applicability of the principle of solutio indebiti to the present case. According to this principle, if something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises. In that situation, a creditor-debtor relationship is created under a quasi-contract, whereby the payor becomes the creditor who then has the right to demand the return of payment made by mistake, and the person who has no right to receive the payment becomes obligated to return it.21 The quasi-contract of solutio indebiti is based on the ancient principle that no one shall enrich oneself unjustly at the expense of another.22


There is solutio indebiti when: (1) Payment is made when there exists no binding relation between the payor, who has no duty to pay, and the person who received the payment; and (2) Payment is made through mistake, and not through liberality or some other cause.23 Though the principle of solutio indebiti may be applicable to some instances of claims for a refund, the elements thereof are wanting in this case. First, there exists a binding relation between petitioner and the CIR, the former being a taxpayer obligated to pay VAT. Second, the payment of input tax was not made through mistake, since petitioner was legally obligated to pay for that liability. The entitlement to a refund or credit of excess input tax is solely based on the distinctive nature of the VAT system. At the time of payment of the input VAT, the amount paid was correct and proper.24 Finally, equity, which has been aptly described as "a justice outside legality," is applied only in the absence of, and never against, statutory law or judicial rules of procedure.25 Section 112 is a positive rule that should preempt and prevail over all abstract arguments based only on equity. Well-settled is the rule that tax refunds or credits, just like tax exemptions, are strictly construed against the taxpayer.26 The burden is on the taxpayer to show strict compliance with the conditions for the grant of the tax refund or credit.27 WHEREFORE, premises considered, the instant Petition is DENIED.

14.

G.R. No. L-12191 October 14, 1918 JOSE CANGCO, plaintiff-appellant, vs. MANILA RAILROAD CO., defendant-appellee. Ramon Sotelo for appellant. Kincaid & Hartigan for appellee.

FISHER, J.: At the time of the occurrence which gave rise to this litigation the plaintiff, Jose Cangco, was in the employment of Manila Railroad Company in the capacity of clerk, with a monthly wage of P25. He lived in the pueblo of San Mateo, in the province of Rizal, which is located upon the line of the defendant railroad company; and in coming daily by train to the company's office in the city of Manila where he worked, he used a pass, supplied by the company, which entitled him to ride upon the company's trains free of charge. Upon the occasion in question, January 20, 1915, the plaintiff arose from his seat in the second class-car where he was riding and, making, his exit through the door, took his position upon the steps of the coach, seizing the upright guardrail with his right hand for support. On the side of the train where passengers alight at the San Mateo station there is a cement platform which begins to rise with a moderate gradient some distance away from the company's office and extends along in front of said office for a distance sufficient to cover the length of several coaches. As the train slowed down another passenger, named Emilio Zuñiga, also an


employee of the railroad company, got off the same car, alighting safely at the point where the platform begins to rise from the level of the ground. When the train had proceeded a little farther the plaintiff Jose Cangco stepped off also, but one or both of his feet came in contact with a sack of watermelons with the result that his feet slipped from under him and he fell violently on the platform. His body at once rolled from the platform and was drawn under the moving car, where his right arm was badly crushed and lacerated. It appears that after the plaintiff alighted from the train the car moved forward possibly six meters before it came to a full stop. The accident occurred between 7 and 8 o'clock on a dark night, and as the railroad station was lighted dimly by a single light located some distance away, objects on the platform where the accident occurred were difficult to discern especially to a person emerging from a lighted car. The explanation of the presence of a sack of melons on the platform where the plaintiff alighted is found in the fact that it was the customary season for harvesting these melons and a large lot had been brought to the station for the shipment to the market. They were contained in numerous sacks which has been piled on the platform in a row one upon another. The testimony shows that this row of sacks was so placed of melons and the edge of platform; and it is clear that the fall of the plaintiff was due to the fact that his foot alighted upon one of these melons at the moment he stepped upon the platform. His statement that he failed to see these objects in the darkness is readily to be credited. The plaintiff was drawn from under the car in an unconscious condition, and it appeared that the injuries which he had received were very serious. He was therefore brought at once to a certain hospital in the city of Manila where an examination was made and his arm was amputated. The result of this operation was

unsatisfactory, and the plaintiff was then carried to another hospital where a second operation was performed and the member was again amputated higher up near the shoulder. It appears in evidence that the plaintiff expended the sum of P790.25 in the form of medical and surgical fees and for other expenses in connection with the process of his curation. Upon August 31, 1915, he instituted this proceeding in the Court of First Instance of the city of Manila to recover damages of the defendant company, founding his action upon the negligence of the servants and employees of the defendant in placing the sacks of melons upon the platform and leaving them so placed as to be a menace to the security of passenger alighting from the company's trains. At the hearing in the Court of First Instance, his Honor, the trial judge, found the facts substantially as above stated, and drew therefrom his conclusion to the effect that, although negligence was attributable to the defendant by reason of the fact that the sacks of melons were so placed as to obstruct passengers passing to and from the cars, nevertheless, the plaintiff himself had failed to use due caution in alighting from the coach and was therefore precluded form recovering. Judgment was accordingly entered in favor of the defendant company, and the plaintiff appealed. It can not be doubted that the employees of the railroad company were guilty of negligence in piling these sacks on the platform in the manner above stated; that their presence caused the plaintiff to fall as he alighted from the train; and that they therefore constituted an effective legal cause of the injuries sustained by the plaintiff. It necessarily follows that the defendant company is liable for the damage thereby occasioned unless recovery is barred by the plaintiff's own contributory negligence. In resolving this problem it is necessary that each of these conceptions of liability, to-wit, the primary responsibility of the defendant company and the contributory negligence of the plaintiff should be separately examined.


It is important to note that the foundation of the legal liability of the defendant is the contract of carriage, and that the obligation to respond for the damage which plaintiff has suffered arises, if at all, from the breach of that contract by reason of the failure of defendant to exercise due care in its performance. That is to say, its liability is direct and immediate, differing essentially, in legal viewpoint from that presumptive responsibility for the negligence of its servants, imposed by article 1903 of the Civil Code, which can be rebutted by proof of the exercise of due care in their selection and supervision. Article 1903 of the Civil Code is not applicable to obligations arising ex contractu, but only to extra-contractual obligations — or to use the technical form of expression, that article relates only to culpa aquiliana and not to culpa contractual. Manresa (vol. 8, p. 67) in his commentaries upon articles 1103 and 1104 of the Civil Code, clearly points out this distinction, which was also recognized by this Court in its decision in the case of Rakes vs. Atlantic, Gulf and Pacific Co. (7 Phil. rep., 359). In commenting upon article 1093 Manresa clearly points out the difference between "culpa, substantive and independent, which of itself constitutes the source of an obligation between persons not formerly connected by any legal tie" and culpa considered as an accident in the performance of an obligation already existing . . . ." In the Rakes case (supra) the decision of this court was made to rest squarely upon the proposition that article 1903 of the Civil Code is not applicable to acts of negligence which constitute the breach of a contract. Upon this point the Court said: The acts to which these articles [1902 and 1903 of the Civil Code] 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 article 1101, 1103, and 1104 of the same code. (Rakes vs. Atlantic, Gulf and Pacific Co., 7 Phil. Rep., 359 at 365.) This distinction is of the utmost importance. The liability, which, under the Spanish law, is, in certain cases imposed upon employers with respect to damages occasioned by the negligence of their employees to persons to whom they are not bound by contract, is not based, as in the English Common Law, upon the principle of respondeat superior — if it were, the master would be liable in every case and unconditionally — but upon the principle announced in article 1902 of the Civil Code, which imposes upon all persons who by their fault or negligence, do injury to another, the obligation of making good the damage caused. One who places a powerful automobile in the hands of a servant whom he knows to be ignorant of the method of managing such a vehicle, is himself guilty of an act of negligence which makes him liable for all the consequences of his imprudence. The obligation to make good the damage arises at the very instant that the unskillful servant, while acting within the scope of his employment causes the injury. The liability of the master is personal and direct. But, if the master has not been guilty of any negligence whatever in the selection and direction of the servant, he is not liable for the acts of the latter, whatever done within the scope of his employment or not, if the damage done by the servant does not amount to a breach of the contract between the master and the person injured. It is not accurate to say that proof of diligence and care in the selection and control of the servant relieves the master from liability for the latter's acts — on the contrary, that proof shows that the responsibility has never existed. As Manresa says (vol. 8, p. 68) the liability arising from extra-contractual culpa is always based upon a voluntary act or omission which, without willful


intent, but by mere negligence or inattention, has caused damage to another. A master who exercises all possible care in the selection of his servant, taking into consideration the qualifications they should possess for the discharge of the duties which it is his purpose to confide to them, and directs them with equal diligence, thereby performs his duty to third persons to whom he is bound by no contractual ties, and he incurs no liability whatever if, by reason of the negligence of his servants, even within the scope of their employment, such third person suffer damage. True it is that under article 1903 of the Civil Code the law creates a presumption that he has been negligent in the selection or direction of his servant, but the presumption is rebuttable and yield to proof of due care and diligence in this respect. The supreme court of Porto Rico, in interpreting identical provisions, as found in the Porto Rico Code, has held that these articles are applicable to cases of extra-contractual culpa exclusively. (Carmona vs. Cuesta, 20 Porto Rico Reports, 215.) This distinction was again made patent by this Court in its decision in the case of Bahia vs. Litonjua and Leynes, (30 Phil. rep., 624), which was an action brought upon the theory of the extra-contractual liability of the defendant to respond for the damage caused by the carelessness of his employee while acting within the scope of his employment. The Court, after citing the last paragraph of article 1903 of the Civil Code, said: 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 master or employer either in selection of the servant or employee, or in supervision over him after the selection, or both; and (2) that 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 relieved from liability. This theory bases the responsibility of the master ultimately on his own negligence and not on that of his servant. This is the notable peculiarity of the Spanish law of negligence. It is, of course, in striking contrast to the American doctrine that, in relations with strangers, the negligence of the servant in conclusively the negligence of the master. The opinion there expressed by this Court, to the effect that in case of extra-contractual culpa based upon negligence, it is necessary that there shall have been some fault attributable to the defendant personally, and that the last paragraph of article 1903 merely establishes a rebuttable presumption, is in complete accord with the authoritative opinion of Manresa, who says (vol. 12, p. 611) that the liability created by article 1903 is imposed by reason of the breach of the duties inherent in the special relations of authority or superiority existing between the person called upon to repair the damage and the one who, by his act or omission, was the cause of it. On the other hand, the liability of masters and employers for the negligent acts or omissions of their servants or agents, when such acts or omissions cause damages which amount to the breach of a contact, is not based upon a mere presumption of the master's negligence in their selection or control, and proof of exercise of the utmost diligence and care in this regard does not relieve the master of his liability for the breach of his contract. Every legal obligation must of necessity be extra-contractual or contractual. Extra-contractual obligation has its source in the breach or omission of those mutual duties which civilized society imposes upon it members, or which arise from these relations, other than contractual, of certain members of society to others,


generally embraced in the concept of status. The legal rights of each member of society constitute the measure of the corresponding legal duties, mainly negative in character, which the existence of those rights imposes upon all other members of society. The breach of these general duties whether due to willful intent or to mere inattention, if productive of injury, give rise to an obligation to indemnify the injured party. The fundamental distinction between obligations of this character and those which arise from contract, rests upon the fact that in cases of noncontractual obligation it is the wrongful or negligent act or omission itself which creates the vinculum juris, whereas in contractual relations the vinculum exists independently of the breach of the voluntary duty assumed by the parties when entering into the contractual relation. With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is competent for the legislature to elect — and our Legislature has so elected — whom such an obligation is imposed is morally culpable, or, on the contrary, for reasons of public policy, to extend that liability, without regard to the lack of moral culpability, so as to include responsibility for the negligence of those person who acts or mission are imputable, by a legal fiction, to others who are in a position to exercise an absolute or limited control over them. The legislature which adopted our Civil Code has elected to limit extra-contractual liability — with certain well-defined exceptions — to cases in which moral culpability can be directly imputed to the persons to be charged. This moral responsibility may consist in having failed to exercise due care in the selection and control of one's agents or servants, or in the control of persons who, by reason of their status, occupy a position of dependency with respect to the person made liable for their conduct. The position of a natural or juridical person who has undertaken by contract to render service to another, is wholly different from that to which article 1903 relates. When the sources of the

obligation upon which plaintiff's cause of action depends is a negligent act or omission, the burden of proof rests upon plaintiff to prove the negligence — if he does not his action fails. But when the facts averred show a contractual undertaking by defendant for the benefit of plaintiff, and it is alleged that plaintiff has failed or refused to perform the contract, it is not necessary for plaintiff to specify in his pleadings whether the breach of the contract is due to willful fault or to negligence on the part of the defendant, or of his servants or agents. Proof of the contract and of its nonperformance is sufficient prima facie to warrant a recovery. As a general rule . . . it is logical that in case of extra-contractual culpa, a suing creditor should assume the burden of proof of its existence, as the only fact upon which his action is based; while on the contrary, in a case of negligence which presupposes the existence of a contractual obligation, if the creditor shows that it exists and that it has been broken, it is not necessary for him to prove negligence. (Manresa, vol. 8, p. 71 [1907 ed., p. 76]). As it is not necessary for the plaintiff in an action for the breach of a contract to show that the breach was due to the negligent conduct of defendant or of his servants, even though such be in fact the actual cause of the breach, it is obvious that proof on the part of defendant that the negligence or omission of his servants or agents caused the breach of the contract would not constitute a defense to the action. If the negligence of servants or agents could be invoked as a means of discharging the liability arising from contract, the anomalous result would be that person acting through the medium of agents or servants in the performance of their contracts, would be in a better position than those acting in person. If one delivers a valuable watch to watchmaker who contract to repair it, and the bailee, by a personal negligent act causes its destruction, he is unquestionably liable. Would it be logical to free him from his liability for the breach of his contract, which involves the duty to exercise due care in the preservation of the watch, if he shows that it was his servant whose negligence


caused the injury? If such a theory could be accepted, juridical persons would enjoy practically complete immunity from damages arising from the breach of their contracts if caused by negligent acts as such juridical persons can of necessity only act through agents or servants, and it would no doubt be true in most instances that reasonable care had been taken in selection and direction of such servants. If one delivers securities to a banking corporation as collateral, and they are lost by reason of the negligence of some clerk employed by the bank, would it be just and reasonable to permit the bank to relieve itself of liability for the breach of its contract to return the collateral upon the payment of the debt by proving that due care had been exercised in the selection and direction of the clerk? This distinction between culpa aquiliana, as the source of an obligation, and culpa contractual as a mere incident to the performance of a contract has frequently been recognized by the supreme court of Spain. (Sentencias of June 27, 1894; November 20, 1896; and December 13, 1896.) In the decisions of November 20, 1896, it appeared that plaintiff's action arose ex contractu, but that defendant sought to avail himself of the provisions of article 1902 of the Civil Code as a defense. The Spanish Supreme Court rejected defendant's contention, saying: These are not cases of injury caused, without any pre-existing obligation, by fault or negligence, such as those to which article 1902 of the Civil Code relates, but of damages caused by the defendant's failure to carry out the undertakings imposed by the contracts . . . . A brief review of the earlier decision of this court involving the liability of employers for damage done by the negligent acts of their servants will show that in no case has the court ever decided that the negligence of the defendant's servants has been held to constitute a defense to an action for damages for breach of contract.

In the case of Johnson vs. David (5 Phil. Rep., 663), the court held that the owner of a carriage was not liable for the damages caused by the negligence of his driver. In that case the court commented on the fact that no evidence had been adduced in the trial court that the defendant had been negligent in the employment of the driver, or that he had any knowledge of his lack of skill or carefulness. In the case of Baer Senior & Co's Successors vs. Compania Maritima (6 Phil. Rep., 215), the plaintiff sued the defendant for damages caused by the loss of a barge belonging to plaintiff which was allowed to get adrift by the negligence of defendant's servants in the course of the performance of a contract of towage. The court held, citing Manresa (vol. 8, pp. 29, 69) that if the "obligation of the defendant grew out of a contract made between it and the plaintiff . . . we do not think that the provisions of articles 1902 and 1903 are applicable to the case." In the case of Chapman vs. Underwood (27 Phil. Rep., 374), plaintiff sued the defendant to recover damages for the personal injuries caused by the negligence of defendant's chauffeur while driving defendant's automobile in which defendant was riding at the time. The court found that the damages were caused by the negligence of the driver of the automobile, but held that the master was not liable, although he was present at the time, saying: . . . unless the negligent acts of the driver are continued for a length of time as to give the owner a reasonable opportunity to observe them and to direct the driver to desist therefrom. . . . The act complained of must be continued in the presence of the owner for such length of time that the owner by his acquiescence, makes the driver's acts his own.


In the case of Yamada vs. Manila Railroad Co. and Bachrach Garage & Taxicab Co. (33 Phil. Rep., 8), it is true that the court rested its conclusion as to the liability of the defendant upon article 1903, although the facts disclosed that the injury complaint of by plaintiff constituted a breach of the duty to him arising out of the contract of transportation. The express ground of the decision in this case was that article 1903, in dealing with the liability of a master for the negligent acts of his servants "makes the distinction between private individuals and public enterprise;" that as to the latter the law creates a rebuttable presumption of negligence in the selection or direction of servants; and that in the particular case the presumption of negligence had not been overcome. It is evident, therefore that in its decision Yamada case, the court treated plaintiff's action as though founded in tort rather than as based upon the breach of the contract of carriage, and an examination of the pleadings and of the briefs shows that the questions of law were in fact discussed upon this theory. Viewed from the standpoint of the defendant the practical result must have been the same in any event. The proof disclosed beyond doubt that the defendant's servant was grossly negligent and that his negligence was the proximate cause of plaintiff's injury. It also affirmatively appeared that defendant had been guilty of negligence in its failure to exercise proper discretion in the direction of the servant. Defendant was, therefore, liable for the injury suffered by plaintiff, whether the breach of the duty were to be regarded as constituting culpa aquiliana or culpa contractual. As Manresa points out (vol. 8, pp. 29 and 69) whether negligence occurs an incident in the course of the performance of a contractual undertaking or its itself the source of an extra-contractual undertaking obligation, its essential characteristics are identical. There is always an act or omission productive of damage due to carelessness or inattention on the part of the defendant. Consequently, when the court holds that a defendant is liable in damages for having failed to exercise due

care, either directly, or in failing to exercise proper care in the selection and direction of his servants, the practical result is identical in either case. Therefore, it follows that it is not to be inferred, because the court held in the Yamada case that defendant was liable for the damages negligently caused by its servants to a person to whom it was bound by contract, and made reference to the fact that the defendant was negligent in the selection and control of its servants, that in such a case the court would have held that it would have been a good defense to the action, if presented squarely upon the theory of the breach of the contract, for defendant to have proved that it did in fact exercise care in the selection and control of the servant. The true explanation of such cases is to be found by directing the attention to the relative spheres of contractual and extracontractual obligations. The field of noncontractual obligation is much more broader than that of contractual obligations, comprising, as it does, the whole extent of juridical human relations. These two fields, figuratively speaking, concentric; that is to say, the mere fact that a person is bound to another by contract does not relieve him from extra-contractual liability to such person. When such a contractual relation exists the obligor may break the contract under such conditions that the same act which constitutes the source of an extra-contractual obligation had no contract existed between the parties. The contract of defendant to transport plaintiff carried with it, by implication, the duty to carry him in safety and to provide safe means of entering and leaving its trains (civil code, article 1258). That duty, being contractual, was direct and immediate, and its non-performance could not be excused by proof that the fault was morally imputable to defendant's servants. The railroad company's defense involves the assumption that even granting that the negligent conduct of its servants in placing an obstruction upon the platform was a breach of its contractual


obligation to maintain safe means of approaching and leaving its trains, the direct and proximate cause of the injury suffered by plaintiff was his own contributory negligence in failing to wait until the train had come to a complete stop before alighting. Under the doctrine of comparative negligence announced in the Rakes case (supra), if the accident was caused by plaintiff's own negligence, no liability is imposed upon defendant's negligence and plaintiff's negligence merely contributed to his injury, the damages should be apportioned. It is, therefore, important to ascertain if defendant was in fact guilty of negligence. It may be admitted that had plaintiff waited until the train had come to a full stop before alighting, the particular injury suffered by him could not have occurred. Defendant contends, and cites many authorities in support of the contention, that it is negligence per se for a passenger to alight from a moving train. We are not disposed to subscribe to this doctrine in its absolute form. We are of the opinion that this proposition is too badly stated and is at variance with the experience of every-day life. In this particular instance, that the train was barely moving when plaintiff alighted is shown conclusively by the fact that it came to stop within six meters from the place where he stepped from it. Thousands of person alight from trains under these conditions every day of the year, and sustain no injury where the company has kept its platform free from dangerous obstructions. There is no reason to believe that plaintiff would have suffered any injury whatever in alighting as he did had it not been for defendant's negligent failure to perform its duty to provide a safe alighting place. We are of the opinion that the correct doctrine relating to this subject is that expressed in Thompson's work on Negligence (vol. 3, sec. 3010) as follows: The test by which to determine whether the passenger has been guilty of negligence in attempting to alight from a moving railway

train, is that of ordinary or reasonable care. It is to be considered whether an ordinarily prudent person, of the age, sex and condition of the passenger, would have acted as the passenger acted under the circumstances disclosed by the evidence. This care has been defined to be, not the care which may or should be used by the prudent man generally, but the care which a man of ordinary prudence would use under similar circumstances, to avoid injury." (Thompson, Commentaries on Negligence, vol. 3, sec. 3010.) Or, it we prefer to adopt the mode of exposition used by this court in Picart vs. Smith (37 Phil. rep., 809), we may say that the test is this; Was there anything in the circumstances surrounding the plaintiff at the time he alighted from the train which would have admonished a person of average prudence that to get off the train under the conditions then existing was dangerous? If so, the plaintiff should have desisted from alighting; and his failure so to desist was contributory negligence.1awph!l.net As the case now before us presents itself, the only fact from which a conclusion can be drawn to the effect that plaintiff was guilty of contributory negligence is that he stepped off the car without being able to discern clearly the condition of the platform and while the train was yet slowly moving. In considering the situation thus presented, it should not be overlooked that the plaintiff was, as we find, ignorant of the fact that the obstruction which was caused by the sacks of melons piled on the platform existed; and as the defendant was bound by reason of its duty as a public carrier to afford to its passengers facilities for safe egress from its trains, the plaintiff had a right to assume, in the absence of some circumstance to warn him to the contrary, that the platform was clear. The place, as we have already stated, was dark, or dimly lighted, and this also is proof of a failure upon the part of the defendant in the performance of a duty owing by it to the plaintiff; for if it were by any possibility concede that it had right to pile these sacks in the path of


alighting passengers, the placing of them adequately so that their presence would be revealed. As pertinent to the question of contributory negligence on the part of the plaintiff in this case the following circumstances are to be noted: The company's platform was constructed upon a level higher than that of the roadbed and the surrounding ground. The distance from the steps of the car to the spot where the alighting passenger would place his feet on the platform was thus reduced, thereby decreasing the risk incident to stepping off. The nature of the platform, constructed as it was of cement material, also assured to the passenger a stable and even surface on which to alight. Furthermore, the plaintiff was possessed of the vigor and agility of young manhood, and it was by no means so risky for him to get off while the train was yet moving as the same act would have been in an aged or feeble person. In determining the question of contributory negligence in performing such act — that is to say, whether the passenger acted prudently or recklessly — the age, sex, and physical condition of the passenger are circumstances necessarily affecting the safety of the passenger, and should be considered. Women, it has been observed, as a general rule are less capable than men of alighting with safety under such conditions, as the nature of their wearing apparel obstructs the free movement of the limbs. Again, it may be noted that the place was perfectly familiar to the plaintiff as it was his daily custom to get on and of the train at this station. There could, therefore, be no uncertainty in his mind with regard either to the length of the step which he was required to take or the character of the platform where he was alighting. Our conclusion is that the conduct of the plaintiff in undertaking to alight while the train was yet slightly under way was not characterized by imprudence and that therefore he was not guilty of contributory negligence. The evidence shows that the plaintiff, at the time of the accident, was earning P25 a month as a copyist clerk, and that the injuries

he has suffered have permanently disabled him from continuing that employment. Defendant has not shown that any other gainful occupation is open to plaintiff. His expectancy of life, according to the standard mortality tables, is approximately thirty-three years. We are of the opinion that a fair compensation for the damage suffered by him for his permanent disability is the sum of P2,500, and that he is also entitled to recover of defendant the additional sum of P790.25 for medical attention, hospital services, and other incidental expenditures connected with the treatment of his injuries. The decision of lower court is reversed, and judgment is hereby rendered plaintiff for the sum of P3,290.25, and for the costs of both instances. So ordered. 15. G.R. No. 34840 September 23, 1931 NARCISO GUTIERREZ, plaintiff-appellee, 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 Piñas, 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 Saturnino Cortez, the owner of the truck, and of his chauffeur Abelardo 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.

16.

G.R. No. 178610 November 17, 2010 HONGKONG AND SHANGHAI BANKING CORP., LTD. STAFF RETIREMENT PLAN, Retirement Trust Fund, Inc.) Petitioner, vs. SPOUSES BIENVENIDO AND EDITHA BROQUEZA, Respondents.

D E C I S I O N CARPIO, J.: G.R. No. 178610 is a petition for review1 assailing the Decision2 promulgated on 30 March 2006 by the Court of Appeals (CA) in CA-G.R. SP No. 62685. The appellate court granted the petition filed by Fe Gerong (Gerong) and Spouses Bienvenido and Editha Broqueza (spouses Broqueza) and dismissed the consolidated complaints filed by Hongkong and Shanghai Banking Corporation, Ltd. - Staff Retirement Plan (HSBCL-SRP) for recovery of sum of money. The appellate court reversed and set aside the Decision3 of Branch 139 of the Regional Trial Court of Makati City (RTC) in Civil Case No. 00-787 dated 11 December 2000, as well as its Order4 dated 5 September 2000. The RTC’s decision affirmed the Decision5 dated 28 December 1999 of Branch 61 of the Metropolitan Trial Court (MeTC) of Makati City in Civil Case No. 52400 for Recovery of a Sum of Money. The Facts The appellate court narrated the facts as follows: Petitioners Gerong and [Editha] Broqueza (defendants below) are employees of Hongkong and Shanghai Banking Corporation


(HSBC). They are also members of respondent Hongkong Shanghai Banking Corporation, Ltd. Staff Retirement Plan (HSBCL-SRP, plaintiff below). The HSBCL-SRP is a retirement plan established by HSBC through its Board of Trustees for the benefit of the employees. On October 1, 1990, petitioner [Editha] Broqueza obtained a car loan in the amount of Php175,000.00. On December 12, 1991, she again applied and was granted an appliance loan in the amount of Php24,000.00. On the other hand, petitioner Gerong applied and was granted an emergency loan in the amount of Php35,780.00 on June 2, 1993. These loans are paid through automatic salary deduction. Meanwhile [in 1993], a labor dispute arose between HSBC and its employees. Majority of HSBC’s employees were terminated, among whom are petitioners Editha Broqueza and Fe Gerong. The employees then filed an illegal dismissal case before the National Labor Relations Commission (NLRC) against HSBC. The legality or illegality of such termination is now pending before this appellate Court in CA G.R. CV No. 56797, entitled Hongkong Shanghai Banking Corp. Employees Union, et al. vs. National Labor Relations Commission, et al. Because of their dismissal, petitioners were not able to pay the monthly amortizations of their respective loans. Thus, respondent HSBCL-SRP considered the accounts of petitioners delinquent. Demands to pay the respective obligations were made upon petitioners, but they failed to pay.6 HSBCL-SRP, acting through its Board of Trustees and represented by Alejandro L. Custodio, filed Civil Case No. 52400 against the spouses Broqueza on 31 July 1996. On 19 September 1996, HSBCL-SRP filed Civil Case No. 52911 against Gerong. Both suits were civil actions for recovery and collection of sums of money.

The Metropolitan Trial Court’s Ruling On 28 December 1999, the MeTC promulgated its Decision7 in favor of HSBCL-SRP. The MeTC ruled that the nature of HSBCLSRP’s demands for payment is civil and has no connection to the ongoing labor dispute. Gerong and Editha Broqueza’s termination from employment resulted in the loss of continued benefits under their retirement plans. Thus, the loans secured by their future retirement benefits to which they are no longer entitled are reduced to unsecured and pure civil obligations. As unsecured and pure obligations, the loans are immediately demandable. The dispositive portion of the MeTC’s decision reads: WHEREFORE, premises considered and in view of the foregoing, the Court finds that the plaintiff was able to prove by a preponderance of evidence the existence and immediate demandability of the defendants’ loan obligations as judgment is hereby rendered in favor of the plaintiff and against the defendants in both cases, ordering the latter: 1. In Civil Case No. 52400, to pay the amount of Php116,740.00 at six percent interest per annum from the time of demand and in Civil Case No. 52911, to pay the amount of Php25,344.12 at six percent per annum from the time of the filing of these cases, until the amount is fully paid; 2. To pay the amount of Php20,000.00 each as reasonable attorney’s fees; 3. Cost of suit. SO ORDERED.8


Gerong and the spouses Broqueza filed a joint appeal of the MeTC’s decision before the RTC. Gerong’s case was docketed Civil Case No. 00-786, while the spouses Broqueza’s case was docketed as Civil Case No. 00-787. The Regional Trial Court’s Ruling The RTC initially denied the joint appeal because of the belated filing of Gerong and the spouses Broqueza’s memorandum. The RTC later reconsidered the order of denial and resolved the issues in the interest of justice. On 11 December 2000, the RTC affirmed the MeTC’s decision in toto.9 The RTC ruled that Gerong and Editha Broqueza’s termination from employment disqualified them from availing of benefits under their retirement plans. As a consequence, there is no longer any security for the loans. HSBCL-SRP has a legal right to demand immediate settlement of the unpaid balance because of Gerong and Editha Broqueza’s continued default in payment and their failure to provide new security for their loans. Moreover, the absence of a period within which to pay the loan allows HSBCL-SRP to demand immediate payment. The loan obligations are considered pure obligations, the fulfillment of which are demandable at once. Gerong and the spouses Broqueza then filed a Petition for Review under Rule 42 before the CA. The Ruling of the Court of Appeals On 30 March 2006, the CA rendered its Decision10 which reversed the 11 December 2000 Decision of the RTC. The CA ruled that the HSBCL-SRP’s complaints for recovery of sum of money against Gerong and the spouses Broqueza are premature

as the loan obligations have not yet matured. Thus, no cause of action accrued in favor of HSBCL-SRP. The dispositive portion of the appellate court’s Decision reads as follows: WHEREFORE, the assailed Decision of the RTC is REVERSED and SET ASIDE. A new one is hereby rendered DISMISSING the consolidated complaints for recovery of sum of money. SO ORDERED.11 HSBCL-SRP filed a motion for reconsideration which the CA denied for lack of merit in its Resolution12 promulgated on 19 June 2007. On 6 August 2007, HSBCL-SRP filed a manifestation withdrawing the petition against Gerong because she already settled her obligations. In a Resolution13 of this Court dated 10 September 2007, this Court treated the manifestation as a motion to withdraw the petition against Gerong, granted the motion, and considered the case against Gerong closed and terminated. Issues HSBCL-SRP enumerated the following grounds to support its Petition: I. The Court of Appeals has decided a question of substance in a way not in accord with law and applicable decisions of this Honorable Court; and II. The Court of Appeals has departed from the accepted and usual course of judicial proceedings in reversing the decision of the Regional Trial Court and the Metropolitan Trial Court.14 The Court’s Ruling


The petition is meritorious. We agree with the rulings of the MeTC and the RTC. The Promissory Notes uniformly provide: PROMISSORY NOTE P_____ Makati, M.M. ____ 19__ FOR VALUE RECEIVED, I/WE _____ jointly and severally promise to pay to THE HSBC RETIREMENT PLAN (hereinafter called the "PLAN") at its office in the Municipality of Makati, Metro Manila, on or before until fully paid the sum of PESOS ___ (P___) Philippine Currency without discount, with interest from date hereof at the rate of Six per cent (6%) per annum, payable monthly. I/WE agree that the PLAN may, upon written notice, increase the interest rate stipulated in this note at any time depending on prevailing conditions. I/WE hereby expressly consent to any extensions or renewals hereof for a portion or whole of the principal without notice to the other(s), and in such a case our liability shall remain joint and several.1avvphi1 In case collection is made by or through an attorney, I/WE jointly and severally agree to pay ten percent (10%) of the amount due on this note (but in no case less than P200.00) as and for attorney’s fees in addition to expenses and costs of suit. In case of judicial execution, I/WE hereby jointly and severally waive our rights under the provisions of Rule 39, Section 12 of the Rules of Court.15 In ruling for HSBCL-SRP, we apply the first paragraph of Article 1179 of the Civil Code:

Art. 1179. Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once. x x x. (Emphasis supplied.) We affirm the findings of the MeTC and the RTC that there is no date of payment indicated in the Promissory Notes. The RTC is correct in ruling that since the Promissory Notes do not contain a period, HSBCL-SRP has the right to demand immediate payment. Article 1179 of the Civil Code applies. The spouses Broqueza’s obligation to pay HSBCL-SRP is a pure obligation. The fact that HSBCL-SRP was content with the prior monthly check-off from Editha Broqueza’s salary is of no moment. Once Editha Broqueza defaulted in her monthly payment, HSBCL-SRP made a demand to enforce a pure obligation. In their Answer, the spouses Broqueza admitted that prior to Editha Broqueza’s dismissal from HSBC in December 1993, she "religiously paid the loan amortizations, which HSBC collected through payroll check-off."16 A definite amount is paid to HSBCLSRP on a specific date. Editha Broqueza authorized HSBCL-SRP to make deductions from her payroll until her loans are fully paid. Editha Broqueza, however, defaulted in her monthly loan payment due to her dismissal. Despite the spouses Broqueza’s protestations, the payroll deduction is merely a convenient mode of payment and not the sole source of payment for the loans. HSBCL-SRP never agreed that the loans will be paid only through salary deductions. Neither did HSBCL-SRP agree that if Editha Broqueza ceases to be an employee of HSBC, her obligation to pay the loans will be suspended. HSBCL-SRP can immediately demand payment of the loans at anytime because the obligation to pay has no period. Moreover, the spouses Broqueza have already incurred in default in paying the monthly installments.


Finally, the enforcement of a loan agreement involves "debtorcreditor relations founded on contract and does not in any way concern employee relations. As such it should be enforced through a separate civil action in the regular courts and not before the Labor Arbiter."17 WHEREFORE, we GRANT the petition. The Decision of the Court of Appeals in CA-G.R. SP No. 62685 promulgated on 30 March 2006 is REVERSED and SET ASIDE. The decision of Branch 139 of the Regional Trial Court of Makati City in Civil Case No. 00-787, as well as the decision of Branch 61 of the Metropolitan Trial Court of Makati City in Civil Case No. 52400 against the spouses Bienvenido and Editha Broqueza, are AFFIRMED. Costs against respondents. 17. G.R. No. L-29900 June 28, 1974 IN THE MATTER OF THE INTESTATE ESTATE OF JUSTO PALANCA, Deceased, GEORGE PAY, petitionerappellant, vs. SEGUNDINA CHUA VDA. DE PALANCA, oppositorappellee. Florentino B. del Rosario for petitioner-appellant. Manuel V. San Jose for oppositor-appellee. FERNANDO, J.:p There is no difficulty attending the disposition of this appeal by petitioner on questions of law. While several points were raised,

the decisive issue is whether a creditor is barred by prescription in his attempt to collect on a promissory note executed more than fifteen years earlier with the debtor sued promising to pay either upon receipt by him of his share from a certain estate or upon demand, the basis for the action being the latter alternative. The lower court held that the ten-year period of limitation of actions did apply, the note being immediately due and demandable, the creditor admitting expressly that he was relying on the wording "upon demand." On the above facts as found, and with the law being as it is, it cannot be said that its decision is infected with error. We affirm. From the appealed decision, the following appears: "The parties in this case agreed to submit the matter for resolution on the basis of their pleadings and annexes and their respective memoranda submitted. Petitioner George Pay is a creditor of the Late Justo Palanca who died in Manila on July 3, 1963. The claim of the petitioner is based on a promissory note dated January 30, 1952, whereby the late Justo Palanca and Rosa Gonzales Vda. de Carlos Palanca promised to pay George Pay the amount of P26,900.00, with interest thereon at the rate of 12% per annum. George Pay is now before this Court, asking that Segundina Chua vda. de Palanca, surviving spouse of the late Justo Palanca, he appointed as administratrix of a certain piece of property which is a residential dwelling located at 2656 Taft Avenue, Manila, covered by Tax Declaration No. 3114 in the name of Justo Palanca, assessed at P41,800.00. The idea is that once said property is brought under administration, George Pay, as creditor, can file his claim against the administratrix." 1 It then stated that the petition could not prosper as there was a refusal on the part of Segundina Chua Vda. de Palanca to be appointed as administratrix; that the property sought to be administered no longer belonged to the debtor, the late Justo Palanca; and that the rights of petitioner-creditor had already prescribed. The promissory note, dated January 30, 1962, is worded thus: " `For value received from time to time since 1947, we [jointly and


severally promise to] pay to Mr. [George Pay] at his office at the China Banking Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos] (P26,900.00), with interest thereon at the rate of 12% per annum upon receipt by either of the undersigned of cash payment from the Estate of the late Don Carlos Palanca or upon demand'. . . . As stated, this promissory note is signed by Rosa Gonzales Vda. de Carlos Palanca and Justo Palanca." 2 Then came this paragraph: "The Court has inquired whether any cash payment has been received by either of the signers of this promissory note from the Estate of the late Carlos Palanca. Petitioner informed that he does not insist on this provision but that petitioner is only claiming on his right under the promissory note ." 3 After which, came the ruling that the wording of the promissory note being "upon demand," the obligation was immediately due. Since it was dated January 30, 1952, it was clear that more "than ten (10) years has already transpired from that time until to date. The action, therefore, of the creditor has definitely prescribed." 4 The result, as above noted, was the dismissal of the petition. In an exhaustive brief prepared by Attorney Florentino B. del Rosario, petitioner did assail the correctness of the rulings of the lower court as to the effect of the refusal of the surviving spouse of the late Justo Palanca to be appointed as administratrix, as to the property sought to be administered no longer belonging to the debtor, the late Justo Palanca, and as to the rights of petitioner-creditor having already prescribed. As noted at the outset, only the question of prescription need detain us in the disposition of this appeal. Likewise, as intimated, the decision must be affirmed, considering the clear tenor of the promissory note. From the manner in which the promissory note was executed, it would appear that petitioner was hopeful that the satisfaction of his credit could he realized either through the debtor sued receiving cash payment from the estate of the late Carlos Palanca

presumptively as one of the heirs, or, as expressed therein, "upon demand." There is nothing in the record that would indicate whether or not the first alternative was fulfilled. What is undeniable is that on August 26, 1967, more than fifteen years after the execution of the promissory note on January 30, 1952, this petition was filed. The defense interposed was prescription. Its merit is rather obvious. Article 1179 of the Civil Code provides: "Every obligation whose performance does not depend upon a future or uncertain event, or upon a past event unknown to the parties, is demandable at once." This used to be Article 1113 of the Spanish Civil Code of 1889. As far back as Floriano v. Delgado, 5 a 1908 decision, it has been applied according to its express language. The well-known Spanish commentator, Manresa, on this point, states: "Dejando con acierto, el caracter mas teorico y grafico del acto, o sea la perfeccion de este, se fija, para determinar el concepto de la obligacion pura, en el distinctive de esta, y que es consecuencia de aquel: la exigibilidad immediata." 6 The obligation being due and demandable, it would appear that the filing of the suit after fifteen years was much too late. For again, according to the Civil Code, which is based on Section 43 of Act No. 190, the prescriptive period for a written contract is that of ten years. 7 This is another instance where this Court has consistently adhered to the express language of the applicable norm. 8 There is no necessity therefore of passing upon the other legal questions as to whether or not it did suffice for the petition to fail just because the surviving spouse refuses to be made administratrix, or just because the estate was left with no other property. The decision of the lower court cannot be overturned. WHEREFORE, the lower court decision of July 24, 1968 is affirmed. Costs against George Pay.


18.

G.R. No. L-16570 March 9, 1922 SMITH, BELL & CO., LTD., plaintiff-appellant, vs. VICENTE SOTELO MATTI, defendant-appellant. Ross and Lawrence and Ewald E. Selph for plaintiffappellant. Ramon Sotelo for defendant-appellant.

ROMUALDEZ, J.: In August, 1918, the plaintiff corporation and the defendant, Mr. Vicente Sotelo, entered into contracts whereby the former obligated itself to sell, and the latter to purchase from it, two steel tanks, for the total price of twenty-one thousand pesos (P21,000), the same to be shipped from New York and delivered at Manila "within three or four months;" two expellers at the price of twenty five thousand pesos (P25,000) each, which were to be shipped from San Francisco in the month of September, 1918, or as soon as possible; and two electric motors at the price of two thousand pesos (P2,000) each, as to the delivery of which stipulation was made, couched in these words: "Approximate delivery within ninety days. — This is not guaranteed." The tanks arrived at Manila on the 27th of April, 1919: the expellers on the 26th of October, 1918; and the motors on the 27th of February, 1919. The plaintiff corporation notified the defendant, Mr. Sotelo, of the arrival of these goods, but Mr. Sotelo refused to receive them and to pay the prices stipulated. The plaintiff brought suit against the defendant, based on four separate causes of action, alleging, among other facts, that it

immediately notified the defendant of the arrival of the goods, and asked instructions from him as to the delivery thereof, and that the defendant refused to receive any of them and to pay their price. The plaintiff, further, alleged that the expellers and the motors were in good condition. (Amended complaint, pages 1630, Bill of Exceptions.) In their answer, the defendant, Mr. Sotelo, and the intervenor, the Manila Oil Refining and By-Products Co., Inc., denied the plaintiff's allegations as to the shipment of these goods and their arrival at Manila, the notification to the defendant, Mr. Sotelo, the latter's refusal to receive them and pay their price, and the good condition of the expellers and the motors, alleging as special defense that Mr. Sotelo had made the contracts in question as manager of the intervenor, the Manila Oil Refining and ByProducts Co., Inc which fact was known to the plaintiff, and that "it was only in May, 1919, that it notified the intervenor that said tanks had arrived, the motors and the expellers having arrived incomplete and long after the date stipulated." As a counterclaim or set-off, they also allege that, as a consequence of the plaintiff's delay in making delivery of the goods, which the intervenor intended to use in the manufacture of cocoanut oil, the intervenor suffered damages in the sums of one hundred sixteen thousand seven hundred eighty-three pesos and ninety-one centavos (P116,783.91) for the nondelivery of the tanks, and twenty-one thousand two hundred and fifty pesos (P21,250) on account of the expellers and the motors not having arrived in due time. The case having been tried, the court below absolved the defendants from the complaint insofar as the tanks and the electric motors were concerned, but rendered judgment against them, ordering them to "receive the aforesaid expellers and pay the plaintiff the sum of fifty thousand pesos (P50,00), the price of the said goods, with legal interest thereon from July 26, 1919, and costs."


Both parties appeal from this judgment, each assigning several errors in the findings of the lower court. The principal point at issue in this case is whether or not, under the contracts entered into and the circumstances established in the record, the plaintiff has fulfilled, in due time, its obligation to bring the goods in question to Manila. If it has, then it is entitled to the relief prayed for; otherwise, it must be held guilty of delay and liable for the consequences thereof. To solve this question, it is necessary to determine what period was fixed for the delivery of the goods. As regards the tanks, the contracts A and B (pages 61 and 62 of the record) are similar, and in both of them we find this clause: To be delivered within 3 or 4 months — The promise or indication of shipment carries with it absolutely no obligation on our part — Government regulations, railroad embargoes, lack of vessel space, the exigencies of the requirement of the United States Government, or a number of causes may act to entirely vitiate the indication of shipment as stated. In other words, the order is accepted on the basis of shipment at Mill's convenience, time of shipment being merely an indication of what we hope to accomplish. In the contract Exhibit C (page 63 of the record), with reference to the expellers, the following stipulation appears: The following articles, hereinbelow more particularly described, to be shipped at San Francisco within the month of September /18, or as soon as possible. — Two Anderson oil expellers . . . . And in the contract relative to the motors (Exhibit D, page 64, rec.) the following appears:

Approximate delivery within ninety days. — This is not guaranteed. — This sale is subject to our being able to obtain Priority Certificate, subject to the United States Government requirements and also subject to confirmation of manufactures. In all these contracts, there is a final clause as follows: The sellers are not responsible for delays caused by fires, riots on land or on the sea, strikes or other causes known as "Force Majeure" entirely beyond the control of the sellers or their representatives. Under these stipulations, it cannot be said that any definite date was fixed for the delivery of the goods. As to the tanks, the agreement was that the delivery was to be made "within 3 or 4 months," but that period was subject to the contingencies referred to in a subsequent clause. With regard to the expellers, the contract says "within the month of September, 1918," but to this is added "or as soon as possible." And with reference to the motors, the contract contains this expression, "Approximate delivery within ninety days," but right after this, it is noted that "this is not guaranteed." The oral evidence falls short of fixing such period. From the record it appears that these contracts were executed at the time of the world war when there existed rigid restrictions on the export from the United States of articles like the machinery in question, and maritime, as well as railroad, transportation was difficult, which fact was known to the parties; hence clauses were inserted in the contracts, regarding "Government regulations, railroad embargoes, lack of vessel space, the exigencies of the requirements of the United States Government," in connection with the tanks and "Priority Certificate, subject to the United State Government requirements," with respect to the motors. At the time of the execution of the contracts, the parties were not


unmindful of the contingency of the United States Government not allowing the export of the goods, nor of the fact that the other foreseen circumstances therein stated might prevent it. Considering these contracts in the light of the civil law, we cannot but conclude that the term which the parties attempted to fix is so uncertain that one cannot tell just whether, as a matter of fact, those articles could be brought to Manila or not. If that is the case, as we think it is, the obligations must be regarded as conditional. Obligations for the performance of which a day certain has been fixed shall be demandable only when the day arrives. A day certain is understood to be one which must necessarily arrive, even though its date be unknown. If the uncertainty should consist in the arrival or non-arrival of the day, the obligation is conditional and shall be governed by the rules of the next preceding section. (referring to pure and conditional obligations). (Art. 1125, Civ. Code.) And as the export of the machinery in question was, as stated in the contract, contingent upon the sellers obtaining certificate of priority and permission of the United States Government, subject to the rules and regulations, as well as to railroad embargoes, then the delivery was subject to a condition the fulfillment of which depended not only upon the effort of the herein plaintiff, but upon the will of third persons who could in no way be compelled to fulfill the condition. In cases like this, which are not expressly provided for, but impliedly covered, by the Civil Code, the obligor will be deemed to have sufficiently performed his part of the obligation, if he has done all that was in his power, even if the condition has not been fulfilled in reality.

In such cases, the decisions prior to the Civil Code have held that the obligee having done all that was in his power, was entitled to enforce performance of the obligation. This performance, which is fictitious — not real — is not expressly authorized by the Code, which limits itself only to declare valid those conditions and the obligation thereby affected; but it is neither disallowed, and the Code being thus silent, the old view can be maintained as a doctrine. (Manresa's commentaries on the Civil Code [1907], vol. 8, page 132.) The decisions referred to by Mr. Manresa are those rendered by the supreme court of Spain on November 19, 1896, and February 23, 1871. In the former it is held: First. That when the fulfillment of the conditions does not depend on the will of the obligor, but on that of a third person who can in no way be compelled to carry it out, and it is found by the lower court that the obligor has done all in his power to comply with the obligation, the judgment of the said court, ordering the other party to comply with his part of the contract, is not contrary to the law of contracts, or to Law 1, Tit. I, Book 10, of the "Novísima Recopilación," or Law 12, Tit. 11, of Partida 5, when in the said finding of the lower court, no law or precedent is alleged to have been violated. (Jurisprudencia Civil published by the directors of the Revista General de Legislacion y Jurisprudencia [1866], vol. 14, page 656.) In the second decision, the following doctrine is laid down: Second. That when the fulfillment of the condition does not depend on the will of the obligor, but on that of a third person, who can in no way be compelled to carry it out, the obligor's part of the contract is complied withalf Belisario not having exercised his right of repurchase reserved in the sale of Basilio Borja


mentioned in paragraph (13) hereof, the affidavit of Basilio Borja for the consolidacion de dominio was presented for record in the registry of deeds and recorded in the registry on the same date. (32) The Maximo Belisario left a widow, the opponent Adelina Ferrer and three minor children, Vitaliana, Eugenio, and Aureno Belisario as his only heirs. (33) That in the execution and sales thereunder, in which C. H. McClure appears as the judgment creditor, he was represented by the opponent Peter W. Addison, who prepared and had charge of publication of the notices of the various sales and that in none of the sales was the notice published more than twice in a newspaper. The claims of the opponent-appellant Addison have been very fully and ably argued by his counsel but may, we think, be disposed of in comparatively few words. As will be seen from the foregoing statement of facts, he rest his title (1) on the sales under the executions issued in cases Nos. 435, 450, 454, and 499 of the court of the justice of the peace of Dagupan with the priority of inscription of the last two sales in the registry of deeds, and (2) on a purchase from the Director of Lands after the land in question had been forfeited to the Government for nonpayment of taxes under Act No. 1791. The sheriff's sales under the execution mentioned are fatally defective for what of sufficient publication of the notice of sale. Section 454 of the Code of civil Procedure reads in part as follows: SEC. 454. Before the sale of property on execution, notice thereof must be given, as follows: 1. In case of perishable property, by posing written notice of the time and place of the sale in three public places of the

municipality or city where the sale is to take place, for such time as may be reasonable, considering the character and condition of the property; 2. * * * * * * * 3. In cases of real property, by posting a similar notice particularly describing the property, for twenty days in three public places of the municipality or city where the property is situated, and also where the property is to be sold, and publishing a copy thereof once a week, for the same period, in some newspaper published or having general circulation in the province, if there be one. If there are newspaper published in the province in both the Spanish and English languages, then a like publication for a like period shall be made in one newspaper published in the Spanish language, and in one published in the English language: Provided, however, That such publication in a newspaper will not be required when the assessed valuation of the property does not exceed four hundred pesos; 4. * * * * * * * Examining the record, we find that in cases Nos. 435 and 450 the sales took place on October 14, 1916; the notice first published gave the date of the sale as October 15th, but upon discovering that October 15th was a Sunday, the date was changed to October 14th. The correct notice was published twice in a local newspaper, the first publication was made on October 7th and the second and last on October 14th, the date of the sale itself. The newspaper is a weekly periodical published every Saturday afternoon. In case No. 454 there were only two publications of the notice in a newspaper, the first publication being made only fourteen days before the date of the sale. In case No. 499, there were also only two publications, the first of which was made thirteen days


before the sale. In the last case the sale was advertised for the hours of from 8:30 in the morning until 4:30 in the afternoon, in violation of section 457 of the Code of Civil Procedure. In cases Nos. 435 and 450 the hours advertised were from 9:00 in the morning until 4.30 in the afternoon. In all of the cases the notices of the sale were prepared by the judgment creditor or his agent, who also took charged of the publication of such notices. In the case of Campomanes vs. Bartolome and Germann & Co. (38 Phil., 808), this court held that if a sheriff sells without the notice prescribe by the Code of Civil Procedure induced thereto by the judgment creditor and the purchaser at the sale is the judgment creditor, the sale is absolutely void and not title passes. This must now be regarded as the settled doctrine in this jurisdiction whatever the rule may be elsewhere. It appears affirmatively from the evidence in the present case that there is a newspaper published in the province where the sale in question took place and that the assessed valuation of the property disposed of at each sale exceeded P400. Comparing the requirements of section 454, supra, with what was actually done, it is self-evident that notices of the sales mentioned were not given as prescribed by the statute and taking into consideration that in connection with these sales the appellant Addison was either the judgment creditor or else occupied a position analogous to that of a judgment creditor, the sales must be held invalid. The conveyance or reconveyance of the land from the Director of Lands is equally invalid. The provisions of Act No. 1791 pertinent to the purchase or repurchase of land confiscated for nonpayment of taxes are found in section 19 of the Act and read: . . . In case such redemption be not made within the time above specified the Government of the Philippine Islands shall have an absolute, indefeasible title to said real property. Upon the

expiration of the said ninety days, if redemption be not made, the provincial treasurer shall immediately notify the Director of Lands of the forfeiture and furnish him with a description of the property, and said Director of Lands shall have full control and custody thereof to lease or sell the same or any portion thereof in the same manner as other public lands are leased or sold: Provided, That the original owner, or his legal representative, shall have the right to repurchase the entire amount of his said real property, at any time before a sale or contract of sale has been made by the director of Lands to a third party, by paying therefore the whole sum due thereon at the time of ejectment together with a penalty of ten per centum . . . . The appellant Addison repurchased under the final proviso of the section quoted and was allowed to do so as the successor in interest of the original owner under the execution sale above discussed. As we have seen, he acquired no rights under these sales, was therefore not the successor of the original owner and could only have obtained a valid conveyance of such titles as the Government might have by following the procedure prescribed by the Public Land Act for the sale of public lands. he is entitled to reimbursement for the money paid for the redemption of the land, with interest, but has acquired no title through the redemption. The question of the priority of the record of the sheriff's sales over that of the sale from Belisario to Borja is extensively argued in the briefs, but from our point of view is of no importance; void sheriff's or execution sales cannot be validated through inscription in the Mortgage Law registry. The opposition of Adelina Ferrer must also be overruled. She maintained that the land in question was community property of the marriage of Eulalio Belisario and Paula Ira: that upon the death of Paula Ira inealed from is modified, and the defendant Mr. Vicente Sotelo Matti, sentenced to accept and receive from the


plaintiff the tanks, the expellers and the motors in question, and to pay the plaintiff the sum of ninety-six thousand pesos (P96,000), with legal interest thereon from July 17, 1919, the date of the filing of the complaint, until fully paid, and the costs of both instances. So ordered. 19. [G.R. No. L-27454. April 30, 1970.] ROSENDO O. CHAVES, Plaintiff-Appellant, v. FRUCTUOSO GONZALES, Defendant-Appellee. Chaves, Elio, Chaves & Associates, for PlaintiffAppellant. Sulpicio E. Platon, for Defendant-Appellee. This is a direct appeal by the party who prevailed in a suit for breach of oral contract and recovery of damages but was unsatisfied with the decision rendered by the Court of First Instance of Manila, in its Civil Case No. 65138, because it awarded him only P31.10 out of his total claim of P690 00 for actual, temperate and moral damages and attorney’s fees. The appealed judgment, which is brief, is hereunder quoted in full:jgc:chanrobles.com.ph "In the early part of July, 1963, the plaintiff delivered to the defendant, who is a typewriter repairer, a portable typewriter for routine cleaning and servicing. The defendant was not able to finish the job after some time despite repeated reminders made by the plaintiff. The defendant merely gave assurances, but failed to comply with the same. In October, 1963, the defendant asked

from the plaintiff the sum of P6.00 for the purchase of spare parts, which amount the plaintiff gave to the defendant. On October 26, 1963, after getting exasperated with the delay of the repair of the typewriter, the plaintiff went to the house of the defendant and asked for the return of the typewriter. The defendant delivered the typewriter in a wrapped package. On reaching home, the plaintiff examined the typewriter returned to him by the defendant and found out that the same was in shambles, with the interior cover and some parts and screws missing. On October 29, 1963. the plaintiff sent a letter to the defendant formally demanding the return of the missing parts, the interior cover and the sum of P6.00 (Exhibit D). The following day, the defendant returned to the plaintiff some of the missing parts, the interior cover and the P6.00. "On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business Machines, and the repair job cost him a total of P89.85, including labor and materials (Exhibit C). "On August 23, 1965, the plaintiff commenced this action before the City Court of Manila, demanding from the defendant the payment of P90.00 as actual and compensatory damages, P100.00 for temperate damages, P500.00 for moral damages, and P500.00 as attorney’s fees. "In his answer as well as in his testimony given before this court, the defendant made no denials of the facts narrated above, except the claim of the plaintiff that the typewriter was delivered to the defendant through a certain Julio Bocalin, which the defendant denied allegedly because the typewriter was delivered to him personally by the plaintiff. "The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85 should not, however, be fully chargeable against the defendant. The repair invoice, Exhibit C, shows that the missing parts had a total value of only P31.10.


"WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of P31.10, and the costs of suit. "SO ORDERED."cralaw virtua1aw library The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves, is that it awarded only the value of the missing parts of the typewriter, instead of the whole cost of labor and materials that went into the repair of the machine, as provided for in Article 1167 of the Civil Code, reading as follows:jgc:chanrobles.com.ph "ART. 1167. If a person obliged to do something fails to do it, the same shall be executed at his cost. This same rule shall be observed if he does it in contravention of the tenor of the obligation. Furthermore it may be decreed that what has been poorly done he undone."cralaw virtua1aw library On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is that he is not liable at all, not even for the sum of P31.10, because his contract with plaintiff-appellant did not contain a period, so that plaintiff-appellant should have first filed a petition for the court to fix the period, under Article 1197 of the Civil Code, within which the defendant appellee was to comply with the contract before said defendant-appellee could be held liable for breach of contract. Because the plaintiff appealed directly to the Supreme Court and the appellee did not interpose any appeal, the facts, as found by the trial court, are now conclusive and non-reviewable. 1 The appealed judgment states that the "plaintiff delivered to the defendant . . . a portable typewriter for routine cleaning and

servicing" ; that the defendant was not able to finish the job after some time despite repeated reminders made by the plaintiff" ; that the "defendant merely gave assurances, but failed to comply with the same" ; and that "after getting exasperated with the delay of the repair of the typewriter", the plaintiff went to the house of the defendant and asked for its return, which was done. The inferences derivable from these findings of fact are that the appellant and the appellee had a perfected contract for cleaning and servicing a typewriter; that they intended that the defendant was to finish it at some future time although such time was not specified; and that such time had passed without the work having been accomplished, far the defendant returned the typewriter cannibalized and unrepaired, which in itself is a breach of his obligation, without demanding that he should be given more time to finish the job, or compensation for the work he had already done. The time for compliance having evidently expired, and there being a breach of contract by non-performance, it was academic for the plaintiff to have first petitioned the court to fix a period for the performance of the contract before filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually admitted non-performance by returning the typewriter that he was obliged to repair in a nonworking condition, with essential parts missing. The fixing of a period would thus be a mere formality and would serve no purpose than to delay (cf. Tiglao. Et. Al. V. Manila Railroad Co. 98 Phil. 18l). It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did not repair the typewriter but returned it "in shambles", according to the appealed decision. For such contravention, as appellant contends, he is liable under Article 1167 of the Civil Code. jam quot, for the cost of executing the obligation in a proper manner. The cost of the execution of the obligation in this case should be the cost of the labor or service expended in the repair of the typewriter, which is in the


amount of P58.75. because the obligation or contract was to repair it. In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code, for the cost of the missing parts, in the amount of P31.10, for in his obligation to repair the typewriter he was bound, but failed or neglected, to return it in the same condition it was when he received it. Appellant’s claims for moral and temperate damages and attorney’s fees were, however, correctly rejected by the trial court, for these were not alleged in his complaint (Record on Appeal, pages 1-5). Claims for damages and attorney’s fees must be pleaded, and the existence of the actual basis thereof must be proved. 2 The appealed judgment thus made no findings on these claims, nor on the fraud or malice charged to the appellee. As no findings of fact were made on the claims for damages and attorney’s fees, there is no factual basis upon which to make an award therefor. Appellant is bound by such judgment of the court, a quo, by reason of his having resorted directly to the Supreme Court on questions of law. IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by ordering the defendant-appellee to pay, as he is hereby ordered to pay, the plaintiff-appellant the sum of P89.85, with interest at the legal rate from the filing of the complaint. Costs in all instances against appellee Fructuoso Gonzales. 20. G.R. No. L-264 October 4, 1946 VICENTE SINGSON ENCARNACION, plaintiff-appellee, vs.

JACINTA BALDOMAR, ET AL., defendants-appellants. Bausa and Ampil for appellants. Tolentino and Aguas for appellee. HILADO, J.: Vicente Singson Encarnacion, owner of the house numbered 589 Legarda Street, Manila, some six years ago leased said house to Jacinto Baldomar and her son, Lefrado Fernando, upon a monthto-month basis for the monthly rental of P35. After Manila was liberated in the last war, specifically on March 16, 1945, and on April 7, of the same year, plaintiff Singson Encarnacion notified defendants, the said mother and son, to vacate the house abovementioned on or before April 15, 1945, because plaintiff needed it for his offices as a result of the destruction of the building where said plaintiff had said offices before. Despite this demand, defendants insisted on continuing their occupancy. When the original action was lodged with the Municipal Court of Manila on April 20, 1945, defendants were in arrears in the payment of the rental corresponding to said month, the agrees rental being payable within the first five days of each month. That rental was paid prior to the hearing of the case in the municipal court, as a consequence of which said court entered judgment for restitution and payment of rentals at the rate of P35 a month from May 1, 1945, until defendants completely vacate the premises. Although plaintiff included in said original complaint a claim for P500 damages per month, that claim was waived by him before the hearing in the municipal court, on account of which nothing was said regarding said damages in the municipal court's decision. When the case reached the Court of First Instance of Manila upon appeal, defendants filed therein a motion to dismiss (which was similar to a motion to dismiss filed by them in the municipal court) based upon the ground that the municipal court had no


jurisdiction over the subject matter due to the aforesaid claim for damages and that, therefore, the Court of First Instance had no appellate jurisdiction over the subject matter of the action. That motion to dismiss was denied by His Honor, Judge Mamerto Roxas, by order dated July 21, 1945, on the ground that in the municipal court plaintiff had waived said claim for damages and that, therefore, the same waiver was understood also to have been made in the Court of First Instance.lawphil.net In the Court of First Instance the graveman of the defense interposed by defendants, as it was expressed defendant Lefrado Fernando during the trial, was that the contract which they had celebrated with plaintiff since the beginning authorized them to continue occupying the house indefinetly and while they should faithfully fulfill their obligations as respects the payment of the rentals, and that this agreement had been ratified when another ejectment case between the parties filed during the Japanese regime concerning the same house was allegedly compounded in the municipal court. The Court of First Instance gave more credit to plaintiff's witness, Vicente Singson Encarnacion, jr., who testified that the lease had always and since the beginning been upon a month-to-month basis. The court added in its decision that this defense which was put up by defendant's answer, for which reason the Court considered it as indicative of an eleventhhour theory. We think that the Court of First Instance was right in so declaring. Furthermore, carried to its logical conclusion, the defense thus set up by defendant Lefrado Fernando would leave to the sole and exclusive will of one of the contracting parties (defendants in this case) the validity and fulfillment of the contract of lease, within the meaning of article 1256 of the Civil Code, since the continuance and fulfillment of the contract would then depend solely and exclusively upon their free and uncontrolled choice between continuing paying the rentals or not, completely depriving the owner of all say in the matter. If this defense were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the

owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue, the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the rentals. This, of course, is prohibited by the aforesaid article of the Civil Code. (8 Manresa, 3d ed., pp. 626, 627; Cuyugan vs. Santos, 34 Phil., 100.) During the pendency of the appeal in the Court of First Instance and before the judgment appealed from was rendered on October 31, 1945, the rentals in areas were those pertaining to the month of August, 1945, to the date of said judgment at the rate of P35 a month. During the pendency of the appeal in that court, certain deposits were made by defendants on account of rentals with the clerk of said court, and in said judgment it is disposed that the amounts thus deposited should be delivered to plaintiff. Upon the whole, we are clearly of opinion that the judgment appealed from should be, as it is hereby, affirmed, with the costs of the three instances to appellants. So ordered. 21. G.R. No. 967 May 19, 1903 DARIO AND GAUDENCIO ELEIZEGUI, plaintiffsappellees, vs. THE MANILA LAWN TENNIS CLUB, defendantappellant. Pillsburry and Sutro for appellant. Manuel Torres Vergara for appellee. ARELLANO, C. J.:


This suit concerns the lease of a piece of land for a fixed consideration and to endure at the will of the lessee. By the contract of lease the lessee is expressly authorized to make improvements upon the land, by erecting buildings of both permanent and temporary character, by making fills, laying pipes, and making such other improvements as might be considered desirable for the comfort and amusement of the members. With respect to the term of the lease the present question has arisen. In its decision three theories have been presented: One which makes the duration depend upon the will of the lessor, who, upon one month's notice given to the lessee, may terminate the lease so stipulated; another which, on the contrary, makes it dependent upon the will of the lessee, as stipulated; and the third, in accordance with which the right is reversed to the courts to fix the duration of the term. The first theory is that which has prevailed in the judgment below, as appears from the language in which the basis of the decision is expressed: "The court is of the opinion that the contract of lease was terminated by the notice given by the plaintiff on August 28 of last year . . . ." And such is the theory maintained by the plaintiffs, which expressly rests upon article 1581 of the Civil Code, the law which was in force at the time the contract was entered into (January 25, 1890). The judge, in giving to this notice the effect of terminating the lease, undoubtedly considers that it is governed by the article relied upon by the plaintiffs, which is of the following tenor: "When the term has not been fixed for the lease, it is understood to be for years when an annual rental has been fixed, for months when the rent is monthly. . . ." The second clause of the contract provides as follows: "The rent of the said land is fixed at 25 pesos per month." (P. 11, Bill of Exceptions.)

In accordance with such a theory, the plaintiffs might have terminated the lease the month following the making of the contract — at any time after the first month, which, strictly speaking, would be the only month with respect to which they were expressly bound, they not being bound for each successive month except by a tacit renewal (art. 1566) — an effect which they might prevent by giving the required notice. Although the relief asked for in the complaint, drawn in accordance with the new form of procedure established by the prevailing Code, is the restitution of the land to the plaintiffs (a formula common to various actions), nevertheless the action which is maintained can be no other than that of desahucio, in accordance with the substantive law governing the contract. The lessor — says article 1569 of the Civil Code — may judicially dispossess the lessee upon the expiration of the conventional term or of the legal term; the conventional term — that is, the one agreed upon by the parties; the legal term, in defect of the conventional, fixed for leases by articles 1577 and 1581. We have already seen what this legal term is with respect to urban properties, in accordance with article 1581. Hence, it follows that the judge has only to determine whether there is or is not conventional term. If there be a conventional term, he can not apply the legal term fixed in subsidium to cover a case in which the parties have made no agreement whatsoever with respect to the duration of the lease. In this case the law interprets the presumptive intention of the parties, they having said nothing in the contract with respect to its duration. "Obligations arising from contracts have the force of law between the contracting parties and must be complied with according to the tenor of the contracts." (Art. 1091 of the Civil Code.) The obligations which, with the force of law, the lessors assumed by the contract entered into, so far as pertaining to the issues, are the following: "First. . . . They lease the above-described land to


Mr. Williamson, who takes it on lease, . . . for all the time the members of the said club may desire to use it . . . Third. . . . the owners of the land undertake to maintain the club as tenant as long as the latter shall see fit, without altering in the slightest degree the conditions of this contract, even though the estate be sold." It is necessary, therefore, to answer the first question: Was there, or was there not, a conventional term, a duration, agreed upon in the contract in question? If there was an agreed duration, a conventional term, then the legal term — the term fixed in article 1581 — has no application; the contract is the supreme law of the contracting parties. Over and above the general law is the special law, expressly imposed upon themselves by the contracting parties. Without these clauses 1 and 3, the contract would contain no stipulation with respect to the duration of the lease, and then article 1581, in connection with article 1569, would necessarily be applicable. In view of these clauses, however, it can not be said that there is no stipulation with respect to the duration of the lease, or that, notwithstanding these clauses, article 1581, in connection with article 1569, can be applied. If this were so, it would be necessary to hold that the lessors spoke in vain — that their words are to be disregarded — a claim which can not be advanced by the plaintiffs nor upheld by any court without citing the law which detracts all legal force from such words or despoils them of their literal sense. It having been demonstrated that the legal term can not be applied, there being a conventional term, this destroys the assumption that the contract of lease was wholly terminated by the notice given by the plaintiffs, this notice being necessary only when it becomes necessary to have recourse to the legal term. Nor had the plaintiffs, under the contract, any right to give such notice. It is evident that they had no intention of stipulating that they reserved the right to give such notice. Clause 3 begins as follows: "Mr. Williamson, or whoever may succeed him as

secretary of said club, may terminate this lease whenever desired without other formality than that of giving a month's notice. The owners of the land undertake to maintain the club as tenant as long as the latter shall see fit." The right of the one and the obligation of the others being thus placed in antithesis, there is something more, much more, than the inclusio unius, exclusio alterius. It is evident that the lessors did not intend to reserve to themselves the right to rescind that which they expressly conferred upon the lessee by establishing it exclusively in favor of the latter. It would be the greatest absurdity to conclude that in a contract by which the lessor has left the termination of the lease to the will of the lessee, such a lease can or should be terminated at the will of the lessor. It would appear to follow, from the foregoing, that, if such is the force of the agreement, there can be no other mode of terminating the lease than by the will of the lessee, as stipulated in this case. Such is the conclusion maintained by the defendant in the demonstration of the first error of law in the judgment, as alleged by him. He goes so far, under this theory, as to maintain the possibility of a perpetual lease, either as such lease, if the name can be applied, or else as an innominate contract, or under any other denomination, in accordance with the agreement of the parties, which is, in fine, the law of the contract, superior to all other law, provided that there be no agreement against any prohibitive statute, morals, or public policy. It is unnecessary here to enter into a discussion of a perpetual lease in accordance with the law and doctrine prior to the Civil Code now in force, and which has been operative since 1889. Hence the judgment of the supreme court of Spain of January 2, 1891, with respect to a lease made in 1887, cited by the defendant, and a decision stated by him to have been rendered by the Audiencia of Pamplona in 1885 (it appears to be rather a


decision by the head office of land registration of July 1, 1885), and any other decision which might be cited based upon the constitutions of Cataluna, according to which a lease of more than ten years is understood to create a life tenancy, or even a perpetual tenancy, are entirely out of point in this case, in which the subject-matter is a lease entered into under the provisions of the present Civil Code, in accordance with the principles of which alone can this doctrine be examined. It is not to be understood that we admit that the lease entered into was stipulated as a life tenancy, and still less as a perpetual lease. The terms of the contract express nothing to this effect. They do, whatever, imply this idea. If the lease could last during such time as the lessee might see fit, because it has been so stipulated by the lessor, it would last, first, as long as the will of the lessee — that is, all his life; second, during all the time that he may have succession, inasmuch as he who contracts does so for himself and his heirs. (Art. 1257 of the Civil Code.) The lease in question does not fall within any of the cases in which the rights and obligations arising from a contract can not be transmitted to heirs, either by its nature, by agreement, or by provision of law. Furthermore, the lessee is an English association. Usufruct is a right of superior degree to that which arises from a lease. It is a real right and includes all the jus utendi and jus fruendi. Nevertheless, the utmost period for which a usufruct can endure, if constituted in favor a natural person, is the lifetime of the usufructuary (art. 513, sec. 1); and if in favor of juridical person, it can not be created for more than thirty years. (Art. 515.) If the lease might be perpetual, in what would it be distinguished from an emphyteusis? Why should the lessee have a greater right than the usufructuary, as great as that of an emphyteuta, with respect to the duration of the enjoyment of the property of another? Why did they not contract for a usufruct or an emphyteusis? It was repeatedly stated in the document that it was a lease, and nothing but a lease, which was agreed upon:

"Being in the full enjoyment of the necessary legal capacity to enter into this contract of lease . . . they have agreed upon the lease of said estate . . . They lease to Mr. Williamson, who receives it as such. . . . The rental is fixed at 25 pesos a month. . . . The owners bind themselves to maintain the club as tenant. . . . Upon the foregoing conditions they make the present contract of lease. . . ." (Pp. 9, 11, and 12, bill of exceptions.) If it is a lease, then it must be for a determinate period. (Art. 1543.) By its very nature it must be temporary, just as by reason of its nature an emphyteusis must be perpetual, or for an unlimited period. (Art. 1608.) On the other hand, it can not be concluded that the termination of the contract is to be left completely at the will of the lessee, because it has been stipulated that its duration is to be left to his will. The Civil Code has made provision for such a case in all kinds of obligations. In speaking in general of obligations with a term it has supplied the deficiency of the former law with respect to the "duration of the term when it has been left to the will of the debtor," and provides that in this case the term shall be fixed by the courts. (Art. 1128, sec. 2.) In every contract, as laid down by the authorities, there is always a creditor who is entitled to demand the performance, and a debtor upon whom rests the obligation to perform the undertaking. In bilateral contracts the contracting parties are mutually creditors and debtors. Thus, in this contract of lease, the lessee is the creditor with respect to the rights enumerated in article 1554, and is the debtor with respect to the obligations imposed by articles 1555 and 1561. The term within which performance of the latter obligation is due is what has been left to the will of the debtor. This term it is which must be fixed by the courts. The only action which can be maintained under the terms of the contract is that by which it is sought to obtain from the judge the


determination of this period, and not the unlawful detainer action which has been brought — an action which presupposes the expiration of the term and makes it the duty of the judge to simply decree an eviction. To maintain the latter action it is sufficient to show the expiration of the term of the contract, whether conventional or legal; in order to decree the relief to be granted in the former action it is necessary for the judge to look into the character and conditions of the mutual undertakings with a view to supplying the lacking element of a time at which the lease is to expire. In the case of a loan of money or a commodatum of furniture, the payment or return to be made when the borrower "can conveniently do so" does not mean that he is to be allowed to enjoy the money or to make use of the thing indefinitely or perpetually. The courts will fix in each case, according to the circumstances, the time for the payment or return. This is the theory also maintained by the defendant in his demonstration of the fifth assignment of error. "Under article 1128 of the Civil Code," thus his proposition concludes, "contracts whose term is left to the will of one of the contracting parties must be fixed by the courts, . . . the conditions as to the term of this lease has a direct legislative sanction," and he cites articles 1128. "In place of the ruthless method of annihilating a solemn obligation, which the plaintiffs in this case have sought to pursue, the Code has provided a legitimate and easily available remedy. . . . The Code has provided for the proper disposition of those covenants, and a case can hardly arise more clearly demonstrating the usefulness of that provision than the case at bar." (Pp. 52 and 53 of appellant's brief.) The plaintiffs, with respect to this conclusion on the part of their opponents, only say that article 1128 "expressly refers to obligations in contracts in general, and that it is well known that a lease is included among special contracts." But they do not observe that if contracts, simply because special rules are provided for them, could be excepted from the provisions of the articles of the Code relative to obligations and contracts in

general, such general provisions would be wholly without application. The system of the Code is that of establishing general rules applicable to all obligations and contracts, and then special provisions peculiar to each species of contract. In no part of Title VI of Book IV, which treats of the contract of lease, are there any special rules concerning pure of conditional obligations which may be stipulated in a lease, because, with respect to these matters, the provisions of section 1, chapter 3, Title I, on the subject of obligations are wholly sufficient. With equal reason should we refer to section 2, which deals with obligations with a term, in the same chapter and title, if a question concerning the term arises out of a contract of lease, as in the present case, and within this section we find article 1128, which decides the question. The judgment was entered below upon the theory of the expiration of a legal term which does not exist, as the case requires that a term be fixed by the courts under the provisions of article 1128 with respect to obligations which, as is the present, are terminable at the will of the obligee. It follows, therefore, that the judgment below is erroneous. The judgment is reversed and the case will be remanded to the court below with directions to enter a judgment of dismissal of the action in favor of the defendant, the Manila Lawn Tennis Club, without special allowance as to the recovery of costs. So ordered. 22. G.R. No. L-17587 September 12, 1967 PHILIPPINE BANKING CORPORATION, representing the estate of JUSTINA SANTOS Y CANON FAUSTINO, deceased, plaintiff-appellant, vs.


LUI SHE in her own behalf and as administratrix of the intestate estate of Wong Heng, deceased, defendantappellant. Nicanor S. Sison for plaintiff-appellant. Ozaeta, Gibbs & Ozaeta for defendant-appellant. CASTRO, J.: Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of land in Manila. This parcel, with an area of 2,582.30 square meters, is located on Rizal Avenue and opens into Florentino Torres street at the back and Katubusan street on one side. In it are two residential houses with entrance on Florentino Torres street and the Hen Wah Restaurant with entrance on Rizal Avenue. The sisters lived in one of the houses, while Wong Heng, a Chinese, lived with his family in the restaurant. Wong had been a long-time lessee of a portion of the property, paying a monthly rental of P2,620. On September 22, 1957 Justina Santos became the owner of the entire property as her sister died with no other heir. Then already well advanced in years, being at the time 90 years old, blind, crippled and an invalid, she was left with no other relative to live with. Her only companions in the house were her 17 dogs and 8 maids. Her otherwise dreary existence was brightened now and then by the visits of Wong's four children who had become the joy of her life. Wong himself was the trusted man to whom she delivered various amounts for safekeeping, including rentals from her property at the corner of Ongpin and Salazar streets and the rentals which Wong himself paid as lessee of a part of the Rizal Avenue property. Wong also took care of the payment; in her behalf, of taxes, lawyers' fees, funeral expenses, masses, salaries of maids and security guard, and her household expenses.

"In grateful acknowledgment of the personal services of the lessee to her," Justina Santos executed on November 15, 1957 a contract of lease (Plff Exh. 3) in favor of Wong, covering the portion then already leased to him and another portion fronting Florentino Torres street. The lease was for 50 years, although the lessee was given the right to withdraw at any time from the agreement; the monthly rental was P3,120. The contract covered an area of 1,124 square meters. Ten days later (November 25), the contract was amended (Plff Exh. 4) so as to make it cover the entire property, including the portion on which the house of Justina Santos stood, at an additional monthly rental of P360. For his part Wong undertook to pay, out of the rental due from him, an amount not exceeding P1,000 a month for the food of her dogs and the salaries of her maids. On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to buy the leased premises for P120,000, payable within ten years at a monthly installment of P1,000. The option, written in Tagalog, imposed on him the obligation to pay for the food of the dogs and the salaries of the maids in her household, the charge not to exceed P1,800 a month. The option was conditioned on his obtaining Philippine citizenship, a petition for which was then pending in the Court of First Instance of Rizal. It appears, however, that this application for naturalization was withdrawn when it was discovered that he was not a resident of Rizal. On October 28, 1958 she filed a petition to adopt him and his children on the erroneous belief that adoption would confer on them Philippine citizenship. The error was discovered and the proceedings were abandoned. On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the term of the lease to 99 years, and another (Plff Exh. 6) fixing the term of the option of 50 years. Both contracts are written in Tagalog.


In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & 279), she bade her legatees to respect the contracts she had entered into with Wong, but in a codicil (Plff Exh. 17) of a later date (November 4, 1959) she appears to have a change of heart. Claiming that the various contracts were made by her because of machinations and inducements practiced by him, she now directed her executor to secure the annulment of the contracts. On November 18 the present action was filed in the Court of First Instance of Manila. The complaint alleged that the contracts were obtained by Wong "through fraud, misrepresentation, inequitable conduct, undue influence and abuse of confidence and trust of and (by) taking advantage of the helplessness of the plaintiff and were made to circumvent the constitutional provision prohibiting aliens from acquiring lands in the Philippines and also of the Philippine Naturalization Laws." The court was asked to direct the Register of Deeds of Manila to cancel the registration of the contracts and to order Wong to pay Justina Santos the additional rent of P3,120 a month from November 15, 1957 on the allegation that the reasonable rental of the leased premises was P6,240 a month. In his answer, Wong admitted that he enjoyed her trust and confidence as proof of which he volunteered the information that, in addition to the sum of P3,000 which he said she had delivered to him for safekeeping, another sum of P22,000 had been deposited in a joint account which he had with one of her maids. But he denied having taken advantage of her trust in order to secure the execution of the contracts in question. As counterclaim he sought the recovery of P9,210.49 which he said she owed him for advances. Wong's admission of the receipt of P22,000 and P3,000 was the cue for the filing of an amended complaint. Thus on June 9, 1960, aside from the nullity of the contracts, the collection of various amounts allegedly delivered on different occasions was sought.

These amounts and the dates of their delivery are P33,724.27 (Nov. 4, 1957); P7,344.42 (Dec. 1, 1957); P10,000 (Dec. 6, 1957); P22,000 and P3,000 (as admitted in his answer). An accounting of the rentals from the Ongpin and Rizal Avenue properties was also demanded. In the meantime as a result of a petition for guardianship filed in the Juvenile and Domestic Relations Court, the Security Bank & Trust Co. was appointed guardian of the properties of Justina Santos, while Ephraim G. Gochangco was appointed guardian of her person. In his answer, Wong insisted that the various contracts were freely and voluntarily entered into by the parties. He likewise disclaimed knowledge of the sum of P33,724.27, admitted receipt of P7,344.42 and P10,000, but contended that these amounts had been spent in accordance with the instructions of Justina Santos; he expressed readiness to comply with any order that the court might make with respect to the sums of P22,000 in the bank and P3,000 in his possession. The case was heard, after which the lower court rendered judgment as follows: [A]ll the documents mentioned in the first cause of action, with the exception of the first which is the lease contract of 15 November 1957, are declared null and void; Wong Heng is condemned to pay unto plaintiff thru guardian of her property the sum of P55,554.25 with legal interest from the date of the filing of the amended complaint; he is also ordered to pay the sum of P3,120.00 for every month of his occupation as lessee under the document of lease herein sustained, from 15 November 1959, and the moneys he has consigned since then shall be imputed to that; costs against Wong Heng.


From this judgment both parties appealed directly to this Court. After the case was submitted for decision, both parties died, Wong Heng on October 21, 1962 and Justina Santos on December 28, 1964. Wong was substituted by his wife, Lui She, the other defendant in this case, while Justina Santos was substituted by the Philippine Banking Corporation. Justina Santos maintained — now reiterated by the Philippine Banking Corporation — that the lease contract (Plff Exh. 3) should have been annulled along with the four other contracts (Plff Exhs. 4-7) because it lacks mutuality; because it included a portion which, at the time, was in custodia legis; because the contract was obtained in violation of the fiduciary relations of the parties; because her consent was obtained through undue influence, fraud and misrepresentation; and because the lease contract, like the rest of the contracts, is absolutely simulated. Paragraph 5 of the lease contract states that "The lessee may at any time withdraw from this agreement." It is claimed that this stipulation offends article 1308 of the Civil Code which provides that "the contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." We have had occasion to delineate the scope and application of article 1308 in the early case of Taylor v. Uy Tieng Piao.1 We said in that case: Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to the insertion in a contract for personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as much in the fulfillment of the contract as any

other act which may have been the subject of agreement. Indeed, the cancellation of a contract in accordance with conditions agreed upon beforehand is fulfillment.2 And so it was held in Melencio v. Dy Tiao Lay 3 that a "provision in a lease contract that the lessee, at any time before he erected any building on the land, might rescind the lease, can hardly be regarded as a violation of article 1256 [now art. 1308] of the Civil Code." The case of Singson Encarnacion v. Baldomar 4 cannot be cited in support of the claim of want of mutuality, because of a difference in factual setting. In that case, the lessees argued that they could occupy the premises as long as they paid the rent. This is of course untenable, for as this Court said, "If this defense were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the rentals." Here, in contrast, the right of the lessee to continue the lease or to terminate it is so circumscribed by the term of the contract that it cannot be said that the continuance of the lease depends upon his will. At any rate, even if no term had been fixed in the agreement, this case would at most justify the fixing of a period5 but not the annulment of the contract. Nor is there merit in the claim that as the portion of the property formerly owned by the sister of Justina Santos was still in the process of settlement in the probate court at the time it was leased, the lease is invalid as to such portion. Justina Santos became the owner of the entire property upon the death of her sister Lorenzo on September 22, 1957 by force of article 777 of the Civil Code. Hence, when she leased the property on November 15, she did so already as owner thereof. As this Court


explained in upholding the sale made by an heir of a property under judicial administration: That the land could not ordinarily be levied upon while in custodia legis does not mean that one of the heirs may not sell the right, interest or participation which he has or might have in the lands under administration. The ordinary execution of property in custodia legis is prohibited in order to avoid interference with the possession by the court. But the sale made by an heir of his share in an inheritance, subject to the result of the pending administration, in no wise stands in the way of such administration.6 It is next contended that the lease contract was obtained by Wong in violation of his fiduciary relationship with Justina Santos, contrary to article 1646, in relation to article 1941 of the Civil Code, which disqualifies "agents (from leasing) the property whose administration or sale may have been entrusted to them." But Wong was never an agent of Justina Santos. The relationship of the parties, although admittedly close and confidential, did not amount to an agency so as to bring the case within the prohibition of the law. Just the same, it is argued that Wong so completely dominated her life and affairs that the contracts express not her will but only his. Counsel for Justina Santos cites the testimony of Atty. Tomas S. Yumol who said that he prepared the lease contract on the basis of data given to him by Wong and that she told him that "whatever Mr. Wong wants must be followed."7 The testimony of Atty. Yumol cannot be read out of context in order to warrant a finding that Wong practically dictated the terms of the contract. What this witness said was: Q Did you explain carefully to your client, Doña Justina, the contents of this document before she signed it?

A I explained to her each and every one of these conditions and I also told her these conditions were quite onerous for her, I don't really know if I have expressed my opinion, but I told her that we would rather not execute any contract anymore, but to hold it as it was before, on a verbal month to month contract of lease. Q But, she did not follow your advice, and she went with the contract just the same? A She agreed first . . . Q Agreed what? A Agreed with my objectives that it is really onerous and that I was really right, but after that, I was called again by her and she told me to follow the wishes of Mr. Wong Heng. x x x x x x x x x Q So, as far as consent is concerned, you were satisfied that this document was perfectly proper? x x x x x x x x x A Your Honor, if I have to express my personal opinion, I would say she is not, because, as I said before, she told me — "Whatever Mr. Wong wants must be followed."8 Wong might indeed have supplied the data which Atty. Yumol embodied in the lease contract, but to say this is not to detract from the binding force of the contract. For the contract was fully explained to Justina Santos by her own lawyer. One incident, related by the same witness, makes clear that she voluntarily consented to the lease contract. This witness said that the original term fixed for the lease was 99 years but that as he


doubted the validity of a lease to an alien for that length of time, he tried to persuade her to enter instead into a lease on a monthto-month basis. She was, however, firm and unyielding. Instead of heeding the advice of the lawyer, she ordered him, "Just follow Mr. Wong Heng."9 Recounting the incident, Atty. Yumol declared on cross examination: Considering her age, ninety (90) years old at the time and her condition, she is a wealthy woman, it is just natural when she said "This is what I want and this will be done." In particular reference to this contract of lease, when I said "This is not proper," she said — "You just go ahead, you prepare that, I am the owner, and if there is any illegality, I am the only one that can question the illegality."10 Atty. Yumol further testified that she signed the lease contract in the presence of her close friend, Hermenegilda Lao, and her maid, Natividad Luna, who was constantly by her side.11 Any of them could have testified on the undue influence that Wong supposedly wielded over Justina Santos, but neither of them was presented as a witness. The truth is that even after giving his client time to think the matter over, the lawyer could not make her change her mind. This persuaded the lower court to uphold the validity of the lease contract against the claim that it was procured through undue influence. Indeed, the charge of undue influence in this case rests on a mere inference12 drawn from the fact that Justina Santos could not read (as she was blind) and did not understand the English language in which the contract is written, but that inference has been overcome by her own evidence. Nor is there merit in the claim that her consent to the lease contract, as well as to the rest of the contracts in question, was given out of a mistaken sense of gratitude to Wong who, she was made to believe, had saved her and her sister from a fire that

destroyed their house during the liberation of Manila. For while a witness claimed that the sisters were saved by other persons (the brothers Edilberto and Mariano Sta. Ana)13 it was Justina Santos herself who, according to her own witness, Benjamin C. Alonzo, said "very emphatically" that she and her sister would have perished in the fire had it not been for Wong.14 Hence the recital in the deed of conditional option (Plff Exh. 7) that "[I]tong si Wong Heng ang siyang nagligtas sa aming dalawang magkapatid sa halos ay tiyak na kamatayan", and the equally emphatic avowal of gratitude in the lease contract (Plff Exh. 3). As it was with the lease contract (Plff Exh. 3), so it was with the rest of the contracts (Plff Exhs. 4-7) — the consent of Justina Santos was given freely and voluntarily. As Atty. Alonzo, testifying for her, said: [I]n nearly all documents, it was either Mr. Wong Heng or Judge Torres and/or both. When we had conferences, they used to tell me what the documents should contain. But, as I said, I would always ask the old woman about them and invariably the old woman used to tell me: "That's okay. It's all right."15 But the lower court set aside all the contracts, with the exception of the lease contract of November 15, 1957, on the ground that they are contrary to the expressed wish of Justina Santos and that their considerations are fictitious. Wong stated in his deposition that he did not pay P360 a month for the additional premises leased to him, because she did not want him to, but the trial court did not believe him. Neither did it believe his statement that he paid P1,000 as consideration for each of the contracts (namely, the option to buy the leased premises, the extension of the lease to 99 years, and the fixing of the term of the option at 50 years), but that the amount was returned to him by her for safekeeping. Instead, the court relied on the testimony of Atty. Alonzo in reaching the conclusion that the contracts are void for want of consideration.


Atty. Alonzo declared that he saw no money paid at the time of the execution of the documents, but his negative testimony does not rule out the possibility that the considerations were paid at some other time as the contracts in fact recite. What is more, the consideration need not pass from one party to the other at the time a contract is executed because the promise of one is the consideration for the other.16 With respect to the lower court's finding that in all probability Justina Santos could not have intended to part with her property while she was alive nor even to lease it in its entirety as her house was built on it, suffice it to quote the testimony of her own witness and lawyer who prepared the contracts (Plff Exhs. 4-7) in question, Atty. Alonzo: The ambition of the old woman, before her death, according to her revelation to me, was to see to it that these properties be enjoyed, even to own them, by Wong Heng because Doña Justina told me that she did not have any relatives, near or far, and she considered Wong Heng as a son and his children her grandchildren; especially her consolation in life was when she would hear the children reciting prayers in Tagalog.17 She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped her much, and she told me to see to it that no one could disturb Wong Heng from those properties. That is why we thought of the ninety-nine (99) years lease; we thought of adoption, believing that thru adoption Wong Heng might acquire Filipino citizenship; being the adopted child of a Filipino citizen.18 This is not to say, however, that the contracts (Plff Exhs. 3-7) are valid. For the testimony just quoted, while dispelling doubt as to the intention of Justina Santos, at the same time gives the clue to what we view as a scheme to circumvent the Constitutional

prohibition against the transfer of lands to aliens. "The illicit purpose then becomes the illegal causa"19 rendering the contracts void. Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they reveal an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to buy real property on condition that he is granted Philippine citizenship. As this Court said in Krivenko v. Register of Deeds:20 [A]liens are not completely excluded by the Constitution from the use of lands for residential purposes. Since their residence in the Philippines is temporary, they may be granted temporary rights such as a lease contract which is not forbidden by the Constitution. Should they desire to remain here forever and share our fortunes and misfortunes, Filipino citizenship is not impossible to acquire. But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot sell or otherwise dispose of his property,21 this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the land ( jus possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to dispose of it ( jus disponendi) — rights the sum total of which make up ownership. It is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this case did within the space of one year, with the result that Justina Santos' ownership of her property was reduced to a hollow concept. If this can be done, then the Constitutional ban against alien landholding in the Philippines, as


announced in Krivenko v. Register of Deeds,22 is indeed in grave peril. It does not follow from what has been said, however, that because the parties are in pari delicto they will be left where they are, without relief. For one thing, the original parties who were guilty of a violation of the fundamental charter have died and have since been substituted by their administrators to whom it would be unjust to impute their guilt.23 For another thing, and this is not only cogent but also important, article 1416 of the Civil Code provides, as an exception to the rule on pari delicto, that "When the agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered." The Constitutional provision that "Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines"24 is an expression of public policy to conserve lands for the Filipinos. As this Court said in Krivenko: It is well to note at this juncture that in the present case we have no choice. We are construing the Constitution as it is and not as we may desire it to be. Perhaps the effect of our construction is to preclude aliens admitted freely into the Philippines from owning sites where they may build their homes. But if this is the solemn mandate of the Constitution, we will not attempt to compromise it even in the name of amity or equity . . . . For all the foregoing, we hold that under the Constitution aliens may not acquire private or public agricultural lands, including residential lands, and, accordingly, judgment is affirmed, without costs.25

That policy would be defeated and its continued violation sanctioned if, instead of setting the contracts aside and ordering the restoration of the land to the estate of the deceased Justina Santos, this Court should apply the general rule of pari delicto. To the extent that our ruling in this case conflicts with that laid down in Rellosa v. Gaw Chee Hun 26 and subsequent similar cases, the latter must be considered as pro tanto qualified. The claim for increased rentals and attorney's fees, made in behalf of Justina Santos, must be denied for lack of merit. And what of the various amounts which Wong received in trust from her? It appears that he kept two classes of accounts, one pertaining to amount which she entrusted to him from time to time, and another pertaining to rentals from the Ongpin property and from the Rizal Avenue property, which he himself was leasing. With respect to the first account, the evidence shows that he received P33,724.27 on November 8, 1957 (Plff Exh. 16); P7,354.42 on December 1, 1957 (Plff Exh. 13); P10,000 on December 6, 1957 (Plff Exh. 14) ; and P18,928.50 on August 26, 1959 (Def. Exh. 246), or a total of P70,007.19. He claims, however, that he settled his accounts and that the last amount of P18,928.50 was in fact payment to him of what in the liquidation was found to be due to him. He made disbursements from this account to discharge Justina Santos' obligations for taxes, attorneys' fees, funeral services and security guard services, but the checks (Def Exhs. 247-278) drawn by him for this purpose amount to only P38,442.84.27 Besides, if he had really settled his accounts with her on August 26, 1959, we cannot understand why he still had P22,000 in the bank and P3,000 in his possession, or a total of P25,000. In his answer, he offered to pay this amount if the court so directed


him. On these two grounds, therefore, his claim of liquidation and settlement of accounts must be rejected. After subtracting P38,442.84 (expenditures) from P70,007.19 (receipts), there is a difference of P31,564 which, added to the amount of P25,000, leaves a balance of P56,564.3528 in favor of Justina Santos. As to the second account, the evidence shows that the monthly income from the Ongpin property until its sale in Rizal Avenue July, 1959 was P1,000, and that from the Rizal Avenue property, of which Wong was the lessee, was P3,120. Against this account the household expenses and disbursements for the care of the 17 dogs and the salaries of the 8 maids of Justina Santos were charged. This account is contained in a notebook (Def. Exh. 6) which shows a balance of P9,210.49 in favor of Wong. But it is claimed that the rental from both the Ongpin and Rizal Avenue properties was more than enough to pay for her monthly expenses and that, as a matter of fact, there should be a balance in her favor. The lower court did not allow either party to recover against the other. Said the court: [T]he documents bear the earmarks of genuineness; the trouble is that they were made only by Francisco Wong and Antonia Matias, nick-named Toning, — which was the way she signed the loose sheets, and there is no clear proof that Doña Justina had authorized these two to act for her in such liquidation; on the contrary if the result of that was a deficit as alleged and sought to be there shown, of P9,210.49, that was not what Doña Justina apparently understood for as the Court understands her statement to the Honorable Judge of the Juvenile Court . . . the reason why she preferred to stay in her home was because there she did not incur in any debts . . . this being the case, . . . the Court will not adjudicate in favor of Wong Heng on his counterclaim; on the other hand, while it is claimed that the expenses were much less than the rentals and there in fact should be a superavit, . . .

this Court must concede that daily expenses are not easy to compute, for this reason, the Court faced with the choice of the two alternatives will choose the middle course which after all is permitted by the rules of proof, Sec. 69, Rule 123 for in the ordinary course of things, a person will live within his income so that the conclusion of the Court will be that there is neither deficit nor superavit and will let the matter rest here. Both parties on appeal reiterate their respective claims but we agree with the lower court that both claims should be denied. Aside from the reasons given by the court, we think that the claim of Justina Santos totalling P37,235, as rentals due to her after deducting various expenses, should be rejected as the evidence is none too clear about the amounts spent by Wong for food29 masses30 and salaries of her maids.31 His claim for P9,210.49 must likewise be rejected as his averment of liquidation is belied by his own admission that even as late as 1960 he still had P22,000 in the bank and P3,000 in his possession. ACCORDINGLY, the contracts in question (Plff Exhs. 3-7) are annulled and set aside; the land subject-matter of the contracts is ordered returned to the estate of Justina Santos as represented by the Philippine Banking Corporation; Wong Heng (as substituted by the defendant-appellant Lui She) is ordered to pay the Philippine Banking Corporation the sum of P56,564.35, with legal interest from the date of the filing of the amended complaint; and the amounts consigned in court by Wong Heng shall be applied to the payment of rental from November 15, 1959 until the premises shall have been vacated by his heirs. Costs against the defendant-appellant. 23. G.R. No. L-34338 November 21, 1984


LOURDES VALERIO LIM, petitioner, vs. PEOPLE OF THE PHILIPPINES, respondent. Petitioner Lourdes Valerio Lim was found guilty of the crime of estafa and was sentenced "to suffer an imprisonment of four (4) months and one (1) day as minimum to two (2) years and four (4) months as maximum, to indemnify the offended party in the amount of P559.50, with subsidize imprisonment in case of insolvency, and to pay the costs." (p. 14, Rollo) From this judgment, appeal was taken to the then Court of Appeals which affirmed the decision of the lower court but modified the penalty imposed by sentencing her "to suffer an indeterminate penalty of one (1) month and one (1) day of arresto mayor as minimum to one (1) year and one (1) day of prision correccional as maximum, to indemnify the complainant in the amount of P550.50 without subsidiary imprisonment, and to pay the costs of suit." (p. 24, Rollo) The question involved in this case is whether the receipt, Exhibit "A", is a contract of agency to sell or a contract of sale of the subject tobacco between petitioner and the complainant, Maria de Guzman Vda. de Ayroso, thereby precluding criminal liability of petitioner for the crime charged. The findings of facts of the appellate court are as follows: ... The appellant is a businesswoman. On January 10, 1966, the appellant went to the house of Maria Ayroso and proposed to sell Ayroso's tobacco. Ayroso agreed to the proposition of the appellant to sell her tobacco consisting of 615 kilos at P1.30 a kilo. The appellant was to receive the overprice for which she could sell the tobacco. This agreement was made in the presence of plaintiff's sister, Salud G. Bantug. Salvador Bantug drew the document, Exh. A, dated January 10, 1966, which reads:

To Whom It May Concern: This is to certify that I have received from Mrs. Maria de Guzman Vda. de Ayroso. of Gapan, Nueva Ecija, six hundred fifteen kilos of leaf tobacco to be sold at Pl.30 per kilo. The proceed in the amount of Seven Hundred Ninety Nine Pesos and 50/100 (P 799.50) will be given to her as soon as it was sold. This was signed by the appellant and witnessed by the complainant's sister, Salud Bantug, and the latter's maid, Genoveva Ruiz. The appellant at that time was bringing a jeep, and the tobacco was loaded in the jeep and brought by the appellant. Of the total value of P799.50, the appellant had paid to Ayroso only P240.00, and this was paid on three different times. Demands for the payment of the balance of the value of the tobacco were made upon the appellant by Ayroso, and particularly by her sister, Salud Bantug. Salud Bantug further testified that she had gone to the house of the appellant several times, but the appellant often eluded her; and that the "camarin" the appellant was empty. Although the appellant denied that demands for payment were made upon her, it is a fact that on October 19, 1966, she wrote a letter to Salud Bantug which reads as follows: Dear Salud, Hindi ako nakapunta dian noon a 17 nitong nakaraan, dahil kokonte pa ang nasisingil kong pera, magintay ka hanggang dito sa linggo ito at tiak na ako ay magdadala sa iyo. Gosto ko Salud ay makapagbigay man lang ako ng marami para hindi masiadong kahiyahiya sa iyo. Ngayon kung gosto mo ay kahit konte muna ay bibigyan kita. Pupunta lang kami ni Mina sa Maynila ngayon. Salud kung talagang kailangan mo ay bukas ay dadalhan kita ng pera.


Medio mahirap ang maningil sa palengke ng Cabanatuan dahil nagsisilipat ang mga suki ko ng puesto. Huwag kang mabahala at tiyak na babayaran kita. Patnubayan tayo ng mahal na panginoon Dios. (Exh. B). Ludy Pursuant to this letter, the appellant sent a money order for P100.00 on October 24, 1967, Exh. 4, and another for P50.00 on March 8, 1967; and she paid P90.00 on April 18, 1967 as evidenced by the receipt Exh. 2, dated April 18, 1967, or a total of P240.00. As no further amount was paid, the complainant filed a complaint against the appellant for estafa. (pp. 14, 15, 16, Rollo) In this petition for review by certiorari, Lourdes Valerio Lim poses the following questions of law, to wit: 1. Whether or not the Honorable Court of Appeals was legally right in holding that the foregoing document (Exhibit "A") "fixed a period" and "the obligation was therefore, immediately demandable as soon as the tobacco was sold" (Decision, p. 6) as against the theory of the petitioner that the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended in which case the only action that can be maintained is a petition to ask the court to fix the duration thereof; 2. Whether or not the Honorable Court of Appeals was legally right in holding that "Art. 1197 of the New Civil Code does not apply" as against the alternative theory of the petitioner that the fore. going receipt (Exhibit "A") gives rise to an obligation wherein the duration of the period depends upon the will of the debtor in which case the only action that can be maintained is a petition to ask the court to fix the duration of the period; and

3. Whether or not the honorable Court of Appeals was legally right in holding that the foregoing receipt is a contract of agency to sell as against the theory of the petitioner that it is a contract of sale. (pp. 3-4, Rollo) It is clear in the agreement, Exhibit "A", that the proceeds of the sale of the tobacco should be turned over to the complainant as soon as the same was sold, or, that the obligation was immediately demandable as soon as the tobacco was disposed of. Hence, Article 1197 of the New Civil Code, which provides that the courts may fix the duration of the obligation if it does not fix a period, does not apply. Anent the argument that petitioner was not an agent because Exhibit "A" does not say that she would be paid the commission if the goods were sold, the Court of Appeals correctly resolved the matter as follows: ... Aside from the fact that Maria Ayroso testified that the appellant asked her to be her agent in selling Ayroso's tobacco, the appellant herself admitted that there was an agreement that upon the sale of the tobacco she would be given something. The appellant is a businesswoman, and it is unbelievable that she would go to the extent of going to Ayroso's house and take the tobacco with a jeep which she had brought if she did not intend to make a profit out of the transaction. Certainly, if she was doing a favor to Maria Ayroso and it was Ayroso who had requested her to sell her tobacco, it would not have been the appellant who would have gone to the house of Ayroso, but it would have been Ayroso who would have gone to the house of the appellant and deliver the tobacco to the appellant. (p. 19, Rollo) The fact that appellant received the tobacco to be sold at P1.30 per kilo and the proceeds to be given to complainant as soon as it was sold, strongly negates transfer of ownership of the goods to the petitioner. The agreement (Exhibit "A') constituted her as an


agent with the obligation to return the tobacco if the same was not sold. ACCORDINGLY, the petition for review on certiorari is dismissed for lack of merit. With costs. 24. G.R. No. L-22558 May 31, 1967 GREGORIO ARANETA, INC., petitioner, vs. THE PHILIPPINE SUGAR ESTATES DEVELOPMENT CO., LTD., respondent. Araneta and Araneta for petitioner. Rosauro Alvarez and Ernani Cruz Paño for respondent. REYES, J.B.L., J.: Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G.R. No. 28249-R, affirming with modification, an amendatory decision of the Court of First Instance of Manila, in its Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd., plaintiff, versus J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc., defendants." As found by the Court of Appeals, the facts of this case are: J. M. Tuason & Co., Inc. is the owner of a big tract land situated in Quezon City, otherwise known as the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an area of 43,034.4 square meters, more or less, for the sum of P430,514.00, to Philippine Sugar Estates

Development Co., Ltd. The parties stipulated, among in the contract of purchase and sale with mortgage, that the buyer will — Build on the said parcel land the Sto. Domingo Church and Convent while the seller for its part will — Construct streets on the NE and NW and SW sides of the land herein sold so that the latter will be a block surrounded by streets on all four sides; and the street on the NE side shall be named "Sto. Domingo Avenue;" The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto. Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing the streets, is unable to finish the construction of the street in the Northeast side named (Sto. Domingo Avenue) because a certain third-party, by the name of Manuel Abundo, who has been physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958, Philippine Sugar Estates Development Co., Lt. filed its complaint against J. M. Tuason & Co., Inc., and instance, seeking to compel the latter to comply with their obligation, as stipulated in the above-mentioned deed of sale, and/or to pay damages in the event they failed or refused to perform said obligation. Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the latter particularly setting up the principal defense that the action was premature since its obligation to construct the streets in question was without a definite period which needs to he fixed first by the court in a proper suit for that purpose before a complaint for specific performance will prosper.


The issues having been joined, the lower court proceeded with the trial, and upon its termination, it dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding the defenses interposed by defendant Gregorio Araneta, Inc.1äwphï1.ñët Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period within which defendants will comply with their obligation to construct the streets in question. Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint did not expressly or impliedly allege and pray for the fixing of a period to comply with its obligation and that the evidence presented at the trial was insufficient to warrant the fixing of such a period. On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the fixing of such a period," issued an order granting plaintiff's motion for reconsideration and amending the dispositive portion of the decision of May 31, 1960, to read as follows: WHEREFORE, judgment is hereby rendered giving defendant Gregorio Araneta, Inc., a period of two (2) years from notice hereof, within which to comply with its obligation under the contract, Annex "A". Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order, which motion, plaintiff opposed. On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc's. motion; and the latter perfected its appeal Court of Appeals.

In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the relief granted, i.e., fixing of a period, under the amendatory decision of July 16, 1960, was not justified by the pleadings and not supported by the facts submitted at the trial of the case in the court below and that the relief granted in effect allowed a change of theory after the submission of the case for decision. Ruling on the above contention, the appellate court declared that the fixing of a period was within the pleadings and that there was no true change of theory after the submission of the case for decision since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said issue by alleging in paragraph 7 of the affirmative defenses contained in its answer which reads — 7. Under the Deed of Sale with Mortgage of July 28, 1950, herein defendant has a reasonable time within which to comply with its obligations to construct and complete the streets on the NE, NW and SW sides of the lot in question; that under the circumstances, said reasonable time has not elapsed; Disposing of the other issues raised by appellant which were ruled as not meritorious and which are not decisive in the resolution of the legal issues posed in the instant appeal before us, said appellate court rendered its decision dated December 27, 1963, the dispositive part of which reads — IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is given two (2) years from the date of finality of this decision to comply with the obligation to construct streets on the NE, NW and SW sides of the land sold to plaintiff so that the same would be a block surrounded by streets on all four sides.


Unsuccessful in having the above decision reconsidered, defendant-appellant Gregorio Araneta, Inc. resorted to a petition for review by certiorari to this Court. We gave it due course. We agree with the petitioner that the decision of the Court of Appeals, affirming that of the Court of First Instance is legally untenable. The fixing of a period by the courts under Article 1197 of the Civil Code of the Philippines is sought to be justified on the basis that petitioner (defendant below) placed the absence of a period in issue by pleading in its answer that the contract with respondent Philippine Sugar Estates Development Co., Ltd. gave petitioner Gregorio Araneta, Inc. "reasonable time within which to comply with its obligation to construct and complete the streets." Neither of the courts below seems to have noticed that, on the hypothesis stated, what the answer put in issue was not whether the court should fix the time of performance, but whether or not the parties agreed that the petitioner should have reasonable time to perform its part of the bargain. If the contract so provided, then there was a period fixed, a "reasonable time;" and all that the court should have done was to determine if that reasonable time had already elapsed when suit was filed if it had passed, then the court should declare that petitioner had breached the contract, as averred in the complaint, and fix the resulting damages. On the other hand, if the reasonable time had not yet elapsed, the court perforce was bound to dismiss the action for being premature. But in no case can it be logically held that under the plea above quoted, the intervention of the court to fix the period for performance was warranted, for Article 1197 is precisely predicated on the absence of any period fixed by the parties. Even on the assumption that the court should have found that no reasonable time or no period at all had been fixed (and the trial court's amended decision nowhere declared any such fact) still, the complaint not having sought that the Court should set a period, the court could not proceed to do so unless the complaint

in as first amended; for the original decision is clear that the complaint proceeded on the theory that the period for performance had already elapsed, that the contract had been breached and defendant was already answerable in damages. Granting, however, that it lay within the Court's power to fix the period of performance, still the amended decision is defective in that no basis is stated to support the conclusion that the period should be set at two years after finality of the judgment. The list paragraph of Article 1197 is clear that the period can not be set arbitrarily. The law expressly prescribes that — the Court shall determine such period as may under the circumstances been probably contemplated by the parties. All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the proven facts precisely warrant the fixing of such a period," a statement manifestly insufficient to explain how the two period given to petitioner herein was arrived at. It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court must first determine that "the obligation does not fix a period" (or that the period is made to depend upon the will of the debtor)," but from the nature and the circumstances it can be inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled, the Court must then proceed to the second step, and decide what period was "probably contemplated by the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period merely because in its opinion it is or should be reasonable, but must set the time that the parties are shown to have intended. As the record stands, the trial Court appears to have pulled the two-year period set in its decision out of thin air, since no circumstances are mentioned to support it. Plainly, this is not warranted by the Civil Code.


In this connection, it is to be borne in mind that the contract shows that the parties were fully aware that the land described therein was occupied by squatters, because the fact is expressly mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12-13). As the parties must have known that they could not take the law into their own hands, but must resort to legal processes in evicting the squatters, they must have realized that the duration of the suits to be brought would not be under their control nor could the same be determined in advance. The conclusion is thus forced that the parties must have intended to defer the performance of the obligations under the contract until the squatters were duly evicted, as contended by the petitioner Gregorio Araneta, Inc. The Court of Appeals objected to this conclusion that it would render the date of performance indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness is what explains why the agreement did not specify any exact periods or dates of performance. It follows that there is no justification in law for the setting the date of performance at any other time than that of the eviction of the squatters occupying the land in question; and in not so holding, both the trial Court and the Court of Appeals committed reversible error. It is not denied that the case against one of the squatters, Abundo, was still pending in the Court of Appeals when its decision in this case was rendered. In view of the foregoing, the decision appealed from is reversed, and the time for the performance of the obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date that all the squatters on affected areas are finally evicted therefrom. Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.

25.

G.R. No. L-55480 PACIFICA MILLARE, petitioner, vs. HON. HAROLD M. HERNANDO, In his capacity as Presiding Judge, Court of Instance of Abra, Second Judicial District, Branch I, ANTONIO CO and ELSA CO, respondents.

FELICIANO, J.: On 17 June 1975, a five-year Contract of Lease 1 was executed between petitioner Pacifica Millare as lessor and private respondent Elsa Co, married to Antonio Co, as lessee. Under the written agreement, which was scheduled to expire on 31 May 1980, the lessor-petitioner agreed to rent out to thelessee at a monthly rate of P350.00 the "People's Restaurant", a commercial establishment located at the corner of McKinley and Pratt Streets in Bangued, Abra. The present dispute arose from events which transpired during the months of May and July in 1980. According to the Co spouses, sometime during the last week of May 1980, the lessor informed them that they could continue leasing the People's Restaurant so long as they were amenable to paying creased rentals of P1,200.00 a month. In response, a counteroffer of P700.00 a month was made by the Co spouses. At this point, the lessor allegedly stated that the amount of monthly rentals could be resolved at a later time since "the matter is simple among us", which alleged remark was supposedly taken by the spouses Co to mean that the Contract of Lease had been renewed, prompting them to continue occupying the subject premises and to forego


their search for a substitute place to rent. 2 In contrast, the lessor flatly denied ever having considered, much less offered, a renewal of the Contract of Lease. The variance in versions notwithstanding, the record shows that on 22 July 1980, Mrs. Millare wrote the Co spouses requesting them to vacate the leased premises as she had no intention of renewing the Contract of Lease which had, in the meantime, already expirecl. 3 In reply, the Co spouses reiterated their unwillingness to pay the Pl,200.00 monthly rentals supposedly sought bv Mrs. Millare which they considered "highly excessive, oppressive and contrary to existing laws". They also signified their intention to deposit the amount of rentals in court, in view of Mrs. Millare's refusal to accept their counter-offer.4 Another letter of demand from Mrs. Millare was received on 28 July 1980 by the Co spouses, who responded by depositing the rentals for June and July (at 700.00 a month) in court. On 30 August 1980, a Saturday, the Co spouses jumped the gun, as it were, and filed a Complaint 5 (docketed as Civil Case No. 1434) with the then Court of First Instance of Abra against Mrs. Millare and seeking judgment (a) ordering the renewal of the Contract of Lease at a rental rate of P700.00 a nionth and for a period of ten years, (b) ordering the defendant to collect the sum of P1,400.00 deposited by plaintiffs with the court, and (c) ordering the defendant to pay damages in the amount of P50,000.00. The following Monday, on 1 September 1980, Mrs. Millare filed an ejectment case against the Co spouses in the Municipal Court of Bangued, Abra, docketed as Civil Case No. 661. The spouses Co, defendants therein, sut)sequently set up lis pendens as a Civil Case No. 661. The spouses Co, defendants therein, subsequently set up lis pendens as a defense against the complaint for ejectment. Mrs. Millare, defendant in Civil Case No. 1434, countered with an Omnibus Motion to Dismiss6 rounded on (a) lack of cause of

action due to plaintiffs' failure to establish a valid renewal of the Contract of Lease, and (b) lack of jurisdiction by the trial court over the complaint for failure of plaintiffs to secure a certification from the Lupong Tagapayapa of the barangay wherein both disputants reside attesting that no amicable settlement between them had been reached despite efforts to arrive at one, as required by Section 6 of Presidential Decree No. 1508. The Co spouses opposed the motion to dismiss. 7 In an Order dated 15 October 1980, respondent judge denied the motion to dismiss and ordered the renewal of the Contract of Lease. Furthermore plaintiffs were allowed to deposit all accruing monthly rentals in court, while defendant Millare was directed to submit her answer to the complaint. 8 A motion for reconsideration 9 was subsequently filed which, however, was likewise denied. 10 Hence, on 13 November 1980, Mrs. Millare filed the instant Petition for Certiorari, Prohibition and Mandamus, seeking injunctive relief from the abovementioned orders. This Court issued a temporary restraining order on 21 November 1980 enjoining respondent, judge from conducting further proceedings in Civil Case No. 1434. 11 Apparently, before the temporary restraining order could be served on the respondent judge, he rendered a "Judgment by Default" dated 26 November 1980 ordering the renewal of the lease contract for a term of 5 years counted from the expiration date of the original lease contract, and fixing monthly rentals thereunder at P700.00 a month, payable in arrears. On18 March 1981, this Court gave due course to the Petition for Certiorari, Prohibition and Mandamus. 12 Two issues are presented for resolution: (1) whether or not the trial court acquired jurisdiction over Civil Case No. 1434; and (2) whether or not private respondents have a valid cause of action against petitioner.


Turning to the first issue, petitioner's attack on the jurisdiction of the trial court must fail, though for reasons different from those cited by the respondent judge. 13 We would note firstly that the conciliation procedure required under P.D. 1508 is not a jurisdictional requirement in the sense that failure to have prior recourse to such procedure would not deprive a court of its jurisdiction either over the subject matter or over the person of the defendant.14 Secondly, the acord shows that two complaints were submitted to the barangay authorities for conciliation — one by petitioner for ejectment and the other by private respondents for renewal of the Contract of Lease. It appears further that both complaints were, in fact, heard by the Lupong Tagapayapa in the afternoon of 30 August 1980. After attempts at conciliation had proven fruitless, Certifications to File Action authorizing the parties to pursue their respective claims in court were then issued at 5:20 p.m. of that same aftemoon, as attested to by the Barangay Captain in a Certification presented in evidence by petitioner herself. 15 Petitioner would, nonetheless, assail the proceedings in the trial court on a technicaety, i.e., private respondents allegedly filed their complaint at 4:00 p.m. of 30 August 1980, or one hour and twenty minutes before the issuance of the requisite certification by the Lupng Tagapayapa. The defect in procedure admittedly initially present at that particular moment when private respondents first filed the complaint in the trial court, was cured by the subsequent issuance of the Certifications to File Action by the barangay Lupong Tagapayapa Such certifications in any event constituted substantial comphance with the requirement of P.D. 1508. We turn to the second issue, that is, whether or not the complaint in Civil Case No. 1434 filed by the respondent Co spouses claiming renewal of the contract of lease stated a valid cause of action. Paragraph 13 of the Contract of Lease reads as follows:

13. This contract of lease is subject to the laws and regulations ofthe goverrunent; and that this contract of lease may be renewed after a period of five (5) years under the terms and conditions as will be mutually agreed upon by the parties at the time of renewal; ... (Emphasis supplied.) The respondent judge, in his Answer and Comment to the Petition, urges that under paragraph 13 quoted above. there was already a consummated and finished mutual agreement of the parties to renew the contract of lease after five years; what is only left unsettled between the parties to the contract of lease is the amount of the monthly rental; the lessor insists Pl,200 a month, while the lessee is begging P700 a month which doubled the P350 monthly rental under the original contract .... In short, the lease contract has never expired because paragraph 13 thereof had expressly mandated that it is renewable. ...16 In the "Judgment by Default" he rendered, the respondent Judge elaborated his views — obviously highly emotional in character — in the following extraordinary tatements: However, it is now the negative posture of the defendant-lessor to block, reject and refuse to renew said lease contract. It is the defendant-lessor's assertion and position that she can at the mere click of her fingers, just throw-out the plaintiffs-lessees from the leased premises and any time after the original term of the lease contract had already expired; This negative position of the defendantlessor, to the mind of this Court does not conform to the principles and correct application of the philosophy underlying the law of lease; for indeed, the law of lease is impressed with public interest, social justice and equity; reason for which, this Court cannot sanction lot owner's business and commercial speculations by allowing them with "unbridled discretion" to raise rentals even to the extent of "extraordinary


gargantuan proportions, and calculated to unreasonably and unjustly eject the helpless lessee because he cannot afford said inflated monthly rental and thereby said lessee is placed without any alternative, except to surrender and vacate the premises mediately,-" Many business establishments would be closed and the public would directly suffer the direct consequences; Nonetheless, this is not the correct concept or perspective the law of lease, that is, to place the lessee always at the mercy of the lessor's "Merchant of Venice" and to agit the latter's personal whims and caprices; the defendant-lessor's hostile attitude by imposing upon the lessee herein an "unreasonable and extraordinary gargantuan monthly rental of P1,200.00", to the mind of this Court, is "fly-by night unjust enrichment" at the expense of said lessees; but, no Man should unjustly enrich himself at the expense of another; under these facts and circumstances surrounding this case, the action therefore to renew the lease contract! is "tenable" because it falls squarely within the coverage and command of Articles 1197 and 1670 of the New Civil Code, to wit: x x x x x x x x x The term "to be renewed" as expressly stipulated by the herein parties in the original contract of lease means that the lease may be renewed for another term of five (5) years; its equivalent to a promise made by the lessor to the lessee, and as a unilateral stipulation, obliges the lessor to fulfill her promise; of course the lessor is free to comply and honor her commitment or back-out from her promise to renew the lease contract; but, once expressly stipulated, the lessor shall not be allowed to evade or violate the obligation to renew the lease because, certainly, the lessor may be held hable for damages caused to the lessee as a consequence of the unjustifiable termination of the lease or renewal of the same; In other words, the lessor is guilty of breach of contract: Since the original lease was fixed for five (5) years, it follows, therefore, that the lease contract is renewable for another five (5)

years and the lessee is not required before hand to give express notice of this fact to the lessor because it was expressly stipulated in the original lease contract to be renewed; Wherefore, the bare refusal of the lessor to renew the lease contract unless the monthly rental is P1,200.00 is contrary to law, morals, good customs, public policy, justice and equity because no one should unjustly enrich herself at the expense of another. Article 1197 and 1670 of the New Civil Code must therefore govern the case at bar and whereby this Court is authorized to fix the period thereof by ordering the renewal of the lease contract to another fixed term of five (5) years.17 Clearly, the respondent judge's grasp of both the law and the Enghsh language is tenuous at best. We are otherwise unable to comprehend how he arrived at the reading set forth above. Paragraph 13 of the Contract of Lease can only mean that the lessor and lessee may agree to renew the contract upon their reaching agreement on the terms and conditions to be embodied in such renewal contract. Failure to reach agreement on the terms and conditions of the renewal contract will of course prevent the contract from being renewed at all. In the instant case, the lessor and the lessee conspicuously failed to reach agreement both on the amount of the rental to be payable during the renewal term, and on the term of the renewed contract. The respondent judge cited Articles 1197 and 1670 of the Civil Code to sustain the "Judgment by Default" by which he ordered the renewal of the lease for another term of five years and fixed monthly rentals thereunder at P700.00 a month. Article 1197 of the Civil Code provides as follows: If the obligation does not fix a period, but from its nature and the circumstances it can be inferred that a period was intended, the courts may fix the duration thereof.


The courts shall also fix the duration of the period when it depends upon the will of the debtor. In every case, the courts shall determine such period as may, under the circumstances, have been probably contemplated by the parties. Once fixed by the courts, the period cannot be changed by them. (Emphasis supplied.) The first paragraph of Article 1197 is clearly inapplicable, since the Contract of Lease did in fact fix an original period of five years, which had expired. It is also clear from paragraph 13 of the Contract of Lease that the parties reserved to themselves the faculty of agreeing upon the period of the renewal contract. The second paragraph of Article 1197 is equally clearly inapplicable since the duration of the renewal period was not left to the wiu of the lessee alone, but rather to the will of both the lessor and the lessee. Most importantly, Article 1197 applies only where a contract of lease clearly exists. Here, the contract was not renewed at all, there was in fact no contract at all the period of which could have been fixed. Article 1670 of the Civil Code reads thus: If at the end of the contract the lessee should continue enjoying the thing left for 15 days with the acquiescence of the lessor and unless a notice to the contrary by either party has previously been given. It is understood that there is an implied new lease, not for the period of the original contract but for the time established in Articles 1682 and 1687. The ther terms of the original contract shall be revived. (Emphasis suplied.) The respondents themselves, public and private, do not pretend that the continued occupancy of the leased premises after 31 May 1980, the date of expiration of the contract, was with the acquiescence of the lessor. Even if it be assumed that tacite reconduccion had occurred, the implied new lease could not

possibly have a period of five years, but rather would have been a month-to-month lease since the rentals (under the original contract) were payable on a monthly basis. At the latest, an implied new lease (had one arisen) would have expired as of the end of July 1980 in view of the written demands served by the petitioner upon the private respondents to vacate the previously leased premises. It follows that the respondent judge's decision requiring renewal of the lease has no basis in law or in fact. Save in the limited and exceptional situations envisaged inArticles ll97 and 1670 of the Civil Code, which do not obtain here, courts have no authority to prescribe the terms and conditions of a contract for the parties. As pointed out by Mr. Justice J.B.L. Reyes in Republic vs. Philippine Long Distance Telephone,Co.,[[18 [P]arties cannot be coerced to enter into a contract where no agreement is had between them as to the principal terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our contractual system, and by express provision of the statute, a contract may be annulled if tainted by violence, intimidation or undue influence (Article 1306, 1336, 1337, Civil Code of the Philippines). Contractual terms and conditions created by a court for two parties are a contradiction in terms. If they are imposed by a judge who draws upon his own private notions of what morals, good customs, justice, equity and public policy" demand, the resulting "agreement" cannot, by definition, be consensual or contractual in nature. It would also follow that such coerced terms and conditions cannot be the law as between the parties themselves. Contracts spring from the volition of the parties. That volition cannot be supplied by a judge and a judge who pretends to do so, acts tyrannically, arbitrarily and in excess of his jurisdiction. 19


WHEREFORE, the Petition for Certiorari, Prohibition and mandamus is granted. The Orders of the respondent judge in Civil Case No. 1434 dated 26 September 1980 (denying petitioner's motion to dismiss) and 4 November 1980 (denying petitioner's motion for reconsideration), and the "Judgment by Default" rendered by the respondent judge dated 26 November 1980, are hereby annulled and set aside and Civil Case No. 1434 is hereby dismissed. The temporary restraining order dated 21 November 1980 issued by this ourt, is hereby made permanent. No pronouncement as to costs. 26.(also 103) G.R. No. 206806 June 25, 2014 ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners, vs. DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES, Respondent. D E C I S I O N LEONEN, J.: Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied only if the old and new contracts are incompatible on every point. Before us is a petition for review on certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed from a complaint3 filed in the Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money.

The facts are as follows: Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business.4 From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President, Candida A. Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent value.6 Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the assurance that the check would not bounce.8 When he deposited the check on April 18, 2007, it was dishonored for being drawn against a closed account.9 On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement10 where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products. The memorandum of agreement reads as follows: Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of P18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of deliveries are as follows:


. . . . It has been agreed further that the Local OCC materials to be used for the production of the above Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at P6.50 per kg. (price subject to change per advance notice). Quantity of Local OCC delivery will be based on the quantity of Test Liner delivered to Megapack Container Corp. based on the above production schedule.11 On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31, but no payment was made to him.13 Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer15 but failed to have its representatives attend the pretrial hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex parte.16 On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation to Dan T. Lim.17 Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not take place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private agreement between them. He argued that if his name was mentioned in the contract, it was only for supplying the parties their required scrap papers, where his conformity through a separate contract was indispensable.19

On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the amount of P7,220,968.31 with interest at 12% per annum from the time of demand; P50,000.00 moral damages; P50,000.00 exemplary damages; and P50,000.00 attorney’s fees.22 The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorney’s fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking.24 Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief Executive Officer, Candida A. Santos, bring this petition for review on certiorari. On one hand, petitioners argue that the execution of the memorandum of agreement constituted a novation of the original obligation since Eric Sy became the new debtor of respondent. They also argue that there is no legal basis to hold petitioner Candida A. Santos personally liable for the transaction that petitioner corporation entered into with respondent. The Court of Appeals, they allege, also erred in awarding moral and exemplary damages and attorney’s fees to respondent who did not show proof that he was entitled to damages.27 Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no proper novation in this case. He argues that the Court of Appeals was correct in ordering the payment of 7,220,968.31 with damages since the debt of petitioners remains unpaid.28 He also argues that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner Candida A. Santos was "the prime mover for such outstanding corporate liability."29 In their reply, petitioners


reiterate that novation took place since there was nothing in the memorandum of agreement showing that the obligation was alternative. They also argue that when respondent allowed them to deliver the finished products to Eric Sy, the original obligation was novated.30 A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC dated November 21, 2000.31 The issues to be resolved by this court are as follows: 1. Whether the obligation between the parties was extinguished by novation 2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc. 3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded The petition is denied. The obligation between the parties was an alternative obligation The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states: Article 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking.

"In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined by the choice of the debtor who generally has the right of election."32 The right of election is extinguished when the party who may exercise that option categorically and unequivocally makes his or her choice known.33 The choice of the debtor must also be communicated to the creditor who must receive notice of it since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the election made by the debtor, and only after said notice shall the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a competent court.34 According to the factual findings of the trial court and the appellate court, the original contract between the parties was for respondent to deliver scrap papers worth P7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price or(2) deliver the finished products of equivalent value to respondent.35 The appellate court, therefore, correctly identified the obligation between the parties as an alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from respondent, would either pay him the price of the raw materials or, in the alternative, deliver to him the finished products of equivalent value. When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap papers, they exercised their option to pay the price. Respondent’s receipt of the check and his subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to pay.


This choice was also shown by the terms of the memorandum of agreement, which was executed on the same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and Paper’s finished products would be to a third person, thereby extinguishing the option to deliver the finished products of equivalent value to respondent. The memorandum of agreement did not constitute a novation of the original contract The trial court erroneously ruled that the execution of the memorandum of agreement constituted a novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver the finished products to a third person, it did not novate the original obligation between the parties. The rules on novation are outlined in the Civil Code, thus: 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. (1203) 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. (1204)

Article 1293. 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. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a) 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."36 Novation was extensively discussed by this court in Garcia v. Llamas:37 Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Article 1293 of the Civil Code defines novation as follows: "Art. 1293. 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. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237." In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from — and may even be made without the knowledge of — the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the


obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the consent of the creditor. Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation. 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.38 (Emphasis supplied) Because novation requires that it be clear and unequivocal, it is never presumed, thus:

In the civil law setting, novatio is 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 tobe a jural reality, its animus must be ever present, debitum pro debito — basically extinguishing the old obligation for the new one.39 (Emphasis supplied) There is nothing in the memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead. The consent of the creditor must also be secured for the novation to be valid: Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old agreement.40 (Emphasis supplied) In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need not be secured. This is clear from the first line of the memorandum, which states: Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . .41 If the memorandum of agreement was intended to novate the original agreement between the parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement must also state in clear and unequivocal terms that it has replaced the original obligation of


petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case. Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their alleged intent to pass on their obligation to Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor consented to the latter as his new debtor. These acts, when taken together, clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of P7,220,968.31. Petitioners are liable for damages Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where the breach is due to fraud or bad faith: Art. 2220. Willfull 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) Moral damages are not awarded as a matter of right but only after the party claiming it proved that the breach was due to fraud or bad faith. As this court stated: Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be

wanton, reckless, malicious or in bad faith, and oppressive or abusive.42 Further, the following requisites must be proven for the recovery of moral damages: An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second, there must be culpable act or omission factually established; (3) third, the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the award of damages is predicated on any of the cases stated in Article 2219 of the Civil Code.43 Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Paper’s act of refusing to pay its obligations. When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an unfunded check but also entered into a contract with a third person in an effort to evade its liability. This proves the third requirement. As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in the following instances: Article 2219. Moral damages may be recovered in the following and analogous cases: (1) A criminal offense resulting in physical injuries; (2) Quasi-delicts 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 Article 309; (10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party breaches a contract, he or she goes against Article 19 of the Civil Code, which states: Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. Persons who have the right to enter into contractual relations must exercise that right with honesty and good faith. Failure to do so results in an abuse of that right, which may become the basis of an action for damages. Article 19, however, cannot be its sole basis: Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of an actionable tort. Article 19 describes the degree of care required so that an actionable tort may arise when it is alleged together with Article 20 or Article 21.44 Article 20 and 21 of the Civil Code are as follows:

Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same. Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts that are contrary to morals, good customs, and public policy: Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have been willful or negligent. Willful may refer to the intention to do the act and the desire to achieve the outcome which is considered by the plaintiff in tort action as injurious. Negligence may refer to a situation where the act was consciously done but without intending the result which the plaintiff considers as injurious. Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily proscribed by law. This article requires that the act be willful, that is, that there was an intention to do the act and a desire to achieve the outcome. In cases under Article 21, the legal issues revolve around whether such outcome should be considered a legal injury on the part of the plaintiff or whether the commission of the act was done in violation of the standards of care required in Article 19.45 When parties act in bad faith and do not faithfully comply with their obligations under contract, they run the risk of violating Article 1159 of the Civil Code:


Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be recovered since it only specifies, among others, Article 21. When a party reneges on his or her obligations arising from contracts in bad faith, the act is not only contrary to morals, good customs, and public policy; it is also a violation of Article 1159. Breaches of contract become the basis of moral damages, not only under Article 2220, but also under Articles 19 and 20 in relation to Article 1159. Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala:46 To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith must prove its existence by clear and convincing evidence for the law always presumes good faith. Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which can be inferred from one’s conduct and/or contemporaneous statements.47 (Emphasis supplied) Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the circumstances in each case.

When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it was presumably with the knowledge that it was being drawn against a closed account. Worse, it attempted to shift their obligations to a third person without the consent of respondent. Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud."48 Moral damages may, therefore, be awarded. Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the following circumstances: Article 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 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they should be adjudicated. Article 2234. While the amount of the exemplary damages need not be proven, 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 should be awarded. In Tankeh v. Development Bank of the Philippines,49 we stated that: The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from the commission of a similar offense. The case of People v. Ranteciting People v. Dalisay held that:


Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These terms are generally, but not always, used interchangeably. In common law, there is preference in the use of exemplary damages when the award is to account for injury to feelings and for the sense of indignity and humiliation suffered by a person as a result of an injury that has been maliciously and wantonly inflicted, the theory being that there should be compensation for the hurt caused by the highly reprehensible conduct of the defendant—associated with such circumstances as willfulness, wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud—that intensifies the injury. The terms punitive or vindictive damages are often used to refer to those species of damages that may be awarded against a person to punish him for his outrageous conduct. In either case, these damages are intended in good measure to deter the wrongdoer and others like him from similar conduct in the future.50 (Emphasis supplied; citations omitted) The requisites for the award of exemplary damages are as follows: (1) they may be imposed by way of example in addition to compensatory damages, and only after the claimant's right to them has been established; (2) that they cannot be recovered as a matter of right, their determination depending upon the amount of compensatory damages that may be awarded to the claimant; and (3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent manner.51

Business owners must always be forthright in their dealings. They cannot be allowed to renege on their obligations, considering that these obligations were freely entered into by them. Exemplary damages may also be awarded in this case to serve as a deterrent to those who use fraudulent means to evade their liabilities. Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be recovered. Article 2208 of the Civil Code states: Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded[.] Petitioner Candida A. Santos is solidarily liable with petitioner corporation Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to prove that the transaction was also a personal undertaking of petitioner Santos. We disagree. In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that: Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A


director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues. . . . . Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the lower court are not supported by the evidence on record or are based on a misapprehension of facts.53 (Emphasis supplied) As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven. Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief Executive Officer of

Arco Pulp and Paper. She also issued the check in partial payment of petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc."54 Any obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking for which she would be solidarily liable with petitioner Arco Pulp and Paper. We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55 Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for nonlegitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical.56 (Emphasis supplied) According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper, stating that: In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to honor their undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68 issued by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner] corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies provided by law in order to protect his rights.57


We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate veil.1âwphi1 When petitioner Arco Pulp and Paper’s obligation to respondent became due and demandable, she not only issued an unfunded check but also contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper. The rate of interest due on the obligation must be reduced in view of Nacar v. Gallery Frames58 In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v. Gallery Frames,59 the rate of interest due on the obligation must be modified from 12% per annum to 6% per annum from the time of demand. Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we have laid down the following guidelines with regard to the rate of legal interest: To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Linesare accordingly modified to embody BSP-MB Circular No. 799, as follows: I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, 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 annum 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. 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 annum from 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.61 (Emphasis supplied; citations omitted.) According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be at 6% per annum, computed from May 5, 2007, when respondent sent his letter of demand to petitioners. This interest shall continue to be due from the finality of this decision until its full satisfaction. WHEREFORE, the petition is DENIED in part. The decision in CAG.R. CV No. 95709 is AFFIRMED. Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay respondent Dan T. Lim the amount of P7,220,968.31 with interest of 6% per annum at the time of demand until finality of judgment and its full satisfaction, with moral damages in the amount of P50,000.00, exemplary damages in the amount of P50,000.00, and attorney's fees in the amount of P50,000.00. 27. G.R. No. L-55138 September 28, 1984 ERNESTO V. RONQUILLO, petitioner, vs.

HONORABLE COURT OF APPEALS AND ANTONIO P. SO, respondents. Gloria A. Fortun for petitioner. Roselino Reyes Isler for respondents. CUEVAS, J.: This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals (now the Intermediate Appellate Court) in CA-G.R. No. SP-10573, entitled "Ernesto V. Ronquillo versus the Hon. Florellana Castro-Bartolome, etc." and the Order of said court dated August 20, 1980, denying petitioner's motion for reconsideration of the above resolution. Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the then Court of First Instance of Rizal (now the Regional Trial Court), Branch XV filed by private respondent Antonio P. So, on July 23, 1979, for the collection of the sum of P17,498.98 plus attorney's fees and costs. The other defendants were Offshore Catertrade Inc., Johnny Tan and Pilar Tan. The amount of P117,498.98 sought to be collected represents the value of the checks issued by said defendants in payment for foodstuffs delivered to and received by them. The said checks were dishonored by the drawee bank. On December 13, 1979, the lower court rendered its Decision 1 based on the compromise agreement submitted by the parties, the pertinent portion of which reads as follows: 1. Plaintiff agrees to reduce its total claim of P117,498-95 to only P11,000 .00 and defendants agree to acknowledge the validity of such claim and further bind themselves to initially pay out of the total indebtedness of P10,000.00 the amount of


P55,000.00 on or before December 24, 1979, the balance of P55,000.00, defendants individually and jointly agree to pay within a period of six months from January 1980, or before June 30, 1980; (Emphasis supplied) xxx xxx xxx 4. That both parties agree that failure on the part of either party to comply with the foregoing terms and conditions, the innocent party will be entitled to an execution of the decision based on this compromise agreement and the defaulting party agrees and hold themselves to reimburse the innocent party for attorney's fees, execution fees and other fees related with the execution. xxx xxx xxx On December 26, 1979, herein private respondent (then plaintiff filed a Motion for Execution on the ground that defendants failed to make the initial payment of P55,000.00 on or before December 24, 1979 as provided in the Decision. Said motion for execution was opposed by herein petitioner (as one of the defendants) contending that his inability to make the payment was due to private respondent's own act of making himself scarce and inaccessible on December 24, 1979. Petitioner then prayed that private respondent be ordered to accept his payment in the amount of P13,750.00. 2 During the hearing of the Motion for Execution and the Opposition thereto on January 16, 1980, petitioner, as one of the four defendants, tendered the amount of P13,750.00, as his prorata share in the P55,000.00 initial payment. Another defendant, Pilar P. Tan, offered to pay the same amount. Because private respondent refused to accept their payments, demanding from them the full initial installment of P 55,000.00, petitioner and Pilar Tan instead deposited the said amount with the Clerk of

Court. The amount deposited was subsequently withdrawn by private respondent. 3 On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution for the balance of the initial amount payable, against the other two defendants, Offshore Catertrade Inc. and Johnny Tan 4 who did not pay their shares. On January 22, 1980, private respondent moved for the reconsideration and/or modification of the aforesaid Order of execution and prayed instead for the "execution of the decision in its entirety against all defendants, jointly and severally." 5 Petitioner opposed the said motion arguing that under the decision of the lower court being executed which has already become final, the liability of the four (4) defendants was not expressly declared to be solidary, consequently each defendant is obliged to pay only his own pro-rata or 1/4 of the amount due and payable. On March 17, 1980, the lower court issued an Order reading as follows: ORDER Regardless of whatever the compromise agreement has intended the payment whether jointly or individually, or jointly and severally, the fact is that only P27,500.00 has been paid. There appears to be a non-payment in accordance with the compromise agreement of the amount of P27,500.00 on or before December 24, 1979. The parties are reminded that the payment is condition sine qua non to the lifting of the preliminary attachment and the execution of an affidavit of desistance. WHEREFORE, let writ of execution issue as prayed for


On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same was set for hearing on March 25,1980. Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the satisfaction of the sum of P82,500.00 as against the properties of the defendants (including petitioner), "singly or jointly hable." 6 On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's sale, for the sale of certain furnitures and appliances found in petitioner's residence to satisfy the sum of P82,500.00. The public sale was scheduled for April 2, 1980 at 10:00 a.m. 7 Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which was set for hearing on March 25, 1980, was upon motion of private respondent reset to April 2, 1980 at 8:30 a.m. Realizing the actual threat to property rights poised by the re-setting of the hearing of s motion for reconsideration for April 2, 1980 at 8:30 a.m. such that if his motion for reconsideration would be denied he would have no more time to obtain a writ from the appellate court to stop the scheduled public sale of his personal properties at 10:00 a.m. of the same day, April 2, 1980, petitioner filed on March 26, 1980 a petition for certiorari and prohibition with the then Court of Appeals (CA-G.R. No. SP-10573), praying at the same time for the issuance of a restraining order to stop the public sale. He raised the question of the validity of the order of execution, the writ of execution and the notice of public sale of his properties to satisfy fully the entire unpaid obligation payable by all of the four (4) defendants, when the lower court's decision based on the compromise agreement did not specifically state the liability of the four (4) defendants to be solidary.

On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the scheduled public sale in that same day did not proceed in view of the pendency of a certiorari proceeding before the then Court of Appeals. On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as follows: This Court, however, finds the present petition to have been filed prematurely. The rule is that before a petition for certiorari can be brought against an order of a lower court, all remedies available in that court must first be exhausted. In the case at bar, herein petitioner filed a petition without waiting for a resolution of the Court on the motion for reconsideration, which could have been favorable to the petitioner. The fact that the hearing of the motion for reconsideration had been reset on the same day the public sale was to take place is of no moment since the motion for reconsideration of the Order of March 17, 1980 having been seasonably filed, the scheduled public sale should be suspended. Moreover, when the defendants, including herein petitioner, defaulted in their obligation based on the compromise agreement, private respondent had become entitled to move for an execution of the decision based on the said agreement. WHEREFORE, the instant petition for certiorari and prohibition with preliminary injunction is hereby denied due course. The restraining order issued in our resolution dated April 9, 1980 is hereby lifted without pronouncement as to costs. SO ORDERED. Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the lower court had already denied the motion referred to and consequently, the legal issues being raised in the petition were already "ripe" for determination. 8


The said motion was however denied by the Court of Appeals in its Resolution dated August 20, 1980. Hence, this petition for review, petitioner contending that the Court of Appeals erred in (a) declaring as premature, and in denying due course to the petition to restrain implementation of a writ of execution issued at variance with the final decision of the lower court filed barely four (4) days before the scheduled public sale of the attached movable properties; (b) denying reconsideration of the Resolution of June 30, 1980, which declared as premature the filing of the petition, although there is proof on record that as of April 2, 1980, the motion referred to was already denied by the lower court and there was no more motion pending therein; (c) failing to resolve the legal issues raised in the petition and in not declaring the liabilities of the defendants, under the final decision of the lower court, to be only joint; (d) not holding the lower court's order of execution dated March 17, 1980, the writ of execution and the notice of sheriff's sale, executing the lower court's decision against "all defendants, singly and jointly", to be at variance with the lower court's final decision which did not provide for solidary obligation; and (e) not declaring as invalid and unlawful the threatened execution, as against the properties of petitioner who had paid his pro-rata share of the adjudged obligation, of the total unpaid amount payable by his joint co-defendants. The foregoing assigned errors maybe synthesized into the more important issues of —

1. Was the filing of a petition for certiorari before the then Court of Appeals against the Order of Execution issued by the lower court, dated March 17, 1980, proper, despite the pendency of a motion for reconsideration of the same questioned Order? 2. What is the nature of the liability of the defendants (including petitioner), was it merely joint, or was it several or solidary? Anent the first issue raised, suffice it to state that while as a general rule, a motion for reconsideration should precede recourse to certiorari in order to give the trial court an opportunity to correct the error that it may have committed, the said rule is not absolutes 9 and may be dispensed with in instances where the filing of a motion for reconsideration would serve no useful purpose, such as when the motion for reconsideration would raise the same point stated in the motion 10 or where the error is patent for the order is void 11 or where the relief is extremely urgent, as in cases where execution had already been ordered 12 where the issue raised is one purely of law. 13 In the case at bar, the records show that not only was a writ of execution issued but petitioner's properties were already scheduled to be sold at public auction on April 2, 1980 at 10:00 a.m. The records likewise show that petitioner's motion for reconsideration of the questioned Order of Execution was filed on March 17, 1980 and was set for hearing on March 25, 1980 at 8:30 a.m., but upon motion of private respondent, the hearing was reset to April 2, 1980 at 8:30 a.m., the very same clay when petitioner's properties were to be sold at public auction. Needless to state that under the circumstances, petitioner was faced with imminent danger of his properties being immediately sold the moment his motion for reconsideration is denied. Plainly, urgency prompted recourse to the Court of Appeals and the adequate and speedy remedy for petitioner under the situation


was to file a petition for certiorari with prayer for restraining order to stop the sale. For him to wait until after the hearing of the motion for reconsideration on April 2, 1980 before taking recourse to the appellate court may already be too late since without a restraining order, the public sale can proceed at 10:00 that morning. In fact, the said motion was already denied by the lower court in its order dated April 2, 1980 and were it not for the pendency of the petition with the Court of Appeals and the restraining order issued thereafter, the public sale scheduled that very same morning could have proceeded. The other issue raised refers to the nature of the liability of petitioner, as one of the defendants in Civil Case No. 33958, that is whether or not he is liable jointly or solidarily. In this regard, Article 1207 and 1208 of the Civil Code provides — Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each one of the former has a right to demand, or that each one of the latter is bound to render, entire compliance with the prestation. Then is a solidary liability only when the obligation expressly so states, or when the law or the nature of the obligation requires solidarity. Art. 1208. If from the law,or the nature or the wording of the obligation to which the preceding article refers the contrary does not appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors and debtors, the credits or debts being considered distinct from one another, subject to the Rules of Court governing the multiplicity of quits. The decision of the lower court based on the parties' compromise agreement, provides:

1. Plaintiff agrees to reduce its total claim of P117,498.95 to only P110,000.00 and defendants agree to acknowledge the validity of such claim and further bind themselves to initially pay out of the total indebtedness of P110,000.00, the amount of P5,000.00 on or before December 24, 1979, the balance of P55,000.00, defendants individually and jointly agree to pay within a period of six months from January 1980 or before June 30, 1980. (Emphasis supply) Clearly then, by the express term of the compromise agreement and the decision based upon it, the defendants obligated themselves to pay their obligation "individually and jointly". The term "individually" has the same meaning as "collectively", "separately", "distinctively", respectively or "severally". An agreement to be "individually liable" undoubtedly creates a several obligation, 14 and a "several obligation is one by which one individual binds himself to perform the whole obligation. 15 In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or separadamente or in the promissory note is an express statement making each of the persons who signed it individually liable for the payment of the fun amount of the obligation contained therein." Likewise in Un Pak Leung vs. Negorra 17 We held that "in the absence of a finding of facts that the defendants made themselves individually hable for the debt incurred they are each liable only for one-half of said amount The obligation in the case at bar being described as "individually and jointly", the same is therefore enforceable against one of the numerous obligors. IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby DISMISSED. Cost against petitioner.


28.

G.R. No. L-36413

September 26, 1988

MALAYAN INSURANCE CO., INC., petitioner, vs. THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents. Freqillana Jr. for petitioner. B.F. Estrella & Associates for respondent Martin Vallejos. Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc. Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc. PADILLA, J.: Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22 February 1973, which affirmed, with some modifications, the decision, ** dated 27 April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan. The antecedent facts of the case are as follows: On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private respondent Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18 April 1967 to 18 April 1968, covering a Willys jeep with Motor

No. ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not to exceed P600.00 and "third-party liability" in the amount of P20,000.00. During the effectivity of said insurance policy, and more particularly on 19 December 1967, at about 3:30 o'clock in the afternoon, the insured jeep, while being driven by one Juan P. Campollo an employee of the respondent San Leon Rice Mill, Inc., collided with a passenger bus belonging to the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short) at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was riding in the ill-fated jeep. As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance Co., Inc. and the PANTRANCO before the Court of First Instance of Pangasinan, which was docketed as Civil Case No. U-2021. He prayed therein that the defendants be ordered to pay him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory damages; and P5,000.00, for attorney's fees. Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive speed and bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of the highway in order to avoid the jeep; and that it had observed the diligence of a good father of a family to prevent damage, especially in the selection and supervision of its employees and in the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability. Defendant Sio Choy and the petitioner insurance company, in their answer, also denied liability to the plaintiff, claiming that the fault in the accident was solely imputable to the PANTRANCO.


Sio Choy, however, later filed a separate answer with a crossclaim against the herein petitioner wherein he alleged that he had actually paid the plaintiff, Martin C. Vallejos, the amount of P5,000.00 for hospitalization and other expenses, and, in his cross-claim against the herein petitioner, he alleged that the petitioner had issued in his favor a private car comprehensive policy wherein the insurance company obligated itself to indemnify Sio Choy, as insured, for the damage to his motor vehicle, as well as for any liability to third persons arising out of any accident during the effectivity of such insurance contract, which policy was in full force and effect when the vehicular accident complained of occurred. He prayed that he be reimbursed by the insurance company for the amount that he may be ordered to pay. Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint against the San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy, at the time of the accident, was an employee of the San Leon Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner prayed that judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse and indemnify the petitioner for any sum that it may be ordered to pay the plaintiff. After trial, judgment was rendered as follows: WHEREFORE, in view of the foregoing findings of this Court judgment is hereby rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance Co., Inc., and third-party defendant San Leon Rice Mill, Inc., as follows:

(a) P4,103 as actual damages; (b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for the period of three (3) years; (c) P5,000.00 as moral damages; (d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs. The above-named parties against whom this judgment is rendered are hereby held jointly and severally liable. With respect, however, to Malayan Insurance Co., Inc., its liability will be up to only P20,000.00. As no satisfactory proof of cost of damage to its bus was presented by defendant Pantranco, no award should be made in its favor. Its counter-claim for attorney's fees is also dismissed for not being proved. 1 On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally liable for the damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance company. 2 Hence, the present recourse by petitioner insurance company. The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to order the San Leon Rice Mill,


Inc. to reimburse petitioner any amount, in excess of one-half (1/2) of the entire amount of damages, petitioner may be ordered to pay jointly and severally with Sio Choy. The Court, acting upon the petition, gave due course to the same, but "only insofar as it concerns the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it being understood that no other aspect of the decision of the Court of Appeals shall be reviewed, hence, execution may already issue in favor of respondent Martin C. Vallejos against the respondents, without prejudice to the determination of whether or not petitioner shall be entitled to reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of whatever the former may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos." 3 However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it is important to determine first the nature or basis of the liability of petitioner to respondent Vallejos, as compared to that of respondents Sio Choy and San Leon Rice Mill, Inc. Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld by the Court of Appeals, was correct in holding petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to respondent Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount petitioner has been adjudged to pay respondent Vallejos on its insurance policy. As to the first issue, it is noted that the trial court found, as affirmed by the appellate court, that petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally liable to respondent Vallejos.

We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy and San Leon Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos. It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides: Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if the former, who was in the vehicle, could have, by the use of due diligence, prevented the misfortune it is disputably presumed that a driver was negligent, if he had been found guilty of reckless driving or violating traffic regulations at least twice within the next preceding two months. If the owner was not in the motor vehicle, the provisions of article 2180 are applicable. On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc. to plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code which reads: Art. 2180. The obligation imposed by article 2176 is demandable not only for one's own acts or omissions, but also for those of persons for whom one is responsible. xxx xxx xxx Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged ill any business or industry.


xxx xxx xxx The responsibility treated in this article shall cease when the persons herein mentioned proved that they observed all the diligence of a good father of a family to prevent damage. It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal tortfeasors who are primarily liable to respondent Vallejos. The law states that the responsibility of two or more persons who are liable for a quasi-delict is solidarily. 4 On the other hand, the basis of petitioner's liability is its insurance contract with respondent Sio Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third party liability clause included in the private car comprehensive policy existing between petitioner and respondent Sio Choy at the time of the complained vehicular accident. In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by the heirs of said passenger against the driver and owner of the jeepney at fault as well as against the insurance company which insured the latter jeepney against third party liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to pay the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon case, it was only the owner and the driver of the jeepney at fault, not including the insurance company, who were held solidarily liable to the heirs of the victim.

While it is true that where the insurance contract provides for indemnity against liability to third persons, such third persons can directly sue the insurer, 6 however, the direct liability of the insurer under indemnity contracts against third party liability does not mean that the insurer can be held solidarily liable with the insured and/or the other parties found at fault. The liability of the insurer is based on contract; that of the insured is based on tort. In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by reason of the indemnity contract against third party liability-under which an insurer can be directly sued by a third party — this will result in a violation of the principles underlying solidary obligation and insurance contracts. In solidary obligation, the creditor may enforce the entire obligation against one of the solidary debtors. 7 On the other hand, insurance is defined as "a contract whereby one undertakes for a consideration to indemnify another against loss, damage, or liability arising from an unknown or contingent event." 8 In the case at bar, the trial court held petitioner together with respondents Sio Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00, with the qualification that petitioner's liability is only up to P20,000.00. In the context of a solidary obligation, petitioner may be compelled by respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court. But, how can petitioner be obliged to pay the entire obligation when the amount stated in its insurance policy with


respondent Sio Choy for indemnity against third party liability is only P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos. As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled that petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the ground that said respondent is not privy to the contract of insurance existing between petitioner and respondent Sio Choy. We disagree. The appellate court overlooked the principle of subrogation in insurance contracts. Thus — ... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs. Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is entitled to be subrogated pro tanto to any right of action which the insured may have against the third person whose negligence or wrongful act caused the loss (44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan Assurance Co., 283 U.S. 284, 75 L. ed. 1037). The right of subrogation is of the highest equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382). Although many policies including policies in the standard form, now provide for subrogation, and thus determine the rights of

the insurer in this respect, the equitable right of subrogation as the legal effect of payment inures to the insurer without any formal assignment or any express stipulation to that effect in the policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays for the loss, such payment operates as an equitable assignment to the insurer of the property and all remedies which the insured may have for the recovery thereof. That right is not dependent upon , nor does it grow out of any privity of contract (emphasis supplied) or upon written assignment of claim, and payment to the insured makes the insurer assignee in equity (Shambley v. Jobe-Blackley Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18). 9 It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation the right to be reimbursed by his co-debtors for the share which corresponds to each. Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation. If two or more solidary debtors offer to pay, the creditor may choose which offer to accept. He who made the payment may claim from his co-debtors only the share which corresponds to each, with the interest for the payment already made. If the payment is made before the debt is due, no interest for the intervening period may be demanded. xxx xxx xxx In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby becoming the subrogee of


solidary debtor Sio Choy, is entitled to reimbursement from respondent San Leon Rice Mill, Inc. To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos may enforce the entire obligation on only one of said solidary debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of P14,551.50 (which is 1/2 of P29,103.00 ) WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the Court of Appeals, is hereby AFFIRMED, with the modification above-mentioned. Without pronouncement as to costs. 29. G.R. No. L-28046 May 16, 1983 PHILIPPINE NATIONAL BANK, plaintiff-appellant, vs. INDEPENDENT PLANTERS ASSOCIATION, INC., ANTONIO DIMAYUGA, DELFIN FAJARDO, CEFERINO VALENCIA, MOISES CARANDANG, LUCIANO CASTILLO, AURELIO VALENCIA, LAURO LEVISTE, GAVINO GONZALES, LOPE GEVANA and BONIFACIO LAUREANA, defendants-appellees. Basa, Ilao, del Rosario Diaz for plaintiff-appellant. Laurel Law Office for Dimayuga.

Tomas Yumol for Fajardo, defendant-appellee.

PLANA, J.: Appeal by the Philippine National Bank (PNB) from the Order of the defunct Court of First Instance of Manila (Branch XX) in its Civil Case No. 46741 dismissing PNB's complaint against several solidary debtors for the collection of a sum of money on the ground that one of the defendants (Ceferino Valencia) died during the pendency of the case (i.e., after the plaintiff had presented its evidence) and therefore the complaint, being a money claim based on contract, should be prosecuted in the testate or intestate proceeding for the settlement of the estate of the deceased defendant pursuant to Section 6 of Rule 86 of the Rules of Court which reads: SEC. 6. Solidary obligation of decedent.— the obligation of the decedent is solidary with another debtor, the claim shall be filed against the decedent as if he were the only debtor, without prejudice to the right of the estate to recover contribution from the other debtor. In a joint obligation of the decedent, the claim shall be confined to the portion belonging to him. The appellant assails the order of dismissal, invoking its right of recourse against one, some or all of its solidary debtors under Article 1216 of the Civil Code — ART. 1216. The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected. The sole issue thus raised is whether in an action for collection of a sum of money based on contract against all the solidary


debtors, the death of one defendant deprives the court of jurisdiction to proceed with the case against the surviving defendants. It is now settled that the quoted Article 1216 grants the creditor the substantive right to seek satisfaction of his credit from one, some or all of his solidary debtors, as he deems fit or convenient for the protection of his interests; and if, after instituting a collection suit based on contract against some or all of them and, during its pendency, one of the defendants dies, the court retains jurisdiction to continue the proceedings and decide the case in respect of the surviving defendants. Thus in Manila Surety & Fidelity Co., Inc. vs. Villarama et al., 107 Phil. 891 at 897, this Court ruled: Construing Section 698 of the Code of Civil Procedure from whence the aforequoted provision (Sec. 6, Rule 86) was taken, this Court held that where two persons are bound in solidum for the same debt and one of them dies, the whole indebtedness can be proved against the estate of the latter, the decedent's liability being absolute and primary; and if the claim is not presented within the time provided by the rules, the same will be barred as against the estate. It is evident from the foregoing that Section 6 of Rule 87 (now Rule 86) provides the procedure should the creditor desire to go against the deceased debtor, but there is certainly nothing in the said provision making compliance with such procedure a condition precedent before an ordinary action against the surviving solidary debtors, should the creditor choose to demand payment from the latter, could be entertained to the extent that failure to observe the same would deprive the court jurisdiction to take cognizance of the action against the surviving debtors. Upon the other hand, the Civil Code expressly allows the creditor to proceed against any one of the solidary debtors or some or all of them simultaneously. There is, therefore, nothing improper in the creditor's filing of an action against the surviving solidary debtors alone, instead of instituting a proceeding for the

settlement of the estate of the deceased debtor wherein his claim could be filed. Similarly, in PNB vs. Asuncion, 80 SCRA 321 at 323-324, this Court, speaking thru Mr. Justice Makasiar, reiterated the doctrine. A cursory perusal of Section 6, Rule 86 of the Revised Rules of Court reveals that nothing therein prevents a creditor from proceeding against the surviving solidary debtors. Said provision merely sets up the procedure in enforcing collection in case a creditor chooses to pursue his claim against the estate of the deceased solidary, debtor. It is crystal clear that Article 1216 of the New Civil Code is the applicable provision in this matter. Said provision gives the creditor the right to 'proceed against anyone of the solidary debtors or some or all of them simultaneously.' The choice is undoubtedly left to the solidary, creditor to determine against whom he will enforce collection. In case of the death of one of the solidary debtors, he (the creditor) may, if he so chooses, proceed against the surviving solidary debtors without necessity of filing a claim in the estate of the deceased debtors. It is not mandatory for him to have the case dismissed against the surviving debtors and file its claim in the estate of the deceased solidary debtor . . . As correctly argued by petitioner, if Section 6, Rule 86 of the Revised Rules of Court were applied literally, Article 1216 of the New Civil Code would, in effect, be repealed since under the Rules of Court, petitioner has no choice but to proceed against the estate of Manuel Barredo only. Obviously, this provision diminishes the Bank's right under the New Civil, Code to proceed against any one, some or all of the solidary debtors. Such a construction is not sanctioned by the principle, which is too well settled to require citation, that a substantive law cannot be amended by a procedural rule. Otherwise stared, Section 6, Rule 86 of the Revised Rules of Court cannot be made to prevail over


Article 1216 of the New Civil Code, the former being merely procedural, while the latter, substantive. WHEREFORE the appealed order of dismissal of the court a quo in its Civil Case No. 46741 is hereby set aside in respect of the surviving defendants; and the case is remanded to the corresponding Regional Trial Court for proceedings. proceedings. No costs. 30. G.R. No. 190696 August 3, 2010 ROLITO CALANG and PHILTRANCO SERVICE ENTERPRISES, INC., Petitioners, vs. PEOPLE OF THE PHILIPPINES, Respondent. R E S O L U T I O N BRION, J.: We resolve the motion for reconsideration filed by the petitioners, Philtranco Service Enterprises, Inc. (Philtranco) and Rolito Calang, to challenge our Resolution of February 17, 2010. Our assailed Resolution denied the petition for review on certiorari for failure to show any reversible error sufficient to warrant the exercise of this Court’s discretionary appellate jurisdiction. Antecedent Facts At around 2:00 p.m. of April 22, 1989, Rolito Calang was driving Philtranco Bus No. 7001, owned by Philtranco along Daang Maharlika Highway in Barangay Lambao, Sta. Margarita, Samar

when its rear left side hit the front left portion of a Sarao jeep coming from the opposite direction. As a result of the collision, Cresencio Pinohermoso, the jeep’s driver, lost control of the vehicle, and bumped and killed Jose Mabansag, a bystander who was standing along the highway’s shoulder. The jeep turned turtle three (3) times before finally stopping at about 25 meters from the point of impact. Two of the jeep’s passengers, Armando Nablo and an unidentified woman, were instantly killed, while the other passengers sustained serious physical injuries. The prosecution charged Calang with multiple homicide, multiple serious physical injuries and damage to property thru reckless imprudence before the Regional Trial Court (RTC), Branch 31, Calbayog City. The RTC, in its decision dated May 21, 2001, found Calang guilty beyond reasonable doubt of reckless imprudence resulting to multiple homicide, multiple physical injuries and damage to property, and sentenced him to suffer an indeterminate penalty of thirty days of arresto menor, as minimum, to four years and two months of prision correccional, as maximum. The RTC ordered Calang and Philtranco, jointly and severally, to pay P50,000.00 as death indemnity to the heirs of Armando; P50,000.00 as death indemnity to the heirs of Mabansag; and P90,083.93 as actual damages to the private complainants. The petitioners appealed the RTC decision to the Court of Appeals (CA), docketed as CA-G.R. CR No. 25522. The CA, in its decision dated November 20, 2009, affirmed the RTC decision in toto. The CA ruled that petitioner Calang failed to exercise due care and precaution in driving the Philtranco bus. According to the CA, various eyewitnesses testified that the bus was traveling fast and encroached into the opposite lane when it evaded a pushcart that was on the side of the road. In addition, he failed to slacken his speed, despite admitting that he had already seen the jeep coming from the opposite direction when it was still half a kilometer away. The CA further ruled that Calang demonstrated a


reckless attitude when he drove the bus, despite knowing that it was suffering from loose compression, hence, not roadworthy. The CA added that the RTC correctly held Philtranco jointly and severally liable with petitioner Calang, for failing to prove that it had exercised the diligence of a good father of the family to prevent the accident. The petitioners filed with this Court a petition for review on certiorari. In our Resolution dated February 17, 2010, we denied the petition for failure to sufficiently show any reversible error in the assailed decision to warrant the exercise of this Court’s discretionary appellate jurisdiction. The Motion for Reconsideration In the present motion for reconsideration, the petitioners claim that there was no basis to hold Philtranco jointly and severally liable with Calang because the former was not a party in the criminal case (for multiple homicide with multiple serious physical injuries and damage to property thru reckless imprudence) before the RTC. The petitioners likewise maintain that the courts below overlooked several relevant facts, supported by documentary exhibits, which, if considered, would have shown that Calang was not negligent, such as the affidavit and testimony of witness Celestina Cabriga; the testimony of witness Rodrigo Bocaycay; the traffic accident sketch and report; and the jeepney’s registration receipt. The petitioners also insist that the jeep’s driver had the last clear chance to avoid the collision. We partly grant the motion. Liability of Calang

We see no reason to overturn the lower courts’ finding on Calang’s culpability. The finding of negligence on his part by the trial court, affirmed by the CA, is a question of fact that we cannot pass upon without going into factual matters touching on the finding of negligence. In petitions for review on certiorari under Rule 45 of the Revised Rules of Court, this Court is limited to reviewing only errors of law, not of fact, unless the factual findings complained of are devoid of support by the evidence on record, or the assailed judgment is based on a misapprehension of facts. Liability of Philtranco We, however, hold that the RTC and the CA both erred in holding Philtranco jointly and severally liable with Calang. We emphasize that Calang was charged criminally before the RTC. Undisputedly, Philtranco was not a direct party in this case. Since the cause of action against Calang was based on delict, both the RTC and the CA erred in holding Philtranco jointly and severally liable with Calang, based on quasi-delict under Articles 21761 and 21802 of the Civil Code. Articles 2176 and 2180 of the Civil Code pertain to the vicarious liability of an employer for quasi-delicts that an employee has committed. Such provision of law does not apply to civil liability arising from delict. If at all, Philtranco’s liability may only be subsidiary. Article 102 of the Revised Penal Code states the subsidiary civil liabilities of innkeepers, tavernkeepers and proprietors of establishments, as follows: In default of the persons criminally liable, innkeepers, tavernkeepers, and any other persons or corporations 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 regulations shall have been committed by them or their employees.1avvphil


Innkeepers are also subsidiary liable for the restitution of goods taken by robbery or theft within their houses from guests lodging therein, 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 of persons unless committed by the innkeeper’s employees. The foregoing subsidiary liability applies to employers, according to Article 103 of the Revised Penal Code, which reads: 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. The provisions of the Revised Penal Code on subsidiary liability – Articles 102 and 103 – are deemed written into the judgments in cases to which they are applicable. Thus, in the dispositive portion of its decision, the trial court need not expressly pronounce the subsidiary liability of the employer.3 Nonetheless, before the employers’ subsidiary liability is enforced, adequate evidence must exist establishing that (1) they are indeed the employers of the convicted employees; (2) they are engaged in some kind of industry; (3) the crime was committed by the employees in the discharge of their duties; and (4) the execution against the latter has not been satisfied due to insolvency. The determination of these conditions may be done in the same criminal action in which the employee’s liability, criminal and civil, has been pronounced, in a hearing set for that precise

purpose, with due notice to the employer, as part of the proceedings for the execution of the judgment.4 WHEREFORE, we PARTLY GRANT the present motion. The Court of Appeals decision that affirmed in toto the RTC decision, finding Rolito Calang guilty beyond reasonable doubt of reckless imprudence resulting in multiple homicide, multiple serious physical injuries and damage to property, is AFFIRMED, with the MODIFICATION that Philtranco’s liability should only be subsidiary. No costs. 31. G.R. No. 204866 January 21, 2015 RUKS KONSULT AND CONSTRUCTION, Petitioner, vs. ADWORLD SIGN AND ADVERTISING CORPORATION* and TRANSWORLD MEDIA ADS, INC., Respondents. D E C I S I O N PERLAS-BERNABE, J.: Assailed in this petition for review on certiorari1 are the Decision2 dated November 16, 2011 and the Resolution3 dated December 10, 2012 of the Court of Appeals (CA) in CA-G.R. CV No. 94693 which affirmed the Decision4 dated August 25, 2009 of the Regional Trial Court of Makati City, Branch 142 (RTC) in Civil Case No. 03-1452 holding, inter alia, petitioner Ruks Konsult and Construction (Ruks) and respondent Transworld Media Ads, Inc. (Transworld) jointly and severally liable to respondent Adworld Sign and Advertising Corporation (Adworld) for damages. The Facts


The instant case arose from a complaint for damages filed by Adworld against Transworld and Comark International Corporation (Comark) before the RTC.5 In the complaint, Adworld alleged that it is the owner of a 75 ft. x 60 ft. billboard structure located at EDSA Tulay, Guadalupe, Barangka Mandaluyong, which was misaligned and its foundation impaired when, on August 11, 2003, the adjacent billboard structure owned by Transworld and used by Comark collapsed and crashed against it. Resultantly, on August 19, 2003, Adworld sent Transworld and Comark a letter demanding payment for the repairs of its billboard as well asloss of rental income. On August 29, 2003, Transworld sent its reply, admitting the damage caused by its billboard structure on Adworld’s billboard, but nevertheless, refused and failed to pay the amounts demanded by Adworld. As Adworld’s final demand letter also went unheeded, it was constrained to file the instant complaint, praying for damages in the aggregate amount of P474,204.00, comprised of P281,204.00 for materials, P72,000.00 for labor, and P121,000.00 for indemnity for loss of income.6 In its Answer with Counterclaim, Transworld averred that the collapse of its billboard structure was due to extraordinarily strong winds that occurred instantly and unexpectedly, and maintained that the damage caused to Adworld’s billboard structure was hardly noticeable. Transworld likewise filed a Third-Party Complaint against Ruks, the company which built the collapsed billboard structure in the former’s favor.1âwphi1 It was alleged therein that the structure constructed by Ruks had a weak and poor foundation not suited for billboards, thus, prone to collapse, and as such, Ruks should ultimately be held liable for the damages caused to Adworld’s billboard structure.7 For its part, Comark denied liability for the damages caused to Adworld’s billboard structure, maintaining that it does not have any interest on Transworld’s collapsed billboard structure as it

only contracted the use of the same. In this relation, Comark prayed for exemplary damages from Transworld for unreasonably includingit as a party-defendant in the complaint.8 Lastly, Ruks admitted that it entered into a contract with Transworld for the construction of the latter’s billboard structure, but denied liability for the damages caused by its collapse. It contended that when Transworld hired its services, there was already an existing foundation for the billboard and that it merely finished the structure according to the terms and conditions of its contract with the latter.9 The RTC Ruling In a Decision10 dated August 25, 2009, the RTC ultimately ruled in Adworld’s favor, and accordingly, declared, inter alia, Transworld and Ruks jointly and severally liable to Adworld in the amount of P474,204.00 as actual damages, with legal interest from the date of the filing of the complaint until full payment thereof, plus attorney’s fees in the amount of P50,000.00.11 The RTC found both Transworld and Ruks negligent in the construction of the collapsed billboard as they knew that the foundation supporting the same was weak and would pose danger to the safety of the motorists and the other adjacent properties, such as Adworld’s billboard, and yet, they did not do anything to remedy the situation.12 In particular, the RTC explained that Transworld was made aware by Ruks that the initial construction of the lower structure of its billboard did not have the proper foundation and would require additional columns and pedestals to support the structure. Notwithstanding, however, Ruks proceeded with the construction of the billboard’s upper structure and merely assumed that Transworld would reinforce its lower structure.13 The RTC then concluded that these negligent acts were the direct and proximate cause of the damages suffered by Adworld’s billboard.14


Aggrieved, both Transworld and Ruks appealed to the CA. In a Resolution dated February 3, 2011, the CA dismissed Transworld’s appeal for its failure to file an appellant’s brief on time.15 Transworld elevated its case before the Court, docketed as G.R. No. 197601.16 However, in a Resolution17 dated November 23, 2011, the Court declared the case closed and terminated for failure of Transworld to file the intended petition for review on certiorariwithin the extended reglementary period. Subsequently, the Court issued an Entry of Judgment18 dated February 22, 2012 in G.R. No. 197601 declaring the Court’s November 23, 2011 Resolution final and executory. The CA Ruling In a Decision19 dated November 16, 2011, the CA denied Ruks’s appeal and affirmed the ruling of the RTC. It adhered to the RTC’s finding of negligence on the part of Transworld and Ruks which brought about the damage to Adworld’s billboard. It found that Transworld failed to ensure that Ruks will comply with the approved plans and specifications of the structure, and that Ruks continued to install and finish the billboard structure despite the knowledge that there were no adequate columns to support the same.20 Dissatisfied, Ruks moved for reconsideration,21 which was, however, denied in a Resolution22 dated December 10, 2012,hence, this petition. On the other hand, Transworld filed another appeal before the Court, docketed as G.R. No. 205120.23 However, the Court denied outright Transworld’s petition in a Resolution24 dated April 15, 2013, holding that the same was already bound by the dismissal of its petition filed in G.R. No. 197601. The Issue Before the Court

The primordial issue for the Court’s resolution is whether or not the CA correctly affirmed the ruling of the RTC declaring Ruks jointly and severally liable with Transworld for damages sustained by Adworld. The Court’s Ruling The petition is without merit. At the outset, it must be stressed that factual findings of the RTC, when affirmed by the CA, are entitled to great weight by the Court and are deemed final and conclusive when supported by the evidence on record.25 Absent any exceptions to this rule – such as when it is established that the trial court ignored, overlooked, misconstrued, or misinterpreted cogent facts and circumstances that, if considered, would change the outcome of the case26 – such findings must stand. After a judicious perusal of the records, the Court sees no cogent reason to deviate from the findings of the RTC and the CA and their uniform conclusion that both Transworld and Ruks committed acts resulting in the collapse of the former’s billboard, which in turn, caused damage to the adjacent billboard of Adworld. Jurisprudence defines negligence as the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of something which a prudent and reasonable man would not do.27 It is the failure to observe for the protection of the interest of another person that degree of care, precaution, and vigilance which the circumstances justly demand, whereby such other person suffers injury.28


In this case, the CA correctly affirmed the RTC’s finding that Transworld’s initial construction of its billboard’s lower structure without the proper foundation, and that of Ruks’s finishing its upper structure and just merely assuming that Transworld would reinforce the weak foundation are the two (2) successive acts which were the direct and proximate cause of the damages sustained by Adworld. Worse, both Transworld and Ruks were fully aware that the foundation for the former’s billboard was weak; yet, neither of them took any positive step to reinforce the same. They merely relied on each other’s word that repairs would be done to such foundation, but none was done at all. Clearly, the foregoing circumstances show that both Transworld and Ruks are guilty of negligence in the construction of the former’s billboard, and perforce, should be held liable for its collapse and the resulting damage to Adworld’s billboard structure. As joint tortfeasors, therefore, they are solidarily liable to Adworld. Verily, "[j]oint tortfeasors are those who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or approve of it after it is done, if done for their benefit. They are also referred to as those who act together in committing wrong or whose acts, if independent of each other, unite in causing a single injury. Under Article 219429 of the Civil Code, joint tortfeasors are solidarily liable for the resulting damage. In other words, joint tortfeasors are each liable as principals, to the same extent and in the same manner as if they had performed the wrongful act themselves."30 The Court’s pronouncement in People v. Velasco31 is instructive on this matter, to wit:32 Where several causes producing an injury are concurrent and each is an efficient cause without which the injury would not have happened, the injury may be attributed to all or any of the causes and recovery may be had against any or all of the responsible persons although under the circumstances of the case, it may appear that one of them was more culpable, and that the duty owed by them to the injured person was not same. No

actor's negligence ceases to be a proximate cause merely because it does not exceed the negligence of other actors. Each wrongdoer is responsible for the entire result and is liable as though his acts were the sole cause of the injury. There is no contribution between joint [tortfeasors] whose liability is solidary since both of them are liable for the total damage.1âwphi1 Where the concurrent or successive negligent acts or omissions of two or more persons, although acting independently, are in combination the direct and proximate cause of a single injury to a third person, it is impossible to determine in what proportion each contributed to the injury and either of them is responsible for the whole injury. x x x. (Emphases and underscoring supplied) In conclusion, the CA correctly affirmed the ruling of the RTC declaring Ruks jointly and severally liable with Transworld for damages sustained by Adworld. WHEREFORE, the petition is DENIED. The Decision dated November 16, 2011 and the Resolution dated December 10, 2012 of the Court of Appeals in CA-G.R. CV No. 94693 are hereby AFFIRMED. 32. G.R. No. L-28497 November 6, 1928 THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs. FAUSTINO ESPIRITU, defendant-appellant. ------------------------------ G.R. No. L-28498 November 6, 1928


THE BACHRACH MOTOR CO., INC., plaintiff-appellee, vs. FAUSTINO ESPIRITU, defendant-appellant, and ROSARIO ESPIRITU, intervenor-appellant. Ernesto Zaragoza and Simeon Ramos for defendantappellant. Benito Soliven and Jose Varela Calderon for intervenor-appellant. B. Francisco for appellee. AVANCEÑA, C. J.: These two cases, Nos. 28497 and 28948, were tried together. It appears, in connection with case 28497; that on July 28, 1925 the defendant Faustino Espiritu purchased of the plaintiff corporation a two-ton White truck for P11,983.50, paying P1,000 down to apply on account of this price, and obligating himself to pay the remaining P10,983.50 within the periods agreed upon. To secure the payment of this sum, the defendants mortgaged the said truck purchased and, besides, three others, two of which are numbered 77197 and 92744 respectively, and all of the White make (Exhibit A). These two trucks had been purchased from the same plaintiff and were fully paid for by the defendant and his brother Rosario Espiritu. The defendant failed to pay P10,477.82 of the price secured by this mortgage. In connection with case 28498, it appears that on February 18, 1925 the defendant bought a one-ton White truck of the plaintiff corporation for the sum of P7,136.50, and after having deducted the P500 cash payment and the 12 per cent annual interest on the unpaid principal, obligated himself to make payment of this sum within the periods agreed upon. To secure this payment the defendant mortgaged to the plaintiff corporation the said truck

purchased and two others, numbered 77197 and 92744, respectively, the same that were mortgaged in the purchase of the other truck referred to in the other case. The defendant failed to pay P4,208.28 of this sum. In both sales it was agreed that 12 per cent interest would be paid upon the unpaid portion of the price at the executon of the contracts, and in case of non-payment of the total debt upon its maturity, 25 per cent thereon, as penalty. In addition to the mortagage deeds referred to, which the defendant executed in favor of the plaintiff, the defendant at the same time also signed a promissory note solidarily with his brother Rosario Espiritu for the several sums secured by the two mortgages (Exhibits B and D). Rosario Espiritu appeared in these two cases as intervenor, alleging to be the exclusive owner of the two White trucks Nos. 77197 and 92744, which appear to have been mortgaged by the defendants to the plaintiff. lawphi1.net While these two cases were pending in the lower court the mortgaged trucks were sold by virtue of the mortgage, all of them together bringing in, after deducting the sheriff's fees and transportation charges to Manila, the net sum of P3,269.58. The judgment appealed from ordered the defendants and the intervenor to pay plaintiff in case 28497 the sum of P7,732.09 with interest at the rate of 12 per cent per annum from May 1, 1926 until fully paid, and 25 per cent thereof in addition as penalty. In case 28498, the trial court ordered the defendant and the intervenor to pay plaintiff the sum of P4,208.28 with interest at 12 per cent per annum from December 1, 1925 until fully paid, and 25 per cent thereon as penalty.


The appellants contend that trucks 77197 and 92744 were not mortgaged, because, when the defendant signed the mortgage deeds these trucks were not included in those documents, and were only put in later, without defendant's knowledge. But there is positive proof that they were included at the time the defendant signed these documents. Besides, there were presented two of defendant's letters to Hidalgo, an employee of the plaintiff's written a few days before the transaction, acquiescing in the inclusion of all his White trucks already paid for, in the mortgage (Exhibit H-I). Appellants also alleged that on February 4, 1925, the defendant sold his rights in said trucks Nos. 77197 and 92744 to the intervenor, and that as the latter did not sign the mortgage deeds, such trucks cannot be considered as mortgaged. But the evidence shows that while the intervenor Rosario Espiritu did not sign the two mortgage deeds (Exhibits A and C), yet, together with the defendants Faustino Espiritu, he signed the two promissory notes (Exhibits B and D) secured by these two mortgages. All these instruments were executed at the same time, and when the trucks 77197 and 92744 were included in the mortgages, the intervenor Rosario Espiritu was aware of it and consented to such inclusion. These facts are supported by the testimony of Bachrach, manager of the plaintiff corporation, of Agustin Ramirez, who witnessed the execution of all these documents, and of Angel Hidalgo, who witnessed the execution of Exhibits B and D. We do not find the statement of the intervenor Rosario Espiritu that he did not sign promissory notes Exhibits B and C to be sufficient to overthrow this evidence. A comparison of his genuine signature on Exhibit AA with those appearing on promissory notes B and C, convinces us that the latter are his signatures. And such is our conclusion, notwithstanding the evidence presented to establish that on the date when Exhibits B appears to have been signed, that is July 25, 1925, the intervenor

was in Batac, Ilocos Norte, many miles away from Manila. And the fact that on the 24th of said month of July, the plaintiff sent some truck accessory parts by rail to Ilocos for the intervenor does not necessarily prove that the latter could not have been in Manila on the 25th of that month. In view of his conclusion that the intervenor signed the promissory notes secured by trucks 77197 and 92744 and consented to the mortgage of the same, it is immaterial whether he was or was not the exclusive owner thereof. It is finally contended that the 25 per cent penalty upon the debt, in addition to the interest of 12 per cent per annum, makes the contract usurious. Such a contention is not well founded. Article 1152 of the Civil Code permits the agreement upon a penalty apart from the interest. Should there be such an agreemnet, the penalty, as was held in the case of Lopez vs. Hernaez (32 Phil., 631), does not include the interest, and which may be demamded separetely. According to this, the penalty is not to be added to the interest for the determination of whether the interest exceeds the rate fixed by the law, since said rate was fixed only for the interest. But considering that the obligation was partly performed, and making use of the power given to the court by article 1154 of the Civil Code, this penalty is reduced to 10 per cent of the unpaid debt. With the sole modification that instead of 25 per cent upon the sum owed, the defendants need pay only 10 per cent thereon as penalty, the judgment appealed from is affired in all other respects without special pronouncement as to costs. So ordered. 33. G.R. No. L-41093 October 30, 1978


ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION, petitioner, vs. COURT OF FIRST INSTANCE OF RIZAL (BRANCH XXXIV), and LOLITA MILLAN, respondents. Purugganan & Bersamin for petitioner. Salvador N. Beltran for respondent. MUÑOZ PALMA, J.: This is a direct appeal on questions of law from a decision of the Court of First Instance of Rizal, Branch XXXIV, presided by the Honorable Bernardo P. Pardo, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered commanding the defendant to register the deed of absolute sale it had executed in favor of plaintiff with the Register of Deeds of Caloocan City and secure the corresponding title in the name of plaintiff within ten (10) days after finality of this decision; if, for any reason, this not possible, defendant is hereby sentenced to pay plaintiff the sum of P5,193.63 with interest at 4% per annum from June 22, 1972 until fully paid. In either case, defendant is sentenced to pay plaintiff nominal damages in the amount of P20,000.00 plus attorney's fee in the amount of P5,000.00 and costs. SO ORDERED. Caloocan City, February 11, 1975. (rollo, p. 21)

Petitioner corporation questions the award for nominal damages of P20,000.00 and attorney's fee of P5,000.00 which are allegedly excessive and unjustified. In the Court's resolution of October 20, 1975, We gave due course to the Petition only as regards the portion of the decision awarding nominal damages. 1 The following incidents are not in dispute: In May 1962 Robes-Francisco Realty & Development Corporation, now petitioner, agreed to sell to private respondent Lolita Millan for and in consideration of the sum of P3,864.00, payable in installments, a parcel of land containing an area of approximately 276 square meters, situated in Barrio Camarin, Caloocan City, known as Lot No. 20, Block No. 11 of its Franville Subdivision. 2 Millan complied with her obligation under the contract and paid the installments stipulated therein, the final payment having been made on December 22, 1971. The vendee made a total payment of P5,193.63 including interests and expenses for registration of title. 3 Thereafter, Lolita Millan made repeated demands upon the corporation for the execution of the final deed of sale and the issuance to her of the transfer certificate of title over the lot. On March 2, 1973, the parties executed a deed of absolute sale of the aforementioned parcel of land. The deed of absolute sale contained, among others, this particular provision: That the VENDOR further warrants that the transfer certificate of title of the above-described parcel of land shall be transferred in the name of the VENDEE within the period of six (6) months from the date of full payment and in case the VENDOR fails to issue said transfer certificate of title, it shall bear the obligation to


refund to the VENDEE the total amount already paid for, plus an interest at the rate of 4% per annum. (record on appeal, p. 9) Notwithstanding the lapse of the above-mentioned stipulated period of six (6) months, the corporation failed to cause the issuance of the corresponding transfer certificate of title over the lot sold to Millan, hence, the latter filed on August 14, 1974 a complaint for specific performance and damages against RobesFrancisco Realty & Development Corporation in the Court of First Instance of Rizal, Branch XXXIV, Caloocan City, docketed therein as Civil Case No. C-3268. 4 The complaint prayed for judgment (1) ordering the reformation of the deed of absolute sale; (2) ordering the defendant to deliver to plaintiff the certificate of title over the lot free from any lien or encumbrance; or, should this be not possible, to pay plaintiff the value of the lot which should not be less than P27,600.00 (allegedly the present estimated value of the lot); and (3) ordering the defendant to pay plaintiff damages, corrective and actual in the sum of P15 000.00. 5 The corporation in its answer prayed that the complaint be dismissed alleging that the deed of absolute sale was voluntarily executed between the parties and the interest of the plaintiff was amply protected by the provision in said contract for payment of interest at 4% per annum of the total amount paid, for the delay in the issuance of the title. 6 At the pretrial conference the parties agreed to submit the case for decision on the pleadings after defendant further made certain admissions of facts not contained in its answer. 7 Finding that the realty corporation failed to cause the issuance of the corresponding transfer certificate of title because the parcel of land conveyed to Millan was included among other properties of the corporation mortgaged to the GSIS to secure an obligation

of P10 million and that the owner's duplicate certificate of title of the subdivision was in the possession of the Government Service Insurance System (GSIS), the trial court, on February 11, 1975, rendered judgment the dispositive portion of which is quoted in pages 1 and 2 of this Decision. We hold that the trial court did not err in awarding nominal damages; however, the circumstances of the case warrant a reduction of the amount of P20,000.00 granted to private respondent Millan. There can be no dispute in this case under the pleadings and the admitted facts that petitioner corporation was guilty of delay, amounting to nonperformance of its obligation, in issuing the transfer certificate of title to vendee Millan who had fully paid up her installments on the lot bought by her. Article 170 of the Civil Code expressly provides that those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. Petitioner contends that the deed of absolute sale executed between the parties stipulates that should the vendor fail to issue the transfer certificate of title within six months from the date of full payment, it shall refund to the vendee the total amount paid for with interest at the rate of 4% per annum, hence, the vendee is bound by the terms of the provision and cannot recover more than what is agreed upon. Presumably, petitioner in invoking Article 1226 of the Civil Code which provides that 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 is no stipulation to the contrary. The foregoing argument of petitioner is totally devoid of merit. We would agree with petitioner if the clause in question were to be considered as a penal clause. Nevertheless, for very obvious reasons, said clause does not convey any penalty, for even without it, pursuant to Article 2209 of the Civil Code, the vendee


would be entitled to recover the amount paid by her with legal rate of interest which is even more than the 4% provided for in the clause. 7-A It is therefore inconceivable that the aforecited provision in the deed of sale is a penal clause which will preclude an award of damages to the vendee Millan. In fact the clause is so worded as to work to the advantage of petitioner corporation. Unfortunately, the vendee, now private respondent, submitted her case below without presenting evidence on the actual damages suffered by her as a result of the nonperformance of petitioner's obligation under the deed of sale. Nonetheless, the facts show that the right of the vendee to acquire title to the lot bought by her was violated by petitioner and this entitles her at the very least to nominal damages. The pertinent provisions of our Civil Code follow: Art. 2221. Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him. Art. 2222. The court may award nominal damages in every obligation arising from any source enumerated in article 1157, or in every case where any property right has been invaded. Under the foregoing provisions nominal damages are not intended for indemnification of loss suffered but for the vindication or recognition of a right violated or invaded. They are recoverable where some injury has been done the amount of which the evidence fails to show, the assessment of damages being left to the discretion of the court according to the circumstances of the case. 8

It is true as petitioner claims that under American jurisprudence nominal damages by their very nature are small sums fixed by the court without regard to the extent of the harm done to the injured party. It is generally held that a nominal damage is a substantial claim, if based upon the violation of a legal right; in such case, the law presumes a damage, although actual or compensatory damages are not proven; in truth nominal damages are damages in name only and not in fact, and are allowed, not as an equivalent of a wrong inflicted, but simply in recogniton of the existence of a technical injury. (Fouraker v. Kidd Springs Boating and Fishing Club, 65 S. W. 2d 796-797, citing 17 C.J. 720, and a number of authorities). 9 In this jurisdiction, in Vda. de Medina, et al. v. Cresencia, et al. 1956, which was an action for damages arising out of a vehicular accident, this Court had occasion to eliminate an award of P10,000.00 imposed by way of nominal damages, the Court stating inter alia that the amount cannot, in common sense, be demeed "nominal". 10 In a subsequent case, viz: Northwest Airlines, Inc. v. Nicolas L. Cuenca, 1965, this Court, however, through then Justice Roberto Concepcion who later became Chief Justice of this Court, sustained an award of P20,000.00 as nominal damages in favor of respnodent Cuenca. The Court there found special reasons for considering P20,000.00 as "nominal". Cuenca who was the holder of a first class ticket from Manila to Tokyo was rudely compelled by an agent of petitioner Airlines to move to the tourist class notwithstanding its knowledge that Cuenca as Commissioner of Public Highways of the Republic of the Philippines was travelling in his official capacity as a delegate of the country to a conference in Tokyo." 11


Actually, as explained in the Court's decision in Northwest Airlines, there is no conflict between that case and Medina, for in the latter, the P10,000.00 award for nominal damages was eliminated principally because the aggrieved party had already been awarded P6,000.00 as compensatory damages, P30,000.00 as moral damages and P10,000.00 as exemplary damages, and "nominal damages cannot coexist with compensatory damages," while in the case of Commissioner Cuenca, no such compensatory, moral, or exemplary damages were granted to the latter. 12 At any rate, the circumstances of a particular case will determine whether or not the amount assessed as nominal damages is within the scope or intent of the law, more particularly, Article 2221 of the Civil Code. In the situation now before Us, We are of the view that the amount of P20,000.00 is excessive. The admitted fact that petitioner corporation failed to convey a transfer certificate of title to respondent Millan because the subdivision property was mortgaged to the GSIS does not in itself show that there was bad faith or fraud. Bad faith is not to be presumed. Moreover, there was the expectation of the vendor that arrangements were possible for the GSIS to make partial releases of the subdivision lots from the overall real estate mortgage. It was simply unfortunate that petitioner did not succeed in that regard. For that reason We cannot agree with respondent Millan Chat the P20,000.00 award may be considered in the nature of exemplary damages. In case of breach of contract, exemplary damages may be awarded if the guilty party acted in wanton, fraudulent, reckless, oppressive or malevolent manner. 13 Furthermore, exemplary or corrective damages are to be imposed by way of example or correction for the public good, only if the injured party has

shown that he is entitled to recover moral, temperate or compensatory damages." Here, respondent Millan did not submit below any evidence to prove that she suffered actual or compensatory damages. 14 To conclude, We hold that the sum of Ten Thousand Pesos (P10,000.00) by way of nominal damages is fair and just under the following circumstances, viz: respondent Millan bought the lot from petitioner in May, 1962, and paid in full her installments on December 22, 1971, but it was only on March 2, 1973, that a deed of absolute sale was executed in her favor, and notwithstanding the lapse of almost three years since she made her last payment, petitioner still failed to convey the corresponding transfer certificate of title to Millan who accordingly was compelled to file the instant complaint in August of 1974. PREMISES CONSIDERED, We modify the decision of the trial court and reduce the nominal damages to Ten Thousand Pesos (P10,000.00). In all other respects the aforesaid decision stands. 34. G.R. No. L-26339 December 14, 1979 MARIANO C. PAMINTUAN, petitioner-appellant, vs. COURT OF APPEALS and YU PING KUN CO., INC., respondent-appellees. V. E. del Rosario & Associates for appellant. Sangco & Sangalang for private respondent.


AQUINO, J.: This case is about the recovery compensatory, damages for breach of a contract of sale in addition to liquidated damages. Mariano C. Pamintuan appealed from the judgment of the Court of Appeals wherein he was ordered to deliver to Yu Ping Kun Co., Inc. certain plastic sheetings and, if he could not do so, to pay the latter P100,559.28 as damages with six percent interest from the date of the filing of the complaint. The facts and the findings of the Court of Appeals are as follows: In 1960, Pamintuan was the holder of a barter license wherein he was authorized to export to Japan one thousand metric tons of white flint corn valued at forty-seven thousand United States dollars in exchange for a collateral importation of plastic sheetings of an equivalent value. By virtue of that license, he entered into an agreement to ship his corn to Tokyo Menka Kaisha, Ltd. of Osaka, Japan in exchange for plastic sheetings. He contracted to sell the plastic sheetings to Yu Ping Kun Co., Inc. for two hundred sixty-five thousand five hundred fifty pesos. The company undertook to open an irrevocable domestic letter of credit for that amount in favor of Pamintuan. It was further agreed that Pamintuan would deliver the plastic sheetings to the company at its bodegas in Manila or suburbs directly from the piers "within one month upon arrival of" the carrying vessels. Any violation of the contract of sale would entitle the aggreived party to collect from the offending party liquidated damages in the sum of ten thousand pesos (Exh. A). On July 28, 1960, the company received a copy of the letter from the Manila branch of Toyo Menka Kaisha, Ltd. confirming the

acceptance by Japanese suppliers of firm offers for the consignment to Pamintuan of plastic sheetings valued at fortyseven thousand dollars. Acting on that information, the company lost no time in securing in favor of Pamintuan an irrevocable letter of credit for two hundred sixty-five thousand five hundred fifty pesos. Pamintuan was apprised by the bank on August 1, 1960 of that letter of credit which made reference to the delivery to Yu Ping Kun Co., Inc. on or before October 31, 1960 of 336, 360 yards of plastic sheetings (p. 21, Record on Appeal). On September 27 and 30 and October 4, 1960, the Japanese suppliers shipped to Pamintuan, through Toyo Menka Kaisha, Ltd., the plastic sheetings in four shipments to wit: (1) Firm Offer No. 327 for 50,000 yards valued at $9,000; (2) Firm Offer No. 328 for 70,000 yards valued at $8,050; (3) Firm Offers Nos. 329 and 343 for 175,000 and 18,440 yards valued at $22,445 and $2,305, respectively, and (4) Firm Offer No. 330 for 26,000 yards valued at $5,200, or a total of 339,440 yards with an aggregate value of $47,000 (pp. 4-5 and 239-40, Record on Appeal). The plastic sheetings arrived in Manila and were received by Pamintuan. Out of the shipments, Pamintuan delivered to the company's warehouse only the following quantities of plastic sheetings: November 11, 1960 — 140 cases, size 48 inches by 50 yards. November 14, 1960 — 258 cases out of 352 cases. November 15, 1960 — 11 cases out of 352 cases. November 15, 1960 — 10 cases out of 100 cases. November 15, 1960 — 30 cases out of 100 cases. Pamintuan withheld delivery of (1) 50 cases of plastic sheetings containing 26,000 yards valued at $5,200; (2) 37 cases containing 18,440 yards valued at $2,305; (3) 60 cases containing 30,000


yards valued at $5,400 and (4) 83 cases containing 40,850 yards valued at $5,236.97. While the plastic sheetings were arriving in Manila, Pamintuan informed the president of Yu Ping Kun Co., Inc. that he was in dire need of cash with which to pay his obligations to the Philippine National Bank. Inasmuch as the computation of the prices of each delivery would allegedly be a long process, Pamintuan requested that he be paid immediately. Consequently, Pamintuan and the president of the company, Benito Y.C. Espiritu, agreed to fix the price of the plastic sheetings at P0.782 a yard, regardless of the kind, quality or actual invoice value thereof. The parties arrived at that figure by dividing the total price of P265,550 by 339,440 yards, the aggregate quantity of the shipments. After Pamintuan had delivered 224,150 yards of sheetings of interior quality valued at P163,.047.87, he refused to deliver the remainder of the shipments with a total value of P102,502.13 which were covered by (i) Firm Offer No. 330, containing 26,000 yards valued at P29,380; (2) Firm Offer No. 343, containing 18,440 yards valued at P13,023.25; (3) Firm Offer No. 217, containing 30,000 yards valued at P30,510 and (4) Firm Offer No. 329 containing 40,850 yards valued at P29,588.88 (See pp. 2432, Record on Appeal). As justification for his refusal, Pamintuan said that the company failed to comply with the conditions of the contract and that it was novated with respect to the price. On December 2, 1960, the company filed its amended complaint for damages against Pamintuan. After trial, the lower court rendered the judgment mentioned above but including moral damages.

The unrealized profits awarded as damages in the trial court's decision were computed as follows (pp. 248-9, Record on Appeal): (1) 26,000 yards with a contract price of Pl.13 per yard and a selling price at the time of delivery of Pl.75 a yard........................................................... P16,120.00 (2) 18,000 yards with a contract price of P0.7062 per yard and selling price of Pl.20 per yard at the time of delivery......................................... 9,105.67 (3) 30,000 yards with a contract price of Pl.017 per yard and a selling price of Pl.70 per yard. 20,490.00 (4) 40,850 yards with a contract price of P0.7247 per yard and a selling price of P1.25 a yard at the time of delivery.............................................. 21,458.50 Total unrealized profits....................... P67,174.17 The overpayment of P12,282.26 made to Pamintuan by Yu Ping Kun Co., Inc. for the 224,150 yards, which the trial court regarded as an item of damages suffered by the company, was computed as follows (p. 71, Record on Appeal): Liquidation value of 224,150 yards at P0.7822 a yard .............................................................................. P175,330.13 Actual peso value of 224,150 yards as per firm offers or as per contract............................................ 163,047.87 Overpayment................................................................ P 12,282.26 To these two items of damages (P67,174.17 as unrealized profits and P12,282.26 as overpayment), the trial court added (a) P10,000 as stipulated liquidated damages, (b) P10,000 as moral


damages, (c) Pl,102.85 as premium paid by the company on the bond of P102,502.13 for the issuance of the writ of preliminary attachment and (d) P10,000 as attorney's fees, or total damages of P110,559.28) p. 250, Record on Appeal). The Court of Appeals affirmed that judgment with the modification that the moral damages were disallowed (Resolution of June 29, 1966). Pamintuan appealed. The Court of Appeals in its decision of March 18, 1966 found that the contract of sale between Pamintuan and the company was partly consummated. The company fulfilled its obligation to obtain the Japanese suppliers' confirmation of their acceptance of firm offers totalling $47,000. Pamintuan reaped certain benefits from the contract. Hence, he is estopped to repudiate it; otherwise, he would unjustly enrich himself at the expense of the company. The Court of Appeals found that the writ of attachment was properly issued. It also found that Pamintuan was guilty of fraud because (1) he was able to make the company agree to change the manner of paying the price by falsely alleging that there was a delay in obtaining confirmation of the suppliers' acceptance of the offer to buy; (2) he caused the plastic sheetings to be deposited in the bonded warehouse of his brother and then required his brother to make him Pamintuan), his attorney-infact so that he could control the disposal of the goods; (3) Pamintuan, as attorney-in-fact of the warehouseman, endorsed to the customs broker the warehouse receipts covering the plastic sheetings withheld by him and (4) he overpriced the plastic sheetings which he delivered to the company. The Court of Appeals described Pamintuan as a man "who, after having succeeded in getting another to accommodate him by agreeing to liquidate his deliveries on the basis of P0.7822 per yard, irrespective of invoice value, on the pretense that he would deliver what in the first place he ought to deliver anyway, when he knew all the while that he had no such intention, and in the

process delivered only the poorer or cheaper kind or those which he had predetermined to deliver and did not conceal in his brother's name and thus deceived the unwary party into overpaying him the sum of P 1 2,282.26 for the said deliveries, and would thereafter refuse to make any further delivery in flagrant violation of his plighted word, would now ask us to sanction his actuation" (pp. 61-62, Rollo). The main contention of appellant Pamintuan is that the buyer, Yu Ping Kun Co., Inc., is entitled to recover only liquidated damages. That contention is based on the stipulation "that any violation of the provisions of this contract (of sale) shall entitle the aggrieved party to collect from the offending party liquidated damages in the sum of P10,000 ". Pamintuan relies on the rule that a penalty and liquidated damages are the same (Lambert vs. Fox 26 Phil. 588); that "in obligations with a penal clause, the penalty shall substitute the indemnity for damages and the payment of interests in case of non-compliance, if there is no stipulation to the contrary " (1st sentence of Art. 1226, Civil Code) and, it is argued, there is no such stipulation to the contrary in this case and that "liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof" (Art. 2226, Civil Code). We hold that appellant's contention cannot be sustained because the second sentence of article 1226 itself provides that I nevertheless, damages shall be paid if the obligor ... is guilty of fraud in the fulfillment of the obligation". "Responsibility arising from fraud is demandable in all obligations" (Art. 1171, Civil Code). "In case of fraud, bad faith, malice or wanton attitude, the obligor shall be responsible for an damages which may be reasonably attributed to the non-performance of the obligation" (Ibid, art. 2201).


The trial court and the Court of Appeals found that Pamintuan was guilty of fraud because he did not make a complete delivery of the plastic sheetings and he overpriced the same. That factual finding is conclusive upon this Court. There is no justification for the Civil Code to make an apparent distinction between penalty and liquidated damages because the settled rule is that there is no difference between penalty and liquidated damages insofar as legal results are concerned and that either may be recovered without the necessity of proving actual damages and both may be reduced when proper (Arts. 1229, 2216 and 2227, Civil Code. See observations of Justice J.B.L. Reyes, cited in 4 Tolentino's Civil Code, p. 251). Castan Tobeñas notes that the penal clause in an obligation has three functions: "1. Una funcion coercitiva o de garantia, consistente en estimular al deudor al complimiento de la obligacion principal, ante la amenaza de tener que pagar la pena. 2. Una funcion liquidadora del daño, o sea la de evaluar por anticipado los perjuicios que habria de ocasionar al acreedor el incumplimiento o cumplimiento inadecuado de la obligacion. 3. Una funcion estrictamente penal, consistente en sancionar o castigar dicho incumplimiento o cumplimiento inadecuado, atribuyendole consecuencias mas onerosas para el deudor que las que normalmente lleva aparejadas la infraccion contractual. " (3 Derecho Civil Espanol, 9th Ed., p. 128). The penalty clause is strictly penal or cumulative in character and does not partake of the nature of liquidated damages (pena sustitutiva) when the parties agree "que el acreedor podra pedir, en el supuesto incumplimiento o mero retardo de la obligacion principal, ademas de la pena, los danos y perjuicios. Se habla en este caso de pena cumulativa, a differencia de aquellos otros ordinarios, en que la pena es sustitutiva de la reparacion ordinaria." (Ibid, Castan Tobenas, p. 130).

After a conscientious consideration of the facts of the case, as found by Court of Appeals and the trial court, and after reflecting on the/tenor of the stipulation for liquidated damages herein, the true nature of which is not easy to categorize, we further hold that justice would be adequately done in this case by allowing Yu Ping Kun Co., Inc. to recover only the actual damages proven and not to award to it the stipulated liquidated damages of ten thousand pesos for any breach of the contract. The proven damages supersede the stipulated liquidated damages. This view finds support in the opinion of Manresa (whose comments were the bases of the new matter found in article 1226, not found in article 1152 of the old Civil Code) that in case of fraud the difference between the proven damages and the stipulated penalty may be recovered (Vol. 8, part. 1, Codigo Civil, 5th Ed., 1950, p. 483). Hence, the damages recoverable by the firm would amount to ninety thousand five hundred fifty-nine pesos and twenty-eight centavos (P90,559.28), with six percent interest a year from the filing of the complaint. With that modification the judgment of the Court of Appeals is affirmed in all respects. No costs in this instance. 35. G.R. No. 204702 January 14, 2015 RICARDO C. HONRADO, Petitioner, vs. GMA NETWORK FILMS, INC., Respondent. D E C I S I O N


CARPIO, J.: The Case We review1 the Decision2 of the Court of Appeals (CA) ordering petitioner Ricardo C. Honrado (petitioner) to pay a sum of money to respondent GMA Network Films, Inc. for breach of contract and breach of trust. The Facts On 11December 1998, respondent GMA Network Films, Inc. (GMA Films) entered into a "TV Rights Agreement" (Agreement) with petitioner under which petitioner, as licensor of 36 films, granted to GMA Films, for a fee of P60.75 million, the exclusive right to telecast the 36 films for a period of three years. Under Paragraph 3 of the Agreement, the parties agreed that "all betacam copies of the [films] should pass through broadcast quality test conducted by GMA-7," the TV station operated by GMA Network, Inc. (GMA Network), an affiliate of GMA Films. The parties also agreed to submit the films for review by the Movie and Television Review and Classification Board (MTRCB) and stipulated on the remedies in the event that MTRCB bans the telecasting ofany of the films (Paragraph 4): The PROGRAMME TITLES listed above shall be subject to approval by the Movie and Television Review and Classification Board (MTRCB) and, in the event of disapproval, LICENSOR [Petitioner] will either replace the censored PROGRAMME TITLES with another title which is mutually acceptable to both parties or, failure to do such, a proportionate reduction from the total price shall either be deducted or refunded whichever is the case by the LICENSOR OR LICENSEE [GMA Films].3 (Emphasis supplied)

Two of the films covered by the Agreement were Evangeline Katorse and Bubot for which GMA Films paid P1.5 million each. In 2003, GMA Films sued petitioner in the Regional Trial Court of Quezon City (trial court) to collect P1.6 million representing the fee it paid for Evangeline Katorse (P1.5 million) and a portion of the fee it paid for Bubot (P350,0004). GMA Films alleged that it rejected Evangeline Katorse because "its running time was too short for telecast"5 and petitioner only remitted P900,000 to the owner of Bubot (Juanita Alano [Alano]), keeping for himself the balance of P350,000. GMA Films prayed for the return of such amount on the theory that an implied trust arose between the parties as petitioner fraudulently kept it for himself.6 Petitioner denied liability, counter-alleging that after GMA Films rejected Evangeline Katorse, he replaced it with another film, Winasak na Pangarap, which GMA Films accepted. As proof of such acceptance, petitioner invoked a certification of GMA Network, dated 30 March 1999, attesting that such film "is of good broadcast quality"7 (Film Certification). Regarding the fee GMA Films paid for Bubot, petitioner alleged that he had settled his obligation to Alano. Alternatively, petitioner alleged that GMA Films, being a stranger to the contracts he entered into with the owners of the films in question, has no personality to question his compliance with the terms of such contracts. Petitioner counterclaimed for attorney’s fees. The Ruling of the Trial Court The trial court dismissed GMA Films’ complaint and, finding merit in petitioner’s counterclaim, ordered GMA Films to pay attorney’s fees (P100,000). The trial court gave credence to petitioner’s defense that he replaced Evangeline Katorse with Winasak na Pangarap. On the disposal of the fee GMA Films paid for Bubot, the trial court rejected GMA Films’ theory of implied


trust, finding insufficient GMA Films’ proof that petitioner pocketed any portion of the fee in question. GMA Films appealed to the CA. The Ruling of the Court of Appeals The CA granted GMA Films’ appeal, set aside the trial court’s ruling, and ordered respondent to pay GMA Films P2 million8 as principal obligation with 12% annual interest, exemplary damages (P100,000), attorney’s fees (P200,000), litigation expenses (P100,000) and the costs. Brushing aside the trial court’s appreciation of the evidence, the CA found that (1) GMA Films was authorized under Paragraph 4 of the Agreement to reject Evangeline Katorse, and (2) GMA Films never accepted Winasak na Pangarap as replacement because it was a "bold" film.9 On petitioner’s liability for the fee GMA Films paid for Bubot, the CA sustained GMA Films’ contention that petitioner was under obligation to turn over to the film owners the fullamount GMA Films paid for the films as "nowhere in the TV Rights Agreement does it provide that the licensor is entitled to any commission x x x [hence] x x x [petitioner] Honrado cannot claim any portion of the purchase price paid for by x x x GMA Films."10 The CA concluded that petitioner’s retention of a portion of the fee for Bubot gave rise to an implied trust between him and GMA Films, obligating petitioner, as trustee, to return to GMA Films, as beneficiary, the amount claimed by the latter. Hence, this petition. Petitioner prays for the reinstatement of the trial court’s ruling while GMA Films attacks the petition for lack of merit. The Issue

The question is whether the CA erred in finding petitioner liable for breach of the Agreement and breach of trust. The Ruling of the Court We grant the petition. We find GMA Films’ complaint without merit and accordingly reinstate the trial court’s ruling dismissing it with the modification that the award of attorney’s fees is deleted. Petitioner Committed No Breach of Contract or Trust MTRCB Disapproval the Stipulated Basis for Film Replacement The parties do not quarrel on the meaning of Paragraph 4 of the Agreement which states: The PROGRAMME TITLES listed [in the Agreement] x x x shall be subject to approval by the Movie and Television Review and Classification Board (MTRCB) and, in the event of disapproval, LICENSOR [Petitioner] will either replace the censored PROGRAMME TITLES with another title which is mutually acceptable to both parties or, failure to do such, a proportionate reduction from the total price shall either be deducted or refunded whichever is the case by the LICENSOR OR LICENSEE [GMA Films].11 (Emphasis supplied) Under this stipulation, what triggersthe rejection and replacement of any film listed in the Agreement is the "disapproval" of its telecasting by MTRCB. Nor is there any dispute that GMA Films rejected Evangeline Katorse not because it was disapproved by MTRCB but because the film’s total running time was too short for telecast (undertime). Instead of rejecting GMA Films’ demand for falling outside of the terms of Paragraph 4, petitioner voluntarily acceded to it and replaced such film with Winasak na Pangarap.


What is disputed is whether GMA Films accepted the replacement film offered by petitioner. Petitioner maintains that the Film Certification issued by GMA Network attesting to the "good broadcast quality" of Winasak na Pangarap amounted to GMA Films’ acceptance of such film. On the other hand, GMA Films insists that such clearance pertained only to the technical quality of the film but not to its content which it rejected because it found the film as "bomba" (bold).12 The CA, working under the assumption that the ground GMA Films invoked to reject Winasak na Pangarap was sanctioned under the Agreement, found merit in the latter’s claim. We hold that regardless of the import of the Film Certification, GMA Films’ rejection of Winasak na Pangarap finds no basis in the Agreement. In terms devoid of any ambiguity, Paragraph 4 of the Agreement requires the intervention of MTRCB, the state censor, before GMA Films can reject a film and require its replacement. Specifically, Paragraph 4 requires that MTRCB, after reviewing a film listed in the Agreement, disapprove or X-rate it for telecasting. GMA Films does not allege, and we find no proof on record indicating, that MTRCB reviewed Winasak na Pangarap and X-rated it. Indeed, GMA Films’ own witness, Jose Marie Abacan (Abacan), then VicePresident for Program Management of GMA Network, testified during trial that it was GMA Network which rejected Winasak na Pangarap because the latter considered the film "bomba."13 In doing so, GMA Network went beyond its assigned role under the Agreement of screening films to test their broadcast quality and assumed the function of MTRCB to evaluate the films for the propriety of their content. This runs counter to the clear terms of Paragraphs 3 and 4 of the Agreement. Disposal of the Fees Paid to Petitioner Outside of the Terms

of the Agreement GMA Films also seeks refund for the balance of the fees it paid to petitioner for Bubot which petitioner allegedly failed to turn-over to the film’s owner, Alano.14 Implicit in GMA Films’ claim is the theory that the Agreement obliges petitioner to give to the film owners the entire amount he received from GMA Films and that his failure to do so gave rise to an implied trust, obliging petitioner to hold whatever amount he kept in trust for GMA Films. The CA sustained GMA Films’ interpretation, noting that the Agreement "does not provide that the licensor is entitled to any commission."15 This is error. The Agreement, as its full title denotes ("TV Rights Agreement"), is a licensing contract, the essence of which is the transfer by the licensor (petitioner) to the licensee (GMA Films), for a fee, of the exclusive right to telecast the films listed in the Agreement. Stipulations for payment of "commission" to the licensor is incongruous to the nature of such contracts unless the licensor merely acted as agent of the film owners. Nowhere in the Agreement, however, did the parties stipulate that petitioner signed the contract in such capacity. On the contrary, the Agreement repeatedly refers to petitioner as "licensor" and GMA Films as "licensee." Nor did the parties stipulate that the fees paid by GMA Films for the films listed in the Agreement will be turned over by petitioner to the film owners. Instead, the Agreement merely provided that the total fees will be paid in three installments (Paragraph 3).16 We entertain no doubt that petitioner forged separate contractual arrangements with the owners of the films listed in the Agreement, spelling out the terms of payment to the latter. Whether or not petitioner complied with these terms, however, is a matter to which GMA Films holds absolutely no interest. Being a


stranger to such arrangements, GMA Films is no more entitled to complain of any breach by petitioner of his contracts with the film owners than the film owners are for any breach by GMA Films of its Agreement with petitioner. We find it unnecessary to pass upon the question whether an implied trust arose between the parties, as held by the CA.1âwphi1 Such conclusion was grounded on the erroneous assumption that GMA Films holds an interest in the disposition of the licensing fees it paid to petitioner. Award of Attorney's Fees to Petitioner Improper The trial court awarded attorney's fees to petitioner as it "deemed it just and reasonable"17 to do so, using the amount provided by petitioner on the witness stand (P100,000). Undoubtedly, attorney's fees may be awarded if the trial court "deems it just and equitable."18 Such ground, however, must be fully elaborated in the body of the ruling.19 Its mere invocation, without more, negates the nature of attorney's fees as a form of actual damages. WHEREFORE, we GRANT the petition. The Decision, dated 30 April 2012 and Resolution, dated 19 November 2012, of the Court of Appeals are SET ASIDE. The Decision, dated 5 December 2008, of the Regional Trial Court of Quezon City (Branch 223) is REINSTATED with the MODIFICATION that the award of attorney's fees is DELETED. SO ORDERED. 36. G.R. No. L-12191 October 14, 1918

JOSE CANGCO, plaintiff-appellant, vs. MANILA RAILROAD CO., defendant-appellee. Ramon Sotelo for appellant. Kincaid & Hartigan for appellee. FISHER, J.: At the time of the occurrence which gave rise to this litigation the plaintiff, Jose Cangco, was in the employment of Manila Railroad Company in the capacity of clerk, with a monthly wage of P25. He lived in the pueblo of San Mateo, in the province of Rizal, which is located upon the line of the defendant railroad company; and in coming daily by train to the company's office in the city of Manila where he worked, he used a pass, supplied by the company, which entitled him to ride upon the company's trains free of charge. Upon the occasion in question, January 20, 1915, the plaintiff arose from his seat in the second class-car where he was riding and, making, his exit through the door, took his position upon the steps of the coach, seizing the upright guardrail with his right hand for support. On the side of the train where passengers alight at the San Mateo station there is a cement platform which begins to rise with a moderate gradient some distance away from the company's office and extends along in front of said office for a distance sufficient to cover the length of several coaches. As the train slowed down another passenger, named Emilio Zuñiga, also an employee of the railroad company, got off the same car, alighting safely at the point where the platform begins to rise from the level of the ground. When the train had proceeded a little farther the plaintiff Jose Cangco stepped off also, but one or both of his feet came in contact with a sack of watermelons with the result


that his feet slipped from under him and he fell violently on the platform. His body at once rolled from the platform and was drawn under the moving car, where his right arm was badly crushed and lacerated. It appears that after the plaintiff alighted from the train the car moved forward possibly six meters before it came to a full stop. The accident occurred between 7 and 8 o'clock on a dark night, and as the railroad station was lighted dimly by a single light located some distance away, objects on the platform where the accident occurred were difficult to discern especially to a person emerging from a lighted car. The explanation of the presence of a sack of melons on the platform where the plaintiff alighted is found in the fact that it was the customary season for harvesting these melons and a large lot had been brought to the station for the shipment to the market. They were contained in numerous sacks which has been piled on the platform in a row one upon another. The testimony shows that this row of sacks was so placed of melons and the edge of platform; and it is clear that the fall of the plaintiff was due to the fact that his foot alighted upon one of these melons at the moment he stepped upon the platform. His statement that he failed to see these objects in the darkness is readily to be credited. The plaintiff was drawn from under the car in an unconscious condition, and it appeared that the injuries which he had received were very serious. He was therefore brought at once to a certain hospital in the city of Manila where an examination was made and his arm was amputated. The result of this operation was unsatisfactory, and the plaintiff was then carried to another hospital where a second operation was performed and the member was again amputated higher up near the shoulder. It appears in evidence that the plaintiff expended the sum of

P790.25 in the form of medical and surgical fees and for other expenses in connection with the process of his curation. Upon August 31, 1915, he instituted this proceeding in the Court of First Instance of the city of Manila to recover damages of the defendant company, founding his action upon the negligence of the servants and employees of the defendant in placing the sacks of melons upon the platform and leaving them so placed as to be a menace to the security of passenger alighting from the company's trains. At the hearing in the Court of First Instance, his Honor, the trial judge, found the facts substantially as above stated, and drew therefrom his conclusion to the effect that, although negligence was attributable to the defendant by reason of the fact that the sacks of melons were so placed as to obstruct passengers passing to and from the cars, nevertheless, the plaintiff himself had failed to use due caution in alighting from the coach and was therefore precluded form recovering. Judgment was accordingly entered in favor of the defendant company, and the plaintiff appealed. It can not be doubted that the employees of the railroad company were guilty of negligence in piling these sacks on the platform in the manner above stated; that their presence caused the plaintiff to fall as he alighted from the train; and that they therefore constituted an effective legal cause of the injuries sustained by the plaintiff. It necessarily follows that the defendant company is liable for the damage thereby occasioned unless recovery is barred by the plaintiff's own contributory negligence. In resolving this problem it is necessary that each of these conceptions of liability, to-wit, the primary responsibility of the defendant company and the contributory negligence of the plaintiff should be separately examined. It is important to note that the foundation of the legal liability of the defendant is the contract of carriage, and that the obligation to respond for the damage which plaintiff has suffered arises, if at


all, from the breach of that contract by reason of the failure of defendant to exercise due care in its performance. That is to say, its liability is direct and immediate, differing essentially, in legal viewpoint from that presumptive responsibility for the negligence of its servants, imposed by article 1903 of the Civil Code, which can be rebutted by proof of the exercise of due care in their selection and supervision. Article 1903 of the Civil Code is not applicable to obligations arising ex contractu, but only to extra-contractual obligations — or to use the technical form of expression, that article relates only to culpa aquiliana and not to culpa contractual. Manresa (vol. 8, p. 67) in his commentaries upon articles 1103 and 1104 of the Civil Code, clearly points out this distinction, which was also recognized by this Court in its decision in the case of Rakes vs. Atlantic, Gulf and Pacific Co. (7 Phil. rep., 359). In commenting upon article 1093 Manresa clearly points out the difference between "culpa, substantive and independent, which of itself constitutes the source of an obligation between persons not formerly connected by any legal tie" and culpa considered as an accident in the performance of an obligation already existing . . . ." In the Rakes case (supra) the decision of this court was made to rest squarely upon the proposition that article 1903 of the Civil Code is not applicable to acts of negligence which constitute the breach of a contract. Upon this point the Court said: The acts to which these articles [1902 and 1903 of the Civil Code] are applicable are understood to be those not growing out of preexisting 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 article 1101, 1103, and 1104 of the same code. (Rakes vs. Atlantic, Gulf and Pacific Co., 7 Phil. Rep., 359 at 365.) This distinction is of the utmost importance. The liability, which, under the Spanish law, is, in certain cases imposed upon employers with respect to damages occasioned by the negligence of their employees to persons to whom they are not bound by contract, is not based, as in the English Common Law, upon the principle of respondeat superior — if it were, the master would be liable in every case and unconditionally — but upon the principle announced in article 1902 of the Civil Code, which imposes upon all persons who by their fault or negligence, do injury to another, the obligation of making good the damage caused. One who places a powerful automobile in the hands of a servant whom he knows to be ignorant of the method of managing such a vehicle, is himself guilty of an act of negligence which makes him liable for all the consequences of his imprudence. The obligation to make good the damage arises at the very instant that the unskillful servant, while acting within the scope of his employment causes the injury. The liability of the master is personal and direct. But, if the master has not been guilty of any negligence whatever in the selection and direction of the servant, he is not liable for the acts of the latter, whatever done within the scope of his employment or not, if the damage done by the servant does not amount to a breach of the contract between the master and the person injured. It is not accurate to say that proof of diligence and care in the selection and control of the servant relieves the master from liability for the latter's acts — on the contrary, that proof shows that the responsibility has never existed. As Manresa says (vol. 8, p. 68) the liability arising from extra-contractual culpa is always based upon a voluntary act or omission which, without willful intent, but by mere negligence or inattention, has caused damage to another. A master who exercises all possible care in the selection of his servant, taking into consideration the


qualifications they should possess for the discharge of the duties which it is his purpose to confide to them, and directs them with equal diligence, thereby performs his duty to third persons to whom he is bound by no contractual ties, and he incurs no liability whatever if, by reason of the negligence of his servants, even within the scope of their employment, such third person suffer damage. True it is that under article 1903 of the Civil Code the law creates a presumption that he has been negligent in the selection or direction of his servant, but the presumption is rebuttable and yield to proof of due care and diligence in this respect. The supreme court of Porto Rico, in interpreting identical provisions, as found in the Porto Rico Code, has held that these articles are applicable to cases of extra-contractual culpa exclusively. (Carmona vs. Cuesta, 20 Porto Rico Reports, 215.) This distinction was again made patent by this Court in its decision in the case of Bahia vs. Litonjua and Leynes, (30 Phil. rep., 624), which was an action brought upon the theory of the extra-contractual liability of the defendant to respond for the damage caused by the carelessness of his employee while acting within the scope of his employment. The Court, after citing the last paragraph of article 1903 of the Civil Code, said: 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 master or employer either in selection of the servant or employee, or in supervision over him after the selection, or both; and (2) that 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 relieved from liability.

This theory bases the responsibility of the master ultimately on his own negligence and not on that of his servant. This is the notable peculiarity of the Spanish law of negligence. It is, of course, in striking contrast to the American doctrine that, in relations with strangers, the negligence of the servant in conclusively the negligence of the master. The opinion there expressed by this Court, to the effect that in case of extra-contractual culpa based upon negligence, it is necessary that there shall have been some fault attributable to the defendant personally, and that the last paragraph of article 1903 merely establishes a rebuttable presumption, is in complete accord with the authoritative opinion of Manresa, who says (vol. 12, p. 611) that the liability created by article 1903 is imposed by reason of the breach of the duties inherent in the special relations of authority or superiority existing between the person called upon to repair the damage and the one who, by his act or omission, was the cause of it. On the other hand, the liability of masters and employers for the negligent acts or omissions of their servants or agents, when such acts or omissions cause damages which amount to the breach of a contact, is not based upon a mere presumption of the master's negligence in their selection or control, and proof of exercise of the utmost diligence and care in this regard does not relieve the master of his liability for the breach of his contract. Every legal obligation must of necessity be extra-contractual or contractual. Extra-contractual obligation has its source in the breach or omission of those mutual duties which civilized society imposes upon it members, or which arise from these relations, other than contractual, of certain members of society to others, generally embraced in the concept of status. The legal rights of each member of society constitute the measure of the corresponding legal duties, mainly negative in character, which


the existence of those rights imposes upon all other members of society. The breach of these general duties whether due to willful intent or to mere inattention, if productive of injury, give rise to an obligation to indemnify the injured party. The fundamental distinction between obligations of this character and those which arise from contract, rests upon the fact that in cases of noncontractual obligation it is the wrongful or negligent act or omission itself which creates the vinculum juris, whereas in contractual relations the vinculum exists independently of the breach of the voluntary duty assumed by the parties when entering into the contractual relation. With respect to extra-contractual obligation arising from negligence, whether of act or omission, it is competent for the legislature to elect — and our Legislature has so elected — whom such an obligation is imposed is morally culpable, or, on the contrary, for reasons of public policy, to extend that liability, without regard to the lack of moral culpability, so as to include responsibility for the negligence of those person who acts or mission are imputable, by a legal fiction, to others who are in a position to exercise an absolute or limited control over them. The legislature which adopted our Civil Code has elected to limit extra-contractual liability — with certain well-defined exceptions — to cases in which moral culpability can be directly imputed to the persons to be charged. This moral responsibility may consist in having failed to exercise due care in the selection and control of one's agents or servants, or in the control of persons who, by reason of their status, occupy a position of dependency with respect to the person made liable for their conduct. The position of a natural or juridical person who has undertaken by contract to render service to another, is wholly different from that to which article 1903 relates. When the sources of the obligation upon which plaintiff's cause of action depends is a negligent act or omission, the burden of proof rests upon plaintiff to prove the negligence — if he does not his action fails. But when

the facts averred show a contractual undertaking by defendant for the benefit of plaintiff, and it is alleged that plaintiff has failed or refused to perform the contract, it is not necessary for plaintiff to specify in his pleadings whether the breach of the contract is due to willful fault or to negligence on the part of the defendant, or of his servants or agents. Proof of the contract and of its nonperformance is sufficient prima facie to warrant a recovery. As a general rule . . . it is logical that in case of extra-contractual culpa, a suing creditor should assume the burden of proof of its existence, as the only fact upon which his action is based; while on the contrary, in a case of negligence which presupposes the existence of a contractual obligation, if the creditor shows that it exists and that it has been broken, it is not necessary for him to prove negligence. (Manresa, vol. 8, p. 71 [1907 ed., p. 76]). As it is not necessary for the plaintiff in an action for the breach of a contract to show that the breach was due to the negligent conduct of defendant or of his servants, even though such be in fact the actual cause of the breach, it is obvious that proof on the part of defendant that the negligence or omission of his servants or agents caused the breach of the contract would not constitute a defense to the action. If the negligence of servants or agents could be invoked as a means of discharging the liability arising from contract, the anomalous result would be that person acting through the medium of agents or servants in the performance of their contracts, would be in a better position than those acting in person. If one delivers a valuable watch to watchmaker who contract to repair it, and the bailee, by a personal negligent act causes its destruction, he is unquestionably liable. Would it be logical to free him from his liability for the breach of his contract, which involves the duty to exercise due care in the preservation of the watch, if he shows that it was his servant whose negligence caused the injury? If such a theory could be accepted, juridical persons would enjoy practically complete immunity from damages arising from the breach of their contracts if caused by


negligent acts as such juridical persons can of necessity only act through agents or servants, and it would no doubt be true in most instances that reasonable care had been taken in selection and direction of such servants. If one delivers securities to a banking corporation as collateral, and they are lost by reason of the negligence of some clerk employed by the bank, would it be just and reasonable to permit the bank to relieve itself of liability for the breach of its contract to return the collateral upon the payment of the debt by proving that due care had been exercised in the selection and direction of the clerk? This distinction between culpa aquiliana, as the source of an obligation, and culpa contractual as a mere incident to the performance of a contract has frequently been recognized by the supreme court of Spain. (Sentencias of June 27, 1894; November 20, 1896; and December 13, 1896.) In the decisions of November 20, 1896, it appeared that plaintiff's action arose ex contractu, but that defendant sought to avail himself of the provisions of article 1902 of the Civil Code as a defense. The Spanish Supreme Court rejected defendant's contention, saying: These are not cases of injury caused, without any pre-existing obligation, by fault or negligence, such as those to which article 1902 of the Civil Code relates, but of damages caused by the defendant's failure to carry out the undertakings imposed by the contracts . . . . A brief review of the earlier decision of this court involving the liability of employers for damage done by the negligent acts of their servants will show that in no case has the court ever decided that the negligence of the defendant's servants has been held to constitute a defense to an action for damages for breach of contract. In the case of Johnson vs. David (5 Phil. Rep., 663), the court held that the owner of a carriage was not liable for the damages

caused by the negligence of his driver. In that case the court commented on the fact that no evidence had been adduced in the trial court that the defendant had been negligent in the employment of the driver, or that he had any knowledge of his lack of skill or carefulness. In the case of Baer Senior & Co's Successors vs. Compania Maritima (6 Phil. Rep., 215), the plaintiff sued the defendant for damages caused by the loss of a barge belonging to plaintiff which was allowed to get adrift by the negligence of defendant's servants in the course of the performance of a contract of towage. The court held, citing Manresa (vol. 8, pp. 29, 69) that if the "obligation of the defendant grew out of a contract made between it and the plaintiff . . . we do not think that the provisions of articles 1902 and 1903 are applicable to the case." In the case of Chapman vs. Underwood (27 Phil. Rep., 374), plaintiff sued the defendant to recover damages for the personal injuries caused by the negligence of defendant's chauffeur while driving defendant's automobile in which defendant was riding at the time. The court found that the damages were caused by the negligence of the driver of the automobile, but held that the master was not liable, although he was present at the time, saying: . . . unless the negligent acts of the driver are continued for a length of time as to give the owner a reasonable opportunity to observe them and to direct the driver to desist therefrom. . . . The act complained of must be continued in the presence of the owner for such length of time that the owner by his acquiescence, makes the driver's acts his own. In the case of Yamada vs. Manila Railroad Co. and Bachrach Garage & Taxicab Co. (33 Phil. Rep., 8), it is true that the court rested its conclusion as to the liability of the defendant upon article 1903, although the facts disclosed that the injury


complaint of by plaintiff constituted a breach of the duty to him arising out of the contract of transportation. The express ground of the decision in this case was that article 1903, in dealing with the liability of a master for the negligent acts of his servants "makes the distinction between private individuals and public enterprise;" that as to the latter the law creates a rebuttable presumption of negligence in the selection or direction of servants; and that in the particular case the presumption of negligence had not been overcome. It is evident, therefore that in its decision Yamada case, the court treated plaintiff's action as though founded in tort rather than as based upon the breach of the contract of carriage, and an examination of the pleadings and of the briefs shows that the questions of law were in fact discussed upon this theory. Viewed from the standpoint of the defendant the practical result must have been the same in any event. The proof disclosed beyond doubt that the defendant's servant was grossly negligent and that his negligence was the proximate cause of plaintiff's injury. It also affirmatively appeared that defendant had been guilty of negligence in its failure to exercise proper discretion in the direction of the servant. Defendant was, therefore, liable for the injury suffered by plaintiff, whether the breach of the duty were to be regarded as constituting culpa aquiliana or culpa contractual. As Manresa points out (vol. 8, pp. 29 and 69) whether negligence occurs an incident in the course of the performance of a contractual undertaking or its itself the source of an extra-contractual undertaking obligation, its essential characteristics are identical. There is always an act or omission productive of damage due to carelessness or inattention on the part of the defendant. Consequently, when the court holds that a defendant is liable in damages for having failed to exercise due care, either directly, or in failing to exercise proper care in the selection and direction of his servants, the practical result is identical in either case. Therefore, it follows that it is not to be inferred, because the court held in the Yamada case that

defendant was liable for the damages negligently caused by its servants to a person to whom it was bound by contract, and made reference to the fact that the defendant was negligent in the selection and control of its servants, that in such a case the court would have held that it would have been a good defense to the action, if presented squarely upon the theory of the breach of the contract, for defendant to have proved that it did in fact exercise care in the selection and control of the servant. The true explanation of such cases is to be found by directing the attention to the relative spheres of contractual and extracontractual obligations. The field of noncontractual obligation is much more broader than that of contractual obligations, comprising, as it does, the whole extent of juridical human relations. These two fields, figuratively speaking, concentric; that is to say, the mere fact that a person is bound to another by contract does not relieve him from extra-contractual liability to such person. When such a contractual relation exists the obligor may break the contract under such conditions that the same act which constitutes the source of an extra-contractual obligation had no contract existed between the parties. The contract of defendant to transport plaintiff carried with it, by implication, the duty to carry him in safety and to provide safe means of entering and leaving its trains (civil code, article 1258). That duty, being contractual, was direct and immediate, and its non-performance could not be excused by proof that the fault was morally imputable to defendant's servants. The railroad company's defense involves the assumption that even granting that the negligent conduct of its servants in placing an obstruction upon the platform was a breach of its contractual obligation to maintain safe means of approaching and leaving its trains, the direct and proximate cause of the injury suffered by plaintiff was his own contributory negligence in failing to wait until the train had come to a complete stop before alighting.


Under the doctrine of comparative negligence announced in the Rakes case (supra), if the accident was caused by plaintiff's own negligence, no liability is imposed upon defendant's negligence and plaintiff's negligence merely contributed to his injury, the damages should be apportioned. It is, therefore, important to ascertain if defendant was in fact guilty of negligence. It may be admitted that had plaintiff waited until the train had come to a full stop before alighting, the particular injury suffered by him could not have occurred. Defendant contends, and cites many authorities in support of the contention, that it is negligence per se for a passenger to alight from a moving train. We are not disposed to subscribe to this doctrine in its absolute form. We are of the opinion that this proposition is too badly stated and is at variance with the experience of every-day life. In this particular instance, that the train was barely moving when plaintiff alighted is shown conclusively by the fact that it came to stop within six meters from the place where he stepped from it. Thousands of person alight from trains under these conditions every day of the year, and sustain no injury where the company has kept its platform free from dangerous obstructions. There is no reason to believe that plaintiff would have suffered any injury whatever in alighting as he did had it not been for defendant's negligent failure to perform its duty to provide a safe alighting place. We are of the opinion that the correct doctrine relating to this subject is that expressed in Thompson's work on Negligence (vol. 3, sec. 3010) as follows: The test by which to determine whether the passenger has been guilty of negligence in attempting to alight from a moving railway train, is that of ordinary or reasonable care. It is to be considered whether an ordinarily prudent person, of the age, sex and condition of the passenger, would have acted as the passenger acted under the circumstances disclosed by the evidence. This

care has been defined to be, not the care which may or should be used by the prudent man generally, but the care which a man of ordinary prudence would use under similar circumstances, to avoid injury." (Thompson, Commentaries on Negligence, vol. 3, sec. 3010.) Or, it we prefer to adopt the mode of exposition used by this court in Picart vs. Smith (37 Phil. rep., 809), we may say that the test is this; Was there anything in the circumstances surrounding the plaintiff at the time he alighted from the train which would have admonished a person of average prudence that to get off the train under the conditions then existing was dangerous? If so, the plaintiff should have desisted from alighting; and his failure so to desist was contributory negligence.1awph!l.net As the case now before us presents itself, the only fact from which a conclusion can be drawn to the effect that plaintiff was guilty of contributory negligence is that he stepped off the car without being able to discern clearly the condition of the platform and while the train was yet slowly moving. In considering the situation thus presented, it should not be overlooked that the plaintiff was, as we find, ignorant of the fact that the obstruction which was caused by the sacks of melons piled on the platform existed; and as the defendant was bound by reason of its duty as a public carrier to afford to its passengers facilities for safe egress from its trains, the plaintiff had a right to assume, in the absence of some circumstance to warn him to the contrary, that the platform was clear. The place, as we have already stated, was dark, or dimly lighted, and this also is proof of a failure upon the part of the defendant in the performance of a duty owing by it to the plaintiff; for if it were by any possibility concede that it had right to pile these sacks in the path of alighting passengers, the placing of them adequately so that their presence would be revealed.


As pertinent to the question of contributory negligence on the part of the plaintiff in this case the following circumstances are to be noted: The company's platform was constructed upon a level higher than that of the roadbed and the surrounding ground. The distance from the steps of the car to the spot where the alighting passenger would place his feet on the platform was thus reduced, thereby decreasing the risk incident to stepping off. The nature of the platform, constructed as it was of cement material, also assured to the passenger a stable and even surface on which to alight. Furthermore, the plaintiff was possessed of the vigor and agility of young manhood, and it was by no means so risky for him to get off while the train was yet moving as the same act would have been in an aged or feeble person. In determining the question of contributory negligence in performing such act — that is to say, whether the passenger acted prudently or recklessly — the age, sex, and physical condition of the passenger are circumstances necessarily affecting the safety of the passenger, and should be considered. Women, it has been observed, as a general rule are less capable than men of alighting with safety under such conditions, as the nature of their wearing apparel obstructs the free movement of the limbs. Again, it may be noted that the place was perfectly familiar to the plaintiff as it was his daily custom to get on and of the train at this station. There could, therefore, be no uncertainty in his mind with regard either to the length of the step which he was required to take or the character of the platform where he was alighting. Our conclusion is that the conduct of the plaintiff in undertaking to alight while the train was yet slightly under way was not characterized by imprudence and that therefore he was not guilty of contributory negligence. The evidence shows that the plaintiff, at the time of the accident, was earning P25 a month as a copyist clerk, and that the injuries he has suffered have permanently disabled him from continuing that employment. Defendant has not shown that any other gainful occupation is open to plaintiff. His expectancy of life,

according to the standard mortality tables, is approximately thirty-three years. We are of the opinion that a fair compensation for the damage suffered by him for his permanent disability is the sum of P2,500, and that he is also entitled to recover of defendant the additional sum of P790.25 for medical attention, hospital services, and other incidental expenditures connected with the treatment of his injuries. The decision of lower court is reversed, and judgment is hereby rendered plaintiff for the sum of P3,290.25, and for the costs of both instances. So ordered. 37. G.R. No. 73867 February 29, 1988 TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner, vs. IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO, SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO, AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO, and HONORABLE INTERMEDIATE APPELLATE COURT, respondents. PADILLA, J.: Petition for review on certiorari of the decision * of the Intermediate Appellate Court, dated 11 February 1986, in AC-G.R. No. CV-70245, entitled "Ignacio Castro, Sr., et al., PlaintiffsAppellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."


The facts of the case are as follows: On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of the other plaintiffs, passed away in Lingayen, Pangasinan. On the same day, her daughter Sofia C. Crouch, who was then vacationing in the Philippines, addressed a telegram to plaintiff Ignacio Castro, Sr. at 685 Wanda, Scottsburg, Indiana, U.S.A., 47170 announcing Consolacion's death. The telegram was accepted by the defendant in its Dagupan office, for transmission, after payment of the required fees or charges. The telegram never reached its addressee. Consolacion was interred with only her daughter Sofia in attendance. Neither the husband nor any of the other children of the deceased, then all residing in the United States, returned for the burial. When Sofia returned to the United States, she discovered that the wire she had caused the defendant to send, had not been received. She and the other plaintiffs thereupon brought action for damages arising from defendant's breach of contract. The case was filed in the Court of First Instance of Pangasinan and docketed therein as Civil Case No. 15356. The only defense of the defendant was that it was unable to transmit the telegram because of "technical and atmospheric factors beyond its control." 1 No evidence appears on record that defendant ever made any attempt to advise the plaintiff Sofia C. Crouch as to why it could not transmit the telegram. The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay the plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum: 1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as moral damages.

2. Ignacio Castro Sr., P20,000.00 as moral damages. 3. Ignacio Castro Jr., P20,000.00 as moral damages. 4. Aurora Castro, P10,000.00 moral damages. 5. Salvador Castro, P10,000.00 moral damages. 6. Mario Castro, P10,000.00 moral damages. 7. Conrado Castro, P10,000 moral damages. 8. Esmeralda C. Floro, P20,000.00 moral damages. 9. Agerico Castro, P10,000.00 moral damages. 10. Rolando Castro, P10,000.00 moral damages. 11. Virgilio Castro, P10,000.00 moral damages. 12. Gloria Castro, P10,000.00 moral damages. Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of P1,000.00 to each of the plaintiffs and costs. 2 On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as moral damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to P120,000. 00 for each. 3 Petitioner appeals from the judgment of the appellate court, contending that the award of moral damages should be


eliminated as defendant's negligent act was not motivated by "fraud, malice or recklessness." In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges paid by Sofia C. Crouch for the telegram that was never sent to the addressee thereof. Petitioner's contention is without merit. Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for damages." Art. 2176 also provides that "whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done." In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract whereby, for a fee, petitioner undertook to send said private respondent's message overseas by telegram. This, petitioner did not do, despite performance by said private respondent of her obligation by paying the required charges. Petitioner was therefore guilty of contravening its obligation to said private respondent and is thus liable for damages. This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in this regard would result in an inequitous situation where petitioner will only be held liable for the actual cost of a telegram fixed thirty (30) years ago. We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may

be recovered if they are the proximate results of the defendant's wrongful act or omission." (Emphasis supplied). Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of the suffering private respondents had to undergo. As the appellate court properly observed: [Who] can seriously dispute the shock, the mental anguish and the sorrow that the overseas children must have suffered upon learning of the death of their mother after she had already been interred, without being given the opportunity to even make a choice on whether they wanted to pay her their last respects? There is no doubt that these emotional sufferings were proximately caused by appellant's omission and substantive law provides for the justification for the award of moral damages. 4 We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch representing the expenses she incurred when she came to the Philippines from the United States to testify before the trial court. Had petitioner not been remiss in performing its obligation, there would have been no need for this suit or for Mrs. Crouch's testimony. The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in the amount of P1,000.00 for each of the private respondents, as a warning to all telegram companies to observe due diligence in transmitting the messages of their customers. WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is held liable to private respondents in the following amounts:


(1) P10,000.00 as moral damages, to each of private respondents; (2) P1,000.00 as exemplary damages, to each of private respondents; (3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch; (4) P5,000.00 as attorney's fees; and (5) Costs of suit. SO ORDERED. 38. G.R. No. 158911 March 4, 2008 MANILA ELECTRIC COMPANY, Petitioner, vs. MATILDE MACABAGDAL RAMOY, BIENVENIDO RAMOY, ROMANA RAMOY-RAMOS, ROSEMARIE RAMOY, OFELIA DURIAN and CYRENE PANADO, Respondents. D E C I S I O N AUSTRIA-MARTINEZ, J.: This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that the Decision1 of the Court of Appeals (CA) dated December 16, 2002, ordering petitioner Manila Electric Company (MERALCO) to pay Leoncio Ramoy2 moral and exemplary damages and attorney's fees, and the CA

Resolution3 dated July 1, 2003, denying petitioner's motion for reconsideration, be reversed and set aside. The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the facts as culled from the records, thus: The evidence on record has established that in the year 1987 the National Power Corporation (NPC) filed with the MTC Quezon City a case for ejectment against several persons allegedly illegally occupying its properties in Baesa, Quezon City. Among the defendants in the ejectment case was Leoncio Ramoy, one of the plaintiffs in the case at bar. On April 28, 1989 after the defendants failed to file an answer in spite of summons duly served, the MTC Branch 36, Quezon City rendered judgment for the plaintiff [MERALCO] and "ordering the defendants to demolish or remove the building and structures they built on the land of the plaintiff and to vacate the premises." In the case of Leoncio Ramoy, the Court found that he was occupying a portion of Lot No. 72-B-2-B with the exact location of his apartments indicated and encircled in the location map as No. 7. A copy of the decision was furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2, 1993, p. 5). On June 20, 1990 NPC wrote Meralco requesting for the "immediate disconnection of electric power supply to all residential and commercial establishments beneath the NPC transmission lines along Baesa, Quezon City (Exh. 7, p. 143, Record). Attached to the letter was a list of establishments affected which included plaintiffs Leoncio and Matilde Ramoy (Exh. 9), as well as a copy of the court decision (Exh. 2). After deliberating on NPC's letter, Meralco decided to comply with NPC's request (Exhibits 6, 6-A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all establishments affected including plaintiffs Leoncio Ramoy (Exhs. 3, 3-A to 3-C), Matilde Ramoy/Matilde Macabagdal (Exhibits 3-D to 3-E), Rosemarie


Ramoy (Exh. 3-F), Ofelia Durian (Exh. 3-G), Jose Valiza (Exh. 3-H) and Cyrene S. Panado (Exh. 3-I). In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to determine all the establishments which are considered under NPC property in view of the fact that "the houses in the area are very close to each other" (Exh. 12). Shortly thereafter, a joint survey was conducted and the NPC personnel pointed out the electric meters to be disconnected (Exh. 13; TSN, October 8, 1993, p. 7; TSN, July 1994, p. 8). In due time, the electric service connection of the plaintiffs [herein respondents] was disconnected (Exhibits D to G, with submarkings, pp. 86-87, Record). Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a parcel of land covered by TCT No. 326346, a portion of which was occupied by plaintiffs Rosemarie Ramoy, Ofelia Durian, Jose Valiza and Cyrene S. Panado as lessees. When the Meralco employees were disconnecting plaintiffs' power connection, plaintiff Leoncio Ramoy objected by informing the Meralco foreman that his property was outside the NPC property and pointing out the monuments showing the boundaries of his property. However, he was threatened and told not to interfere by the armed men who accompanied the Meralco employees. After the electric power in Ramoy's apartment was cut off, the plaintiffs-lessees left the premises. During the ocular inspection ordered by the Court and attended by the parties, it was found out that the residence of plaintiffsspouses Leoncio and Matilde Ramoy was indeed outside the NPC property. This was confirmed by defendant's witness R.P. Monsale III on cross-examination (TSN, October 13, 1993, pp. 10 and 11). Monsale also admitted that he did not inform his supervisor about this fact nor did he recommend re-connection of plaintiffs' power supply (Ibid., p. 14).

The record also shows that at the request of NPC, defendant Meralco re-connected the electric service of four customers previously disconnected none of whom was any of the plaintiffs (Exh. 14).4 The RTC decided in favor of MERALCO by dismissing herein respondents' claim for moral damages, exemplary damages and attorney's fees. However, the RTC ordered MERALCO to restore the electric power supply of respondents. Respondents then appealed to the CA. In its Decision dated December 16, 2002, the CA faulted MERALCO for not requiring from National Power Corporation (NPC) a writ of execution or demolition and in not coordinating with the court sheriff or other proper officer before complying with the NPC's request. Thus, the CA held MERALCO liable for moral and exemplary damages and attorney's fees. MERALCO's motion for reconsideration of the Decision was denied per Resolution dated July 1, 2003. Hence, herein petition for review on certiorari on the following grounds: I THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT WHEN IT DISCONNECTED THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS. II THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND EXEMPLARY DAMAGES AND ATTORNEY'S FEES AGAINST MERALCO UNDER THE CIRCUMSTANCES THAT THE LATTER ACTED IN GOOD FAITH IN THE DISCONNECTION OF THE ELECTRIC SERVICES OF THE RESPONDENTS. 5


The petition is partly meritorious. MERALCO admits6 that respondents are its customers under a Service Contract whereby it is obliged to supply respondents with electricity. Nevertheless, upon request of the NPC, MERALCO disconnected its power supply to respondents on the ground that they were illegally occupying the NPC's right of way. Under the Service Contract, "[a] customer of electric service must show his right or proper interest over the property in order that he will be provided with and assured a continuous electric service."7 MERALCO argues that since there is a Decision of the Metropolitan Trial Court (MTC) of Quezon City ruling that herein respondents were among the illegal occupants of the NPC's right of way, MERALCO was justified in cutting off service to respondents. Clearly, respondents' cause of action against MERALCO is anchored on culpa contractual or breach of contract for the latter's discontinuance of its service to respondents under Article 1170 of the Civil Code which provides: Article 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages. In Radio Communications of the Philippines, Inc. v. Verchez,8 the Court expounded on the nature of culpa contractual, thus: "In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for

recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promissee that may include his "expectation interest," which is his interest in having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, or his "reliance interest," which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made; or his "restitution interest," which is his interest in having restored to him any benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for their makers or for society, unless they are made the basis for action. The effect of every infraction is to create a new duty, that is, to make recompense to the one who has been injured by the failure of another to observe his contractual obligation unless he can show extenuating circumstances, like proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing liability.9 (Emphasis supplied) Article 1173 also provides that the fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of the time and of the place. The Court emphasized in Ridjo Tape & Chemical Corporation v. Court of Appeals10 that "as a public utility, MERALCO has the obligation to discharge its functions with utmost care and diligence."11 The Court agrees with the CA that under the factual milieu of the present case, MERALCO failed to exercise the utmost degree of care and diligence required of it. To repeat, it was not enough for MERALCO to merely rely on the Decision of the MTC without ascertaining whether it had become final and executory. Verily, only upon finality of said Decision can it be said with conclusiveness that respondents have no right or proper interest


over the subject property, thus, are not entitled to the services of MERALCO. Although MERALCO insists that the MTC Decision is final and executory, it never showed any documentary evidence to support this allegation. Moreover, if it were true that the decision was final and executory, the most prudent thing for MERALCO to have done was to coordinate with the proper court officials in determining which structures are covered by said court order. Likewise, there is no evidence on record to show that this was done by MERALCO. The utmost care and diligence required of MERALCO necessitates such great degree of prudence on its part, and failure to exercise the diligence required means that MERALCO was at fault and negligent in the performance of its obligation. In Ridjo Tape,12 the Court explained: [B]eing a public utility vested with vital public interest, MERALCO is impressed with certain obligations towards its customers and any omission on its part to perform such duties would be prejudicial to its interest. For in the final analysis, the bottom line is that those who do not exercise such prudence in the discharge of their duties shall be made to bear the consequences of such oversight.13 This being so, MERALCO is liable for damages under Article 1170 of the Civil Code. The next question is: Are respondents entitled to moral and exemplary damages and attorney's fees? Article 2220 of the Civil Code provides: Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the

circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by withholding from him and his tenants the supply of electricity to which they were entitled under the Service Contract. This is contrary to public policy because, as discussed above, MERALCO, being a vital public utility, is expected to exercise utmost care and diligence in the performance of its obligation. It was incumbent upon MERALCO to do everything within its power to ensure that the improvements built by respondents are within the NPC’s right of way before disconnecting their power supply. The Court emphasized in Samar II Electric Cooperative, Inc. v. Quijano14 that: Electricity is a basic necessity the generation and distribution of which is imbued with public interest, and its provider is a public utility subject to strict regulation by the State in the exercise of police power. Failure to comply with these regulations will give rise to the presumption of bad faith or abuse of right.15 (Emphasis supplied) Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the performance of its obligation to Leoncio Ramoy, its customer, is tantamount to bad faith. Leoncio Ramoy testified that he suffered wounded feelings because of MERALCO's actions.16 Furthermore, due to the lack of power supply, the lessees of his four apartments on subject lot left the premises.17 Clearly, therefore, Leoncio Ramoy is entitled to moral damages in the amount awarded by the CA. Leoncio Ramoy, the lone witness for respondents, was the only one who testified regarding the effects on him of MERALCO's electric service disconnection. His co-respondents Matilde


Ramoy, Rosemarie Ramoy, Ofelia Durian and Cyrene Panado did not present any evidence of damages they suffered. It is a hornbook principle that damages may be awarded only if proven. In Mahinay v. Velasquez, Jr.,18 the Court held thus: In order that moral damages may be awarded, there must be pleading and proof of moral suffering, mental anguish, fright and the like. While respondent alleged in his complaint that he suffered mental anguish, serious anxiety, wounded feelings and moral shock, he failed to prove them during the trial. Indeed, respondent should have taken the witness stand and should have testified on the mental anguish, serious anxiety, wounded feelings and other emotional and mental suffering he purportedly suffered to sustain his claim for moral damages. Mere allegations do not suffice; they must be substantiated by clear and convincing proof. No other person could have proven such damages except the respondent himself as they were extremely personal to him. In Keirulf vs. Court of Appeals, we held: "While no proof of pecuniary loss is necessary in order that moral damages may be awarded, the amount of indemnity being left to the discretion of the court, it is nevertheless essential that the claimant should satisfactorily show the existence of the factual basis of damages and its causal connection to defendant’s acts. This is so because moral damages, though incapable of pecuniary estimation, are in the category of an award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the wrongdoer. In Francisco vs. GSIS, the Court held that there must be clear testimony on the anguish and other forms of mental suffering. Thus, if the plaintiff fails to take the witness stand and testify as to his/her social humiliation, wounded feelings and anxiety, moral damages cannot be awarded. In Cocoland Development Corporation vs. National

Labor Relations Commission, the Court held that "additional facts must be pleaded and proven to warrant the grant of moral damages under the Civil Code, these being, x x x social humiliation, wounded feelings, grave anxiety, etc. that resulted therefrom." x x x The award of moral damages must be anchored to a clear showing that respondent actually experienced mental anguish, besmirched reputation, sleepless nights, wounded feelings or similar injury. There was no better witness to this experience than respondent himself. Since respondent failed to testify on the witness stand, the trial court did not have any factual basis to award moral damages to him.19 (Emphasis supplied) Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings, may be awarded moral damages.20 With regard to exemplary damages, Article 2232 of the Civil Code provides that in contracts and quasi-contracts, the court may award exemplary damages if the defendant, in this case MERALCO, acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, while Article 2233 of the same Code provides that such damages cannot be recovered as a matter of right and the adjudication of the same is within the discretion of the court.1avvphi1 The Court finds that MERALCO fell short of exercising the due diligence required, but its actions cannot be considered wanton, fraudulent, reckless, oppressive or malevolent. Records show that MERALCO did take some measures, i.e., coordinating with NPC officials and conducting a joint survey of the subject area, to verify which electric meters should be disconnected although these measures are not sufficient, considering the degree of diligence required of it. Thus, in this case, exemplary damages should not be awarded.


Since the Court does not deem it proper to award exemplary damages in this case, then the CA's award for attorney's fees should likewise be deleted, as Article 2208 of the Civil Code states that in the absence of stipulation, attorney's fees cannot be recovered except in cases provided for in said Article, to wit: Article 2208. In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded; (2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; (3) In criminal cases of malicious prosecution against the plaintiff; (4) In case of a clearly unfounded civil action or proceeding against the plaintiff; (5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff’s plainly valid, just and demandable claim; (6) In actions for legal support; (7) In actions for the recovery of wages of household helpers, laborers and skilled workers; (8) In actions for indemnity under workmen’s compensation and employer’s liability laws; (9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded; (11) In any other case where the court deems it just and equitable that attorney’s fees and expenses of litigation should be recovered. In all cases, the attorney’s fees and expenses of litigation must be reasonable. None of the grounds for recovery of attorney's fees are present. WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals is AFFIRMED with MODIFICATION. The award for exemplary damages and attorney's fees is DELETED. 39. G.R. No. 162467 May 8, 2009 MINDANAO TERMINAL AND BROKERAGE SERVICE, INC. Petitioner, vs. PHOENIX ASSURANCE COMPANY OF NEW YORK/MCGEE & CO., INC., Respondent. D E C I S I O N TINGA, J.: Before us is a petition for review on certiorari1 under Rule 45 of the 1997 Rules of Civil Procedure of the 29 October 20032 Decision of the Court of Appeals and the 26 February 2004 Resolution3 of the same court denying petitioner’s motion for reconsideration.


The facts of the case are not disputed. Del Monte Philippines, Inc. (Del Monte) contracted petitioner Mindanao Terminal and Brokerage Service, Inc. (Mindanao Terminal), a stevedoring company, to load and stow a shipment of 146,288 cartons of fresh green Philippine bananas and 15,202 cartons of fresh pineapples belonging to Del Monte Fresh Produce International, Inc. (Del Monte Produce) into the cargo hold of the vessel M/V Mistrau. The vessel was docked at the port of Davao City and the goods were to be transported by it to the port of Inchon, Korea in favor of consignee Taegu Industries, Inc. Del Monte Produce insured the shipment under an "open cargo policy" with private respondent Phoenix Assurance Company of New York (Phoenix), a non-life insurance company, and private respondent McGee & Co. Inc. (McGee), the underwriting manager/agent of Phoenix.4 Mindanao Terminal loaded and stowed the cargoes aboard the M/V Mistrau. The vessel set sail from the port of Davao City and arrived at the port of Inchon, Korea. It was then discovered upon discharge that some of the cargo was in bad condition. The Marine Cargo Damage Surveyor of Incok Loss and Average Adjuster of Korea, through its representative Byeong Yong Ahn (Byeong), surveyed the extent of the damage of the shipment. In a survey report, it was stated that 16,069 cartons of the banana shipment and 2,185 cartons of the pineapple shipment were so damaged that they no longer had commercial value.5 Del Monte Produce filed a claim under the open cargo policy for the damages to its shipment. McGee’s Marine Claims Insurance Adjuster evaluated the claim and recommended that payment in the amount of $210,266.43 be made. A check for the recommended amount was sent to Del Monte Produce; the latter then issued a subrogation receipt6 to Phoenix and McGee.

Phoenix and McGee instituted an action for damages7 against Mindanao Terminal in the Regional Trial Court (RTC) of Davao City, Branch 12. After trial, the RTC,8 in a decision dated 20 October 1999, held that the only participation of Mindanao Terminal was to load the cargoes on board the M/V Mistrau under the direction and supervision of the ship’s officers, who would not have accepted the cargoes on board the vessel and signed the foreman’s report unless they were properly arranged and tightly secured to withstand voyage across the open seas. Accordingly, Mindanao Terminal cannot be held liable for whatever happened to the cargoes after it had loaded and stowed them. Moreover, citing the survey report, it was found by the RTC that the cargoes were damaged on account of a typhoon which M/V Mistrau had encountered during the voyage. It was further held that Phoenix and McGee had no cause of action against Mindanao Terminal because the latter, whose services were contracted by Del Monte, a distinct corporation from Del Monte Produce, had no contract with the assured Del Monte Produce. The RTC dismissed the complaint and awarded the counterclaim of Mindanao Terminal in the amount of P83,945.80 as actual damages and P100,000.00 as attorney’s fees.9 The actual damages were awarded as reimbursement for the expenses incurred by Mindanao Terminal’s lawyer in attending the hearings in the case wherein he had to travel all the way from Metro Manila to Davao City. Phoenix and McGee appealed to the Court of Appeals. The appellate court reversed and set aside10 the decision of the RTC in its 29 October 2003 decision. The same court ordered Mindanao Terminal to pay Phoenix and McGee "the total amount of $210,265.45 plus legal interest from the filing of the complaint until fully paid and attorney’s fees of 20% of the claim."11 It sustained Phoenix’s and McGee’s argument that the damage in the cargoes was the result of improper stowage by Mindanao Terminal. It imposed on Mindanao Terminal, as the stevedore of the cargo, the duty to exercise extraordinary diligence in loading


and stowing the cargoes. It further held that even with the absence of a contractual relationship between Mindanao Terminal and Del Monte Produce, the cause of action of Phoenix and McGee could be based on quasi-delict under Article 2176 of the Civil Code.12 Mindanao Terminal filed a motion for reconsideration,13 which the Court of Appeals denied in its 26 February 200414 resolution. Hence, the present petition for review. Mindanao Terminal raises two issues in the case at bar, namely: whether it was careless and negligent in the loading and stowage of the cargoes onboard M/V Mistrau making it liable for damages; and, whether Phoenix and McGee has a cause of action against Mindanao Terminal under Article 2176 of the Civil Code on quasi-delict. To resolve the petition, three questions have to be answered: first, whether Phoenix and McGee have a cause of action against Mindanao Terminal; second, whether Mindanao Terminal, as a stevedoring company, is under obligation to observe the same extraordinary degree of diligence in the conduct of its business as required by law for common carriers15 and warehousemen;16 and third, whether Mindanao Terminal observed the degree of diligence required by law of a stevedoring company. We agree with the Court of Appeals that the complaint filed by Phoenix and McGee against Mindanao Terminal, from which the present case has arisen, states a cause of action. The present action is based on quasi-delict, arising from the negligent and careless loading and stowing of the cargoes belonging to Del Monte Produce. Even assuming that both Phoenix and McGee have only been subrogated in the rights of Del Monte Produce, who is not a party to the contract of service between Mindanao Terminal and Del Monte, still the insurance carriers may have a cause of action in light of the Court’s consistent ruling that the act that breaks the contract may be also a tort.17 In fine, a liability

for tort may arise even under a contract, where tort is that which breaches the contract18 . In the present case, Phoenix and McGee are not suing for damages for injuries arising from the breach of the contract of service but from the alleged negligent manner by which Mindanao Terminal handled the cargoes belonging to Del Monte Produce. Despite the absence of contractual relationship between Del Monte Produce and Mindanao Terminal, the allegation of negligence on the part of the defendant should be sufficient to establish a cause of action arising from quasidelict.19 The resolution of the two remaining issues is determinative of the ultimate result of this case. Article 1173 of the Civil Code is very clear that if the law or contract does not state the degree of diligence which is to be observed in the performance of an obligation then that which is expected of a good father of a family or ordinary diligence shall be required. Mindanao Terminal, a stevedoring company which was charged with the loading and stowing the cargoes of Del Monte Produce aboard M/V Mistrau, had acted merely as a labor provider in the case at bar. There is no specific provision of law that imposes a higher degree of diligence than ordinary diligence for a stevedoring company or one who is charged only with the loading and stowing of cargoes. It was neither alleged nor proven by Phoenix and McGee that Mindanao Terminal was bound by contractual stipulation to observe a higher degree of diligence than that required of a good father of a family. We therefore conclude that following Article 1173, Mindanao Terminal was required to observe ordinary diligence only in loading and stowing the cargoes of Del Monte Produce aboard M/V Mistrau. imposing a higher degree of diligence,21 on Mindanao Terminal in loading and stowing the cargoes. The case of Summa Insurance Corporation v. CA, which involved the issue of whether an arrastre operator is legally liable for the loss of a shipment in its


custody and the extent of its liability, is inapplicable to the factual circumstances of the case at bar. Therein, a vessel owned by the National Galleon Shipping Corporation (NGSC) arrived at Pier 3, South Harbor, Manila, carrying a shipment consigned to the order of Caterpillar Far East Ltd. with Semirara Coal Corporation (Semirara) as "notify party." The shipment, including a bundle of PC 8 U blades, was discharged from the vessel to the custody of the private respondent, the exclusive arrastre operator at the South Harbor. Accordingly, three good-order cargo receipts were issued by NGSC, duly signed by the ship's checker and a representative of private respondent. When Semirara inspected the shipment at house, it discovered that the bundle of PC8U blades was missing. From those facts, the Court observed: x x x The relationship therefore between the consignee and the arrastre operator must be examined. This relationship is much akin to that existing between the consignee or owner of shipped goods and the common carrier, or that between a depositor and a warehouseman[22 ]. In the performance of its obligations, an arrastre operator should observe the same degree of diligence as that required of a common carrier and a warehouseman as enunciated under Article 1733 of the Civil Code and Section 3(b) of the Warehouse Receipts Law, respectively. Being the custodian of the goods discharged from a vessel, an arrastre operator's duty is to take good care of the goods and to turn them over to the party entitled to their possession. (Emphasis supplied)23 There is a distinction between an arrastre and a stevedore.24 Arrastre, a Spanish word which refers to hauling of cargo, comprehends the handling of cargo on the wharf or between the establishment of the consignee or shipper and the ship's tackle. The responsibility of the arrastre operator lasts until the delivery of the cargo to the consignee. The service is usually performed by longshoremen. On the other hand, stevedoring refers to the handling of the cargo in the holds of the vessel or between the ship's tackle and the holds of the vessel. The responsibility of the

stevedore ends upon the loading and stowing of the cargo in the vessel.1avvphi1 It is not disputed that Mindanao Terminal was performing purely stevedoring function while the private respondent in the Summa case was performing arrastre function. In the present case, Mindanao Terminal, as a stevedore, was only charged with the loading and stowing of the cargoes from the pier to the ship’s cargo hold; it was never the custodian of the shipment of Del Monte Produce. A stevedore is not a common carrier for it does not transport goods or passengers; it is not akin to a warehouseman for it does not store goods for profit. The loading and stowing of cargoes would not have a far reaching public ramification as that of a common carrier and a warehouseman; the public is adequately protected by our laws on contract and on quasi-delict. The public policy considerations in legally imposing upon a common carrier or a warehouseman a higher degree of diligence is not present in a stevedoring outfit which mainly provides labor in loading and stowing of cargoes for its clients. In the third issue, Phoenix and McGee failed to prove by preponderance of evidence25 that Mindanao Terminal had acted negligently. Where the evidence on an issue of fact is in equipoise or there is any doubt on which side the evidence preponderates the party having the burden of proof fails upon that issue. That is to say, if the evidence touching a disputed fact is equally balanced, or if it does not produce a just, rational belief of its existence, or if it leaves the mind in a state of perplexity, the party holding the affirmative as to such fact must fail.261avvphi1 We adopt the findings27 of the RTC,28 which are not disputed by Phoenix and McGee. The Court of Appeals did not make any new findings of fact when it reversed the decision of the trial court. The only participation of Mindanao Terminal was to load the cargoes on board M/V Mistrau.29 It was not disputed by Phoenix and McGee that the materials, such as ropes, pallets, and


cardboards, used in lashing and rigging the cargoes were all provided by M/V Mistrau and these materials meets industry standard.30 It was further established that Mindanao Terminal loaded and stowed the cargoes of Del Monte Produce aboard the M/V Mistrau in accordance with the stowage plan, a guide for the area assignments of the goods in the vessel’s hold, prepared by Del Monte Produce and the officers of M/V Mistrau.31 The loading and stowing was done under the direction and supervision of the ship officers. The vessel’s officer would order the closing of the hatches only if the loading was done correctly after a final inspection.32 The said ship officers would not have accepted the cargoes on board the vessel if they were not properly arranged and tightly secured to withstand the voyage in open seas. They would order the stevedore to rectify any error in its loading and stowing. A foreman’s report, as proof of work done on board the vessel, was prepared by the checkers of Mindanao Terminal and concurred in by the Chief Officer of M/V Mistrau after they were satisfied that the cargoes were properly loaded.33 Phoenix and McGee relied heavily on the deposition of Byeong Yong Ahn34 and on the survey report35 of the damage to the cargoes. Byeong, whose testimony was refreshed by the survey report,36 found that the cause of the damage was improper stowage37 due to the manner the cargoes were arranged such that there were no spaces between cartons, the use of cardboards as support system, and the use of small rope to tie the cartons together but not by the negligent conduct of Mindanao Terminal in loading and stowing the cargoes. As admitted by Phoenix and McGee in their Comment38 before us, the latter is merely a stevedoring company which was tasked by Del Monte to load and stow the shipments of fresh banana and pineapple of Del Monte Produce aboard the M/V Mistrau. How and where it should load and stow a shipment in a vessel is wholly dependent on the shipper and the officers of the vessel. In other words, the work of

the stevedore was under the supervision of the shipper and officers of the vessel. Even the materials used for stowage, such as ropes, pallets, and cardboards, are provided for by the vessel. Even the survey report found that it was because of the boisterous stormy weather due to the typhoon Seth, as encountered by M/V Mistrau during its voyage, which caused the shipments in the cargo hold to collapse, shift and bruise in extensive extent.39 Even the deposition of Byeong was not supported by the conclusion in the survey report that: CAUSE OF DAMAGE x x x From the above facts and our survey results, we are of the opinion that damage occurred aboard the carrying vessel during sea transit, being caused by ship’s heavy rolling and pitching under boisterous weather while proceeding from 1600 hrs on 7th October to 0700 hrs on 12th October, 1994 as described in the sea protest.40 As it is clear that Mindanao Terminal had duly exercised the required degree of diligence in loading and stowing the cargoes, which is the ordinary diligence of a good father of a family, the grant of the petition is in order. However, the Court finds no basis for the award of attorney’s fees in favor of petitioner.lawphil.net None of the circumstances enumerated in Article 2208 of the Civil Code exists. The present case is clearly not an unfounded civil action against the plaintiff as there is no showing that it was instituted for the mere purpose of vexation or injury. It is not sound public policy to set a premium to the right to litigate where such right is exercised in good faith, even if erroneously.41 Likewise, the RTC erred in awarding P83,945.80 actual damages to Mindanao Terminal. Although actual expenses were incurred by Mindanao Terminal


in relation to the trial of this case in Davao City, the lawyer of Mindanao Terminal incurred expenses for plane fare, hotel accommodations and food, as well as other miscellaneous expenses, as he attended the trials coming all the way from Manila. But there is no showing that Phoenix and McGee made a false claim against Mindanao Terminal resulting in the protracted trial of the case necessitating the incurrence of expenditures.42 WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals in CA-G.R. CV No. 66121 is SET ASIDE and the decision of the Regional Trial Court of Davao City, Branch 12 in Civil Case No. 25,311.97 is hereby REINSTATED MINUS the awards of P100,000.00 as attorney’s fees and P83,945.80 as actual damages. 40. G.R. No. 71049 May 29, 1987 BERNARDINO JIMENEZ, petitioner, vs. CITY OF MANILA and INTERMEDIATE APPELLATE COURT, respondents. PARAS, J.: This is a petition for review on certiorari of: (1) the decision * of the Intermediate Appellate Court in AC-G.R. No. 013887-CV Bernardino Jimenez v. Asiatic Integrated Corporation and City of Manila, reversing the decision ** of the Court of First Instance of Manila, Branch XXII in Civil Case No. 96390 between the same parties, but only insofar as holding Asiatic Integrated Corporation solely liable for damages and attorney's fees instead of making the City of Manila jointly and solidarily liable with it as prayed for by the petitioner and (2) the resolution of the same

Appellate Court denying his Partial Motion for Reconsideration (Rollo, p. 2). The dispositive portion of the Intermediate Appellate Court's decision is as follows: WHEREFORE, the decision appealed from is hereby REVERSED. A new one is hereby entered ordering the defendant Asiatic Integrated Corporation to pay the plaintiff P221.90 actual medical expenses, P900.00 for the amount paid for the operation and management of a school bus, P20,000.00 as moral damages due to pains, sufferings and sleepless nights and P l0,000.00 as attorney's fees. SO ORDERED. (p. 20, Rollo) The findings of respondent Appellate Court are as follows: The evidence of the plaintiff (petitioner herein) shows that in the morning of August 15, 1974 he, together with his neighbors, went to Sta. Ana public market to buy "bagoong" at the time when the public market was flooded with ankle deep rainwater. After purchasing the "bagoong" he turned around to return home but he stepped on an uncovered opening which could not be seen because of the dirty rainwater, causing a dirty and rusty four- inch nail, stuck inside the uncovered opening, to pierce the left leg of plaintiff-petitioner penetrating to a depth of about one and a half inches. After administering first aid treatment at a nearby drugstore, his companions helped him hobble home. He felt ill and developed fever and he had to be carried to Dr. Juanita Mascardo. Despite the medicine administered to him by the latter, his left leg swelled with great pain. He was then rushed to the Veterans Memorial Hospital where he had to be confined for twenty (20) days due to high fever and severe pain.


Upon his discharge from the hospital, he had to walk around with crutches for fifteen (15) days. His injury prevented him from attending to the school buses he is operating. As a result, he had to engage the services of one Bienvenido Valdez to supervise his business for an aggregate compensation of nine hundred pesos (P900.00). (Decision, AC-G.R. CV No. 01387, Rollo, pp. 13-20). Petitioner sued for damages the City of Manila and the Asiatic Integrated Corporation under whose administration the Sta. Ana Public Market had been placed by virtue of a Management and Operating Contract (Rollo, p. 47). The lower court decided in favor of respondents, the dispositive portion of the decision reading: WHEREFORE, judgment is hereby rendered in favor of the defendants and against the plaintiff dismissing the complaint with costs against the plaintiff. For lack of sufficient evidence, the counterclaims of the defendants are likewise dismissed. (Decision, Civil Case No. 96390, Rollo, p. 42). As above stated, on appeal, the Intermediate Appellate Court held the Asiatic Integrated Corporation liable for damages but absolved respondent City of Manila. Hence this petition. The lone assignment of error raised in this petition is on whether or not the Intermediate Appellate Court erred in not ruling that respondent City of Manila should be jointly and severally liable with Asiatic Integrated Corporation for the injuries petitioner suffered. In compliance with the resolution of July 1, 1985 of the First Division of this Court (Rollo, p. 29) respondent City of Manila

filed its comment on August 13, 1985 (Rollo, p. 34) while petitioner filed its reply on August 21, 1985 (Reno, p. 51). Thereafter, the Court in the resolution of September 11, 1985 (Rollo, p. 62) gave due course to the petition and required both parties to submit simultaneous memoranda Petitioner filed his memorandum on October 1, 1985 (Rollo, p. 65) while respondent filed its memorandum on October 24, 1985 (Rollo, p. 82). In the resolution of October 13, 1986, this case was transferred to the Second Division of this Court, the same having been assigned to a member of said Division (Rollo, p. 92). The petition is impressed with merit. As correctly found by the Intermediate Appellate Court, there is no doubt that the plaintiff suffered injuries when he fell into a drainage opening without any cover in the Sta. Ana Public Market. Defendants do not deny that plaintiff was in fact injured although the Asiatic Integrated Corporation tries to minimize the extent of the injuries, claiming that it was only a small puncture and that as a war veteran, plaintiff's hospitalization at the War Veteran's Hospital was free. (Decision, AC-G.R. CV No. 01387, Rollo, p. 6). Respondent City of Manila maintains that it cannot be held liable for the injuries sustained by the petitioner because under the Management and Operating Contract, Asiatic Integrated Corporation assumed all responsibility for damages which may be suffered by third persons for any cause attributable to it. It has also been argued that the City of Manila cannot be held liable under Article 1, Section 4 of Republic Act No. 409 as amended (Revised Charter of Manila) which provides:


The City shall not be liable or held for damages or injuries to persons or property arising from the failure of the Mayor, the Municipal Board, or any other City Officer, to enforce the provisions of this chapter, or any other law or ordinance, or from negligence of said Mayor, Municipal Board, or any other officers while enforcing or attempting to enforce said provisions. This issue has been laid to rest in the case of City of Manila v. Teotico (22 SCRA 269-272 [1968]) where the Supreme Court squarely ruled that Republic Act No. 409 establishes a general rule regulating the liability of the City of Manila for "damages or injury to persons or property arising from the failure of city officers" to enforce the provisions of said Act, "or any other law or ordinance or from negligence" of the City "Mayor, Municipal Board, or other officers while enforcing or attempting to enforce said provisions." Upon the other hand, Article 2189 of the Civil Code of the Philippines which provides that: Provinces, cities and municipalities shall be liable for damages for the death of, or injuries suffered by any person by reason of defective conditions of roads, streets, bridges, public buildings and other public works under their control or supervision. constitutes a particular prescription making "provinces, cities and municipalities ... liable for damages for the death of, or injury suffered by any person by reason" — specifically — "of the defective condition of roads, streets, bridges, public buildings, and other public works under their control or supervision." In other words, Art. 1, sec. 4, R.A. No. 409 refers to liability arising from negligence, in general, regardless of the object, thereof, while Article 2189 of the Civil Code governs liability due to "defective streets, public buildings and other public works" in particular and is therefore decisive on this specific case.

In the same suit, the Supreme Court clarified further that under Article 2189 of the Civil Code, it is not necessary for the liability therein established to attach, that the defective public works belong to the province, city or municipality from which responsibility is exacted. What said article requires is that the province, city or municipality has either "control or supervision" over the public building in question. In the case at bar, there is no question that the Sta. Ana Public Market, despite the Management and Operating Contract between respondent City and Asiatic Integrated Corporation remained under the control of the former. For one thing, said contract is explicit in this regard, when it provides: II That immediately after the execution of this contract, the SECOND PARTY shall start the painting, cleaning, sanitizing and repair of the public markets and talipapas and within ninety (90) days thereof, the SECOND PARTY shall submit a program of improvement, development, rehabilitation and reconstruction of the city public markets and talipapas subject to prior approval of the FIRST PARTY. (Rollo, p. 44) xxx xxx xxx VI That all present personnel of the City public markets and talipapas shall be retained by the SECOND PARTY as long as their services remain satisfactory and they shall be extended the same rights and privileges as heretofore enjoyed by them. Provided, however, that the SECOND PARTY shall have the right, subject to


prior approval of the FIRST PARTY to discharge any of the present employees for cause. (Rollo, p. 45). VII That the SECOND PARTY may from time to time be required by the FIRST PARTY, or his duly authorized representative or representatives, to report, on the activities and operation of the City public markets and talipapas and the facilities and conveniences installed therein, particularly as to their cost of construction, operation and maintenance in connection with the stipulations contained in this Contract. (lbid) The fact of supervision and control of the City over subject public market was admitted by Mayor Ramon Bagatsing in his letter to Secretary of Finance Cesar Virata which reads: These cases arose from the controversy over the Management and Operating Contract entered into on December 28, 1972 by and between the City of Manila and the Asiatic Integrated Corporation, whereby in consideration of a fixed service fee, the City hired the services of the said corporation to undertake the physical management, maintenance, rehabilitation and development of the City's public markets and' Talipapas' subject to the control and supervision of the City. xxx xxx xxx It is believed that there is nothing incongruous in the exercise of these powers vis-a-vis the existence of the contract, inasmuch as the City retains the power of supervision and control over its public markets and talipapas under the terms of the contract. (Exhibit "7-A") (Emphasis supplied.) (Rollo, p. 75). In fact, the City of Manila employed a market master for the Sta. Ana Public Market whose primary duty is to take direct

supervision and control of that particular market, more specifically, to check the safety of the place for the public. Thus the Asst. Chief of the Market Division and Deputy Market Administrator of the City of Manila testified as follows: Court This market master is an employee of the City of Manila? Mr. Ymson Yes, Your Honor. Q What are his functions? A Direct supervision and control over the market area assigned to him."(T.s.n.,pp. 41-42, Hearing of May 20, 1977.) xxx xxx xxx Court As far as you know there is or is there any specific employee assigned with the task of seeing to it that the Sta. Ana Market is safe for the public? Mr. Ymson Actually, as I stated, Your Honor, that the Sta. Ana has its own market master. The primary duty of that market master is to make the direct supervision and control of that particular market, the check or verifying whether the place is safe for public safety is vested in the market master. (T.s.n., pp. 2425, Hearing of July 27, 1977.) (Emphasis supplied.) (Rollo, p. 76). Finally, Section 30 (g) of the Local Tax Code as amended, provides: The treasurer shall exercise direct and immediate supervision administration and control over public markets and the personnel thereof, including those whose duties concern the maintenance and upkeep of the market and ordinances and other


pertinent rules and regulations. (Emphasis supplied.) (Rollo, p. 76) The contention of respondent City of Manila that petitioner should not have ventured to go to Sta. Ana Public Market during a stormy weather is indeed untenable. As observed by respondent Court of Appeals, it is an error for the trial court to attribute the negligence to herein petitioner. More specifically stated, the findings of appellate court are as follows: ... The trial court even chastised the plaintiff for going to market on a rainy day just to buy bagoong. A customer in a store has the right to assume that the owner will comply with his duty to keep the premises safe for customers. If he ventures to the store on the basis of such assumption and is injured because the owner did not comply with his duty, no negligence can be imputed to the customer. (Decision, AC-G. R. CV No. 01387, Rollo, p. 19). As a defense against liability on the basis of a quasi-delict, one must have exercised the diligence of a good father of a family. (Art. 1173 of the Civil Code). There is no argument that it is the duty of the City of Manila to exercise reasonable care to keep the public market reasonably safe for people frequenting the place for their marketing needs. While it may be conceded that the fulfillment of such duties is extremely difficult during storms and floods, it must however, be admitted that ordinary precautions could have been taken during good weather to minimize the dangers to life and limb under those difficult circumstances. For instance, the drainage hole could have been placed under the stalls instead of on the passage ways. Even more important is the fact, that the City should have seen to it that the openings were covered. Sadly, the evidence indicates that long before petitioner

fell into the opening, it was already uncovered, and five (5) months after the incident happened, the opening was still uncovered. (Rollo, pp. 57; 59). Moreover, while there are findings that during floods the vendors remove the iron grills to hasten the flow of water (Decision, AC-G.R. CV No. 0 1387; Rollo, p. 17), there is no showing that such practice has ever been prohibited, much less penalized by the City of Manila. Neither was it shown that any sign had been placed thereabouts to warn passersby of the impending danger. To recapitulate, it appears evident that the City of Manila is likewise liable for damages under Article 2189 of the Civil Code, respondent City having retained control and supervision over the Sta. Ana Public Market and as tort-feasor under Article 2176 of the Civil Code on quasi-delicts Petitioner had the right to assume that there were no openings in the middle of the passageways and if any, that they were adequately covered. Had the opening been covered, petitioner could not have fallen into it. Thus the negligence of the City of Manila is the proximate cause of the injury suffered, the City is therefore liable for the injury suffered by the peti- 4 petitioner. Respondent City of Manila and Asiatic Integrated Corporation being joint tort-feasors are solidarily liable under Article 2194 of the Civil Code. PREMISES CONSIDERED, the decision of the Court of Appeals is hereby MODIFIED, making the City of Manila and the Asiatic Integrated Corporation solidarily liable to pay the plaintiff P221.90 actual medical expenses, P900.00 for the amount paid for the operation and management of the school bus, P20,000.00 as moral damages due to pain, sufferings and sleepless nights and P10,000.00 as attorney's fees.


41.

G.R. No. L-47851

October 3, 1986

JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners, 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, vs. COURT OF APPEALS, ET AL., respondents. G.R. No. L-47896 October 3, 1986 PHILIPPINE BAR ASSOCIATION, ET AL., petitioners, 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 thirdparty 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 thirdparty 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 November 29, 1968 until full payment to be 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) in equal shares. SO ORDERED. Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other 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 thirdparty 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 construction alone (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. 11741175). 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 thirdparty 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; AlsuaBett 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 (L47896, 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 involved appreciable risks with respect to the accidental forces which may result from earthquake shocks. He conceded, however, that the fact that those deficiencies or defects may have arisen from an obsolete or not too conservative code or even a code that does not require a design for earthquake forces mitigates in a large measure the responsibility or liability of the architect and engineer designer. The Third-party defendants, who are the most concerned with this portion of the Commissioner's report, voiced opposition to


the same on the grounds that (a) the finding is 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 rectangular box on stilts with shear wan at one end; (b) the finding that there were defects and a deficiency in the design of the building would at best be based on an approximation and, therefore, rightly belonged to the realm of speculation, rather than of certainty and could very possibly be outright error; (c) the Commissioner has failed to back up or support his finding with extensive, complex and highly specialized computations and analyzes which he himself emphasizes are necessary in the determination of such a highly technical question; and (d) the Commissioner has analyzed the design of the PBA building not in the light of existing and available earthquake engineering knowledge at the time of the preparation of the design, but in the light of recent and current standards. The Commissioner answered the said objections alleging that third-party defendants' objections were based on estimates or exhibits not presented during the hearing that the resort to engineering references posterior to the date of the preparation of the plans was induced by the third-party defendants themselves who submitted computations of the third-party defendants are erroneous. The issue presently considered is admittedly a technical one of the highest degree. It involves questions not within the ordinary competence of the bench and the bar to resolve by themselves. Counsel for the third-party defendants has aptly remarked that "engineering, although dealing in mathematics, is not an exact science and that the present knowledge as to the nature of earthquakes and the behaviour of forces generated by them still leaves much to be desired; so much so "that the experts of the different parties, who are all engineers, cannot agree on what equation to use, as to what earthquake co-efficients are, on the codes to be used and even as to the type of structure that the PBA

building (is) was (p. 29, Memo, of third- party defendants before the Commissioner). The difficulty expected by the Court if tills technical matter were to be tried and inquired into by the Court itself, coupled with the intrinsic nature of the questions involved therein, constituted the reason for the reference of the said issues to a Commissioner whose qualifications and experience have eminently qualified him for the task, and whose competence had not been questioned by the parties until he submitted his report. Within the pardonable limit of the Court's ability to comprehend the meaning of the Commissioner's report on this issue, and the objections voiced to the same, the Court sees no compelling reasons to disturb the findings of the Commissioner that there were defects and deficiencies in the design, plans and specifications prepared by third-party defendants, and that said defects and deficiencies involved appreciable risks with respect to the accidental forces which may result from earthquake shocks. (2) (a) The deviations, if any, made by the defendants from the plans and specifications, and how said deviations contributed to the damage sustained by the building. (b) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the construction of the building. These two issues, being interrelated with each other, will be discussed together. The findings of the Commissioner on these issues were as follows: We now turn to the construction of the PBA Building and the alleged deficiencies or defects in the construction and violations


or deviations from the plans and specifications. All these may be summarized as follows: a. Summary of alleged defects as reported by Engineer Mario M. Bundalian. (1) Wrongful and defective placing of reinforcing bars. (2) Absence of effective and desirable integration of the 3 bars in the cluster. (3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no larger than 1 inch. (4) Reinforcement assembly is not concentric with the column, eccentricity being 3" off when on one face the main bars are only 1 1/2' from the surface. (5) Prevalence of honeycombs, (6) Contraband construction joints, (7) Absence, or omission, or over spacing of spiral hoops, (8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground floor, (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 earthquakeresistant 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 spirals and ties in the columns were greater than that

called for in the specifications; that the hollow in column A4, second floor, the eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the spirals in column A5, ground floor, did not aggravate or contribute to the damage suffered by the building; that the defects in the construction were within the tolerable margin of safety; and that the cutting of the spirals in column A5, ground floor, was done by the plumber or his men, and not by the defendants. Answering the said objections, the Commissioner stated that, since many of the defects were minor only the totality of the defects was considered. As regards the objection as to failure to state the number of cases where the spirals and ties were not carried from the floor level to the bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the first one without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the bottom. The Commissioner likewise specified the first storey columns where the spacings were greater than that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B-7. The objection to the failure of the Commissioner to specify the number of columns where there was lack of proper length of splicing of spirals, the Commissioner 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 columns. He answered the supposition of the defendants that the spirals and the ties must have been looted, by calling attention to 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, although the act of a third person, or an act of God for which he is not responsible, intervenes to precipitate the loss. As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells out the fatal difference; gross negligence and evident bad faith, without which the damage would not have occurred. WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case, We deem it reasonable to render a decision imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages (with the exception of attorney's fees) occasioned by the loss of the building (including interest charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon afore-mentioned amounts from finality until paid. Solidary costs against the defendant and third-party defendants (except Roman Ozaeta). 42. G.R. No. 189563 April 7, 2014 GILAT SATELLITE NETWORKS, LTD., Petitioner, vs. UNITED COCONUT PLANTERS BANK GENERAL INSURANCE CO., INC., Respondent.


D E C I S I O N SERENO, CJ: This is an appeal via a Petition for Review on Certiorari1 filed 6 November 2009 assailing the Decision2 and Resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 89263, which reversed the Decision4 of the Regional Trial Court (RTC), Branch 141, Makati City in Civil Case No. 02-461, ordering respondent to pay petitioner a sum of money. The antecedent facts, as culled from the CA, are as follows: On September 15, 1999, One Virtual placed with GILAT a purchase order for various telecommunications equipment (sic), accessories, spares, services and software, at a total purchase price of Two Million One Hundred Twenty Eight Thousand Two Hundred Fifty Dollars (US$2,128,250.00). Of the said purchase price for the goods delivered, One Virtual promised to pay a portion thereof totalling US$1.2 Million in accordance with the payment schedule dated 22 November 1999. To ensure the prompt payment of this amount, it obtained defendant UCPB General Insurance Co., Inc.’s surety bond dated 3 December 1999, in favor of GILAT. During the period between [sic] September 1999 and June 2000, GILAT shipped and delivered to One Virtual the purchased products and equipment, as evidenced by airway bills/Bill of Lading (Exhibits "F", "F-1" to "F-8"). All of the equipment (including the software components for which payment was secured by the surety bond, was shipped by GILAT and duly received by One Virtual. Under an endorsement dated December 23, 1999 (Exhibit "E"), the surety issued, with One Virtual’s conformity, an amendment to the surety bond, Annex "A" thereof, correcting its expiry date from May 30, 2001 to July 30, 2001.

One Virtual failed to pay GILAT the amount of Four Hundred Thousand Dollars (US$400,000.00) on the due date of May 30, 2000 in accordance with the payment schedule attached as Annex "A" to the surety bond, prompting GILAT to write the surety defendant UCPB on June 5, 2000, a demand letter (Exhibit "G") for payment of the said amount of US$400,000.00. No part of the amount set forth in this demand has been paid to date by either One Virtual or defendant UCPB. One Virtual likewise failed to pay on the succeeding payment instalment date of 30 November 2000 as set out in Annex "A" of the surety bond, prompting GILAT to send a second demand letter dated January 24, 2001, for the payment of the full amount of US$1,200,000.00 guaranteed under the surety bond, plus interests and expenses (Exhibits "H") and which letter was received by the defendant surety on January 25, 2001. However, defendant UCPB failed to settle the amount of US$1,200,000.00 or a part thereof, hence, the instant complaint."5 (Emphases in the original) On 24 April 2002, petitioner Gilat Satellite Networks, Ltd., filed a Complaint6 against respondent UCPB General Insurance Co., Inc., to recover the amounts supposedly covered by the surety bond, plus interests and expenses. After due hearing, the RTC rendered its Decision,7 the dispositive portion of which is herein quoted: WHEREFORE, premises considered, the Court hereby renders judgment for the plaintiff, and against the defendant, ordering, to wit: 1. The defendant surety to pay the plaintiff the amount of One Million Two Hundred Thousand Dollars (US$1,200,000.00) representing the principal debt under the Surety Bond, with legal interest thereon at the rate of 12% per annum computed from the time the judgment becomes final and executory until the obligation is fully settled; and


2. The defendant surety to pay the plaintiff the amount of Forty Four Thousand Four Dollars and Four Cents (US$44,004.04) representing attorney’s fees and litigation expenses. Accordingly, defendant’s counterclaim is hereby dismissed for want of merit. SO ORDERED. (Emphasis in the original) In so ruling, the RTC reasoned that there is "no dispute that plaintiff [petitioner] delivered all the subject equipments [sic] and the same was installed. Even with the delivery and installation made, One Virtual failed to pay any of the payments agreed upon. Demand notwithstanding, defendant failed and refused and continued to fail and refused to settle the obligation."8 Considering that its liability was indeed that of a surety, as "spelled out in the Surety Bond executed by and between One Virtual as Principal, UCPB as Surety and GILAT as Creditor/Bond Obligee,"9 respondent agreed and bound itself to pay in accordance with the Payment Milestones. This obligation was not made dependent on any condition outside the terms and conditions of the Surety Bond and Payment Milestones.10 Insofar as the interests were concerned, the RTC denied petitioner’s claim on the premise that while a surety can be held liable for interest even if it becomes more onerous than the principal obligation, the surety shall only accrue when the delay or refusal to pay the principal obligation is without any justifiable cause.11 Here, respondent failed to pay its surety obligation because of the advice of its principal (One Virtual) not to pay.12 The RTC then obligated respondent to pay petitioner the amount of USD1,200,000.00 representing the principal debt under the Surety Bond, with legal interest at the rate of 12% per annum computed from the time the judgment becomes final and

executory, and USD44,004.04 representing attorney’s fees and litigation expenses. On 18 October 2007, respondent appealed to the CA.13 The appellate court rendered a Decision14 in the following manner: WHEREFORE, this appealed case is DISMISSED for lack of jurisdiction. The trial court’s Decision dated December 28, 2006 is VACATED. Plaintiff-appellant Gilat Satellite Networks Ltd., and One Virtual are ordered to proceed to arbitration, the outcome of which shall necessary bind the parties, including the surety, defendant-appellant United Coconut Planters Bank General Insurance Co., Inc. SO ORDERED. (Emphasis in the original) The CA ruled that in "enforcing a surety contract, the ‘complementary-contracts-construed-together’ doctrine finds application." According to this doctrine, the accessory contract must be construed with the principal agreement.15 In this case, the appellate court considered the Purchase Agreement entered into between petitioner and One Virtual as the principal contract,16 whose stipulations are also binding on the parties to the suretyship.17 Bearing in mind the arbitration clause contained in the Purchase Agreement18 and pursuant to the policy of the courts to encourage alternative dispute resolution methods,19 the trial court’s Decision was vacated; petitioner and One Virtual were ordered to proceed to arbitration. On 9 September 2008, petitioner filed a Motion for Reconsideration with Motion for Oral Argument. The motion was denied for lack of merit in a Resolution20 issued by the CA on 16 September 2009. Hence, the instant Petition.


On 31 August 2010, respondent filed a Comment21 on the Petition for Review. On 24 November 2010, petitioner filed a Reply.22 ISSUES From the foregoing, we reduce the issues to the following: 1. Whether or not the CA erred in dismissing the case and ordering petitioner and One Virtual to arbitrate; and 2. Whether or not petitioner is entitled to legal interest due to the delay in the fulfilment by respondent of its obligation under the Suretyship Agreement. THE COURT’S RULING The existence of a suretyship agreement does not give the surety the right to intervene in the principal contract, nor can an arbitration clause between the buyer and the seller be invoked by a non-party such as the surety. Petitioner alleges that arbitration laws mandate that no court can compel arbitration, unless a party entitled to it applies for this relief.23 This referral, however, can only be demanded by one who is a party to the arbitration agreement.24 Considering that neither petitioner nor One Virtual has asked for a referral, there is no basis for the CA’s order to arbitrate. Moreover, Articles 1216 and 2047 of the Civil Code25 clearly provide that the creditor may proceed against the surety without having first sued the principal debtor.26 Even the Surety Agreement itself states that respondent becomes liable upon "mere failure of the Principal to make such prompt payment."27 Thus, petitioner should not be ordered to make a separate claim

against One Virtual (via arbitration) before proceeding against respondent.28 On the other hand, respondent maintains that a surety contract is merely an accessory contract, which cannot exist without a valid obligation.29 Thus, the surety may avail itself of all the defenses available to the principal debtor and inherent in the debt30 – that is, the right to invoke the arbitration clause in the Purchase Agreement. We agree with petitioner. In suretyship, the oft-repeated rule is that a surety’s liability is joint and solidary with that of the principal debtor. This undertaking makes a surety agreement an ancillary contract, as it presupposes the existence of a principal contract.31 Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, its liability to the creditor or "promise" of the principal is said to be direct, primary and absolute; in other words, a surety is directly and equally bound with the principal.32 He becomes liable for the debt and duty of the principal obligor, even without possessing a direct or personal interest in the obligations constituted by the latter.33 Thus, a surety is not entitled to a separate notice of default or to the benefit of excussion.34 It may in fact be sued separately or together with the principal debtor.35 After a thorough examination of the pieces of evidence presented by both parties,36 the RTC found that petitioner had delivered all the goods to One Virtual and installed them. Despite these compliances, One Virtual still failed to pay its obligation,37 triggering respondent’s liability to petitioner as the former’s surety.1âwphi1 In other words, the failure of One Virtual, as the principal debtor, to fulfill its monetary obligation to petitioner gave the latter an immediate right to pursue respondent as the surety.


Consequently, we cannot sustain respondent’s claim that the Purchase Agreement, being the principal contract to which the Suretyship Agreement is accessory, must take precedence over arbitration as the preferred mode of settling disputes. First, we have held in Stronghold Insurance Co. Inc. v. Tokyu Construction Co. Ltd.,38 that "[the] acceptance [of a surety agreement], however, does not change in any material way the creditor’s relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. In other words, the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises only upon the debtor’s default, at which time, it can be directly held liable by the creditor for payment as a solidary obligor." Hence, the surety remains a stranger to the Purchase Agreement. We agree with petitioner that respondent cannot invoke in its favor the arbitration clause in the Purchase Agreement, because it is not a party to that contract.39 An arbitration agreement being contractual in nature,40 it is binding only on the parties thereto, as well as their assigns and heirs.41 Second, Section 24 of Republic Act No. 928542 is clear in stating that a referral to arbitration may only take place "if at least one party so requests not later than the pre-trial conference, or upon the request of both parties thereafter." Respondent has not presented even an iota of evidence to show that either petitioner or One Virtual submitted its contesting claim for arbitration. Third, sureties do not insure the solvency of the debtor, but rather the debt itself.43 They are contracted precisely to mitigate risks of non-performance on the part of the obligor. This responsibility necessarily places a surety on the same level as that of the principal debtor.44 The effect is that the creditor is given the right to directly proceed against either principal debtor or surety. This is the reason why excussion cannot be invoked.45

To require the creditor to proceed to arbitration would render the very essence of suretyship nugatory and diminish its value in commerce. At any rate, as we have held in Palmares v. Court of Appeals,46 "if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor." Interest, as a form of indemnity, may be awarded to a creditor for the delay incurred by a debtor in the payment of the latter’s obligation, provided that the delay is inexcusable. Anent the issue of interests, petitioner alleges that it deserves to be paid legal interest of 12% per annum from the time of its first demand on respondent on 5 June 2000 or at most, from the second demand on 24 January 2001 because of the latter’s delay in discharging its monetary obligation.47 Citing Article 1169 of the Civil Code, petitioner insists that the delay started to run from the time it demanded the fulfilment of respondent’s obligation under the suretyship contract. Significantly, respondent does not contest this point, but instead argues that it is only liable for legal interest of 6% per annum from the date of petitioner’s last demand on 24 January 2001. In rejecting petitioner’s position, the RTC stated that interests may only accrue when the delay or the refusal of a party to pay is without any justifiable cause.48 In this case, respondent’s failure to heed the demand was due to the advice of One Virtual that petitioner allegedly breached its undertakings as stated in the Purchase Agreement.49 The CA, however, made no pronouncement on this matter. We sustain petitioner. Article 2209 of the Civil Code is clear: "[i]f an obligation consists in the payment of a sum of money, and the debtor incurs a 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." Delay arises from the time the obligee judicially or extrajudicially demands from the obligor the performance of the obligation, and the latter fails to comply.50 Delay, as used in Article 1169, is synonymous with default or mora, which means delay in the fulfilment of obligations.51 It is the nonfulfillment of an obligation with respect to time.52 In order for the debtor (in this case, the surety) 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.53 Having held that a surety upon demand fails to pay, it can be held liable for interest, even if in thus paying, its liability becomes more than the principal obligation.54 The increased liability is not because of the contract, but because of the default and the necessity of judicial collection.55 However, for delay to merit interest, it must be inexcusable in nature. In Guanio v. Makati-Shangri-la Hotel,56 citing RCPI v. Verchez,57 we held thus: In culpa contractual x x x the mere proof of the existence of the contract and the failure of its compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory force of contracts, will not permit a party to be set free from liability for any kind of misperformance of the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers upon the injured party a valid cause for recovering that which may have been lost or suffered. The remedy serves to preserve the interests of the promissee that may include his "expectation interest," which is his interest in

having the benefit of his bargain by being put in as good a position as he would have been in had the contract been performed, or his "reliance interest," which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made; or his "restitution interest," which is his interest in having restored to him any benefit that he has conferred on the other party. Indeed, agreements can accomplish little, either for their makers or for society, unless they are made the basis for action. The effect of every infraction is to create a new duty, that is, to make RECOMPENSE to the one who has been injured by the failure of another to observe his contractual obligation unless he can show extenuating circumstances, like proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him from his ensuing liability. (Emphasis ours) We agree with petitioner that records are bereft of proof to show that respondent’s delay was indeed justified by the circumstances – that is, One Virtual’s advice regarding petitioner’s alleged breach of obligations. The lower court’s Decision itself belied this contention when it said that "plaintiff is not disputing that it did not complete commissioning work on one of the two systems because One Virtual at that time is already in default and has not paid GILAT."58 Assuming arguendo that the commissioning work was not completed, respondent has no one to blame but its principal, One Virtual; if only it had paid its obligation on time, petitioner would not have been forced to stop operations. Moreover, the deposition of Mr. Erez Antebi, vice president of Gilat, repeatedly stated that petitioner had delivered all equipment, including the licensed software; and that the equipment had been installed and in fact, gone into operation.59 Notwithstanding these compliances, respondent still failed to pay.


As to the issue of when interest must accrue, our Civil Code is explicit in stating that it accrues from the time judicial or extrajudicial demand is made on the surety. This ruling is in accordance with the provisions of Article 1169 of the Civil Code and of the settled rule that where there has been an extra-judicial demand before an action for performance was filed, interest on the amount due begins to run, not from the date of the filing of the complaint, but from the date of that extra-judicial demand.60 Considering that respondent failed to pay its obligation on 30 May 2000 in accordance with the Purchase Agreement, and that the extrajudicial demand of petitioner was sent on 5 June 2000,61 we agree with the latter that interest must start to run from the time petitioner sent its first demand letter (5 June 2000), because the obligation was already due and demandable at that time. With regard to the interest rate to be imposed, we take cue from Nacar v. Gallery Frames,62 which modified the guidelines established in Eastern Shipping Lines v. CA63 in relation to Bangko Sentral-Monetary Board Circular No. 799 (Series of 2013), to wit: 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.1âwphi1 In the absence of stipulation, the rate of interest shall be 6% per annum 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. x x x x 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 annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of credit. Applying the above-discussed concepts and in the absence of an agreement as to interests, we are hereby compelled to award petitioner legal interest at the rate of 6% per annum from 5 June 2000, its first date of extra judicial demand, until the satisfaction of the debt in accordance with the revised guidelines enunciated in Nacar. WHEREFORE, the Petition for Review on Certiorari is hereby GRANTED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 89263 are REVERSED. The Decision of the Regional Trial Court, Branch 141, Makati City is REINSTATED, with MODIFICATION insofar as the award of legal interest is concerned. Respondent is hereby ordered to pay legal interest at the rate of 6% per annum from 5 June 2000 until the satisfaction of its obligation under the Suretyship Contract and Purchase Agreement. 43.

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. D E C I S I O N

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:

PEREZ, J.:

PROMISSORY NOTE

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. 021052562 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 P50,000.00.

120,000.00

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.

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 (P120,000.00) 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 P5,000.00 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

We proceed to the facts. 191 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

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 P25,000.00. 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 P133,454.00 with "cash" as payee. Purportedly, both checks were simply partial payment for Rivera’s loan in the principal amount of P120,000.00. 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 P366,000.00 covering the principal of P120,000.00 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 P133,454.00; and (6) there was no demand for payment of the amount of P120,000.00 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 x x x x Witness Magbojos enumerated his credentials as follows: joined the NBI (1987); NBI document examiner (1989); NBI Senior Document Examiner (1994 to the date he testified); registered criminologist; graduate of 18th Basic Training Course [i]n Questioned Document Examination conducted by the NBI; twice attended a seminar on US Dollar Counterfeit Detection conducted by the US Embassy in Manila; attended a seminar on Effective Methodology in Teaching and Instructional design conducted by the NBI Academy; seminar lecturer on Questioned Documents, Signature Verification and/or Detection; had examined more than a hundred thousand questioned documents at the time he testified.


Upon [order of the MeTC], Mr. Magbojos examined the purported signature of [Rivera] appearing in the Promissory Note and compared the signature thereon with the specimen signatures of [Rivera] appearing on several documents. After a thorough study, examination, and comparison of the signature on the questioned document (Promissory Note) and the specimen signatures on the documents submitted to him, he concluded that the questioned signature appearing in the Promissory Note and the specimen signatures of [Rivera] appearing on the other documents submitted were written by one and the same person. In connection with his findings, Magbojos prepared Questioned Documents Report No. 712-1000 dated 8 January 2001, with the following conclusion: "The questioned and the standard specimen signatures RODGRIGO RIVERA were written by one and the same person."

Promissory Note was not his signature and that he did not execute the Promissory Note.6

[Rivera] testified as follows: he and [respondent] Salvador are "kumpadres;" in May 1998, he obtained a loan from [respondent] Salvador and executed a real estate mortgage over a parcel of land in favor of [respondent Salvador] as collateral; aside from this loan, in October, 1998 he borrowed P25,000.00 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 that the signature appearing thereon was not his signature; [respondent Salvador’s] claim that PCIB Check No. 0132224 was partial payment for the Promissory Note was not true, the truth being that he delivered the check to [respondent Salvador] with the space for amount left blank as he and [respondent] Salvador had agreed that the latter was to fill it in with the amount of P1,300.00 which amount he owed [the spouses Chua]; however, on 29 December 1998 [respondent] Salvador called him and told him that he had written P133,454.00 instead of P1,300.00; x x x. To rebut the testimony of NBI Senior Document Examiner Magbojos, [Rivera] reiterated his averment that the signature appearing on the

WHEREFORE, except as to the amount of attorney’s fees which is hereby deleted, the rest of the Decision dated October 21, 2002 is hereby AFFIRMED.8

After trial, the MeTC ruled in favor of the Spouses Chua: WHEREFORE, [Rivera] is required to pay [the spouses Chua]: P120,000.00 plus stipulated interest at the rate of 5% per month from 1 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 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:

Both trial courts found the Promissory Note as authentic and validly bore the signature of Rivera. Undaunted, Rivera appealed to the Court of Appeals which affirmed Rivera’s liability under the Promissory Note, 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: WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the interest rate of 60% per annum is hereby reduced to12% per annum and the award of attorney’s fees is reinstated atthe reduced amount of P50,000.00 Costs against [Rivera].9 Hence, these consolidated petitions for review on certiorariof Rivera in G.R. No. 184458 and the Spouses Chua in G.R. No. 184472, respectively raising the following issues:


A. In G.R. No. 184458 1. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE RULING OF THE RTC AND M[e]TC THAT THERE WAS A VALID PROMISSORY NOTE EXECUTED BY [RIVERA]. 2. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT DEMAND IS NO LONGER NECESSARY AND IN APPLYING THE PROVISIONS OF THE NEGOTIABLE INSTRUMENTS LAW. 3. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES DESPITE THE FACT THAT THE SAME HAS NO BASIS IN FACT AND IN LAW AND DESPITE THE FACT THAT [THE SPOUSES CHUA] DID NOT APPEAL FROM THE DECISION OF THE RTC DELETING THE AWARD OF ATTORNEY’S FEES.10 B. In G.R. No. 184472 [WHETHER OR NOT] THE HONORABLE COURT OF APPEALS COMMITTED GROSS LEGAL ERROR WHEN IT MODIFIED THE APPEALED JUDGMENT BY REDUCING THE INTEREST RATE FROM 60% PER ANNUM TO 12% PER ANNUM IN SPITE OF THE FACT THAT RIVERA NEVER RAISED IN HIS ANSWER THE DEFENSE THAT THE SAID STIPULATED RATE OF INTEREST IS EXORBITANT, UNCONSCIONABLE, UNREASONABLE, 11 INEQUITABLE, ILLEGAL, IMMORAL OR VOID. 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 court specifically concerning the correct rate of interest on Rivera’s indebtedness under the Promissory Note.12

On 26 February 2009, Entry of Judgment was made in G.R. No. 184472. 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. 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. However, each of these loan transactions was respectively "secured by checks or sufficient collateral." Rivera points out that the Spouses Chua "never demanded payment for the loan nor interest thereof (sic) from [Rivera] for almost four (4) years from the time of the alleged default in payment [i.e., after December 31, 1995]."13 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 promissory note was forged, only that the signature is not his and varies from his usual signature. He likewise makes a confusing defense of having previously obtained loans from the Spouses Chua who were money lenders and who had allowed him a period of "almost four (4) years" before demanding payment of the loan under the Promissory Note. First, we cannot give credence to such a naked claim of forgery over the testimony of the National Bureau of Investigation (NBI) handwriting expert on the integrity of the promissory note. On that score, the appellate court aptly disabled Rivera’s contention:


[Rivera] failed to adduce clear and convincing evidence that the signature on the promissory note is a forgery. The fact of forgery cannot be presumed but must be proved by clear, positive and convincing evidence. Mere variance of signatures cannot be considered as conclusive proof that the same was forged. Save for the denial of Rivera 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 alleged forged documents, the opinions of handwriting experts are nevertheless helpful in the court’s determination of a document’s authenticity. To be sure, a bare denial will not suffice to overcome the positive value 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 the same person. 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 that which is offered in opposition to it." Evaluating the evidence on record, we are convinced that [the Spouses Chua] have established a prima faciecase in their favor, hence, the burden of evidence has shifted to [Rivera] to prove his allegation of forgery. Unfortunately for [Rivera], he failed to substantiate his defense.14 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 respect and are considered conclusive between the parties.15 A review of such findings by this Court is not warranted except upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial court are grounded entirely on speculation, surmises or conjectures; (2) when a 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 beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a misappreciation of facts; (6) 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 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 reflected in the Promissory Note. 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 In this case, Rivera’s bare assertion is unsubstantiated and directly disputed by the testimony of a handwriting expert from the NBI. While it is true that resort to experts is not mandatory or indispensable to the 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 Hence, the MeTC ruled that: [Rivera] executed the Promissory Note after consideration of the following: categorical statement of [respondent] Salvador that [Rivera] signed the Promissory Note before him, in his ([Rivera’s]) house; the conclusion of NBI Senior Documents Examiner that the questioned signature (appearing on the Promissory Note) and standard specimen signatures "Rodrigo Rivera" "were written by one and the same person"; actual view


at the hearing of the enlarged photographs of the questioned signature and the standard specimen signatures.19 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, 1998 secured by a real estate mortgage, when he was already in default and has not been paying any interest for a loan incurred in February 1995."20 We disagree. It is likewise likely that precisely because of the long standing friendship of the parties as "kumpadres," Rivera was allowed another loan, albeit this time secured by a real estate mortgage, which will cover 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 by only a Promissory Note. Also completely plausible is thatgiven the relationship between the parties, Rivera was allowed a substantial amount of time before the Spouses Chua demanded payment of the obligation due under the Promissory Note. In all, Rivera’s evidence or lack thereof consisted only of a barefaced 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 established a prima facie case against Rivera, the burden of evidence shifted to the latter to establish his defense.21 Consequently, Rivera failed to discharge the burden of evidence, refute the existence of the Promissory Note duly signed by him and subsequently, that he did not fail to pay his obligation thereunder. On the whole, there was no question left on where the respective evidence of the parties

preponderated—in favor of plaintiffs, the Spouses Chua. Rivera next argues that even assuming the validity of the Promissory Note, demand was still necessary in order to charge him liable thereunder. Rivera argues that it was grave error on the part of the appellate court to apply Section 70 of the Negotiable Instruments Law (NIL).22 We agree that the subject promissory note is not a negotiable instrument and the provisions of the NIL do not apply to this case. Section 1 of the NIL requires the concurrence of the following elements to be a negotiable instrument: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. 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 P120,000.00 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 (P120,000.00) 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 P120,000.00. Thereafter, on 1 January 1996, upon default, Rivera became liable to pay the Spouses Chua damages, in the form of stipulated interest.

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 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.

The penalty may be enforced only when it is demandable in accordance with the provisions of this 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 P120,000.00 upon default. Article 1226 of the Civil Code provides:

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 P120,000.00. 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. x x x x As observed by [Rivera], the stipulated interest of 5% per month or 60% per annum in addition to legal interests and attorney’s fees is, indeed, highly iniquitous and unreasonable. Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to temper interest rates when necessary. Since the interest rate agreed upon is void, the parties are considered to have no stipulation regarding the interest rate, thus, the rate of interest should be 12% per annum computed from the date of judicial or extrajudicial demand.27 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 to it being illegal, iniquitous and unconscionable. Significantly, the issue on payment of interest has been squarely disposed of in G.R. No. 184472 denying the petition of the Spouses Chua for failure to sufficiently showany reversible error in the ruling of the appellate court, specifically the reduction of the interest rate imposed on Rivera’s indebtedness under the Promissory Note. Ultimately, the denial of the petition in G.R. No. 184472 is res judicata in its concept of "bar by prior judgment" on whether the Court of Appeals correctly reduced the interest rate stipulated in the Promissory Note. Res judicata applies in the concept of "bar by prior judgment" if the following requisites concur: (1) the former judgment or order must be final; (2) the judgment or order must be on the merits; (3) the decision must have been rendered by a court having jurisdiction over the subject matter and the parties; and (4) there

must be, between the first and the second action, identity of parties, of subject matter and of causes of action.28 In this case, the petitions in G.R. Nos. 184458 and 184472 involve an identity of parties and subject matter raising specifically errors in the Decision of the Court of Appeals. Where the Court of Appeals’ disposition on the propriety of the reduction of the interest rate was raised by the Spouses Chua in G.R. No. 184472, our ruling thereon affirming the Court of Appeals is a "bar by prior judgment." At the time interest accrued from 1 January 1996, the date of default under the Promissory Note, the then prevailing rate of legal interest was 12% per annum under Central Bank (CB) Circular No. 416 in cases involving the loan or for bearance of money.29 Thus, the legal interest accruing from the Promissory Note is 12% per annum from the date of default on 1 January 1996. However, the 12% per annumrate of legal interest is only applicable until 30 June 2013, before the advent and effectivity of Bangko Sentral ng Pilipinas (BSP) Circular No. 799, Series of 2013 reducing the rate of legal interest to 6% per annum. Pursuant to our ruling in Nacar v. Gallery Frames,30 BSP Circular No. 799 is prospectively applied from 1 July 2013. In short, the applicable rate of legal interest from 1 January 1996, the date when Rivera defaulted, to date when this Decision becomes final and executor is divided into two periods reflecting two rates of legal interest: (1) 12% per annum from 1 January 1996 to 30 June 2013; and (2) 6% per annum FROM 1 July 2013 to date when this Decision becomes final and executory. 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 We cite our recent ruling in Nacar v. Gallery Frames:33 I. When an obligation, regardless of its source, 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 for bearance 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 annum to be computed from default, i.e., from judicial or extra judicial demand under and subject to the provisions ofArticle 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.1âwphi1 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 annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a for bearance 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. (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 P50,000.00 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: Face value Stipulated of the Interest A & B Promissory Note

Interest Attorney’s due fees earning legal interest A & B

Total Amount

February 24, 1995 to December 31, 1995

A. June Wholesale 11, 1999 Amount (date of judicial demand) to June 30, 2013 B. July 1, 2013 to date when this Decision becomes final and executor y

A. January 1, 1996 to June 30, 2013 B. July 1 2013 to date when this Decision becomes final and executory

principal amount of P120,000.0 0 B. 6% per annumon the principal amount of P120,000.0 0

annumon the total amount of column 2 B. 6% per annumon the total amount of column 235

of Column s 1-4

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 P120,000.00; (2) legal interest of 12% per annumof the principal amount of P120,000.00 reckoned from 1 January 1996 until 30 June 2013; (3) legal interest of 6% per annumof the principal amount of P120,000.00 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; 201 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n P120,000.0 0

A. 12 % per A. 12% P50,000.0 annumon the per 0

Total amount

(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 P50,000.00; 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. 44. SOLAR HARVEST, INC., Petitioner, - versus - DAVAO CORRUGATED CARTON CORPORATION, Respondent.

G.R. No. 176868 Present: CARPIO, J., Chairperson, NACHURA, PERALTA, ABAD, and MENDOZA, JJ. Promulgated: July 26, 2010 x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.: Petitioner seeks a review of the Court of Appeals (CA) Decision1[1] dated September 21, 2006 and Resolution2[2] dated February 23, 2007, which denied petitioners motion for reconsideration. The assailed Decision denied petitioners claim for reimbursement for the amount it paid to respondent for the manufacture of corrugated carton boxes. The case arose from the following antecedents: In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement with respondent, Davao Corrugated Carton Corporation, for the purchase of corrugated carton boxes, specifically designed for petitioners business of exporting fresh bananas, at US$1.10 each. The agreement was not reduced into writing. To get the production underway, petitioner deposited, on March 31, 1998, US$40,150.00 in respondents US Dollar Savings Account with Westmont Bank, as full payment for the ordered boxes. Despite such payment, petitioner did not receive any boxes from respondent. On January 3, 2001, petitioner wrote a demand letter for reimbursement of the amount paid. 3[3] On February 19, 2001, respondent replied that the boxes had been completed as early as April 3, 1998 and that petitioner failed to pick them up from the formers warehouse 30 days from completion, as agreed upon. Respondent mentioned that


petitioner even placed an additional order of 24,000 boxes, out of which, 14,000 had been manufactured without any advanced payment from petitioner. Respondent then demanded petitioner to remove the boxes from the factory and to pay the balance of US$15,400.00 for the additional boxes and P132,000.00 as storage fee. On August 17, 2001, petitioner filed a Complaint for sum of money and damages against respondent. The Complaint averred that the parties agreed that the boxes will be delivered within 30 days from payment but respondent failed to manufacture and deliver the boxes within such time. It further alleged 6. That repeated follow-up was made by the plaintiff for the immediate production of the ordered boxes, but every time, defendant [would] only show samples of boxes and ma[k]e repeated promises to deliver the said ordered boxes. 7. That because of the failure of the defendant to deliver the ordered boxes, plaintiff ha[d] to cancel the same and demand payment and/or refund from the defendant but the latter refused to pay and/or refund the US$40,150.00 payment made by the former for the ordered boxes.4[4] In its Answer with Counterclaim,5[5] respondent insisted that, as early as April 3, 1998, it had already completed production of the 36,500 boxes, contrary to petitioners allegation. According to respondent, petitioner, in fact, made an additional order of 24,000 boxes, out of which, 14,000 had been

completed without waiting for petitioners payment. Respondent stated that petitioner was to pick up the boxes at the factory as agreed upon, but petitioner failed to do so. Respondent averred that, on October 8, 1998, petitioners representative, Bobby Que (Que), went to the factory and saw that the boxes were ready for pick up. On February 20, 1999, Que visited the factory again and supposedly advised respondent to sell the boxes as rejects to recoup the cost of the unpaid 14,000 boxes, because petitioners transaction to ship bananas to China did not materialize. Respondent claimed that the boxes were occupying warehouse space and that petitioner should be made to pay storage fee at P60.00 per square meter for every month from April 1998. As counterclaim, respondent prayed that judgment be rendered ordering petitioner to pay $15,400.00, plus interest, moral and exemplary damages, attorneys fees, and costs of the suit. In reply, petitioner denied that it made a second order of 24,000 boxes and that respondent already completed the initial order of 36,500 boxes and 14,000 boxes out of the second order. It maintained that respondent only manufactured a sample of the ordered boxes and that respondent could not have produced 14,000 boxes without the required pre-payments.6[6] During trial, petitioner presented Que as its sole witness. Que testified that he ordered the boxes from respondent and deposited the money in respondents account.7[7] He specifically stated that, when he visited respondents factory, he saw that the boxes had no print of petitioners logo.8[8] A few months later, he followed-up the order and was told that the company had full production, and thus, was promised that production of the order would be rushed. He told respondent that it should indeed rush production because the need for the boxes was urgent. Thereafter, he asked his partner, Alfred Ong, to cancel the order


because it was already late for them to meet their commitment to ship the bananas to China.9[9] On cross-examination, Que further testified that China Zero Food, the Chinese company that ordered the bananas, was sending a ship to Davao to get the bananas, but since there were no cartons, the ship could not proceed. He said that, at that time, bananas from Tagum Agricultural Development Corporation (TADECO) were already there. He denied that petitioner made an additional order of 24,000 boxes. He explained that it took three years to refer the matter to counsel because respondent promised to pay.10[10] For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in Davao in October 1998 to inspect the boxes and that the latter got samples of them. In February 2000, they inspected the boxes again and Que got more samples. Estanislao said that petitioner did not pick up the boxes because the ship did not arrive. 11 [11] Jaime Tan (Tan), president of respondent, also testified that his company finished production of the 36,500 boxes on April 3, 1998 and that petitioner made a second order of 24,000 boxes. He said that the agreement was for respondent to produce the boxes and for petitioner to pick them up from the warehouse.12[12] He also said that the reason why petitioner did not pick up the boxes was that the ship that was to carry the bananas did not arrive.13[13] According to him, during the last visit of Que and Estanislao, he asked them to withdraw the boxes immediately because they were occupying a big space in his plant, but they, instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes at P20.00 each for a total of P100,000.00. They then told him to apply the said amount to the unpaid balance.

In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent did not commit any breach of faith that would justify rescission of the contract and the consequent reimbursement of the amount paid by petitioner. The RTC said that respondent was able to produce the ordered boxes but petitioner failed to obtain possession thereof because its ship did not arrive. It thus dismissed the complaint and respondents counterclaims, disposing as follows: WHEREFORE, premises considered, judgment is hereby rendered in favor of defendant and against the plaintiff and, accordingly, plaintiffs complaint is hereby ordered DISMISSED without pronouncement as to cost. Defendants counterclaims are similarly dismissed for lack of merit. SO ORDERED.14[14] Petitioner filed a notice of appeal with the CA. On September 21, 2006, the CA denied the appeal for lack of merit.15[15] The appellate court held that petitioner failed to discharge its burden of proving what it claimed to be the parties agreement with respect to the delivery of the boxes. According to the CA, it was unthinkable that, over a period of more than two years, petitioner did not even demand for the delivery of the boxes. The CA added that even assuming that the agreement was for respondent to deliver the boxes, respondent would not be liable for breach of contract as petitioner had not yet demanded from it the delivery of the boxes.16[16]


Petitioner moved for reconsideration,17[17] but the motion was denied by the CA in its Resolution of February 23, 2007.18[18] In this petition, petitioner insists that respondent did not completely manufacture the boxes and that it was respondent which was obliged to deliver the boxes to TADECO. We find no reversible error in the assailed Decision that would justify the grant of this petition. Petitioners claim for reimbursement is actually one for rescission (or resolution) of contract under Article 1191 of the Civil Code, which reads: 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. The right to rescind a contract arises once the other party defaults in the performance of his obligation. In determining when default occurs, Art. 1191 should be taken in conjunction with Art. 1169 of the same law, which 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 reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment of the parties respective obligations should be simultaneous. Hence, no demand is generally necessary because, once a party fulfills his obligation and the other party does not fulfill his, the latter automatically incurs in delay. But when different dates for performance of the obligations are fixed, the default for each obligation must be determined by the rules given in the first paragraph of the present article,19[19] that is, the other party would incur in delay only from the moment the other party demands fulfillment of the formers obligation. Thus, even in reciprocal obligations, if the period for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary before the obligor can be considered in default and before a cause of action for rescission will accrue. Evident from the records and even from the allegations in the complaint was the lack of demand by petitioner upon respondent to fulfill its obligation to manufacture and deliver the boxes. The Complaint only alleged that petitioner made a followup upon respondent, which, however, would not qualify as a demand for the fulfillment of the obligation. Petitioners witness also testified that they made a follow-up of the boxes, but not a demand. Note is taken of the fact that, with respect to their claim for reimbursement, the Complaint alleged and the witness testified that a demand letter was sent to respondent. Without a previous demand for the fulfillment of the obligation, petitioner would not have a cause of action for rescission against respondent as the latter would not yet be considered in breach of its contractual obligation.

Even assuming that a demand had been previously made before filing the present case, petitioners claim for reimbursement would still fail, as the circumstances would show that respondent was not guilty of breach of contract. The existence of a breach of contract is a factual matter not usually reviewed in a petition for review under Rule 45.20[20] The Court, in petitions for review, limits its inquiry only to questions of law. After all, it is not a trier of facts, and findings of fact made by the trial court, especially when reiterated by the CA, must be given great respect if not considered as final.21[21] In dealing with this petition, we will not veer away from this doctrine and will thus sustain the factual findings of the CA, which we find to be adequately supported by the evidence on record. As correctly observed by the CA, aside from the pictures of the finished boxes and the production report thereof, there is ample showing that the boxes had already been manufactured by respondent. There is the testimony of Estanislao who accompanied Que to the factory, attesting that, during their first visit to the company, they saw the pile of petitioners boxes and Que took samples thereof. Que, petitioners witness, himself confirmed this incident. He testified that Tan pointed the boxes to him and that he got a sample and saw that it was blank. Ques absolute assertion that the boxes were not manufactured is, therefore, implausible and suspicious. In fact, we note that respondents counsel manifested in court, during trial, that his client was willing to shoulder expenses for a representative of the court to visit the plant and see the boxes.22[22] Had it been true that the boxes were not yet


completed, respondent would not have been so bold as to challenge the court to conduct an ocular inspection of their warehouse. Even in its Comment to this petition, respondent prays that petitioner be ordered to remove the boxes from its factory site,23[23] which could only mean that the boxes are, up to the present, still in respondents premises. We also believe that the agreement between the parties was for petitioner to pick up the boxes from respondents warehouse, contrary to petitioners allegation. Thus, it was due to petitioners fault that the boxes were not delivered to TADECO. Petitioner had the burden to prove that the agreement was, in fact, for respondent to deliver the boxes within 30 days from payment, as alleged in the Complaint. Its sole witness, Que, was not even competent to testify on the terms of the agreement and, therefore, we cannot give much credence to his testimony. It appeared from the testimony of Que that he did not personally place the order with Tan, thus: Q. No, my question is, you went to Davao City and placed your order there? A. I made a phone call. Q. You made a phone call to Mr. Tan? A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact with Mr. Tan. Q. So, your first statement that you were the one who placed the order is not true?

A. Thats true. The Solar Harvest made a contact with Mr. Tan and I deposited the money in the bank. Q. You said a while ago [t]hat you were the one who called Mr. Tan and placed the order for 36,500 boxes, isnt it? A. First time it was Mr. Alfred Ong. Q. It was Mr. Ong who placed the order[,] not you? A. Yes, sir.24[24] Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido Estanislao? A. Yes, sir.25[25] Moreover, assuming that respondent was obliged to deliver the boxes, it could not have complied with such obligation. Que, insisting that the boxes had not been manufactured, admitted that he did not give respondent the authority to deliver the boxes to TADECO: Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO? A. No, sir. As I have said, before the delivery, we must have to check the carton, the quantity and quality. But I have not seen a single carton. Q. Are you trying to impress upon the [c]ourt that it is only after the boxes are


completed, will you give authority to Mr. Tan to deliver the boxes to TADECO[?] A. Sir, because when I checked the plant, I have not seen any carton. I asked Mr. Tan to rush the carton but not26[26] Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO? A. Because I have not seen any of my carton. Q. You dont have any authority yet given to Mr. Tan? A. None, your Honor.27[27] Surely, without such authority, TADECO would not have allowed respondent to deposit the boxes within its premises. In sum, the Court finds that petitioner failed to establish a cause of action for rescission, the evidence having shown that respondent did not commit any breach of its contractual obligation. As previously stated, the subject boxes are still within respondents premises. To put a rest to this dispute, we therefore relieve respondent from the burden of having to keep the boxes within its premises and, consequently, give it the right to dispose of them, after petitioner is given a period of time within which to remove them from the premises. WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision dated September 21, 2006 and Resolution dated February 23, 2007 are AFFIRMED. In addition, petitioner is given a period of 30 days from notice within which to cause the removal of the 36,500

boxes from respondents warehouse. After the lapse of said period and petitioner fails to effect such removal, respondent shall have the right to dispose of the boxes in any manner it may deem fit. SO ORDERED. 45.

G.R. No. L-30056 August 30, 1988 MARCELO AGCAOILI, plaintiff-appellee vs. GOVERNMENT SERVICE INSURANCE SYSTEM, defendantappellant. Artemio L. Agcaoili for plaintiff-appellee. Office of the Government Corporate Counsel for defendantappellant.

NARVASA, J.:

The appellant Government Service Insurance System, (GSIS, for short) having approved the application of the appellee Agcaoili for the purchase of a house and lot in the GSIS Housing Project at Nangka Marikina, Rizal, subject to the condition that the latter should forthwith occupy the house, a condition that Agacoili tried to fulfill but could not for the reason that the house was absolutely uninhabitable; Agcaoili, after paying the first installment and other fees, having thereafter refused to make further payment of other stipulated installments until GSIS had made the house habitable; 208 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

and appellant having refused to do so, opting instead to cancel the award and demand the vacation by Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of First Instance of Manila for specific performance with damages and having obtained a favorable judgment, the case was appealled to this Court by the GSIS. Its appeal must fail. The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for purchase 1 was contained in a letter 2 addressed to Agcaoili and signed by GSIS Manager Archimedes Villanueva in behalf of the Chairman-General Manager, reading as follows: Please be informed that your application to purchase a house and lot in our GSIS Housing Project at Nangka, Marikina, Rizal, has been approved by this Office. Lot No. 26, Block No. (48) 2, together with the housing unit constructed thereon, has been allocated to you. You are, therefore, advised to occupy the said house immediately. If you fail to occupy the same within three (3) days from receipt of this notice, your application shall be considered automatically disapproved and the said house and lot will be awarded to another applicant. Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the very next day, because the house was nothing more than a shell, in such a state of incompleteness that civilized occupation was not possible: ceiling, stairs, double walling, lighting facilities, water connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however ask a homeless friend, a certain Villanueva, to stay in the premises as some sort of

watchman, pending completion of the construction of the house. Agcaoili thereafter complained to the GSIS, to no avail. The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first monthly installment and the incidental fees, 3 but refused to make further payments until and unless the GSIS completed the housing unit. What the GSIS did was to cancel the award and require Agcaoili to vacate the premises. 4 Agcaoili reacted by instituting suit in the Court of First Instance of Manila for specific performance and damages. 5 Pending the action, a written protest was lodged by other awardees of housing units in the same subdivision, regarding the failure of the System to complete construction of their own houses. 6 Judgment was in due course rendered , 7 on the basis of the evidence adduced by Agcaoili only, the GSIS having opted to dispense with presentation of its own proofs. The judgment was in Agcaoili's favor and contained the following dispositions, 8 to wit: 1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff (Mariano Agcaoili) illegal and void; 2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the plaintiff relative to Lot No. 26, Block No. (48) 2 of the Government Service Insurance System (GSIS) low cost housing project at Nangka Marikina, Rizal; 3) Ordering the defendant to complete the house in question so as to make the same habitable and authorizing it (defendant) to collect the monthly amortization thereon only after said house shall have been completed under the terms and conditions mentioned in Exhibit A ;and


4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for attorney's fees, and costs. Appellant GSIS would have this Court reverse this judgment on the argument that— 1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness of his housing unit, since said unit had been sold "in the condition and state of completion then existing ... (and) he is deemed to have accepted the same in the condition he found it when he accepted the award;" and assuming indefiniteness of the contract in this regard, such circumstance precludes a judgment for specific performance. 9 2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's immediate occupancy of the house subject thereof, and the latter having failed to comply with the condition, no contract ever came into existence between them ; 10 3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or subsequent knowledge or consent of the defendant (GSIS)" operated as a repudiation by Agcaoili of the award and a deprivation of the GSIS at the same time of the reasonable rental value of the property. 11 Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled "Application to Purchase a House and/or Lot." Agcaoili filled up the form, signed it, and submitted it. 12 The acceptance of the application was also set out in a form (mimeographed) also prepared by the GSIS. As already mentioned, this form sent to Agcaoili, duly filled up, advised him of the approval of his "application to purchase a house and lot in our GSIS Housing Project at NANGKA, MARIKINA, RIZAL," and that "Lot No. 26, Block No. (48) 2, together with the housing unit constructed thereon, has been allocated to you." Neither the application form nor the

acceptance or approval form of the GSIS — nor the notice to commence payment of a monthly amortizations, which again refers to "the house and lot awarded" — contained any hint that the house was incomplete, and was being sold "as is," i.e., in whatever state of completion it might be at the time. On the other hand, the condition explicitly imposed on Agcaoili — "to occupy the said house immediately," or in any case within three (3) days from notice, otherwise his "application shall be considered automatically disapproved and the said house and lot will be awarded to another applicant" — would imply that construction of the house was more or less complete, and it was by reasonable standards, habitable, and that indeed, the awardee should stay and live in it; it could not be interpreted as meaning that the awardee would occupy it in the sense of a pioneer or settler in a rude wilderness, making do with whatever he found available in the envirornment. There was then a perfected contract of sale between the parties; there had been a meeting of the minds upon the purchase by Agcaoili of a determinate house and lot in the GSIS Housing Project at Nangka Marikina, Rizal at a definite price payable in amortizations at P31.56 per month, and from that moment the parties acquired the right to reciprocally demand performance. 13 It was, to be sure, the duty of the GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by the buyer for the purpose contemplated , 14 in other words, to deliver the house subject of the contract in a reasonably livable state. This it failed to do. It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of the sale. Under the circumstances there can hardly be any doubt that the house contemplated was one that could be occupied for purposes of residence in reasonable comfort and convenience. There would be no sense to require the awardee to immediately occupy and live in a shell of a house, a structure consisting only of four walls with openings, and a roof, and to theorize, as the GSIS does, that this was what was intended by


the parties, since the contract did not clearly impose upon it the obligation to deliver a habitable house, is to advocate an absurdity, the creation of an unfair situation. By any objective interpretation of its terms, the contract can only be understood as imposing on the GSIS an obligation to deliver to Agcaoili a reasonably habitable dwelling in return for his undertaking to pay the stipulated price. Since GSIS did not fulfill that obligation, and was not willing to put the house in habitable state, it cannot invoke Agcaoili's suspension of payment of amortizations as cause to cancel the contract between them. It is axiomatic that "(i)n 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 Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the latter had not complied with the condition of occupying the house within three (3) days. The record shows that Agcaoili did try to fulfill the condition; he did try to occupy the house but found it to be so uninhabitable that he had to leave it the following day. He did however leave a friend in the structure, who being homeless and hence willing to accept shelter even of the most rudimentary sort, agreed to stay therein and look after it. Thus the argument that Agcaoili breached the agreement by failing to occupy the house, and by allowing another person to stay in it without the consent of the GSIS, must be rejected as devoid of merit. Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or imprecise as to its exact prestation Blame for the imprecision cannot be imputed to Agcaoili; it was after all the GSIS which caused the contract to come into being by its written acceptance of Agcaoili's offer to purchase, that offer being contained in a printed form supplied by the GSIS. Said appellant having caused the ambiguity of which it would now make

capital, the question of interpretation arising therefrom, should be resolved against it. It will not do, however, to dispose of the controversy by simply declaring that the contract between the parties had not been validly cancelled and was therefore still in force, and that Agcaoili could not be compelled by the GSIS to pay the stipulated price of the house and lot subject of the contract until and unless it had first completed construction of the house. This would leave the contract hanging or in suspended animation, as it were, Agcaoili unwilling to pay unless the house were first completed, and the GSIS averse to completing construction, which is precisely what has been the state of affairs between the parties for more than twenty (20) years now. On the other hand, assuming it to be feasible to still finish the construction of the house at this time, to compel the GSIS to do so so that Agcaoili's prestation to pay the price might in turn be demanded, without modifying the price therefor, would not be quite fair. The cost to the GSIS of completion of construction at present prices would make the stipulated price disproportionate, unrealistic. The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may render complete justice to both parties. As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579, 589 [1978]). "(E)quity as the complement of legal jurisdiction seeks to reach and do complete justice where courts of law, through the inflexibility of their rules and want of power to adapt their judgments to the special circumstances of cases, are incompetent so to do. Equity regards the spirit of and not the letter, the intent and not the form, the substance rather than the circumstance, as it is variously expressed by different courts... " 16


In this case, the Court can not require specific performance of the contract in question according to its literal terms, as this would result in inequity. The prevailing rule is that in decreeing specific performance equity requires 17 — ... not only that the contract be just and equitable in its provisions, but that the consequences of specific performance likewise be equitable and just. The general rule is that this equitable relief will not be granted if, under the circumstances of the case, the result of the specific enforcement of the contract would be harsh, inequitable, oppressive, or result in an unconscionable advantage to the plaintiff . . In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance with the circumstances obtaining at the time of rendition of judgment, when these are significantly different from those existing at the time of generation of those rights. The Court is not restricted to an adjustment of the rights of the parties as they existed when suit was brought, but will give relief appropriate to events occuring ending the suit. 18 While equitable jurisdiction is generally to be determined with reference to the situation existing at the time the suit is filed, the relief to be accorded by the decree is governed by the conditions which are shown to exist at the time of making thereof, and not by the circumstances attending the inception of the litigation. In making up the final decree in an equity suit the judge may rightly consider matters arising after suit was brought. Therefore, as a general rule, equity will administer such relief as the nature, rights,

facts and exigencies of the case demand at the close of the trial or at the time of the making of the decree. 19 That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a person must act with justice, give everyone his due, and observe honesty and good faith. 20 Adjustment of rights has been held to be particularly applicable when there has been a depreciation of currency. Depreciation of the currency or other medium of payment contracted for has frequently been held to justify the court in withholding specific performance or at least conditioning it upon payment of the actual value of the property contracted for. Thus, in an action for the specific performance of a real estate contract, it has been held that where the currency in which the plaintiff had contracted to pay had greatly depreciated before enforcement was sought, the relief would be denied unless the complaint would undertake to pay the equitable value of the land. (Willard & Tayloe [U.S.] 8 Wall 557,19 L. Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21 In determining the precise relief to give, the Court will "balance the equities" or the respective interests of the parties, and take account of the relative hardship that one relief or another may occasion to them .22 The completion of the unfinished house so that it may be put into habitable condition, as one form of relief to the plaintiff Agcaoili, no longer appears to be a feasible option in view of the not inconsiderable time that has already elapsed. That would require an adjustment of the price of the subject of the sale to conform to present prices of construction materials and labor. It is more in


keeping with the realities of the situation, and with equitable norms, to simply require payment for the land on which the house stands, and for the house itself, in its unfinished state, as of the time of the contract. In fact, this is an alternative relief proposed by Agcaoili himself, i.e., "that judgment issue . . (o)rdering the defendant (GSIS) to execute a deed of sale that would embody and provide for a reasonable amortization of payment on the basis of the present actual unfinished and uncompleted condition, worth and value of the said house. 23 WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the cancellation by respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26, Block No. (48) 2 of the GSIS low cost housing project at Nangka, Marikina, Rizal, and orders the former to respect the aforesaid award and to pay damages in the amounts specified, is AFFIRMED as being in accord with the facts and the law. Said judgments is however modified by deleting the requirement for respondent GSIS "to complete the house in question so as to make the same habitable," and instead it is hereby ORDERED that the contract between the parties relative to the property above described be modified by adding to the cost of the land, as of the time of perfection of the contract, the cost of the house in its unfinished state also as of the time of perfection of the contract, and correspondingly adjusting the amortizations to be paid by petitioner Agcaoili, the modification to be effected after determination by the Court a quo of the value of said house on the basis of the agreement of the parties, or if this is not possible by such commissioner or commissioners as the Court may appoint. No pronouncement as to costs. SO ORDERED.

46.

G.R. No. L-15645 January 31, 1964 PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffsappellees, vs. NATIONAL RICE AND CORN CORPORATION, defendantappellant, MANILA UNDERWRITERS INSURANCE CO., INC., defendantappellee. Teehankee and Carreon for plaintiffs-appellees. The Government Corporate Counsel for defendant-appellant. Isidro A. Vera for defendant-appellee.

REGALA, J.: This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February 20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of contract and dismissing the counterclaim and third party complaint of the defendant-appellant NARIC. In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration (NARIC) is hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent with the provisions of this Act, and all personnel are transferred "to the Rice and Corn Administration (RCA). All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA pursuant to the aforementioned law.


On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta and the appellant corporation entered into a Contract of Sale of Rice, under the terms of which the former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per metric ton, CIF Manila. In turn, the defendant corporation committed itself to pay for the imported rice "by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the plaintiff-appellee and/or supplier in Burma, immediately." Despite the commitment to pay immediately "by means of an irrevocable, confirmed and assignable Letter of Credit," however, it was only on July 30, 1952, or a full month from the execution of the contract, that the defendant corporation, thru its general manager, took the first to open a letter of credit by forwarding to the Philippine National Bank its Application for Commercial Letter Credit. The application was accompanied by a transmittal letter, the relevant paragraphs of which read: In view of the fact that we do not have sufficient deposit with your institution with which to cover the amount required to be deposited as a condition for the opening of letters of credit, we will appreciate it if this application could be considered special case. We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4, 1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that date. We would therefore request your full cooperation on this matter. On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of the extreme necessity for the

immediate opening of the letter credit since she had by then made a tender to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and in compliance with the regulations in Rangoon this 5% will be confiscated if the required letter of credit is not received by them before August 4, 1952." On August 4, 1952, the Philippine National Bank informed the appellant corporation that its application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the Board of Directors with the condition that marginal cash deposit be paid and that drafts are to be paid upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank represented that it "will hold your application in abeyance pending compliance with the above stated requirement." As it turned out, however, the appellant corporation not in any financial position to meet the condition. As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its dilemma: "In this connection, please be advised that our application for opening of the letter of credit has been presented to the bank since July 30th but the latter requires that we first deposit 50% of the value of the letter amounting to aproximately $3,614,000.00 which we are not in a position to meet." (Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits) Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months from the execution of the contract) the party named by the appellee as beneficiary of the letter of credit.1äwphï1.ñët As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5% deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it must be made of record that although the Burmese


authorities had set August 4, 1952, as the deadline for the remittance of the required letter of credit, the cancellation of the allocation and the confiscation of the 5% deposit were not effected until August 20, 1952, or, a full half month after the expiration of the deadline. And yet, even with the 15-day grace, appellant corporation was unable to make good its commitment to open the disputed letter of credit. The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility of reinstating the same became apparent, she offered to substitute Thailand rice instead to the defendant NARIC, communicating at the same time that the offer was "a solution which should be beneficial to the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25—Def., p. 38, Folder of Exhibits). This offer for substitution, however, was rejected by the appellant in a resolution dated November 15, 1952. On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand having been rejected she instituted this case now on appeal. At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance Company was brought to the suit as a third party defendant to hold it liable on the performance bond it executed in favor of the plaintiff-appellee. We find for the appellee. It is clear upon the records that the sole and principal reason for the cancellation of the allocation contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be opened with the contemplated period. This failure must, therefore, be taken as the immediate cause for the consequent damage which resulted.

As it is then, the disposition of this case depends on a determination of who was responsible for such failure. Stated differently, the issue is whether appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the contract of July 1, 1952 for which it may be held liable in damages. Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On the contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed negotiable instrument was not promptly secured because the appellee , failed to seasonably furnish data necessary and required for opening the same, namely, "(1) the amount of the letter of credit, (2) the person, company or corporation in whose favor it is to be opened, and (3) the place and bank where it may be negotiated." Appellant would have this Court believe, therefore, that had these informations been forthwith furnished it, there would have been no delay in securing the instrument. Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an area of the proceedings into which We are not at liberty to encroach. The explanation refers to a question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the trial judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out by the evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to the time-honored tradition of this Tribunal to hold trial judges better situated to make conclusions on questions of fact. For the record, We quote hereunder the lower court's ruling on the point: The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these facts were known to defendant even before the contract was executed because these facts were


necessarily revealed to the defendant before she could qualify as a bidder. She stated too that she had given the necessary data immediately after the execution of Exh. "A" (the contract of July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and in writing and that she also pressed for the opening of the letter of credit on these occasions. These statements have not been controverted and defendant NARIC, notwithstanding its previous intention to do so, failed to present Mr. Belmonte to testify or refute this. ... Secondly, from the correspondence and communications which form part of the record of this case, it is clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn, caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to meet the condition importation by the Bank for granting the same. We do not think the appellant corporation can refute the fact that had it been able to put up the 50% marginal cash deposit demanded by the bank, then the letter of credit would have been approved, opened and released as early as August 4, 1952. The letter of the Philippine National Bank to the NARIC was plain and explicit that as of the said date, appellant's "application for a letter of credit ... has been approved by the Board of Directors with the condition that 50% marginal cash deposit be paid and that drafts are to be paid upon presentment." (Emphasis supplied) The liability of the appellant, however, stems not alone from this failure or inability to satisfy the requirements of the bank. Its culpability arises from its willful and deliberate assumption of contractual obligations even as it was well aware of its financial incapacity to undertake the prestation. We base this judgment upon the letter which accompanied the application filed by the appellant with the bank, a part of which letter was quoted earlier in this decision. In the said accompanying correspondence, appellant

admitted and owned that it did "not have sufficient deposit with your institution (the PNB) with which to cover the amount required to be deposited as a condition for the opening of letters of credit. ... . A number of logical inferences may be drawn from the aforementioned admission. First, that the appellant knew the bank requirements for opening letters of credit; second, that appellant also knew it could not meet those requirement. When, therefore, despite this awareness that was financially incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be similarly held to have bound itself to answer for all and every consequences that would result from the representation. aptly observed by the trial court: ... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be exact, it should have a certained its ability and capacity to comply with the inevitably requirements in cash to pay for such importation. Having announced the bid, it must be deemed to have impliedly assured suppliers of its capacity and facility to finance the importation within the required period, especially since it had imposed the supplier the 90-day period within which the shipment of the rice must be brought into the Philippines. Having entered in the contract, it should have taken steps immediately to arrange for the letter of credit for the large amount involved and inquired into the possibility of its issuance. In relation to the aforequoted observation of the trial court, We would like to make reference also to Article 11 of the Civil Code which provides:


Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable in damages. Under this provision, not only debtors guilty of fraud, negligence or default in the performance of obligations a decreed liable; in general, every debtor who fails in performance of his obligations is bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of Manila, 18 Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982; Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54 Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any manner contravene the tenor" of the obligation includes any illicit act which impairs the strict and faithful fulfillment of the obligation or every kind or defective performance. (IV Tolentino, Civil Code of the Philippines, citing authorities, p. 103.) The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might have derived from the breach of the contract. We disagree. Waivers are not presumed, but must be clearly and convincingly shown, either by express stipulation or acts admitting no other reasonable explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent to waive has been established. We have carefully examined and studied the oral and documentary evidence presented in this case and upon which the lower court based its award. Under the contract, the NARIC bound itself to buy 20,000 metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight, and all in U.S. currency, C.I.F. Manila ..." On the other hand, documentary and other evidence establish with equal certainty that the plaintiff-appellee was able to secure the contracted commodity at the cost price of $180.70 per metric ton from her supplier in Burma. Considering freights,

insurance and charges incident to its shipment here and the forfeiture of the 5% deposit, the award granted by the lower court is fair and equitable. For a clearer view of the equity of the damages awarded, We reproduce below the testimony of the appellee, adequately supported by the evidence and record: Q. Will you please tell the court, how much is the damage you suffered? A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice is $180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the cost of the rice, the freight, the insurance, the total would be about $187.99 that would be $15.01 gross profit per metric ton, multiply by 20,000 equals $300,200, that is my supposed profit if I went through the contract. The above testimony of the plaintiff was a general approximation of the actual figures involved in the transaction. A precise and more exact demonstration of the equity of the award herein is provided by Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane. It is equally of record now that as shown in her request dated July 29, 1959, and other communications subsequent thereto for the opening by your corporation of the required letter of credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars ($8.00) in the same currency per ton for shipping and other handling expenses, so that she is already assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency, per ton or a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S. Currency, in the aforesaid transaction. ...


Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized profit damages in the total sum of $406,000.00 from the failure of the projected contract to materialize. This counterclaim was supported by a cost study made and submitted by the appellant itself and wherein it was illustrated how indeed had the importation pushed thru, NARIC would have realized in profit the amount asserted in the counterclaim. And yet, the said amount of P406,000.00 was realizable by appellant despite a number of expenses which the appellee under the contract, did not have to incur. Thus, under the cost study submitted by the appellant, banking and unloading charges were to be shouldered by it, including an Import License Fee of 2% and superintendence fee of $0.25 per metric ton. If the NARIC stood to profit over P400 000.00 from the disputed transaction inspite of the extra expenditures from which the herein appellee was exempt, we are convicted of the fairness of the judgment presently under appeal. In the premises, however, a minor modification must be effected in the dispositive portion of the decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin or currency which at the time of payment is legal tender for public and private debts." In view of that law, therefore, the award should be converted into and expressed in Philippine Peso. This brings us to a consideration of what rate of exchange should apply in the conversion here decreed. Should it be at the time of the breach, at the time the obligation was incurred or at the rate of exchange prevailing on the promulgation of this decision. In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages for breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the indemnity to be

allowed should be expressed in Philippine currency at the rate of exchange at the time of the judgment rather than at the rate of exchange prevailing on the date of defendant's breach. This ruling, however, can neither be applied nor extended to the case at bar for the same was laid down when there was no law against stipulating foreign currencies in Philippine contracts. But now we have Republic Act No. 529 which expressly declares such stipulations as contrary to public policy, void and of no effect. And, as We already pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is null and void as contrary to public policy (Republic Act 529), and the most that could be demanded is to pay said obligation in Philippine currency "to be measured in the prevailing rate of exchange at the time the obligation was incurred (Sec. 1, idem)." UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole modification that the award should be converted into the Philippine peso at the rate of exchange prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was executed. The appellee insurance company, in the light of this judgment, is relieved of any liability under this suit. No pronouncement as to costs. Bengzon, C.J., Padilla, Concepcion, Paredes, Dizon and Makalintal, JJ., concur. Barrera, J., took no part. Reyes, J.B.L., J., reserves his vote. 47.

G.R. No. 159617 August 8, 2007


ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners, vs. LULU V. JORGE and CESAR JORGE, respondents. D E C I S I O N AUSTRIA-MARTINEZ, J.: Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr. (petitioner Sicam) and Agencia de R.C. Sicam, Inc. (petitioner corporation) seeking to annul the Decision1 of the Court of Appeals dated March 31, 2003, and its Resolution2 dated August 8, 2003, in CA G.R. CV No. 56633. It appears that on different dates from September to October 1987, Lulu V. Jorge (respondent Lulu) pawned several pieces of jewelry with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF Homes Parañaque, Metro Manila, to secure a loan in the total amount of P59,500.00. On October 19, 1987, two armed men entered the pawnshop and took away whatever cash and jewelry were found inside the pawnshop vault. The incident was entered in the police blotter of the Southern Police District, Parañaque Police Station as follows: Investigation shows that at above TDPO, while victims were inside the office, two (2) male unidentified persons entered into the said office with guns drawn. Suspects(sic) (1) went straight inside and poked his gun toward Romeo Sicam and thereby tied him with an electric wire while suspects (sic) (2) poked his gun toward Divina Mata and Isabelita Rodriguez and ordered them to lay (sic) face flat on the floor. Suspects asked forcibly the case and assorted pawned jewelries items mentioned above.

Suspects after taking the money and jewelries fled on board a Marson Toyota unidentified plate number.3 Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing her of the loss of her jewelry due to the robbery incident in the pawnshop. On November 2, 1987, respondent Lulu then wrote a letter4 to petitioner Sicam expressing disbelief stating that when the robbery happened, all jewelry pawned were deposited with Far East Bank near the pawnshop since it had been the practice that before they could withdraw, advance notice must be given to the pawnshop so it could withdraw the jewelry from the bank. Respondent Lulu then requested petitioner Sicam to prepare the pawned jewelry for withdrawal on November 6, 1987 but petitioner Sicam failed to return the jewelry. On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge, filed a complaint against petitioner Sicam with the Regional Trial Court of Makati seeking indemnification for the loss of pawned jewelry and payment of actual, moral and exemplary damages as well as attorney's fees. The case was docketed as Civil Case No. 88-2035. Petitioner Sicam filed his Answer contending that he is not the real party-in-interest as the pawnshop was incorporated on April 20, 1987 and known as Agencia de R.C. Sicam, Inc; that petitioner corporation had exercised due care and diligence in the safekeeping of the articles pledged with it and could not be made liable for an event that is fortuitous. Respondents subsequently filed an Amended Complaint to include petitioner corporation. Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned considering that he is not the real party-in-interest.


Respondents opposed the same. The RTC denied the motion in an Order dated November 8, 1989.5 After trial on the merits, the RTC rendered its Decision6 dated January 12, 1993, dismissing respondents’ complaint as well as petitioners’ counterclaim. The RTC held that petitioner Sicam could not be made personally liable for a claim arising out of a corporate transaction; that in the Amended Complaint of respondents, they asserted that "plaintiff pawned assorted jewelries in defendants' pawnshop"; and that as a consequence of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of a stockholder. The RTC further ruled that petitioner corporation could not be held liable for the loss of the pawned jewelry since it had not been rebutted by respondents that the loss of the pledged pieces of jewelry in the possession of the corporation was occasioned by armed robbery; that robbery is a fortuitous event which exempts the victim from liability for the loss, citing the case of Austria v. Court of Appeals;7 and that the parties’ transaction was that of a pledgor and pledgee and under Art. 1174 of the Civil Code, the pawnshop as a pledgee is not responsible for those events which could not be foreseen. Respondents appealed the RTC Decision to the CA. In a Decision dated March 31, 2003, the CA reversed the RTC, the dispositive portion of which reads as follows: WHEREFORE, premises considered, the instant Appeal is GRANTED, and the Decision dated January 12, 1993,of the Regional Trial Court of Makati, Branch 62, is hereby REVERSED and SET ASIDE, ordering the appellees to pay appellants the actual value of the lost jewelry amounting to P272,000.00, and attorney' fees of P27,200.00.8

In finding petitioner Sicam liable together with petitioner corporation, the CA applied the doctrine of piercing the veil of corporate entity reasoning that respondents were misled into thinking that they were dealing with the pawnshop owned by petitioner Sicam as all the pawnshop tickets issued to them bear the words "Agencia de R.C. Sicam"; and that there was no indication on the pawnshop tickets that it was the petitioner corporation that owned the pawnshop which explained why respondents had to amend their complaint impleading petitioner corporation. The CA further held that the corresponding diligence required of a pawnshop is that it should take steps to secure and protect the pledged items and should take steps to insure itself against the loss of articles which are entrusted to its custody as it derives earnings from the pawnshop trade which petitioners failed to do; that Austria is not applicable to this case since the robbery incident happened in 1961 when the criminality had not as yet reached the levels attained in the present day; that they are at least guilty of contributory negligence and should be held liable for the loss of jewelries; and that robberies and hold-ups are foreseeable risks in that those engaged in the pawnshop business are expected to foresee. The CA concluded that both petitioners should be jointly and severally held liable to respondents for the loss of the pawned jewelry. Petitioners’ motion for reconsideration was denied in a Resolution dated August 8, 2003. Hence, the instant petition for review with the following assignment of errors: THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED AS ITS OWN


WITHOUT IN THE MEANTIME ACKNOWLEDGING IT) WHAT THE RESPONDENTS ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS PALPABLY UNSUSTAINABLE. THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL BY THIS HONORABLE COURT, WHEN IT AGAIN ADOPTED UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING IT) THE SUBMISSIONS OF THE RESPONDENTS IN THEIR BRIEF WITHOUT ADDING ANYTHING MORE THERETO DESPITE THE FACT THAT THE SAID ARGUMENT OF THE RESPONDENTS COULD NOT HAVE BEEN SUSTAINED IN VIEW OF UNREBUTTED EVIDENCE ON RECORD.9 Anent the first assigned error, petitioners point out that the CA’s finding that petitioner Sicam is personally liable for the loss of the pawned jewelries is "a virtual and uncritical reproduction of the arguments set out on pp. 5-6 of the Appellants’ brief."10 Petitioners argue that the reproduced arguments of respondents in their Appellants’ Brief suffer from infirmities, as follows: (1) Respondents conclusively asserted in paragraph 2 of their Amended Complaint that Agencia de R.C. Sicam, Inc. is the present owner of Agencia de R.C. Sicam Pawnshop, and therefore, the CA cannot rule against said conclusive assertion of respondents; (2) The issue resolved against petitioner Sicam was not among those raised and litigated in the trial court; and (3) By reason of the above infirmities, it was error for the CA to have pierced the corporate veil since a corporation has a personality distinct and separate from its individual stockholders or members.

Anent the second error, petitioners point out that the CA finding on their negligence is likewise an unedited reproduction of respondents’ brief which had the following defects: (1) There were unrebutted evidence on record that petitioners had observed the diligence required of them, i.e, they wanted to open a vault with a nearby bank for purposes of safekeeping the pawned articles but was discouraged by the Central Bank (CB) since CB rules provide that they can only store the pawned articles in a vault inside the pawnshop premises and no other place; (2) Petitioners were adjudged negligent as they did not take insurance against the loss of the pledged jelweries, but it is judicial notice that due to high incidence of crimes, insurance companies refused to cover pawnshops and banks because of high probability of losses due to robberies; (3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), the victim of robbery was exonerated from liability for the sum of money belonging to others and lost by him to robbers. Respondents filed their Comment and petitioners filed their Reply thereto. The parties subsequently submitted their respective Memoranda. We find no merit in the petition. To begin with, although it is true that indeed the CA findings were exact reproductions of the arguments raised in respondents’ (appellants’) brief filed with the CA, we find the same to be not fatally infirmed. Upon examination of the Decision, we find that it expressed clearly and distinctly the facts and the law on which it is based as required by Section 8, Article VIII of the Constitution. The


discretion to decide a case one way or another is broad enough to justify the adoption of the arguments put forth by one of the parties, as long as these are legally tenable and supported by law and the facts on records.11

Even petitioners’ counsel, Atty. Marcial T. Balgos, in his letter16 dated October 15, 1987 addressed to the Central Bank, expressly referred to petitioner Sicam as the proprietor of the pawnshop notwithstanding the alleged incorporation in April 1987.

Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of errors of law committed by the appellate court. Generally, the findings of fact of the appellate court are deemed conclusive and we are not duty-bound to analyze and calibrate all over again the evidence adduced by the parties in the court a quo.12 This rule, however, is not without exceptions, such as where the factual findings of the Court of Appeals and the trial court are conflicting or contradictory13 as is obtaining in the instant case.

We also find no merit in petitioners' argument that since respondents had alleged in their Amended Complaint that petitioner corporation is the present owner of the pawnshop, the CA is bound to decide the case on that basis.

However, after a careful examination of the records, we find no justification to absolve petitioner Sicam from liability. The CA correctly pierced the veil of the corporate fiction and adjudged petitioner Sicam liable together with petitioner corporation. The rule is that the veil of corporate fiction may be pierced when made as a shield to perpetrate fraud and/or confuse legitimate issues. 14 The theory of corporate entity was not meant to promote unfair objectives or otherwise to shield them.15 Notably, the evidence on record shows that at the time respondent Lulu pawned her jewelry, the pawnshop was owned by petitioner Sicam himself. As correctly observed by the CA, in all the pawnshop receipts issued to respondent Lulu in September 1987, all bear the words "Agencia de R. C. Sicam," notwithstanding that the pawnshop was allegedly incorporated in April 1987. The receipts issued after such alleged incorporation were still in the name of "Agencia de R. C. Sicam," thus inevitably misleading, or at the very least, creating the wrong impression to respondents and the public as well, that the pawnshop was owned solely by petitioner Sicam and not by a corporation.

Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or written, made by a party in the course of the proceedings in the same case, does not require proof. The admission may be contradicted only by showing that it was made through palpable mistake or that no such admission was made. Thus, the general rule that a judicial admission is conclusive upon the party making it and does not require proof, admits of two exceptions, to wit: (1) when it is shown that such admission was made through palpable mistake, and (2) when it is shown that no such admission was in fact made. The latter exception allows one to contradict an admission by denying that he made such an admission.17 The Committee on the Revision of the Rules of Court explained the second exception in this wise: x x x if a party invokes an "admission" by an adverse party, but cites the admission "out of context," then the one making the "admission" may show that he made no "such" admission, or that his admission was taken out of context. x x x that the party can also show that he made no "such admission", i.e., not in the sense in which the admission is made to appear.


That is the reason for the modifier "such" because if the rule simply states that the admission may be contradicted by showing that "no admission was made," the rule would not really be providing for a contradiction of the admission but just a denial.18 (Emphasis supplied). While it is true that respondents alleged in their Amended Complaint that petitioner corporation is the present owner of the pawnshop, they did so only because petitioner Sicam alleged in his Answer to the original complaint filed against him that he was not the real party-in-interest as the pawnshop was incorporated in April 1987. Moreover, a reading of the Amended Complaint in its entirety shows that respondents referred to both petitioner Sicam and petitioner corporation where they (respondents) pawned their assorted pieces of jewelry and ascribed to both the failure to observe due diligence commensurate with the business which resulted in the loss of their pawned jewelry. Markedly, respondents, in their Opposition to petitioners’ Motion to Dismiss Amended Complaint, insofar as petitioner Sicam is concerned, averred as follows: Roberto C. Sicam was named the defendant in the original complaint because the pawnshop tickets involved in this case did not show that the R.C. Sicam Pawnshop was a corporation. In paragraph 1 of his Answer, he admitted the allegations in paragraph 1 and 2 of the Complaint. He merely added "that defendant is not now the real party in interest in this case." It was defendant Sicam's omission to correct the pawnshop tickets used in the subject transactions in this case which was the cause of the instant action. He cannot now ask for the dismissal of the complaint against him simply on the mere allegation that his pawnshop business is now incorporated. It

is a matter of defense, the merit of which can only be reached after consideration of the evidence to be presented in due course.19 Unmistakably, the alleged admission made in respondents' Amended Complaint was taken "out of context" by petitioner Sicam to suit his own purpose. Ineluctably, the fact that petitioner Sicam continued to issue pawnshop receipts under his name and not under the corporation's name militates for the piercing of the corporate veil. We likewise find no merit in petitioners' contention that the CA erred in piercing the veil of corporate fiction of petitioner corporation, as it was not an issue raised and litigated before the RTC. Petitioner Sicam had alleged in his Answer filed with the trial court that he was not the real party-in-interest because since April 20, 1987, the pawnshop business initiated by him was incorporated and known as Agencia de R.C. Sicam. In the pre-trial brief filed by petitioner Sicam, he submitted that as far as he was concerned, the basic issue was whether he is the real party in interest against whom the complaint should be directed.20 In fact, he subsequently moved for the dismissal of the complaint as to him but was not favorably acted upon by the trial court. Moreover, the issue was squarely passed upon, although erroneously, by the trial court in its Decision in this manner: x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is concerned for the reason that he cannot be made personally liable for a claim arising from a corporate transaction. This Court sustains the contention of the defendant Roberto C. Sicam, Jr. The amended complaint itself asserts that


"plaintiff pawned assorted jewelries in defendant's pawnshop." It has been held that " as a consequence of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder, nor is the stockholder's debt or credit that of a corporation.21 Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether petitioner Sicam is personally liable is inextricably connected with the determination of the question whether the doctrine of piercing the corporate veil should or should not apply to the case. The next question is whether petitioners are liable for the loss of the pawned articles in their possession. Petitioners insist that they are not liable since robbery is a fortuitous event and they are not negligent at all. We are not persuaded. Article 1174 of the Civil Code provides: Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen or which, though foreseen, were inevitable. Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same. 22

To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and, (d) the obligor must be free from any participation in the aggravation of the injury or loss. 23 The burden of proving that the loss was due to a fortuitous event rests on him who invokes it.24 And, in order for a fortuitous event to exempt one from liability, it is necessary that one has committed no negligence or misconduct that may have occasioned the loss. 25 It has been held that an act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to be partly the result of a person's participation -- whether by active intervention, neglect or failure to act -- the whole occurrence is humanized and removed from the rules applicable to acts of God. 26 Petitioner Sicam had testified that there was a security guard in their pawnshop at the time of the robbery. He likewise testified that when he started the pawnshop business in 1983, he thought of opening a vault with the nearby bank for the purpose of safekeeping the valuables but was discouraged by the Central Bank since pawned articles should only be stored in a vault inside the pawnshop. The very measures which petitioners had allegedly adopted show that to them the possibility of robbery was not only foreseeable, but


actually foreseen and anticipated. Petitioner Sicam’s testimony, in effect, contradicts petitioners’ defense of fortuitous event.

possibility of fault or negligence on the part of private respondent.28

Moreover, petitioners failed to show that they were free from any negligence by which the loss of the pawned jewelry may have been occasioned.

Just like in Co, petitioners merely presented the police report of the Parañaque Police Station on the robbery committed based on the report of petitioners' employees which is not sufficient to establish robbery. Such report also does not prove that petitioners were not at fault.

Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the possibility of negligence on the part of herein petitioners. In Co v. Court of Appeals,27 the Court held: It is not a defense for a repair shop of motor vehicles to escape liability simply because the damage or loss of a thing lawfully placed in its possession was due to carnapping. Carnapping per se cannot be considered as a fortuitous event. The fact that a thing was unlawfully and forcefully taken from another's rightful possession, as in cases of carnapping, does not automatically give rise to a fortuitous event. To be considered as such, carnapping entails more than the mere forceful taking of another's property. It must be proved and established that the event was an act of God or was done solely by third parties and that neither the claimant nor the person alleged to be negligent has any participation. In accordance with the Rules of Evidence, the burden of proving that the loss was due to a fortuitous event rests on him who invokes it — which in this case is the private respondent. However, other than the police report of the alleged carnapping incident, no other evidence was presented by private respondent to the effect that the incident was not due to its fault. A police report of an alleged crime, to which only private respondent is privy, does not suffice to establish the carnapping. Neither does it prove that there was no fault on the part of private respondent notwithstanding the parties' agreement at the pre-trial that the car was carnapped. Carnapping does not foreclose the

On the contrary, by the very evidence of petitioners, the CA did not err in finding that petitioners are guilty of concurrent or contributory negligence as provided in Article 1170 of the Civil Code, to wit: Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.29 Article 2123 of the Civil Code provides that with regard to pawnshops and other establishments which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions on pledge, mortgage and antichresis. The provision on pledge, particularly Article 2099 of the Civil Code, provides that the creditor shall take care of the thing pledged with the diligence of a good father of a family. This means that petitioners must take care of the pawns the way a prudent person would as to his own property. In this connection, Article 1173 of the Civil Code further provides: Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature


of the obligation and corresponds with the circumstances of the persons, of time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2 shall apply. If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required. We expounded in Cruz v. Gangan30 that negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do; or the doing of something which a prudent and reasonable man would not do.31 It is want of care required by the circumstances. A review of the records clearly shows that petitioners failed to exercise reasonable care and caution that an ordinarily prudent person would have used in the same situation. Petitioners were guilty of negligence in the operation of their pawnshop business. Petitioner Sicam testified, thus: Court:

Q. I am asking you how were the robbers able to enter despite the fact that there was a security guard? A. At the time of the incident which happened about 1:00 and 2:00 o'clock in the afternoon and it happened on a Saturday and everything was quiet in the area BF Homes Parañaque they pretended to pawn an article in the pawnshop, so one of my employees allowed him to come in and it was only when it was announced that it was a hold up. Q. Did you come to know how the vault was opened? A. When the pawnshop is official (sic) open your honor the pawnshop is partly open. The combination is off. Q. No one open (sic) the vault for the robbers? A. No one your honor it was open at the time of the robbery. Q. It is clear now that at the time of the robbery the vault was open the reason why the robbers were able to get all the items pawned to you inside the vault. A. Yes sir.32

Q. Do you have security guards in your pawnshop? A. Yes, your honor. Q. Then how come that the robbers were able to enter the premises when according to you there was a security guard? A. Sir, if these robbers can rob a bank, how much more a pawnshop.

revealing that there were no security measures adopted by petitioners in the operation of the pawnshop. Evidently, no sufficient precaution and vigilance were adopted by petitioners to protect the pawnshop from unlawful intrusion. There was no clear showing that there was any security guard at all. Or if there was one, that he had sufficient training in securing a pawnshop. Further, there is no showing that the alleged security guard exercised all that was necessary to prevent any untoward incident or to ensure that no suspicious individuals were allowed to enter the premises. In fact, it is even doubtful that there was a security guard, since it is


quite impossible that he would not have noticed that the robbers were armed with caliber .45 pistols each, which were allegedly poked at the employees.33 Significantly, the alleged security guard was not presented at all to corroborate petitioner Sicam's claim; not one of petitioners' employees who were present during the robbery incident testified in court.

However, this Section was subsequently amended by CB Circular No. 764 which took effect on October 1, 1980, to wit:

Furthermore, petitioner Sicam's admission that the vault was open at the time of robbery is clearly a proof of petitioners' failure to observe the care, precaution and vigilance that the circumstances justly demanded. Petitioner Sicam testified that once the pawnshop was open, the combination was already off. Considering petitioner Sicam's testimony that the robbery took place on a Saturday afternoon and the area in BF Homes Parañaque at that time was quiet, there was more reason for petitioners to have exercised reasonable foresight and diligence in protecting the pawned jewelries. Instead of taking the precaution to protect them, they let open the vault, providing no difficulty for the robbers to cart away the pawned articles.

where the requirement that insurance against burglary was deleted. Obviously, the Central Bank considered it not feasible to require insurance of pawned articles against burglary.

We, however, do not agree with the CA when it found petitioners negligent for not taking steps to insure themselves against loss of the pawned jewelries.

Sec. 17 Insurance of Office Building and Pawns – The office building/premises and pawns of a pawnshop must be insured against fire. (emphasis supplied).

The robbery in the pawnshop happened in 1987, and considering the above-quoted amendment, there is no statutory duty imposed on petitioners to insure the pawned jewelry in which case it was error for the CA to consider it as a factor in concluding that petitioners were negligent. Nevertheless, the preponderance of evidence shows that petitioners failed to exercise the diligence required of them under the Civil Code.

Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for Pawnshops, which took effect on July 13, 1973, and which was issued pursuant to Presidential Decree No. 114, Pawnshop Regulation Act, it is provided that pawns pledged must be insured, to wit:

The diligence with which the law requires the individual at all times to govern his conduct varies with the nature of the situation in which he is placed and the importance of the act which he is to perform.34 Thus, the cases of Austria v. Court of Appeals,35 Hernandez v. Chairman, Commission on Audit36 and Cruz v. Gangan37 cited by petitioners in their pleadings, where the victims of robbery were exonerated from liability, find no application to the present case.

Sec. 17. Insurance of Office Building and Pawns- The place of business of a pawnshop and the pawns pledged to it must be insured against fire and against burglary as well as for the latter(sic), by an insurance company accredited by the Insurance Commissioner.

In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds to be sold on commission basis, but which Abad failed to subsequently return because of a robbery committed upon her in 1961. The incident became the subject of a criminal case filed against several persons. Austria filed an action against Abad and her


husband (Abads) for recovery of the pendant or its value, but the Abads set up the defense that the robbery extinguished their obligation. The RTC ruled in favor of Austria, as the Abads failed to prove robbery; or, if committed, that Maria Abad was guilty of negligence. The CA, however, reversed the RTC decision holding that the fact of robbery was duly established and declared the Abads not responsible for the loss of the jewelry on account of a fortuitous event. We held that for the Abads to be relieved from the civil liability of returning the pendant under Art. 1174 of the Civil Code, it would only be sufficient that the unforeseen event, the robbery, took place without any concurrent fault on the debtor’s part, and this can be done by preponderance of evidence; that to be free from liability for reason of fortuitous event, the debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or negligence.38 We found in Austria that under the circumstances prevailing at the time the Decision was promulgated in 1971, the City of Manila and its suburbs had a high incidence of crimes against persons and property that rendered travel after nightfall a matter to be sedulously avoided without suitable precaution and protection; that the conduct of Maria Abad in returning alone to her house in the evening carrying jewelry of considerable value would have been negligence per se and would not exempt her from responsibility in the case of robbery. However we did not hold Abad liable for negligence since, the robbery happened ten years previously; i.e., 1961, when criminality had not reached the level of incidence obtaining in 1971. In contrast, the robbery in this case took place in 1987 when robbery was already prevalent and petitioners in fact had already foreseen it as they wanted to deposit the pawn with a nearby bank for safekeeping. Moreover, unlike in Austria, where no negligence was committed, we found petitioners negligent in securing their pawnshop as earlier discussed.

In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of the Ternate Beach Project of the Philippine Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went to Manila to encash two checks covering the wages of the employees and the operating expenses of the project. However for some reason, the processing of the check was delayed and was completed at about 3 p.m. Nevertheless, he decided to encash the check because the project employees would be waiting for their pay the following day; otherwise, the workers would have to wait until July 5, the earliest time, when the main office would open. At that time, he had two choices: (1) return to Ternate, Cavite that same afternoon and arrive early evening; or (2) take the money with him to his house in Marilao, Bulacan, spend the night there, and leave for Ternate the following day. He chose the second option, thinking it was the safer one. Thus, a little past 3 p.m., he took a passenger jeep bound for Bulacan. While the jeep was on Epifanio de los Santos Avenue, the jeep was held up and the money kept by Hernandez was taken, and the robbers jumped out of the jeep and ran. Hernandez chased the robbers and caught up with one robber who was subsequently charged with robbery and pleaded guilty. The other robber who held the stolen money escaped. The Commission on Audit found Hernandez negligent because he had not brought the cash proceeds of the checks to his office in Ternate, Cavite for safekeeping, which is the normal procedure in the handling of funds. We held that Hernandez was not negligent in deciding to encash the check and bringing it home to Marilao, Bulacan instead of Ternate, Cavite due to the lateness of the hour for the following reasons: (1) he was moved by unselfish motive for his co-employees to collect their wages and salaries the following day, a Saturday, a nonworking, because to encash the check on July 5, the next working day after July 1, would have caused discomfort to laborers who were dependent on their wages for sustenance; and (2) that choosing Marilao as a safer destination, being nearer, and in view of the comparative hazards in the trips to the two places, said decision seemed logical at that time. We further held that the fact that two


robbers attacked him in broad daylight in the jeep while it was on a busy highway and in the presence of other passengers could not be said to be a result of his imprudence and negligence. Unlike in Hernandez where the robbery happened in a public utility, the robbery in this case took place in the pawnshop which is under the control of petitioners. Petitioners had the means to screen the persons who were allowed entrance to the premises and to protect itself from unlawful intrusion. Petitioners had failed to exercise precautionary measures in ensuring that the robbers were prevented from entering the pawnshop and for keeping the vault open for the day, which paved the way for the robbers to easily cart away the pawned articles. In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological Education and Skills Development Authority (TESDA), boarded the Light Rail Transit (LRT) from Sen. Puyat Avenue to Monumento when her handbag was slashed and the contents were stolen by an unidentified person. Among those stolen were her wallet and the government-issued cellular phone. She then reported the incident to the police authorities; however, the thief was not located, and the cellphone was not recovered. She also reported the loss to the Regional Director of TESDA, and she requested that she be freed from accountability for the cellphone. The Resident Auditor denied her request on the ground that she lacked the diligence required in the custody of government property and was ordered to pay the purchase value in the total amount of P4,238.00. The COA found no sufficient justification to grant the request for relief from accountability. We reversed the ruling and found that riding the LRT cannot per se be denounced as a negligent act more so because Cruz’s mode of transit was influenced by time and money considerations; that she boarded the LRT to be able to arrive in Caloocan in time for her 3 pm meeting; that any prudent and rational person under similar circumstance can reasonably be expected to do the same; that possession of a cellphone should not

hinder one from boarding the LRT coach as Cruz did considering that whether she rode a jeep or bus, the risk of theft would have also been present; that because of her relatively low position and pay, she was not expected to have her own vehicle or to ride a taxicab; she did not have a government assigned vehicle; that placing the cellphone in a bag away from covetous eyes and holding on to that bag as she did is ordinarily sufficient care of a cellphone while traveling on board the LRT; that the records did not show any specific act of negligence on her part and negligence can never be presumed. Unlike in the Cruz case, the robbery in this case happened in petitioners' pawnshop and they were negligent in not exercising the precautions justly demanded of a pawnshop. WHEREFORE, except for the insurance aspect, the Decision of the Court of Appeals dated March 31, 2003 and its Resolution dated August 8, 2003, are AFFIRMED. Costs against petitioners. SO ORDERED. Ynares-Santiago, Chairperson, Chico-Nazario, Nachura, JJ., concur 48.

G.R. No. L-47379

May 16, 1988

NATIONAL POWER CORPORATION, petitioner, vs. HONORABLE COURT OF APPEALS and ENGINEERING CONSTRUCTION, INC., respondents. 229 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

G.R. No. L-47481 May 16, 1988 ENGINEERING CONSTRUCTION, INC., petitioner, vs. COUTRT OF APPEALS and NATIONAL POWER CORPORATION, respondents. Raymundo A. Armovit for private respondent in L47379. The Solicitor General for petitioner. GUTIERREZ, JR., J.: These consolidated petitions seek to set aside the decision of the respondent Court of Appeals which adjudged the National Power Corporation liable for damages against Engineering Construction, Inc. The appellate court, however, reduced the amount of damages awarded by the trial court. Hence, both parties filed their respective petitions: the National Power Corporation (NPC) in G.R. No. 47379, questioning the decision of the Court of Appeals for holding it liable for damages and the Engineering Construction, Inc. (ECI) in G.R. No. 47481, questioning the same decision for reducing the consequential damages and attorney's fees and for eliminating the exemplary damages. The facts are succinctly summarized by the respondent Court of Appeals, as follows: On August 4, 1964, plaintiff Engineering Construction, Inc., being a successful bidder, executed a contract in Manila with the National Waterworks and Sewerage Authority (NAWASA), whereby the former undertook to furnish all tools, labor, equipment, and materials (not furnished by Owner), and to

construct the proposed 2nd lpo-Bicti Tunnel, Intake and Outlet Structures, and Appurtenant Structures, and Appurtenant Features, at Norzagaray, Bulacan, and to complete said works within eight hundred (800) calendar days from the date the Contractor receives the formal notice to proceed (Exh. A). The project involved two (2) major phases: the first phase comprising, the tunnel work covering a distance of seven (7) kilometers, passing through the mountain, from the Ipo river, a part of Norzagaray, Bulacan, where the Ipo Dam of the defendant National Power Corporation is located, to Bicti; the other phase consisting of the outworks at both ends of the tunnel. By September 1967, the plaintiff corporation already had completed the first major phase of the work, namely, the tunnel excavation work. Some portions of the outworks at the Bicti site were still under construction. As soon as the plaintiff corporation had finished the tunnel excavation work at the Bicti site, all the equipment no longer needed there were transferred to the Ipo site where some projects were yet to be completed. The record shows that on November 4,1967, typhoon 'Welming' hit Central Luzon, passing through defendant's Angat Hydroelectric Project and Dam at lpo, Norzagaray, Bulacan. Strong winds struck the project area, and heavy rains intermittently fell. Due to the heavy downpour, the water in the reservoir of the Angat Dam was rising perilously at the rate of sixty (60) centimeters per hour. To prevent an overflow of water from the dam, since the water level had reached the danger height of 212 meters above sea level, the defendant corporation caused the opening of the spillway gates." (pp. 45-46, L-47379, Rollo) The appellate court sustained the findings of the trial court that the evidence preponlderantly established the fact that due to the negligent manner with which the spillway gates of the Angat Dam were opened, an extraordinary large volume of water rushed out


of the gates, and hit the installations and construction works of ECI at the lpo site with terrific impact, as a result of which the latter's stockpile of materials and supplies, camp facilities and permanent structures and accessories either washed away, lost or destroyed. The appellate court further found that: It cannot be pretended that there was no negligence or that the appellant exercised extraordinary care in the opening of the spillway gates of the Angat Dam. Maintainers of the dam knew very well that it was far more safe to open them gradually. But the spillway gates were opened only when typhoon Welming was already at its height, in a vain effort to race against time and prevent the overflow of water from the dam as it 'was rising dangerously at the rate of sixty centimeters per hour. 'Action could have been taken as early as November 3, 1967, when the water in the reservoir was still low. At that time, the gates of the dam could have been opened in a regulated manner. Let it be stressed that the appellant knew of the coming of the typhoon four days before it actually hit the project area. (p. 53, L-47379, Rollo) As to the award of damages, the appellate court held: We come now to the award of damages. The appellee submitted a list of estimated losses and damages to the tunnel project (Ipo side) caused by the instant flooding of the Angat River (Exh. J-1). The damages were itemized in four categories, to wit: Camp Facilities P55,700.00; Equipment, Parts and Plant — P375,659.51; Materials P107,175.80; and Permanent Structures and accessories — P137,250.00, with an aggregate total amount of P675,785.31. The list is supported by several vouchers which were all submitted as Exhibits K to M-38 a, N to O, P to U-2 and V to X- 60-a (Vide: Folders Nos. 1 to 4). The appellant did not submit proofs to traverse the aforementioned documentary

evidence. We hold that the lower court did not commit any error in awarding P 675,785.31 as actual or compensatory damages. However, We cannot sustain the award of P333,200.00 as consequential damages. This amount is broken down as follows: P213,200.00 as and for the rentals of a crane to temporarily replace the one "destroyed beyond repair," and P120,000.00 as one month bonus which the appellee failed to realize in accordance with the contract which the appellee had with NAWASA. Said rental of the crane allegedly covered the period of one year at the rate of P40.00 an hour for 16 hours a day. The evidence, however, shows that the appellee bought a crane also a crawler type, on November 10, 1967, six (6) days after the incident in question (Exh N) And according to the lower court, which finding was never assailed, the appellee resumed its normal construction work on the Ipo- Bicti Project after a stoppage of only one month. There is no evidence when the appellee received the crane from the seller, Asian Enterprise Limited. But there was an agreement that the shipment of the goods would be effected within 60 days from the opening of the letter of credit (Exh. N).<äre||anº•1àw> It appearing that the contract of sale was consummated, We must conclude or at least assume that the crane was delivered to the appellee within 60 days as stipulated. The appellee then could have availed of the services of another crane for a period of only one month (after a work stoppage of one month) at the rate of P 40.00 an hour for 16 hours a day or a total of P 19,200.00 as rental. But the value of the new crane cannot be included as part of actual damages because the old was reactivated after it was repaired. The cost of the repair was P 77,000.00 as shown in item No. 1 under the Equipment, Parts and Plants category (Exh. J-1), which amount of repair was already included in the actual or compensatory damages. (pp. 54-56, L-47379, Rollo)


The appellate court likewise rejected the award of unrealized bonus from NAWASA in the amount of P120,000.00 (computed at P4,000.00 a day in case construction is finished before the specified time, i.e., within 800 calendar days), considering that the incident occurred after more than three (3) years or one thousand one hundred seventy (1,170) days. The court also eliminated the award of exemplary damages as there was no gross negligence on the part of NPC and reduced the amount of attorney's fees from P50,000.00 to P30,000.00. In these consolidated petitions, NPC assails the appellate court's decision as being erroneous on the ground that the destruction and loss of the ECI's equipment and facilities were due to force majeure. It argues that the rapid rise of the water level in the reservoir of its Angat Dam due to heavy rains brought about by the typhoon was an extraordinary occurrence that could not have been foreseen, and thus, the subsequent release of water through the spillway gates and its resultant effect, if any, on ECI's equipment and facilities may rightly be attributed to force majeure. On the other hand, ECI assails the reduction of the consequential damages from P333,200.00 to P19,000.00 on the grounds that the appellate court had no basis in concluding that ECI acquired a new Crawler-type crane and therefore, it only can claim rentals for the temporary use of the leased crane for a period of one month; and that the award of P4,000.00 a day or P120,000.00 a month bonus is justified since the period limitation on ECI's contract with NAWASA had dual effects, i.e., bonus for earlier completion and liquidated damages for delayed performance; and in either case at the rate of P4,000.00 daily. Thus, since NPC's negligence compelled work stoppage for a period of one month, the said award of P120,000.00 is justified. ECI further assailes the reduction of attorney's fees and the total elimination of exemplary damages.

Both petitions are without merit. It is clear from the appellate court's decision that based on its findings of fact and that of the trial court's, petitioner NPC was undoubtedly negligent because it opened the spillway gates of the Angat Dam only at the height of typhoon "Welming" when it knew very well that it was safer to have opened the same gradually and earlier, as it was also undeniable that NPC knew of the coming typhoon at least four days before it actually struck. And even though the typhoon was an act of God or what we may call force majeure, NPC cannot escape liability because its negligence was the proximate cause of the loss and damage. As we have ruled in Juan F. Nakpil & Sons v. Court of Appeals, (144 SCRA 596, 606-607): 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 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 was, and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 11741175). 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 the 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). Furthermore, the question of whether or not there was negligence on the part of NPC is a question of fact which properly falls within the jurisdiction of the Court of Appeals and will not be disturbed by this Court unless the same is clearly unfounded. Thus, in Tolentino v. Court of appeals, (150 SCRA 26, 36) we ruled: Moreover, the findings of fact of the Court of Appeals are generally final and conclusive upon the Supreme Court (Leonardo v. Court of Appeals, 120 SCRA 890 [1983]. In fact it is settled that the Supreme Court is not supposed to weigh evidence but only to determine its substantially (Nuñez v. Sandiganbayan, 100 SCRA 433 [1982] and will generally not disturb said findings of fact when supported by substantial evidence (Aytona v. Court of Appeals, 113 SCRA 575 [1985]; Collector of Customs of Manila v. Intermediate Appellate Court, 137 SCRA 3 [1985]. On the other hand substantial evidence is defined as such relevant evidence as a reasonable mind might accept as adequate to support a conclusion (Philippine Metal Products, Inc. v. Court of Industrial Relations, 90 SCRA 135 [1979]; Police Commission v. Lood, 127 SCRA 757 [1984]; Canete v. WCC, 136 SCRA 302 [1985]) Therefore, the respondent Court of Appeals did not err in holding the NPC liable for damages. Likewise, it did not err in reducing the consequential damages from P333,200.00 to P19,000.00. As shown by the records, while there was no categorical statement or admission on the part of ECI that it bought a new crane to replace the damaged one, a sales contract was presented to the effect that the new crane

would be delivered to it by Asian Enterprises within 60 days from the opening of the letter of credit at the cost of P106,336.75. The offer was made by Asian Enterprises a few days after the flood. As compared to the amount of P106,336.75 for a brand new crane and paying the alleged amount of P4,000.00 a day as rental for the use of a temporary crane, which use petitioner ECI alleged to have lasted for a period of one year, thus, totalling P120,000.00, plus the fact that there was already a sales contract between it and Asian Enterprises, there is no reason why ECI should opt to rent a temporary crane for a period of one year. The appellate court also found that the damaged crane was subsequently repaired and reactivated and the cost of repair was P77,000.00. Therefore, it included the said amount in the award of of compensatory damages, but not the value of the new crane. We do not find anything erroneous in the decision of the appellate court that the consequential damages should represent only the service of the temporary crane for one month. A contrary ruling would result in the unjust enrichment of ECI. The P120,000.00 bonus was also properly eliminated as the same was granted by the trial court on the premise that it represented ECI's lost opportunity "to earn the one month bonus from NAWASA ... ." As stated earlier, the loss or damage to ECI's equipment and facilities occurred long after the stipulated deadline to finish the construction. No bonus, therefore, could have been possibly earned by ECI at that point in time. The supposed liquidated damages for failure to finish the project within the stipulated period or the opposite of the claim for bonus is not clearly presented in the records of these petitions. It is not shown that NAWASA imposed them. As to the question of exemplary damages, we sustain the appellate court in eliminating the same since it found that there was no bad faith on the part of NPC and that neither can the latter's negligence be considered gross. In Dee Hua Liong


Electrical Equipment Corp. v. Reyes, (145 SCRA 713, 719) we ruled: Neither may private respondent recover exemplary damages since he is not entitled to moral or compensatory damages, and again because the petitioner is not shown to have acted in a wanton, fraudulent, reckless or oppressive manner (Art. 2234, Civil Code; Yutuk v. Manila Electric Co., 2 SCRA 377; Francisco v. Government Service Insurance System, 7 SCRA 577; Gutierrez v. Villegas, 8 SCRA 527; Air France v. Carrascoso, 18 SCRA 155; Pan Pacific (Phil.) v. Phil. Advertising Corp., 23 SCRA 977; Marchan v. Mendoza, 24 SCRA 888). We also affirm the reduction of attorney's fees from P50,000.00 to P30,000.00. There are no compelling reasons why we should set aside the appellate court's finding that the latter amount suffices for the services rendered by ECI's counsel. WHEREFORE, the petitions in G.R. No. 47379 and G.R. No. 47481 are both DISMISSED for LACK OF MERIT. The decision appealed from is AFFIRMED. 49. G.R. No. 185798 January 13, 2014 FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC., Petitioners, vs. SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents. D E C I S I O N PEREZ, J.:

Before the Court is a petition for review on certiorari under Rule 45 of 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. As culled from the records, the facts are as follow: Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place Tower while co-petitioner Fil-Estate Network, Inc. is its authorized marketing agent. Respondent Spouses Conrado and Maria Victoria Ronquillo purchased from petitioners an 82-square meter condominium unit at Central Park Place Tower in Mandaluyong City for a pre-selling contract price of FIVE MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND ONLY (P5,174,000.00). On 29 August 1997, respondents executed and signed a Reservation Application Agreement wherein they deposited P200,000.00 as reservation fee. As agreed upon, respondents paid the full downpayment of P1,552,200.00 and had been paying the P63,363.33 monthly amortizations until September 1998. Upon learning that construction works had stopped, respondents likewise stopped paying their monthly amortization. Claiming to have paid a total of P2,198,949.96 to petitioners, respondents through two (2) successive letters, demanded a full refund of their payment with interest. When their demands went unheeded, respondents were constrained to file a Complaint for Refund and Damages before the Housing and Land Use Regulatory Board (HLURB). Respondents prayed for reimbursement/refund of P2,198,949.96 representing the total amortization payments, P200,000.00 as and by way of moral damages, attorney’s fees and other litigation expenses.


On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to file their Answer within the reglementary period despite service of summons.2 Petitioners filed a motion to lift order of default and attached their position paper attributing the delay in construction to the 1997 Asian financial crisis. Petitioners denied committing fraud or misrepresentation which could entitle respondents to an award of moral damages. On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered judgment ordering petitioners to jointly and severally pay respondents the following amount: a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT THOUSAND NINE HUNDRED FORTY NINE PESOS & 96/100 (P2,198,949.96) with interest thereon at twelve percent (12%) per annum to be computed from the time of the complainants’ demand for refund on October 08, 1998 until fully paid, b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as moral damages, c) FIFTY THOUSAND PESOS (P50,000.00) as attorney’s fees, d) The costs of suit, and e) An administrative fine of TEN THOUSAND PESOS (P10,000.00) payable to this Office fifteen (15) days upon receipt of this decision, for violation of Section 20 in relation to Section 38 of PD 957.3 The Arbiter considered petitioners’ failure to develop the condominium 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 contractual and legal delay. 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 denied4 the petition and affirmed the Arbiter’s Decision. The HLURB reiterated that the depreciation of the peso as a result of the Asian financial crisis is not a fortuitous event which will exempt petitioners from the performance of their contractual obligation. Petitioners filed a motion for reconsideration but it was denied5 on 8 May 2006. Thereafter, petitioners filed a Notice of Appeal with the Office of the President. On 18 April 2007, petitioners’ appeal was dismissed6 by the Office of the President for lack of merit. Petitioners moved for a reconsideration but their motion was denied7 on 26 July 2007. 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: I. THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HONORABLE HOUSING AND LAND USE REGULATORY BOARD AND ORDERING PETITIONERSAPPELLANTS TO REFUND RESPONDENTS-APPELLEES THE SUM OF P2,198,949.96 WITH 12% INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING THAT THE COMPLAINT STATES NO CAUSE OF ACTION AGAINST PETITIONERSAPPELLANTS. II.


THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE OFFICE BELOW ORDERING PETITIONERS-APPELLANTS TO PAY RESPONDENTS-APPELLEES THE SUM OF P100,000.00 AS MORAL DAMAGES AND P50,000.00 AS ATTORNEY’S FEES CONSIDERING THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS THEREFOR. III. THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE HOUSING AND LAND USE REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS TO PAY P10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH FINDING.8 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 not been developed in accordance with the approved 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 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 P100,000.00 AS MORAL DAMAGES, P50,000.00 AS ATTORNEY’S FEES AND P10,000.00 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 including interest and damages; and third, petitioners are likewise 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 Go13 promulgated 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 P10,000.00 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. 50. G.R. No. L-29155 May 13, 1970 UNIVERSAL FOOD CORPORATION, petitioner, vs. THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N. FRANCISCO, respondents. Wigberto E. Tañada for petitioner. Teofilo Mendoza for respondents.

CASTRO, J.: Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals of February 13, 1968 in CAG.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco, plaintiffs-appellants vs. Universal Food Corporation, defendant-appellee), the dispositive portion of which reads as follows: "WHEREFORE the appealed decision is hereby reversed; the BILL OF ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula subjectmatter of Exhibit A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the return to him of said trademark and formula, plus attorney's fees in the amount of P500.00, with costs against defendant." 1 On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of First Instance of Manila, against, the Universal Food Corporation, an action for rescission of a contract entitled "Bill of Assignment." The plaintiffs prayed the court to adjudge the defendant as without any right to the use of the Mafran trademark and formula, and order the latter to restore to them the said right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from December 1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit. 1 On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof "admits the allegations contained in paragraph 3 of plaintiffs' complaint." The answer further alleged that the defendant had complied with all the terms and conditions of the Bill of Assignment and, consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff Magdalo V. Francisco, Sr. was not dismissed from the service as permanent chief chemist of the corporation as he is still its chief chemist; and, by way of special defenses, that


the aforesaid plaintiff is estopped from questioning 1) the contents and due execution of the Bill of Assignment, 2) the corporate acts of the petitioner, particularly the resolution adopted by its board of directors at the special meeting held on October 14, 1960, to suspend operations to avoid further losses due to increase in the prices of raw materials, since the same plaintiff was present when that resolution was adopted and even took part in the consideration thereof, 3) the actuations of its president and general manager in enforcing and implementing the said resolution, 4) the fact that the same plaintiff was negligent in the performance of his duties as chief chemist of the corporation, and 5) the further fact that the said plaintiff was delinquent in the payment of his subscribed shares of stock with the corporation. The defendant corporation prayed for the dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in exemplary or corrective damages. On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim for damages and attorney's fees, with costs against the former, who promptly appealed to the Court of Appeals. On February 13, 1969 the appellate court rendered the judgment now the subject of the present recourse. The Court of Appeals arrived at the following "uncontroverted" findings of fact: That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a formula for the manufacture of a food seasoning (sauce) derived from banana fruits popularly known as MAFRAN sauce; that the manufacture of this product was used in commercial scale in 1942, and in the same year plaintiff registered his trademark in his name as owner and inventor with the Bureau of Patents; that due to lack of sufficient capital to finance the expansion of the business, in 1960, said plaintiff secured the financial assistance of Tirso T. Reyes who, after a

series of negotiations, formed with others defendant Universal Food Corporation eventually leading to the execution on May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1). Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco, Sr. was appointed Chief Chemist with a salary of P300.00 a month, and plaintiff Victoriano V. Francisco was appointed auditor and superintendent with a salary of P250.00 a month. Since the start of the operation of defendant corporation, plaintiff Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory, never allowed anyone, not even his own son, or the President and General Manager Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula secret to himself. However, said plaintiff expressed a willingness to give the formula to defendant provided that the same should be placed or kept inside a safe to be opened only when he is already incapacitated to perform his duties as Chief Chemist, but defendant never acquired a safe for that purpose. On July 26, 1960, President and General Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or two members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes did not compel or force plaintiff to accede to said request. Thereafter, however, due to the alleged scarcity and high prices of raw materials, on November 28, 1960, Secretary-Treasurer Ciriaco L. de Guzman of defendant issued a Memorandum (Exhibit B), duly approved by the President and General Manager Tirso T. Reyes that only Supervisor Ricardo Francisco should be retained in the factory and that the salary of plaintiff Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation should resume its operation. Some five (5) days later, that is, on December 3, 1960, President and General Manager Tirso T. Reyes, issued a memorandom to Victoriano Francisco ordering him to report to the factory and produce "Mafran Sauce" at the rate of not less than 100 cases a day so as to cope with the orders of the


corporation's various distributors and dealers, and with instructions to take only the necessary daily employees without employing permanent employees (Exhibit B). Again, on December 6, 1961, another memorandum was issued by the same President and General Manager instructing the Assistant Chief Chemist Ricardo Francisco, to recall all daily employees who are connected in the production of Mafran Sauce and also some additional daily employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960, another memorandum was issued by the President and General Manager instructing Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to produce Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with further instructions to hire daily laborers in order to cope with the full blast protection (Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in the amount of P300.00 a month only until his services were terminated on November 30, 1960. On January 9 and 16, 1961, defendant, acting thru its President and General Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a buyer of the corporation including its trademarks, formula and assets at a price of not less than P300,000.00 (Exhibits D and D-1). Due to these successive memoranda, without plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter filed the present action on February 14, 1961. About a month afterwards, in a letter dated March 20, 1961, defendant, thru its President and General Manager, requested said plaintiff to report for duty (Exhibit 3), but the latter declined the request because the present action was already filed in court (Exhibit J). 1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that under article 1191 of the new Civil Code, the right to rescind a reciprocal obligation is not absolute and can be demanded only if one is ready, willing and able to comply with his own obligation and the other is not; that under article 1169 of the same Code, 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; that in this case the trial court found that the respondents not only have failed to show that the petitioner has been guilty of default in performing its contractual obligations, "but the record sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco who had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the record is replete with the various attempt made by the defendant (herein petitioner) to secure the said formula from Magdalo V. Francisco to no avail; and that upon the foregoing findings, the respondent Court of Appeals unjustly concluded that the private respondents are entitled to rescind the Bill of Assignment. The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. 2 The Bill of Assignment sets forth the following terms and conditions: THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive owner of the MAFRAN trade-mark and the formula for MAFRAN SAUCE; THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net annual profit which the PARTY OF THE Second Part [Universal Food Corporation] may realize by and/or out of its production of MAFRAN SAUCE and other food products and from other business which the Party of the Second Part may engage in as defined in its Articles of Incorporation, and which its Board of Directors shall determine and declare, said Party of the


First Part hereby assign, transfer, and convey all its property rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part; THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit which the Party of the Second Part obligates itself to pay unto the Party of the First Part as founder and as owner of the MAFRAN trademark and formula for MAFRAN SAUCE, shall be paid at every end of the Fiscal Year after the proper accounting and inventories has been undertaken by the Party of the Second Part and after a competent auditor designated by the Board of Directors shall have duly examined and audited its books of accounts and shall have certified as to the correctness of its Financial Statement; THAT it is hereby understood that the Party of the First Part, to improve the quality of the products of the Party of the First Part and to increase its production, shall endeavor or undertake such research, study, experiments and testing, to invent or cause to invent additional formula or formulas, the property rights and interest thereon shall likewise be assigned, transferred, and conveyed unto the Party of the Second Part in consideration of the foregoing premises, covenants and stipulations: THAT in the operation and management of the Party of the First Part, the Party of the First Part shall be entitled to the following Participation: (a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President and Chief Chemist of the Party of the Second Part, which appointments are permanent in character and Mr. VICTORIANO V. FRANCISCO shall be appointed Auditor thereof and in the event that the Treasurer or any officer who may have the custody of the funds, assets and other properties of the Party of the Second Part comes from the Party of the First Part, then the Auditor shall not be appointed from the latter;

furthermore should the Auditor be appointed from the Party representing the majority shares of the Party of the Second Part, then the Treasurer shall be appointed from the Party of the First Part; (b) THAT in case of death or other disabilities they should become incapacitated to discharge the duties of their respective position, then, their shares or assigns and who may have necessary qualifications shall be preferred to succeed them; (c) That the Party of the First Part shall always be entitled to at least two (2) membership in the Board of Directors of the Party of the Second Part; (d) THAT in the manufacture of MAFRAN SAUCE and other food products by the Party of the Second Part, the Chief Chemist shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the Chemicals and other mixtures used in the preparation of said products; THAT this assignment, transfer and conveyance is absolute and irrevocable in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula, except when a dissolution of the Party of the Second Part, voluntary or otherwise, eventually arises, in which case then the property rights and interests over said trademark and formula shall automatically revert the Party of the First Part. Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the respondent patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran sauce. Thus, the last part of the second paragraph recites that the respondent patentee "assign, transfer and convey all its property rights and interest


over said Mafran trademark and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last paragraph states that such "assignment, transfer and conveyance is absolute and irrevocable (and) in no case shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said MAFRAN trademark and mafran formula." However, a perceptive analysis of the entire instrument and the language employed therein 3 would lead one to the conclusion that what was actually ceded and transferred was only the use of the Mafran sauce formula. This was the precise intention of the parties, 4 as we shall presently show. Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of TWO (2%) PER CENTUM of the net annual profit" which the petitioner corporation may realize by and/or out of its production of Mafran sauce and other food products, etc. The word "royalty," when employed in connection with a license under a patent, means the compensation paid for the use of a patented invention. 'Royalty,' when used in connection with a license under a patent, means the compensation paid by the licensee to the licensor for the use of the licensor's patented invention." (Hazeltine Corporation vs. Zenith Radio Corporation, 100 F. 2d 10, 16.) 5 Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized proliferation, it is provided in paragraph 5-(a) of the Bill that the respondent patentee was to be appointed "chief chemist ... permanent in character," and that in case of his "death or other disabilities," then his "heirs or assigns who may have necessary qualifications shall be preferred to succeed" him as such chief chemist. It is further provided in paragraph 5-(d) that the same respondent shall have and shall exercise absolute control and supervision over the laboratory assistants and personnel and over the purchase and safekeeping

of the chemicals and other mixtures used in the preparation of the said product. All these provisions of the Bill of Assignment clearly show that the intention of the respondent patentee at the time of its execution was to part, not with the formula for Mafran sauce, but only its use, to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6 Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation eventually take place, "the property rights and interests over said trademark and formula shall automatically revert to the respondent patentee. This must be so, because there could be no reversion of the trademark and formula in this case, if, as contended by the petitioner, the respondent patentee assigned, ceded and transferred the trademark and formula — and not merely the right to use it — for then such assignment passes the property in such patent right to the petitioner corporation to which it is ceded, which, on the corporation becoming insolvent, will become part of the property in the hands of the receiver thereof. 7 Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred by virtue of the Bill of Assignment is the "use of the formula" (and not the formula itself). This incontrovertible fact is admitted without equivocation in paragraph 3 of the petitioner's answer. Hence, it does "not require proof and cannot be contradicted." 8 The last part of paragraph 3 of the complaint and paragraph 3 of the answer are reproduced below for ready reference: 3. — ... and due to these privileges, the plaintiff in return assigned to said corporation his interest and rights over the said trademark and formula so that the defendant corporation could use the formula in the preparation and manufacture of the mafran sauce, and the trade name for the marketing of said project, as appearing in said contract ....


3. — Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint. Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce formula by the respondent patentee. Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be interpreted to effect "the least transmission of right," 9 and is there a better example of least transmission of rights than allowing or permitting only the use, without transfer of ownership, of the formula for Mafran sauce. The foregoing reasons support the conclusion of the Court of Appeals 10 that what was actually ceded and transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was only the use of the formula. Properly speaking, the Bill of Assignment vested in the petitioner corporation no title to the formula. Without basis, therefore, is the observation of the lower court that the respondent patentee "had been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran sauce." 2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr. was dismissed from his position as chief chemist of the corporation without justifiable cause, and in violation of paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is "permanent in character." The petitioner submits that there is nothing in the successive memoranda issued by the corporate officers of the petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the respondent patentee was being dismissed from his position

as chief chemist of the corporation. The fact, continues the petitioner, is that at a special meeting of the board of directors of the corporation held on October 14, 1960, when the board decided to suspend operations of the factory for two to four months and to retain only a skeletal force to avoid further losses, the two private respondents were present, and the respondent patentee was even designated as the acting superintendent, and assigned the mission of explaining to the personnel of the factory why the corporation was stopping operations temporarily and laying off personnel. The petitioner further submits that exhibit B indicates that the salary of the respondent patentee would not be paid only during the time that the petitioner corporation was idle, and that he could draw his salary as soon as the corporation resumed operations. The clear import of this exhibit was allegedly entirely disregarded by the respondent Court of Appeals, which concluded that since the petitioner resumed partial production of Mafran sauce without notifying the said respondent formally, the latter had been dismissed as chief chemist, without considering that the petitioner had to resume partial operations only to fill its pending orders, and that the respondents were duly notified of that decision, that is, that exhibit B-1 was addressed to Ricardo Francisco, and this was made known to the respondent Victoriano V. Francisco. Besides, the records will show that the respondent patentee had knowledge of the resumption of production by the corporation, but in spite of such knowledge he did not report for work. The petitioner further submits that if the respondent patentee really had unqualified interest in propagating the product he claimed he so dearly loved, certainly he would not have waited for a formal notification but would have immediately reported for work, considering that he was then and still is a member of the corporation's board of directors, and insofar as the petitioner is concerned, he is still its chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom had been entrusted the performance of the duties of chief chemist, while


the respondent Victoriano V. Francisco is his brother, the respondent patentee could not feign ignorance of the resumption of operations. The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated December 29, 1960, the records will show that the petitioner was set to resume full capacity production only sometime in March or April, 1961, and the respondent patentee cannot deny that in the very same month when the petitioner was set to resume full production, he received a copy of the resolution of its board of directors, directing him to report immediately for duty; that exhibit H, of a later vintage as it is dated February 1, 1961, clearly shows that Ricardo Francisco was merely the acting chemist, and this was the situation on February 1, 1961, thirteen days before the filing of the present action for rescission. The designation of Ricardo Francisco as the chief chemist carried no weight because the president and general manager of the corporation had no power to make the designation without the consent of the corporation's board of directors. The fact of the matter is that although the respondent Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly indicates that Ricardo Francisco was merely the acting chemist as he was the one assisting his father. In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28, 1960 the secretarytreasurer of the corporation issued a memorandum (exh. B), duly approved by its president and general manager, directing that only Ricardo Francisco be retained in the factory and that the salary of respondent patentee, as chief chemist, be stopped for the time being until the corporation resumed operations. This measure was taken allegedly because of the scarcity and high prices of raw materials. Five days later, however, or on December 3, the president and general manager issued a memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to report

to the factory and to produce Mafran sauce at the rate of no less than 100 cases a day to cope with the orders of the various distributors and dealers of the corporation, and instructing him to take only the necessary daily employees without employing permanent ones. Then on December 6, the same president and general manager issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief chemist, to recall all daily employees connected with the production of Mafran sauce and to hire additional daily employees for the production of Porky Pops. Twenty-three days afterwards, or on December 29, the same president and general manager issued still another memorandum (exh. S-2), directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961, with the further instruction to hire daily laborers in order to cope with the full blast production. And finally, at the hearing held on October 24, 1961, the same president and general manager admitted that "I consider that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is the separation pay." The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when the complaint for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner, acting through its corporate officers, 11 schemed and maneuvered to ease out, separate and dismiss the said respondent from the service as permanent chief chemist, in flagrant violation of paragraph 5-(a) and (b) of the Bill of Assignment. The fact that a month after the institution of the action for rescission, the petitioner corporation, thru its president and general manager, requested the respondent patentee to report for duty (exh. 3), is of no consequence. As the Court of Appeals correctly observed, such request was a "recall to placate said plaintiff."


3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote for ready reference the following articles of the new Civil Code governing rescission of contracts: 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 of the Mortgage Law. 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. ART. 1384. Rescission shall be only to the extent necessary to cover the damages caused. At the moment, we shall concern ourselves with the first two paragraphs of 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 fulfillment and rescission of the obligation, with payment of damages in either case.

In this case before us, there is no controversy that the provisions of the Bill of Assignment are reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically paragraph 5-(a) and (b), by terminating the services of the respondent patentee Magdalo V. Francisco, Sr., without lawful and justifiable cause. Upon the factual milieu, is rescission of the Bill of Assignment proper? The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. 12 The question of whether a breach of a contract is substantial depends upon the attendant circumstances. 13 The petitioner contends that rescission of the Bill of Assignment should be denied, because under article 1383, rescission is a subsidiary remedy which cannot be instituted except when the party suffering damage has no other legal means to obtain reparation for the same. However, in this case the dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without any fault or negligence on his part. Thus, apart from the legal principle that the option — to demand performance or ask for rescission of a contract — belongs to the injured party, 14 the fact remains that the respondents-appellees had no alternative but to file the present action for rescission and damages. It is to be emphasized that the respondent patentee would not have agreed to the other terms of the Bill of Assignment were it not for the basic commitment of the petitioner corporation to appoint him as its Second VicePresident and Chief Chemist on a permanent basis; that in the manufacture of Mafran sauce and other food products he would have "absolute control and supervision over the laboratory assistants and personnel and in the purchase and safeguarding of


said products;" and that only by all these measures could the respondent patentee preserve effectively the secrecy of the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for himself a lifetime job and steady income. The salient provisions of the Bill of Assignment, namely, the transfer to the corporation of only the use of the formula; the appointment of the respondent patentee as Second VicePresident and chief chemist on a permanent status; the obligation of the said respondent patentee to continue research on the patent to improve the quality of the products of the corporation; the need of absolute control and supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the chemicals and other mixtures used in the preparation of said product — all these provisions of the Bill of Assignment are so interdependent that violation of one would result in virtual nullification of the rest. 4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent patentee is entitled to payment of his monthly salary of P300 from December 1, 1960, until the return to him of the Mafran trademark and formula, arguing that under articles 1191, the right to specific performance is not conjunctive with the right to rescind a reciprocal contract; that a plaintiff cannot ask for both remedies; that the appellate court awarded the respondents both remedies as it held that the respondents are entitled to rescind the Bill of Assignment and also that the respondent patentee is entitled to his salary aforesaid; that this is a gross error of law, when it is considered that such holding would make the petitioner liable to pay respondent patentee's salary from December 1, 1960 to "kingdom come," as the said holding requires the petitioner to make payment until it returns the formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is that the said respondent patentee refused to go back to work, notwithstanding the call for him to return — which negates his right to be paid his back salaries for services which he

had not rendered; and that if the said respondent is entitled to be paid any back salary, the same should be computed only from December 1, 1960 to March 31, 1961, for on March 20, 1961 the petitioner had already formally called him back to work. The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the particular provisions in their proper setting, we hold that the contract placed the use of the formula for Mafran sauce with the petitioner, subject to defined limitations. One of the considerations for the transfer of the use thereof was the undertaking on the part of the petitioner corporation to employ the respondent patentee as the Second Vice-President and Chief Chemist on a permanent status, at a monthly salary of P300, unless "death or other disabilities supervened. Under these circumstances, the petitioner corporation could not escape liability to pay the private respondent patentee his agreed monthly salary, as long as the use, as well as the right to use, the formula for Mafran sauce remained with the corporation. 5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return to the respondents the trademark and formula for Mafran sauce, when both the decision of the appellate court and that of the lower court state that the corporation is not aware nor is in possession of the formula for Mafran sauce, and the respondent patentee admittedly never gave the same to the corporation. According to the petitioner these findings would render it impossible to carry out the order to return the formula to the respondent patentee. The petitioner's predicament is understandable. Article 1385 of the new Civil Code provides that rescission creates the obligation to return the things which were the object of the contract. But that as it may, it is a logical inference from the appellate court's decision that what was meant to be returned to the respondent patentee is not the formula itself, but only its use and the right to such use. Thus, the respondents in their complaint for rescission


specifically and particularly pray, among others, that the petitioner corporation be adjudged as "without any right to use said trademark and formula." ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court of Appeals is modified to read as follows: "Wherefore the appealed decision is reversed. The Bill of Assignment (Exhibit A) is hereby rescinded, and the defendant corporation is ordered to return and restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran sauce trademark and formula, subject-matter of the Bill of Assignment, and to this end the defendant corporation and all its assigns and successors are hereby permanently enjoined, effective immediately, from using in any manner the said Mafran sauce trademark and formula. The defendant corporation shall also pay to Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1, 1960, until the date of finality of this judgment, inclusive, the total amount due to him to earn legal interest from the date of the finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500, with costs against the defendant corporation." As thus modified, the said judgment is affirmed, with costs against the petitioner corporation. 51. G.R. No. L-47774 March 14, 1941 MAGDALENA ESTATE, INC., petitioner-appellant, vs. LOUIS J. MYRICK, respondent-appellee. Felipe Ysmael and Eusebio C. Encarnacion for petitioner. Andres C. Aguilar for respondent.

LAUREL, J.: On January 2, 1928, the Magdalena Estate, Inc., sold to Louis J. Myrick lots Nos. 28 and 29 of Block 1, Parcel 9 of the San Juan Subdivision, San Juan Rizal, their contract of sale No. SJ-639 (Exhibits B and 1) providing that the price of P7,953 shall be payable in 120 equal monthly installments of P96.39 each on the second day of every month beginning the date of execution of the agreement. Simultaneously, the vendee executed and delivered to the vendor a promissory note (Exhibits C and 2) for the whole purchase price, wherein it was stipulated that "si cualquier pago o pagos de este pagare quedasen en mora por mas de dos meses, entonces todos el saldo no pagado del mismo con cualesquiera intereses que hubiese devengado, vercera y sera exigible inmediatamente y devengara intereses al mismo tipo de 9 por ciento al año hasta su completo pago, y en tal caso me comprometo, ademas, a pagar al tenedor de este pagare el 10 por ciento de la cantidad en concepto de honorarios de abogado." In pursuance of said agreement, the vendee made several monthly payments amounting to P2,596.08, the last being on October 4, 1930, although the first installment due and unpaid was that of May 2, 1930. By reason of this default, the vendor, through its president, K.H. Hemady, on December 14, 1932, notified the vendee that, in view of his inability to comply with the terms of their contract, said agreement had been cancelled as of that date, thereby relieving him of any further obligation thereunder, and that all amounts paid by him had been forfeited in favor of the vendor, who assumes the absolute right over the lots in question. To this communication, the vendee did not reply, and it appears likewise that the vendor thereafter did not require him to make any further disbursements on account of the purchase price.


On July 22, 1936, Louis J. Myrick, respondent herein, commenced the present action in the Court of First Instance of Albay, praying for an entry of judgment against the Magdalena Estate, Inc. for the sum of P2,596.08 with legal interest thereon from the filing of the complaint until its payment, and for costs of the suit. Said defendant, the herein petitioner, on September 7, 1936, filed his answer consisting in a general denial and a cross-complaint and counterclaim, alleging that contract SJ-639 was still in full force and effect and that, therefore, the plaintiff should be condemned to pay the balance plus interest and attorneys' fees. After due trial, the Court of First Instance of Albay, on January 31, 1939, rendered its decision ordering the defendant to pay the plaintiff the sum of P2,596.08 with legal interest from December 14, 1932 until paid and costs, and dismissing defendant's counterclaim. From this judgment, the Magdalena Estate, Inc. appealed to the Court of Appeals, where the cause was docketed as CA-G.R. No. 5037, and which, on August 23, 1940, confirmed the decision of the lower court, with the only modification that the payment of interest was to be computed from the date of the filing of the complaint instead of from the date of the cancellation of the contract. A motion for reconsideration was presented, which was denied on September 6, 1940. Hence, the present petition for a writ of certiorari. Petitioner-appellant assigns several errors which we proceed to discuss in the course of this opinion. Petitioner holds that contract SJ-639 has not been rendered inefficacious by its letter to the respondent, dated December 14, 1932, and submits the following propositions: (1) That the intention of the author of a written instrument shall always prevail over the literal sense of its wording; (2) that a bilateral contract may be resolved or cancelled only by the prior mutual agreement of the parties, which is approved by the judgment of the proper court; and (3) that the letter of December 14, 1932 was not assented to by the respondent, and therefore, cannot be

deemed to have produced a cancellation, even if it ever was intended. Petitioner contends that the letter in dispute is a mere notification and, to this end, introduced in evidence the disposition of Mr. K.H. Hemady, president of the Magdalena Estate, Inc. wherein he stated that the word "cancelled" in the letter of December 14, 1932, "es un error de mi interpretacion sin ninguna intencion de cancelar," and the testimony of Sebastian San Andres, one of its employees, that the lots were never offered for sale after the mailing of the letter aforementioned. Upon the other hand, the Court of Appeals, in its decision of August 23, 1940, makes the finding that "notwithstanding the deposition of K.H. Hemady, president of the defendant corporation, to the effect that the contract was not cancelled nor was his intention to do so when he wrote the letter of December 14, 1932, marked Exhibit 6 and D (pp. 6-7, deposition Exhibit 1-a), faith and credit cannot be given to such testimony in view of the clear terms of the letter which evince his unequivocal intent to resolve the contract. His testimony is an afterthought. The intent to resolve the contract is expressed unmistakably not only in the letter of December 14, 1932, already referred to (Exhibit 6 and D), but is reiterated in the letters which the president of the defendant corporation states that plaintiff lost his rights for the land for being behind more than two years, and of April 10, 1035 (Exhibit G), where defendant's president makes the following statements: "Confirming the verbal arrangement had between you and our Mr. K.H. Hemady regarding the account of Mr. Louis J. Myrick under contract No. SJ-639, already cancelled." This conclusion of fact of the Court of Appeals is final and should not be disturbed. (Guico vs. Mayuga and Heirs of Mayuga, 63 Phil., 328; Mamuyac vs. Abena, XXXVIII Off. Gaz. 84.) Where the terms of a writing are clear, positive and unambiguous, the intention of the parties should be gleaned from the language therein employed, which is conclusive in the absence of mistake (13 C.J. 524; City of Manila vs. Rizal Park Co., 52 Phil. 515). The proposition that the intention of the writer, once ascertained,


shall prevail over the literal sense of the words employed is not absolute and should be deemed secondary to and limited by the primary rule that, when the text of the instrument is explicit and leaves no doubt as to its intention, the court may not read into it any other which would contradict its plain import. Besides, we have met with some circumstances of record which demonstrate the unequivocal determination of the petitioner to cancel their contract. They are: (1) the act of the petitioner in immediately taking possession of the lots in question and offering to resell them to Judge M.V. del Rosario, as demonstrated by his letter marked Exhibit G, shortly after December 14, 1932; (2) his failure to demand from the respondent the balance of the account after the mailing of the disputed letter; and (3) the letters of January 10, 1933 (Exhibit F-2) and April 10, 1935 (Exhibit G) reiterate, in clear terms, the intention to cancel first announced by petitioner since December 14, 1932. It is next argued that contract SJ-639, being a bilateral agreement, in the absence of a stipulation permitting its cancellation, may not be resolved by the mere act of the petitioner. The fact that the contracting parties herein did not provide for resolution is now of no moment, for the reason that the obligations arising from the contract of sale being reciprocal, such obligations are governed by article 1124 of the Civil Code which declares that the power to resolve, in the event that one of the obligors should not perform his part, is implied. (Mateos vs. Lopez, 6 Phil., 206; Cortez vs. Bibaño & Beramo, 41 Phil. 298; Cui. vs. Sun Chan, 41 Phil., 523; Po Pauco vs. Siguenza, 49 Phil., 404.) Upon the other hand, where, as in this case, the petitioner cancelled the contract, advised the respondent that he has been relieved of his obligations thereunder, and led said respondent to believe it so and act upon such belief, the petitioner may not be allowed, in the language of section 333 of the Code of Civil Procedure (now section 68 (a) of Rule 123 of the New Rules of Court), in any litigation the course of litigation or in dealings in nais, be permitted to repudiate his representations, or occupy inconsistent positions, or, in the letter

of the Scotch law, to "approbate and reprobate." (Bigelow on Estoppel, page 673; Toppan v. Cleveland, Co. & C.R. Co., Fed. Cas. 14,099.) The contract of sale, contract SJ-639, contains no provision authorizing the vendor, in the event of failure of the vendee to continue in the payment of the stipulated monthly installments, to retain the amounts paid to him on account of the purchase price. The claim, therefore, of the petitioner that it has the right to forfeit said sums in its favor is untenable. Under article 1124 of the Civil Code, however, he may choose between demanding the fulfillment of the contract or its resolution. These remedies are alternative and not cumulative, and the petitioner in this case, having to cancel the contract, cannot avail himself of the other remedy of exacting performance. (Osorio & Tirona vs. Bennet & Provincial Board of Cavite, 41 Phil., 301; Yap Unki vs. Chua Jamco, 14 Phil., 602.) As a consequence of the resolution, the parties should be restored, as far as practicable, to their original situation (Po Pauco vs. Siguenza, supra) which can be approximated only by ordering, as we do now, the return of the things which were the object of the contract, with their fruits and of the price, with its interest (article 1295, Civil Code), computed from the date of the institution of the action. (Verceluz vs. Edaño, 46 Phil. 801.) The writ prayed for is hereby denied, with costs against the petitioner. So ordered. 52. 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 abovenamed 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" with said firm, and which contract was referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's unilateral rescission of the logging contract, without a court order, was


invalid; that petitioner's supervisor refused to allow respondent to cut new logs unless the logs previously cut during the management of Cesar Guy be first sold; that respondent was permitted to cut logs in the middle of June 1965 but petitioner's supervisor stopped all logging operations on 15 July 1965; that it had made several offers to petitioner for respondent to resume logging operations but respondent received no reply. The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded, and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently sustained it (although the order expresses no specific findings in this regard), that it is only after a final court decree declaring the contract rescinded for violation of its terms that U.P. could disregard ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect. We find that position untenable. In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit." As to such special stipulation, and in connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276: there is nothing in the law that prohibits the parties from entering into agreement that violation of the terms of the contract would cause cancellation thereof, even without court intervention. In other words, it is not always necessary for the injured party to resort to court for rescission of the contract.

Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. 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 the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation, 1 since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will


remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder. In fact, even without express provision conferring the power of cancellation upon one contracting party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that, a resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully impugned in court. El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones reciprocas para el caso de que uno de los obligados no cumpliese lo que le incumbe, facultad que, segun jurisprudencia de este Tribunal, surge immediatamente despuesque la otra parte incumplio su deber, sin necesidad de una declaracion previa de los Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897). Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una "facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la cual tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo convenido, que puede ejercitarse, ya en la via 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 impugna por la otra, queda aquella sometida el examen y sancion de los Tribunale, que habran de declarar, en definitiva, bien hecha la resolucion o por el contrario, no ajustada a Derecho. (Sent. TS of Spain, 16 November 1956; Jurisp. Aranzadi, 3, 447). La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de las partes de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la declaracion de voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por la demanda de la perjudicada, cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios realmente causados, siempre quese acredite, ademas, una actitud o conducta persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto, definitivo o irreformable lo impida, segun el art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y 16 Nov. 1956, entre otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem, fides non est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied). In the light of the foregoing principles, and considering that the 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. 53. G.R. No. L-29360 January 30, 1982 JOSE C. ZULUETA, petitioner, vs. HON. HERMINIO MARIANO, in his capacity as Presiding Judge of Branch X of the Court of First Instance of Rizal; and LAMBERTO AVELLANA, respondents.

MELENCIO-HERRERA, J.: In this action for mandamus and Prohibition, petitioner seeks to compel respondent Judge to assume appellate, not original jurisdiction over an Ejectment case appealed from the Municipal Court of Pasig (CC No. 1190 entitled Jose C. Zulueta vs. Lamberto Avellana), and to issue a Writ of Execution in said case. The antecedental facts follow: Petitioner Jose C. Zulueta is the registered owner of a residential house and lot situated within the Antonio Subdivision, Pasig, Rizal. On November 6, 1964, petitioner Zulueta and private respondent Lamberto Avellana, a movie director, entered into a "Contract to Sell" the aforementioned property for P75,000.00 payable in twenty years with respondent buyer assuming to pay a down payment of P5,000.00 and a monthly installment of P630.00 payable in advance before the 5th day of the corresponding month, starting with December, 1964. It was further stipulated: 12) That upon failure of the BUYER to fulfill any of the conditions herein stipulated, BUYER automatically and irrevocably authorizes OWNER to recover extra-judicially, physical possession of the land, building and other improvements which are the subject of this contract, and to take possession also extra-judicially whatever personal properties may be found within the aforesaid premises from the date of said failure to answer for whatever unfulfilled monetary obligations BUYER may have with OWNER; and this contract shall be considered as without force and effect also from said date; all payments made by the BUYER to OWNER shall be deemed as rental payments without prejudice to OWNER's right to collect from BUYER


whatever other monthly installments and other money obligations which may have been paid until BUYER vacates the aforesaid premises; upon his failure to comply with any of the herein conditions BUYER forfeits all money claims against OWNER and shall pay a monthly rental equivalent to his monthly installment under Condition 1 of this Contract from the date of the said failure to the date of recovery of physical possession by OWNER of the land, building and other improvements which are the subject of this Contract; BUYER shall not remove his personal properties without the previous written consent of OWNER, who, should he take possession of such properties following the aforesaid failure of BUYER, shall return the same to BUYER only after the latter shall have fulfilled all money claims against him by OWNER; in all cases herein, demand is waived; Respondent Avellana occupied the property from December, 1964, but title remained with petitioner Zulueta. Upon the allegation that respondent Avellana had failed to comply with the monthly amortizations stipulated in the contract, despite demands to pay and to vacate the premises, and that thereby the contract was converted into one of lease, petitioner, on June 22, 1966, commenced an Ejectment suit against respondent before the Municipal Court of Pasig (CC No. 1190), praying that judgment be rendered ordering respondent 1) to vacate the premises; 2) to pay petitioner the sum of P11,751.30 representing respondent's balance owing as of May, 1966; 3) to pay petitioner the sum of P 630.00 every month after May, 1966, and costs. Respondent controverted by contending that the Municipal Court had no jurisdiction over the nature of the action as it involved the interpretation and/or rescission of the contract; that prior to the execution of the contract to sell, petitioner was already indebted to him in the sum of P31,269.00 representing the cost of two movies respondent made for petitioner and used by the latter in

his political campaign in 1964 when petitioner ran for Congressman, as well as the cost of one 16 millimeter projector petitioner borrowed from respondent and which had never been returned, which amounts, according to their understanding, would be applied as down payment for the property and to whatever obligations respondent had with petitioner. The latter strongly denied such an understanding. Respondent's total counterclaim against petitioner was in the amount of P42,629.99 representing petitioner's pleaded indebtedness to private respondent, claim for moral damages, and attorney's fees. The counterclaim was dismissed by the Municipal Court for being in an amount beyond its jurisdiction. However, as a special defense, private respondent sought to offset the sum of P31,269.00 against his obligations to petitioner. Deciding the case on May 10, 1967, the Municipal Court found that respondent Avellana had failed to comply with his financial obligations under the contract and ordered him to vacate the premises and deliver possession thereof to petitioner; to pay petitioner the sum of P21,093.88 representing arrearages as of April, 1967, and P630.00 as monthly rental from and after May, 1967 until delivery of possession of that premises to petitioner. That conclusion was premised on title finding that breach of any of the conditions by private respondent converted the agreement into a lease contractual and upon the following considerations: The question involved herein is that of possession, that who of the contending parties has the better right to possession of the properly in question. The issue in this case being that of possession, the claim of defendant against plaintiff or P 31,269.00 indebtedness, has no place as a defense here. It should be the subject- matter of a separate action against, plaintiff Jose C. Zulueta. As it is, said indebtedness is only a claim still debatable and controversial and not a final judgment. 'It is our considered opinion that to admit and to allow such a defense would be


tantamount to prejuding the claim on its merits prematurely in favor of defendant. This court can not do without violating some rules of law. This is not the proper court and this is not the proper case in which to ventilate the claim. Respondent Avellana appealed to the Court of First Instance of Rizal presided by respondent Judge. Thereat, petitioner summoned for execution alleging private respondent's failure to deposit in accordance the monthly rentals, which the latter denied. Respondent Judge held resolution thereof in abeyance. On February 19, 1968, respondent Avellana filed a Motion to Dismiss Appeal alleging that, inasmuch as the defense set up in his Answer was that he had not breached his contract with petitioner, the case necessarily involved the interpretation and/or rescission of the contract and, therefore, beyond the jurisdiction of the Municipal Court. Petitioner opposed claiming that the Complaint had set out a clear case of unlawful detainer considering that judicial action for the rescission of the contract was unnecessary due to the automatic rescission clause therein and the fact that petitioner had cancelled said contract so that respondent's right to remain in the premises had ceased. On March 21, 1968, respondent Judge dismissed the case on the ground of lack of jurisdiction of the Municipal Court, explaining: The decision of the lower court declared said Contract to Sell to have been converted into a contract of lease. It is the contention of the defendant that the lower court had no jurisdiction to entertain the case as the same involves the interpretation of contract as to whether or not the same has been converted to lease contract. Although the contract to sell object of this case states that the same may be converted into a lease contract upon the failure of the defendant to pay the amortization of the property in question, there is no showing that before filing this case in the lower court, the plaintiff has exercised or has pursued

his right pursuant to the contract which should be the basis of the action in the lower court. Petitioner's Motion for Reconsideration was denied by respondent Judge as follows: The plaintiff having filed a motion for reconsideration of this Court's Order dismissing the appeal, the Court, while standing pat on its Order dismissing this case for lack of jurisdiction of the lower court over the subject matter, hereby takes cognizance of the case and will try the case as if it has been filed originally in this Court. WHEREFORE, let this case be set for pre-trial on July 12, 1968 at 8:30 a.m. with notice to an parties. Petitioner then availed of the instant recourse. Was the action before the Municipal Court of Pasig essentially for detainer and, therefore, within its exclusive original jurisdiction, or one for rescission or annulment of a contract, which should be litigated before a Court of First Instance? Upon a review of the attendant circumstances, we uphold the ruling of respondent Judge that the Municipal Court of Pasig was bereft of jurisdiction to take cognizance of the case filed before it. In his Complaint, petitioner had alleged violation by respondent Avellana of the stipulations of their agreement to sell and thus unilaterally considered the contract rescinded. Respondent Avellana denied any breach on his part and argued that the principal issue was one of interpretation and/or rescission of the contract as well as of set-off. Under those circumstances, proof of violation is a condition precedent to resolution or rescission. It is only when the violation has been established that the contract can be declared resolved or rescinded. Upon such rescission, in turn, hinges a pronouncement that possession of the realty has


become unlawful. Thus, the basic issue is not possession but one of rescission or annulment of a contract. which is beyond the jurisdiction of the Municipal Court to hear and determine. A violation by a party of any of the stipulations of a contract on agreement to sell real property would entitle the other party to resolved or rescind it. An allegation of such violation in a detainer suit may be proved by competent evidence. And if proved a justice of the peace court might make a finding to that effect, but it certainly cannot declare and hold that the contract is resolved or rescinded. It is beyond its power so to do. And as the illegality of the possession of realty by a party to a contract to sell is premised upon the resolution of the contract, it follows that an allegation and proof of such violation, a condition precedent to such resolution or rescission, to render unlawful the possession of the land or building erected thereon by the party who has violated the contract, cannot be taken cognizance of by a justice of the peace court. ... 1 True, the contract between the parties provided for extrajudicial rescission. This has legal effect, however, where the other party does not oppose it. 2 Where it is objected to, a judicial determination of the issue is still necessary. A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex proprio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and' determination. 3 But while respondent Judge correctly ruled that the Municipal Court had no jurisdiction over the case and correctly dismissed the appeal, he erred in assuming original jurisdiction, in the face of the objection interposed by petitioner. Section 11, Rule 40, leaves no room for doubt on this point:

Section 11. Lack of jurisdiction —A case tried by an inferior court without jurisdiction over the subject matter shall be dismiss on appeal by the Court of First Instance. But instead of dismissing the case, the Court of First Instance may try the case on the merits, if the parties therein file their pleadings and go to trial without any objection to such jurisdiction. There was no other recourse left for respondent Judge, therefore, except to dismiss the appeal. If an inferior court tries a case without jurisdiction over the subject-matter on appeal, the only authority of the CFI is to declare the inferior court to have acted without jurisdiction and dismiss the case, unless the parties agree to the exercise by the CFI of its original jurisdiction to try the case on the merits. 4 The foregoing premises considered, petitioner's prayer for a Writ of Execution of the judgment of the Municipal Court of Pasig must perforce be denied. WHEREFORE, the Writ of mandamus is denied, but the Writ of Prohibition is granted and respondent Court hereby permanently enjoined from taking cognizance of Civil Case No. 10595 in the exercise of its original jurisdiction. No costs. 54. G.R. No. L-56076 September 21, 1983 PALAY, INC. and ALBERT ONSTOTT, petitioner, vs. JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and NAZARIO DUMPIT respondents.


Santos, Calcetas-Santos & Geronimo Law Office for petitioner. Wilfredo E. Dizon for private respondent. MELENCIO-HERRERA, J.: The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said Resolution of May 2, 1980, are being assailed in this petition. On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of one month, without need of notice and with forfeiture of all installments paid. Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last payment was

made on December 5, 1967 for installments up to September 1967. On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all his overdue accounts with interest, and seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the same request. Replying petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold. Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated October 23, 1979. 1 On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition wherein the following issues are raised: I


Whether notice or demand is not mandatory under the circumstances and, therefore, may be dispensed with by stipulation in a contract to sell. II Whether petitioners may be held liable for the refund of the installment payments made by respondent Nazario M. Dumpit. III Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar. IV Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the decision of respondent NHA holding petitioners solidarily liable for the refund of the installment payments made by respondent Nazario M. Dumpit thereby denying substantial justice to the petitioners, particularly petitioner Onstott We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due course to the petition on March 15, 1982. On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior notice or demand upon respondent in view of paragraph 6 thereof which provides- 6. That in case the BUYER falls to satisfy any monthly installment or any other payments herein agreed upon, the

BUYER shall be granted a month of grace within which to make the payment of the t in arrears together with the one corresponding to the said month of grace. -It shall be understood, however, that should the month of grace herein granted to the BUYER expire, without the payment & corresponding to both months having been satisfied, an interest of ten (10%) per cent per annum shall be charged on the amounts the BUYER should have paid; it is understood further, that should a period of NINETY (90) DAYS elapse to begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER shall not have paid all the amounts that the BUYER should have paid with the corresponding interest up to the date, the SELLER shall have the right to declare this contract cancelled and of no effect without notice, and as a consequence thereof, the SELLER may dispose of the lot/lots covered by this Contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of this Contract, all the amounts which may have been paid by the BUYER in accordance with the agreement, together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises and for liquidated damages suffered by virtue of the failure of the BUYER to fulfill his part of this agreement : and the BUYER hereby renounces his right to demand or reclaim the return of the same and further obligates peacefully to vacate the premises and deliver the same to the SELLER. Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract as cancelled should be made known to the other. We quote the pertinent excerpt:


Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved in account of infractions by the other contracting party must be made known to the other and is always provisional being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified it is free to resort to judicial action in its own behalf, and bring the matter to court. 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 the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was

proper or not. It is in this sense that judicial action win be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation unless attack thereon should become barred by acquiescense, estoppel or prescription. Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder (Emphasis supplied). Of similar import is the ruling in Nera vs. Vacante 4, reading: A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex propio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and determination. This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue is still necessary. In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination. 7 In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court


to determine whether resolution of the contract by petitioners was warranted. We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in court because from the moment the petitioner defaulted in the timely payment of the installments, the contract between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case notice in writing was made to the vendee of the cancellation and annulment of the contract although the contract entitled the seller to immediate repossessing of the land upon default by the buyer. The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments." which took effect on September 14, 1972, when it specifically provided: Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer. (Emphasis supplied). The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully accorded. 9 Moreover, it is a matter of

public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments. Regarding the second issue on refund of the installment payments made by private respondent. Article 1385 of the Civil Code provides: 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 sham 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. In this case, indemnity for damages may be demanded from the person causing the loss. As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the legal rate of 12% computed from the date of the institution of the action. 10 It would be most inequitable if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another. We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who was made jointly and


severally liable with petitioner corporation for refund to private respondent of the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as wen as from that of any other legal entity to which it may be related. 11 As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice 12 ; or for purposes that could not have been intended by the law that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud or confuse legitimate issues 15 ; or to circumvent the law or perpetuate deception 16 ; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. 17 We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person. In this case, petitioner Onstott was made liable because he was then the President of the corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality. 18 In this respect then, a modification of the Resolution under review is called for. WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the

amount of P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted. 55. G.R. No. L-42283 March 18, 1985 BUENAVENTURA ANGELES, ET AL., plaintiffsappellees, vs. URSULA TORRES CALASANZ, ET AL., defendantsappellants. GUTIERREZ, JR., J.: This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District, Branch X, declaring the contract to sell as not having been validly cancelled and ordering the defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay P500.00 attorney's fees and costs. The facts being undisputed, the Court of Appeals certified the case to us since only pure questions of law have been raised for appellate review. On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum.


The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly installments until July 1966, when their aggregate payment already amounted to P4,533.38. On numerous occasions, the defendants-appellants accepted and received delayed installment payments from the plaintiffs-appellees. On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting the remittance of past due accounts. On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffs-appellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration of the said cancellation was denied by the defendants-appellants. The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question, they found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and incidental expenses for the registration and transfer of the land. The defendants-appellants alleged in their answer that the complaint states no cause of action and that the plaintiffsappellees violated paragraph six (6) of the contract to sell when they failed and refused to pay and/or offer to pay the monthly installments corresponding to the month of August, 1966 for more than five (5) months, thereby constraining the defendantsappellants to cancel the said contract.

The lower court rendered judgment in favor of the plaintiffsappellees. The dispositive portion of the decision reads: WHEREFORE, based on the foregoing considerations, the Court hereby renders judgment in favor of the plaintiffs and against the defendants declaring that the contract subject matter of the instant case was NOT VALIDLY cancelled by the defendants. Consequently, the defendants are ordered to execute a final Deed of Sale in favor of the plaintiffs and to pay the sum of P500.00 by way of attorney's fees. Costs against the defendants. A motion for reconsideration filed by the defendants-appellants was denied. As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves pure questions of law. The defendants-appellants assigned the following alleged errors of the lower court: First Assignment of Error THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL (ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY CANCELLED. Second Assignment of Error EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF THE PLAINTIFF. Third Assignment of Error


THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S FEES. The main issue to be resolved is whether or not the contract to sell has been automatically and validly cancelled by the defendants-appellants. The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six of the contract which provides: xxx xxx xxx SIXTH.—In case the party of the SECOND PART fails to satisfy any monthly installments, or any other payments herein agreed upon, he is granted a month of grace within which to make the retarded payment, together with the one corresponding to the said month of grace; it is understood, however, that should the month of grace herein granted to the party of the SECOND PART expired; without the payments corresponding to both months having been satisfied, an interest of 10% per annum will be charged on the amounts he should have paid; it is understood further, that should a period of 90 days elapse, to begin from the expiration of the month of grace herein mentioned, and the party of SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to that date, the party of the FIRST PART has the right to declare this contract cancelled and of no effect, and as consequence thereof, the party of the FIRST PART may dispose of the parcel of land covered by this contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of the contract, all the amounts paid in accordance with this agreement together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises, and as payment for the damages suffered by failure of the party of the SECOND PART to fulfill his part of the agreement;

and the party of the SECOND PART hereby renounces all his right to demand or reclaim the return of the same and obliges himself to peacefully vacate the premises and deliver the same to the party of the FIRST PART. (Emphasis supplied by appellant) xxx xxx xxx The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966 installment despite demands for more than four (4) months. The defendants-appellants point to Jocson v. Capitol Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the right of the subdivision owner to automatically cancel a contract to sell on the strength of a provision or stipulation similar to paragraph 6 of the contract in this case. The defendants-appellants also argue that even in the absence of the aforequoted provision, they had the right to cancel the contract to sell under Article 1191 of the Civil Code of the Philippines. The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state that paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of specified breaches of its terms, the sellers have the right to declare the contract cancelled and of no effect, because it granted the sellers an absolute and automatic right of rescission. Article 1191 of the Civil Code on the rescission of reciprocal obligations provides: 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. xxx xxx xxx Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the law that prohibits the parties from entering into an agreement that violation of the terms of the contract would cause its cancellation even without court intervention (Froilan v. Pan Oriental Shipping, Co., et al., 12 SCRA 276)— Well settled is, however, the rule that a judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions' (Lopez v. Commissioner of Customs, 37 SCRA 327, and cases cited therein) Resort to judicial action for rescission is obviously not contemplated . . . The validity of the stipulation can not be seriously disputed. It is in the nature of a facultative resolutory condition which in many cases has been upheld by this Court. (Ponce Enrile v. Court of Appeals, 29 SCRA 504). The rule that it is not always necessary for the injured party to resort to court for rescission of the contract when the contract itself provides that it may be rescinded for violation of its terms and conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA 102) where we explained that: Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved on account of infractions by the other contracting party must be made known to the other and is always provisional, being ever subject to scrutiny and review

by the proper court. If the other party denies that rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to court. 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 the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated many consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. ... . We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631; Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription. The right to rescind the contract for non-performance of one of its stipulations, therefore, is not absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that— The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but only for such substantial and fundamental breach as would defeat the very


object of the parties in making the agreement. (Song Fo & Co. v. Hawaiian-Philippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968). ... . The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell which provides: SECOND.—That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as follows: (a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this contract is signed; and (b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of each month, from this date until the total payment of the price above stipulated, including interest. because they failed to pay the August installment, despite demand, for more than four (4) months. The breach of the contract adverted to by the defendantsappellants is so slight and casual when we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the entire obligation would have been paid. Furthermore, although the principal obligation was only P 3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs-

appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly enrich the defendants-appellants. Article 1234 of the Civil Code which provides that: If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee. also militates against the unilateral act of the defendantsappellants in cancelling the contract. We agree with the observation of the lower court to the effect that: Although the primary object of selling subdivided lots is business, yet, it cannot be denied that this subdivision is likewise purposely done to afford those landless, low income group people of realizing their dream of a little parcel of land which they can really call their own. The defendants-appellants cannot rely on paragraph 9 of the contract which provides: NINTH.-That whatever consideration of the party of the FIRST PART may concede to the party of the SECOND PART, as not exacting a strict compliance with the conditions of paragraph 6 of this contract, as well as any other condonation that the party of the FIRST PART may give to the party of the SECOND PART with regards to the obligations of the latter, should not be interpreted as a renunciation on the part of the party of the FIRST PART of any right granted it by this contract, in case of default or noncompliance by the party of the SECOND PART.


The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance of paragraph 6 not merely once, but for as many times as he wishes. The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when the defendantsappellants, instead of availing of their alleged right to rescind, have accepted and received delayed payments of installments, though the plaintiffs-appellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. In De Guzman v. Guieb (48 SCRA 68), we held that: xxx xxx xxx But defendants do not deny that in spite of the long arrearages, neither they nor their predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject the appellees from the home-lot in question. On the contrary, it is admitted that the delayed payments were received without protest or qualification. ... Under these circumstances, We cannot but agree with the lower court that at the time appellees exercised their option, appellants had already forfeited their right to invoke the abovequoted provision regarding the nullifying effect of the nonpayment of six months rentals by appellees by their having accepted without qualification on July 21, 1964 the full payment by appellees of all their arrearages. The defendants-appellants contend in the second assignment of error that the ledger of payments show a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the total monthly installments paid by the plaintiffsappellees may have exceeded P3,920.00, a substantial portion of the said payments were applied to the interests since the contract specifically provides for a 7% interest per annum on the

remaining balance. The defendants-appellants rely on paragraph 2 of the contract which provides: SECOND.—That in consideration of the agreement of sale of the above described property, the party of the SECOND PART obligates himself to pay to the party of the FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P 3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... . (Emphasis supplied) The plaintiffs-appellees on the other hand are firm in their submission that since they have already paid the defendantsappellants a total sum of P4,533.38, the defendants-appellants must now be compelled to execute the final deed of sale pursuant to paragraph 12 of the contract which provides: TWELFTH.—That once the payment of the sum of P3,920.00, the total price of the sale is completed, the party to the FIRST PART will execute in favor of the party of the SECOND PART, the necessary deed or deeds to transfer to the latter the title of the parcel of land sold, free from all hens and encumbrances other than those expressly provided in this contract; it is understood, however, that au the expenses which may be incurred in the said transfer of title shall be paid by the party of the SECOND PART, as above stated. Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the contract herein is a contract of adhesion. We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the contract. The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed their signatures and assented to the terms and conditions of the contract. They had no


opportunity to question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it" basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that: xxx xxx xxx ... (W)hile generally, stipulations in a contract come about after deliberate drafting by the parties thereto. . . . there are certain contracts almost all the provisions of which have been drafted only by one party, usually a corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the signing of his signature or his "adhesion" thereto. Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this category. (Paras, Civil Code of the Philippines, Seventh ed., Vol. 1, p. 80.) (Emphasis supplied) While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-appellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00 price sale. The contract to sell, being a contract of adhesion, must be construed against the party causing it. We agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be interpreted against the party who drafted the same, especially where such interpretation will help effect justice to buyers who, after having invested a big amount of money, are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology, condemnable in its lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the buyers." Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees have already paid an aggregate amount of P4,533.38, the courts should only order the

payment of the few remaining installments but not uphold the cancellation of the contract. Upon payment of the balance of P671.67 without any interest thereon, the defendants-appellants must immediately execute the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents as provided in paragraph 12 of the contract. The attorney's fees are justified. WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any interests. Costs against the defendantsappellants. 56. 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. R E S O L U T I O N


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. 2627, 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 ElordeBoysaw 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. 57. G.R. No. L-67881 PILIPINAS BANK as Successor-In-Interest Of And/Or In substitution to, The MANUFACTURERS BANK AND TRUST COMPANY, petitioner-appellant vs. INTERMEDIATE APPELLATE COURT (Fourth Civil Cases Division), and JOSE W. DIOKNO and CARMEN I. DIOKNO, respondents-appellees. PARAS, J.: This is an appeal by certiorari from the Decision 1 of the respondent court dated May 31, 1984 in CA-G.R. CV No. 67205 entitled "Jose W. Diokno and Carmen I. Diokno, plaintiffsappellees, vs. The Manufacturers Bank and Trust Company, defendant-appellant" which affirmed the decision 2 of the Court of First Instance of Rizal (Pasig Branch XXI) in Civil Case No. 19660, the dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of the plaintiffs and against the defendant, ordering the defendant Manufacturers Bank & Trust Company: 1. To deliver to the plaintiffs the parcel of land described in Contract to Sell No. VV-18-(a) in the total area of 5,936 square meters and to execute in their favor the necessary deed of absolute sale therefor; 2. To pay the sum of P556,160.00 less the amount due on the contract (i.e., the unpaid installments from December, 1966 until the contract would have been fully paid together with interest thereon up to March 25, 1974) with legal interest on said balance from April 22, 1974 until the same is fully paid; 3. P50,000.00 by way of moral damages; 4. P50,000.00 by way of exemplary damages; 5. Ten per cent (10%) of the judgment by way of attorney's fees; and 6. Costs of suit. SO ORDERED. (Rollo, pp. 14-15) The following are the undisputed facts of the case: 1. On April 18, 1961, Hacienda Benito, Inc. (petitioner's predecessor-in-interest) as vendor, and private respondents, as vendees executed Contract to Sell No. VV-18 (a) (Exh. A) over a parcel of land with an area of 5,936 square meters of the Victoria Valley Subdivision in Antipolo, Rizal, subject to the following terms and conditions, among others, relevant to this petition:


(a) The total contract price for the entire 5,936 square-meterlot was P47,488.00; (b) Of the total sum, an amount of Pl2,182.00 was applied thereto so as to reduce the balance on the principal to P35,306.00; (c) The aforesaid balance, together with the stipulated interest of 6% per annum, was to be paid over a period of 8-1/2 years starting on May 1, 1961 at a monthly installment of P446.10 until fully paid-although this monthly installment was later adjusted to the higher amount of P797.86, starting on April 1, 1965; (d) Upon complete payment by the vendee of the total price of the lot the vendor shall execute a deed of sale in favor of the vendee; (e) The contract shall be considered automatically rescinded and cancelled and of no further force and effect upon failure of the vendee to pay when due, three or more consecutive installments as stipulated therein or to comply with any of the terms and conditions thereof, in which case the vendor shall have right to resell the said parcel of land to any person interested, forfeiting payments made by the vendee as liquidated damages. 2. On July 27, 1965, petitioner sent to private respondents a Statement of Account (Exh. F-1) requesting remittance of installment arrears showing partial payments for the month of April 1965 and May 1965 and complete default for June, July and August, 1965; 3. Likewise, on August 31, 1965, petitioner sent to private respondents another Statement of Account with the additional entries of interests and the incoming installment for September, 1965;

4. In partial compliance with the aforesaid Statements of Account, private respondents paid on September 3, 1965 the sum of Pl,397.00 which answers for the installments for the months of June 1965 to August 1965; 5. On March 17, 1967, petitioner sent private respondents a simple demand letter showing a delinquency in their monthly amortizations for 19 months (Exh. 9); 6. On April 17, 1967, petitioner again sent private respondents a demand letter showing total arrearages of 20 months as of April 1965, but this time advising that unless they up-date their installment payments, petitioner shall be constrained to avail of the automatic rescission clause (Exh. 10); 7. On May 17, 1967, private respondents made a partial payment of P2,000.00 with the request for an extension of 60 days from May 17, 1967 within which to up-date their account (Exh. 10-a); 8. On July 17, 1967, private respondents wrote a letter to petitioner asking another extension of sixty (60) days to pay all their arrearages and update their payments under Contract No. VV-18 (a); 9. On September 18, 1967, private respondents paid P5,000.00 as partial payment and requested an extension of another 30 days from September 18, 1967 within which to update their account (Exh. 10-c); 10. On October 19, 1967, however, private respondents failed to update their arrearages and did not request for any further extension of time within which to update their account;


11. After almost three (3) years, or on July 16, 1970, private respondents wrote a letter to petitioner requesting for a Statement of Account as of date in arrears and interests(Exh. 10d), to which petitioner made a reply on July 22, 1970 (Exh. 11); 12. On May 19, 1971, petitioner wrote a letter to private respondents, reminding them of their balance which will be due on the 31st instant (Exh. J); 13. More than two (2) years from May 19, 1971 or on July 5, 1973, private respondents wrote a letter to petitioner expressing their desire to fully settle their obligation, requesting for a complete statement of all the balance due including interests; 14. On March 14, 1974, private respondents wrote a letter reiterating their request in their letter dated July 5, 1973, which has not been complied with despite several follow-ups (Exh. O); 15. On March 25, 1974, private respondent Carmen I. Diokno went to see the Chairman of petitioner's Board of Directors on the matter informing him that she had a buyer who was ready to purchase the property, 16. On March 27, 1974, petitioner wrote a letter to private respondents, informing them that the contract to sell had been rescinded/cancelled by a notarial act, to which letter was annexed a "Demand for Rescission of Contract", notarized on March 25, 1974 (Exh. 12); 17. In view of the foregoing, private respondents filed Complaint for Specific Performance with Damages to compel petitioner to execute a deed of sale in their favor, and to deliver to them the title of the lot in question. 18. Petitioner filed an Answer with counterclaim for damages in the form of attorney's fees, claiming that Contract to Sell No.

VV-18(a) has been automatically rescinded or cancelled by virtue of private respondents' failure to pay the installments due in the contract under the automatic rescission clause. 19. After trial, the lower court rendered a decision in private respondents' favor, holding that petitioner could not rescind the contract to sell, because: (a) petitioner waived the automatic rescission clause by accepting payment on September 1967, and by sending letters advising private respondents of the balances due, thus, looking forward to receiving payments thereon; (b) in any event, until May 18, 1977 (when petitioner made arrangements for the acquisition of additional 870 square meters) petitioner could not have delivered the entire area contracted for, so, neither could private respondents be liable in default, citing Art. 1 189 of the New Civil Code. (Decision, pp. 141148, Amended Record on Appeal). Said decision was affirmed on appeal. Hence, this Petition For Review on Certiorari, raising the main issue of whether or not the Contract to Sell No. VV-18(a) was rescinded or cancelled, under the automatic rescission clause contained therein. We find the petition meritless. While it is true that in the leading case of Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc. and Myers Building Co., 43 SCRA 93 the Supreme Court reiterated among other things that a contractual provision allowing "automatic rescission" (without prior need of judicial rescission, resolution or cancellation) is VALID, the remedy of one who feels aggrieved being to go to Court for the cancellation of the rescission itself, in case the rescission is found unjustified under the circumstances, still in the instant case there is a clear WAIVER of the stipulated right of "automatic rescission," as evidenced by the many extensions granted private respondents


by the petitioner. In all these extensions, the petitioner never called attention to the proviso on "automatic rescission." WHEREFORE the assailed decision is hereby AFFIRMED but the actual damages are hereby reduced to P250,000.00 (the profit private respondents could have earned had the land been delivered to them at the time they were ready to pay all their arrearages) minus whatever private respondents still owe the petitioner (with the stipulated 6% annual interest up to March 25, 1974) as a result of the contract. 58. 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, 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; xxx xxx xxx (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 business in the Philippines and instructed the Acting Superintendent of 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 nonexisting 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 overvaluation 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. 59. G.R. No. 149338 July 28, 2008 UNLAD RESOURCES DEVELOPMENT CORPORATION, UNLAD RURAL BANK OF NOVELETA, INC., UNLAD COMMODITIES, INC., HELENA Z. BENITEZ, and CONRADO L. BENITEZ II, Petitioners, vs. RENATO P. DRAGON, TARCISIUS R. RODRIGUEZ, VICENTE D. CASAS, ROMULO M. VIRATA, FLAVIANO PERDITO, TEOTIMO BENITEZ, ELENA BENITEZ, and ROLANDO SUAREZ, Respondents. D E C I S I O N NACHURA, J.: Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Civil Procedure seeking the reversal of the

November 29, 2000 Decision1 and August 2, 2001 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 54226. The facts, as found by the CA, are as follows: On December 29, 1981, the Plaintiffs (herein respondents) and defendant (herein petitioner) Unlad Resources, through its Chairman[,] Helena Z. Benitez[,] entered into a Memorandum of Agreement wherein it is provided that [respondents], as controlling stockholders of the Rural Bank [of Noveleta] shall allow Unlad Resources to invest four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of additional equity. On the other hand, [petitioner] Unlad Resources bound itself to invest the said amount of 4.8 million pesos in the Rural Bank; upon signing, it was, likewise, agreed that [petitioner] Unlad Resources shall subscribe to a minimum of four hundred eighty thousand pesos (P480,000.00) (sic) common or preferred non-voting shares of stock with a total par value of four million eight hundred thousand pesos (P4,800,000.00) and pay up immediately one million two hundred thousand pesos (P1,200,000.00) for said subscription; that the [respondents], upon the signing of the said agreement shall transfer control and management over the Rural Bank to Unlad Resources. According to the [respondents], immediately after the signing of the agreement, they complied with their obligation and transferred control of the Rural Bank to Unlad Resources and its nominees and the Bank was renamed the Unlad Rural Bank of Noveleta, Inc. However, [respondents] claim that despite repeated demands, Unlad Resources has failed and refused to comply with their obligation under the said Memorandum of Agreement when it did not invest four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank in the form of additional equity and, likewise, it failed to immediately infuse one million two hundred thousand pesos (P1,200,000.00) as paid in capital upon signing of the Memorandum of Agreement.


On August 10, 1984, the Board of Directors of [petitioner] Unlad Resources passed Resolution No. 84-041 authorizing the President and the General Manager to lease a mango plantation situated in Naic, Cavite. Pursuant to this Resolution, the Bank as [lessee] entered into a Contract of Lease with the [petitioner] Helena Z. Benitez as [lessor]. The management of the mango plantation was undertaken by Unlad Commodities, Inc., a subsidiary of Unlad Resources[,] under a Management Contract Agreement. The Management Contract provides that Unlad Commodities, Inc. would receive eighty percent (80%) of the net profits generated by the operation of the mango plantation while the Bank’s share is twenty percent (20%). It was further agreed that at the end of the lease period, the Rural Bank shall turn over to the lessor all permanent improvements introduced by it on the plantation. x x x x On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding [the] Central Bank’s approval to retire its [Development Bank of the Philippines] preferred shares in the amount of P219,000.00 and giving notice for subscription to proportionate shares. The [respondents] objected on the grounds that there is already a sinking fund for the retirement of the said DBP-held preferred shares provided for annually and that it could deprive the Rural Bank of a cheap source of fund. (sic) [Respondents] alleged compliance with all of their obligations under the Memorandum of Agreement in that they have transferred control and management over the Rural bank to the [petitioners] and are ready, willing and able to allow [petitioners] to subscribe to a minimum of four hundred eighty thousand (P480,000.00) (sic) common or preferred non-voting shares of stocks with a total par value of four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank. However,

[petitioners] have failed and refused to subscribe to the said shares of stock and to pay the initial amount of one million two hundred thousand pesos (P1,200,000.00) for said subscription.3 On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of Makati City, Branch 61 a Complaint4 for rescission of the agreement and the return of control and management of the Rural Bank from petitioners to respondents, plus damages. After trial, the RTC rendered a Decision,5 the dispositive portion of which provides: WHEREFORE, Premises Considered, judgment is hereby rendered, as follows: 1. The Memorandum of Agreement dated 29 December 1991 (sic) is hereby declared rescinded and: (a) Defendant Unlad Resources Development Corporation is hereby ordered to immediately return control and management over the Rural Bank of Noveleta, Inc. to Plaintiffs; and (b) Unlad Rural Bank of Noveleta, Inc. is hereby ordered to return to Defendants the sum of One Million Three Thousand Seventy Pesos (P1,003,070.00) 2. The Director for Rural Banks of the Bangko Sentral ng Pilipinas is hereby appointed as Receiver of the Rural Bank; 3. Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from placing the retired DBP-held preferred shares available for subscription and the same is hereby ordered to be placed under a sinking fund; 4. Defendant Unlad Resources Development Corporation is hereby ordered to pay plaintiffs the following:


(a) actual compensatory damages amounting to Four Million Six Hundred One Thousand Seven Hundred Sixty- Five and 38/100 Pesos (P4,601,765.38); (b) moral damages in the amount of Five Hundred Thousand Pesos (P500,000.00); (c) exemplary and corrective damages in the amount of One Hundred Thousand Pesos (P100,000.00); and (d) attorney’s fees in the sum of (P100,000.00), plus cost of suit. SO ORDERED.6 Herein petitioners appealed the ruling to the CA. Respondents filed a Motion to Dismiss and, subsequently, a Supplemental Motion to Dismiss, which were both denied. Later, however, the CA, in a Decision dated November 29, 2000, dismissed the appeal for lack of merit and affirmed the RTC Decision in all respects. Petitioners’ motion for reconsideration was denied in CA Resolution dated August 2, 2001. Petitioners are now before this Court alleging that the CA committed a grave and serious reversible error in issuing the assailed Decision. Petitioners question the jurisdiction of the trial court, something they have done from the beginning of the controversy, contending that the issues that respondents raised before the trial court are intra-corporate in nature and are, therefore, beyond the jurisdiction of the trial court. They point out that respondents’ complaint charged them with mismanagement and alleged dissipation of the assets of the Rural Bank. Since the complaint challenges corporate actions and decisions of the Board of Directors and prays for the recovery of the control and management of the Rural Bank, these matters fall outside the jurisdiction of the trial court. Thus, they posit that the

judgment of the trial court, as affirmed by the CA, is null and void and may be impugned at any time. Petitioners further argue that the action instituted by respondents had already prescribed, because Article 1389 of the Civil Code provides that an action for rescission must be commenced within four years. They claim that the trial court and the CA mistakenly applied Article 1144 of the Civil Code which treats of prescription of actions in general. They submit that Article 1389, which deals specifically with actions for rescission, is the applicable law. Moreover, petitioners assert that they have fully complied with their undertaking under the subject Memorandum of Agreement, but that the undertaking has become a "legal and factual impossibility" because the authorized capital stock of the Rural Bank was increased from P1.7 million to only P5 million, and could not accommodate the subscription by petitioners of P4.8 million worth of shares. Such deficiency, petitioners contend, is with the knowledge and approval of respondent Renato P. Dragon and his nominees to the Board of Directors. Petitioners, without conceding the propriety of the judgment of rescission, also argue that the subject Memorandum of Agreement could not just be ordered rescinded without the corresponding order for the restitution of the parties’ total contributions and/or investments in the Rural Bank. Finally, they assail the award for moral and exemplary damages, as well as the award for attorney’s fees, as bereft of factual and legal bases given that, in the body of the Decision, it was merely stated that respondents suffered moral damages without any discussion or explanation of, nor any justification for such award. Likewise, the matter of attorney’s fees was not at all discussed in the body of the Decision. Petitioners claim that pursuant to the prevailing rule, attorney’s fees cannot be recovered in the absence of stipulation.


On the other hand, respondents declare that immediately after the signing of the Memorandum of Agreement, they complied with their obligation and transferred control of the Rural Bank to petitioner Unlad Resources and its nominees, but that, despite repeated demands, petitioners have failed and refused to comply with their concomitant obligations under the Agreement. Respondents narrate that shortly after taking over the Rural Bank, petitioners Conrado L. Benitez II and Jorge C. Cerbo, as President and General Manager, respectively, entered into a Contract of Lease over the Naic, Cavite mango plantation, and that, as a consequence of this venture, the bank incurred expenses amounting to P475,371.57, equivalent to 25.76% of its capital and surplus. The respondents further assert that the Central Bank found this undertaking not inherently connected with bona fide rural banking operations, nor does it fall within the allied undertakings permitted under Section 26 of Central Bank Circular No. 741 and Section 3379 of the Manual of Regulations of the Central Bank. Thus, respondents contend that this circumstance, coupled with the fact that petitioners Helena Z. Benitez and Conrado L. Benitez II were also stockholders and members of the Board of Directors of Unlad Resources, Unlad Rural Bank, and Unlad Commodities at that time, is adequate proof that the Rural Bank’s management had every intention of diverting, dissipating, and/or wasting the bank’s assets for petitioners’ own gain. They likewise allege that because of the failure of petitioners to comply with their obligations under the Memorandum of Agreement, respondents, with the exception of Tarcisius Rodriguez, lodged a complaint with the Securities and Exchange Commission (SEC), seeking rescission of the Agreement, damages, and the appointment of a management committee, but the SEC dismissed the complaint for lack of jurisdiction.

Furthermore, when the Rural Bank informed respondents of the Central Bank’s approval of its plan to retire its DBP-held preferred shares, giving notices for subscription to proportionate shares, respondents objected on the ground that there was already a sinking fund for the retirement of said shares provided for annually, and that the retirement would deprive the petitioner Rural Bank of a cheap source of fund. It was at that point, respondents claim, that they instituted the aforementioned Complaint against petitioners before the RTC of Makati. The respondents also seek the outright dismissal of this Petition for lack of verification as to petitioners Helena Z. Benitez and Conrado L. Benitez II; lack of proper verification as to petitioners Unlad Resources Development Corporation, Unlad Rural Bank of Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper verified statement of material dates; and lack of proper sworn certification of non-forum shopping. They support the proposition that Tijam v. Sibonghanoy7 applies, and that petitioners are indeed estopped from questioning the jurisdiction of the trial court. They also share the lower court’s view that it is Article 1144 of the Civil Code, and not Article 1389, that is applicable to this case. Finally, respondents allege that the failure of petitioner Unlad Resources to comply with its undertaking under the Agreement, as uniformly found by the trial court and the CA, may no longer be assailed in the instant Petition, and that the award of moral and exemplary damages and attorney’s fees is justified. The Petition is bereft of merit. We uphold the Decision of the CA affirming that of the RTC. First, the subject of jurisdiction. The main issue in this case is the rescission of the Memorandum of Agreement. This is to be distinguished from respondents’ allegation of the alleged mismanagement and dissipation of corporate assets by the


petitioners which is based on the prayer for receivership over the bank. The two issues, albeit related, are obviously separate, as they pertain to different acts of the parties involved. The issue of receivership does not arise from the parties’ obligations under the Memorandum of Agreement, but rather from specific acts attributed to petitioners as members of the Board of Directors of the Bank. Clearly, the rescission of the Memorandum of Agreement is a cause of action within the jurisdiction of the trial courts, notwithstanding the fact that the parties involved are all directors of the same corporation. Still, the petitioners insist that the trial court had no jurisdiction over the complaint because the issues involved are intracorporate in nature. This argument miserably fails to persuade. The law in force at the time of the filing of the case was Presidential Decree (P.D.) 902-A, Section 5(b) of which vested the Securities and Exchange Commission with original and exclusive jurisdiction to hear and decide cases involving controversies arising out of intracorporate relations.8 Interpreting this statutorily conferred jurisdiction on the SEC, this Court had occasion to state: Nowhere in said decree do we find even so much as an [intimation] that absolute jurisdiction and control is vested in the Securities and Exchange Commission in all matters affecting corporations. To uphold the respondent’s arguments would remove without legal imprimatur from the regular courts all conflicts over matters involving or affecting corporations, regardless of the nature of the transactions which give rise to such disputes. The courts would then be divested of jurisdiction not by reason of the nature of the dispute submitted to them for adjudication, but solely for the reason that the dispute involves a corporation. This cannot be done.9

It is well to remember that the respondents had actually filed with the SEC a case against the petitioners which, however, was dismissed for lack of jurisdiction due to the pendency of the case before the RTC.10 The SEC’s Order dismissing the respondents’ complaint is instructive: From the foregoing allegations, it is apparent that the present action involves two separate causes of action which are interrelated, and the resolution of which hinges on the very document sought to be rescinded. The assertion that the defendants failed to comply with their contractual undertaking and the claim for rescission of the contract by the plaintiffs has, in effect, put in issue the very status of the herein defendants as stockholders of the Rural Bank. The issue as to whether or not the defendants are stockholders of the Rural Bank is a pivotal issue to be determined on the basis of the Memorandum of Agreement. It is a prejudicial question and a logical antecedent to confer jurisdiction to this Commission. It is to be noted, however, that determination of the contractual undertaking of the parties under a contract lies with the Regional Trial Courts and not with this Commission. x x x11 Be that as it may, this point has been rendered moot by Republic Act (R.A.) No. 8799, also known as the Securities Regulation Code. This law, which took effect in 2000, has transferred jurisdiction over such disputes to the RTC. Specifically, R.A. 8799 provides: Sec. 5. Powers and Functions of the Commission x x x x 5.2. The Commission’s jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the


appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. Section 5 of P.D. No. 902-A reads, thus: Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: a) Devices and schemes employed by or any acts of the board of directors, business associates, its officers or partnership, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and/or of the stockholder, partners, members of associations or organizations registered with the Commission; b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity;

c) Controversies in the election or appointment of directors, trustees, officers or managers of such corporations, partnerships or associations. Consequently, whether the cause of action stems from a contractual dispute or one that involves intra-corporate matters, the RTC already has jurisdiction over this case. In this light, the question of whether the doctrine of estoppel by laches applies, as enunciated by this Court in Tijam v. Sibonghanoy, no longer finds relevance. Second, the issue of prescription. Petitioners further contend that the action for rescission has prescribed under Article 1398 of the Civil Code, which provides: Article 1389. The action to claim rescission must be commenced within four years x x x. This is an erroneous proposition. Article 1389 specifically refers to rescissible contracts as, clearly, this provision is under the chapter entitled "Rescissible Contracts." In a previous case,12 this Court has held that Article 1389: applies to rescissible contracts, as enumerated and defined in Articles 1380 and 1381. We must stress however, that the "rescission" in Article 1381 is not akin to the term "rescission" in Article 1191 and Article 1592. In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said article. The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144, which provides that the


action upon a written contract should be brought within ten years from the time the right of action accrues. Article 1381 sets out what are rescissible contracts, to wit: Article 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 onefourth 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. The Memorandum of Agreement subject of this controversy does not fall under the above enumeration. Accordingly, the prescriptive period that should apply to this case is that provided for in Article 1144, to wit: Article 1144. The following actions must be brought within ten years from the time the right of action accrues: (1) Upon a written contract; x x x x

Based on the records of this case, the action was commenced on July 3, 1987, while the Memorandum of Agreement was entered into on December 29, 1981. Article 1144 specifically provides that the 10-year period is counted from "the time the right of action accrues." The right of action accrues from the moment the breach of right or duty occurs.13 Thus, the original Complaint was filed well within the prescriptive period. We now proceed to determine if the trial court, as affirmed by the CA, correctly ruled for the rescission of the subject Agreement. Petitioners contend that they have fully complied with their obligation under the Memorandum of Agreement. They allege that due to respondents’ failure to increase the capital stock of the corporation to an amount that will accommodate their undertaking, it had become impossible for them to perform their end of the Agreement. Again, petitioners’ contention is untenable. There is no question that petitioners herein failed to fulfill their obligation under the Memorandum of Agreement. Even they admit the same, albeit laying the blame on respondents. It is true that respondents increased the Rural Bank’s authorized capital stock to only P5 million, which was not enough to accommodate the P4.8 million worth of stocks that petitioners were to subscribe to and pay for. However, respondents’ failure to fulfill their undertaking in the agreement would have given rise to the scenario contemplated by Article 1191 of the Civil Code, which reads: Article 1191. The power to rescind reciprocal 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. Thus, petitioners should have exacted fulfillment from the respondents or asked for the rescission of the contract instead of simply not performing their part of the Agreement. But in the course of things, it was the respondents who availed of the remedy under Article 1191, opting for the rescission of the Agreement in order to regain control of the Rural Bank. Having determined that the rescission of the subject Memorandum of Agreement was in order, the trial court ordered petitioner Unlad Resources to return to respondents the management and control of the Rural Bank and for the latter to return the sum of P1,003,070.00 to petitioners. 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.14 Article 1385 of the Civil Code provides, thus: 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 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 who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. This Court has consistently ruled that this provision applies to rescission under Article 1191: [S]ince Article 1385 of the Civil Code expressly and clearly states that "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," the Court finds no justification to sustain petitioners’ position that said Article 1385 does not apply to rescission under Article 1191.15 Rescission has the effect of "unmaking a contract, or its undoing from the beginning, and not merely its termination."16 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.17 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. The rescission has the effect of abrogating the contract in all parts.18 Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there was just cause for rescission. With the contract


thus rescinded, the parties must be restored to the status quo ante, that is, before they entered into the Memorandum of Agreement. Finally, we must resolve the question of the propriety of the award for damages and attorney’s fees. The trial court’s Decision mentioned that the "evidence is clear and convincing that Plaintiffs (herein respondents) suffered actual compensatory damages amounting to Four Million Six Hundred One Thousand Seven Hundred Sixty-Five and 38/100 Pesos (P4,601,765.38) moral damages and attorney’s fees." Though not discussed in the body of the Decision, the records show that the amount of P4,601,765.38 pertains to actual losses incurred by respondents as a result of petitioners’ noncompliance with their undertaking under the Memorandum of Agreement. On this point, respondent Dragon presented testimonial and documentary evidence to prove the actual amount of damages, thus: Atty. Cruz Q: Was there any consequence to you Mr. Dragon due to any breach of the agreement marked as Exhibit A? A: Yes sir I could have earned thru the shares of stock that I have, or we have or we had by this time amounting to several millions pesos (sic). They have only put in the whole amount that we have agreed upon (sic). Q: In this connection did you cause computation of these losses that you incured (sic)? A: Yes sir.

x x x x Q: Will you please kindly go through this computation and explain the same to the Honorable Court? A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only Three Hundred Ninety Nine Thousand Two hundred for Nineteen Thousand Nine Hundred Sixty shares which should have been sold if it were sold to others for P50.00 each for a total of Nine Hundred Ninety Eight Thousand but sold to them for Three Hundred Ninety nine (sic) Thousand two (sic) Hundred only and of which only Three Hundred Twenty Four Thousand Six Hundred was paid to me. Therefore, there was a difference of Six Hundred Seven Three (sic) Thousand Four Hundred (P673,400.00). On the basis of the commulative (sic) lost income every year from March 1982 from the amount of Seven Six Hundred (sic) Seventy Three Thousand four (sic) Hundred (P673,400.) (sic) there would be a discommulative (sic) lost (sic) of One Million Ninety Three Thousand Nine Hundred Fifty Two Pesos and forty two (sic) centavos (P1,093,952.42). Please note that the interest imputed is only at 12% per annum but it should had (sic) been much higher. In 1984 to 1986 (sic) alone rates went as higher (sic) as 40% per annum from the so called (sic) Jobo Bills and yet we only computed the imputed income or lost income at 12% per annum and then there is a 40% participation on the unrealized earnings due to their failure to put in an stabilized (sic) earnings. You will note that if they put in 4.8 million Pesos and it would be earning money, 40% of that will go to us because 40% of the bank would be ours and 60% would be there (sic). But because they did put in the 4.8 million our 40% did not earn up to that extent and computed again on the basis of 12% the amount (sic) on the commulative (sic) basis up to September 1990 is 2 million three hundred fifty two thousand sixty five pesos and four centavos (sic). (P2,352,065.04). You will note again that the average return of investment of any Cavite


based (sic) Rural Bank has been no less than 20% or about 30% per annum. And we computed only the earnings at 12%. x x x x There were loans granted fraudulently to members of the board and some borrowers which were not all charged interest for several years and on this basis we computed a 40% shares (sic) on the foregone income interest income (sic) on all these fraudulently granted loans, without interest being collected and none a project (sic) among a plantation project (sic), which was funded by the bank but nothing was given back to the bank for several hundred thousand of pesos (sic). And we arrived an (sic) estimate of the foregone interest income a total of One Million Two Hundred Five Thousand Eight Hundred Sixty None Pesos and eighty one (sic) centavos and 40 percent share of this (sic) would be Four Hundred Eighty Two Thousand Three Hundred Forty Seven Pesos and Ninety Two Centavos. All in all our estimate of the damages we have suffered is Four Million Six Hundred one (sic) Thousand Seven Hundred Sixty Five Pesos and thirty eight (sic) centavos (P4,601,765.38).19 More importantly, petitioners never raised in issue before the CA this award of actual compensatory damages. They did not raise the matter of damages in their Appellants’ Brief, while in their Motion for Reconsideration, they questioned only the award of moral and exemplary damages, not the award of actual damages. Even in the present Petition for Review, what petitioners raised was the propriety of the award of moral and exemplary damages and attorney’s fees. On the grant of moral and exemplary damages and attorney’s fees, we note that the trial court’s Decision did not discuss the basis for the award. No mention of these damages awarded – or their factual basis – is made in the body of the Decision, only in

the dispositive portion. Be that as it may, we have examined the records of the case and found that the award must be sustained. It should be remembered that there are two separate causes of action in this case: one for rescission of the Memorandum of Agreement and the other for receivership based on alleged mismanagement of the company by the plaintiffs. While the award of actual compensatory damages was based on the breach of duty under the Memorandum of Agreement, the award of moral damages appears to be based on petitioners’ mismanagement of the company when they became members of the Board of Directors of the Rural Bank. Thus, the trial court said: Under the Rural Bank’s management, a systematic diversion of the bank’s assets was conceived whereby: (a) The Rural Bank’s funds would be funneled in the development and improvements of the Benitez Mango Plantation in the guise of an investment in said plantation; (b) Of the net profits earned from the plantation’s operations, the Rural Bank’s share therein, although it shoulders all of the financial risks, would be a measly twenty percent (20%) thereof while UCI, without investing a single centavo, would earn eighty percent (80%) of the said profits. Thus, the bulk of the profits of the mango plantation was also sought to be diverted to an entity wherein Helena Z. Benitez and Conrado L. Benitez II are not only principal stockholders but also the Chairman of the Board of Directors and President, respectively. Moreover, Defendant Helena Z. Benitez would be entitled to receive, under the lease contract, rentals in the total amount of Three Hundred Thousand Pesos (P300,000.00) or ten percent (10%) of gross profits, whichever is higher. (c) Finally, at the end of the lease period, the Rural Bank was obliged to turn over to the lessor (Helena Z. Benitez) all permanent improvements introduced by it on the plantation at no cost to Ms. Benitez.


Further, in its report dated March 13, 1985, the [Central Bank] after conducting its general examination upon the Rural Bank ordered the latter to "explain satisfactorily why the bank engage (sic) in an undertaking not inherently connected with [bona fide] rural banking operations nor within the allowed allied undertakings," contrary to the provisions of Section 3379 of the CB Manual of Regulations and Section 26 of CB Circular No. 741, otherwise known as the "Circular on Rural Banks[.]" The aforestated CB report states that "total exposure to this project now amounts to P475,371.57 or 25.76% of its capital and surplus[.]" Notwithstanding a finding by the CB of the undertaking’s illegality, the defendants nevertheless persisted in pursuing the Mango Plantation Project and never acceded to the call of [the] CB for it to desist from further implementing the said project. It was only after another letter from the CB was received when defendant finally shelved the mango plantation project. The result of the aforestated report, as well as the actuations of the Defendants in not yielding to the order of the CB, adequately establishes not only a violation of CB Rules (specifically Section 26, Circular 741 and Section 3379 of the CB Manual of Regulations, but also, that it has caused undue damage both to the Rural bank as well as its stockholders. The initial CB report should have sufficiently apprised Defendants of the illegality of the undertaking. Defendants, therefore have the duty to terminate the Mango Plantation Project. They, however, [chose] to continue it, apparently to further their [own] interest in the scheme for their own personal benefit and gain, an act which is clearly contrary to the fiduciary nature of their relationship with the corporation in which they are officers. Such persistence proves evident bad faith, or a breach of a known duty through some motive or ill-will, which resulted in the further dissipation and wastage of the Rural

Bank’s assets, unjustly depriving Plaintiffs of their fair share in the assets of the bank. All the foregoing satisfactorily affirms the allegations of Plaintiffs to the effect that these contracts were but part of a device employed by Defendants to siphon [off] the Rural bank for their personal gain.20 Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of precise pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant’s wrongful act or omission.21 Article 2220 of the Civil Code further provides that moral damages may be recovered in case of a breach of contract where the defendant acted in bad faith.22 To award moral damages, a court must be satisfied with proof of the following requisites: (1) an injury – whether physical, mental, or psychological – clearly sustained by the claimant; (2) a culpable act or omission factually established; (3) a wrongful act or omission of the defendant as the proximate cause of the injury sustained by the claimant; and (4) the award of damages predicated on any of the cases stated in Article 2219.231avvphi1 Accordingly, based upon the findings of the trial court, it is clear that respondents are entitled to moral damages. The acts attributed to the petitioners as directors of the Rural Bank manifestly prejudiced the respondents causing detriment to their standing as directors and stockholders of the Rural Bank. Exemplary damages cannot be recovered as a matter of right.24 While these need not be proved, respondents must show that they are entitled to moral, temperate or compensatory damages before the court may consider the question of awarding exemplary damages.25 We find that respondents are indeed


entitled to moral damages; thus, the award for exemplary damages is in order. Anent the award for attorney’s fees, Article 2208 of the Civil Code states: In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded. Hence, the award of exemplary damages is in itself sufficient justification for the award of attorney’s fees.26 WHEREFORE, the foregoing premises considered, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 54226 are AFFIRMED. SO ORDERED. 60. G.R. No. 207133 SWIRE REALTY DEVELOPMENT CORPORATION, Petitioner, vs. JAYNE YU, Respondent. D E C I S I O N PERALTA, J.: This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure which seeks to reverse and set

aside the Decision1 dated January 24, 2013 and Resolution2 dated April 30, 2013 of the Court of Appeals (CA) in CA-G.R. SP No. 121175. The facts follow. 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 comer 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). On October 19, 2004, the HLURB ENCRFO rendered a Decision3 dismissing respondent’s complaint. It ruled that rescission is not permitted for slight or casual breach of the contract but only for 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 follows: WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered ordering [petitioner] the following:


1.To finish the subject unit as pointed out in the inspection Report 2.To pay [respondent] the following: a.the amount of P100,000 as compensatory damages for the minor irreversible defects in her unit [respondent], or, in the alternative, conduct the necessary repairs on the subject unit to conform to the intended specifications; b.moral damages of P20,000.00 c.Attorney’s fees of P20,000.00 On the other hand, [respondent] is hereby directed to immediately update her account insofar as the parking slot is concerned, without interest, surcharges or penalties charged therein. All other claims and counterclaims are hereby dismissed for lack of merit. IT IS SO ORDERED.4 Respondent then elevated the matter to the HLURB Board of Commissioners. In a Decision5 dated March 30, 2006, the HLURB Board of Commissioners reversed and set aside the ruling of the HLURB ENCRFO and ordered the rescission of the Contract to Sell, ratiocinating: We find merit in the appeal. 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. 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 entitles [respondent] to rescind the contract, demand a refund and payment of damages. 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; 2.Directing [petitioner] to pay respondent attorney’s fees in the amount of P20,000.00; 3.Directing [petitioner] to pay an administrative fine of P10,000.00 for violation of Section 20, in relation to Section 38 of P.D. 957: SO ORDERED.6 Petitioner moved for reconsideration, but the same was denied by the HLURB Board of Commissioners in a Resolution7 dated June 14, 2007. Unfazed, petitioner appealed to the Office of the President (OP) on August 7, 2007.


In a Decision8 dated November 21, 2007, the OP, through then Deputy Executive Secretary Manuel Gaite, dismissed petitioner’s appeal on the ground that it failed to promptly file its appeal before the OP. It held: Records show that [petitioner] received its copy of the 30 March 2006 HLURB Decision on 17 April 2006 and instead of filing an appeal, it opted first to file a Motion for Reconsideration on 28 April 2006 or eleven (11) days thereafter. The said motion interrupted the 15-day period to appeal. On 23 July 2007, [petitioner] received the HLURB Resolution dated 14 June 2007 denying the Motion for Reconsideration. Based on the ruling in United Overseas Bank Philippines, Inc. v. 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 receipt thereof pursuant to Section 15 of P.D. No. 957 and Section 2 of P.D. No. 1344 which are special laws that provide an exception to Section 1 of Administrative Order No. 18. Corollary thereto, par. 2, Section 1 of Administrative Order No. 18, Series of 1987 provides that: The time during which a motion for reconsideration has been pending with the Ministry/Agency concerned shall be deducted from the period of appeal. But where such a motion for reconsideration has been filed during office hours of the last day of the period herein provided, the appeal must be made within the day following receipt of the denial of said motion by the appealing party (Underscoring supplied) x x x x 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 2007 to file the Notice of Appeal before this Office. However, [petitioner] filed its appeal only on 7 August 2007 or eleven (11) days late. 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. WHEREFORE, premises considered, [petitioner]’s appeal is hereby DISMISSED, and the HLURB Decision dated 30 March 2006 and HLURB Resolution dated 14 June 2007 are hereby AFFIRMED. SO ORDERED.9 Immediately thereafter, petitioner filed a motion for reconsideration against said decision. In a Resolution10 dated February 17, 2009, the OP, through then Executive Secretary Eduardo Ermita, granted petitioner’s motion and set aside Deputy Executive Secretary Gaite’s decision. It held that after a careful and thorough evaluation and study of the records of the case, 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 jurisprudence relevant to the case. Thus: WHEREFORE, premises considered, the instant Motion for Reconsideration is hereby GRANTED. The Decision and Resolution of the HLURB Third Division Board of Commissioners, dated March 30, 2006 and June 14, 2007, respectively, are hereby SET ASIDE, and the HLURB ENCRFO Decision dated October 19, 2004 is hereby REINSTATED. SO ORDERED.11


Respondent sought reconsideration of said resolution, however, the same was denied by the OP in a Resolution12 dated August 18, 2011. Consequently, respondent filed an appeal to the CA. In a Decision dated January 24, 2013, the CA granted respondent’s appeal and reversed and set aside the Order of the OP. The fallo of its decision reads: WHEREFORE, the Petition is hereby GRANTED. The assailed Resolution dated 17 February 2009 and Order dated 18 August 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 March 2006 and Resolution dated 14 June 2007 of the HLURB Board of Commissioners in HLURB Case No. REM-A050127-0014, are REINSTATED. SO ORDERED.13 Petitioner moved for reconsideration, however, the CA denied the same in a Resolution dated April 30, 2013. Hence, the present petition wherein petitioner raises the following grounds to support its petition: THE COURT OF APPEALS GRAVELY ERRED IN IGNORING THE LEGAL PRECEPTS THAT: A.TECHNICAL RULES ARE NOT BINDING UPON ADMINISTRATIVE AGENCIES; and B.RESCISSION WILL BE ORDERED ONLY WHERE THE BREACH COMPLAINED OF IS SUBSTANTIAL AS TO DEFEAT THE OBJECT OF THE PARTIES IN ENTERING INTO THE AGREEMENT.14

In essence, the issues are: (1) whether petitioner’s appeal was timely filed before the OP; and (2) whether rescission of the contract is proper in the instant case. We shall resolve the issues in seriatim. First, the period to appeal the decision of the HLURB Board of Commissioners to the Office of the President has long been settled in the case of SGMC Realty Corporation v. Office of the President,15 as reiterated in the cases of Maxima Realty Management and Development Corporation v. Parkway Real Estate Development Corporation16 and United Overseas Bank Philippines, Inc. v. Ching.17 In the aforementioned cases, we ruled that the period to appeal decisions of the HLURB Board of Commissioners is fifteen (15) days from receipt thereof pursuant to Section 1518 of PD No. 95719 and Section 220 of PD No. 134421 which are special laws that provide an exception to Section 1 of Administrative Order No. 18. Thus, in the SGMC Realty Corporation v. Office of the President case, the Court explained: As pointed out by public respondent, the aforecited administrative order allows aggrieved party to file its appeal with the Office of the President within thirty (30) days from receipt of the decision complained of. Nonetheless, such thirty-day period is subject to the qualification that there are no other statutory periods of appeal applicable. If there are special laws governing particular cases which provide for a shorter or longer reglementary period, the same shall prevail over the thirty-day period provided for in the administrative order. This is in line with the rule in statutory construction that an administrative rule or regulation, in order to be valid, must not contradict but conform to the provisions of the enabling law.


We note that indeed there are special laws that mandate a shorter period of fifteen (15) days within which to appeal a case to public respondent. First, Section 15 of Presidential Decree No. 957 provides that the decisions of the National Housing Authority (NHA) shall 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 No. 1344 states that decisions of the National Housing Authority shall become final and executory after the lapse of fifteen (15) days from the 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 development has been transferred to Human Settlements Regulatory Commission, now known as HLURB. x x x22 Records show that petitioner received a copy of the HLURB Board of Commissioners’ decision on April 17, 2006. Correspondingly, it had fifteen days from April 17, 2006 within which to file its appeal or until 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 Reconsideration, instead of an appeal. Concomitantly, Section 1 of Administrative Order No. 1823 provides that the time during which a motion for reconsideration has been pending with the ministry or agency concerned shall be deducted from the period for appeal. Petitioner received the HLURB Board Resolution denying its Motion for Reconsideration on July 23, 2007 and filed its appeal only on August 7, 2007. Consequently therefore, petitioner had only four days from July 23, 2007, or until July 27, 2007, within which to file its appeal to the OP as the filing of the motion for reconsideration 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. 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.24 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.26 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:


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. 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. 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.27 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:

May 3, 2002: 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 26th Floor. 2.During the time of inspection, the said unit appears to be completed except for the installation of kitchen cabinets and fixtures. 3.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. i.Bathrooms and powder room have been installed in such manner acceptable to the undersigned.28 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.

61.

G.R. No. 196251 July 9, 2014 OLIVAREZ REALTY CORPORATION and DR. PABLO R. OLIVAREZ, Petitioner, vs. BENJAMIN CASTILLO, Respondent. D E C I S I O N

LEONEN, J.: Trial may be dispensed with and a summary judgment rendered if the case can be resolved judiciously by plain resort to the pleadings, affidavits, depositions, and other papers filed by the parties. This is a petition for review on certiorari1 of the Court of Appeals' decision2 dated July 20, 2010 and resolution3dated March 18, 2011 in CAG.R. CV No. 91244. The facts as established from the pleadings of the parties are as follows: Benjamin Castillo was the registered owner of a 346,918squaremeter parcel of land located in Laurel, Batangas, covered by Transfer Certificate of Title No. T-19972.4 The Philippine Tourism Authority allegedly claimed ownership of the sameparcel of land based on Transfer Certificate of Title No. T18493.5 On April 5, 2000, Castillo and Olivarez Realty Corporation, represented by Dr. Pablo R. Olivarez, entered into a contract of conditional sale6 over the property. Under the deed of conditional sale, Castillo agreed to sell his property to Olivarez Realty Corporation for P19,080,490.00. Olivarez Realty


Corporation agreed toa down payment of P5,000,000.00, to be paid according to the following schedule: DATE

AMOUNT

April 8, 2000

500,000.00

May 8, 2000

500,000.00

May 16, 2000

500,000.00

June 8, 2000

1,000,000.0 0

July 8, 2000

500,000.00

August 8, 2000

500,000.00

Should the action against the Philippine Tourism Authority be denied, Castillo agreed to reimburse all the amounts paid by Olivarez Realty Corporation. Paragraph D of the deed of conditional sale provides: D. In the event that the Court denie[s] the petition against the Philippine Tourism Authority, all sums received by [Castillo] shall be reimbursed to [Olivarez Realty Corporation] without interest[.]11

September 8, 2000 500,000.00 October 8, 2000

500,000.00

November 8, 2000 500,000.00

described property be nullified and voided; with the full assistance of [Castillo][.]10

7

As to the balance of P14,080,490.00, Olivarez Realty Corporation agreed to pay in 30 equal monthly installments every eighth day of the month beginning in the month that the parties would receive a decision voiding the Philippine Tourism Authority’s title to the property.8 Under the deed of conditional sale, Olivarez RealtyCorporation shall file the action against the Philippine Tourism Authority "with the full assistance of [Castillo]."9 Paragraph C of the deed of conditional sale provides: C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have the claim/title TCT T-18493 of Philippine Tourism Authority over the above-

As to the "legitimate tenants" occupying the property, Olivarez Realty Corporation undertook to pay them "disturbance compensation," while Castillo undertook to clear the land of the tenants within six months from the signing of the deed of conditional sale. Should Castillo fail to clear the land within six months, Olivarez Realty Corporation may suspend its monthly down payment until the tenants vacate the property. Paragraphs E and F of the deed of conditional sale provide: E. That [Olivarez Realty Corporation] shall pay the disturbance compensation to legitimate agricultural tenants and fishermen occupants which in no case shall exceed ONE MILLION FIVE HUNDRED THOUSAND (P1,500,000.00) PESOS. Said amountshall not form part of the purchase price. In excess of this amount, all claims shall be for the account of [Castillo]; F. That [Castillo] shall clear the land of [the] legitimate tenants within a period of six (6) months upon signing of this Contract, and in case [Castillo] fails, [Olivarez Realty Corporation] shall have the right to suspend the monthly down payment until such time that the tenants [move] out of the land[.]12 The parties agreed thatOlivarez Realty Corporation may immediately occupy the property upon signing of the deed of


conditional sale. Should the contract be cancelled, Olivarez RealtyCorporation agreed to return the property’s possession to Castillo and forfeit all the improvements it may have introduced on the property. Paragraph I of the deed of conditional sale states:

conditional sale was a contract of adhesion, Castillo prayed for rescission of contract under Article 1191 of the Civil Code of the Philippines. He further prayed that Olivarez Realty Corporation and Dr. Olivarez be made solidarily liable for moral damages, exemplary damages, attorney’s fees, and costs of suit.17

I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and develop the subject property. In case this Contract is canceled [sic], any improvement introduced by [the corporation] on the property shall be forfeited in favor of [Castillo][.]13

In their answer,18 Olivarez Realty Corporation and Dr. Olivarez admitted that the corporation only paid P2,500,000.00 ofthe purchase price. In their defense, defendants alleged that Castillo failed to "fully assist"19 the corporation in filing an action against the Philippine Tourism Authority. Neither did Castillo clear the property of the tenants within six months from the signing of the deed of conditional sale. Thus, according to defendants, the corporation had "all the legal right to withhold the subsequent payments to [fully pay] the purchase price."20

On September 2, 2004, Castillo filed a complaint14 against Olivarez Realty Corporation and Dr. Olivarez with the Regional Trial Court of Tanauan City, Batangas. Castillo alleged that Dr. Olivarez convinced him into selling his property to Olivarez Realty Corporation on the representation that the corporation shall be responsible in clearing the property of the tenants and in paying them disturbance compensation. He further alleged that Dr. Olivarez solely prepared the deed of conditional sale and that he was made to sign the contract with its terms "not adequately explained [to him] in Tagalog."15

Olivarez Realty Corporation and Dr. Olivarez prayedthat Castillo’s complaint be dismissed. By way of compulsory counterclaim, they prayed for P100,000.00 litigation expenses and P50,000.00 attorney’s fees.21

After the parties had signed the deed of conditional sale, Olivarez Realty Corporation immediately took possession of the property. However, the corporation only paid 2,500,000.00 ofthe purchase price. Contrary to the agreement, the corporation did not file any action against the Philippine Tourism Authority to void the latter’s title to the property. The corporation neither cleared the land of the tenants nor paid them disturbance compensation. Despite demand, Olivarez Realty Corporation refused to fully pay the purchase price.16

Castillo replied to the counterclaim,22 arguing that Olivarez Realty Corporation and Dr. Olivarez had no right to litigation expenses and attorney’s fees. According to Castillo, the deed of conditional sale clearly states that the corporation "assume[d] the responsibility of taking necessary legal action"23 against the Philippine Tourism Authority, yet the corporation did not file any case. Also, the corporation did not pay the tenants disturbance compensation. For the corporation’s failure to fully pay the purchase price, Castillo claimed that hehad "all the right to pray for the rescission of the [contract],"24 and he "should not be held liable . . . for any alleged damages by way of litigation expenses and attorney’s fees."25

Arguing that Olivarez Realty Corporation committed substantial breach of the contract of conditional sale and that the deed of

On January 10, 2005, Castillo filed a request for admission,26 requesting Dr. Olivarez to admit under oath the


genuineness of the deed of conditional sale and Transfer Certificate of Title No. T-19972. He likewise requested Dr. Olivarez to admit the truth of the following factual allegations: 1. That Dr. Olivarez is the president of Olivarez Realty Corporation; 2. That Dr. Olivarez offered to purchase the parcel of land from Castillo and that he undertook to clear the property of the tenants and file the court action to void the Philippine Tourism Authority’s title to the property; 3. That Dr. Olivarez caused the preparation of the deed of conditional sale; 4. That Dr. Olivarez signed the deed of conditional sale for and on behalf of Olivarez Realty Corporation; 5. That Dr. Olivarez and the corporation did not file any action against the Philippine Tourism Authority; 6. That Dr. Olivarez and the corporation did not pay the tenants disturbance compensation and failed to clear the property of the tenants; and 7. That Dr. Olivarez and the corporation only paid P2,500,000.00 of the agreed purchase price.27 On January 25, 2005, Dr. Olivarez and Olivarez Realty Corporation filed their objections to the request for admission,28 stating that they "reiterate[d] the allegations [and denials] in their [answer]."29 The trial court conducted pre-trial conference on December 17, 2005.

On March 8, 2006, Castillo filed a motion for summary judgment and/or judgment on the pleadings.30 He argued that Olivarez Realty Corporation and Dr. Olivarez "substantially admitted the material allegations of [his] complaint,"31specifically: 1. That the corporation failed to fully pay the purchase price for his property;32 2. That the corporation failed to file an action to void the Philippine Tourism Authority’s title to his property;33and 3. That the corporation failed to clear the property of the tenants and pay them disturbance compensation.34 Should judgment on the pleadings beimproper, Castillo argued that summary judgment may still be rendered asthere is no genuine issue as to any material fact.35 He cited Philippine National Bank v. Noah’s Ark Sugar Refinery36 as authority. Castillo attached to his motion for summary judgment and/or judgment on the pleadings his affidavit37 and the affidavit of a Marissa Magsino38 attesting to the truth of the material allegations of his complaint. Olivarez Realty Corporation and Dr. Olivarez opposed39 the motion for summary judgment and/or judgment on the pleadings, arguing that the motion was "devoid of merit."40 They reiterated their claim that the corporation withheld further payments of the purchase price because "there ha[d] been no favorable decision voiding the title of the Philippine Tourism Authority."41 They added that Castillo sold the property to another person and that the sale was allegedly litigated in Quezon City.42 Considering that a title adverse to that of Castillo’s existed, Olivarez Realty Corporation and Dr. Olivarez argued that the case


should proceed to trial and Castillo be required to prove that his title to the property is "not spurious or fake and that he had not sold his property to another person."43 In reply to the opposition to the motion for summary judgment and/or judgment on the pleadings,44 Castillo maintained that Olivarez Realty Corporation was responsible for the filing of an action against the Philippine Tourism Authority. Thus, the corporation could not fault Castillo for not suing the PhilippineTourism Authority.45 The corporation illegally withheld payments of the purchase price. As to the claim that the case should proceed to trial because a title adverse to his title existed, Castillo argued that the Philippine Tourism Authority’s title covered another lot, not his property.46 During the hearing on August 3, 2006, Olivarez Realty Corporation and Dr. Olivarez prayed that they be given 30 days to file a supplemental memorandum on Castillo’s motion for summary judgment and/or judgment on the pleadings.47 The trial court granted the motion. Itgave Castillo 20 days to reply to the memorandum and the corporation and Dr. Olivarez 15 days to respond to Castillo’s reply.48 In their supplemental memorandum,49 Olivarez Realty Corporation and Dr. Olivarez argued that there was "an obvious ambiguity"50 as to which should occur first — the payment of disturbance compensation to the tenants or the clearing of the property of the tenants.51 This ambiguity, according to defendants, is a genuine issue and "oughtto be threshed out in a full blown trial."52 Olivarez Realty Corporation and Dr. Olivarez added that Castillo prayed for irreconcilable reliefs of reformation of instrument and

rescission of contract.53 Thus, Castillo’s complaint should be dismissed. Castillo replied54 to the memorandum, arguing that there was no genuine issue requiring trial of the case. According to Castillo, "common sense dictates . . . that the legitimate tenants of the [property] shall not vacate the premises without being paid any disturbance compensation . . ."55 Thus, the payment of disturbance compensation should occur first before clearing the property of the tenants. With respect to the other issuesraised in the supplemental memorandum, specifically, that Castillo sold the property to another person, he argued that these issues should not be entertained for not having been presented during pre-trial.56 In their comment on the reply memorandum,57 Olivarez Realty Corporation and Dr. Olivarez reiterated their arguments that certain provisions of the deed of conditional sale were ambiguous and that the complaint prayed for irreconcilable reliefs.58 As to the additional issues raised in the supplemental memorandum, defendants argued that issues not raised and evidence not identified and premarked during pre-trial may still be raised and presented during trial for good cause shown. Olivarez Realty Corporation and Dr. Olivarez prayed that Castillo’s complaint be dismissed for lack of merit.59 Ruling of the trial court The trial court found that Olivarez Realty Corporation and Dr. Olivarez’s answer "substantially [admitted the material allegations of Castillo’s] complaint and [did] not . . . raise any genuine issue [as to any material fact]."60


Defendants admitted that Castillo owned the parcel of land covered by Transfer Certificate of Title No. T-19972. They likewise admitted the genuineness of the deed of conditional sale and that the corporation only paid P2,500,000.00 of the agreed purchase price.61 According to the trial court, the corporation was responsible for suing the Philippine Tourism Authority and for paying the tenants disturbance compensation. Since defendant corporation neither filed any case nor paid the tenants disturbance compensation, the trial court ruled that defendant corporation had no right to withhold payments from Castillo.62 As to the alleged ambiguity of paragraphs E and F of the deed of conditional sale, the trial court ruled that Castillo and his witness, Marissa Magsino, "clearly established"63 in their affidavits that the deed of conditional sale was a contract of adhesion. The true agreement between the parties was that the corporation would both clear the land of the tenants and pay them disturbance compensation. With these findings, the trial court ruled that Olivarez Realty Corporation breached the contract ofconditional sale.1âwphi1 In its decision64 dated April 23, 2007, the trial court ordered the deed of conditional sale rescinded and the P2,500,000.00 forfeited in favor of Castillo "as damages under Article 1191 of the Civil Code."65 The trial court declared Olivarez Realty Corporation and Dr. Olivarez solidarily liable to Castillo for 500,000.00 as moral damages, P50,000.00 as exemplary damages, and P50,000.00 as costs of suit.66 Ruling of the Court of Appeals

Olivarez Realty Corporation and Dr. Olivarez appealed to the Court of Appeals.67 In its decision68 dated July 20, 2010, the Court of Appeals affirmed in totothe trial court’s decision. According to the appellate court, the trial court "did not err in its finding that there is no genuine controversy as to the facts involved [in this case]."69 The trial court, therefore, correctly rendered summary judgment.70 As to the trial court’s award of damages, the appellatecourt ruled that a court may award damages through summary judgment "if the parties’ contract categorically [stipulates] the respective obligations of the parties in case of default."71 As found by the trial court,paragraph I of the deed of conditional sale categorically states that "in case [the deed of conditional sale] is cancelled, any improvementintroduced by [Olivarez Realty Corporation] on the property shall be forfeited infavor of [Castillo]."72 Considering that Olivarez Realty Corporation illegally retained possession of the property, Castillo forewent rentto the property and "lost business opportunities."73 The P2,500,000.00 down payment, according to the appellate court, shouldbe forfeited in favor of Castillo. Moral and exemplary damages and costs ofsuit were properly awarded. On August 11, 2010, Olivarez RealtyCorporation and Dr. Olivarez filed their motion for reconsideration,74 arguing that the trial court exceeded its authority in forfeiting the P2,500,000.00 down payment and awarding P500,000.00 in moral damages to Castillo. They argued that Castillo only prayed for a total of P500,000.00 as actual and moral damages in his complaint.75 Appellants prayed that the Court of Appeals "take a second hard look"76 at the case and reconsider its decision. In the resolution77 dated March 18, 2011, the Court of Appeals denied the motion for reconsideration.


Proceedings before this court Olivarez Realty Corporation and Dr. Olivarez filed their petition for review on certiorari78 with this court. Petitionersargue that the trial court and the Court of Appeals erred in awarding damages to Castillo. Under Section 3, Rule 35 of the 1997 Rules ofCivil Procedure, summary judgment may be rendered except as to the amountof damages. Thus, the Court of Appeals "violated the procedural steps in rendering summary judgment."79 Petitioners reiterate that there are genuine issues ofmaterial fact to be resolved in this case. Thus, a full-blown trial is required, and the trial court prematurely decided the case through summary judgment. They cite Torres v. Olivarez Realty Corporation and Dr. Pablo Olivarez,80 a case decided by the Ninth Division of the Court of Appeals. In Torres, Rosario Torres was the registeredowner of a parcel of land covered by Transfer Certificate of Title No. T-19971. Under a deed of conditional sale, she sold her property to OlivarezRealty Corporation for P17,345,900.00. When the corporation failed to fully pay the purchase price, she sued for rescission of contractwith damages. In their answer, the corporation and Dr. Olivarez argued thatthey discontinued payment because Rosario Torres failed to clear the land of the tenants. Similar to Castillo, Torres filed a motion for summary judgment, which the trial court granted. On appeal, the Court of Appeals set aside the trial court’s summary judgment and remanded the case to the trial court for further proceedings.81 The Court of Appeals ruled that the material allegations of the complaint "were directly disputed by [the corporation and Dr. Olivarez] in their answer"82 when they argued that they refused to pay because Torres failed to clear the land of the tenants.

With the Court of Appeals’ decision in Torres,Olivarez Realty Corporation and Dr. Olivarez argue that this case should likewise be remanded to the trial court for further proceedings under the equipoise rule. Petitioners maintain that Castillo availed himself of the irreconcilable reliefs of reformation of instrument and rescission of contract.83 Thus, the trial court should have dismissed the case outright. Petitioners likewise argue that the trial court had no jurisdiction to decide the case as Castillo failed topay the correct docket fees.84 Petitioners argue that Castillo should have paid docket fees based on the property’s fair market value since Castillo’s complaint is a real action.85 In his comment,86 Castillo maintains that there are no genuine issues as to any material fact inthis case. The trial court, therefore, correctly rendered summary judgment. As to petitioners’ claim that the trial court had no jurisdiction to decide the case, Castillo argues that he prayed for rescission of contract in his complaint. This action is incapable of pecuniary estimation, and the Clerk of Court properly computed the docket fees based on this prayer.87 Olivarez Realty Corporation and Dr. Olivarez replied,88reiterating their arguments in the petition for review on certiorari. The issues for our resolution are the following: I. Whether the trial court erred in rendering summary judgment; II. Whether proper docket fees were paid in this case. The petition lacks merit.


I The trial court correctly summary judgment, as there were no

rendered

genuine issues of material fact in this case Trial "is the judicial examination and determination of the issues between the parties to the action."89 During trial, parties "present their respective evidence of their claims and defenses."90 Parties to an action have the right "to a plenary trial of the case"91 to ensure that they were given a right to fully present evidence on their respective claims. There are instances, however, whentrial may be dispensed with. Under Rule 35 of the 1997 Rules of Civil Procedure, a trial court may dispense with trial and proceed to decide a case if from the pleadings, affidavits, depositions, and other papers on file, there is no genuine issue as to any material fact. In such a case, the judgment issued is called a summary judgment. A motion for summary judgment is filed either by the claimant or the defending party.92 The trial court then hears the motion for summary judgment. If indeed there are no genuine issues of material fact, the trial court shall issue summary judgment. Section 3, Rule 35 of the 1997 Rules of Civil Procedure provides: SEC. 3. Motion and proceedings thereon. – The motion shall be served at least ten (10) days beforethe time specified for the hearing. The adverse party may serve opposing affidavits, depositions, or admission at least three (3) days before the hearing. After the hearing, the judgment sought shall be rendered forthwith ifthe pleadings, supporting affidavits, depositions, and admissions on file, showthat, except as to the amount of damages, there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

An issue of material fact exists if the answer or responsive pleading filed specifically denies the material allegations of fact set forth in the complaint or pleading. If the issue offact "requires the presentation of evidence, it is a genuine issue of fact."93 However, if the issue "could be resolved judiciously by plain resort"94 to the pleadings, affidavits, depositions, and other paperson file, the issue of fact raised is sham, and the trial court may resolve the action through summary judgment. A summary judgment is usually distinguished from a judgment on the pleadings. Under Rule 34 of the 1997 Rules of Civil Procedure, trial may likewise be dispensed with and a case decided through judgment on the pleadings if the answer filed fails to tender an issue or otherwise admits the material allegations of the claimant’s pleading.95 Judgment on the pleadings is proper when the answer filed fails to tender any issue, or otherwise admitsthe material allegations in the complaint.96 On the other hand, in a summary judgment, the answer filed tenders issues as specific denials and affirmative defenses are pleaded, but the issues raised are sham, fictitious, or otherwise not genuine.97 In this case, Olivarez Realty Corporation admitted that it did not fully pay the purchase price as agreed upon inthe deed of conditional sale. As to why it withheld payments from Castillo, it set up the following affirmative defenses: First, Castillo did not filea case to void the Philippine Tourism Authority’s title to the property; second,Castillo did not clear the land of the tenants; third, Castillo allegedly sold the property to a third person, and the subsequent sale is currently being litigated beforea Quezon City court. Considering that Olivarez RealtyCorporation and Dr. Olivarez’s answer tendered an issue, Castillo properly availed himself of a motion for summary judgment.


However, the issues tendered by Olivarez Realty Corporation and Dr. Olivarez’s answer are not genuine issues of material fact. These are issues that can be resolved judiciously by plain resort to the pleadings, affidavits, depositions, and other papers on file; otherwise, these issues are sham, fictitious, or patently unsubstantial.

six months from the signing of the deed of conditional sale. The obligations must be performed simultaneously. In this case, the parties should have coordinated to ensure that tenants on the property were paid disturbance compensation and were made to vacate the property six months after the signingof the deed of conditional sale.

Petitioner corporation refused to fully pay the purchase price because no court case was filed to void the Philippine Tourism Authority’s title on the property. However, paragraph C of the deed of conditional sale is clear that petitioner Olivarez Realty Corporation is responsible for initiating court action against the Philippine Tourism Authority:

On one hand, pure obligations, or obligations whose performance do not depend upon a future or uncertainevent, or upon a past event unknown to the parties, are demandable at once.102 On the other hand, obligations with a resolutory period also take effect at once but terminate upon arrival of the day certain.103

C. [Olivarez Realty Corporation] assumes the responsibility of taking necessary legal action thru Court to have the claim/title TCT T-18493 of Philippine Tourism Authority over the abovedescribed property be nullified and voided; with the full assistance of [Castillo].98 Castillo’s alleged failureto "fully assist"99 the corporation in filing the case is not a defense. As the trial court said, "how can [Castillo] assist [the corporation] when [the latter] did not file the action [in the first place?]"100 Neither can Olivarez Realty Corporation argue that it refused to fully pay the purchase price due to the Philippine Tourism Authority’s adverse claim on the property. The corporation knew of this adverse claim when it entered into a contract of conditional sale. It even obligated itself under paragraph C of the deed of conditional sale to sue the Philippine Tourism Authority. This defense, therefore, is sham. Contrary to petitioners’ claim, there is no "obvious ambiguity"101 as to which should occur first — the payment of the disturbance compensation or the clearing of the land within

Olivarez Realty Corporation’s obligation to pay disturbance compensation is a pure obligation. The performance of the obligation to pay disturbance compensation did not depend on any condition. Moreover, the deed of conditional sale did not give the corporation a period to perform the obligation. As such, the obligation to pay disturbance compensation was demandable at once. Olivarez RealtyCorporation should have paid the tenants disturbance compensation upon execution of the deed of conditional sale. With respect to Castillo’s obligation to clear the land of the tenants within six months from the signing of the contract, his obligation was an obligation with a resolutory period. The obligation to clear the land of the tenants took effect at once, specifically, upon the parties’ signing of the deed of conditional sale. Castillo had until October 2, 2000, six months from April 5, 2000 when the parties signed the deed of conditional sale, to clear the land of the tenants. Olivarez Realty Corporation, therefore, had no right to withhold payments of the purchase price. As the trial court ruled, Olivarez Realty Corporation "can only claim non-compliance [of the


obligation to clear the land of the tenants in] October 2000."104 It said:

Corporation illegally withheld payments of the purchase price. The trial court did not err in rendering summary judgment.

. . . it is clear that defendant [Olivarez Realty Corporation] should have paid the installments on the P5 million downpayment up to October 8, 2000, or a total of P4,500,000.00. That is the agreement because the only time that defendant [corporation] can claim non-compliance of the condition is after October, 2000 and so it has the clear obligation topay up to the October 2000 the agreed installments. Since it paid only 2,500,000.00, then a violation of the contract has already been committed. . . .105

II Castillo is entitled of conditional sale

The claim that Castillo sold the property to another is fictitious and was made in bad faith to prevent the trial court from rendering summary judgment. Petitioners did not elaborate on this defense and insisted on revealing the identity of the buyer only during trial.106 Even in their petition for review on certiorari, petitioners never disclosed the name of this alleged buyer. Thus, as the trial court ruled, this defense did not tender a genuine issue of fact, with the defense "bereft of details."107 Castillo’s alleged prayer for the irreconcilable reliefs of rescission of contract and reformation of instrument is not a ground to dismiss his complaint. A plaintiff may allege two or more claims in the complaint alternatively or hypothetically, either in one cause of action or in separate causes of action per Section 2, Rule 8 of the 1997 Rules of Civil Procedure.108 It is the filing of two separatecases for each of the causes of action that is prohibited since the subsequently filed case may be dismissed under Section 4, Rule 2 of the 1997 Rules of Civil Procedure109 on splitting causes of action. As demonstrated, there are no genuineissues of material fact in this case. These are issues that can be resolved judiciously by plain resort to the pleadings, affidavits, depositions, and other papers on file. As the trial court found, Olivarez Realty

to

cancel

the

contract

Since Olivarez Realty Corporation illegally withheld payments of the purchase price, Castillo is entitled to cancel his contract with petitioner corporation. However, we properly characterize the parties’ contract as a contract to sell, not a contract of conditional sale. In both contracts to sell and contracts of conditional sale, title to the property remains with the seller until the buyer fully pays the purchase price.110 Both contracts are subject to the positive suspensive condition of the buyer’s full payment of the purchase price.111 In a contract of conditional sale, the buyer automatically acquires title to the property upon full payment of the purchase price.112 This transfer of title is "by operation of law without any further act having to be performed by the seller."113 In a contract to sell, transfer of title to the prospective buyer is not automatic.114 "The prospective seller [must] convey title to the property [through] a deed of conditional sale."115 The distinction is important to determine the applicable laws and remedies in case a party does not fulfill his or her obligations under the contract. In contracts of conditional sale, our laws on sales under the Civil Code of the Philippines apply. On the other hand, contracts to sell are not governed by our law on sales116 but by the Civil Code provisions on conditional obligations.


Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does not apply to contracts to sell.117 As this court explained in Ong v. Court of Appeals,118 failure to fully pay the purchase price in contracts to sell is not the breach of contract under Article 1191.119 Failure to fully pay the purchase price is "merely an event which prevents the [seller’s] obligation to convey title from acquiring binding force."120 This is because "there can be no rescission of an obligation that is still nonexistent, the suspensive condition not having [happened]."121 In this case, Castillo reserved his title to the property and undertook to execute a deed of absolute sale upon Olivarez Realty Corporation’s full payment of the purchase price.122 Since Castillo still has to execute a deed of absolute sale to Olivarez RealtyCorporation upon full payment of the purchase price, the transfer of title is notautomatic. The contract in this case is a contract to sell. As this case involves a contract tosell, Article 1191 of the Civil Code of the Philippines does not apply. The contract to sell is instead cancelled, and the parties shall stand as if the obligation to sell never existed.123 Olivarez Realty Corporation shall return the possession of the property to Castillo. Any improvement that Olivarez Realty Corporation may have introduced on the property shall be forfeited in favor of Castillo per paragraph I of the deed of conditional sale: I. Immediately upon signing thisContract, [Olivarez Realty Corporation] shall be entitled to occupy, possess and develop the subject property. In case this Contract is cancelled, any improvement introduced by [Olivarez Realty Corporation] on the property shall be forfeited in favor of [Castillo.]124

As for prospective sellers, thiscourt generally orders the reimbursement of the installments paidfor the property when setting aside contracts to sell.125 This is true especially ifthe property’s possession has not been delivered to the prospective buyer prior to the transfer of title. In this case, however, Castillo delivered the possession of the property to Olivarez Realty Corporation prior to the transfer of title. We cannot order the reimbursement of the installments paid. In Gomez v. Court of Appeals,126 the City of Manila and Luisa Gomez entered into a contract to sell over a parcel of land. The city delivered the property’s possession to Gomez. She fully paid the purchase price for the property but violated the terms of the contract to sell by renting out the property to other persons. This court set aside the contract to sell for her violation of the terms of the contract to sell. It ordered the installments paid forfeited in favor of the City of Manila "as reasonable compensation for [Gomez’s] use of the [property]"127 for eight years. In this case, Olivarez Realty Corporation failed to fully pay the purchase price for the property. It only paid P2,500,000.00 out of the P19,080,490.00 agreed purchase price. Worse, petitioner corporation has been in possession of Castillo’s property for 14 years since May 5, 2000 and has not paid for its use of the property. Similar to the ruling in Gomez, we order the P2,500,000.00 forfeited in favor of Castillo as reasonable compensation for Olivarez Realty Corporation’s use of the property. III Olivarez Realty moral and attorney’s fees

Corporation exemplary

is liable damages


for and

We note that the trial court erred in rendering summary judgment on the amount of damages. Under Section 3, Rule 35 of the 1997 Rules of Civil Procedure, summary judgment may be rendered, except as to the amount of damages. In this case, the trial court erred in forfeiting the P2,500,000.00 in favor of Castillo as damages under Article 1191 of the Civil Code of the Philippines. As discussed, there is nobreach of contract under Article 1191 in this case. The trial court likewise erred inrendering summary judgment on the amount of moral and exemplary damages and attorney’s fees. Nonetheless, we hold that Castillois entitled to moral damages, exemplary damages, and attorney’s fees. Moral damages may be awarded in case the claimant experienced physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury.128 As for exemplary damages, they are awarded in addition to moral damages by way of example or correction for the public good.129 Specifically in contracts, exemplary damages may be awarded if the defendant acted in a wanton, fraudulent,reckless, oppressive, or malevolent manner.130 Under the deed of conditional sale, Olivarez Realty Corporation may only suspend the monthly down payment in case Castillo fails to clear the land of the tenants six months from the signing of the instrument. Yet, even before the sixth month arrived, Olivarez Realty Corporation withheld payments for Castillo’s property. It evenused as a defense the fact that no case was filed against the PhilippineTourism Authority when, under the deed of conditional sale, Olivarez Realty Corporation was clearly responsible for initiating action against the Philippine Tourism

Authority. These are oppressive and malevolent acts, and we find Castillo entitled to P500,000.00 moral damages and P50,000.00 exemplary damages: Plaintiff Castillo is entitled to moral damages because of the evident bad faith exhibited by defendants in dealing with him regarding the sale of his lot to defendant [Olivarez Realty Corporation]. He suffered much prejudice due to the failure of defendants to pay him the balance of purchase price which he expected touse for his needs which caused him wounded feelings, sorrow, mental anxiety and sleepless nights for which defendants should pay P500,000.00 as moral damages more than six (6) years had elapsed and defendants illegally and unfairly failed and refused to pay their legal obligations to plaintiff, unjustly taking advantage of a poor uneducated man like plaintiff causing much sorrow and financial difficulties. Moral damages in favor of plaintiff is clearly justified . . . [Castillo] is also entitled to P50,000.00 as exemplary damages to serve as a deterrent to other parties to a contract to religiously comply with their prestations under the contract.131 We likewise agree that Castillo is entitled to attorney’s fees in addition to the exemplary damages.132 Considering that Olivarez Realty Corporation refused to satisfy Castillo’splainly valid, just, and demandable claim,133 the award of P50,000.00 as attorney’s fees is in order. However, we find that Dr. Pablo R.Olivarez is not solidarily liable with Olivarez Realty Corporation for the amount of damages. Under Article 1207 of the Civil Code of the Philippines, there is solidary liability only when the obligation states it or when the law or the nature of the obligation requires solidarity.134 In case of corporations, they are solely liable for their obligations.135 The directors or trustees and officers are not liable with the corporation even if it is through their acts that the corporation


incurred the obligation. This is because a corporation is separate and distinct from the persons comprising it.136

docket fees to be paid to the court."139Thus, according to petitioners, the case should be dismissed for lack of jurisdiction.

As an exception to the rule, directors or trustees and corporate officers may be solidarily liable with the corporation for corporate obligations if they acted "in bad faith or with gross negligence in directing the corporate affairs."137

Castillo countered that his action for rescission is an action incapable of pecuniary estimation. Thus, the Clerk of Court of the Regional Trial Court of Tanauan City did not err in assessing the docket fees based on his prayer.

In this case, we find that Castillo failed to prove with preponderant evidence that it was through Dr. Olivarez’s bad faith or gross negligence that Olivarez Realty Corporation failed to fully pay the purchase price for the property. Dr. Olivarez’s alleged act of making Castillo sign the deed of conditional sale without explaining to the latter the deed’s terms in Tagalog is not reason to hold Dr. Olivarez solidarily liable with the corporation. Castillo had a choice not to sign the deed of conditional sale. He could have asked that the deed of conditional sale be written in Tagalog. Thus, Olivarez Realty Corporation issolely liable for the moral and exemplary damages and attorney’s fees to Castillo.

We rule for Castillo. In De Leon v. Court of Appeals,140 this court held that an action for rescission of contract of sale of real property is an action incapable of pecuniary estimation. In De Leon, the action involved a real property. Nevertheless, this court held that "it is the nature of the action as one for rescission of contract which is controlling."141 Consequently, the docket fees to be paid shall be for actions incapableof pecuniary estimation, regardless if the claimant may eventually recover the real property. This court said:

IV The trial court acquired jurisdiction over Castillo’s action as he paid the correct docket fees Olivarez Realty Corporation and Dr. Olivarez claimed that the trial court had no jurisdiction to take cognizance of the case. In the reply/motion to dismiss the complaint138 they filed with the Court of Appeals, petitioners argued that Castillo failed to pay the correct amount of docket fees. Stating that this action is a real action, petitioners argued that the docket fee Castillo paid should have been based on the fair market value of the property. In this case, Castillo only paid 4,297.00, which is insufficient "if the real nature of the action was admitted and the fair market value of the property was disclosed and made the basis of the amount of

. . . the Court in Bautista v.Lim, held that an action for rescission of contract is one which cannot be estimated and therefore the docket fee for its filing should be the flat amount of P200.00 as then fixed in the former Rule 141, §141, §5(10). Said this Court: We hold that Judge Dalisay did not err in considering Civil Case No. V-144 as basically one for rescission or annulment of contract which is not susceptible of pecuniary estimation (1 Moran's Comments on the Rules of Court, 1970 Ed, p. 55; Lapitan vs. Scandia, Inc., L-24668, July 31, 1968, 24 SCRA 479, 781-483). Consequently, the fee for docketing it is P200, an amount already paid by plaintiff, now respondent Matilda Lim.1âwphi1 (She should pay also the two pesos legal research fund fee, if she has not paid it, as required in Section 4 of Republic Act No. 3870, the charter of the U.P. Law Center).


Thus, although eventually the result may be the recovery of land, it is the nature of the action as one for rescission of contract which is controlling. The Court of Appeals correctly applied these cases to the present one. As it said: We would like to add the observations that since the action of petitioners [private respondents] against private respondents [petitioners] is solely for annulment or rescission which is not susceptible of pecuniary estimation, the action should not be confused and equated with the "value of the property" subject of the transaction; that by the very nature of the case, the allegations, and specific prayer in the complaint, sans any prayer for recovery of money and/or value of the transaction, or for actual or compensatory damages, the assessment and collection of the legal fees should not be intertwined with the merits of the case and/or what may be its end result; and that to sustain private respondents' [petitioners'] position on what the respondent court may decide after all, then the assessment should be deferred and finally assessed only after the court had finally decided the case, which cannot be done because the rules require that filing fees should be based on what is alleged and prayed for in the face of the complaint and paid upon the filing of the complaint.142 Although we discussed that there isno rescission of contract to speak of in contracts of conditional sale, we hold that an action to cancel a contract to sell, similar to an action for rescission of contract of sale, is an action incapable of pecuniary estimation. Like any action incapable of pecuniary estimation, an action to cancel a contract to sell "demands an inquiry into other factors"143 aside from the amount of money to be awarded to the claimant. Specifically in this case, the trial court principally determined whether Olivarez Realty Corporation failed to pay installments of the property’s purchase price as the parties agreed upon in the deed of conditional sale. The principal

natureof Castillo’s action, therefore, is incapable of pecuniary estimation. All told, there is no issue that the parties in this case entered into a contract to sell a parcel of land and that Olivarez Realty Corporation failed to fully pay the installments agreed upon.Consequently, Castillo is entitled to cancel the contract to sell. WHEREFORE, the petition for review on certiorari is DENIED. The Court of Appeals’ decision dated July 20, 2010 and in CA-G.R. CV No. 91244 is AFFIRMEDwith MODIFICATION. The deed of conditional sale dated April 5, 2000 is declared CANCELLED. Petitioner Olivarez Realty Corporation shall RETURN to respondent Benjamin Castillo the possession of the property covered by Transfer Certificate of Title No. T-19972 together with all the improvements that petitioner corporation introduced on the property. The amount of P2,500,000.00 is FORFEITED in favor of respondent Benjamin Castillo as reasonable compensation for the use of petitioner Olivarez Realty Corporation of the property. Petitioner Olivarez Realty Corporation shall PAY respondent Benjamin Castillo P500,000.00 as moral damages, P50,000.00 as exemplary damages, and P50,000.00 as attorney's fees with interest at 6% per annum from the time this decision becomes final and executory until petitioner corporation fully pays the amount of damages.144


62.

G.R. No. L-24968 April 27, 1972 SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee, vs. DEVELOPMENT BANK OF THE PHILIPPINES, defendantappellant. Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee. Jesus A. Avanceña and Hilario G. Orsolino for defendantappellant.

MAKALINTAL, J.:p In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965 sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The present appeal is from that judgment. In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks); P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and P9,100.00 as additional working capital. Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on the strength of a letter of

credit extended by the Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the said bank. On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be secured by a first mortgage on the factory building to be constructed, the land site thereof, and the machinery and equipment to be installed. Among the other terms spelled out in the resolution were the following: 1. That the proceeds of the loan shall be utilized exclusively for the following purposes: For construction of factory building P250,000.00 For payment of the balance of purchase price of machinery and equipment 240,900.00 For working capital 9,100.00 T O T A L P500,000.00 4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation; 5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to availability of funds, and as the construction of the factory buildings progresses, to be certified to by an appraiser of this Corporation;" Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently having otherwise been


informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the other co-makers, having acquired the latter's shares in Saura, Inc.

Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly registered on the following April 17.

In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this approved loan ... with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next meeting of the Board."

RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the reexamination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference as to the advisability of financing this particular project based on present conditions obtaining in the operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be authorized as may be necessary from time to time to place the factory in actual operation: PROVIDED that all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and effect."

On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for the loan, and asked that the necessary documents be prepared in accordance with the terms and conditions specified in Resolution No. 145. In connection with the reexamination of the project to be financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective committees of engineers and technical men to meet with each other and undertake the necessary studies, although in appointing its own committee Saura, Inc. made the observation that the same "should not be taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement already) entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145. On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing China Engineers,

It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:

On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2 requested RFC that the registration of the mortgage be withdrawn.


In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The request was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire to consider the loan insofar as they are concerned." On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the P500,000.00 originally approved by you.". On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly with the borrower-corporation," but with the following proviso: That in view of observations made of the shortage and high cost of imported raw materials, the Department of Agriculture and Natural Resources shall certify to the following: 1. That the raw materials needed by the borrowercorporation to carry out its operation are available in the immediate vicinity; and 2. That there is prospect of increased production thereof to provide adequately for the requirements of the factory." The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954, wherein it was explained that the certification by the Department of Agriculture and Natural Resources was required "as the intention of the original approval (of

the loan) is to develop the manufacture of sacks on the basis of locally available raw materials." This point is important, and sheds light on the subsequent actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially in theIsland of Mindanao where the proposed jutemill is located ..." This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place, and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural Resources as to the availability of local raw materials to provide adequately for the requirements of the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1) stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my company and associates will be able to bring in sufficient jute materials as may be necessary for the full operation of the jute mill;" and (3) asking that releases of the loan be made as follows: a) For the payment of the receipt for jute mill machineries with the Prudential Bank & Trust Company P250,000.00


(For immediate release) b) For the purchase of materials and equipment per attached list to enable the jute mill to operate 182,413.91 c) For raw materials and labor 67,586.09 1) P25,000.00 to be released on the opening of the letter of credit for raw jute for $25,000.00. 2) P25,000.00 to be released upon arrival of raw jute. 3) P17,586.09 to be released as soon as the mill is ready to operate. On January 25, 1955 RFC sent to Saura, Inc. the following reply: Dear Sirs: This is with reference to your letter of January 21, 1955, regarding the release of your loan under consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if revived, are proposed to be made from time to time, subject to availability of funds towards the end that the sack factory shall be placed in actual operating

status. We shall be able to act on your request for revised purpose and manner of releases upon re-appraisal of the securities offered for the loan. With respect to our requirement that the Department of Agriculture and Natural Resources certify that the raw materials needed are available in the immediate vicinity and that there is prospect of increased production thereof to provide adequately the requirements of the factory, we wish to reiterate that the basis of the original approval is to develop the manufacture of sacks on the basis of the locally available raw materials. Your statement that you will have to rely on the importation of jute and your request that we give you assurance that your company will be able to bring in sufficient jute materials as may be necessary for the operation of your factory, would not be in line with our principle in approving the loan. With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc. It appears that the cancellation was requested to make way for the registration of a mortgage contract, executed on August 6, 1954,


over the same property in favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.

There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill its obligation and the plaintiff is therefore entitled to recover damages.

On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and approved, thereby preventing the plaintiff from completing or paying contractual commitments it had entered into, in connection with its jute mill project.

It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved on December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation are available in the immediate vicinity; and (2) that there is prospect of increased production thereof to provide adequately for the requirements of the factory." The imposition of those conditions was by no means a deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7, 1954, namely — "that the proceeds of the loan shall be utilized exclusively for the following purposes: for construction of factory building — P250,000.00; for payment of the balance of purchase price of machinery and equipment — P240,900.00; for working capital — P9,100.00." Evidently Saura, Inc. realized that it could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that local jute "will not be able in sufficient quantity this year or probably next year," and asking that out of the loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did a diversion of part of the proceeds of the loan to purposes other than those agreed upon.

The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself did not comply with the terms thereof. We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil Code, which provides: ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding upon the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the object of the contract.


When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus taken by both parties was in the nature cf mutual desistance — what Manresa terms "mutuo disenso" 1 — which is a mode of extinguishing obligations. It is a concept that derives from the principle that since mutual agreement can create a contract, mutual disagreement by the parties can cause its extinguishment. 2 The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice and corn project, which application was disapproved. It was only in 1964, nine years after the loan agreement had been cancelled at its own request, that Saura, Inc. brought this action for damages.All these circumstances demonstrate beyond doubt that the said agreement had been extinguished by mutual desistance — and that on the initiative of the plaintiff-appellee itself. With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in the respective briefs of the parties. WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the plaintiff-appellee. Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and Antonio, JJ., concur.

Makasiar, J., took no part. 63.

G.R. No. 175863 February 18, 2015 NATIONAL POWER CORPORATION, Petitioner, vs. LUCMAN M. IBRAHIM, ATTY. OMAR G. MARUHOM, ELIAS G. MARUHOM, BUCAY G. MARUHOM, MAMOD G. MARUHOM, FAROUK G. MARUHOM, HIDJARA G. MARUHOM, ROCANIA G. MARUHOM, POTRISAM G. MARUHOM, LUMBA G. MAR UH OM, SIN AB G. MARUHOM, ACMAD G. MARUHOM, SOLAYMAN G. MARUHOM, MOHAMAD M. IBRAHIM, CAIRONESA M. IBRAHIM and MACAPANTON K. MANGONDATO Respondents. D E C I S I O N

PEREZ, J.: At bench is a petition for review on certiorari1 assailing the Decision2 dated 24 June 2005 and Resolution3 dated 5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061. The facts: The Subject Land In 1978, petitioner took possession of a 21,995 square meter parcel of land in Marawi City (subject land) for the purpose of building thereon a hydroelectric power plant pursuant to its Agus 1 project. The subject land, while in truth a portion of a private estate registered under Transfer Certificate of Title (TCT) No. 378-A4 in the name of herein respondent Macapanton K. Mangondato


(Mangondato),5 was occupied by petitioner under the mistaken belief that such land is part of the vast tract of public land reserved for its use by the government under Proclamation No. 1354, s. 1974.6 Mangondato first discovered petitioner’s occupation of the subject land in 1979—the year that petitioner started its construction of the Agus 1plant. Shortly after such discovery, Mangondato began demanding compensation for the subject land from petitioner. In support of his demand for compensation, Mangondato sent to petitioner a letter7 dated 28 September 1981 wherein the former detailed the origins of his ownership over the lands covered by TCT No. 378-A, including the subject land. The relevant portions of the letter read: Now let me trace the basis of the title to the land adverted to for particularity. The land titled in my name was originally consisting of seven (7) hectares. This piece of land was particularly set aside by the Patriarch Maruhom, a fact recognized by all royal datus of Guimba, to belong to his eldest son, Datu Magayo-ong Maruhom. This is the very foundation of the right and ownership over the land in question which was titled in my name because as the son-in-law of Hadji Ali Maruhom the eldest son of, and only lawyer among the descendants of Datu Magayo-ong Maruhom, the authority and right to apply for the title to the land was given to me by said heirs after mutual agreement among themselves besides the fact that I have already bought a substantial portion of the original seven (7) hectares. The original title of this seven (7) hectares has been subdivided into several TCTs for the other children of Datu Magayo-ong Maruhom with whom I have executed a quit claim. Presently, only three (3) hectares is left to me out of the original seven (7) hectares representing those portion [sic] belonging to my wife and those I

have bought previously from other heirs. This is now the subject of this case.8 Petitioner, at first, rejected Mangondato’s claim of ownership over the subject land; the former then adamant in its belief that the said land is public land covered by Proclamation No. 1354, s. 1974. But, after more than a decade, petitioner finally acquiesced to the fact that the subject land is private land covered by TCT No. 378-A and consequently acknowledged Mangondato’s right, as registered owner, to receive compensation therefor. Thus, during the early 1990s, petitioner and Mangondato partook in a series of communications aimed at settling the amount of compensation that the former ought to pay the latter in exchange for the subject land. Ultimately, however, the communications failed to yield a genuine consensus between petitioner and Mangondato as to the fair market value of the subject land. Civil Case No. 605-92 and Civil Case No. 610-92 With an agreement basically out of reach, Mangondato filed a complaint for reconveyance against petitioner before the Regional Trial Court (RTC) of Marawi City in July 1992. In his complaint, Mangondato asked for, among others, the recovery of the subject land and the payment by petitioner of a monthly rental from 1978 until the return of such land. Mangondato’s complaint was docketed as Civil Case No. 605-92. For its part, petitioner filed an expropriation complaint9 before the RTC on 27 July 1992. Petitioner’s complaint was docketed as Civil Case No. 610-92. Later, Civil Case No. 605-92 and Civil Case No. 610-92 were consolidated before Branch 8 of the Marawi City RTC.


On 21 August 1992, Branch 8 of the Marawi City RTC rendered a Decision10 in Civil Case No. 605-92 and Civil Case No. 610-92. The decision upheld petitioner’s right to expropriate the subject land: it denied Mangondato’s claim for reconveyance and decreed the subject land condemned in favor of the petitioner, effective July of 1992, subject to payment by the latter of just compensation in the amount of P21,995,000.00. Anent petitioner’s occupation of the subject land from 1978to July of 1992, on the other hand, the decision required the former to pay rentals therefor at the rate of P15,000.00 per month with12% interest per annum. The decision’s fallo reads: WHEREFORE, the prayer in the recovery case for [petitioner’s] surrender of the property is denied but[petitioner] is ordered to pay monthly rentals in the amount of P15,000.00 from 1978 up to July 1992 with 12% interest per annum xxx and the property is condemned in favor of [petitioner] effective July 1992 upon payment of the fair market value of the property at One Thousand (P1,000.00) Pesos per square meter or a total of Twenty-One Million Nine Hundred Ninety-Five Thousand (P21,995,000.00) [P]esos.11 Disagreeing with the amount of just compensation that it was adjudged to pay under the said decision, petitioner filed an appeal with the Court of Appeals. This appeal was docketed in the Court of Appeals as CA-G.R. CV No. 39353. Respondents Ibrahims and Maruhoms and Civil Case No. 967-93 During the pendency of CA-G.R. CV No. 39353, or on 29 March 1993, herein respondents the Ibrahims and Maruhoms12 filed before the RTC of Marawi City a complaint13 against Mangondato and petitioner. This complaint was docketed as Civil Case No. 967-93and was raffled to Branch 10of the Marawi City RTC.

In their complaint, the Ibrahims and Maruhoms disputed Mangondato’s ownership of the lands covered by TCT No. 378-A, including the subject land. The Ibrahims and Maruhoms asseverate that they are the real owners of the lands covered by TCT No. 378-A; they being the lawful heirs of the late Datu Magayo-ong Maruhom, who was the original proprietor of the said lands.14 They also claimed that Mangondato actually holds no claim or right over the lands covered by TCT No. 378-A except that of a trustee who merely holds the said lands in trust for them.15 The Ibrahims and Maruhoms submit that since they are the real owners of the lands covered by TCT No. 378-A, they should be the ones entitled to any rental fees or expropriation indemnity that may be found due for the subject land. Hence, the Ibrahims and Maruhoms prayed for the following reliefs in their complaint:16 1. That Mangondato be ordered to execute a Deed of Conveyance transferring to them the ownership of the lands covered by TCT No. 378-A; 2. That petitioner be ordered to pay to them whatever indemnity for the subject land it is later on adjudged to pay in Civil Case No. 605-92 and Civil Case No. 610-92; 3. That Mangondato be ordered to pay to them any amount that the former may have received from the petitioner by way of indemnity for the subject land; 4. That petitioner and Mangondatobe ordered jointly and severally liable to pay attorney’s fees in the sum of P200,000.00. In the same complaint, the Ibrahims and Maruhoms also prayed for the issuance of a temporary restraining order (TRO) and a writ of preliminary injunction to enjoin petitioner, during the pendency of


the suit, from making any payments to Mangondato concerning expropriation indemnity for the subject land.17 On 30 March 1993, Branch 10 of the Marawi City RTC granted the prayer of the Ibrahims and Maruhoms for the issuance of a TRO.18 On 29 May 1993, after conducting an appropriate hearing for the purpose, the same court likewise granted the prayer for the issuance of a writ of preliminary injunction.19 In due course, trial then ensued in Civil Case No. 967-93. The Decision of the Court of Appeals in CA-G.R. CV No. 39353 and the Decision of this Court in G.R. No. 113194 On 21 December 1993, the Court of Appeals rendered a Decision in CA-G.R. CV No. 39353 denying the appeal of petitioner and affirming in toto the 21 August 1992 Decision in Civil Case No. 605-92 and Civil Case No. 610-92. Undeterred, petitioner next filed a petition for review on certiorari with this Court that was docketed herein as G.R. No. 113194.20 On 11 March 1996, we rendered our Decision in G.R. No. 113194 wherein we upheld the Court of Appeals’ denial of petitioner’s appeal.21 In the same decision, we likewise sustained the appellate court’s affirmance of the decision in Civil Case No. 605-92 and Civil Case No. 610-92 subject only to a reduction of the rate of interest on the monthly rental fees from 12% to 6% per annum.22 Our decision in G.R. No. 113194 eventually became final and executory on 13 May 1996.23 Execution of the 21 August 1992 Decision in Civil Case No. 605-92 and Civil Case No. 610-92, as Modified

In view of the finality of this Court’s decision in G.R. No. 113194, Mangondato filed a motion for execution of the decision in Civil Case No. 605-92 and Civil Case No. 610-92.24 Against this motion, however, petitioner filed an opposition.25 In its opposition, petitioner adverted to the existence of the writ of preliminary injunction earlier issued in Civil Case No. 967-93 that enjoins it from making any payment of expropriation indemnity over the subject land in favor of Mangondato.26 Petitioner, in sum, posits that such writ of preliminary injunction constitutes a legal impediment that effectively bars any meaningful execution of the decision in Civil Case No. 605-92 and Civil Case No. 610-92. Finding no merit in petitioner’s opposition, however, Branch 8 of the Marawi City RTC rendered a Resolution27 dated 4 June 1996 ordering the issuance of a writ of execution in favor of Mangondato in Civil Case No. 605-92 and Civil Case No. 610-92. Likewise, in the same resolution, the trial court ordered the issuance of a notice of garnishment against several of petitioner’s bank accounts28 for the amount of P21,801,951.00—the figure representing the total amount of judgment debt due from petitioner in Civil Case No. 60592 and Civil Case No. 610-92 less the amount then already settled by the latter. The dispositive portion of the resolution reads: WHEREFORE, let a Writ of Execution and the corresponding order or notice of garnishment be immediately issued against [petitioner] and in favor of [Mangondato] for the amount of Twenty One Million Eight Hundred One Thousand and Nine Hundred Fifty One (P21,801,951.00) Pesos. x x x.29 Pursuant to the above resolution, a notice of garnishment30 dated 5 June 1996 for the amount of P21,801,951.00 was promptly served upon the Philippine National Bank (PNB)—the authorized depositary


of petitioner. Consequently, the amount thereby garnished was paid to Mangondato in full satisfaction of petitioner’s judgment debt in Civil Case No. 605-92 and Civil Case No. 610-92. Decision in Civil Case No. 967-93 Upon the other hand, on 16 April 1998, Branch 10 of the Marawi City RTC decided Civil Case No. 967-93.31 In its decision, Branch 10 of the Marawi City RTC made the following relevant findings:32 1. The Ibrahims and Maruhoms—not Mangondato—are the true owners of the lands covered by TCT No. 378-A, which includes the subject land. 2. The subject land, however, could no longer be reconveyed to the Ibrahims and Maruhoms since the same was already expropriated and paid for by the petitioner under Civil Case No. 605-92 and Civil Case No. 610-92. 3. Be that as it may, the Ibrahims and Maruhoms, as true owners of the subject land, are the rightful recipients of whatever rental fees and indemnity that may be due for the subject land as a result of its expropriation. Consistent with the foregoing findings, Branch 10 of the Marawi City RTC thus required payment of all the rental fees and expropriation indemnity due for the subject land, as previously adjudged in Civil Case No. 605-92 and Civil Case No. 610-92, to the Ibrahims and Maruhoms. Notable in the trial court’s decision, however, was that it held both Mangondato and the petitioner solidarily liable to the Ibrahims and Maruhoms for the rental fees and expropriation indemnity adjudged in Civil Case No. 605-92 and Civil Case No. 610-92.33

In addition, Mangondato and petitioner were also decreed solidarily liable to the Ibrahims and Maruhoms for attorney’s fees in the amount of P200,000.00.34 The pertinent dispositions in the decision read: WHEREFORE, premises considered, judgment is hereby rendered in favor of [the Ibrahims and Maruhoms] and against [Mangondato and petitioner] as follows: 1. x x x 2. Ordering [Mangondato and petitioner] to pay jointly and severally [the Ibrahims and Maruhoms] all forms of expropriation indemnity as adjudged for [the subject land] consisting of 21,995 square meters in the amount of P21,801,051.00 plus other forms of indemnity such as rentals and interests; 3. Ordering [Mangondato and petitioner] to pay [the Ibrahims and Maruhoms] jointly and severally the sum of P200,000.00 as attorney’s fees; 4. x x x 5. x x x 6. x x x SO ORDERED.35 Petitioner’s Appeal to the Court of Appeals and the Execution Pending Appeal of the Decision in Civil Case No. 967-93


Petitioner appealed the decision in Civil Case No. 967-93 with the Court of Appeals: contesting mainly the holding in the said decision that it ought to be solidarily liable with Mangondato to pay to the Ibrahims and Maruhoms the rental fees and expropriation indemnity adjudged due for the subject land. This appeal was docketed as CA-G.R. CV No. 68061. While the foregoing appeal was still pending decision by the Court of Appeals, however, the Ibrahims and Maruhoms were able to secure with the court a quo a writ of execution pending appeal36 of the decision in Civil Case No. 967-93. The enforcement of such writ led to the garnishment of Mangondato’s moneys in the possession of the Social Security System (SSS) in the amount of P2,700,000.00 on 18 September 1998.37 Eventually, the amount thereby garnished was paid to the Ibrahims and Mangondato in partial satisfaction of the decision in Civil Case No. 967-93. On 24 June 2005, the Court of Appeals rendered its Decision38 in CAG.R. CV No. 68061 denying petitioner’s appeal. The appellate court denied petitioner’s appeal and affirmed the decision in Civil Case No. 967-93, subject to the right of petitioner to deduct the amount of P2,700,000.00 from its liability as a consequence of the partial execution of the decision in Civil Case No. 967-93.39 Hence, the present appeal by petitioner. The Present Appeal The present appeal poses the question of whether it is correct, in view of the facts and circumstances in this case, to hold petitioner liable in favor of the Ibrahims and Maruhoms for the rental fees and expropriation indemnity adjudged due for the subject land. In their respective decisions, both Branch 10 of the Marawi City RTC and the Court of Appeals had answered the foregoing question in

the affirmative. The two tribunals postulated that, notwithstanding petitioner’s previous payment to Mangondato of the rental fees and expropriation indemnity as a consequence of the execution of the decision in Civil Case No. 605-92 and 610-92, petitioner may still be held liable to the Ibrahims and Maruhoms for such fees and indemnity because its previous payment to Mangondato was tainted with "bad faith."40 As proof of such bad faith, both courts cite the following considerations:41 1. Petitioner "allowed" payment to Mangondato despite its prior knowledge, which dates back as early as 28 September 1981, by virtue of Mangondato’s letter of even date, that the subject land was owned by a certain Datu Magayo-ong Maruhom and not by Mangondato; and 2. Petitioner "allowed" such payment despite the issuance of a TRO and a writ of preliminary injunction in Civil Case No. 967-93 that precisely enjoins it from doing so. For the two tribunals, the bad faith on the part of petitioner rendered its previous payment to Mangondato invalid insofar as the Ibrahims and Maruhoms are concerned. Hence, both courts concluded that petitioner may still be held liable to the Ibrahims and Maruhoms for the rental fees and expropriation indemnity previously paid to Mangondato.42 Petitioner, however, argues otherwise. It submits that a finding of bad faith against it would have no basis in fact and law, given that it merely complied with the final and executory decision in Civil Case No. 605-92 and Civil Case No. 610-92 when it paid the rental fees and expropriation indemnity due the subject to Mangondato.43 Petitioner thus insists that it should be absolved from any liability to pay the rental fees and expropriation indemnity to the Ibrahims and Maruhoms and prays for the dismissal of Civil Case No. 967-93 against it.


OUR RULING We grant the appeal. No Bad Faith On The Part of Petitioner Petitioner is correct. No "bad faith" may be taken against it in paying Mangondato the rental fees and expropriation indemnity due the subject land. Our case law is not new to the concept of bad faith. Decisions of this Court, both old and new, had been teeming with various pronouncements that illuminate the concept amidst differing legal contexts. In any attempt to understand the basics of bad faith, it is mandatory to take a look at some of these pronouncements:

In the 1967 case of Board of Liquidators v. Heirs of M. Kalaw,50 on the other hand, we enunciated one of the more oft-repeated formulations of bad faith in our case law: "xxx bad faith does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It means breach of a known duty thru some motive or interest of ill will; it partakes of the nature of fraud."51 As a testament to its enduring quality, the foregoing pronouncement in Board of Liquidators had been reiterated in a slew of later cases,52 more recently, in the 2009 case of Nazareno, et al. v. City of Dumaguete53 and the 2012 case of Aliling v. Feliciano.54

In Lopez, et al. v. Pan American World Airways,44 a 1966 landmark tort case, we defined the concept of bad faith as:

Still, in 1995, the case of Far East Bank and Trust Company v. Court of Appeals55 contributed the following description of bad faith in our jurisprudence:

"…a breach of a known duty through some motive of interest or ill will."45

"Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity;xxx."56

Just months after the promulgation of Lopez, however, came the case of Air France v. Carrascoso, et al.,46 In Air France, we expounded on Lopez’s definition by describing bad faith as:

The description of bad faith in Far East Bank and Trust Companythen went on to be repeated in subsequent cases such as 1995’s Ortega v. Court of Appeals,57 1997’s Laureano Investment and Development Corporation v. Court of Appeals,58 2010’s Lambert Pawnbrokers v. Binamira59 and 2013’s California Clothing, Inc., v. Quiñones,60 to name a few.

"xxx a state of mind affirmatively operating with furtive design or with some motive of self-interest or will or for ulterior purpose."47 Air France’s articulation of the meaning of bad faith was, in turn, echoed in a number subsequent cases,48 one of which, is the 2009 case of Balbuena, et al. v. Sabay, et al.49

Verily, the clear denominator in all of the foregoing judicial pronouncements is that the essence of bad faith consists in the deliberate commission of a wrong. Indeed, the concept has often been equated with malicious or fraudulent motives, yet distinguished from the mere unintentional wrongs resulting from mere simple negligence or oversight.61


A finding of bad faith, thus, usually assumes the presence of two (2) elements: first, that the actor knew or should have known that a particular course of action is wrong or illegal, and second, that despite such actual or imputable knowledge, the actor, voluntarily, consciously and out of his own free will, proceeds with such course of action. Only with the concurrence of these two elements can we begin to consider that the wrong committed had been done deliberately and, thus, in bad faith. In this case, both Branch 10 of the Marawi City RTC and the Court of Appeals held that petitioner was in bad faith when it paid to Mangondato the rental fees and expropriation indemnity due the subject land. The two tribunals, in substance, fault petitioner when it "allowed" such payment to take place despite the latter’s alleged knowledge of the existing claim of the Ibrahims and Maruhoms upon the subject land and the issuance ofa TRO in Civil Case No. 967-93. Hence, the two tribunals claim that petitioner’s payment to Mangondato is ineffective as to the Ibrahims and Maruhoms, whom they found to be the real owners of the subject land. We do not agree. Branch 10 of the Marawi City RTC and the Court of Appeals erred in their finding of bad faith because they have overlooked the utter significance of one important fact: that petitioner’s payment to Mangondato of the rental fees and expropriation indemnity adjudged due for the subject land in Civil Case No. 605-92 and Civil Case No. 610-92, was required by the final and executory decision in the said two cases and was compelled thru a writ of garnishment issued by the court that rendered such decision. In other words, the payment to Mangondato was not a product of a deliberate choice on the part of the petitioner but was made only in compliance to the lawful orders of a court with jurisdiction.

Contrary then to the view of Branch 10 of the Marawi City RTC and of the Court of Appeals, it was not the petitioner that "allowed" the payment of the rental fees and expropriation indemnity to Mangondato. Indeed, given the circumstances, the more accurate rumination would be that it was the trial court in Civil Case No. 60592 and Civil Case No. 610-92 that ordered or allowed the payment to Mangondato and that petitioner merely complied with the order or allowance by the trial court. Since petitioner was only acting under the lawful orders of a court in paying Mangondato, we find that no bad faith can be taken against it, even assuming that petitioner may have had prior knowledge about the claims of the Ibrahims and Maruhoms upon the subject land and the TRO issued in Civil Case No. 967-93. Sans Bad Faith, Petitioner Cannot Be Held Liable to the Ibrahims and Maruhoms Without the existence of bad faith, the ruling of the RTC and of the Court of Appeals apropos petitioner’s remaining liability to the Ibrahims and Maruhoms becomes devoid of legal basis. In fact, petitioner’s previous payment to Mangondato of the rental fees and expropriation indemnity due the subject land pursuant to the final judgment in Civil Case No. 605-92 and Civil Case No. 610-92 may be considered to have extinguished the former’s obligation regardless of who between Mangondato, on one hand, and the Ibrahims and Maruhoms, on the other, turns out to be the real owner of the subject land.62 Either way, petitioner cannot be made liable to the Ibrahims and Maruhoms: First. If Mangondato is the real owner of the subject land, then the obligation by petitioner to pay for the rental fees and expropriation indemnity due the subject land is already deemed extinguished by the latter’s previous payment under the final judgment in Civil Case No. 605-92 and Civil Case No. 610-92. This would be a simple case of


an obligation being extinguished through payment by the debtor to its creditor.63 Under this scenario, the Ibrahims and Maruhoms would not even be entitled to receive anything from anyone for the subject land. Hence, petitioner cannot be held liable to the Ibrahims and Maruhoms. Second. We, however, can reach the same conclusion even if the Ibrahims and Maruhoms turn out to be the real owners of the subject land. Should the Ibrahims and Maruhoms turn out to be the real owners of the subject land, petitioner’s previous payment to Mangondato pursuant to Civil Case No. 605-92 and Civil Case No. 610-92—given the absence of bad faith on petitioner’s part as previously discussed—may nonetheless be considered as akin to a payment made in "good faith "to a person in "possession of credit" per Article 1242 of the Civil Code that, just the same, extinguishes its obligation to pay for the rental fees and expropriation indemnity due for the subject land. Article 1242 of the Civil Code reads: "Payment made in good faith to any person in possession of the credit shall release the debtor." Article 1242 of the Civil Code is an exception to the rule that a valid payment of an obligation can only be made to the person to whom such obligation is rightfully owed.64 It contemplates a situation where a debtor pays a "possessor of credit" i.e., someone who is not the real creditor but appears, under the circumstances, to be the real creditor.65 In such scenario, the law considers the payment to the "possessor of credit" as valid even as against the real creditor taking into account the good faith of the debtor. Borrowing the principles behind Article 1242 of the Civil Code, we find that Mangondato—being the judgment creditor in Civil Case No. 605-92 and Civil Case No. 610-92 as well as the registered owner of the subject land at the time66 —may be considered as a "possessor

of credit" with respect to the rental fees and expropriation indemnity adjudged due for the subject land in the two cases, if the Ibrahims and Maruhoms turn out to be the real owners of the subject land. Hence, petitioner’s payment to Mangondato of the fees and indemnity due for the subject land as a consequence of the execution of Civil Case No. 605-92 and Civil Case No. 610-92 could still validly extinguish its obligation to pay for the same even as against the Ibrahims and Maruhoms. Effect of Extinguishment of Petitioner’s Obligation The extinguishment of petitioner’s obligation to pay for the rental fees and expropriation indemnity due the subject land carries with it certain legal effects: First. If Mangondato turns out to be the real owner of the subject land, the Ibrahims and Maruhoms would not be entitled to recover anything from anyone for the subject land.1âwphi1 Consequently, the partial execution of the decision in Civil Case No. 967-93 that had led to the garnishment of Mangondato’s moneys in the possession of the Social Security System (SSS) in the amount of P2,700,000.00 in favor of the Ibrahims and Maruhoms, becomes improper and unjustified. In this event, therefore, the Ibrahims and Maruhoms may be ordered to return the amount so garnished to Mangondato. Otherwise, i.e. if the Ibrahims and Maruhoms really are the true owners of the subject land, they may only recover the rental fees and expropriation indemnity due the subject land against Mangondato but only up to whatever payments the latter had previously received from petitioner pursuant to Civil Case No. 60592 and Civil Case No. 610-92.


Second. At any rate, the extinguishment of petitioner’s obligation to pay for the rental fees and expropriation indemnity due the subject land negates whatever cause of action the Ibrahims and Maruhoms might have had against the former in Civil Case No. 967-93. Hence, regardless of who between Mangondato, on one hand, and the Ibrahims and Maruhoms, on the other, turns out to be the real owner of the subject land, the dismissal of Civil Case No. 967-93 insofar as petitioner isconcerned is called for. Re: Attorney’s Fees The dismissal of Civil Case No. 967-93 as against petitioner necessarily absolves the latter from paying attorney’s fees to the Ibrahims and Maruhoms arising from that case. WHEREFORE, premises considered, the instant petition is GRANTED. The Decision dated 24 June2005 and Resolution dated 5 December 2006 of the Court of Appeals in CA-G.R. CV No. 68061 is hereby SET ASIDE. The Decision dated 16 April 1998 of the Regional Trial Court in Civil Case No. 967-93 is MODIFIED in that petitioner is absolved from any liability in that case in favor of the respondents Lucman M. Ibrahim, Atty. Omar G. Maruhom, Elias G. Maruhom, Bucay G. Maruhom, Mamod G. Maruhom, Farouk G. Maruhom, Hidjara G. Maruhom, Rocania G. Maruhom, Potrisam G. Maruhom, Lumba G. Maruhom, Sinab G. Maruhom, Acmad G. Maruhom, Solayman G. Maruhom, Mohamad M. Ibrahim and Caironesa M. Ibrahim. Civil Case No. 967-93 is DISMISSED as against petitioner. No costs. SO ORDERED.

64.

G.R. No. 190755 November 24, 2010 LAND BANK OF THE PHILIPPINES, Petitioner, vs. ALFREDO ONG, Respondent.

D E C I S I O N VELASCO, JR., J.: This is an appeal from the October 20, 2009 Decision of the Court of Appeals (CA) in CA-G.R. CR-CV No. 84445 entitled Alfredo Ong v. Land Bank of the Philippines, which affirmed the Decision of the Regional Trial Court (RTC), Branch 17 in Tabaco City. The Facts On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land Bank Legazpi City in the amount of PhP 16 million. The loan was secured by three (3) residential lots, five (5) cargo trucks, and a warehouse. Under the loan agreement, PhP 6 million of the loan would be short-term and would mature on February 28, 1997, while the balance of PhP 10 million would be payable in seven (7) years. The Notice of Loan Approval dated February 22, 1996 contained an acceleration clause wherein any default in payment of amortizations or other charges would accelerate the maturity of the loan.1 Subsequently, however, the Spouses Sy found they could no longer pay their loan. On December 9, 1996, they sold three (3) of their mortgaged parcels of land for PhP 150,000 to Angelina Gloria Ong, Evangeline’s mother, under a Deed of Sale with Assumption of Mortgage. The relevant portion of the document2 is quoted as follows:


WHEREAS, we are no longer in a position to settle our obligation with the bank; NOW THEREFORE, for and in consideration of the sum of ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00) Philippine Currency, we hereby these presents SELL, CEDE, TRANSFER and CONVEY, by way of sale unto ANGELINA GLORIA ONG, also of legal age, Filipino citizen, married to Alfredo Ong, and also a resident of Tabaco, Albay, Philippines, their heirs and assigns, the above-mentioned debt with the said LAND BANK OF THE PHILIPPINES, and by reason hereof they can make the necessary representation with the bank for the proper restructuring of the loan with the said bank in their favor; That as soon as our obligation has been duly settled, the bank is authorized to release the mortgage in favor of the vendees and for this purpose VENDEES can register this instrument with the Register of Deeds for the issuance of the titles already in their names. IN WITNESS WHEREOF, we have hereunto affixed our signatures this 9th day of December 1996 at Tabaco, Albay, Philippines. (signed) EVANGELINE O. SY Vendor (signed) JOHNSON B. SY Vendor Evangeline’s father, petitioner Alfredo Ong, later went to Land Bank to inform it about the sale and assumption of mortgage.3 Atty. Edna Hingco, the Legazpi City Land Bank Branch Head, told Alfredo and his counsel Atty. Ireneo de Lumen that there was nothing wrong with the agreement with the Spouses Sy but provided them with requirements for the assumption of

mortgage. They were also told that Alfredo should pay part of the principal which was computed at PhP 750,000 and to update due or accrued interests on the promissory notes so that Atty. Hingco could easily approve the assumption of mortgage. Two weeks later, Alfredo issued a check for PhP 750,000 and personally gave it to Atty. Hingco. A receipt was issued for his payment. He also submitted the other documents required by Land Bank, such as financial statements for 1994 and 1995. Atty. Hingco then informed Alfredo that the certificate of title of the Spouses Sy would be transferred in his name but this never materialized. No notice of transfer was sent to him.4 Alfredo later found out that his application for assumption of mortgage was not approved by Land Bank. The bank learned from its credit investigation report that the Ongs had a real estate mortgage in the amount of PhP 18,300,000 with another bank that was past due. Alfredo claimed that this was fully paid later on. Nonetheless, Land Bank foreclosed the mortgage of the Spouses Sy after several months. Alfredo only learned of the foreclosure when he saw the subject mortgage properties included in a Notice of Foreclosure of Mortgage and Auction Sale at the RTC in Tabaco, Albay. Alfredo’s other counsel, Atty. Madrilejos, subsequently talked to Land Bank’s lawyer and was told that the PhP 750,000 he paid would be returned to him.5 On December 12, 1997, Alfredo initiated an action for recovery of sum of money with damages against Land Bank in Civil Case No. T-1941, as Alfredo’s payment was not returned by Land Bank. Alfredo maintained that Land Bank’s foreclosure without informing him of the denial of his assumption of the mortgage was done in bad faith. He argued that he was lured into believing that his payment of PhP 750,000 would cause Land Bank to approve his assumption of the loan of the Spouses Sy and the transfer of the mortgaged properties in his and his wife’s name.6 He also claimed incurring expenses for attorney’s fees of PhP


150,000, filing fee of PhP 15,000, and PhP 250,000 in moral damages.7 Testifying for Land Bank, Atty. Hingco claimed during trial that as branch manager she had no authority to approve loans and could not assure anybody that their assumption of mortgage would be approved. She testified that the breakdown of Alfredo’s payment was as follows: PhP 101,409.59 applied to principal 216,246.56 accrued interests receivable 396,571.77 interests 18,766.10 penalties 16,805.98 accounts receivable Total: ---------------- 750,000.00 According to Atty. Hingco, the bank processes an assumption of mortgage as a new loan, since the new borrower is considered a new client. They used character, capacity, capital, collateral, and conditions in determining who can qualify to assume a loan. Alfredo’s proposal to assume the loan, she explained, was referred to a separate office, the Lending Center. 8 During cross-examination, Atty. Hingco testified that several months after Alfredo made the tender of payment, she received word that the Lending Center rejected Alfredo’s loan application. She stated that it was the Lending Center and not her that should have informed Alfredo about the denial of his and his wife’s assumption of mortgage. She added that although she told Alfredo that the agreement between the spouses Sy and Alfredo was valid between them and that the bank would accept payments from him, Alfredo did not pay any further amount so the foreclosure of the loan collaterals ensued. She admitted that Alfredo demanded the return of the PhP 750,000 but said that there was no written demand before the case against the bank

was filed in court. She said that Alfredo had made the payment of PhP 750,000 even before he applied for the assumption of mortgage and that the bank received the said amount because the subject account was past due and demandable; and the Deed of Assumption of Mortgage was not used as the basis for the payment. 9 The Ruling of the Trial Court The RTC held that the contract approving the assumption of mortgage was not perfected as a result of the credit investigation conducted on Alfredo. It noted that Alfredo was not even informed of the disapproval of the assumption of mortgage but was just told that the accounts of the spouses Sy had matured and gone unpaid. It ruled that under the principle of equity and justice, the bank should return the amount Alfredo had paid with interest at 12% per annum computed from the filing of the complaint. The RTC further held that Alfredo was entitled to attorney’s fees and litigation expenses for being compelled to litigate.10 The dispositive portion of the RTC Decision reads: WHEREFORE, premises considered, a decision is rendered, ordering defendant bank to pay plaintiff, Alfredo Ong the amount of P750,000.00 with interest at 12% per annum computed from Dec. 12, 1997 and attorney’s fees and litigation expenses of P50,000.00. Costs against defendant bank. SO ORDERED.11 The Ruling of the Appellate Court


On appeal, Land Bank faulted the trial court for (1) holding that the payment of PhP 750,000 made by Ong was one of the requirements for the approval of his proposal to assume the mortgage of the Sy spouses; (2) erroneously ordering Land Bank to return the amount of PhP 750,000 to Ong on the ground of its failure to effect novation; and (3) erroneously affirming the award of PhP 50,000 to Ong as attorney’s fees and litigation expenses. The CA affirmed the RTC Decision.12 It held that Alfredo’s recourse is not against the Sy spouses. According to the appellate court, the payment of PhP 750,000 was for the approval of his assumption of mortgage and not for payment of arrears incurred by the Sy spouses. As such, it ruled that it would be incorrect to consider Alfredo a third person with no interest in the fulfillment of the obligation under Article 1236 of the Civil Code. Although Land Bank was not bound by the Deed between Alfredo and the Spouses Sy, the appellate court found that Alfredo and Land Bank’s active preparations for Alfredo’s assumption of mortgage essentially novated the agreement. On January 5, 2010, the CA denied Land Bank’s motion for reconsideration for lack of merit. Hence, Land Bank appealed to us. The Issues I Whether the Court of Appeals erred in holding that Art. 1236 of the Civil Code does not apply and in finding that there is no novation. II

Whether the Court of Appeals misconstrued the evidence and the law when it affirmed the trial court decision’s ordering Land Bank to pay Ong the amount of Php750,000.00 with interest at 12% annum. III Whether the Court of Appeals committed reversible error when it affirmed the award of Php50,000.00 to Ong as attorney’s fees and expenses of litigation. The Ruling of this Court We affirm with modification the appealed decision. Recourse is against Land Bank Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should have sought recourse against the Spouses Sy instead of Land Bank. Art. 1236 provides: The creditor is not bound to accept payment or performance by a third person who has no interest in the fulfillment of the obligation, unless there is a stipulation to the contrary. Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to the debtor.1avvphi1 We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land Bank was not bound to accept Alfredo’s payment, since as far as the former was concerned, he did not have an interest in the payment of the loan of the Spouses Sy. However, in the context of the second part of said paragraph, Alfredo was not making payment to fulfill the obligation of the


Spouses Sy. Alfredo made a conditional payment so that the properties subject of the Deed of Sale with Assumption of Mortgage would be titled in his name. It is clear from the records that Land Bank required Alfredo to make payment before his assumption of mortgage would be approved. He was informed that the certificate of title would be transferred accordingly. He, thus, made payment not as a debtor but as a prospective mortgagor. But the trial court stated: [T]he contract was not perfected or consummated because of the adverse finding in the credit investigation which led to the disapproval of the proposed assumption. There was no evidence presented that plaintiff was informed of the disapproval. What he received was a letter dated May 22, 1997 informing him that the account of spouses Sy had matured but there [were] no payments. This was sent even before the conduct of the credit investigation on June 20, 1997 which led to the disapproval of the proposed assumption of the loans of spouses Sy.13 Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the obligation of the Spouses Sy, since his interest hinged on Land Bank’s approval of his application, which was denied. The circumstances of the instant case show that the second paragraph of Art. 1236 does not apply. As Alfredo made the payment for his own interest and not on behalf of the Spouses Sy, recourse is not against the latter. And as Alfredo was not paying for another, he cannot demand from the debtors, the Spouses Sy, what he has paid. Novation of the loan agreement Land Bank also faults the CA for finding that novation applies to the instant case. It reasons that a substitution of debtors was made without its consent; thus, it was not bound to recognize the substitution under the rules on novation.

On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance Corporation14 provides the following discussion: 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. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functions ─ one to extinguish an existing obligation, the other to substitute a new one in its place ─ requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation. x x x In order that an obligation may be extinguished by another which substitutes 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. The test of incompatibility is whether or not the two obligations can stand together, each one having its independent existence. x x x (Emphasis supplied.) Furthermore, Art. 1293 of the Civil Code states: 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. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237.


We do not agree, then, with the CA in holding that there was a novation in the contract between the parties. Not all the elements of novation were present. Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old agreement.15 Land Bank is thus correct when it argues that there was no novation in the following: [W]hether or not Alfredo Ong has an interest in the obligation and payment was made with the knowledge or consent of Spouses Sy, he may still pay the obligation for the reason that even before he paid the amount of P750,000.00 on January 31, 1997, the substitution of debtors was already perfected by and between Spouses Sy and Spouses Ong as evidenced by a Deed of Sale with Assumption of Mortgage executed by them on December 9, 1996. And since the substitution of debtors was made without the consent of Land Bank – a requirement which is indispensable in order to effect a novation of the obligation, it is therefore not bound to recognize the substitution of debtors. Land Bank did not intervene in the contract between Spouses Sy and Spouses Ong and did not expressly give its consent to this substitution.16 Unjust enrichment Land Bank maintains that the trial court erroneously applied the principle of equity and justice in ordering it to return the PhP 750,000 paid by Alfredo. Alfredo was allegedly in bad faith and in estoppel. Land Bank contends that it enjoyed the presumption of regularity and was in good faith when it accepted Alfredo’s tender of PhP 750,000. It reasons that it did not unduly enrich itself at Alfredo’s expense during the foreclosure of the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the Spouses Sy’s outstanding loan obligation.

Alfredo’s recourse then, according to Land Bank, is to have his payment reimbursed by the Spouses Sy. We rule that Land Bank is still liable for the return of the PhP 750,000 based on the principle of unjust enrichment. Land Bank is correct in arguing that it has no obligation as creditor to recognize Alfredo as a person with interest in the fulfillment of the obligation. But while Land Bank is not bound to accept the substitution of debtors in the subject real estate mortgage, it is estopped by its action of accepting Alfredo’s payment from arguing that it does not have to recognize Alfredo as the new debtor. The elements of estoppel are: First, the actor who usually must have knowledge, notice or suspicion of the true facts, communicates something to another in a misleading way, either by words, conduct or silence; second, the other in fact relies, and relies reasonably or justifiably, upon that communication; third, the other would be harmed materially if the actor is later permitted to assert any claim inconsistent with his earlier conduct; and fourth, the actor knows, expects or foresees that the other would act upon the information given or that a reasonable person in the actor’s position would expect or foresee such action.17 By accepting Alfredo’s payment and keeping silent on the status of Alfredo’s application, Land Bank misled Alfredo to believe that he had for all intents and purposes stepped into the shoes of the Spouses Sy. The defense of Land Bank Legazpi City Branch Manager Atty. Hingco that it was the bank’s Lending Center that should have notified Alfredo of his assumption of mortgage disapproval is unavailing. The Lending Center’s lack of notice of disapproval, the Tabaco Branch’s silence on the disapproval, and the bank’s subsequent actions show a failure of the bank as a whole, first, to notify Alfredo that he is not a recognized debtor in the eyes of the


bank; and second, to apprise him of how and when he could collect on the payment that the bank no longer had a right to keep. We turn then on the principle upon which Land Bank must return Alfredo’s payment. Unjust enrichment exists "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."18 There is unjust enrichment under Art. 22 of the Civil Code when (1) a person is unjustly benefited, and (2) such benefit is derived at the expense of or with damages to another.19 Additionally, unjust enrichment has been applied to actions called accion in rem verso. In order that the accion in rem verso may prosper, the following conditions must concur: (1) that the defendant has been enriched; (2) that the plaintiff has suffered a loss; (3) that the enrichment of the defendant is without just or legal ground; and (4) that the plaintiff has no other action based on contract, quasi-contract, crime, or quasi-delict.20 The principle of unjust enrichment essentially contemplates payment when there is no duty to pay, and the person who receives the payment has no right to receive it.21 The principle applies to the parties in the instant case, as, Alfredo, having been deemed disqualified from assuming the loan, had no duty to pay petitioner bank and the latter had no right to receive it. Moreover, the Civil Code likewise requires under Art. 19 that "[e]very person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith." Land Bank, however, did not even bother to inform Alfredo that it was no longer approving his assumption of the Spouses Sy’s mortgage. Yet it acknowledged his interest in the loan when the branch head of

the bank wrote to tell him that his daughter’s loan had not been paid.22 Land Bank made Alfredo believe that with the payment of PhP 750,000, he would be able to assume the mortgage of the Spouses Sy. The act of receiving payment without returning it when demanded is contrary to the adage of giving someone what is due to him. The outcome of the application would have been different had Land Bank first conducted the credit investigation before accepting Alfredo’s payment. He would have been notified that his assumption of mortgage had been disapproved; and he would not have taken the futile action of paying PhP 750,000. The procedure Land Bank took in acting on Alfredo’s application cannot be said to have been fair and proper. As to the claim that the trial court erred in applying equity to Alfredo’s case, we hold that Alfredo had no other remedy to recover from Land Bank and the lower court properly exercised its equity jurisdiction in resolving the collection suit. As we have held in one case: Equity, as the complement of legal jurisdiction, seeks to reach and complete justice where courts of law, through the inflexibility of their rules and want of power to adapt their judgments to the special circumstances of cases, are incompetent to do so. Equity regards the spirit and not the letter, the intent and not the form, the substance rather than the circumstance, as it is variously expressed by different courts.23 Another claim made by Land Bank is the presumption of regularity it enjoys and that it was in good faith when it accepted Alfredo’s tender of PhP 750,000. The defense of good faith fails to convince given Land Bank’s actions. Alfredo was not treated as a mere prospective borrower. After he had paid PhP 750,000, he was made to sign bank documents including a promissory note and real estate mortgage. He was assured by Atty. Hingco that the titles to the properties


covered by the Spouses Sy’s real estate mortgage would be transferred in his name, and upon payment of the PhP 750,000, the account would be considered current and renewed in his name.24 Land Bank posits as a defense that it did not unduly enrich itself at Alfredo’s expense during the foreclosure of the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the Spouses Sy’s outstanding loan obligation. It is observed that this is the first time Land Bank is revealing this defense. However, issues, arguments, theories, and causes not raised below may no longer be posed on appeal.25 Land Bank’s contention, thus, cannot be entertained at this point.1avvphi1 Land Bank further questions the lower court’s decision on the basis of the inconsistencies made by Alfredo on the witness stand. It argues that Alfredo was not a credible witness and his testimony failed to overcome the presumption of regularity in the performance of regular duties on the part of Land Bank. This claim, however, touches on factual findings by the trial court, and we defer to these findings of the trial court as sustained by the appellate court. These are generally binding on us. While there are exceptions to this rule, Land Bank has not satisfactorily shown that any of them is applicable to this issue.26 Hence, the rule that the trial court is in a unique position to observe the demeanor of witnesses should be applied and respected27 in the instant case. In sum, we hold that Land Bank may not keep the PhP 750,000 paid by Alfredo as it had already foreclosed on the mortgaged lands. Interest and attorney’s fees

As to the applicable interest rate, we reiterate the guidelines found in Eastern Shipping Lines, Inc. v. Court of Appeals:28 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 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


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. No evidence was presented by Alfredo that he had sent a written demand to Land Bank before he filed the collection suit. Only the verbal agreement between the lawyers of the parties on the return of the payment was mentioned.29 Consequently, the obligation of Land Bank to return the payment made by Alfredo upon the former’s denial of the latter’s application for assumption of mortgage must be reckoned from the date of judicial demand on December 12, 1997, as correctly determined by the trial court and affirmed by the appellate court. The next question is the propriety of the imposition of interest and the proper imposable rate of applicable interest. The RTC granted the rate of 12% per annum which was affirmed by the CA. From the above-quoted guidelines, however, the proper imposable interest rate is 6% per annum pursuant to Art. 2209 of the Civil Code. Sunga-Chan v. Court of Appeals is illuminating in this regard: 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: Art. 2209. If the obligation consists in the 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 per cent per annum. The term "forbearance," within the context of usury law, has been described as a contractual obligation of a 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. Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum under Art. 2209 of the Civil Code applies "when the transaction involves the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of obligations in general," with the application of both rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid." In either instance, the reckoning period for the commencement of the running of the legal interest shall be subject to the condition "that the courts are vested with discretion, depending on the equities of each case, on the award of interest."30 (Emphasis supplied.) Based on our ruling above, forbearance of money refers to the contractual obligation of the lender or creditor to desist for a fixed period from requiring the borrower or debtor to repay the loan or debt then due and for which 12% per annum is imposed as interest in the absence of a stipulated rate. In the instant case, Alfredo’s conditional payment to Land Bank does not constitute forbearance of money, since there was no agreement or obligation for Alfredo to pay Land Bank the amount of PhP 750,000, and the obligation of Land Bank to return what Alfredo has conditionally paid is still in dispute and has not yet been


determined. Thus, it cannot be said that Land Bank’s alleged obligation has become a forbearance of money. On the award of attorney’s fees, attorney’s fees and expenses of litigation were awarded because Alfredo was compelled to litigate due to the unjust refusal of Land Bank to refund the amount he paid. There are instances when it is just and equitable to award attorney’s fees and expenses of litigation.31 Art. 2208 of the Civil Code pertinently states: In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered, except: x x x x (2) When the defendant’s act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest. Given that Alfredo was indeed compelled to litigate against Land Bank and incur expenses to protect his interest, we find that the award falls under the exception above and is, thus, proper given the circumstances. On a final note. The instant case would not have been litigated had Land Bank been more circumspect in dealing with Alfredo. The bank chose to accept payment from Alfredo even before a credit investigation was underway, a procedure worsened by the failure to even inform him of his credit standing’s impact on his assumption of mortgage. It was, therefore, negligent to a certain degree in handling the transaction with Alfredo. It should be remembered that the business of a bank is affected with public interest and it should observe a higher standard of diligence when dealing with the public.32

WHEREFORE, the appeal is DENIED. The CA Decision in CA-G.R. CR-CV No. 84445 is AFFIRMED with MODIFICATION in that the amount of PhP 750,000 will earn interest at 6% per annum reckoned from December 12, 1997, and the total aggregate monetary awards will in turn earn 12% per annum from the finality of this Decision until fully paid. 65. [G.R. No. L-28569. February 27, 1970.] J. M. TUASON & Co. INC., Plaintiff-Appellant, v. LIGAYA JAVIER, Defendant-Appellee. CONCEPCION, C.J.: This appeal, taken by plaintiff J.M. Tuason & Co., Inc., from a decision of the Court of First Instance of Rizal, has been certified to Us by the Court of Appeals, only questions of law being raised therein. The record shows that, on September 7, 1954, a contract was entered into between the plaintiff, on the one hand, and defendant-appellee, Ligaya Javier, on the other, whereby plaintiff agreed to sell, transfer and convey to the defendant a parcel of land known as Lot No. 28, Block No. 356, PSD 30328, of the Sta. Mesa Heights Subdivision, for the total sum of P3,691.20, with interest thereon at the rate of ten (10) per centum a year, payable as follows: P896.12 upon the execution of the contract and P43.92 every month thereafter, for a period of ten (10) years. The sixth paragraph of said contract provided that:jgc:chanrobles.com.ph


". . . In case the party of the SECOND PART fails to satisfy any monthly installments, or any other payments herein agreed upon, he is granted a month of grace within which to make the retarded payment, together with the one corresponding to the said month of grace; it is understood, however, that should the month of grace herein granted to the party of the SECOND PART expire without the payments corresponding to both months having been satisfied, an interest of 10% per annum will be charged on the amount he should have paid it is understood further, that should a period of 90 days elapse, to begin from the expiration of the month of grace herein mentioned, and the party of the SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to that date, the party of the FIRST PART has the right to declare this contract cancelled and of no effect, and as consequence thereof, the party of the FIRST PART may dispose of the parcel or parcels of land covered by this contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of this contract, all the amounts paid in accordance with this agreement together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises, and as payment for the damages suffered by failure of the party of the SECOND PART to fulfill his part of the agreement; and the party of the SECOND PART hereby renounces all his right to demand or reclaim the return of the same and obliges himself to peacefully vacate the premises and deliver the same to the party of the FIRST PART."cralaw virtua1aw library Upon the execution of the contract and the payment of the first installment of P396.12, the defendant was placed in possession of the land. Thereafter and until January 5, 1962, she paid the stipulated monthly installments which, including the initial payment of P396.12, aggregated P1,134.08. Subsequently, however, she defaulted in the payment of said installments, in view of which, on May 22, 1964, plaintiff informed her by letter

that their contract had been rescinded. Defendant having thereafter failed or refused to vacate said land, on July 9, 1964, plaintiff commenced the present action against her, in the Court of First Instance of Rizal. After alleging substantially the foregoing fact, plaintiff prayed in its complaint that the aforementioned contract be declared validly rescinded and that the defendant and all persons claiming under her be ordered to deliver to the plaintiff the lot in question, with all the improvements thereon, and to pay a monthly rental of P40.00, from January 5, 1962, until the property shall have been surrendered to the plaintiff, as well as all costs. Admitting that she had defaulted in the payment of the stipulated monthly installments, from January 5, 1962, defendant alleged in her answer that this fact "was due to unforeseen circumstances" ; that she is "willing to pay all arrears in installments under the contract" and had "in fact offered the same to the plaintiff" ; and that said contract "can not be rescinded upon the unilateral act of the plaintiff." At a pre-trial conference held before said court, the following facts were — in the language of the decision appealed from — agreed upon between the parties:jgc:chanrobles.com.ph ". . . that since January 5, 1962, up to the present, the defendant has failed to pay the monthly installments called for in the contract to sell; that in view of the failure of the defendant to pay her installment payments since January 5, 1962, the plaintiff rescinded the contract pursuant to the provision thereof; that after the filing of the complaint, defendant in an attempt to arrive at a compromise agreement with the plaintiff, offered to pay all the installment payments in arrears, the interest thereon from the time of default of payment, reasonable attorney’s fees, and the costs of suit; that said offer was repeated by the defendant in writing on December 1, 1964, and also during the pre-trial conference of this case, but said offer was turned down by the plaintiff."cralaw virtua1aw library


The case having been submitted for decision upon the foregoing stipulation, said courts, applying Art. 1592 of our Civil Code, rendered its aforementioned decision, the dispositive part of which reads:jgc:chanrobles.com.ph "WHEREFORE, judgment is hereby rendered, declaring that the contract to sell has not yet been rescinded, and ordering the defendant to pay to the plaintiff within sixty (60) days from receipt hereof all the installment payments in arrears together with interest thereon at 10% per annum from January 5, 1962, the date of default, attorney’s fees in the sum of P1,000.00, and the costs of suit. Upon payment of same, the plaintiff in ordered to execute in favor of the defendant the necessary deed to transfer to the defendant the title to the parcel of land in question, free from all liens and encumbrances except those provided for in the contract, all expenses which may be incurred in said transfer of title to be paid by the defendant."cralaw virtua1aw library Hence, this appeal by plaintiff, based mainly upon the alleged erroneous application to the case at bar of said Art. 1592, pursuant to which: "In the sale of immovable property, even though it may have been stipulated that upon the failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may pay, even after the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially or by a notarial act. After the demand, the court may not grant him a new term."cralaw virtua1aw library Plaintiff maintains that this provision governs contracts of sale, not contracts to sell, such as the one entered into by the parties in this case. Regardless, however, of the propriety of applying said Art. 1592 thereto, We find that plaintiff herein has not been

denied substantial justice, for, according to Art. 1234 of said Code:jgc:chanrobles.com.ph "If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee."cralaw virtua1aw library In this connection, it should be noted that, apart from the initial installment of P396.12, paid upon the execution of the contract, on September 7, 1954, the defendant religiously satisfied the monthly installments accruing thereafter, for a period of almost eight (8) years, or up to January 5, 1962; that, although the principal obligation under the contract was P3,691.20, the total payments made by the defendant up to January 5, 1962, including stipulated interest, aggregated P4,134.08; that the defendant has offered to pay all of the installments overdue including the stipulated interest, apart from reasonable attorney’s fees and the costs; and that, accordingly, the trial court sentenced the defendant to pay all such installments, interest, fees and costs. Thus, plaintiff will thereby recover everything due thereto, pursuant to its contract with the defendant, including such damages as the former may have suffered in consequence of the latter’s default. Under these circumstances, We feel that, in the interest of justice and equity, the decision appealed from may be upheld upon the authority of Art. 1234 of the Civil Code. 1 WHEREFORE, said decision is hereby affirmed, with out special pronouncement as to costs in this instance. It is so ordered. 66. G.R. No. L-26578 January 28, 1974 LEGARDA HERMANOS and JOSE LEGARDA, petitioners,


vs. FELIPE SALDAÑA and COURT OF APPEALS (FIFTH DIVISION) * respondents. Manuel Y. Macias for petitioners. Mario E. Ongkiko for private respondent.

TEEHANKEE, J.:1äwphï1.ñët The Court, in affirming the decision under review of the Court of Appeals, which holds that the respondent buyer of two small residential lots on installment contracts on a ten-year basis who has faithfully paid for eight continuous years on the principal alone already more than the value of one lot, besides the larger stipulated interests on both lots, is entitled to the conveyance of one fully paid lot of his choice, rules that the judgment is fair and just and in accordance with law and equity. The action originated as a complaint for delivery of two parcels of land in Sampaloc, Manila and for execution of the corresponding deed of conveyance after payment of the balance still due on their purchase price. Private respondent as plaintiff had entered into two written contracts with petitioner Legarda Hermanos as defendant subdivision owner, whereby the latter agreed to sell to him Lots Nos. 7 and 8 of block No. 5N of the subdivision with an area of 150 square meters each, for the sum of P1,500.00 per lot, payable over the span of ten years divided into 120 equal monthly installments of P19.83 with 10% interest per annum, to commence on May 26, 1948, date of execution of the contracts. Subsequently, Legarda Hermanos partitioned the subdivision among the brothers and sisters, and the two lots were among those allotted to co-petitioner Jose Legarda who was then included as co-defendant in the action.

It is undisputed that respondent faithfully paid for eight continuous years about 95 (of the stipulated 120) monthly installments totalling P3,582.06 up to the month of February, 1956, which as per petitioners' own statement of account, Exhibit "1", was applied to respondent's account (without distinguishing the two lots), as follows: To interests P1,889.78 To principal 1,682.28 Total P3,582.06 1 It is equally undisputed that after February, 1956 up to the filing of respondent's complaint in the Manila court of first instance in 1961, respondent did not make further payments. The account thus shows that he owed petitioners the sum of P1,317.72 on account of the balance of the purchase price (principal) of the two lots (in the total sum of P3,000.00), although he had paid more than the stipulated purchase price of P1,500.00 for one lot. Almost five years later, on February 2, 1961 just before the filing of the action, respondent wrote petitioners stating that his desire to build a house on the lots was prevented by their failure to introduce improvements on the subdivision as "there is still no road to these lots," and requesting information of the amount owing to update his account as "I intend to continue paying the balance due on said lots." Petitioners replied in their letter of February 11, 1961 that as respondent had failed to complete total payment of the 120 installments by May, 1958 as stipulated in the contracts to sell, "pursuant to the provisions of both contracts all the amounts paid in accordance with the agreement together with the improvements on the premises have been considered as rents


paid and as payment for damages suffered by your failure," 2 and "Said cancellation being in order, is hereby confirmed." From the adverse decision of July 17, 1963 of the trial court sustaining petitioners' cancellation of the contracts and dismissing respondent's complaint, respondent appellate court on appeal rendered its judgment of July 27, 1966 reversing the lower court's judgment and ordering petitioners "to deliver to the plaintiff possession of one of the two lots, at the choice of defendants, and to execute the corresponding deed of conveyance to the plaintiff for the said lot," 3 ruling as follows: — During the hearing, plaintiff testified that he suspended payments because the lots were not actually delivered to him, or could not be, due to the fact that they were completely under water; and also because the defendants-owners failed to make improvements on the premises, such as roads, filling of the submerged areas, etc., despite repeated promises of their representative, the said Mr. Cenon. As regards the supposed cancellation of the contracts, plaintiff averred that no demand has been made upon him regarding the unpaid installments, and for this reason he could not be declared in default so as to entitle the defendants to cancel the said contracts. The issue, therefore, is: Under the above facts, may defendants be compelled, or not, to allow plaintiff to complete payment of the purchase price of the two lots in dispute and thereafter to execute the final deeds of conveyance thereof in his favor? xxx xxx xxx Whether or not plaintiffs explanation for his failure to pay the remaining installments is true, considering the circumstances obtaining in this case, we elect to apply the broad principles of equity and justice. In the case at bar, we find that the plaintiff has paid the total sum of P3,582.06 including interests, which is even

more than the value of the two lots. And even if the sum applied to the principal alone were to be considered, which was of the total of P1,682.28, the same was already more than the value of one lot, which is P1,500.00. The only balance due on both lots was P1,317.72, which was even less than the value of one lot. We will consider as fully paid by the plaintiff at least one of the two lots, at the choice of the defendants. This is more in line with good conscience than a total denial to the plaintiff of a little token of what he has paid the defendant Legarda Hermanos. 4 Hence, the present petition for review, wherein petitioners insist on their right of cancellation under the "plainly valid written agreements which constitute the law between the parties" as against "the broad principles of equity and justice" applied by the appellate court. Respondent on the other hand while adhering to the validity of the doctrine of the Caridad Estates cases 5 which recognizes the right of a vendor of land under a contract to sell to cancel the contract upon default, with forfeiture of the installments paid as rentals, disputes its applicability herein contending that here petitioners-sellers were equally in default as the lots were "completely under water" and "there is neither evidence nor a finding that the petitioners in fact cancelled the contracts previous to receipt of respondent's letter." 6 The Court finds that the appellate court's judgment finding that of the total sum of P3,582.06 (including interests of P1,889.78) already paid by respondent (which was more than the value of two lots), the sum applied by petitioners to the principal alone in the amount of P1,682.28 was already more than the value of one lot of P1,500.00 and hence one of the two lots as chosen by respondent would be considered as fully paid, is fair and just and in accordance with law and equity. As already stated, the monthly payments for eight years made by respondent were applied to his account without specifying or distinguishing between the two lots subject of the two


agreements under petitioners' own statement of account, Exhibit "1". 7 Even considering respondent as having defaulted after February 1956, when he suspended payments after the 95th installment, he had as of the already paid by way of principal (P1,682.28) more than the full value of one lot (P1,500.00). The judgment recognizing this fact and ordering the conveyance to him of one lot of his choice while also recognizing petitioners' right to retain the interests of P1,889.78 paid by him for eight years on both lots, besides the cancellation of the contract for one lot which thus reverts to petitioners, cannot be deemed to deny substantial justice to petitioners nor to defeat their rights under the letter and spirit of the contracts in question. The Court's doctrine in the analogous case of J.M. Tuason & Co. Inc. vs. Javier 8 is fully applicable to the present case, with the respondent at bar being granted lesser benefits, since no rescission of contract was therein permitted. There, where the therein buyer-appellee identically situated as herein respondent buyer had likewise defaulted in completing the payments after having religiously paid the stipulated monthly installments for almost eight years and notwithstanding that the seller-appellant had duly notified the buyer of the rescission of the contract to sell, the Court upheld the lower court's judgment denying judicial confirmation of the rescission and instead granting the buyer an additional grace period of sixty days from notice of judgment to pay all the installment payments in arrears together with the stipulated 10% interest per annum from the date of default, apart from reasonable attorney's fees and costs, which payments, the Court observed, would have the plaintiff-seller "recover everything due thereto, pursuant to its contract with the defendant, including such damages as the former may have suffered in consequence of the latter's default." In affirming, the Court held that "Regardless, however, of the propriety of applying said Art. 1592 thereto, We find that plaintiff herein has not been denied substantial justice, for, according to

Art. 1234 of said Code: 'If the obligation has been substantially performed in good faith, the obligor may recover as though there had been a strict and complete fulfillment, less damages suffered by the obligee,'" and "that in the interest of justice and equity, the decision appealed from may be upheld upon the authority of Article 1234 of the Civil Code." 9 ACCORDINGLY, the appealed judgment of the appellate court is hereby affirmed. Without pronouncement as to costs. 67. G.R. No. L-30597 GUILLERMO AZCONA and FE JALANDONI AZCONA, petitioners, vs. JOSE JAMANDRE, Administrator of the Intestate Estate of Cirilo Jamandre (Sp. Proc. 6921 of the Court of First Instance of Negros Occidental), and the HONORABLE COURT OF APPEALS, respondents. CRUZ, J.: This involves the interpretation of a contract of lease which was found by the trial court to have been violated by both the plaintiff and the defendant. On appeal, its decision was modified by the respondent court in favor of the plaintiff, for which reason the defendant has now come to us in a petition for certiorari.


By the said contract, 1 Guillermo Azcona (hereinafter called the petitioner) leased 80 hectares of his 150-hectare pro indiviso share in Hacienda Sta. Fe in Escalante, Negros Occidental, to Cirilo Jamandre (represented here by the administrator of his intestate estate, and hereinafter called the private respondent). The agreed yearly rental was P7,200.00. The lease was for three agricultural years beginning 1960, extendible at the lessee's option to two more agricultural years, up to 1965. The first annual rental was due on or before March 30, 1960, but because the petitioner did not deliver possession of the leased property to the respondent, he "waived" payment, as he put it, of that rental. 2 The respondent actually entered the premises only on October 26, 1960, after payment by him to the petitioner of the sum of P7,000.00, which was acknowledged in the receipt later offered as Exhibit "B". On April 6, 1961, the petitioner, through his lawyer, notified the respondent that the contract of lease was deemed cancelled, terminated, and of no further effect," pursuant to its paragraph 8, for violation of the conditions specified in the said agreement. 3 Earlier, in fact, the respondent had been ousted from the possession of 60 hectares of the leased premises and left with only 20 hectares of the original area. 4 The reaction of the respondent to these developments was to file a complaint for damages against the petitioner, who retaliated with a counterclaim. As previously stated, both the complaint and the counterclaim were dismissed by the trial court * on the finding that the parties were in pari delicto. 5 The specific reasons invoked by the petitioner for canceling the lease contract were the respondent's failure: 1) to attach thereto the parcelary plan Identifying the exact area subject of the agreement, as stipulated in the contract; 2; to secure the approval

by the Philippine National Bank of the said contract; and 3) to pay the rentals. 6 The parcelary plan was provided for in the contract as follows: That the LESSOR by these presents do hereby agree to lease in favor of the LESSEE a portion of the said lots above-described with an extension of EIGHTY (80) hectares, more or less, which portion is to be Identified by the parcelary plan duly marked and to be initialed by both LESSOR and LESSEE, and which parcelary plan is known as Annex "A" of this contract and considered as an integral part hereof. 7 According to the petitioners, the parcelary plan was never agreed upon or annexed to the contract, which thereby became null and void under Article 1318 of the Civil Code for lack of a subject matter. Moreover, the failure of the parties to approve and annex the said parcelary plan had the effect of a breach of the contract that justified its cancellation under its paragraph 8. 8 In one breath, the petitioner is arguing that there was no contract because there was no object and at the same time that there was a contract except that it was violated. The correct view, as we see it, is that there was an agreed subject-matter, to wit, the 80 hectares of the petitioner's share in the Sta. Fe hacienda, although it was not expressly defined because the parcelary plan was not annexed and never approved by the parties. Despite this lack, however, there was an ascertainable object because the leased premises were sufficiently Identified and delineated as the petitioner admitted in his amended answer and in his direct testimony. 9 Thus, in his amended answer, he asserted that "the plaintiff . . .must delimit his work to the area previously designated and delivered." Asked during the trial how many hectares the private


respondent actually occupied, the petitioner declared: "About 80 hectares. The whole 80 hectares." 10 The petitioner cannot now contradict these written and oral admissions." 11 Moreover, it appears that the failure to attach the parcelary plan to the contract is imputable to the petitioner himself because it was he who was supposed to cause the preparation of the said plan. As he testified on direct examination, "Our agreement was to sign our agreement, then I will have the parcelary plan prepared so that it will be a part of our contract." 12 That this was never done is not the respondent's fault as he had no control of the survey of the petitioner's land. Apparently, the Court of Appeals ** found, the parties impliedly decided to forego the annexing of the parcelary plan because they had already agreed on the area and limits of the leased premises. 13 The Identification of the 80 hectares being leased rendered the parcelary plan unnecessary, and its absence did not nullify the agreement. Coming next to the alleged default in the payment of the stipulated rentals, we observe first that when in Exhibit "B" the petitioner declared that "I hereby waive payment for the rentals corresponding to the crop year 1960-61 and which was due on March 30, 1960, " there was really nothing to waive because, as he himself put it in the same document, possession of the leased property "was not actually delivered" to the respondent. 14 The petitioner claims that such possession was not delivered because the approval by the PNB of the lease contract had not "materialized" due to the respondent's neglect. Such approval, he submitted, was to have been obtained by the respondents, which seems logical to us, for it was the respondent who was negotiating the loan from the PNB. As the respondent court saw it, however, "paragraph 6 (of the contract) does not state upon whom fell the obligation to secure the approval" so that it was

not clear that "the fault, if any, was due solely to one or the other." 15 At any rate, that issue and the omission of the parcelary plan became immaterial when the parties agreed on the lease for the succeeding agricultural year 1961-62, the respondent paying and the petitioner receiving therefrom the sum of P7,000.00, as acknowledged in Exhibit "B," which is reproduced in full as follows: Bacolod City October 26, 1960 R E C E I P T RECEIVED from Mr. Cirilo Jamandre at the City of Bacolod, Philippines, this 26th day of October, 1960, Philippine National Bank Check No. 180646-A (Manager's Check Binalbagan Branch) for the amount of SEVEN THOUSAND PESOS (P7,000.00), Philippine Currency as payment for the rental corresponding to crop year 1961-62, by virtue of the contract of lease I have executed in his favor dated November 23, 1959, and ratified under Notary Public Mr. Enrique F. Marino as Doc. No. 119, Page No. 25, Book No. XII, Series of 1959. It is hereby understood, that this payment corresponds to the rentals due on or before January 30, 1961, as per contract. It is further understood that I hereby waive payment for the rentals corresponding to crop year 196061 and which was due on March 30, 1960, as possession of the property lease in favor of Mr. Cirilo Jamandre was not actually delivered to him, but the same to be delivered only after receipt of the amount as stated in this receipt. That Mr. Cirilo Jamandre is hereby authorized to take immediate possession of the property under lease effective today, October 26, 1960.


WITNESS my hand at the City of Bacolod, Philippines, this 26th day of October, 1960. (SGD.) GUILLERMO AZCONA SIGNED IN THE PRESENCE OF: (SGD.) JOSE T. JAMANDRE Citing the stipulation in the lease contract for an annual rental of P7,200.00, the petitioner now submits that there was default in the payment thereof by the respondent because he was P200.00 short of such rental. That deficiency never having been repaired, the petitioner concludes, the contract should be deemed cancelled in accordance with its paragraph 8. 16 For his part, the respondent argues that the receipt represented an express reduction of the stipulated rental in consideration of his allowing the use of 16 hectares of the leased area by the petitioner as grazing land for his cattle. Having unqualifiedly accepted the amount of P7,000.00 as rental for the agricultural year 1961-62, the petitioner should not now be heard to argue that the payment was incomplete. 17 After a study of the receipt as signed by the petitioner and witnessed for the respondent, this Court has come to the conclusion, and so holds, that the amount of P7,000.00 paid to by the respondent and received by the petitioner represented payment in full of the rental for the agricultural year 1961-62. The language is clear enough: "The amount of SEVEN THOUSAND PESOS (P7,000.00), Philippine Currency, as payment for the rental corresponding to crop year 1961-62 ... to the rental due on or before January 30, 1961, as per contract." The conclusion should be equally clear.

The words "as per contract" are especially significant as they suggest that the parties were aware of the provisions of the agreement, which was described in detail elsewhere in the receipt. The rental stipulated therein was P7,200.00. The payment being acknowledged in the receipt was P7,000.00 only. Yet no mention was made in the receipt of the discrepancy and, on the contrary, the payment was acknowledged "as per contract." We read this as meaning that the provisions of the contract were being maintained and respected except only for the reduction of the agreed rental. The respondent court held that the amount of P200.00 had been condoned, but we do not think so. The petitioner is correct in arguing that the requisites of condonation under Article 1270 of the Civil Code are not present. What we see here instead is a mere reduction of the stipulated rental in consideration of the withdrawal from the leased premises of the 16 hectares where the petitioner intended to graze his cattle. The signing of Exhibit "B " by the petitioner and its acceptance by the respondent manifested their agreement on the reduction, which modified the lease contract as to the agreed consideration while leaving the other stipulations intact. The petitioner says that having admittedly been drafted by lawyer Jose Jamandre, the respondent's son, the receipt would have described the amount of P7,000.00 as "payment in full" of the rental if that were really the case. It seems to us that this meaning was adequately conveyed in the acknowledgment made by the petitioner that this was "payment for the rental corresponding to crop year 1961-62" and "corresponds to the rentals due on or before January 30, 1961, as per contract." On the other hand, if this was not the intention, the petitioner does not explain why he did not specify in the receipt that there was still a balance of P200.00 and, to be complete, the date when it was to be paid by the respondent.


It is noted that the receipt was meticulously worded, suggesting that the parties were taking great pains, indeed, to provide against any possible misunderstanding, as if they were even then already apprehensive of future litigation. Such a reservation-if there was one-would have been easily incorporated in the receipt, as befitted the legal document it was intended to be. In any event, the relative insignificance of the alleged balance seems to us a paltry justification for annulling the contract for its supposed violation. If the petitioner is fussy enough to invoke it now, it stands to reason that he would have fussed over it too in the receipt he willingly signed after accepting, without reservation and apparently without protest, only P7,000.00. The applicable provision is Article 1235 of the Civil Code, declaring that: Art. 1235. When the obligee accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, the obligation is deemed fully complied with. The petitioner says that he could not demand payment of the balance of P200.00 on October 26, 1960, date of the receipt because the rental for the crop year 1961-62 was due on or before January 30, 1961. 18 But this would not have prevented him from reserving in the receipt his right to collect the balance when it fell due. Moreover, there is no evidence in the record that when the due date arrived, he made any demand, written or verbal, for the payment of that amount. As this Court is not a trier of facts, 19 we defer to the findings of the respondent court regarding the losses sustained by the respondent on the basis of the estimated yield of the properties in question in the years he was supposed to possess and exploit

them. While the calculations offered by the petitioner are painstaking and even apparently exhaustive, we do not find any grave abuse of discretion on the part of the respondent court to warrant its reversal on this matter. We also sustain the P5,000.00 attorney's fee. WHEREFORE, the decision of the respondent Court of Appeals is AFFIRMED in full, with costs against the petitioners. 68. [G.R. No. L-52807. February 29, 1984.] JOSE ARAÑAS and LUISA QUIJENCIO ARAÑAS, Petitioners, v. HON. EDUARDO C. TUTAAN, as Judge of the Court of First Instance of Quezon City, and UNIVERSAL TEXTILE MILLS, INC., Respondents. Jose R. Francisco, for Petitioners. Reyes, Santayana, Tayao & Picazo Law Office for Respondents. TEEHANKEE, J.: In a decision rendered on May 3, 1971 by the now defunct Court of First Instance of Rizal, Branch V, at Quezon City, in Civil Case No. Q-40689 thereof, entitled "Jose Arañas, Et. Al. v. Juanito R. Castañeda, Et Al.," the said court declared that petitioner Luisa Quijencio as plaintiff (assisted by her spouse co-petitioner Jose Arañas) was the owner of 400 shares of stock of respondent Universal Textile Mills, Inc. (UTEX) as defendant issued "in the names of its co-defendants Gene Manuel and B.R. Castañeda, including the stock dividends that accrued to said shares, and


ordering defendant Universal Textile Mills, Inc. to cancel said certificates and issue new ones in the name of said plaintiff Luisa Quijencio Arañas and to deliver to her all dividends appertaining to same, whether in cash or in stocks." chanrobles law library : red In a motion for clarification and/or motion for reconsideration, respondent UTEX manifested, inter alia, that" (I)f this Honorable Court by the phrase ‘to deliver to her all dividends appertaining to same, whether in cash or in stocks,’ meant dividends properly pertaining to plaintiffs after the court’s declaration of plaintiffs’ ownership of said 400 shares of stock, then as defendant UTEX has always maintained it would rightfully abide by whatever decision may be rendered by this Honorable Court since such would be the logical consequence after the declaration or ruling in respect to the rightful ownership of the said shares of stock." The motion for clarification was granted by the trial court which ruled that its judgment against UTEX was to pay to Luisa Quijencio Arañas the cash dividends which accrued to the stocks in question after the rendition of this decision excluding cash dividends already paid to its co-defendants Gene Manuel and B.R. Castañeda which accrued before its decision and could not be claimed by the petitioners-spouses, as follows:jgc:chanrobles.com.ph "This in mind, clarification of the dispositive portion of the decision as aforequoted is indeed necessary, and thus made as to ordain the payment to plaintiff Luisa Quijencio Arañas of cash dividends which accrue to the stocks in question after the rendition of this decision. Cash dividends already paid to defendants which accrued before this decision may not, therefore, be claimed by plaintiffs."cralaw virtua1aw library Apparently satisfied with the clarification, UTEX neither moved for reconsideration of the order nor appealed from the judgment. Subsequently, the trial court granted the motion for new trial of

the two co-defendants Manuel and Castañeda, and after such new trial, it rendered under date of October 23, 1972 its decision against them which was substantially the same as its first decision of May 3, 1971 which had already become final and executory as against UTEX, declaring petitioners-spouses the owners of the questioned shares of stock in the names of aforementioned co-defendants Castañeda and Manuel and ordering the cancellation of the certificates in their names and to issue new ones in the names of petitioners.chanrobles lawlibrary : rednad Co-defendants Castañeda and Manuel appealed this judgment of October 23, 1972 against them to the Court of Appeals (now Intermediate Appellate Court), which rendered on September 1, 1978 its judgment affirming in toto the trial court’s judgment. Said co-defendants sought to appeal the appellate’s court’s adverse judgment on a petition for review with this Court, which rendered its Resolution of March 7, 1979 denying the petition for review for lack of merit and the judgment against the defendants accordingly became final and executory. At petitioners’ instance, the lower court issued a writ of execution and a specific order of December 5, 1979 directing UTEX:jgc:chanrobles.com.ph "1. To effect the cancellation of the certificates of stock in question in the names of B.R. Castañeda and Gene G. Manuel and the issuance of new ones in the names of the plaintiffs; "2. To pay the amount of P100,701.45 representing the cash dividends that accrued to the same stocks from 1972 to 1979 with interest thereon at the rate of 12% per annum from the date of the service of the writ of execution on October 3, 1979 until fully paid."cralaw virtua1aw library


Upon UTEX’ motion for partial reconsideration alleging that the cash dividends of the stocks corresponding to the period from 1972 to 1979 had already been paid and delivered by it to codefendants Castañeda and Manuel who then still appeared as the registered owners of the said shares, the lower court issued its order of January 4, 1980 granting said motion of UTEX and partially reconsidered its order "to the effect that the defendant Universal Textile Mills, Inc. is absolved from paying the cash dividend corresponding to the stocks in question to the plaintiffs for the period 1972 to 1979."cralaw virtua1aw library Hence, the present action for certiorari to set aside respondent judge’s questioned order of January 4, 1980 as having been issued without jurisdiction and for mandamus to compel respondent judge to perform his ministerial duty of ordering execution of the final and executory judgment against UTEX according to its terms. The Court finds merit in the petition and accordingly grants the same. The final and executory judgment against UTEX in favor of petitioners, declared petitioners as the owners of the questioned UTEX shares of stock as againsts its co-defendants Castañeda and Manuel. It was further made clear upon UTEX’ own motion for clarification that all dividends accruing to the said shares of stock after the rendition of the decision of August 7, 1971 which for the period from 1972 to 1979 amounted to P100,701.45 were to be paid by UTEX to petitioners, and UTEX, per the trial court’s order of clarification of June 16, 1971 above quoted had expressly maintained "it would rightfully abide by whatever decision may be rendered by this Honorable Court since such would be the logical consequence after the declaration or ruling in respect to the rightful ownership of the said shares of stock." chanrobles.com.ph : virtual law library

Consequently, there is no legal nor equitable basis for respondent judge’s position "that it would indeed be most unjust and inequitable to require the defendant Universal Textile Mills, Inc. to pay twice cash dividends on particular shares of stocks." 1 If UTEX nevertheless chose to pay the wrong parties, notwithstanding its full knowledge and understanding of the final judgment, that it was liable to pay all dividends after the trial court’s judgment in 1971 to petitioners as the lawfully declared owners of the questioned shares of stock (but which could not be enforced against it pending the outcome of the appeal filed by the co-defendants Castañeda and Manuel in the Court of Appeals), it only had itself to blame therefor. The burden of recovering the supposed payment of the cash dividends made by UTEX to the wrong parties Castañeda and Manuel squarely falls upon itself by its own action and cannot be passed by it to petitioners as innocent parties. It is elementary that payment made by a judgment debtor to a wrong party cannot extinguish the judgment obligation of such debtor to its creditor. It is equally elementary that once a judgment becomes final and executory, the court which rendered it cannot change or modify the same in any material aspect such as what respondent judge has without authority attempted to do with his questioned order, which would relieve the judgment debtor UTEX of its acknowledged judgment obligation to pay to petitioners as the lawful owners of the questioned shares of stock, the cash dividends that accrued after the rendition of the judgment recognizing them as the lawful owners. (Miranda v. Tiangco, 96 Phil. 626 [1955]). Execution of a final and executory judgment according to its terms is a matter of right for the prevailing party and becomes the ministerial duty of the court (De los Angeles v. Victoriano, 109 Phil. 12).chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph ACCORDINGLY, judgment is rendered setting aside the questioned order of January 4, 1980 of respondent judge and a


writ of mandamus is hereby issued commanding said respondent judge to order the execution of his judgment against respondent Universal Textile Mills, Inc., pursuant to his first order of June 16, 1971 ordering it to pay the sum of P100,701.45, representing the cash dividends that accrued to petitioners’ UTEX shares of stock from 1972 to 1979, with interest thereon at the rate of 12% per annum from the date of service of the writ of execution on October 3, 1979 until fully paid, as well as to pay petitioners any subsequent cash dividends that may have been issued by it thereafter, with interest from due date of payment until actual payment, and directing the sheriff to satisfy such judgment out of the properties of respondent UTEX. With costs against respondent UTEX. This judgment is immediately executory. 69. G.R. No. L-27782 July 31, 1970 OCTAVIO A. KALALO, plaintiff-appellee, vs. ALFREDO J. LUZ, defendant-appellant. ZALDIVAR, J.: Appeal from the decision, dated, February 10, 1967, of the Court of First Instance of Rizal (Branch V, Quezon City) in its Civil Case No. Q-6561. On November 17, 1959, plaintiff-appellee Octavio A. Kalalo hereinafter referred to as appellee), a licensed civil engineer doing business under the firm name of O. A. Kalalo and Associates, entered into an agreement (Exhibit A ) 1 with defendant-appellant Alfredo J . Luz (hereinafter referred to as appellant), a licensed architect, doing business under firm name

of A. J. Luz and Associates, whereby the former was to render engineering design services to the latter for fees, as stipulated in the agreement. The services included design computation and sketches, contract drawing and technical specifications of all engineering phases of the project designed by O. A. Kalalo and Associates bill of quantities and cost estimate, and consultation and advice during construction relative to the work. The fees agreed upon were percentages of the architect's fee, to wit: structural engineering, 12-½%; electrical engineering, 2-½%. The agreement was subsequently supplemented by a "clarification to letter-proposal" which provided, among other things, that "the schedule of engineering fees in this agreement does not cover the following: ... D. Foundation soil exploration, testing and evaluation; E. Projects that are principally engineering works such as industrial plants, ..." and "O. A. Kalalo and Associates reserve the right to increase fees on projects ,which cost less than P100,000 ...." 2 Pursuant to said agreement, appellee rendered engineering services to appellant in the following projects: (a) Fil-American Life Insurance Building at Legaspi City; (b) Fil-American Life Insurance Building at Iloilo City; (c) General Milling Corporation Flour Mill at Opon Cebu; (d) Menzi Building at Ayala Blvd., Makati, Rizal; (e) International Rice Research Institute, Research center Los Baños, Laguna; (f) Aurelia's Building at Mabini, Ermita, Manila; (g) Far East Bank's Office at Fil-American Life Insurance Building at Isaac Peral Ermita, Manila;


(h) Arthur Young's residence at Forbes Park, Makati, Rizal; (i) L & S Building at Dewey Blvd., Manila; and (j) Stanvac Refinery Service Building at Limay, Bataan. On December 1 1, '1961, appellee sent to appellant a statement of account (Exhibit "1"), 3 to which was attached an itemized statement of defendant-appellant's account (Exh. "1-A"), according to which the total engineering fee asked by appellee for services rendered amounted to P116,565.00 from which sum was to be deducted the previous payments made in the amount of P57,000.00, thus leaving a balance due in the amount of P59,565.00. On May 18, 1962 appellant sent appellee a resume of fees due to the latter. Said fees, according to appellant. amounted to P10,861.08 instead of the amount claimed by the appellee. On June 14, 1962 appellant sent appellee a check for said amount, which appellee refused to accept as full payment of the balance of the fees due him. On August 10, 1962, appellee filed a complaint against appellant, containing four causes of action. In the first cause of action, appellee alleged that for services rendered in connection with the different projects therein mentioned there was due him fees in sum s consisting of $28,000 (U.S.) and P100,204.46, excluding interests, of which sums only P69,323.21 had been paid, thus leaving unpaid the $28,000.00 and the balance of P30,881.25. In the second cause of action, appellee claimed P17,000.00 as consequential and moral damages; in the third cause of action claimed P55,000.00 as moral damages, attorney's fees and expenses of litigation; and in the fourth cause of action he claimed P25,000.00 as actual damages, and also for attorney's fees and expenses of litigation.

In his answer, appellant admitted that appellee rendered engineering services, as alleged in the first cause of action, but averred that some of appellee's services were not in accordance with the agreement and appellee's claims were not justified by the services actually rendered, and that the aggregate amount actually due to appellee was only P80,336.29, of which P69,475.21 had already been paid, thus leaving a balance of only P10,861.08. Appellant denied liability for any damage claimed by appellee to have suffered, as alleged in the second, third and fourth causes of action. Appellant also set up affirmative and special defenses, alleging that appellee had no cause of action, that appellee was in estoppel because of certain acts, representations, admissions and/or silence, which led appellant to believe certain facts to exist and to act upon said facts, that appellee's claim regarding the Menzi project was premature because appellant had not yet been paid for said project, and that appellee's services were not complete or were performed in violation of the agreement and/or otherwise unsatisfactory. Appellant also set up a counterclaim for actual and moral damages for such amount as the court may deem fair to assess, and for attorney's fees of P10,000.00. Inasmuch as the pleadings showed that the appellee's right to certain fees for services rendered was not denied, the only question being the assessment of the proper fees and the balance due to appellee after deducting the admitted payments made by appellant, the trial court, upon agreement of the parties, authorized the case to be heard before a Commissioner. The Commissioner rendered a report which, in resume, states that the amount due to appellee was $28,000.00 (U.S.) as his fee in the International Research Institute Project which was twenty percent (20%) of the $140,000.00 that was paid to appellant, and P51,539.91 for the other projects, less the sum of P69,475.46 which was already paid by the appellant. The Commissioner also recommended the payment to appellee of the sum of P5,000.00 as attorney's fees.


At the hearing on the Report of the Commissioner, the respective counsel of the parties manifested to the court that they had no objection to the findings of fact of the Commissioner contained in the Report, and they agreed that the said Report posed only two legal issues, namely: (1) whether under the facts stated in the Report, the doctrine of estoppel would apply; and (2) whether the recommendation in the Report that the payment of the amount. due to the plaintiff in dollars was legally permissible, and if not, at what rate of exchange it should be paid in pesos. After the parties had submitted their respective memorandum on said issues, the trial court rendered its decision dated February 10, 1967, the dispositive portion of which reads as follows: WHEREFORE, judgment is rendered in favor of plaintiff and against the defendant, by ordering the defendant to pay plaintiff the sum of P51,539.91 and $28,000.00, the latter to be converted into the Philippine currency on the basis of the current rate of exchange at the time of the payment of this judgment, as certified to by the Central Bank of the Philippines, from which shall be deducted the sum of P69,475.46, which the defendant had paid the plaintiff, and the legal rate of interest thereon from the filing of the complaint in the case until fully paid for; by ordering the defendant to pay to plaintiff the further sum of P8,000.00 by way of attorney's fees which the Court finds to be reasonable in the premises, with costs against the defendant. The counterclaim of the defendant is ordered dismissed. From the decision, this appeal was brought, directly to this Court, raising only questions of law. During the pendency of this appeal, appellee filed a petition for the issuance of a writ of attachment under Section 1 (f) of Rule 57 of the Rules of Court upon the ground that appellant is presently residing in Canada as a permanent resident thereof. On June 3, 1969, this Court resolved, upon appellee's posting a bond of

P10,000.00, to issue the writ of attachment, and ordered the Provincial Sheriff of Rizal to attach the estate, real and personal, of appellant Alfredo J. Luz within the province, to the value of not less than P140,000.00. The appellant made the following assignments of errors: I. The lower court erred in not declaring and holding that plaintiff-appellee's letter dated December 11, 1961 (Exhibit "1") and the statement of account (Exhibit "1-A") therein enclosed, had the effect, cumulatively or alternatively, of placing plaintiffappellee in estoppel from thereafter modifying the representations made in said exhibits, or of making plaintiffappellee otherwise bound by said representations, or of being of decisive weight in determining the true intent of the parties as to the nature and extent of the engineering services rendered and/or the amount of fees due. II. The lower court erred in declaring and holding that the balance owing from defendant-appellant to plaintiff-appellee on the IRRI Project should be paid on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of payment of judgment. . III. The lower court erred in not declaring and holding that the aggregate amount of the balance due from defendant-appellant to plaintiff-appellee is only P15,792.05. IV. The lower court erred in awarding attorney's fees in the sum of P8,000.00, despite the commissioner's finding, which plaintiffappellee has accepted and has not questioned, that said fee be only P5,000.00; and V. The lower court erred in not granting defendant-appellant relief on his counter-claim.


1. In support of his first assignment of error appellant argues that in Exhibit 1-A, which is a statement of accounts dated December 11, 1961, sent by appellee to appellant, appellee specified the various projects for which he claimed engineering fees, the precise amount due on each particular engineering service rendered on each of the various projects, and the total of his claims; that such a statement barred appellee from asserting any claim contrary to what was stated therein, or from taking any position different from what he asserted therein with respect to the nature of the engineering services rendered; and consequently the trial court could not award fees in excess of what was stated in said statement of accounts. Appellant argues that for estoppel to apply it is not necessary, contrary to the ruling of the trial court, that the appellant should have actually relied on the representation, but that it is sufficient that the representations were intended to make the defendant act there on; that assuming arguendo that Exhibit 1-A did not put appellee in estoppel, the said Exhibit 1-A nevertheless constituted a formal admission that would be binding on appellee under the law on evidence, and would not only belie any inconsistent claim but also would discredit any evidence adduced by appellee in support of any claim inconsistent with what appears therein; that, moreover, Exhibit 1-A, being a statement of account, establishes prima facie the accuracy and correctness of the items stated therein and its correctness can no longer be impeached except for fraud or mistake; that Exhibit 1-A furthermore, constitutes appellee's own interpretation of the contract between him and appellant, and hence, is conclusive against him. On the other hand, appellee admits that Exhibit 1-A itemized the services rendered by him in the various construction projects of appellant and that the total engineering fees charged therein was P116,565.00, but maintains that he was not in estoppel: first, because when he prepared Exhibit 1-A he was laboring under an innocent mistake, as found by the trial court; second, because appellant was not ignorant of the services actually rendered by

appellee and the fees due to the latter under the original agreement, Exhibit "A." We find merit in the stand of appellee. The statement of accounts (Exh. 1-A) could not estop appellee, because appellant did not rely thereon as found by the Commissioner, from whose Report we read: While it is true that plaintiff vacillated in his claim, yet, defendant did not in anyway rely or believe in the different claims asserted by the plaintiff and instead insisted on a claim that plaintiff was only entitled to P10,861.08 as per a separate resume of fees he sent to the plaintiff on May 18, 1962 (See Exhibit 6). 4 The foregoing finding of the Commissioner, not disputed by appellant, was adopted by the trial court in its decision. Under article 1431 of the Civil Code, in order that estoppel may apply the person, to whom representations have been made and who claims the estoppel in his favor must have relied or acted on such representations. Said article provides: Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. An essential element of estoppel is that the person invoking it has been influenced and has relied on the representations or conduct of the person sought to be estopped, and this element is wanting in the instant case. In Cristobal vs. Gomez, 5 this Court held that no estoppel based on a document can be invoked by one who has not been mislead by the false statements contained therein. And in Republic of the Philippines vs. Garcia, et al., 6 this Court ruled that there is no estoppel when the statement or action invoked as its basis did not mislead the adverse party-Estoppel has been characterized as harsh or odious and not favored in law. 7 When


misapplied, estoppel becomes a most effective weapon to accomplish an injustice, inasmuch as it shuts a man's mouth from speaking the truth and debars the truth in a particular case. 8 Estoppel cannot be sustained by mere argument or doubtful inference: it must be clearly proved in all its essential elements by clear, convincing and satisfactory evidence. 9 No party should be precluded from making out his case according to its truth unless by force of some positive principle of law, and, consequently, estoppel in pains must be applied strictly and should not be enforced unless substantiated in every particular. 1 0 The essential elements of estoppel in pais may be considered in relation to the party sought to be estopped, and in relation to the party invoking the estoppel in his favor. As related to the party to be estopped, the essential elements are: (1) conduct amounting to false representation or concealment of material facts or at least calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) intent, or at least expectation that his conduct shall be acted upon by, or at least influence, the other party; and (3) knowledge, actual or constructive, of the real facts. As related to the party claiming the estoppel, the essential elements are (1) lack of knowledge and of the means of knowledge of the truth as the facts in questions; (2) (reliance, in good faith, upon the conduct or statements of the party to be estopped; (3) action or inaction based thereon of such character as To change the position or status of the party claiming the estoppel, to his injury, detriment or prejudice. 1 1 The first essential element in relation to the party sought to be estopped does not obtain in the instant case, for, as appears in the Report of the Commissioner, appellee testified "that when he wrote Exhibit 1 and prepared Exhibit 1-A, he had not yet consulted the services of his counsel and it was only upon advice of counsel that the terms of the contract were interpreted to him

resulting in his subsequent letters to the defendant demanding payments of his fees pursuant to the contract Exhibit A." 1 2 This finding of the Commissioner was adopted by the trial court. 1 3 It is established , therefore, that Exhibit 1-A was written by appellee through ignorance or mistake. Anent this matter, it has been held that if an act, conduct or misrepresentation of the party sought to be estopped is due to ignorance founded on innocent mistake, estoppel will not arise. 1 4 Regarding the essential elements of estoppel in relation to the party claiming the estoppel, the first element does not obtain in the instant case, for it cannot be said that appellant did not know, or at least did not have the means of knowing, the services rendered to him by appellee and the fees due thereon as provided in Exhibit A. The second element is also wanting, for, as adverted to, appellant did not rely on Exhibit 1-A but consistently denied the accounts stated therein. Neither does the third element obtain, for appellant did not act on the basis of the representations in Exhibit 1-A, and there was no change in his position, to his own injury or prejudice. Appellant, however, insists that if Exhibit 1-A did not put appellee in estoppel, it at least constituted an admission binding upon the latter. In this connection, it cannot be gainsaid that Exhibit 1-A is not a judicial admission. Statements which are not estoppels nor judicial admissions have no quality of conclusiveness, and an opponent. whose admissions have been offered against him may offer any evidence which serves as an explanation for his former assertion of what he now denies as a fact. This may involve the showing of a mistake. Accordingly, in Oas vs. Roa, 1 6 it was held that when a party to a suit has made an admission of any fact pertinent to the issue involved, the admission can be received against him; but such an admission is not conclusive against him, and he is entitled to present evidence to overcome the effect of the admission. Appellee did explain, and the trial court concluded, that Exhibit 1-A was based on either his


ignorance or innocent mistake and he, therefore, is not bound by it. Appellant further contends that Exhibit 1-A being a statement of account, establishes prima facie the accuracy and correctness of the items stated therein. If prima facie, as contended by appellant, then it is not absolutely conclusive upon the parties. An account stated may be impeached for fraud, mistake or error. In American Decisions, Vol. 62, p. 95, cited as authority by appellant himself. we read thus: An account stated or settled is a mere admission that the account is correct. It is not an estoppel. The account is still open to impeachment for mistakes or errors. Its effect is to establish, prima facie, the accuracy of the items without other proof; and the party seeking to impeach it is bound to show affirmatively the mistake or error alleged. The force of the admission and the strength of the evidence necessary to overcome it will depend upon the circumstances of the case. In the instant case, it is Our view that the ignorance mistake that attended the writing of Exhibit 1-A by appellee was sufficient to overcome the prima facie evidence of correctness and accuracy of said Exhibit 1-A. Appellant also urges that Exhibit 1-A constitutes appellee's own interpretation of the contract, and is, therefore, conclusive against him. Although the practical construction of the contract by one party, evidenced by his words or acts, can be used against him in behalf of the other party, 1 7 yet, if one of the parties carelessly makes a wrong interpretation of the words of his contract, or performs more than the contract requires (as reasonably interpreted independently of his performance), as happened in the instant case, he should be entitled to a restitutionary remedy, instead of being bound to continue to his erroneous interpretation or his erroneous performance and "the

other party should not be permitted to profit by such mistake unless he can establish an estoppel by proving a material change of position made in good faith. The rule as to practical construction does not nullify the equitable rules with respect to performance by mistake." 1 8 In the instant case, it has been shown that Exhibit 1-A was written through mistake by appellee and that the latter is not estopped by it. Hence, even if said Exhibit 1-A be considered as practical construction of the contract by appellee, he cannot be bound by such erroneous interpretation. It has been held that if by mistake the parties followed a practice in violation of the terms of the agreement, the court should not perpetuate the error. 1 9 2. In support of the second assignment of error, that the lower court erred in holding that the balance from appellant on the IRRI project should be paid on the basis of the rate of exchange of the U.S. dollar to the Philippine peso at the time of payment of the judgment, appellant contends: first, that the official rate at the time appellant received his architect's fees for the IRRI project, and correspondingly his obligation to appellee's fee on August 25, 1961, was P2.00 to $1.00, and cites in support thereof Section 1612 of the Revised Administrative Code, Section 48 of Republic Act 265 and Section 6 of Commonwealth Act No. 699; second, that the lower court's conclusion that the rate of exchange to be applied in the conversion of the $28,000.00 is the current rate of exchange at the time the judgment shall be satisfied was based solely on a mere presumption of the trial court that the defendant did not convert, there being no showing to that effect, the dollars into Philippine currency at the official rate, when the legal presumption should be that the dollars were converted at the official rate of $1.00 to P2.00 because on August 25, 1961, when the IRRI project became due and payable, foreign exchange controls were in full force and effect, and partial decontrol was effected only afterwards, during the Macapagal administration; third, that the other ground advanced by the lower court for its ruling, to wit, that appellant committed a breach of his obligation


to turn over to the appellee the engineering fees received in U.S. dollars for the IRRI project, cannot be upheld, because there was no such breach, as proven by the fact that appellee never claimed in Exhibit 1-A that he should be paid in dollars; and there was no provision in the basic contract (Exh. "A") that he should be paid in dollars; and, finally, even if there were such provision, it would have no binding effect under the provision of Republic Act 529; that, moreover, it cannot really be said that no payment was made on that account for appellant had already paid P57,000.00 to appellee, and under Article 125 of the Civil Code, said payment could be said to have been applied to the fees due from the IRRI project, this project being the biggest and this debt being the most onerous. In refutation of appellant's argument in support of the second assignment of error, appellee argues that notwithstanding Republic Act 529, appellant can be compelled to pay the appellee in dollars in view of the fact that appellant received his fees in dollars, and appellee's fee is 20% of appellant's fees; and that if said amount is be converted into Philippine Currency, the rate of exchange should be that at the time of the execution of the judgment. 2 0 We have taken note of the fact that on August 25, 1961, the date when appellant said his obligation to pay appellee's fees became due, there was two rates of exchange, to wit: the preferred rate of P2.00 to $1.00, and the free market rate. It was so provided in Circular No. 121 of the Central Bank of the Philippines, dated March 2, 1961. amending an earlier Circular No. 117, and in force until January 21, 1962 when it was amended by Circular No. 133, thus: 1. All foreign exchange receipts shall be surrendered to the Central Bank of those authorized to deal in foreign exchange as follows:

Percentage of Total to be surrendered at Preferred: Free Market Rate: Rate: (a) Export Proceeds, U.S. Government Expenditures invisibles other than those specifically mentioned below. ................................................ 25 75 (b) Foreign Investments, Gold Proceeds, Tourists and Inward Remittances of Veterans and Filipino Citizens; and Personal Expenses of Diplomatic Per personnel ................................. 100" 2 1 The amount of $140,000.00 received by appellant foil the International Rice Research Institute project is not within the scope of sub-paragraph (a) of paragraph No. 1 of Circular No. 121. Appellant has not shown that 25% of said amount had to be surrendered to the Central Bank at the preferred rate because it was either export proceeds, or U.S. Government expenditures, or invisibles not included in sub-paragraph (b). Hence, it cannot be said that the trial court erred in presuming that appellant converted said amount at the free market rate. It is hard to believe that a person possessing dollars would exchange his dollars at the preferred rate of P2.00 to $1.00, when he is not obligated to do so, rather than at the free market rate which is much higher. A person is presumed to take ordinary care of his concerns, and that the ordinary course of business has been followed. 2 2 Under the agreement, Exhibit A, appellee was entitled to 20% of $140,000.00, or the amount of $28,000.00. Appellee, however, cannot oblige the appellant to pay him in dollars, even if appellant himself had received his fee for the IRRI project in dollars. This payment in dollars is prohibited by Republic Act 529 which was enacted on June 16, 1950. Said act provides as follows:


SECTION 1. Every provision contained in, or made with respect to, any obligation which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null, void and of no effect, and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. Every obligation heretofore or here after incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That, ( a) if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred, (b) except in case of a loan made in a foreign currency stipulated to be payable in the same currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail. All coin and currency, including Central Bank notes, heretofore or hereafter issued and declared by the Government of the Philippines shall be legal tender for all debts, public and private. Under the above-quoted provision of Republic Act 529, if the obligation was incurred prior to the enactment of the Act and require payment in a particular kind of coin or currency other than the Philippine currency the same shall be discharged in Philippine currency measured at the prevailing rate of exchange at the time the obligation was incurred. As We have adverted to, Republic Act 529 was enacted on June 16, 1950. In the case now before Us the obligation of appellant to pay appellee the 20% of $140,000.00, or the sum of $28,000.00, accrued on August 25, 1961, or after the enactment of Republic Act 529. It follows that the provision of Republic Act 529 which requires payment at the

prevailing rate of exchange when the obligation was incurred cannot be applied. Republic Act 529 does not provide for the rate of exchange for the payment of obligation incurred after the enactment of said Act. The logical Conclusion, therefore, is that the rate of exchange should be that prevailing at the time of payment. This view finds support in the ruling of this Court in the case of Engel vs. Velasco & Co. 2 3 where this Court held that even if the obligation assumed by the defendant was to pay the plaintiff a sum of money expressed in American currency, the indemnity to be allowed should be expressed in Philippine currency at the rate of exchange at the time of judgment rather than at the rate of exchange prevailing on the date of defendant's breach. This is also the ruling of American court as follows: The value in domestic money of a payment made in foreign money is fixed with respect to the rate of exchange at the time of payment. (70 CJS p. 228) According to the weight of authority the amount of recovery depends upon the current rate of exchange, and not the par value of the particular money involved. (48 C.J. 605-606) The value in domestic money of a payment made in foreign money is fixed in reference to the rate of exchange at the time of such payment. (48 C.J. 605) It is Our considered view, therefore, that appellant should pay the appellee the equivalent in pesos of the $28,000.00 at the free market rate of exchange at the time of payment. And so the trial court did not err when it held that herein appellant should pay appellee $28,000.00 "to be converted into the Philippine currency on the basis of the current rate of exchange at the time of payment of this judgment, as certified to by the Central Bank of the Philippines, ...." 2 4


Appellant also contends that the P57,000.00 that he had paid to appellee should have been applied to the due to the latter on the IRRI project because such debt was the most onerous to appellant. This contention is untenable. The Commissioner who was authorized by the trial court to receive evidence in this case, however, reports that the appellee had not been paid for the account of the $28,000.00 which represents the fees of appellee equivalent to 20% of the $140,000.00 that the appellant received as fee for the IRRI project. This is a finding of fact by the Commissioner which was adopted by the trial court. The parties in this case have agreed that they do not question the finding of fact of the Commissioner. Thus, in the decision appealed from the lower court says: At the hearing on the Report of the Commissioner on February 15, 1966, the counsels for both parties manifested to the court that they have no objection to the findings of facts of the Commissioner in his report; and agreed that the said report only poses two (2)legal issues, namely: (1) whether under the facts stated in the Report, the doctrine of estoppel will apply; and (2) whether the recommendation in the Report that the payment of amount due to the plaintiff in dollars is permissible under the law, and, if not, at what rate of exchange should it be paid in pesos (Philippine currency) .... 2 5 In the Commissioner's report, it is spetifically recommended that the appellant be ordered to pay the plaintiff the sum of "$28,000. 00 or its equivalent as the fee of the plaintiff under Exhibit A on the IRRI project." It is clear from this report of the Commissioner that no payment for the account of this $28,000.00 had been made. Indeed, it is not shown in the record that the peso equivalent of the $28,000.00 had been fixed or agreed upon by the parties at the different times when the appellant had made partial payments to the appellee.

3. In his third assignment of error, appellant contends that the lower court erred in not declaring that the aggregate amount due from him to appellee is only P15,792.05. Appellant questions the propriety or correctness of most of the items of fees that were found by the Commissioner to be due to appellee for services rendered. We believe that it is too late for the appellant to question the propriety or correctness of those items in the present appeal. The record shows that after the Commissioner had submitted his report the lower court, on February 15, 1966, issued the following order: When this case was called for hearing today on the report of the Commissioner, the counsels of the parties manifested that they have no objection to the findings of facts in the report. However, the report poses only legal issues, namely: (1) whether under the facts stated in the report, the doctrine of estoppel will apply; and (2) whether the recommendation in the report that the alleged payment of the defendant be made in dollars is permissible by law and, if not, in what rate it should be paid in pesos (Philippine Currency). For the purpose of resolving these issues the parties prayed that they be allowed to file their respective memoranda which will aid the court in the determination of said issues. 2 6 In consonance with the afore-quoted order of the trial court, the appellant submitted his memorandum which opens with the following statements: As previously manifested, this Memorandum shall be confined to: (a) the finding in the Commissioner's Report that defendant's defense of estoppel will not lie (pp. 17-18, Report); and (b) the recommendation in the Commissioner's Report that defendant be ordered to pay plaintiff the sum of '$28,000.00 (U.S.) or its equivalent as the fee of the plaintiff under Exhibit 'A' in the IRRI project.'


More specifically this Memorandum proposes to demonstrate the affirmative of three legal issues posed, namely: First: Whether or not plaintiff's letter dated December 11, 1961 (Exhibit 'I') and/or Statement of Account (Exhibit '1-A') therein enclosed has the effect of placing plaintiff in estoppel from thereafter modifying the representations made in said letter and Statement of Account or of making plaintiff otherwise bound thereby; or of being decisive or great weight in determining the true intent of the parties as to the amount of the engineering fees owing from defendant to plaintiff; Second: Whether or not defendant can be compelled to pay whatever balance is owing to plaintiff on the IRRI (International Rice and Research Institute) project in United States dollars; and Third: Whether or not in case the ruling of this Honorable Court be that defendant cannot be compelled to pay plaintiff in United States dollars, the dollar-to-peso convertion rate for determining the peso equivalent of whatever balance is owing to plaintiff in connection with the IRRI project should be the 2 to 1 official rate and not any other rate. 2 7 It is clear, therefore, that what was submitted by appellant to the lower court for resolution did not include the question of correctness or propriety of the amounts due to appellee in connection with the different projects for which the appellee had rendered engineering services. Only legal questions, as above enumerated, were submitted to the trial court for resolution. So much so, that the lower court in another portion of its decision said, as follows: The objections to the Commissioner's Report embodied in defendant's memorandum of objections, dated March 18, 1966, cannot likewise be entertained by the Court because at the

hearing of the Commissioner's Report the parties had expressly manifested that they had no objection to the findings of facts embodied therein. We, therefore hold that the third assignment of error of the appellant has no merit. 4. In his fourth assignment of error, appellant questions the award by the lower court of P8,000.00 for attorney's fees. Appellant argues that the Commissioner, in his report, fixed the sum of P5,000.00 as "just and reasonable" attorney's fees, to which amount appellee did not interpose any objection, and by not so objecting he is bound by said finding; and that, moreover, the lower court gave no reason in its decision for increasing the amount to P8,000.00. Appellee contends that while the parties had not objected to the findings of the Commissioner, the assessment of attorney's fees is always subject to the court's appraisal, and in increasing the recommended fees from P5,000.00 to P8,000.00 the trial court must have taken into consideration certain circumstances which warrant the award of P8,000.00 for attorney's fees. We believe that the trial court committed no error in this connection. Section 12 of Rule 33 of the Rules of Court, on which the fourth assignment of error is presumably based, provides that when the parties stipulate that a commissioner's findings of fact shall be final, only questions of law arising from the facts mentioned in the report shall thereafter be considered. Consequently, an agreement by the parties to abide by the findings of fact of the commissioner is equivalent to an agreement of facts binding upon them which the court cannot disregard. The question, therefore, is whether or not the estimate of the reasonable fees stated in the report of the Commissioner is a finding of fact.


The report of the Commissioner on this matter reads as follows: As regards attorney's fees, under the provisions of Art 2208, par (11), the same may be awarded, and considering the number of hearings held in this case, the nature of the case (taking into account the technical nature of the case and the voluminous exhibits offered in evidence), as well as the way the case was handled by counsel, it is believed, subject to the Court's appraisal of the matter, that the sum of P5,000.00 is just and reasonable as attorney's fees." 2 8 It is thus seen that the estimate made by the Commissioner was an expression of belief, or an opinion. An opinion is different from a fact. The generally recognized distinction between a statement of "fact" and an expression of "opinion" is that whatever is susceptible of exact knowledge is a matter of fact, while that not susceptible of exact knowledge is generally regarded as an expression of opinion. 2 9 It has also been said that the word "fact," as employed in the legal sense includes "those conclusions reached by the trior from shifting testimony, weighing evidence, and passing on the credit of the witnesses, and it does not denote those inferences drawn by the trial court from the facts ascertained and settled by it. 3 0 In the case at bar, the estimate made by the Commissioner of the attorney's fees was an inference from the facts ascertained by him, and is, therefore, not a finding of facts. The trial court was, consequently, not bound by that estimate, in spite of the manifestation of the parties that they had no objection to the findings of facts of the Commissioner in his report. Moreover, under Section 11 of Rule 33 of the Rules of Court, the court may adopt, modify, or reject the report of the commissioner, in whole or in part, and hence, it was within the trial court's authority to increase the recommended attorney's fees of P5,000.00 to P8,000.00. It is a settled rule that the amount of attorney's fees is addressed to the sound discretion of the court. 3 1

It is true, as appellant contends, that the trial court did not state in the decision the reasons for increasing the attorney's fees. The trial court, however, had adopted the report of the Commissioner, and in adopting the report the trial court is deemed to have adopted the reasons given by the Commissioner in awarding attorney's fees, as stated in the above-quoted portion of the report. Based on the reasons stated in the report, the trial court must have considered that the reasonable attorney's fees should be P8,000.00. Considering that the judgment against the appellant would amount to more than P100,000.00, We believe that the award of P8,000.00 for attorney's fees is reasonable. 5. In his fifth assignment of error appellant urges that he is entitled to relief on his counterclaim. In view of what We have stated in connection with the preceding four assignments of error, We do not consider it necessary to dwell any further on this assignment of error. WHEREFORE, the decision appealed from is affirmed, with costs against the defendant-appellant. It is so ordered. 70. G.R. No. L-49494 May 31, 1979 NELIA G. PONCE and VICENTE C. PONCE, petitioners, vs. THE HONORABLE COURT OF APPEALS, and JESUSA B. AFABLE, respondents. MELENCIO-HERRERA, J.: This is a Petition for Certiorari seeking to set aside the Resolution of the Court of Appeals, dated June 8, 1978, reconsidering its


Decision dated December 17, 1977 and reversing the judgment of the Court of First Instance of Manila in favor of petitioners as well as the Resolutions, dated July 6, 1978 and November 27, 1978, denying petitioners' Motion for Reconsideration. The factual background of the case is as follows: On June 3, 1969, private respondent Jesusa B. Afable, together with Felisa L. Mendoza and Ma. Aurora C. Diño executed a promissory note in favor of petitioner Nelia G. Ponce in the sum of P814,868.42, Philippine Currency, payable, without interest, on or before July 31, 1969. It was further provided therein that should the indebtedness be not paid at maturity, it shall draw interest at 12% per annum, without demand; that should it be necessary to bring suit to enforce pay ment of the note, the debtors shall pay a sum equivalent to 10% of the total amount due for attorney's fees; and, in the event of failure to pay the indebtedness plus interest in accordance with its terms, the debtors shall execute a first mortgage in favor of the creditor over their properties or of the Carmen Planas Memorial, Inc. Upon the failure of the debtors to comply with the terms of the promissory note, petitioners (Nelia G. Ponce and her husband) filed, on July 27, 1970, a Complaint against them with the Court of First Instance of Manila for the recovery of the principal sum of P814,868.42, plus interest and damages. Defendant Ma. Aurora C. Diño's Answer consisted more of a general denial and the contention that she did not borrow any amount from plaintiffs and that her signature on the promissory note was obtained by plaintiffs on their assurance that the same was for " formality only." Defendant Jesusa B. Afable, for her part, asserted in her Answer that the promissory note failed to express the true intent and agreement of the parties, the true agreement being that the

obligation therein mentioned would be assumed and paid entirely by defendant Felisa L. Mendoza; that she had signed said document only as President of the Carmen Planas Memorial, Inc., and that she was not to incur any personal obligation as to the payment thereof because the same would be repaid by defendant Mendoza and/or Carmen Planas Memorial, Inc. In her Amended Answer, defendant Felisa L. Mendoza admitted the authenticity and due execution of the promissory note, but averred that it was a recapitulation of a series of transactions between her and the plaintiffs, "with defendant Ma. Aurora C. Diño and Jesusa B. Afable coming only as accomodation parties." As affirmative defense, defendant Mendoza contended that the promissory note was the result of usurious transactions, and, as counterclaim, she prayed that plaintiffs be ordered to account for all the interests paid. Plaintiffs filed their Answer to defendant Mendoza's counterclaim denying under oath the allegations of usury. After petitioners had rested, the case was deemed submitted for decision since respondent Afable and her co-debtors had repeatedly failed to appear before the trial Court for the presentation of their evidence. On March 9, 1972, the trial Court rendered judgment ordering respondent Afable and her co-debtors, Felisa L. Mendoza and Ma. Aurora C. Diño , to pay petitioners, jointly and severally, the sum of P814,868.42, plus 12% interest per annum from July 31, 1969 until full payment, and a sum equivalent to 10% of the total amount due as attorney's fees and costs. From said Decision, by respondent Afable appealed to the Court of Appeals. She argued that the contract under consideration involved the payment of US dollars and was, therefore, illegal; and that under the in pari delicto rule, since both parties are


guilty of violating the law, neither one can recover. It is to be noted that said defense was not raised in her Answer. On December 13, 1977, the Court of Appeals* rendered judgment affirming the decision of the trial Court. In a Resolution dated February 27, 1978, the Court of Appeals,** denied respondent's Motion for Reconsideration. However, in a Resolution dated June 8, 1978, the Court of Appeals acting on the Second Motion for Reconsideration filed by private respondent, set aside the Decision of December 13, 1977, reversed the judgment of the trial Court and dismissed the Complaint. The Court of Appeals opined that the intent of the parties was that the promissory note was payable in US dollars, and, therefore, the transaction was illegal with neither party entitled to recover under the in pari delicto rule. Their Motions for Reconsideration having been denied in the Resolutions dated July 6, 1978 and November 27, 1978, petitioners filed the instant Petition raising the following Assignments of Error. I THE RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE PROMISSORY NOTE EVIDENCING THE TRANSACTION OF THE PARTIES IS PAYABLE IN U.S. DOLLARS THEREBY DETERMINING THE INTENT OF THE PARTIES OUTSIDE OF THEIR PROMISSORY NOTE DESPITE LACK OF SHOWING THAT IT FAILED TO EXPRESS THE TRUE INTENT OR AGREEMENT OF THE PARTIES AND ITS PAYABILITY IN PHILIPPINE PESOS WHICH IS EXPRESSED, AMONG OTHERS, BY ITS CLEAR AND PRECISE TERMS. II

THE RESPONDENT COURT, OF APPEALS ERRED IN HOLDING THAT REPUBLIC ACT 529, OTHERWISE KNOWN ASIAN ACT TO ASSURE UNIFORM VALUE TO PHILIPPINE COINS AND CURRENCY,' COVERS THE TRANSACTION OF THE PARTIES HEREIN. III THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING THAT PRIVATE RESPONDENT JESUSA B. AFABLE COULD NOT FAVORABLY AVAIL HERSELF OF THE DEFENSE OF ALLEGED APPLICABILITY OF REPUBLIC ACT 529 AND THE DOCTRINE OF IN PARI DELICTO AS THESE WERE NOT PLEADED NOR ADOPTED BY HER IN THE TRIAL. IV THE RESPONDENT COURT OF APPEALS ERRED IN NOT FINDING ASSUMING ARGUENDO THAT REPUBLIC ACT 529 COVERS THE PARTIES TRANSACTION, THAT THE Doctrine OF IN PARI DELICTO DOES NOT APPLY AND THE PARTIES AGREEMENT WAS NOT NULL AND VOID PURSUANT TO THE RULING IN OCTAVIO A. KALALO VS. ALFREDO J. LUZ, NO.-27782, JULY 31, 1970. In the Resolution dated June 8, 1978, the Court of Appeals made the following observations: We are convinced from the evidence that the amount awarded by the lower Court was indeed owed by the defendants to the plaintiffs. However, the sole issue raised in this second motion for reconconsideration is not the existence of the obligation itself but the legality of the subject matter of the contract. If the subject matter is illegal and against public policy, the doctrine of pari delicto applies.


xxx xxx xxx We are constrained to reverse our December 13, 1977 decision. While it is true that the promissory note does not mention any obligation to pay in dollars, plaintiff-appellee Ponce himself admitted that there was an agreement that he would be paid in dollars by the defendants. The promissory note is payable in U.S. donors. The in. tent of the parties prevails over the bare words of the written contracts. xxx xxx xxx The agreement is null and void and of no effect under Republic Act No. 529. Under the doctrine of pari delicto, no recovery can be made in favor of the plaintiffs for being themselves guilty of violating the law. 1 We are constrained to disagree. Reproduced hereunder is Section 1 of Republic Act No. 529, which was enacted on June 16, 1950: Section 1. Every provision contained in, or made with respect to, any domestic obligation to wit, any obligation contracted in the Philippines which provision purports to give the obligee the right to require payment in gold or in a particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, be as it is hereby declared against public policy, and null voice and of no effect and no such provision shall be contained in, or made with respect to, any obligation hereafter incurred. The above prohibition shall not apply to (a) transactions were the funds involved are the proceeds of loans or investments made directly or indirectly, through bona fide intermediaries or agents, by foreign governments, their agencies and instrumentalities, and international financial and banking institutions so long as the

funds are Identifiable, as having emanated from the sources enumerated above; (b) transactions affecting high priority economic projects for agricultural industrial and power development as may be determined by the National Economic Council which are financed by or through foreign funds; (c) forward exchange transactions entered into between banks or between banks and individuals or juridical persons; (d) importexport and other international banking financial investment and industrial transactions. With the exception of the cases enumerated in items (a) (b), (c) and (d) in the foregoing provision, in, which cases the terms of the parties' agreement shag apply, every other domestic obligation heretofore or hereafter incurred whether or not any such provision as to payment is contained therein or made with- respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts: Provided, That if the obligation was incurred prior to the enactment of this Act and required payment in a particular kind of coin or currency other than Philippine currency, it shall be discharge in Philippine currency measured at the prevailing rates of exchange at the time the obligation was incurred, except in case of a loan made in foreign currency stipulated to be payable in the currency in which case the rate of exchange prevailing at the time of the stipulated date of payment shall prevail All coin and currency, including Central Bank notes, heretofore and hereafter issued and d by the Government of the Philippines shall be legal tender for all debts, public and private. (As amended by RA 4100, Section 1, approved June 19, 1964) (Empahsis supplied). It is to be noted that while an agreement to pay in dollars is declared as null and void and of no effect, what the law specifically prohibits is payment in currency other than legal tender. It does not defeat a creditor's claim for payment, as it specifically provides that "every other domestic obligation ... whether or not any such provision as to payment is contained


therein or made with respect thereto, shall be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts." A contrary rule would allow a person to profit or enrich himself inequitably at another's expense. As the Court of Appeals itself found, the promissory note in question provided on its face for payment of the obligation in Philippine currency, i.e., P814,868.42. So that, while the agreement between the parties originally involved a dollar transaction and that petitioners expected to be paid in the amount of US$194,016.29, petitioners are not now insisting on their agreement with respondent Afable for the payment of the obligation in dollars. On the contrary, they are suing on the basis of the promissory note whereby the parties have already agreed to convert the dollar loan into Philippine currency at the rate of P4.20 to $1.00. 2 It may likewise be pointed out that the Promissory Note contains no provision "giving the obligee the right to require payment in a particular kind of currency other than Philippine currency, " which is what is specifically prohibited by RA No. 529. At any rate, even if we were to disregard the promissory note providing for the payment of the obligation in Philippine currency and consider that the intention of the parties was really to provide for payment of the obligation would be made in dollars, petitioners can still recover the amount of US$194,016.29, which respondent Afable and her co-debtors do not deny having received, in its peso equivalent. As held in Eastboard Navigation, Ltd. vs. Juan Ysmael & Co. Inc., 102 Phil. 1 (1957), and Arrieta vs. National Rice & Corn Corp., 3 if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the same is nun and void as contrary to public policy, pursuant to Republic Act No. 529, and the most that could be demanded is to pay said obligation in Philippine currency. In other words, what is prohibited by RA No. 529 is the

payment of an obligation in dollars, meaning that a creditor cannot oblige the debtor to pay him in dollars, even if the loan were given in said currency. In such a case, the indemnity to be allowed should be expressed in Philippine currency on the basis of the current rate of exchange at the time of payment. 4 The foregoing premises considered, we deem it unnecessary to discuss the other errors assigned by petitioners. WHEREFORE, the Resolutions of the Court of Appeals dated June 8, 1978, July 6, 1978 and November 27, 1978 are hereby set aside, and judgment is hereby rendered reinstating the Decision of the Court of First Instance of Manila. No pronouncement as to costs. 71. G.R. No. L-41764 December 19, 1980 NEW PACIFIC TIMBER & SUPPLY COMPANY, INC., petitioner, vs. HON. ALBERTO V. SENERIS, RICARDO A. TONG and EXOFFICIO SHERIFF HAKIM S. ABDULWAHID, respondents. CONCEPCION JR., J.: A petition for certiorari with preliminary injunction to annul and/or modify the order of the Court of First Instance of Zamboanga City (Branch ii) dated August 28, 1975 denying petitioner's Ex-Parte Motion for Issuance of Certificate Of Satisfaction Of Judgment.


Herein petitioner is the defendant in a complaint for collection of a sum of money filed by the private respondent. 1 On July 19, 1974, a compromise judgment was rendered by the respondent Judge in accordance with an amicable settlement entered into by the parties the terms and conditions of which, are as follows: (1) That defendant will pay to the plaintiff the amount of Fifty Four Thousand Five Hundred Pesos (P54,500.00) at 6% interest per annum to be reckoned from August 25, 1972; (2) That defendant will pay to the plaintiff the amount of Six Thousand Pesos (P6,000.00) as attorney's fees for which P5,000.00 had been acknowledged received by the plaintiff under Consolidated Bank and Trust Corporation Check No. 16-135022 amounting to P5,000.00 leaving a balance of One Thousand Pesos (P1,000.00); (3) That the entire amount of P54,500.00 plus interest, plus the balance of P1,000.00 for attorney's fees will be paid by defendant to the plaintiff within five months from today, July 19, 1974; and (4) Failure one the part of the defendant to comply with any of the above-conditions, a writ of execution may be issued by this Court for the satisfaction of the obligation. 2 For failure of the petitioner to comply with his judgment obligation, the respondent Judge, upon motion of the private respondent, issued an order for the issuance of a writ of execution on December 21, 1974. Accordingly, writ of execution was issued for the amount of P63,130.00 pursuant to which, the Ex-Officio Sheriff levied upon the following personal properties of the petitioner, to wit: (1) Unit American Lathe 24

(1) Unit American Lathe 18 Cracker Wheeler (1) Unit Rockford Shaper 24 and set the auction sale thereof on January 15, 1975. However, prior to January 15, 1975, petitioner deposited with the Clerk of Court, Court of First Instance, Zamboanga City, in his capacity as Ex-Officio Sheriff of Zamboanga City, the sum of P63,130.00 for the payment of the judgment obligation, consisting of the following: 1. P50.000.00 in Cashier's Check No. S-314361 dated January 3, 1975 of the Equitable Banking Corporation; and 2. P13,130.00 incash. 3 In a letter dated January 14, 1975, to the Ex-Officio Sheriff, 4 private respondent through counsel, refused to accept the check as well as the cash deposit. In the 'same letter, private respondent requested the scheduled auction sale on January 15, 1975 to proceed if the petitioner cannot produce the cash. However, the scheduled auction sale at 10:00 a.m. on January 15, 1975 was postponed to 3:00 o'clock p.m. of the same day due to further attempts to settle the case. Again, the scheduled auction sale that afternoon did not push through because of a last ditch attempt to convince the private respondent to accept the check. The auction sale was then postponed on the following day, January 16, 1975 at 10:00 o'clock a.m. 5 At about 9:15 a.m., on January 16, 1975, a certain Mr. Tañedo representing the petitioner appeared in the office of the Ex-Officio Sheriff and the latter reminded Mr. Tañedo that the auction sale would proceed at 10:00 o'clock. At 10:00 a.m., Mr. Tañedo and Mr. Librado, both representing the petitioner requested the Ex-Officio Sheriff to give them fifteen minutes within which to contract their lawyer which request was granted. After Mr. Tañedo and Mr. Librado


failed to return, counsel for private respondent insisted that the sale must proceed and the Ex-Officio Sheriff proceeded with the auction sale. 6 In the course of the proceedings, Deputy Sheriff Castro sold the levied properties item by item to the private respondent as the highest bidder in the amount of P50,000.00. As a result thereof, the Ex-Officio Sheriff declared a deficiency of P13,130.00. 7 Thereafter, on January 16, 1975, the Ex-Officio Sheriff issued a "Sheriff's Certificate of Sale" in favor of the private respondent, Ricardo Tong, married to Pascuala Tong for the total amount of P50,000.00 only. 8 Subsequently, on January 17, 1975, petitioner filed an ex-parte motion for issuance of certificate of satisfaction of judgment. This motion was denied by the respondent Judge in his order dated August 28, 1975. In view thereof, petitioner now questions said order by way of the present petition alleging in the main that said respondent Judge capriciously and whimsically abused his discretion in not granting the motion for issuance of certificate of satisfaction of judgment for the following reasons: (1) that there was already a full satisfaction of the judgment before the auction sale was conducted with the deposit made to the Ex-Officio Sheriff in the amount of P63,000.00 consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash; and (2) that the auction sale was invalid for lack of proper notice to the petitioner and its counsel when the Ex-Officio Sheriff postponed the sale from June 15, 1975 to January 16, 1976 contrary to Section 24, Rule 39 of the Rules of Court. On November 10, 1975, the Court issued a temporary restraining order enjoining the respondent Ex-Officio Sheriff from delivering the personal properties subject of the petition to Ricardo A. Tong in view of the issuance of the "Sheriff Certificate of Sale." We find the petition to be impressed with merit. The main issue to be resolved in this instance is as to whether or not the private respondent can validly refuse acceptance of the payment of the judgment obligation made by the petitioner

consisting of P50,000.00 in Cashier's Check and P13,130.00 in cash which it deposited with the Ex-Officio Sheriff before the date of the scheduled auction sale. In upholding private respondent's claim that he has the right to refuse payment by means of a check, the respondent Judge cited the following: Section 63 of the Central Bank Act: Sec. 63. Legal Character. — Checks representing deposit money do not have legal tender power and their acceptance in payment of debts, both public and private, is at the option of the creditor, Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account. Article 1249 of the New Civil Code: Art. 1249. — The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. Likewise, the respondent Judge sustained the contention of the private respondent that he has the right to refuse payment of the amount of P13,130.00 in cash because the said amount is less than the judgment obligation, citing the following Article of the New Civil Code:


Art. 1248. Unless there is an express stipulation to that effect, the creditor cannot be compelled partially to receive the presentations in which the obligation consists. Neither may the debtor be required to make partial payment. However, when the debt is in part liquidated and in part unliquidated, the creditor may demand and the debtor may effect the payment of the former without waiting for the liquidation of the latter. It is to be emphasized in this connection that the check deposited by the petitioner in the amount of P50,000.00 is not an ordinary check but a Cashier's Check of the Equitable Banking Corporation, a bank of good standing and reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a certified crossed check. 9 It is a well-known and accepted practice in the business sector that a Cashier's Check is deemed as cash. Moreover, since the said check had been certified by the drawee bank, by the certification, the funds represented by the check are transferred from the credit of the maker to that of the payee or holder, and for all intents and purposes, the latter becomes the depositor of the drawee bank, with rights and duties of one in such situation. 10 Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance. 11 Said certification "implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an understanding that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes in circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties, is to enable the holder to use it as money." 12 When the holder procures the check to be certified, "the check operates as an assignment of a part of the

funds to the creditors." 13 Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the effect "that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in cash in an amount equal to the amount credited to his account" shall apply in this case. Considering that the whole amount deposited by the petitioner consisting of Cashier's Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 as mentioned in the writ of execution, then, We see no valid reason for the private respondent to have refused acceptance of the payment of the obligation in his favor. The auction sale, therefore, was uncalled for. Furthermore, it appears that on January 17, 1975, the Cashier's Check was even withdrawn by the petitioner and replaced with cash in the corresponding amount of P50,000.00 on January 27, 1975 pursuant to an agreement entered into by the parties at the instance of the respondent Judge. However, the private respondent still refused to receive the same. Obviously, the private respondent is more interested in the levied properties than in the mere satisfaction of the judgment obligation. Thus, petitioner's motion for the issuance of a certificate of satisfaction of judgment is clearly meritorious and the respondent Judge gravely abused his discretion in not granting the same under the circumstances. In view of the conclusion reached in this instance, We find no more need to discuss the ground relied in the petition. It is also contended by the private respondent that Appeal and not a special civil action for certiorari is the proper remedy in this case, and that since the period to appeal from the decision of the respondent Judge has already expired, then, the present petition has been filed out of time. The contention is untenable. The decision of the respondent Judge in Civil Case No. 250 (166) has long become final and executory and so, the same is not being questioned herein. The subject of the petition at bar as having


been issued in grave abuse of discretion is the order dated August 28, 1975 of the respondent Judge which was merely issued in execution of the said decision. Thus, even granting that appeal is open to the petitioner, the same is not an adequate and speedy remedy for the respondent Judge had already issued a writ of execution. 14 WHEREFORE, in view of all the foregoing, judgment is hereby rendered: 1. Declaring as null and void the order of the respondent Judge dated August 28, 1975; 2. Declaring as null and void the auction sale conducted on January 16, 1975 and the certificate of sale issued pursuant thereto; 3. Ordering the private respondent to accept the sum of P63,130.00 under deposit as payment of the judgment obligation in his favor; 4. Ordering the respondent Judge and respondent Ex-Officio Sheriff to release the levied properties to the herein petitioner. The temporary restraining order issued is hereby made permanent. Costs against the private respondent. 72. [G.R. No. 72110. November 16, 1990.] ROMAN CATHOLIC BISHOP OF MALOLOS, INC., Petitioner, v. INTERMEDIATE APPELLATE COURT, and

ROBES-FRANCISCO REALTY AND DEVELOPMENT CORPORATION, Respondents.

SARMIENTO, J.: This is a petition for review on certiorari which seeks the reversal and setting aside of the decision 1 of the Court of Appeals, 2 the dispositive portion of which reads:chanrobles law library : red WHEREFORE, the decision appealed from is hereby reversed and set aside and another one entered for the plaintiff ordering the defendant-appellee Roman Catholic Bishop of Malolos, Inc. to accept the balance of P124,000.00 being paid by plaintiffappellant and thereafter to execute in favor of Robes-Francisco Realty Corporation a registerable Deed of Absolute Sale over 20,655 square meters portion of that parcel of land situated in San Jose del Monte, Bulacan described in OCT No. 575 (now Transfer Certificates of Title Nos. T-169493, 169494,169495 and 169496) of the Register of Deeds of Bulacan. In case of refusal of the defendant to execute the Deed of Final Sale, the clerk of court is directed to execute the said document. Without pronouncement as to damages and attorney’s fees. Costs against the defendant-appellee. 3 The case at bar arose from a complaint filed by the private respondent, then plaintiff, against the petitioner, then defendant, in the Court of First Instance (now Regional Trial Court) of Bulacan, at Sta. Maria, Bulacan, 4 for specific performance with damages, based on a contract 5 executed on July 7, 1971. The property subject matter of the contract consists of a 20,655 sq.m.-portion, out of the 30,655 sq.m. total area, of a parcel of land covered by Original Certificate of Title No. 575 of the Province of Bulacan, issued and registered in the name of the


petitioner which it sold to the private respondent for and in consideration of P123,930.00.chanrobles virtual lawlibrary The crux of the instant controversy lies in the compliance or noncompliance by the private respondent with the provision for payment to the petitioner of the principal balance of P100,000.00 and the accrued interest of P24,000.00 within the grace period. A chronological narration of the antecedent facts is as follows:chanrob1es virtual 1aw library On July 7, 1971, the subject contract over the land in question was executed between the petitioner as vendor and the private respondent through its then president, Mr. Carlos F. Robes, as vendee, stipulating for a downpayment of P23,930.00 and the balance of P100,000.00 plus 12% interest per annum to be paid within four (4) years from execution of the contract, that is, on or before July 7, 1975. The contract likewise provides for cancellation, forfeiture of previous payments, and reconveyance of the land in question in case the private respondent would fail to complete payment within the said period. On March 12, 1973, the private respondent, through its new president, Atty. Adalia Francisco, addressed a letter 6 to Father Vasquez, parish priest of San Jose Del Monte, Bulacan, requesting to be furnished with a copy of the subject contract and the supporting documents. On July 17, 1975, admittedly after the expiration of the stipulated period for payment, the same Atty. Francisco wrote the petitioner a formal request 7 that her company be allowed to pay the principal amount of P100,000.00 in three (3) equal installments of six (6) months each with the first installment and the accrued interest of P24,000.00 to be paid immediately upon approval of the said request.

On July 29, 1975, the petitioner, through its counsel, Atty. Carmelo Fernandez, formally denied the said request of the private respondent, but granted the latter a grace period of five (5) days from the receipt of the denial 8 to pay the total balance of P124,000.00, otherwise, the provisions of the contract regarding cancellation, forfeiture, and reconveyance would be implemented. On August 4, 1975, the private respondent, through its president, Atty. Francisco, wrote 9 the counsel of the petitioner requesting an extension of 30 days from said date to fully settle its account. The counsel for the petitioner, Atty. Fernandez, received the said letter on the same day. Upon consultation with the petitioner in Malolos, Bulacan, Atty. Fernandez, as instructed, wrote the private respondent a letter 10 dated August 7, 1975 informing the latter of the denial of the request for an extension of the grace period. Consequently, Atty. Francisco, the private respondent’s president, wrote a letter 11 dated August 22, 1975, directly addressed to the petitioner, protesting the alleged refusal of the latter to accept tender of payment purportedly made by the former on August 5, 1975, the last day of the grace period. In the same letter of August 22, 1975, received on the following day by the petitioner, the private respondent demanded the execution of a deed of absolute sale over the land in question and after which it would pay its account in full, otherwise, judicial action would be resorted to.chanrobles.com.ph : virtual law library On August 27, 1975, the petitioner’s counsel, Atty. Fernandez, wrote a reply 12 to the private respondent stating the refusal of his client to execute the deed of absolute sale due to its (private respondent’s) failure to pay its full obligation. Moreover, the petitioner denied that the private respondent had made any tender of payment whatsoever within the grace period. In view of this alleged breach of contract, the petitioner cancelled the


contract and considered all previous payments forfeited and the land as ipso facto reconveyed. From a perusal of the foregoing facts, we find that both the contending parties have conflicting versions on the main question of tender of payment. The trial court, in its ratiocination, preferred not to give credence to the evidence presented by the private Respondent. According to the trial court:chanrob1es virtual 1aw library . . . What made Atty. Francisco suddenly decide to pay plaintiff’s obligation on August 5, 1975, go to defendant’s office at Malolos, and there tender her payment, when her request of August 4, 1975 had not yet been acted upon until August 7, 1975? If Atty. Francisco had decided to pay the obligation and had available funds for the purpose on August 5, 1975, then there would have been no need for her to write defendant on August 4, 1975 to request an extension of time. Indeed, Atty. Francisco’s claim that she made a tender of payment on August 5, 1975 — such alleged act, considered in relation to the circumstances both antecedent and subsequent thereto, being not in accord with the normal pattern of human conduct — is not worthy of credence. 13 The trial court likewise noted the inconsistency in the testimony of Atty. Francisco, president of the private respondent, who earlier testified that a certain Mila Policarpio accompanied her on August 5, 1975 to the office of the petitioner. Another person, however, named Aurora Oracion, was presented to testify as the secretary-companion of Atty. Francisco on that same occasion. Furthermore, the trial court considered as fatal the failure of Atty. Francisco to present in court the certified personal check allegedly tendered as payment or, at least, its xerox copy, or even bank records thereof. Finally, the trial court found that the private respondent had insufficient funds available to fulfill the

entire obligation considering that the latter, through its president, Atty. Francisco, only had a savings account deposit of P64,840.00, and although the latter had a money-market placement of P300,000.00, the same was to mature only after the expiration of the 5-day grace period. Based on the above considerations, the trial court rendered a decision in favor of the petitioner, the dispositive portion of which reads:chanrobles virtual lawlibrary WHEREFORE, finding plaintiff to have failed to make out its case, the court hereby declares the subject contract cancelled and plaintiff’s downpayment of P23,930.00 forfeited in favor of defendant, and hereby dismisses the complaint; and on the counterclaim, the Court orders plaintiff to pay defendant. (1) Attorney’s fees of P10,000.00; (2) Litigation expenses of P2,000.00; and (3) Judicial costs. SO ORDERED. 14 Not satisfied with the said decision, the private respondent appealed to the respondent Intermediate Appellate Court (now Court of Appeals) assigning as reversible errors, among others, the findings of the trial court that the available funds of the private respondent were insufficient and that the latter did not effect a valid tender of payment and consignation. The respondent court, in reversing the decision of the trial court, essentially relies on the following findings:chanrob1es virtual 1aw library


. . . We are convinced from the testimony of Atty. Adalia Francisco and her witnesses that in behalf of the plaintiff-appellant they have a total available sum of P364,840.00 at her and at the plaintiff’s disposal on or before August 4, 1975 to answer for the obligation of the plaintiff-appellant. It was not correct for the trial court to conclude that the plaintiff-appellant had only about P64,840.00 in savings deposit on or before August 5, 1975, a sum not enough to pay the outstanding account of P124,000.00. The plaintiff-appellant, through Atty. Francisco proved and the trial court even acknowledged that Atty. Adalia Francisco had about P300,000.00 in money market placement. The error of the trial court has in concluding that the money market placement of P300,000.00 was out of reach of Atty. Francisco. But as testified to by Mr. Catalino Estrella, a representative of the Insular Bank of Asia and America, Atty. Francisco could withdraw anytime her money market placement and place it at her disposal, thus proving her financial capability of meeting more than the whole of P124,000.00 then due per contract. This situation, We believe, proves the truth that Atty. Francisco apprehensive that her request for a 30-day grace period would be denied, she tendered payment on August 4, 1975 which offer defendant through its representative and counsel refused to receive. . .15 (Emphasis supplied) In other words, the respondent court, finding that the private respondent had sufficient available funds, ipso facto concluded that the latter had tendered payment. Is such conclusion warranted by the facts proven? The petitioner submits that it is not.cralawnad Hence, this petition. 16 The petitioner presents the following issues for resolution:chanrob1es virtual 1aw library x x x

A. Is a finding that private respondent had sufficient available funds on or before the grace period for the payment of its obligation proof that it (private respondent) did tender of (sic) payment for its said obligation within said period? x x x B. Is it the legal obligation of the petitioner (as vendor) to execute a deed of absolute sale in favor of the private respondent (as vendee) before the latter has actually paid the complete consideration of the sale — where the contract between and executed by the parties stipulates — "That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE."cralaw virtua1aw library x x x. C. Is an offer of a check a valid tender of payment of an obligation under a contract which stipulates that the consideration of the sale is in Philippine Currency? 17 We find the petition impressed with merit. With respect to the first issue, we agree with the petitioner that a finding that the private respondent had sufficient available funds on or before the grace period for the payment of its obligation does not constitute proof of tender of payment by the latter for its obligation within the said period. Tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the former’s


obligation and demanding that the latter accept the same. Thus, tender of payment cannot be presumed by a mere inference from surrounding circumstances. At most, sufficiency of available funds is only affirmative of the capacity or ability of the obligor to fulfill his part of the bargain. But whether or not the obligor avails himself of such funds to settle his outstanding account remains to be proven by independent and credible evidence. Tender of payment presupposes not only that the obligor is able, ready, and willing, but more so, in the act of performing his obligation. Ab posse ad actu non vale illatio. "A proof that an act could have been done is no proof that it was actually done."cralaw virtua1aw library The respondent court was therefore in error to have concluded from the sheer proof of sufficient available funds on the part of the private respondent to meet more than the total obligation within the grace period, the alleged truth of tender of payment. The same is a classic case of non-sequitur.chanrobles virtual lawlibrary On the contrary, the respondent court finds itself remiss in overlooking or taking lightly the more important findings of fact made by the trial court which we have earlier mentioned and which as a rule, are entitled to great weight on appeal and should be accorded full consideration and respect and should not be disturbed unless for strong and cogent reasons. 18 While the Court is not a trier of facts, yet, when the findings of fact of the Court of Appeals are at variance with those of the trial court, 19 or when the inference of the Court of Appeals from its findings of fact is manifestly mistaken, 20 the Court has to review the evidence in order to arrive at the correct findings based on the record. Apropos the second issue raised, although admittedly the documents for the deed of absolute sale had not been prepared,

the subject contract clearly provides that the full payment by the private respondent is an a priori condition for the execution of the said documents by the petitioner. That upon complete payment of the agreed consideration by the herein VENDEE, the VENDOR shall cause the execution of a Deed of Absolute Sale in favor of the VENDEE. 21 The private respondent is therefore in estoppel to claim otherwise as the latter did in the testimony in cross-examination of its president, Atty. Francisco, which reads:chanrob1es virtual 1aw library Q Now, you mentioned, Atty. Francisco, that you wanted the defendant to execute the final deed of sale before you would given (sic) the personal certified check in payment of your balance, is that correct? A Yes, sir. 22 x x x Art. 1159 of the Civil Code of the Philippines provides that "obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith." And unless the stipulations in said contract are contrary to law, morals, good customs, public order, or public policy, the same are binding as between the parties.23 What the private respondent should have done if it was indeed desirous of complying with its obligations would have been to pay the petitioner within the grace period and obtain a receipt of such payment duly issued by the latter. Thereafter, or, allowing a reasonable time, the private respondent could have demanded from the petitioner the execution of the necessary documents. In


case the petitioner refused, the private respondent could have had always resorted to judicial action for the legitimate enforcement of its right. For the failure of the private respondent to undertake this more judicious course of action, it alone shall suffer the consequences.chanrobles.com:cralaw:red With regard to the third issue, granting arguendo that we would rule affirmatively on the two preceding issues, the case of the private respondent still can not succeed in view of the fact that the latter used a certified personal check which is not legal tender nor the currency stipulated, and therefore, can not constitute valid tender of payment. The first paragraph of Art. 1249 of the Civil Code provides that "the payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The Court en banc in the recent case of Philippine Airlines v. Court of Appeals, 24 G.R. No. L-49188, stated thus:chanrob1es virtual 1aw library Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment (citing Sec. 189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; Bryan London Co. v. American Bank, 7 Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, whether a manager’s check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. Hence, where the tender of payment by the private respondent was not valid for failure to comply with the requisite payment in legal tender or currency stipulated within the grace period and as such, was validly refused receipt by the petitioner, the subsequent consignation did not operate to discharge the former from its obligation to the latter.

In view of the foregoing, the petitioner in the legitimate exercise of its rights pursuant to the subject contract, did validly order therefore the cancellation of the said contract, the forfeiture of the previous payment, and the reconveyance ipso facto of the land in question.chanrobles lawlibrary : rednad WHEREFORE, the petition for review on certiorari is GRANTED and the DECISION of the respondent court promulgated on April 25, 1985 is hereby SET ASIDE and ANNULLED and the DECISION of the trial court dated May 25, 1981 is hereby REINSTATED. Costs against the private Respondent. 73. G.R. No. 100290 June 4, 1993 NORBERTO TIBAJIA, JR. and CARMEN TIBAJIA, petitioners, vs. THE HONORABLE COURT OF APPEALS and EDEN TAN, respondents. PADILLA, J.: Petitioners, spouses Norberto Tibajia, Jr. and Carmen Tibajia, are before this Court assailing the decision * of respondent appellate court dated 24 April 1991 in CA-G.R. SP No. 24164 denying their petition for certiorari prohibition, and injunction which sought to annul the order of Judge Eutropio Migriño of the Regional Trial Court, Branch 151, Pasig, Metro Manila in Civil Case No. 54863 entitled "Eden Tan vs. Sps. Norberto and Carmen Tibajia." Stated briefly, the relevant facts are as follows:


Case No. 54863 was a suit for collection of a sum of money filed by Eden Tan against the Tibajia spouses. A writ of attachment was issued by the trial court on 17 August 1987 and on 17 September 1987, the Deputy Sheriff filed a return stating that a deposit made by the Tibajia spouses in the Regional Trial Court of Kalookan City in the amount of Four Hundred Forty Two Thousand Seven Hundred and Fifty Pesos (P442,750.00) in another case, had been garnished by him. On 10 March 1988, the Regional Trial Court, Branch 151 of Pasig, Metro Manila rendered its decision in Civil Case No. 54863 in favor of the plaintiff Eden Tan, ordering the Tibajia spouses to pay her an amount in excess of Three Hundred Thousand Pesos (P300,000.00). On appeal, the Court of Appeals modified the decision by reducing the award of moral and exemplary damages. The decision having become final, Eden Tan filed the corresponding motion for execution and thereafter, the garnished funds which by then were on deposit with the cashier of the Regional Trial Court of Pasig, Metro Manila, were levied upon. On 14 December 1990, the Tibajia spouses delivered to Deputy Sheriff Eduardo Bolima the total money judgment in the following form: Cashier's Check P262,750.00 Cash 135,733.70 ———— Total P398,483.70 Private respondent, Eden Tan, refused to accept the payment made by the Tibajia spouses and instead insisted that the garnished funds deposited with the cashier of the Regional Trial Court of Pasig, Metro Manila be withdrawn to satisfy the judgment obligation. On 15 January 1991, defendant spouses (petitioners) filed a motion to lift the writ of execution on the ground that the judgment debt had already been paid. On 29 January 1991, the motion was denied by the trial court on the

ground that payment in cashier's check is not payment in legal tender and that payment was made by a third party other than the defendant. A motion for reconsideration was denied on 8 February 1991. Thereafter, the spouses Tibajia filed a petition for certiorari, prohibition and injunction in the Court of Appeals. The appellate court dismissed the petition on 24 April 1991 holding that payment by cashier's check is not payment in legal tender as required by Republic Act No. 529. The motion for reconsideration was denied on 27 May 1991. In this petition for review, the Tibajia spouses raise the following issues: I WHETHER OR NOT THE BPI CASHIER'S CHECK NO. 014021 IN THE AMOUNT OF P262,750.00 TENDERED BY PETITIONERS FOR PAYMENT OF THE JUDGMENT DEBT, IS "LEGAL TENDER". II WHETHER OR NOT THE PRIVATE RESPONDENT MAY VALIDLY REFUSE THE TENDER OF PAYMENT PARTLY IN CHECK AND PARTLY IN CASH MADE BY PETITIONERS, THRU AURORA VITO AND COUNSEL, FOR THE SATISFACTION OF THE MONETARY OBLIGATION OF PETITIONERS-SPOUSES. 1 The only issue to be resolved in this case is whether or not payment by means of check (even by cashier's check) is considered payment in legal tender as required by the Civil Code, Republic Act No. 529, and the Central Bank Act. It is contended by the petitioners that the check, which was a cashier's check of the Bank of the Philippine Islands, undoubtedly a bank of good standing and reputation, and which was a crossed check marked "For Payee's Account Only" and payable to private respondent Eden Tan, is considered legal tender, payment with which operates to discharge their monetary obligation. 2 Petitioners, to support their contention, cite the case of New


Pacific Timber and Supply Co., Inc. v. Señeris 3 where this Court held through Mr. Justice Hermogenes Concepcion, Jr. that "It is a well-known and accepted practice in the business sector that a cashier's check is deemed as cash". The provisions of law applicable to the case at bar are the following: a. Article 1249 of the Civil Code which provides: Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance.; b. Section 1 of Republic Act No. 529, as amended, which provides: Sec. 1. Every provision contained in, or made with respect to, any obligation which purports to give the obligee the right to require payment in gold or in any particular kind of coin or currency other than Philippine currency or in an amount of money of the Philippines measured thereby, shall be as it is hereby declared against public policy null and void, and of no effect, and no such provision shall be contained in, or made with respect to, any obligation thereafter incurred. Every obligation heretofore and hereafter incurred, whether or not any such provision as to payment is contained therein or made with respect thereto, shall

be discharged upon payment in any coin or currency which at the time of payment is legal tender for public and private debts. c. Section 63 of Republic Act No. 265, as amended (Central Bank Act) which provides: Sec. 63. Legal character — Checks representing deposit money do not have legal tender power and their acceptance in the payment of debts, both public and private, is at the option of the creditor: Provided, however, that a check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash in an amount equal to the amount credited to his account. From the aforequoted provisions of law, it is clear that this petition must fail. In the recent cases of Philippine Airlines, Inc. vs. Court of Appeals 4 and Roman Catholic Bishop of Malolos, Inc. vs. Intermediate Appellate Court, 5 this Court held that — A check, whether a manager's check or ordinary check, is not legal tender, and an offer of a check in payment of a debt is not a valid tender of payment and may be refused receipt by the obligee or creditor. The ruling in these two (2) cases merely applies the statutory provisions which lay down the rule that a check is not legal tender and that a creditor may validly refuse payment by check, whether it be a manager's, cashier's or personal check. Petitioners erroneously rely on one of the dissenting opinions in the Philippine Airlines case 6 to support their cause. The dissenting opinion however does not in any way support the contention that a check is legal tender but, on the contrary, states that "If the PAL checks in question had not been encashed by


Sheriff Reyes, there would be no payment by PAL and, consequently, no discharge or satisfaction of its judgment obligation." 7 Moreover, the circumstances in the Philippine Airlines case are quite different from those in the case at bar for in that case the checks issued by the judgment debtor were made payable to the sheriff, Emilio Z. Reyes, who encashed the checks but failed to deliver the proceeds of said encashment to the judgment creditor. In the more recent case of Fortunado vs. Court of Appeals, 8 this Court stressed that, "We are not, by this decision, sanctioning the use of a check for the payment of obligations over the objection of the creditor." WHEREFORE, the petition is DENIED. The appealed decision is hereby AFFIRMED, with costs against the petitioners. 74.

G.R. No. 180144 September 24, 2014 LEONARDO BOGNOT, Petitioner, vs. RRI LENDING CORPORATION, represented by its General Manager, DARIO J. BERNARDEZ, Respondent.

Background Facts RRI Lending Corporation (respondent) is an entity engaged in the business of lending money to its borrowers within Metro Manila. It is duly represented by its General Manager, Mr. Dario J. Bernardez (Bernardez). Sometime in September 1996, the petitioner and his younger brother, Rolando A. Bognot (collectively referred to as the "Bognot siblings"), applied for and obtained a loan of Five Hundred Thousand Pesos (P500,000.00) from the respondent, payable on November 30, 1996.4 The loan was evidenced by a promissory note and was secured by a post dated check5 dated November 30, 1996. Evidence on record shows that the petitioner renewed the loan several times on a monthly basis. He paid a renewal fee of P54,600.00 for each renewal, issued a new post-dated checkas security, and executed and/or renewed the promissory note previouslyissued. The respondent on the other hand, cancelled and returned to the petitioner the post-dated checks issued prior to their renewal.

D E C I S I O N

Sometime in March 1997, the petitioner applied for another loan renewal. He again executed as principal and signed Promissory Note No. 97-0356 payable on April 1, 1997; his co-maker was again Rolando. As security for the loan, the petitioner also issued BPI Check No. 0595236,7 post dated to April 1, 1997.8

Before the Court is the petition for review on certiorari1 filed by Leonardo Bognot (petitioner) assailing the March 28, 2007 decision2 and the October 15, 2007 resolution3 of the Court of Appeals (CA) in CA-G.R. CV No. 66915.

Subsequently, the loan was again renewed on a monthly basis (until June 30, 1997), as shown by the Official Receipt No. 7979 dated May 5, 1997, and the Disclosure Statement dated May 30, 1997 duly signed by Bernardez. The petitioner purportedly paid the renewal fees and issued a post-dated check dated June 30, 1997 as security. As had been done in the past, the respondent superimposed the

BRION, J.:


date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it appear that it would mature on the said date. Several days before the loan’s maturity, Rolando’s wife, Julieta Bognot (Mrs. Bognot), went to the respondent’s office and applied for another renewal of the loan. She issued in favor of the respondent Promissory Note No. 97-051, and International Bank Exchange (IBE) Check No. 00012522, dated July 30, 1997, in the amount of P54,600.00 as renewal fee. On the excuse that she needs to bring home the loan documents for the Bognot siblings’ signatures and replacement, Mrs. Bognot asked the respondent’s clerk to release to her the promissory note, the disclosure statement, and the check dated July 30, 1997. Mrs. Bognot, however, never returned these documents nor issued a new post-dated check. Consequently, the respondent sent the petitioner follow-up letters demanding payment of the loan, plus interest and penalty charges. These demands went unheeded. On November 27, 1997, the respondent, through Bernardez, filed a complaint for sum of money before the Regional Trial Court (RTC) against the Bognot siblings. The respondent mainly alleged that the loan renewal payable on June 30, 1997 which the Bognot siblings applied for remained unpaid; that before June30, 1997, Mrs. Bognot applied for another loan extension and issued IBE Check No. 00012522 as payment for the renewal fee; that Mrs. Bognot convinced the respondent’s clerk to release to her the promissory note and the other loan documents; that since Mrs. Bognot never issued any replacement check, no loanextension took place and the loan, originally payable on June 30, 1997, became due on this date; and despite repeated demands, the Bognot siblings failed to pay their joint and solidary obligation. Summons were served on the Bognotsiblings. However, only the petitioner filed his answer.

In his Answer,10 the petitioner claimed that the complaint states no cause of action because the respondent’s claim had been paid, waived, abandoned or otherwise extinguished. He denied being a party to any loan application and/or renewal in May 1997. He also denied having issued the BPI check post-dated to June 30, 1997, as well as the promissory note dated June 30, 1997, claiming that this note had been tampered. He claimed that the one (1) month loan contracted by Rolando and his wife in November 1996 which was lastly renewed in March 1997 had already been fully paid and extinguished in April 1997.11 Trial on the merits thereafter ensued. The Regional Trial Court Ruling In a decision12 dated January 17, 2000,the RTC ruled in the respondent’s favor and ordered the Bognot siblings to pay the amount of the loan, plus interest and penalty charges. It considered the wordings of the promissory note and found that the loan they contracted was joint and solidary. It also noted that the petitioner signed the promissory note as a principal (and not merely as a guarantor), while Rolando was the co-maker. It brushed the petitioner’s defense of full payment aside, ruling that the respondent had successfully proven, by preponderance of evidence, the nonpayment of the loan. The trial court said: Records likewise reveal that while he claims that the obligation had been fully paid in his Answer, he did not, in order to protect his right filed (sic) a cross-claim against his co-defendant Rolando Bognot despite the fact that the latter did not file any responsive pleading. In fine, defendants are liable solidarily to plaintiff and must pay the loan of P500,000.00 plus 5% interest monthly as well as 10% monthly penalty charges from the filing of the complaint on December 3, 1997 until fully paid. As plaintiff was constrained to


engage the services of counsel in order to protect his right,defendants are directed to pay the former jointly and severally the amount of P50,000.00 as and by way of attorney’s fee. The petitioner appealed the decision to the Court of Appeals. The Court of Appeals Ruling In its decision dated March 28, 2007, the CA affirmed the RTC’s findings. It found the petitioner’s defense of payment untenable and unsupported by clear and convincing evidence. It observed that the petitioner did not present any evidence showing that the check dated June 30, 1997 had, in fact, been encashed by the respondent and the proceeds applied to the loan, or any official receipt evidencing the payment of the loan. It further stated that the only document relied uponby the petitioner to substantiate his defense was the April 1, 1997 checkhe issued which was cancelled and returned to him by the respondent. The CA, however, noted the respondent’s established policy of cancelling and returning the post-dated checks previously issued, as well as the subsequent loan renewals applied for by the petitioner, as manifested by the official receipts under his name. The CA thus ruled that the petitioner failed to discharge the burden of proving payment. The petitioner moved for the reconsideration of the decision, but the CA denied his motion in its resolution of October 15, 2007, hence, the present recourse to us pursuant toRule 45 of the Rules of Court. The Petition The petitioner submits that the CA erred in holding him solidarily liable with Rolando and his wife. Heclaimed that based on the legal

presumption provided by Article 1271 of the Civil Code,13 his obligation had been discharged by virtue of his possession of the post-dated check (stamped "CANCELLED") that evidenced his indebtedness. He argued that it was Mrs. Bognot who subsequently assumed the obligation by renewing the loan, paying the fees and charges, and issuing a check. Thus, there is an entirely new obligation whose payment is her sole responsibility. The petitioner also argued that as a result of the alteration of the promissory note without his consent (e.g., the superimposition of the date "June 30, 1997" on the upper right portion of Promissory Note No. 97-035 to make it appear that it would mature on this date), the respondent can no longer collect on the tampered note, let alone, hold him solidarily liable with Rolando for the payment of the loan. He maintained that even without the proof of payment, the material alteration of the promissory note is sufficient to extinguish his liability. Lastly, he claimed that he had been released from his indebtedness by novation when Mrs. Bognot renewed the loan and assumed the indebtedness. The Case for the Respondents The respondent submits that the issues the petitioner raised hinge on the appreciation of the adduced evidence and of the factual lower courts’ findings that, as a rule, are notreviewable by this Court. The Issues The case presents to us the following issues: 1. Whether the CA committed a reversible error in holding the petitioner solidarily liable with Rolando;


2. Whether the petitioner is relieved from liability by reason of the material alteration in the promissory note; and 3. Whether the parties’ obligation was extinguished by: (i) payment; and (ii) novation by substitution of debtors. Our Ruling We find the petition partly meritorious. As a rule, the Court’s jurisdiction in a Rule 45 petition is limited to the review of pure questions of law.14 Appreciation of evidence and inquiry on the correctness of the appellate court's factual findings are not the functions of this Court; we are not a trier of facts.15 A question of law exists when the doubt or dispute relates to the application of the law on given facts. On the other hand, a question of fact exists when the doubt or dispute relates to the truth or falsity of the parties’ factual allegations.16 As the respondent correctly pointedout, the petitioner’s allegations are factual issuesthat are not proper for the petition he filed. In the absence of compelling reasons, the Court cannot re-examine, review or re-evaluate the evidence and the lower courts’ factual conclusions. This is especially true when the CA affirmed the lower court’s findings, as in this case. Since the CA’s findings of facts affirmed those of the trial court, they are binding on this Court, rendering any further factual review unnecessary. If only to lay the issues raised - both factual and legal – to rest, we shall proceed to discuss their merits and demerits. No Evidence Was Presented to Establish the Fact of Payment

Jurisprudence tells us that one who pleads payment has the burden of proving it;17 the burden rests on the defendant to prove payment, rather than on the plaintiff to prove non-payment.18 Indeed, once the existence of an indebtedness is duly established by evidence, the burden of showing with legal certainty that the obligation has been discharged by payment rests on the debtor.19 In the present case, the petitioner failed to satisfactorily prove that his obligation had already been extinguished by payment. As the CA correctly noted, the petitioner failed to present any evidence that the respondent had in fact encashed his check and applied the proceeds to the payment of the loan. Neither did he present official receipts evidencing payment, nor any proof that the check had been dishonored. We note that the petitioner merely relied on the respondent’s cancellation and return to him of the check dated April 1, 1997. The evidence shows that this check was issued to secure the indebtedness. The acts imputed on the respondent, standing alone, do not constitute sufficient evidence of payment. Article 1249, paragraph 2 of the Civil Code provides: x x x x The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. (Emphasis supplied) Also, we held in Bank of the Philippine Islands v. Spouses Royeca:20 Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a


substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized.(Emphasis supplied) Although Article 1271 of the Civil Code provides for a legal presumption of renunciation of action (in cases where a private document evidencing a credit was voluntarily returned by the creditor to the debtor), this presumption is merely prima facieand is not conclusive; the presumption loses efficacy when faced with evidence to the contrary.

Q: In the case of the renewal of the loan you admitted that a renewal fee is charged to the debtor which he or she must pay before a renewal is allowed. I show you Exhibit "3" official receipt of plaintiff dated July 3, 1997, would this be your official receipt which you issued to your client which they make renewal of the loan? A: Yes, sir. x x x x x x x x x Q: And naturally when a loan has been renewed, the old one which is replaced by the renewal has already been cancelled, is that correct?

Moreover, the cited provision merely raises a presumption, not of payment, but of the renunciation of the credit where more convincing evidence would be required than what normally would be called for to prove payment.21 Thus, reliance by the petitioner on the legal presumption to prove payment is misplaced.

A: Yes, sir.

To reiterate, no cash payment was proven by the petitioner. The cancellation and return of the check dated April 1, 1997, simply established his renewal of the loan – not the fact of payment. Furthermore, it has been established during trial, through repeated acts, that the respondent cancelled and surrendered the post-dated check previously issued whenever the loan is renewed. We trace whatwould amount to a practice under the facts of this case, to the following testimonial exchanges:

A: Yes, sir. xxx22

Civil Case No. 97-0572 TSN December 14, 1998, Page 13. Atty. Almeda:

Q: It is also true to say that all promissory notes and all postdated checks covered by the old loan which have been the subject of the renewal are deemed cancelled and replaced is that correct?

Civil Case No. 97-0572 TSN November 27, 1998, Page 27. Q: What happened to the check that Mr. Bognot issued? Court: There are two Bognots. Who in particular? Q: Leonardo Bognot, Your Honor. A: Every month, they were renewed, he issued a new check, sir. Q: Do you have a copy of the checks?


A: We returned the check upon renewing the loan.23 In light of these exchanges, wefind that the petitioner failed to discharge his burden ofproving payment. The Alteration of the Promissory Note Did Not Relieve the Petitioner From Liability We now come to the issue of material alteration. The petitioner raised as defense the alleged material alteration of Promissory Note No. 97-035 as basis to claim release from his loan. He alleged that the respondent’s superimposition of the due date "June 30, 1997" on the promissory note without his consent effectively relieved him of liability. We find this defense untenable. Although the respondent did not dispute the fact of alteration, he nevertheless denied that the alteration was done without the petitioner’s consent. The parties’ Pre-Trial Order dated November 3, 199824 states that: xxx There being no possibility of a possible compromise agreement, stipulations, admissions, and denials were made, to wit: FOR DEFENDANT LEONARDO BOGNOT 13. That the promissory note subject of this case marked as Annex "A" of the complaint was originally dated April 1, 1997 with a superimposed rubber stamp mark "June 30, 1997" to which the plaintiff admitted the superimposition.

14. The superimposition was done without the knowledge, consent or prior consultation with Leonardo Bognot which was denied by plaintiff."25 (Emphasis supplied) Significantly, the respondent also admitted in the Pre-Trial Order that part of its company practice is to rubber stamp, or make a superimposition through a rubber stamp, the old promissory note which has been renewed to make it appear that there is a new loan obligation. The petitioner did not rebut this statement. To our mind, the failure to rebut is tantamount to an admission of the respondent’s allegations: "22. That it is the practice of plaintiff to just rubber stamp or make superimposition through a rubber stamp on old promissory note which has been renewed to make it appear that there is a new loan obligation to which the plaintiff admitted." (Emphasis Supplied).26 Even assuming that the note had indeed been tampered without the petitioner’s consent, the latter cannot totally avoid payment of his obligation to the respondent based on the contract of loan. Based on the records, the Bognot Siblings had applied for and were granted a loan of P500,000.00 by the respondent. The loan was evidenced by a promissory note and secured by a post-dated check27 dated November 30, 1996. In fact, the petitioner himself admitted his loan application was evidenced by the Promissory Note dated April 1, 1997.28 This loan was renewed several times by the petitioner, after paying the renewal fees, as shown by the Official Receipt Nos. 79729 and 58730 dated May 5 and July 3, 1997, respectively. These official receipts were issued in the name of the petitioner. Although the petitioner had insisted that the loan had been extinguished, no other evidence was presented to prove payment other than the cancelled and returnedpost-dated check.


Under this evidentiary situation, the petitioner cannot validly deny his obligation and liability to the respondent solely on the ground that the Promissory Note in question was tampered. Notably, the existence of the obligation, as well as its subsequent renewals, have been duly established by: first, the petitioner’s application for the loan; second, his admission that the loan had been obtained from the respondent; third, the post-dated checks issued by the petitioner to secure the loan; fourth, the testimony of Mr. Bernardez on the grant, renewal and non-payment of the loan; fifth, proof of non-payment of the loan; sixth, the loan renewals; and seventh, the approval and receipt of the loan renewals. In Guinsatao v. Court of Appeals,31 this Court pointed out that while a promissory note is evidence of an indebtedness, it is not the only evidence, for the existence of the obligation can be proven by other documentary evidence such as a written memorandum signed by the parties. In Pacheco v. Court of Appeals,32 this Court likewise expressly recognized that a check constitutes anevidence of indebtedness and is a veritable proof of an obligation. It canbe used in lieu of and for the same purpose as a promissory note and can therefore be presented to establish the existence of indebtedness.33 In the present petition, we find that the totality of the evidence on record sufficiently established the existence of the petitioner’s indebtedness (and liability) based on the contract ofloan. Even with the tampered promissory note, we hold that the petitioner can still be held liable for the unpaid loan.

It is a settled principle of law thatno issue may be raised on appeal unless it has been brought before the lower tribunal for its consideration.34 Matters neither alleged in the pleadingsnor raised during the proceedings below cannot be ventilated for the first time on appeal before the Supreme Court.35 In any event, we find no merit in the defense of novation as we discuss at length below. Novation cannot be presumed and must be clearly and unequivocably proven. Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor.36 Article 1293 of the Civil Code defines novation as follows: "Art. 1293. Novation which consists insubstituting a new debtor in the place of the originalone, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him rights mentioned in Articles 1236 and 1237."

The Petitioner’s BelatedClaim of Novation by Substitution May no Longer be Entertained

To give novation legal effect, the original debtor must be expressly released from the obligation, and the new debtor must assume the original debtor’s place in the contractual relationship. Depending on who took the initiative, novation by substitution of debtor has two forms – substitution by expromision and substitution by delegacion. The difference between these two was explained in Garcia v. Llamas:37

It has not escaped the Court’s attention that the petitioner raised the argument that the obligation had been extinguished by novation. The petitioner never raised this issue before the lower courts.

"In expromision, the initiative for the change does not come from -- and may even be made without the knowledge of -- the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent of the third person and the


creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary."

Since the petitioner failed to show thatthe respondent assented to the substitution, no valid novation took place with the effect of releasing the petitioner from his obligation to the respondent.

In both cases, the original debtor must be released from the obligation; otherwise, there can be no valid novation.38 Furthermore, novation by substitution of debtor must alwaysbe made with the consent of the creditor.39

Moreover, in the absence of showing that Mrs. Bognot and the respondent had agreed to release the petitioner, the respondent can still enforce the payment of the obligation against the original debtor. Mere acquiescence to the renewal of the loan, when there is clearly no agreement to release the petitioner from his responsibility, does not constitute novation.

The petitioner contends thatnovation took place through a substitution of debtors when Mrs. Bognot renewed the loan and assumed the debt. He alleged that Mrs. Bognot assumed the obligation by paying the renewal fees and charges, and by executing a new promissory note. He further claimed that she issued her own check40 to cover the renewal fees, which fact, according to the petitioner, was done with the respondent’s consent. Contrary to the petitioner’s contention, Mrs. Bognot did not substitute the petitioner as debtor. She merely attempted to renew the original loan by executing a new promissory note41 and check. The purported one month renewal of the loan, however, did not push through, as Mrs. Bognot did not return the documents or issue a new post dated check. Since the loan was not renewed for another month, the originaldue date, June 30,1997, continued to stand. More importantly, the respondent never agreed to release the petitioner from his obligation. That the respondent initially allowed Mrs. Bognot to bring home the promissory note, disclosure statement and the petitioner’s previous check dated June 30, 1997, does not ipso factoresult in novation. Neither will this acquiescence constitute an implied acceptance of the substitution of the debtor. In order to give novation legal effect, the creditor should consent to the substitution of a new debtor. Novation must be clearly and unequivocally shown, and cannot be presumed.

The Nature of the Petitioner’s Liability On the nature of the petitioner’s liability, we rule however, that the CA erred in holding the petitioner solidarily liable with Rolando. A solidary obligation is one in which each of the debtors is liable for the entire obligation, and each of the creditors is entitled to demand the satisfaction of the whole obligation from any or all of the debtors.42 There is solidary liability when the obligation expressly so states, when the law so provides, or when the nature of the obligation so requires.43 Thus, when the obligor undertakes to be "jointly and severally" liable, the obligation is solidary, In this case, both the RTC and the CA found the petitioner solidarily liable with Rolando based on Promissory Note No. 97-035 dated June 30, 1997. Under the promissory note, the Bognot Siblings defined the parameters of their obligation as follows: "FOR VALUE RECEIVED, I/WE, jointly and severally, promise to pay to READY RESOURCES INVESTORS RRI LENDING CORPO. or Order, its office at Paranaque, M.M. the principal sum of Five Hundred Thousand PESOS (P500,000.00), PhilippineCurrency, with interest thereon at the rate of Five percent (5%) per month/annum, payable in One Installment (01) equal daily/weekly/semi-monthly/monthly


of PESOS Five Hundred Thousand Pesos (P500,000.00), first installment to become due on June 30, 1997. xxx"44 (Emphasis Ours).

The 5% Monthly Interest Stipulated in the Promissory Note is Unconscionable and Should be Equitably Reduced

Although the phrase "jointly and severally" in the promissory note clearly and unmistakably provided for the solidary liability of the parties, we note and stress that the promissory note is merely a photocopyof the original, which was never produced.

Finally, on the issue of interest, while we agree with the CA that the petitioner is liable to the respondentfor the unpaid loan, we find the imposition of the 5% monthly interest to be excessive, iniquitous, unconscionable and exorbitant, and hence, contrary to morals and jurisprudence. Although parties to a loan agreement have wide latitude to stipulate on the applicable interest rate under Central Bank Circular No. 905 s. 1982 (which suspended the Usury Law ceiling on interest effective January 1, 1983), we stress that unconscionable interest rates may still be declared illegal.49

Under the best evidence rule, whenthe subject of inquiry is the contents of a document, no evidence isadmissible other than the original document itself except in the instances mentioned in Section 3, Rule 130 of the Revised Rules of Court.45 The records show that the respondenthad the custody of the original promissory note dated April 1, 1997, with a superimposed rubber stamp mark "June 30, 1997", and that it had been given every opportunity to present it. The respondent even admitted during pre-trial that it could not present the original promissory note because it is in the custody of its cashier who is stranded in Bicol.46 Since the respondent never produced the original of the promissory note, much less offered to produce it, the photocopy of the promissory note cannot be admitted as evidence. Other than the promissory note in question, the respondent has not presented any other evidence to support a finding of solidary liability. As we earlier noted, both lower courts completely relied on the note when they found the Bognot siblingssolidarily liable. The well-entrenched rule is that solidary obligation cannot be inferred lightly. It must be positively and clearly expressed and cannot be presumed.47 In view of the inadmissibility of the promissory note, and in the absence of evidence showing that the petitioner had bound himself solidarily with Rolando for the payment of the loan, we cannot but conclude that the obligation to pay is only joint.48

In several cases, we haveruled that stipulations authorizing iniquitous or unconscionable interests are contrary to morals and are illegal. In Medel v. Court of Appeals,50 we annulled a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan, and a 6% per month or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive, iniquitous, unconscionableand exorbitant.1âwphi1 We reiterated this ruling in Chua v. Timan,51 where we held that the stipulated interest rates of 3% per month and higher are excessive, iniquitous, unconscionable and exorbitant, and must therefore be reduced to 12% per annum. Applying these cited rulings, we now accordingly hold that the stipulated interest rate of 5% per month, (or 60% per annum) in the promissory note is excessive, unconscionable, contrary to morals and is thus illegal. It is void ab initiofor violating Article 130652 of the Civil Code.1âwphi1 We accordingly find it equitable to reduce the interest rate from 5% per month to 1% per month or 12% per annum in line with the prevailing jurisprudence.


WHEREFORE, premises considered, the Decision dated March 28, 2007 of the Court of Appeals in CA-G.R. CV No. 66915 is hereby AFFIRMED with MODIFICATION, as follows: 1. The petitioner Leonardo A. Bognotand his brother, Rolando A. Bognot are JOINTLY LIABLE to pay the sum of P500,000.00 plus 12% interest per annum from December 3, 1997 until fully paid. 2. The rest of the Court of Appeals' dispositions are hereby AFFIRMED. Costs against petitioner Leonardo A. Bognot. SO ORDERED. 75.

G.R. No. L-18390

August 6, 1971

PEDRO J. VELASCO, plaintiff-appellant, vs. MANILA ELECTRIC CO., WILLIAM SNYDER, its President; JOHN COTTON and HERMENEGILDO B. REYES, its Vice-Presidents; and ANASTACIO A. AGAN, City Engineer of Quezon City, defendants-appellees.

REYES, J.B.L., J.: The present case is direct appeal (prior to Republic Act 5440) by the herein plaintiff-appellant, Pedro J. Velasco (petitioner in L14035; respondent in L-13992) * from the decision of the Court

of First Instance of Rizal, Quezon City Branch, in its Civil Case No. 1355, absolving the defendants from a complaint for the abatement of the sub-station as a nuisance and for damages to his health and business in the amount of P487,600.00. In 1948, appellant Velasco bought from the People's Homesite and Housing Corporation three (3) adjoining lots situated at the corner of South D and South 6 Streets, Diliman, Quezon City. These lots are within an area zoned out as a "first residence" district by the City Council of Quezon City. Subsequently, the appellant sold two (2) lots to the Meralco, but retained the third lot, which was farthest from the street-corner, whereon he built his house. In September, 1953, the appellee company started the construction of the sub-station in question and finished it the following November, without prior building permit or authority from the Public Service Commission (Meralco vs. Public Service Commission, 109 Phil. 603). The facility reduces high voltage electricity to a current suitable for distribution to the company's consumers, numbering not less than 8,500 residential homes, over 300 commercial establishments and about 30 industries (T.s.n., 19 October 1959, page 1765). The substation has a rated capacity of "2 transformers at 5000 Kva each or a total of 10,000 Kva without fan cooling; or 6250 Kva each or a total of 12,500 Kva with fan cooling" (Exhibit "A-3"). It was constructed at a distance of 10 to 20 meters from the appellant's house (T.s.n., 16 July 1956, page 62; 19 December 1956, page 343; 1 June 1959, page 29). The company built a stone and cement wall at the sides along the streets but along the side adjoining the appellant's property it put up a sawale wall but later changed it to an interlink wire fence. It is undisputed that a sound unceasingly emanates from the substation. Whether this sound constitutes an actionable nuisance or not is the principal issue in this case.


Plaintiff-appellant Velasco contends that the sound constitutes an actionable nuisance under Article 694 of the Civil Code of the Philippines, reading as follows: A nuisance is any act, omission, establishment, business condition of property or anything else which: (1) Injuries or endangers the health or safety of others; or (2) Annoys or offends the senses; xxx xxx xxx because subjection to the sound since 1954 had disturbed the concentration and sleep of said appellant, and impaired his health and lowered the value of his property. Wherefore, he sought a judicial decree for the abatement of the nuisance and asked that he be declared entitled to recover compensatory, moral and other damages under Article 2202 of the Civil Code. ART. 2202. In crimes and quasi-delicts, the defendant shall be liable for all damages which are the natural and probable consequences of the act or omission complained of. It is not necessary that such damages have been foreseen or could have reasonably been foreseen by the defendant. After trial, as already observed, the court below dismissed the claim of the plaintiff, finding that the sound of substation was unavoidable and did not constitute nuisance; that it could not have caused the diseases of anxiety neurosis, pyelonephritis, ureteritis, lumbago and anemia; and that the items of damage claimed by plaintiff were not adequate proved. Plaintiff then appealed to this Court.

The general rule is that everyone is bound to bear the habitual or customary inconveniences that result from the proximity of others, and so long as this level is not surpassed, he may not complain against them. But if the prejudice exceeds the inconveniences that such proximity habitually brings, the neighbor who causes such disturbance is held responsible for the resulting damage, 1 being guilty of causing nuisance. While no previous adjudications on the specific issue have been made in the Philippines, our law of nuisances is of American origin, and a review of authorities clearly indicates the rule to be that the causing or maintenance of disturbing noise or sound may constitute an actionable nuisance (V. Ed. Note, 23 ALR, 2d 1289). The basic principles are laid down in Tortorella vs. Traiser & Co., Inc., 90 ALR 1206: A noise may constitute an actionable nuisance, Rogers vs. Elliott, 146 Mass, 349, 15 N.E. 768, 4 Am. St. Rep. 316, Stevens v. Rockport Granite Co., 216 Mass. 486, 104 N.E. 371, Ann. Cas. 1915B, 1954, Stodder v. Rosen Talking Machine Co., 241 Mass. 245, 135 N. E. 251, 22 A. L. R. 1197, but it must be a noise which affects injuriously the health or comfort of ordinary people in the vicinity to an unreasonable extent. Injury to a particular person in a peculiar position or of specially sensitive characteristics will not render the noise an actionable nuisance. Rogers v. Elliott, 146 Mass. 349, 15 N. E. 768, 4 Am. St. Rep. 316. In the conditions of present living noise seems inseparable from the conduct of many necessary occupations. Its presence is a nuisance in the popular sense in which that word is used, but in the absence of statute noise becomes actionable only when it passes the limits of reasonable adjustment to the conditions of the locality and of the needs of the maker to the needs of the listener. What those limits are cannot be fixed by any definite measure of quantity or quality. They depend upon the circumstances of the particular case. They may be affected, but are not controlled, by zoning ordinances. Beane v. H. J. Porter, Inc., 280 Mass. 538, 182 N. E.


823, Marshal v. Holbrook, 276 Mass. 341, 177 N. E. 504, Strachan v. Beacon Oil Co., 251 Mass. 479, 146 N. E. 787. The delimitation of designated areas to use for manufacturing, industry or general business is not a license to emit every noise profitably attending the conduct of any one of them. Bean v. H. J. Porter, Inc.. 280 Mass. 538, 182 N. E. 823. The test is whether rights of property of health or of comfort are so injuriously affected by the noise in question that the sufferer is subjected to a loss which goes beyond the reasonable limit imposed upon him by the condition of living, or of holding property, in a particular locality in fact devoted to uses which involve the emission of noise although ordinary care is taken to confine it within reasonable bounds; or in the vicinity of property of another owner who though creating a noise is acting with reasonable regard for the rights of those affected by it. Stevens v. Rockport Granite Co., 216 Mass. 486, 104 NE 371, Ann. Cas. 1915B, 1054. With particular reference to noise emanating from electrical machinery and appliances, the court, in Kentucky & West Virginia Power Co. v. Anderson, 156 S. W. 2d 857, after a review of authorities, ruled as follows: There can be no doubt but that commercial and industrial activities which are lawful in themselves may become nuisances if they are so offensive to the senses that they render the enjoyment of life and property uncomfortable. It is no defense that skill and care have been exercised and the most improved methods and appliances employed to prevent such result. Wheat Culvert Company v. Jenkins, 246 Ky. 319, 55 S. W. 2d 4; 46 C.J. 683, 705; 20 R. C. L. 438; Annotations, 23 A. L. R. 1407; 90 A. L. R. 1207. Of course, the creation of trifling annoyance and inconvenience does not constitute an actionable nuisance, and the locality and surroundings are of importance. The fact that the cause of the complaint must be substantial has often led to expressions in the opinions that to be a nuisance the noise must be deafening or loud or excessive and unreasonable. Usually it

was shown to be of that character. The determinating factor when noise alone is the cause of complaint is not its intensity or volume. It is that the noise is of such character as to produce actual physical discomfort and annoyance to a person of ordinary sensibilities, rendering adjacent property less comfortable and valuable. If the noise does that it can well be said to be substantial and unreasonable in degree; and reasonableness is a question of fact dependent upon all the circumstances and conditions. 20 R. C. L. 445, 453; Wheat Culvert Company v. Jenkins, supra. There can be no fixed standard as to what kind of noise constitutes a nuisance. It is true some witnesses in this case say they have been annoyed by the humming of these transformers, but that fact is not conclusive as to the nonexistence of the cause of complaint, the test being the effect which is had upon an ordinary person who is neither sensitive nor immune to the annoyance concerning which the complaint is made. In the absence of evidence that the complainant and his family are supersensitive to distracting noises, it is to be assumed that they are persons of ordinary and normal sensibilities. Roukovina v. Island Farm Creamery Company, 160 Minn. 335, 200 N. W. 350, 38 A. L. R. 1502. xxx xxx xxx In Wheat Culvert Company vs. Jenkins, supra, we held an injunction was properly decreed to stop the noise from the operation of a metal culvert factory at night which interfered with the sleep of the occupants of an adjacent residence. It is true the clanging, riveting and hammering of metal plates produces a sound different in character from the steady hum or buzz of the electric machinery described in this case. In the Jenkins case the noise was loud, discordant and intermittent. Here it is interminable and monotonous. Therein lies the physical annoyance and disturbance. Though the noise be harmonious and slight and trivial in itself, the constant and monotonous sound of a cricket on the earth, or the drip of a leaking faucet is


irritating, uncomfortable, distracting and disturbing to the average man and woman. So it is that the intolerable, steady monotony of this ceaseless sound, loud enough to interfere with ordinary conversation in the dwelling, produces a result generally deemed sufficient to constitute the cause of it an actionable nuisance. Thus, it has been held the continuous and monotonous playing of a phonograph for advertising purposes on the street even though there were various records, singing, speaking and instrumental, injuriously affected plaintiff's employees by a gradual wear on their nervous systems, and otherwise, is a nuisance authorizing an injunction and damages. Frank F. Stodder, et al. v. Rosen Talking Machine Company, 241 Mass. 245, 135 N. E. 251, 22 A. L. R. 1197. The principles thus laid down make it readily apparent that inquiry must be directed at the character and intensity of the noise generated by the particular substation of the appellee. As can be anticipated, character and loudness of sound being of subjective appreciation in ordinary witnesses, not much help can be obtained from the testimonial evidence. That of plaintiff Velasco is too plainly biased and emotional to be of much value. His exaggerations are readily apparent in paragraph V of his amended complaint, signed by him as well as his counsel, wherein the noise complained of as — fearful hazardous noise and clangor are produced by the said electric transformer of the MEC's substation, approximating a noise of a reactivated about-to-explode volcano, perhaps like the nerve wracking noise of the torture chamber in Germany's Dachau or Buchenwald (Record on Appeal, page 6). The estimate of the other witnesses on the point of inquiry are vague and imprecise, and fail to give a definite idea of the intensity of the sound complained of. Thus:

OSCAR SANTOS, Chief Building Inspector, Department of Engineering, Quezon City ____ "the sound (at the front door of plaintiff Velasco's house) becomes noticeable only when I tried to concentrate ........" (T.s.n., 16 July 1956, page 50) SERAFIN VILLARAZA, Building Inspector ____ "..... like a high pitch note." (the trial court's description as to the imitation of noise made by witness:"........ more of a hissing sound) (T.s.n., 16 July 1956, pages 59-60) CONSTANCIO SORIA, City Electrician ____ "........ humming sound" ..... "of a running car". (T.s.n., 16 July 1956, page 87) JOSE R. ALVAREZ, Sanitary Engineer, Quezon City Health Department ____ "..... substation emits a continuous rumbling sound which is audible within the premises and at about a radius of 70 meters." "I stayed there from 6:00 p.m. to about 1:00 o'clock in the morning" ..... "increases with the approach of twilight." (T.s.n., 5 September 1956, pages 40-44) NORBERTO S. AMORANTO, Quezon City Mayor ____ (for 30 minutes in the street at a distance of 12 to 15 meters from substation) "I felt no effect on myself." "..... no [piercing noise]" (T.s.n., 18 September 1956, page 189) PACIFICO AUSTRIA, architect, appellant's neighbor: "..... like an approaching airplane ..... around five kilometers away." (T.s.n., 19 November 1956, pages 276-277) ANGEL DEL ROSARIO, radiologist, appellant's neighbor: "..... as if it is a running motor or a running dynamo, which disturbs the ear and the hearing of a person." T.s.n., 4 December 1956, page 21) ANTONIO D. PAGUIA, lawyer ____ "It may be likened to the sound emitted by the whistle of a boat at a far distance but it is very audible." (T.s.n., 19 December 1956, page 309)


RENE RODRIGUEZ, sugar planter and sugar broker, appellant's neighbor ____ "It sounds like a big motor running continuously." (T.s.n., 19 December 1956, page 347) SIMPLICIO BELISARIO, Army captain, ____ (on a visit to Velasco) "I can compare the noise to an airplane C-47 being started - the motor." [Did not notice the noise from the substation when passing by, in a car, Velasco's house] (T.s.n., 7 January 1957, pages 11-12) MANOLO CONSTANTINO, businessman, appellant's neighbor ____ "It disturbs our concentration of mind." (T.s.n., 10 January 1957, page 11) PEDRO PICA, businessman, appellant's neighbor: "..... We can hear it very well [at a distance of 100 to 150 meters]. (T.s.n., 10 January 1957, page 41) CIRENEO PUNZALAN, lawyer ____ "..... a continuous droning, ..... like the sound of an airplane." (T.s.n., 17 January 1957, page 385) JAIME C. ZAGUIRRE, Chief, Neuro-Psychiatry Section, V. Luna Gen. Hospital ____ "..... comparatively the sound was really loud to bother a man sleeping." (T.s.n., 17 January 1957, page 406) We are thus constrained to rely on quantitative measurements shown by the record. Under instructions from the Director of Health, samplings of the sound intensity were taken by Dr. Jesus Almonte using a sound level meter and other instruments. Within the compound of the plaintiff-appellant, near the wire fence serving as property line between him and the appellee, on 27 August 1957 at 11:45 a.m., the sound level under the sampaloc tree was 46-48 decibels, while behind Velasco's kitchen, the meter registered 49-50; at the same places on 29 August 1957, at 6:00 a.m., the readings were 56-59 and 61-62 decibels,

respectively; on 7 September 1957, at 9:30 a.m., the sound level under the sampaloc tree was 74-76 decibels; and on 8 September 1957 at 3:35 in the morning, the reading under the same tree was 70 decibels, while near the kitchen it was 79-80 decibels. Several measurements were also taken inside and outside the house (Exhibit "NN-7, b-f"). The ambient sound of the locality, or that sound level characteristic of it or that sound predominating minus the sound of the sub-station is from 28 to 32 decibels. (T.s.n., 26 March 1958, pages 6-7) Mamerto Buenafe, superintendent of the appellee's electrical laboratory, also took sound level samplings. On 19 December 1958, between 7:00 to 7:30 o'clock in the evening, at the substation compound near the wire fence or property line, the readings were 55 and 54 and still near the fence close to the sampaloc tree, it was 52 decibels; outside but close to the concrete wall, the readings were 42 to 43 decibels; and near the transformers, it was 76 decibels (Exhibit "13"). Buenafe also took samplings at the North General Hospital on 4 January 1959 between 9:05 to 9:45 in the evening. In the different rooms and wards from the first to the fourth floors, the readings varied from 45 to 67 decibels. Technical charts submitted in evidence show the following intensity levels in decibels of some familiar sounds: average residence: 40; average office: 55; average automobile, 15 feet: 70; noisiest spot at Niagara Falls: 92 (Exhibit "11- B"); average dwelling: 35; quiet office: 40; average office: 50; conversation: 60; pneumatic rock drill: 130 (Exhibit "12"); quiet home — average living room: 40; home ventilation fan, outside sound of good home airconditioner or automobile at 50 feet: 70 (Exhibit "15-A"). Thus the impartial and objective evidence points to the sound emitted by the appellee's substation transformers being of much


higher level than the ambient sound of the locality. The measurements taken by Dr. Almonte, who is not connected with either party, and is a physician to boot (unlike appellee's electrical superintendent Buenafe), appear more reliable. The conclusion must be that, contrary to the finding of the trial court, the noise continuously emitted, day and night, constitutes an actionable nuisance for which the appellant is entitled to relief, by requiring the appellee company to adopt the necessary measures to deaden or reduce the sound at the plaintiff's house, by replacing the interlink wire fence with a partition made of sound absorbent material, since the relocation of the substation is manifestly impracticable and would be prejudicial to the customers of the Electric Company who are being serviced from the substation. Appellee company insists that as the plaintiff's own evidence (Exhibit "NN-7[c]") the intensity of the sound (as measured by Dr. Almonte) inside appellant's house is only 46 to 47 decibels at the consultation room, and 43 to 45 decibels within the treatment room, the appellant had no ground to complain. This argument is not meritorious, because the noise at the bedrooms was determined to be around 64-65 decibels, and the medical evidence is to the effect that the basic root of the appellant's ailments was his inability to sleep due to the incessant noise with consequent irritation, thus weakening his constitution and making him easy prey to pathogenic germs that could not otherwise affect a person of normal health. In Kentucky and West Virginia Co., Inc. vs. Anderson, 156 SW. 857, the average of three readings along the plaintiff's fence was only 44 decibels but, because the sound from the sub-station was interminable and monotonous, the court authorized an injunction and damages. In the present case, the three readings along the property line are 52, 54 and 55 decibels. Plaintiff's case is manifestly stronger.

Appellee company argues that the plaintiff should not be heard to complain because the sound level at the North General Hospital, where silence is observed, is even higher than at his residence. This comparison lacks basis because it has not been established that the hospital is located in surroundings similar to the residential zone where the plaintiff lived or that the sound at the hospital is similarly monotonous and ceaseless as the sound emitted by the sub-station. Constancio Soria testified that "The way the transformers are built, the humming sound cannot be avoided". On this testimony, the company emphasizes that the substation was constructed for public convenience. Admitting that the sound cannot be eliminated, there is no proof that it cannot be reduced. That the sub-station is needed for the Meralco to be able to serve well its customers is no reason, however, why it should be operated to the detriment and discomfort of others. 2 The fact that the Meralco had received no complaint although it had been operating hereabouts for the past 50 years with substations similar to the one in controversy is not a valid argument. The absence of suit neither lessens the company's liability under the law nor weakens the right of others against it to demand their just due. As to the damages caused by the noise, appellant Velasco, himself a physician, claimed that the noise, as a precipitating factor, has caused him anxiety neurosis, which, in turn, predisposed him to, or is concomitant with, the other ailments which he was suffering at the time of the trial, namely, pyelonephritis, ureteritis and others; that these resulted in the loss of his professional income and reduced his life expectancy. The breakdown of his claims is as follows: Loss of professional earnings P12,600 Damage to life expectancy 180,000


Moral damages 100,000 Loss due to frustration of sale of house 125,000 Exemplary damages 25,000 Attorneys' fees 45,000 A host of expert witnesses and voluminous medical literature, laboratory findings and statistics of income were introduced in support of the above claims. The medical evidence of plaintiff's doctors preponderates over the expert evidence for defendant-appellee, not merely because of its positive character but also because the physicians presented by plaintiff had actually treated him, while the defense experts had not done so. Thus the evidence of the latter was to a large extent conjectural. That appellant's physical ailments should be due to infectious organisms does not alter the fact that the loss of sleep, irritation and tension due to excessive noise weakened his constitution and made him easy prey to the infection. Regarding the amount of damages claimed by appellant, it is plain that the same are exaggerated. To begin with, the alleged loss of earnings at the rate of P19,000 per annum is predicated on the Internal Revenue assessment, Exhibit "QQ-1", wherein appellant was found to have undeclared income of P8,338.20 in additional to his declared gross income of P10,975.00 for 1954. There is no competent showing, however, that the source of such undeclared income was appellant's profession. In fact, the inference would be to the contrary, for his gross income from the previous years 1951 to 1953 [Exhibits "QQ-1 (d)" to "QQ-1 (f)"] was only P8,085.00, P5,860.00 and P7,120.00, respectively, an average of P7,000.00 per annum. Moreover, while his 1947 and 1948 income was larger (P9,995.00 and P11,900.00), it appears that P5,000 thereof was the appellant's annual salary from the Quezon Memorial Foundation, which was not really connected with the usual earnings derived from practice as a physician.

Considering, therefore, his actual earnings, the claimed moral damages of P100,000.00 are utterly disproportionate. The alleged losses for shortening of appellant's, life expectancy are not only inflated but speculative. As to the demand for exemplary or punitive damages, there appears no adequate basis for their award. While the appellee Manila Electric Company was convicted for erecting the substation in question without permit from the Public Service Commission, We find reasonable its explanation that its officials and counsel had originally deemed that such permit was not required as the installation was authorized by the terms of its franchise (as amended by Republic Act No. 150) requiring it to spend within 5 years not less than forty million pesos for maintenance and additions to its electric system, including needed power plants and substations. Neither the absence of such permit from the Public Service Commission nor the lack of permit from the Quezon City authorities (a permit that was subsequently granted) is incompatible with the Company's good faith, until the courts finally ruled that its interpretation of the franchise was incorrect. There are, moreover, several factors that mitigate defendant's liability in damages. The first is that the noise from the substation does not appear to be an exclusive causative factor of plaintiffappellant's illnesses. This is proved by the circumstance that no other person in Velasco's own household nor in his immediate neighborhood was shown to have become sick despite the noise complained of. There is also evidence that at the time the plaintiff-appellant appears to have been largely indebted to various credit institutions, as a result of his unsuccessful gubernatorial campaign, and this court can take judicial cognizance of the fact that financial worries can affect unfavorably the debtor's disposition and mentality.


The other factor militating against full recovery by the petitioner Velasco in his passivity in the face of the damage caused to him by the noise of the substation. Realizing as a physician that the latter was disturbing or depriving him of sleep and affecting both his physical and mental well being, he did not take any steps to bring action to abate the nuisance or remove himself from the affected area as soon as the deleterious effects became noticeable. To evade them appellant did not even have to sell his house; he could have leased it and rented other premises for sleeping and maintaining his office and thus preserve his health as ordinary prudence demanded. Instead he obstinately stayed until his health became gravely affected, apparently hoping that he would thereby saddle appellee with large damages. The law in this jurisdiction is clear. Article 2203 prescribes that "The party suffering loss or injury must exercise the diligence of a good father of a family to minimize the damages resulting from the act or omission in question". This codal rule, which embodies the previous jurisprudence on the point, 3 clearly obligates the injured party to undertake measures that will alleviate and not aggravate his condition after the infliction of the injury, and places upon him the burden of explaining why he could not do so. This was not done. Appellant Velasco introduced evidence to the effect that he tried to sell his house to Jose Valencia, Jr., in September, 1953, and on a 60 day option, for P95,000.00, but that the prospective buyer backed out on account of his wife objecting to the noise of the substation. There is no reliable evidence, however, how much were appellant's lot and house worth, either before the option was given to Valencia or after he refused to proceed with the sale or even during the intervening period. The existence of a previous offer for P125,000.00, as claimed by the plaintiff, was not corroborated by Valencia. What Valencia testified to in his deposition is that when they were negotiating on the price Velasco mentioned to him about an offer by someone for

P125,000.00. The testimony of Valencia proves that in the dialogue between him and Velasco, part of the subject of their conversation was about the prior offer, but it does not corroborate or prove the reality of the offer for P125,000.00. The testimony of Velasco on this point, standing alone, is not credible enough, what with his penchant for metaphor and exaggeration, as previously adverted to. It is urged in appellant's brief, along the lines of his own testimony, that since one (1) transformer was measured by witness, Jimenez with a noise intensity of 47.2 decibels at a distance of 30.48 meters, the two (2) transformers of the substation should create an intensity of 94.4 decibels at the same distance. If this were true, then the residence of the plaintiff is more noisy than the noisiest spot at the Niagara Falls, which registers only 92 decibels (Exhibit "15-A"). Since there is no evidence upon which to compute any loss or damage allegedly incurred by the plaintiff by the frustration of the sale on account of the noise, his claim therefore was correctly disallowed by the trial court. It may be added that there is no showing of any further attempts on the part of appellant to dispose of the house, and this fact suffices to raise doubts as to whether he truly intended to dispose of it. He had no actual need to do so in order to escape deterioration of his health, as heretofore noted. Despite the wide gap between what was claimed and what was proved, the plaintiff is entitled to damages for the annoyance and adverse effects suffered by him since the substation started functioning in January, 1954. Considering all the circumstances disclosed by the record, as well as appellant's failure to minimize the deleterious influences from the substation, this Court is of the opinion that an award in the amount of P20,000.00, by way of moderate and moral damages up to the present, is reasonable. Recovery of attorney's fees and litigation expenses in the sum of P5,000.00 is also


justified — the factual and legal issues were intricate (the transcript of the stenographic notes is about 5,000 pages, side from an impressive number of exhibits), and raised for the first time in this jurisdiction. 4 The last issue is whether the City Engineer of Quezon City, Anastacio A. Agan, a co-defendant, may be held solidarily liable with Meralco. Agan was included as a party defendant because he allegedly (1) did not require the Meralco to secure a building permit for the construction of the substation; (2) even defended its construction by not insisting on such building permit; and (3) did not initiate its removal or demolition and the criminal prosecution of the officials of the Meralco. The record does not support these allegations. On the first plea, it was not Agan's duty to require the Meralco to secure a permit before the construction but for Meralco to apply for it, as per Section 1. Ordinance No. 1530, of Quezon City. The second allegation is not true, because Agan wrote the Meralco requiring it to submit the plan and to pay permit fees (T.s.n., 14 January 1960, pages 2081-2082). On the third allegation, no law or ordinance has been cited specifying that it is the city engineer's duty to initiate the removal or demolition of, or for the criminal prosecution of, those persons who are responsible for the nuisance. Republic Act 537, Section 24 (d), relied upon by the plaintiff, requires an order by, or previous approval of, the mayor for the city engineer to cause or order the removal of buildings or structures in violation of law or ordinances, but the mayor could not be expected to take action because he was of the belief, as he testified, that the sound "did not have any effect on his body." FOR THE FOREGOING REASONS, the appealed decision is hereby reversed in part and affirmed in part. The defendant-appellee Manila Electric Company is hereby ordered to either transfer its

substation at South D and South 6 Streets, Diliman, Quezon City, or take appropriate measures to reduce its noise at the property line between the defendant company's compound and that of the plaintiff-appellant to an average of forty (40) to fifty (50) decibels within 90 days from finality of this decision; and to pay the said plaintiff-appellant P20,000.00 in damages and P5,000.00 for attorney's fees. In all other respects, the appealed decision is affirmed. No costs. 76. G.R. No. L-36706 March 31, 1980 COMMISSIONER OF PUBLIC HlGHWAYS, petitioner, vs. HON. FRANCISCO P. BURGOS, in his capacity as Judge of the Court of First Instance of Cebu City, Branch 11, and Victoria Amigable, respondents. DE CASTRO, J.: Victoria Amigable is the owner of parcel of land situated in Cebu City with an area of 6,167 square meters. Sometime in 1924, the Government took this land for road-right-of-way purpose. The land had since become streets known as Mango Avenue and Gorordo Avenue in Cebu City. On February 6, 1959, Victoria Amigable filed in the Court of First Instance of Cebu a complaint, which was later amended on April 17, 1959 to recover ownership and possession of the land, and for damages in the sum of P50,000.00 for the alleged illegal occupation of the land by the Government, moral damages in the sum of P25,000.00, and attorney's fees in the sum of P5,000.00, plus costs of suit. The complaint was docketed as Civil Case No. R5977 of the Court of First Instance of Cebu, entitled "Victoria


Amigable vs. Nicolas Cuenca, in his capacity as Commissioner of Public Highway and Republic of the Philippines. 1 In its answer, 2 the Republic alleged, among others, that the land was either donated or sold by its owners to the province of Cebu to enhance its value, and that in any case, the right of the owner, if any, to recover the value of said property was already barred by estoppel and the statute of limitations, defendants also invoking the non-suability of the Government. In a decision rendered on July 29, 1959 by Judge Amador E. Gomez, the plaintiff's complaint was dismissed on the grounds relied upon by the defendants therein. 3 The plaintiff appealed the decision to the Supreme Court where it was reversed, and the case was remanded to the court of origin for the determination of the compensation to be paid the plaintiff-appellant as owner of the land, including attorney's fees. 4 The Supreme Court decision also directed that to determine just compensation for the land, the basis should be the price or value thereof at the time of the taking. 5 In the hearing held pursuant to the decision of the Supreme Court, the Government proved the value of the property at the time of the taking thereof in 1924 with certified copies, issued by the Bureau of Records Management, of deeds of conveyance executed in 1924 or thereabouts, of several parcels of land in the Banilad Friar Lands in which the property in question is located, showing the price to be at P2.37 per square meter. For her part, Victoria Amigable presented newspaper clippings of the Manila Times showing the value of the peso to the dollar obtaining about the middle of 1972, which was P6.775 to a dollar. Upon consideration of the evidence presented by both parties, the court which is now the public respondent in the instant petition, rendered judgment on January 9, 1973 directing the Republic of the Philippines to pay Victoria Amigable the sum of

P49,459.34 as the value of the property taken, plus P145,410.44 representing interest at 6% on the principal amount of P49,459.34 from the year 1924 up to the date of the decision, plus attorney's fees of 10% of the total amount due to Victoria Amigable, or a grand total of P214,356.75. 6 The aforesaid decision of the respondent court is now the subject of the present petition for review by certiorari, filed by the Solicitor General as counsel of the petitioner, Republic of the Philippines, against the landowner, Victoria Amigable, as private respondent. The petition was given due course after respondents had filed their comment thereto, as required. The Solicitor General, as counsel of petitioner, was then required to file petitioner's brief and to serve copies thereof to the adverse parties. 7 Petitioner's brief was duly filed on January 29, 1974, 8 to which respondents filed only a "comment." 9 instead of a brief, and the case was then considered submitted for decision. 10 1. The issue of whether or not the provision of Article 1250 of the New Civil Code is applicable in determining the amount of compensation to be paid to respondent Victoria Amigable for the property taken is raised because the respondent court applied said Article by considering the value of the peso to the dollar at the time of hearing, in determining due compensation to be paid for the property taken. The Solicitor General contends that in so doing, the respondent court violated the order of this Court, in its decision in G.R. No. L-26400, February 29, 1972, to make as basis of the determination of just compensation the price or value of the land at the time of the taking. It is to be noted that respondent judge did consider the value of the property at the time of the taking, which as proven by the petitioner was P2.37 per square meter in 1924. However, applying Article 1250 of the New Civil Code, and considering that the value of the peso to the dollar during the hearing in 1972 was P6.775 to a dollar, as proven by the evidence of the private


respondent Victoria Amigable the Court fixed the value of the property at the deflated value of the peso in relation, to the dollar, and came up with the sum of P49,459.34 as the just compensation to be paid by the Government. To this action of the respondent judge, the Solicitor General has taken exception. Article 1250 of the New Civil Code seems to be the only provision in our statutes which provides for payment of an obligation in an amount different from what has been agreed upon by the parties because of the supervention of extra-ordinary inflation or deflation. Thus, the Article provides: ART. 1250. In case extra-ordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. It is clear that the foregoing provision applies only to cases where a contract or agreement is involved. It does not apply where the obligation to pay arises from law, independent of contract. The taking of private property by the Government in the exercise of its power of eminent domain does not give rise to a contractual obligation. We have expressed this view in the case of Velasco vs. Manila Electric Co., et al., L-19390, December 29, 1971. 11 Moreover, the law as quoted, clearly provides that the value of the currency at the time of the establishment of the obligation shall be the basis of payment which, in cases of expropriation, would be the value of the peso at the time of the taking of the property when the obligation of the Government to pay arises. 12 It is only when there is an "agreement to the contrary" that the extraordinary inflation will make the value of the currency at the time of payment, not at the time of the establishment of the obligation, the basis for payment. In other words, an agreement is needed for the effects of an extraordinary inflation to be taken into account to alter the value of the currency at the time of the

establishment of the obligation which, as a rule, is always the determinative element, to be varied by agreement that would find reason only in the supervention of extraordinary inflation or deflation. We hold, therefore, that under the law, in the absence of any agreement to the contrary, even assuming that there has been an extraordinary inflation within the meaning of Article 1250 of the New Civil Code, a fact We decline to declare categorically, the value of the peso at the time of the establishment of the obligation, which in the instant case is when the property was taken possession of by the Government, must be considered for the purpose of determining just compensation. Obviously, there can be no "agreement to the contrary" to speak of because the obligation of the Government sought to be enforced in the present action does not originate from contract, but from law which, generally is not subject to the will of the parties. And there being no other legal provision cited which would justify a departure from the rule that just compensation is determined on the basis of the value of the property at the time of the taking thereof in expropriation by the Government, the value of the property as it is when the Government took possession of the land in question, not the increased value resulting from the passage of time which invariably brings unearned increment to landed properties, represents the true value to be paid as just compensation for the property taken. 13 In the present case, the unusually long delay of private respondent in bringing the present action-period of almost 25 years which a stricter application of the law on estoppel and the statute of limitations and prescription may have divested her of the rights she seeks on this action over the property in question, is an added circumstance militating against payment to her of an amount bigger-may three-fold more than the value of the property as should have been paid at the time of the taking. For conformably to the rule that one should take good care of his own


concern, private respondent should have commenced proper action soon after she had been deprived of her right of ownership and possession over the land, a deprivation she knew was permanent in character, for the land was intended for, and had become, avenues in the City of Cebu. A penalty is always visited upon one for his inaction, neglect or laches in the assertion of his rights allegedly withheld from him, or otherwise transgressed upon by another. From what has been said, the correct amount of compensation due private respondent for the taking of her land for a public purpose would be not P49,459.34, as fixed by the respondent court, but only P14,615.79 at P2.37 per square meter, the actual value of the land of 6,167 square meters when it was taken in 1924. The interest in the sum of P145,410.44 at the rate of 6% from 1924 up to the time respondent court rendered its decision, as was awarded by the said court should accordingly be reduced. In Our decision in G.R. No. L-26400, February 29, 1972, 14 We have said that Victoria Amigable is entitled to the legal interest on the price of the land from the time of the taking. This holding is however contested by the Solicitor General, citing the case of Raymunda S. Digsan vs. Auditor General, et al., 15 alleged to have a similar factual environment and involving the same issues, where this Court declared that the interest at the legal rate in favor of the landowner accrued not from the taking of the property in 1924 but from April 20, 1961 when the claim for compensation was filed with the Auditor General. Whether the ruling in the case cited is still the prevailing doctrine, what was said in the decision of this Court in the abovecited case involving the same on the instant matter, has become the "law of the case", no motion for its reconsideration having been filed by the Solicitor General before the decision became final. Accordingly, the interest to be paid private respondent, Victoria Amigable, shall commence from 1924, when the taking of the property took

place, computed on the basis of P14,615.79, the value of the land when taken in said year 1924. 2. On the amount of attorney's fees to be paid private respondent, about which the Solicitor General has next taken issue with the respondent court because the latter fixed the same at P19,486.97, while in her complaint, respondent Amigable had asked for only P5,000.00, the amount as awarded by the respondent court, would be too exhorbitant based as it is, on the inflated value of the land. An attorney's fees of P5,000.00, which is the amount asked for by private respondent herself in her complaint, would be reasonable. WHEREFORE, the judgment appealed from is hereby reversed as to the basis in the determination of the price of the land taken as just compensation for its expropriation, which should be the value of the land at the time of the taking, in 1924. Accordingly, the same is hereby fixed at P14,615.79 at P2.37 per square meter, with interest thereon at 6% per annum, from the taking of the property in 1924, to be also paid by Government to private respondent, Victoria Amigable, until the amount due is fully paid, plus attorney's fees of P5,000.00. 77. G.R. No. L-43446 May 3, 1988 FILIPINO PIPE AND FOUNDRY CORPORATION, plaintiff-appellant, vs. NATIONAL WATERWORKS AND SEWERAGE AUTHORITY, defendant-appellee. GRIÑO-AQUINO, J.:


The plaintiff Filipino Pipe and Foundry Corporation (hereinafter referred to as "FPFC" for brevity) appealed the dismissal of its complaint against defendant National Waterworks and Sewerage Authority (NAWASA) by the Court of First Instance of Manila on September 5, 1973. The appeal was originally brought to the Court of Appeals. However, finding that the principal purpose of the action was to secure a judicial declaration that there exists 'extraordinary inflation' within the meaning of Article 1250 of the New Civil Code to warrant the application of that provision, the Court of Appeals, pursuant to Section 3, Rule 50 of the Rules of Court, certified the case to this Court for proper disposition. On June 12,1961, the NAWASA entered into a contract with the plaintiff FPFC for the latter to supply it with 4" and 6" diameter centrifugally cast iron pressure pipes worth P270,187.50 to be used in the construction of the Anonoy Waterworks in Masbate and the Barrio San Andres-Villareal Waterworks in Samar. Defendant NAWASA paid in installments on various dates, a total of One Hundred Thirty-Four Thousand and Six Hundred Eighty Pesos (P134,680.00) leaving a balance of One Hundred ThirtyFive Thousand, Five Hundred Seven Pesos and Fifty centavos (P135,507.50) excluding interest. Having completed the delivery of the pipes, the plaintiff demanded payment from the defendant of the unpaid balance of the price with interest in accordance with the terms of their contract. When the NAWASA failed to pay the balance of its account, the plaintiff filed a collection suit on March 16, 1967 which was docketed as Civil Case No. 66784 in the Court of First Instance of Manila. On November 23, 1967, the trial court rendered judgment in Civil Case No. 66784 ordering the defendant to pay the unpaid balance of P135,507.50 in NAWASA negotiable bonds, redeemable after ten years from their issuance with interest at 6% per annum, P40,944.73 as interest up to March 15, 1966 and the interest accruing thereafter to the issuance of the bonds at 6% per annum and the costs. Defendant, however, failed to satisfy the decision. It

did not deliver the bonds to the judgment creditor. On February 18, 1971, the plaintiff FPFC filed another complaint which was docketed as Civil Case No. 82296, seeking an adjustment of the unpaid balance in accordance with the value of the Philippine peso when the decision in Civil Case No. 66784 was rendered on November 23, 1967. On May 3, 1971, the defendant filed a motion to dismiss the complaint on the ground that it is barred by the 1967 decision in Civil Case No. 66784. The trial court, in its order dated May 26, 1971, denied the motion to dismiss on the ground that the bar by prior judgment did not apply to the case because the causes of action in the two cases are different: the first action being for collection of the defendant's indebtedness for the pipes, while the second case is for adjustment of the value of said judgment due to alleged supervening extraordinary inflation of the Philippine peso which has reduced the value of the bonds paid to the plaintiff. Article 1250 of the Civil Code provides: In case an extraordinary inflation or deflation of the currency stipulated should supervene, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.. The court suggested to the parties during the trial that they present expert testimony to help it in deciding whether the economic conditions then, and still prevailing, would justify the application of Article 1250 of the Civil Code. The plaintiff presented voluminous records and statistics showing that a spiralling inflation has marked the progress of the country from 1962 up to the present. There is no denying that the price index of commodities, which is the usual evidence of the value of the currency has been rising.


The trial court pointed out, however, than this is a worldwide occurence, but hardly proof that the inflation is extraordinary in the sense contemplated by Article 1250 of the Civil Code, which was adopted by the Code Commission to provide "a just solution" to the "uncertainty and confusion as a result of Malabanan contracts entered into or payments made during the last war." (Report of the Code Commission, 132-133.) Noting that the situation situation during the Japanese Occupation "cannot that the be compared with the economic conditions today," the a. Malabanan trial court, on September 5, 1973, rendered judgment dismissing the complaint. The only issue before Us whether, on the basis of the continously spiralling price index indisputably shown by the plaintiff, there exists an extraordinary inflation of the currency justifying an adjustment of defendant appellee's unpaid judgment obligation the plaintiff-appellant. Extraordinary inflation exists "when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value said currency, and such decrease or increase could not have reasonably foreseen or was manifestly beyond contemplation the the parties at the time of the establishment of the obligation. (Tolentino Commentaries and Jurisprudence on the Civil Code Vol. IV, p. 284.) An example of extraordinary inflation is the following description of what happened to the Deutschmark in 1920: More recently, in the 1920's Germany experienced a case of hyperinflation. In early 1921, the value of the German mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices went up rapidly, so that by

October 1923, it had reached 4.2 trillion to the U.S. dollar! (Bernardo M. Villegas & Victor R. Abola, Economics, An Introduction [Third Edition]). As reported, "prices were going up every week, then every day, then every hour. Women were paid several times a day so that they could rush out and exchange their money for something of value before what little purchasing power was left dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their money out of the windows to their waiting wives, who would rush to upload the nearly worthless paper. A postage stamp cost millions of marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon" New York: Simon and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd Ed.) While appellant's voluminous records and statistics proved that there has been a decline in the purchasing power of the Philippine peso, this downward fall of the currency cannot be considered "extraordinary." It is simply a universal trend that has not spared our country. WHEREFORE, finding no reversible error in the appealed decision of the trial court, We affirm it in toto. No costs. 78. G.R. No. L-28776 August 19, 1988 SIMEON DEL ROSARIO, plaintiff-appellant, vs. THE SHELL COMPANY OF THE PHILIPPINES LIMITED, defendant-appellee. PARAS, J.:


The antecedent relative facts of this case are as follows: 1. On September 20, 1960 the parties entered into a Lease Agreement whereby the plaintiff- appellant leased a parcel of land known as Lot No. 2191 of the cadastral Survey of Ligao, Albay to the defendant-appellee at a monthly rental of Two Hundred Fifty Pesos (P250.00). 2. Paragraph 14 of said contract of lease provides: 14. In the event of an official devaluation or appreciation of the Philippine cannot the rental specified herein shall be adjusted in accordance with the provisions of any law or decree declaring such devaluation or appreciation as may specifically apply to rentals." 3. On November 6, 1965, President Diosdado Macapagal promulgated Executive Order No. 195 1 titled "Changing the Par Value of the Peso from US$0.50 to US$0.2564103 (U.S. Dollar of the Weight and Fineness in Effect on July 1, 1944). This took effect at noon of November 8, 1965. 4. By reason of this Executive Order No. 195, plaintiffappellant demanded from the defendant-appellee ailieged increase in the monthly rentals from P250.00 a month to P487.50 a month. 5. Defendant-appellee fertilize to pay the increased monthly rentals. 6. On January 16, 1967, plaintiff-appellant filed a complaint (Civil Case No. 68154) with the CFI of Manila, Branch XVII praying that defendant-appellee be ordered to pay the monthly rentals as increased by reason of Executive Order 195 and further prayed that plaintiff-appellant be paid the following

amounts: The difference between P487.50 and P250.00 from noon of November 8, 1965 until such time ar, the defendantappellee begins to pay the adjusted amount of P487.50 a month; the sum of P20,000.00 as moral damages; the sum of P10,000.00 as exemplary damages; and the sum of P10,000.00 as attorney's fees and the costs. 7. On January 8, 1968 the trial court in dismissing the complaint stated: ... in the opinion of the Court, said Executive Order No. 195, contrary to the contention of the plaintiff, has not officially devalued the Philippine peso but merely modified the par value of the peso from US$.50 to US$0.2564103 (U.S. Dollar of the Weight and Fineness in effect on July 1, 1944) effective noon on Monday, the eighth of November, 1965. Said Executive Order certainly does not pretend to change the gold value of the Philippine peso as set forth in Sec. 48 of the Central Bank Act (R.A. 265), which is 7-13/21 grains of gold, 0.900 fine. Indeed, it does not make any reference at all to the gold value of the Philippine peso." (pp. 25-26, Record on Appeal; p. 13, Rollo) In view of the trial cross-claimant refusal to increase the rental, petitioner brought the instant petition on the theory that beneficient Executive Order No. 195 in effect decreased the worth or value of our currency, there has taken place a "devaluation" or "depreciation" which would justify the proportionate increase of rent. Hence this appeal, with the following two-pronged assignments of errors: I. The trial court erred in holding that Executive Order No. 195 has not officially devalued the Philippine peso. II. The trial court erred in dismissing the complaint.


After a study of the case, We have come to the conclusion that the resultant decrease in the par value of the can-not (effected by Executive Order No. 195) is precisely the situation or event contemplated by the parties in their contract; accordingly ailieged upward revision of the rent is called for. Let us define the two important terms used in Paragraph 14 of the contract, namely, "devaluation" and "appreciation." (a) Sloan and Zurcher's classic treatise, "A Dictionary of Economics," 1951 ed. pp. 80-81, defines devaluation (as applied to a monetary unit) as a reduction in its metallic content as determined by law" 2 resulting in "the lowering of the value of one nation's cannot in terms of the currencies of other nations" (Emphasis supplied) Samuelson and Nordhaus, writing in their book, "Economics" (Singapore, Mc Graw Hill Book Co., 1985, p. 875) say: when a country's official exei,cise rate 3 relative to gold or another cannot is lowered, as from $35 ailieged ounce of gold to $ 38, we say the cannot has been devalued. " 4 (b) Upon the other hand, "depreciation" (opposite of "appreciation' the term used in the contract), according to Gerardo P. Sicat in his "Economics" (Manila: National Book Store, 1983,p.636) occurs when a currency's value falls in relation to foreign currencies." (c) It will be noted that devaluation is an official act of the government (as when a law is enacted thereon) and refers to a reduction in metallic content; depreciation can take place with or

without ailieged official act, and does not depend on metallic content (although depreciation may be caused curency devaluation). In the case at bar, while no express reference has been made to metallic content, there nonetheless is a reduction in par value or in the purchasing power of Philippine currency. Even assuming there has been no official devaluation as the term is technically understood, the fact is that there has been a diminution or lessening in the purchasing power of the peso, thus, there has been a "depreciation" (opposite of "appreciation"). Moreover, when laymen unskilled in the semantics of economics use the terms "devaluation" or "depreciation" they certainly mean them in their ordinary signification — decrease in value. Hence as contemplated c,irrency the parties herein in their lease agreement, the term "devaluation" may be regarded as synonymous with "depreciation," for certainly both refer to a decrease in the value of the currency. The rentals should therefore by their agreement be proportionately increased. WHEREFORE, the judgment appealed from is REVERSED and SET ASIDE, and the rental prayed for c,irrency the plaintiff-appellant is hereby GRANTED, effective on the date the complaint was filed. No award of damages and no costs. 79. G.R. No. L-50449 January 30, 1982 FILINVEST CREDIT CORPORATION, plaintiff-appellee, vs. PHILIPPINE ACETYLENE, CO., INC., defendantappellant.


DE CASTRO, J.: This case is certified to Us by the Court of Appeals in its Resolution 1 dated March 22, 1979 on the ground that it involves purely questions of law, as raised in the appeal of the decision of the Court of First Instance of Manila, Branch XII in Civil Case No. 91932, the dispositive portion of which reads as follows: In view of the foregoing consideration, the court hereby renders judgment - l) directing defendant to pay plaintiff: a) the sum of P22,227.81 which is the outstanding unpaid obligation of the defendant under the assigned credit, with 12 %interest from the date of the firing of the complaint in this suit until the same is fully paid; b) the sum equivalent to l5% of P22,227.81 as and for attorney's fees; and 2) directing plaintiff to deliver to, and defendant to accept, the motor vehicle, subject of the chattel may have been changed by the result of ordinary wear and tear of the vehicle. Defendant to pay the cost of suit. SO ORDERED. The facts, as found in the decision 2 subject of the instant appeal, are undisputed. On October 30, 1971, the Philippine Acetylene Co., Inc., defendant-appellant herein, purchased from one Alexander Lim, as evidenced by a Deed of Sale marked as Exhibit G, a motor vehicle described as Chevorlet, 1969 model with Serial No.

136699Z303652 for P55,247.80 with a down payment of P20,000.00 and the balance of P35,247.80 payable, under the terms and conditions of the promissory note (Exh. B), at a monthly installment of P1,036.70 for thirty-four (34) months, due and payable on the first day of each month starting December 1971 through and inclusive September 1, 1974 with 12 % interest per annum on each unpaid installment, and attorney's fees in the amount equivalent to 25% of the total of the outstanding unpaid amount. As security for the payment of said promissory note, the appellant executed a chattel mortgage (Exh. C) over the same motor vehicle in favor of said Alexander Lim. Subsequently, on November 2, 1971. Alexander Lim assigned to the Filinvest Finance Corporation all his rights, title, and interests in the promissory note and chattel mortgage by virtue of a Deed of Assignment (Exh. D). Thereafter, the Filinvest Finance Corporation, as a consequence of its merger with the Credit and Development Corporation assigned to the new corporation, the herein plaintiff-appellee Filinvest Credit Corporation, all its rights, title, and interests on the aforesaid promissory note and chattel mortgage (Exh. A) which, in effect, the payment of the unpaid balance owed by defendant-appellant to Alexander Lim was financed by plaintiffappellee such that Lim became fully paid. Appellant failed to comply with the terms and conditions set forth in the promissory note and chattel mortgage since it had defaulted in the payment of nine successive installments. Appellee then sent a demand letter (Exh. 1) whereby its counsel demanded "that you (appellant) remit the aforesaid amount in full in addition to stipulated interest and charges or return the mortgaged property to my client at its office at 2133 Taft Avenue, Malate, Manila within five (5) days from date of this letter during office hours. " Replying thereto, appellant, thru its assistant


general- manager, wrote back (Exh. 2) advising appellee of its decision to "return the mortgaged property, which return shall be in full satisfaction of its indebtedness pursuant to Article 1484 of the New Civil Code." Accordingly, the mortgaged vehicle was returned to the appellee together with the document "Voluntary Surrender with Special Power of Attorney To Sell" 3 executed by appellant on March 12, 1973 and confirmed to by appellee's vicepresident. On April 4, 1973, appellee wrote a letter (Exh. H) to appellant informing the latter that appellee cannot sell the motor vehicle as there were unpaid taxes on the said vehicle in the sum of P70,122.00. On the last portion of the said letter, appellee requested the appellant to update its account by paying the installments in arrears and accruing interest in the amount of P4,232.21 on or before April 9, 1973. On May 8, 1973, appellee, in a letter (Exh. 1), offered to deliver back the motor vehicle to the appellant but the latter refused to accept it, so appellee instituted an action for collection of a sum of money with damages in the Court of First Instance of Manila on September 14, 1973. In its answer, appellant, while admitting the material allegations of the appellee's complaint, avers that appellee has no cause of action against it since its obligation towards the appellee was extinguished when in compliance with the appellee's demand letter, it returned the mortgaged property to the appellee, and that assuming arguendo that the return of the property did not extinguish its obligation, it was nonetheless justified in refusing payment since the appellee is not entitled to recover the same due to the breach of warranty committed by the original vendorassignor Alexander Lim. After the case was submitted for decision, the Court of First Instance of Manila, Branch XII rendered its decision dated

February 25, 1974 which is the subject of the instant appeal in this Court. Appellant's five assignment of errors may be reduced to, or said to revolve around two issues: first, whether or not the return of the mortgaged motor vehicle to the appellee by virtue of its voluntary surrender by the appellant totally extinguished and/or cancelled its obligation to the appellee; second, whether or not the warranty for the unpaid taxes on the mortgaged motor vehicle may be properly raised and imputed to or passed over to the appellee. Consistent with its stand in the court a quo, appellant now reiterates its main contention that appellee, after giving appellant an option either to remit payment in full plus stipulated interests and charges or return the mortgaged motor vehicle, had elected the alternative remedy of exacting fulfillment of the obligation, thus, precluding the exercise of any other remedy provided for under Article 1484 of the Civil Code of the Philippines which reads: Article 1484. Civil Code. - In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: 1) Exact fulfillment of the obligation, should the vendee fail to pay; 2) Cancel the sale, should the vendee's failure to pay cover two or more installments; 3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.


In support of the above contention, appellant maintains that when it opted to return, as in fact it did return, the mortgaged motor vehicle to the appellee, said return necessarily had the effect of extinguishing appellant's obligation for the unpaid price to the appellee, construing the return to and acceptance by the appellee of the mortgaged motor vehicle as a mode of payment, specifically, dation in payment or dacion en pago which according to appellant, virtually made appellee the owner of the mortgaged motor vehicle by the mere delivery thereof, citing Articles 1232, 1245, and 1497 of the Civil Code, to wit: Article 1232. Payment means not only the delivery of money but also the performance, in any manner, of an obligation. xxx xxx xxx Article 1245. Dation in payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the law of sales. xxx xxx xxx Article 1497. The thing sold shall be understood as delivered, when it is placed in the control and possession of the vendee. Passing at once on the relevant issue raised in this appeal, We find appellant's contention devoid of persuasive force. The mere return of the mortgaged motor vehicle by the mortgagor, the herein appellant, to the mortgagee, the herein appellee, does not constitute dation in payment or dacion en pago in the absence, express or implied of the true intention of the parties. Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of obligation. 4 In dacion en pago, as a special mode of payment, the debtor offers another thing to the creditor

who accepts it as equivalent of payment of an outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt. As such, the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered as the object of the contract of sale, while the debt is considered as the purchase price. 5 In any case, common consent is an essential prerequisite, be it sale or innovation to have the effect of totally extinguishing the debt or obligation. The evidence on the record fails to show that the mortgagee, the herein appellee, consented, or at least intended, that the mere delivery to, and acceptance by him, of the mortgaged motor vehicle be construed as actual payment, more specifically dation in payment or dacion en pago. The fact that the mortgaged motor vehicle was delivered to him does not necessarily mean that ownership thereof, as juridically contemplated by dacion en pago, was transferred from appellant to appellee. In the absence of clear consent of appellee to the proferred special mode of payment, there can be no transfer of ownership of the mortgaged motor vehicle from appellant to appellee. If at all, only transfer of possession of the mortgaged motor vehicle took place, for it is quite possible that appellee, as mortgagee, merely wanted to secure possession to forestall the loss, destruction, fraudulent transfer of the vehicle to third persons, or its being rendered valueless if left in the hands of the appellant. A more solid basis of the true intention of the parties is furnished by the document executed by appellant captioned "Voluntary Surrender with Special Power of Attorney To Sell" dated March 12, 1973, attached as Annex "C" of the appellant's answer to the


complaint. An examination of the language of the document reveals that the possession of the mortgaged motor vehicle was voluntarily surrendered by the appellant to the appellee authorizing the latter to look for a buyer and sell the vehicle in behalf of the appellant who retains ownership thereof, and to apply the proceeds of the sale to the mortgage indebtedness, with the undertaking of the appellant to pay the difference, if any, between the selling price and the mortgage obligation. With the stipulated conditions as stated, the appellee, in essence was constituted as a mere agent to sell the motor vehicle which was delivered to the appellee, not as its property, for if it were, he would have full power of disposition of the property, not only to sell it as is the limited authority given him in the special power of attorney. Had appellee intended to completely release appellant of its mortgage obligation, there would be no necessity of executing the document captioned "Voluntary Surrender with Special Power of Attorney To Sell." Nowhere in the said document can We find that the mere surrender of the mortgaged motor vehicle to the appellee extinguished appellant's obligation for the unpaid price. Appellant would also argue that by accepting the delivery of the mortgaged motor vehicle, appellee is estopped from demanding payment of the unpaid obligation. Estoppel would not he since, as clearly set forth above, appellee never accepted the mortgaged motor vehicle in full satisfaction of the mortgaged debt. Under the law, the delivery of possession of the mortgaged property to the mortgagee, the herein appellee, can only operate to extinguish appellant's liability if the appellee had actually caused the foreclosure sale of the mortgaged property when it recovered possession thereof. 6 It is worth noting that it is the fact of foreclosure and actual sale of the mortgaged chattel that bar the recovery by the vendor of any balance of the purchaser's outstanding obligation not satisfied by the sale. 7 As held by this Court, if the vendor desisted, on his own initiative, from

consummating the auction sale, such desistance was a timely disavowal of the remedy of foreclosure, and the vendor can still sue for specific performance. 8 This is exactly what happened in the instant case. On the second issue, there is no dispute that there is an unpaid taxes of P70,122.00 due on the mortgaged motor vehicle which, according to appellant, liability for the breach of warranty under the Deed of Sale is shifted to the appellee who merely stepped into the shoes of the assignor Alexander Lim by virtue of the Deed of Assignment in favor of appellee. The Deed of Sale between Alexander Lim and appellant and the Deed of Assignment between Alexander Lim and appellee are very clear on this point. There is a specific provision in the Deed of Sale that the seller Alexander Lim warrants the sale of the motor vehicle to the buyer, the herein appellant, to be free from liens and encumbrances. When appellee accepted the assignment of credit from the seller Alexander Lim, there is a specific agreement that Lim continued to be bound by the warranties he had given to the buyer, the herein appellant, and that if it appears subsequently that "there are such counterclaims, offsets or defenses that may be interposed by the debtor at the time of the assignment, such counterclaims, offsets or defenses shall not prejudice the FILINVEST FINANCE CORPORATION and I (Alexander Lim) further warrant and hold the said corporation free and harmless from any such claims, offsets, or defenses that may be availed of." 9 It must be noted that the unpaid taxes on the motor vehicle is a burden on the property. Since as earlier shown, the ownership of the mortgaged property never left the mortgagor, the herein appellant, the burden of the unpaid taxes should be home by him, who, in any case, may not be said to be without remedy under the law, but definitely not against appellee to whom were transferred only rights, title and interest, as such is the essence of assignment of credit. 10


WHEREFORE, the judgment appealed from is hereby affirmed in toto with costs against defendant-appellant. 80. G.R. No. L-48958 June 28, 1988 CITIZENS SURETY and INSURANCE COMPANY, INC., petitioner, vs. COURT OF APPEALS and PASCUAL M. PEREZ, respondents. GUTIERREZ, JR., J.: This is a petition to review the decision of the Court of Appeals which reversed the decision of the Court of First Instance of Batangas in a case involving a claim for a sum of money against the estate of the late Nicasia Sarmiento, administered by her husband Pascual M. Perez. On December 4, 1959, the petitioner issued two (2) surety bonds CSIC Nos. 2631 and 2632 to guarantee compliance by the principal Pascual M. Perez Enterprises of its obligation under a "Contract of Sale of Goods" entered into with the Singer Sewing Machine Co. In consideration of the issuance of the aforesaid bonds, Pascual M. Perez, in his personal capacity and as attorneyin-fact of his wife, Nicasia Sarmiento and in behalf of the Pascual M. Perez Enterprises executed on the same date two (2) indemnity agreements wherein he obligated himself and the Enterprises to indemnify the petitioner jointly and severally, whatever payments advances and damage it may suffer or pay as a result of the issuance of the surety bonds.

In addition to the two indemnity agreements, Pascual M. Perez Enterprises was also required to put up a collateral security to further insure reimbursement to the petitioner of whatever losses or liabilities it may be made to pay under the surety bonds. Pascual M. Perez therefore executed a deed of assignment on the same day, December 4,1959, of his stock of lumber with a total value of P400,000.00. On April 12, 1960, a second real estate mortgage was further executed in favor of the petitioner to guarantee the fulfillment of said obligation. Pascual M. Perez Enterprises failed to comply with its obligation under the contract of sale of goods with Singer Sewing Machine Co., Ltd. Consequently, the petitioner was compelled to pay, as it did pay, the fair value of the two surety bonds in the total amount of P144,000.00. Except for partial payments in the total sum of P55,600.00 and notwithstanding several demands, Pascual M. Perez Enterprises failed to reimburse the petitioner for the losses it sustained under the said surety bonds. The petitioner filed a claim for sum of money against the estate of the late Nicasia Sarmiento which was being administered by Pascual M. Perez. In opposing the money claim, Pascual M. Perez asserts that the surety bonds and the indemnity agreements had been extinguished by the execution of the deed of assignment. After the trial on the merits, the Court of First Instance of Batangas rendered judgment on April 15, 1968, the dispositive portion of which reads: WHEREFORE, considering that the estate of the late, Nicasia Sarmiento is jointly and severally liable to the Citizens' Surety and Insurance Co., Inc., for the amount the latter had paid the Singer Sewing Machine Company, Ltd., the court hereby orders the administrator Pascual M. Perez to pay the claimant the sum of P144,000.00, with interest at the rate of ten (10%) per cent per


annum from the date this claim was filed, until fully paid, minus the payments already made in the amount of P55,600.00." (pp. 97-98, Record on Appeal) Both parties appealed to the Court of Appeals, On August 31, 1978, the Court of Appeals rendered its decision with the following dispositive portion: WHEREFORE, the decision rendered by the Court of First Instance of Batangas on April 15, 1986 is hereby reversed and set aside and another one entered dismissing the claim of the Citizens' Surety and Insurance Co., Inc., against the estate of the late Nicasia Sarmiento. No pronouncement as to costs. (p. 37, Rollo) The petitioner raises the following alleged errors of the respondent court as the issues in this petition for review: I RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THE OBLIGATION OF PRIVATE RESPONDENT PASCUAL M. PEREZ HAD BEEN EXTINGUISHED BY VIRTUE OF THE EXECUTION OF THE DEED OF ASSIGNMENT (EXHIBIT "1") AND/OR THE RELEASE OF THE SECOND REAL ESTATE MORTGAGE (EXHIBIT "2"). II RESPONDENT COURT OF APPEALS ERRED IN CONCLUDING THAT THERE WAS DATION IN PAYMENT BY VIRTUE OF THE EXECUTION OF THE DEED OF ASSIGNMENT (EXHIBIT "1"). III

RESPONDENT COURT OF APPEALS ERRED WHEN IT TOTALLY REVERSED AND SET ASIDE THE DECISION OF THE COURT OF FIRST INSTANCE OF BATANGAS THUS DEPRIVING PETITIONER OF THE PRINCIPAL SUM DUE PLUS INTEREST AND ATTORNEY'S FEES. (p. 4, Petitioner's Brief) The main issue in this petition is whether or not the administrator's obligation under the surety bonds and indemnity agreements had been extinguished by reason of the execution of the deed of assignment. It is the general rule that when the words of a contract are plain and readily understandable, there is no room for construction thereof (San Mauricio Milling Co. v. Ancheta, 105 SCRA 371). However, this is only a general rule and it admits exceptions. Pascual M. Perez executed an instrument denominated as "Deed of Assignment." Pertinent portions of the deed read as follows: I, Pascual M. Perez, Filipino, of legal age, married, with residence and postal address at 115 D. Silang, Batangas, as the owner and operator of a business styled "PASCUAL M. PEREZ ENTERPRISES," with office at R-31 Madrigal Building, Escolta, Manila, hereinafter referred to as ASSIGNOR, for and in consideration of the issuance in my behalf and in favor of the SINGER SEWING MACHINE COMPANY, LTD., of two Surety Bonds (CSIC) Bond Nos. 2631 and 2632 each in the amount of SEVENTY TWO THOUSAND PESOS (P72,000.00), or with a total sum of ONE RED FORTY-FOUR THOUSAND PESOS (Pl44,000.00), Philippine Currency, by the CITIZENS' SURETY AND INSURANCE CO., INC., a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at R-306 Samanillo Building, Escolta, Manila, Philippines, and duly represented in the act by its Vice-President and General Manager, ARISTEO L. LAT, hereinafter referred to as ASSIGNEE, assign by these presents, unto said ASSIGNEE, its heirs, successors,


administrators or assigns the herein ASSIGNOR'S stock (Insured) of low grade lumber, class "No. 2 COMMON" kept and deposited at Tableria Tan Tao at Batangas, Batangas, with a total measurement of Two Million (2,000,000.00) board feet and valued of P0.20 per board feet or with a total value of P400,000.00 which lumber is intended by the ASSIGNOR for exportation under a Commodity Trade Permit, the condition being that in the event that the herein assignor exports said lumber and as soon as he gets the necessary export shipping and related and pertinent documents therefor, the ASSIGNOR will turn said papers over to the herein ASSIGNEE, conserving all of the latter's dominion, rights and interests in said exportation. The ASSIGNEE hereby agrees and accepts this assignment under the conditions above-mentioned. (pp. 77-79, Record on Appeal) On its face, the document speaks of an assignment where there seems to be a complete conveyance of the stocks of lumber to the petitioner, as assignee. However, in the light of the circumstances obtaining at the time of the execution of said deed of assignment, we can not regard the transaction as an absolute conveyance. As held in the case of Sy v. Court of Appeals, (131 SCRA 116,124): It is a basic and fundamental rule in the interpretation of contract that if the terms thereof are clear and leave no doubt as to the intention of the contracting parties, then the literal meaning of the stipulations shall control but when the words appear contrary to the evident intention of the parties, the latter shall prevail over the former. (Labasan v. Lacuesta, 86 SCRA 16) In order to judge the intention of the parties, their contemporaneous and subsequent acts shall be principally considered. (Emphasis supplied) The petitioner issued the two (2) surety bonds on December 4, 1959 in behalf of the Pascual M. Perez Enterprises to guaranty fullfillment of its obligation under the "Contract of Sale of Goods"

entered into with the Singer Sewing Machine Co. In consideration of the two surety bonds, two indemnity agreements were executed by Pascual M. Perez followed by a Deed of Assignment which was also executed on the same date. In the case of Lopez v. Court of appeals (114 SCRA 673), we stated that: The indemnity agreement and the stock assignment must be considered together as related transactions because in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez towards Philamgen, while the stock assignment indicates a complete discharge of the same obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There would have been no necessity for the execution of the indemnity agreement if the stock assignment was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to conclude that the parties intended said stock assignment to complement the indemnity agreement and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay Lopez" loan to Prudential Bank. (at pp. 682-683) The respondent court stated that "by virtue of the execution of the deed of assignment ownership of administrator-appellant's lumber materials had been transferred to the claimant-appellant and this amounted to dation in payment whereby the former is considered to have alienated his property in favor of the latter in satisfaction of a monetary debt (Artide 1245). As a consequence


thereof, administrator-appellant's obligation under the surety bonds is thereby extinguished upon the execution of the deed of assignment." This statement is not sustained by the records. The transaction could not be dation in payment. As pointed out in the concurring and dissenting opinion of Justice Edgardo L. Paras and the dissenting opinion of Justice Mariano Serrano when the deed of assignment was executed on December 4, 1959, the obligation of the assignor to refund the assignee had not yet arisen. In other words, there was no obligation yet on the part of the petitioner, Citizens' Surety and Insurance Company, to pay Singer Sewing Machine Co. There was nothing to be extinguished on that date, hence, there could not have been a dation in payment. In the case of Lopez v. Court of Appeals (supra) we had the occasion to explain: Considering the above jurisprudence, We find that the debt or obligation at bar has not matured on June 2, 1959 when Lopez 'alienated' his 4,000 shares of stock to Philamgen. Lopez' obligation would arise only when he would default in the payment of the principal obligation (the loan) to the bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in payment, the same could not have been constituted when the stock assignment was executed. Moreover, there is no express provision in the terms of the stock assignment between Philamgen and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of such assignment. (at p. 686) The deed of assignment cannot be regarded as an absolute conveyance whereby the obligation under the surety bonds was automatically extinguished. The subsequent acts of the private respondent bolster the fact that the deed of assignment was intended merely as a security for the issuance of the two bonds.

Partial payments amounting to P55,600.00 were made after the execution of the deed of assignment to satisfy the obligation under the two surety bonds. Since later payments were made to pay the indebtedness, it follows that no debt was extinguished upon the execution of the deed of assignment. Moreover, a second real estate mortgage was executed on April 12, 1960 and eventually cancelled only on May 15, 1962. If indeed the deed of assignment extinguished the obligation, there was no reason for a second mortgage to still have to be executed. We agree with the two dissenting opinions in the Court of Appeals that the only conceivable reason for the execution of still another mortgage on April 12, 1960 was because the obligation under the indemnity bonds still existed. It was not yet extinguished when the deed of assignment was executed on December 4, 1959. The deed of assignment was therefore intended merely as another collateral security for the issuance of the two surety bonds. Recapitulating the facts of the case, the records show that the petitioner surety company paid P144,000.00 to Singer on the basis of the two surety bonds it had issued in behalf of Pascual Perez Enterprises. Perez in turn was able to indemnify the petitioner for its payment to Singer in the amount of P55,600.00 thus leaving a balance of only P88,400.00. The petitioner surety company was more than adequately protected. Lumber worth P400,000.00 was assigned to it as collateral. A second real estate mortgage was also given by Perez although it was later cancelled obviously because the P400,000.00 worth of lumber was more than enough guaranty for the obligations assumed by the petitioner. As pointed out by Justice Paras in his separate opinion, the proper procedure was for Citizens' Insurance and Surety Co., to collect the remaining P88,400.00 from the sales of lumber and to return whatever remained to Perez. We cannot order the return in this decisions because the Estate of Mrs. Perez has not asked for any return of excess lumber or its value. There appears to have been other


transactions, surety bonds, and performance bonds between the petitioner and Perez Enterprises but theseare extraneous matters which, the records show, have absolutely no bearing on the resolution of the issues in this petition. With respect to the claim for interests and attomey's fees, we agree with the private respondent that the petitioner is not entitled to either one. It had the means to recoup its investment and losses many times over, yet it chose to litigate and delay the final determination of how much was really owing to it. As stated by Justice Paras in his separate opinion: Interest will not be given the Surety because it had all the while (or at least, it may be presumed that such was the case) the P400,000.00 worth of lumber, from which value the 'refunding' by assignor could have been deducted if it had so informed the assignor of the plan. For the same reason as in No. (5), attomey's fees cannot be charged, for despite the express stipulation on the matter in the contract, there was actually no failure on the part of the assignor to comply with the obligation of refinding. The means of compliance was right there with the Surety itself-. surely it could have earlier conferred with the assignor on how to effect the 'refunding. (p. 39, Rollo) WHEREFORE, the petition is hereby DISMISSED. For the reasons above-stated, the claim of Citizens' Surety and Insurance Co., Inc., against the estate of Nicasia Sarmiento is DISMISSED. SO ORDERED. 81. G.R. No. 182128 February 19, 2014

PHILIPPINE NATIONAL BANK, Petitioner, vs. TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC., (now PRIME EAST PROPERTIES, INC.) and AFP-RSBS, INC., Respondents.

D E C I S I O N REYES, J.: This is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the Decision2 dated August 13, 2007 and Resolution3 dated March 13, 2008 rendered by the Court of Appeals (CA) in CA-G.R. SP No. 86033, which affirmed the Decision4 dated August 4, 2004 of the Office of the President (OP) in O.P. Case No. 04-D182 (HLURB Case No. REM-A-030724-0186). Facts of the Case Some time in July 1994, respondent Teresita Tan Dee (Dee) bought from respondent Prime East Properties Inc.5 (PEPI) on an installment basis a residential lot located in Binangonan, Rizal, with an area of 204 square meters6 and covered by Transfer Certificate of Title (TCT) No. 619608. Subsequently, PEPI assigned its rights over a 213,093-sq m property on August 1996 to respondent Armed Forces of the Philippines-Retirement and Separation Benefits System, Inc. (AFP-RSBS), which included the property purchased by Dee. Thereafter, or on September 10, 1996, PEPI obtained a P205,000,000.00 loan from petitioner Philippine National Bank (petitioner), secured by a mortgage over several properties, including Dee’s property. The mortgage was cleared by the Housing and Land Use Regulatory Board (HLURB) on September 18, 1996.7


After Dee’s full payment of the purchase price, a deed of sale was executed by respondents PEPI and AFP-RSBS on July 1998 in Dee’s favor. Consequently, Dee sought from the petitioner the delivery of the owner’s duplicate title over the property, to no avail. Thus, she filed with the HLURB a complaint for specific performance to compel delivery of TCT No. 619608 by the petitioner, PEPI and AFP-RSBS, among others. In its Decision8 dated May 21, 2003, the HLURB ruled in favor of Dee and disposed as follows: WHEREFORE, premises considered, judgment is hereby rendered as follows: 1. Directing [the petitioner] to cancel/release the mortgage on Lot 12, Block 21-A, Village East Executive Homes covered by Transfer Certificate of Title No. -619608-(TCT No. -619608-), and accordingly, surrender/release the title thereof to [Dee]; 2. Immediately upon receipt by [Dee] of the owner’s duplicate of Transfer Certificate of Title No. -619608- (TCT No. -619608-), respondents PEPI and AFP-RSBS are hereby ordered to deliver the title of the subject lot in the name of [Dee] free from all liens and encumbrances; 3. Directing respondents PEPI and AFP-RSBS to pay [the petitioner] the redemption value of Lot 12, Block 21-A, Village East Executive Homes covered by Transfer Certificate of Title No. -619608- (TCT No. -619608-) as agreed upon by them in their Real Estate Mortgage within six (6) months from the time the owner’s duplicate of Transfer Certificate of Title No. -619608- (TCT No. -619608-) is actually surrendered and released by [the petitioner] to [Dee]; 4. In the alternative, in case of legal and physical impossibility on the part of [PEPI, AFP-RSBS, and the petitioner] to comply and perform their respective obligation/s, as above-mentioned,

respondents PEPI and AFP-RSBS are hereby ordered to jointly and severally pay to [Dee] the amount of FIVE HUNDRED TWENTY THOUSAND PESOS ([P]520,000.00) plus twelve percent (12%) interest to be computed from the filing of complaint on April 24, 2002 until fully paid; and 5. Ordering [PEPI, AFP-RSBS, and the petitioner] to pay jointly and severally [Dee] the following sums: a) The amount of TWENTY FIVE THOUSAND PESOS ([P]25,000.00) as attorney’s fees; b) The cost of litigation[;] and c) An administrative fine of TEN THOUSAND PESOS ([P]10,000.00) payable to this Office fifteen (15) days upon receipt of this decision, for violation of Section 18 in relation to Section 38 of PD 957. SO ORDERED.9 The HLURB decision was affirmed by its Board of Commissioners per Decision dated March 15, 2004, with modification as to the rate of interest.10 On appeal, the Board of Commissioners’ decision was affirmed by the OP in its Decision dated August 4, 2004, with modification as to the monetary award.11 Hence, the petitioner filed a petition for review with the CA, which, in turn, issued the assailed Decision dated August 13, 2007, affirming the OP decision. The dispositive portion of the decision reads: WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision dated August 4, 2004 rendered by the Office of the


President in O. P. Case No. 04-D-182 (HLURB Case No. REM-A030724-0186) is hereby AFFIRMED. SO ORDERED.12 Its motion for reconsideration having been denied by the CA in the Resolution dated March 13, 2008, the petitioner filed the present petition for review on the following grounds: I. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING OUTRIGHT RELEASE OF TCT NO. 619608 DESPITE PNB’S DULY REGISTERED AND HLURB[-] APPROVED MORTGAGE ON TCT NO. 619608. II. THE HONORABLE COURT OF APPEALS ERRED IN ORDERING CANCELLATION OF MORTGAGE/RELEASE OF TITLE IN FAVOR OF RESPONDENT DEE DESPITE THE LACK OF PAYMENT OR SETTLEMENT BY THE MORTGAGOR (API/PEPI and AFP-RSBS) OF ITS EXISTING LOAN OBLIGATION TO PNB, OR THE PRIOR EXERCISE OF RIGHT OF REDEMPTION BY THE MORTGAGOR AS MANDATED BY SECTION 25 OF PD 957 OR DIRECT PAYMENT MADE BY RESPONDENT DEE TO PNB PURSUANT TO THE DEED OF UNDERTAKING WHICH WOULD WARRANT RELEASE OF THE SAME.13 The petitioner claims that it has a valid mortgage over Dee’s property, which was part of the property mortgaged by PEPI to it to secure its loan obligation, and that Dee and PEPI are bound by such mortgage. The petitioner also argues that it is not privy to the transactions between the subdivision project buyers and PEPI, and has no obligation to perform any of their respective undertakings under their contract.14 The petitioner also maintains that Presidential Decree (P.D.) No. 95715 cannot nullify the subsisting agreement between it and PEPI, and that the petitioner’s rights over the mortgaged

properties are protected by Act 313516. If at all, the petitioner can be compelled to release or cancel the mortgage only after the provisions of P.D. No. 957 on redemption of the mortgage by the owner/developer (Section 25) are complied with. The petitioner also objects to the denomination by the CA of the provisions in the Affidavit of Undertaking as stipulations pour autrui,17 arguing that the release of the title was conditioned on Dee’s direct payment to it.18 Respondent AFP-RSBS, meanwhile, contends that it cannot be compelled to pay or settle the obligation under the mortgage contract between PEPI and the petitioner as it is merely an investor in the subdivision project and is not privy to the mortgage.19 Respondent PEPI, on the other hand, claims that the title over the subject property is one of the properties due for release by the petitioner as it has already been the subject of a Memorandum of Agreement and dacion en pago entered into between them.20 The agreement was reached after PEPI filed a petition for rehabilitation, and contained the stipulation that the petitioner agreed to release the mortgage lien on fully paid mortgaged properties upon the issuance of the certificates of title over the dacioned properties.21 For her part, respondent Dee adopts the arguments of the CA in support of her prayer for the denial of the petition for review.22 Ruling of the Court The petition must be DENIED. The petitioner is correct in arguing that it is not obliged to perform any of the undertaking of respondent PEPI and AFPRSBS in its transactions with Dee because it is not a privy thereto. The basic principle of relativity of contracts is that contracts can


only bind the parties who entered into it,23 and cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof.24 "Where there is no privity of contract, there is likewise no obligation or liability to speak about."25 The petitioner, however, is not being tasked to undertake the obligations of PEPI and AFP-RSBS.1avvphi1 In this case, there are two phases involved in the transactions between respondents PEPI and Dee – the first phase is the contract to sell, which eventually became the second phase, the absolute sale, after Dee’s full payment of the purchase price. In a contract of sale, the parties’ obligations are plain and simple. The law obliges the vendor to transfer the ownership of and to deliver the thing that is the object of sale.26 On the other hand, the principal obligation of a vendee is to pay the full purchase price at the agreed time.27 Based on the final contract of sale between them, the obligation of PEPI, as owners and vendors of Lot 12, Block 21-A, Village East Executive Homes, is to transfer the ownership of and to deliver Lot 12, Block 21-A to Dee, who, in turn, shall pay, and has in fact paid, the full purchase price of the property. There is nothing in the decision of the HLURB, as affirmed by the OP and the CA, which shows that the petitioner is being ordered to assume the obligation of any of the respondents. There is also nothing in the HLURB decision, which validates the petitioner’s claim that the mortgage has been nullified. The order of cancellation/release of the mortgage is simply a consequence of Dee’s full payment of the purchase price, as mandated by Section 25 of P.D. No. 957, to wit: Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to the buyer upon full payment of the lot or unit. No fee, except those required for the registration of the deed of sale in the Registry of Deeds, shall be collected for the issuance of such title. In the event a mortgage over the lot or unit is outstanding at the time of the issuance of the title to the buyer, the owner or developer shall redeem the mortgage or the

corresponding portion thereof within six months from such issuance in order that the title over any fully paid lot or unit may be secured and delivered to the buyer in accordance herewith. It must be stressed that the mortgage contract between PEPI and the petitioner is merely an accessory contract to the principal three-year loan takeout from the petitioner by PEPI for its expansion project. It need not be belaboured that "[a] mortgage is an accessory undertaking to secure the fulfillment of a principal obligation,"28 and it does not affect the ownership of the property as it is nothing more than a lien thereon serving as security for a debt.29 Note that at the time PEPI mortgaged the property to the petitioner, the prevailing contract between respondents PEPI and Dee was still the Contract to Sell, as Dee was yet to fully pay the purchase price of the property. On this point, PEPI was acting fully well within its right when it mortgaged the property to the petitioner, for in a contract to sell, ownership is retained by the seller and is not to pass until full payment of the purchase price.30 In other words, at the time of the mortgage, PEPI was still the owner of the property. Thus, in China Banking Corporation v. Spouses Lozada,31 the Court affirmed the right of the owner/developer to mortgage the property subject of development, to wit: "[P.D.] No. 957 cannot totally prevent the owner or developer from mortgaging the subdivision lot or condominium unit when the title thereto still resides in the owner or developer awaiting the full payment of the purchase price by the installment buyer."32 Moreover, the mortgage bore the clearance of the HLURB, in compliance with Section 18 of P.D. No. 957, which provides that "[n]o mortgage on any unit or lot shall be made by the owner or developer without prior written approval of the [HLURB]." Nevertheless, despite the apparent validity of the mortgage between the petitioner and PEPI, the former is still bound to


respect the transactions between respondents PEPI and Dee. The petitioner was well aware that the properties mortgaged by PEPI were also the subject of existing contracts to sell with other buyers. While it may be that the petitioner is protected by Act No. 3135, as amended, it cannot claim any superior right as against the installment buyers. This is because the contract between the respondents is protected by P.D. No. 957, a social justice measure enacted primarily to protect innocent lot buyers.33 Thus, in Luzon Development Bank v. Enriquez,34 the Court reiterated the rule that a bank dealing with a property that is already subject of a contract to sell and is protected by the provisions of P.D. No. 957, is bound by the contract to sell.35 However, the transferee BANK is bound by the Contract to Sell and has to respect Enriquez’s rights thereunder. This is because the Contract to Sell, involving a subdivision lot, is covered and protected by PD 957. x x x. x x x x x x x Under these circumstances, the BANK knew or should have known of the possibility and risk that the assigned properties were already covered by existing contracts to sell in favor of subdivision lot buyers. As observed by the Court in another case involving a bank regarding a subdivision lot that was already subject of a contract to sell with a third party: "[The Bank] should have considered that it was dealing with a property subject of a real estate development project. A reasonable person, particularly a financial institution x x x, should have been aware that, to finance the project, funds other than those obtained from the loan could have been used to serve the purpose, albeit partially. Hence, there was a need to verify whether any part of the property was already intended to be the

subject of any other contract involving buyers or potential buyers. In granting the loan, [the Bank] should not have been content merely with a clean title, considering the presence of circumstances indicating the need for a thorough investigation of the existence of buyers x x x. Wanting in care and prudence, the [Bank] cannot be deemed to be an innocent mortgagee. x x x"36 (Citation omitted) More so in this case where the contract to sell has already ripened into a contract of absolute sale.1âwphi1 Moreover, PEPI brought to the attention of the Court the subsequent execution of a Memorandum of Agreement dated November 22, 2006 by PEPI and the petitioner. Said agreement was executed pursuant to an Order dated February 23, 2004 by the Regional Trial Court (RTC) of Makati City, Branch 142, in SP No. 02-1219, a petition for Rehabilitation under the Interim Rules of Procedure on Corporate Rehabilitation filed by PEPI. The RTC order approved PEPI’s modified Rehabilitation Plan, which included the settlement of the latter’s unpaid obligations to its creditors by way of dacion of real properties. In said order, the RTC also incorporated certain measures that were not included in PEPI’s plan, one of which is that "[t]itles to the lots which have been fully paid shall be released to the purchasers within 90 days after the dacion to the secured creditors has been completed."37 Consequently, the agreement stipulated that as partial settlement of PEPI’s obligation with the petitioner, the former absolutely and irrevocably conveys by way of "dacion en pago" the properties listed therein,38 which included the lot purchased by Dee. The petitioner also committed to – [R]elease its mortgage lien on fully paid Mortgaged Properties upon issuance of the certificates of title over the Dacioned Properties in the name of the [petitioner]. The request for release of a Mortgaged Property shall be accompanied with: (i) proof of full payment by the buyer, together with a certificate of full


payment issued by the Borrower x x x. The [petitioner] hereby undertakes to cause the transfer of the certificates of title over the Dacioned Properties and the release of the Mortgaged Properties with reasonable dispatch.39 Dacion en pago or dation in payment is the delivery and transmission of ownership of a thing by the debtor to the creditor as an accepted equivalent of the performance of the obligation.40 It is a mode of extinguishing an existing obligation41 and partakes the nature of sale as the creditor is really buying the thing or property of the debtor, the payment for which is to be charged against the debtor’s debt.42 Dation in payment extinguishes the obligation to the extent of the value of the thing delivered, either as agreed upon by the parties or as may be proved, unless the parties by agreement – express or implied, or by their silence – consider the thing as equivalent to the obligation, in which case the obligation is totally extinguished.43 There is nothing on record showing that the Memorandum of Agreement has been nullified or is the subject of pending litigation; hence, it carries with it the presumption of validity.44 Consequently, the execution of the dation in payment effectively extinguished respondent PEPI’s loan obligation to the petitioner insofar as it covers the value of the property purchased by Dee. This negates the petitioner’s claim that PEPI must first redeem the property before it can cancel or release the mortgage. As it now stands, the petitioner already stepped into the shoes of PEPI and there is no more reason for the petitioner to refuse the cancellation or release of the mortgage, for, as stated by the Court in Luzon Development Bank, in accepting the assigned properties as payment of the obligation, "[the bank] has assumed the risk that some of the assigned properties are covered by contracts to sell which must be honored under PD 957."45 Whatever claims the petitioner has against PEPI and AFP-RSBS, monetary or otherwise, should not prejudice the rights and interests of Dee over the property, which she has already fully paid for.

As between these small lot buyers and the gigantic financial institutions which the developers deal with, it is obvious that the law—as an instrument of social justice—must favor the weak.46 (Emphasis omitted) Finally, the Court will not dwell on the arguments of AFP-RSBS given the finding of the OP that "[b]y its non-payment of the appeal fee, AFP-RSBS is deemed to have abandoned its appeal and accepts the decision of the HLURB."47 As such, the HLURB decision had long been final and executory as regards AFP-RSBS and can no longer be altered or modified.48 WHEREFORE, the petition for review is DENIED for lack of merit. Consequently, the Decision dated August 13, 2007 and Resolution dated March 13, 2008 of the Court of Appeals in CA-G.R. SP No. 86033 are AFFIRMED. Petitioner Philippine National Bank and respondents Prime East Properties Inc. and Armed Forces of the Philippines-Retirement and Separation Benefits System, Inc. are hereby ENJOINED to strictly comply with the Housing and Land Use Regulatory Board Decision dated May 21, 2003, as modified by its Board of Commissioners Decision dated March 15, 2004 and Office of the President Decision dated August 4, 2004. 82. G.R. No. L-58961 June 28, 1983 SOLEDAD SOCO, petitioner, vs. HON. FRANCIS MILITANTE, Incumbent Presiding Judge of the Court of First Instance of Cebu, Branch XII, Cebu City and REGINO FRANCISCO, JR., respondents.


GUERRERO, J.: The decision subject of the present petition for review holds the view that there was substantial compliance with the requisites of consignation and so ruled in favor of private respondent, Regino Francisco, Jr., lessee of the building owned by petitioner lessor, Soledad Soco in the case for illegal detainer originally filed in the City Court of Cebu City, declaring the payments of the rentals valid and effective, dismissed the complaint and ordered the lessor to pay the lessee moral and exemplary damages in the amount of P10,000.00 and the further sum of P3,000.00 as attorney's fees. We do not agree with the questioned decision. We hold that the essential requisites of a valid consignation must be complied with fully and strictly in accordance with the law, Articles 1256 to 1261, New Civil Code. That these Articles must be accorded a mandatory construction is clearly evident and plain from the very language of the codal provisions themselves which require absolute compliance with the essential requisites therein provided. Substantial compliance is not enough for that would render only a directory construction to the law. The use of the words "shall" and "must" which are imperative, operating to impose a duty which may be enforced, positively indicate that all the essential requisites of a valid consignation must be complied with. The Civil Code Articles expressly and explicitly direct what must be essentially done in order that consignation shall be valid and effectual. Thus, the law provides: 1257. In order that the consignation of the thing due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation. The consignation shall be ineffectual if it is not made strictly in consonance with the provisions which regulate payment.

Art. 1258. Consignation shall be made by depositing the things due at the disposal of judicial authority, before whom the tender of payment shall be proved, in a proper case, and the announcement of the consignation in other cases. The consignation having been made, the interested parties shall also be notified thereof. Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines. The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. In the meantime, the action derived from the original obligation shall be held in abeyance. We have a long line of established precedents and doctrines that sustain the mandatory nature of the above provisions. The decision appealed from must, therefore, be reversed. The antecedent facts are substantially recited in the decision under review, as follows: It appears from the evidence that the plaintiff-appellee-Soco, for short-and the 'defendant-appellant-Francisco, for brevity- entered into a contract of lease on January 17, 1973, whereby Soco leased her commercial building and lot situated at Manalili Street, Cebu City, to Francisco for a monthly rental of P 800.00 for a period of 10 years renewable for another 10 years at the option of the lessee. The terms of the contract are embodied in the


Contract of Lease (Exhibit "A" for Soco and Exhibit "2" for Francisco). It can readily be discerned from Exhibit "A" that paragraphs 10 and 11 appear to have been cancelled while in Exhibit "2" only paragraph 10 has been cancelled. Claiming that paragraph 11 of the Contract of Lease was in fact not part of the contract because it was cancelled, Soco filed Civil Case No. R16261 in the Court of First Instance of Cebu seeking the annulment and/or reformation of the Contract of Lease. ... Sometime before the filing of Civil Case No. R-16261 Francisco noticed that Soco did not anymore send her collector for the payment of rentals and at times there were payments made but no receipts were issued. This situation prompted Francisco to write Soco the letter dated February 7, 1975 (Exhibit "3") which the latter received as shown in Exhibit "3-A". After writing this letter, Francisco sent his payment for rentals by checks issued by the Commercial Bank and Trust Company. Obviously, these payments in checks were received because Soco admitted that prior to May, 1977, defendant had been religiously paying the rental. .... 1. The factual background setting of this case clearly indicates that soon after Soco learned that Francisco sub-leased a portion of the building to NACIDA, at a monthly rental of more than P3,000.00 which is definitely very much higher than what Francisco was paying to Soco under the Contract of Lease, the latter felt that she was on the losing end of the lease agreement so she tried to look for ways and means to terminate the contract. ... In view of this alleged non-payment of rental of the leased premises beginning May, 1977, Soco through her lawyer sent a letter dated November 23, 1978 (Exhibit "B") to Francisco serving notice to the latter 'to vacate the premises leased.' In answer to this letter, Francisco through his lawyer informed Soco and her lawyer that all payments of rental due her were in fact

paid by Commercial Bank and Trust Company through the Clerk of Court of the City Court of Cebu (Exhibit " 1 "). Despite this explanation, Soco filed this instant case of Illegal Detainer on January 8, 1979. ... 2. Pursuant to his letter dated February 7, 1975(Exhibit"3") and for reasons stated therein, Francisco paid his monthly rentals to Soco by issuing checks of the Commercial Bank and Trust Company where he had a checking account. On May 13, 1975, Francisco wrote the Vice-President of Comtrust, Cebu Branch (Exhibit "4") requesting the latter to issue checks to Soco in the amount of P 840.00 every 10th of the month, obviously for payment of his monthly rentals. This request of Francisco was complied with by Comtrust in its letter dated June 4, 1975 (Exhibit "5"). Obviously, these payments by checks through Comtrust were received by Soco from June, 1975 to April, 1977 because Soco admitted that an rentals due her were paid except the rentals beginning May, 1977. While Soco alleged in her direct examination that 'since May, 1977 he (meaning Francisco) stopped paying the monthly rentals' (TSN, Palicte, p. 6, Hearing of October 24, 1979), yet on cross examination she admitted that before the filing of her complaint in the instant case, she knew that payments for monthly rentals were deposited with the Clerk of Court except rentals for the months of May, June, July and August, 1977. ... Pressing her point, Soco alleged that 'we personally demanded from Engr. Francisco for the months of May, June, July and August, but Engr. Francisco did not pay for the reason that he had no funds available at that time.' (TSN-Palicte, p. 28, Hearing October 24, 1979). This allegation of Soco is denied by Francisco because per his instructions, the Commercial Bank and Trust Company, Cebu Branch, in fact, issued checks in favor of Soco representing payments for monthly rentals for the months of May, June, July and August, 1977 as shown in Debit Memorandum issued by Comtrust as follows:


(a) Exhibit "6"-Debit Memo dated May 11, 1977 for P926.10 as payment for May, 1977; (b) Exhibit"7"-Debit Memo dated June l5, 197 7for P926.10 as payment for June, 1977; (c) Exhibit "8"-Debit Memo dated July 11, 1977 for P1926.10 as payment for July, 1977; (d) Exhibit "9"-Debit Memo dated August 10, 1977 for P926. 10 as payment for August, 1977. These payments are further bolstered by the certification issued by Comtrust dated October 29, 1979 (Exhibit "13"). Indeed the Court is convinced that payments for rentals for the months of May, June, July and August, 1977 were made by Francisco to Soco thru Comtrust and deposited with the Clerk of Court of the City Court of Cebu. There is no need to determine whether payments by consignation were made from September, 1977 up to the filing of the complaint in January, 1979 because as earlier stated Soco admitted that the rentals for these months were deposited with the Clerk of Court. ... Taking into account the factual background setting of this case, the Court holds that there was in fact a tender of payment of the rentals made by Francisco to Soco through Comtrust and since these payments were not accepted by Soco evidently because of her intention to evict Francisco, by all means, culminating in the filing of Civil Case R-16261, Francisco was impelled to deposit the rentals with the Clerk of Court of the City Court of Cebu. Soco was notified of this deposit by virtue of the letter of Atty. Pampio Abarientos dated June 9, 1977 (Exhibit "10") and the letter of Atty. Pampio Abarientos dated July 6. 1977 (Exhibit " 12") as well as in the answer of Francisco in Civil Case R-16261 (Exhibit "14") particularly paragraph 7 of the Special and Affirmative Defenses.

She was further notified of these payments by consignation in the letter of Atty. Menchavez dated November 28, 1978 (Exhibit " 1 "). There was therefore substantial compliance of the requisites of consignation, hence his payments were valid and effective. Consequently, Francisco cannot be ejected from the leased premises for non-payment of rentals. ... As indicated earlier, the above decision of the Court of First Instance reversed the judgment of the City Court of Cebu, Branch 11, the dispositive portion of the latter reading as follows: WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the defendant, Regino Francisco, Jr.: (1) To vacate immediately the premises in question, consisting of a building located at Manalili St., Cebu City; (2) To pay to the plaintiff the sum of P40,490.46 for the rentals, covering the period from May, 1977 to August, 1980, and starting with the month of September, 1980, to pay to the plaintiff for one (1) year a monthly rental of P l,072.076 and an additional amount of 5 per cent of said amount, and for so much amount every month thereafter equivalent to the rental of the month of every preceding year plus 5 percent of same monthly rental until the defendant shall finally vacate said premises and possession thereof wholly restored to the plaintiff-all plus legal interest from date of filing of the complaint; (3) To pay to the plaintiff the sum of P9,000.00 for attorney's fee; (4) To pay to the plaintiff the sum of P5,000.00 for damages and incidental litigation expenses; and (5) To pay the Costs. SOORDERED.


Cebu City, Philippines, November 21, 1980. (SGD.) PATERNO D. MONTESCLAROS Acting Presiding Judge According to the findings of fact made by the City Court, the defendant Francisco had religiously paid to the plaintiff Soco the corresponding rentals according to the terms of the Least Contract while enjoying the leased premises until one day the plaintiff had to demand upon the defendant for the payment of the rentals for the month of May, 1977 and of the succeeding months. The plaintiff also demanded upon the defendant to vacate the premises and from that time he failed or refused to vacate his possession thereof; that beginning with the month of May, 1977 until at present, the defendant has not made valid payments of rentals to the plaintiff who, as a consequence, has not received any rental payment from the defendant or anybody else; that for the months of May to August, 1977, evidence shows that the plaintiff through her daughter, Teolita Soco and salesgirl, Vilma Arong, went to the office or residence of defendant at Sanciangko St., Cebu City, on various occasions to effect payment of rentals but were unable to collect on account of the defendant's refusal to pay; that defendant contended that payments of rental thru checks for said four months were made to the plaintiff but the latter refused to accept them; that in 1975, defendant authorized the Commercial Bank and Trust Company to issue checks to the plaintiff chargeable against his bank account, for the payment of said rentals, and the delivery of said checks was coursed by the bank thru the messengerial services of the FAR Corporation, but the plaintiff refused to accept them and because of such refusal, defendant instructed said bank to make consignation with the Clerk of Court of the City Court of Cebu as regard said rentals for May to August, 1977 and for subsequent months.

The City Court further found that there is no showing that the letter allegedly delivered to the plaintiff in May, 1977 by Filomeno Soon, messenger of the FAR Corporation contained cash money, check, money order, or any other form of note of value, hence there could never be any tender of payment, and even granting that there was, but plaintiff refused to accept it without any reason, still no consignation for May, 1977 rental could be considered in favor of the defendant unless evidence is presented to establish that he actually made rental deposit with the court in cash money and prior and subsequent to such deposit, he notified the plaintiff thereof. Notwithstanding the contradictory findings of fact and the resulting opposite conclusions of law by the City Court and the Court of First Instance, both are agreed, however, that the case presents the issue of whether the lessee failed to pay the monthly rentals beginning May, 1977 up to the time the complaint for eviction was filed on January 8, 1979. This issue in turn revolves on whether the consignation of the rentals was valid or not to discharge effectively the lessee's obligation to pay the same. The City Court ruled that the consignation was not valid. The Court of First Instance, on the other hand, held that there was substantial compliance with the requisites of the law on consignation. Let us examine the law and consider Our jurisprudence on the matter, aside from the codal provisions already cited herein. According to Article 1256, New Civil Code, if the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due. Consignation alone shall produce the same effect in the following cases: (1) When the creditor is absent or unknown, or does not appear at the place of payment; (2) When he is incapacitated to receive the payment at the time it is due; (3) When, without just cause, he refuses to give


a receipt; (4) When two or more persons claim the same right to collect; (5) When the title of the obligation has been lost. Consignation is the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment and it generally requires a prior tender of payment. (Limkako vs. Teodoro, 74 Phil. 313). In order that consignation may be effective, the debtor must first comply with certain requirements prescribed by law. The debtor must show (1) that there was a debt due; (2) that the consignation of the obligation had been made because the creditor to whom tender of payment was made refused to accept it, or because he was absent or incapacitated, or because several persons claimed to be entitled to receive the amount due (Art. 1176, Civil Code); (3) that previous notice of the consignation had been given to the person interested in the performance of the obligation (Art. 1177, Civil Code); (4) that the amount due was placed at the disposal of the court (Art. 1178, Civil Code); and (5) that after the consignation had been made the person interested was notified thereof (Art. 1178, Civil Code). Failure in any of these requirements is enough ground to render a consignation ineffective. (Jose Ponce de Leon vs. Santiago Syjuco, Inc., 90 Phil. 311). Without the notice first announced to the persons interested in the fulfillment of the obligation, the consignation as a payment is void. (Limkako vs. Teodoro, 74 Phil. 313), In order to be valid, the tender of payment must be made in lawful currency. While payment in check by the debtor may be acceptable as valid, if no prompt objection to said payment is made (Desbarats vs. Vda. de Mortera, L-4915, May 25, 1956) the fact that in previous years payment in check was accepted does not place its creditor in estoppel from requiring the debtor to pay his obligation in cash (Sy vs. Eufemio, L-10572, Sept. 30, 1958).

Thus, the tender of a check to pay for an obligation is not a valid tender of payment thereof (Desbarats vs. Vda. de Mortera, supra). See Annotation, The Mechanics of Consignation by Atty. S. Tabios, 104 SCRA 174-179. Tender of payment must be distinguished from consignation. Tender is the antecedent of consignation, that is, an act preparatory to the consignation, which is the principal, and from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. (8 Manresa 325). Reviewing carefully the evidence presented by respondent lessee at the trial of the case to prove his compliance with all the requirements of a valid tender of payment and consignation and from which the respondent Judge based his conclusion that there was substantial compliance with the law on consignation, We note from the assailed decision hereinbefore quoted that these evidences are: Exhibit 10, the letter of Atty. Pampio Abarintos dated June 9, 1977: Exhibit 12, letter of Atty. Pampio Abarintos dated July 6, 1977; Exhibit 14, the Answer of respondent Francisco in Civil Case R- 16261, particularly paragraph 7 of the Special and Affirmative Defenses; and Exhibit 1, letter of Atty. Eric Menchavez dated November 28, 1978. All these evidences, according to respondent Judge, proved that petitioner lessor was notified of the deposit of the monthly rentals. We have analyzed and scrutinized closely the above exhibits and We find that the respondent Judge's conclusion is manifestly wrong and based on misapprehension of facts. Thus- (1) Exhibit 10 reads: (see p. 17, Records)


June 9, 1977 Miss Soledad Soco Soledad Soco Retazo P. Gullas St., Cebu City Dear Miss Soco: This is in connection with the payment of rental of my client, Engr. Regino Francisco, Jr., of your building situated at Manalili St., Cebu City. It appears that twice you refused acceptance of the said payment made by my client. It appears further that my client had called your office several times and left a message for you to get this payment of rental but until the present you have not sent somebody to get it. In this connection, therefore, in behalf of my client, you are hereby requested to please get and claim the rental payment aforestated from the Office of my client at Tagalog Hotel and Restaurant, Sanciangko St., Cebu City. within three (3) days from receipt hereof otherwise we would be constrained to make a consignation of the same with the Court in accordance with law. Hoping for your cooperation on this matter, we remain. Very truly yours, (SGD.) PAMPIO A. ABARINTOS Counsel for Engr. REGINO FRANCISCO, Jr. We may agree that the above exhibit proves tender of payment of the particular monthly rental referred to (the letter does not, however, indicate for what month and also the intention to

deposit the rental with the court, which is the first notice. But certainly, it is no proof of tender of payment of other or subsequent monthly rentals. Neither is it proof that notice of the actual deposit or consignation was given to the lessor, which is the second notice required by law. (2) Exhibit 12 (see p. 237, Records) states: July 6, 1977 Miss Soledad Soco Soledad Soco Reta P. Gullas St., Cebu City Dear Miss Soco: This is to advise and inform you that my client, Engr. Regino Francisco, Jr., has consigned to you, through the Clerk of Court, City Court of Cebu, Cebu City, the total amount of Pl,852.20, as evidenced by cashier's checks No. 478439 and 47907 issued by the Commercial Bank and Trust Company (CBTC) Cebu City Branch, dated May 11, 1977 and June 15, 1977 respectively and payable to your order, under Official Receipt No. 0436936 dated July 6,1977. This amount represents payment of the rental of your building situated at Manalili St., Cebu City which my client, Engr. Regino Francisco, Jr., is renting. You can withdraw the said amount from the Clerk of Court, City Court of Cebu, Cebu City at any time. Please be further notified that all subsequent monthly rentals will be deposited to the Clerk of Court, City Court of Cebu, Cebu City. Very truly yours,


(SGD.) PAMPIO A. ABARINTOS Counsel for ENGR. REGINO FRANCISCO, JR. The above evidence is, of course, proof of notice to the lessor of the deposit or consignation of only the two payments by cashier's checks indicated therein. But surely, it does not prove any other deposit nor the notice thereof to the lessor. It is not even proof of the tender of payment that would have preceded the consignation. (3) Exhibit 14, paragraph 7 of the Answer (see p. 246, Records) alleges: 7. That ever since, defendant had been religiously paying his rentals without any delay which, however, the plaintiff had in so many occasions refused to accept obviously in the hope that she may declare non-payment of rentals and claim it as a ground for the cancellation of the contract of lease. This, after seeing the improvements in the area which were effected, at no small expense by the defendant. To preserve defendant's rights and to show good faith in up to date payment of rentals, defendant had authorized his bank to issue regularly cashier's check in favor of the plaintiff as payment of rentals which the plaintiff had been accepting during the past years and even for the months of January up to May of this year, 1977 way past plaintiff's claim of lease expiration. For the months of June and July, however, plaintiff again started refusing to accept the payments in going back to her previous strategy which forced the defendant to consign his monthly rental with the City Clerk of Court and which is now the present state of affairs in so far as payment of rentals is concerned. These events only goes to show that the wily plaintiff had thought of this mischievous scheme only very recently and filed herein malicious and unfounded complaint. The above exhibit which is lifted from Civil Case No. R-16261 between the parties for annulment of the lease contract, is self-

serving. The statements therein are mere allegations of conclusions which are not evidentiary. (4) Exhibit 1 (see p. 15, Records) is quoted thus: November 28, 1978 Atty. Luis V. Diores Suite 504, SSS Bldg. Jones Avenue, Cebu City Dear Compañero: Your letter dated November 23, 1978 which was addressed to my client, Engr. Regino Francisco, Jr. has been referred to me for reply. It is not true that my client has not paid the rentals as claimed in your letter. As a matter of fact, he has been religiously paying the rentals in advance. Payment was made by Commercial Bank and Trust Company to the Clerk of Court, Cebu City. Attached herewith is the receipt of payment made by him for the month of November, 1978 which is dated November 16, 1978. You can check this up with the City Clerk of Court for satisfaction. Regards. (SGD.) ERIC MENCHAVEZ Counsel for Regino Francisco, Jr. 377-B Junquera St., Cebu City (new address) Again, Exhibit 1 merely proves rental deposit for the particular month of November, 1978 and no other. It is no proof of tender of payment to the lessor, not even proof of notice to consign. We hold that the best evidence of the rental deposits with the Clerk


of Court are the official receipts issued by the Clerk of Court. These the respondent lessee utterly failed to present and produce during the trial of the case. As pointed out in petitioner's Memorandum, no single official receipt was presented in the trial court as nowhere in the formal offer of exhibits for lessee Francisco can a single official receipt of any deposit made be found (pp. 8-9, Memorandum for Petitioner; pp. 163-164, Records). Summing up Our review of the above four (4) exhibits, We hold that the respondent lessee has utterly failed to prove the following requisites of a valid consignation: First, tender of payment of the monthly rentals to the lessor except that indicated in the June 9, l977 Letter, Exhibit 10. In the original records of the case, We note that the certification, Exhibit 11 of Filemon Soon, messenger of the FAR Corporation, certifying that the letter of Soledad Soco sent last May 10 by Commercial Bank and Trust Co. was marked RTS (return to sender) for the reason that the addressee refused to receive it, was rejected by the court for being immaterial, irrelevant and impertinent per its Order dated November 20, 1980. (See p. 117, CFI Records). Second, respondent lessee also failed to prove the first notice to the lessor prior to consignation, except the payment referred to in Exhibit 10. In this connection, the purpose of the notice is in order to give the creditor an opportunity to reconsider his unjustified refusal and to accept payment thereby avoiding consignation and the subsequent litigation. This previous notice is essential to the validity of the consignation and its lack invalidates the same. (Cabanos vs. Calo, 104 Phil. 1058; Limkako vs. Teodoro, 74 Phil. 313). There is no factual basis for the lower court's finding that the lessee had tendered payment of the monthly rentals, thru his

bank, citing the lessee's letter (Exh. 4) requesting the bank to issue checks in favor of Soco in the amount of P840.00 every 10th of each month and to deduct the full amount and service fee from his current account, as well as Exhibit 5, letter of the Vice President agreeing with the request. But scrutinizing carefully Exhibit 4, this is what the lessee also wrote: "Please immediately notify us everytime you have the check ready so we may send somebody over to get it. " And this is exactly what the bank agreed: "Please be advised that we are in conformity to the above arrangement with the understanding that you shall send somebody over to pick up the cashier's check from us." (Exhibit 4, see p. 230, Original Records; Exhibit 5, p. 231, Original Records) Evidently, from this arrangement, it was the lessee's duty to send someone to get the cashier's check from the bank and logically, the lessee has the obligation to make and tender the check to the lessor. This the lessee failed to do, which is fatal to his defense. Third, respondent lessee likewise failed to prove the second notice, that is after consignation has been made, to the lessor except the consignation referred to in Exhibit 12 which are the cashier's check Nos. 478439 and 47907 CBTC dated May 11, 1977 and June 15, 1977 under Official Receipt No. 04369 dated July 6, 1977. Respondent lessee, attempting to prove compliance with the requisites of valid consignation, presented the representative of the Commercial Bank and Trust Co., Edgar Ocañada, Bank Comptroller, who unfortunately belied respondent's claim. We quote below excerpts from his testimony, as follows: ATTY. LUIS DIORES:


Q What month did you say you made ,you started making the deposit? When you first deposited the check to the Clerk of Court? A The payment of cashier's check in favor of Miss Soledad Soco was coursed thru the City Clerk of Court from the letter of request by our client Regino Francisco, Jr., dated September 8, 1977. From that time on, based on his request, we delivered the check direct to the City Clerk of Court. Q What date, what month was that, you first delivered the check to the Clerk of Court.? A We started September 12, 1977. Q September 1977 up to the present time, you delivered the cashier's check to the City Clerk of Court? A Yes. Q You were issued the receipts of those checks? A Well, we have an acknowledgment letter to be signed by the one who received the check. Q You mean you were issued, or you were not issued any official receipt? My question is whether you were issued any official receipt? So, were you issued, or you were not issued? A We were not issued. Q On September, 1977, after you deposited the manager's check for that month with the Clerk of Court, did you serve notice upon Soledad Soco that the deposit was made on such amount for the month of September, 1977 and now to the Clerk of Court? Did you or did you not?

A Well, we only act on something upon the request of our client. Q Please answer my question. I know that you are acting upon instruction of your client. My question was-after you made the deposit of the manager's check whether or not you notified Soledad Soco that such manager's check was deposited in the Clerk of Court from the month of September, 1977? A We are not bound to. Q I am not asking whether you are bound to or not. I'masking whether you did or you did not? A I did not. Q Alright, for October, 1977, after having made a deposit for that particular month, did you notify Miss Soledad Soco that the deposit was in the Clerk of Court? A No, we did not. Q Now, on November, 1977, did you notify Soledad Soco that you deposited the manager's check to the City Clerk of Court for that month? A I did not. Q You did not also notify Soledad Soco for the month December, 1977, so also from January, February, March, April, May, June, July until December, 1978, you did not also notify Miss Soledad Soco all the deposits of the manager's check which you said you deposited with the Clerk of Court in every end of the month? So also from each and every month from January 1979 up to December 1979, you did not also serve notice upon Soledad Socco of the deposit in the Clerk of Court, is that correct?


A Yes. Q So also in January 1980 up to this month 1980, you did not instructed by your client Mr. and Mrs. Regino Francisco, jr. to make also serve notice upon Soledad Soco of the Manager's check which you said you deposited to the Clerk of Court? A I did not. Q Now, you did not make such notices because you were not such notices after the deposits you made, is that correct? A Yes, sir. Q Now, from 1977, September up to the present time, before the deposit was made with the Clerk of Court, did you serve notice to Soledad Soco that a deposit was going to be made in each and every month? A Not. Q In other words, from September 1977 up to the present time, you did not notify Soledad Soco that you were going to make the deposit with the Clerk of Court, and you did not also notify Soledad Soco after the deposit was made, that a deposit has been made in each and every month during that period, is that correct? A Yes Q And the reason was because you were not instructed by Mr. and Mrs. Regino Francisco, Jr. that such notification should be made before the deposit and after the deposit was made, is that correct?

A No, I did not. (Testimony of Ocanada pp. 32-41, Hearing on June 3, 1980). Recapitulating the above testimony of the Bank Comptroller, it is clear that the bank did not send notice to Soco that the checks will be deposited in consignation with the Clerk of Court (the first notice) and also, the bank did not send notice to Soco that the checks were in fact deposited (the second notice) because no instructions were given by its depositor, the lessee, to this effect, and this lack of notices started from September, 1977 to the time of the trial, that is June 3, 1980. The reason for the notification to the persons interested in the fulfillment of the obligation after consignation had been made, which is separate and distinct from the notification which is made prior to the consignation, is stated in Cabanos vs. Calo, G.R. No. L-10927, October 30, 1958, 104 Phil. 1058. thus: "There should be notice to the creditor prior and after consignation as required by the Civil Code. The reason for this is obvious, namely, to enable the creditor to withdraw the goods or money deposited. Indeed, it would be unjust to make him suffer the risk for any deterioration, depreciation or loss of such goods or money by reason of lack of knowledge of the consignation." And the fourth requisite that respondent lessee failed to prove is the actual deposit or consignation of the monthly rentals except the two cashier's checks referred to in Exhibit 12. As indicated earlier, not a single copy of the official receipts issued by the Clerk of Court was presented at the trial of the case to prove the actual deposit or consignation. We find, however, reference to some 45 copies of official receipts issued by the Clerk of Court marked Annexes "B-1 " to "B-40" to the Motion for Reconsideration of the Order granting execution pending appeal filed by defendant Francisco in the City Court of Cebu (pp, 150194, CFI Original Records) as well as in the Motion for Reconsideration of the CFI decision, filed by plaintiff lessor (pp.


39-50, Records, marked Annex "E ") the allegation that "there was no receipt at all showing that defendant Francisco has deposited with the Clerk of Court the monthly rentals corresponding to the months of May and June, 1977. And for the months of July and August, 1977, the rentals were only deposited with the Clerk of Court on 20 November 1979 (or more than two years later)."... The deposits of these monthly rentals for July and August, 1977 on 20 November 1979, is very significant because on 24 October 1979, plaintiff Soco had testified before the trial court that defendant had not paid the monthly rentals for these months. Thus, defendant had to make a hurried deposit on the following month to repair his failure. " (pp. 43-44, Records). We have verified the truth of the above claim or allegation and We find that indeed, under Official Receipt No. 1697161Z, the rental deposit for August, 1977 in cashier's check No. 502782 dated 8-10-77 was deposited on November 20, 1979 (Annex "B15", p. 169, Original CFI Records) and under Official Receipt No. 1697159Z, the rental deposit for July under Check No. 479647 was deposited on November 20, 1979 (Annex "B-16", p. 170, Original CFI Records). Indeed, these two rental deposits were made on November 20, 1979, two years late and after the filing of the complaint for illegal detainer. The decision under review cites Exhibits 6, 7, 8 and 9, the Debit Memorandum issued by Comtrust Bank deducting the amounts of the checks therein indicated from the account of the lessee, to prove payment of the monthly rentals. But these Debit Memorandums are merely internal banking practices or office procedures involving the bank and its depositor which is not binding upon a third person such as the lessor. What is important is whether the checks were picked up by the lessee as per the arrangement indicated in Exhibits 4 and 5 wherein the lessee had to pick up the checks issued by CBTC or to send somebody to pick them up, and logically, for the lessee to tender the same to the

lessor. On this vital point, the lessee miserably failed to present any proof that he complied with the arrangement. We, therefore, find and rule that the lessee has failed to prove tender of payment except that in Exh. 10; he has failed to prove the first notice to the lessor prior to consignation except that given in Exh. 10; he has failed to prove the second notice after consignation except the two made in Exh. 12; and he has failed to pay the rentals for the months of July and August, 1977 as of the time the complaint was filed for the eviction of the lessee. We hold that the evidence is clear, competent and convincing showing that the lessee has violated the terms of the lease contract and he may, therefore, be judicially ejected. The other matters raised in the appeal are of no moment. The motion to dismiss filed by respondent on the ground of "want of specific assignment of errors in the appellant's brief, or of page references to the records as required in Section 16(d) of Rule 46," is without merit. The petition itself has attached the decision sought to be reviewed. Both Petition and Memorandum of the petitioner contain the summary statement of facts; they discuss the essential requisites of a valid consignation; the erroneous conclusion of the respondent Judge in reversing the decision of the City Court, his grave abuse of discretion which, the petitioner argues, "has so far departed from the accepted and usual course of judicial proceeding in the matter of applying the law and jurisprudence on the matter." The Memorandum further cites other basis for petitioner's plea. In Our mind, the errors in the appealed decision are sufficiently stated and assigned. Moreover, under Our rulings, We have stated that: This Court is clothed with ample authority to review matters, even if they are not assigned as errors in the appeal, if it finds that their consideration is necessary in arriving at a just decision


of the case. Also, an unassigned error closely related to an error properly assigned or upon which the determination of the questioned raised by the error properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as an error." (Ortigas, Jr. vs. Lufthansa German Airlines, L-28773, June 30, 1975, 64 SCRA 610) Under Section 5 of Rule 53, the appellate court is authorized to consider a plain error, although it was not specifically assigned by appellants." (Dilag vs. Heirs of Resurreccion, 76 Phil. 649) Appellants need not make specific assignment of errors provided they discuss at length and assail in their brief the correctness of the trial court's findings regarding the matter. Said discussion warrants the appellate court to rule upon the point because it substantially complies with Section 7, Rule 51 of the Revised Rules of Court, intended merely to compel the appellant to specify the questions which he wants to raise and be disposed of in his appeal. A clear discussion regarding an error allegedly committed by the trial court accomplishes the purpose of a particular assignment of error." (Cabrera vs. Belen, 95 Phil. 54; Miguel vs Court of Appeals, L- 20274, Oct. 30, 1969, 29 SCRA 760773, cited in Moran, Comments on the Rules of Court, Vol. 11, 1970 ed., p. 534). Pleadings as well as remedial laws should be construed liberally in order that the litigants may have ample opportunity to prove their respective claims, and that a possible denial of substantial justice, due to legal technicalities, may be avoided." (Concepcion, et al. vs. The Payatas Estate Improvement Co., Inc., 103 Phil. 10 17). WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of First Instance of Cebu, 14th Judicial District, Branch XII is hereby REVERSED and SET ASIDE, and the derision of the

City Court of Cebu, Branch II is hereby reinstated, with costs in favor of the petitioner. 83. G.R. No. L-42230 April 15, 1988 LAURO IMMACULATA, represented by his wife AMPARO VELASCO, as Guardian Ad Litem, petitioner, vs. HON. PEDRO C. NAVARRO, in his capacity as Presiding Judge of the Court of First Instance of Rizal, Branch No. II, and HEIRS OF JUANITO VICTORIA, namely: LOLITA, TOMAS, BENJAMIN, VIRGINIA, BRENDA and ELVIE, all surnamed VICTORIA, and JUANITA NAVAL, surviving widow; and the PROVINCIAL SHERIFF OF RIZAL, respondents. PARAS, J.: Petitioner's Motion for Reconsideration of Our decision dated November 26, 1986 asks Us to consider a point inadvertently missed by the Court — the matter of legal redemption of a parcel of land previously obtained by petitioner Lauro Immaculata thru a free patent. The reconsideration of this issue is hereby GRANTED. While res judicata may bar questions on the validity of the sale in view of alleged insanity and intimidation (and this point is no longer pressed by counsel for the petitioner) still the question of the right of legal redemption has remained unresolved. Be it noted that in an action (Civil Case No. 20968) filed on March 24, 1975 before the defunct Court of First Instance of Rizal,


petitioner presented an alternative cause of action or prayer just in case the validity of the sale would be sustained. And this alternative cause of action or prayer is to allow petitioner to legally redeem the property. We hereby grant said alternative cause of action or prayer. While the sale was originally executed sometime in December, 1969, it was only on February 3, 1974 when, as prayed for 1 by private respondent, and as ordered by the court a quo, a "deed of conveyance" was formally executed. Since offer to redeem was made on March 24, 1975, this was clearly within the five-year period of legal redemption allowed by the Public Land Act (See Abuan v. Garcia, 14 SCRA 759, 761). The allegation that the offer to redeem was not sincere, because there was no consignation of the amount in Court is devoid of merit. The right to redeem is a RIGHT, not an obligation, therefore, there is no consignation required (De Jesus v. Garcia, C.A. 47 O.G. 2406; Resales v. Reyes, 25 Phil. 495, Vda. de Quirino v. Palarca, L-28269, Aug. 16, 1969) to preserve the right to redeem (Villegas v. Capistrano, 9 Phil. 416). WHEREFORE, as prayed for by the petitioner Lauro Immaculata (represented by his wife, Amparo Velasco, as Guardian ad litem) the decision of this Court dated November 26, 1986 is hereby MODIFIED, and the case is remanded to the court a quo for it to accept payment or consignation 2 (in connection with the legal redemption which We are hereby allowing the petitioner to do) by the herein petitioner of whatever he received from respondent at the time the transaction was made. SO ORDERED.

84.

G.R. No. 181723 August 11, 2014 ELIZABETH DEL CARMEN, Petitioner, vs. SPOUSES RESTITUTO SABORDO and MIMA MAHILUMSABORDO, Respondents.

D E C I S I O N PERALTA, J.: This treats of the petition for review on certiorari assailing the Decision1 and Resolution2 of the Court of Appeals (CA), dated May 25, 2007 and January 24, 2008, respectively, in CA-G.R. CV No. 75013. The factual and procedural antecedents of the case are as follows: Sometime in 1961, the spouses Toribio and Eufrocina Suico (Suico spouses), along with several business partners, entered into a business venture by establishing a rice and com mill at Mandaue City, Cebu. As part of their capital, they obtained a loan from the Development Bank of the Philippines (DBP), and to secure the said loan, four parcels of land owned by the Suico spouses, denominated as Lots 506, 512, 513 and 514, and another lot owned by their business partner, Juliana Del Rosario, were mortgaged. Subsequently, the Suico spouses and their business partners failed to pay their loan obligations forcing DBP to foreclose the mortgage. After the Suico spouses and their partners failed to redeem the foreclosed properties, DBP consolidated its ownership over the same. Nonetheless, DBP later allowed the Suico spouses and Reginald and Beatriz Flores (Flores spouses), as substitutes for Juliana Del Rosario, to repurchase the subject lots by way of a conditional sale for the sum of P240,571.00. The Suico and Flores spouses were able to pay the downpayment and the first monthly amortization, but no


monthly installments were made thereafter. Threatened with the cancellation of the conditional sale, the Suico and Flores spouses sold their rights over the said properties to herein respondents Restituto and Mima Sabordo, subject to the condition that the latter shall pay the balance of the sale price. On September 3, 1974, respondents and the Suico and Flores spouses executed a supplemental agreement whereby they affirmed that what was actually sold to respondents were Lots 512 and 513, while Lots 506 and 514 were given to them as usufructuaries. DBP approved the sale of rights of the Suico and Flores spouses in favor of herein respondents. Subsequently, respondents were able to repurchase the foreclosed properties of the Suico and Flores spouses. On September 13, 1976, respondent Restituto Sabordo (Restituto) filed with the then Court of First Instance of Negros Occidental an original action for declaratory relief with damages and prayer for a writ of preliminary injunction raising the issue of whether or not the Suico spouses have the right to recover from respondents Lots 506 and 514. In its Decision dated December 17, 1986, the Regional Trial Court (RTC) of San Carlos City, Negros Occidental, ruled in favor of the Suico spouses directing that the latter have until August 31, 1987 within which to redeem or buy back from respondents Lots 506 and 514. On appeal, the CA, in its Decision3 in CA-G.R. CV No. 13785, dated April 24, 1990, modified the RTC decision by giving the Suico spouses until October 31, 1990 within which to exercise their option to purchase or redeem the subject lots from respondents by paying the sum of P127,500.00. The dispositive portion of the CADecision reads as follows: x x x x

For reasons given, judgment is hereby rendered modifying the dispositive portion of [the] decision of the lower court to read: 1) The defendants-appellees are granted up to October 31, 1990 within which toexercise their option to purchase from the plaintiff-appellant Restituto Sabordo and Mima Mahilum Lot No. 506, covered by Transfer Certificate of Title No. T-102598 and Lot No. 514, covered by Transfer Certificate of Title No. T102599, both of Escalante Cadastre, Negros Occidental by reimbursing or paying to the plaintiff the sum of ONE HUNDRED TWENTY-SEVEN THOUSAND FIVE HUNDRED PESOS (P127,500.00); 2) Within said period, the defendants-appellees shall continue to have usufructuary rights on the coconut trees on Lots Nos. 506 and 514, Escalante Cadastre, Negros Occidental; 3) The Writ of Preliminary Injunction dated August 12, 1977 shall be effective untildefendants-appellees shall have exercised their option to purchase within said period by paying or reimbursing to the plaintiff-appellant the aforesaid amount. No pronouncement as to costs. SO ORDERED.4 In a Resolution5 dated February 13, 1991, the CA granted the Suico spouses an additional period of 90 days from notice within which to exercise their option to purchase or redeem the disputed lots. In the meantime, Toribio Suico (Toribio) died leaving his widow, Eufrocina, and several others, includingherein petitioner, as legal heirs. Later, they discovered that respondents mortgaged Lots 506 and 514 with Republic Planters Bank (RPB) as security for a loan which, subsequently, became delinquent.


Thereafter, claiming that theyare ready with the payment of P127,500.00, but alleging that they cannot determine as to whom such payment shall be made, petitioner and her co-heirs filed a Complaint6 with the RTC of San Carlos City, Negros Occidental seeking to compel herein respondents and RPB to interplead and litigate between themselves their respective interests on the abovementioned sum of money.1âwphi1 The Complaint also prayed that respondents be directed to substitute Lots 506 and 514 with other real estate properties as collateral for their outstanding obligation with RPB and that the latter be ordered toaccept the substitute collateral and release the mortgage on Lots 506 and 514. Upon filing of their complaint, the heirs of Toribio deposited the amount of P127,500.00 with the RTC of San Carlos City, Branch 59. Respondents filed their Answer7 with Counterclaim praying for the dismissal of the above Complaint on the grounds that (1) the action for interpleader was improper since RPB isnot laying any claim on the sum of P127,500.00; (2) that the period withinwhich the complainants are allowed to purchase Lots 506 and 514 had already expired; (3) that there was no valid consignation, and (4) that the case is barred by litis pendenciaor res judicata. On the other hand, RPB filed a Motion to Dismiss the subject Complaint on the ground that petitioner and her co-heirs had no valid cause of action and that they have no primary legal right which is enforceable and binding against RPB. On December 5, 2001, the RTC rendered judgment, dismissing the Complaint of petitioner and her co-heirs for lack of merit.8 Respondents' Counterclaim was likewise dismissed. Petitioner and her co-heirs filed an appeal with the CA contending that the judicial deposit or consignation of the

amount of P127,500.00 was valid and binding and produced the effect of payment of the purchase price of the subject lots. In its assailed Decision, the CA denied the above appeal for lack of merit and affirmed the disputed RTC Decision. Petitioner and her co-heirs filed a Motion for Reconsideration,9 but it was likewise denied by the CA. Hence, the present petition for review on certiorariwith a lone Assignment of Error, to wit: THE COURT OF APPEALS ERRED IN AFFIRMING THE DECISION OF THE LOWER COURT WHICH HELD THAT THE JUDICIAL DEPOSIT OF P127,500.00 MADE BY THE SUICOS WITH THE CLERK OF COURT OF THE RTC, SAN CARLOS CITY, IN COMPLIANCE WITH THE FINAL AND EXECUTORY DECISION OF THE COURT OF APPEALS IN CA-G.R. CV-13785 WAS NOT VALID.10 Petitioner's main contention is that the consignation which she and her co-heirs made was a judicial deposit based on a final judgment and, as such, does not require compliance with the requirements of Articles 125611 and 125712 of the Civil Code. The petition lacks merit. At the outset, the Court quotes withapproval the discussion of the CA regarding the definition and nature of consignation, to wit: … consignation [is] the act of depositing the thing due with the court or judicial authorities whenever the creditor cannot accept or refuses to accept payment, and it generally requires a prior tender of payment. It should be distinguished from tender of payment which is the manifestation by the debtor to the creditor of his desire to comply with his obligation, with the offer of immediate performance.Tender is the antecedent of consignation, thatis, an act preparatory to the consignation, which is the principal, and


from which are derived the immediate consequences which the debtor desires or seeks to obtain. Tender of payment may be extrajudicial, while consignation is necessarily judicial, and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation. Tender and consignation, where validly made, produces the effect of payment and extinguishes the obligation.13 In the case of Arzaga v. Rumbaoa,14 which was cited by petitioner in support of his contention, this Court ruled that the deposit made with the court by the plaintiff-appellee in the saidcase is considered a valid payment of the amount adjudged, even without a prior tender of payment thereof to the defendants-appellants,because the plaintiff-appellee, upon making such deposit, expressly petitioned the court that the defendants-appellees be notified to receive the tender of payment.This Court held that while "[t]he deposit, by itself alone, may not have been sufficient, but with the express terms of the petition, there was full and complete offer of payment made directly to defendants-appellants."15 In the instant case, however, petitioner and her co-heirs, upon making the deposit with the RTC, did not ask the trial court that respondents be notified to receive the amount that they have deposited. In fact, there was no tender of payment. Instead, what petitioner and her co-heirs prayed for is thatrespondents and RPB be directed to interplead with one another to determine their alleged respective rights over the consigned amount; that respondents be likewise directed to substitute the subject lots with other real properties as collateral for their loan with RPB and that RPB be also directed to accept the substitute real properties as collateral for the said loan. Nonetheless,the trial court correctly ruled that interpleader is not the proper remedy because RPB did notmake any claim whatsoever over the amount consigned by petitioner and her coheirs with the court.

In the cases of Del Rosario v. Sandico16 and Salvante v. Cruz,17 likewise cited as authority by petitioner, this Court held that, for a consignation or deposit with the court of an amount due on a judgment to be considered as payment, there must beprior tender to the judgment creditor who refuses to accept it. The same principle was reiterated in the later case of Pabugais v. Sahijwani.18 As stated above, tender of payment involves a positive and unconditional act by the obligor of offering legal tender currency as payment to the obligee for the former’s obligation and demanding that the latter accept the same.19 In the instant case, the Court finds no cogent reason to depart from the findings of the CA and the RTC that petitioner and her coheirs failed to make a prior valid tender of payment to respondents. It is settled that compliance with the requisites of a valid consignation is mandatory.20 Failure to comply strictly with any of the requisites will render the consignation void. One of these requisites is a valid prior tender of payment.21 Under Article 1256, the only instances where prior tender of payment is excused are: (1) when the creditor is absent or unknown, or does not appear at the place of payment; (2) when the creditor is incapacitated to receive the payment at the time it is due; (3) when, without just cause, the creditor refuses to give a receipt; (4) when two or more persons claim the same right to collect; and (5) when the title of the obligation has been lost. None of these instances are present in the instant case. Hence, the fact that the subject lots are in danger of being foreclosed does not excuse petitioner and her co-heirs from tendering payment to respondents, as directed by the court. WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals, dated May 25, 2007, and its Resolution dated January 24, 2008, both in CA-G.R. CV No. 75013, are AFFIRMED.


85.

G.R. No. L-21507

June 7, 1971

PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. NATIVIDAD FRANKLIN, accused, ASIAN SURETY & INSURANCE COMPANY, INC., bondsman-appellant.

DIZON, J.: Appeal taken by the Asian Surety & Insurance Company, Inc. from the decision of the Court of First Instance of Pampanga dated April 17, 1963, forfeiting the bail bond posted by it for the provisional release of Natividad Franklin, the accused in Criminal Case No. 4300 of said court, as well as from the latter's orders denying the surety company's motion for a reductions of bail, and its motion for reconsideration thereof. It appears that an information filed with the Justice of the Peace Court of Angeles, Pampanga, docketed as Criminal Case No. 5536, Natividad Franklin was charged with estafa. Upon a bail bond posted by the Asian Surety & Insurance Company, Inc. in the amount of P2,000.00, she was released from custody. After the preliminary investigation of the case, the Justice of the Peace Court elevated it to the Court of First Instance of Pampanga where the Provincial Fiscal filed the corresponding information against the accused. The Court of First Instance then set her arraignment on July 14, 1962, on which date she failed to appear, but the court postponed the arraignment to July 28 of the same year upon motion of counsel for the surety company. The accused failed to appear again, for which reason the court ordered her

arrest and required the surety company to show cause why the bail bond posted by it should not be forfeited. On September 25, 1962, the court granted the surety company a period of thirty days within which to produce and surrender the accused, with the warning that upon its failure to do so the bail bond posted by it would be forfeited. On October 25, 1962 the surety company filed a motion praying for an extension of thirty days within which to produce the body of the accused and to show cause why its bail bond should not be forfeited. As not withstanding the extension granted the surety company failed to produce the accused again, the court had no other alternative but to render the judgment of forfeiture. Subsequently, the surety company filed a motion for a reduction of bail alleging that the reason for its inability to produce and surrender the accused to the court was the fact that the Philippine Government had allowed her to leave the country and proceed to the United States on February 27, 1962. The reason thus given not being to the satisfaction of the court, the motion for reduction of bail was denied. The surety company's motion for reconsideration was also denied by the lower court on May 27, 1963, although it stated in its order that it would consider the matter of reducing the bail bond "upon production of the accused." The surety company never complied with this condition. Appellant now contends that the lower court should have released it from all liability under the bail bond posted by it because its failure to produce and surrender the accused was due to the negligence of the Philippine Government itself in issuing a passport to said accused, thereby enabling her to leave the country. In support of this contention the provisions of Article 1266 of the New Civil Code are invoked.


Appellant's contention is untenable. The abovementioned legal provision does not apply to its case, because the same speaks of the relation between a debtor and a creditor, which does not exist in the case of a surety upon a bail bond, on the one hand, and the State, on the other. In U.S. vs. Bonoan, et al., 22 Phil., p. 1, We held that: The rights and liabilities of sureties on a recognizance or bail bond are, in many respects, different from those of sureties on ordinary bonds or commercial contracts. The former can discharge themselves from liability by surrendering their principal; the latter, as a general rule, can only be released by payment of the debt or performance of the act stipulated. In the more recent case of Uy Tuising, 61 Phil. 404, We also held that: By the mere fact that a person binds himself as surety for the accused, he takes charge of, and absolutely becomes responsible for the latter's custody, and under such circumstances it is incumbent upon him, or rather, it is his inevitable obligation not merely a right, to keep the accused at all times under his surveillance, inasmuch as the authority emanating from his character as surety is no more nor less than the Government's authority to hold the said accused under preventive imprisonment. In allowing the accused Eugenio Uy Tuising to leave the jurisdiction of the Philippines, the appellee necessarily ran the risk of violating and in fact it clearly violated the terms of its bail bonds because it failed to produce the said accused when on January 15, 1932, it was required to do so. Undoubtedly, the result of the obligation assumed by the appellee to hold the accused at all times to the orders and processes of the lower court was to prohibit said accused from leaving the jurisdiction of the Philippines because, otherwise, said orders and processes would be nugatory and inasmuch as the jurisdiction of the court

from which they issued does not extend beyond that of the Philippines, they would have no binding force outside of said jurisdiction. It is clear, therefore, that in the eyes of the law a surety becomes the legal custodian and jailer of the accused, thereby assuming the obligation to keep the latter at all times under his surveillance, and to produce and surrender him to the court upon the latter's demand. That the accused in this case was able to secure a Philippine passport which enabled her to go to the United States was, in fact, due to the surety company's fault because it was its duty to do everything and take all steps necessary to prevent that departure. This could have been accomplished by seasonably informing the Department of Foreign Affairs and other agencies of the government of the fact that the accused for whose provisional liberty it had posted a bail bond was facing a criminal charge in a particular court of the country. Had the surety company done this, there can be no doubt that no Philippine passport would have been issued to Natividad Franklin. UPON ALL THE FOREGOING, the decision appealed from is affirmed in all its parts, with costs. 86. G.R. No. L-23546 August 29, 1974 LAGUNA TAYABAS BUS COMPANY and BATANGAS TRANSPORTATION COMPANY, petitioners, vs. FRANCISCO C. MANABAT, as assignee of Biñan Transportation Company, Insolvent, respondent.


MAKASIAR, J.: This is an appeal by certiorari from a judgment of the Court of Appeals dated August 31, 1964, which WE AFFIRM. The undisputed facts are recounted by the Court of Appeals through then Associate Justice Salvador Esguerra thus: On January 20, 1956, a contract was executed whereby the Biñan Transportation Company leased to the Laguna-Tayabas Bus Company at a monthly rental of P2,500.00 its certificates of public convenience over the lines known as Manila-Biñan, Manila-Canlubang and Sta. Rosa-Manila, and to the Batangas Transportation Company its certificate of public convenience over the line known as Manila-Batangas Wharf, together with one "International" truck, for a period of five years, renewable for another similar period, to commence from the approval of the lease contract by the Public Service Commission. On the same date the Public Service Commission provisionally approved the lease contract on condition that the lessees should operate on the leased lines in accordance with the prescribed time schedule and that such approval was subject to modification or cancellation and to whatever decision that in due time might be rendered in the case. Sometime after the execution of the lease contract, the plaintiff Biñan Transportation Company was declared insolvent in Special Proceedings No. B-30 of the Court of First Instance of Laguna, and Francisco C. Manabat was appointed as its assignee. From time to time, the defendants paid the lease rentals up to December, 1957, with the exception of the rental for August 1957, from which there was deducted the sum of P1,836.92 without the consent of the plaintiff. This deduction was based on the ground that the employees of the defendants on the leased lines went on strike for 6 days in June and another 6 days in July, 1957, and caused a loss of P500 for each strike, or a total of P1,000.00; and that in

Civil Case No. 696 of the Court of First Instance of Batangas, Branch II, judgment was rendered in favor of defendant Batangas Transportation Company against the Biñan Transportation Company for the sum of P836.92. The assignee of the plaintiff objected to such deduction, claiming that the contract of lease would be suspended only if the defendants could not operate the leased lines due to the action of the officers, employees or laborers of the lessor but not of the lessees, and that the deduction of P836.92 amounted to a fraudulent preference in the insolvency proceedings as whatever judgment might have been rendered in favor of any of the lessees should have been filed as a claim in said proceedings. The defendants neither refunded the deductions nor paid the rentals beginning January, 1958, notwithstanding demands therefor made from time to time. At first, the defendants assured the plaintiff that the lease rentals would be paid, although it might be delayed, but in the end they failed to comply with their promise. On February 18, 1958, the Batangas Transportation Company and Laguna-Tayabas Bus Company separately filed with the Public Service Commission a petition for authority to suspend the operation on the lines covered by the certificates of public convenience leased to each of them by the Biñan Transportation Company. The defendants alleged as reasons the reduction in the amount of dollars allowed by the Monetary Board of the Central Bank of the Philippines for the purchase of spare parts needed in the operation of their trucks, the alleged difficulty encountered in securing said parts, and their procurement at exorbitant costs, thus rendering the operation of the leased lines prohibitive. The defendants further alleged that the high cost of operation, coupled with the lack of passenger traffic on the leased lines resulted in financial losses. For these reasons they asked permission to suspend the operation of the leased lines until such time as the operating expenses were restored to normal levels so as to allow the lessees to realize a reasonable margin of profit from their operation.


Plaintiff's assignee opposed the petition on the ground that the Public Service Commission had no jurisdiction to grant the relief prayed for as it should involve the interpretation of the lease contract, which act falls exclusively within the jurisdiction of the ordinary courts; that the petitioners had not asked for the suspension of the operation of the lines covered by their own certificates of public convenience; that to grant the petition would amount to an impairment of the obligation of contract; and that the defendants have no legal personality to ask for suspension of the operation of the leased lines since they belonged exclusively to the plaintiffwho is the grantee of the corresponding certificate of public convenience. Aside from the assignee, the Commissioner of the Internal Revenue and other creditors of the Biñan Transportation Company, like the Standard Vacuum Oil Co. and Parsons Hardware Company, filed oppositions to the petitions for suspension of operation. On October 15, 1958, the Public Service Commission overruled all oppositions filed by the assignee and other creditors of the insolvent, holding that upon its approval of the lease contract, the lessees acquired the operating rights of the lessor and assumed full responsibility for compliance with all the terms and conditions of the certificate of public convenience. The Public Service Commission further stated that the petition to suspend operation did not pertain to any act of dominion or ownership but only to the use of the certificate of public convenience which had been transferred by the plaintiff to the defendants, and that the suspension prayed for was but an incident of the operation of the lines leased to the defendants. The Public Service Commission further ruled that being a quasi-judicial body of limited jurisdiction, it had no authority to interpret contracts, which function belongs to the exclusive domain of the ordinary courts, but the petition did not call for interpretation of any provision of the lease contract as the authority of the Public Service Commission to grant or deny the prayer therein was derived

from its regulatory power over the leased certificates of public convenience. While proceedings before the Public Service Commission were thus going on, as a consequence of the continuing failure of the lessees to fulfill their earlier promise to pay the accruing rentals on the leased certificates, On May 19, 1959, plaintiff Biñan Transportation Company represented by Francisco C. Manabat, assignee, filed this action against defendants Laguna Tayabas Bus Company and Batangas Transportation Company for the recovery of the sum of P42,500 representing the accrued rentals for the lease of the certificates of public convenience of the former to the latter, corresponding to the period from January 1958, to May 1959, inclusive, plus the sum of P1,836.92 which was deducted by the defendants from the rentals due for August, 1957, together with all subsequent rentals from June, 1959, that became due and payable; P5,000.00 for attorney's fees and such corrective and exemplary damages as the court may find reasonable. The defendants moved to dismiss the complaint for lack of jurisdiction over the subject matter of the action, there being another case pending in the Public Service Commission between the same parties for the same cause. ... (pp. 20-21, rec.; pp. 54-55, ROA). The motion to dismiss was, however, denied. Meanwhile — The Public Service Commission delegated its Chief Attorney to receive evidence of the parties on the petition of the herein defendants for authority to suspend operation on the lines leased to them by the plaintiff. The defendants, the assignee of the plaintiff and other creditors of the insolvent presented evidence before the Chief Attorney and the hearing was concluded on June


29, 1959. On October 20, 1959, the Public Service Commission issued an order the dispositive part of which reads as follows: In view of the foregoing, the petitioners herein are authorized to suspend their operation of the trips of the Biñan Transportation Company between Batangas Piers-Manila, Biñan-Manila, Sta. Rosa-Manila and Canlubang-Manila authorized in the aforementioned cases from the date of the filing of their petition on February 18, 1958, until December 31, 1959. (p. 25, rec.; pp. 60-61, ROA). Going back to the Court of First Instance of Laguna — ... The motion (to dismiss) having been denied, the defendants answered the complaint, alleging among others, that the Public Service Commission authorized the suspension of operation over the leased lines from February 18, 1950, up to December 31, 1959, and hence the lease contract should be deemed suspended during that period; that plaintiff failed to place defendants in peaceful and adequate enjoyment and possession of the things leased; that as a result of the plaintiff being declared insolvent the lease contract lost further force and effect and payment of rentals thereafter was made under a mistake and should be refunded to the defendants. (p. 21; rec.; p. 55, ROA). The Court of Appeals proceeded to state that — After hearing in the court a quo and presentation by the parties herein of their respective memoranda, the trial court on March 18, 1960, rendered judgment in favor of plaintiff, ordering the defendants jointly and severally to pay to the former the sum of P65,000.00 for the rentals of the certificates of public convenience corresponding to the period from January, 1958, to February, 1960, inclusive, including the withheld amount of P836.92 from the rentals for August, 1957, plus the rentals that might become due and payable beginning March, 1960, at the

rate of P2,500.00 a month, with interest on the sums of P42,500 and P836.92 at the rate of 6% per annum from the date of the filing of the complaint, with interest on the subsequent rentals at the same rate beginning the first of the following month, plus the sum of P3,000.00 as attorney's fees, and the cost of the suit. (pp. 25-26, rec.) From the decision of the Court of First Instance, defendants appealed to the Court of Appeals, which affirmed the same in toto in its decision dated August 31, 1964. Said decision was received by the appellants on September 7, 1964. On September 21, 1964, appellants filed the present appeal, raising the following questions of law: 1. Considering that the Court of Appeals found that the Public Service Commission provisionally approved the lease contract of January 20, 1956 between petitioners and Biñan Transportation Company upon the condition, amongothers, that such approval was subject to modification and cancellation and towhatever decision that in due time might be rendered in the case, the Court ofAppeals erred in giving no legal effect and significance whatever to the suspension of operations later granted by the Public Service Commission after due hearing covering the lines leased to petitioners thereby nullifying, contrary to law and decisions of this Honorable Court, the authority and powersconferred on the Public Service Commission. 2. The Court of Appeals misapplied the statutory rules on interpreting contracts and erred in its construction of the clauses in the lease agreement authorizing petitioners to suspend operation without the corresponding liability for rentals during the period of suspension.


3. Contrary to various decisions of this Honorable Court relieving the lessee from the obligation to pay rent where there is failure to use or enjoy the thing leased, the Court of Appeals erroneously required petitioners to pay rentals, with interest, during the period of suspension of the lease from January, 1958 up to the expiration of the agreement on January 20, 1961. (p. 7, rec.) On October 12, 1964, the Supreme Court issued a resolution dismissing said petition "for lack of merit." (p. 43, rec.). Said resolution was received by petitioners on October 16, 1964. On October 31, 1964, the day the Court's resolution was to become final, petitioners filed a "Motion to Admit Amended Petition and to Give Due Course Thereto." In said motion, petitioners explained — ... The amendment includes an alternative ground relating to petitioners' prayer for the reduction of the rentals payable by them. This alternative petition was not included in the original one as petitioners where genuinely convinced that they should have been absolved from all liabilities whatever. However, in view of the apparent position taken by this Honorable Court, as implied in its resolution on October 12, 1964, notice of which was received on October 16, 1964, petitioners now squarely submit their alternative position for consideration. There is decisional authority for the reduction of rentals payable (see Reyes v. Caltex, 47 O.G. 1193, 1203-1204) (p. 44, rec). The new question raised is presented thus: xxx xxx xxx IV

This Honorable Court is authorized to equitably reduce the rentals payableby the petitioners, should this Honorable Court adopt the position of the Courtof Appeals and the lower court that petitioners have not been releived from thepayment of rentals on the leased lines. (p. 7 Amended Petition for Certiorari,pp. 46, 52, rec.). On November 5, 1964, the Supreme Court required respondents herein to file an answer to the amended petition. On the same date, respondents filed, quite belatedly, an opposition to the motion of the petitioners. Said opposition was later "noted" by the Court in its resolution dated December 1, 1964. I First, it must be pointed out that the first three questions of law raised by petitioners were already disposed of in Our resolution dated October 12, 1964 dismissing the original petition for lack of merit, which in effect affirmed the appealed decision of the Court of of Appeals. Although, in their motion to admit amended petition dated October 31, 1964, petitioners sought a reconsideration of the said resolution not only in the light of the fourth legal issue raised but also on the said first three legal questions, the petitioners advanced no additional arguments nor cited new authorities in support of their stand on the first three questions of law. They merely reproduced verbatim from their original petition their discussion on said questions. To the extent therefore that the motion filed by the petitioner seeks a reconsideration of our order of dismissal by submitting anew, through the amended petition, the very same arguments already dismissed by this Court, the motion shall be considered pro forma, (See Estrada v. Sto. Domingo, 28 SCRA 890, 905-906, 911) and hence is without merit.


Consequently, we limit the resolution of this case solely on the discussions on the last (fourth) question of law raised, taking into consideration the discussion on the first three questions only insofar as they place the petitioners' discussion on the fourth question in its proper context and perspective. II The undisguised object of petitioners' discussion on the fourth question of law raised is to justify their plea for a reduction of the rentals on the ground that the subject matter of the lease was allegedly not used by them as a result of the suspension of operations on the lines authorized by the Public Service Commission. In support of said plea, petitioners invoke article 1680 of the Civil Code which grants lessees of rural lands a right to a reduction of rentals whenever the harvest on the land leased is considerably damaged by an extraordinary fortuitous event. Reliance was also placed by the petitioners on Our decision in Reyes v. Caltex (Phil.) Inc., 84 Phil. 654, which supposedly applied said article by analogy to a lease other than that covered by said legal provision. The authorities from which the petitioners draw support, however, are not applicable to the case at bar. Article 1680 of the Civil Code reads thus: Art. 1680. The lessee shall have no right to a reduction of the rent on accountof the sterility of the land leased, or by reason of the loss of fruits due toordinary fortuitous events; but he shall have such right in case of the loss ofmore than one-half of the fruits through extraordinary and unforeseen fortuitous events, save always when there is a specific stipulation to the contrary.

Extraordinary fortuitous events are understood to be: fire, war, pestilence, unusual flood, locusts, earthquake, or others which are uncommon, and which thecontracting parties could not have reasonably foreseen. Article 1680, it will be observed is a special provision for leases of rural lands. No other legal provision makes it applicable to ordinary leases. Had theintention of the lawmakers been so, they would have placed the article among the general provisions on lease. Nor can the article be applied analogously to ordinary leases, for precisely because of its special character, it was meant to apply only to a special specie of lease. It is a provision of social justice designed to relieve poor farmers from the harsh consequences of their contracts with rich landowners. And taken in that light, the article provides no refuge to lessees whose financial standing or social position is equal to, or even better than, the lessor as in the case at bar. Even if the cited article were a general rule on lease, its provisions nevertheless do not extend to petitioners. One of its requisites is that the cause of loss of the fruits of the leased property must be an "extraordinary and unforeseen fortuitous event." The circumstances of the instant case fail tosatisfy such requisite. As correctly ruled by the Court of Appeals, the alleged causes for the suspension of operations on the lines leased, namely, the high prices of spare parts and gasoline and the reduction of the dollar allocations, "already existed when the contract of lease was executed" (p. 11, Decision; p. 30, rec.; Cuyugan v. Dizon, 89 Phil. 80). The cause of petitioners' inability to operate on the lines cannot, therefore, be ascribed to fortuitous events or circumstances beyond their control, but to their own voluntary desistance (p. 13, Decision; p. 32, rec.). If the petitioners would predicate their plea on the basis solely of their inability to use the certificates of public convenience, absent the requisite of fortuitous event, the cited article would speak


strongly against their plea.Article 1680 opens with the statement: "The lessee shall have no right to reduction of the rent on account of the sterility of the land leased ... ." Obviously, no reduction can be sustained on the ground that the operation of the leased lines was suspended upon the mere speculation that it would yield no substantial profit for the lessee bus company. Petitioners' profits may be reduced due to increase operating costs; but the volume of passenger traffic along the leased lines not only remains same but may even increase as the tempo of the movement of population is intensified by the industrial development of the areas covered or connected by the leased routes. Moreover, upon proper showing, the Public Service Commission might have granted petitioners an increase in rates, as it has done so in several instances, so that public interest will always be promoted by a continuous flow of transportation facilities to service the population and the economy. The citizenry and the economy will suffer by reason of any disruption in the transportation facilities. Furthermore, we are not at all convinced that the lease contract brought no material advantage to the lessor for the period of suspension. It must be recalled that the lease contract not only stipulated for the transfer of the lessor's right to operate the lines covered by the contract, but also for a forbearance on the part of the lessor to operate transportation business along the same lines — and to hold a certificate for that purpose. Thus, even if the lessee would not actually make use of the lessor's certificates over the leased lines, the contractual commitment of the lessor not to operate on the lines would sufficiently insure added profit to the lessees on account of the lease contract. In other words, the commitment alone of the lessor under the contract would enable the lessees to reap full benefits therefrom since the commuting public would, after all, be forced — at their inconvenience and prejudice — to patronize petitioner's remaining buses. Contrary to what petitioners want to suggest, WE refused in the Reyes case, supra, to apply by analogy Article 1680 and

consequently, WE denied the plea oflessee therein for an equitable reduction of the stipulated rentals, holding that: The general rule on performance of contracts is graphically set forth in American treatises which is also the rule, in our opinion, obtaining under the Civil Code. Where a person by his contract charges himself with an obligation possible to be performed, he must perform it, unless the performance is rendered impossible by the act of God, by the law, or by the other party, it being the rule that in case the party desires to be excused from the performance in the event of contingencies arising, it is his duty to provide therefor in his contract. Hence, performance is not excused by subsequent inability to perform, by unforeseen difficulties, by unusual or unexpected expenses, by danger, by inevitable accident, by breaking of machinery, by strikes, by sickness, by failure of a party to avail himself of the benefits tobe had under the contract, by weather conditions, by financial stringency or bystagnation of business. Neither is performance excused by the fact that the contract turns out to be hard and improvident, unprofitable, or impracticable, ill-advised, or even foolish, or less profitable, unexpectedly burdensome. (17 CJS 946-948) (Reyes vs. Caltex, supra, 664. Emphasis supplied). Also expressed in said case is a ruling in American jurisprudence, which found relevance again in the case at bar, to wit: "(S)ince, by the lease, the lessee was to have the advantage of casual profits of the leased premises, he should run the hazard of casual losses during the term and not lay the whole burden upon the lessor." (Reyes vs. Caltex, supra, 664). Militating further against a grant of reduction of the rentals to the petitioners is the petitioners' conduct which is not in accord with the rules of fair play and justice. Petitioners, it must be recalled, promised to pay the accrued rentals in due time. Later, however,


when they believed they found a convenient excuse for escaping their obligation, they reneged on their earlier promise. Moreover, petitioners' option to suspend operation on the leased lines appears malicious. Thus, Justice Esguerra, speaking for the Court of Appeals, propounded the following questions: "If it were true that thecause of the suspension was the high prices of spare parts, gasoline and needed materials and the reduction of the dollar allocation, why was it that only plaintiff-appellee's certificate of public convenience was sought to be suspended? Why did not the defendants-appellants ask for a corresponding reduction or suspension under their own certificate along the same route? Suppose the prices of the spare parts and needed materials were cheap, would the defendants-appellants have paid more than what is stipulated in the lease contract? We believe not. Hence, the suspension of operation on the leased lines was conceived as a scheme to lessen operation costs with the expectation of greater profit." (p. 14, Decision). Indeed, petitioners came to court with unclean hands, which fact militates against their plea for equity. WHEREFORE, THE ORIGINAL AND AMENDED PETITIONS ARE HEREBY DISMISSED, AND THE DECISION OF THE COURT OF APPEALS DATED AUGUST 31, 1964 IS HEREBY AFFIRMED, WITH COSTS AGAINST PETITIONERS. 87. G.R. No. L-44349 October 29, 1976 JESUS V. OCCENA and EFIGENIA C. OCCENA, petitioners, vs.

HON. RAMON V. JABSON, Presiding Judge of the Court Of First Instance of Rizal, Branch XXVI; COURT OF APPEALS and TROPICAL HOMES, INC., respondents. TEEHANKEE, J.: The Court reverses the Court of Appeals appealed resolution. The Civil Code authorizes the release of an obligor when the service has become so difficult as to be manifestly beyond the contemplation of the parties but does not authorize the courts to modify or revise the subdivision contract between the parties or fix a different sharing ratio from that contractually stipulated with the force of law between the parties. Private respondent's complaint for modification of the contract manifestly has no basis in law and must therefore be dismissed for failure to state a cause of action. On February 25, 1975 private respondent Tropical Homes, Inc. filed a complaint for modification of the terms and conditions of its subdivision contract with petitioners (landowners of a 55,330 square meter parcel of land in Davao City), making the following allegations: "That due to the increase in price of oil and its derivatives and the concomitant worldwide spiralling of prices, which are not within the control of plaintiff, of all commodities including basis raw materials required for such development work, the cost of development has risen to levels which are unanticipated, unimagined and not within the remotest contemplation of the parties at the time said agreement was entered into and to such a degree that the conditions and factors which formed the original basis of said contract, Annex 'A', have been totally changed; 'That further performance by the plaintiff under the contract. That further performance by the plaintiff under the contract,Annex 'S', will result in situation where defendants would be unustly enriched at the expense of the plaintiff; will cause an inequitous distribution of proceeds from the sales of


subdivided lots in manifest actually result in the unjust and intolerable exposure of plaintiff to implacable losses, all such situations resulting in an unconscionable, unjust and immoral situation contrary to and in violation of the primordial concepts of good faith, fairness and equity which should pervade all human relations. Under the subdivision contract, respondent "guaranteed (petitioners as landowners) as the latter's fixed and sole share and participation an amount equivalent to forty (40%) percent of all cash receifpts fromthe sale of the subdivision lots" Respondent pray of the Rizal court of first instance that "after due trial, this Honorable Court render judgment modifying the terms and conditions of the contract ... by fixing the proer shares that shouls pertain to the herein parties out of the gross proceeds from the sales of subdivided lots of subjects subdivision". Petitioners moved to dismiss the complaint principally for lack of cause of action, and upon denial thereof and of reconsideration by the lower court elevated the matter on certiorari to respondent Court of Appeals. Respondent court in its questioned resolution of June 28, 1976 set aside the preliminary injunction previously issued by it and dimissed petition on the ground that under Article 1267 of the Civil Code which provides that ART. 1267. When the service has become so difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be released therefrom, in whole or in part. 1 ... a positive right is created in favor of the obligor to be released from the performance of an obligation in full or in part when its performance 'has become so difficult as to be manifestly beyond the contemplation of the parties.

Hence, the petition at abar wherein petitioners insist that the worldwide increase inprices cited by respondent does not constitute a sufficient casue of action for modification of the subdivision contrct. After receipt of respondent's comment, the Court in its Resolution of September 13, 1976 resolved to treat the petition as special civil actionand declared the case submitted for decision. The petition must be granted. While respondent court correctly cited in its decision the Code Commission's report giving the rationale for Article 1267 of the Civil Code, to wit; The general rule is that impossibility of performance releases the obligor. However, it is submitted that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the court should be authorized to release the obligor in whole or in part. The intention of the parties should govern and if it appears that the service turns out to be so difficult as have been beyond their contemplation, it would be doing violence to that intention to hold the obligor still responsible. ... 2 It misapplied the same to respondent's complaint. If respondent's complaint were to be released from having to comply with the subdivision contract, assuming it could show at the trial that the service undertaken contractually by it had "become so difficult as to be manifestly beyond the contemplation of the parties", then respondent court's upholding of respondet's complaint and dismissal of the petition would be justifiable under the cited codal article. Without said article, respondent would remain bound by its contract under the theretofore prevailing doctrine that performance therewith is ot


excused "by the fact that the contract turns out to be hard and improvident, unprofitable, or unespectedly burdensome", 3 since in case a party desires to be excuse from performance in the event of such contingencies arising, it is his duty to provide threfor in the contract. But respondent's complaint seeks not release from the subdivision contract but that the court "render judgment I modifying the terms and Conditions of the Contract by fixing the proper shares that should pertain to the herein parties out of the gross proceed., from the sales of subdivided lots of subject subdivision". The cited article does not grant the courts this authority to remake, modify or revise the contract or to fix the division of shares between the parties as contractually stipulated with the force of law between the parties, so as to substitute its own terms for those covenanted by the partiesthemselves. Respondent's complaint for modification of contract manifestly has no basis in law and therefore states no cause of action. Under the particular allegations of respondent's complaint and the circumstances therein averred, the courts cannot even in equity grant the relief sought. A final procedural note. Respondent cites the general rule that an erroneous order denying a motion to dismiss is interlocutory and should not be corrected by certiorari but by appeal in due course. This case however manifestly falls within the recognized exception that certiorari will lie when appeal would not prove to be a speedy and adequate remedy.' Where the remedy of appeal would not, as in this case, promptly relieve petitioners from the injurious effects of the patently erroneous order maintaining respondent's baseless action and compelling petitioners needlessly to go through a protracted trial and clogging the court dockets by one more futile case, certiorari will issue as the plain, speedy and adequate remedy of an aggrieved party.

ACCORDINGLY, the resolution of respondent appellate court is reversed and the petition for certiorari is granted and private respondent's complaint in the lower court is ordered dismissed for failure to state a sufficient cause of action. With costs in all instances against private respondent. 88. G.R. No. L-22490 May 21, 1969 GAN TION, petitioner, vs. HON. COURT OF APPEALS, HON. JUDGE AGUSTIN P. MONTESA, as Judge of the Court of First Instance of Manila, ONG WAN SIENG and THE SHERIFF OF MANILA, respondents. MAKALINTAL, J.: The sole issue here is whether or not there has been legal compensation between petitioner Gan Tion and respondent Ong Wan Sieng. Ong Wan Sieng was a tenant in certain premises owned by Gan Tion. In 1961 the latter filed an ejectment case against the former, alleging non-payment of rents for August and September of that year, at P180 a month, or P360 altogether. The defendant denied the allegation and said that the agreed monthly rental was only P160, which he had offered to but was refused by the plaintiff. The plaintiff obtained a favorable judgment in the municipal court (of Manila), but upon appeal the Court of First Instance, on July 2, 1962, reversed the judgment and dismissed the complaint, and ordered the plaintiff to pay the defendant the sum of P500 as attorney's fees. That judgment became final.


On October 10, 1963 Gan Tion served notice on Ong Wan Sieng that he was increasing the rent to P180 a month, effective November 1st, and at the same time demanded the rents in arrears at the old rate in the aggregate amount of P4,320.00, corresponding to a period from August 1961 to October 1963.lâwphi1.ñet In the meantime, over Gan Tion's opposition, Ong Wan Sieng was able to obtain a writ of execution of the judgment for attorney's fees in his favor. Gan Tion went on certiorari to the Court of Appeals, where he pleaded legal compensation, claiming that Ong Wan Sieng was indebted to him in the sum of P4,320 for unpaid rents. The appellate court accepted the petition but eventually decided for the respondent, holding that although "respondent Ong is indebted to the petitioner for unpaid rentals in an amount of more than P4,000.00," the sum of P500 could not be the subject of legal compensation, it being a "trust fund for the benefit of the lawyer, which would have to be turned over by the client to his counsel." In the opinion of said court, the requisites of legal compensation, namely, that the parties must be creditors and debtors of each other in their own right (Art. 1278, Civil Code) and that each one of them must be bound principally and at the same time be a principal creditor of the other (Art. 1279), are not present in the instant case, since the real creditor with respect to the sum of P500 was the defendant's counsel. This is not an accurate statement of the nature of an award for attorney's fee's. The award is made in favor of the litigant, not of his counsel, and is justified by way of indemnity for damages recoverable by the former in the cases enumerated in Article 2208 of the Civil Code.1 It is the litigant, not his counsel, who is the judgment creditor and who may enforce the judgment by execution. Such credit, therefore, may properly be the subject of legal compensation. Quite obviously it would be unjust to compel petitioner to pay his debt for P500 when admittedly his creditor is indebted to him for more than P4,000.

WHEREFORE, the judgment of the Court of Appeals is reversed, and the writ of execution issued by the Court of First Instance of Manila in its Civil Case No. 49535 is set aside. Costs against respondent. 89. G.R. No. L-69255 February 27, 1987 PHILIPPINE NATIONAL BANK, petitioner, vs. GLORIA G. VDA. DE ONG ACERO, ARNOLFO ONG ACERO & SOLEDAD ONG ACERO CHUA, respondents. NARVASA, J.: Savings Account No. 010-5878868-D of Isabela Wood Construction & Development Corporation, opened with the Philippine National Bank on March 9, 1979 in the amount of P2 million is the subject of two (2) conflicting claims, sought to be definitively resolved in the proceedings at bar. 1 One claim is asserted by the ACEROS — Gloria G. Vda. de Ong Acero, Arnolfo Ong Acero and Soledad Ong Acero-Chua, judgment creditors of the depositor (hereafter simply referred to as ISABELA) — who seek to enforce against said savings account the final and executory judgment rendered in their favor by the Court of First Instance of Rizal QC Br. XVI). The other claim has been put forth by the Philippine National Bank (hereafter, simply PNB) which claims that since ISABELA was at some point in time both its debtor and creditor-ISABELA's deposit being deemed a loan to it (PNB)-there had occurred a mutual set-off between them, which effectively precluded the ACEROS' recourse to that deposit.


The controversy was decided by the Intermediate Appellate Court adversely to the PNB. It is this decision that the PNB would have this Court reverse. The ACEROS' claim to the bank deposit is more specifically founded upon the garnishment thereof by the sheriff, effected in execution of the partial judgment rendered by the CFI at Quezon City in their favor on November 18, 1979. The partial judgment ordered payment by ISABELA to the ACEROS of the amount of P1,532,000.07. 2 Notice of garnisment was served on the PNB on January 9, 1980, pursuant to the writ of execution dated December 23, 1979. 3 This was followed by an Order issued on February 15, 1980 directing PNB to hand over this amount of P1,532,000.07 to the sheriff for delivery, in turn, to the ACEROS. Not quite two months later, or on April 8, 1980, a second (and the final and complete judgment) was promulgated by the CFI in favor of the ACEROS and against ISABELA, the dispositive part of which is as follows: WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiffs and against the defendant: 1. Reiterating the dispositive portion of the partial judgment issued by this Court, dated November 16, 1979, ordering the defendant to pay to the plaintiff the amount of P1,532,000.07 as principal, with interest at 12% per annum from December 11, 1975 until the whole amount is fully paid; 2. Ordering defendant to pay the plaintiffs the amount of P207,148.00 as compensatory damages, with legal interest thereon from the filing of the complaint until the whole amount is fully paid; 3. Ordering defendant to pay plaintiffs the amount of P383,000.00 as and by way of attorneys fees. 4

On the other hand, PNB's claim to the two-million-peso deposit in question is made to rest on an agreement between it and ISABELA in virtue of which, according to PNB: (1) the deposit was made by ISABELA as "collateral" in connection with its indebtedness to PNB as to which it (ISABELA) had assumed certain contractual undertakings; and (2) in the event of ISABELA's failure to fulfill those undertakings, PNB was empowered to apply the deposit to the payment of that indebtedness. The facts upon which PNB's theory stands are summarized in the Order of CFI Judge Solano dated October 1, 1982, 5 relevant portions of which are here reproduced: On October 13, 1977, Isabela Wood Construction and Development Corporation ** entered into a Credit Agreement with PNB. Under the agreement PNB, having approved the application of defendant (Isabela & c.) for the establishment for its account of a deferred letter of credit in the amount of DM 4,695,947.00 in favor of the Machinenfabric Augsburg Nunberg (MAN) of Germany from whom defendant purchased thirty-five (35) units of MAN trucks, defendant corporation agreed to put up, as collaterals, among others, the following: 4. The CLIENT shall assign to the BANK the proceeds of its contract with the Department of Public Works for the construction of Nagapit Suspension Bridge (Substructure) in Cagayan. This particular proviso in the aforesaid agreement was to be subsequently confirmed by Faustino Dy, Jr., as president of defendant corporation, in a letter to the PNB, dated February 21, 1970, quoted in full as follows: Gentlemen: This is to confirm our arrangement that the treasury warrant in the amount of P2,704 millon in favor of Isabela Wood


Construction and Development Corporation to be delivered either by the Commission on Audit or the Ministry of Public Highways, shall be placed in a savings account with your bank to the extent of P 2 million. The said amount shall remain in the savings account until we are able to comply with the delivery and registration of the mortgage in favor of the Philippine National Bank of our Paranaque property, and the securing from Metropolitan Bank and Home Owners Savings and Loan Association to snow PNB a second mortgage on the properties of Isabela Wood Construction Group, Inc., presently under first mortgage with them. Thus, on March 9, 1970, pursuant to paragraph 4 of the Credit Agreement, quoted above, PNB thru its International Department opened the savings account in question, under Account No. 01058768-D, with an initial deposit of P2,000,000.00, proceeds of a treasury warrant delivered to PNB (EXHIBIT 3-A). xxx xxx xxx Since defendant corporation failed to deliver to PNB by way of mortgage its Paranaque property, neither was defendant corporation able to secure from Metropolitan Bank and Home Owners Savings and Loan Association its consent to allow PNB a second mortgage, and considering that the obligation of defendant corporation to PNB have been due and unsettled, PNB applied the amount of P 2,102804.11 in defendant's savings account of PNB. It was upon this version of the facts, and its theory thereon based on a mutual set-off, or compensation, between it and ISABELA — in accordance with Articles 1278 et al. of the Civil Code — that PNB intervened in the action between the ACEROS and ISABELA on or about February 28, 1980 and moved for reconsideration of the Order of February 15, 1980 (requiring it to turn over to the

sheriff the sum of P1,532,000.07, supra: fn. 2). But its motion met with no success. It was denied by the Lower Court (Hon. Judge Apostol, presiding) by Order dated May 14, 1980. 6 And a motion for the reconsideration of that Order of May 14, 1980 was also denied, by Order dated August 11, 1980. PNB again moved for reconsideration, this time of the Order of August 11, 1980; it also pleaded for suspension in the meantime of the enforcement of the Orders of February 15, and May 14, 1980. Its persistence seemingly paid off. For the Trial Court (now presided over by Hon. Judge Solano), directed on October 9, 1980 the setting aside of the said Orders of May 14, and August 11, 1980, and set for hearing PNB's first motion for the reconsideration of the Order of February 15, 1980. 7 Several months afterwards, or more precisely on October 1, 1982, the Order of February 15, 1980 was itself also struck down, 8 the Lower Court opining that under the circumstances, there had been a valid assignment by ISABELA to PNB of the amount deposited, which effectively placed that amount beyond the reach of the ACE ROS, viz: When the two million or so treasury warrant, proceeds of defendant's contract with the government was delivered to PNB, said amount, per agreement aforequoted, had already been assigned by defendant corporation to PNB, as collateral. The said amount is not a pledge. The assignment is valid. The defendant need not be the owner thereof at the time of assignment. An assignment of credit and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475.


The contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the interest and upon its price. It is not necessary for the perfection of the contract of sale that the thing be delivered and that the price be paid. Neither is it necessary that the thing should belong to the vendor at the time of the perfection of the contract, it being sufficient that the vendor has the right to transfer ownership thereof at the time it is delivered. The shoe was now on the other foot. It was the ACEROS' turn to move for reconsideration, which they did as regards this Order of October 1, 1982; but by Order promulgated on December 14, 1982, the Court declined to modify its resolution. The ACEROS then appealed to the Intermediate Appellate Court which, after due proceedings, sustained them. On September 14, 1984, it rendered judgment the dispositive part whereof reads as follows: WHEREFORE, the Orders of October 1 and December 14, 1982 of the Court a quo are hereby REVERSED and SET ASIDE, and in their stead, it is hereby adjudged: 1. That the Order of February 15, 1980 of the Court a quo is hereby ordered reinstated; 2. That intervenor PNB must deliver the amount stated in the Order of February 15, 1980 with interest thereon at 12% from February 15, 1980 until delivered to appellants, the amount of interest to be paid by PNB and not to be deducted from the deposit of Isabela Wood;

3. That intervenor PNB must pay attorney's fees and expenses of litigation to appellants in the amount of P10,000.00 plus the costs of suit. 9 This dispositive part was subsequently modified at the ACEROS' instance, by Resolution dated November 8, 1984 which inter alia "additionally ** (ordered) PNB to likewise deliver to appellants the balance of the deposit of Isabela Wood Construction and Development Corporation after first deducting the amount applied to the partial judgment of P1,532,000.00 in satisfaction of appeallants' final judgment." 10 PNB's main thesis is that when it opened a savings account for ISABELA on March 9, 1979 in the amount of P 2M, it (PNB) became indebted to ISABELA in that amount. 11 So that when ISABELA itself subsequently came to be indebted to it on account of ISABELA's breach of the terms of the Credit Agreement of October 13, 1977, and therefore ISABELA and PNB became at the same time creditors and debtors of each other, compensation automatically took place between them, in accordance with Article 1278 of the Civil Code. The amounts due from each other were, in its view, applied by operation of law to satisfy and extinguish their respective credits. More specifically, the P2M owed by PNB to ISABELA was automatically applied in payment and extinguishment of PNB's own credit against ISABELA. This having taken place, that amount of P2M could no longer be levied on by any other creditor of ISABELA, as the ACEROS attempted to do in the case at bar, in order to satisfy their judgment against ISABELA. Article 1278 of the Civil Code does indeed provide that "Compensation shall take when two persons, in their own right, are creditors and debtors of each other. " Also true is that compensation may transpire by operation of law, as when all the requisites therefor, set out in Article 1279, are present.


Nonetheless, these legal provisions can not apply to PNB's advantage under the circumstances of the case at bar. The insuperable obstacle to the success of PNB's cause is the factual finding of the IAC, by which upon firmly established rules even this Court is bound, 12 that it has not proven by competent evidence that it is a creditor of ISABELA. The only evidence present by PNB towards this end consists of two (2) documents marked in its behalf as Exhibits 1 and 2, But as the IAC has cogently observed, these documents do not prove any indebtedness of ISABELA to PNB. All they do prove is that a letter of credit might have been opened for ISABELA by PNB, but not that the credit was ever availed of (by ISABELA's foreign correspondent MAN, or that the goods thereby covered were in fact shipped, and received by ISABELA. Quite obviously, as the IAC has further observed, the most persuasive evidence of these facts — i.e., ISABELA's availment of the credit, as well as the actual delivery of the goods covered by and shipped pursuant to the letter of credit-assuming these facts to have occurred, would naturally and logically have been in PNB's possession and could have been readily submitted to the Court, to wit: 1. The document of availment by the foreign creditor of the letter of credit. 2. The document of release of the amounts mentioned in the agreement. 3. The documents showing that the trucks (transported to the Philippines by the foreign creditor [MAN] were shipped to ** and received by Isabela. 4. The trust receipts by which possession was given to Isabela of the 35 (Imported) trucks.

5. The chattel mortgages over the trucks required under No. 3 of II Collaterals of the Credit Agreement (Exhibit 1). 6. The receipt by Isabela of the standing accounts sent by PNB. 7. There receipt of the letter of demand by Isabela Wood. 13 It bears stressing that PNB did not at all lack want for opportunity to produce these documents, if it does indeed have them. Judge Solano, it should be recalled, specifically allowed PNB to introduce evidence in relation to its Motion for Reconsideration filed on August 26, 1980, 14 and thus furnished the occasion for PNB to prove, among others, ISABELA's debt to it. PNB unaccountably failed to do so. Moreover, PNB never even attempted to offer or exhibit such evidence, in the course of the appellate proceedings before the IAC, which is a certain indication, in that Court's view, that PNB does not really have these proofs at ala For this singular omission PNB offers no explanation except that it saw no necessity to submit the Documents in evidence, because sometime on March 14, 1980, the ACEROS's attorney had been shown those precise documents — setting forth ISABELA's loan obligations, such as the import bills and the sight draft covering drawings on the L/C for ISABELA's account — and after all, the ACEROS had not really put this indebtedness in issue. 15The explanation cannot be taken seriously. In the picturesque but forceful language of the Appellate Court, the explanation "is silly as you do not prove a fact in issue by showing evidence in support thereof to the opposing counsel; you prove it by submitting evidence to the proper court." The fact is that the record does not disclose that the ACEROS have ever admitted the asserted theory of ISABELA's indebtedness to PNB. At any rate, not being privies to whatever transactions might have generated


that indebtedness, they were clearly not in a position to make any declaration on the matter. The fact is, too, that the avowed indebtedness of ISABELA was an essential element of PNB's claim to the former's P2 million deposit and hence, it was incumbent on the latter to demonstrate it by competent evidence if it wished its claim to be judicially recognized and enforced. This, it has failed to do. The failure is fatal to its claim. PNB has however deposited an alternative theory, which is that the P2M deposit had been assigned to it by ISABELA as "collateral," although not by way of pledge; that ISABELA had explicitly authorized it to apply the P2M deposit in payment of its indebtedness; and that PNB had in fact applied the deposit to the payment of ISABELA's debt on February 26, 1980, in concept of voluntary compensation. 16 This second, alternative theory, is as untenable as the first. In the first place, there being no indebtedness to PNB on ISABELA's part, there is in consequence no occasion to speak of any mutual set-off, or compensation, whether it be legal, i.e., which automatically occurs by operation of law, or voluntary, i.e., which can only take place by agreement of the parties. 17 In the second place, the documents indicated by PNB as constitutive of the claimed assignment do not in truth make out any such transaction. While the Credit Agreement of October 13, 1977 (Exh. 1) declares it to be ISABELA's intention to "assign to the BANK the proceeds of its contract with the Department of Public Works for the construction of Nagapit Suspension Bridge (Substructure) in Cagayan," 18 it does not appear that that intention was adhered to, much less carried out. The letter of ISABELA's president dated February 21, 1979 (Exh. 2) would on the contrary seem to indicate the abandonment of that intention, in the light of the statements therein that the amount of P2M (representing the bulk of the proceeds of its contract referred to) "shall be placed in a savings account" and that "said amount shall

remain in the savings account until ** (ISABELA is) able to comply with" specified commitments — these being: the constitution and registration of a mortgage in PNB's favor over its "Paranaque property," and the obtention from the first mortgage thereof of consent for the creation of a second lien on the property. 19 These statements are to be sure inconsistent with the notion of an assignment of the money. In addition, there is yet another circumstance militating against the actuality of such an assignment-the "most telling argument" against it, in fact, in the line of the Appellate Court-and that is, that PNB itself, through its International Department, deposited the whole amount of ?2 million, not in its name, but in the name of ISABELA, 20 without any accompanying statement even remotely intimating that it (PNB) was the owner of the deposit, or that an assignment thereof was intended, or that some condition or lien was meant to burden it. Even if it be assumed that such an assignment had indeed been made, and PNB had been really authorized to apply the P2M deposit to the satisfaction of ISABELA's indebtedness to it, nevertheless, since the record reveals that the application was attempted to be made by PNB only on February 26, 1980, that essayed application was ineffectual and futile because at that time, the deposit was already in custodia legis, notice of garnishment thereof having been served on PNB on January 9, 1980 (pursuant to the writ of execution issued by the Court of First Instance on December 23, 1979 for the enforcement of the partial judgment in the ACEROS' favor rendered on November 18,1979). One final factor precludes according validity to PNB's arguments. On the assumption that the P 2M deposit was in truth assigned as some sort of "collateral" to PNB — although as PNB insists, it was not in the form of a pledge — the agreement postulated by PNB that it had been authorized to assume ownership of the fund upon the coming into being of ISABELA s indebtedness is void ab


initio, it being in the nature of a pactum commisoruim proscribed as contrary to public policy. 21 WHEREFORE, the judgment of the Intermediate Appellate Court subject of the instant appeal, being fully in accord with the facts and the law, is hereby affirmed in toto. Costs against petitioner. 90. G.R. No. L-67649 June 28, 1988 ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents. GUTIERREZ, JR., J.: The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the latter's name. The antecedent facts are as follows: Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property. Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas. On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds. On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January 24, 1980. On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads: WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint and ordering: (a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the defendant Ho


Fernandez over the parcel of land including the improvements thereon, subject to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled. (b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30, Record on Appeal) The Intermediate Appellate Court affirmed the decision of the lower court in toto. Hence, this petition for review. Francia prefaced his arguments with the following assignments of grave errors of law: I RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER. II RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00. III

RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo) We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property was sold at public auction without notice to him and that the price paid for the property was shockingly inadequate, amounting to fraud and deprivation without due process of law. A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant of his petition. We are constrained to dismiss it. Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977. There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;


xxx xxx xxx (3) that the two debts be due. xxx xxx xxx This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that: A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the governmental body not included in the tax levy. This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off." There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction. Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he pocketed the notice of the auction sale without reading it. Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law on sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof therefore rests


upon him to show that plaintiff was duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied) We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof to show that there was compliance with all the prescribed requisites for a tax sale. The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that: xxx xxx xxx ... [D]ue process of law to be followed in tax proceedings must be established by proof and the general rule is that the purchaser of a tax title is bound to take upon himself the burden of showing the regularity of all proceedings leading up to the sale. (emphasis supplied) There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings are presumed to be regular. But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale. The records sustain the lower court's finding that: [T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the auction sale. Surprisingly, however, he admitted in his testimony that he received the letter dated November 21, 1977 (Exhibit "I") as

shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on December 5, 1977 the date of the auction sale because he went to Iligan City. As long as there was substantial compliance with the requirements of the notice, the validity of the auction sale can not be assailed ... . We quote the following testimony of the petitioner on crossexamination, to wit: Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the property in question shall be sold at public auction to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this letter? A. I just signed it because I was not able to read the same. It was just sent by mail carrier. Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but you did not read the contents of it? A. Yes, sir, as I was in a hurry. Q. After you received that original where did you place it? A. I placed it in the usual place where I place my mails. Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice. By his very own admission that he received the notice, his now coming to court assailing the validity of the auction sale loses its force. Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation


Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held: ... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable considering the wide divergence between their assessed values and the amounts for which they had been actually sold. However, while in ordinary sales for reasons of equity a transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts to interfere, such does not follow when the law gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory that the lesser the price the easier it is for the owner to effect the redemption. And so it was aptly said: "When there is the right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by reason of the price obtained at the auction sale." The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290): If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold for taxes, the inadequacy of the price given is not a valid objection to the sale." This rule arises from necessity, for, if a fair price for the land were essential to the sale, it would

be useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369). In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555): Like most cases of this character there is here a certain element of hardship from which we would be glad to relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty in the collection of taxes which are the life blood of the state. We are convinced that the present rules are just, and that they bring hardship only to those who have invited it by their own neglect. We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas, real estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny the petition. And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency. There is furthermore


no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly asking for the annulment of the sale. WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent court is affirmed. 91. G.R. No. L-30240 March 25, 1988 REPUBLIC OF THE PHILIPPINES as Lessor, ZOILA DE CHAVEZ, assisted by her husband Col. Isaac Chavez, DEOGRACIAS MERCADO, ROSENDO IBANEZ and GUILLERMO MERCADO, as permittees and/or Lessees of public fishponds, petitioners, vs. HON. JUDGE JAIME DE LOS ANGELES of the court of First Instance of Batangas, (BR. III, Balayan) [later replaced by JUDGE JESUS ARLEGUI] SHERIFF OF BATANGAS, ENRIQUE ZOBEL and THE REGISTER OF DEEDS AT BALAYAN, BATANGAS, respondents. TEEHANKEE, C.J.: The moment of truth is finally at hand. It is about time to cause the execution in favor of the Republic of the Philippines of the 1965 final and executory judgment of this Court (Republic vs. Ayala y Cia ) 1affirming that of the CFI of Batangas in Civil Case No. 373 thereof and to recover for the Republic what "Ayala y Cia Hacienda de Calatagan and/or Alfonso Zobel had illegally expanded [in] the original area of their TCT No. 722 (derived from OCT No. 20) from 9,652.583 hectares to about 12,000

hectares thereby usurping about 2,000 hectares consisting of portions of the territorial sea, the foreshore, the beach and navigable waters properly belong(ing) to the public domain." 2 The Court's decision in said case found that We have gone over the evidence presented in this case and found no reason to disturb the factual findings of the trial court. It has been established that certain areas originally portions of the navigable water or of the foreshores of the bay were converted into fishponds or sold by defendant company to third persons. There is also no controversy as to the fact that the said defendant was able to effect these sales after it has obtained a certificate of title (TCT No. 722) and prepared a "composite plan" wherein the aforesaid foreshore areas appeared to be parts of Hacienda Calatagan. Defendants- appellants do not deny that there is an excess in area between those delimited as boundaries of the hacienda in TCT No. 722 and the plan prepared by its surveyor. This, however, was justified by claiming that it could have been caused by the system (magnetic survey) used in the preparation of the original titles, and, anyway, the excess in area (536 hectares, according to defendants) is within the allowable margin given to a magnetic survey. But even assuming for the sake of argument that this contention is correct, the fact remains that the areas in dispute (those covered by permits issued by the Bureau of Fisheries), were found to be portions of the foreshore, beach, or of the navigable water itself And, it is an elementary principle of law that said areas not being capable of registration, their inclusion in a certificate of title does not convert the same into properties of private ownership or confer title on the registrant. 3 The Solicitor General's Memorandum 4 further points out


... that the modus operandi in said usurpation, i.e. grabbing lands of the public domain, was expressly made of record in the case of Dizon v. Rodriguez, 13 SCRA 704 (April 30, 1965), where it was recounted that Hacienda de Calatagan, owned by Alfonso and Jacobo Zobel, was originally covered by TCT No. 722, and that in 1948, upon the cessation of their sugar mill operations, the hacienda owners converted the pier (used by vessels loading sugar) which stretched to about 600 meters off the shore into the navigable waters of the Pagaspas Bay" into a fishpond dike by enclosing 30 and 37 hectares of the bay on both sides of the pier in the process. Subsequently, in 1949, the owners of the hacienda ordered its subdivision which enabled them to acquire titles to the subdivided lots which were outside the hacienda's perimeter. Thus, these subdivided lots, which were converted into fishponds were illegally absorbed as part of the hacienda and titled in the name of Jacobo Zobel which were subsequently sold and transferred to the Dizons, Gocos and others. In said Dizon case, "this Honorable Court affirmed the court a quo's findings that the subdivision plan was prepared not in accordance with the technical description in TCT No. 722 but in disregard of it." And that the appropriated fishpond lots "are actually part of the territorial waters and belong to the State. But all through the years, as stressed in the Republic's memorandum, "the technical maneuvers employed by Ayala and Zobel [of which the instant petition is an off-shoot] .... undercut the Republic's efforts to execute the aforesaid 1965 final judgment" 5 to recover the estimated 2,000 hectares of territorial sea, foreshore, beach and navigable waters and marshy land of the public domain. It may seem incredible that execution of such 1965 final judgment in favor of the Republic no less could have been thwarted for twenty-three years now. But the Republic's odyssey

and travails since 1965 through the martial law regime to now are recorded in the annals of our jurisprudence. Suffice it to point out that upon petition of the Republic and its co- petitioners (as permittees and/or lessees of the Republic), mandamus was issued on June 30, 1967 by unanimous decision with one abstention in Republic vs. De los Angeles, 6 overruling the therein respondent-judge's refusal to issue a writ of execution of the aforesaid 1965 final judgment and ordering him to issue such writ. The Court denied reconsideration on September 19, 1967, but on a second and supplemental motion for reconsideration, it set aside the original decision of Jane 30, 1967 and dismissed the petition for mandamus and denied execution, per its Resolution of October 4, 1971 by a split 6-3-2 vote. 7 The court denied the Republic, et al motions for reconsideration by the same split 6-32 vote per its Resolution of April 11, 1972. 8 An undermanned Court subsequently denied the Republic's co-petitioner Tolentino's second motion for reconsideration for lack of necessary votes per its Resolution of April 27, 1973. 9 Parenthetically, the complexity magnitude and persistence of respondents' maneuvers are set forth in the series of decisions and extended resolutions and majority and dissenting opinions reported in the Supreme Court Reports Annotated as per the citations — hereinabove given. A reading of said reports together with the Memorandum for Granting of the Petition at bar (and giving the case's backgrounder) which I had circulated in the Court as against the proposed contrary draft of Justice Estanislao A. Fernandez (which did not gain the concurrence of the majority of the Court during his seventeen-month incumbency from October 20, 1973 to March 28, 1975) shows the full extent background and scope of these maneuvers, particularly those in the present case. For the sake of brevity and conciseness, I attach the said Memorandum as Annex A hereof and make the same an integral part of this decision, instead of reproducing the same in the body of this opinion.


Pending respondents' maneuvers in this Court for thwarting the issuance of a writ for execution of the aforesaid 1965 final judgment for the Republic's recovery of land and waters of the public domain in the 1967 mandamus case brought by the Republic, supra, they intensified their maneuvers to defeat the Republic's judgment for recovery of the public lands and waters when they got the trial judge, notwithstanding this Court's final 1965 judgment for reversion of the public lands, to uphold their refusal to recognize the rights of the Republic's public fishponds permittees and/or lessees to the lands leased by the Republic to them. Thus, the Republic as lessor and said permittees/lessees as co-petitioners filed through then Solicitor General Antonio P. Barredo their Amended Complaint of August 2, 1967 in Civil Case No. 653 against herein respondent Enrique Zobel as defendant and the Register of Deeds of Batangas. As summarized by the Solicitor General in his Memorandum of June 1, 1984: Respondent Zobel had ousted Zoila de Chavez, a government's fishpond permittee from a portion of the subject fishpond lot described as Lot 33 of Plan Swo-30999 (also known as Lots 55 and 66 of subdivision TCT No. 3699) by bulldozing the same, and threatened to eject fishpond permittees Zoila de Chavez, Guillermo Mercado, Deogracias Mercado and Rosendo Ibañez from their respective fishpond lots described as Lots 4, 5, 6 and 7 and Lots 55 and 56, of Plan Swo-30999, embraced in the void subdivision titles TCT No. 3699 and TCT No. 9262 claimed by said respondent. Thus, on August 2, 1967, the Republic filed an Amended Complaint captioned Accion Reinvidicatoria with Preliminary Injunction" against respondent Zobel and the Register of Deeds of Batangas, docketed as Civil Case No. 653, for cancellation of Zobel's void subdivision titles TCT No. 3699 and TCT No. 9262, and the reconveyance of the same to the government; to place aforenamed fishpond permittees in peaceful and adequate possession thereof; to require respondent Zobel to pay back rentals to the Republic; and to enjoin said

respondent from usurping and exercising further acts of dominion and ownership over the subject land of public domain; Respondent Zobel, however, filed a Motion to Dismiss Amended Complaint, dated August 16, 1967, contending inter alia that said Amended Complaint (Civil Case No. 653) is barred by prior judgment in Civil Case No. 373 (G.R. No. 20950, the 1965 final judgment in favor of the Republic), and arguing that "if TCT Nos. T-3699 and T-9262 had been declared null and void in Civil Case No. 373, the proper procedure would be to secure the proper execution of the decision in the same proceedings and not thru the filing of a new case." He further contended "that there is another action pending between the same parties for the same cause," and points to the abovementioned mandamus case, G.R. No. 26112 anent execution of Civil Case No. 373 as the said pending case. His aforesaid motion, however, was denied by the trial court in its order of December 13, 1967, and accordingly he was required to file his answer. But in his answer with counterclaim, respondent Zobel averred, among others, that the subject TCT Nos. 3699 and 9262 registered in his name are valid and subsisting since in the decision under G. R. No. L-20950 "only TCT No. T-9550 was specifically declared as null and void and no other;" and that when Civil Case No. 373 was docketed, respondent Enrique Zobel "was and still is at present one of the members and managing .ng partners of Ayala y Cia one of the defendants in the 91 said civil case, and, therefore, privy thereto." He then prayed for a writ of preliminary mandatory injunction restoring to him possession of the subject land, and further prayed for judgment ordering Zoila de Chavez and Guillermo Mercado to vacate the premises in question and to surrender possession thereof to defendant Zobel. This was unfortunately granted by respondent Judge De los Angeles per the impugned order at bar of October 1, 1968. (Annex D, petition). Hence, the filing of the instant petition.


On March 7, 1969, the Court issued a restraining order in the case at bar, enjoining respondent judge from enforcing the writ of preliminary mandatory injunction until further orders. While G.R. No. L-26112 re: execution) and G.R. No. L-30240 (the case at bar) were pending, the Republic filed its motion of July 8, 1970 in Civil Case No. 373, for authority to conduct the necessary resurvey of the lands affected so as to properly segregate from Ayala and Zobel's private land originally covered by TCT No. 722 the areas outside thereof comprising about 2,000 hectares of public land, beach, foreshore and territorial sea. Ayala and Zobel vigorously opposed the same, contending again that the proper step for the government was to ask for a writ of execution; that no other subdivision titles, besides TCT No. T- 9550 were really declared null and void in the 1965 judgment; and that the lower court could not make a ruling on the motion for resurvey "without requiring the presentation of additional evidence, and that, in effect, would be tantamount to reopening a case where the judgment is already final and executory and that the Government's failure to seek a "clarification of the decision to find out what other titles should have been declared null and void" precludes it from doing so now, I since the decision is now final and executory." The respondent judge, having earlier denied execution of the 1965 final judgment, issued his order of October 27, 1970 denying the Government's motion for authority to conduct such prerequisite re-survey; Ayala and Zobel's technical maneuvers to impede execution of the 1965 final judgment again bore fruit, as above indicated, when their second motion for reconsideration in G.R. No. L26112 was granted by a split Court in a Resolution dated October 4, 1971 (41 SCRA 422). As a result, the earlier decision of June 30, 1967 directing the issuance of the writ of execution was set aside and the Republic's petition for certiorari and mandamus impugning the lower court's quashal and denial of the writ of execution was dismissed.

While the Court's new majority denied the Republic's motion for reconsideration of aforesaid resolution, per its resolution of April 11, 1972, it, however, made the important modification that said denial "does not constitute a denial of the right of the Republic to the cancellation of the titles nullified by the decision of Judge Tengco (in Civil Case No. 373) affirmed by this Court (in G.R. No. L-20950)." It also stated that: "(E)ven the (trial court's) order of October 27, 1970 about the resurvey merely held the remedy to be premature until the decision in this case has become final. Of course, it is understood that in such eventuality, the resurvey requested by the Provincial Fiscal would be in order and as soon as the same is completed, the proper writ of execution for the delivery of possession of the portions found to be public land should issue." (G.R. No. I, 26112, 44 SCRA 255, 262 [19721) Thus, the majority's denial of the motions for reconsideration was made expressly "with the clarification aforemade of the rights of the Republic." [Note: My attached Memorandum, Annex A hereof (at pages 2 to 6 thereof), quotes more extensively the same pronouncements of the ponente, Justice Villamor, speaking for the majority, that the Resolution simply cancelled out the final damage award in favor of intervenor Tolentino, as government permittee/lessee it covers as well similar pronouncements from Justice Makalintal in his separate concurrence that "The resolution in no way affects the rights of the Government as declared in the decision," and Justice Barredo's separate concurrence that "I am sure that the five justices whom I am joining in denying Petitioners motion for reconsideration are as firm as the three distinguished dissenters in the resolution not to allow this Court to be an instrument of land-grabbing as they are against the reversal or even modification in any substantial degree of any final and executory judgment whether of this Court or any other court in this country, and, that if there were such possibilities in consequence of the resolution of October 4, 1971 and the present resolution of


denial, they would not give their assent to said resolutions. We are certain that in deciding against Petitioner Tolentino, We are not condoning nor permitting that the lands in question remain with the Dizons or with "the Ayalas." In my dissenting opinion, I expressed gratification that the dissents (submitted by then Chief Justice Roberto Concepcion and myself, both concurred in by Justice J.B.L. Reyes) had contributed to the overriding clarification "that the majority's position although it denies reconsideration and maintains reversal of the June 30, 1967 decision at bar-is that the Government may now finally effect reversion and recover possession of all usurped areas of the public domain "outside (Ayala's) private land covered by TCT No. 722, which including the lots in T-9550 (Lots 360, 362, 363 and 182) are hereby reverted to public dominion." (Paragraph [al of 1965 judgment). 10 After said G.R. No. L-26112 was finally disposed of, herein petitioner filed in Civil Case No. 373, a "Motion to Re-survey." This was granted in an Order dated August 21, 1973, as well as in the Orders of December 27, 1973 and February 26, 1974, respectively. About three (3) years later, a Report on the Resurvey dated August 5, 1977 (Annex "A" to Republic's Comment dated March 30, 1981), as well as the "Final Report" thereon dated September 2, 1977 and the "Resurvey Plan" (Annexes "B" and "C", Ibid.) were approved by the Director of Lands and the Secretary of Agriculture and Natural Resources. The Re-survey further confirmed the uncontroverted fact that the disputed areas in the case at bar form part of the expanded area already reverted to public dominion. Upon approval of said Re-survey Plan and Report, petitioner submitted the same to the trial court in Civil Case No. 373. However, notwithstanding its approval by the Director of Lands, and the Secretary of Agriculture and Natural Resources, Judge

Jesus P. Arlegui [who had been assigned to respondent Judge De los Angeles" court in Batangas upon the latter's retirement] arrogating unto himself the function which properly belongs to the Director of Lands, disapproved the said Report and Re-survey Plan, thereby preventing execution of the subdivision (a) of the decision in Civil Case No. 373. In effect, such disapproval by Judge Arlegui was intended to negate the earlier resolution in G.R. No. L-26112 (44 SCRA 255, 263) that as soon as resurvey "is completed the proper writ of execution for the delivery of possession of the portions found to be public land should issue;" Earlier, in Civil Case No. 653, respondent Zobel filed on July 10, 1969 a Motion to Suspend Further Hearing, etc., praying that the hearings in said Civil Case be indefinitely suspended until the case at bar is resolved by this Honorable Court. He contended that the issues raised in the case at bar are the very issues pending in the case below, Civil Case No. 653, and that the decision that the Court renders here "would greatly affect the respective claims of said parties in (said) case." (G.R. No. 1, 46396, Record, pp. 128-130) The aforesaid motion was followed by respondent Zobel's Motion for Immediate Resolution of Defendant-Movant's Motion to Suspend, etc., dated August 20, 1969. An opposition thereto was filed by plaintiff therein and a reply was filed in turn by respondent Zobel on July 30, 1 969. Acting on the said motions, the trial court issued an order on September 2, 1969 giving the parties certain periods to file their pleadings and cancelling a scheduled hearing until it shall have resolved the motion to suspend. Since that time, however, the trial court chose not, or failed, to act formally on the aforesaid motion to suspend hearings. Then after five (5) years, with the trial court now presided by Judge Arlegui, respondent Zobel flip-flopped and filed a Motion to Dismiss the case below dated January 14, 1976, claiming alleged failure to


prosecute and res judicata, which was vigorously opposed by herein petitioner. Judge Arlegui, robot-like, nonetheless dismissed the Republic's complaint for Zobel's alleged grounds of failure to prosecute for an unreasonable length of time and res judicata per his order of January 12, 1977. A 35-page motion for reconsideration thereof was filed by Petitioner within the extended period sought for in an earlier motion. The then Presiding Judge Arlegui summarily denied the motion for extension of time earlier filed, per its order of March 3, 1977. The "Motion for Reconsideration of Order" dated March 3, 1977, and "Supplement to Motion for Reconsideration of Order" dated March 3,1977, were similarly denied by Judge Arlegui in his order dated June 14, 1977. Petitioner Republic thus elevated the matter to this Court by certiorari and mandamus which was docketed as G.R. No. L-46396 11 and asked that it be consolidated with the case at bar which from the beginning was assigned to the Court en banc. However, G.R. No. L-46396 was somehow assigned to the Second Division of the Court which peremptorily dismissed the petition per its minute resolution dated December 1 7, 1977, which reads: Acting on the petition for certiorari and mandamus in this case as well as the comment thereon of the private respondent and the reply of petitioner and rejoinder thereto of said respondent, the Court resolved to DISMISS the petition, considering that although the motion for extension of time to file a motion for reconsideration of petitioner dated February 19, 1977 may be deemed as filed within the reglementary period for appeal, the same did not suspend said period which expired on February 21, 1977 (Gibbs v. Court of First Instance of Manila, 80 Phil. 160, where the appeal albeit late by one day, was nevertheless allowed on the ground that under the peculiar circumstances of the case showing utmost effort on the part of appellant to make

the same on time, there was excusable neglect, which does not obtain here) because "the petition for extension of time should not .interrupt the period fixed by law for the taking of the appeal" on the ground that "the only purpose of said petition is to ask the court to grant an additional period to that fixed by law to that end." (Alejandro v. Endencia 64 Phil, 321) Soon after the dismissal of the petition in G.R. No. 46396, respondent Zobel filed in this case a "Motion to Dismiss Petition" and "Manifestation and Motion to Lift Temporary Restraining Order" issued on March 7, 1969, and another supplemental motion, on the ground that the instant case has become moot and academic by the dismissal of the complaint in Civil Case No. 653 in the court below. This was refuted by the herein petitioner in its Comment dated March 30, 1981. On December 15, 1981, Judge Arlegui precipitately rendered in Civil Case No. 653 a decision on the Counterclaim of herein respondent Zobel, declaring him the true, absolute and registered owner of the lands covered by Transfer Certificate of Title Nos. 3699, T-7702 and 9262 (now No. 10031) and directing the Government's licensees and permittees occupying the same to vacate the lands held by them. Subsequently, on March 9, 1982, Judge Arlegui issued a writ of execution in Civil Case No. 653, prompting the heirs of Guillermo Mercado to file in this case an Urgent Motion dated March 22,1982 to stay the same. Acting on the Urgent Motion, the "Court issued another restraining order dated June 17, 1982, emphasizing the necessity therefor in this wise: ... the issuance of the restraining order now prayed for by movants-heirs of Guillermo Mercado is necessary to retain the status quo since whatever rights they have are only in representation of the petitioner Republic who claims the said


lands by virtue of their reversion to the public dominion as specifically adjudged by this court in G.R. No. L- 26112., Respondent Zobel then moved for a reconsideration and lifting of aforesaid restraining order. The heirs of intervenor Zoila de Chavez on the other hand, moved for a preliminary mandatory injunction to restore them in possession of a Portion of the land in dispute from where they had been ousted by virtue of the writ of execution issued in Civil Case No. 653. In a Consolidated Comment dated September 30, 1982, petitioner Republic opposed the said motion of respondent Zobel, and at the same time concurred with the motion filed by the heirs of Zoila de Chavez for the issuance of a writ of preliminary mandatory injunction. On or about November 8, 1983, the heirs of intervenor Guillermo Mercado filed an "Urgent Motion for Contempt and Issuance of a Temporary Restraining Order, etc.," as respondent Zobel's representative, in spite of the restraining order enjoining them from enforcing the writ of execution, had begun to acquire possession of the land in question by cutting off trees in the undeveloped fishpond being leased by Mercado from the 7 government. On November 10, 1983, the Court issued the corresponding restraining order prayed for "enjoining respondent Enrique Zobel or his duly authorized representative from further cutting off the trees in the undeveloped fishpond of Guillermo Mercado having an area of two (2) hectares, more or less, and from hauling the big trees already cut off costing P10,000.00 "Resolution dated November 13, 1983). On or about November 23, 1983, the heirs of Guillermo Mercado filed a "Second Urgent Motion for Contempt and a Second Restraining Order, etc." since, in spite of the foregoing restraining

order issued by this Court, respondent Zobel and his agent were still cutting off the trees in the disputed areas. On December 6, 1983, after the hearing en banc of this case on the merits, a resolution was rendered by this Court "to ISSUE a second temporary restraining order enjoining respondent Enrique Zobel and his agents, representatives and/or any other person or persons acting on his behalf to desist from cutting off or removing any tree in the questioned areas which were declared reverted to the public domain and which are claimed by the Republic, effective immediately and until further orders by the Court. Against this background, respondent Zobel now contends that his TCT No. 3699 and TCT No. 9262 (now T-10031) are valid and subsisting as said titles "cannot be considered automatically annulled" by the decision in G.R. No. L-20950; that the decision in G.R. No. L-20950 annulled only TCT No. 9550 and no other; that he cannot be bound by the decision in said G.R. No. L-20950 since he was not a party thereto; that the dismissal of Civil Case No. 653 and of the appeal therefrom by the Republic has quieted his questioned titles and has rendered the instant petition moot and academic; that the decision on his counterclaim in Civil Case No. 653 declaring him to be the true and registered owner of the subject land had long become final and executory, and that under the principle of res judicata the present petition ought to be dismissed; and that intervenors Mercado and Chavez have no right of possession over the land in question. The Republic's petition is patently meritorious. 1. On the original issue at bar brought against respondent Judge Angeles" issuance of preliminary mandatory injunction per the questioned Order of October 1, 1968, petitioner Republic and its co-petitioner licensees are manifestly entitled to the restraining orders issued by the Court on March 7, 1969 enjoining


respondent judge from enforcing the preliminary mandatory injunction that he had issued that would oust the Republic and its licensees from the public lands in question and transfer possession thereof to respondent Zobel; that issued on June 17, 1982 enjoining enforcement of respondent Judge Arlegui's writ of execution issued on March 9, 1982 declaring without trial respondent Zobel (on his counterclaim to the dismissed complaint) as the true and registered owner of the lands covered by TCT Nos. 3699, 7702 and 9262 (now 10031) and directing the Republic's licensees to vacate the same; and that issued on December 6, 1983 after the hearing on the merits, "enjoining respondent Enrique Zobel and his agents, representatives and/ or any other person or persons acting on his behalf to desist from cutting off or removing any tree in the questioned areas which were declared reverted to the public domain and which are claimed by the Republic." Respondent Judge Arlegui, after he succeeded Judge Angeles as presiding judge, committed the gravest abuse of discretion, when, instead of granting the preliminary injunction sought by the Republic and its co-petitioners to enjoin respondent Zobel from usurping lands of the public domain covered by his voided expanded subdivision titles, he dismissed the complaint on January 12, 1977 and almost four years later on December 15, 1981, without any trial, granted said respondent's counter prayer in his Answer to the complaint in Civil Case No. 653 for the issuance of a mandatory injunction upon a P10,000.00 bond to oust petitioner Republic and its permittees and/or lessees from the property and to deliver possession thereof to respondent Zobel. It is settled doctrine that as a preliminary mandatory injunction usually tends to do more than to maintain the status quo, it is generally improper to issue such an injunction prior to the final hearing and that it may issue only in cases of extreme urgency, where the right is very clear. 12

Contrary to respondent Zobel's assertion, the 1965 final judgment in favor of the Republic declared as null and void, not only TCT No. 9550, but also "other subdivision titles" issued over the expanded areas outside the private land of Hacienda Calatagan covered by TCT No. 722. As shown at the outset, 13 after respondents ordered subdivision of the Hacienda Calatagan which enabled them to acquire titles to and "illegally absorb" the subdivided lots which were outside the hacienda's perimeter, they converted the same into fishponds and sold them to third parties, But as the Court stressed in the 1965 judgment and time and again in other cases, 'it is an elementary principle of law that said areas not being capable of registration, their inclusion in a certificate of title does not convert the same into properties of private ownership or confer title on the registrant." 14 This is crystal clear from the dispositive portion or judgment which reads: WHEREFORE, judgment is hereby rendered as follows: (a) Declaring as null and void Transfer Certificate of Title No. T 550 (or Exhibit "24") of the Register of Deeds of the Province of Batangas and other subdivision titles issued in favor of Ayala y Cia and/or Hacienda de Calatagan over the areas outside its private land covered by TCT No. 722, which including the lots in T-9550 (lots 360, 362, 363 and 182) are hereby reverted to public dominion." This final 1965 judgment reverting to public dominion all public lands unlawfully titled by respondent Zobel and Ayala and/or Hacienda Calatagan is now beyond question, review or reversal by any court, although as sadly shown hereinabove, respondents' tactics and technical maneuvers have all these 23 long years thwarted its execution petition and the Republic's recovery of the lands and waters of the public domain.


Respondent Zobel is bound by his admission in his Answer to the Complaint below that when Civil Case No. 373 was docketed, he "was and still is at present one of the members and managing partners of Ayala y Cia one of the defendants in the said civil case, and, therefore. privy thereto." Clearly, the burden of proof lies on respondent Zobel and other transferees to show that his subdivision titles are not among the unlawful expanded subdivision titles declared null and void by the said 1965 judgment. Respondent Zobel not only -did not controvert the Republic's assertion that his titles are embraced within the phrase "other subdivision titles" ordered cancelled but failed to show that the sub division titles in his name cover lands within the original area covered by Ayala's TCT No. 722 (derived from OCT No. 20) and not part of the beach, foreshore and territorial sea belonging and ordered reverted to public dominion in the aforesaid 1965 judgment. 2. The issues at bar have been expanded by the parties, as shown by the voluminous records of the case (which have expanded to 2,690 pages in three volumes), to cover the questioned actions of respondent Judge Arlegui (a) in dismissing the Republic's complaint in Civil Case No. 653 of his court per his Order of January 12, 1977 (subject of the Court's Second Division's Resolution of December 17, 1979 dismissing the Republic's petition for review in Case G.R. No. L,46396); and (b) his decision of December 15, 1981, after almost four years, on respondent Zobel's counterclaim in the same case, declaring him the true and registered owner of the lands covered by some three subdivision titles in his name, 15 as well as (c) the resurvey of the lands affected so as to properly segregate from Ayala's expanded TCT No. 722 the estimated 2,000 hectares of territorial sea, foreshore, and navigable waters, etc., of the public domain and enforcement and execution of the 1965 final judgment reverting these usurped public areas to public dominion. 16

3. On the first question of the precipitate dismissal of the Republic's complaint in the case below, Civil Case No. 653, the . records show respondent judge's action to have been capricious , arbitrary and whimsical. His first ground of non-prosecution of the action by the Republic is belied by his very Order which shows that the proceedings had been suspended all the while since its filing in 1967 upon insistent motions of respondent Zobel. against petitioner's vigorous opposition, that it was necessary as a cuestion previa to await the Court's resolution of the case at bar. His second ground of res judicata is likewise devoid of logic and reason. The first case (the 1965 judgment in Case L-20950) decreeing the reversion to public dominion of the public lands and waters usurped by respondent's unlawfully expanded titles and ordering the cancellation of all such titles and their transfers could not possibly be invoked as res judicata in the case at bar on respondent Zobel's untenable submission that his unlawfully expanded titles were not specifically mentioned in the 1965 judgment. The Court in said 1965 judgment had stressed the elementary rule that the generally incontestable and indefeasible character of a Torrens Certificate of Title does not operate when the land covered thereby is not capable of registration, as in this case, being part of the sea, beach, foreshore or navigable water or other public lands incapable of registration. 17 It should be noted further that the doctrine of estoppel or laches does not apply when the Government sues as a Sovereign or asserts governmental rights, nor does estoppel or laches validate an act that contravenes law or public policy 18 and that res judicata is to be disregarded if its application would involve the sacrifice of justice to technicality. 19 Respondent Judge Arlegui's refusal to grant the Republic a simple 15-day extension of time to file a Motion for Reconsideration on the ground that such motion was filed on the last day (following a Sunday) and he could no longer act thereon within the original


period per his Orders of March 3, 1977 and June 14, 1977 20 depict an incomprehensible disregard of the cardinal principle that procedural rules are supposed to help and not hinder the administration of justice and crass indifference, if not outright hostility against the public interest. At any rate, such dismissal of the complaint and dismissal on December 17, 1979 of the petition for certiorari thereof by the Court's Second Division, based on purely procedural and technical grounds, does not and cannot in any way have any legal significance or prejudice the Republic's case. Such dismissal by the Second Division cannot in any way affect, much less render nugatory, the final and executory 1965 judgment in G.R. No. L20950 reverting the public lands and waters to public dominion. Much more so when we take into account the mandatory provisions of Article VIII, Section 4(3) of the 1987 Constitution (and its counterpart Article X, Section 2(3) of the 1973 Constitution) to the effect that only the Supreme Court en banc may modify or reverse a doctrine or principle of law or ruling laid down by the Court in a decision rendered en banc or in division. 3. Respondent judge's "decision" on respondent Zobel's counterclaim and declaring him, four years after dismissal of the Republic's complaint, as the true owner of the lands unlawfully titled in Zobel's name is properly before the Court in the case at bar. We declare the same null and void for want of jurisdiction over the subject properties which were reverted to public dominion in the final 1965 judgment which annulled all expanded titles unlawfully secured by respondents and their transferees to public waters and lands. 4. As to the third and most important question of finally executing and enforcing the 1965 judgment in favor of the Republic and reverting all usurped areas to public dominion, the Solicitor General has complained rightfully in his Memorandum

that "mass usurpation of public domain remains unabated . ... for almost (23) years now execution of the 1965 final judgment in G.R. No. L-20950, ordering the cancellation of the subdivision titles covering the expanded areas outside the private lands of Hacienda Calatagan, is being frustrated by respondent Zobel, the Ayala and/or Hacienda Calatagan. As a consequence, the mass usurpation of lands of public domain consisting of portions of the territorial sea, the foreshore, beach and navigable water bordering Balayan Bay, Pagaspas Bay and the China Sea, still remain unabated . ... (T)he efforts of Ayala and Zobel to prevent execution of said final judgment are evident from the heretoforementioned technical maneuvers they have resorted to. In brief, they moved to quash and secured the quashal of the writ of execution, succeeded in opposing the issuance of another writ of execution, opposed the motion to conduct re-survey, opposed the approval and secured a disapproval of resurvey plan, moved to dismiss and got a dismissal of Civil Case No. 653, ousted government fishpond permittees from the subject lands and threatened to eject the other permittees therefrom, and secured from the lower court a declaration of validity of their void titles. Also, in this case, respondent Zobel is trying to prevent the cancellation of his void titles by resorting to frivolous technicalities thus flouting this Honorable Court's decision in G.R. No. L-20950 . " 21 We heed the Republic's pleas that "It bears stressing that the Re-survey Plan (Annex "C", together with Annexes "A" and "B" of Republic's Comment dated March 30,1981, being a Report on the Re-survey dated August 5,1977 and the "Final Report" dated September 2, 1977, respectively) delineating the expanded areas covered by subdivision titles derived from TCT No. 722 has been prepared by a Committee created by the Secretary of Agriculture and Natural Resources wherein Ayala and/or Hacienda Calatagan was represented by Engineer Tomas Sanchez, Jr. and approved by the Director of


Lands. Well to recall that under G.R. No. 26112 (44 SCRA 255, 263), this Honorable Court, in a Resolution dated April 11, 1972, declared that as soon as said resurvey Is completed the proper writ of execution for the delivery of possession of the portion found to be public land should issue." Thus: [See pages 3-5 of Annex "A" hereof for text of Resolution.] "By virtue of the aforesaid resolution, therefore, there should no longer be any legal impediment against the execution of the final judgment in Civil Case No. 373 (G.R. No. L-20950), the issuance of which is purely ministerial the dubious decision in Civil Case No. 653 notwithstanding. Accordingly, to give legal significance to the earlier decision and resolution of this Honorable Court in G.R. No. L-20950 and 26112, respectively, and to foreclose any further legal obstacle on the matter, we pray this Honorable Court to declare the proceedings conducted by respondent judge in Civil Case No. 653 null and void ab initio, and to consider the resurvey plan as sufficient basis for the immediate issuance of the corresponding writ of execution in Civil Case No. 373. For it is only upon said execution that the oft revived issues of ownership and possession over the land in question, as well as over all other lots covered by the subdivision titles outside the private land covered by TCT No. 722, may be finally laid to rest. Indeed, under the facts and circumstances obtaining in the case at bar, execution of the final judgment in Civil Case No. 373 is long overdue ." 22 To allow repetition after repetition of the maneuvers hereinabove set forth in detail, notwithstanding the final 1965 judgment in favor of the Republic, and to protract further the return to the Republic of the usurped lands pertaining to the public domain would be to sanction a legal abomination As stated by the late Chief Justice Roberto Concepcion, to frustrate delivery and return of the usurped lands to the Republic would:

(1) Establish a precedent-fraught with possibilities tending to impair the stability of judicial decisions and affording a means to prolong court proceedings or justify the institution of new ones, despite the finality of the judgment or decree rendered in the main case, by sanctioning a departure from the clear, plain and natural meaning of said judgment or decree; (2) Contribute to the further increase of the steadily mounting number of cases pending before our courts of justice, and thus generate greater delay in the determination of said cases, as well as offset the effect of legislative and administrative measures taken-some upon the suggestion or initiative of the Supreme Court to promote the early disposal of such cases; (3) Impair a normal and legitimate means to implement the constitutional mandate for the protection and conservation of our natural resources and the patrimony of the nation; and (4) Promote usurpations of the public domain, as well as the simulation of sales thereof by the original usurper, by exempting him from responsibility for damage which would not have been sustained were it not for the irregularities committed by him so long as he has conveyed the subject matter thereof to a purchaser for value, in good faith. 23 As in Air Manila, Inc. v. CIR 24 and several other cases in order to avoid further intolerable delay and finally bring to reality the execution of the 1965 judgment that would enable the State to recover at last the estimated 2,000 hectares of lands and waters of the public domain, the Court will order its Clerk of Court to issue directly the corresponding writ of execution of judgment addressed to the sheriffs of the locality. We declare respondent judge's gratuitous "disapproval" of the Re-survey Plan and Report duly approved by the Director of Lands and the then Secretary of Agriculture and Natural Resources as null and void for being ultra vires and lack of jurisdiction over the same. It is


well-recognized principle that purely administrative and discretionary functions may not be interfered with by the courts. In general, courts have no supervising " power over the proceedings and actions of the administrative departments of government. This is generally true with respect to acts involving the exercise of judgment or discretion, and findings of fact. 25 There should be no thought of disregarding the traditional line separating judicial and administrative competence, the former being entrusted with the determination of legal questions and the latter being limited as a result of its expertise to the ascertainment of the decisive facts. 26 WHEREFORE, judgment is hereby rendered 1. Annulling the questioned mandatory injunction of October 1, 1968 issued by respondent-judge and making permanent the restraining orders issued by the Court; 2. Declaring as null and void the questioned decision of December 15, 1981, as well as the corresponding writ of execution therefore having been issued by respondent judge with grave abuse of discretion and without jurisdiction, and for being in contravention of the final 1965 decision in Civil Case No. 373 as affirmed in G.R. No. L-20950; 3. Declaring the Re-survey Plan duly approved by the Director of Lands as sufficient basis for the execution of the final judgment in the aforesaid Civil Case No. 373 as affirmed in G.R. No. L- 20950; and 4. Directing the Clerk of this Court to forthwith issue the corresponding writ of execution in the case at bar for Civil Case No. 373 of the Regional Trial Court (formerly Court of First Instance) of Batangas (Balayan Branch) reverting to public dominion and delivering to the duly authorized representatives of the Republic all public lands and lots, fishponds, territorial bay

waters, rivers, manglares foreshores and beaches, etc. as delineated in the aforesaid duly approved Re-survey Plan (Annex "C") and any supplemental Re-survey Plan as may be found necessary * and duly approved by the Secretary of Agriculture. This decision is IMMEDIATELY EXECUTORY and no motion for extension of time to file a motion for reconsideration will be granted. 92. G.R. No. L-50638 July 25, 1983 LORETO J. SOLINAP, petitioner, vs. HON. AMELIA K. DEL ROSARIO, as Presiding Judge of Branch IV, Court of First Instance of Iloilo, SPOUSES JUANITO and HARDEVI R. LUTERO, and THE PROVINCIAL SHERIFF OF ILOILO, respondents. ESCOLIN; J.: Posed for resolution in this petition is the issue of whether or not the obligation of petitioners to private respondents may be compensated or set- off against the amount sought to be recovered in an action for a sum of money filed by the former against the latter. The facts are not disputed. On June 2, 1970, the spouses Tiburcio Lutero and Asuncion Magalona, owners of the Hacienda Tambal, leased the said hacienda to petitioner Loreto Solinap for a period of ten [10] years for the stipulated rental of P50,000.00 a year. It was further agreed in the lease contract that out of the aforesaid annual rental, the sum of P25,000.00 should be paid by Solinap to the Philippine National Bank to amortize the indebtedness of the spouses Lutero with the said bank.


Tiburcio Lutero died on January 21, 1971. Soon after, his heirs instituted the testate estate proceedings of the deceased, docketed as Sp. Proc. No. 1870 of the Court of First Instance of Iloilo, presided by respondent Judge Amelia K. del Rosario. In the course of the proceedings, the respondent judge, upon being apprized of the mounting interest on the unpaid account of the estate, issued an order, stating, among others, "that in order to protect the estate, the administrator, Judge Nicolas Lutero, is hereby authorized to scout among the testamentary heirs who is financially in a position to pay all the unpaid obligations of the estate, including interest, with the right of subrogation in accordance with existing laws." On the basis of this order, respondents Juanito Lutero [grandson and heir of the late Tiburcio] and his wife Hardivi R. Lutero paid the Philippine National Bank the sum of P25,000.00 as partial settlement of the deceased's obligations. Whereupon the respondents Lutero filed a motion in the testate court for reimbursement from the petitioner of the amount thus paid. They argued that the said amount should have been paid by petitioner to the PNB, as stipulated in the lease contract he had entered into with the deceased Tiburcio Lutero; and that such reimbursement to them was proper, they being subrogees of the PNB. Before the motion could be resolved by the court, petitioner on April 28, 1978 filed in the Court of First Instance of Iloilo a separate action against the spouses Juanito Lutero and Hardivi R. Lutero for collection of the total amount of P71,000.00, docketed as Civil Case No. 12397. Petitioner alleged in the complaint that on April 25, 1974 the defendants Lutero borrowed from him the sum of P45,000.00 for which they executed a deed of real estate mortgage; that on July 2, 1974, defendants obtained an additional loan of P3,000.00, evidenced by a receipt issued by them; that defendants are further liable to him for the sum of P23,000.00, representing the value of certain dishonored checks issued by

them to the plaintiff; and that defendants refused and failed to settle said accounts despite demands. In their answer, the respondents Lutero traversed the material averments of the complaint and set up legal and factual defenses. They further pleaded a counterclaim against petitioners for the total sum of P 125,000.00 representing unpaid rentals on Hacienda Tambal. Basis of the counterclaim is the allegation that they had purchased one-half [1/2] of Hacienda Tambal, which their predecessors, the spouses Tiburcio Lutero and Asuncion Magalona, leased to the plaintiff for a rental of P50,000.00 a year; and that plaintiffs had failed to pay said rentals despite demands. At the pre-trial, the parties defined the issues in that case as follows: (1) Whether or not the defendants [Luteros] are indebted to the plaintiff and, if so, the amount thereof; (2) Whether or not the defendants are the owners of one-half [1/2] of that parcel of land known as 'Hacienda Tambal' presently leased to the plaintiff and, therefore, entitled to collect from the latter one-half [1/2] of its lease rentals; and in the affirmative, the amount representing the unpaid rental by plaintiff in favor of the defendant. 1 On June 14, 1978, the respondent judge issued an order in Sp. Proc. No. 1870, granting the respondent Lutero's motion for reimbursement from petitioner of the sum of P25,000.00 plus interest, as follows: WHEREFORE, Mr. Loreto Solinap is hereby directed to pay spouses Juanito Lutero and Hardivi R. Lutero the sum of P25,000.00 with interest at 12% per annum from June 17, 1975 until the same shall have been duly paid.


Petitioner filed a petition for certiorari before this Court, docketed as G.R. No. L-48776, assailing the above order. This Court, however, in a resolution dated January 4, 1979 dismissed the petition thus: L-48776 [Loreto Solinap vs. CFI etc., et al.]- Acting on the petition in this case as well as the comment thereon of respondents and the reply of petitioner to said comment, the Court Resolved to DISMISS the petition for lack of merit, anyway, the P25,000.00 to be paid by the petitioner to the private respondent Luteros may well be taken up in the final liquidation of the account between petitioner as and the subject estate as lessor. Thereafter the respondent Luteros filed with the respondent court a "Motion to Reiterate Motion for Execution of the Order dated June 14, 1978." Petitioner filed a rejoinder to said motion, raising for the first time the thesis that the amount payable to private respondents should be compensated against the latter's indebtedness to him amounting to P71,000.00. Petitioner attached to his rejoinder copies of the pleadings filed in Civil Case No. 12397, then pending before Branch V of the Court of First Instance of Iloilo. This motion was denied by respondent judge on the ground that "the claim of Loreto Solinap against Juanito Lutero in Civil Case No. 12397 is yet to be liquidated and determined in the said case, such that the requirement in Article 1279 of the New Civil Code that both debts are liquidated for compensation to take place has not been established by the oppositor Loreto Solinap." Petition filed a motion for reconsideration of this order, but the same was denied. Hence, this petition. The petition is devoid of merit. Petitioner contends that respondent judge gravely abused her discretion in not declaring

the mutual obligations of the parties extinguished to the extent of their respective amounts. He relies on Article 1278 of the Civil Code to the effect that compensation shall take place when two persons, in their own right, are creditors and debtors of each other. The argument fails to consider Article 1279 of the Civil Code which provides that compensation can take place only if both obligations are liquidated. In the case at bar, the petitioner's claim against the respondent Luteros in Civil Case No. 12379 is still pending determination by the court. While it is not for Us to pass upon the merits of the plaintiffs' cause of action in that case, it appears that the claim asserted therein is disputed by the Luteros on both factual and legal grounds. More, the counterclaim interposed by them, if ultimately found to be meritorious, can defeat petitioner's demand. Upon this premise, his claim in that case cannot be categorized as liquidated credit which may properly be set-off against his obligation. As this Court ruled in Mialhe vs. Halili, 2 " compensation cannot take place where one's claim against the other is still the subject of court litigation. It is a requirement, for compensation to take place, that the amount involved be certain and liquidated." WHEREFORE, the petition is dismissed, with costs against petitioner. 93. G.R. No. L-38711 January 31, 1985 FRANCISCO SYCIP, petitioner, vs. HONORABLE COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents. RELOVA, J.:


On August 25, 1970, the then Court of First Instance of Manila rendered a decision convicting the herein petitioner Francisco Sycip of the crime of estafa and sentencing him to an indeterminate penalty of three (3) months of arresto mayor, as minimum to one (1) year and eight (8) months of prision correccional, as maximum; to indemnify complainant Jose K. Lapuz the sum of P5,000.00, with subsidiary imprisonment in case of insolvency; and to pay the costs. The then Court of Appeals affirmed the trial court's decision but deleted that part of the sentence imposing subsidiary imprisonment. The facts of the case as found by respondent appellate court read: ... [I]n April 1961, Jose K. Lapuz received from Albert Smith in Manila 2,000 shares of stock of the Republic Flour Mills, Inc., covered by Certificate No. 57 in the name of Dwight Dill who had left for Honolulu. Jose K. Lapuz "was supposed to sell his (the shares) at present market value out of which I (he) was supposed to get certain commission." According to Jose K. Lapuz, the accused-appellant approached him and told him that he had good connections in the Stock Exchange, assuring him that he could sent them at a good price. Before accepting the offer of the accused-appellant to sent the shares of stock, Jose K. Lapuz made it clear to him that the shares of stock did not belong to him and were shortly entrusted to him for sale. He then gave the shares of stock to the accused-appellant who put them in the market. Thereafter, Jose K. Lapuz received a letter from the accusedappellant, dated April 25, 1961 (Exhibit "A"), the latter informing him that "1,758 shares has been sold for a net amount of P29,000.00," but that the transaction could not be concluded until they received the Power of Attorney duly executed by Dwight Dill, appointing a person to endorse the certificate of

stock, and a resolution from the Biochemical Research Laboratory, Inc., authorizing the transfer of the certificate. Jose K. Lapuz signed his conformity to the contents of the letter. Jose K. Lapuz declared that he "was able to secure a power of attorney of Dr. Dwight Dill, and gave it to the accused-appellant." The power of attorney authorized the sale of 1,758 shares only; the difference of 242 shares were given back to Biochemical Research Laboratory, Inc. Of the 1,758 shares of stock, the accused-appellant sold 758 shares for P12,128.00 at P16.00 a share, for which Jose K. Lapuz issued a receipt, dated May 23, 1961 (Exhibit "C"). On the same day, Jose K. Lapuz turned over to Albert Smith the sum of P9,981.40 in payment of 758 shares of P14.00 a share (Exhibits "D" and "E"). On May 30, 1961, Jose K. Lapuz received a letter from the accused-appellant (Exhibit "F"), the latter informing him that "although the deal (relative to the 1,000 shares) has been closed, actual delivery has been withheld pending receipt of payment ..., I have chose(n) to return the shares ...," enclosing Certificate No. 955 for 500 shares, Certificate No. 952 for 50 shares in name of Felix Gonzales, and the photostat of Certificate No. 953 for 208 shares, which had been sold to Trans Oceanic Factors and Company, for which a check would be issued "within the next few days." He promised to deliver the 242 shares as soon as he would have received them from one Vicente Chua. "The next day (May 31, 1961), Jose K. Lapuz wrote a letter to the accused-appellant (Exhibit "C"), stating therein, "Per our conversation this morning, I hereby authorize you to sell 1,000 shares of Republic Flour Mills." Later, the accused-appellant wrote a letter to Jose K. Lapuz, dated June 1, 1961 (Exhibit "I"), confirming their conversation on that date that "500 shares out of the 1,000 shares of the Republic


Flour ... has been sold," and stating further that "pending receipt of the payment, expected next week, we are enclosing herewith our draft to cover the full value of 500 shares." He asked in that letter, "Please give me the 50 shares in the name of Mr. Felix Gonzales and the photostat of 208 shares in the name of Trans Oceanic Factors and Company." The date of the letter (Exhibit "I") is disputed, the prosecution contending that it should be July 1, 1961, not June 1, 1961. The contention of the prosecution has the support of the date of the draft (Exhibit "J") mentioned in the letter. The accused-appellant sold and paid for the other 500 shares of stock, for the payment of which Jose K. Lapuz issued in his favor a receipt, dated June 9, 1961 (Exhibit "H"). The draft (Exhibit "J") for P8,000.00, "the full value of the 500 shares' mentioned in the letter of the accused-appellant (Exhibit "I"), was dishonored by the bank, for lack of funds. Jose K. Lapuz then "discovered from the bookkeeper that he got the money and he pocketed it already, so I (he) started hunting for Mr. Sycip" (accused-appellant). When he found the accused-appellant, the latter gave him a check in the amount of P5,000.00, issued by his daughter on July 12, 1961 (Exhibit "K"). This also was dishonored by the bank for lack of sufficient funds to cover it (Exhibits "K-l" and "K-2"). When Jose K. Lapuz sent a wire to him, telling him that he would "file estafa case (in the) fiscals office ... against him' unless he raise [the] balance left eight thousand" (Exhibit "L"), the accusedappellant answered him by sending a wire, "P5,000 remitted ask boy check Equitable (Exhibit "M"). But "the check was never made good," so Jose K. Lapuz testified. He had to pay Albert Smith the value of the 500 shares of stock." (Petitioner's brief, pp. 5862)

Coming to this Court on a petition for review on certiorari, petitioner claims that respondent appellate court erred (1) in denying petitioner of a hearing, as provided under Section 9, Rule 124, Rules of Court; (2) in not upholding due process of law (Sections 1 and 17), Article IV, Bill of Rights, Constitution; (3) in refusing to uphold the provisions on compensation, Articles 1278 and 1279, Civil Code; (4) in not dismissing the complaint, even granting arguendo, that compensation does not apply; (5) in not ruling that a consummated contract (Deed of Sale, Exhibit '10') is not covered by the Statute of Frauds and that its decision is not in accordance with Section 4, Rule 51, Rules of Court; and, (6) in ignoring the ruling case promulgated by this Honorable Supreme Court in People vs. Benitez, G.R. No. L-15923, June 29, 1960, in its applicability to offenses under Article 315, paragraph 1 (b) of the Penal Code. Petitioner in his first and second assigned errors argues that respondent Court of Appeals erred in denying him his day in court notwithstanding his motion praying that the appealed case be heard. He invokes Section 9 of Rule 124 of the Revised Rules of Court and relates it to Sections 1 and 17 of Article IV of the New Constitution. This contention is devoid of merit. Petitioner was afforded the right to be present during every step in the trial before the Court of First Instance, that is, from the arraignment until the sentence was promulgated. On appeal, he cannot assert as a matter of right to be present and to be heard in connection with his case. It is the procedure in respondent court that within 30 days from receipt of the notice that the evidence is already attached to the record, the appellant shall file 40 copies of his brief with the clerk accompanied by proof of service of 5 copies upon the appellee (Section 3, Rule 124 of the Revised Rules of Court). Within 30 days from receipt of appellant's brief, the appellee shall file 40 copies of his brief with the clerk accompanied by proof of service of 5 copies upon the appellant (Section 4, Rule 124 of the Revised Rules of Court). Each party may be allowed extensions of time to file brief for good and


sufficient cause. Thereafter, the appellate court may reverse, affirm or modify the judgment, increase or reduce the penalty imposed, remand the case for new trial or re-trial or dismiss the case (Section 11, Rule 124 of the Revised Rules of Court). It is discretionary on its part whether or not to set a case for oral argument. If it desires to hear the parties on the issues involved, motu propio or upon petition of the parties, it may require contending parties to be heard on oral arguments. Stated differently, if the Court of Appeals chooses not to hear the case, the Justices composing the division may just deliberate on the case, evaluate the recorded evidence on hand and then decide it. Accused-appellant need not be present in the court during its deliberation or even during the hearing of the appeal before the appellate court; it will not be heard in the manner or type of hearing contemplated by the rules for inferior or trial courts. In his third and fourth assigned errors, petitioner contends that respondent Court of Appeals erred in not applying the provisions on compensation or setting-off debts under Articles 1278 and 1279 of the New Civil Code, despite evidence showing that Jose K. Lapuz still owed him an amount of more than P5,000.00 and in not dismissing the appeal considering that the latter is not legally the aggrieved party. This contention is untenable. Compensation cannot take place in this case since the evidence shows that Jose K. Lapuz is only an agent of Albert Smith and/or Dr. Dwight Dill. Compensation takes place only when two persons in their own right are creditors and debtors of each other, and that each one of the obligors is bound principally and is at the same time a principal creditor of the other. Moreover, as correctly pointed out by the trial court, Lapuz did not consent to the off-setting of his obligation with petitioner's obligation to pay for the 500 shares. Anent the fifth assigned error, petitioner argues that the appellate court erred in not ruling that the deed of sale is a consummated contract and, therefore, not covered by the Statute of Frauds. It must be pointed out that the issue on whether or not

the alleged contract of sale is covered by the Statute of Frauds has not been raised in the trial court or with the Court of Appeals. It cannot now be raised for the first time in this petition. Thus, there is no need for respondent court to make findings of fact on this matter. With respect to the sixth assigned error, petitioner points out that the Court of Appeals erred in affirming the decision of the trial court convicting him of the crime charged. Petitioner mentions that in People vs. Benitez, G.R. No. L-15923, June 30, 1960 (108 Phil. 920), We have ruled that to secure conviction under Article 315, paragraph 1 (b), Revised Penal Code, it is essential that the following requirements be present: (a) existence of fraud; (b) failure to return the goods on demand; and (c) failure to give any reason or explanation to the foregoing. He claims that nowhere in the decision was he found to have any particular malice or intent to commit fraud, or, that he failed to return the shares on any formal demand made by Jose K. Lapuz to him, and/or was he unable to make any explanation thereto. On this score, We only have to quote from the decision of the respondent court, as follows: The "malice or intent to commit fraud" is indicated in that part of the decision herein before quoted, that is, the accused- appellant "received from Jose K. Lapuz the 500 shares in question (a part of 1,758 shares) for sale, and that, although the same had already been sold, the accused ... failed to turn over the proceeds thereof to Jose K. Lapuz." The abuse of confidence in misappropriating the funds or property after they have come to the hands of the offender may be said to be a fraud upon the person injured thereby (U.S. vs. Pascual, 10 Phil. 621). xxx xxx xxx The accused-appellant having informed Jose K. Lapuz that the "500 shares out of the 1000 shares ... has been sold" (Exhibit "I"),


for which he issued a draft for P8,000.00 (Exhibit "J"), the latter cannot be expected to make a demand for the return of the 500 shares. His demand was for the payment of the shares when the draft was dishonored by the bank. The delivery of a worthless check in the amount of P5,000.00 by the accused-appellant to Jose K, Lapuz, after the latter's "hunting" for him is even a circumstance indicating intent to commit fraud. (pp. 48-49, Rollo) xxx xxx xxx His explanation of his inability to return the 500 shares of stock is not satisfactory. ... If it is true that he gave the 500 shares of stock to his creditor, Tony Lim, he is nonetheless liable for the crane of estafa, he having received the 500 shares of stock to be sold on commission. By giving the shares to his creditor, he thereby committed estafa by conversion. (pp. 49-50, Rollo) Indeed, Jose K. Lapuz demanded from petitioner the amount of P5,000.00 with a notice that in the event he (petitioner) would fail to pay the amount, Lapuz would file an estafa case against him. By and large, respondent Court of Appeals has not overlooked facts of substance and value that, if considered, would alter the result of the judgment. WHEREFORE, for lack of merit the petition is hereby DISMISSED. 94. G.R. No. L-50900 April 9, 1985 COMPAÑIA MARITIMA, petitioner,

vs. COURT OF APPEALS and PAN ORIENTAL SHIPPING CO., respondents. G.R. No. L-51438 April 9, 1985 REPUBLIC OF THE PHILIPPINES (BOARD OF LlQUIDATORS), petitioner, vs. COURT OF APPEALS and PAN ORIENTAL SHIPPING CO., respondents. G.R. No. L-51463 April 9, 1985 PAN ORIENTAL SHIPPING CO., petitioner, vs. COURT OF APPEALS, COMPAÑIA MARITIMA and THE REPUBLIC OF THE PHILIPPINES (BOARD OF LIQUIDATORS), respondents.

MELENCIO-HERRERA, J.: The above-entitled three (3) cases stemmed from the Decision of this Court, dated October 31, 1964, entitled "Fernando A. Froilan vs. Pan-Oriental Shipping Co., et al. 1 and our four (4) subsequent Resolutions of August 27, 1965, November 23, 1966, December 16, 1966, and January 5, 1967, respectively. The antecedental background is narrated in the aforestated Decision, the pertinent portions of which read: On March 7, 1947, Fernando A. Froilan purchased from the Shipping Administration a boat described as MV/FS-197 for the


sum of P200,000.00, with a down payment of P50,000.00. To secure payment of the unpaid balance of the purchase price, a mortgage was constituted on the vessel in favor of the Shipping Administration .... xxx xxx xxx Th(e) contract was duly approved by the President of the Philippines. Froilan appeared to have defaulted in spite of demands, not only in the payment of the first installment on the unpaid balance of the purchase price and the interest thereon when they fell due, but also failed in his express undertaking to pay the premiums on the insurance coverage of the vessel obliging the Shipping Administration to advance such payment to the insurance company. ... Subsequently, FROILAN appeared to have still incurred a series of defaults notwithstanding reconsiderations granted, so much so that: On February 21, 1949, the General Manager (of the Shipping Administration) directed its officers ... to take immediate possession of the vessel and to suspend the unloading of all cargoes on the same until the owners thereof made the corresponding arrangement with the Shipping Administration. Pursuant to these instructions, the boat was, not only actually repossessed, but the title thereto was registered again in the name of the Shipping Administration, thereby re-transferring the ownership thereof to the government. On February 22, 1949, Pan Oriental Shipping Co., hereinafter referred to as Pan Oriental, offered to charter said vessel FS-197 for a monthly rent of P3,000.00. Because the government was then spending for the guarding of the boat and subsistence of the

crew members since repossession, the Slopping Administration on April 1, 1949, accepted Pan Oriental's offer "in principle" subject to the condition that the latter shag cause the repair of the vessel advancing the cost of labor and drydocking thereof, and the Shipping Administration to furnish the necessary spare parts. In accordance with this charter contract, the vessel was delivered to the possession of Pan Oriental. In the meantime, or on February 22, 1949, Froilan tried to explain his failure to comply with the obligations he assumed and asked that he be given another extension up to March 15, 1949 to file the necessary bond. Then on March 8, Froilan offered to pay all his overdue accounts. However, as he failed to fulfill even these offers made by him in these two communications, the Shipping Administration denied his petition for reconsideration (of the rescission of the contract) on March 22, 1949. It should be noted that while his petition for reconsideration was denied on March 22, it does not appear when he formally formulated his appeal. In the meantime, as already stated, the boat has been repossessed by the Shipping Administration and the title thereto re-registered in the name of the government, and delivered to the Pan Oriental in virtue of the charter agreement. On June 2, 1949, Froilan protested to the President against the charter of the vessel. xxx xxx xxx On June 4, 1949, the Shipping Administration and the Pan Oriental formalized the charter agreement and signed a bareboat contract with option to purchase, containing the following pertinent provisions: III. CHARTER HIRE, TIME OF PAYMENT. — The CHARTERER shall pay to the owner a monthly charter hire of THREE THOUSAND (P3,000.00) PESOS from date of delivery of the vessel, payable in advance on or before the 5th of every current


month until the return of the vessel to OWNER or purchase of the vessel by CHARTERER. IV. RIGHT OF OPTION TO PURCHASE.— The right of option to purchase the vessel at the price of P150,000.00 plus the amount expended for its present repairs is hereby granted to the CHARTERER within 120 days from the execution of this Contract, unless otherwise extended by the OWNER. This right shall be deemed exercised only if, before the expiration of the said period, or its extension by the OWNER, the CHARTERER completes the payment, including any amount paid as Charter hire, of a total sum of not less than twenty-five percentum (25%) of said price of the vessel. The period of option may be extended by the OWNER without in any way affecting the other provisions, stipulations, and terms of this contract. If, for any reason whatsoever, the CHARTERER fails to exercise its option to purchase within the period stipulated, or within the extension thereof by the OWNER, its right of option to purchase shall be deemed terminated, without prejudice to the continuance of the Charter Party provisions of this contract. The right to dispose of the vessel or terminate the Charter Party at its discretion is reserved to the OWNER. XIII. TRANSFER OF OWNERSHIP OF THE VESSEL. — After the CHARTERER has exercised his right of option as provided in the preceding paragraph (XII), the vessel shall be deemed conditionally sold to the purchaser, but the ownership thereof shag not be deemed transferred unless and until all the price of the vessel, together with the interest thereon, and any other obligation due and payable to the OWNER under this contract, have been fully paid by the CHARTERER. xxx xxx xxx

XXI. APPROVAL OF THE PRESIDENT. — This contract shall take effect only upon approval of His Excellency, the President. On September 6, 1949, the Cabinet revoked the cancellation of Froilan's contract of sale and restored to him all his rights thereunder, on condition that he would give not less than P1,000.00 to settle partially as overdue accounts and that reimbursement of the expenses incurred for the repair and drydocking of the vessel performed by Pan Oriental was to be made in accordance with future adjustment between him and the Shipping Administration (Exh. I). Later, pursuant to this reservation, Froilan's request to the Executive Secretary that the Administration advance the payment of the expenses incurred by Pan Oriental in the drydocking and repair of the vessel, was granted on condition that Froilan assume to pay the same and file a bond to cover said undertaking (EXH. III). On September 7, 1949, the formal bareboat charter with option to purchase filed on June 4, 1949, in favor of the Pan Oriental was returned to the General Manager of the Shipping Administration without action (not disapproval), only because of the Cabinet resolution of September 6, 1949 restoring Froilan to his rights under the conditions set forth therein, namely, the payment of P10,000.00 to settle partially his overdue accounts and the filing of a bond to guarantee the reimbursement of the expenses incurred by the Pan Oriental in the drydocking and repair of the vessel But Froilan again failed to comply with these conditions. And so the Cabinet, considering Froilan's consistent failure to comply with his obligations, including those imposed in the resolution of September 6, 1949, resolved to reconsider said previous resolution restoring him to his previous rights. And, in a letter dated December 3, 1949, the Executive Secretary authorized the Administration to continue its charter contract with Pan Oriental in respect to FS-197 and enforce whatever


rights it may still have under the original contract with Froilan (Exh. 188). xxx xxx xxx On August 25, 1950, the Cabinet resolved once more to restore Froilan to his rights under the original contract of sale, on condition that he shall pay the sum of P10,000.00 upon delivery of the vessel to him, said amount to be credited to his outstanding accounts; that he shall continue paying the remaining installments due, and that he shall assume the expenses incurred for the repair and drydocking of the vessel (Exh. 134). Pan Oriental protested to this restoration of Froilan's rights under the contract of sale, for the reason that when the vessel was delivered to it, the Shipping Administration had authority to dispose of the said property, Froilan having already relinquished whatever rights he may have thereon. Froilan paid the required cash of P10,000.00, and as Pan Oriental refused to surrender possession of the vessel, he filed an action for replevin in the Court of First Instance of Manila (Civil Case No. 13196) to recover possession thereof and to have him declared the rightful owner of said property. Upon plaintiff's filing a bond of P400,000.00, the court ordered the seizure of the vessel from Pan Oriental and its delivery to the plaintiff. Pan Oriental tried to question the validity of this order in a petition for certiorari filed in this Court (G.R. No. L-4577), but the same was dismissed for lack of merit by resolution of February 22, 1951. Defendant accordingly filed an answer, denying the averments of the complaint. The Republic of the Philippines, having been allowed to intervene in the proceeding, also prayed for the possession of the vessel in order that the chattel mortgage constituted thereon may be foreclosed. Defendant Pari Oriental resisted said intervention, claiming to have a better right to the possession of the vessel by

reason of a valid and subsisting contract in its favor, and of its right of retention, in view of the expenses it had incurred for the repair of the said vessel. As counterclaim, defendant demanded of the intervenor to comply with the latter's obligation to deliver the vessel pursuant to the provisions of the charter contract. xxx xxx xxx Subsequently, Compañia Maritima, as purchaser of the vessel from Froilan, was allowed to intervene in the proceedings (in the lower court), said intervenor taking common cause with the plaintiff Froilan. In its answer to the complaint in intervention, defendant set-up a counterclaim for damages in the sum of P50,000.00, alleging that plaintiff secured the Cabinet resolutions and the writ of replevin, resulting in its deprivation of possession of the vessel, at the instigation and inducement of Compania Maritima. This counterclaim was denied by both plaintiff and intervenor Maritima. On September 28, 1956, the lower court rendered a decision upholding Froilan's (and Compañia Maritima's) right to the ownership and possession of the FS-197. xxx xxx xxx It is not disputed that appellant Pan Oriental took possession of the vessel in question after it had been repossessed by the Shipping Administration and title thereto reacquired by the government, and operated the same from June 2, 1949 after it had repaired the vessel until it was dispossessed of the property on February 3, 1951, in virtue of a bareboat charter contract entered into between said company and the Shipping Administration. In the same agreement, appellant as charterer, was given the option to purchase the vessel, which may be exercised upon payment of a certain amount within a specified period. The President and Treasurer of the appellant company,


tendered the stipulated initial payment on January 16, l950. Appellant now contends that having exercised the option, the subsequent Cabinet resolutions restoring Froilan's rights on the vessel, violated its existing rights over the same property. To the contention of plaintiff Froffan that the charter contract never became effective because it never received presidential approval as required therein, Pan Oriental answers that the letter of the Executive Secretary dated December 3, 1949 (Exh. 118), authorizing the Shipping Administration to continue its charter contract with appellant, satisfies such requirement (of presidential approval). It is to be noted, however, that said letter was signed by the Executive Secretary only and not under authority of the President. The same, therefore, cannot be considered to have attached unto the charter contract the required consent of the Chief Executive for its validity. xxx xxx xxx (Emphasis supplied) This Court then held: In the circumstances of this case, therefore, the resulting situation is that neither Froilan nor the Pan Oriental holds a valid contract over the vessel. However, since the intervenor Shipping Administration, representing the government practically ratified its proposed contract with Froilan by receiving the full consideration of the sale to the latter, for which reason the complaint in intervention was dismissed as to Froilan, and since Pan Oriental has no capacity to question this actuation of the Shipping Administration because it had no valid contract in its favor, the of the lower court adjudicating the vessel to Froilan and its successor Maritima, must be sus Nevertheless, under the already adverted to, Pan Oriental cannot be considered as in bad faith until after the institution of the case. However, since it is not disputed that said made useful and necessary expenses on the

vessel, appellant is entitled to the refund of such expenses with the light to retain the vessel until he has been reimbursed therefor (Art. 546, Civil Code). As it is by the concerted acts of defendants and intervenor Republic of the Philippines that appellant was deprived of the possession of the vessel over which appellant had a lien for his expenses, appellees Froilan, Compañia Maritima, and the Republic of the Philippines are declared liable for the reimbursement to appellant of its legitimate expenses, as allowed by law, with legal interest from the time of disbursement. Modified in this manner, the decision appealed from is affirmed, without costs. Case is remanded to the lower court for further proceedings in the matter of expenses. So ordered. (Emphasis supplied). On August 27, 1965, this Court, in resolving a Motion for Reconsideration filed by FROILAN and MARITIMA, ruled: In G.R. No. L-11897 (Fernando A. Froilan vs. Pan Oriental Shipping Co.); before us are (1) a motion, filed by appellant Pan Oriental to reconsider the ruling made in this case sustaining Froilan's right to ownership and possession of the vessel FS-197, and holding that there was never a perfected contract between said movant and the intervenor Republic of the Philippines; and (2) a motion by plaintiff-appellee Fernando A. Froilan, and intervenor-appellee Compañia Maritima, for reconsideration of the decision insofar as it declared said movants, together with intervenor Republic of the Philippines, liable for reimbursement to appellant Pan Oriental of the latter's legitimate necessary expenses made on the vessel in question. 1. .Appellant Pan Oriental's Motion must be denied. It may be remembered that in the instant case, the alleged approval of the charter contract or permission to proceed with


said contract was given by the Executive Secretary in his own name and not under the authority of the President. xxx xxx xxx 2. Anent, appellant's motion, considering that the writ of replevin, by virtue of which appellant Pan Oriental was divested of possession of the vessel FS-197, was issued by the lower court on February 8, 1951 at the instance of plaintiff Froilan and with the cooperation of intervenor Republic of the Philippines, which accepted the payment tendered by him (Froilan) notwithstanding its previous dealings with Pan Oriental; and whereas, the intervenor Compañia Maritima acquired the same property only on December 1, 1951, it is clear that only plaintiff Froilan and the intervenor Republic of the Philippines may be held responsible for the deprivation of defendant of its right to the retention of the property until fully reimbursed of the necessary expenditure made on the vessel. For this reason, Froilan and the Republic of the Philippines are declared jointly and severally liable, not only for reimbursement to Pan Oriental of the legitimate necessary expenses incurred on the vessel but also for payment of legal interest thereon, computed from the date of the defendant's dispossession of the property. However, as defendant was in actual possession of the vessel from April 1, 1949 to February 7, 1951, it must be required to pay reasonable rental for the use thereof, at the rate of P3,000.00 a month — the same rate specified as rental in the imperfected charter contract — which shall be deductible from whatever may be due and owing the said party by way of reimbursable necessary expenses and interest. This rental shall commence from the time defendant Pan Oriental actually operated the vessel, which date shall be determined by the lower court. Case is remanded to the court of origin for further proceedings on the matter of necessary expenses, interest and rental, as directed in our decision and this resolution. (Emphasis supplied).

On November 23, 1966, acting on a second Motion for Reconsideration filed by PAN ORIENTAL, this Court resolved: In case G.R. No. L-11817, Fernando A, Froilan, et al., appellees, vs. Pan Oriental Shipping Company, appellant, the latter filed a .second motion for reconsideration, alleging that the Resolution of this Court of August 27, 1965 denying its motion for reconsideration of December 16, 1964 is not in accordance with law; and that the modification of the judgment following the exparte motion for reconsideration of appellee Froilan is contrary to due process. Considering that foregoing motion as well as the opposition thereto by plaintiff-appellee and intervenor-appellee Compañia Maritima, the Court RESOLVED to amend the ruling in this case by holding intervenor-appellee Compañia Maritima, because of its actual knowledge of the circumstances surrounding the purchase by Froilan of the vessel in question from the Shipping Administrator, jointly and severally liable with the other appellees, for reimbursement to appellant of the necessary expenses incurred and expended by the latter on the said vessel, minus the amount of rentals due from the appellant for the use thereof for the period it was actually operated by Pan Oriental. The period of actual operation shall not include the time when the vessel was drydocked. On December 16,1966, acting on PAN ORIENTAL's Motion for Reconsideration or Application for Damages on account of the wrongful issuance of the Writ of Replevin, this Court issued a Resolution as follows: Before us again in Case G.R. No. 11897 (Fernando A. Froilan vs. Pan Oriental Shipping Co. et al) is a motion for reconsideration or Application for damages filed by respondent Pan Oriental Shipping Co., allegedly on account of the wrongful issuance of the


writ of replevin, pursuant to Rule 60, Section 10, in relation to Rule 57, Section 20 of the Revised Rules of Court. Considering that by virtue of our resolution dated August 27, 1965, this case has been ordered to be remanded to the Court of origin for further proceedings on the matter of necessary expenses, interest and rentals, and since evidence would have to be presented if the application for damages is allowed, the Court resolved, first, to deny the present motion for reconsideration and, second, to refer the application to the trial court, there to be heard and decided as prescribed by law and the Rules. (See last sentence, Section 20, Rule 57). Pursuant thereto, the case was remanded to the Court of First Instance of Manila, Branch VI (Civil Case No. 13196). After the evidence of the parties was received and assessed by a Commissioner, said Court issued an Order, dated June 4, 1975, the dispositive portion of which reads: WHEREFORE, in view of the foregoing consideration, the Court orders the intervenor Compañia (plaintiff Fernando A. Froilan's successor-in-interest) and intervenor Republic of the Philippines (Board of Liquidators) jointly and severally to pay defendant Pan Oriental Shipping Company the sum of P6,937.72 a month from the time 'it was dispossessed on February 3, 1951' until it is paid its useful and necessary expenses; the sum of P40,797.54 actual amount expended for the repairs and improvements prior to the operation of the vessel on June 1, 1949 with legal interest from the time of disbursement of said legitimate expenses. The Court also orders the intervenor Republic of the Philippines to return the sum of P15,000.00 tendered by defendant Pan Oriental Shipping Company as provided in the option with legal interest from January 16, 1950, the date it was paid by the latter. SO ORDERED. 2

The amount of P6,937.72 ordered to be paid monthly represented the lower Court's computation of damages of PAN ORIENTAL for deprivation of the right to retain the vessel. 3 On appeal by REPUBLIC and MARITIMA to the then Court of Appeals, judgment was promulgated decreeing. WHEREFORE, in the light of the foregoing pronouncements, the judgment appealed from is hereby MODIFIED as follows: Ordering intervenors-appellants Republic and Compañia Maritima, jointly and severally, to pay appellee Pan Oriental Shipping Company the sum of P40,797.54 with legal interest from February 3, 1951 until fully paid but there shah be deducted therefrom the amount of P59,500.00 representing the unpaid rentals due the Republic of the Philippines; and AFFIRMED in all other respects. In other words, (a) the date from which interest is to be paid on the amount of P40,797.54 is from February 3, 1951, the date of dispossession, and not from the time of disbursement and (b) the unpaid rentals due the Republic are deductible from the amount of expenses payable to PAN-ORIENTAL. It should be recalled that the deduction of rentals from the amount payable to PANORIENTAL by REPUBLIC was pursuant to this Court's Resolutions of August 27, 1965 and November 23, 1966, supra, From the foregoing Decision, the parties filed their respective Petitions for Review now before us. For clarity, the sums ordered to be paid by MARITIMA and the REPUBLIC, jointly and severally, to PAN-ORIENTAL are: (a) the sum of P6,937.72 a month from February 3, 1951, the date of PAN-ORIENTAL's dispossession, in the concept of damages for the deprivation of its right to retain the vessel, it until it is paid its useful and necessary expenses"; 4 (b) the sum of P15,000.00,


representing PAN-ORIENTAL's deposit with REPUBLIC for the purchase of the vessel, "with legal interest from January 16, 1950," the date PAN-ORIENTAL had paid the same; 5 and (c) the sum of P40,797.54 representing the expenses for repairs incurred by PAN-ORIENTAL, "with legal interest from February 3, 1951 until fully paid," minus the amount of P59,500.00 representing the unpaid rentals due the REPUBLIC 6 The legal rate of interest is made payable only on the last two amounts (b) and (c). REPUBLIC attributes the following errors to the Appellate Court: (1) in not holding that compensation by operation of law took place as between REPUBLIC and PAN-ORIENTAL as of the date of dispossession; (2) in not holding that the obligation of the REPUBLIC to pay legal interest on the amount of useful and necessary expenses from February 3, 1951 had become stale and ineffective; (3) in affirming the Order of the Trial Court that MARITIMA and REPUBLIC, jointly and severally, pay to PANORIENTAL the sum of P6,937.72 a month from the time it was dispossessed of the vessel on February 3, 1951 until it is paid its useful and necessary expenses; and (4) in not holding that the Trial Court had no jurisdiction to order the return of P15,000.00 to PAN-ORIENTAL. MARITIMA, for its part, aside from assailing the sums it was ordered to pay PAN-ORIENTAL, jointly and severally, with REPUBLIC, echoed the theory of compensation and added that the question of damages on account of alleged wrongful replevin was not a proper subject of inquiry by the Trial Court when it determined the matter of necessary expenses, interest and rentals. REPUBLIC's Submissions 1) REPUBLIC maintains that compensation or set-off took place between it and PAN-ORIENTAL as of February 3, 1951, the date the latter was dispossessed of the vessel For compensation to take place, one of the elements necessary is that the debts be

liquidated. 7 In this case, all the elements for Compensation to take place were not present on the date of dispossession, or on February 3, 1951. The amount expended for repairs and improvements had yet to be determined by the Trial Court pursuant to the Decision of this Court promulgated on October 31, 1964. At the time of dispossession also, PAN-ORIENTAL was still insisting on its right to purchase the vessel. The obligation of REPUBLIC to reimburse PAN-ORIENTAL for expenses arose only after this Court had so ruled. Rentals for the use of the vessel by PAN- ORIENTAL were neither due and demandable at the time of dispossession but only after this Court had issued its Resolution of August 27, 1965. More, the legal interest payable from February 3, 1951 on the sum of P40,797.54, representing useful expenses incurred by PAN-ORIENTAL, is also still unliquidated 8 since interest does not stop accruing "until the expenses are fully paid." 9 Thus, we find without basis REPUBLIC's allegation that PAN- ORIENTAL's claim in the amount of P40,797.54 was extinguished by compensation since the rentals payable by PAN-ORIENTAL amount to P59,500.00 while the expenses reach only P40,797.54. Deducting the latter amount from the former, REPUBLIC claims that P18,702.46 would still be owing by PAN-ORIENTAL to REPUBLIC. That argument loses sight of the fact that to the sum of P40,797.54 will still have to be added the legal rate of interest "from February 3, 1951 until fully paid." But although compensation by operation of law cannot take place as between REPUBLIC and PAN-ORIENTAL, by specific pronouncement of this Court in its Resolution of November 23, 1966, supra, the rentals payable by PAN-ORIENTAL in the amount of P59,500.00 should be deducted from the sum of useful expenses plus legal interest due, assuming that the latter amount would still be greater. Otherwise, the corresponding adjustments can be made depending on the totality of the respective amounts.


2) Since we are holding that the obligation of REPUBLIC to pay P40,797.54 to PAN-ORIENTAL was not extinguished by compensation, the obligation of REPUBLIC to pay legal interest on said amount has neither become stale as REPUBLIC contends. Of special note is the fact that payment of that interest was the specific ruling of this Court in its Resolution of August 27, 1965, thus: ... For this reason, Froilan and the REPUBLIC of the Philippines are declared jointly and severally liable, not only for reimbursement to Pan Oriental, of the legitimate necessary expenses incurred on the vessel, but also for payment of legal interest thereon, computed from the date of the defendant's dispossession of the property ... . 3) The amount of P6,937.72 a month ordered to be paid by REPUBLIC and MARITIMA to PAN-ORIENTAL until the latter is paid its useful and necessary expenses is likewise in order. That amount represents the damages for the wrongful issuance of the Writ of Replevin and was computed as follows: P4,132.77 for loss of income by PAN-ORIENTAL plus P2,804.95 as monthly depreciation of the vessel in lieu of the charter hire. It should further be recalled that this Court, in acting on PAN- ORIENTAL's application for damages in its Resolution of December 16, 1966, supra, did not deny the same but referred it instead to the Trial Court "there to be heard and decided" since evidence would have to be presented. Moreover, this Court found that PAN-ORIENTAL was "deprived of the possession of the vessel over which (it) had a lien for these expenses" 10 and that FROILAN and REPUBLIC "may be held responsible for the deprivation of defendant (PANORIENTAL) of its right to retention of the property until fully reimbursed on the necessary expenditures made on the vessel. " 11

4) There return of Pl5,000.00 ordered by the Trial Court and affirmed by the Appellate Court was but just and proper. As this Court found, that sum was tendered to REPUBLIC "which together with its (PAN-ORIENTAL's) alleged expenses already made on the vessel, cover 25% of the cost of the vessel, as provided in the option granted in the bareboat contract (Exhibit "C"). This amount was accepted by the Administration as deposit ...." Since the purchase did not eventually materialize for reasons attributable to REPUBLIC, it is but just that the deposit be returned. 12 It is futile to allege that PAN-ORIENTAL did not plead for the return of that amount since its prayer included other reliefs as may be just under the premises. Courts may issue such orders of restitution as justice and equity may warrant. MARITIMA's Position We find no merit in MARITIMA's contention that the alleged damages on account of wrongful replevin was barred by res judicata, and that the application for damages before the lower Court was but a mere adoption of a different method of presenting claims already litigated. For the records show that an application for damages for wrongful replevin was filed both before this Court and thereafter before the Trial Court after this Tribunal specifically remanded the issue of those damages to the Trial Court there to be heard and decided pursuant to Rule 60, Section 10 in relation to Rule 57, Section 20. 13 The matter of legal compensation which MARITIMA has also raised has been previously discussed. Parenthetically, PAN-ORIENTAL can no longer raise the alleged error of the Trial Court in computing the necessary and useful expenses at only P40,797.54 when they should be P87,267.30, since it did not appeal from that Court's Decision.


In a nutshell, we find that the appealed Decision of the Trial Court and of the then Court of Appeals is in consonance with the Decision and Resolutions of this Court. ACCORDINGLY, the judgment appealed from is hereby affirmed. No costs. 95. G.R. No. L-69560 June 30, 1988 THE INTERNATIONAL CORPORATE BANK INC., petitioner, vs. THE IMMEDIATE APPELLATE COURT, HON. ZOILO AGUINALDO, as presiding Judge of the Regional Trial Court of Makati, Branch 143, NATIVIDAD M. FAJARDO, and SILVINO R. PASTRANA, as Deputy and Special Sheriff, respondents. PARAS, J.: This is a petition for review on certiorari of the Decision of the Court of Appeals dated October 31, 1984 in AC-G.R. SP No. 02912 entitled "THE INTERNATIONAL CORPORATE BANK, INC. v. Hon. ZOILO AGUINALDO, et al.," dismissing petitioner's petition for certiorari against the Regional Trial Court of Makati (Branch 143) for lack of merit, and of its Resolution dated January 7, 1985, denying petitioner's motion for reconsideration of the aforementioned Decision. Petitioner also prays that upon filing of the petition, a restraining order be issued ex-parte, enjoining respondents or any person acting in their behalf, from enforcing or in any manner implementing the Order of the respondent trial court dated

February 13 and March 9, 1984, and January 10 and January 11, 1985. The facts of this case, as found by the trial court and subsequently adopted by the Court of Appeals, are as follows: In the early part of 1980, private respondent secured from petitioner's predecessors-in-interest, the then Investment and Underwriting Corp. of the Philippines and Atrium Capital Corp., a loan in the amount of P50,000,000.00. To secure this loan, private respondent mortgaged her real properties in Quiapo, Manila and in San Rafael, Bulacan, which she claimed have a total market value of P110,000,000.00. Of this loan, only the amount of P20,000,000.00 was approved for release. The same amount was applied to pay her other obligations to petitioner, bank charges and fees. Thus, private respondent's claim that she did not receive anything from the approved loan. On September 11, 1980, private respondent made a money market placement with ATRIUM in the amount of P1,046,253.77 at 17% interest per annum for a period of 32 days or until October 13, 1980, its maturity date. Meanwhile, private respondent allegedly failed to pay her mortgaged indebtedness to the bank so that the latter refused to pay the proceeds of the money market placement on maturity but applied the amount instead to the deficiency in the proceeds of the auction sale of the mortgaged properties. With Atrium being the only bidder, said properties were sold in its favor for only P20,000,000.00. Petitioner claims that after deducting this amount, private respondent is still indebted in the amount of P6.81 million. On November 17, 1982, private respondent filed a complaint with the trial court against petitioner for annulment of the sheriff's sale of the mortgaged properties, for the release to her of the balance of her loan from petitioner in the amount of P30,000,000,00, and for recovery of P1,062,063.83 representing


the proceeds of her money market investment and for damages. She alleges in her complaint, which was subsequently amended, that the mortgage is not yet due and demandable and accordingly the foreclosure was illegal; that per her loan agreement with petitioner she is entitled to the release to her of the balance of the loan in the amount of P30,000,000.00; that petitioner refused to pay her the proceeds of her money market placement notwithstanding the fact that it has long become due and payable; and that she suffered damages as a consequence of petitioner's illegal acts. In its answer, petitioner denies private respondent's allegations and asserts among others, that it has the right to apply or set off private respondent's money market claim of P1,062,063.83. Petitioner thus interposes counterclaims for the recovery of P5,763,741.23, representing the balance of its deficiency claim after deducting the proceeds of the money market placement, and for damages. The trial court subsequently dismissed private respondent's cause of action concerning the annulment of the foreclosure sale, for lack of jurisdiction, but left the other causes of action to be resolved after trial. Private respondent then filed separate complaints in Manila and in Bulacan for annulment of the foreclosure sale of the properties in Manila and in Bulacan, respectively. On December 15, 1983, private respondent filed a motion to order petitioner to release in her favor the sum of P1,062,063.83, representing the proceeds of the money market placement, at the time when she had already given her direct testimony on the merits of the case and was being cross-examined by counsel. On December 24, 1983, petitioner filed an opposition thereto, claiming that the proceeds of the money market investment had already been applied to partly satisfy its deficiency claim, and that to grant the motion would be to render judgment in her

favor without trial and make the proceedings moot and academic. However, at the hearing on February 9, 1984, counsel for petitioner and private respondent jointly manifested that they were submitting for resolution said motion as well as the opposition thereto on the basis of the pleadings and of the evidence which private respondent had already presented. On February 13, 1984, respondent judge issued an order granting the motion, as follows: IN VIEW OF THE FOREGOING, the defendant International Corporate Bank is hereby ordered to deliver to the plaintiff Natividad M. Pajardo the amount of P1,062,063.83 covered by the repurchase agreement with Serial No. AOY-14822 (Exhibit "A'), this amount represented the principal of P1,046,253.77 which the plaintiff held including its interest as of October 13, 1980, conditioned upon the plaintiff filing a bond amount to P1,062,063.83 to answer for all damages which the said defendant bank may suffer in the event that the Court should finally decide that the plaintiff was not entitled to the said amount. Petitioner filed a motion for reconsideration to the aforesaid order, asserting among other things that said motion is not verified, and therefore a mere scrap of paper. Private respondent however manifested that since she testified in open court and was cross-examined by counsel for petitioner on the motion for release of the proceeds of the money market placement, the defect had already been cured. On March 9, 1984, the respondent judge issued an order denying petitioner's motion for reconsideration. (CA Decision, Rollo, pp. 109-111). On March 13, 1984, petitioner filed a special civil action for certiorari and prohibition with preliminary injunction with the Court of Appeals, (a) for the setting aside and annulment of the Orders dated February 13, 1984 and March 9,1984, issued by the


respondent trial court, and (b) for an order commanding or directing the respondent trial judge to desist from enforcing and/or implementing and/or executing the aforesaid Orders. The temporary restraining order prayed for was issued by respondent Court of Appeals on March 22, 1984. (Please see CA Decision, Rollo, p. 114, last paragraph). In a decision rendered on October 31, 1984 (Rollo, pp. 109-14), the Court of Appeals dismissed said petition finding—(a) that while the Motion for the release of the proceeds of the money market investment in favor of private respondent was not verified by her, that defect was cured when she testified under oath to substantiate her allegations therein: (b) that, petitioner cannot validly claim it was denied due process for the reason that it was given ample time to be heard, as it was in fact heard when it filed an Opposition to the motion and a motion for reconsideration; (c) that the circumstances of this case prevent legal compensation from taking place because the question of whether private respondent is indebted to petitioner in the amount of 6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed; (d) that the release of the proceeds of the money market investment for private respondent will not make the causes of action of the case pending before the trial court moot and academic nor will it cause irreparable damage to petitioner, private respondent having filed her bond in the amount of P1,062,063.83 to answer for all damages which the former may suffer in the event that the court should finally decide that private respondent is not entitled to the return of said amount (CA Decision, Rello, pp. 112-114). The dispositive portion of the aforementioned Decision reads: ... We hold that the respondent court cannot be successfully charged with grave abuse of discretion amounting to lack of jurisdiction when it issued its Orders of February 13, 1984 and

March 9, 1984, based as they are on a correct appreciation of the import of the parties' evidence and the applicable law. IN VIEW WHEREOF, the petition is dismissed for lack of merit and the temporary restraining order issued by this Court on March 22, 1984 is lifted. (Ibid., p. 114). Petitioner moved for the reconsideration of the above decision (Annex "S", Rollo, pp. 116-124), but for the reason that the same failed to raise any issue that had not been considered and passed upon by the respondent Court of Appeals, it was denied in a Resolution dated January 7, 1985 (CA Resolution, Rollo, p. 126). Having been affirmed by the Court of Appeals, the trial court issued a Writ of Execution to implement its Order of February 13, 1984 (Annex "BB", Rollo, p. 188) and by virtue thereof, a levy was made on petitioner's personal property consisting of 20 motor vehicles (Annex "U", Rollo, p. 127). On January 9, 1985, herein private respondent (then plaintiff) filed in the trial court an ex-parte motion praying that the four branches of the petitioner such as: Baclaran Branch, Paranaque, Metro Manila; Ylaya Branch, Divisoria, Metro Manila; Cubao Branch, Quezon City and Binondo Branch, Sta. Cruz, Manila, be ordered to pay the amount of P250,000.00 each, and the main office of the petitioner bank at Paseo de Roxas, Makati, Metro Manila, be ordered to pay the amount of P62,063.83 in order to answer for the claim of private respondent amounting to P1,062,063.83. Thereupon, on January 10, 1985, the trial court issued an Order (Annex "V", Rollo, p. 129) granting the above-mentioned prayers. Acting on the ex-parte motion by the plaintiff (now private respondent), the trial court, on January 11, 1984, ordered the President of defendant International Corporate Bank (now


petitioner) and all its employees and officials concemed to deliver to the sheriff the 20 motor vehicles levied by virtue of the Writ of Execution dated December 12, 1984 (Annex "W", Rollo, p. 131). The petitioner having failed to comply with the above-cited Order, the respondent trial court issued two (2) more Orders: the January 16, 1985 (Annex "CC," Rollo, p. 190) and January 21, 1985 Orders (Annex "DD", Rollo, p. 191), directing several employees mentioned therein to show cause wily they should not be cited in contempt. Hence, this petition for review on certiorari with prayer for a restraining order and for a writ of preliminary injunction. Three days after this petition was filed, or specifically on January 18, 1985, petitioner filed an urgent motion reiterating its prayer for the issuance of an ex-parte restraining order (Rollo, p. 132). Simultaneous with the filing of the present petition, petitioner, as defendant, filed with the trial court an ex-parte motion to suspend the implementation of any and all orders and writs issued pursuant to Civil Case No. 884 (Annex "A", Rollo, p. 135). This Court's resolution dated January 21, 1985, without giving due course to the petition, resolved (a) to require the respondents to comment: (b) to issue, effective immediately and until further orders from this Court, a Temporary Restraining Order enjoining the respondents from enforcing or in any manner implementing the questioned Orders dated February 13, 1984, March 9, 1984, January 10, 1985 and January 11 and 16, 1985, issued in Civil Case No. 884. The corresponding writ was issued on the same day (Rollo, pp. 139-140).

As required, the Comment of private respondent was filed on January 28, 1985 (Rollo, pp. 141- 150). Thereafter, petitioner moved for leave to file a supplemental petition on the ground that after it had filed this present petition, petitioner discovered that the bond filed with, and approved by, the respondent lower court showed numerous material erasures, alterations and/or additions (Rollo, p. 151), which the issuing insurance company certified as having been done without its authority or consent (Annex "Z", Rollo, p. 178). The Supplemental Petition was actually filed on February 1, 1985 (Rollo, pp. 154-171). It pointed out the erasures, alterations and/or additions in the bond as follows: a. below "Civil Case No. 884" after the words, "Plaintiff's Bond," the phrase "For Levying of Attachment" was erased or deleted; b. in lines 2 and 3 after the word "order," the phrase "approving plaintiff's motion dated Dec. 15, 1983, was inserted or added; c. in line 3, the phrases "Of attachment" and "ordered that a writ of attachment issue' were erased or deleted; d also in line 3 after the words "the court has" the phrase "approved the Motion was likewise inserted or added; e. in line 9, the phrase "and of the levying of said attachment" was also erased or deleted; f. in line 13, the word "attachment" was likewise erased or deleted;


g. also in line 13 after the deletion of word "attachment" the phrase "release of the P1,062,063.83 to the plaintiff was similarly inserted or added." Petitioner contended therein that in view of the foregoing facts, the genuineness, due execution and authenticity as well as the validity and enforceability of the bond (Rello, p. 174) is now placed in issue and consequently, the bond may successfully be repudiated as falsified and, therefore, without any force and effect and the bonding company may thereby insist that it has been released from any hability thereunder. Also, petitioner pointed as error the respondent trial court's motu proprio transferring Civil Case No. 884 to the Manila Branch of the same Court arguing that improper venue, as a ground for, and unless raised in, a Motion to Dismiss, may be waived by the parties and the court may not pre-empt the right of the parties to agree between or among themselves as to the venue of their choice in litigating their justiciable controversy (Supplemental Petition, Rollo, p. 160). On being required to comment thereon, (Rollo, p. 192) private respondent countered (Rollo, pp. 193-198) that bond forms are ready-prepared forms and the bonding company used the form for "Levying of Attachment" because the company has no readyprepared form for the kind of bond called for or required in Civil Case 884. Whatever deletions or additions appear on the bond were made by the Afisco Insurance Corporation itself for the purpose of accomplishing what was required or intended. Nonetheless, on May 7, 1985, private respondent filed "Plaintiffs Bond" in the respondent trial court in the amount of P1,062,063.83 a xerox copy of which was furnished this Court (Rollo, p. 219), and noted in the Court's Resolution dated May 29,1985 (Rollo, p. 225).

On March 11, 1985, petitioner was required to file a Consolidated Reply (Rollo, p. 199) which was filed on April 10, 1985 (Rollo, p. 201). Thereafter, a Rejoinder (Rollo, p. 238) was filed by private respondent on September 18, 1985 after Atty. Advincula, counsel for private respondents was required by this Court to show cause why he should not be disciplinarily dealt with or held in contempt for his failure to comply on time (Rollo, p. 226) and on August 19, 1985 said lawyer was finally admonished (Rollo, p. 229) for his failure to promptly apprise the Court of his alleged non-receipt of copy of petitioner's reply, which alleged nonreceipt was vehemently denied by petitioner in its Counter Manifestation (Rollo, p. 230) filed on August 5, 1985. Finally, on October 7, 1985, this petition was given due course and both parties were required to submit simultaneous memoranda (Rollo, p. 249) but before the same were filed, petitioner moved for leave to file sur-rejoinder (Rollo, p. 250), the sur-rejoinder was filed on October 14,1985 (Rollo, pp. 252254). Petitioner's memorandum was filed on December 28, 1985 (Rollo, pp. 264-292) while that of private respondent was submitted on January 10, 1986 (Rollo, pp. 295-304). Petitioner again moved for leave to file a Reply Memorandum (Rollo, p. 307) which, despite permission from this Court, was not filed and on August 22, 1986, private respondent prayed for early resolution of the petition (Rollo, p. 311). In a resolution dated October 13, 1986 (Rollo, p. 314) this case was transferred to the Second Division of this Court, the same being assigned to a member of that Division.


The crucial issue to be resolved in this case is whether or not there can be legal compensation in the case at bar. Petitioner contends that after foreclosing the mortgage, there is still due from private respondent as deficiency the amount of P6.81 million against which it has the right to apply or set off private respondent's money market claim of P1,062,063.83. The argument is without merit. As correctly pointed out by the respondent Court of Appeals — Compensation shall take place when two persons, in their own right, are creditors and debtors of each other. (Art. 1278, Civil Code). "When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation of law, even without the consent or knowledge of the debtors." (Art. 1290, Civil Code). Article 1279 of the Civil Code requires among others, that in order that legal compensation shall take place, "the two debts be due" and "they be liquidated and demandable." Compensation is not proper where the claim of the person asserting the set-off against the other is not clear nor liquidated; compensation cannot extend to unliquidated, disputed claim arising from breach of contract. (Compañia General de Tabacos vs. French and Unson, 39 Phil. 34; Lorenzo & Martinez vs. Herrero, 17 Phil. 29). There can be no doubt that petitioner is indebted to private respondent in the amount of P1,062,063.83 representing the proceeds of her money market investment. This is admitted. But whether private respondent is indebted to petitioner in the amount of P6.81 million representing the deficiency balance after the foreclosure of the mortgage executed to secure the loan extended to her, is vigorously disputed. This circumstance prevents legal compensation from taking place. (CA Decision, Rollo, pp. 112-113).

It must be noted that Civil Case No. 83-19717 is still pending consideration at the RTC Manila, for annulment of Sheriffs sale on extra-judicial foreclosure of private respondent's property from which the alleged deficiency arose. (Annex "AA", Rollo, pp. 181189). Therefore, the validity of the extrajudicial foreclosure sale and petitioner's claim for deficiency are still in question, so much so that it is evident, that the requirement of Article 1279 that the debts must be liquidated and demandable has not yet been met. For this reason, legal compensation cannot take place under Article 1290 of the Civil Code. Petitioner now assails the motion of the plaintiff (now private respondent) filed in the trial court for the release of the proceeds of the money market investment, arguing that it is deficient in form, the same being unverified (petitioner's Memorandum, Rollo, p. 266). On this score, it has been held that "as enjoined by the Rules of Court and the controlling jurisprudence, a liberal construction of the rules and the pleadings is the controlling principle to effect substantial justice." (Maturan v. Araula, 111 SCRA 615 [1982]). Finally, the filing of insufficient or defective bond does not dissolve absolutely and unconditionally the injunction issued. Whatever defect the bond possessed was cured when private respondent filed another bond in the trial court. PREMISES CONSIDERED, the questioned Decision and Resolution of the respondent Court of Appeals are hereby AFFIRMED. 96. G.R. No. L-62169 February 28, 1983


MINDANAO PORTLAND CEMENT CORPORATION, petitioner, vs. COURT OF APPEALS, PACWELD STEEL CORPORATION and ATTY. CASIANO P. LAQUIHON respondents.

TEEHANKEE, J.: The Court of Appeals (now Intermediate Appellate Court) certified petitioner's appeal therein as defendant-appellant, docketed as C.A.-G.R. No. 65102 thereof, to this Court as involving only questions of law in its Resolution of August 31, 1982, reading as follows: The 'Statement of the Case and the Statement of Facts' contained in appellant's brief follow: STATEMENT OF FACTS On January 3, 1978, one Atty. Casiano P. Laquihon, in behalf of third-party defendant Pacweld Steel Corporation (Pacweld for short) as the latter's attorney, filed a pleading addressed to the defendant & Third-Party Plaintiff Mindanao Portland Cement Corporation (MPCC) for short), herein appellant, entitled 'motion to direct payment of attorney's fee to counsel' (himself ), invoking in his motion the fact that in the decision of the court of Sept. 14, 1976, MPCC was adjudged to pay Pacweld the sum of P10,000.00 as attorney's fees (Record on Appeal, pp. 1, 6-9). On March 14, 1978, MPCC filed an opposition to Atty. Laquihon's motion, stating, as grounds therefor, that said amount is set-off by a like sum of P10,000.00 which it MPCC has collectible in its favor from Pacweld also by way of attorney's fees which MPCC recovered from the same Court of First Instance of Manila (Branch XX) in Civil Case No. 68346, entitled Pacweld Steel

Corporation, et al. writ of execution to this effect having been issued by said court (Record on Appeal, pp, 2,10- 14). On June 26, 1978 the court issued the order appealed from (Record on Appeal, pp. 24-25) and despite MPCCs motion for reconsideration of said order, citing the law applicable and Supreme Court decisions (Record on Appeal, pp. 26-33), denied the same in its order of August 28, 1978 (Record on Appeal, p. 37), also subject matter of this appeal. The writ of execution referred to above which MPCC has invoked to set- off the amount sought to be collected by Pacweld through the latter's lawyer, Atty. Casiano P. Laquihon, is hereunder quoted in full. In his brief, appellee comments that the statements in appellant's brief are 'substantially correct,' as follows: STATEMENT OF THE CASE This is an appeal from the Order of the Court of First Instance of Manila (Branch X dated June 26, 1978 ordering the appellant (MINDANAO PORTLAND CEMENT CORPORATION) to pay the amount of P10,000.00 attorney's fees directly to Atty. Casiano B. Laquihon (Record on Appeal, pp. 24-25) and from the Order dated August 28, 1978 denying appellant's motion for reconsideration (Record on Appeal, p. 37). There was no trial or submission of documentary evidence. Against the orders of June 26. 1978, and August 28, 1978, appellant has brought this appeal to this Court, contending that: The lower court erred in not holding that the two obligations are extinguished reciprocally by operation of law.' (p. 6, Appellant's Brief)


This appeal calls for the application of Arts. 1278, 1279 and 1290 of the Civil Code, as urged by the appellant. Another question is: The judgment in Civil Case No. 75179 being already final at the time the motion under consideration was filed, does not the order of June 26, 1976 constitute a change or alteration of the said judgment, though issued by the very same court that rendered the judgment? WHEREFORE, since only questions of law are involved and there is no factual issue left for us to determine, let the records of the appeal in this case be certified to the Honorable Supreme Court for determination. After considering the briefs of the parties in the appellate court and the additional pleadings required of them by this Court, the Court finds merit in the appeal and sets aside the appealed orders of June 26 and August 28, 1978 of the Court of First Instance (now Regional Trial Court) of Manila, Branch XX. It is clear from the record that both corporations, petitioner Mindanao Portland Cement Corporation (appellant) and respondent Pacweld Steel Corporation (appellee), were creditors and debtors of each other, their debts to each other consisting in final and executory judgments of the Court of First Instance in two (2) separate cases, ordering the payment to each other of the sum of P10,000.00 by way of attorney's fees. The two (2) obligations, therefore, respectively offset each other, compensation having taken effect by operation of law and extinguished both debts to the concurrent amount of P10,000.00, pursuant to the provisions of Arts. 1278, 1279 and 1290 of the Civil Code, since all the requisites provided in Art. 1279 of the said Code for automatic compensation "even though the creditors and debtors are not aware of the compensation" were duly present.**

Necessarily, the appealed order of June 26, 1978 granting Atty. Laquihon's motion for amendment of the judgment of September 14, 1976 against Mindanao Portland Cement Corporation so as to make the award therein of P10,000.00 as attorney's fees payable directly to himself as counsel of Pacweld Steel Corporation instead of payable directly to said corporation as provided in the judgment, which had become final and executory long before the issuance of said "amendatory" order was a void alteration of judgment. It was a substantial change or amendment beyond the trial court's jurisdiction and authority and it could not defeat the compensation or set-off of the two (2) obligations of the corporations to each other which had already extinguished both debts by operation of law. ACCORDINGLY. the appealed orders are hereby annulled and set aside. No costs. 97. G.R. No. 136202 January 25, 2007 BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. COURT OF APPEALS, ANNABELLE A. SALAZAR, and JULIO R. TEMPLONUEVO, Respondents D E C I S I O N AZCUNA, J.: This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the Decision1 dated April 3, 1998, and the Resolution2 dated November 9, 1998, of the Court of Appeals in CA-G.R. CV No. 42241.


The facts3 are as follows: A.A. Salazar Construction and Engineering Services filed an action for a sum of money with damages against herein petitioner Bank of the Philippine Islands (BPI) on December 5, 1991 before Branch 156 of the Regional Trial Court (RTC) of Pasig City. The complaint was later amended by substituting the name of Annabelle A. Salazar as the real party in interest in place of A.A. Salazar Construction and Engineering Services. Private respondent Salazar prayed for the recovery of the amount of Two Hundred Sixty-Seven Thousand, Seven Hundred Seven Pesos and Seventy Centavos (P267,707.70) debited by petitioner BPI from her account. She likewise prayed for damages and attorney’s fees. Petitioner BPI, in its answer, alleged that on August 31, 1991, Julio R. Templonuevo, third-party defendant and herein also a private respondent, demanded from the former payment of the amount of Two Hundred Sixty-Seven Thousand, Six Hundred Ninety-Two Pesos and Fifty Centavos (P267,692.50) representing the aggregate value of three (3) checks, which were allegedly payable to him, but which were deposited with the petitioner bank to private respondent Salazar’s account (Account No. 02031187-67) without his knowledge and corresponding endorsement. Accepting that Templonuevo’s claim was a valid one, petitioner BPI froze Account No. 0201-0588-48 of A.A. Salazar and Construction and Engineering Services, instead of Account No. 0203-1187-67 where the checks were deposited, since this account was already closed by private respondent Salazar or had an insufficient balance. Private respondent Salazar was advised to settle the matter with Templonuevo but they did not arrive at any settlement. As it appeared that private respondent Salazar was not entitled to the funds represented by the checks which were deposited and

accepted for deposit, petitioner BPI decided to debit the amount of P267,707.70 from her Account No. 0201-0588-48 and the sum of P267,692.50 was paid to Templonuevo by means of a cashier’s check. The difference between the value of the checks (P267,692.50) and the amount actually debited from her account (P267,707.70) represented bank charges in connection with the issuance of a cashier’s check to Templonuevo. In the answer to the third-party complaint, private respondent Templonuevo admitted the payment to him of P267,692.50 and argued that said payment was to correct the malicious deposit made by private respondent Salazar to her private account, and that petitioner bank’s negligence and tolerance regarding the matter was violative of the primary and ordinary rules of banking. He likewise contended that the debiting or taking of the reimbursed amount from the account of private respondent Salazar by petitioner BPI was a matter exclusively between said parties and may be pursuant to banking rules and regulations, but did not in any way affect him. The debiting from another account of private respondent Salazar, considering that her other account was effectively closed, was not his concern. After trial, the RTC rendered a decision, the dispositive portion of which reads thus: WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff [private respondent Salazar] and against the defendant [petitioner BPI] and ordering the latter to pay as follows: 1. The amount of P267,707.70 with 12% interest thereon from September 16, 1991 until the said amount is fully paid; 2. The amount of P30,000.00 as and for actual damages; 3. The amount of P50,000.00 as and for moral damages;


4. The amount of P50,000.00 as and for exemplary damages; 5. The amount of P30,000.00 as and for attorney’s fees; and 6. Costs of suit. The counterclaim is hereby ordered DISMISSED for lack of factual basis. The third-party complaint [filed by petitioner] is hereby likewise ordered DISMISSED for lack of merit. Third-party defendant’s [i.e., private respondent Templonuevo’s] counterclaim is hereby likewise DISMISSED for lack of factual basis. SO ORDERED.4 On appeal, the Court of Appeals (CA) affirmed the decision of the RTC and held that respondent Salazar was entitled to the proceeds of the three (3) checks notwithstanding the lack of endorsement thereon by the payee. The CA concluded that Salazar and Templonuevo had previously agreed that the checks payable to JRT Construction and Trading5 actually belonged to Salazar and would be deposited to her account, with petitioner acquiescing to the arrangement.6 Petitioner therefore filed this petition on these grounds: I. The Court of Appeals committed reversible error in misinterpreting Section 49 of the Negotiable Instruments Law and Section 3 (r and s) of Rule 131 of the New Rules on Evidence.

II. The Court of Appeals committed reversible error in NOT applying the provisions of Articles 22, 1278 and 1290 of the Civil Code in favor of BPI. III. The Court of Appeals committed a reversible error in holding, based on a misapprehension of facts, that the account from which BPI debited the amount of P267,707.70 belonged to a corporation with a separate and distinct personality. IV. The Court of Appeals committed a reversible error in holding, based entirely on speculations, surmises or conjectures, that there was an agreement between SALAZAR and TEMPLONUEVO that checks payable to TEMPLONUEVO may be deposited by SALAZAR to her personal account and that BPI was privy to this agreement. V. The Court of Appeals committed reversible error in holding, based entirely on speculation, surmises or conjectures, that SALAZAR suffered great damage and prejudice and that her business standing was eroded. VI. The Court of Appeals erred in affirming instead of reversing the decision of the lower court against BPI and dismissing SALAZAR’s complaint. VII.


The Honorable Court erred in affirming the decision of the lower court dismissing the third-party complaint of BPI.7 The issues center on the propriety of the deductions made by petitioner from private respondent Salazar’s account. Stated otherwise, does a collecting bank, over the objections of its depositor, have the authority to withdraw unilaterally from such depositor’s account the amount it had previously paid upon certain unendorsed order instruments deposited by the depositor to another account that she later closed? Petitioner argues thus: 1. There is no presumption in law that a check payable to order, when found in the possession of a person who is neither a payee nor the indorsee thereof, has been lawfully transferred for value. Hence, the CA should not have presumed that Salazar was a transferee for value within the contemplation of Section 49 of the Negotiable Instruments Law,8 as the latter applies only to a holder defined under Section 191of the same.9 2. Salazar failed to adduce sufficient evidence to prove that her possession of the three checks was lawful despite her allegations that these checks were deposited pursuant to a prior internal arrangement with Templonuevo and that petitioner was privy to the arrangement. 3. The CA should have applied the Civil Code provisions on legal compensation because in deducting the subject amount from Salazar’s account, petitioner was merely rectifying the undue payment it made upon the checks and exercising its prerogative to alter or modify an erroneous credit entry in the regular course of its business.

4. The debit of the amount from the account of A.A. Salazar Construction and Engineering Services was proper even though the value of the checks had been originally credited to the personal account of Salazar because A.A. Salazar Construction and Engineering Services, an unincorporated single proprietorship, had no separate and distinct personality from Salazar. 5. Assuming the deduction from Salazar’s account was improper, the CA should not have dismissed petitioner’s third-party complaint against Templonuevo because the latter would have the legal duty to return to petitioner the proceeds of the checks which he previously received from it. 6. There was no factual basis for the award of damages to Salazar. The petition is partly meritorious. First, the issue raised by petitioner requires an inquiry into the factual findings made by the CA. The CA’s conclusion that the deductions from the bank account of A.A. Salazar Construction and Engineering Services were improper stemmed from its finding that there was no ineffective payment to Salazar which would call for the exercise of petitioner’s right to set off against the former’s bank deposits. This finding, in turn, was drawn from the pleadings of the parties, the evidence adduced during trial and upon the admissions and stipulations of fact made during the pre-trial, most significantly the following: (a) That Salazar previously had in her possession the following checks: (1) Solid Bank Check No. CB766556 dated January 30, 1990 in the amount of P57,712.50;


(2) Solid Bank Check No. CB898978 dated July 31, 1990 in the amount of P55,180.00; and, (3) Equitable Banking Corporation Check No. 32380638 dated August 28, 1990 for the amount of P154,800.00; (b) That these checks which had an aggregate amount of P267,692.50 were payable to the order of JRT Construction and Trading, the name and style under which Templonuevo does business; (c) That despite the lack of endorsement of the designated payee upon such checks, Salazar was able to deposit the checks in her personal savings account with petitioner and encash the same; (d) That petitioner accepted and paid the checks on three (3) separate occasions over a span of eight months in 1990; and (e) That Templonuevo only protested the purportedly unauthorized encashment of the checks after the lapse of one year from the date of the last check.10 Petitioner concedes that when it credited the value of the checks to the account of private respondent Salazar, it made a mistake because it failed to notice the lack of endorsement thereon by the designated payee. The CA, however, did not lend credence to this claim and concluded that petitioner’s actions were deliberate, in view of its admission that the "mistake" was committed three times on three separate occasions, indicating acquiescence to the internal arrangement between Salazar and Templonuevo. The CA explained thus: It was quite apparent that the three checks which appellee Salazar deposited were not indorsed. Three times she deposited them to her account and three times the amounts borne by these checks were credited to the same. And in those separate

occasions, the bank did not return the checks to her so that she could have them indorsed. Neither did the bank question her as to why she was depositing the checks to her account considering that she was not the payee thereof, thus allowing us to come to the conclusion that defendant-appellant BPI was fully aware that the proceeds of the three checks belong to appellee. For if the bank was not privy to the agreement between Salazar and Templonuevo, it is most unlikely that appellant BPI (or any bank for that matter) would have accepted the checks for deposit on three separate times nary any question. Banks are most finicky over accepting checks for deposit without the corresponding indorsement by their payee. In fact, they hesitate to accept indorsed checks for deposit if the depositor is not one they know very well.11 The CA likewise sustained Salazar’s position that she received the checks from Templonuevo pursuant to an internal arrangement between them, ratiocinating as follows: If there was indeed no arrangement between Templonuevo and the plaintiff over the three questioned checks, it baffles us why it was only on August 31, 1991 or more than a year after the third and last check was deposited that he demanded for the refund of the total amount of P267,692.50. A prudent man knowing that payment is due him would have demanded payment by his debtor from the moment the same became due and demandable. More so if the sum involved runs in hundreds of thousand of pesos. By and large, every person, at the very moment he learns that he was deprived of a thing which rightfully belongs to him, would have created a big fuss. He would not have waited for a year within which to do so. It is most inconceivable that Templonuevo did not do this.12


Generally, only questions of law may be raised in an appeal by certiorari under Rule 45 of the Rules of Court.13 Factual findings of the CA are entitled to great weight and respect, especially when the CA affirms the factual findings of the trial court.14 Such questions on whether certain items of evidence should be accorded probative value or weight, or rejected as feeble or spurious, or whether or not the proofs on one side or the other are clear and convincing and adequate to establish a proposition in issue, are questions of fact. The same holds true for questions on whether or not the body of proofs presented by a party, weighed and analyzed in relation to contrary evidence submitted by the adverse party may be said to be strong, clear and convincing, or whether or not inconsistencies in the body of proofs of a party are of such gravity as to justify refusing to give said proofs weight – all these are issues of fact which are not reviewable by the Court.15 This rule, however, is not absolute and admits of certain exceptions, namely: a) when the conclusion is a finding grounded entirely on speculations, surmises, or conjectures; b) when the inference made is manifestly mistaken, absurd, or impossible; c) when there is a grave abuse of discretion; d) when the judgment is based on a misapprehension of facts; e) when the findings of fact are conflicting; f) when the CA, in making its findings, went beyond the issues of the case and the same are contrary to the admissions of both appellant and appellee; g) when the findings of the CA are contrary to those of the trial court; h) when the findings of fact are conclusions without citation of specific evidence on which they are based; i) when the finding of fact of the CA is premised on the supposed absence of evidence but is contradicted by the evidence on record; and j) when the CA manifestly overlooked certain relevant facts not disputed by the parties and which, if properly considered, would justify a different conclusion.16

In the present case, the records do not support the finding made by the CA and the trial court that a prior arrangement existed between Salazar and Templonuevo regarding the transfer of ownership of the checks. This fact is crucial as Salazar’s entitlement to the value of the instruments is based on the assumption that she is a transferee within the contemplation of Section 49 of the Negotiable Instruments Law. Section 49 of the Negotiable Instruments Law contemplates a situation whereby the payee or indorsee delivers a negotiable instrument for value without indorsing it, thus: Transfer without indorsement; effect of- Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made. 17 It bears stressing that the above transaction is an equitable assignment and the transferee acquires the instrument subject to defenses and equities available among prior parties. Thus, if the transferor had legal title, the transferee acquires such title and, in addition, the right to have the indorsement of the transferor and also the right, as holder of the legal title, to maintain legal action against the maker or acceptor or other party liable to the transferor. The underlying premise of this provision, however, is that a valid transfer of ownership of the negotiable instrument in question has taken place. Transferees in this situation do not enjoy the presumption of ownership in favor of holders since they are neither payees nor indorsees of such instruments. The weight of authority is that the mere possession of a negotiable instrument does not in itself


conclusively establish either the right of the possessor to receive payment, or of the right of one who has made payment to be discharged from liability. Thus, something more than mere possession by persons who are not payees or indorsers of the instrument is necessary to authorize payment to them in the absence of any other facts from which the authority to receive payment may be inferred.18 The CA and the trial court surmised that the subject checks belonged to private respondent Salazar based on the pre-trial stipulation that Templonuevo incurred a one-year delay in demanding reimbursement for the proceeds of the same. To the Court’s mind, however, such period of delay is not of such unreasonable length as to estop Templonuevo from asserting ownership over the checks especially considering that it was readily apparent on the face of the instruments19 that these were crossed checks. In State Investment House v. IAC,20 the Court enumerated the effects of crossing a check, thus: (1) that the check may not be encashed but only deposited in the bank; (2) that the check may be negotiated only once - to one who has an account with a bank; and (3) that the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that such holder must inquire if the check has been received pursuant to that purpose. Thus, even if the delay in the demand for reimbursement is taken in conjunction with Salazar’s possession of the checks, it cannot be said that the presumption of ownership in Templonuevo’s favor as the designated payee therein was sufficiently overcome. This is consistent with the principle that if instruments payable to named payees or to their order have not been indorsed in blank, only such payees or their indorsees can be holders and entitled to receive payment in their own right.21

The presumption under Section 131(s) of the Rules of Court stating that a negotiable instrument was given for a sufficient consideration will not inure to the benefit of Salazar because the term "given" does not pertain merely to a transfer of physical possession of the instrument. The phrase "given or indorsed" in the context of a negotiable instrument refers to the manner in which such instrument may be negotiated. Negotiable instruments are negotiated by "transfer to one person or another in such a manner as to constitute the transferee the holder thereof. If payable to bearer it is negotiated by delivery. If payable to order it is negotiated by the indorsement completed by delivery."22 The present case involves checks payable to order. Not being a payee or indorsee of the checks, private respondent Salazar could not be a holder thereof. It is an exception to the general rule for a payee of an order instrument to transfer the instrument without indorsement. Precisely because the situation is abnormal, it is but fair to the maker and to prior holders to require possessors to prove without the aid of an initial presumption in their favor, that they came into possession by virtue of a legitimate transaction with the last holder.23 Salazar failed to discharge this burden, and the return of the check proceeds to Templonuevo was therefore warranted under the circumstances despite the fact that Templonuevo may not have clearly demonstrated that he never authorized Salazar to deposit the checks or to encash the same. Noteworthy also is the fact that petitioner stamped on the back of the checks the words: "All prior endorsements and/or lack of endorsements guaranteed," thereby making the assurance that it had ascertained the genuineness of all prior endorsements. Having assumed the liability of a general indorser, petitioner’s liability to the designated payee cannot be denied. Consequently, petitioner, as the collecting bank, had the right to debit Salazar’s account for the value of the checks it previously credited in her favor. It is of no moment that the account debited


by petitioner was different from the original account to which the proceeds of the check were credited because both admittedly belonged to Salazar, the former being the account of the sole proprietorship which had no separate and distinct personality from her, and the latter being her personal account. The right of set-off was explained in Associated Bank v. Tan:24 A bank generally has a right of set-off over the deposits therein for the payment of any withdrawals on the part of a depositor. The right of a collecting bank to debit a client's account for the value of a dishonored check that has previously been credited has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil Code provides that "[f]ixed, savings, and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loan." Hence, the relationship between banks and depositors has been held to be that of creditor and debtor. Thus, legal compensation under Article 1278 of the Civil Code may take place "when all the requisites mentioned in Article 1279 are present," as follows: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.

While, however, it is conceded that petitioner had the right of setoff over the amount it paid to Templonuevo against the deposit of Salazar, the issue of whether it acted judiciously is an entirely different matter.25 As businesses affected with public interest, and because of the nature of their functions, banks are under obligation to treat the accounts of their depositors with meticulous care, always having in mind the fiduciary nature of their relationship.26 In this regard, petitioner was clearly remiss in its duty to private respondent Salazar as its depositor. To begin with, the irregularity appeared plainly on the face of the checks. Despite the obvious lack of indorsement thereon, petitioner permitted the encashment of these checks three times on three separate occasions. This negates petitioner’s claim that it merely made a mistake in crediting the value of the checks to Salazar’s account and instead bolsters the conclusion of the CA that petitioner recognized Salazar’s claim of ownership of checks and acted deliberately in paying the same, contrary to ordinary banking policy and practice. It must be emphasized that the law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it, for the purpose of determining their genuineness and regularity. The collecting bank, being primarily engaged in banking, holds itself out to the public as the expert on this field, and the law thus holds it to a high standard of conduct.27 The taking and collection of a check without the proper indorsement amount to a conversion of the check by the bank.28 More importantly, however, solely upon the prompting of Templonuevo, and with full knowledge of the brewing dispute between Salazar and Templonuevo, petitioner debited the account held in the name of the sole proprietorship of Salazar without even serving due notice upon her. This ran contrary to petitioner’s assurances to private respondent Salazar that the account would remain untouched, pending the resolution of the


controversy between her and Templonuevo.29 In this connection, the CA cited the letter dated September 5, 1991 of Mr. Manuel Ablan, Senior Manager of petitioner bank’s Pasig/Ortigas branch, to private respondent Salazar informing her that her account had been frozen, thus: From the tenor of the letter of Manuel Ablan, it is safe to conclude that Account No. 0201-0588-48 will remain frozen or untouched until herein [Salazar] has settled matters with Templonuevo. But, in an unexpected move, in less than two weeks (eleven days to be precise) from the time that letter was written, [petitioner] bank issued a cashier’s check in the name of Julio R. Templonuevo of the J.R.T. Construction and Trading for the sum of P267,692.50 (Exhibit "8") and debited said amount from Ms. Arcilla’s account No. 0201-0588-48 which was supposed to be frozen or controlled. Such a move by BPI is, to Our minds, a clear case of negligence, if not a fraudulent, wanton and reckless disregard of the right of its depositor. The records further bear out the fact that respondent Salazar had issued several checks drawn against the account of A.A. Salazar Construction and Engineering Services prior to any notice of deduction being served. The CA sustained private respondent Salazar’s claim of damages in this regard: The act of the bank in freezing and later debiting the amount of P267,692.50 from the account of A.A. Salazar Construction and Engineering Services caused plaintiff-appellee great damage and prejudice particularly when she had already issued checks drawn against the said account. As can be expected, the said checks bounced. To prove this, plaintiff-appellee presented as exhibits photocopies of checks dated September 8, 1991, October 28, 1991, and November 14, 1991 (Exhibits "D", "E" and "F" respectively)30

These checks, it must be emphasized, were subsequently dishonored, thereby causing private respondent Salazar undue embarrassment and inflicting damage to her standing in the business community. Under the circumstances, she was clearly not given the opportunity to protect her interest when petitioner unilaterally withdrew the above amount from her account without informing her that it had already done so. For the above reasons, the Court finds no reason to disturb the award of damages granted by the CA against petitioner. This whole incident would have been avoided had petitioner adhered to the standard of diligence expected of one engaged in the banking business. A depositor has the right to recover reasonable moral damages even if the bank’s negligence may not have been attended with malice and bad faith, if the former suffered mental anguish, serious anxiety, embarrassment and humiliation.31 Moral damages are not meant to enrich a complainant at the expense of defendant. It is only intended to alleviate the moral suffering she has undergone. The award of exemplary damages is justified, on the other hand, when the acts of the bank are attended by malice, bad faith or gross negligence. The award of reasonable attorney’s fees is proper where exemplary damages are awarded. It is proper where depositors are compelled to litigate to protect their interest.32 WHEREFORE, the petition is partially GRANTED. The assailed Decision dated April 3, 1998 and Resolution dated April 3, 1998 rendered by the Court of Appeals in CA-G.R. CV No. 42241 are MODIFIED insofar as it ordered petitioner Bank of the Philippine Islands to return the amount of Two Hundred Sixty-seven Thousand Seven Hundred and Seven and 70/100 Pesos (P267,707.70) to respondent Annabelle A. Salazar, which portion is REVERSED and SET ASIDE. In all other respects, the same are AFFIRMED.


98.

G.R. No. 191555 January 20, 2014 UNION BANK OF THE PHILIPPINES, Petitioner, vs. DEVELOPMENT BANK OF THE PHILIPPINES, Respondent.

D E C I S I O N PERLAS-BERNABE, J.: Assailed in this petition for review on Certiorari1 are the Decision2 dated November 3, 2009 and Resolution3 dated February 26, 2010 of the Court of Appeals (CA) in CA-G.R. SP No. 93833 which affirmed the Orders4 dated November 9, 2005 and January 30, 2006 of the Regional Trial Court of Makati, Branch 585 (RTC) in Civil Case No. 7648 denying the motion to affirm legal compensation6 filed by petitioner Union Bank of the Philippines (Union Bank) against respondent Development Bank of the Philippines (DBP). The Facts Foodmasters, Inc. (FI) had outstanding loan obligations to both Union Bank’s predecessor-in-interest, Bancom Development Corporation (Bancom), and to DBP. On May 21, 1979, FI and DBP, among others, entered into a Deed of Cession of Property In Payment of Debt7 (dacion en pago) whereby the former ceded in favor of the latter certain properties (including a processing plant in Marilao, Bulacan [processing plant]) in consideration of the following: (a) the full and complete satisfaction of FI’s loan obligations to DBP; and (b) the direct

assumption by DBP of FI’s obligations to Bancom in the amount of P17,000,000.00 (assumed obligations).8 On the same day, DBP, as the new owner of the processing plant, leased back9 for 20 years the said property to FI (Lease Agreement) which was, in turn, obliged to pay monthly rentals to be shared by DBP and Bancom. DBP also entered into a separate agreement10 with Bancom (Assumption Agreement) whereby the former: (a) confirmed its assumption of FI’s obligations to Bancom; and (b) undertook to remit up to 30% of any and all rentals due from FI to Bancom (subject rentals) which would serve as payment of the assumed obligations, to be paid in monthly installments. The pertinent portions of the Assumption Agreement reads as follows: WHEREAS, DBP has agreed and firmly committed in favor of Bancom that the above obligations to Bancom which DBP has assumed shall be settled, paid and/or liquidated by DBP out of a portion of the lease rentals or part of the proceeds of sale of those properties of the Assignors conveyed to DBP pursuant to the [Deed of Cession of Property in Payment of Debt dated May 21, 1979] and which are the subject of [the Lease Agreement] made and executed by and between DBP and [FI], the last hereafter referred to as the "Lessee" to be effective as of July 31, 1978. x x x x 4. DBP hereby covenants and undertakes that the amount up to 30% of any and all rentals due from the Lessee pursuant to the Lease Agreement shall be remitted by DBP to Bancom at the latter’s offices at Pasay Road, Makati, Metro Manila within five (5) days from due dates thereof, and applied in payment of the Assumed Obligations. Likewise, the amount up to 30% of the proceeds from any sale of the Leased Properties shall within the


same period above, be remitted by DBP to Bancom and applied in payment or prepayment of the Assumed Obligations. x x x. Any balance of the Assumed Obligations after application of the entire rentals and or the entire sales proceeds actually received by Bancom on the Leased Properties shall be paid by DBP to Bancom not later than December 29, 1998. (Emphases supplied) Meanwhile, on May 23, 1979, FI assigned its leasehold rights under the Lease Agreement to Foodmasters Worldwide, Inc. (FW);11 while on May 9, 1984, Bancom conveyed all its receivables, including, among others, DBP’s assumed obligations, to Union Bank.12 Claiming that the subject rentals have not been duly remitted despite its repeated demands, Union Bank filed, on June 20, 1984, a collection case against DBP before the RTC, docketed as Civil Case No. 7648.13 In opposition, DBP countered, among others, that the obligations it assumed were payable only out of the rental payments made by FI. Thus, since FI had yet to pay the same, DBP’s obligation to Union Bank had not arisen.14 In addition, DBP sought to implead FW as third party-defendant in its capacity as FI’s assignee and, thus, should be held liable to Union Bank.15 In the interim, or on May 6, 1988, DBP filed a motion to dismiss on the ground that it had ceased to be a real-party-in-interest due to the supervening transfer of its rights, title and interests over the subject matter to the Asset Privatization Trust (APT). Said motion was, however, denied by the RTC in an Order dated May 27, 1988.16 The RTC Ruling in Civil Case No. 7648 Finding the complaint to be meritorious, the RTC, in a Decision17 dated May 8, 1990, ordered: (a) DBP to pay Union Bank the sum

of P4,019,033.59, representing the amount of the subject rentals (which, again, constitutes 30% of FI’s [now FW’s] total rental debt), including interest until fully paid; and (b) FW, as thirdparty defendant, to indemnify DBP, as third- party plaintiff, for its payments of the subject rentals to Union Bank. It ruled that there lies no evidence which would show that DBP’s receipt of the rental payments from FW is a condition precedent to the former’s obligation to remit the subject rentals under the Lease Agreement. Thus, when DBP failed to remit the subject rentals to Union Bank, it defaulted on its assumed obligations.18 DBP then elevated the case on appeal before the CA, docketed as CA-G.R. CV No. 35866. The CA Ruling in CA-G.R. CV No. 35866 In a Decision19 dated May 27, 1994 (May 27, 1994 Decision), the CA set aside the RTC’s ruling, and consequently ordered: (a) FW to pay DBP the amount of P32,441,401.85 representing the total rental debt incurred under the Lease Agreement, including P10,000.00 as attorney’s fees; and (b) DBP, after having been paid by FW its unpaid rentals, to remit 30% thereof (i.e., the subject rentals) to Union Bank.20 It rejected Union Bank’s claim that DBP has the direct obligation to remit the subject rentals not only from FW’s rental payments but also out of its own resources since said claim contravened the "plain meaning" of the Assumption Agreement which specifies that the payment of the assumed obligations shall be made "out of the portion of the lease rentals or part of the proceeds of the sale of those properties of [FI] conveyed to DBP."21 It also construed the phrase under the Assumption Agreement that DBP is obligated to "pay any balance of the Assumed Obligations after application of the entire rentals and/or the entire sales proceeds actually received by [Union Bank] on the Leased Properties . . . not later than December 29, 1998" to mean that the lease rentals must first be applied to the payment of the assumed obligations


in the amount of P17,000,000.00, and that DBP would have to pay out of its own money only in case the lease rentals were insufficient, having only until December 29, 1998 to do so. Nevertheless, the monthly installments in satisfaction of the assumed obligations would still have to be first sourced from said lease rentals as stipulated in the assumption agreement.22 In view of the foregoing, the CA ruled that DBP did not default in its obligations to remit the subject rentals to Union Bank precisely because it had yet to receive the rental payments of FW.23 Separately, the CA upheld the RTC’s denial of DBP’s motion to dismiss for the reason that the transfer of its rights, title and interests over the subject matter to the APT occurred pendente lite, and, as such, the substitution of parties is largely discretionary on the part of the court. At odds with the CA’s ruling, Union Bank and DBP filed separate petitions for review on certiorari before the Court, respectively docketed as G.R. Nos. 115963 and 119112, which were thereafter consolidated. The Court’s Ruling in G.R. Nos. 115963 & 119112 The Court denied both petitions in a Resolution24 dated December 13, 1995. First, it upheld the CA’s finding that while DBP directly assumed FI’s obligations to Union Bank, DBP was only obliged to remit to the latter 30% of the lease rentals collected from FW, from which any deficiency was to be settled by DBP not later than December 29, 1998.25 Similarly, the Court agreed with the CA that the denial of DBP’s motion to dismiss was proper since substitution of parties, in case of transfers pendente lite, is merely discretionary on the part of the court, adding further that the proposed substitution of APT will amount to a novation of debtor which cannot be done without the consent of the creditor.26

On August 2, 2000, the Court’s resolution became final and executory.27 The RTC Execution Proceedings On May 16, 2001, Union Bank filed a motion for execution28 before the RTC, praying that DBP be directed to pay the amount of P9,732,420.555 which represents the amount of the subject rentals (i.e., 30% of the FW’s total rental debt in the amount of P32,441,401.85). DBP opposed29 Union Bank’s motion, contending that it sought to effectively vary the dispositive portion of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866. Also, on September 12, 2001, DBP filed its own motion for execution against FW, citing the same CA decision as its basis. In a Consolidated Order30 dated October 15, 2001 (Order of Execution), the RTC granted both motions for execution. Anent Union Bank’s motion, the RTC opined that the CA’s ruling that DBP’s payment to Union Bank shall be demandable only upon payment of FW must be viewed in light of the date when the same was rendered. It noted that the CA decision was promulgated only on May 27, 1994, which was before the December 29, 1998 due date within which DBP had to fully pay its obligation to Union Bank under the Assumption Agreement. Since the latter period had already lapsed, "[i]t would, thus, be too strained to argue that payment by DBP of its assumed obligation[s] shall be dependent on [FW’s] ability, if not availability, to pay."31 In similar regard, the RTC granted DBP’s motion for execution against FW since its liability to Union Bank and DBP remained undisputed. As a result, a writ of execution32 dated October 15, 2001 (October 15, 2001 Writ of Execution) and, thereafter, a notice of garnishment33 against DBP were issued. Records, however, do not show that the same writ was implemented against FW.


DBP filed a motion for reconsideration34 from the Execution Order, averring that the latter issuance varied the import of the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866 in that it prematurely ordered DBP to pay the assumed obligations to Union Bank before FW’s payment. The motion was, however, denied on December 5, 2001.35 Thus, DBP’s deposits were eventually garnished.36 Aggrieved, DBP filed a petition for certiorari37 before the CA, docketed as CA-G.R. SP No. 68300. The CA Ruling in CA-G.R. SP No. 68300 In a Decision38 dated July 26, 2002, the CA dismissed DBP’s petition, finding that the RTC did not abuse its discretion when it issued the October 15, 2001 Writ of Execution. It upheld the RTC’s observation that there was "nothing wrong in the manner how [said writ] was implemented," as well as "in the zealousness and promptitude exhibited by Union Bank" in moving for the same. DBP appealed the CA’s ruling before the Court, which was docketed as G.R. No. 155838. The Court’s Ruling in G.R. No. 155838 In a Decision39 dated January 13, 2004 (January 13, 2004 Decision), the Court granted DBP’s appeal, and thereby reversed and set aside the CA’s ruling in CA-G.R. SP No. 68300. It found significant points of variance between the CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866, and the RTC’s Order of Execution/October 15, 2001 Writ of Execution. It ruled that both the body and the dispositive portion of the same decision acknowledged that DBP’s obligation to Union Bank for remittance of the lease payments is contingent on FW’s prior payment to DBP, and that any deficiency DBP had to pay by December 29, 1998 as per the Assumption Agreement cannot be determined until after the satisfaction of FW’s own rental obligations to DBP. Accordingly, the Court: (a) nullified the October 15, 2001 Writ of Execution and all related issuances

thereto; and (b) ordered Union Bank to return to DBP the amounts it received pursuant to the said writ.40 Dissatisfied, Union Bank moved for reconsideration which was, however, denied by the Court in a Resolution dated March 24, 2004 with finality. Thus, the January 13, 2004 Decision attained finality on April 30, 2004.41 Thereafter, DBP moved for the execution of the said decision before the RTC. After numerous efforts on the part of Union Bank proved futile, the RTC issued a writ of execution (September 6, 2005 Writ of Execution), ordering Union Bank to return to DBP all funds it received pursuant to the October 15, 2001 Writ of Execution.42 Union Bank’s Motion to Affirm Legal Compensation On September 13, 2005, Union Bank filed a Manifestation and Motion to Affirm Legal Compensation,43 praying that the RTC apply legal compensation between itself and DBP in order to offset the return of the funds it previously received from DBP. Union Bank anchored its motion on two grounds which were allegedly not in existence prior to or during trial, namely: (a) on December 29, 1998, DBP’s assumed obligations became due and demandable;44 and (b) considering that FWI became nonoperational and non-existent, DBP became primarily liable to the balance of its assumed obligation, which as of Union Bank’s computation after its claimed set-off, amounted to P1,849,391.87.45 On November 9, 2005, the RTC issued an Order46 denying the above-mentioned motion for lack of merit, holding that Union Bank’s stated grounds were already addressed by the Court in the January 13, 2004 Decision in G.R. No. 155838. With Union Bank’s motion for reconsideration therefrom having been denied, it filed a petition for certiorari47 with the CA, docketed as CA-G.R. SP No. 93833.


Pending resolution, Union Bank issued Manager’s Check48 No. 099-0003192363 dated April 21, 2006 amounting to P52,427,250.00 in favor of DBP, in satisfaction of the Writ of Execution dated September 6, 2005 Writ of Execution. DBP, however, averred that Union Bank still has a balance of P756,372.39 representing a portion of the garnished funds of DBP,49 which means that said obligation had not been completely extinguished. The CA Ruling in CA-G.R. SP No. 93833 In a Decision50 dated November 3, 2009, the CA dismissed Union Bank’s petition, finding no grave abuse of discretion on the RTC’s part. It affirmed the denial of its motion to affirm legal compensation considering that: (a) the RTC only implemented the Court’s January 13, 2004 Decision in G.R. No. 155838 which by then had already attained finality; (b) DBP is not a debtor of Union Bank; and (c) there is neither a demandable nor liquidated debt from DBP to Union Bank.51 Undaunted, Union Bank moved for reconsideration which was, however, denied in a Resolution52 dated February 26, 2010; hence, the instant petition. The Issue Before the Court The sole issue for the Court’s resolution is whether or not the CA correctly upheld the denial of Union Bank’s motion to affirm legal compensation. The Court’s Ruling The petition is bereft of merit. Compensation is defined as a mode of extinguishing obligations whereby two persons in their capacity as principals are mutual debtors and creditors of each other with respect to equally liquidated and demandable

obligations to which no retention or controversy has been timely commenced and communicated by third parties.53 The requisites therefor are provided under Article 1279 of the Civil Code which reads as follows: Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.1awp++i1 (Emphases and underscoring supplied) The rule on legal54 compensation is stated in Article 1290 of the Civil Code which provides that "[w]hen all the requisites mentioned in Article 1279 are present, compensation takes effect by operation of law, and extinguishes both debts to the concurrent amount, even though the creditors and debtors are not aware of the compensation." In this case, Union Bank filed a motion to seek affirmation that legal compensation had taken place in order to effectively offset (a) its own obligation to return the funds it previously received from DBP as directed under the September 6, 2005 Writ of Execution with (b) DBP’s assumed obligations under the


Assumption Agreement. However, legal compensation could not have taken place between these debts for the apparent reason that requisites 3 and 4 under Article 1279 of the Civil Code are not present. Since DBP’s assumed obligations to Union Bank for remittance of the lease payments are – in the Court’s words in its Decision dated January 13, 2004 in G.R. No. 155838 – " contingent on the prior payment thereof by [FW] to DBP," it cannot be said that both debts are due (requisite 3 of Article 1279 of the Civil Code). Also, in the same ruling, the Court observed that any deficiency that DBP had to make up (by December 29, 1998 as per the Assumption Agreement) for the full satisfaction of the assumed obligations " cannot be determined until after the satisfaction of Foodmasters’ obligation to DBP." In this regard, it cannot be concluded that the same debt had already been liquidated, and thereby became demandable (requisite 4 of Article 1279 of the Civil Code). The aforementioned Court decision had already attained finality on April 30, 200455 and, hence, pursuant to the doctrine of conclusiveness of judgment, the facts and issues actually and directly resolved therein may not be raised in any future case between the same parties, even if the latter suit may involve a different cause of action.56 Its pertinent portions are hereunder quoted for ready reference:57 Both the body and the dispositive portion of the [CA’s May 27, 1994 Decision in CA-G.R. CV No. 35866] correctly construed the nature of DBP’s liability for the lease payments under the various contracts, to wit: x x x Construing these three contracts, especially the "Agreement" x x x between DBP and Bancom as providing for the payment of DBP’s assumed obligation out of the rentals to be paid to it does not mean negating DBP’s assumption "for its own account" of the P17.0 million debt x x x. It only means that they provide a mechanism for discharging [DBP’s] liability. This

liability subsists, since under the "Agreement" x x x, DBP is obligated to pay "any balance of the Assumed Obligations after application of the entire rentals and or the entire sales proceeds actually received by [Union Bank] on the Leased Properties … not later than December 29, 1998." x x x It only means that the lease rentals must first be applied to the payment of the P17 million debt and that [DBP] would have to pay out of its money only in case of insufficiency of the lease rentals having until December 29, 1998 to do so. In this sense, it is correct to say that the means of repayment of the assumed obligation is not limited to the lease rentals. The monthly installments, however, would still have to come from the lease rentals since this was stipulated in the "Agreement." x x x x Since, as already stated, the monthly installments for the payment of the P17 million debt are to be funded from the lease rentals, it follows that if the lease rentals are not paid, there is nothing for DBP to remit to [Union Bank], and thus [DBP] should not be considered in default. It is noteworthy that, as stated in the appealed decision, "as regards plaintiff’s claim for damages against defendant for its alleged negligence in failing and refusing to enforce a lessor’s remedies against Foodmasters Worldwide, Inc., the Court finds no competent and reliable evidence of such claim." x x x x WHEREFORE, the decision appealed from is SET ASIDE and another one is RENDERED, (i) Ordering third-party defendant-appellee Foodmasters Worldwide, Inc. to pay defendant and third-party plaintiffappellant Development Bank of the Philippines the sum of P32,441,401.85, representing the unpaid rentals from August


1981 to June 30, 1987, as well as P10,000.00 for attorney’s fees; and (ii) Ordering defendant and third-party plaintiff-appellant Development Bank of the Philippines after having been paid by third-party defendant-appellee the sum of P32,441,401.85, to remit 30% thereof to plaintiff-appellee Union Bank of the Philippines. SO ORDERED. In other words, both the body and the dispositive portion of the aforequoted decision acknowledged that DBP’s obligation to Union Bank for remittance of the lease payments is contingent on the prior payment thereof by Foodmasters to DBP. A careful reading of the decision shows that the Court of Appeals, which was affirmed by the Supreme Court, found that only the balance or the deficiency of the P17 million principal obligation, if any, would be due and demandable as of December 29, 1998. Naturally, this deficiency cannot be determined until after the satisfaction of Foodmasters obligation to DBP, for remittance to Union Bank in the proportion set out in the 1994 Decision. (Emphases and underscoring supplied; citations omitted) x x x x In fine, since requisites 3 and 4 of Article 1279 of the Civil Code have not concurred in this case, no legal compensation could have taken place between the above-stated debts pursuant to Article 1290 of the Civil Code. Perforce, the petition must be denied, and the denial of Union Bank s motion to affirm legal compensation sustained.

WHEREFORE, the petition is DENIED. The Decision dated November 3, 2009 and Resolution dated February 26, 2010 of the Court of Appeals in CA-G.R. SP No. 93833 are hereby AFFIRMED. 99. G.R. No. L-48797 July 30, 1943 FUA CAM LU, plaintiff-appellee, vs. YAP FAUCO and YAP SINGCO, defendants-appellants. The plaintiff-appellee, Fua Cam Lu, obtained in civil case No. 42125 of the Court of First Instance of Manila a judgment sentencing the defendants-appellants, Yap Fauco and Yap Singco, to pay P1,538.04 with legal interest and costs. By virtue of a writ of execution, a certain parcel of land belonging to the appellants, assessed at P3,550 and situated in Donsol, Sorsogon was levied upon the provincial sheriff of Sorsogon who, on November 15, 1933, made a notice, duly posted in three conspicuous places in the municipalities of Donsol and Sorsogon and published in the Mamera Press, that said land would be sold at public auction on December 12, 1933. On December 16, 1933, the appellants executed a mortgage in favor of the appellee, wherein it was stipulated that their obligation under the judgment in civil case No. 41225 was reduced to P1,200 which was made payable in four installments of P300 during the period commencing on February 8, 1934, and ending on August 8, 1935l that to secure the payment of the said P1,200, a camarin belonging to the appellants and built on the above-mentioned land, was mortgaged to the appellee; that in case the appellants defaulted in the payment of any of the installments, they would pay ten per cent of the unpaid balance as attorney's fees. plus the costs of the action to be brought by the appellee by reason of such default, and the further amount of P338, representing the discount


conceded to the appellants. As a result of the agreement thus reached by the parties, the sale of the land advertised by the provincial sheriff did not take place. However, pursuant to an alias writ of execution issued by the Court of First instance of manila in civil case No. 42125 on March 31, 1934, the provincial sheriff, without publishing a new notice, sold said land at a public auction held on May 28, 1934, to the appellee for P1,923.32. On June 13, 1935, the provincial sheriff executed a final deed in favor of the appellee. On August 29, 1939, the appellee instituted the present action in the Court of First Instance of Sorsogon against the appellants in view of their refusal to recognize appellee's title and to vacate the land. The appellants relied on the legal defenses that their obligation under the judgment in civil case No. 42125 was novated by the mortgage executed by them in favor of the appellee and that the sheriffs sale was void for lack of necessary publication. These contentions were overruled by the lower court which rendered judgment declaring the appellee to be the owner of the land and ordering the appellants to deliver the same to him, without special pronouncement as to costs. The appellants seek the reversal of this judgment. We concur in the theory that appellants liability under the judgment in civil case No. 42125 had been extinguished by the settlement evidenced by the mortgage executed by them in favor of the appellee on December 16, 1933. Although said mortgage did not expressly cancel the old obligation, this was impliedly novated by reason of incompatibly resulting from the fact that, whereas the judgment was for P1,538.04 payable at one time, did not provide for attorney's fees, and was not secured, the new obligation is or P1,200 payable in installments, stipulated for attorney's fees, and is secured by a mortgage. The appellee, however, argues that the later agreement merely extended the time of payment and did not take away his concurrent right to have the judgment executed. This court not have been the purpose for executive the mortgage, because it was therein recited that the appellants promised to pay P1,200 to the

appellee as a settlement of the judgment in civil case No. 42125 (en forma de transaccion de la decision . . . en el asunto civil No. 42125). Said judgment cannot be said to have been settled, unless it was extinguished. Moreover, the sheriff's sale in favor of the appellee is void because no notice thereof was published other than that which appeared in the Mamera Press regarding the sale to be held on December 12, 1933. Lack of new publication is shown by appellee's own evidence and the issue, though not raised in the pleadings, was thereby tried by implied consent of the parties, emphasized by the appellants in the memorandum filed by them in the lower court and squarely threshed out in this Court by both the appellants and the appellee. The latter had, besides, admitted that there was no new publication, and so much so that in his brief he merely resorted to the argument that "section 460 of Act 190 authorized the sheriff to adjourn any sale upon execution to any date agreed upon in writing by the parties . . . and does not require the sheriff to publish anew the public sale which was adjourned." The appellee has correctly stated the law but has failed to show that it supports his side, for it is not pretended that there was any written agreement between the parties to adjourn the sale advertised for December 12, 1933, to May 28, 1934. Neither may it be pretended that the sale in favor of the appellee was by virtue of a mere adjournment, it appearing that it was made pursuant to an alias writ of execution. Appellee's admission has thus destroyed the legal presumption that official duty was regularly performed. The appealed judgment is, therefore, reversed and the defendants-appellants, who are hereby declared to be the owners of the land in question are absolved from the complaint, with costs against the appellee. So ordered.


100. G.R. No. 170141 April 22, 2008 JAPAN AIRLINES, petitioner, vs. JESUS SIMANGAN, respondent. D E C I S I O N REYES R.T., J.: WHEN an airline issues a ticket to a passenger confirmed on a particular flight on a certain date, a contract of carriage arises, and the passenger has every right to expect that he would fly on that flight and on that date. If he does not, then the carrier opens itself to a suit for breach of contract of carriage.1 The power to admit or not an alien into the country is a sovereign act which cannot be interfered with even by Japan Airlines (JAL).2 In this petition for review on certiorari,3 petitioner JAL appeals the: (1) Decision4 dated May 31, 2005 of the Court of Appeals (CA) ordering it to pay respondent Jesus Simangan moral and exemplary damages; and (2) Resolution5 of the same court dated September 28, 2005 denying JAL's motion for reconsideration. The Facts In 1991, respondent Jesus Simangan decided to donate a kidney to his ailing cousin, Loreto Simangan, in UCLA School of Medicine in Los Angeles, California, U.S.A. Upon request of UCLA, respondent undertook a series of laboratory tests at the National Kidney Institute in Quezon City to verify whether his blood and tissue type are compatible with Loreto's.6 Fortunately, said tests

proved that respondent's blood and tissue type were wellmatched with Loreto's.7 Respondent needed to go to the United States to complete his preliminary work-up and donation surgery. Hence, to facilitate respondent's travel to the United States, UCLA wrote a letter to the American Consulate in Manila to arrange for his visa. In due time, respondent was issued an emergency U.S. visa by the American Embassy in Manila.8 Having obtained an emergency U.S. visa, respondent purchased a round trip plane ticket from petitioner JAL for US$1,485.00 and was issued the corresponding boarding pass.9 He was scheduled to a particular flight bound for Los Angeles, California, U.S.A. via Narita, Japan.10 On July 29, 1992, the date of his flight, respondent went to Ninoy Aquino International Airport in the company of several relatives and friends.11 He was allowed to check-in at JAL's counter.12 His plane ticket, boarding pass, travel authority and personal articles were subjected to rigid immigration and security routines.13 After passing through said immigration and security procedures, respondent was allowed by JAL to enter its airplane.14 While inside the airplane, JAL's airline crew suspected respondent of carrying a falsified travel document and imputed that he would only use the trip to the United States as a pretext to stay and work in Japan.15 The stewardess asked respondent to show his travel documents. Shortly after, the stewardess along with a Japanese and a Filipino haughtily ordered him to stand up and leave the plane.16 Respondent protested, explaining that he was issued a U.S. visa. Just to allow him to board the plane, he pleaded with JAL to closely monitor his movements when the aircraft stops over in Narita.17 His pleas were ignored. He was then constrained to go out of the plane.18 In a nutshell, respondent was bumped off the flight.


Respondent went to JAL's ground office and waited there for three hours. Meanwhile, the plane took off and he was left behind.19 Afterwards, he was informed that his travel documents were, indeed, in order.20 Respondent was refunded the cost of his plane ticket less the sum of US$500.00 which was deducted by JAL.21 Subsequently, respondent's U.S. visa was cancelled.22 Displeased by the turn of events, respondent filed an action for damages against JAL with the Regional Trial Court (RTC) in Valenzuela City, docketed as Civil Case No. 4195-V-93. He claimed he was not able to donate his kidney to Loreto; and that he suffered terrible embarrassment and mental anguish.23 He prayed that he be awarded P3 million as moral damages, P1.5 million as exemplary damages and P500,000.00 as attorney's fees.24 JAL denied the material allegations of the complaint. It argued, among others, that its failure to allow respondent to fly on his scheduled departure was due to "a need for his travel documents to be authenticated by the United States Embassy"25 because no one from JAL's airport staff had encountered a parole visa before.26 It posited that the authentication required additional time; that respondent was advised to take the flight the following day, July 30, 1992. JAL alleged that respondent agreed to be rebooked on July 30, 1992.27 JAL also lodged a counterclaim anchored on respondent's alleged wrongful institution of the complaint. It prayed for litigation expenses, exemplary damages and attorney's fees.28 On September 21, 2000, the RTC presided by Judge Floro P. Alejo rendered its decision in favor of respondent (plaintiff), disposing as follows:

WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the amount of P1,000,000.00 as moral damages, the amount of P500,000.00 as exemplary damages and the amount of P250,000.00 as attorney's fees, plus the cost of suit.29 The RTC explained: In summarily and insolently ordering the plaintiff to disembark while the latter was already settled in his assigned seat, the defendant violated the contract of carriage; that when the plaintiff was ordered out of the plane under the pretext that the genuineness of his travel documents would be verified it had caused him embarrassment and besmirched reputation; and that when the plaintiff was finally not allowed to take the flight, he suffered more wounded feelings and social humiliation for which the plaintiff was asking to be awarded moral and exemplary damages as well as attorney's fees. The reason given by the defendant that what prompted them to investigate the genuineness of the travel documents of the plaintiff was that the plaintiff was not then carrying a regular visa but just a letter does not appear satisfactory. The defendant is engaged in transporting passengers by plane from country to country and is therefore conversant with the travel documents. The defendant should not be allowed to pretend, to the prejudice of the plaintiff not to know that the travel documents of the plaintiff are valid documents to allow him entry in the United States. The foregoing act of the defendant in ordering the plaintiff to deplane while already settled in his assigned seat clearly demonstrated that the defendant breached its contract of carriage with the plaintiff as passenger in bad faith and as such the plaintiff is entitled to moral and exemplary damages as well as to an award of attorney's fees.30


Disagreeing with the RTC judgment, JAL appealed to the CA contending that it is not guilty of breach of contract of carriage, hence, not liable for damages.31 It posited that it is the one entitled to recover on its counterclaim.32 CA Ruling In a Decision33 dated May 31, 2005, the CA affirmed the decision of the RTC with modification in that it lowered the amount of moral and exemplary damages and deleted the award of attorney's fees. The fallo of the CA decision reads: WHEREFORE, the appealed Decision is AFFIRMED with MODIFICATION. Appellant JAPAN AIR LINES is ordered to pay appellee JESUS SIMANGAN the reduced sums, as follows: Five Hundred Thousand Pesos (P500,000.00) as moral damages, and Two Hundred Fifty Thousand Pesos (P250,000.00) as exemplary damages. The award of attorney's fees is hereby DELETED.34 The CA elucidated that since JAL issued to respondent a round trip plane ticket for a lawful consideration, "there arose a perfected contract between them."35 It found that respondent was "haughtily ejected"36 by JAL and that "he was certainly embarrassed and humiliated"37 when, in the presence of other passengers, JAL's airline staff "shouted at him to stand up and arrogantly asked him to produce his travel papers, without the least courtesy every human being is entitled to";38 and that "he was compelled to deplane on the grounds that his papers were fake."39 The CA ratiocinated: While the protection of passengers must take precedence over convenience, the implementation of security measures must be attended by basic courtesies.

In fact, breach of the contract of carriage creates against the carrier a presumption of liability, by a simple proof of injury, relieving the injured passenger of the duty to establish the fault of the carrier or of his employees; and placing on the carrier the burden to prove that it was due to an unforeseen event or to force majeure. That appellee possessed bogus travel documents and that he might stay illegally in Japan are allegations without substantiation. Also, appellant's attempt to rebook appellee the following day was too late and did not relieve it from liability. The damage had been done. Besides, its belated theory of novation, i.e., that appellant's original obligation to carry appellee to Narita and Los Angeles on July 29, 1992 was extinguished by novation when appellant and appellant agreed that appellee will instead take appellant's flight to Narita on the following day, July 30, 1992, deserves little attention. It is inappropriate at bar. Questions not taken up during the trial cannot be raised for the first time on appeal.40 (Underscoring ours and citations were omitted) Citing Ortigas, Jr. v. Lufthansa German Airlines,41 the CA declared that "(i)n contracts of common carriage, inattention and lack of care on the part of the carrier resulting in the failure of the passenger to be accommodated in the class contracted for amounts to bad faith or fraud which entitles the passengers to the award of moral damages in accordance with Article 2220 of the Civil Code."42 Nevertheless, the CA modified the damages awarded by the RTC. It explained: Fundamental in the law on damages is that one injured by a breach of a contract, or by a wrongful or negligent act or omission shall have a fair and just compensation commensurate


to the loss sustained as consequence of the defendant's act. Being discretionary on the court, the amount, however, should not be palpably and scandalously excessive. Here, the trial court's award of P1,000,000.00 as moral damages appears to be overblown. No other proof of appellee's social standing, profession, financial capabilities was presented except that he was single and a businessman. To Us, the sum of 500,000.00 is just and fair. For, moral damages are emphatically not intended to enrich a complainant at the expense of the defendant. They are awarded only to enable the injured party to obtain means, diversion or amusements that will serve to alleviate the moral suffering he has undergone, by reason of the defendant's culpable action. Moreover, the grant of P500,000.00 as exemplary damages needs to be reduced to a reasonable level. The award of exemplary damages is designed to permit the courts to mould behavior that has socially deleterious consequences and its imposition is required by public policy to suppress the wanton acts of the offender. Hence, the sum of P250,000.00 is adequate under the circumstances. The award of P250,000.00 as attorney's fees lacks factual basis. Appellee was definitely compelled to litigate in protecting his rights and in seeking relief from appellant's misdeeds. Yet, the record is devoid of evidence to show the cost of the services of his counsel and/or the actual expenses incurred in prosecuting his action.43 (Citations were omitted) When JAL's motion for reconsideration was denied, it resorted to the petition at bar. Issues JAL poses the following issues -

I. WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT RESPONDENT WAS ENTITLED TO MORAL DAMAGES, CONSIDERING THAT: A. JAL WAS NOT GUILTY OF BREACH OF CONTRACT. B. MORAL DAMAGES MAY BE AWARDED IN BREACH OF CONTRACT CASES ONLY WHEN THE BREACH IS ATTENDED BY FRAUD OR BAD FAITH. ASSUMING ARGUENDO THAT JAL WAS GUILTY OF BREACH, JAL DID NOT ACT FRAUDULENTLY OR IN BAD FAITH AS TO ENTITLE RESPONDENT TO MORAL DAMAGES. C. THE LAW DISTINGUISHES A CONTRACTUAL BREACH EFFECTED IN GOOD FAITH FROM ONE ATTENDED BY BAD FAITH. II. WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT RESPONDENT WAS ENTITLED TO EXEMPLARY DAMAGES CONSIDERING THAT: A. EXEMPLARY DAMAGES ARE NOT RECOVERABLE IN BREACH OF CONTRACT OF CARRIAGE UNLESS THE CARRIER IS GUILTY OF WANTON, FRAUDULENT, RECKLESS, OPPRESSIVE OR MALEVOLENT CONDUCT. B. ASSUMING ARGUENDO THAT JAL WAS GUILTY OF BREACH, JAL DID NOT ACT IN A WANTON FRAUDULENT, RECKLESS, OPPRESSIVE OR MALEVOLENT MANNER AS TO ENTITLE RESPONDENT TO EXEMPLARY DAMAGES. III.


ASSUMING ARGUENDO THAT RESPONDENT WAS ENTITLED TO AN AWARD OF DAMAGES, WHETHER OR NOT THE COURT OF APPEALS AWARD OF P750,000 IN DAMAGES WAS EXCESSIVE AND UNPRECEDENTED. IV. WHETHER OR NOT THE COURT OF APPEALS ERRED IN NOT FINDING FOR JAL ON ITS COUNTERCLAIM.44 (Underscoring Ours) Basically, there are three (3) issues to resolve here: (1) whether or not JAL is guilty of contract of carriage; (2) whether or not respondent is entitled to moral and exemplary damages; and (3) whether or not JAL is entitled to its counterclaim for damages. Our Ruling This Court is not a trier of facts. Chiefly, the issues are factual. The RTC findings of facts were affirmed by the CA. The CA also gave its nod to the reasoning of the RTC except as to the awards of damages, which were reduced, and that of attorney's fees, which was deleted. We are not a trier of facts. We generally rely upon, and are bound by, the conclusions on this matter of the lower courts, which are better equipped and have better opportunity to assess the evidence first-hand, including the testimony of the witnesses.45 We have repeatedly held that the findings of fact of the CA are final and conclusive and cannot be reviewed on appeal to the Supreme Court provided they are based on substantial evidence.46 We have no jurisdiction, as a rule, to reverse their findings.47 Among the exceptions to this rule are: (a) when the

conclusion is a finding grounded entirely on speculations, surmises or conjectures; (b) when the inference made is manifestly mistaken, absurd or impossible; (c) where there is grave abuse of discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the findings of facts are conflicting; (f) when the CA, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee.48 The said exceptions, which are being invoked by JAL, are not found here. There is no indication that the findings of the CA are contrary to the evidence on record or that vital testimonies of JAL's witnesses were disregarded. Neither did the CA commit misapprehension of facts nor did it fail to consider relevant facts. Likewise, there was no grave abuse of discretion in the appreciation of facts or mistaken and absurd inferences. We thus sustain the coherent facts as established by the courts below, there being no sufficient showing that the said courts committed reversible error in reaching their conclusions. JAL is guilty of breach of contract of carriage. That respondent purchased a round trip plane ticket from JAL and was issued the corresponding boarding pass is uncontroverted.49 His plane ticket, boarding pass, travel authority and personal articles were subjected to rigid immigration and security procedure.50 After passing through said immigration and security procedure, he was allowed by JAL to enter its airplane to fly to Los Angeles, California, U.S.A. via Narita, Japan.51 Concisely, there was a contract of carriage between JAL and respondent. Nevertheless, JAL made respondent get off the plane on his scheduled departure on July 29, 1992. He was not allowed by JAL


to fly. JAL thus failed to comply with its obligation under the contract of carriage. JAL justifies its action by arguing that there was "a need to verify the authenticity of respondent's travel document."52 It alleged that no one from its airport staff had encountered a parole visa before.53 It further contended that respondent agreed to fly the next day so that it could first verify his travel document, hence, there was novation.54 It maintained that it was not guilty of breach of contract of carriage as respondent was not able to travel to the United States due to his own voluntary desistance.55 We cannot agree. JAL did not allow respondent to fly. It informed respondent that there was a need to first check the authenticity of his travel documents with the U.S. Embassy.56 As admitted by JAL, "the flight could not wait for Mr. Simangan because it was ready to depart."57 Since JAL definitely declared that the flight could not wait for respondent, it gave respondent no choice but to be left behind. The latter was unceremoniously bumped off despite his protestations and valid travel documents and notwithstanding his contract of carriage with JAL. Damage had already been done when respondent was offered to fly the next day on July 30, 1992. Said offer did not cure JAL's default. Considering that respondent was forced to get out of the plane and left behind against his will, he could not have freely consented to be rebooked the next day. In short, he did not agree to the alleged novation. Since novation implies a waiver of the right the creditor had before the novation, such waiver must be express.58 It cannot be supposed, without clear proof, that respondent had willingly done away with his right to fly on July 29, 1992.

Moreover, the reason behind the bumping off incident, as found by the RTC and CA, was that JAL personnel imputed that respondent would only use the trip to the United States as a pretext to stay and work in Japan.59 Apart from the fact that respondent's plane ticket, boarding pass, travel authority and personal articles already passed the rigid immigration and security routines,60 JAL, as a common carrier, ought to know the kind of valid travel documents respondent carried. As provided in Article 1755 of the New Civil Code: "A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances."61 Thus, We find untenable JAL's defense of "verification of respondent's documents" in its breach of contract of carriage. It bears repeating that the power to admit or not an alien into the country is a sovereign act which cannot be interfered with even by JAL.62 In an action for breach of contract of carriage, all that is required of plaintiff is to prove the existence of such contract and its nonperformance by the carrier through the latter's failure to carry the passenger safely to his destination.63 Respondent has complied with these twin requisites. Respondent is entitled to moral and exemplary damages and attorney's fees plus legal interest. With reference to moral damages, JAL alleged that they are not recoverable in actions ex contractu except only when the breach is attended by fraud or bad faith. It is contended that it did not act fraudulently or in bad faith towards respondent, hence, it may not be held liable for moral damages.


As a general rule, moral damages are not recoverable in actions for damages predicated on a breach of contract for it is not one of the items enumerated under Article 2219 of the Civil Code.64 As an exception, such damages are recoverable: (1) in cases in which the mishap results in the death of a passenger, as provided in Article 1764, in relation to Article 2206(3) of the Civil Code; and (2) in the cases in which the carrier is guilty of fraud or bad faith, as provided in Article 2220.65 The acts committed by JAL against respondent amounts to bad faith. As found by the RTC, JAL breached its contract of carriage with respondent in bad faith. JAL personnel summarily and insolently ordered respondent to disembark while the latter was already settled in his assigned seat. He was ordered out of the plane under the alleged reason that the genuineness of his travel documents should be verified. These findings of facts were upheld by the CA, to wit: x x x he was haughtily ejected by appellant. He was certainly embarrassed and humiliated when, in the presence of other passengers, the appellant's airline staff shouted at him to stand up and arrogantly asked him to produce his travel papers, without the least courtesy every human being is entitled to. Then, he was compelled to deplane on the grounds that his papers were fake. His protestation of having been issued a U.S. visa coupled with his plea to appellant to closely monitor his movements when the aircraft stops over in Narita, were ignored. Worse, he was made to wait for many hours at the office of appellant only to be told later that he has valid travel documents.66 (Underscoring ours) Clearly, JAL is liable for moral damages. It is firmly settled that moral damages are recoverable in suits predicated on breach of a contract of carriage where it is proved that the carrier was guilty of fraud or bad faith, as in this case. Inattention to and lack of

care for the interests of its passengers who are entitled to its utmost consideration, particularly as to their convenience, amount to bad faith which entitles the passenger to an award of moral damages. What the law considers as bad faith which may furnish the ground for an award of moral damages would be bad faith in securing the contract and in the execution thereof, as well as in the enforcement of its terms, or any other kind of deceit.67 JAL is also liable for exemplary damages as its above-mentioned acts constitute wanton, oppressive and malevolent acts against respondent. Exemplary damages, which are awarded by way of example or correction for the public good, may be recovered in contractual obligations, as in this case, if defendant acted in wanton, fraudulent, reckless, oppressive, or malevolent manner.68 Exemplary damages are designed by our civil law to permit the courts to reshape behaviour that is socially deleterious in its consequence by creating negative incentives or deterrents against such behaviour. In requiring compliance with the standard of extraordinary diligence, a standard which is, in fact, that of the highest possible degree of diligence, from common carriers and in creating a presumption of negligence against them, the law seeks to compel them to control their employees, to tame their reckless instincts and to force them to take adequate care of human beings and their property.69 Neglect or malfeasance of the carrier's employees could give ground for an action for damages. Passengers have a right to be treated by the carrier's employees with kindness, respect, courtesy and due consideration and are entitled to be protected against personal misconduct, injurious language, indignities and abuses from such employees.70 The assessment of P500,000.00 as moral damages and P100,000.00 as exemplary damages in respondent's favor is, in


Our view, reasonable and realistic. This award is reasonably sufficient to indemnify him for the humiliation and embarrassment he suffered. This also serves as an example to discourage the repetition of similar oppressive acts. With respect to attorney's fees, they may be awarded when defendant's act or omission has compelled plaintiff to litigate with third persons or to incur expenses to protect his interest.71 The Court, in Construction Development Corporation of the Philippines v. Estrella,72 citing Traders Royal Bank Employees Union-Independent v. National Labor Relations Commission,73 elucidated thus: There are two commonly accepted concepts of attorney's fees, the so-called ordinary and extraordinary. In its ordinary concept, an attorney's fee is the reasonable compensation paid to a lawyer by his client for the legal services he has rendered to the latter. The basis of this compensation is the fact of his employment by and his agreement with the client. In its extraordinary concept, an attorney's fee is an indemnity for damages ordered by the court to be paid by the losing party in a litigation. The basis of this is any of the cases provided by law where such award can be made, such as those authorized in Article 2208, Civil Code, and is payable not to the lawyer but to the client, unless they have agreed that the award shall pertain to the lawyer as additional compensation or as part thereof.74 It was therefore erroneous for the CA to delete the award of attorney's fees on the ground that the record is devoid of evidence to show the cost of the services of respondent's counsel. The amount is actually discretionary upon the Court so long as it passes the test of reasonableness. They may be recovered as actual or compensatory damages when exemplary damages are awarded and whenever the court deems it just and equitable,75 as in this case.

Considering the factual backdrop of this case, attorney's fees in the amount of P200,000.00 is reasonably modest. The above liabilities of JAL in the total amount of P800,000.00 earn legal interest pursuant to the Court's ruling in Construction Development Corporation of the Philippines v. Estrella,76 citing Eastern Shipping Lines, Inc. v. Court of Appeals,77 to wit: Regarding the imposition of legal interest at the rate of 6% from the time of the filing of the complaint, we held in Eastern Shipping Lines, Inc. v. Court of Appeals, that when an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the contravenor can be held liable for payment of interest in the concept of actual and compensatory damages, subject to the following rules, to wit - 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 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 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.78 (Emphasis supplied and citations omitted) Accordingly, in addition to the said total amount of P800,000.00, JAL is liable to pay respondent legal interest. Pursuant to the above ruling of the Court, the legal interest is 6% and it shall be reckoned from September 21, 2000 when the RTC rendered its judgment. From the time this Decision becomes final and executory, the interest rate shall be 12% until its satisfaction. JAL is not entitled to its counterclaim for damages. The counterclaim of JAL in its Answer79 is a compulsory counterclaim for damages and attorney's fees arising from the filing of the complaint. There is no mention of any other counter claims. This compulsory counterclaim of JAL arising from the filing of the complaint may not be granted inasmuch as the complaint against it is obviously not malicious or unfounded. It was filed by respondent precisely to claim his right to damages against JAL. Well-settled is the rule that the commencement of an action does not per se make the action wrongful and subject the action to

damages, for the law could not have meant to impose a penalty on the right to litigate.80 We reiterate case law that if damages result from a party's exercise of a right, it is damnum absque injuria.81 Lawful acts give rise to no injury. Walang perhuwisyong maaring idulot ang paggamit sa sariling karapatan. During the trial, however, JAL presented a witness who testified that JAL suffered further damages. Allegedly, respondent caused the publications of his subject complaint against JAL in the newspaper for which JAL suffered damages.82 Although these additional damages allegedly suffered by JAL were not incorporated in its Answer as they arose subsequent to its filing, JAL's witness was able to testify on the same before the RTC.83 Hence, although these issues were not raised by the pleadings, they shall be treated in all respects as if they had been raised in the pleadings. As provided in Section 5, Rule 10 of the Rules of Court, "(w)hen issues not raised by the pleadings are tried with the express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings." Nevertheless, JAL's counterclaim cannot be granted. JAL is a common carrier. JAL's business is mainly with the traveling public. It invites people to avail themselves of the comforts and advantages it offers.84 Since JAL deals with the public, its bumping off of respondent without a valid reason naturally drew public attention and generated a public issue. The publications involved matters about which the public has the right to be informed because they relate to a public issue. This


public issue or concern is a legitimate topic of a public comment that may be validly published. Assuming that respondent, indeed, caused the publication of his complaint, he may not be held liable for damages for it. The constitutional guarantee of freedom of the speech and of the press includes fair commentaries on matters of public interest. This is explained by the Court in Borjal v. Court of Appeals,85 to wit: To reiterate, fair commentaries on matters of public interest are privileged and constitute a valid defense in an action for libel or slander. The doctrine of fair comment means that while in general every discreditable imputation publicly made is deemed false, because every man is presumed innocent until his guilt is judicially proved, and every false imputation is deemed malicious, nevertheless, when the discreditable imputation is directed against a public person in his public capacity, it is not necessarily actionable. In order that such discreditable imputation to a public official may be actionable, it must either be a false allegation of fact or a comment based on a false supposition. If the comment is an expression of opinion, based on established facts, then it is immaterial that the opinion happens to be mistaken, as long as it might reasonably be inferred from the facts.86 (Citations omitted and underscoring ours) Even though JAL is not a public official, the rule on privileged commentaries on matters of public interest applies to it. The privilege applies not only to public officials but extends to a great variety of subjects, and includes matters of public concern, public men, and candidates for office.87 Hence, pursuant to the Borjal case, there must be an actual malice in order that a discreditable imputation to a public person in his public capacity or to a public official may be actionable. To be considered malicious, the libelous statements must be shown to

have been written or published with the knowledge that they are false or in reckless disregard of whether they are false or not.88 Considering that the published articles involve matters of public interest and that its expressed opinion is not malicious but based on established facts, the imputations against JAL are not actionable. Therefore, JAL may not claim damages for them. WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals is AFFIRMED WITH MODIFICATION. As modified, petitioner Japan Airlines is ordered to pay respondent Jesus Simangan the following: (1) P500,000.00 as moral damages; (2) P100,000.00 as exemplary damages; and (3) P200,000.00 as attorney's fees. The total amount adjudged shall earn legal interest at the rate of 6% per annum from the date of judgment of the Regional Trial Court on September 21, 2000 until the finality of this Decision. From the time this Decision becomes final and executory, the unpaid amount, if any, shall earn legal interest at the rate of 12% per annum until its satisfaction. 101. G.R. No. 171998 October 20, 2010 ANAMER SALAZAR, Petitioner, vs. J.Y. BROTHERS MARKETING CORPORATION, Respondent. D E C I S I O N PERALTA, J.:


Before us is a petition for review seeking to annul and set aside the Decision1 dated September 29, 2005 and the Resolution2 dated March 2, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 83104. The facts, as found by the Court of Appeals, are not disputed, thus: J.Y. Brothers Marketing (J.Y. Bros., for short) is a corporation engaged in the business of selling sugar, rice and other commodities. On October 15, 1996, Anamer Salazar, a freelance sales agent, was approached by Isagani Calleja and Jess Kallos, if she knew a supplier of rice. Answering in the positive, Salazar accompanied the two to J.Y. Bros. As a consequence, Salazar with Calleja and Kallos procured from J. Y. Bros. 300 cavans of rice worth P214,000.00. As payment, Salazar negotiated and indorsed to J.Y. Bros. Prudential Bank Check No. 067481 dated October 15, 1996 issued by Nena Jaucian Timario in the amount of P214,000.00 with the assurance that the check is good as cash. On that assurance, J.Y. Bros. parted with 300 cavans of rice to Salazar. However, upon presentment, the check was dishonored due to "closed account." Informed of the dishonor of the check, Calleja, Kallos and Salazar delivered to J.Y. Bros. a replacement cross Solid Bank Check No. PA365704 dated October 29, 1996 again issued by Nena Jaucian Timario in the amount of P214,000.00 but which, just the same, bounced due to insufficient funds. When despite the demand letter dated February 27, 1997, Salazar failed to settle the amount due J.Y. Bros., the latter charged Salazar and Timario with the crime of estafa before the Regional Trial Court of Legaspi City, docketed as Criminal Case No. 7474. After the prosecution rested its case and with prior leave of court, Salazar submitted a demurrer to evidence. On November 19,

2001, the court a quo rendered an Order, the dispositive portion of which reads: WHEREFORE, premises considered, the accused Anamer D. Salazar is hereby ACQUITTED of the crime charged but is hereby held liable for the value of the 300 bags of rice. Accused Anamer D. Salazar is therefore ordered to pay J.Y. Brothers Marketing Corporation the sum of P214,000.00. Costs against the accused. SO ORDERED. Aggrieved, accused attempted a reconsideration on the civil aspect of the order and to allow her to present evidence thereon. The motion was denied. Accused went up to the Supreme Court on a petition for review on certiorari under Rule 45 of the Rules of Court. Docketed as G.R. 151931, in its Decision dated September 23, 2003, the High Court ruled: IN LIGHT OF ALL THE FOREGOING, the Petition is GRANTED. The Orders dated November 19, 2001 and January 14, 2002 are SET ASIDE and NULLIFIED. The Regional Trial Court of Legaspi City, Branch 5, is hereby DIRECTED to set Criminal Case No. 7474 for the continuation of trial for the reception of the evidence-in-chief of the petitioner on the civil aspect of the case and for the rebuttal evidence of the private complainant and the sur-rebuttal evidence of the parties if they opt to adduce any. SO ORDERED.3 The Regional Trial Court (RTC) of Legaspi City, Branch 5, then proceeded with the trial on the civil aspect of the criminal case. On April 1, 2004, the RTC rendered its Decision,4 the dispositive portion of which reads:


WHEREFORE, Premises Considered, judgment is rendered DISMISSING as against Anamer D. Salazar the civil aspect of the above-entitled case. No pronouncement as to costs. Place into the files (archive) the record of the above-entitled case as against the other accused Nena Jaucian Timario. Let an alias (bench) warrant of arrest without expiry dated issue for her apprehension, and fix the amount of the bail bond for her provisional liberty at 59,000.00 pesos. SO ORDERED.5 The RTC found that the Prudential Bank check drawn by Timario for the amount of P214,000.00 was payable to the order of respondent, and such check was a negotiable order instrument; that petitioner was not the payee appearing in the check, but respondent who had not endorsed the check, much less delivered it to petitioner. It then found that petitioner’s liability should be limited to the allegation in the amended information that "she endorsed and negotiated said check," and since she had never been the holder of the check, petitioner's signing of her name on the face of the dorsal side of the check did not produce the technical effect of an indorsement arising from negotiation. The RTC ruled that after the Prudential Bank check was dishonored, it was replaced by a Solid Bank check which, however, was also subsequently dishonored; that since the Solid Bank check was a crossed check, which meant that such check was only for deposit in payee’s account, a condition that rendered such check nonnegotiable, the substitution of a non-negotiable Solid Bank check for a negotiable Prudential Bank check was an essential change which had the effect of discharging from the obligation whoever may be the endorser of the negotiable check. The RTC concluded that the absence of negotiability rendered nugatory the obligation arising from the technical act of indorsing a check and, thus, had the effect of novation; and that the ultimate effect of

such substitution was to extinguish the obligation arising from the issuance of the Prudential Bank check. Respondent filed an appeal with the CA on the sole assignment of error that: IN BRIEF, THE LOWER COURT ERRED IN RULING THAT ACCUSED ANAMER SALAZAR BY INDORSING THE CHECK (A) DID NOT BECOME A HOLDER OF THE CHECK, (B) DID NOT PRODUCE THE TECHNICAL EFFECT OF AN INDORSEMENT ARISING FROM NEGOTIATION; AND (C) DID NOT INCUR CIVIL LIABILITY.6 After petitioner filed her appellees' brief, the case was submitted for decision. On September 29, 2005, the CA rendered its assailed Decision, the decretal portion of which reads: IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged Decision is REVERSED and SET ASIDE, and a new one entered ordering the appellee to pay the appellant the amount of P214,000.00, plus interest at the legal rate from the written demand until full payment. Costs against the appellee.7 In so ruling, the CA found that petitioner indorsed the Prudential Bank check, which was later replaced by a Solid Bank check issued by Timario, also indorsed by petitioner as payment for the 300 cavans of rice bought from respondent. The CA, applying Sections 63,8 669 and 2910 of the Negotiable Instruments Law, found that petitioner was considered an indorser of the checks paid to respondent and considered her as an accommodation indorser, who was liable on the instrument to a holder for value, notwithstanding that such holder at the time of the taking of the instrument knew her only to be an accommodation party.


Respondent filed a motion for reconsideration, which the CA denied in a Resolution dated March 2, 2006. Hence this petition, wherein petitioner raises the following assignment of errors: 1. THE COURT OF APPEALS ERRED IN IGNORING THE RAMIFICATIONS OF THE ISSUANCE OF THE SOLIDBANK CHECK IN REPLACEMENT OF THE PRUDENTIAL BANK CHECK WHICH WOULD HAVE RESULTED TO THE NOVATION OF THE OBLIGATION ARISING FROM THE ISSUANCE OF THE LATTER CHECK. 2. THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT OF LEGASPI CITY, BRANCH 5, DISMISSING AS AGAINST THE PETITIONER THE CIVIL ASPECT OF THE CRIMINAL ACTION ON THE GROUND OF NOVATION OF OBLIGATION ARISING FROM THE ISSUANCE OF THE PRUDENTIAL BANK CHECK. 3. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION WHEN IT DENIED THE MOTION FOR RECONSIDERATION OF THE PETITIONER ON THE GROUND THAT THE ISSUE RAISED THEREIN HAD ALREADY BEEN PASSED UPON AND CONSIDERED IN THE DECISION SOUGHT TO BE RECONSIDERED WHEN IN TRUTH AND IN FACT SUCH ISSUE HAD NOT BEEN RESOLVED AS YET.11 Petitioner contends that the issuance of the Solid Bank check and the acceptance thereof by the respondent, in replacement of the dishonored Prudential Bank check, amounted to novation that discharged the latter check; that respondent's acceptance of the Solid Bank check, notwithstanding its eventual dishonor by the drawee bank, had the effect of erasing whatever criminal responsibility, under Article 315 of the Revised Penal Code, the

drawer or indorser of the Prudential Bank check would have incurred in the issuance thereof in the amount of P214,000.00; and that a check is a contract which is susceptible to a novation just like any other contract. Respondent filed its Comment, echoing the findings of the CA. Petitioner filed her Reply thereto. We find no merit in this petition. Section 119 of the Negotiable Instrument Law provides, thus: SECTION 119. Instrument; how discharged. – A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right. (Emphasis ours) And, under Article 1231 of the Civil Code, obligations are extinguished: x x x x (6) By novation.


Petitioner's claim that respondent's acceptance of the Solid Bank check which replaced the dishonored Prudential bank check resulted to novation which discharged the latter check is unmeritorious. In Foundation Specialists, Inc. v. Betonval Ready Concrete, Inc. and Stronghold Insurance Co., Inc.,12 we stated the concept of novation, thus: x x x Novation is done by the substitution or change of the obligation by a subsequent one which extinguishes the first, either by changing the object or principal conditions, or by substituting the person of the debtor, or by subrogating a third person in the rights of the creditor. Novation may: [E]ither be extinctive or modificatory, much being dependent on the nature of the change and the intention of the parties. Extinctive novation is never presumed; there must be an express intention to novate; in cases where it is implied, the acts of the parties must clearly demonstrate their intent to dissolve the old obligation as the moving consideration for the emergence of the new one. Implied novation necessitates that the incompatibility between the old and new obligation be total on every point such that the old obligation is completely superceded by the new one. The test of incompatibility is whether they can stand together, each one having an independent existence; if they cannot and are irreconcilable, the subsequent obligation would also extinguish the first. An extinctive novation would thus have the twin effects of, first, extinguishing an existing obligation and, second, creating a new one in its stead. This kind of novation presupposes a confluence of four essential requisites: (1) a previous valid obligation, (2) an agreement of all parties concerned to a new contract, (3) the extinguishment of the old obligation, and (4) the birth of a valid new obligation. Novation is merely modificatory where the

change brought about by any subsequent agreement is merely incidental to the main obligation (e.g., a change in interest rates or an extension of time to pay; in this instance, the new agreement will not have the effect of extinguishing the first but would merely supplement it or supplant some but not all of its provisions.) The obligation to pay a sum of money is not novated by an instrument that expressly recognizes the old, changes only the terms of payment, adds other obligations not incompatible with the old ones or the new contract merely supplements the old one.13 In Nyco Sales Corporation v. BA Finance Corporation,14 we found untenable petitioner Nyco's claim that novation took place when the dishonored BPI check it endorsed to BA Finance Corporation was subsequently replaced by a Security Bank check,15 and said: There are only two ways which indicate the presence of novation and thereby produce the effect of extinguishing an obligation by another which substitutes the same. First, novation must be explicitly stated and declared in unequivocal terms as novation is never presumed. Secondly, the old and the new obligations must be incompatible on every point.1avvphi1 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. In the instant case, there was no express agreement that BA Finance's acceptance of the SBTC check will discharge Nyco from liability. Neither is there incompatibility because both checks were given precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As novation speaks of two distinct obligations, such is inapplicable to this case.16


In this case, respondent’s acceptance of the Solid Bank check, which replaced the dishonored Prudential Bank check, did not result to novation as there was no express agreement to establish that petitioner was already discharged from his liability to pay respondent the amount of P214,000.00 as payment for the 300 bags of rice. As we said, novation is never presumed, there must be an express intention to novate. In fact, when the Solid Bank check was delivered to respondent, the same was also indorsed by petitioner which shows petitioner’s recognition of the existing obligation to respondent to pay P214,000.00 subject of the replaced Prudential Bank check. Moreover, respondent’s acceptance of the Solid Bank check did not result to any incompatibility, since the two checks − Prudential and Solid Bank checks − were precisely for the purpose of paying the amount of P214,000.00, i.e., the credit obtained from the purchase of the 300 bags of rice from respondent. Indeed, there was no substantial change in the object or principal condition of the obligation of petitioner as the indorser of the check to pay the amount of P214,000.00. It would appear that respondent accepted the Solid Bank check to give petitioner the chance to pay her obligation. Petitioner also contends that the acceptance of the Solid Bank check, a non-negotiable check being a crossed check, which replaced the dishonored Prudential Bank check, a negotiable check, is a new obligation in lieu of the old obligation arising from the issuance of the Prudential Bank check, since there was an essential change in the circumstance of each check. Such argument deserves scant consideration. Among the different types of checks issued by a drawer is the crossed check.17 The Negotiable Instruments Law is silent with respect to crossed checks,18 although the Code of Commerce makes reference to such instruments.19 We have taken judicial

cognizance of the practice that a check with two parallel lines in the upper left hand corner means that it could only be deposited and could not be converted into cash.20 Thus, the effect of crossing a check relates to the mode of payment, meaning that the drawer had intended the check for deposit only by the rightful person, i.e., the payee named therein.21 The change in the mode of paying the obligation was not a change in any of the objects or principal condition of the contract for novation to take place.22 Considering that when the Solid Bank check, which replaced the Prudential Bank check, was presented for payment, the same was again dishonored; thus, the obligation which was secured by the Prudential Bank check was not extinguished and the Prudential Bank check was not discharged. Thus, we found no reversible error committed by the CA in holding petitioner liable as an accommodation indorser for the payment of the dishonored Prudential Bank check. WHEREFORE, the petition is DENIED. The Decision dated September 29, 2005 and the Resolution dated March 2, 2006, of the Court of Appeals in CA-G.R. CV No. 83104, are AFFIRMED. 102. G.R. No. 159097 July 5, 2010 METROPOLITAN BANK AND TRUST COMPANY, Petitioner, vs. RURAL BANK OF GERONA, INC. Respondent. D E C I S I O N BRION, J.:


Petitioner Metropolitan Bank and Trust Company (Metrobank) filed this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court to challenge the Court of Appeals (CA) decision dated December 17, 20022 and the resolution dated July 14, 20033 in CA-G.R. CV No. 46777. The CA decision set aside the July 7, 1994 decision4 of the Regional Trial Court (RTC) of Tarlac, Branch 65, in Civil Case No. 6028 (a collection case filed by Metrobank against respondent Rural Bank of Gerona, Inc. [RBG]), and ordered the remand of the case to include the Central Bank of the Philippines5 (Central Bank) as a necessary party. THE FACTUAL ANTECEDENTS RBG is a rural banking corporation organized under Philippine laws and located in Gerona, Tarlac. In the 1970s, the Central Bank and the RBG entered into an agreement providing that RBG shall facilitate the loan applications of farmers-borrowers under the Central Bank-International Bank for Reconstruction and Development’s (IBRD’s) 4th Rural Credit Project. The agreement required RBG to open a separate bank account where the IBRD loan proceeds shall be deposited. The RBG accordingly opened a special savings account with Metrobank’s Tarlac Branch. As the depository bank of RBG, Metrobank was designated to receive the credit advice released by the Central Bank representing the proceeds of the IBRD loan of the farmers-borrowers; Metrobank, in turn, credited the proceeds to RBG’s special savings account for the latter’s release to the farmers-borrowers. On September 27, 1978, the Central Bank released a credit advice in Metrobank’s favor and accordingly credited Metrobank’s demand deposit account in the amount of P178,652.00, for the account of RBG. The amount, which was credited to RBG’s special savings account represented the approved loan application of farmer-borrower Dominador de Jesus. RBG withdrew the P178,652.00 from its account.

On the same date, the Central Bank approved the loan application of another farmer-borrower, Basilio Panopio, for P189,052.00, and credited the amount to Metrobank’s demand deposit account. Metrobank, in turn, credited RBG’s special savings account. Metrobank claims that the RBG also withdrew the entire credited amount from its account. On October 3, 1978, the Central Bank approved Ponciano Lagman’s loan application for P220,000.00. As with the two other IBRD loans, the amount was credited to Metrobank’s demand deposit account, which amount Metrobank later credited in favor of RBG’s special savings account. Of the P220,000.00, RBG only withdrew P75,375.00. On November 3, 1978, more than a month after RBG had made the above withdrawals from its account with Metrobank, the Central Bank issued debit advices, reversing all the approved IBRD loans.6 The Central Bank implemented the reversal by debiting from Metrobank’s demand deposit account the amount corresponding to all three IBRD loans. Upon receipt of the November 3, 1978 debit advices, Metrobank, in turn, debited the following amounts from RBG’s special savings account: P189,052.00, P115,000.00, and P8,000.41. Metrobank, however, claimed that these amounts were insufficient to cover all the credit advices that were reversed by the Central Bank. It demanded payment from RBG which could make partial payments. As of October 17, 1979, Metrobank claimed that RBG had an outstanding balance of P334,220.00. To collect this amount, it filed a complaint for collection of sum of money against RBG before the RTC, docketed as Civil Case No. 6028.7 In its July 7, 1994 decision,8 the RTC ruled for Metrobank, finding that legal subrogation had ensued:


[Metrobank] had allowed releases of the amounts in the credit advices it credited in favor of [RBG’s special savings account] which credit advices and deposits were under its supervision. Being faulted in these acts or omissions, the Central Bank [sic] debited these amounts against [Metrobank’s] demand [deposit] reserve; thus[, Metrobank’s] demand deposit reserves diminished correspondingly, [Metrobank as of this time,] suffers prejudice in which case legal subrogation has ensued.9 It thus ordered RBG to pay Metrobank the sum of P334,200.00, plus interest at 14% per annum until the amount is fully paid. On appeal, the CA noted that this was not a case of legal subrogation under Article 1302 of the Civil Code. Nevertheless, the CA recognized that Metrobank had a right to be reimbursed of the amount it had paid and failed to recover, as it suffered loss in an agreement that involved only the Central Bank and the RBG. It clarified, however, that a determination still had to be made on who should reimburse Metrobank. Noting that no evidence exists why the Central Bank reversed the credit advices it had previously confirmed, the CA declared that the Central Bank should be impleaded as a necessary party so it could shed light on the IBRD loan reversals. Thus, the CA set aside the RTC decision, and remanded the case to the trial court for further proceedings after the Central Bank is impleaded as a necessary party.10 After the CA denied its motion for reconsideration, Metrobank filed the present petition for review on certiorari. THE PETITION FOR REVIEW ON CERTIORARI Metrobank disagrees with the CA’s ruling to implead the Central Bank as a necessary party and to remand the case to the RTC for further proceedings. It argues that the inclusion of the Central Bank as party to the case is unnecessary since RBG has already admitted its liability for the amount Metrobank failed to recover. In two letters,11 RBG’s President/Manager made proposals to

Metrobank for the repayment of the amounts involved. Even assuming that no legal subrogation took place, Metrobank claims that RBG’s letters more than sufficiently proved its liability. Metrobank additionally contends that a remand of the case would unduly delay the proceedings. The transactions involved in this case took place in 1978, and the case was commenced before the RTC more than 20 years ago. The RTC resolved the complaint for collection in 1994, while the CA decided the appeal in 2002. To implead Central Bank, as a necessary party in the case, means a return to square one and the restart of the entire proceedings. THE COURT’S RULING The petition is impressed with merit. A basic first step in resolving this case is to determine who the liable parties are on the IBRD loans that the Central Bank extended. The Terms and Conditions of the IBRD 4th Rural Credit Project12 (Project Terms and Conditions) executed by the Central Bank and the RBG shows that the farmers-borrowers to whom credits have been extended, are primarily liable for the payment of the borrowed amounts. The loans were extended through the RBG which also took care of the collection and of the remittance of the collection to the Central Bank. RBG, however, was not a mere conduit and collector.1avvphil While the farmersborrowers were the principal debtors, RBG assumed liability under the Project Terms and Conditions by solidarily binding itself with the principal debtors to fulfill the obligation.1awphi1 How RBG profited from the transaction is not clear from the records and is not part of the issues before us, but if it delays in remitting the amounts due, the Central Bank imposed a 14% per annum penalty rate on RBG until the amount is actually remitted. The Central Bank was further authorized to deduct the amount


due from RBG’s demand deposit reserve should the latter become delinquent in payment. On these points, paragraphs 5 and 6 of the Project Terms and Conditions read: 5. Collection received representing repayments of borrowers shall be immediately remitted to the Central Bank, otherwise[,] the Rural Bank/SLA shall be charged a penalty of fourteen [percent] (14%) p.a. until date of remittance. 6. In case the rural bank becomes delinquent in the payment of amortizations due[,] the Central Bank is authorized to deduct the corresponding amount from the rural bank’s demand deposit reserve13 at any time to cover any delinquency. [Emphasis supplied.] Based on these arrangements, the Central Bank’s immediate recourse, therefore should have been against the farmersborrowers and the RBG; thus, it erred when it deducted the amounts covered by the debit advices from Metrobank’s demand deposit account. Under the Project Terms and Conditions, Metrobank had no responsibility over the proceeds of the IBRD loans other than serving as a conduit for their transfer from the Central Bank to the RBG once credit advice has been issued. Thus, we agree with the CA’s conclusion that the agreement governed only the parties involved – the Central Bank and the RBG. Metrobank was simply an outsider to the agreement. Our disagreement with the appellate court is in its conclusion that no legal subrogation took place; the present case, in fact, exemplifies the circumstance contemplated under paragraph 2, of Article 1302 of the Civil Code which provides: Art. 1302. It is presumed that there is legal subrogation: (1) When a creditor pays another creditor who is preferred, even without the debtor’s knowledge;

(2) When a third person, not interested in the obligation, pays with the express or tacit approval of the debtor; (3) When, even without the knowledge of the debtor, a person interested in the fulfillment of the obligation pays, without prejudice to the effects of confusion as to the latter’s share. [Emphasis supplied.] As discussed, Metrobank was a third party to the Central BankRBG agreement, had no interest except as a conduit, and was not legally answerable for the IBRD loans. Despite this, it was Metrobank’s demand deposit account, instead of RBG’s, which the Central Bank proceeded against, on the assumption perhaps that this was the most convenient means of recovering the cancelled loans. That Metrobank’s payment was involuntarily made does not change the reality that it was Metrobank which effectively answered for RBG’s obligations. Was there express or tacit approval by RBG of the payment enforced against Metrobank? After Metrobank received the Central Bank’s debit advices in November 1978, it (Metrobank) accordingly debited the amounts it could from RBG’s special savings account without any objection from RBG.14 RBG’s President and Manager, Dr. Aquiles Abellar, even wrote Metrobank, on August 14, 1979, with proposals regarding possible means of settling the amounts debited by Central Bank from Metrobank’s demand deposit account.15 These instances are all indicative of RBG’s approval of Metrobank’s payment of the IBRD loans. That RBG’s tacit approval came after payment had been made does not completely negate the legal subrogation that had taken place. Article 1303 of the Civil Code states that subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons. As the entity against which the collection was enforced,


Metrobank was subrogated to the rights of Central Bank and has a cause of action to recover from RBG the amounts it paid to the Central Bank, plus 14% per annum interest. Under this situation, impleading the Central Bank as a party is completely unnecessary. We note that the CA erroneously believed that the Central Bank’s presence is necessary "in order x x x to shed light on the matter of reversals made by it concerning the loan applications of the end users and to have a complete determination or settlement of the claim."16 In so far as Metrobank is concerned, however, the Central Bank’s presence and the reasons for its reversals of the IBRD loans are immaterial after subrogation has taken place; Metrobank’s interest is simply to collect the amounts it paid the Central Bank. Whatever cause of action RBG may have against the Central Bank for the unexplained reversals and any undue deductions is for RBG to ventilate as a third-party claim; if it has not done so at this point, then the matter should be dealt with in a separate case that should not in any way further delay the disposition of the present case that had been pending before the courts since 1980. While we would like to fully and finally resolve this case, certain factual matters prevent us from doing so. Metrobank contends in its petition that it credited RBG’s special savings account with three amounts corresponding to the three credit advices issued by the Central Bank: the P178,652.00 for Dominador de Jesus; the P189,052.00 for Basilio Panopio; and the P220,000.00 for Ponciano Lagman. Metrobank claims that all of the three credit advices were subsequently reversed by the Central Bank, evidenced by three debit advices. The records, however, contained only the credit and debit advices for the amounts set aside for de Jesus and Lagman;17 nothing in the findings of fact by the RTC and the CA referred to the amount set aside for Panopio.

Thus, what were sufficiently proven as credited and later on debited from Metrobank’s demand deposit account were only the amounts of P178,652.00 and P189,052.00. With these amounts combined, RBG’s liability would amount to P398,652.00 – the same amount RBG acknowledged as due to Metrobank in its August 14, 1979 letter.18 Significantly, Metrobank likewise quoted this amount in its July 11, 197919 and July 26, 197920 demand letters to RBG and its Statement of Account dated December 23, 1982.21 RBG asserts that it made partial payments amounting to P145,197.40,22 but neither the RTC nor the CA made a conclusive finding as to the accuracy of this claim. Although Metrobank admitted that RBG indeed made partial payments, it never mentioned the actual amount paid; neither did it state that the P145,197.40 was part of the P312,052.41 that, it admitted, it debited from RBG’s special savings account. Deducting P312,052.41 (representing the amounts debited from RBG’s special savings account, as admitted by Metrobank) from P398,652.00 amount due to Metrobank from RBG, the difference would only be P86,599.59. We are, therefore, at a loss on how Metrobank computed the amount of P334,220.00 it claims as the balance of RBG’s loan. As this Court is not a trier of facts, we deem it proper to remand this factual issue to the RTC for determination and computation of the actual amount RBG owes to Metrobank, plus the corresponding interest and penalties. WHEREFORE, we GRANT the petition for review on certiorari, and REVERSE the decision and the resolution of the Court of Appeals, in CA-G.R. CV No. 46777, promulgated on December 17, 2002 and July 14, 2003, respectively. We AFFIRM the decision of the Regional Trial Court, Branch 65, Tarlac, promulgated on July 7, 1994, insofar as it found respondent liable to the petitioner Metropolitan Bank and Trust Company, but order the REMAND of the case to the trial court to determine the actual amounts due to


the petitioner. Costs against respondent Rural Bank of Gerona, Inc. 103. G.R. No. 206806 June 25, 2014 ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS, Petitioners, vs. DAN T. LIM, doing business under the name and style of QUALITY PAPERS & PLASTIC PRODUCTS ENTERPRISES, Respondent. D E C I S I O N LEONEN, J.: Novation must be stated in clear and unequivocal terms to extinguish an obligation. It cannot be presumed and may be implied only if the old and new contracts are incompatible on every point. Before us is a petition for review on certiorari1 assailing the Court of Appeals’ decision2 in CA-G.R. CV No. 95709, which stemmed from a complaint3 filed in the Regional Trial Court of Valenzuela City, Branch 171, for collection of sum of money. The facts are as follows: Dan T. Lim works in the business of supplying scrap papers, cartons, and other raw materials, under the name Quality Paper and Plastic Products, Enterprises, to factories engaged in the paper mill business.4 From February 2007 to March 2007, he delivered scrap papers worth 7,220,968.31 to Arco Pulp and

Paper Company, Inc. (Arco Pulp and Paper) through its Chief Executive Officer and President, Candida A. Santos.5 The parties allegedly agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the raw materials or deliver to him their finished products of equivalent value.6 Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp and Paper issued a post-dated check dated April 18, 20077 in the amount of 1,487,766.68 as partial payment, with the assurance that the check would not bounce.8 When he deposited the check on April 18, 2007, it was dishonored for being drawn against a closed account.9 On the same day, Arco Pulp and Paper and a certain Eric Sy executed a memorandum of agreement10 where Arco Pulp and Paper bound themselves to deliver their finished products to Megapack Container Corporation, owned by Eric Sy, for his account. According to the memorandum, the raw materials would be supplied by Dan T. Lim, through his company, Quality Paper and Plastic Products. The memorandum of agreement reads as follows: Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy that ARCO will deliver 600 tons Test Liner 150/175 GSM, full width 76 inches at the price of P18.50 per kg. to Megapack Container for Mr. Eric Sy’s account. Schedule of deliveries are as follows: . . . . It has been agreed further that the Local OCC materials to be used for the production of the above Test Liners will be supplied by Quality Paper & Plastic Products Ent., total of 600 Metric Tons at P6.50 per kg. (price subject to change per advance notice). Quantity of Local OCC delivery will be based on the quantity of


Test Liner delivered to Megapack Container Corp. based on the above production schedule.11 On May 5, 2007, Dan T.Lim sent a letter12 to Arco Pulp and Paper demanding payment of the amount of 7,220,968.31, but no payment was made to him.13 Dan T. Lim filed a complaint14 for collection of sum of money with prayer for attachment with the Regional Trial Court, Branch 171, Valenzuela City, on May 28, 2007. Arco Pulp and Paper filed its answer15 but failed to have its representatives attend the pretrial hearing. Hence, the trial court allowed Dan T. Lim to present his evidence ex parte.16 On September 19, 2008, the trial court rendered a judgment in favor of Arco Pulp and Paper and dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy entered into the memorandum of agreement, novation took place, which extinguished Arco Pulp and Paper’s obligation to Dan T. Lim.17 Dan T. Lim appealed18 the judgment with the Court of Appeals. According to him, novation did not take place since the memorandum of agreement between Arco Pulp and Paper and Eric Sy was an exclusive and private agreement between them. He argued that if his name was mentioned in the contract, it was only for supplying the parties their required scrap papers, where his conformity through a separate contract was indispensable.19 On January 11, 2013, the Court of Appeals20 rendered a decision21 reversing and setting aside the judgment dated September 19, 2008 and ordering Arco Pulp and Paper to jointly and severally pay Dan T. Lim the amount of P7,220,968.31 with interest at 12% per annum from the time of demand; P50,000.00 moral damages; P50,000.00 exemplary damages; and P50,000.00 attorney’s fees.22

The appellate court ruled that the facts and circumstances in this case clearly showed the existence of an alternative obligation.23 It also ruled that Dan T. Lim was entitled to damages and attorney’s fees due to the bad faith exhibited by Arco Pulp and Paper in not honoring its undertaking.24 Its motion for reconsideration25 having been denied,26 Arco Pulp and Paper and its President and Chief Executive Officer, Candida A. Santos, bring this petition for review on certiorari. On one hand, petitioners argue that the execution of the memorandum of agreement constituted a novation of the original obligation since Eric Sy became the new debtor of respondent. They also argue that there is no legal basis to hold petitioner Candida A. Santos personally liable for the transaction that petitioner corporation entered into with respondent. The Court of Appeals, they allege, also erred in awarding moral and exemplary damages and attorney’s fees to respondent who did not show proof that he was entitled to damages.27 Respondent, on the other hand, argues that the Court of Appeals was correct in ruling that there was no proper novation in this case. He argues that the Court of Appeals was correct in ordering the payment of 7,220,968.31 with damages since the debt of petitioners remains unpaid.28 He also argues that the Court of Appeals was correct in holding petitioners solidarily liable since petitioner Candida A. Santos was "the prime mover for such outstanding corporate liability."29 In their reply, petitioners reiterate that novation took place since there was nothing in the memorandum of agreement showing that the obligation was alternative. They also argue that when respondent allowed them to deliver the finished products to Eric Sy, the original obligation was novated.30


A rejoinder was submitted by respondent, but it was noted without action in view of A.M. No. 99-2-04-SC dated November 21, 2000.31 The issues to be resolved by this court are as follows: 1. Whether the obligation between the parties was extinguished by novation 2. Whether Candida A. Santos was solidarily liable with Arco Pulp and Paper Co., Inc. 3. Whether moral damages, exemplary damages, and attorney’s fees can be awarded The petition is denied. The obligation between the parties was an alternative obligation The rule on alternative obligations is governed by Article 1199 of the Civil Code, which states: Article 1199. A person alternatively bound by different prestations shall completely perform one of them. The creditor cannot be compelled to receive part of one and part of the other undertaking. "In an alternative obligation, there is more than one object, and the fulfillment of one is sufficient, determined by the choice of the debtor who generally has the right of election."32 The right of election is extinguished when the party who may exercise that option categorically and unequivocally makes his or her choice known.33

The choice of the debtor must also be communicated to the creditor who must receive notice of it since: The object of this notice is to give the creditor . . . opportunity to express his consent, or to impugn the election made by the debtor, and only after said notice shall the election take legal effect when consented by the creditor, or if impugned by the latter, when declared proper by a competent court.34 According to the factual findings of the trial court and the appellate court, the original contract between the parties was for respondent to deliver scrap papers worth P7,220,968.31 to petitioner Arco Pulp and Paper. The payment for this delivery became petitioner Arco Pulp and Paper’s obligation. By agreement, petitioner Arco Pulp and Paper, as the debtor, had the option to either (1) pay the price or(2) deliver the finished products of equivalent value to respondent.35 The appellate court, therefore, correctly identified the obligation between the parties as an alternative obligation, whereby petitioner Arco Pulp and Paper, after receiving the raw materials from respondent, would either pay him the price of the raw materials or, in the alternative, deliver to him the finished products of equivalent value. When petitioner Arco Pulp and Paper tendered a check to respondent in partial payment for the scrap papers, they exercised their option to pay the price. Respondent’s receipt of the check and his subsequent act of depositing it constituted his notice of petitioner Arco Pulp and Paper’s option to pay. This choice was also shown by the terms of the memorandum of agreement, which was executed on the same day. The memorandum declared in clear terms that the delivery of petitioner Arco Pulp and Paper’s finished products would be to a


third person, thereby extinguishing the option to deliver the finished products of equivalent value to respondent. The memorandum of agreement did not constitute a novation of the original contract The trial court erroneously ruled that the execution of the memorandum of agreement constituted a novation of the contract between the parties. When petitioner Arco Pulp and Paper opted instead to deliver the finished products to a third person, it did not novate the original obligation between the parties. The rules on novation are outlined in the Civil Code, thus: 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. (1203) 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. (1204) Article 1293. 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. Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (1205a) 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."36 Novation was extensively discussed by this court in Garcia v. Llamas:37 Novation is a mode of extinguishing an obligation by changing its objects or principal obligations, by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. Article 1293 of the Civil Code defines novation as follows: "Art. 1293. 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. Payment by the new debtor gives him rights mentioned in articles 1236 and 1237." In general, there are two modes of substituting the person of the debtor: (1) expromision and (2) delegacion. In expromision, the initiative for the change does not come from — and may even be made without the knowledge of — the debtor, since it consists of a third person’s assumption of the obligation. As such, it logically requires the consent of the third person and the creditor. In delegacion, the debtor offers, and the creditor accepts, a third person who consents to the substitution and assumes the obligation; thus, the consent of these three persons are necessary. Both modes of substitution by the debtor require the consent of the creditor.


Novation may also be extinctive or modificatory. It is extinctive when an old obligation is terminated by the creation of a new one that takes the place of the former. It is merely modificatory when the old obligation subsists to the extent that it remains compatible with the amendatory agreement. Whether extinctive or modificatory, novation is made either by changing the object or the principal conditions, referred to as objective or real novation; or by substituting the person of the debtor or subrogating a third person to the rights of the creditor, an act known as subjective or personal novation. 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.38 (Emphasis supplied) Because novation requires that it be clear and unequivocal, it is never presumed, thus: In the civil law setting, novatio is 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 tobe a jural reality, its animus must be ever present, debitum pro debito — basically

extinguishing the old obligation for the new one.39 (Emphasis supplied) There is nothing in the memorandum of agreement that states that with its execution, the obligation of petitioner Arco Pulp and Paper to respondent would be extinguished. It also does not state that Eric Sy somehow substituted petitioner Arco Pulp and Paper as respondent’s debtor. It merely shows that petitioner Arco Pulp and Paper opted to deliver the finished products to a third person instead. The consent of the creditor must also be secured for the novation to be valid: Novation must be expressly consented to. Moreover, the conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances with which to deduce a clear and unequivocal intent by the parties to novate the old agreement.40 (Emphasis supplied) In this case, respondent was not privy to the memorandum of agreement, thus, his conformity to the contract need not be secured. This is clear from the first line of the memorandum, which states: Per meeting held at ARCO, April 18, 2007, it has been mutually agreed between Mrs. Candida A. Santos and Mr. Eric Sy. . . .41 If the memorandum of agreement was intended to novate the original agreement between the parties, respondent must have first agreed to the substitution of Eric Sy as his new debtor. The memorandum of agreement must also state in clear and unequivocal terms that it has replaced the original obligation of petitioner Arco Pulp and Paper to respondent. Neither of these circumstances is present in this case. Petitioner Arco Pulp and Paper’s act of tendering partial payment to respondent also conflicts with their alleged intent to pass on


their obligation to Eric Sy. When respondent sent his letter of demand to petitioner Arco Pulp and Paper, and not to Eric Sy, it showed that the former neither acknowledged nor consented to the latter as his new debtor. These acts, when taken together, clearly show that novation did not take place. Since there was no novation, petitioner Arco Pulp and Paper’s obligation to respondent remains valid and existing. Petitioner Arco Pulp and Paper, therefore, must still pay respondent the full amount of P7,220,968.31. Petitioners are liable for damages Under Article 2220 of the Civil Code, moral damages may be awarded in case of breach of contract where the breach is due to fraud or bad faith: Art. 2220. Willfull 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) Moral damages are not awarded as a matter of right but only after the party claiming it proved that the breach was due to fraud or bad faith. As this court stated: Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive.42 Further, the following requisites must be proven for the recovery of moral damages:

An award of moral damages would require certain conditions to be met, to wit: (1)first, there must be an injury, whether physical, mental or psychological, clearly sustained by the claimant; (2) second, there must be culpable act or omission factually established; (3) third, the wrongful act or omission of the defendant is the proximate cause of the injury sustained by the claimant; and (4) fourth, the award of damages is predicated on any of the cases stated in Article 2219 of the Civil Code.43 Here, the injury suffered by respondent is the loss of P7,220,968.31 from his business. This has remained unpaid since 2007. This injury undoubtedly was caused by petitioner Arco Pulp and Paper’s act of refusing to pay its obligations. When the obligation became due and demandable, petitioner Arco Pulp and Paper not only issued an unfunded check but also entered into a contract with a third person in an effort to evade its liability. This proves the third requirement. As to the fourth requisite, Article 2219 of the Civil Code provides that moral damages may be awarded in the following instances: Article 2219. Moral damages may be recovered in the following and analogous cases: (1) A criminal offense resulting in physical injuries; (2) Quasi-delicts 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 Article 309; (10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34, and 35. Breaches of contract done in bad faith, however, are not specified within this enumeration. When a party breaches a contract, he or she goes against Article 19 of the Civil Code, which states: Article 19. Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. Persons who have the right to enter into contractual relations must exercise that right with honesty and good faith. Failure to do so results in an abuse of that right, which may become the basis of an action for damages. Article 19, however, cannot be its sole basis: Article 19 is the general rule which governs the conduct of human relations. By itself, it is not the basis of an actionable tort. Article 19 describes the degree of care required so that an actionable tort may arise when it is alleged together with Article 20 or Article 21.44 Article 20 and 21 of the Civil Code are as follows: Article 20. Every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same.

Article 21.Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. To be actionable, Article 20 requires a violation of law, while Article 21 only concerns with lawful acts that are contrary to morals, good customs, and public policy: Article 20 concerns violations of existing law as basis for an injury. It allows recovery should the act have been willful or negligent. Willful may refer to the intention to do the act and the desire to achieve the outcome which is considered by the plaintiff in tort action as injurious. Negligence may refer to a situation where the act was consciously done but without intending the result which the plaintiff considers as injurious. Article 21, on the other hand, concerns injuries that may be caused by acts which are not necessarily proscribed by law. This article requires that the act be willful, that is, that there was an intention to do the act and a desire to achieve the outcome. In cases under Article 21, the legal issues revolve around whether such outcome should be considered a legal injury on the part of the plaintiff or whether the commission of the act was done in violation of the standards of care required in Article 19.45 When parties act in bad faith and do not faithfully comply with their obligations under contract, they run the risk of violating Article 1159 of the Civil Code: Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Article 2219, therefore, is not an exhaustive list of the instances where moral damages may be recovered since it only specifies, among others, Article 21. When a party reneges on his or her


obligations arising from contracts in bad faith, the act is not only contrary to morals, good customs, and public policy; it is also a violation of Article 1159. Breaches of contract become the basis of moral damages, not only under Article 2220, but also under Articles 19 and 20 in relation to Article 1159. Moral damages, however, are not recoverable on the mere breach of the contract. Article 2220 requires that the breach be done fraudulently or in bad faith. In Adriano v. Lasala:46 To recover moral damages in an action for breach of contract, the breach must be palpably wanton, reckless and malicious, in bad faith, oppressive, or abusive. Hence, the person claiming bad faith must prove its existence by clear and convincing evidence for the law always presumes good faith. Bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud. It is, therefore, a question of intention, which can be inferred from one’s conduct and/or contemporaneous statements.47 (Emphasis supplied) Since a finding of bad faith is generally premised on the intent of the doer, it requires an examination of the circumstances in each case. When petitioner Arco Pulp and Paper issued a check in partial payment of its obligation to respondent, it was presumably with the knowledge that it was being drawn against a closed account. Worse, it attempted to shift their obligations to a third person without the consent of respondent. Petitioner Arco Pulp and Paper’s actions clearly show "a dishonest purpose or some moral obliquity and conscious doing

of a wrong, a breach of known duty through some motive or interest or ill will that partakes of the nature of fraud."48 Moral damages may, therefore, be awarded. Exemplary damages may also be awarded. Under the Civil Code, exemplary damages are due in the following circumstances: Article 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 2233. Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they should be adjudicated. Article 2234. While the amount of the exemplary damages need not be proven, 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 should be awarded. In Tankeh v. Development Bank of the Philippines,49 we stated that: The purpose of exemplary damages is to serve as a deterrent to future and subsequent parties from the commission of a similar offense. The case of People v. Ranteciting People v. Dalisay held that: Also known as ‘punitive’ or ‘vindictive’ damages, exemplary or corrective damages are intended to serve as a deterrent to serious wrong doings, and as a vindication of undue sufferings and wanton invasion of the rights of an injured or a punishment for those guilty of outrageous conduct. These terms are generally, but not always, used interchangeably. In common law, there is preference in the use of exemplary damages when the award is to


account for injury to feelings and for the sense of indignity and humiliation suffered by a person as a result of an injury that has been maliciously and wantonly inflicted, the theory being that there should be compensation for the hurt caused by the highly reprehensible conduct of the defendant—associated with such circumstances as willfulness, wantonness, malice, gross negligence or recklessness, oppression, insult or fraud or gross fraud—that intensifies the injury. The terms punitive or vindictive damages are often used to refer to those species of damages that may be awarded against a person to punish him for his outrageous conduct. In either case, these damages are intended in good measure to deter the wrongdoer and others like him from similar conduct in the future.50 (Emphasis supplied; citations omitted) The requisites for the award of exemplary damages are as follows: (1) they may be imposed by way of example in addition to compensatory damages, and only after the claimant's right to them has been established; (2) that they cannot be recovered as a matter of right, their determination depending upon the amount of compensatory damages that may be awarded to the claimant; and (3) the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or malevolent manner.51 Business owners must always be forthright in their dealings. They cannot be allowed to renege on their obligations, considering that these obligations were freely entered into by them. Exemplary damages may also be awarded in this case to serve as a deterrent to those who use fraudulent means to evade their liabilities.

Since the award of exemplary damages is proper, attorney’s fees and cost of the suit may also be recovered. Article 2208 of the Civil Code states: Article 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except: (1) When exemplary damages are awarded[.] Petitioner Candida A. Santos is solidarily liable with petitioner corporation Petitioners argue that the finding of solidary liability was erroneous since no evidence was adduced to prove that the transaction was also a personal undertaking of petitioner Santos. We disagree. In Heirs of Fe Tan Uy v. International Exchange Bank,52 we stated that: Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation. Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues. . . . .


Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith. While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the lower court are not supported by the evidence on record or are based on a misapprehension of facts.53 (Emphasis supplied) As a general rule, directors, officers, or employees of a corporation cannot be held personally liable for obligations incurred by the corporation. However, this veil of corporate fiction may be pierced if complainant is able to prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and (2) such negligence or bad faith was clearly and convincingly proven. Here, petitioner Santos entered into a contract with respondent in her capacity as the President and Chief Executive Officer of Arco Pulp and Paper. She also issued the check in partial payment of petitioner corporation’s obligations to respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face of the check bearing the account name, "Arco Pulp & Paper, Co., Inc."54 Any obligation arising from these acts would not, ordinarily, be petitioner Santos’ personal undertaking for which she would be solidarily liable with petitioner Arco Pulp and Paper.

We find, however, that the corporate veil must be pierced. In Livesey v. Binswanger Philippines:55 Piercing the veil of corporate fiction is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purposes. Under the doctrine, the corporate existence may be disregarded where the entity is formed or used for nonlegitimate purposes, such as to evade a just and due obligation, or to justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable considerations, other unjustifiable aims or intentions, in which case, the fiction will be disregarded and the individuals composing it and the two corporations will be treated as identical.56 (Emphasis supplied) According to the Court of Appeals, petitioner Santos was solidarily liable with petitioner Arco Pulp and Paper, stating that: In the present case, We find bad faith on the part of the [petitioners] when they unjustifiably refused to honor their undertaking in favor of the [respondent]. After the check in the amount of 1,487,766.68 issued by [petitioner] Santos was dishonored for being drawn against a closed account, [petitioner] corporation denied any privity with [respondent]. These acts prompted the [respondent] to avail of the remedies provided by law in order to protect his rights.57 We agree with the Court of Appeals. Petitioner Santos cannot be allowed to hide behind the corporate veil.1âwphi1 When petitioner Arco Pulp and Paper’s obligation to respondent became due and demandable, she not only issued an unfunded check but also contracted with a third party in an effort to shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s obligations to respondent. These acts clearly amount to bad faith. In this


instance, the corporate veil may be pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper. The rate of interest due on the obligation must be reduced in view of Nacar v. Gallery Frames58 In view, however, of the promulgation by this court of the decision dated August 13, 2013 in Nacar v. Gallery Frames,59 the rate of interest due on the obligation must be modified from 12% per annum to 6% per annum from the time of demand. Nacar effectively amended the guidelines stated in Eastern Shipping v. Court of Appeals,60 and we have laid down the following guidelines with regard to the rate of legal interest: To recapitulate and for future guidance, the guidelines laid down in the case of Eastern Shipping Linesare accordingly modified to embody BSP-MB Circular No. 799, as follows: I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, 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 annum 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. 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 annum from 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.61 (Emphasis supplied; citations omitted.) According to these guidelines, the interest due on the obligation of P7,220,968.31 should now be at 6% per annum, computed


from May 5, 2007, when respondent sent his letter of demand to petitioners. This interest shall continue to be due from the finality of this decision until its full satisfaction. WHEREFORE, the petition is DENIED in part. The decision in CAG.R. CV No. 95709 is AFFIRMED. Petitioners Arco Pulp & Paper Co., Inc. and Candida A. Santos are hereby ordered solidarily to pay respondent Dan T. Lim the amount of P7,220,968.31 with interest of 6% per annum at the time of demand until finality of judgment and its full satisfaction, with moral damages in the amount of P50,000.00, exemplary damages in the amount of P50,000.00, and attorney's fees in the amount of P50,000.00. 104. G.R. No. L-29981 April 30, 1971 EUSEBIO S. MILLAR, petitioner, vs. THE HON. COURT OF APPEALS and ANTONIO P. GABRIEL, respondents. CASTRO, J.: On February 11, 1956, Eusebio S. Millar (hereinafter referred to as the petitioner) obtained a favorable judgment from the Court of First Instance of Manila, in civil case 27116, condemning Antonio P. Gabriel (hereinafter referred to as the respondent) to pay him the sum of P1,746.98 with interest at 12% per annum from the date of the filing of the complaint, the sum of P400 as attorney's fees, and the costs of suit. From the said judgment, the respondent appealed to the Court of Appeals which, however, dismissed the appeal on January 11, 1957.

Subsequently, on February 15, 1957, after remand by the Court of Appeals of the case, the petitioner moved ex parte in the court of origin for the issuance of the corresponding writ of execution to enforce the judgment. Acting upon the motion, the lower court issued the writ of execution applied for, on the basis of which the sheriff of Manila seized the respondent's Willy's Ford jeep (with motor no. B-192297 and plate no. 7225, Manila, 1956). The respondent, however, pleaded with the petitioner to release the jeep under an arrangement whereby the respondent, to secure the payment of the judgement debt, agreed to mortgage the vehicle in favor of the petitioner. The petitioner agreed to the arrangement; thus, the parties, on February 22, 1957, executed a chattel mortgage on the jeep, stipulating, inter alia, that This mortgage is given as security for the payment to the said EUSEBIO S. MILLAR, mortgagee, of the judgment and other incidental expenses in Civil Case No. 27116 of the Court of First Instance of Manila against Antonio P. Gabriel, MORTGAGOR, in the amount of ONE THOUSAND SEVEN HUNDRED (P1,700.00) PESOS, Philippine currency, which MORTGAGOR agrees to pay as follows: March 31, 1957 — EIGHT HUNDRED FIFTY (P850) PESOS; April 30, 1957 — EIGHT HUNDRED FIFTY (P850.00) PESOS. Upon failure of the respondent to pay the first installment due on March 31, 1957, the petitioner obtained an alias writ of execution. This writ which the sheriff served on the respondent only on May 30, 1957 — after the lapse of the entire period stipulated in the chattel mortgage for the respondent to comply with his obligation — was returned unsatisfied.


So on July 17, 1957 and on various dates thereafter, the lower court, at the instance of the petitioner, issued several alias writs, which writs the sheriff also returned unsatisfied. On September 20, 1961, the petitioner obtained a fifth alias writ of execution. Pursuant to this last writ, the sheriff levied on certain personal properties belonging to the respondent, and then scheduled them for execution sale. However, on November 10, 1961, the respondent filed an urgent motion for the suspension of the execution sale on the ground of payment of the judgment obligation. The lower court, on November 11, 1961, ordered the suspension of the execution sole to afford the respondent the opportunity to prove his allegation of payment of the judgment debt, and set the matter for hearing on November 25, 1961. After hearing, the lower court, on January 25, 1962, issued an order the dispositive portion of which reads: IN VIEW WHEREOF, execution reiterated for P1,700.00 plus costs of execution. The lower court ruled that novation had taken place, and that the parties had executed the chattel mortgage only "to secure or get better security for the judgment. The respondent duly appealed the aforesaid order to the Court of Appeals, which set aside the order of execution in a decision rendered on October 17, 1968, holding that the subsequent agreement of the parties impliedly novated the judgment obligation in civil case 27116. The appellate court stated that the following circumstances sufficiently demonstrate the incompatibility between the judgment debt and the obligation embodied in the deed of chattel mortgage, warranting a conclusion of implied novation:

1. Whereas the judgment orders the respondent to pay the petitioner the sum of P1,746.98 with interest at 12% per annum from the filing of the complaint, plus the amount of P400 and the costs of suit, the deed of chattel mortgage limits the principal obligation of the respondent to P1,700; 2. Whereas the judgment mentions no specific mode of payment of the amount due to the petitioner, the deed of chattel mortgage stipulates payment of the sum of P1,700 in two equal installments; 3. Whereas the judgment makes no mention of damages, the deed of chattel mortgage obligates the respondent to pay liquidated damages in the amount of P300 in case of default on his part; and 4. Whereas the judgment debt was unsecured, the chattel mortgage, which may be foreclosed extrajudicially in case of default, secured the obligation. On November 26, 1968, the petitioner moved for reconsideration of the appellate court's decision, which motion the Court of Appeals denied in its resolution of December 7, 1968. Hence, the present petition for certiorari to review the decision of the Court of Appeals, seeking reversal of the appellate court's decision and affirmance of the order of the lower court. Resolution of the controversy posed by the petition at bar hinges entirely on a determination of whether or not the subsequent agreement of the parties as embodied in the deed of chattel mortgage impliedly novated the judgment obligation in civil case 27116. The Court of Appeals, in arriving at the conclusion that implied novation has taken place, took into account the four circumstances heretofore already adverted to as indicative of the incompatibility between the judgment debt and the principal obligation under the deed of chattel mortgage.


1. Anent the first circumstance, the petitioner argues that this does not constitute a circumstance in implying novation of the judgment debt, stating that in the interim — from the time of the rendition of the judgment in civil case 27116 to the time of the execution of the deed of chattel mortgage — the respondent made partial payments, necessarily resulting in the lesser sum stated in the deed of chattel mortgage. He adds that on record appears the admission by both parties of the partial payments made before the execution of the deed of chattel mortgage. The erroneous conclusion arrived at by the Court of Appeals, the petitioner argues, creates the wrong impression that the execution of the deed of chattel mortgage provided the consideration or the reason for the reduced judgment indebtedness. Where the new obligation merely reiterates or ratifies the old obligation, although the former effects but minor alterations or slight modifications with respect to the cause or object or conditions of he latter, such changes do not effectuate any substantial incompatibility between the two obligations Only those essential and principal changes introduced by the new obligation producing an alteration or modification of the essence of the old obligation result in implied novation. In the case at bar, the mere reduction of the amount due in no sense constitutes a sufficient indictum of incompatibility, especially in the light of (a) the explanation by the petitioner that the reduced indebtedness was the result of the partial payments made by the respondent before the execution of the chattel mortgage agreement and (b) the latter's admissions bearing thereon. At best, the deed of chattel mortgage simply specified exactly how much the respondent still owed the petitioner by virtue of the judgment in civil case 27116. The parties apparently in their desire to avoid any future confusion as to the amounts already paid and as to the sum still due, decoded to state with specificity

in the deed of chattel mortgage only the balance of the judgment debt properly collectible from the respondent. All told, therefore, the first circumstance fails to satisfy the test of substantial and complete incompatibility between the judgment debt an the pecuniary liability of the respondent under the chattel mortgage agreement. 2. The petitioner also alleges that the third circumstance, considered by the Court of Appeals as indicative of incompatibility, is directly contrary to the admissions of the respondent and is without any factual basis. The appellate court pointed out that while the judgment made no mention of payment of damages, the deed of chattel mortgage stipulated the payment of liquidated damages in the amount of P300 in case of default on the part of the respondent. However, the petitioner contends that the respondent himself in his brief filed with the Court of Appeals admitted his obligation, under the deed of chattel mortgage, to pay the amount of P300 by way of attorney's fees and not as liquidated damages. Similarly, the judgment makes mention of the payment of the sum of P400 as attorney's fees and omits any reference to liquidated damages. The discrepancy between the amount of P400 and tile sum of P300 fixed as attorney's fees in the judgment and the deed of chattel mortgage, respectively, is explained by the petitioner, thus: the partial payments made by the respondent before the execution of the chattel mortgage agreement were applied in satisfaction of part of the judgment debt and of part of the attorney's fee fixed in the judgment, thereby reducing both amounts. At all events, in the absence of clear and convincing proof showing that the parties, in stipulating the payment of P300 as attorney's fees in the deed of chattel mortgage, intended the same as an obligation for the payment of liquidated damages in


case of default on the part of the respondent, we find it difficult to agree with the conclusion reached by the Court of Appeals. 3. As to the second and fourth circumstances relied upon by the Court of Appeals in holding that the montage obligation superseded, through implied novation, the judgment debt, the petitioner points out that the appellate court considered said circumstances in a way not in accordance with law or accepted jurisprudence. The appellate court stated that while the judgment specified no mode for the payment of the judgment debt, the deed of chattel mortgage provided for the payment of the amount fixed therein in two equal installments. On this point, we see no substantial incompatibility between the mortgage obligation and the judgment liability of the respondent sufficient to justify a conclusion of implied novation. The stipulation for the payment of the obligation under the terms of the deed of chattel mortgage serves only to provide an express and specific method for its extinguishment — payment in two equal installments. The chattel mortgage simply gave the respondent a method and more time to enable him to fully satisfy the judgment indebtedness. 1 The chattel mortgage agreement in no manner introduced any substantial modification or alteration of the judgment. Instead of extinguishing the obligation of the respondent arising from the judgment, the deed of chattel mortgage expressly ratified and confirmed the existence of the same, amplifying only the mode and period for compliance by the respondent. The Court of Appeals also considered the terms of the deed of chattel mortgage incompatible with the judgment because the chattel mortgage secured the obligation under the deed, whereas the obligation under the judgment was unsecured. The petitioner argues that the deed of chattel agreement clearly shows that the parties agreed upon the chattel mortgage solely to secure, not the payment of the reduced amount as fixed in the aforesaid deed,

but the payment of the judgment obligation and other incidental expenses in civil case 27116. The unmistakable terms of the deed of chattel mortgage reveal that the parties constituted the chattel mortgage purposely to secure the satisfaction of the then existing liability of the respondent arising from the judgment against him in civil case 27116. As a security for the payment of the judgment obligation, the chattel mortgage agreement effectuated no substantial alteration in the liability of the respondent. The defense of implied novation requires clear and convincing proof of complete incompatibility between the two obligations. 2 The law requires no specific form for an effective novation by implication. The test is whether the two obligations can stand together. If they cannot, incompatibility arises, and the second obligation novates the first. If they can stand together, no incompatibility results and novation does not take place. We do not see any substantial incompatibility between the two obligations as to warrant a finding of an implied novation. Nor do we find satisfactory proof showing that the parties, by explicit terms, intended the full discharge of the respondent's liability under the judgment by the obligation assumed under the terms of the deed of chattel mortgage so as to justify a finding of express novation. ACCORDINGLY, the decision of the Court of Appeals of October 17, 1968 is set aside, and the order of the Court of First Instance of Manila of January 25, 1962 is affirmed, at respondent Antonio Gabriel's cost. 105. G.R. No. L-26115 November 29, 1971


CARLOS SANDICO, SR., and TEOPISTO P. TIMBOL, petitioners, vs. THE HONORABLE MINERVA R. INOCENCIO PIGUING, Judge of the Court of First Instance of Pampanga, and DESIDERIO PARAS, respondents.

CASTRO, J.: On April 16, 1960 the spouses Carlos Sandico and Enrica Timbol, and Teopisto P. Timbol, administrator of the estate of the late Sixta Paras, obtained a judgment in their favor against Desiderio Paras (hereinafter referred to as the respondent) in civil case 1554, an action for easement and damages in the Court of First Instance of Pampanga. On appeal, the Court of Appeals affirmed and modified the judgment, as follows: IN VIEW WHEREOF, judgment affirmed and modified; as a consequence, defendant is condemned to recognize the easement which is held binding as to him; he is sentenced to pay plaintiffs the sums of P5,000.00 actual, and P500.00 exemplary damages, and P500.00 attorney's fees; plus costs in both instances. 1 Thereafter, upon remand to the court a quo of civil case 1554, the Sandicos and Timbol (hereinafter referred to as the petitioners) moved for the issuance of a writ of execution to enforce the appellate court's judgment which had acquired finality. Acting upon the motion, the court a quo issued a writ of execution on July 22, 1964. This writ the provincial sheriff served upon the respondent on August 22, 1964. Meanwhile the petitioners and the respondent reached a settlement, finally agreeing to the reduction of the money judgment from P6,000 to P4,000. Thus, the respondent, on August 5, 1964, paid the petitioners the sum of P3,000; he made

another payment in the amount of P1,000 as evidenced by a receipt issued by the petitioners' counsel. This receipt is hereunder reproduced in full: P1,000.00 RECEIVED from Mr. Desiderio Paras the sum of ONE THOUSAND PESOS (P1,000.00), Philippine Currency, in full satisfaction of the money judgment rendered against him in Civil Case No. 1554 of the Court of First Instance of Pampanga, it being understood that the portion of the final judgment rendered in the said case ordering him to reconstruct the irrigation canal in question shall be complied with by him immediately. City of Angeles, August 31, 1964. (SGD.) DALMACIO P. TIMBOL Counsel for Plaintiffs in Civil Case No. 1554 I AGREE: (SGD.) DESIDERIO PARAS Subsequently, the petitioners sent the respondent a letter dated November 5, 1964 demanding compliance by the latter with the portion of the judgment in civil case 1554 relative to the reconstruction and reopening of the irrigation canal. On February 12, 1965 the provincial sheriff returned the writ of execution issued on July 22, 1964 unsatisfied. Upon failure and refusal of the respondent to rebuild and reopen the irrigation canal, the petitioners, on March 3, 1965, filed with the court a quo, with Judge Minerva R. Inocencio Piguing (hereinafter referred to as the respondent judge) presiding, a motion to declare the said private respondent in contempt of


court, pursuant to provisions of section 9, Rule 39 of the Rules of Court. Opposing the motion, the respondent alleged recognition by him of the existence of the easement and compliance with the appellate court's judgment, stating that he had dug a canal in its former place, measuring about one and-a-half feet deep, for the petitioners' use. On September 8, 1965 the respondent judge issued an order denying the petitioners' motion to declare the respondents in contempt of court, ruling that. ... it appears from the dispositive part of the decision that the defendant was only ordered to recognize the easement which is held binding as to him and to pay the plaintiffs the sums P5,000.00 of actual, and P500.00 exemplary damages. Apparently, it is clear from the dispositive part of the decision that there is nothing to show that the defendant was ordered to reconstruct the canal. On September 16, 1965 the petitioners moved for issuance of an alias writ of execution to enforce the judgement of the Court of Appeals. This motion the respondent judge granted in an order dated September 25, 1965. On November 3, 1965. the respondent moved to set aside the said alias writ, alleging full satisfaction of the judgment per agreement of the parties when the petitioner received the sum of P4,000 in August, 1964 as evidenced by the receipt dated August 31, 1964. The respondent judge then issued an order dated November 11, 1965 directing the provincial sheriff to suspend the execution of the alias writ until further orders. On February 3, 1966 the respondent judge issued an order calling, and directing the quashal of the alias writ of execution. The respondent judge stated in her order that the agreement of the parties "novated"

the money judgment provided for in the decision of the Court of Appeals, ruling that the said decision. ... which is sought now to be executed by this Court, has already been fully satisfied as to the money judgment and nothing more is left to be executed from the aforesaid Decision as it does not allege (aside from money judgment) any other condition except for the defendants to recognize the easement therein. With their subsequent motion for reconsideration denied by the respondent judge, the petitioners, on May 27, 1966, filed with this Court the present petition 2 for certiorari seeking to set aside (1) the order of the respondent judge dated September 8, 1965 denying their motion to declare the respondent in contempt of court in civil case 1554, and (2) the orders of the respondent judge dated February 3, 1966 and March 30, 1966 granting the respondent's motion to set aside the alias writ of execution issued in the same civil case, on the ground that the respondent judge acted in excess of jurisdiction or with grave abuse of discretion. Here tendered for resolution are the following issues: (1) Whether the respondent judge correctly constructed the judgment of the Court of Appeals as not requiring the respondent to reconstruct and reopen the irrigation canal, and consequently, whether the said respondent judge acted in excess of jurisdiction or with grave abuse of discretion in denying the petitioners' motion to declare the respondent in contempt of court for failing and refusing to comply with the appellate court's judgment; and (2) Whether the payment by the respondent to the petioners of the amount of P4,000 extinguished the money judgment, and, consequently, whether the respondent judge acted in excess of jurisdiction or with grave abuse of discretion in ordering the recall and quashal of the alias writ of execution.


1. Anent the first issue, the petitioners argue that although the dispositive portion of the appellate court's judgment omitted any directive to the respondent to reconstruct and reopen the irrigation canal, the Court of Appeals' order requiring recognition of the easement on the part of the said respondent suffices to make him aware of his obligation under the judgment. The only way of recognizing the easement, the petitioners continue, consists in performing positive act — the reconstruction and restoration of the irrigation canal to its former condition. Moreover, to understand the full intendment of the dispositive portion of the judgment directing the respondent "to recognize the easement" necessitates reference to a statement in the decision of the Court of Appeals that reads: ... the result of this must be to justify the conclusion prayed for by the plaintiffs that the easement should be held to be existing and binding upon defendant and he should be held to have acted without authority in closing the canal which should be ordered reopened. On the other hand, the respondent alleges that there is no ambiguity in the phraseology of the portion of the Court of Appeals' judgment condemning to recognize the easement. Said decision requires him only to "recognize" the easement and in compliance therewith, he gives the petitioners permission to reconstruct and reopen the irrigation canal themselves. Neither the decision a quo nor that of the appellate court orders him to reconstruct and reopen the irrigation canal. The agreement reached by the petitioners and the respondent in August, 1964 relative to the judgment of the appellate court which had acquired finality and the interpretation by the parties themselves of the said judgment, specifically its dispositive portion, as embodied in the receipt dated August 31, 1964, constitute the considerations of prime importance in the

resolution of the first question. No doubt exists that the parties entered into the agreement, fully aware of the judgment of the appellate court ordering the respondent to comply with two obligations, to wit, payment of a sum of money and recognition of the easement. The receipt evidencing the agreement, aside from providing for the reduction of the money judgment, provides for the reconstruction of the irrigation canal. Such constitutes the interpretation accorded by the parties to that part of the dispositive portion of the appellate court's judgment condemning the respondent to recognize the easement. This stipulation — one wherein the respondent clearly recognizes his obligation "to reconstruct the irrigation canal" — embodied in precise and clear terms in the receipt binds the said respondent, a signatory to the said receipt, and requires from him full compliance. We thus fail to perceive any reason to sustain the contention of the respondent that he has no obligation at all to reconstruct and reopen the irrigation canal, a position utterly inconsistent with his agreement with the petitioners as embodied in the receipt dated August 31, 1964. The record, however, shows that the respondent exerted efforts to reconstruct the portion of the irrigation canal running through his land by digging a canal about one meter wide and about oneand-a-half feet deep. This partial reconstruction of the irrigation canal the petitioners admit. Still, the petitioners demand the reconstruction of the irrigation canal to its former condition — measuring four meters wide, five feet deep, and one-hundred and twenty-eight meters long — contending that the rebuilt canal serves no useful purpose because the water passing through it overflows, which overflow ultimately causes the destruction of the canal itself. Nonetheless, we believe that need to give full force and effect to the existence of the easement demands that the respondent reconstruct the irrigation canal to its condition before he closed and destroyed the same. After all, the respondent himself in his answer dated June 16, 1959 filed with the court a quo admitted the original dimensions of the irrigation


canal as four meters wide and one-hundred and twenty-eight meters long. The respondent's attempt, to rebuild the irrigation canal, partially and not in conformity with the dimensions of the original one, does not constitute satisfactory and substantial compliance with his obligation to recognize the easement per the appellate court's judgment and to reconstruct the irrigation canal pursuant to his agreement with the petitioners in August, 1964. Due to the respondent's failure and refusal to reconstruct and reopen the irrigation canal, the petitioners sought to declare him in contempt of court, under the provisions of section 9 of Rule 39 of the Rules of Court. The respondent judge, however, believing that the appellate court's judgement required the respondent merely to recognize the equipment without doing any positive act of reconstruction and reopening of the irrigation canal, dismissed the petition motion to declare the respondent in contempt of court. In doing so, the petitioners allege, the respondent judge acted in excess of jurisdiction or with grave abuse of discretion. The petitioners thus ask us now to annul the order of the respondent judge denying their motion to declared the respondent in contempt of court or, by way of native, to declare the respondent in contempt of court and to punish him accordingly. The petitioners predicate their stand mainly upon the provisions of section 9 of Rule 39 of the Rules of Court. Said section reads: Sec. 9. Writ of execution of special judgment. — When judgment requires the performance of any other act than the payment of money, or the sale or delivery of real or personal property, a certified copy of the judgment shall be attached the writ of execution and shall be served by the officer upon the party against whom the same is rendered, or upon any of person required thereby, or by law, to obey the same, and party or person may be punished forcontempt if he disobeys such judgment.

Section 9 applies to specific acts other than those cover by section 10 of the same rule. Section 10 pertinently provides: See. 10. Judgment for an acts; vesting title. — If a judgment directs a party to execute a conveyance of land, or to deliver deeds or other documents, or to perform any other specific act, and the party fails to comply within the time specified, the court may direct the act to be done at the cost of disobedient party by some other person appointed by the court and the act when so done shall have like effect as if done by the party. ... Section 9 refers to a judgment directing the performance of a specific act which the said judgment requires the party or person to personally do because of his personal qualifications and circumstances. Section 10 refers to a judgment requiring the execution of a conveyance of land or the delivery of deeds or other documents or the performance of any other specific act susceptible of execution by some other person or in some other way provided by law with the same effect. Under section 10, the court may designate some other person to do the act ordained to be done by the judgment, the reasonable cost of its performance chargeable to the disobedient party. The act, when so done, shall have the same effect as if performed by the party himself. In such an instance, the disobedient party incurs no liability for contempt. 3 Under section 9, the court may resort to proceedings for contempt in order to enforce obedience to a judgment which requires the personal performance of a specific act other than the payment of money, or the sale or delivery of real or personal property. An examination of the case at bar makes it apparent that the same falls within the contemplation of section 10, and not of section 9 as the petitioners contend. The reconstruction and reopening of the irrigation canal may be done by same other person designated by the court, at the cost of the respondent. In


fact, the respondent in his attempt to rebuild the irrigation canal, contracted the services of one Gerardo Salenga. Accordingly, in conformity with the appellate court's judgment as further mutually interpreted by the parties themselves, the court a quo, because of the failure and refusal of the respondent to restore the irrigation canal to its former condition and to reopen it, should have appointed some other person to do the reconstruction, charging the expenses therefor to the said respondent. 2. As to the second question, which relates to the money judgment, the petitioners vehemently insist on their right to recover an additional sum of P2,000 — the alleged unsatisfied portion of the appellate court's judgement requiring the respondent to pay to the petitioners the total amount of P6,000 corresponding to damages and attorney's fees. The petitioners allege that their agreement with the respondent in August, 1964, reducing the amount due from the respondent, constitutes neither waiver of their claim for the sum of P2,000 nor novation of the money judgment provided for in the Court of Appeals' decision. They state that their agreement with the respondent reduced the amount of the money judgment, subject to the condition that the latter reconstruct and reopen the irrigation canal immediately. This, they argue, does not constitute alteration of the appellate court's judgment. For his part, the respondent contends that his payment of the sum of P4,000, received and acknowledged by the petitioners through their counsel as "in full satisfaction of the money judgment" in civil case 1554, extinguished his pecuniary liability. Thus, when the petitioners, notwithstanding the admitted payment of the judgment debt in the lesser amount of P4,000, still sought to enforce the money judgment for the full amount of P6,000 through an alias writ of execution, the court a quo, in recalling and quashing the alias writ previously issued, acted correctly andwithin its authority.

Parenthetically, the petitioner's application for the issuance of the alias writ of execution dated September 16, 1965, the alias writ of execution dated September 29, 1965, and the levy on execution and the notice of sheriff's sale, both dated October 21, 1965, all refer to the amount of P6,000 and make no mention whatsoever of the true status of the judgement debt. On this point the respondent charges the petitioners with concealing from the court a quo the true amount, if any, still due from him. And in effect, he alleges, the petitioners apparently seek the payment of the judgment debt twice. The petitioners, however, emphasize that they demand payment of only the balance of P2,000. To rebut the respondents charge of concealment, they state that they informed the court a quo that the respondent already paid them the sum of P4,000. Furthermore, they allege that another lawyer, a former associate of their counsel, prepared their motion for the issuance of the alias writ of execution, received the alias writ and delivered the same to the sheriff. Impliedly, therefore, they attribute the inconsistency regarding the amount still allegedly due from the respondent to the former associate of their counsel. Reverting to the second question, the appellate court's judgment obliges the respondent to do two things: (1) to recognize the easement, and (2) to pay the petitioners the sums of P5,000 actual and P500 exemplary damages and P500 attorney's fees, or a total of P6,000. The full satisfaction of the said judgment requires specific performance and payment of a sum of money by the respondent. We adjudge the respondent's judgment debt as having been fully satisfied. We see no valid objection to the petitioners and the respondent entering into an agreement regarding the monetary obligation of the latter under the judgment of the Court of Appeals, reducing the same from P6,000 to P4,000. The payment by the respondent of the lesser amount of P4,000, accepted by the petitioners without any protest or objection and


acknowledged by them as "in full satisfaction of the money judgment" in civil case 1554, completely extinguished the judgment debt and released the respondent from his pecuniary liability. Both the petitioners and the respondent take exception to the respondent judge's ruling that their agreement of August, 1964 to reduce the judgment debt, as evidenced by the receipt hereinbefore adverted to, "novated" the money judgment rendered by the appellate court. Novation results in two stipulations — one to extinguish an existing obligation, the other to substitute a new one in its place. 4 Fundamental it is that novation effects a substitution or modification of an obligation by another or an extinguishment of one obligation in the creation of another. In the case at hand, we fail to see what new or modified obligation arose out of the payment by the respondent of the reduced amount of P4,000 and substitute the monetary liability for P6,000 of the said respondent under the appellate court's judgment. Additionally, to sustain novation necessitates that the same be so declared in unequivocal terms — clearly and unmistakably shown by the express agreement of the parties or by acts of equivalent import — or that there is complete and substantial incompatibility between the two obligations. 5 Neither do we appreciate the petitioners' stand that, according to their agreement with the respondent, their assent to the reduction of the money judgment was subject to the condition that the respondent reconstruct and reopen the portion of the irrigation canal passing through his land immediately. The petitioners even state that the receipt of August 31, 1964 embodies this condition. The terms of the receipt dated August 31, 1964, we find clear and definite. The receipt neither expressly nor impliedly declares that

the reduction of the money judgment was conditioned on the respondent's reconstruction and reopening of the irrigation canal. The receipt merely embodies the recognition by the respondent of his obligation to reconstruct the irrigation canal. And the receipt simply requires the respondent to comply with such obligation "immediately." The obligation of the respondent remains as a portion of the Court of Appeals' judgment. In fact, the petitioners themselves, in their letter dated November 5, 1964, sent to the respondent, demanding that the latter reconstruct the irrigation canal immediately, referred to the same not as a condition but as "the portion of the judgment" in civil case 1594. Consequently, the respondent judge, when she granted the motion of the respondent to set aside the alias writ of execution and issued the order dated February 3, 1966 recalling and quashing the said alias writ, acted correctly. Courts have jurisdiction to entertain motions to quash previously issued writs of execution because courts have the inherent power, for the advancement of justice, to correct the errors of their ministerial officers and to control their own processes. However, this power, well circumscribed, to quash the writ, may be exercised only in certain situations, as when it appears that (a) the writ has been improvidently issued, or (b) the writ is defective in substance, or (c) the writ has been issued against the wrong party, or (d) the judgment debt has been paid or otherwise satisfied, or (e) the writ has been issued without authority, or (f) there has been a change in the situation of the parties which renders such execution inequitable, or (g) the controversy has never been submitted to the judgment of the court, and, therefore, no judgment at all has ever been rendered thereon. 6 In the instant case, the payment of the judgment debt by the respondent, although in a reduced amount but accepted by the petitioners as "in full satisfaction of the money judgment," warrants the quashal of the alias writ.


ACCORDINGLY, judgment is hereby rendered, (1) declaring that the respondent judge did not act in excess of jurisdiction or with grave abuse of discretion in issuing the order dated February 3, 1966 (granting the respondent's motion to set aside the alias writ of execution, and recalling and guashing the said alias writ) and the order dated March 30, 1966 (denying the petitioners' motion for reconsideration, of the order dated February 3, 1966) ; and (2) remanding the case to the court a quo with instructions that the respondent court (a) conduct an ocular inspection of the irrigation canal passing through the respondent's land to determine whether or not the said canal has been rebuilt in accordance with its original dimensions; (b) in the event that the said canal fails to meet the measurements of the original one, order the respondent to reconstruct the same to its former condition; and (3) in the event of the respondent's further refusal or failure to do so, appoint some other person to reconstruct the canal in accordance with its original dimensions, at the cost of the said respondent, pursuant to section 10 of Rule 39 of the Rules of Court. Without pronouncement as to costs. 106. G.R. Nos. L-62845-46 November 25, 1983 NATIONAL POWER CORPORATION, petitioner, vs. JUDGE ABELARDO M. DAYRIT, Court of First Instance of Manila, Branch 39, and DANIEL R. ROXAS, doing business as United Veterans Security Agency and Foreign Boats Watchmen, respondents. ABAD SANTOS, This is a petition to set aside the Order, dated September 22, 1982, of the respondent judge. The prayer is premised on the

allegation that the questioned Order was issued with grave abuse of discretion. In Civil Case No. 133528 of the defunct Court of First Instance of Manila, DANIEL E. ROXAS, doing business under the name and style of United Veterans Security Agency and Foreign Boats Watchmen, sued the NATIONAL POWER CORPORATION (NPC) and two of its officers in Iligan City. The purpose of the suit was to compel the NPC to restore the contract of Roxas for security services which the former had terminated. After several incidents, the litigants entered into a Compromise Agreement on October 14, 1981, and they asked the Court to approve it. Accordingly, a Decision was rendered on October 30, 1981, which reads as follows: têñ.£îhqwâ£ In order to abbreviate the proceedings in this case, the parties, instead of going into trial, submitted a compromise agreement, as follows: têñ.£îhqwâ£ The parties, DANIEL E. ROXAS, etc. and NATIONAL POWER CORPORATION, ET AL., represented by its President Mr. Gabriel Y. Itchon with due and proper authority under NP Board Resolution No. 81-224, assisted by their respective counsel, to this Honorable Court respectfully submit the following compromise agreement: 1. The defendant National Power Corporation shall pay to plaintiff the sum of P7,277.45, representing the amount due to plaintiff for the services of one of plaintiff's supervisors; 2. The defendant shall pay plaintiff the value of the line materials which were stolen but recovered, by plaintiff's agency which value is to be determined after a joint inventory by the representatives of both parties;


3. The parties shall continue with the contract of security services under the same terms and conditions as the previous contract effective upon the signing thereof; 4. The parties waive all their respective claims and counterclaims in favor of each other; 5. The parties agree to faithfully comply with the foregoing agreement. PRAYER WHEREFORE, it is respectfully prayed that the Hon. Court approve the following compromise agreement.' Examining the foregoing agreement, the Court finds that the same is in accordance with law and not against morals and public policy. CONFORMABLY, the Court hereby renders judgment in accordance with the terms and conditions thereof, enjoining the parties to strictly comply with the terms and conditions of the compromise agreement, without pronouncement as to cost. (Rollo, pp. 33-34.) The judgment was not implemented for reasons which have no relevance here. On May 14, 1982, the NPC executed another contract for security services with Josette L. Roxas whose relationship to Daniel is not shown. At any rate Daniel has owned the contract. The NPC refused to implement the new contract for which reason Daniel filed a Motion for Execution in the aforesaid civil case which had been re-numbered R-82-10787. The Motion reads: têñ.£îhqwâ£ PLAINTIFF, by counsel, respectfully shows:

1. On October 30, 1981, this Honorable Court rendered its decision based on compromise agreement submitted by the parties, under which it was provided, among others, that — têñ.£îhqwâ£ 3. The parties shall continue with the contract of security services under the same terms and conditions as the previous contract effective upon the signing thereof; 2. To date, after more than about eight (8) months since the decision of this Honorable Court, defendant National Power Corporation, through bad faith by reason of excuses made one after another, has yet to comply with the aforesaid terms of the decision. It has not reinstated the contract with the plaintiff in gross violation of the terms of the said compromise agreement which this Honorable Court approved, 'enjoining the parties to strictly comply with the terms and conditions of the compromise agreement, 3. Hence, plaintiff is compelled to seek the assistance of this Honorable Court for the execution of its decision. PRAYER têñ.£îhqwâ£ WHEREFORE, it is respectfully prayed that this Honorable Court order the issuance of the writ of execution for the enforcement of the aforesaid portion of its decision. (Rollo, pp. 35-36.) Acting on the Motion, the respondent judge issued the following Order: têñ.£îhqwâ£ Acting on the motion for execution dated July 14, 1982, visibly over the objection and/or opposition to the motion for execution dated July 19, 1982, the Court, considering that the decision of October 30, 1981 was based on a Compromise Agreement


entered into by and between the parties which decidedly, become final and executory, is inclined to grant said action. CONFORMABLY, let the corresponding writ of execution be issued to be served by the Deputy Sheriff assigned to this branch. (Rollo, p. 54.) The NPC assails the Order on the ground that it directs execution of a contract which had been novated by that of May 14, 1982. Upon the other hand, Roxas claims that said contract was executed precisely to implement the compromise agreement for which reason there was no novation. We sustain the private respondent. Article I of the May 14, 1982, agreement supports his contention. Said article reads: têñ.£îhqwâ£ ARTICLE I DOCUMENTS COMPRISING THE CONTRACT The letter proposal dated September 5, 1981; CORPORATION'S counter- proposal dated September 11, 1981; Board Resolution No. 81-244 dated September 28, 1981; the Compromise Agreement and Court Decision dated October 30, 1981 in Civil Case No. 133528 CFI-Manila; other subsequent letters and the performance bond of AGENCY to be flied in favor of CORPORATION in the manner hereinafter provided, are hereby expressly made integral parts of this contract by reference. (Rollo, pp. 59-60.) It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations in every aspect. Thus the Civil Code provides: têñ.£îhqwâ£

Art. 1292. In order that an obligation may be extinguished by another which substitutes 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 the case at bar there is nothing in the May 14, 1982, agreement which supports the petitioner's contention. There is neither explicit novation nor incompatibility on every point between the "old" and the "new" agreements. WHEREFORE, the petition is denied for lack of merit with costs against the petitioner. 107. G.R. No. L-41117 December 29, 1986 INTEGRATED CONSTRUCTION SERVICES, INC., and ENGINEERING CONSTRUCTION, INC., petitioners, vs. THE HONORABLE LORENZO RELOVA, as Judge of the Court of First Instance of Manila, and METROPOLITAN WATERWORKS & SEWERAGE SYSTEM, respondents. PARAS, J.: This is a petition 1 for mandamus as a special civil action and/or, in the alternative, an appeal from orders of the Court of First Instance of Manila under Republic Act 5440 in Civil Case No. 80390 entitled "Integrated Construction Services, Inc. and Engineering Construction, Inc., plaintiffs, versus National Waterworks and Sewerage Authority (now Metropolitan Waterworks & Sewerage System), defendant." Petitioners complied with the requisites for both remedies.


The facts are not in dispute: Petitioners on July 17, 1970 sued the respondent Metropolitan Waterworks and Sewerage System (MWSS), formerly the National Waterworks and Sewerage Authority (NAWASA), in the Court of First Instance of Manila for breach of contract, docketed as Civil Case No. 80390 in that Court. Meanwhile, the parties submitted the case to arbitration. The Arbitration Board, after extensive hearings, rendered its decision-award on August 11, 1972. Respondent Judge confirmed the Award on September 9, 1972 and the same has long since become final and executory. The decision-award ordered MWSS to pay petitioners P15,518,383.61-less P2,329,433.41, to be set aside as a trust fund to pay creditors of the joint venture in connection with the projector a net award of P13,188,950.20 with interest thereon from the filing of the complaint until fully paid. Subsequently, however, petitioners agreed to give MWSS some discounts in consideration of an early payment of the award. Thus, on September 21, 1972, MWSS adopted Board Resolution No. 132-72, embodying the terms and conditions of their agreement. On October 2, 1972, MWSS sent a letter-agreement to petitioners, quoting Board Resolution No. 13272, granting MWSS some discounts from the amount payable under the decision award (consisting of certain reductions in interests, in the net principal award and in the trust fund), provided that MWSS would pay the judgment, less the said discounts, within fifteen days therefrom or up to October 17, 1972. Upon MWSS' request, the petitioners signed their "Conforme" to the said letter-agreement, and extended the period to pay the judgment less the discounts aforesaid to October 31, 1972. MWSS, however, paid only on December 22, 1972, the amount

stated in the decision but less the reductions provided for in the October 2, 1972 letter-agreement. Three years thereafter, or on June, 1975, after the last balance of the trust fund had been released and used to satisfy creditors' claims, the petitioners filed a motion for execution in said civil case against MWSS for the balance due under the decision-award. Respondent MWSS opposed execution setting forth the defenses of payment and estoppel. (p. 174, Rollo) On July 10, 1975, respondent judge denied the motion for execution on the ground that the parties had novated the award by their subsequent letter-agreement. Petitioners moved for reconsideration but respondent judge, likewise, denied the same in his Order dated July 24, 1975. Hence, this Petition for Mandamus, alleging that respondent judge unlawfully refused to comply with his mandatory duty-to order the execution of the unsatisfied portion of the final and executory award. In a Resolution dated October 17, 1975, the Supreme Court dismissed the Petition for lack of merit. (p. 107, Rollo )and denied petitioners' Motion for Reconsideration of the same. (p. 131, Rollo) At the hearing on petitioners' Second Motion for Reconsideration, however, respondent MWSS asserted new matters, (p. 186, Rollo) arguing that: the delay in effecting payment was caused by an unforeseen circumstance the declaration of martial law, thus, placing MWSS under the management of the Secretary of National Defense, which impelled MWSS to refer the matter of payment to the Auditor General and/or the Secretary of National Defense; and that the 15-day period was merely intended to pressure MWSS officials to process the voucher. Petitioners,


however, vehemently deny these matters which are not supported by the records. We agree with the petitioners. While the tenor of the subsequent letter-agreement in a sense novates the judgment award there being a shortening of the period within which to pay (Kabangkalan Sugar Co. vs. Pacheco, 55 Phil. 555), the suspensive and conditional nature of the said agreement (making the novation conditional) is expressly acknowledged and stipulated in the 14th whereas clause of MWSS' Resolution No. 132-72, (p. 23, Rollo) which states: WHEREAS, all the foregoing benefits and advantages secured by the MWSS out of said conferences were accepted by the Joint Venture provided that the remaining net amount payable to the Joint Venture will be paid by the MWSS within fifteen (15) days after the official release of this resolution and a written CONFORME to be signed by the Joint Venture; (Emphasis supplied) MWSS' failure to pay within the stipulated period removed the very cause and reason for the agreement, rendering some ineffective. Petitioners, therefore, were remitted to their original rights under the judgment award. The placing of MWSS under the control and management of the Secretary of National Defense thru Letter of Instruction No. 2, dated September 22, 1972 was not an unforeseen supervening factor because when MWSS forwarded the letter-agreement to the petitioners on October 2, 1972, the MWSS was already aware of LOI No. 2. MWSS' contention that the stipulated period was intended to pressure MWSS officials to process the voucher is untenable. As aforestated, it is apparent from the terms of the agreement that

the 15-day period was intended to be a suspensive condition. MWSS, admittedly, was aware of this, as shown by the internal memorandum of a responsible MWSS official, stating that necessary steps should be taken to effect payment within 15 days, for otherwise, MWSS would forego the advantages of the discount. " (p. 426, Rollo) As to whether or not petitioners are now in estoppel to question the subsequent agreement, suffice it to state that petitioners never acknowledged full payment; on the contrary, petitioners refused MWSS' request for a conforme or quitclaim. (p. 125, Rollo) Accordingly, the award is still subject to execution by mere motion, which may be availed of as a matter of right any time within (5) years from entry of final judgment in accordance with Section 5, Rule 39 of the Rules of Court. WHEREFORE, We hereby set aside the assailed orders, and issue the writ of mandamus directing the present Regional Trial Judge of the Branch that handled this case originally to grant the writ of execution for the balance due under the award. 108. G.R. No. L-47369 JOSEPH COCHINGYAN, JR. and JOSE K. VILLANUEVA, petitioners, vs. R & B SURETY AND INSURANCE COMPANY, INC., respondent. FELICIANO, J.:


This case was certified to us by the Court of Appeals in its resolution dated 11 November 1977 as one involving only questions of law and, therefore, falling within the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296, as amended. In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was granted an increase in its line of credit from P400,000.00 to P800,000.00 (the "Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's approval, PAGRICO had to give a good and sufficient bond in the amount of P400,000.00, representing the increment in its line of credit, to secure its faithful compliance with the terms and conditions under which its line of credit was increased. In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765, issued by the respondent R & B Surety and Insurance Co., Inc. (R & B Surety") in the specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO and R & B Surety bound themselves jointly and severally to comply with the "terms and conditions of the advance line [of credit] established by the [PNB]." PNB had the right under the Surety Bond to proceed directly against R & B Surety "without the necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety Bond also provided that R & B Surety's liability was not to be limited to the principal sum of P400,000.00, but would also include "accrued interest" on the said amount "plus all expenses, charges or other legal costs incident to collection of the obligation [of R & B Surety]" under the Surety Bond. In consideration of R & B Surety's issuance of the Surety Bond, two Identical indemnity agreements were entered into with R & B Surety: (a) one agreement dated 23 December 1963 was executed by the Catholic Church Mart (CCM) and by petitioner Joseph Cochingyan, Jr, the latter signed not only as President of CCM but also in his personal and individual capacity; and (b)

another agreement dated 24 December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO), Jose K. Villanueva and Liu Tua Ben Mr. Villanueva signed both as Manager of PAGRICO and in his personal and individual capacity; Mr. Liu signed both as President of PACOCO and in his individual and personal capacity. Under both indemnity agreements, the indemnitors bound themselves jointly and severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful compliance of the terms and conditions set forth in said SURETY BOND for a period beginning ... until the same is CANCELLED and/or DISCHARGED." The Indemnity Agreements further provided: (b) INDEMNITY: — TO indemnify the SURETY COMPANY for any damage, prejudice, loss, costs, payments, advances and expenses of whatever kind and nature, including [of] attorney's fees, which the CORPORATION may, at any time, become liable for, sustain or incur as consequence of having executed the above mentioned Bond, its renewals, extensions or substitutions and said attorney's fees [shall] not be less than twenty [20%] per cent of the total amount claimed by the CORPORATION in each action, the same to be due, demandable and payable, irrespective of whether the case is settled judicially or extrajudicially and whether the amount has been actually paid or not; (c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: — The said indemnities will be paid to the CORPORATION as soon as demand is received from the Creditor or upon receipt of Court order or as soon as it becomes liable to make payment of any sum under the terms of the abovementioned Bond, its renewals, extensions, modifications or substitutions, whether the said sum or sums or part thereof, have been actually paid or not.


We authorize the SURETY COMPANY, to accept in any case and at its entire discretion, from any of us, payments on account of the pending obligations, and to grant extension to any of us, to liquidate said obligations, without necessity of previous knowledge of [or] consent from the other obligors. x x x x x x x x x (e) INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY. — Any payment or disbursement made by the SURETY COMPANY on account of the above-mentioned Bonds, its renewals, extensions or substitutions, either in the belief that the SURETY COMPANY was obligate[d] to make such payment or in the belief that said payment was necessary in order to avoid greater losses or obligations for which the SURETY COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions or substitutions, shall be final and will not be disputed by the undersigned, who jointly and severally bind themselves to indemnify the SURETY COMPANY of any and all such payments as stated in the preceding clauses. x x x x x x x x x When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB demanded payment from R & B Surety of the sum of P400,000.00, the full amount of the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of that demand totalling P70,000.00 evidenced by detailed vouchers and receipts. R & B Surety in turn sent formal demand letters to petitioners Joseph Cochingyan, Jr. and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and for a discharge of its liability to the PNB under the Surety Bond. When petitioners failed to heed its demands, R & B Surety brought suit against Joseph Cochingyan, Jr., Jose K. Villanueva and Liu Tua Ben in the

Court of First Instance of Manila, praying principally that judgment be rendered: b. Ordering defendants to pay jointly and severally, unto the plaintiff, the sum of P20,412.20 representing the unpaid premiums for Surety Bond No. 4765 from 1965 up to 1968, and the additional amount of P5,103.05 yearly until the Surety Bond No. 4765 is discharged, with interest thereon at the rate of 12% per annum; [and] c. Ordering the defendants to pay jointly and severally, unto the plaintiff the sum of P400,000.00 representing the total amount of the Surety Bond No. 4765 with interest thereon at the rate of 12% per annum on the amount of P70,000.00 which had been paid to the Phil. National Bank already, the interest to begin from the month of September, 1966; x x x x x x x x x Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity Agreement he executed in favor of R & B Surety: (i) did not express the true intent of the parties thereto in that he had been asked by R & B Surety to execute the Indemnity Agreement merely in order to make it appear that R & B Surety had complied with the requirements of the PNB that credit lines be secured; (ii) was executed so that R & B Surety could show that it was complying with the regulations of the Insurance Commission concerning bonding companies; (iii) that R & B Surety had assured him that the execution of the agreement was a mere formality and that he was to be considered a stranger to the transaction between the PNB and R & B Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity Agreement as against him. Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the Indemnity Agreement in favor of R & B Surety


only "for accommodation purposes" and that it did not express their true intention; (ii) that the Principal Obligation of PAGRICO to the PNB secured by the Surety Bond had already been assumed by CCM by virtue of a Trust Agreement entered into with the PNB, where CCM represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was thereby extinguished by novation arising from the change of debtor under the Principal Obligation; and (iv) that the filing of the complaint was premature, considering that R & B Surety filed the case against him as indemnitor although the PNB had not yet proceeded against R & B Surety to enforce the latter's liability under the Surety Bond. Petitioner Cochingyan, however, did not present any evidence at all to support his asserted defenses. Petitioner Villanueva did not submit any evidence either on his "accommodation" defense. The trial court was therefore constrained to decide the case on the basis alone of the terms of the Trust Agreement and other documents submitted in evidence. In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in favor of R & B Surety, the dispositive portion of which reads as follows; Premises considered, judgment is hereby rendered: (a) ordering the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to pay, jointly and severally, unto the plaintiff the sum of 400,000,00, representing the total amount of their liability on Surety Bond No. 4765, and interest at the rate of 6% per annum on the following amounts: On P14,000.00 from September 27, 1966; On P4,000.00 from November 28, 1966;

On P4,000.00 from December 14, 1966; On P4,000.00 from January 19, 1967; On P8,000.00 from February 13, 1967; On P4,000.00 from March 6, 1967; On P8,000.00 from June 24, 1967; On P8,000. 00 from September 14, 1967; On P8,000.00 from November 28, 1967; and On P8,000. 00 from February 26, 1968 until full payment; (b) ordering said defendants to pay, jointly and severally, unto the plaintiff the sum of P20,412.00 as the unpaid premiums for Surety Bond No. 4765, with legal interest thereon from the filing of plaintiff's complaint on August 1, 1968 until fully paid, and the further sum of P4,000.00 as and for attorney's fees and expenses of litigation which this Court deems just and equitable. There being no showing the summons was duly served upon the defendant Liu Tua Ben who has filed no answer in this case, plaintiff's complaint is hereby dismissed as against defendant Liu Tua Ben without prejudice. Costs against the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva. Not satisfied with the decision of the trial court, the petitioners took this appeal to the Court of Appeals which, as already noted, certified the case to us as one raising only questions of law.


The issues we must confront in this appeal are: 1. whether or not the Trust Agreement had extinguished, by novation, the obligation of R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the obligations of the petitioners under the Indemnity Agreements; 2. whether the Trust Agreement extended the term of the Surety Bond so as to release petitioners from their obligation as indemnitors thereof as they did not give their consent to the execution of the Trust Agreement; and 3. whether or not the filing of this complaint was premature since the PNB had not yet filed a suit against R & B Surety for the forfeiture of its Surety Bond. We address these issues seriatim. 1. The Trust Agreement referred to by both petitioners in their separate briefs, was executed on 28 December 1965 (two years after the Surety Bond and the Indemnity Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing business under the name and style of the Catholic Church Mart, represented by Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and (3) the PNB as beneficiary. The Trust Agreement provided, in pertinent part, as follows: WHEREAS, the TRUSTOR has guaranteed a bond in the amount of P400,000.00 issued by the R & B Surety and Insurance Co. (R & B) at the instance of Pacific Agricultural Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the BENEFICIARY in connection with the application of PAGRICO for an advance line of P400,000.00 to P800,000.00; WHEREAS, the TRUSTOR has also guaranteed a bond issued by the Consolacion Insurance & Surety Co., Inc. (CONSOLACION) in

the amount of P900,000.00 in favor of the BENEFICIARY to secure certain credit facilities extended by the BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO); WHEREAS, the PAGRICO and the PACOCO have defaulted in the payment of their respective obligations in favor of the BENEFICIARY guaranteed by the bonds issued by the R & B and the CONSOLACION, respectively, and by reason of said default, the BENEFICIARY has demanded compliance by the R & B and the CONSOLACION of their respective obligations under the aforesaid bonds; WHEREAS, the TRUSTOR is, therefore, bound to comply with his obligation under the indemnity agreements aforementioned executed by him in favor of R & B and the CONSOLACION, respectively and in order to forestall impending suits by the BENEFICIARY against said companies, he is willing as he hereby agrees to pay the obligations of said companies in favor of the BENEFICIARY in the total amount of P1,300,000 without interest from the net profits arising from the procurement of reparations consumer goods made thru the allocation of WARVETS; . . . l. TRUSTOR hereby constitutes and appoints Atty. TOMAS BESA as TRUSTEE for the purpose of paying to the BENEFICIARY Philippine National Bank in the manner stated hereunder, the obligations of the R & B under the R & B Bond No. G-4765 for P400,000.00 dated December 23, 1963, and of the CONSOLACION under The Consolacion Bond No. G-5938 of June 3, 1964 for P900,000.00 or the total amount of P1,300,000.00 without interest from the net profits arising from the procurement of reparations consumer goods under the Memorandum of Settlement and Deeds of Assignment of February 2, 1959 through the allocation of WARVETS; x x x x x x x x x


6. THE BENEFICIARY agrees to hold in abeyance any action to enforce its claims against R & B and CONSOLACION, subject of the bond mentioned above. In the meantime that this TRUST AGREEMENT is being implemented, the BENEFICIARY hereby agrees to forthwith reinstate the R & B and the CONSOLACION as among the companies duly accredited to do business with the BENEFICIARY and its branches, unless said companies have been blacklisted for reasons other than those relating to the obligations subject of the herein TRUST AGREEMENT; x x x x x x x x x 9. This agreement shall not in any manner release the R & B and CONSOLACION from their respective liabilities under the bonds mentioned above. (emphasis supplied) There is no question that the Surety Bond has not been cancelled or fully discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety Bond has been extinguished by another means, it must still subsist. And so must the supporting Indemnity Agreements. 3 We are unable to sustain petitioners' claim that the Surety Bond and their respective obligations under the Indemnity Agreements were extinguished by novation brought about by the subsequent execution of the Trust Agreement. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which terminates it, either by changing its object or principal conditions, or by substituting a new debtor in place of the old one, or by subrogating a third person to the rights of the creditor. 4 Novation through a change of the object or principal conditions of an existing obligation is referred to as objective (or real) novation. Novation by the change of either the person of the debtor or of the creditor is described as subjective (or personal)

novation. Novation may also be both objective and subjective (mixed) at the same time. In both objective and subjective novation, a dual purpose is achieved-an obligation is extinguished and a new one is created in lieu thereof.5 If objective novation is to take place, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the old one. 6 Novation is never presumed: it must be established either by the discharge of the old debt by the express terms of the new agreement, or by the acts of the parties whose intention to dissolve the old obligation as a consideration of the emergence of the new one must be clearly discernible. 7 Again, if subjective novation by a change in the person of the debtor is to occur, it is not enough that the juridical relation between the parties to the original contract is extended to a third person. It is essential that the old debtor be released from the obligation, and the third person or new debtor take his place in the new relation. If the old debtor is not released, no novation occurs and the third person who has assumed the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8 Applying the above principles to the instant case, it is at once evident that the Trust Agreement does not expressly terminate the obligation of R & B Surety under the Surety Bond. On the contrary, the Trust Agreement expressly provides for the continuing subsistence of that obligation by stipulating that "[the Trust Agreement] shall not in any manner release" R & B Surety from its obligation under the Surety Bond. Neither can the petitioners anchor their defense on implied novation. Absent an unequivocal declaration of extinguishment of a pre-existing obligation, a showing of complete incompatibility between the old and the new obligation (and nothing else) would


sustain a finding of novation by implication. 9 But where, as in this case, the parties to the new obligation expressly recognize the continuing existence and validity of the old one, where, in other words, the parties expressly negated the lapsing of the old obligation, there can be no novation. The issue of implied novation is not reached at all. What the trust agreement did was, at most, merely to bring in another person or persons-the Trustor[s]-to assume the same obligation that R & B Surety was bound to perform under the Surety Bond. It is not unusual in business for a stranger to a contract to assume obligations thereunder; a contract of suretyship or guarantee is the classical example. The precise legal effect is the increase of the number of persons liable to the obligee, and not the extinguishment of the liability of the first debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that: [t]he mere fact that the creditor receives a guaranty or accepts payments from a third person who has agreed to assume the obligation, when there is no agreement that the first debtor shall be released from responsibility, does not constitute a novation, and the creditor can still enforce the obligation against the original debtor. In the present case, we note that the Trustor under the Trust Agreement, the CCM, was already previously bound to R & B Surety under its Indemnity Agreement. Under the Trust Agreement, the Trustor also became directly liable to the PNB. So far as the PNB was concerned, the effect of the Trust Agreement was that where there had been only two, there would now be three obligors directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the Trustor. And the PNB could proceed against any of the three, in any order or sequence. Clearly, PNB never intended to release, and never did release, R & B Surety. Thus, R & B Surety, which was not a party to the Trust

Agreement, could not have intended to release any of its own indemnitors simply because one of those indemnitors, the Trustor under the Trust Agreement, became also directly liable to the PNB. 2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any action to enforce its claims against R & B Surety . The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and severally (in solidum) to the R & B Surety] — to become SURETY upon a SURETY BOND demanded by and in favor of [PNB] in the sum of [P400,000.00] for the faithful compliance of the terms and conditions set forth in said SURETY BOND — ." This part of the Agreement suggests that the indemnitors (including the petitioners) would become cosureties on the Security Bond in favor of PNB. The record, however, is bereft of any indication that the petitionersindemnitors ever in fact became co-sureties of R & B Surety vis-avis the PNB. The petitioners, so far as the record goes, remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB could not have directly demanded payment of the Principal Obligation from the petitioners. Thus, we do not see how Article 2079 of the Civil Code-which provides in part that "[a]n extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty" could apply in the instant case. The petitioner-indemnitors are, as, it were, second-tier parties so far as the PNB was concerned and any extension of time granted by PNB to any of the first-tier obligators (PAGRICO, R &B Surety and the trustors[s]) could not prejudice the second-tier parties.


There is no other reason why petitioner Villanueva's contention must fail. PNB's undertaking under the Trust Agreement "to hold in abeyance any action to enforce its claims" against R & B Surety did not extend the maturity of R & B Surety's obligation under the Surety Bond. The Principal Obligation had in fact already matured, along with that of R &B Surety, by the time the Trust Agreement was entered into. Petitioner's Obligation had in fact already matured, for those obligations were to amture "as soon as [R & B Surety] became liable to make payment of any sum under the terms of the [Surety Bond] — whether the said sum or sums or part thereof have been actually paid or not." Thus, the situation was that precisely envisaged in Article 2079: [t]he mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension of the referred to herein.(emphasis supplied) The theory behind Article 2079 is that an extension of time given to the principal debtor by the creditor without the surety of his right to pay the creditor and to be immediately subrogated to the creditor's remedies against the principal debtor upon the original maturity date. The surety is said to be entitled to protect himself against the principal debtor upon the orginal maturity date. The surety is said to be entitled to protect himself against the contingency of the principal debtor or the indemnitors becoming insolvent during the extended period. The underlying rationale is not present in the instant case. As this Court has held, merely delay or negligence in proceeding against the principal will not discharge a surety unless there is between the creditor and the principal debtor a valid and binding agreement therefor, one which tends to prejudice [the surety] or to deprive it of the power of obtaining indemnity by presenting a legal objection for the time, to the prosecution of an action on the original security.12

In the instant case, there was nothing to prevent the petitioners from tendering payment, if they were so minded, to PNB of the matured obligation on behalf of R & B Surety and thereupon becoming subrogated to such remedies as R & B Surety may have against PAGRICO. 3. The last issue can be disposed of quicjly, Clauses (b) and (c) of the Indemnity Agreements (quoted above) allow R & B Surety to recover from petitioners even before R & B Surety shall have paid the PNB. We have previously held similar indemnity clauses to be enforceable and not violative of any public policy. 13 The petitioners lose sight of the fact that the Indemnity Agreements are contracts of indemnification not only against actual loss but against liability as well. 14 While in a contract of indemnity against loss as indemnitor will not be liable until the person to be indemnified makes payment or sustains loss, in a contract of indemnity against liability, as in this case, the indemnitor's liability arises as soon as the liability of the person to be indemnified has arisen without regard to whether or not he has suffered actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners not only for the partial payments already made but for the full amount owed by PAGRICO to the PNB. Summarizing, we hold that : (1) The Surety Bond was not novated by the Trust Agreement. Both agreements can co-exist. The Trust Agreement merely furnished to PNB another party obligor to the Principal Obligation in addition to PAGRICO and R & B Surety. (2) The undertaking of the PNB to 'hold in abeyance any action to enforce its claim" against R & B Surety did not amount to an "extension granted to the debtor" without petitioner's


consent so as to release petitioner's from their undertaking as indemnitors of R & B Surety under the INdemnity Agreements; and (3) Petitioner's are indemnitors of R & B Surety against both payments to and liability for payments to the PNB. The present suit is therefore not premature despite the fact that the PNB has not instituted any action against R & B Surety for the collection of its matured obligation under the Surety Bond. WHEREFORE, the petitioner's appeal is DENIED for the lack of merit and the decision of the trial court is AFFIRMED in toto. Costs against the petitioners. 109. G.R. No. L-68477 October 29, 1987 SPOUSES ANICETO BALILA and EDITHA S. DE GUZ MAN, SPOUSES ASTERIO DE GUZMAN and ERLINDA CONCEPCION and ENCARNACION OCAMPO VDA. DE CONCEPCION, petitioners, vs. HONORABLE INTERMEDIATE APPELLATE COURT, HONORABLE FLORANTE S. ABASOLO, in his capacity as Judge, Regional Trial Court, First Judicial Region, Branch L, Villasis, Pangasinan, GUADALUPE C. VDA. DE DEL CASTILLO and WALDO DEL CASTILLO, respondents. PARAS, J.: This is a Petition for Review on certiorari of (1) the decision 1 of the Intermediate Appellate Court (IAC) affirming in toto the order 2 dated April 26, 1983 in Civil Case No. U-3501 of the trial

court which ordered the consolidation of ownership in favor of private respondent Guadalupe C. Vda. del Castillo over two (2) parcels of land including the improvements thereon, situated in Villasis, Pangasinan namely, Lot No. 965, with an area of 648 square meters covered by TCT No. 93407 and Lot No. 16 with an area of 910 square meters covered by TCT No. 101794 and (2) the Order of the Intermediate Appellate Court (IAC) dated July 25, 1984 denying petitioners' Motion for Reconsideration. The petition at bar began as an amicable settlement between petitioners and private respondents as defendants and plaintiffs in Civil Case No. U-3501, which was approved by the trial court and made as the basis of its Decision 3 dated December 11, 1980 ordering the parties to comply strictly with the terms and conditions embodied in said amicable settlement. The salient points therein show that defendants admitted "having sold under a pacto de retro sale the parcels of land 4 described in the complaint in the amount of P84,000.00" and that they "hereby promise to pay the said amount within the period of four (4) months but not later than May 15,1981." 5 On December 30, 1981 or more than seven months after the last day for making payments, defendants redeemed from plaintiff Guadalupe (one of the private respondents herein) Lot No. 52 with an area of 294 sq.m. covered by TCT 101352 which was one of the three parcels of land described in the complaint by paying the amount of P20,000.00. On August 4, 1982, plaintiff filed a motion for a hearing on the consolidation of title over the remaining two (2) parcels of land namely Lot 965 and Lot 16 alleging that the court's decision dated December 11, 1980 remained unenforced for no payment of the total obligation due from defendants. Defendants opposed said motion alleging that they had made partial payments of their obligation through plaintiff's attorney in fact and son, Waldo del


Castillo, as well as to the Sheriff. On April 26, 1983, the lower court issued the questioned order affirming consolidation. On June 8, 1983, while the Order of the lower court had not yet been enforced, defendants paid plaintiff Guadalupe Vda. del Castillo by tendering the amount of P28,800.00 to her son Waldo del Castillo (one of the private respondents herein) thus leaving an unpaid balance of P35,200.00. A Certification dated June 8, 1983, (Annex D, Rollo, page 31) and signed by Waldo shows that defendants were given a period of 45 days from date or up to July 23, 1983 within which to pay the balance. Said Certification supported defendants' motion for reconsideration and supplemental motion for reconsideration of the Order reconsolidation of title, which motions were both denied by the lower court, prompting defendants to file a petition for certiorari, prohibition and mandamus with pre injunction petition with the Intermediate Appellate Court to seeking to annul and set aside the assailed Order dated April 26, 1983 and the Order denying their motion for reconsideration. After due consideration of the records of the case, the appellate tribunal sustained the lower court, hence the present petition for certiorari, defendants relying on the following arguments:, (1) The appellate court erred in not declaring that the contract between the petitioners and private respondent Guadalupe is one of equitable mortgage and not a pacto de retro sale, (2) The appellate court erred in not declaring that the decision dated 11, 1980, based upon the agreement of the parties was novated upon subsequent mutual agreements of the said parties. Petitioners contend that despite the rendition of the said decision by the appellate court, private respondent Guadalupe Vda. de del Castillo, represented by her son Waldo del Castillo as for

attorney-in-fact, accepted payments from petitioners and gave petitioners several extensions of time to pay their remaining obligations thus: 5.A. On July 8, 1984, private respondents accepted the amounts of P6,130.00 from petitioners- and gave petitioners up to August 30, 1984 to pay the latter's balance of P23,870.00; (Certification Annex "J" Petition); 5.B. On September 9, 1984, private respondents accepted the amount of P1,100.00 from petitioners and gave petitioners up to October 30, 1984 to pay the latter's balance of P21,624.00 (Certification Annex "L" Petition); 5.C. On October 30, 1984, private respondents accepted the amount of P2,500.00 from petitioners and gave petitioners up to November 15, 1984 to pay the latter's balance of P19,124.00 (Receipt, Annex "N" Reply); 5.D. On November 13, 1984, private respondents accepted the amount of P3,124.00 from petitioners and gave petitioners up to December 30, 1984 to pay the latter's balance of P16,000.00 and private respondent promised to deliver TCT Nos. 146360 and 146361 already in-the name of private respondent Guadalupe Vda. de del Castillo, covering lots 965 and 16, respectively, in favor of petitioners (Receipt, Annex "O," Reply); 5.E. On November 23, 1984, private respondents accepted the amount of P6,000.00 from petitioners and gave petitioners up to December 30, 1984 to pay the latter's balance of P10,000.00 and private respondents proposed to deliver TCT Nos. 146360 and 146361, covering Lots 965 and 16, respectively, and promised to reconvey said lots in favor of petitioners (Receipt, Annex "P," Reply). (Memo for Petitioners, pp. 175-176, Rollo)


Petitioners likewise allege that private respondents Guadalupe Vda. de del Castillo and son Waldo, were nowhere to be found on December 30, 1984, the last day for petitioners to pay their balance of P10,000.00 and for private respondents to reconvey the lands in question (Lots 965 and 16) in favor of petitioners and to deliver TCT Nos. 146360 and 146361 already in the name of private respondent Guadalupe Vda. de del Castillo, covering said lots respectively. This incident compelled petitioners to deposit said amount with the Regional Trial Court as per receipt OR No. 9764172 (Annex "Q") accompanied by a motion to deposit (Annex "R") which motion was granted as per Order dated January 9, 1985 (Annex "S"). The aforementioned titles over the two parcels of lands are subject to Notice of Lis Pendens dated August 15, 1983 (Annex "T"). On the other hand, some of the private respondents do not deny they received the amounts stated in Annexes "D," "F," "J," "L," N," and "P". They aver however that the amicable settlement entered into by and between the parties duly assisted by their counsel was, with respect to Guadalupe, signed by her personally and that at no time thereafter did she ever appoint Waldo del Castillo who is one of her children to receive for her any sum of money to be paid by the petitioners for the settlement of their obligations arising out of their amicable settlement. Guadalupe also questions the inclusion as private respondent of Waldo del Castillo in this Court and the inclusion of the alleged receipts of payments as these receipts were never offered in evidence before the 'trial court or the appellate court nor were the same admitted in evidence by said courts. Petitioners' contentions deserve Our consideration. The root of all the issues raised before Us is that judgment by compromise rendered by the lower court based on the terms of the amicable settlement of the contending parties. Such

agreement not being contrary to law, good morals or public policy was approved by the lower court and therefore binds the parties who are enjoined to comply therewith. However, the records show that petitioners made partial payments to private respondent Waldo del Castillo after May 15, 1981 or the last day for making payments, redeeming Lot No. 52 as earlier stated. (Annex "A," Petition). There is no question that petitioners tendered several payments to Waldo del Castillo even after redeeming lot No. 52. A total of these payments reveals that petitioners share. fulIy paid the amount stated in the judgment by com promise. The only issue is whether Waldo del Castillo was a person duly authorized by his mother Guadalupe Vda. de del Castillo, as her attorney-in-fact to represent her in transactions involving the properties in question. We believe that he was so authorized in the same way that the appellate court took cognizance of such fact as embodied in its assailed decision. reading as follows: It may be mentioned that on May 25,1981, Guadalupe Vda. de Del Castillo, represented by her attorney in fact Waldo Castillo, filed a complaint for consolidation of ownership against the same petitioners herein before the Court of First Instance of Pangasinan, docketed as Civil Case No. U-3650, the allegations of which are Identical to the complaint filed in Civil Case No. U-3501 of the same court. This case U-3650 was, however, dismissed in an Order dated May 27, 1983, in view of the order of consolidation issued in Civil Case No. U-350 1. (p. 37, Rollo) (Underscoring supplied) The fact therefore remains that the amount of P84,000.00 payable on or before May 15, 1981 decreed by the trial court in its judgment by compromise was novated and amended by the subsequent mutual agreements and actions of petitioners and private respondents. Petitioners paid the aforestated amount on


an insatalment basis and they were given by private respondents no less than eight extensions of time pay their obligation. These transactions took place during the pendency of the motion for reconsideration of the Order of the trial court dated April 26, 1983 in Civil Case No. U-3501, during the pendency of the petition for certiorari in AC-G.R. SP-01307 before the Intermediate Appellate Court and after the filing of the petition before us. This answers the claim of the respondents on the failure of the petitioners to present evidences or proofs of payment in the lower court and the appellate court. We have touched on this issue, similarly, in the case of de los Santos vs. Rodriguez 6 wherein We ruled that: As early as Molina vs. De la Riva 7 the principle has been laid down that, when, after judgment has become final, facts and circumstances transpire which render its execution impossible or unjust, the interested party may ask the court to modify or alter the judgment to harmonize the same with justice and the facts. For this reason, in Amor vs. Judge Jose, 8 we used the following language: The Court cannot refuse to issue a writ of execution upon a final and executory judgment, or quash it, or order its stay, for, as a general rule, parties will not be allowed, after final judgment, to object to the execution by raising new issues of fact or of law, except when there had been a change in the situation of the parties which makes such execution inequitable; or when it appears that the controversy has never been submitted to the judgment of the court, or when it appears that the writ of execution has been improvidently issued, or that it is defective in substance, or issued against the wrong party or that judgment debt has been paid or otherwise satisfied or when the writ has been issued without authority. (emphasis supplied) Likewise in the case of Dormitorio vs. Fernandez, 9 We held:

What was done by respondent Judge in setting aside the writ of execution in Civil Case No. 5111 finds support in the applicable authorities. There is this relevant excerpt in Barretto v. Lopez 10 this Court speaking through the then Chief Justice Paras: "Allegating that the respondent judge of the municipal court had acted in excess of her jurisdiction and with grave abuse of discretion in issuing the writ of execution of December 15, 1947, the petitioner has filed the present petition for certiorari and prohibition for the purpose of having said writ of execution annulled. Said petition is meritorious. The agreement filed by the parties in the ejectment case created as between them new rights and obligations which naturally superseded the judgment of the municipal court." In Santos v. Acuna, 11 it was contended that a lower court decision was novated by the subsequent agreement of the parties. Implicit in this Court's ruling is that such a plea would merit approval if indeed that was what the parties intended. ... WHEREFORE, finding merit in the petition, the same is hereby given DUE COURSE and the assailed decision, SET ASIDE. Private respondents are hereby ordered to reconvey and deliver lot No. 965 and Lot No. 16 as covered by TCT Nos. 146360 and 146361 respectively in favor of petitioners. Should private respondents fail to do so, the Clerk of Court of the Regional Trial Court concerned is ordered to execute the necessary deed of reconveyance, conformably with the provisions of the Rules of Court. The local Register of Property is ordered to register said deed of reconveyance. Private respondents are hereby authorized to withdraw the balance in the amount of P10,000 consigned by petitioners on January 9, 1985 with the trial court as per OR No. 9764172 (Annex "O") a full payment of petitioners' obligation.


This decision is immediately executory and no motion for extension of the period within which to file a motion for reconsideration will be granted. 110. G.R. No. L-29280 August 11, 1988 PEOPLE'S BANK AND TRUST COMPANY, plaintiffappellee, vs. SYVEL'S INCORPORATED, ANTONIO Y. SYYAP and ANGEL Y SYYAP, defendants-appellants. PARAS, J.: This is an appeal from the decision dated May 16, 1968 rendered by the Court of First Instance of Manila, Branch XII in Civil Case No. 68095, the decretal portion of which states: IN VIEW OF THE FOREGOING, judgment is rendered sentencing all the defendants to pay the plaintiff jointly and severally the sum of P601,633.01 with interest thereon at the rate of 11% per annum from June 17, 1967, until the whole amount is paid, plus 10% of the total amount due for attorney's fees and the costs of suit. Should the defendants fail to pay the same to the plaintiff, then it is ordered that all the effects, materials and stocks covered by the chattel mortgages be sold at public auction in conformity with the Provisions of Sec. 14 of the Chattel Mortgage Law, and the proceeds thereof applied to satisfy the judgment herein rendered. The counterclaim of the defendants, upon the evidence presented and in the light of the authorities above cited, is dismissed for lack of merit. SO ORDERED

(pp. 89-90, Record on Appeal; p. 15, Rollo) The facts of the case based on the statement of facts, made by the trial court in its decision as cited in the briefs of both parties are as follows: This is an action for foreclosure of chattel mortgage executed in favor of the plaintiff by the defendant Syvel's Incorporated on its stocks of goods, personal properties and other materials owned by it and located at its stores or warehouses at No. 406, Escolta, Manila; Nos. 764-766 Rizal Avenue, Manila; Nos. 10-11 Cartimar Avenue, Pasay City; No. 886 Nicanor Reyes, Sr. (formerly Morayta), Manila; as evidenced by Annex"A."The chattel mortgage was duly registered in the corresponding registry of deeds of Manila and Pasay City. The chattel mortgage was in connection with a credit commercial line in the amount of P900,000.00 granted the said defendant corporation, the expiry date of which was May 20, 1966. On May 20, 1965, defendants Antonio V. Syyap and Angel Y. Syyap executed an undertaking in favor of the plaintiff whereby they both agreed to guarantee absolutely and unconditionally and without the benefit of excussion the full and prompt payment of any indebtedness to be incurred on account of the said credit line. Against the credit line granted the defendant Syvel's Incorporated the latter drew advances in the form of promissory notes which are attached to the complaint as Annexes "C" to "l." In view of the failure of the defendant corporation to make payment in accordance with the terms and conditions agreed upon in the Commercial Credit Agreement the plaintiff started to foreclose extrajudicially the chattel mortgage. However, because of an attempt to have the matter settled, the extra-judicial foreclosure was not pushed thru. As no payment had been paid, this case was even tually filed in this Court.


On petition of the plaintiff based on the affidavits executed by Mr. Leopoldo R. Rivera, Assistant Vice President of the plaintiff bank and Atty. Eduardo J. Berenguer on January 12, 1967, to the effect, among others, that the defendants are disposing of their properties with intent to defraud their creditors, particularly the plaintiff herein, a preliminary writ of attachment was issued. As a consequence of the issuance of the writ of attachment, the defendants, in their answer to the complaint set up a compulsory counterclaim for damages. After the filing of this case in this court and during its pendency defendant Antonio v. Syyap proposed to have the case settled amicably and to that end a conference was held in which Mr. Antonio de las Alas, Jr., Vice President of the Bank, plaintiff, defendant Antonio V. Syyap and Atty. Mendoza were present. Mr. Syyap requested that the plaintiff dismiss this case because he did not want to have the goodwill of Syvel's Incorporated impaired, and offered to execute a real estate mortgage on his real property located in Bacoor, Cavite. Mr. De las Alas consented, and so the Real Estate Mortgage, marked as Exhibit A, was executed by the defendant Antonio V. Syyap and his wife Margarita Bengco Syyap on June 22, 1967. In that deed of mortgage, defendant Syyap admitted that as of June 16, 1967, the indebtedness of Syvel's Incorporated was P601,633.01, the breakdown of which is as follows: P568,577.76 as principal and P33,055.25 as interest. Complying with the promise of the plaintiff thru its Vice President to ask for the dismissal of this case, a motion to dismiss this case without prejudice was prepared, Exhibit C, but the defendants did not want to agree if the dismissal would mean also the dismissal of their counterclaim Against the plaintiff. Hence, trial proceeded. As regards the liabilities of the defendants, there is no dispute that a credit line to the maximum amount of P900,000.00 was granted to the defendant corporation on the guaranty of the merchandise or stocks in goods of the said corporation which

were covered by chattel mortgage duly registered as required by law. There is likewise no dispute that the defendants Syyap guaranteed absolutely and unconditionally and without the benefit of excussion the full and prompt payment of any indebtedness incurred by the defendant corporation under the credit line granted it by the plaintiff. As of June 16, 1967, its indebtedness was in the total amount of P601,633.01. This was admitted by defendant Antonio V. Syyap in the deed of real estate mortgage executed by him. No part of the amount has been paid by either of the defendants. Hence their liabilities cannot be questioned. (pp. 3-6, Brief for Appellee; p. 26, Rollo) In their brief, appellants assign the following errors: I The lower court erred in not holding that the obligation secured by the Chattel Mortgage sought to be foreclosed in the aboveentitled case was novated by the subsequent execution between appellee and appellant Antonio V, Syyap of a real estate mortgage as additional collateral to the obligation secured by said chattel mortgage. II The lower court erred in not dismissing the above-entitled case and in finding appellants liable under the complaint. III The lower court erred in not holding that the writ of preliminary attachment is devoid of any legal and factual basis whatsoever. IV


The lower court erred in dismissing appellants'counterclaim and in not holding appellee liable to appellants for the consequent damages arising out of a wrongful attachment. (pp. 1-2, Brief for the Appellants, p. 25, Rollo) Appellants admit that they are indebted to the appellee bank in the amount of P601,633.01, breakdown of which is as follows: P568,577.76 as principal and P33,055.25 as interest. After the filing of the case and during its pendency, defendant Antonio V. Syyap proposed to have the case amicably settled and for that purpose a conference was held in which Mr. Antonio de las Alas, Jr., Vice President of plaintiff People's Bank and Trust Company, defendant Antonio V. Syyap and Atty. Mendoza were present. Mr. Syyap requested that the plaintiff dismiss this case as he did not want to have the goodwill of Syvel's Incorporated impaired, and offered to execute a real estate mortgage on his real property located in Bacoor, Cavite. Mr. de las Alas consented, and so the Real Estate Mortgage (Exhibit "A") was executed by defendant Antonio Syyap and his wife Margarita Bengco Syyap on June 22, 1967. Defendants did not agree with plaintiffs motion to dismiss which included the dismissal of their counterclaim and filed instead their own motion to dismiss (Record on Appeal, pp. 6872) on the ground that by the execution of said real estate mortgage, the obligation secured by the chattel mortgage subject of this case was novated, and therefore, appellee's cause of action thereon was extinguished. In an Order dated September 23, 1967, the motion was denied for not being well founded (record on Appeal, p. 78). Appellants contention is without merit. Novation takes place when the object or principal condition of an obligation is changed or altered. It is elementary that novation is never presumed; it must be explicitly stated or there must be manifest incompatibility between the old and the new obligations

in every aspect (Goni v. CA, 144 SCRA 223 [1986]; National Power Corp. v. Dayrit, 125 SCRA 849 [1983]). In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants'submission. The contract on its face does not show the existence of an explicit novation nor incompatibility on every point between the "old and the "new" agreements as the second contract evidently indicates that the same was executed as new additional security to the chattel mortgage previously entered into by the parties. Moreover, records show that in the real estate mortgage, appellants agreed that the chattel mortgage "shall remain in full force and shall not be impaired by this (real estate) mortgage." The pertinent provision of the contract is quoted as follows: That the chattel mortgage executed by Syvel's Inc. (Doc. No. 439, Book No. I, Series of 1965, Notary Public Jose C. Merris, Manila); real estate mortgage executed by Angel V. Syyap and Rita V. Syyap (Doc. No. 441, Page No. 90, Book No. I, Series of 1965, Notary Public Jose C. Merris, Manila) shall remain in full force and shall not be impaired by this mortgage (par. 5, Exhibit"A," Emphasis ours). It is clear, therefore, that a novation was not intended. The real estate mortgage was evidently taken as additional security for the performance of the contract (Bank of P.I. v. Herrige, 47 Phil. 57). In the determination of the legality of the writ of attachment by the Court of First Instance of Manila, it is a well established rule that the grant or denial of a writ of attachment rests upon the sound discretion of the court. Records are bereft of any evidence that grave abuse of discretion was committed by respondent judge in the issuance of the writ of attachment.


Appellants contend that the affidavits of Messrs. Rivera and Berenguer on which the lower court based the issuance of the writ of preliminary attachment relied on the reports of credit investigators sent to the field and not on the personal knowledge of the affiants. Such contention deserves scant consideration. Evidence adduced during the trial strongly shows that the witnesses have personal knowledge of the facts stated in their affidavits in support of the application for the writ. They testified that Syvel's Inc. had disposed of all the articles covered by the chattel mortgage but had not remitted the proceeds to appellee bank; that the Syvel's Stores at the Escolta, Rizal Avenue and Morayta Street were no longer operated by appellants and that the latter were disposing of their properties to defraud appellee bank. Such testimonies and circumstances were given full credit by the trial court in its decision (Brief for Appellee, p. 14). Hence, the attachment sought on the ground of actual removal of property is justified where there is physical removal thereof by the debtor, as shown by the records (McTaggert v. Putnam Corset Co., 8 N.Y. S 800 cited in Moran, Comments on the Rules of Court, 1970 Ed., Vol. 3, p. 7). Besides, the actuations of appellants were clearly seen by the witnesses who "saw a Fiat Bantam Car-Fiat Car, a small car and about three or four persons hurrying; they were carrying goods coming from the back portion of this store of Syvels at the Escolta, between 5:30 and 6:00 o'clock in the evening." (Record on Appeal, pp. 45-46). Therefore, "the act of debtor (appellant) in taking his stock of goods from the rear of his store at night, is sufficient to support an attachment upon the ground of the fraudulent concealment of property for the purpose of delaying and defrauding creditors." (4 Am. Jur., 841 cited in Francisco, Revised Rules of Court, Second Edition, 1985, p. 24). In any case, intent to defraud may be and usually is inferred from the facts and circumstances of the case; it can rarely be proved by

direct evidence. It may be gleaned also from the statements and conduct of the debtor, and in this connection, the principle may be applied that every person is presumed to intend the natural consequences of his acts (Francisco, Revised Rules of Court, supra, pp. 24-25), In fact the trial court is impressed "that not only has the plaintiff acted in perfect good faith but also on facts sufficient in themselves to convince an ordinary man that the defendants were obviously trying to spirit away a port;.on of the stocks of Syvel's Incorporated in order to render ineffectual at least partially anyjudgment that may be rendered in favor of the plaintiff." (Decision; Civil Case No. 68095; Record on Appeal, pp. 88-89). Appellants having failed to adduce evidence of bad faith or malice on the part of appellee in the procurement of the writ of preliminary attachment, the claim of the former for damages is evidently negated. In fact, the allegations in the appellee's complaint more than justify the issuance of the writ of attachment. PREMISES CONSIDERED, this appeal is DISMISSED for lack of merit and the judgment appealed from is AFFIRMED. 111. G.R. No. L-22958 January 30, 1971 ESTRELLA BENIPAYO RODRIGUEZ, MANUEL D. BENIPAYO, DONATO BENIPAYO, JR., JAIME D. BENIPAYO, MAXIMA BENIPAYO MORALES, AURORA BENIPAYO DE LEON, FRANCISCO D. BENIPAYO, ALEJANDRO D. BENIPAYO, TERESITA BENIPAYO DE LOS SANTOS, LYDIA BENIPAYO CLEMENTE, and JULIA C. MERCADO, petitioners, vs.


HON. JUAN O. REYES, in his capacity as Presiding Judge of the Manila Court of First Instance, Branch XXI, ALBERTO D. BENIPAYO, DR. JOSE N. DUALAN and VICENTE SAYSON, JR., respondents. REYES, J.B.L., J.: Petition for certiorari, with a prayer for the issuance of a writ of preliminary injunction, filed by some1 of the children of the deceased spouses, Donato Benipayo, Jr., and Pura Disonglo, seeking to have this Court set aside the order issued on 28 April 1964 by the Hon. Juan O. Reyes in Civil Case No. 52188 of the Court of First Instance of Manila, entitled "Estrella BenipayoRodriguez, et al. vs. Alberto D. Benipayo," approving the sheriff's sales of properties owned in common by the plaintiffs and defendant aforesaid, subject to the condition that the vendors should clear the titles thereof from any encumbrance in favor of the Development Bank of the Philippines.lâwphî1.ñèt The petition further sought to compel the respondent judge to cause a re-bidding of the properties involved, at public auction, or to approve the sales aforementioned without the condition imposed upon the vendors. Upon the filing of a bond in the amount of P20,000.00 this Court ordered the issuance of a writ of preliminary injunction on 25 June 1964.2 It appears that on 13 November 1962, petitioners filed with the respondent court a complaint against their brother, respondent Alberto D. Benipayo, for the partition of the properties held by them in common as heirs of the late spouses, Donato D. Benipayo and Pura Disonglo (Civil Case No. 52188). After respondent Benipayo had answered the complaint, the court set the case for a pre-trial conference, and in the course thereof the parties agreed to have the properties in litigation sold at public auction to the highest bidder. Pursuant to an order issued by the respondent

judge, the parties submitted to the court a list of the properties to be sold, among which were some lots in Albay, and the following parcels of land, with their improvements, that were at the time mortgaged to the Development Bank of the Philippines: 1. Lot No. 6-A, Block 2124, with an area of 314.70 square meters, evidenced by TCT No. 48978, Manila; 2. Lot No. 6-B-2, Block No. 2124, with an area of 389.90 square meters, evidenced by TCT No. 48979, Manila; 3. The improvements erected on the above two lots denominated as No. 664 Misericordia, Manila. The above improvements and two lots are mortgaged with the Development Bank of the Philippines with an outstanding mortgage capital of about P50,000.00. The respondent judge first directed the sale at public auction of properties located in Albay. After the consummation of the sale and the approval thereof, His Honor ordered the sale of the two Manila lots and improvements described above. Pursuant to the order, the sheriff of the City of Manila scheduled the auction sale on 30 March 1964 at 10:00 o'clock A.M. Notice thereof was duly posted and published, with the following warning: NOTE: According to information furnished by the plaintiffs' counsel, Atty. Gonzalo D. David, the real properties described above are mortgaged with (sic) the Development Bank of the Philippines, under which there is allegedly an outstanding balance in the sum of P37,121.76. Prospective buyers and bidders are hereby enjoined to investigate for themselves the titles to the real properties described above, as well as the encumbrances thereon, if any there be.


On the date set for the sale, petitioners moved for its postponement on the ground that they were not in a position to actively participate therein, but upon objection of respondent Benipayo's counsel, His honor denied the motion and the sale was held as scheduled. Herein respondent, Jose N. Dualan, successfully bid at the auction sale the sum of P235,000.0 for Lot No. 6-B-2, Block No. 2124, covered by Transfer Certificate of Title No. 48979, issued by the Office of the Register of Deeds of Manila; while respondent Vicente Sayson's bid of P173,000.00 was the highest for Lot No. 6-A of Block No. 2124, covered by Transfer Certificate of Title No. 48978 issued by the same office.3 After the sheriff had filed his return with the respondent judge, petitioners moved for the approval of the sale, deducting from the total amount of P408,000.00 the sheriff's percentage, and the expenses incurred by petitioners for the publication of the notice of sale. Commenting on the aforesaid motion, respondents Benipayo and Dualan prayed that the respondent judge order (1) the payment of the mortgage debt in favor of the Development Bank of the Philippines in the amount of P37,121.96 from the proceeds of the auction sale; (2) the issuance by the sheriff of Manila of a certificate of sale in favor of Dualan of the property sold to him free from all liens and encumbrances; and (3) the payment to respondent Benipayo of 1/12 of the proceeds of the sale after deducting therefrom the payment to the Development Bank of the Philippines. After hearing the arguments of the parties on the motion, the respondent judge apparently entertained some doubts as to whether there had been a meeting of minds on the question of who was to discharge the mortgage obligation in favor of the Development Bank, so he suggested that the properties be subjected to another "bidding" "with a clear-cut understanding

that the 12 heirs shall assume all obligations and that they should not be paid by the buyers."4 The suggestion was not accepted by the buyers; and the respondent judge, on 28 April 1964, issued the order complained of, the dispositive portion of which reads as follows: WHEREFORE, the Manila Sheriff's Report dated March 30, 1964, and the Quezon City Sheriff's Report dated April 6, 1964, are hereby approved, subject to the following conditions: 1. That the vendors or the owners of the properties sold shall clear said properties of all encumbrances that were incurred in them long before the auction sales; 2. That since the taxes on said real estates are not encumbrances incurred by the owners of the properties, but are proper charges attached and against the properties themselves, the real estate taxes shall be borne by the owner or owners of the said properties on the date when said taxes become due for payment. Petitioners' motion for reconsideration of the above-quoted order having been denied, the present petition for certiorari was filed by them. After the respondents had filed their answer to the petition and the parties had submitted their respective memorandum, the petitioners, jointly with respondents Vicente Sayson and Alberto Benipayo, submitted a compromise agreement, on 8 May 1970, cancelling the sale to respondent Vicente Sayson of the property (TCT No. 48978) previously bidded for by him, upon the consideration that the amount paid to the Sheriff by Sayson be returned to the latter. As respondent Jose Dualan interposed no objection to the approval of the said compromise agreement, this Court rendered, on 30 June 1970, a partial decision, approving the compromise agreement and ordering the compliance with its


provisions by the parties thereto, and, as prayed for, dismissed this case as against Vicente Sayson, leaving only Jose N. Dualan, purchaser of the property covered by TCT No. 48979 of the City of Manila, as party respondent. The petitioners seek to apply the doctrine of caveat emptor to the successful bidder Dualan, and contend that under said rule Dualan bought at his own peril and, having purchased the property with knowledge of the encumbrance he should assume payment of the indebtedness secured thereby. We find the stand of petitioners-appellants to be unmeritorious and untenable. The maxim "caveat emptor" applies only to execution sales, and this was not one such.5 The mere fact that the purchaser of an immovable has notice that the required realty is encumbered with a mortgage does not render him liable for the payment of the debt guaranteed by the mortgage, in the absence of stipulation or condition that he is to assume payment of the mortgage debt. The reason is plain: the mortgage is merely an encumbrance on the property, entitling the mortgagee to have the property foreclosed, i.e., sold, in case the principal obligor does not pay the mortgage debt, and apply the proceeds of the sale to the satisfaction of his credit. Mortgage is merely an accessory undertaking for the convenience and security of the mortgage creditor, and exists independently of the obligation to pay the debt secured by it. The mortgagee, if he is so minded, can waive the mortgage security and proceed to collect the principal debt by personal action against the original mortgagor. By buying the property covered by TCT No. 48979 with notice that it was mortgaged, respondent Dualan only undertook either to pay or else allow the land's being sold if the mortgage creditor could not or did no obtain payment from the principal debtor when the debt matured. 6 Nothing else. Certainly the buyer did not obligate himself to replace the debtor in the principal

obligation, and he could not do so in law without the creditor's consent. Our Civil Code, Article 1293, explicitly provides: ART. 1293. Novation which consists in substituting a new debtor in the place of the original one, may be made even with out the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237. The obligation to discharge the mortgage indebtedness, therefore, remained on the shoulders of the original debtors and their heirs, petitioners herein, since the record is devoid of any evidence of contrary intent. This Court has so ruled in Bank of the Philippine Islands vs. Concepcion e Hijos, Inc., 53 Phil. 806, from which We quote: But the plaintiff argues that in American jurisprudence, the purchaser of mortgaged property who assumes the payment of the mortgage debt, may for that reason alone be sued for the debt by the creditor and that that rule is applicable in this jurisdiction. Aside from the fact we are not here dealing with a mere assumption of the debt, but with a subrogation, it may be noted that this court has already held that the American doctrine in this respect is not in harmony with the spirit of our legislation and has not been adopted in this country. In the case of E. C. McCullough & Co. vs. Veloso and Serna (46 Phil., 1), the court, speaking through its present Chief Justice, said: The effects of a transfer of a mortgaged property to a third person are well determined by the Civil Code. According to article 1879 7 of this Code, the creditor may demand of the third person in possession of the property mortgaged payment of such part of the debt, as is secured by the property in his possession, in the manner and form established by the law. The Mortgage Law in force at the promulgation of the Civil Code and referred to in the latter, exacted, among other conditions, also the circumstance


that after judicial or notarial demand, the original debtor had failed to make payment of the debt at maturity. (Art. 135 of the Mortgage Law of the Philippines of 1889.) According to this, the obligation of the new possessor to pay the debt originated only from the right of the creditor to demand payment of him, it being necessary that a demand for payment should have previously been made upon the debtor and the latter should have failed to pay. And even if these requirements were complied with, still the third possessor might abandon the property mortgaged, and in that case it is considered to be in the possession of the debtor. (Art. 136 of the same law.) This clearly shows that the spirit of the Civil Code is to let the obligation of the debtor to pay the debt stand although the property mortgaged to secure the payment of said debt may have been transferred to a third person. While the Mortgage Law of 1893 eliminated these provisions, it contained nothing indicating any change in the spirit of the law in this respect. Article 129 of this law, which provides for the substitution of the debtor by the third person in possession of the property, for the purposes of the giving of notice, does not show this change and has reference to a case where the action is directed only against the property burdened with the mortgage. (Art. 168 of the Regulation ) Upon the other hand, the orders complained of, in so far as they require the vendors-heirs to clear the title to the land sold to respondent Dualan, when the latter bid for it with full knowledge that the same was subject to a valid and subsisting mortgage, is plainly erroneous. In submitting his bid, Dualan is presumed to know, and in fact did know, that the property was subject to a mortgage lien; that such encumbrance would make him, as purchaser, eventually liable to discharge mortgage by paying or settling with the mortgage creditor, should the original mortgagors fail to satisfy the debt. Normally, therefore, he would have taken this eventuality into account in making his bid, and offer a lower amount for the lot than if it were not encumbered. If he intended his bid to be understood as conditioned upon the

property being conveyed to him free from encumbrance, it was his duty to have so stated in his bid, or at least before depositing the purchase price. He did not do so, and the bid must be understood and taken to conform to the normal practice of the buyer's taking the mortgaged property subject to the mortgage. Consequently, he may not demand that the vendors should discharge the encumbrance aforesaid. Thus, the questioned order of the trial court ordering the vendors-heirs to clear the property of all its encumbrances is not in accordance with law. The second and fourth grounds for the petition for certiorari are that the minds of the parties allegedly never met, so that the court should have ordered a re-bidding. The claim that there was no meeting of the minds is not only inconsistent with petitioners' own argument on the main issue, but is belied by their conduct. The fact is that an offer to sell was advertised, a bidding was conducted, and the winning bidder deposited the price. A rebidding would have been proper had all the parties agreed to it, but they did not. Instead, the petitioners authorized their lawyer to negotiate for the redemption of the property, thereby implying that they have accepted the validity of the sale and that their questioning it now is but an afterthought. The third ground relied upon in the petition for annulling the sale is the participation of Atty. Ambrosio Padilla in the auction sale on behalf of respondent Dualan while still the counsel of record for respondent Benipayo. The ground lacks merit, for the reason that petitioners have not shown that they were in any way prejudiced, and they had, by their conduct, accepted the validity of the sale. FOR THE FOREGOING REASONS, the petition for certiorari is hereby granted and the orders complained of are reversed and set aside in so far as they require petitioners to clear the property


sold from the mortgage in favor of the Development Bank. The writ of preliminary injunction heretofore issued is made permanent. No costs.


CONTRACTS (Art. 1305-1422)

112. G.R. No. L-25071 March 29, 1972 GEORGE W. BATCHELDER, doing business under the name and style of Batchelder Equipment, plaintiffappellant, vs. THE CENTRAL BANK OF THE PHILIPPINES, defendantappellant. Quasha, Asperilla, Blanco, Zafra, and Tayag for plaintiffappellant. F.E. Evangelista, Cruz-Espiritu & Associates for defendantappellant. FERNANDO, J.:p In essence, the pivotal legal question presented by this appeal of defendant Central Bank of the Philippines, 1 is whether or not the issuance of a monetary policy by it, thereafter implemented by the appropriate resolutions, as to the rate of exchange at which dollars after being surrendered and sold to it could be reacquired, creates a contractual obligation. It was the holding of the lower court that in law there was such a contract, the terms of which had to be respected by defendant Central Bank. Such a conclusion is challenged in this appeal. For reasons to be hereinafter set forth, we find that the lower court was far too generous in its appreciation of the claim of plaintiff George W. Batchelder. The law in our opinion does not go that far, and accordingly, we reverse. This is a suit filed by plaintiff George W. Batchelder to compel defendant Central Bank of the Philippines, now appellant, to resell to him $170,210.60 at the preferred rate of exchange of two Philippine pesos for one American dollar, more specifically P2.00375, or, in the alternative, to pay to him the difference between the peso cost of such amount at the market rate prevailing on the date of the satisfaction of the judgment in his

favor and the peso cost of $170,210.60 at said preferred rate. Plaintiff likewise sought compensatory damages consisting of actual expenses of litigation and attorney's fees as well as exemplary damages. Defendant Central Bank specifically denied in its answer certain facts set forth in the complaint and was quite insistent on the absence of any such right on the part of plaintiff to re-acquire from it the sum of $170,210.60 at the preferred rate of exchange. It would follow accordingly that it was not liable either to plaintiff for the difference between its peso cost at the rate prevailing on the date of the satisfaction of whatever judgment there may be in plaintiff's favor and the peso cost of $170,210.60 at said preferred rate. There was likewise a denial of liability for compensatory and exemplary damages, attorney's fees, and costs of the suit. According to the appealed decision: "From the evidence on record, it appears that the plaintiff is an American citizen who has been permanently residing in the Philippines and who is engaged in the construction business under the name and style of Batchelder Equipment. The defendant is a government corporation duly organized and existing under Republic Act No. 265." 2 Then came this portion: "On December 9, 1949, the defendant issued Central Bank Circular No. 20 imposing exchange contract in this jurisdiction ... . To implement the program of exchange controls, the defendant issued subsequent circulars, one of which was Circular No. 44 dated June 12, 1953 ... . On July 16, 1959, Republic Act No. 2609 was approvedwhich, among other things, provides that "the monetary authorities shall take steps for the adoption of a four-year program of gradual decontrol." To implement this program of gradual decontrol, defendant Central Bank issued Circular No. 105 on April 25, 1960 ..., providing for the gradual lifting of the restrictions on transactions involving gold and foreign exchange. Likewise, on the same date, it issued Circular No. 106 ... governing the sale agent banks — of foreign exchange in the free market. On September 12, 1960, Circular No. 105 was amended by Circular


No. 111 ... and by Circular No. 117 ... on November 28, 1960. This last Circular No. 117 was amended by Circular No. 121 ... on March 2. 1961, which in return, was amended by Circular No. 133 ... on January 21, 1962, providing, among others, that "only authorized agent banks may sell foreign exchange for imports" and that "such exchange should be sold at the prevailing free market rate to any applicant, without requiring prior specific licensing from the Central Bank." " 3 The appealed decision went on to state "that on March 30, 1960, the U.S. Navy accepted the proposal of the plaintiff of March 18, 1960 in the sum of $188,000.00 for the construction of the Mindanao Weather Station, Bukidnon, Mindanao, Philippines, in accordance with Bid Item 3, Yards and Docks Specifications No. 13374/59 ... ." 4 Reference was then therein made to the specific resolution of defendant Central Bank. Thus: "In connection with construction projects in U.S. military bases in the Philippines, the defendant through its Monetary Board, promulgated Monetary Board Resolution No. 857 on June 17, 1960 ... which, in part, provided: "I. General Policy — Filipino and resident American contractors undertaking construction projects in U.S. military bases in the Philippines shall be authorized to utilize ninety per cent (90%) of the proceeds of their contracts for the purchase of construction equipment, spare parts and either supplies, regardless of commodity classification, to be used in projects inside the U.S. military bases in the Philippines, as well as for payment of imports of construction equipment, materials and supplies, except those commodity items falling under "NEC" and "UI" categories, either for resale or to be used in their projects outside the U.S. military bases; provided, that in the latter case (where the imported items will be used outside of their projects in the U.S. military bases) the margin levy shall be imposed." " 5 There was moreover an implementation of the above resolution with the Central Bank issuing "its Memorandum to Authorized Agent Banks ID-FM No. 11 dated June 23, 1960 ... . Under Resolution No. 857 of the Monetary Board, which was fully quoted in the Memorandum to Authorized Agent Banks of the

defendant ..., it was specifically provided that: "For imports against proceeds of contracts entered into prior to April 25, 1960, the preferred buying rate shall govern, regardless of the present commodity classifications." " 6 There was however a modification arising from Monetary Board Resolution No. 695 of April 28, 1961, which specified that the agent bank should, upon compliance with its terms, credit the contractor's accounts in pesos, the buying rate being governed by the appropriate rules and regulations. 7 The following facts as found by the lower court are likewise relevant: "It appears that in compliance with defendant's Monetary Board Resolutions Nos. 857 and 695 ..., plaintiff surrendered to the Central Bank, through the latter's authorized agents, his dollar earnings amounting to U.S. $199,966.00 ... . The plaintiff also appears to have applied with the defendant for licences to utilize 90% of his surrendered earnings or the sum of U.S. $25,847.84 ... or 21.41% of the amount applied for. The plaintiff demanded from the defendant that it be allowed to utilize the balance of the 90% of his surrendered dollar earnings. However, it was only on March 21, 1963, after the plaintiff had filed the complaint in the present case and after full decontrol had been established through Circular No. 133 dated January 21, 1962 ..., that the defendant informed the plaintiff, through its communication ..., that the lattercould utilize at the free market rate the balance of his said 90% of surrendered earnings which had not been previously granted by the defendant for his importations.The present action, therefore, seeks to compel the defendant to permit the plaintiff to utilize the said balance of his 90% surrendered earnings for importation at the preferred rate of exchange which is P2.00 per U.S. $1.00" 8 The appealed decision took note that in answer to the contention of defendant Central Bank that the Monetary Board Resolutions Nos. 857 and 695 relied upon simply laid down a mere policy without in any way giving rise to a valid and binding agreement to which the law should give effect, plaintiff Batchelder would stress that the enunciation of the policy embodied in the


appropriate resolution did give rise to a contract that must be complied with. That argument found favor with the lower court, for in its opinion, "considering the facts surrounding the transaction between the plaintiff and the defendant, the defendant is now bound by a contract, which could be implied from its stated policy, as enunciated in Monetary Board Resolutions Nos. 857 and 695, and the plaintiff's reliance on said resolutions,to resell in favor of the plaintiff 90% of the U.S. dollars earned by him under his U.S. Navy Contract aforementioned which were duly surrendered to the defendant." 9 The appealed decision recapitulated matters thus: "In short, it is apparent that by the issuance of its various resolutions and circulars aforementioned the defendant had considered the plaintiff and other contractors similarly situated with contracts with the U.S. military authorities predating April 25, 1960, as exempted from decontrol, pursuant to defendant's Monetary Board Resolutions Nos. 857 and 695. Hence, they are entitled to the utilization of the 90% of the U.S. dollars surrendered by them to the defendant at the preferred rate of exchange." 10 Judgment was thus rendered in favor of plaintiff George W. Batchelder, ordering defendant Central Bank "to resell to plaintiff U.S. $154,094.56 at the rate of exchange Philippine peso P2.00375 per U.S. $1.00 or, in the alternative, to pay to the plaintiff in pesos the difference between the peso cost of said U.S. $154,094.56 at the rate prevailing on the date of the satisfaction of judgment and the peso cost of said $154,094.56 at said preferred rate." 11 As noted earlier, an appeal was interposed by defendant Central Bank, raising as a principal legal question that there was no such contractual obligation by virtue of which it could be held liable. It is its contention that its refusal to honor plaintiff's claim is impressed with validity in accordance with the governing provision of the existing rules and regulations governing the sale of foreign exchange. That, to repeat, is the crux of the litigation now before us. The appeal which plaintiff did likewise interpose, complaining against the alleged failure of the

lower court to grant him actual expenses of litigation, attorney's fees as well as exemplary damages, is dependent on the disposition of such decisive issue posed as to the existence of a valid contractual commitment on the part of defendant Central Bank. After carefully going over the records of the case a well as the briefs of the parties, it is the conclusion of Court, as set forth at the outset, that the governing principle of law applicable to actuation of administrative agencies, like the Central Bank, precludes a finding that under the circumstances disclosed by the case, there was a contract in law giving rise to an obligation which must be fulfilled by such governmental body. A reversal, as already mentioned, is thus indicated. 1. We start with fundamentals. The Civil Code expressly provides that a contract is a meeting of minds between two persons whereby one binds himself with respect to the other to give something or render some service. 12 The above provision is practically a restatement, with slight modification, of Article1254 of the Civil Code of Spain of 1889, formerly enforced in our jurisdiction. Such an article, in the opinion of Justice J.B.L. Reyes, speaking for the Court, in A. Magsaysay, Inc. v. Cebu Portland Cement Co., 13 requires that "the area of agreement must extend to all points that the parties deem material or there is no contract." 14 It is noteworthy that in his Outlines on Civil Law, with JudgeRicardo Puno as co-author, he speaks highly of Article 1321 of the Civil Code of Italy. It reads thus: "A contract is the accord of two (or more) persons (with previously diverging interests) for the purpose of creating, modifying or extinguishing a juridical relation between them." 15 Likewise all commentators on the Civil Code have agreed that the birth or perfection of a consensual contract, Article 1315, commences from the moment the parties come to an agreementon a definite subject matter and valid consideration. Justice Capistrano, who was with the Code Commission, and Senators Ambrosio Padilla and Arturo Tolentino,all three distinguished in the field of civil law, are substantially in agreement." 16


Planiol states the following: "The consent of the parties, that is to say, the accord of wills, is the essential element of every contract ... . The consent, in the matter of contracts, is composed of a double operation. (1) The parties must commence by agreeing as to the contents the "convention" that is to say, by making sufficiently precise the object and the essential conditions, and discussing the particular clauses which they desire to introduce to modify or to complete the ordinary effects ... . (2) This first operation having been terminated, the parties are in accord on the projected contract: there is between them what Littre calls the uniformity of opinions, which is one sense of the word "consent", but the contract is not included, it still exists in a projected state. There remains to give its obligatory force by an act of will, expressing the individual adherence of each one of the parties to the act thus prepared. ... . When all the necessary consents (sic) are obtained, and manifested in legal form, the contract is formed, the lien of law is tied. It is therefore the union of these adherences (sic) which constitute the contract and which gives birth to the obligations which are derived from it. It is an act of volition, while the preliminary operation of discussion of the project is a work of the mind and reasoning. 17 In their Jurisprudence and Legal Philosophy, the late Professors Morris R. Cohen and Felix R. Cohen, father and son and jurists of note, noted that the concepts found in the Civil Code of Spain showing basic contract rules are "equally valid in France, Chile, Columbia, Germany, Holland, Italy, Mexico, Portugal and many other lands, and equally honored across eighteen and more centuries ... ." Even more impressive is their conclusion that the views of such common law scholars as Maine, Williston, Pound, Holdsworth, Llewellyn, and Kessler, are not dissimilar. Thus Pollock could describe the English common law quoting whole paragraphs from a German scholar's description of the law of ancient Rome. It is in that sense that for them the Roman phrasing contrahitur obligatio "throws more light than volumes of exegesis: One contracts an obligation as one contracts pneumonia or any otherdisability. Contract is that part of our

legal burdens that we bring on ourselves." 18 If there be full cognizance of the implications of the controlling principles as thus expounded, impressive for their well-nigh unanimity of approach, the conclusion reached by the lower court certainly cannot be accepted as correct. 2. As is so evident from the recital of facts made in the lower court and equally so in the brief of plaintiff Batchelder, as appellant, what was done by the Central Bank was merely to issue in pursuance of its rule-making power the resolutions relied upon by plaintiff, which for him should be impressed with a contractual character. Insofar as this aspect of the matter is concerned, his brief speaks for itself. "In July, 1959, the Republic of the Philippines adopted a gradual decontrol program through the enactment of Republic Act No. 2609. To implement this legislation defendant Central Bank issued Circular Nos. 105 and 106 both dated April 25, 1960 ... . The exchange rate under the decontrol program was higher than the prevailing rate before decontrol of P2.00 per US$1.00. On March 30, 1960, plaintiffappellant entered into a contract with the United States Navy for the construction of a weather station in Bukidnon, Mindanao covered by U.S. Navy Contract No. NBy-13374 ... . On June 17, 1960, the defendant-appellant through its governing Monetary Board promulgated Resolution No. 857 ... and implemented this resolution through its Memorandum to Authorized Agent Banks, I.D.-FM No. 11 dated June 23, 1960 ... . Under Resolution No. 857 and the implementing circular aforesaid, Filipino and American resident contractors for constructions in U.S. military bases in the Philippines whose contracts antedated April 25, 1960 were required to surrender to the defendant-appellant Central Bank their dollar earnings under their respective contracts but were entitled to utilize 90% of their surrendered dollars for importation at the preferred rate of commodities for use within or outside said U.S. military bases. The defendant-appellant pursuant to the decontrol program also promulgated Circulars Nos. 111, 117, and 121, dated September 12, 1960 ..., November 28, 1960 ...; and March 2, 1961 ..., respectively, and finally adopted


full decontrol through its Circular No. 133 dated January 21, 1962 ... . Defendant-appellant also promulgated Monetary Board Resolution No. 695 dated April 28, 1961 ... amending MB Resolution No. 857 of June 23, 1960, and implementing the former through Memorandum ID-FM No. 30 on May 18, 1961 ... ." 19 There is no question that the Central Bank as a public corporation could enter into contracts. It is so provided for among the corporate powers vested in it. Thus:"The Central Bank is hereby authorized to adopt, alter, and use a corporate seal which shall be judicially noticed; to make contracts; to lease or own real personal property, and to sell or otherwise dispose of the same; to sue and be sued; and otherwise to do and perform any and all things that may be necessary or proper to carry out the purposes of this Act." 20 No doubt would have arisen therefore if defendant Central Bank, utilizing a power expressly granted, did enter into a contract with plaintiff. It could have done so, but it did not do so. How could it possibly be maintained then that merely through the exercise of its regulatory power to implement statutory provisions, a contract as known to the law was thereby created?. Yet that is precisely what the lower court held in reaching such a conclusion. It was not only unmindful of the controlling doctrines as to when a contract exists, but itwas equally oblivious of the competence lodged in an administrative agency like the Central Bank. Even the most cursory perusal of Republic Act No. 265 would yield the irresistible conclusion that the establishment of the Central Bankwas intended to attain basic objectives in the field of currency and finance. In the language of the Act: "It shall be the responsibility of the Central Bankof the Philippines to administer the monetary and banking system of the Republic. It shall be the duty of the Central Bank to use the powers granted to it under this Act to achieve the following objectives: (a) to maintain monetary stability in the Philippines; (b) to preserve the international value of the pesoand the convertibility of the peso into other freely convertible currencies; and (c) to promote

a rising level of production, employment and real income in the Philippines." 21 It would be then to set at naught fundamental concepts in administrative law that accord due recognition to the vesting of quasi-legislative and quasi-judicial power in administrative law for the purpose of attaining statutory objectives, especially now that government is saddled with greater responsibilities due to the complex situation of the modern era, if the lower court is to be upheld. For if such be the case then, by the judiciary failing to exercise due care in itsoversight of an administrative agency, substituting its own discretion for what usually is the more expert appraisal of such an instrumentality, there may even be a frustration if not a nullification of the objective of the law. Nor is this to deal unjustly with plaintiff. Defendant Central Bank in its motion to dismiss before the lower court was quite explicit as to why under the circumstances, no right could be recognized as possessed by him. As set forth in such pleading: "We contend that Monetary Board Resolution No. 857, dated June 17, 1960, as amended by Monetary Board Resolution No. 695, dated April 28, 1961, does not give right to Filipino and resident American contractors undertaking construction projects in U.S. military bases to reacquire at the preferred rate ninety per cent (90%) of the foreign exchange sold or surrendered to defendant Central Bank thru the authorized agent banks. Nor does said resolution serve as a general authorization or license granted by the Central Bank to utilize the ninety per cent (90%) of their dollar earnings. M.B. Resolution No. 857, as amended, merely laid down a general policy on the utilization of the dollar earnings of Filipino and resident American contractors undertaking projects in U.S. military bases, ... ." 22 Further, there is this equally relevant portion in such motion to dismiss: "It is clear from the aforecited provisions of said memorandum that not all imports againt proceeds of contracts entered into prior to April 25, 1960 are entitled to the preferred buying rate of exchange. Only imports against proceeds of contracts entered into prior to April 25, 1960, not otherwise classified as dollar-to-dollar transactions, are


entitled to the preferred rate of exchange. It is for this reason that the contractor is required to first file an application with defendant Central Bank (Import Department) thru theAuthorized Agent Banks, for the purpose of determining whether the imports against proceeds of contracts entered into prior to April 25, 1960 are classified asdollar-to-dollar transactions (which are not entitled to the preferred rate of exchange), or not (which are entitled to the preferred rate of exchange), and that if said imports are entitled to the preferred rate of exchange, defendant Central Bank would issue a license to the contractor for authority to buy foreign exchange at the preferred rate for the payment of said imports." 33 Had there been greater care therefore on the part of the plaintiff to show why in his opinion he could assert a right in accordance not with a contract binding on the Central Bank, because there is none, but by virtue of compliance with rules and regulations of an administrative tribunal, then perhaps a different outcome would have been justified. 3. With the disposition of this Court makes on this appeal of defendant Central Bank, there is no need to consider at all the appeal of the plaintiff insofar as the lower court denied his plea for the recovery of the actual expenses of litigation, attorney's fees and exemplary damages. Clearly there is no ground for the award of such items sought. WHEREFORE, the decision of the lower court of January 10, 1963 is reversed and the complaint of the plaintiff dismissed, without prejudice to his taking the appropriate action to enforce whatever rights he possesses against defendant Central Bank in accordance with its valid and binding rules and regulations. With costs against plaintiff. Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Villamor and Makasiar, JJ., concur. Castro, Teehankee and Barredo, JJ., concur in the result.

113. G.R. No. L-18841 January 27, 1969 REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, defendant-appellant. Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Antonio A. Torres and Solicitor Camilo D. Quiason for plaintiff-appellant.   Ponce Enrile, Siguion Reyna, Montecillo and Belo for defendant-appellant. REYES, J.B.L., J.: Direct appeals, upon a joint record on appeal, by both the plaintiff and the defendant from the dismissal, after hearing, by the Court of First Instance of Manila, in its Civil Case No. 35805, of their respective complaint and counterclaims, but making permanent a preliminary mandatory injunction theretofore issued against the defendant on the interconnection of telephone facilities owned and operated by said parties. The plaintiff, Republic of the Philippines, is a political entity exercising governmental powers through its branches and instrumentalities, one of which is the Bureau of Telecommunications. That office was created on 1 July 1947, under Executive Order No. 94, with the following powers and duties, in addition to certain powers and duties formerly vested in the Director of Posts: 1awphil.ñêt SEC. 79. The Bureau of Telecommunications shall exercise the following powers and duties: (a) To operate and maintain existing wire-telegraph and radiotelegraph offices, stations, and facilities, and those to be established to restore the pre-war telecommunication service under the Bureau of Posts, as well as such additional offices or stations as may hereafter be established to provide telecommunication service in places requiring such service; (b) To investigate, consolidate, negotiate for, operate and maintain wire-telephone or radio telephone communication service throughout the Philippines by utilizing such existing


facilities in cities, towns, and provinces as may be found feasible and under such terms and conditions or arrangements with the present owners or operators thereof as may be agreed upon to the satisfaction of all concerned; (c) To prescribe, subject to approval by the Department Head, equitable rates of charges for messages handled by the system and/or for time calls and other services that may be rendered by said system; (d) To establish and maintain coastal stations to serve ships at sea or aircrafts and, when public interest so requires, to engage in the international telecommunication service in agreement with other countries desiring to establish such service with the Republic of the Philippines; and (e) To abide by all existing rules and regulations prescribed by the International Telecommunication Convention relative to the accounting, disposition and exchange of messages handled in the international service, and those that may hereafter be promulgated by said convention and adhered to by the Government of the Republic of the Philippines. 1 The defendant, Philippine Long Distance Telephone Company (PLDT for short), is a public service corporation holding a legislative franchise, Act 3426, as amended by Commonwealth Act 407, to install, operate and maintain a telephone system throughout the Philippines and to carry on the business of electrical transmission of messages within the Philippines and between the Philippines and the telephone systems of other countries. 2 The RCA Communications, Inc., (which is not a party to the present case but has contractual relations with the parties) is an American corporation authorized to transact business in the Philippines and is the grantee, by assignment, of a legislative franchise to operate a domestic station for the reception and transmission of long distance wireless messages (Act 2178) and to operate broadcasting and radio-telephone and radiotelegraphic communications services (Act 3180). 3 Sometime in 1933, the defendant, PLDT, and the RCA Communications, Inc., entered into an agreement whereby

telephone messages, coming from the United States and received by RCA's domestic station, could automatically be transferred to the lines of PLDT; and vice-versa, for calls collected by the PLDT for transmission from the Philippines to the United States. The contracting parties agreed to divide the tolls, as follows: 25% to PLDT and 75% to RCA. The sharing was amended in 1941 to 30% for PLDT and 70% for RCA, and again amended in 1947 to a 5050 basis. The arrangement was later extended to radio-telephone messages to and from European and Asiatic countries. Their contract contained a stipulation that either party could terminate it on a 24-month notice to the other. 4 On 2 February 1956, PLDT gave notice to RCA to terminate their contract on 2 February 1958. 5 Soon after its creation in 1947, the Bureau of Telecommunications set up its own Government Telephone System by utilizing its own appropriation and equipment and by renting trunk lines of the PLDT to enable government offices to call private parties. 6 Its application for the use of these trunk lines was in the usual form of applications for telephone service, containing a statement, above the signature of the applicant, that the latter will abide by the rules and regulations of the PLDT which are on file with the Public Service Commission. 7 One of the many rules prohibits the public use of the service furnished the telephone subscriber for his private use. 8 The Bureau has extended its services to the general public since 1948, 9 using the same trunk lines owned by, and rented from, the PLDT, and prescribing its (the Bureau's) own schedule of rates. 10 Through these trunk lines, a Government Telephone System (GTS) subscriber could make a call to a PLDT subscriber in the same way that the latter could make a call to the former. On 5 March 1958, the plaintiff, through the Director of Telecommunications, entered into an agreement with RCA Communications, Inc., for a joint overseas telephone service whereby the Bureau would convey radio-telephone overseas calls received by RCA's station to and from local residents. 11 Actually, they inaugurated this joint operation on 2 February


1958, under a "provisional" agreement. 12 On 7 April 1958, the defendant Philippine Long Distance Telephone Company, complained to the Bureau of Telecommunications that said bureau was violating the conditions under which their Private Branch Exchange (PBX) is inter-connected with the PLDT's facilities, referring to the rented trunk lines, for the Bureau had used the trunk lines not only for the use of government offices but even to serve private persons or the general public, in competition with the business of the PLDT; and gave notice that if said violations were not stopped by midnight of 12 April 1958, the PLDT would sever the telephone connections. 13 When the PLDT received no reply, it disconnected the trunk lines being rented by the Bureau at midnight on 12 April 1958. 14 The result was the isolation of the Philippines, on telephone services, from the rest of the world, except the United States. 15 At that time, the Bureau was maintaining 5,000 telephones and had 5,000 pending applications for telephone connection. 16 The PLDT was also maintaining 60,000 telephones and had also 20,000 pending applications. 17 Through the years, neither of them has been able to fill up the demand for telephone service. The Bureau of Telecommunications had proposed to the PLDT on 8 January 1958 that both enter into an interconnecting agreement, with the government paying (on a call basis) for all calls passing through the interconnecting facilities from the Government Telephone System to the PLDT. 18 The PLDT replied that it was willing to enter into an agreement on overseas telephone service to Europe and Asian countries provided that the Bureau would submit to the jurisdiction and regulations of the Public Service Commission and in consideration of 37 1/2% of the gross revenues. 19 In its memorandum in lieu of oral argument in this Court dated 9 February 1964, on page 8, the defendant reduced its offer to 33 1/3 % (1/3) as its share in the overseas telephone service. The proposals were not accepted by either party. On 12 April 1958, plaintiff Republic commenced suit against the

defendant, Philippine Long Distance Telephone Company, in the Court of First Instance of Manila (Civil Case No. 35805), praying in its complaint for judgment commanding the PLDT to execute a contract with plaintiff, through the Bureau, for the use of the facilities of defendant's telephone system throughout the Philippines under such terms and conditions as the court might consider reasonable, and for a writ of preliminary injunction against the defendant company to restrain the severance of the existing telephone connections and/or restore those severed. Acting on the application of the plaintiff, and on the ground that the severance of telephone connections by the defendant company would isolate the Philippines from other countries, the court a quo, on 14 April 1958, issued an order for the defendant: (1) to forthwith reconnect and restore the seventy-eight (78) trunk lines that it has disconnected between the facilities of the Government Telephone System, including its overseas telephone services, and the facilities of defendant; (2) to refrain from carrying into effect its threat to sever the existing telephone communication between the Bureau of Telecommunications and defendant, and not to make connection over its telephone system of telephone calls coming to the Philippines from foreign countries through the said Bureau's telephone facilities and the radio facilities of RCA Communications, Inc.; and (3) to accept and connect through its telephone system all such telephone calls coming to the Philippines from foreign countries — until further order of this Court. On 28 April 1958, the defendant company filed its answer, with counterclaims. It denied any obligation on its part to execute a contrary of services with the Bureau of Telecommunications; contested the jurisdiction of the Court of First Instance to compel it to enter into interconnecting agreements, and averred that it was justified to disconnect the trunk lines heretofore leased to the Bureau of Telecommunications under the existing agreement because its facilities were being used in fraud of its rights. PLDT further claimed that the Bureau was engaging in commercial telephone


operations in excess of authority, in competition with, and to the prejudice of, the PLDT, using defendants own telephone poles, without proper accounting of revenues. After trial, the lower court rendered judgment that it could not compel the PLDT to enter into an agreement with the Bureau because the parties were not in agreement; that under Executive Order 94, establishing the Bureau of Telecommunications, said Bureau was not limited to servicing government offices alone, nor was there any in the contract of lease of the trunk lines, since the PLDT knew, or ought to have known, at the time that their use by the Bureau was to be public throughout the Islands, hence the Bureau was neither guilty of fraud, abuse, or misuse of the poles of the PLDT; and, in view of serious public prejudice that would result from the disconnection of the trunk lines, declared the preliminary injunction permanent, although it dismissed both the complaint and the counterclaims. Both parties appealed. Taking up first the appeal of the Republic, the latter complains of the action of the trial court in dismissing the part of its complaint seeking to compel the defendant to enter into an interconnecting contract with it, because the parties could not agree on the terms and conditions of the interconnection, and of its refusal to fix the terms and conditions therefor. We agree with the court below that parties can not be coerced to enter into a contract where no agreement is had between them as to the principal terms and conditions of the contract. Freedom to stipulate such terms and conditions is of the essence of our contractual system, and by express provision of the statute, a contract may be annulled if tainted by violence, intimidation, or undue influence (Articles 1306, 1336, 1337, Civil Code of the Philippines). But the court a quo has apparently overlooked that while the Republic may not compel the PLDT to celebrate a contract with it, the Republic may, in the exercise of the sovereign power of eminent domain, require the telephone company to permit interconnection of the government telephone system and that of the PLDT, as the needs of the government

service may require, subject to the payment of just compensation to be determined by the court. Nominally, of course, the power of eminent domain results in the taking or appropriation of title to, and possession of, the expropriated property; but no cogent reason appears why the said power may not be availed of to impose only a burden upon the owner of condemned property, without loss of title and possession. It is unquestionable that real property may, through expropriation, be subjected to an easement of right of way. The use of the PLDT's lines and services to allow inter-service connection between both telephone systems is not much different. In either case private property is subjected to a burden for public use and benefit. If, under section 6, Article XIII, of the Constitution, the State may, in the interest of national welfare, transfer utilities to public ownership upon payment of just compensation, there is no reason why the State may not require a public utility to render services in the general interest, provided just compensation is paid therefor. Ultimately, the beneficiary of the interconnecting service would be the users of both telephone systems, so that the condemnation would be for public use. The Bureau of Telecommunications, under section 78 (b) of Executive Order No. 94, may operate and maintain wire telephone or radio telephone communications throughout the Philippines by utilizing existing facilities in cities, towns, and provinces under such terms and conditions or arrangement with present owners or operators as may be agreed upon to the satisfaction of all concerned; but there is nothing in this section that would exclude resort to condemnation proceedings where unreasonable or unjust terms and conditions are exacted, to the extent of crippling or seriously hampering the operations of said Bureau. A perusal of the complaint shows that the Republic's cause of action is predicated upon the radio telephonic isolation of the Bureau's facilities from the outside world if the severance of interconnection were to be carried out by the PLDT, thereby preventing the Bureau of Telecommunications from properly


discharging its functions, to the prejudice of the general public. Save for the prayer to compel the PLDT to enter into a contract (and the prayer is no essential part of the pleading), the averments make out a case for compulsory rendering of interconnecting services by the telephone company upon such terms and conditions as the court may determine to be just. And since the lower court found that both parties "are practically at one that defendant (PLDT) is entitled to reasonable compensation from plaintiff for the reasonable use of the former's telephone facilities" (Decision, Record on Appeal, page 224), the lower court should have proceeded to treat the case as one of condemnation of such services independently of contract and proceeded to determine the just and reasonable compensation for the same, instead of dismissing the petition. This view we have taken of the true nature of the Republic's petition necessarily results in overruling the plea of defendantappellant PLDT that the court of first instance had no jurisdiction to entertain the petition and that the proper forum for the action was the Public Service Commission. That body, under the law, has no authority to pass upon actions for the taking of private property under the sovereign right of eminent domain. Furthermore, while the defendant telephone company is a public utility corporation whose franchise, equipment and other properties are under the jurisdiction, supervision and control of the Public Service Commission (Sec. 13, Public Service Act), yet the plaintiff's telecommunications network is a public service owned by the Republic and operated by an instrumentality of the National Government, hence exempt, under Section 14 of the Public Service Act, from such jurisdiction, supervision and control. The Bureau of Telecommunications was created in pursuance of a state policy reorganizing the government offices — to meet the exigencies attendant upon the establishment of the free and independent Government of the Republic of the Philippines, and for the purpose of promoting simplicity, economy and efficiency in its operation (Section 1, Republic Act

No. 51) — and the determination of state policy is not vested in the Commission (Utilities Com. vs. Bartonville Bus Line, 290 Ill. 574; 124 N.E. 373). Defendant PLDT, as appellant, contends that the court below was in error in not holding that the Bureau of Telecommunications was not empowered to engage in commercial telephone business, and in ruling that said defendant was not justified in disconnecting the telephone trunk lines it had previously leased to the Bureau. We find that the court a quo ruled correctly in rejecting both assertions. Executive Order No. 94, Series of 1947, reorganizing the Bureau of Telecommunications, expressly empowered the latter in its Section 79, subsection (b), to "negotiate for, operate and maintain wire telephone or radio telephone communication service throughout the Philippines", and, in subsection (c), "to prescribe, subject to approval by the Department Head, equitable rates of charges for messages handled by the system and/or for time calls and other services that may be rendered by the system". Nothing in these provisions limits the Bureau to non-commercial activities or prevents it from serving the general public. It may be that in its original prospectuses the Bureau officials had stated that the service would be limited to government offices: but such limitations could not block future expansion of the system, as authorized by the terms of the Executive Order, nor could the officials of the Bureau bind the Government not to engage in services that are authorized by law. It is a well-known rule that erroneous application and enforcement of the law by public officers do not block subsequent correct application of the statute (PLDT vs. Collector of Internal Revenue, 90 Phil. 676), and that the Government is never estopped by mistake or error on the part of its agents (Pineda vs. Court of First Instance of Tayabas, 52 Phil. 803, 807; Benguet Consolidated Mining Co. vs. Pineda, 98 Phil. 711, 724). The theses that the Bureau's commercial services constituted unfair competition, and that the Bureau was guilty of fraud and


abuse under its contract, are, likewise, untenable. First, the competition is merely hypothetical, the demand for telephone service being very much more than the supposed competitors can supply. As previously noted, the PLDT had 20,000 pending applications at the time, and the Bureau had another 5,000. The telephone company's inability to meet the demands for service are notorious even now. Second, the charter of the defendant expressly provides: SEC. 14. The rights herein granted shall not be exclusive, and the rights and power to grant to any corporation, association or person other than the grantee franchise for the telephone or electrical transmission of message or signals shall not be impaired or affected by the granting of this franchise: — (Act 3436) And third, as the trial court correctly stated, "when the Bureau of Telecommunications subscribed to the trunk lines, defendant knew or should have known that their use by the subscriber was more or less public and all embracing in nature, that is, throughout the Philippines, if not abroad" (Decision, Record on Appeal, page 216). The acceptance by the defendant of the payment of rentals, despite its knowledge that the plaintiff had extended the use of the trunk lines to commercial purposes, continuously since 1948, implies assent by the defendant to such extended use. Since this relationship has been maintained for a long time and the public has patronized both telephone systems, and their interconnection is to the public convenience, it is too late for the defendant to claim misuse of its facilities, and it is not now at liberty to unilaterally sever the physical connection of the trunk lines. ..., but there is high authority for the position that, when such physical connection has been voluntarily made, under a fair and workable arrangement and guaranteed by contract and the continuous line has come to be patronized and established as a great public convenience, such connection shall not in breach of the agreement be severed by one of the parties. In that case, the

public is held to have such an interest in the arrangement that its rights must receive due consideration. This position finds approval in State ex rel. vs. Cadwaller, 172 Ind. 619, 636, 87 N.E. 650, and is stated in the elaborate and learned opinion of Chief Justice Myers as follows: "Such physical connection cannot be required as of right, but if such connection is voluntarily made by contract, as is here alleged to be the case, so that the public acquires an interest in its continuance, the act of the parties in making such connection is equivalent to a declaration of a purpose to waive the primary right of independence, and it imposes upon the property such a public status that it may not be disregarded" — citing Mahan v. Mich. Tel. Co., 132 Mich. 242, 93 N.W. 629, and the reasons upon which it is in part made to rest are referred to in the same opinion, as follows: "Where private property is by the consent of the owner invested with a public interest or privilege for the benefit of the public, the owner can no longer deal with it as private property only, but must hold it subject to the right of the public in the exercise of that public interest or privilege conferred for their benefit." Allnut v. Inglis (1810) 12 East, 527. The doctrine of this early case is the acknowledged law. (Clinton-Dunn Tel. Co. v. Carolina Tel. & Tel. Co., 74 S.E. 636, 638). It is clear that the main reason for the objection of the PLDT lies in the fact that said appellant did not expect that the Bureau's telephone system would expand with such rapidity as it has done; but this expansion is no ground for the discontinuance of the service agreed upon. The last issue urged by the PLDT as appellant is its right to compensation for the use of its poles for bearing telephone wires of the Bureau of Telecommunications. Admitting that section 19 of the PLDT charter reserves to the Government — the privilege without compensation of using the poles of the grantee to attach one ten-pin cross-arm, and to install, maintain and operate wires of its telegraph system thereon; Provided, however, That the Bureau of Posts shall have the right to place additional cross-arms and wires on the poles of the grantee by


paying a compensation, the rate of which is to be agreed upon by the Director of Posts and the grantee; — the defendant counterclaimed for P8,772.00 for the use of its poles by the plaintiff, contending that what was allowed free use, under the aforequoted provision, was one ten-pin cross-arm attachment and only for plaintiff's telegraph system, not for its telephone system; that said section could not refer to the plaintiff's telephone system, because it did not have such telephone system when defendant acquired its franchise. The implication of the argument is that plaintiff has to pay for the use of defendant's poles if such use is for plaintiff's telephone system and has to pay also if it attaches more than one (1) ten-pin crossarm for telegraphic purposes. As there is no proof that the telephone wires strain the poles of the PLDT more than the telegraph wires, nor that they cause more damage than the wires of the telegraph system, or that the Government has attached to the poles more than one ten-pin cross-arm as permitted by the PLDT charter, we see no point in this assignment of error. So long as the burden to be borne by the PLDT poles is not increased, we see no reason why the reservation in favor of the telegraph wires of the government should not be extended to its telephone lines, any time that the government decided to engage also in this kind of communication. In the ultimate analysis, the true objection of the PLDT to continue the link between its network and that of the Government is that the latter competes "parasitically" (sic) with its own telephone services. Considering, however, that the PLDT franchise is non-exclusive; that it is well-known that defendant PLDT is unable to adequately cope with the current demands for telephone service, as shown by the number of pending applications therefor; and that the PLDT's right to just compensation for the services rendered to the Government telephone system and its users is herein recognized and preserved, the objections of defendant-appellant are without merit. To uphold the PLDT's contention is to subordinate the

needs of the general public to the right of the PLDT to derive profit from the future expansion of its services under its nonexclusive franchise. WHEREFORE, the decision of the Court of First Instance, now under appeal, is affirmed, except in so far as it dismisses the petition of the Republic of the Philippines to compel the Philippine Long Distance Telephone Company to continue servicing the Government telephone system upon such terms, and for a compensation, that the trial court may determine to be just, including the period elapsed from the filing of the original complaint or petition. And for this purpose, the records are ordered returned to the court of origin for further hearings and other proceedings not inconsistent with this opinion. No costs. Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Fernando, Capistrano, Teehankee and Barredo, JJ., concur. 114. G.R. No. L-40424 June 30, 1980 R. MARINO CORPUS, petitioner, vs. COURT OF APPEALS and JUAN T. DAVID, respondents MAKASIAR, J.: This is a petition for review on certiorari of the decision of the Court of Appeals promulgated on February 14, 1975 in CA-G.R. No. 40583-R, affirming the decision of the court of Instance of Manila, Branch V. dated september 4, 1967, in Civil Case no. 61802 entitled "Juan T. David,plaintiff, versus R. Mariano Corpus, defendant', for the recovery of attorneys fees for professional services rendered by the plaintiff, private respondent herein, to defendant, petitioner herein. A Having been close friends, aside from being membres Civil Liberties Union, petitioner Corpus intimately calls respondent


David by his nickname "Juaning" and the latter addresses the former simply as "Marino". The factual setting of this case is stated in the decision of the lower court, thus: It appears that in March, 1958, the defendant was charged administratively by several employee of the Central Bank Export Department of which the defendant is the director. The defendant was represented by Atty. Rosauro Alvarez. Pending the investigation and effective March 18, 1958, he defendant was suspended from office. After the investigating committee found the administrative charges to be without merit, and subsequently recommended the immediate reinstatement of the defendant, the then Governor of Central Bank, Miguel Cuaderno, Sr., recommended that the defendant be considered resigned as on the ground that he had lost confidence in him. The Monetary Board, by a resolution of July 20, 1959, declared the defendant as resigned as of the date of suspension. On August 18, 1959, the defendant, thru Atty. Alvarez, filed the Court of First Instance of Manila a petition for certiorari, mandamus and quo warranto with preliminary mandatory injuction and damages against Miguel Cuaderno, Sr., the Central Bank and Mario Marcos who was appointed to the position of the defendant, said case having been docketed as Civil Case No. 41226 and assigned to Branch VII presided over by Judge Gregorio T. Lantin. On September 7, 1959, the respondent filed a motion to dismiss the petition, alleging among other grounds, the failure of the defendant to exhaust, available administrative remedies (Exh. X). On September 25, 1959, the defendant, thru Atty. Alvarez, filed his opposition to the said motion. On March 17, 1960, during the course of the presentation of the evidence for the petition for a writ of preliminary mandatory injunction, Atty. Alvarez manifested that the defendant was abandoning his prayer for a writ of preliminary mandatory injunction and asked for a ruling on the motion to dismiss. On June 14, 1960, Judge Lantin dismissed Civil Case No. 41226 for failure to exhaust she administrative remedies available to the herein defendant.

On June 24, 1960, Atty. Alverez received a copy of the order of dismissal It was at this state that the plaintiff entered into the case under circumstances about which the parties herein have given divergent versions. According to the plaintiff, six or seven days prior to the expiration of the period for appeal from the order of dismissal, he chanced to meet the late Rafael Corpus, father of the defendant, at the Taza de Oro coffee shop. After they talked about the defendant's having lost his case before Judge Lantin, and knowing that the plaintiff and the defendant were both members of the Civil Liberties Union, Rafael Corpus requested the plaintiff to go over the case and further said that he would send his son, the herein defendant, to the plaintiff to find out what could be done about the case. The defendant called up the plaintiff the following morning for an appointment, and the plaintiff agreed to am him in the latter's office. At said conference, the defendant requested the plaintiff to handle the case because Atty. Alvarez had already been disenchanted and wanted to give up the case. Although at first reluctant to handle the case, the plaintiff finally agreed on condition that he and Atty. Alverez would collaborate in the case. The defendant's version of how the plaintiff came into the case is as follows: After the order of dismissal issued by Judge Lantin was published in the newspapers, the plaintiff sought a conference with the defendant at Taza de Oro, but the defendant told him that he would rather meet the plaintiff at the Swiss Inn. Even before the case was dismissed the plaintiff had shown interest in the same by being present during the hearings of said case in the sala of Judge Lantin When the plaintiff and the defendant met at the Swiss Inn, the plaintiff handed the defendant a memorandum prepared by him on how he can secure the reversal of the order of dismissal by means of a formula stated in said memorandum. During the said occasion the plaintiff scribbled some notes on a paper napkin (Exhibit 19). On June 28, 1960, the defendant wrote the plaintiff, sending with it a copy of the order of Judge Lantin dated June 14, 1960 (Exhibit S Inasmuch as said letter, Exhibit S


already mentions the 'memorandum' of the plaintiff, the defendant contends that it was not six or seven days prior to the expiration of the period of appeal (which should be on or about July 2 or 3, 1960) but on a date even earlier than June 28, 1960 that the plaintiff and the defendant met together to discuss the latter's case. Laying aside for the moment the true circumstances under which the plaintiff started rendering professional services to the defendant, the undisputed evidence shows that on July 7, 1960, the plaintiff filed a motion for reconsideration of the order of dismissal under the joint signatures of the plaintiff and Atty. Alverez (Exhibit B). The plaintiff argued the said motion during the hearing thereof On August 8, 1960, he file a 13-page 'Memorandum of Authorities in support of said motion for reconsideration (Exhibit C). A 3-page supplemental memorandum of authorities was filed by the plaintiff on September 6, 1960 (Exhibit D) On November 15, 1960, Judge Lantin denied the motion for reconsideration. On November 19, 1960, the plaintiff perfected the appeal from the order of dismissal dated June 14, 1960. For purposes of said appeal the plaintiff prepared a 232-page brief and submitted the same before the Supreme Court in Baguio City on April 20, 1961. The plaintiff was the one who orally argued the case before the Supreme Court. In connection with the trip to Baguio for the said oral argument, the plaintiff used his car hich broke down and necessitated extensive repairs paid for by the plaintiff himself. On March 30, 1962, the Supreme Court promulgated its decision reversing the order of dismissal and remanding the case for further proceedings. On April 18, 1962, after the promulgation of the decision of the Supreme Court reversing the dismissal of the case the defendant wrote the plaintiff the following letter, Exhibit 'Q'. . x x x x x x x x x Dear Juaning Will you please accept the attached check in the amount of TWO

THOUSAND P2,000.00) PESOS for legal services in the handling of L-17860 recently decided by the Court? I wish I could give more but as y u know we were banking on a SC decision reinstating me and reimburse my backstage I had been wanting to offer some token of my appreciation of your legal fight for and in my behalf, and it was only last week that I received something on account of a pending claim. Looking forward to a continuation of the case in the lower court, I remain Sincerely yours, Illegible x x x x x x x x x In a reply letter dated April 25, 1962, the plaintiff returned the check, explaining said act as follows: April 25, 1962 My dear Marino: Yesterday, I received your letter of April 18th with its enclosure. I wished thank you for your kind thoughts, however, please don't take offense if I have to return the check. I will explain. When I decided to render professional services in your case, I was motivated by the value to me of the very intimate relations which you and I have enjoyed during the past many years. It was nor primarily, for a professional fee. Although we were not fortunate to have obtained a decision in your case which should have put an end to it. I feel that we have reason to be jubilant over the outcome, because, the final favorable outcome of the case seems certain irrespective of the length of time required to terminate the same. Your appreciation of the efforts I have invested in your case is enough compensation therefor, however, when you shall have obtained a decision which would have finally resolved the case in your favor, remembering me then will make me happy. In the meantime, you will make me happier by just keeping the check. Sincerely yours, JUANING x x x x x x x x x When the case was remanded for further proceedings before Judge


Lantin, the evidence for the defendant was presented by Atty. 'Alvarez with the plaintiff cooperating in the same-'On June 24, 1963, Judge Lantin rendered his decision in favor of the defendant declaring illegal the resolution of the Monetary Board of July 20, 1959, and ordering the defendant's reinstatement and the payment of his back salaries and allowances - The respondents in said Civil Case No. 41226 filed a motion for reconsideration which was opposed by the herein plaintiff. The said decision was appealed by the respondents, as well as by the herein defendant with respect to the award of P5, 000. 00 attorney's feed The plaintiff prepared two briefs for submission to the Court of Appeals one as appellee (Exhibit H) and the other as appellant (Exhibit H1). The Court of Appeal however, certified the case to the Supreme Court in 1964. On March 31, 1965, the Supreme Court rendered a decision affirming the judgment of the Court of first Instance of Manila. On April 19, 1965 the plaintiffs law office made a formal de command upon the defendant for collection of 50% of the amount recovered by the defendant as back salaries and other emoluments from the Central Bank (Exhibit N). This letter was written after the defendant failed to appear at an appointment with the plaintiff so that they could go together to the Central Bank to claim the possession of the office to which the defendant was reinstated and after a confrontation in the office of the plaintiff wherein the plaintiff was remanding 50% of the back salaries and other emoluments amounting to P203,000.00 recoverable by the defendant. The defendant demurred to this demand inasmuch as he had plenty of outstanding obligations and that his tax liability for said back salaries was around P90,000.00, and that he expected to net only around P10,000.00 after deducting all expenses and taxes. On the same date, April 19,1965 the plaintiff wrote the Governor for of Central Bank requesting that the amount representing the sack salaries of the defendant be made out in two one in favor of the defendant and the other representing the professional fees equivalent to 50% of the said back salaries being claimed by the plaintiff (Exhibit 8). F to obtain the relief from the Governor of

Central Bank, the plaintiff instituted this action before this Court on July 20, 1965 (Emphasis supplied). As therein defendant, herein petitioner Marino Corpus filed in August 5, 1965 an answer with counter-claim. On August 30, 1965, private respondent Atty. Juan T. David, plaintiff therein, filed a reply with answer to the counterclaim of petitioner. After due trial, the lower court rendered judgment on September 4, 1967, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered, ordering the defendant to pay plaintiff the sum of P30,000.00 in the concept of professional fees, and to pay the costs (pp. 112-113, CA Record on Appeal p. 54, rec.) After receipt on September 7, 1967 of a copy of the aforequoted judgment, petitioner Marino Corpus, defendant therein, filed on October 7, 1967 a notice of appeal from said judgment to the Court of Appeals. In his appeal, he alleged that the lower court erred: 1. In not holding that the plaintiff's professional services were offered and rendered gratuitously; 2. Assuming that plaintiff is entitled to compensation — in holding that he was entitled to attorney's fees in the amount of P30,000.00 when at most he would be entitled to only P2,500.00; 3. In not dismissing plaintiff's complaint; and 4. In not awarding damages and attorney's fees to the defendant (p. 2, CA Decision, p. 26, rec.) Likewise, private respondent Atty. Juan T. David, plaintiff therein, appealed to the Court of Appeals on October 9, 1967 assigning one error, to wit: The lower court erred in ordering the defendant to pay the plaintiff only the sum of P30,000.00 in the concept of attorney's fees (p. 1, CA Decision, p. 25, rec.). On February 14, 1975, respondent Court of Appeals promulgated its decision affirming in toto the decision of the lower court, with costs against petitioner Marino Corpus (Annex A, Petition for Certiorari, p. 25, rec.) Hence, the instant petition for review on certiorari, petitioner —


contending that the respondent Court of Appeals erred in finding that petitioner accepted private respondent's services "with the understanding of both that he (private respondent) was to be compensated" in money; and that the fee of private respondent was contingent (pp. 3 & 5, Petition for Certiorari, pp. 17 & 19, rec.). On October 1, 1975, the case was deemed submitted for decision (p. 177, rec.), after the parties filed their respective memoranda. B On January 31, 1978, private respondent Atty. Juan T. David filed a petition to remand the case to the court a quo for execution of the latter's decision in Civil Case No. 61802, dated September 4, 1967, alleging that said decision is already deemed affirmed pursuant to Section 11(2), Article X of the New Constitution by reason of the failure of this Tribunal to decide the case within 18 months. Then on July 7, 1978, another petition to remand the case to the lower court to execution was filed by herein private respondent. Subsequently, private respondent Atty. Juan T. David filed with The court a quo a motion dated September 13, 1978 for the issuance of a writ of execution of the lower court's decision in the aforesaid civil case, also invoking Section 11 (2), Article X of the 1973 Constitution. In an order dated September 19, 1978, the lower court, through Judge Jose H. Tecson, directed the issuance of a writ of execution. The writ of execution was issued on October 2, 1978 and a notice of garnishment was also issued n October 13, 1978 to garnish the bank deposits of herein petitioner Marino Corpus in the Commercial Bank and Trust Company, Makati Branch. It appears that on October 13, 1978, herein petitioner filed a motion for reconsideration of the September 19, 1978 order. Private respondent Atty. Juan T. David filed on October 19, 1978 an opposition to said motion and herein petitioner filed a reply on October 30, 1978. The lower court denied said motion for reconsideration in its over dated November 7, 1978. It appears also that in a letter dated October 18, 1978, herein

petitioner Marino Corpus requested this Court to inquire into what appears to be an irregularity in the issuance of the aforesaid garnishment notice to the Commercial Bank and Trust Company, by virtue of which his bank deposits were garnished and he was prevented from making withdrawals from his bank account. In OUR resolution of November 3, 1978, WE required private respondent Atty. Juan T. David and the Commercial Bank and Trust Company to comment on petitioner's letter, and for the bank to explain why it did not honor petitioner's withdrawals from his bank deposits when no garnishment order has been issued by the Supreme Court. This Court further inquired from the lower court whether it has issued any garnishment order during the pendency of the present case. On November 27, 1978, the Commercial Bank and Trust Company filed its comment which was noted in the Court's resolution of December 4, 1978. In said resolution, the Court also required Judge Jose H. Tecson to comply with the resolution of November 3, 1978, inquiring as to whether he had issued any garnishment order, and to explain why a writ of execution was issued despite the pendency of the present case before the Supreme Court. Further, WE required private respondent Atty. Juan T. David Lo explain his failure to file his comment, and to file the same as directed by the resolution of the Court dated November 3, 1978. Private respondent's compliance came on December 13, 1978, requesting to be excused from the filing of his comment because herein petitioner's letter was unverified. Judge Tecson's compliance was filed on December 15, 1978, to which herein petitioner replied on January 11, 1979. In OUR resolution dated January 3, 1979, WE set aside the order of Judge Jose H. Tecson dated September 19, 1978, the writ of execution as well as the notice of garnishment, and required private respondent Atty. Juan T. David to show cause why he should not be cited for contempt for his failure to file his comment as directed by the resolution of the Court dated December 4, 1978, and for filing a motion for execution knowing


that the case is pending appeal and review before this Court Likewise, the Court required Judge Jose H. Tecson to show cause why he should not be cited for contempt for issuing an order directing the issuance of a writ of execution and for issuing such writ despite the pendency of the present case in the Supreme Court. On January 12, 1979, Judge Jose H. Tecson filed his compliance explanation as directed by the aforesaid resolution of January 3, 1979, while private respondent Atty. Juan T. David filed on January 30, 19 79 his compliance and motion for reconsideration after the Court has granted him an extension of time to file his compliance. Private respondent Atty. Juan T. David filed on February 28, 1979, a petition praying that the merits of his compliance be resolved by the Court en banc. Subsequently, on March 26, 1979, another petition was filed by herein private respondent asking the Chief Justice and the members of the First Division to inhibit themselves from participating in the determination of the merits of his compliance and for its merits to be resolved by the Court en banc. C The main thrust of this petition for review is whether or not private respondent Atty. Juan T. David is entitled to attorney's fees. Petitioner Marino Corpus contends that respondent David is not entitled to attorney's fees because there was no contract to that effect. On the other hand, respondent David contends that the absence of a formal contract for the payment of the attorney's fees will not negate the payment thereof because the contract may be express or implied, and there was an implied understanding between the petitioner and private respondent that the former will pay the latter attorney's fees when a final decision shall have been rendered in favor of the petitioner reinstating him to -his former position in the Central Bank and paying his back salaries.

I WE find respondent David's position meritorious. While there was express agreement between petitioner Corpus and respondent David as regards attorney's fees, the facts of the case support the position of respondent David that there was at least an implied agreement for the payment of attorney's fees. Petitioner's act of giving the check for P2,000.00 through his aforestated April 18, 1962 letter to respondent David indicates petitioner's commitment to pay the former attorney's fees, which is stressed by expressing that "I wish I could give more but as you know we were banking on a SC decision reinstating me and reimbursing my back salaries This last sentiment constitutes a promise to pay more upon his reinstatement and payment of his back salaries. Petitioner ended his letter that he was "looking forward to a continuation of the case in the lower court, ... to which the certiorari-mandamus-quo warranto case was remanded by the Supreme Court for further proceedings. Moreover, respondent David's letter-reply of April 25, 1962 confirms the promise of petitioner Corpus to pay attorney's fees upon his reinstatement and payment of back salaries. Said reply states that respondent David decided to be his counsel in the case because of the value to him of their intimate relationship over the years and "not, primarily, for a professional fee." It is patent then, that respondent David agreed to render professional services to petitioner Corpus secondarily for a professional fee. This is stressed by the last paragraph of said reply which states that "however, when you shall have obtained a decision which would have finally resolved the case in your favor, remembering me then will make me happy. In the meantime, you will make me happier by just keeping the check." Thereafter, respondent David continued to render legal services to petitioner Corpus, in collaboration with Atty. Alverez until he and Atty. Alvarez secured the decision directing petitioner's reinstatement with back salaries, which legal services were undisputedly accepted by, and benefited petitioner. Moreover, there is no reason to doubt respondent David's


assertion that Don Rafael Corpus, the late father of petitioner Corpus, requested respondent to help his son, whose suit for reinstatement was dismissed by the lower court; that pursuant to such request, respondent conferred in his office with petitioner, who requested respondent to handle the case as his lawyer, Atty. Alvarez, was already disenchanted and wanted to give up the case; and that respondent agreed on the case. It would have been unethical for respondent to even offer his services when petitioner had a competent counsel in the person of Atty. Alvarez, who has been teaching political, constitutional and administrative law for over twenty years. Likewise, it appears that after the Supreme Court affirmed on March 31, 1965 the order of the lower court reinstating petitioner Corpus with back salaries and awarding attorney's fees of P5,000.00, respondent David made a written demand on April 19, 1965 upon petitioner Corpus for the payment of his attorney's fees in an amount equivalent to 50% of what was paid as back salaries (Exh. N p. 75, Folder of Exhibits, Civil Case No. 61802). Petitioner Corpus, in his reply dated May 7, 1965 to the aforesaid written demand, while disagreeing as to the amount of attorney's fees demanded, did not categorically deny the right of respondent David to attorney's fees but on the contrary gave the latter the amount of P2,500.00, which is one-half (½) of the court-awarded attorney's fees of P5,000.00, thus impliedly admitting the right of respondent David to attorney's fees (Exh. K, p. 57, Folder of Exhibits, Civil Case No. 61802). It is further shown by the records that in the motion filed on March 5, 1975 by petitioner Corpus before the Court of Appeals for the reconsideration of its decision the order of the lower court granting P30,000.00 attorney's fee's to respondent David, he admitted that he was the first to acknowledge that respondent David was entitled to tion for legal services rendered when he sent the chock for P2,000.00 in his letter of April 18, 1962, and he is still to compensate the respondent but only to the extent of P10,000.00 (p. 44, rec.). This admission serves only to further emphasize the fact that petitioner Corpus was aware all the time

that he was liable to pay attorney's fees to respondent David which is therefore inconsistent with his position that the services of respondent David were gratuitous, which did not entitle said respondent to compensation. It may be advanced that respondent David may be faulted for not reducing the agreement for attorney's fees with petitioner Corpus in writing. However, this should be viewed from their special relationship. It appears that both have been friends for several years and were co-members of the Civil Liberties Union. In addition, respondent David and petitioner's father, the late Rafael Corpus, were also close friends. Thus, the absence of an express contract for attorney's fees between respondent David and petitioner Corpus is no argument against the payment of attorney's fees, considering their close relationship which signifies mutual trust and confidence between them. II Moreover, the payment of attorney's fees to respondent David may also be justified by virtue of the innominate contract of facio ut des (I do and you give which is based on the principle that "no one shall unjustly enrich himself at the expense of another." innominate contracts have been elevated to a codal provision in the New Civil Code by providing under Article 1307 that such contracts shall be regulated by the stipulations of the parties, by the general provisions or principles of obligations and contracts, by the rules governing the most analogous nominate contracts, and by the customs of the people. The rationale of this article was stated in the 1903 case of Perez vs. Pomar (2 Phil. 982). In that case, the Court sustained the claim of plaintiff Perez for payment of services rendered against defendant Pomar despite the absence of an express contract to that effect, thus: It does not appear that any written contract was entered into between the parties for the employment of the plaintiff as interpreter, or that any other innominate contract was entered into but whethertheplaintiffsservicesweresolicitedorwhethertheywereoff ered to the defendant for his assistance, inasmuch as these


services were accepted and made use of by the latter, we must consider that there was a tacit and mutual consent as to the rendition of the services. This gives rise to the obligation upon the person benefited by the services to make compensation therefor, since the bilateral obligation to render service as interpreter, on the one hand, and on the other to pay for the service rendered, is thereby incurred. (Arts. 1088, 1089, and 1262 of the Civil Code). x x x x x x x x x ... Whether the service was solicited or offered, the fact remains that Perez rendered to Pomar services as interpreter. As it does not appear that he did this gratuitously, the duty is imposed upon the defendant, he having accepted the benefit of the service, to pay a just compensation therefor, by virtue of the innominate contract of facio ut des implicitly established. x x x x x x x x x ... because it is a well-known principle of law that no one should permitted to enrich himself to the damage of another" (emphasis supplied; see also Tolentino, Civil Code of the Philippines, p. 388, Vol. IV 119621, citing Estate of Reguera vs. Tandra 81 Phil. 404 [1948]; Arroyo vs. Azur 76 Phil. 493119461; and Perez vs. Pomar. 2 Phil. 682 [1903]). WE reiterated this rule in Pacific Merchandising Corp. vs. Consolacion Insurance & Surety Co., Inc. (73 SCRA 564 [1976]) citing the case of Perez v. Pomar, supra thus: Where one has rendered services to another, and these services are accepted by the latter, in the absence of proof that the service was rendered gratuitously, it is but just that he should pay a reasonable remuneration therefor because 'it is a well-known principle of law, that no one should be permitted to enrich himself to the damage of another (emphasis supplied). Likewise, under American law, the same rule obtains (7 CJS 1079; FL Still & Co. v. Powell, 114 So 375). III There was no contract for contingent fee between Corpus and respondent David. Contingent fees depend on an express contract

therefor. Thus, "an attorney is not entitled to a percentage of the amount recovered by his client in the absence of an express contract to that effect" (7 C.J.S. 1063 citing Thurston v. Travelers Ins. Co., 258 N.W. 66, 128 Neb. 141). Where services were rendered without any agreement whatever as to the amount or terms of compensation, the attorney is not acting under a contract for a contingent fee, and a letter by the attorney to the client stating that a certain sum would be a reasonable amount to charge for his services and adding that a rate of not less than five percent nor more than ten would be reasonable and customary does not convert the original agreement into a contract for a contingent fee (7 C.J.S. 1063 citing Fleming v. Phinizy 134 S.E. 814). While there was no express contract between the parties for the payment of attorney's fees, the fact remains that respondent David rendered legal services to petitioner Corpus and therefore as aforestated, is entitled to compensation under the innominate contract of facio lit des And such being the case, respondent David is entitled to a reasonable compensation. IV In determining a reasonable fee to be paid to respondent David as compensation for his services, on a quantum meruit basis, it is proper to consider all the facts and circumstances obtaining in this case particularly the following: The extent of the services rendered by respondent David should be considered together with the extent of the services of Petitioner's other counsel, Atty. Rosauro Alvarez, It is undisputed that Atty. Rosauro Alvarez had rendered legal services as principal counsel for more shall six (6) years while respondent David has rendered legal services as collaborating counsel for almost four (4) years. It appears that Atty. Alvarez started to render legal services after the administrative case was filed on March 7, 1958 against petitioner Corpus. He represented petitioner Corpus in the hearing of said case which was conducted from May 5, 1958 to October 8, 1958, involving 56 sessions, and this resulted in the complete exoneration by the


Investigating Committee of all the charges against the petitioner. It appears further that after the Monetary Board, in its resolution of July 20, 1959, declared petitioner Corpus as being considered resigned from the service, Atty. Alvarez instituted on August 18, 1958 Civil Case No. 41126 in the Court of First Instance of Manila for the setting aside of the aforestated resolution and for the reinstatement of petitioner Corpus. Atty. Alvarez actively participated in the proceedings. On the other hand, respondent David entered his appearance as counsel for petitioner Corpus sometime after the dismissal on June 14, 1960 of the aforesaid civil case. From the time he entered his appearance, both he and Atty. Alvarez rendered legal services to petitioner Corpus in connection with the appeals of the aforementioned civil case to the Court of Appeals and to the Supreme Court. The records disclose that in connection with the appeal from the June 14, 1960 order of dismissal, respondent David prepared and signed pleadings although the same were made for and on behalf of Atty. Alvarez and himself And it is not far-fetched to conclude that all appearances were made by both counsels considering that Atty. Alverez was the principal counsel and respondent David was the collaborating counsel. Thus, when the case was called for oral argument on April 20, 1961 before the Supreme Court, respondent David and Atty. Alverez appeared for petitioner Corpus although it was David who orally argued the case. When the Supreme Court, in its decision of March 30, 1962, remanded the case to the lower court for further it was Atty. Alverez who conducted the presentation of evidence while respondent David assisted him The records also review that respondent David prepared and signed for Atty. Alverez and himself. certain pleadings, including a memorandum. Moreover, after the lower court rendered judgment on June 2 4, 1963 ordering the reinstatement and payment of back salaries to petitioner Corpus and awarding him P5,000.00 by way of attorney's fees, both petitioner Corpus and the respondents in said case appealed the judgment. At that stage, respondent David

again prepared and signed for Atty. Alvarez and himself, the necessary pleadings, including two appeal briefs. And in addition, he made oral arguments in the hearings of motions filed in the lower court before the records of the case were forwarded to the appellate court. Furthermore, while it appears that it was Atty. Alvarez who laid down the basic theory and foundation of the case of petitioner Corpus in the administrative case and later in the civil case, respondent David also advanced legal propositions. Petitioner Corpus contends that said legal propositions were invariably rejected by the courts. This is, however, of no moment because the fact remains that respondent David faithfully rendered legal services for the success of petitioner's case. The benefits secured for petitioner Corpus may also be considered in ascertaining what should be the compensation of respondent David. It cannot be denied that both Atty. Alvarez and respondent David were instrumental in obtaining substantial benefits for petitioner Corpus which consisted primarily of his reinstatement, recovery of back salaries and the vindication of his honor and reputation. But, note should also be taken of the fact that respondent David came at the crucial stage when the case of petitioner Corpus was dismissed by the lower court. Atty. Rosauro Alvarez admittedly was paid by petitioner Corpus the sum of P20,000.00 or at most P22,500.00 (T.s.n., Jan. 11, 1967, pp. 34-35; T.s.n., Feb. 10, 1967, pp. 48-49). On the other hand, petitioner Corpus, after WE suggested on August 15, 1975 that they settle the case amicably has, in his September 15, 1975 pleading filed before this Court (p. 166, rec.), manifested his willingness to pay P10,000.00 for the services of respondent David. However, respondent David has not manifested his intention to accept the offer. In his complaint in the instant case, he asked for P75,000.00 as his attorney's fees. The records reveal that petitioner Corpus actually received only P150,158.50 as back salaries and emoluments after deducting taxes as well as retirement and life insurance premiums due to the GSIS. The amount thus claimed by respondent David represents 50% of the amount actually


received by petitioner Corpus. The lower court, however, awarded only P30,000.00 and it was affirmed by the Court of Appeals. Considering the aforestated circumstances, WE are of the opinion that the reasonable compensation of respondent David should be P20,000.00. V WE find private respondent Juan T. David and Judge Jose H. Tecson, Presiding Judge of the Court of First Instance of Manila, Branch V, guilty of contempt of court. Respondent David filed on or about September 13, 1978 a motion with the court a quo for the issuance of a writ of execution to enforce its decision in Civil Case No 61802, subject of the present petition, knowing fully well that it was then still pending appeal before this Court. In addition, no certification that the aforesaid decision is already deemed affirmed had as yet been issued by the Chief Justice pursuant to Section 11, paragraph 2, Article X of the New Constitution; because respondent David's petitions filed with the Supreme Court on January 31, 1978 and on July 7, 1978 to remand the case to the trial court for execution and for the issuance of such certification had not yet been acted upon as the same were still pending consideration by this Court. In fact, this Court has not as of this time made any pronouncement on the aforesaid provision of the New Constitution. This act of respondent David constitutes disrespect to, as well as disregard of, the authority of this Court as the final arbiter of all cases duly appealed to it, especially constitutional questions. It must be emphasized that as a member of the Philippine Bar he is required "to observe and maintain the respect due to the court of justice and judicial officers" (Section 20 (b), 138 of the Revised Rules of Court). Likewise, Canon 1 of. the Canons of Professional Ethic expressly provide that: "It is the duty of the lawyer to maintain towards the Courts a respectful attitude, not for the sake of the temporary incumbent of the judgement office, but for the maintenance of its supreme importance." And this Court had stressed that "the duty of an attorney to the courts 'can only be

maintained by rendering no service involving any disrespect to the judicial office which he is bound to uphold'" (Rheem of the Philippines v. Ferrer, 20 SCRA 441, 444 [1967] citing the case of Lualhati v. Albert, 67 Phil. 86, 92 [1932]). Moreover, this Court takes judicial notice of the fact that herein respondent David, in the previous case of Integrated Construction Services, Inc. and Engineering Construction, Inc. v. Relova (65 SCRA 638 [1975]), had sent letters addressed to the then Chief Justice Querube C. Makalintal and later to the late Chief Justice Fred Ruiz Castro, requesting for the issuance of certification on the basis of the aforementioned provision of the New Constitution which were not given due consideration. And knowing this, respondent David should have been more prudent and cautious in g with the court a quo any motion for execution. Furthermore, there was even a taint of arrogance and defiance on the part of respondent David in not filing his comment to the letter- complaint dated October 18, 1978 of petitioner Corpus, as required by this Court in its November 3, 1978 and December 4,1978 resolutions which were duly received by him, and instead, he sent on December 13, 1978 a letter requesting to be excused from the filing of his comment on the lame excuse that petitioner's letter-complaint was not verified. On the part of Judge Jose H. Tecson, his presumptuous and precipitate act of granting the motion for execution of dent David likewise constitutes disrespect to, as well as of, the authority of this Court because he know for a that the case was still pending apply as the had not yet been remanded to it and that no certification has been issued by this Court. As a judicial officer, Judge Tecson is charged with the knowledge of the fact that this Court has yet to make a definite pronouncement on Section 11, paragraph 2, Article X of the New Constitution. Judge Tecson should know that only the Supreme Court can authoritatively interpret Section 11 (2) of Article X of the 1973 Constitution. Yet, Judge Tecson assumed the role of the Highest Court of the Land. He should be reminded of what Justice Laurel speaking for the Court, has said in People v. Vera (65 Phil 56, 82 [1937]):


A becoming modesty of inferior courts demands conscious realization of the position that they occupy in the interrelation and operation of the integrated judged system of the nation. It may also be added that the improvident act of respondent David in firing the motion for execution and the precipitate act of Judge Tecson in issuing the writ of execution are intriguing as they invite suspicion that there was connivance between the two. Respondent David would seem to imply that his claim for attorney's fees should be given preference over the other cams now pending in this Court. Certainly, such should not be the case because there are cases which by their nature require immediate or preferential attention by this Tribunal like habeas corpus cases, labor cases and c cases involving death sentence, let alone cases involving properties and property rights of poor litigants pending decision or resolution long before the New Constitution of 1973. Nobility and exempt forbearance were expected of Atty. David, who is old and experienced in the practice of the legal profession, from which he has derived a great measure. of economic well-being and independence Consequently, the filing of the motion for immediate tion and the issuance of the writ of execution constitute a defiance and usurpation of the jurisdiction of the Supreme Court. As a disciplinary measure for the preservation and vindication of the dignity of this Supreme Tribunal respondent Atty. Juan T. David should be REPRIMANDED for his precipitate action of filing a motion for execution as well as Judge Jose H. Tecson for his improvident issuance of a writ of execution while the case is pending appeal before the Supreme Court, and a repetition of said acts would be dealt with more severely. WHEREFORE, PETITIONER R. MARINO CORPUS IS HEREBY DIRECTED TO PAY RESPONDENT ATTY. JUAN T. DAVID THE SUM OF TWENTY THOUSAND (P20,000.00) PESOS AS ATTORNEY'S FEES. RESPONDENT ATTY. JUAN T. DAVID AND JUDGE JOSE H. TECSON OF THE COURT OF FIRST INSTANCE OF MANILA, BRANCH V, ARE HEREBY DECLARED GUILTY OF CONTEMPT AND ARE

HEREBY REPRIMANDED, WITH A WARNING THAT REPETITION TION OF THE SAME OR SIMILAR ACTS WILL BE DEALT WITH MORE SEVERELY. COSTS AGAINST PETITIONER. SO ORDERED. Teehankee (Chairman), Fernandez and Melencio-Herrera, JJ., concur. De Castro, J., concurs in the result. Guerrero, J., is on leave. 115. G.R. No. 192099 July 8, 2015 PAULINO M. EJERCITO, JESSIE M. EJERCITO and JOHNNY D. CHANG, Petitioners, vs. ORIENTAL ASSURANCE CORPORATION, Respondent. D E C I S I O N SERENO, CJ: This is a Petition for Review on Certiorari1 filed by Paulino M. Ejercity, Jessie M. Ejercito and Johnny D. Chang (petitioners) under Rule 45 of the 1997 Rules of Civil Procedure assailing the Court of Appeals (CA) Decision dated 2 October 20092 and Resolution date 14 April 20103 in CA-G.R. CV No. 90828. The Special Third Division of the CA reversed and set aside the Regional Trial Court (RTC) Decision in Civil Case No. 01-101999: WHEREFORE, premises considered, the present appeal is hereby GRANTED. THE Decision dated February 2, 2007 of the Regional


Trial Court of Manila, Branch 36 in Civil Case No. 01-101999 is hereby SET ASIDE.

amounting to 15,024.54 was paid by the insured corporation under Official Receipt No. 100262.

A new judgment is hereby entered ordering the defendants appellees Merissa C Somes, Paulino M. Ejercito, Jessie M. Ejercito and Johnny D. Chang jointly and severally liable to pay plaintiffappellant Oriental Assurance Corporation the following sums:

FFV Travel & Tours, Inc. has been declared in default for failure to pay its obligations amounting 5,484,086.97 and USD 18,760.98 as of 31 July 2000. Consequently, IATA demanded payment of the bond, and respondent heeded the demand on 28 November 2000 as evidenced by China Bank Check No. 104949. IATA executed a Release of Claim on 29 November 2000 acknowledging payment of the surety bond.

1. The principal amount of P3,000,000.00 with interest at the rate of 12% per annum from the time of the filing of the complaint until the same shall have been fully paid: 2. Attorney’s fees in the amount of P30,000.00; and 3. Costs of suit. SO ORDERED

Respondent sent demand letters to petitioners and Somes for reimbursement of the 3 million pursuant to the indemnity agreement.1âwphi1 For their failure to reimburse respondent, the latter filed a collection suit. THE RTC RULING

THE FACTS The facts of the case, as found by the CA, are as follows: On 10 May 1999, respondent Oriental Assurance Corporation, through its Executive Vice President Luz N. Cotoco issued a Surety Bond in favor of FFV Travel & Tours, Inc. (Company). The bond was intended to guarantee the Company’s payment of airline tickets purchased on credit from participating members of International Air Transport Association (IATA) to the extent of 3million. On the same day, petitioners and Merissa C. Somes (Somes) executed a Deed of Indemnity in favor of respondent. The Surety Bond was effective for one year from its issuance until 10 May 2000. It was renewed for another year, from 10 May 2000 to 10 May 2001, as shown in Bond Endorsement No. OAC-2000/0145 dated 17 April 2000. The corresponding renewal premium

After trial, the RTC rendered a Decision dismissing the complaint against petitioners of lack of merit and pronouncing Somes liable to pay the amount of 3 million and interest per annum at the rate of 12% of the principal obligation from the date the complaint was filed up to the date the obligation would have been fully paid. The RTC found that there was no written agreement to show the intention of petitioners to renew the Deed of Indemnity. The absence thereof was evidenced by the nonappearance of any signature on the Renewal Notice, which was not signed by Somes. However, she was held liable to pay the surety value of the cost of tickets as she had paid the premium for the renewal of the Surety Bond and used the renewed bond by submitting it to IATA. THE CA RULING The CA reversed the finding of the RTC and ruled that petitioners could not escape liability as they had authorized respondent to


grant any renewals or extensions pursuant to the indemnity agreement. The Deed of Indemnity contained a stipulation that the signatories (petitioners) were authorizing the Company (respondent) to grant or consent to the grant of any extension, continuation, increase, modification, change or alteration, and/or renewal of the original bond. Petitioners voluntarily signed the agreement and, are educated persons (Paulino, being a lawyer), so they could not have misunderstood the legal effects of the undertaking they had signed. ISSUES Petitioners raise the following issues: Whether or not the Honorable Court of Appeals erred in ruling that petitioners are liable to indemnify the respondent under the deed of indemnity considering that petitioners did not give their consent to be bound thereby beyond the one (1) year effectivity period of the original surety bond. Whether or not the Honorable Court of Appeal erred in ruling that petitioners are liable to pay the respondent attorney’s fees considering that petitioners did not breach their obligation under the deed of indemnity to indemnify the respondent during the one (1) year effectivity period of the original surety bond.5 THE COURT’S RULING We find no merit in the Petition. The contract of indemnity is the law between the parties.6 it is a cardinal rule in the interpretation of a contract that if its terms are clear and leave no doubt on the intention of the contracting parties, the literal meaning of its stipulation shall control.7 the CA aptly found provisions in the contract that could not exonerate petitioners from their liability.

The deed of indemnity contains the following stipulations: INDEMNITY: To indemnify the COMPANY for any damages, payments, advances, prejudices, loss, costs and expenses of whatever kind and nature, including counsel or attorney’s fees, which the company may at any time sustain or incur as a consequence of having executed the above mentioned Bond, it renewals, extensions modifications or substitutions and said attorney’s fees shall not be less than fifteen (15%) per cent of the amount claimed by the company in each action, the same to be due and payable irrespective of whether the case is settle judicially or extrajudicially. Xxxx MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH: - the said indemnities will be paid to the COMPANY as soon as demand is received from the creditor or as soon as it becomes liable to make payment of any sum under the terms of the abovementioned Bond, its renewals. Extension, modifications or substitutions whether the said sum or sums or par thereof have been actually paid or not. We authorize the COMPANY to accept in any case and at its entire discretion, from any of us, payment on account of the pending obligation, and to grant extensions to any of us, to liquidate said obligations, without necessity of pervious knowledge or consent from the obligors. X x x x INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: Any payment or disbursement made by the COMPANY on account of the above mentioned Bond, its renewals, extensions, modifications or substitutions either in the belief that the Company was obligated to make such payment or in the belief that the company was obligated to make such payment or in the


belief that said payment was necessary in order to avoid greater losses or obligation for which the company might be liable by virtue of the terms of the above mentioned Bond, its renewals, extensions, modifications or substitutions shall be final and will not be disputed by the undersigned who jointly and severally bind themselves to indemnify the COMPANY of any and all such payments as stated in the preceding clauses. WAIVER: -- the undersigned hereby waive all the rights, privileges, and benefits that they have or may have under Articles 2077, 2078, 2079, 2080 and 2081 of the Civil Code. RENEWALS ALTERATIONS AND SUBSTITUTIONS: - the undersigned hereby empower and authorize the company to grant or consent to the granting of any extension continuation increase modifications change alteration and/or renewal of the original bond herein referred to and to execute or consent to the execution of any substitution for said bond with the same or different conditions and parties and the undersigned hereby hold themselves jointly and severally liable to the company for the original bond hereinabove mentioned or for any extension, continuation, increase, modification, change, alteration, renewal or substitution thereof until the full amount including principal interests premiums costs and other expenses due to the company thereunder is fully paid up8 Clearly, as far as respondent is concerned, petitioners have expressly bound themselves to the contract, which provides for the term granting authority to the company to renew the original bond. The terms of the contract are clear, explicit and unequivocal. Therefore, the subsequent acts of the Company, through Somes, the led to the renewal of the surety bond are binding on petitioners as well.

The intention of Somes to renew the bond cannot be denied, as she paid the renewal premium and even submitted the renewed bond to IATA.9 The claim of petitioners that they only consented to the one-year validity of the surety bond must be directed against Somes in a separate action.1awp++i1 She allegedly convinced them that the bond was valid for on year only. The allegation of petitioners is an agreement outside of the contract. In other words, respondent is not privy to the alleged agreement between Somes and petitioners. For respondent, there was a valid indemnity agreement executed by the parties, and contained a proviso that became the basis for the authority to renew the original bond. With regard to the contention that the Deed of Indemnity is a contract of adhesion, the Court has consistently held that contracts of adhesion are not invalid per se and that their binding effects have been upheld on numerous occasions.10 the pretension that petitioners did not consent to the renewal of the bond is belied by the fact that the terms of the contract which they voluntarily entered into contained a clause granting authority to the Company to grant or consent to the renewal of the bond. Having entered into the contract with full knowledge of its terms and conditions, petitioners are stopped from asserting that they did so under the ignorance of the legal effect of the contract or the undertaking. It is true that on some occasions, the Court has struck down such contract as void when the weaker party is imposed upon in dealing with the dominant party is reduced to the alternative of accepting the contract or leaving it, completely deprived of the opportunity to bargain on equal footing.13 this reasoning cannot be used in the instant case. One of the petitioners, Paulino M. Ejercito, is a lawyer who cannot feign ignorance of the legal effect of his undertaking. Petitioners could have easily inserted a


remark in the clause granting authority to the Company to renew the original bond, if the renewal thereof was their intention. The rule that ignorance of the contents of an instrument does not ordinarily affect the liability of the one who signs it12 may also be applied to this Indemnity Agreement. And the mistake of petitioners as to the legal effect of their obligation is ordinarily no reason for relieving them of liability.13 WHEREFORE, premises considered the Petition is DENIED. The Court or Appeals Decision dated 2 October 2009 and Resolution dated 14 April 2010 in CA-G.R. CV No. 90828 are AFFIRMED. SO ORDERED. 116. G.R. No. 163512 February 28, 2007 DAISY B. TIU, Petitioner vs. PLATINUM PLANS PHIL., INC., Respondent. D E C I S I O N QUISUMBING, J.: For review on certiorari are the Decision1 dated January 20, 2004 of the Court of Appeals in CA-G.R. CV No. 74972, and its Resolution2 dated May 4, 2004 denying reconsideration. The Court of Appeals had affirmed the decision3 dated February 28, 2002 of the Regional Trial Court (RTC) of Pasig City, Branch 261, in an action for damages, ordering petitioner to pay respondent P100,000 as liquidated damages. The relevant facts are as follows: Respondent Platinum Plans Philippines, Inc. is a domestic corporation engaged in the pre-need industry. From 1987 to

1989, petitioner Daisy B. Tiu was its Division Marketing Director. On January 1, 1993, respondent re-hired petitioner as Senior Assistant Vice-President and Territorial Operations Head in charge of its Hongkong and Asean operations. The parties executed a contract of employment valid for five years.4 On September 16, 1995, petitioner stopped reporting for work. In November 1995, she became the Vice-President for Sales of Professional Pension Plans, Inc., a corporation engaged also in the pre-need industry. Consequently, respondent sued petitioner for damages before the RTC of Pasig City, Branch 261. Respondent alleged, among others, that petitioner’s employment with Professional Pension Plans, Inc. violated the non-involvement clause in her contract of employment, to wit: 8. NON INVOLVEMENT PROVISION – The EMPLOYEE further undertakes that during his/her engagement with EMPLOYER and in case of separation from the Company, whether voluntary or for cause, he/she shall not, for the next TWO (2) years thereafter, engage in or be involved with any corporation, association or entity, whether directly or indirectly, engaged in the same business or belonging to the same pre-need industry as the EMPLOYER. Any breach of the foregoing provision shall render the EMPLOYEE liable to the EMPLOYER in the amount of One Hundred Thousand Pesos (P100,000.00) for and as liquidated damages.5 Respondent thus prayed for P100,000 as compensatory damages; P200,000 as moral damages; P100,000 as exemplary damages; and 25% of the total amount due plus P1,000 per counsel’s court appearance, as attorney’s fees. Petitioner countered that the non-involvement clause was unenforceable for being against public order or public policy: First, the restraint imposed was much greater than what was necessary to afford respondent a fair and reasonable protection. Petitioner contended that the transfer to a rival company was an accepted practice in the pre-need industry. Since the products sold by the companies were more or less the same, there was


nothing peculiar or unique to protect. Second, respondent did not invest in petitioner’s training or improvement. At the time petitioner was recruited, she already possessed the knowledge and expertise required in the pre-need industry and respondent benefited tremendously from it. Third, a strict application of the non-involvement clause would amount to a deprivation of petitioner’s right to engage in the only work she knew. In upholding the validity of the non-involvement clause, the trial court ruled that a contract in restraint of trade is valid provided that there is a limitation upon either time or place. In the case of the pre-need industry, the trial court found the two-year restriction to be valid and reasonable. The dispositive portion of the decision reads: WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering the latter to pay the following: 1. the amount of One Hundred Thousand Pesos (P100,000.00) for and as damages, for the breach of the non-involvement provision (Item No. 8) of the contract of employment; 2. costs of suit. There being no sufficient evidence presented to sustain the grant of attorney’s fees, the Court deems it proper not to award any. SO ORDERED.6 On appeal, the Court of Appeals affirmed the trial court’s ruling. It reasoned that petitioner entered into the contract on her own will and volition. Thus, she bound herself to fulfill not only what was expressly stipulated in the contract, but also all its consequences that were not against good faith, usage, and law. The appellate court also ruled that the stipulation prohibiting non-employment for two years was valid and enforceable considering the nature of respondent’s business. Petitioner moved for reconsideration but was denied. Hence, this appeal by certiorari where petitioner alleges that the Court of Appeals erred when: A. … [IT SUSTAINED] THE VALIDITY OF THE NON-INVOLVEMENT

CLAUSE IN PETITIONER’S CONTRACT CONSIDERING THAT THE PERIOD FIXED THEREIN IS VOID FOR BEING OFFENSIVE TO PUBLIC POLICY B. … [IT SUSTAINED] THE AWARD OF LIQUIDATED DAMAGES CONSIDERING THAT IT BEING IN THE NATURE OF A PENALTY THE SAME IS EXCESSIVE, INIQUITOUS OR UNCONSCIONABLE7 Plainly stated, the core issue is whether the non-involvement clause is valid. Petitioner avers that the non-involvement clause is offensive to public policy since the restraint imposed is much greater than what is necessary to afford respondent a fair and reasonable protection. She adds that since the products sold in the pre-need industry are more or less the same, the transfer to a rival company is acceptable. Petitioner also points out that respondent did not invest in her training or improvement. At the time she joined respondent, she already had the knowledge and expertise required in the pre-need industry. Finally, petitioner argues that a strict application of the non-involvement clause would deprive her of the right to engage in the only work she knows. Respondent counters that the validity of a non-involvement clause has been sustained by the Supreme Court in a long line of cases. It contends that the inclusion of the two-year noninvolvement clause in petitioner’s contract of employment was reasonable and needed since her job gave her access to the company’s confidential marketing strategies. Respondent adds that the non-involvement clause merely enjoined her from engaging in pre-need business akin to respondent’s within two years from petitioner’s separation from respondent. She had not been prohibited from marketing other service plans. As early as 1916, we already had the occasion to discuss the validity of a non-involvement clause. In Ferrazzini v. Gsell,8 we said that such clause was unreasonable restraint of trade and therefore against public policy. In Ferrazzini, the employee was prohibited from engaging in any business or occupation in the Philippines for a period of five years after the termination of his


employment contract and must first get the written permission of his employer if he were to do so. The Court ruled that while the stipulation was indeed limited as to time and space, it was not limited as to trade. Such prohibition, in effect, forces an employee to leave the Philippines to work should his employer refuse to give a written permission. In G. Martini, Ltd. v. Glaiserman,9 we also declared a similar stipulation as void for being an unreasonable restraint of trade. There, the employee was prohibited from engaging in any business similar to that of his employer for a period of one year. Since the employee was employed only in connection with the purchase and export of abaca, among the many businesses of the employer, the Court considered the restraint too broad since it effectively prevented the employee from working in any other business similar to his employer even if his employment was limited only to one of its multifarious business activities. However, in Del Castillo v. Richmond,10 we upheld a similar stipulation as legal, reasonable, and not contrary to public policy. In the said case, the employee was restricted from opening, owning or having any connection with any other drugstore within a radius of four miles from the employer’s place of business during the time the employer was operating his drugstore. We said that a contract in restraint of trade is valid provided there is a limitation upon either time or place and the restraint upon one party is not greater than the protection the other party requires. Finally, in Consulta v. Court of Appeals,11 we considered a noninvolvement clause in accordance with Article 130612 of the Civil Code. While the complainant in that case was an independent agent and not an employee, she was prohibited for one year from engaging directly or indirectly in activities of other companies that compete with the business of her principal. We noted therein that the restriction did not prohibit the agent from engaging in any other business, or from being connected with any other company, for as long as the business or company did not compete with the principal’s business. Further, the prohibition applied

only for one year after the termination of the agent’s contract and was therefore a reasonable restriction designed to prevent acts prejudicial to the employer. Conformably then with the aforementioned pronouncements, a non-involvement clause is not necessarily void for being in restraint of trade as long as there are reasonable limitations as to time, trade, and place. In this case, the non-involvement clause has a time limit: two years from the time petitioner’s employment with respondent ends. It is also limited as to trade, since it only prohibits petitioner from engaging in any pre-need business akin to respondent’s.1awphi1.net More significantly, since petitioner was the Senior Assistant VicePresident and Territorial Operations Head in charge of respondent’s Hongkong and Asean operations, she had been privy to confidential and highly sensitive marketing strategies of respondent’s business. To allow her to engage in a rival business soon after she leaves would make respondent’s trade secrets vulnerable especially in a highly competitive marketing environment. In sum, we find the non-involvement clause not contrary to public welfare and not greater than is necessary to afford a fair and reasonable protection to respondent.13 In any event, Article 1306 of the Civil Code provides that parties to a contract 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. Article 115914 of the same Code also provides that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Courts cannot stipulate for the parties nor amend their agreement where the same does not contravene law, morals, good customs, public order or public policy, for to do so would be to alter the real intent of the parties, and would run contrary to the function of the courts to give force and effect thereto.15 Not being contrary to public policy, the non-involvement clause,


which petitioner and respondent freely agreed upon, has the force of law between them, and thus, should be complied with in good faith.16 Thus, as held by the trial court and the Court of Appeals, petitioner is bound to pay respondent P100,000 as liquidated damages. While we have equitably reduced liquidated damages in certain cases,17 we cannot do so in this case, since it appears that even from the start, petitioner had not shown the least intention to fulfill the non-involvement clause in good faith. WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 20, 2004, and the Resolution dated May 4, 2004, of the Court of Appeals in CA-G.R. CV No. 74972, are AFFIRMED. Costs against petitioner. SO ORDERED. 117. G.R. No. L-15127 May 30, 1961 EMETERIO CUI, plaintiff-appellant, vs. ARELLANO UNIVERSITY, defendant-appellee. G.A.S. Sipin, Jr., for plaintiff-appellant. E. Voltaire Garcia for defendant-appellee. CONCEPCION, J.: Appeal by plaintiff Emeterio Cui from a decision of the Court of First Instance of Manila, absolving defendant Arellano University from plaintiff's complaint, with costs against the plaintiff, and dismissing defendant's counter claim, for insufficiency of proof thereon. In the language of the decision appealed from: The essential facts of this case are short and undisputed. As established by the agreement of facts Exhibits X and by the respective oral and documentary evidence introduced by the parties, it appears conclusive that plaintiff, before the school year

1948-1949 took up preparatory law course in the defendant University. After finishing his preparatory law course plaintiff enrolled in the College of Law of the defendant from the school year 1948-1949. Plaintiff finished his law studies in the defendant university up to and including the first semester of the fourth year. During all the school years in which plaintiff was studying law in defendant law college, Francisco R. Capistrano, brother of the mother of plaintiff, was the dean of the College of Law and legal counsel of the defendant university. Plaintiff enrolled for the last semester of his law studies in the defendant university but failed to pay his tuition fees because his uncle Dean Francisco R. Capistrano having severed his connection with defendant and having accepted the deanship and chancellorship of the College of Law of Abad Santos University, plaintiff left the defendant's law college and enrolled for the last semester of his fourth year law in the college of law of the Abad Santos University graduating from the college of law of the latter university. Plaintiff, during all the time he was studying law in defendant university was awarded scholarship grants, for scholastic merit, so that his semestral tuition fees were returned to him after the ends of semester and when his scholarship grants were awarded to him. The whole amount of tuition fees paid by plaintiff to defendant and refunded to him by the latter from the first semester up to and including the first semester of his last year in the college of law or the fourth year, is in total P1,033.87. After graduating in law from Abad Santos University he applied to take the bar examination. To secure permission to take the bar he needed the transcripts of his records in defendant Arellano University. Plaintiff petitioned the latter to issue to him the needed transcripts. The defendant refused until after he had paid back the P1,033 87 which defendant refunded to him as above stated. As he could not take the bar examination without those transcripts, plaintiff paid to defendant the said sum under protest. This is the sum which plaintiff seeks to recover from defendant in this case. Before defendant awarded to plaintiff the scholarship grants as


above stated, he was made to sign the following contract covenant and agreement: "In consideration of the scholarship granted to me by the University, I hereby waive my right to transfer to another school without having refunded to the University (defendant) the equivalent of my scholarship cash. (Sgd.) Emeterio Cui". It is admitted that, on August 16, 1949, the Director of Private Schools issued Memorandum No. 38, series of 1949, on the subject of "Scholarship," addressed to "All heads of private schools, colleges and universities," reading: 1. School catalogs and prospectuses submitted to this, Bureau show that some schools offer full or partial scholarships to deserving students — for excellence in scholarship or for leadership in extra-curricular activities. Such inducements to poor but gifted students should be encouraged. But to stipulate the condition that such scholarships are good only if the students concerned continue in the same school nullifies the principle of merit in the award of these scholarships. 2. When students are given full or partial scholarships, it is understood that such scholarships are merited and earned. The amount in tuition and other fees corresponding to these scholarships should not be subsequently charged to the recipient students when they decide to quit school or to transfer to another institution. Scholarships should not be offered merely to attract and keep students in a school. 3. Several complaints have actually been received from students who have enjoyed scholarships, full or partial, to the effect that they could not transfer to other schools since their credentials would not be released unless they would pay the fees corresponding to the period of the scholarships. Where the Bureau believes that the right of the student to transfer is being denied on this ground, it reserves the right to authorize such transfer. that defendant herein received a copy of this memorandum; that plaintiff asked the Bureau of Private Schools to pass upon the

issue on his right to secure the transcript of his record in defendant University, without being required to refund the sum of P1,033.87; that the Bureau of Private Schools upheld the position taken by the plaintiff and so advised the defendant; and that, this notwithstanding, the latter refused to issue said transcript of records, unless said refund were made, and even recommended to said Bureau that it issue a written order directing the defendant to release said transcript of record, "so that the case may be presented to the court for judicial action." As above stated, plaintiff was, accordingly, constrained to pay, and did pay under protest, said sum of P1,033.87, in order that he could take the bar examination in 1953. Subsequently, he brought this action for the recovery of said amount, aside from P2,000 as moral damages, P500 as exemplary damages, P2,000 as attorney's fees, and P500 as expenses of litigation. In its answer, defendant reiterated the stand it took, vis-a-vis the Bureau of Private Schools, namely, that the provisions of its contract with plaintiff are valid and binding and that the memorandum above-referred to is null and void. It, likewise, set up a counterclaim for P10,000.00 as damages, and P3,000 as attorney's fees. The issue in this case is whether the above quoted provision of the contract between plaintiff and the defendant, whereby the former waived his right to transfer to another school without refunding to the latter the equivalent of his scholarships in cash, is valid or not. The lower court resolved this question in the affirmative, upon the ground that the aforementioned memorandum of the Director of Private Schools is not a law; that the provisions thereof are advisory, not mandatory in nature; and that, although the contractual provision "may be unethical, yet it was more unethical for plaintiff to quit studying with the defendant without good reasons and simply because he wanted to follow the example of his uncle." Moreover, defendant maintains in its brief that the aforementioned memorandum of the Director of Private Schools is null and void because said officer had no authority to issue it, and because it had been


neither approved by the corresponding department head nor published in the official gazette. We do not deem it necessary or advisable to consider as the lower court did, the question whether plaintiff had sufficient reasons or not to transfer from defendant University to the Abad Santos University. The nature of the issue before us, and its far reaching effects, transcend personal equations and demand a determination of the case from a high impersonal plane. Neither do we deem it essential to pass upon the validity of said Memorandum No. 38, for, regardless of the same, we are of the opinion that the stipulation in question is contrary to public policy and, hence, null and void. The aforesaid memorandum merely incorporates a sound principle of public policy. As the Director of Private Schools correctly pointed, out in his letter, Exhibit B, to the defendant, There is one more point that merits refutation and that is whether or not the contract entered into between Cui and Arellano University on September 10, 1951 was void as against public policy. In the case of Zeigel vs. Illinois Trust and Savings Bank, 245 Ill. 180, 19 Ann. Case 127, the court said: 'In determining a public policy of the state, courts are limited to a consideration of the Constitution, the judicial decisions, the statutes, and the practice of government officers.' It might take more than a government bureau or office to lay down or establish a public policy, as alleged in your communication, but courts consider the practices of government officials as one of the four factors in determining a public policy of the state. It has been consistently held in America that under the principles relating to the doctrine of public policy, as applied to the law of contracts, courts of justice will not recognize or uphold a transaction which its object, operation, or tendency is calculated to be prejudicial to the public welfare, to sound morality or to civic honesty (Ritter vs. Mutual Life Ins. Co., 169 U.S. 139; Heding vs. Gallaghere 64 L.R.A. 811; Veazy vs. Allen, 173 N.Y. 359). If Arellano University understood clearly the real essence of scholarships and the motives which prompted this office to issue Memorandum No.

38, s. 1949, it should have not entered into a contract of waiver with Cui on September 10, 1951, which is a direct violation of our Memorandum and an open challenge to the authority of the Director of Private Schools because the contract was repugnant to sound morality and civic honesty. And finally, in Gabriel vs. Monte de Piedad, Off. Gazette Supp. Dec. 6, 1941, p. 67 we read: 'In order to declare a contract void as against public policy, a court must find that the contract as to consideration or the thing to be done, contravenes some established interest of society, or is inconsistent with sound policy and good morals or tends clearly to undermine the security of individual rights. The policy enunciated in Memorandum No. 38, s. 1949 is sound policy. Scholarship are awarded in recognition of merit not to keep outstanding students in school to bolster its prestige. In the understanding of that university scholarships award is a business scheme designed to increase the business potential of an education institution. Thus conceived it is not only inconsistent with sound policy but also good morals. But what is morals? Manresa has this definition. It is good customs; those generally accepted principles of morality which have received some kind of social and practical confirmation. The practice of awarding scholarships to attract students and keep them in school is not good customs nor has it received some kind of social and practical confirmation except in some private institutions as in Arellano University. The University of the Philippines which implements Section 5 of Article XIV of the Constitution with reference to the giving of free scholarships to gifted children, does not require scholars to reimburse the corresponding value of the scholarships if they transfer to other schools. So also with the leading colleges and universities of the United States after which our educational practices or policies are patterned. In these institutions scholarships are granted not to attract and to keep brilliant students in school for their propaganda mine but to reward merit or help gifted students in whom society has an established interest or a first lien. (Emphasis supplied.) WHEREFORE, the decision appealed from is hereby reversed and


another one shall be entered sentencing the defendant to pay to the plaintiff the sum of P1,033.87, with interest thereon at the legal rate from September 1, 1954, date of the institution of this case, as well as the costs, and dismissing defendant's counterclaim. It is so ordered. Bengzon, C.J., Padilla, Labrador, Reyes, J.B.L., Barrera, Parades, Dizon, De Leon and Natividad, JJ., concur. Bautista Angelo, J., reserves his vote. 118. G.R. No. L-13403 March 23, 1960 RAMON E. SAURA, plaintiff-appellant, vs. ESTELA P. SINDICO, defendant-appellee. Anacleto Magno for appellant. Espeque and Jalandoni for appellee. REYES, J. B. L., J.: Appeal on issues of law from an order of the Court of First Instance of Pangasinan dismissing plaintiff's complaint for damages. From the records it appears that Ramon E. Saura and Estela P. Sindico were contesting for nomination as the official candidate of the Nacionalista Party in the fourth district of Pangasinan in the congressional elections of November 12, 1957. On August 23, 1957, the parties entered into a written agreement bearing the same date, containing among other matters stated therein, a pledge that — Each aspirant shall respect the result of the aforesaid convention, i.e., no one of us shall either run as a rebel or independent candidate after losing in said convention. In the provincial convention held by the Nacionalista Party on August 31, 1957, Saura was elected and proclaimed the Party's official congressional candidate for the aforesaid district of

Pangasinan. Nonetheless, Sindico, in disregard of the covenant, filed, on September 6, 1957, her certificate of candidacy for the same office with the Commission on Elections, and she openly and actively campaigned for her election. Wherefore, on October 5, 1957, plaintiff Saura commenced this suit for the recovery of damages. Upon motion of the defendant, the lower court, in its order of November 19, 1957, dismissed the complaint on the basis that the agreement sued upon is null and void, in tat (1) the subject matter of the contract, being a public office, is not within the commerce of man; and (2) the "pledge" was in curtailment of the free exercise of elective franchise and therefore against public policy. Hence, this appeal. We agree with the lower court in adjudging the contract or agreement in question a nullity. Among those that may not be the subject matter (object) of contracts are certain rights of individuals, which the law and public policy have deemed wise to exclude from the commerce of man. Among them are the political rights conferred upon citizens, including, but not limited to, once's right to vote, the right to present one's candidacy to the people and to be voted to public office, provided, however, that all the qualifications prescribed by law obtain. Such rights may not, therefore, be bargained away curtailed with impunity, for they are conferred not for individual or private benefit or advantage but for the public good and interest. Constitutional and statutory provision fix the qualifications of persons who may be eligible for certain elective public offices. Said requirements may neither be enlarged nor reduced by mere agreements between private parties. A voter possessing all the qualifications required to fill an office may, by himself or through a political party or group, present his candidacy without further limitations than those provided by law. Every voter has a right to be a candidate for public office if he possesses the qualifications required to fill the office. It does not necessarily follow that he can be the candidate of a particular political party. The statute provides when and how one may be a candidate of a political party. If he cannot fill the requirement so as


to be the candidates of the political party of his choice, he may still be a candidate at the general election by petition. The right of the voter to vote at the general election for whom he pleases cannot be limited. (Roberts vs. Cleveland, Secretary of State of State of New Mexico, 48 NM 226, 149 P (2d) 120, 153 A.L.R. 635, 637-638) (Emphasis supplied) In common law, certain agreements in consideration of the withdrawal of candidates for office have invariably been condemned by the courts as being against public policy, be it a withdrawal from the race for nomination or, after nomination, from the race for election. (See notes in 37 L. R. A. (N.S.) 289 and cases cited therein; 18 Am. Jur. Sec. 352, pp. 399-400) In the case at hand, plaintiff complains on account of defendant's alleged violation of the "pledge" in question by filing her own certificate o candidacy for a seat in the Congress of the Philippines and in openly and actively campaigning for her election. In the face of the preceding considerations, we certainly cannot entertain plaintiff's action, which would result in limiting the choice of the electors to only those persons selected by a small group or by party boses. The case of Pendleton vs. Pace, 9 S.W. (2nd) 437, cited by the appellant, is clearly inapplicable. The court there only sanctioned the validity of an agreement by the opposing candidates for nomination setting aside and re-submitting the nomination for another primary election on account of the protest or contest filed by the losing candidate in the first primary election. To abandon the contest proceedings, the candidates for nomination agreed to submit again their nomination to the electors in the subsequent primary. Appellant likewise cites and quotes a portion of our ruling in Monsale vs. Nico, 83 Phil., 758; 46 Off. Gaz., 210, to the effect that it is not incompetent or a candidate to withdraw or annul his certificate of candidacy. This is not in point, for while we stated there that he may do so, there being no legal prohibition against such a voluntary withdrawal, it does not follow, nor did we imply anywhere in the decision, that in case there is any agreement or

consideration for such a withdrawal, said agreement or consideration should be held valid or given effect. We find it unnecessary to discuss the other points raised by the parties. Wherefore, the order of dismissal appealed from is hereby affirmed. No pronouncement as to costs. Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia, Barrera and Gutierrez David, JJ., concur. 119. G.R. No. L-65425 November 5, 1987 IRENEO LEAL, JOSE LEAL, CATALINA LEAL, BERNABELA LEAL, VICENTE LEAL EUIOGIA LEAL PATERNO RAMOS, MACARIO DEL ROSARIO, MARGARITA ALBERTO, VICTORIA TORRES, JUSTINA MANUEL, JULIAN MANUEL, MELANIA SANTOS, CLEMENTE SAMARIO, MARIKINA VALLEY, INC., MIGUELA MENDOZA, and REGISTER OF DEEDS OF RIZAL, petitioners, vs. THE HONORABLE INTERMEDIATE APPELLATE COURT (4th Civil Cases Division), and VICENTE SANTIAGO (Substituted by SALUD M. SANTIAGO), respondents. SARMIENTO, J.: In its resolution dated September 27, 1983, the respondent Intermediate Appellate Court, 1 speaking through Justice Porfirio V, Sison, ordered, in part, the petitioners to accept the sum of P5,600.00 from the private respondent as repurchase price of the lots described in the "Compraventa" and, thereafter, to execute a Deed of Repurchase to effect transfer over ownership over the same properties to the private respondent. This ruling was a complete reversal of the earlier decision, 2 dated June 28, 1.978, penned by Justice Paras, of the Court of


Appeals, in the same case, affirming the trial court's dismissal of the private respondent's complaint. The petitioners, feeling aggrieved and astonished by the complete turnaround of the respondent court, come to Us with this petition for review by certiorari. The antecedent facts are undisputed. This case brings us back almost half a century ago, on March 21, 1941, when a document entitled "Compraventa," written entirely in the Spanish language, involving three parcels of land, was executed by the private respondent's predecessors-in-interest, Vicente Santiago and his brother, Luis Santiago, in favor of Cirilio Leal the deceased father of some of the petitioners, Pursuant to this "Compraventa," the title over the three parcels of land in the name of the vendors was cancelled and a new one was issued in the name of Cirilo Leal who immediately took possession and exercised ownership over the said lands. When Cirilo died on December 10, 1959, the subject lands were inherited by his six children, who are among the petitioners, and who caused the consolidation and subdivision of the properties among themselves. Between the years 1960 and 1965, the properties were either mortgaged or leased by the petitioners-children of Cirilo Leal — to their co-petitioners. Sometime before the agricultural year 1966-1967, Vicente Santiago approached the petitioners and offered re- repurchase the subject properties. Petitioners, however, refused the offer. Consequently, Vicente Santiago instituted a complaint for specific performance before the then Court of First Instance of Quezon City on August 2, 1967. All the trial, the court a quo rendered its decision,-dismissing the complaint on the ground that the same was still premature considering that there was, as yet, no sale nor any alienation equivalent to a sale. Not satisfied with this decision, the private respondent appealed to the Court of Appeals and the latter, acting through the Fourth Division and with Justice Edgardo Paras as ponente affirmed the decision of the court a quo.

The petitioners seasonably filed a motion to amend the dispositive portion of the decision so as to include an order for the cancellation of the annotations at the back of the Transfer certificates of Title issued in their favor. The private respondent,on the other hand, filed a-timely motion for reconsideration of the above decision and an opposition to petitioners' motion to amend. These incidents were not resolved until then Court of Appeals was abolished and in lieu of which the Intermideate Appellate Court was established In view of the said reorganization, case was reassigned to the Fourth Civil in this cases Division. Resolving the abovestated motion for reconsideration, the respondent court, in a resolution penned by Justice Sison and promulgated on September 27, 1983, ruled, as follows: WHEREFORE, Our decision of June 28, 1978 is hereby reversed and set aside and another one is rendered ordering: (1) defendants-appellees surnamed Leal to accept the sum of P5,600.00 from plaintiff-appellant (substituted by Salud M. Santiago) as repurchase price of the lots described in the "Compraventa" of March 21, 1941, and thereafter to execute a deed of repurchase sufficient in law to transfer ownership of the properties to appellant Salud M. Santiago, the same to be done within five (5) days from payment; (2) ordering the same defendants Leals and defendant Clemente Samario to indemnify appellant in the sum of P3,087.50 as rental for the year 19671968 and the same amount every year thereafter; (3) ordering an the defendants jointly and severally to pay the sum of Pl,500.00 as attorney's fees and other expenses of litigation; and (4) ordering defendant Register of Deeds of Rizal to cancel Transfer Certificate of Title No. 42535 in the names of Vicente Santiago and Luis Santiago upon presentation of the deed of sale herein ordered to be executed by the appellees in favor of Salud M. Santiago and to issue thereof another Transfer Certificate of Title in the name alone of Salud M. Santiago. No costs here and in the courts (sic) below. SO ORDERED.


Verily, the well-spring whence the present controversy arose is the abovementioned "Compraventa," more particularly paragraph (b) thereof, to wit: xxx xxx xxx (b) En caso de venta, no podran vender a otros dichos tres lotes de terreno sino al aqui vendedor Vicente Santiago, o los herederos o sucesores de este por el niismo precio de CINCO MIL SEISCIENTOS PESOS (P5,600.00) siempre y cuando estos ultimos pueden hacer la compra. 3 xxx xxx xxx which is now the subject of varying and conflicting interpretations. xxx xxx xxx It is admitted by both parties that the phrase "they shall not sell to others these three lots but only to the seller Vicente Santiago or to his heirs or successors" is an express prohibition against the sale of the lots described in the "Compraventa" to third persons or strangers to the contract. However, while private respondent naturally lauds the resolution of Justice Sison, which sustains the validity of this prohibition, the petitioners, on the other hand, endorse the decision penned by Justice Paras, which states, in part: xxx xxx xxx Finally, there is grave doubt re the validity of the ostensible resolutory condition here, namely, the prohibition to sell the lots to persons other than the vendor (appellant); uncertainly, a prohibition to alienate should not exceed at most a period of twenty years, otherwise there would be subversion of public policy, which naturally frowns on unwarranted restrictions on the right of ownership. 4 xxx xxx xxx We agree with the Paras ponencia. Contracts are generally binding between the parties, their assigns and heirs; however, under Art. 1255 of the Civil Code of Spain, which is applicable in this instance, pacts, clauses, and conditions which are contrary to public order are null and void, thus,

without any binding effect. Parenthetically, the equivalent provision in the Civil Code of the Philippines is that of Art. 1306, which states: "That 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. Public order signifies the public weal — public policy. 5 Essentially, therefore, public order and public policy mean one and the same thing. Public policy is simply the English equivalent of "order publico" in Art. 1255 of the Civil Code of Spain. 6 One such condition which is contrary to public policy is the present prohibition to self to third parties, because the same virtually amounts to a perpetual restriction to the right of ownership, specifically the owner's right to freely dispose of his properties. This, we hold that any such prohibition, indefinite and stated as to time, so much so that it shall continue to be applicable even beyond the lifetime of the original parties to the contract, is, without doubt, a nullity. In the light of this pronouncement, we grant the petitioners' prayer for the cancellation of the annotations of this prohibition at the back of their Transfer Certificates 'Title. It will be noted, moreover, that the petitioners have never sold, or even attempted to sell, the properties subject of the "Compraventa. " We now come to what we believe is the very issue in this case which is, whether or not under the aforequoted paragraph (b) of the "Compraventa" a right of repurchase in favor of the private respondent exist. The ruling of the Fourth Division (Justice Paras) is that the said stipulation does not grant a right to repurchase. Contrarily, the resolution of the Fourth Civil Cases Division (Justice P. V. Sison) interpreted the same provision as granting the right to repurchase subject to a condition precedent. Thus, the assailed Resolution, reversing the earlier decision of the same respondent court, ruled xxx xxx xxx


The all-importartant phrase "en caso de venta," must of necessity refer to the sale of the properties either by Cirilo or his heirs to the Santiago brothers themselves or to their heirs, including appellants Vicente Santiago including appellants Vicente Santiago and Salud M Santiago, for the same sum of P5,600.00, "siempre y cuando estos ultimos pueden hacer la compra" (when the latter shall be able to buy it). xxx xxx xxx ... We repeat, The words envision the situation contemplated by the contracting parties themselves, the resale of the lots to their owners, and NOT to a sale of the lots to third parties or strangers to the contracts. ... 7 xxx xxx xxx The law provides that for conventional redemption to take place, the vendor should reserve, in no uncertain terms, the right to repurchase the thing sold. 8 Thus, the right to redeem must be expressly stipulated in the contract of sale in order that it may have legal existence. In the case before us, we cannot and any express or implied grant of a right to repurchase, nor can we infer, from any word or words in the questioned paragraph, the existence of any such right. The interpretation in the resolution (Justice Sison) is rather strained. The phrase "in case case" of should be construed to mean "should the buyers wish to sell which is the plain and simple import of the words, and not "the buyers should sell," which is clearly a contorted construction of the same phrase. The resort to Article 1373 of the Civil Code of the Philippines is erroneous. The subject phrase is patent and unambiguous, hence, it must not be given another interpretation But even assuming that such a right of repurchase is granted under the "Compraventa," the petitioner correctly asserts that the same has already prescribed. Under Art. 1508 of the Civil Code of Spain (Art,. 1606 of the Civil Code of the Philippines), the right to redeem or repurchase, in the absence of an express agreement as to time, shall last four years from the date of the contract. In this case then, the right to repurchase, if it was at four

guaranteed under in the "Compraventa," should have been exercise within four years from March 21, 1941 (indubitably the date of execution of the contract), or at the latest in 1945. In the respondent court's resolution, it is further ruled that the right to repurchase was given birth by the condition precedent provided for in the phrase "siempre y cuando estos ultimos pueden hacer la compra" (when the buyer has money to buy). In other words, it is the respondent court's contention that the right may be exercised only when the buyer has money to buy. If this were so, the second paragraph of Article 1508 would apply — there is agreement as to the time, although it is indefinite, therefore, the right should be exercised within ten years, because the law does not favor suspended ownership. Since the alleged right to repurchase was attempted to be exercised by Vicente Santiago only in 1966, or 25 years from the date of the contract, the said right has undoubtedly expired. WHEREFORE, in view of the foregoing, the Resolution dated September 27, 1983, of the respondent court is SET ASIDE and the Decision promulgated on June 28, 1978 is hereby REINSTATED. The annotations of the prohibition to sell at the back of TCT Nos. 138837, 138838, 138839, 138840, 138841, and 138842 are hereby ordered CANCELLED. Costs against the private respondent. SO ORDERED. Yap (Chairman), Melencio-Herrera and Padilla, JJ., concur. Paras, J., took no part. 120. G.R. No. L-46591 July 28, 1987 BANCO FILIPINO SAVINGS and MORTGAGE BANK, petitioner, vs. HON. MIGUEL NAVARRO, Presiding Judge, Court of First Instance of Manila, Branch XXXI and FLORANTE


DEL VALLE, respondents. MELENCIO-HERRERA, J.: This is a Petition to review on certiorari the Decision of respondent Court, the dispositive portion of which decrees: WHEREFORE, the Court finds that the enforcement of the escalation clause retroactively before the lapse of the 15-year period stated in the promissory note is contrary to Sec. 3 of Presidential Decree No. 116 and Sec. 109 of Republic Act No. 265, and hereby declares null and void the said escalation clause. The respondent Banco Filipino Savings and Mortgage Bank is hereby ordered to desist from enforcing the increased rate of interest on petitioner's loan. SO ORDERED. The facts are not in dispute: On May 20, 1975, respondent Florante del Valle (the BORROWER) obtained a loan secured by a real estate mortgage (the LOAN, for short) from petitioner BANCO FILIPINO1 in the sum of Forty-one Thousand Three Hundred (P41,300.00) Pesos, payable and to be amortized within fifteen (15) years at twelve (12%) per cent interest annually. Hence, the LOAN still had more than 730 days to run by January 2, 1976, the date when CIRCULAR No. 494 was issued by the Central Bank. Stamped on the promissory note evidencing the loan is an Escalation Clause, reading as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. The Escalation Clause is based upon Central Bank CIRCULAR No. 494 issued on January 2, 1976, the pertinent portion of which reads: 3. The maximum rate of interest, including commissions, premiums, fees and other charges on loans with maturity of more than seven hundred thirty (730) days, by banking institutions,

including thrift banks and rural banks, or by financial intermediaries authorized to engage in quasi-banking functions shall be nineteen percent (19%) per annum. x x x x x x x x x 7. Except as provided in this Circular and Circular No. 493, loans or renewals thereof shall continue to be governed by the Usury Law, as amended." CIRCULAR No. 494 was issued pursuant to the authority granted to the Monetary Board by Presidential Decree No. 116 (Amending Further Certain Sections of the Usury Law) promulgated on January 29, 1973, the applicable section of which provides: Sec. 2. The same Act is hereby amended by adding the following section immediately after section one thereof, which reads as follows: Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions: Provided, that such changes shall not be made oftener than once every twelve months. The same grant of authority appears in P.D. No. 858, promulgated on December 31, 1975, except that the limitation on the frequency of changes was eliminated. On the strength of CIRCULAR No. 494 BANCO FILIPINO gave notice to the BORROWER on June 30, 1976 of the increase of interest rate on the LOAN from 12% to 17% per annum effective on March 1, 1976. On September 24, 1976, Ms. Mercedes C. Paderes of the Central Bank wrote a letter to the BORROWER as follows: September 24, 1976 Mr. Florante del Valle 14 Palanca Street B.F. Homes, Paranaque Rizal Dear Mr. del Valle:


This refers to your letter dated August 28, 1976 addressed to the Governor, Central Bank of the Philippines, seeking clarification and our official stand on Banco Filipino's recent decision to raise interest rates on lots bought on installment from 12% to 17% per annum. A verification made by our Examiner of the copy of your Promissory Note on file with Banco Filipino showed that the following escalation clause with your signature is stamped on the Promissory Note: I /We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan. In this connection, please be advised that the Monetary Board, in its Resolution No. 1155 dated June 11, 1976, adopted the following guidelines to govern interest rate adjustments by banks and non-banks performing quasi-banking functions on loans already existing as of January 3, 1976, in the light of Central Bank Circulars Nos. 492-498: l. Only banks and non-bank financial intermediaries performing quasi-banking functions may increase interest rates on loans already existings of January 2, 1976, provided that: a. The pertinent loan contracts/documents contain escalation clauses expressly authorizing lending bank or non-bank performing quasi-banking functions to increase the rate of interest stipulated in the contract, in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans; and b. Said loans were directly granted by them and the remaining maturities thereof were more than 730 days as of January 2, 1976; and 2. The increase in the rate of interest can be effective only as of January 2, 1976 or on a later date. The foregoing guidelines, however, shall not be understood as precluding affected parties from questioning before a competent

court of justice the legality or validity of such escalation clauses. We trust the above guidelines would help you resolve your problems regarding additional interest charges of Banco Filipino. Very truly yours, (Sgd.) MERCEDES C. PAREDES Director Contending that CIRCULAR No. 494 is not the law contemplated in the Escalation Clause of the promissory note, the BORROWER filed suit against BANCO FILIPINO for "Declaratory Relief" with respondent Court, praying that the Escalation Clause be declared null and void and that BANCO FILIPINO be ordered to desist from enforcing the increased rate of interest on the BORROWER's real estate loan. For its part, BANCO FILIPINO maintained that the Escalation Clause signed by the BORROWER authorized it to increase the interest rate once a law was passed increasing the rate of interest and that its authority to increase was provided for by CIRCULAR No. 494. In its judgment, respondent Court nullified the Escalation Clause and ordered BANCO FILIPINO to desist from enforcing the increased rate of interest on the BORROWER's loan. It reasoned out that P.D. No. 116 does not expressly grant the Central Bank authority to maximize interest rates with retroactive effect and that BANCO FILIPINO cannot legally impose a higher rate of interest before the expiration of the 15-year period in which the loan is to be paid other than the 12% per annum in force at the time of the execution of the loan. It is from that Decision in favor of the BORROWER that BANCO FILIPINO has come to this instance on review by Certiorari. We gave due course to the Petition, the question being one of law. On February 24, 1983, the parties represented by their respective counsel, not only moved to withdraw the appeal on the ground that it had become moot and academic "because of recent developments in the rules and regulations of the Central Bank," but also prayed that "the decision rendered in the Court of First Instance be therefore vacated and declared of no force and


effect as if the case was never filed," since the parties would like to end this matter once and for all." However, "considering the subject matter of the controversy in which many persons similarly situated are interested and because of the need for a definite ruling on the question," the Court, in its Resolution of February 24, 1983, impleaded the Central Bank and required it to submit its Comment, and encouraged homeowners similarly situated as the BORROWER to intervene in the proceedings. At the hearing on February 24, 1983, one Leopoldo Z. So, a mortgage homeowner at B.F. Resort Subdivision, was present and manifested that he was in a similar situation as the BORROWER. Since then, he has written several letters to the Court, pleading for early resolution of the case. The Court allowed the intervention of Lolita Perono2 and issued a temporary restraining order enjoining the Regional Trial Court (Pasay City Branch) in the case entitled "Banco Filipino Savings and Mortgage Bank vs. Lolita Perono" from issuing a writ of possession over her mortgaged property. Also snowed to intervene were Enrique Tabalon, Jose Llopis, et als., who had obtained loans with Identical escalation clauses from Apex Mortgage and Loans Corporation, apparently an affiliate of BANCO FILIPINO, Upon motion of Jose Llopis, a Temporary Restraining Order was likewise issued enjoining the foreclosure of his real estate mortgage by BANCO FILIPINO. The Court made it explicit, however, that intervention was allowed only for the purpose of "joining in the discussion of the legal issue involved in this proceedings, to wit, the validity of the so-called "escalation clause," or its applicability to existing contracts of loan." The Central Bank has submitted its Comment and Supplemental Comment and like BANCO FILIPINO, has taken the position that the issuance of its Circulars is a valid exercise of its authority to scribe maximum rates of interest and that, based on general principles of contract, the Escalation Clause is a valid provision in the loan agreement provided that "(1) the increased rate

imposed or charged by petitioner does not exceed the ceiling fixed by law or the Monetary Board; (2) the increase is made effective not earlier than the effectivity of the law or regulation authorizing such an increase; and (3) the remaining maturities of the loans are more than 730 days as of the effectivity of the law or regulation authorizing such an increase. However, with respect to loan agreements entered into,on or after March 17, 1980, such agreement, in order to be valid, must also include a de-escalation clause as required by Presidential Decree No. 1684."3 The substantial question in this case is not really whether the Escalation Clause is a valid or void stipulation. There should be no question that the clause is valid. Some contracts contain what is known as an "escalator clause," which is defined as one in which the contract fixes a base price but contains a provision that in the event of specified cost increases, the seller or contractor may raise the price up to a fixed percentage of the base. Attacks on such a clause have usually been based on the claim that, because of the open priceprovision, the contract was too indefinite to be enforceable and did not evidence an actual meeting of the minds of the parties, or that the arrangement left the price to be determined arbitrarily by one party so that the contract lacked mutuality. In most instances, however, these attacks have been unsuccessful.4 The Court further finds as a matter of law that the cost of living index adjustment, or escalator clause, is not substantively unconscionable. Cost of living index adjustment clauses are widely used in commercial contracts in an effort to maintain fiscal stability and to retain "real dollar" value to the price terms of long term contracts. The provision is a common one, and has been universally upheld and enforced. Indeed, the Federal government has recognized the efficacy of escalator clauses in tying Social Security benefits to the cost of living index, 42 U.S.C.s 415(i). Pension benefits and labor contracts negotiated by most of the major labor unions are other examples. That inflation, expected


or otherwise, will cause a particular bargain to be more costly in terms of total dollars than originally contemplated can be of little solace to the plaintiffs.5 What should be resolved is whether BANCO FILIPINO can increase the interest rate on the LOAN from 12% to 17% per annum under the Escalation Clause. It is our considered opinion that it may not. The Escalation Clause reads as follows: I/We hereby authorize Banco Filipino to correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law increasing the lawful rates of interest that may be charged on this particular kind of loan. (Paragraphing and emphasis supplied) It is clear from the stipulation between the parties that the interest rate may be increased "in the event a law should be enacted increasing the lawful rate of interest that may be charged on this particular kind of loan." " The Escalation Clause was dependent on an increase of rate made by "law" alone. CIRCULAR No. 494, although it has the effect of law, is not a law. "Although a circular duly issued is not strictly a statute or a law, it has, however, the force and effect of law."6 (Italics supplied). "An administrative regulation adopted pursuant to law has the force and effect of law."7 "That administrative rules and regulations have the force of law can no longer be questioned. "8 The distinction between a law and an administrative regulation is recognized in the Monetary Board guidelines quoted in the letter to the BORROWER of Ms. Paderes of September 24, 1976 (supra). According to the guidelines, for a loan's interest to be subject to the increases provided in CIRCULAR No. 494, there must be an Escalation Clause allowing the increase "in the event that any law or Central Bank regulation is promulgated increasing the maximum interest rate for loans." The guidelines thus presuppose that a Central Bank regulation is not within the term

"any law." The distinction is again recognized by P.D. No. 1684, promulgated on March 17, 1980, adding section 7-a to the Usury Law, providing that parties to an agreement pertaining to a loan could stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased "by law or by the Monetary Board." To quote: Sec. 7-a Parties to an agreement pertaining to a loan or forbearance of money, goods or credits may stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increased by law or by the Monetary Board: Provided, That such stipulation shall be valid only if there is also a stipulation in the agreement that the rate of interest agreed upon shall be reduced in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board; Provided, further, That the adjustment in the rate of interest agreed upon shall take effect on or after the effectivity of the increase or decrease in the maximum rate of interest. (Paragraphing and emphasis supplied). It is now clear that from March 17, 1980, escalation clauses to be valid should specifically provide: (1) that there can be an increase in interest if increased by law or by the Monetary Board; and (2) in order for such stipulation to be valid, it must include a provision for reduction of the stipulated interest "in the event that the applicable maximum rate of interest is reduced by law or by the Monetary Board." While P.D. No. 1684 is not to be given retroactive effect, the absence of a de-escalation clause in the Escalation Clause in question provides another reason why it should not be given effect because of its one-sidedness in favor of the lender. 2. The Escalation Clause specifically stipulated that the increase in interest rate was to be "on this particular kind of loan, " meaning one secured by registered real estate mortgage. Paragraph 7 of CIRCULAR No. 494 specifically directs that "loans or renewals continue to be governed by the Usury Law, as


amended." So do Circular No. 586 of the Central Bank, which superseded Circular No. 494, and Circular No. 705, which superseded Circular No. 586. The Usury Law, as amended by Acts Nos. 3291, 3998 and 4070, became effective on May 1, 1916. It provided for the maximum yearly interest of 12% for loans secured by a mortgage upon registered real estate (Section 2), and a maximum annual interest of 14% for loans covered by security other than mortgage upon registered real estate (Section 3). Significant is the separate treatment of registered real estate loans and other loans not secured by mortgage upon registered real estate. It appears clear in the Usury Law that the policy is to make interest rates for loans guaranteed by registered real estate lower than those for loans guaranteed by properties other than registered realty. On June 15, 1948, Congress approved Republic Act No. 265, creating the Central Bank, and establishing the Monetary Board. That law provides that "the Monetary Board may, within the limits prescribed in the Usury law,9 fix the maximum rates of interest which banks may charge for different types of loans and for any other credit operations, ... " and that "any modification in the maximum interest rates permitted for the borrowing or lending operations of the banks shall apply only to future operations and not to those made prior to the date on which the modification becomes effective" (Section 109).1avvphi1 On January 29, 1973, P.D. No. 116 was promulgated amending the Usury Law. The Decree gave authority to the Monetary Board "to prescribe maximum rates of interest for the loan or renewal thereof or the forbearance of any money goods or credits, and to change such rate or rates whenever warranted by prevailing economic and social conditions. In one section,10 the Monetary Board could prescribe the maximum rate of interest for loans secured by mortgage upon registered real estate or by any document conveying such real estate or an interest therein and, in another separate section,11 the Monetary Board was also granted authority to fix the maximum interest rate for loans secured by types of security other than registered real property.

The two sections read: SEC. 3. Section two of the same Act is hereby amended to read as follows: SEC. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions, premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate the title to which is duly registered or by any document conveying such real estate or an interest therein, than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under this section or the maximum rate of interest that may be prescribed by the Monetary Board under this section may likewise apply to loans secured by other types of security as may be specified by the Monetary Board. SEC. 4. Section three of the same Act is hereby amended to read as follows: SEC. 3. No person or corporation shall directly or indirectly demand, take, receive, or agree to charge in money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance of money, goods, or credits, where such loan or forbearance is not secured as provided in Section two hereof, than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and in force at the time the loan or forbearance is granted. Apparent then is that the separate treatment for the two classes of loans was maintained. Yet, CIRCULAR No. 494 makes no distinction as to the types of loans that it is applicable to unlike Circular No. 586 dated January 1, 1978 and Circular No. 705 dated December 1, 1979, which fix the effective rate of interest on loan transactions with maturities of more than 730 days to not exceeding 19% per annum (Circular No. 586) and not


exceeding 21% per annum (Circular No. 705) "on both secured and unsecured loans as defined by the Usury Law, as amended." In the absence of any indication in CIRCULAR No. 494 as to which particular type of loan was meant by the Monetary Board, the more equitable construction is to limit CIRCULAR No. 494 to loans guaranteed by securities other than mortgage upon registered realty. WHEREFORE, the Court rules that while an escalation clause like the one in question can ordinarily be held valid, nevertheless, petitioner Banco Filipino cannot rely thereon to raise the interest on the borrower's loan from 12% to 17% per annum because Circular No. 494 of the Monetary Board was not the "law" contemplated by the parties, nor should said Circular be held as applicable to loans secured by registered real estate in the absence of any such specific indication and in contravention of the policy behind the Usury Law. The judgment appealed from is, therefore, hereby affirmed in so far as it orders petitioner Banco Filipino to desist from enforcing the increased rate of interest on petitioner's loan. The Temporary Restraining Orders heretofore issued are hereby made permanent if the escalation clauses are Identical to the one herein and the loans involved have applied the increased rate of interest authorized by Central Bank Circular No. 494. SO ORDERED. Teehankee, C.J., Yap, Fernando, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento, Cortes, JJ., concur. 121. G.R. No. 101771 December 17, 1996 SPOUSES MARIANO and GILDA FLORENDO, petitioners, vs. COURT OF APPEALS and LAND BANK OF THE PHILIPPINES, respondents.

PANGANIBAN, J.:p May a bank unilaterally raise the interest rate on a housing loan granted an employee, by reason of the voluntary resignation of the borrower? Such is the query raised in the petition for review on certiorari now before us, which assails the Decision promulgated on June 19, 1991 by respondent Court of Appeals 1 in CA-G.R. CV No. 24956, upholding the validity and enforceability of the escalation by private respondent Land Bank of the Philippines of the applicable interest rate on the housing loan taken out by petitioner-spouses. The Antecedent Facts Petitioners filed an action for Injunction with Damages docketed as Civil Case No. 86-38146 before the Regional Trial Court of Manila, Branch XXII against respondent bank. Both parties, after entering into a joint stipulation of facts, submitted the case for decision on the basis of said stipulation and memoranda. The stipulation reads in part: 2 1. That (Petitioner) Gilda Florendo (was) an employee of (Respondent Bank) from May 17, 1976 until August 16, 1984 when she voluntarily resigned. However, before her resignation, she applied for a housing loan of P148,000.00, payable within 25 years from (respondent bank's) Provident Fund on July 20, 1983; 2. That (petitioners) and (respondent bank), through the latter's duly authorized representative, executed the Housing Loan Agreement, . . .; 3. That, together with the Housing Loan Agreement, (petitioners) and (respondent bank), through the latter's authorized representative, also executed a Real Estate Mortgage and Promissory Note, . . .; 4. That the loan . . . was actually given to (petitioner) Gilda Florendo, . . ., in her capacity as employee of (respondent bank); 5. That on March 19, 1985, (respondent bank) increased the interest rate on (petitioner's) loan from 9% per annum to 17%, the said increase to take effect on March 19, 1985;


6. That the details of the increase are embodied in (Landbank's) ManCom Resolution No. 85-08 dated March 19, 1985, . . . , and in a PF (Provident Fund) Memorandum Circular (No. 85-08, Series of 1985), . . .; 7. That (respondent bank) first informed (petitioners) of the said increase in a letter dated June 7, 1985, . . . . Enclosed with the letter are a copy of the PF Memo Circular . . . and a Statement of Account as of May 31, 1985, . . .; 8. That (petitioners) protested the increase in a letter dated June 11, 1985 to which (respondent bank) replied through a letter dated July 1, 1985, . . . Enclosed with the letter is a Memorandum dated June 26, 1985 of (respondent bank's) legal counsel, A.B. F. Gaviola, Jr., . . .; 9. That thereafter, (respondent bank) kept on demanding that (petitioner) pay the increased interest or the new monthly installments based on the increased interest rate, but Plaintiff just as vehemently maintained that the said increase is unlawful and unjustifiable. Because of (respondent bank's) repeated demands, (petitioners) were forced to file the instant suit for Injunction and Damages; 10. That, just the same, despite (respondent bank's) demands that (petitioners) pay the increased interest or increased monthly installments, they (petitioners) have faithfully paid and discharged their loan obligations, more particularly the monthly payment of the original stipulated installment of P1,248.72. Disregarding (respondent bank's) repeated demand for increased interest and monthly installment, (petitioners) are presently up-to-date in the payments of their obligations under the original contracts (Housing Loan Agreement, Promissory Note and Real Estate Mortgage) with (respondent bank); xxx xxx xxx The clauses or provisions in the Housing Loan Agreement and the Real Estate Mortgage referred to above as the basis for the escalation are: a. Section I-F of Article VI of the Housing Loan Agreement, 3 which provides that, for as long as the loan or any portion thereof

or any sum that may be due and payable under the said loan agreement remains outstanding, the borrower shall — f) Comply with all the rules and regulations of the program imposed by the LENDER and to comply with all the rules and regulations that the Central Bank of the Philippines has imposed or will impose in connection with the financing programs for bank officers and employees in the form of fringe benefits. b. Paragraph (f) of the Real Estate Mortgage 4 which states: The rate of interest charged on the obligation secured by this mortgage. . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee may prescribe for its debtors and subject to the condition that the increase/decrease shall only take effect on the date of effectivity of said increase/decrease and shall only apply to the remaining balance of the loan. c. and ManCom (Management Committee) Resolution No. 85-08, together with PF (Provident Fund) Memorandum Circular No. 85-08, which escalated the interest rates on outstanding housing loans of bank employees who voluntarily "secede" (resign) from the Bank; the range of rates varied depending upon the number of years service rendered by the employees concerned. The rates were made applicable to those who had previously resigned from the bank as well as those who would be resigning in the future. The trial court ruled in favor of respondent bank, and held that the bank was vested with authority to increase the interest rate (and the corresponding monthly amortizations) pursuant to said escalation provisions in the housing loan agreement and the mortgage contract. The dispositive portion of the said decision reads: 5 WHEREFORE, judgment is hereby rendered denying the instant suit for injunction and declaring that the rate of interest on the loan agreement in question shall be 17% per annum and the monthly amortization on said loan properly raised to P2,064.75 a month, upon the finality of this judgment.


xxx xxx xxx Petitioners promptly appealed, arguing that, inter alia, the increased rate of interest is onerous and was imposed unilaterally, without the consent of the borrower-spouses. Respondent bank likewise appealed and contested the propriety of having the increased interest rate apply only upon the finality of the judgment and not from March 19, 1985. The respondent Court subsequently affirmed with modification the decision of the trial court, holding that: 6 . . . Among the salient provisions of the mortgage is paragraph (f) which provides that the interest rate shall be subject, during the term of the loan, to such increases/decreases as may be allowed under the prevailing rules and/or circulars of the Central Bank and as the Provident Fund of the Bank may prescribe for its borrowers. In other words, the spouses agreed to the escalation of the interest rate on their original loan. Such an agreement is a contractual one and the spouses are bound by it. Escalation clauses have been ruled to be valid stipulations in contracts in order to maintain fiscal stability and to retain the value of money in long term contracts (Insular Bank of Asia and America vs. Spouses Epifania Salazar and Ricardo Salazar, 159 SCRA 133). One of the conditions for the validity of an escalation clause such as the one which refers to an increase rate is that the contract should also contain a proviso for a decrease when circumstances so warrant it. Paragraph (f) referred to above contains such provision. A contract is binding on the parties no matter that a provision thereof later proves onerous and which on hindsight, a party feels he should not have agreed to in the first place. and disposed as follows: 7 WHEREFORE, the dispositive part of the decision is MODIFIED in the sense that the interest of 17% on the balance of the loan of the spouses shall be computed starting July 1, 1985. Dissatisfied, the petitioners had recourse to this Court. The Issues Petitioners ascribe to respondent Court "a grave and patent

error" in not nullifying the respondent bank's unilateral increase of the interest rate and monthly amortizations of the loan — 1. . . . (simply because of) a bare and unqualified stipulation that the interest rate may be increased; 2. . . . on the ground that the increase has no basis in the contracts between the parties; 3. . . . on the ground that the increase violates Section 7-A of the Usury Law; 4. . . . on the ground that the increase and the contractual provision that (respondent bank) relies upon for the increase are contrary to morals, good customs, public order and public policy. 8 The key issue may be simply presented as follows: Did the respondent bank have a valid and legal basis to impose an increased interest rate on the petitioners' housing loan? The Court's Ruling Basis for Increased Interest Rate Petitioners argue that the HLA provision covers only administrative and other matters, and does not include interest rates per se, since Article VI of the agreement deals with insurance on and upkeep of the mortgaged property. As for the stipulation in the mortgage deed, they claim that it is vague because it does not state if the "prevailing" CB rules and regulations referred to therein are those prevailing at the time of the execution of these contracts or at the time of the increase or decrease of the interest rate. They insist that the bank's authority to escalate interest rates has not been shown to be "crystal-clear as a matter of fact" and established beyond doubt. The contracts being "contracts of adhesion," any vagueness in their provisions should be interpreted in favor of petitioners. We note that Section 1-F of Article VI of the HLA cannot be read as an escalation clause as it does not make any reference to increases or decreases in the interest rate on loans. However, paragraph (f) of the mortgage contract is clearly and indubitably an escalation provision, and therefore, the parties were and are bound by the said stipulation that "(t)he rate of interest charged


on the obligation secured by this mortgage . . ., shall be subject, during the life of this contract, to such an increase/decrease in accordance with prevailing rules, regulations and circulars of the Central Bank of the Philippines as the Provident Fund Board of Trustees of the Mortgagee (respondent bank) may prescribe for its debtors . . . ." 9 Contrary to petitioners' allegation, there is no vagueness in the aforequoted proviso; even their own arguments (below) indicate that this provision is quite clear to them. In Banco Filipino Savings & Mortgage Bank vs. Navarro, 10 this Court in essence ruled that in general there is nothing inherently wrong with escalation clauses. In IBAA vs. Spouses Salazar, 11 the Court reiterated the rule that escalation clauses are valid stipulations in commercial contracts to maintain fiscal stability and to retain the value of money in long term contracts. Application of the Escalation to Petitioners Petitioners however insist that while ManCom Resolution No. 8508 authorized a rate increase for resigned employees, it could not apply as to petitioner-employee because nowhere in the loan agreement or mortgage contract is it provided that petitionerwife's resignation will be a ground for the adjustment of interest rates, which is the very bedrock of and the raison d'etre specified in said ManCom Resolution. They additionally contend that the escalation is violative of Section 7-A of the Usury Law (Act No. 2655, as amended) which requires a law or MB act fixing an increased maximum rate of interest, and that escalation upon the will of the respondent bank is contrary to the principle of mutuality of contracts, per Philippine National Bank vs. Court of Appeals. 12 What is actually central to the disposition of this case is not really the validity of the escalation clause but the retroactive enforcement of the ManCom Resolution as against petitioneremployee. In the case at bar, petitioners have put forth a telling argument that there is in fact no Central Bank rule, regulation or other issuance which would have triggered an application of the escalation clause as to her factual situation. In Banco Filipino, 13 this Court, speaking through Mme. Justice

Ameurfina M. Herrera, disallowed the bank from increasing the interest rate on the subject loan from 12% to 17% despite an escalation clause in the loan agreement authorizing the bank to "correspondingly increase the interest rate stipulated in this contract without advance notice to me/us in the event a law should be enacted increasing the lawful rates of interest that may be charged on this particular kind of loan". In said case, the bank had relied upon a Central Bank circular as authority to up its rates. The Court ruled that CB Circular No. 494, although it has the effect of law, is not a law, but an administrative regulation. In PNB vs. Court of Appeals, 14 this Court disallowed the increases in interest rate imposed by the petitioner-bank therein, on the ground, among others, that said bank relied merely on its own Board Resolution (No. 681), PNB Circular No. 40-79-84, and PNB Circular No. 40-129-84, which were neither laws nor resolutions of the Monetary Board. In the case at bar, the loan was perfected on July 20, 1983. PD No. 116 became effective on January 29, 1973. CB Circular No. 416 was issued on July 29, 1974. CB Circ. 504 was issued February 6, 1976. CB Circ. 706 was issued December 1, 1979. CB Circ. 905, lifting any interest rate ceiling prescribed under or pursuant to the Usury Law, as amended, was promulgated in 1982. These and other relevant CB issuances had already come into existence prior to the perfection of the housing loan agreement and mortgage contract, and thus it may be said that these regulations had been taken into consideration by the contracting parties when they first entered into their loan contract. In light of the CB issuances in force at that time, respondent bank was fully aware that it could have imposed an interest rate higher than 9% per annum rate for the housing loans of its employees, but it did not. In the subject loan, the respondent bank knowingly agreed that the interest rate on petitioners' loan shall remain at 9% p.a. unless a CB issuance is passed authorizing an increase (or decrease) in the rate on such employee loans and the Provident Fund Board of Trustees acts accordingly. Thus, as far as the parties were concerned, all other onerous factors, such as employee


resignations, which could have been used to trigger an application of the escalation clause were considered barred or waived. If the intention were otherwise, they — especially respondent bank — should have included such factors in their loan agreement. ManCom Resolution No. 85-08, which is neither a rule nor a resolution of the Monetary Board, cannot be used as basis for the escalation in lieu of CB issuances, since paragraph (f) of the mortgage contract very categorically specifies that any interest rate increase be in accordance with "prevailing rules, regulations and circulars of the Central Bank . . . as the Provident Fund Board . . . may prescribe." The Banco Filipino and PNB doctrines are applicable four-square in this case. As a matter of fact, the said escalation clause further provides that the increased interest rate "shall only take effect on the date of effectivity of (the) increase/decrease" authorized by the CB rule, regulation or circular. Without such CB issuance, any proposed increased rate will never become effective. We have already mentioned (and now reiterate our holding in several cases 15) that by virtue of CB Circular 905, the Usury Law has been rendered ineffective. Thus, petitioners' contention that the escalation clause is violative of the said law is bereft of any merit. On the other hand, it will not be amiss to point out that the unilateral determination and imposition of increased interest rates by the herein respondent bank is obviously violative of the principle of mutuality of contracts ordained in Article 1308 of the Civil Code. As this Court held in PNB: 16 In order that obligations arising from contracts may have the force of law between the parties, there must be mutuality between the parties based on their essential equality. A contract containing a condition which makes its fulfillment dependent exclusively upon the uncontrolled will of one of the contracting parties, is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that the . . . loan agreement between the PNB and the private respondent gave the PNB a license (although

in fact there was none) to increase the interest rate at will during the term of the loan, that license would have been null and void for being violative of the principle of mutuality essential in contracts. It would have invested the loan agreement with the character of a contract of adhesion, where the parties do not bargain on equal footing, the weaker party's (the debtor) participation being reduced to the alternative "to take it or leave it" (Qua vs. Law Union & Rock Insurance Co., 95 Phil 85). Such a contract is a veritable trap for the weaker party whom the courts of justice must protect against abuse and imposition. The respondent bank tried to sidestep this difficulty by averring that petitioner Gilda Florendo as a former bank employee was very knowledgeable concerning respondent bank's lending rates and procedures, and therefore, petitioners were "on an equal footing" with respondent bank as far as the subject loan contract was concerned. That may have been true insofar as entering into the original loan agreement and mortgage contract was concerned. However, that does not hold true when it comes to the determination and imposition of escalated rates of interest as unilaterally provided in the ManCom Resolution, where she had no voice at all in its preparation and application. To allay fears that respondent bank will inordinately be prejudiced by being stuck with this "sweetheart loan" at patently concessionary interest rates, which according to respondent bank is the "sweetest deal" anyone could obtain and is an act of generosity considering that in 1985 lending rates in the banking industry were peaking well over 30% p.a., 17 we need only point out that the bank had the option to impose in its loan contracts the condition that resignation of an employee-borrower would be a ground for escalation. The fact is it did not. Hence, it must live with such omission. And it would be totally unfair to now impose said condition, not to mention that it would violate the principle of mutuality of consent in contracts. It goes without saying that such escalation ground can be included in future contracts — not to agreements already validly entered into. Let it be clear that this Court understands respondent bank's


position that the concessional interest rate was really intended as a means to remunerate its employees and thus an escalation due to resignation would have been a valid stipulation. But no such stipulation was in fact made, and thus the escalation provision could not be legally applied and enforced as against herein petitioners. WHEREFORE, the petition is hereby GRANTED. The Court hereby REVERSES and SETS ASIDE the challenged Decision of the Court of Appeals. The interest rate on the subject housing loan remains at nine (9) percent per annum and the monthly amortization at P1,248.72. SO ORDERED. Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur. 122. G.R. No. 187930 February 23, 2015 NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Petitioner, vs. AMA COMPUTER LEARNING CENTER, INC., Respondent. x - - - - - - - - - - - - - - - - - - - - - - - x G.R. No. 188250 AMA COMPUTER LEARNING CENTER, INC., Petitioner. vs. NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Respondent,

SERENO, CJ: Before us are consolidated Petitions for Review on Certiorari under Rule 45 of the Rules of Court assailing the Court of Appeals (CA) Decision1 dated 22 January 2009 and Resolution2 dated 18 May 2009 in CA-G.R. CV No. 89483. The CA Decision ordered AMA Computer Learning Center, Inc. (AMA) to pay New World Developers and Management, Inc. (New World) unpaid rentals for 2 months, as well asliquidated damages equivalent to 4 months’ rent. The CA Resolution denied the separate motions for reconsideration filed by the parties. FACTS New World is the owner of a commercial building located at No. 1104-1118 España corner Paredes Streets, Sampaloc, Manila.3 In 1998, AMA agreed to lease the entire second floor of the building for its computer learning center, and the parties entered into a Contract of Lease4 covering the eight-year period from 15 June 1998 to 14 March 2006. The monthly rental for the first year was set at P181,500, with an annual escalation rate equivalent to 15% for the succeeding years.5 It was also provided that AMA may preterminate the contract by sending notice in writing to New World at least six months before the intended date.6 In case of pretermination, AMA shall be liable for liquidated damages in an amount equivalent to six months of the prevailing rent. In compliance with the contract, AMA paid New World the amount of P450,000 as advance rental and another P450,000 as security deposit.7

D E C I S I O N 614 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

For the first three years, AMA paid the monthly rent as stipulated in the contract, with the required adjustment in accordance with the escalation rate for the second and the third years.8

On 27 October 2004, New World filed a complaint for a sum of money and damages against AMA before the Regional Trial Court of Marikina City, Branch 156 (RTC).14

In a letter dated 18 March 2002, AMA requested the deferment of the annual increase in the monthly rent by citing financial constraints brought about by a decrease in its enrollment. New World agreed to reduce the escalation rate by 50% for the next six months. The following year, AMA again requested the adjustment of the monthly rent and New World obliged by granting a 45% reduction of the monthly rent and a 5% reduction of the escalation rate for the remaining term of the lease. For this purpose, the parties entered into an Addendum to the Contract of Lease.9

RULING OF THE RTC

On the evening of 6 July 2004, AMA removed all its office equipment and furniture from the leased premises. The following day, New World received a letter from AMA dated 6 July 200410 stating that the former had decided to preterminate the contract effective immediately on the ground of business losses due to a drastic decline in enrollment. AMA also demanded the refund of its advance rental and security deposit. New World replied in a letter dated 12 July 2004,11 to which was attached a Statement of Account12 indicating the following amounts to be paid by AMA: 1) unpaid two months’ rent in the amount of P466,620; 2) 3% monthly interest for the unpaid rent in the amount of P67,426.59; 3) liquidated damages equivalent to six months of the prevailing rent in the amount of P1,399,860; and 4) damage to the leased premises amounting to P15,580. The deduction of the advance rental and security deposit paid by AMA still left an unpaid balance in the amount of P1,049,486.59. Despite the meetings between the parties, they failed to arrive at a settlement regarding the payment of the foregoing amounts.13

In a Decision15 dated 31 January 2007, the RTC ordered AMA to pay New World P466,620 as unpaid rentals plus 3% monthly penalty interest until payment; P1,399,860 as liquidated damages equivalent to six months’ rent, with the advance rental and security deposit paid by AMA to be deducted therefrom; P15,580 for the damage to the leased premises; P100,000 as attorney’s fees; and costs of the suit. According to the RTC, AMA never denied that it had arrearages equivalent to two months’ rent. Other than its allegation that it did not participate in the preparation of the Statement of Account, AMA did not proffer any evidence disputing the unpaid rent. For its part, New World clearly explained the existence of the arrears. While sympathizing with AMA in view of its business losses, the RTC ruled that AMA could not shirk from its contractual obligations, which provided that it had to pay liquidated damages equivalent to six months’ rent in case of a pretermination of the lease. The RTC provided no bases for awarding P15,580 for the damage to the leased premises and P100,000 for attorney’s fees, while denying the prayer for exemplary and moral damages. Upon the denial of its motion for reconsideration, AMA filed an appeal before the CA.16 RULING OF THE CA


In the assailed Decision dated 22 January 2009, the CA ordered AMA to pay New World P466,620 for unpaid rentals and P933,240 for liquidated damages equivalent to four months’ rent, with the advance rental and security deposit paid by AMA to be deducted therefrom.17 The appellate court ruled that the RTC erred in imposing a 3% monthly penalty interest on the unpaid rent, because there was no stipulation either in the Contract of Lease or in the Addendum to the Contract of Lease concerning the imposition of interest in the event of a delay in the payment of the rent.18 Thus, the CA ruled that the rent in arrears should earn interest at the rate of 6% per annum only, reckoned from the date of the extrajudicial demand on 12 July 2004 until the finality of the Decision. Thereafter, interest at the rate of12% per annum shall be imposed until full payment. The CA also ruled that the RTC’s imposition of liquidated damages equivalent to six months’ rent was iniquitous.19 While conceding that AMA was liable for liquidated damages for preterminating the lease, the CA also recognized that stipulated penalties may be equitably reduced by the courts based on its sound discretion. Considering that the unexpired portion of the term of lease was already less than two years, and that AMA had suffered business losses rendering it incapable of paying for its expenses, the CA deemed that liquidated damages equivalent to four months’ rent was reasonable.20 The appellate court deleted the award for the damage to the leased premises, because no proof other than the Statement of Account was presented by New World.21 Furthermore, noting that the latter was already entitled to liquidated damages, and that the trial court did not give any justification for attorney’s fees, the CA disallowed the award thereof.22

Both parties filed their respective motions for reconsideration, which were denied in the assailed Resolution dated 10 May 2009. Hence, the present petitions for review on certiorari. On 3 August 2009, the Court resolved to consolidate the petitions, considering that they involve the same parties and assail the same CA Decision and Resolution.23 PARTIES’ POSITIONS According to New World, when parties freely stipulate on the manner by which one may preterminate the lease, that stipulation has the force of law between them and should be complied with in good faith.24 Since AMA preterminated the lease, it became liable to liquidated damages equivalent to six months’ rent. Furthermore, its failure to give notice to New World six months prior to the intended pretermination of the contract and its leaving the leased premises in the middle of the night, with all its office equipment and furniture, smacked of gross bad faith that renders it undeserving of sympathy from the courts.25 Thus, the CA erred in reducing the liquidated damages from an amount equivalent to six months’ rent to only four months. New World also challenges the CA Decision and Resolution for disallowing the imposition of the 3% monthly interest on the unpaid rentals. It is argued that AMA never disputed the imposition of the 3% monthly interest; rather, it only requested that the interest rate be reduced.26 On the other hand, AMA assails the CA ruling for not recognizing the fact that compensation took place between the unpaid rentals and the advance rental paid by AMA.27 Considering that the obligation of AMA as to the arrears has been extinguished by operation of law, there would be no occasion for the imposition of interest.28


AMA also prays for the further reduction of the liquidated damages to an amount equivalent to one month’s rent up to one and a half months, arguing that four months’ worth of rent is still iniquitous on account of the severe financial losses it suffered.29

This Court is, first and foremost, one of law. While we are also a court of equity, we do not employ equitable principles when wellestablished doctrines and positive provisions of the law clearly apply.31

ISSUES

The law does not relieve a party from the consequences of a contract it entered into with all the required formalities.32 Courts have no power to ease the burden of obligations voluntarily assumed by parties, just because things did not turn out as expected at the inception of the contract.33 It must also be emphasized that AMA is an entity that has had significant business experience, and is not a mere babe in the woods.

1. Whether AMA is liable to pay six months’ worth of rent as liquidated damages. 2. Whether AMA remained liable for the rental arrears. OUR RULING I. AMA is liable for six months’ worth of rent as liquidated damages. Item No. 14 of the Contract of Lease states: That [AMA] may pre-terminate this Contract of Lease by notice in writing to [New World] at least six (6) months before the intended date of pretermination, provided, however, that in such case, [AMA] shall be liable to [New World] for an amount equivalent to six (6) months current rental as liquidated damages;30 Quite notable is the fact that AMA never denied its liability for the payment of liquidated damages in view of its pretermination of the lease contract with New World. What it claims, however, is that it is entitled to the reduction of the amount due to the serious business losses it suffered as a result of a drastic decrease in its enrollment.

Articles 1159 and 1306 of the Civil Code state: Art. 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. x x x x Art. 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. The fundamental rule is that a contract is the law between the parties. Unless it has been shown that its provisions are wholly or in part contrary to law, morals, good customs, public order, or public policy, the contract will be strictly enforced by the courts.34 In rebuttal, AMA invokes Article 2227 of the Civil Code, to wit:


Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable.

3. Only after it had cleared the premises did it send New World a notice of pretermination effective immediately.

In Ligutan v. CA, we held that the resolution of the question of whether a penalty is reasonable, or iniquitous or unconscionable would depend on factors including but not limited to the type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach and its consequences; the supervening realities; and the standing and relationship of the parties.35 The appreciation of these factors is essentially addressed to the sound discretion of the court.36

4. It had the gall to demand a full refund of the advance rental and security deposit, albeit without prejudice to their removal of the improvements introduced in the premises.

It is quite easy to understand the reason why a lessor would impose liquidated damages in the event of the pretermination of a lease contract. Pretermination is effectively the breach of a contract, that was originally intended to cover an agreed upon period of time. A definite period assures the lessor a steady income for the duration. A pretermination would suddenly cut short what would otherwise have been a longer profitable relationship. Along the way, the lessor is bound to incur losses until it is able to find a new lessee, and it is this loss of income that is sought to be compensated by the payment of liquidated damages. There might have been other ways to work around its difficult financial situation and lessen the impact of the pretermination to both parties. However, AMA opted to do the following: 1. It preterminated the lease without notifying New World at least six months before the intended date. 2. It removed all its office equipment and left the premises in the middle of the night.

We cannot understand the inability of AMA to be forthright with New World, considering that the former had been transparent about its business losses in its previous requests for the reduction of the monthly rental. The drastic decrease in AMA’s enrollment had been unfolding since 2002. Thus, it cannot be said that the business losses had taken it by surprise. It is also highly unlikely that the decision to preterminate the lease contract was made at the last minute. The cancellation of classes, the transfer of students, and administrative preparations for the closure of the computer learning center and the removal of office equipment therefrom should take at least weeks, if not months, of logistic planning. Had AMA come clean about the impending pretermination, measures beneficial to both parties could have been arrived at, and the instant cases would not have reached this Court. Instead, AMA forced New World to share in the former’s losses, causing the latter to scramble for new lessees while the premises remained untenanted and unproductive. In the sphere of personal and contractual relations governed by laws, rules and regulations created to promote justice and fairness, equity is deserved, not demanded. The application of equity necessitates a balancing of the equities involved in a case,37 for "[h]e who seeks equity must do equity, and he who comes into equity must come with clean hands."38 Persons in dire straits are never justified in trampling on other persons’ rights. Litigants shall be denied relief if their conduct has been


inequitable, unfair and dishonest as to the controversy in issue.39 The actions of AMA smack of bad faith. We cannot abide by the prayer for the further reduction of the liquidated damages. We find that, in view of the surrounding circumstances, the CA even erred in reducing the liquidated damages to four month’s worth of rent. Under the terms of the contract, and in light of the failure of AMA to show that it is deserving of this Court’s indulgence, the payment of liquidated damages in an amount equivalent to six months’ rent is proper. Also proper is an award of exemplary damages. Article 2234 of the Civil Code provides: Art. 2234. While 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 should be awarded. In case liquidated damages have been agreed upon, although no proof of loss is necessary in order that such liquidated damages may be recovered, nevertheless, before the court may consider the question of granting exemplary in addition to the liquidated damages, the plaintiff must show that he would be entitled to moral, temperate or compensatory damages were it not for the stipulation for liquidated damages. (Emphasis supplied) In this case, it is quite clear that New World sustained losses as a result of the unwarranted acts of AMA. Further, were it not for the stipulation in the contract regarding the payment of liquidated damages, we would be awarding compensatory damages to New World. "Exemplary damages are designed by our civil law to permit the courts to reshape behaviour that is socially deleterious in its consequence by creating negative incentives or deterrents

against such behaviour."40 As such, they may be awarded even when not pleaded or prayed for.41 In order to prevent the commission of a similar act in the future, AMA shall pay New World exemplary damages in the amount of P100,000. II. AMA’s liability for the rental arrears has already been extinguished. AMA assails the CA ruling mainly for the imposition of legal interest on the rent in arrears. AMA argues that the advance rental has extinguished its obligation as to the arrears. Thus, it says, there is no more basis for the imposition of interest at the rate of 6% per annum from the date of extrajudicial demand on 12 July 2004 until the finality of the Decision, plus interest at the rate of 12% per annum from finality until full payment. At this juncture, it is necessary to look into the contract to determine the purpose of the advance rental and security deposit. Item Nos. 2, 3 and 4 of the Contract of Lease provide: x x x x 2. That [AMA] shall pay to [New World] in advance within the first 5 days of each calendar month a monthly rental in accordance with the following schedule for the entire term of this Contract of Lease; PERIOD Year 1 June 15, 1998 – Mar 14,

MONTHLY RENTAL RATES 181,500.00


1999 Year 2 Mar 15, 1999 – Mar 14, 2000

P208,725.00

Year 3 Mar 15, 2000 – Mar 14, 2001

P240,033.75

Year 4 Mar 15, 2001 – Mar 14, 2002

P276,038.81

Year 5 Mar 15, 2002 – Mar 14, 2003

P317,444.63

Year 6 Mar 15, 2003 – Mar 14, 2004

P365,061.33

Year 7 Mar 15, 2004 – Mar 14, 2005

P419,820.53

Year 8 Mar 15, 2005 – Mar 14, 2006

P482,793.61

(P482,793.61 – 37,500 = P445,293.61) The monthly rentals referred to above were computed at an escalation rate of Fifteen Percent (15%) every year for the entire duration of this lease contract. 3. Upon signing of this Contract, [AMA] shall pay advance rental in the amount of FOUR HUNDRED FIFTY THOUSAND PESOS (P450,000.00); Said advance rental shall be applied as part of the rental for the last year of the Contract with a remaining balance of Four Hundred Forty Five Thousand Two Hundred Ninety Three and 61/100 Pesos

(P445,293.61) as monthly rental for the tenth [sic] and last year of the lease term; 4. Upon signing of the Contract, [AMA] shall pay [New World] a Security Deposit in the amount of FOUR HUNDRED FIFTY THOUSAND PESOS (P450,000.00) which shall be applied for any unpaid rental balance and damages on the leased premises, and the balance of which shall be refunded by [New World] to [AMA] within sixty (60) days after the termination of the Contract, it being understood that such balance is being held by [New World] in trust for [AMA].42 Based on Item No. 4, the security deposit was paid precisely to answer for unpaid rentals that may be incurred by AMA while the contract was in force. The security deposit was held in trust by New World, and whatever may have been left of it after the termination of the lease shall be refunded to AMA. Based on Item No. 3 in relation to Item No. 2, the parties divided the advance rental of P450,000 by 12 months. They came up with P37,500, which they intended to deduct from the monthly rental to be paid by AMA for the last year of the lease term. Thus, unlike the security deposit, no part of the advance rental was ever meant to be refunded to AMA. Instead, the parties intended to apply the advance rental, on a staggered basis, to a portion of the monthly rental in the last year of the lease term. Considering the pretermination of the lease contract in the present case, this intent of the parties as regards the advance rental failed to take effect. The advance rental, however, retains its purpose of answering for the outstanding amounts that AMA may owe New World.


We now delve into the actual application of the security deposit and the advance rental.

the imposition of 3% monthly penalty interest thereon. We quote with approval the ruling of the CA on this issue:

At the time of the pretermination of the contract of lease, the monthly rent stood at P233,310, inclusive of taxes;43 hence, the two-month rental arrears in the amount of P466,620.

If the obligation consists in the 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 per cent per annum.

Applying the security deposit of P450,000 to the arrears will leave a balance of P16,620 in New World’s favor.1âwphi1 Given that we have found AMA liable for liquidated damages equivalent to six months’ rent in the amount of P1,399,860 (monthly rent of P233,310 multiplied by 6 months), its total liability to New World is P1,416,480. We then apply the advance rental of P450,000 to this amount to arrive at a total extinguishment of the liability for the unpaid rentals and a partial extinguishment of the liability for liquidated damages. This shall leave AMA still liable to New World in the amount of P966,480 (P1,416,480 total liability less P450,000 advance rental).

In the instant case, the Contract of Lease and the Addendum to the Contract of Lease do not specify any interest in the event of delay of payment of rentals. Accordingly, there being no stipulation concerning interest, the trial court erred in imposing 3% interest per month on the two-month unpaid rentals. [New World] argues that the said3% interest per month on the unpaid rentals was agreed upon by the parties as allegedly shown in Exhibits "A-4", "A-5", "A-6", "B-4", and "B-5". We are not persuaded.

Not constituting a forbearance of money,44 this amount shall earn interest pursuant to Item II(2)45 of our pronouncement in Eastern Shipping Lines v. CA.46 This item remained unchanged by the modification made in Nacar v. Gallery Frames.47 Interest at the rate of 6% per annum is hereby imposed on the amount of 966,480 from the time of extrajudicial demand on 12 July 2004 until the finality of this Decision.

[New World’s] letter dated 12 July 2004 to [AMA], Statement of Account dated 07 July 2004; and another Statement of Account dated 27 October 2004 were all prepared by [New World], with no participation or any indication of agreement on [AMA’s] part. The alleged proposal of [AMA] as contained in the Schedule of Receivable/Payable is just a computer print-out and does not contain any signature showing [AMA’s] conformity to the same.49

Thereafter – this time pursuant to the modification in Nacar– the amount due shall earn interest at the rate of 6% per annum until satisfaction, this interim period being deemed to be by then equivalent to a forbearance of credit.48

Having relied on the Contract of Lease for its demand for payment of liquidated damages, New World should have also referred to the contract to determine the proper application of the advance rental and security deposit. Had it done so in the first instance, it would have known that there is no occasion for the imposition of interest, 3% or otherwise, on the unpaid rentals. WHEREFORE, the Court of Appeals Decision dated 22 January

Considering the foregoing, there was no occasion for the unpaid two months’ rental to earn interest. Besides, we cannot sanction


2009 and Resolution dated 10 May 2009 in CA-G.R. CV No. 89483 is AFFIRMED with MODIFICATION.

City, finding petitioner Aniceto G. Saludo, Jr. and Booklight, Inc. (Booklight) jointly and severally liable to Security Bank Corporation (SBC). AMA Computer Learning Center, Inc. is ordered to pay New World Developers and Management, Inc. the amount of P966,480, The basic facts follow with interest at the rate of 6% per annum from 12 July 2004 until full payment. On 30 May 1996, Booklight was extended an omnibus line credit facility by SBC in the amount of P10,000,000.00. Said loan was In addition, AMA shall pay New World exemplary damages in the covered by a Credit Agreement and a Continuing Suretyship with amount of P100,000, which shall earn interest at the rate of 6% petitioner as surety, both documents dated 1 August 1996, to per annum from the finality of this Decision until full payment. secure full payment and performance of the obligations arising from the credit accommodation. SO ORDERED. Booklight drew several availments of the approved credit facility from 1996 to 1997 and faithfully complied with the terms of the loan. On 30 October 1997, SBC approved the renewal of credit facility of Booklight in the amount of P10,000,000.00 under the prevailing security lending rate. From August 3 to 14, 1998, Booklight executed nine (9) promissory notesin favor of SBC in 123. ANICETO G. SALUDO, JR., G.R. No. 184041 the aggregate amount of P9,652,725.00. For failure to settle the Petitioner, loans upon maturity, demands were made on Booklight and petitioner for the payment of the obligation but the duo failed to pay. As of 15 May 2000, the obligation of Booklight stood at SECURITY BANK CORPORATION, P10,487,875.41, inclusive of interest past due and penalty Respondent. On 16 June 2000, SBC filed against Booklight and herein petitioner an action for collection of sum of money with the RTC. Booklight initially filed a motion to dismiss, which was later on D E C I S I O N denied for lack of merit. In his Answer, Booklight asserted that the amount demanded by SBC was not based on the omnibus PEREZ, J.: credit line facility of 30 May 1996, but rather on the amendment of the credit facilities on 15 October 1996 increasing the loan line Before this Court is a petition for review on certiorari from P8,000,000.00 to P10,000,000.00. Booklight denied seeking the reversal of the Decision of the Court of Appeals in CAexecuting the promissory notes. It also claimed that it was not in G.R. CV No. 88079 dated 24 January 2008 which affirmed the default as in fact, it paid the sum of P1,599,126.11 on 30 Decision Branch 149 of the Regional Trial Court (RTC) of Makati September 1999 as a prelude to restructuring its loan for which it 622 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

earnestly negotiated for a mutually acceptable agreement until 5 July 2000, without knowing that SBC had already filed the collection case. In his Answer to the complaint, herein petitioner alleged that under the Continuing Suretyship, it was the parties understanding that his undertaking and liability was merely as an accommodation guarantor of Booklight. He countered that he came to know that Booklight offered to pay SBC the partial payment of the loan and proposed the restructuring of the obligation. Petitioner argued that said offer to pay constitutes a valid tender of payment which discharged Booklights obligation to the extent of the offer. Petitioner also averred that the imposition of the penalty on the supposed due and unpaid principal obligation based on the penalty rate of 2% per month is clearly unconscionable. On 7 March 2005, Booklight was declared in default. Consequently, SBC presented its evidence ex-parte. The case against petitioner, however, proceeded and the latter was able to present evidence on his behalf. After trial, the RTC ruled that petitioner is jointly and solidarily liable with Booklight under the Continuing Suretyship Agreement. The dispositive portion reads: WHEREFORE, in view of the foregoing considerations, the Court hereby finds in favor of the plaintiff against the defendants by ordering the defendants Booklight, Inc. and Aniceto G. Saludo, Jr., jointly and severally liable (solidarily liable) to plaintiff [sic], the following sums of Philippine Pesos:

PN No.

Amount

Interest Rate (per Beginnin annum) 20.189% Novembe 20.189% Novembe 20.189% Novembe 20.178% Novembe 20.178% Novembe 20.178% Novembe 20.178% Novembe 20.178% Novembe 20.178% Novembe

74/787/98 P1,927,000.00 74/788/98 913,545.00 74/789/98 1,927,090.00 74/791/98 500,000.0 74/792/98 800,000.00 74/793/98 665,000.00 74/808/98 970,000.00 74/822/98 975,000.00 74/823/98 975,000.00 with attorneys fee of P100,000.00 plus cost of suit

Petitioner filed a motion for reconsideration but it was denied by the Court of Appeals on 7 August 2008. Hence, the instant petition on the following arguments: The first credit facility has a one-year term from 30 June 1996 to 30 June 1997 while the second credit facility runs from 30 October 1997 to 30 October 1998. When the first credit facility expired, its accessory contract, the Continuing Surety agreement likewise expired. The second credit facility is not covered by the Continuing Suretyship, thus, availments made in 1998 by Booklight are not covered by the Continuing Suretyship. The approval of the second credit facility necessitates the consent of petitioner for the latters Continuing Suretyship to be effective.


The nine (9) promissory notes executed and drawn by Booklight in 1998 did not specify that they were drawn against and subject to the Continuing Suretyship. Neither was it mentioned in the Continuing Suretyship that it was executed to serve as collateral to the nine (9) promissory notes. The Continuing Suretyship is a contract of adhesion and petitioners participation to it is his signing of his contract. The approval of the second credit facility is considered a novation of the first sufficient to extinguish the Continuing Suretyship and discharge petitioner. The main derivative of these averments is the issue of whether or not petitioner should be held solidarily liable for the second credit facility extended to Booklight. We rule in the affirmative. There is no doubt that Booklight was extended two (2) credit facilities, each with a one-year term, by SBC. Booklight availed of these two (2) credit lines. While Booklight was able to comply with its obligation under the first credit line, it defaulted in the payment of the loan obligation amounting to P9,652,725.00 under the second credit line. There is likewise no dispute that the first credit line facility, with a term from 30 June 1996 to 30 June 1997, was covered by a Continuing Suretyship with petitioner acting as the surety. The dispute is on the coverage by the Continuing Suretyship of the loan contracted under the second credit facility. Under the Continuing Suretyship, petitioner undertook to guarantee the following obligations: Guaranteed Obligations the obligations of the Debtor arising from all credit accommodations extended by the Bank to the Debtor, including increases, renewals, roll-overs, extensions,

restructurings, amendments or novations thereof, as well as (i) all obligations of the Debtor presently or hereafter owing to the Bank, as appears in the accounts, books and records of the Bank, whether direct or indirect, and (ii) any and all expenses which the Bank may incur in enforcing any of its rights, powers and remedies under the Credit Instruments as defined hereinbelow; Whether the second credit facility is considered a renewal of the first or a brand new credit facility altogether was indirectly answered by the trial court when it invoked paragraph 10 of the Continuing Suretyship which provides: 10. remain in full force and effect until full and due payment and performance of the Guaranteed Obligations. This Suretyship shall not be terminated by the partial payment to the Bank of Guaranteed Obligations by any other surety or sureties of the Guaranteed Obligations, even if the particular surety or sureties are relieved of further liabilities. and concluded that the liability of petitioner did not expire upon the termination of the first credit facility. It cannot be gainsaid that the second credit facility was renewed for another one-year term by SBC. The terms of renewal read: 30 October 1997 BOOKLIGHT, INC. x x x x Gentlemen:


We are pleased to advise you that the Bank has approved the renewal of your credit facility subject to the terms and conditions set forth below:

Facility : Loan Line

Amount : P10,000,000.00

Collateral : Existing JSS of Atty. Aniceto Saludo (marital consent waived)

Term : 180 day Promissory Notes

Interest Rate : Prevailing SBC lending rate; subject to monthly setting and payment

Expiry : October 31, 1998

x x x x.[

This very renewal is explicitly covered by the guaranteed obligations of the Continuing Suretyship. The essence of a continuing surety has been highlighted in the case of Totanes v. China Banking Corporation in this wise: Comprehensive or continuing surety agreements are, in fact, quite commonplace in present day financial and commercial practice. A bank or financing company which anticipates entering into a series of credit transactions with a particular company, normally requires the projected principal debtor to execute a continuing surety agreement along with its sureties. By executing such an agreement, the principal places itself in a position to enter into the projected series of transactions with its creditor; with such suretyship agreement, there would be no need to execute a separate surety contract or bond for each financing or credit accommodation extended to the principal debtor.

In Gateway Electronics Corporation v. Asianbank Corporation, the Court emphasized that [b]y its nature, a continuing suretyship covers current and future loans, provided that, with respect to future loan transactions, they are x x x within the description or contemplation of the contract of guaranty.


Petitioner argues that the approval of the second credit facility necessitates his consent considering the onerous and solidary liability of a surety. This is contrary to the express waiver of his consent to such renewal, contained in paragraph 12 of the Continuing Suretyship, which provides in part: 12. Waivers by the Surety. The Surety hereby waives: x x x (v) notice or consent to any modification, amendment, renewal, extension or grace period granted by the Bank to the Debtor with respect to the Credit Instruments.

Respondent, as last resort, harps on the novation of the first credit facility to exculpate itself from liability from the second credit facility. At the outset, it must be pointed out that the Credit Agreement is actually the principal contract and it covers all credit facilities now or hereafter extended by [SBC] to [Booklight]; and that the suretyship agreement was executed precisely to guarantee these obligations, i.e., the credit facilities arising from the credit agreement. The principal contract is the credit agreement covered by the Continuing Suretyship. The two loan facilities availed by Booklight under the credit agreement are the Omnibus Line amounting to P10,000,000.00 granted to Booklight in 1996 and the other one is the Loan Line of the same amount in 1997. Petitioner however seeks to muddle the issue by insisting that these two availments were two separate principal contracts, conveniently ignoring the fact that it is the credit agreement which constitutes the principal contract signed by Booklight in order to avail of SBCs credit facilities. The two credit facilities are but loans made available to

Booklight pursuant to the credit agreement. On these facts the novation argument advanced by petitioner must fail. There is no novation to speak of. It is the first credit facility that expired and not the Credit Agreement. There was a second loan pursuant to the same credit agreement. The terms and conditions under the Credit Agreement continue to apply and the Continuing Suretyship continues to guarantee the Credit Agreement. The lameness of petitioners stand is pointed up by his attempt to escape from liability by labelling the Continuing Suretyship as a contract of adhesion. A contract of adhesion is defined as one in which one of the parties imposes a ready-made form of contract, which the other party may accept or reject, but which the latter cannot modify. One party prepares the stipulation in the contract, while the other party merely affixes his signature or his adhesion thereto, giving no room for negotiation and depriving the latter of the opportunity to bargain on equal footing.[if

A contract of adhesion presupposes that the party adhering to the contract is a weaker party. That cannot be said of petitioner. He is a lawyer. He is deemed knowledgeable of the legal implications of the contract that he is signing. It must be borne in mind, however, that contracts of adhesion are not invalid per


se. Contracts of adhesion, where one party imposes a ready-made form of contract on the other, are not entirely prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives his consent

Finally, petitioner challenges the imposition of 20.189% interest rate as unconscionable. We rule otherwise. In Development Bank of the Philippines v. Family Foods Manufacturing Co. Ltd this Court upheld the validity of the imposition of 18% and 22% stipulated rates of interest in the two (2) promissory notes. Likewise in Spouses Bacolor v. Banco Filipino Savings and Mortgage Bank,[ the 24% interest rate agreed upon by parties was held as not violative of the Usury Law, as amended by Presidential Decree No. 116. WHEREFORE, the petition is DENIED. The Decision dated 24 January 2008 of the Court of Appeals in CA-G.R. CV No. 88079 is AFFIRMED in toto. SO ORDERED. 124. METROPOLITANT BANK TRUST AND COMPANY vs REYNADO AND ADRANDEA D E C I S I O N DEL CASTILLO, J.:

It is a hornbook doctrine in our criminal law that the criminal liability for estafa is not affected by a compromise, for it is a public offense which must be prosecuted and punished by the government on its own motion, even though complete reparation [has] been made of the damage suffered by the private offended party. Since a criminal offense like estafa is committed against the State, the private offended party may not waive or extinguish the criminal liability that the law imposes for the commission of the crime. This Petition for Review on Certiorari under Rule 45 of the Rules of Court seeks the reversal of the Court of Appeals (CAs) Decisiondated October 21, 2002 in CA-G.R. SP No. 58548 and its further Resolution dated July 12, 2004 denying petitioners Motion for Reconsideration Factual Antecedents On January 31, 1997, petitioner Metropolitan Bank and Trust Company charged respondents before the Office of the City Prosecutor of Manila with the crime of estafa under Article 315, paragraph 1(b) of the Revised Penal Code. In the affidavit of petitioners audit officer, Antonio Ivan S. Aguirre, it was alleged that the special audit conducted on the cash and lending operations of its Port Area branch uncovered anomalous/fraudulent transactions perpetrated by respondents in connivance with client Universal Converter Philippines, Inc. (Universal); that respondents were the only voting members of the branchs credit committee authorized to extend credit accommodation to clients up to P200,000.00; that through the socalled Bills Purchase Transaction, Universal, which has a paid-up capital of only P125,000.00 and actual maintaining balance of P5,000.00, was able to make withdrawals totaling P81,652,000.00[against uncleared regional checks deposited in


its account at petitioners Port Area branch; that, consequently, Universal was able to utilize petitioners funds even before the seven-day clearing period for regional checks expired; that Universals withdrawals against uncleared regional check deposits were without prior approval of petitioners head office; that the uncleared checks were later dishonored by the drawee bank for the reason Account Closed; and, that respondents acted with fraud, deceit, and abuse of confidence. In their defense, respondents denied responsibility in the anomalous transactions with Universal and claimed that they only intended to help the Port Area branch solicit and increase its deposit accounts and daily transactions. Meanwhile, on February 26, 1997, petitioner and Universal entered into a Debt Settlement Agreementwhereby the latter acknowledged its indebtedness to the former in the total amount of P50,990,976.27as of February 4, 1997 and undertook to pay the same in bi-monthly amortizations in the sum of P300,000.00 starting January 15, 1997, covered by postdated checks, plus balloon payment of the remaining principal balance and interest and other charges, if any, on December 31, 2001 Findings of the Prosecutor Following the requisite preliminary investigation, Assistant City Prosecutor Winnie M. Edad (Prosecutor Edad) in her Resolution dated July 10, 1997 found petitioners evidence insufficient to hold respondents liable for estafa. According to Prosecutor Edad: The execution of the Debt Settlement Agreement puts complainant bank in estoppel to argue that the liability is criminal. Since the agreement was made even before the filing of this case, the relations between the parties [have] change[d], novation has set in and prevented the incipience of any criminal liability on the part of respondents. Thus, Prosecutor Edad recommended the dismissal of the case

WHEREFORE, for insufficiency of evidence, it is respectfully recommended that the case be dismissed

On December 9, 1997, petitioner appealed the Resolution of Prosecutor Edad to the Department of Justice (DOJ) by means of a Petition for Review Ruling of the Department of Justice On June 22, 1998, the DOJ dismissed the petition ratiocinating that: It is evident that your client based on the same transaction chose to file estafa only against its employees and treat with kid gloves its big time client Universal who was the one who benefited from this transaction and instead, agreed that it should be paid on installment basis.

To allow your client to make the choice is to make an unwarranted classification under the law which will result in grave injustice against herein respondents. Thus, if your client agreed that no estafa was committed in this transaction with Universal who was the principal player and beneficiary of this transaction[,] more so with herein respondents whose liabilities are based only on conspiracy with Universal.

Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated the P53,873,500.00 which Universal owed your client after its checks


deposited with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive Committee and the Credit Committee of Metrobank were duly notified of these transactions which they approved. Further, no damage was caused to your client as it agreed [to] the settlement [with] Universal.

A Motion for Reconsideration was filed by petitioner, but the same was denied on March 1, 2000 by then Acting Secretary of Justice Artemio G. Tuquero. Aggrieved, petitioner went to the CA by filing a Petition for Certiorari & Mandamus

for estafa neither does restitution negate the offense already committed Additionally, the OSG, in sharing the views of petitioner contended that failure to implead other responsible individuals in the complaint does not warrant its dismissal, suggesting that the proper remedy is to cause their inclusion in the information.[ This notwithstanding, however, the CA disposed of the petition as follows: WHEREFORE, the petition is DENIED due course and, accordingly,DISMISSED. Consequently, the resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice are AFFIRMED. SO ORDERED

Ruling of the Court of Appeals Hence, this instant petition before the Court. By Decision of October 21, 2002, the CA affirmed the twin resolutions of the Secretary of Justice. Citing jurisprudence wherein we ruled that while novation does not extinguish criminal liability, it may prevent the rise of such liability as long On November 8, 2004, we required[respondents to file as it occurs prior to the filing of the criminal information in court. Comment, not a motion to dismiss, on the petition Hence, according to the CA, [j]ust as Universal cannot be held within 10 days from notice. The OSG filed a responsible under the bills purchase transactions on account of Manifestation and Motion in Lieu of Comment while novation, private respondents, who acted in complicity with the respondent Jose C. Adraneda (Adraneda) submitted his former, cannot be made liable [for] the same transactionsThe CA Comment on the petition. The Secretary of Justice failed added that [s]ince the dismissal of the complaint is founded on to file the required comment on the OSGs Manifestation legal ground, public respondents may not be compelled by and Motion in Lieu of Comment and respondent Rogelio mandamus to file an information in court Reynado (Reynado) did not submit any. For which reason, we issued a show cause order on July 19, 2006. Incidentally, the CA totally ignored the Commentof the Office of Their persistent non-compliance with our directives the Solicitor General (OSG) where the latter, despite being the constrained us to resolve that they had waived the filing statutory counsel of public respondent DOJ, agreed with of comment and to impose a fine of P1,000.00 on petitioner that the DOJ erred in dismissing the complaint. It Reynado. Upon submission of the required alleged that where novation does not extinguish criminal liability memorandum by petitioner and Adraneda, the instant 629 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

petition was submitted for resolution.

Issues Petitioner presented the following main arguments for our consideration: Novation and undertaking to pay the amount embezzled do not extinguish criminal liability. [It is the duty of the public prosecutor to implead all persons who appear criminally liable for the offense charged. Petitioner persistently insists that the execution of the Debt Settlement Agreement with Universal did not absolve private respondents from criminal liability for estafa. Petitioner submits that the settlement affects only the civil obligation of Universal but did not extinguish the criminal liability of the respondents. Petitioner thus faults the CA in sustaining the DOJ which in turn affirmed the finding of Prosecutor Edad for committing apparent error in the appreciation and the application of the law on novation. By petitioners claim, citing Metropolitan Bank and Trust Co. v. Tonda, the negotiations pertain [to] and affect only the civil aspect of the case but [do] not preclude prosecution for the offense already committed. In his Comment, Adraneda denies being a privy to the anomalous transactions and passes on the sole responsibility to his co-respondent Reynado as the latter was able to conceal the pertinent documents being the head of petitioners Port Area branch. Nonetheless, he contends that because of the Debt Settlement Agreement, they cannot be held liable for estafa.

The OSG, for its part, instead of contesting the arguments of petitioner, even prayed before the CA to give due course to the petition contending that DOJ indeed erred in dismissing the complaint for estafa. Given the facts of the case, the basic issue presented before this Court is whether the execution of the Debt Settlement Agreement precluded petitioner from holding respondents liable to stand trial for estafa under Art. 315 (1)(b) of the Revised Penal Code. Our Ruling We find the petition highly meritorious. Novation not a mode of extinguishingcriminal liability for estafa; Criminal liability for estafa not affected by compromise or novation of contract. Initially, it is best to emphasize that novation is not one of the grounds prescribed by the Revised Penal Code for the extinguishment of criminal liability. In a catena of cases, it was ruled that criminal liability for estafa is not affected by a compromise or novation of contract. In Firaza v. People and Recuerdo v. People this Court ruled that in a crime of estafa, reimbursement or belated payment to the offended party of the money swindled by the accused does not extinguish the criminal liability of the latter. We also held in People v. Morenoand in People v. Ladera that criminal liability for estafa is not affected by compromise or novation of contract, for it is a public offense which must be prosecuted and punished by the Government on its own motion even though complete reparation should have been made of the damage suffered by the offended party. Similarly in the case of Metropolitan Bank and Trust Company v. Tonda cited by petitioner, we held that in a crime of


estafa, reimbursement of or compromise as to the amount misappropriated, after the commission of the crime, affects only the civil liability of the offender, and not his criminal liability. Thus, the doctrine that evolved from the aforecited cases is that a compromise or settlement entered into after the commission of the crime does not extinguish accuseds liability for estafa. Neither will the same bar the prosecution of said crime. Accordingly, in such a situation, as in this case, the complaint for estafa against respondents should not be dismissed just because petitioner entered into a Debt Settlement Agreement with Universal. Even the OSG arrived at the same conclusion: Contrary to the conclusion of public respondent, the Debt Settlement Agreement entered into between petitioner and Universal Converter Philippines extinguishes merely the civil aspect of the latters liability as a corporate entity but not the criminal liability of the persons who actually committed the crime of estafa against petitioner Metrobank. x x

Unfortunately for petitioner, the above observation of the OSG was wittingly glossed over in the body of the assailed Decision of the CA. Execution of the Debt Settlement Agreement did not prevent the incipience of criminal liability. Even if the instant case is viewed from the standpoint of the law on contracts, the disposition absolving the respondents from criminal liability because of novation is still erroneous.

Under Article 1311 of the Civil Code, contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The civil law principle of relativity of contracts provides that contracts can only bind the parties who entered into it, and it cannot favor or prejudice a third person, even if he is aware of such contract and has acted with knowledge thereof. In the case at bar, it is beyond cavil that respondents are not parties to the agreement. The intention of the parties thereto not to include them is evident either in the onerous or in the beneficent provisions of said agreement. They are not assigns or heirs of either of the parties. Not being parties to the agreement, respondents cannot take refuge therefrom to bar their anticipated trial for the crime they committed. It may do well for respondents to remember that the criminal action commenced by petitioner had its genesis from the alleged fraud, unfaithfulness, and abuse of confidence perpetrated by them in relation to their positions as responsible bank officers. It did not arise from a contractual dispute or matters strictly between petitioner and Universal. This being so, respondents cannot rely on subject settlement agreement to preclude prosecution of the offense already committed to the end of extinguishing their criminal liability or prevent the incipience of any liability that may arise from the criminal offense. This only demonstrates that the execution of the agreement between petitioner and Universal has no bearing on the innocence or guilt of the respondents. Determination of the probable cause, a function belonging to the public prosecutor; judicial review allowed where it has been clearly established that the prosecutor committed grave abuse of discretion.


In a preliminary investigation, a public prosecutor determines whether a crime has been committed and whether there is probable cause that the accused is guilty thereof. The Secretary of Justice, however, may review or modify the resolution of the prosecutor. Probable cause is defined as such facts and circumstances that will engender a well-founded belief that a crime has been committed and that the respondent is probably guilty thereof and should be held for trial. Generally, a public prosecutor is afforded a wide latitude of discretion in the conduct of a preliminary investigation. By way of exception, however, judicial review is allowed where respondent has clearly established that the prosecutor committed grave abuse of discretion that is, when he has exercised his discretion in an arbitrary, capricious, whimsical or despotic manner by reason of passion or personal hostility, patent and gross enough as to amount to an evasion of a positive duty or virtual refusal to perform a duty enjoined by law. Tested against these guidelines, we find that this case falls under the exception rather than the general rule. A close scrutiny of the substance of Prosecutor Edads Resolution dated July 10, 1997 readily reveals that were it not for the Debt Settlement Agreement, there was indeed probable cause to indict respondents for the crime charged. From her own assessment of the Complaint-Affidavit of petitioners auditor, her preliminary finding is that Ordinarily, the offense of estafa has been sufficiently established. Interestingly, she suddenly changed tack and declared that the agreement altered the relation of the parties and that novation had set in preventing the incipience of any criminal liability on respondents. In light of the jurisprudence herein earlier discussed, the prosecutor should not have gone that far and executed an apparent somersault. Compounding further the error, the DOJ in dismissing petitioners petition, ruled out estafa contrary to the findings of the prosecutor. Pertinent portion of the ruling reads:

Equivocally, there is no estafa in the instant case as it was not clearly shown how respondents misappropriated the P53,873,500.00 which Universal owed your client after its checks deposited with Metrobank were dishonored. Moreover, fraud is not present considering that the Executive Committee and the Credit Committee of Metrobank were duly notified of these transactions which they approved. Further, no damage was caused to your client as it agreed [to] the settlement [with] Universal.

The findings of the Secretary of Justice in sustaining the dismissal of the Complaint are matters of defense best left to the trial courts deliberation and contemplation after conducting the trial of the criminal case. To emphasize, a preliminary investigation for the purpose of determining the existence of probable cause is not a part of the trial. A full and exhaustive presentation of the parties evidence is not required, but only such as may engender a well-grounded belief that an offense has been committed and that the accused is probably guilty thereof. A finding of probable cause does not require an inquiry into whether there is sufficient evidence to procure a conviction. It is enough that it is believed that the act or omission complained of constitutes the offense charged So we held in Balangauan v. Court of Appeals.

Applying the foregoing disquisition to the present petition, the reasons of DOJ for affirming the dismissal of the criminal complaints for estafa and/or qualified estafa are determinative of whether or not it committed grave abuse of discretion amounting to lack or excess of jurisdiction. In requiring hard facts and solid evidence as the basis for a finding of probable cause to hold petitioners Bernyl and Katherene liable to stand trial for the 632 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

crime complained of, the DOJ disregards the definition of probable cause that it is a reasonable ground of presumption that a matter is, or may be, well-founded, such a state of facts in the mind of the prosecutor as would lead a person of ordinary caution and prudence to believe, or entertain an honest or strong suspicion, that a thing is so. The term does not mean actual and positive cause nor does it import absolute certainty. It is merely based on opinion and reasonable belief; that is, the belief that the act or omission complained of constitutes the offense charged. While probable cause demands more than bare suspicion, it requires less than evidence which would justify conviction. Herein, the DOJ reasoned as if no evidence was actually presented by respondent HSBC when in fact the records of the case were teeming; or it discounted the value of such substantiation when in fact the evidence presented was adequate to excite in a reasonable mind the probability that petitioners Bernyl and Katherene committed the crime/s complained of. In so doing, the DOJ whimsically and capriciously exercised its discretion, amounting to grave abuse of discretion, which rendered its resolutions amenable to correction and annulment by the extraordinary remedy of certiorari.

In the case at bar, as analyzed by the prosecutor, a prima facie case of estafa exists against respondents. As perused by her, the facts as presented in the Complaint-Affidavit of the auditor are reasonable enough to excite her belief that respondents are guilty of the crime complained of. In Andres v. Justice Secretary Cuevas we had occasion to rule that the presence or absence of the elements of the crime is evidentiary in nature and is a matter of defense that may be passed upon after a fullblown trial on the merits Thus confronted with the issue on whether the public prosecutor and the Secretary of Justice committed grave abuse of

discretion in disposing of the case of petitioner, given the sufficiency of evidence on hand, we do not hesitate to rule in the affirmative. We have previously ruled that grave abuse of discretion may arise when a lower court or tribunal violates and contravenes the Constitution, the law or existing jurisprudence. Non-inclusion of officers of Universal not a ground for the dismissal of the complaint. The DOJ in resolving to deny petitioners appeal from the resolution of the prosecutor gave another ground failure to implead the officers of Universal. It explained: To allow your client to make the choice is to make an unwarranted classification under the law which will result in grave injustice against herein respondents. Thus, if your client agreed that no estafa was committed in this transaction with Universal who was the principal player and beneficiary of this transaction[,] more so with herein respondents whose liabilities are based only on conspiracy with Universal.

The ratiocination of the Secretary of Justice conveys the idea that if the charge against respondents rests upon the same evidence used to charge co-accused (officers of Universal) based on the latters conspiratorial participation, the non-inclusion of said co-accused in the charge should benefit the respondents. The reasoning of the DOJ is flawed.


Suffice it to say that it is indubitably within the discretion of the prosecutor to determine who must be charged with what crime or for what offense. Public prosecutors, not the private complainant, are the ones obliged to bring forth before the law those who have transgressed it. Section 2, Rule 110 of the Rules of Court mandates that all criminal actions must be commenced either by complaint or information in the name of the People of the Philippines against all persons who appear to be responsible therefor. Thus the law makes it a legal duty for prosecuting officers to file the charges against whomsoever the evidence may show to be responsible for the offense. The proper remedy under the circumstances where persons who ought to be charged were not included in the complaint of the private complainant is definitely not to dismiss the complaint but to include them in the information. As the OSG correctly suggested, the proper remedy should have been the inclusion of certain employees of Universal who were found to have been in cahoots with respondents in defrauding petitioner. The DOJ, therefore, cannot seriously argue that because the officers of Universal were not indicted, respondents themselves should not likewise be charged. Their non-inclusion cannot be perversely used to justify desistance by the public prosecutor from prosecution of the criminal case just because not all of those who are probably guilty thereof were charged. Mandamus a proper remedy when resolution of public respondent is tainted with grave abuse of discretion. Mandamus is a remedial measure for parties aggrieved. It shall issue when any tribunal, corporation, board, officer or person unlawfully neglects the performance of an act which the law specifically enjoins as a duty resulting from an office, trust or station. The writ of mandamus is not available to control

discretion neither may it be issued to compel the exercise of discretion. Truly, it is a matter of discretion on the part of the prosecutor to determine which persons appear responsible for the commission of a crime. However, the moment he finds one to be so liable it becomes his inescapable duty to charge him therewith and to prosecute him for the same. In such a situation, the rule loses its discretionary character and becomes mandatory. Thus, where, as in this case, despite the sufficiency of the evidence before the prosecutor, he refuses to file the corresponding information against the person responsible, he abuses his discretion. His act is tantamount to a deliberate refusal to perform a duty enjoined by law. The Secretary of Justice, on the other hand, gravely abused his discretion when, despite the existence of sufficient evidence for the crime of estafa as acknowledged by the investigating prosecutor, he completely ignored the latters finding and proceeded with the questioned resolution anchored on purely evidentiary matters in utter disregard of the concept of probable cause as pointed out in Balangauan. To be sure, findings of the Secretary of Justice are not subject to review unless shown to have been made with grave abuse. The present case calls for the application of the exception. Given the facts of this case, petitioner has clearly established that the public prosecutor and the Secretary of Justice committed grave abuse of discretion. WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 58548 promulgated on October 21, 2002 affirming the Resolutions dated June 22, 1998 and March 1, 2000 of the Secretary of Justice, and its Resolution dated July 12, 2004 denying reconsideration thereon are hereby REVERSED and SET ASIDE. The public prosecutor is ordered to file the necessary information for estafa against the respondents.


125. PRUDENTIAL BANK AND TRUST COMPANY (now BANK OF THE PHILIPPINE ISLANDS, Petitioner, - versus - LIWAYWAY ABASOLO, Respondent. x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x D E C I S I O N CARPIO MORALES, J. Leonor Valenzuela-Rosales inherited two parcels of land situated in Palanan, Sta. Cruz, Laguna (the properties), registered as Original Certificates of Title Nos. RO-527 and RO-528. After she passed away, her heirs executed on June 14, 1993 a Special Power of Attorney (SPA) in favor of Liwayway Abasolo (respondent) empowering her to sell the properties. Sometime in 1995, Corazon Marasigan (Corazon) wanted to buy the properties which were being sold for P2,448,960, but as she had no available cash, she broached the idea of first mortgaging the properties to petitioner Prudential Bank and Trust Company (PBTC), the proceeds of which would be paid directly to respondent. Respondent agreed to the proposal. On Corazon and respondents consultation with PBTCs Head Office, its employee, Norberto Mendiola (Mendiola), allegedly advised respondent to issue an authorization for Corazon to mortgage the properties, and for her (respondent) to act as one of the co-makers so that the proceeds could be released to both of

them.

To guarantee the payment of the property, Corazon executed on August 25, 1995 a Promissory Note for P2,448,960 in favor of respondent. By respondents claim, in October 1995, Mendiola advised her to transfer the properties first to Corazon for the immediate processing of Corazons loan application with assurance that the proceeds thereof would be paid directly to her (respondent), and the obligation would be reflected in a bank guarantee. Heeding Mendiolas advice, respondent executed a Deed of Absolute Sale over the properties in favor of Corazon following which or on December 4, 1995, Transfer Certificates of Title Nos. 164159 and 164160 were issued in the name of Corazon. Corazons application for a loan with PBTCs Tondo Branch was approved on December 1995. She thereupon executed a real estate mortgage covering the properties to secure the payment of the loan. In the absence of a written request for a bank guarantee, the PBTC released the proceeds of the loan to Corazon. Respondent later got wind of the approval of Corazons loan application and the release of its proceeds to Corazon who, despite repeated demands, failed to pay the purchase price of the properties. Respondent eventually accepted from Corazon partial payment in kind consisting of one owner type jeepney and four passenger jeepneys, plus installment payments, which, by the trial courts computation, totaled P665,000. In view of Corazons failure to fully pay the purchase price, respondent filed a complaint for collection of sum of money


and annulment of sale and mortgage with damages, against Corazon and PBTC (hereafter petitioner), before the Regional Trial Court (RTC) of Sta. Cruz, Laguna. In her Answer Corazon denied that there was an agreement that the proceeds of the loan would be paid directly to respondent. And she claimed that the vehicles represented full payment of the properties, and had in fact overpaid P76,040. Petitioner also denied that there was any arrangement between it and respondent that the proceeds of the loan would be released to her It claimed that it may process a loan application of the registered owner of the real property who requests that proceeds of the loan or part thereof be payable directly to a third party [but] the applicant must submit a letter request to the Bank On pre-trial, the parties stipulated that petitioner was not a party to the contract of sale between respondent and Corazon; that there was no written request that the proceeds of the loan should be paid to respondent; and that respondent received five vehicles as partial payment of the properties. Despite notice, Corazon failed to appear during the trial to substantiate her claims. By Decision of March 12, 2004, Branch 91 of the Sta. Cruz, Laguna RTC rendered judgment in favor of respondent and against Corazon who was made directly liable to respondent, and against petitioner who was made subsidiarily liable in the event that Corazon fails to pay. Thus the trial court disposed: WHEREFORE, premises considered, finding the plaintiff has established her claim against the defendants, Corazon Marasigan and Prudential Bank and Trust Company, judgment is hereby rendered in favor of the

plaintiff ordering:

Defendant Corazon Marasigan to pay the plaintiff the amount of P1,783,960.00 plus three percent (3%) monthly interest per month from August 25, 1995 until fully paid. Further, to pay the plaintiff the sum equivalent to twenty percent five [sic] (25%) of P1,783,960.00 as attorneys fees.

Defendant Prudential Bank and Trust Company to pay the plaintiff the amount of P1,783,960.00 or a portion thereof plus the legal rate of interest per annum until fully paid in the event that Defendant Corazon Marasigan fails to pay the said amount or a portion thereof. Other damages claimed not duly proved are hereby dismissed.

So Ordered.

In finding petitioner subsidiarily liable, the trial court held that


petitioner breached its understanding to release the proceeds of the loan to respondent: Liwayway claims that the bank should also be held responsible for breach of its obligation to directly release to her the proceeds of the loan or part thereof as payment for the subject lots. The evidence shows that her claim is valid. The Bank had such an obligation as proven by evidence. It failed to rebut the credible testimony of Liwayway which was given in a frank, spontaneous, and straightforward manner and withstood the test of rigorous cross-examination conducted by the counsel of the Bank. Her credibility is further strengthened by the corroborative testimony of Miguela delos Reyes who testified that she went with Liwayway to the bank for several times. In her presence, Norberto Mendiola, the head of the loan department, instructed Liwayway to transfer the title over the subject lots to Corazon to facilitate the release of the loan with the guarantee that Liwayway will be paid upon the release of the proceeds.

Further, Liwayway would not have executed the deed of sale in favor of Corazon had Norberto Mendiola did not promise and guarantee that the proceeds of the loan would be directly paid to her. Based on ordinary human experience, she would not have readily transferred the title over the subject lots had there been no strong and reliable guarantee. In this case, what caused her to transfer title is the promise and guarantee made by Norberto Mendiola that the proceeds of the loan would be directly paid to her.

!

affirmed the trial courts decision with modification on the amount of the balance of the purchase price which was reduced from P1,783,960 to P1,753,960. It disposed: WHEREFORE, premises considered, the assailed Decision dated March 12, 2004 of the Regional Trial Court of Sta. Cruz, Laguna, Branch 91, is AFFIRMED WITH MODIFICATION as to the amount to be paid which is P1,753,960.00. SO ORDERED.

Petitioners motion for reconsideration having been denied by the appellate court by Resolution of February 23, 2009, the present petition for review was filed

The only issue petitioner raises is whether it is subsidiarily liable.

The petition is meritorious. In the absence of a lender-borrower relationship between petitioner and Liwayway, there is no inherent obligation of petitioner to release the proceeds of the loan to her. To a banking institution, well-defined lending policies and sound lending practices are essential to perform its lending function effectively and minimize the risk inherent in any extension of credit. Thus, Section X302 of the Manual of Regulations for

On appeal, the Court of Appeals by Decision of January 14, 2008[if 637 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

Banks provides: X-302. To ensure that timely and adequate management action is taken to maintain the quality of the loan portfolio and other risk assets and that adequate loss reserves are set up and maintained at a level sufficient to absorb the loss inherent in the loan portfolio and other risk assets, each bank shall establish a system of identifying and monitoring existing or potential problem loans and other risk assets and of evaluating credit policies vis--vis prevailing circumstances and emerging portfolio trends. Management must also recognize that loss reserve is a stabilizing factor and that failure to account appropriately for losses or make adequate provisions for estimated future losses may result in misrepresentation of the banks financial condition. In order to identify and monitor loans that a bank has extended, a system of documentation is necessary. Under this fold falls the issuance by a bank of a guarantee which is essentially a promise to repay the liabilities of a debtor, in this case Corazon. It would be contrary to established banking practice if Mendiola issued a bank guarantee, even if no request to that effect was made. The principle of relativity of contracts in Article 1311 of the Civil Code supports petitioners cause: Art. 1311. Contracts take effect only between the parties, their assigns and heirs, except in case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent.

If a contract should contain some stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to

the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person.

For Liwayway to prove her claim against petitioner, a clear and deliberate act of conferring a favor upon her must be present. A written request would have sufficed to prove this, given the nature of a banking business, not to mention the amount involved. Since it has not been established that petitioner had an obligation to Liwayway, there is no breach to speak of. Liwayways claim should only be directed against Corazon. Petitioner cannot thus be held subisidiarily liable. To the Court, Liwayway did not rely on Mendiolas representations, even if he indeed made them. The contract for Liwayway to sell to Corazon was perfected from the moment there was a meeting of minds upon the properties-object of the contract and upon the price. Only the source of the funds to pay the purchase price was yet to be resolved at the time the two inquired from Mendiola. Consider Liwayways testimony: Q: We are referring to the promissory note which you aforementioned a while ago, why did this promissory note come about?

A: Because the negotiation was already completed, sir, and the deed of sale will have to be 638 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

executed, I asked the defendant (Corazon) to execute the promissory note first before I could execute a deed of absolute sale, for assurance that she really pay me, sir.[if !supportFootnotes][14][endif] (emphasis and underscoring supplied)

That it was on Corazons execution of a promissory note that prompted Liwayway to finally execute the Deed of Sale is thus clear. The trial Courts reliance on the doctrine of apparent authority that the principal, in this case petitioner, is liable for the obligations contracted by its agent, in this case Mendiola, does not lie. Prudential Bank v. Court of Appeals[if !supportFootnotes][15][endif] instructs: [A] banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetuate fraud upon his principal or some person, for his own ultimate benefit.[if !supportFootnotes][16][endif] (underscoring supplied)

his authority lies on Liwayway. She, however, failed to discharge the onus. It bears noting that Mendiola was not privy to the approval or disallowance of Corazons application for a loan nor that he would benefit by the approval thereof. Aside from Liwayways bare allegations, evidence is wanting to show that there was collusion between Corazon and Mendiola to defraud her. Even in Liwayways Complaint, the allegation of fraud is specifically directed against Corazon. IN FINE, Liwayways cause of action lies against only Corazon. WHEREFORE, the Decision of January 14, 2008 of the Court of Appeals, in so far as it holds petitioner, Prudential Bank and Trust Company (now Bank of the Philippine Islands), subsidiary liable in case its co-defendant Corazon Marasigan, who did not appeal the trial courts decision, fails to pay the judgment debt, is REVERSED and SET ASIDE. The complaint against petitioner is accordingly DISMISSED. SO ORDERED. 126. ASIAN CATHAY FINANCE AND LEASING CORPORATION, Petitioner, - versus - SPOUSES CESARIO GRAVADOR and NORMA DE VERA and SPOUSES EMMA CONCEPCION G. DUMIGPI and FEDERICO L. DUMIGPI, Respondents.

The onus probandi that attempt to commit fraud attended petitioners employee Mendiolas acts and that he abused 639 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

NACHURA, J.: On appeal is the June 10, 2008 Decision of the Court of Appeals (CA) in CA-G.R. CV No. 83197, setting aside the April 5, 2004 decisionof the Regional Trial Court (RTC), Branch 9, Bulacan, as well as its subsequent Resolutiondated February 11, 2009, denying petitioners motion for reconsideration. On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of Eight Hundred Thousand Pesos (P800,000.00)to respondent Cesario Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loan was payable in sixty (60) monthly installments of P24,400.00 each. To secure the loan, respondent Cesario executed a real estate mortgage over his property in Sta. Maria, Bulacan, covered by Transfer Certificate of Title No. T29234. Respondents paid the initial installment due in November 1999. However, they were unable to pay the subsequent ones. Consequently, on February 1, 2000, respondents received a letter demanding payment of P1,871,480.00 within five (5) days from receipt thereof. Respondents requested for an additional period to settle their account, but ACFLC denied the request. Petitioner filed a petition for extrajudicial foreclosure of mortgage with the Office of the Deputy Sheriff of Malolos, Bulacan. On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and promissory note with damages and prayer for issuance of a temporary restraining order (TRO) and writ of preliminary injunction. Respondents claimed that the real estate mortgage is null and void. They pointed out that the mortgage does not make reference to the promissory note dated October 22, 1999. The promissory note does not specify the maturity date of the loan, the interest rate, and the mode of payment; and it illegally imposed liquidated damages. The real estate mortgage, on the other hand, contains a provision on the

waiver of the mortgagors right of redemption, a provision that is contrary to law and public policy. Respondents added that ACFLC violated Republic Act No. 3765, or the Truth in Lending Act, in the disclosure statement that should be issued to the borrower. Respondents, thus, claimed that ACFLCs petition for foreclosure lacked factual and legal basis, and prayed that the promissory note, real estate mortgage, and any certificate of sale that might be issued in connection with ACFLCs petition for extrajudicial foreclosure be declared null and void. In the alternative, respondents prayed that the court fix their obligation at P800,000.00 if the mortgage could not be annulled, and declare as null and void the provisions on the waiver of mortgagors right of redemption and imposition of the liquidated damages. Respondents further prayed for moral and exemplary damages, as well as attorneys fees, and for the issuance of a TRO to enjoin ACFLC from foreclosing their property. On April 12, 2000, the RTC issued an Order, denying respondents application for TRO, as the acts sought to be enjoined were already fait accompli. On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the complaint and averring failure to state a cause of action and lack of cause of action, as defenses. ACFLC claimed that it was merely exercising its right as mortgagor; hence, it prayed for the dismissal of the complaint. After trial, the RTC rendered a decision, dismissing the complaint for lack of cause of action. Sustaining the validity of the promissory note and the real estate mortgage, the RTC held that respondents are well-educated individuals who could not feign naivet in the execution of the loan documents. It, therefore, rejected respondents claim that ACFLC deceived them into signing the promissory note, disclosure statement, and deed of real estate mortgage. The RTC further held that the alleged defects in the promissory note and in the deed of real estate


mortgage are too insubstantial to warrant the nullification of the mortgage. It added that a promissory note is not one of the essential elements of a mortgage; thus, reference to a promissory note is neither indispensable nor imperative for the validity of the mortgage. The RTC also upheld the interest rate and the penalty charge imposed by ACFLC, and the waiver of respondents right of redemption provided in the deed of real estate mortgage. The RTC disposed thus: WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence applicable thereto, judgment is hereby rendered DISMISSING the complaint in the above-entitled case for want of cause of action as well as the counterclaim of [petitioner] Asian Cathay Finance & Leasing Corporation for moral and exemplary damages and attorneys fees for abject lack of proof to justify the same. SO ORDERED. Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the assailed Decision, reversing the RTC. It held that the amount of P1,871,480.00 demanded by ACFLC from respondents is unconscionable and excessive. Thus, it declared respondents principal loan to be P800,000.00, and fixed the interest rate at 12% per annum and reduced the penalty charge to 1% per month. It explained that ACFLC could not insist on the interest rate provided on the note because it failed to provide respondents with the disclosure statement prior to the consummation of the loan transaction. Finally, the CA invalidated the waiver of respondents right of redemption for reasons of public policy. Thus, the CA ordered: WHEREFORE, premises considered, the appealed decision is REVERSED AND SET ASIDE. Judgment is hereby rendered as follows:

1) Affirming the amount of the principal loan under the REM and Disclosure Statement both dated October 22, 1999 to be P800,000.00, subject to: a. 1% interest per month (12% per annum) on the principal from November 23, 1999 until the date of the foreclosure sale, less P24,000.00 paid by [respondents] as first month amortization b. 1% penalty charge per month on the principal from December 23, 1999 until the date of the foreclosure sale. 2) Declaring par. 14 of the REM as null and void by reason of public policy, and granting mortgagors a period of one year from the finality of this Decision within which to redeem the subject property by paying the redemption price as computed under paragraph 1 hereof, plus one percent (1%) interest thereon from the time of foreclosure up to the time of the actual redemption pursuant to Section 28, Rule 39 of the 1997 Rules on Civil Procedure.

The claim of the [respondents] for moral and exemplary damages and attorneys fees is dismissed for lack of merit. SO ORDERED ACFLC filed a motion for reconsideration, but the CA denied it on February 11, 2009. ACFLC is now before us, faulting the CA for reversing the dismissal of respondents complaint. It points out that respondents are well-educated persons who are familiar with the


execution of loan documents. Thus, they cannot be deceived into signing a document containing provisions that they are not amenable to. ACFLC ascribes error on the part of the CA for invalidating the interest rates imposed on respondents loan, and the waiver of the right of redemption. The appeal lacks merit. It is true that parties to a loan agreement have a wide latitude to stipulate on any interest rate in view of Central Bank Circular No. 905, series of 1982, which suspended the Usury Law ceiling on interest rate effective January 1, 1983. However, interest rates, whenever unconscionable, may be equitably reduced or even invalidated. In several cases,[if !supportFootnotes][10][endif] this Court had declared as null and void stipulations on interest and charges that were found excessive, iniquitous and unconscionable. Records show that the amount of loan obtained by respondents on October 22, 1999 was P800,000.00. Respondents paid the installment for November 1999, but failed to pay the subsequent ones. On February 1, 2000, ACFLC demanded payment of P1,871,480.00. In a span of three months, respondents obligation ballooned by more than P1,000,000.00. ACFLC failed to show any computation on how much interest was imposed and on the penalties charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is unconscionable. In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion T. Clemente and Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps. Marie Rose T. Soliman and Arvin Soliman and Julius Amiel Tan,[if !supportFootnotes][11][endif] this Court held: The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and

unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals. Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived. The nullity of the stipulation on the usurious interest does not, however, affect the lenders right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed. The nullification by the CA of the interest rate and the penalty charge and the consequent imposition of an interest rate of 12% and penalty charge of 1% per month cannot, therefore, be considered a reversible error. ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage which provides for the waiver of the mortgagors right of redemption. It argues that the right of redemption is a privilege; hence, respondents are at liberty to waive their right of redemption, as they did in this case. Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be couched in clear and unequivocal terms which will leave no doubt as to the intention of a party to give up a right or benefit which legally pertains to him. Additionally, the intention to waive a right or an advantage


must be shown clearly and convincingly. Unfortunately, ACFLC failed to convince us that respondents waived their right of redemption voluntarily. As the CA had taken pains to demonstrate: The supposed waiver by the mortgagors was contained in a statement made in fine print in the REM. It was made in the form and language prepared by [petitioner]ACFLC while the [respondents] merely affixed their signatures or adhesion thereto. It thus partakes of the nature of a contract of adhesion. It is settled that doubts in the interpretation of stipulations in contracts of adhesion should be resolved against the party that prepared them. This principle especially holds true with regard to waivers, which are not presumed, but which must be clearly and convincingly shown. [Petitioner] ACFLC presented no evidence hence it failed to show the efficacy of this waiver.

the mortgagor for reasons of public policy. A contract of adhesion may be struck down as void and unenforceable for being subversive to public policy, when the weaker party is completely deprived of the opportunity to bargain on equal footing.

In fine, when the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid rather than to defeat his right.Thus, we affirm the CA in nullifying the waiver of the right of redemption provided in the real estate mortgage. Finally, ACFLC claims that respondents complaint for annulment of mortgage is a collateral attack on its certificate of title. The argument is specious. The instant complaint for annulment of mortgage was filed on April 7, 2000, long before the consolidation of ACFLCs title over the property. In fact, when respondents filed this suit at the first instance, the title to the property was still in the name of respondent Cesario. The instant case was pending with the RTC when ACFLC filed a petition for foreclosure of mortgage and even when a writ of possession was issued. Clearly, ACFLCs title is subject to the final outcome of the present case. WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 83197 are AFFIRMED. Costs against petitioner. SO ORDERED.

Moreover, to say that the mortgagors right of redemption may be waived through a fine print in a mortgage contract is, in the last analysis, tantamount to placing at the mortgagees absolute disposal the property foreclosed. It would render practically nugatory this right that is provided by law for 643 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

127. G.R. No. 186550 July 5, 2010 ASIAN CATHAY FINANCE AND LEASING CORPORATION, Petitioner, vs. SPOUSES CESARIO GRAVADOR and NORMA DE VERA and SPOUSES EMMA CONCEPCION G. DUMIGPI and FEDERICO L. DUMIGPI, Respondents. D E C I S I O N NACHURA, J.: On appeal is the June 10, 2008 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 83197, setting aside the April 5, 2004 decision2 of the Regional Trial Court (RTC), Branch 9, Bulacan, as well as its subsequent Resolution3 dated February 11, 2009, denying petitioner’s motion for reconsideration. On October 22, 1999, petitioner Asian Cathay Finance and Leasing Corporation (ACFLC) extended a loan of Eight Hundred Thousand Pesos (P800,000.00)4 to respondent Cesario Gravador, with respondents Norma de Vera and Emma Concepcion Dumigpi as co-makers. The loan was payable in sixty (60) monthly installments of P24,400.00 each. To secure the loan, respondent Cesario executed a real estate mortgage5 over his property in Sta. Maria, Bulacan, covered by Transfer Certificate of Title No. T29234.6 Respondents paid the initial installment due in November 1999. However, they were unable to pay the subsequent ones. Consequently, on February 1, 2000, respondents received a letter demanding payment of P1,871,480.00 within five (5) days from receipt thereof. Respondents requested for an additional period

to settle their account, but ACFLC denied the request. Petitioner filed a petition for extrajudicial foreclosure of mortgage with the Office of the Deputy Sheriff of Malolos, Bulacan. On April 7, 2000, respondents filed a suit for annulment of real estate mortgage and promissory note with damages and prayer for issuance of a temporary restraining order (TRO) and writ of preliminary injunction. Respondents claimed that the real estate mortgage is null and void. They pointed out that the mortgage does not make reference to the promissory note dated October 22, 1999. The promissory note does not specify the maturity date of the loan, the interest rate, and the mode of payment; and it illegally imposed liquidated damages. The real estate mortgage, on the other hand, contains a provision on the waiver of the mortgagor’s right of redemption, a provision that is contrary to law and public policy. Respondents added that ACFLC violated Republic Act No. 3765, or the Truth in Lending Act, in the disclosure statement that should be issued to the borrower. Respondents, thus, claimed that ACFLC’s petition for foreclosure lacked factual and legal basis, and prayed that the promissory note, real estate mortgage, and any certificate of sale that might be issued in connection with ACFLC’s petition for extrajudicial foreclosure be declared null and void. In the alternative, respondents prayed that the court fix their obligation at P800,000.00 if the mortgage could not be annulled, and declare as null and void the provisions on the waiver of mortgagor’s right of redemption and imposition of the liquidated damages. Respondents further prayed for moral and exemplary damages, as well as attorney’s fees, and for the issuance of a TRO to enjoin ACFLC from foreclosing their property. On April 12, 2000, the RTC issued an Order,7 denying respondents’ application for TRO, as the acts sought to be enjoined were already fait accompli.


On May 12, 2000, ACFLC filed its Answer, denying the material allegations in the complaint and averring failure to state a cause of action and lack of cause of action, as defenses. ACFLC claimed that it was merely exercising its right as mortgagor; hence, it prayed for the dismissal of the complaint. After trial, the RTC rendered a decision, dismissing the complaint for lack of cause of action. Sustaining the validity of the promissory note and the real estate mortgage, the RTC held that respondents are well-educated individuals who could not feign naiveté in the execution of the loan documents. It, therefore, rejected respondents’ claim that ACFLC deceived them into signing the promissory note, disclosure statement, and deed of real estate mortgage. The RTC further held that the alleged defects in the promissory note and in the deed of real estate mortgage are too insubstantial to warrant the nullification of the mortgage. It added that a promissory note is not one of the essential elements of a mortgage; thus, reference to a promissory note is neither indispensable nor imperative for the validity of the mortgage. The RTC also upheld the interest rate and the penalty charge imposed by ACFLC, and the waiver of respondents’ right of redemption provided in the deed of real estate mortgage. The RTC disposed thus: WHEREFORE, on the basis of the evidence on record and the laws/jurisprudence applicable thereto, judgment is hereby rendered DISMISSING the complaint in the above-entitled case for want of cause of action as well as the counterclaim of [petitioner] Asian Cathay Finance & Leasing Corporation for moral and exemplary damages and attorney’s fees for abject lack of proof to justify the same. SO ORDERED.8

Aggrieved, respondents appealed to the CA. On June 10, 2008, the CA rendered the assailed Decision, reversing the RTC. It held that the amount of P1,871,480.00 demanded by ACFLC from respondents is unconscionable and excessive. Thus, it declared respondents’ principal loan to be P800,000.00, and fixed the interest rate at 12% per annum and reduced the penalty charge to 1% per month. It explained that ACFLC could not insist on the interest rate provided on the note because it failed to provide respondents with the disclosure statement prior to the consummation of the loan transaction. Finally, the CA invalidated the waiver of respondents’ right of redemption for reasons of public policy. Thus, the CA ordered: WHEREFORE, premises considered, the appealed decision is REVERSED AND SET ASIDE. Judgment is hereby rendered as follows: 1) Affirming the amount of the principal loan under the REM and Disclosure Statement both dated October 22, 1999 to be P800,000.00, subject to: a. 1% interest per month (12% per annum) on the principal from November 23, 1999 until the date of the foreclosure sale, less P24,000.00 paid by [respondents] as first month amortization[;] b. 1% penalty charge per month on the principal from December 23, 1999 until the date of the foreclosure sale. 2) Declaring par. 14 of the REM as null and void by reason of public policy, and granting mortgagors a period of one year from the finality of this Decision within which to redeem the subject property by paying the redemption price as computed under paragraph 1 hereof, plus one percent (1%) interest thereon from the time of


foreclosure up to the time of the actual redemption pursuant to Section 28, Rule 39 of the 1997 Rules on Civil Procedure. The claim of the [respondents] for moral and exemplary damages and attorney’s fees is dismissed for lack of merit. SO ORDERED.9 ACFLC filed a motion for reconsideration, but the CA denied it on February 11, 2009. ACFLC is now before us, faulting the CA for reversing the dismissal of respondents’ complaint. It points out that respondents are well-educated persons who are familiar with the execution of loan documents. Thus, they cannot be deceived into signing a document containing provisions that they are not amenable to. ACFLC ascribes error on the part of the CA for invalidating the interest rates imposed on respondents’ loan, and the waiver of the right of redemption. The appeal lacks merit. It is true that parties to a loan agreement have a wide latitude to stipulate on any interest rate in view of Central Bank Circular No. 905, series of 1982, which suspended the Usury Law ceiling on interest rate effective January 1, 1983. However, interest rates, whenever unconscionable, may be equitably reduced or even invalidated. In several cases,10 this Court had declared as null and void stipulations on interest and charges that were found excessive, iniquitous and unconscionable. Records show that the amount of loan obtained by respondents on October 22, 1999 was P800,000.00. Respondents paid the installment for November 1999, but failed to pay the subsequent ones. On February 1, 2000, ACFLC demanded payment of

P1,871,480.00. In a span of three months, respondents’ obligation ballooned by more than P1,000,000.00. ACFLC failed to show any computation on how much interest was imposed and on the penalties charged. Thus, we fully agree with the CA that the amount claimed by ACFLC is unconscionable. In Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, Sps. Concepcion T. Clemente and Alexander C. Clemente, Sps. Elizabeth T. Carpio and Alvin Carpio, Sps. Marie Rose T. Soliman and Arvin Soliman and Julius Amiel Tan,11 this Court held: The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals. Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 1409 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived. The nullity of the stipulation on the usurious interest does not, however, affect the lender’s right to recover the principal of the loan. Nor would it affect the terms of the real estate mortgage. The right to foreclose the mortgage remains with the creditors, and said right can be exercised upon the failure of the debtors to pay the debt due. The debt due is to be considered without the stipulation of the excessive interest. A legal interest of 12% per annum will be added in place of the excessive interest formerly imposed.12 The nullification by the CA of the interest rate and the penalty charge and the consequent imposition of an interest rate


of 12% and penalty charge of 1% per month cannot, therefore, be considered a reversible error. ACFLC next faults the CA for invalidating paragraph 14 of the real estate mortgage which provides for the waiver of the mortgagor’s right of redemption. It argues that the right of redemption is a privilege; hence, respondents are at liberty to waive their right of redemption, as they did in this case. Settled is the rule that for a waiver to be valid and effective, it must, in the first place, be couched in clear and unequivocal terms which will leave no doubt as to the intention of a party to give up a right or benefit which legally pertains to him. Additionally, the intention to waive a right or an advantage must be shown clearly and convincingly.13 Unfortunately, ACFLC failed to convince us that respondents waived their right of redemption voluntarily. As the CA had taken pains to demonstrate: The supposed waiver by the mortgagors was contained in a statement made in fine print in the REM. It was made in the form and language prepared by [petitioner]ACFLC while the [respondents] merely affixed their signatures or adhesion thereto. It thus partakes of the nature of a contract of adhesion. It is settled that doubts in the interpretation of stipulations in contracts of adhesion should be resolved against the party that prepared them. This principle especially holds true with regard to waivers, which are not presumed, but which must be clearly and convincingly shown. [Petitioner] ACFLC presented no evidence hence it failed to show the efficacy of this waiver. Moreover, to say that the mortgagor’s right of redemption may be waived through a fine print in a mortgage contract is, in the last analysis, tantamount to placing at the mortgagee’s absolute disposal the property foreclosed. It would render practically

nugatory this right that is provided by law for the mortgagor for reasons of public policy. A contract of adhesion may be struck down as void and unenforceable for being subversive to public policy, when the weaker party is completely deprived of the opportunity to bargain on equal footing.14 In fine, when the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid rather than to defeat his right.15 Thus, we affirm the CA in nullifying the waiver of the right of redemption provided in the real estate mortgage. Finally, ACFLC claims that respondents’ complaint for annulment of mortgage is a collateral attack on its certificate of title. The argument is specious. The instant complaint for annulment of mortgage was filed on April 7, 2000, long before the consolidation of ACFLC’s title over the property. In fact, when respondents filed this suit at the first instance, the title to the property was still in the name of respondent Cesario. The instant case was pending with the RTC when ACFLC filed a petition for foreclosure of mortgage and even when a writ of possession was issued. Clearly, ACFLC’s title is subject to the final outcome of the present case.1avvphi1 WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 83197 are AFFIRMED. Costs against petitioner. SO ORDERED. 128. G.R. No. L-47544 January 28, 1980 PEPITO VELASCO, AMABLE LUMANLAN, RAMON


GALANG, FELIPE LUMBANG and APOLONIO DE LOS SANTOS, petitioners, vs. COURT OF APPEALS and GOVERNMENT SERVICE INSURANCE SYSTEM, respondents. Ocampo, Velasco, Sicat & Associate for petitioners. Manuel M. Lazaro for respondent GSIS.

BARREDO, J.: Petition for certiorari, erroneously citing Section I of Rule 65, for the review of the decision of the Special Division of Five of the Court of Appeals dated December 6, 1977 in CA .G.R. No. 06152 declaring, by a vote of four to one, null and void the order of the Court of First Instance of Pampanga in Civil Case No. 4260 dated December 2, 1976, which had declared the judgment of said court in said case final and executory, directing in consequence, said trial court to approve the record on appeal of herein respondent Government Service Insurance System (GSIS for short) and to give due course to its appeal, setting aside correspondingly the restraining order it had previously issued in the same case, the Court of Appeals holding that, contrary to the ruling of the trial court, the motion for new trial of the GSIS admittedly filed on time is not pro-forma and, therefore, the period to appeal the trial court's decision in question had been suspended by said motion, hence, said decision was still appealable. From the foregoing brief statement of the nature of the instant case, it would appear that Our sole function in this proceeding should be to resolve the single issue of whether or not the Court of Appeals erred in ruling that the motion for new trial of the GSIS in question should indeed be deemed pro-forma. But going over the extended pleadings of both parties, the Court is immediately impressed that substantial justice may not be timely achieved, if We should decide this case upon such a technical ground alone. We have carefully read all the allegations and arguments of the parties, very ably and comprehensively expounded by evidently knowledgeable and unusually competent

counsel, and We feel We can better serve the interests of justice by broadening the scope of Our inquiry, for as the record before Us stands, We see that there is enough basis for Us to end the basic controversy between the parties here and now, dispensing, however, with procedural steps which would not anyway affect substantially the merits of their respective claims. As a matter of fact, after our first study of this case, We already announced Our intention in this direction at the hearing held on February 21, 1979, where Attys. Celestino T. Ocampo, Vicente Sicat and Victoriano David appeared and argued for the petitioners and Justice Manuel Lazaro and Atty. Antonio F. Navarrete, for the GSIS. We reiterated said intention in Our resolution of said date by requiring the parties "to INFORM the Court ... whether or not there are any issues of fact that the purported appeal of private respondent would involve and whether or not petitioners controvert the same, with the end in view of enabling this Court to take the necessary steps to convert this proceeding into an appeal ... (under) Republic Act 5440". To be sure, in its compliance dated April 10, 1979 with said resolution, GSIS does enumerate certain allegedly "pivotal factual issues" its appeal "would involve." However, as will be explained anon even the "pivotal factual issues" referred to may be justly resolved here without the need of returning this case to the trial court. The exact position of the parties in respect to said issues and the allegations of fact in their pleadings here and in the court below as well as the undisputed evidence related thereto are so clearly stated and comprehensively discussed by the parties in their said pleadings that to conduct further proceedings or to await any other briefs from them would be superfluous and a waste of time and effort. Accordingly, We now deem this case as submitted for Our decision as a duly made appeal under Republic Act 5440. According to GSIS: A Detailed Statement of Facts and of the Case It is not without reason to state that the ambience of a particular case has much to contribute to the resolution thereof. So it is with


the instant case. And for a better appreciation of the antecedents which led to the decision of the Court of First Instance of Pampanga and subsequently the questioned decision of the respondent Court of Appeals, the environmental facts which spawned them should thus be laid bare before this Honorable Court, the better to appreciate their factual significance and legal consequences. 1. Sometime on November 10, 1965, Alta Farms secured from the GSIS a Three Million Two Hundred Fifty Five Thousand Pesos (P3,255,000.00) loan and an additional loan of Five Million SixtyTwo Thousand Pesos (P5,062,000.00) on October 5, 1967, to finance a piggery project. These loans were secured by two mortgage (Exh. "B"). 2. Alta Farms defaulted in the payment of its amortizations. it is presumably because of this that Alta Farms executed a Deed of Sale With Assumption of Mortgage with Asian Engineering Corporation on July 10, 1969 (Exh. "C"), but without the previous consent or approval of the GSIS and in direct violation of the provisions of the mortgage contracts. 3. Even without the approval of the Deed of Sale With Assumption of Mortgage by the GSIS, Asian Engineering Corporation executed an Exclusive Sales Agency, Management and Administration Contract in favor of Laigo Realty Corporation, with the intention of converting the piggery farm into a subdivision (Exh. "D"). And on October 20, 1969, Asian Engineering executed another contract with Laigo, whereby Laigo was to undertake the development of the property into a subdivision (Exh. "E"). Conformably with the two contracts (Exh "D" and "E"), Laigo started the development of the lot into a subdivision. Contract of Petitioner Lumanlan and his admission 4. After developing the area, on December 4, 1969, Laigo entered into a contract (Exh. "GG") with Amable Lumanlan, one of the petitioners, to construct for the home buyers, 20 houses on the subdivision. The contract provided that Laigo shall secure the

agreement and signature of the home buyers (Paragraph 6 of Agreement, Exh. "GG") and that Laigo "shall pay for the houses on a "turn-key" bases" (Paragraph 5 of Agreement, Exh. "GG"). The parties to the agreement are, stated by the agreement itself, as follows: This Agreement, executed this 29th day of November, 1969, in the City of Manila, by and between LAIGO REALTY CORPORATION, ... represented by its President, RHODY E. LAIGO, ... hereinafter referred to as the FIRST PARTY - and - ... AMABLE G. LUMANLAN ... hereinafter referred to as the SECOND PARTY. And the signatories are - IN WITNESS WHEREOF, the parties hereunto affixed their signatures this 4th day of Dec. 1969 at Manila, Philippines. (Sgd) Illegible LAIGO REALTY CORPORATION ALEJANDRO Y. D BY: By: (Sgd) RHODY E. LAIGO (Sgd) Illegible (t) RHODY E. LAIGO AMABLE G. LUM - President - (Sgd) Illegible ANASTACIO F. D (See Exh. "GG") 5. Petitioner Lumanlan allegedly constructed 20 houses for the home buyers and for which he claims a balance of P309,187.76 from the home buyers and Laigo. This is reflected in Exhibit "X" of petitioners. However, in the letter of Lumanlan to the GSIS on January 7, 1972, he was collecting only P216,500.00 (Exh. "W" evidence of Lumanlan). Thus, even the evidence of Lumanlan on what is due him is conflicting. 6. Out of his claim, petitioner Lumanlan admits that Mrs. Rhody Laigo paid him in several checks totalling P124,855.00 but which checks were all dishonored when presented for payment. This is Exhibit "X" of petitioners.


7. Thus, on November 7, 1970, petitioner Lumanlan wrote a letter Refund for expenses to Laigo Realty Corporation (Exh. "Y", evidence of Lumanlan) in the execution of which reads — housing plans for the 1 ,455.00 I wish to inform you that I have received from Mrs. Rhody E. above houses. P 124,855.0 Laigo several bank checks which were either dishonored by the bank or were cancelled at the request of Mrs. Rhody E. Laigo for It is significant to note that Exhibits "GG", "W" "X" and "Y" are reasons of insufficient funds. part of the evidence of petitioners. The following are the checks: 9. On December 17, 1970, Laigo acknowledged its dishonored checks and promised to make good the same. This is reflected in DATE SER. NO. AMOUNT BANK Exhibit "Y-l" of petitioners. The dishonored checks were all May 20,1970 646371 P36,000.00 Prudential Bank presented by petitioners and marked Exhibits "II-l" to "II-6". June 10,1970 659907 9,000.00 " Contract of Petitioner June 30, 1970 646397 20,000.00 " Velasco and his admissions July 6, 1970 646398 19,800.00 " 10. On December 29, 1969, Laigo entered into a contract with July 3, 1970 464399 11,250.00 " petitioner Pepito Velasco to construct houses for the home Aug. 7,1970 659913 16,200.00 " buyers who agreed with Velasco on the prices and the Aug. 14,1970 659914 12,605.00 " downpayment. Exhibits "HH" and "HH-l" for petitioners. The Total P124,855.00 parties to the contract are - LAIGO REALTY CORPORATION, ... as the FIRST PARTY 8. In the same letter, Exh, "Y", Lumanlan admits that the checks of - and - Laigo that were dishonored were intended to pay 8 houses ... PEPITO VELASCO, ... jointly known as the SECOND PARTY; occupied by home buyers, who caused the construction in 11. Petitioner Velasco constructed houses for various home accordance with the Agreement of Laigo and Lumanlan (Exh. buyers, who individually agreed with Velasco, as to the prices "GG"). The letter of Lumanlan also admits - and the downpayment to be paid by the individual home buyers. This amount was intended to pay for eight (8) houses occupied When neither Laigo nor the individual home buyers paid for the by the following home buyers: home constructed, Velasco wrote the GSIS to intercede for the unpaid accounts of the home buyers (Exh. "AA" for petitioners). 1. Liborio Yalung P18,000.00 Exhibit "AA" admits that Pepito Velasco is one of the building 2. Caridad Pascua 13,500.00 contractors contracted by Laigo to construct houses for home 3. Antonio Candelaria 15,300.00 buyers. it states the names of the home buyers, the cost of houses 4. Alberto Rarela 11,800.00 agreed upon, the downpayment made by the buyers and their 5. Felomena Gonzales 16,200.00 respective balance to Velasco. Since the letter of Velasco, Exh. 6. Estelita Manalang 16,200.00 "AA", is a written admission that is highly revealing and 7. Rogelio Zabala 16,200.00 illuminating we feel it important and material to quote therefrom 8. Wilhelmina Paras 16,200.00 as follows. P123,400.00 May I inform your good offices that the undersigned is one of the 650 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

building contractors contracted by the Laigo Realty Corporation to construct residential houses of lot buyers therein For your further information the following are the names of the lot owners for whom the undersigned have constructed houses for, including the respective balances payable to me as of this date. Name of Buyer Cost of House 1. Benjamin Cristobal P19,500.00 2. Nehemiah Quipot 23,000.00 3. Alberto Villalon 18,000.00 4. Luis Jacob 20,000.00 5. Jose Salonga 20,000.00 6. Antonio Jontillano 12,500.00 xxx xxx xxx Very respectfully yours, (Sgd) Pepito Velasco (t) PEPITO VELASCO Contractor' This is the evidence of Velasco. 12. Velasco admits that Laigo paid him in five (5) checks with the total amount of P35,000.00 but which all bounched or were dishonored (Exh. "BB" of petitioners). It is interesting to note that in the same letter of Velasco to his lawyer, Velasco also named the buyers of the houses for whom he constructed the houses and the balance due from the home buyers (See Exh. "BB" of petitioners). Con tract of Petitioner de los Santos and his admissions 13. On March 4, 1970, Laigo entered into a contract with petitioner Apolonio de los Santos whereby the latter agreed to construct houses for the home buyers and Laigo agreed to pay the full purchase price of every house constructed ... based on a "turn- key arrangement". (Vide Exh. "A") The parties to the contract are shown as follows:

If these conditions above are acceptable to your good self, kindly signify your conformity below. Truly yours, (Sgd) Rhody E. Laigo (t) RHODY E. LAIGO CONFORME (Sgd) APOLONIO DE LOS SANTOS Down Balances (Date) March 4, 1970 P1,950.00 17,550.00 (Vide Exhibit "A" of petitioners) 2,300.00 20,700.00 Contract of Petitioner 1,800.00 16,200.00 Galang and his admissions 2,000.00 18,000.00 14. Petitioner Ramon Galang also constructed a house for Victor 2,000.00 18,000.00 Coquilla 1,200.00 for an agreed price of 11,300.00 P14,000.00. Coquilla paid a downpayment of P1,400.00, thereby P101,750.00 leaving a balance of P12,600.00, which he wanted the GSIS to pay. Thus, in his letter to the GSIS (Exh "CC" for Petitioners) he admits - In connection with your Palos Verdes Estate Subdivision located in Talipapa, Caloocan City and which was era d Realty Corporation I wish to inform you that I have the Laigo Realty Corporation constructed in the subdivision the following house, its owner and cost of construction Name Of Owner Cost of House 1. Victor Coquilla P14,000.00 May I inform your good Offices further that the amount of P12,600.00 referred to above as the 'balance 'is payable to the undersigned, Payment of which has been delayed for almost one and a half years now. Trusting that you give this letter your usual Prompt attention, I beg to remain Very respectfully yours, (Sgd.) Ramon R. Galang (t) RAMON R. GALANG Contractor, (Vide Exh. "KK" for petitioners; emphasis supplied)


Amou P1,40

Contract of Petitioner Lumbang 15. Petitioner Felipe Lumbang also claims to have constructed for the home buyers upon the instance of Laigo, four (4) houses with the balance of P82,705.00. Lumanlan admits that he constructed the four houses for the home buyers who paid him a downpayment but who still have outstanding balances Vide Exh. "LL" for the petitioners). 16. The Deed of Sale With Assumption of Mortgage between Alta Farms and Asian Engineering, for one reason or another, was not approved by the GSIS. And when Alta Farms failed to liquidate its accounts, GSIS foreclosed the properties including all improvements (the house in 1970. In November and December 1971, the Certificate of Sale in favor of the GSIS were issued. 17. While the properties were under foreclosure and even pending the consolidation of titles, certain lots were sold on installment basis, for which Laigo received P985,000.00, and 63 houses in various stages were constructed, among which are the houses allegedly constructed by the petitioners. xxx xxx xxx 21. An along, from the time the contracts were entered into by Laigo Realty Corporation, the petitioners had always directed their claims against Laigo Realty Corporation as may be shown by Exhibits "Z", "X", "Y" and "I-1"; Laigo would pay by checks to the contractors; and when the checks were dishonored they would always file a protest with Laigo Realty Corporation. Originally, an claims were addressed to Laigo Realty Corporation, being the party who executed the contracts 22. When the petitioners could not collect from Laigo and the home buyers and after the GSIS foreclosed the subdivision including the improvements (the houses constructed), the petitioners sent a letter of demand on August 3, 1974 (Exhibit "EE") for GSIS to pay for the indebtedness of Laigo Realty Corporation. It is enlightening and interesting to note that the annexes to the letter specifies who are the home buyers who caused the construction the agreed price of the construction

between the home buyers and the contractors, the downpayment made by the home buyers to the contractors, and the balance of the home buyers due the contractors by reason of the contracts (Exhibits "EE-l" and "EE-2"). It is crystal clear from the letter of the lawyer of the petitioners that the ones who caused the construction are home buyers through Laigo Realty Corporation, that the home buyers made downpayments to the contractors, and that the latter agreed to the price and the balance that were not paid by the home buyers This is certainly indubitable proof that the GSIS had nothing to do whatsoever in the construction of the houses by the petitioners. 23. On August 12. 1974, the Assistant General Manager on A legal affairs - he GSIS categorically and specifically denied the an the firm and clear legal ground, among others, that the has no privity of contract with the petitioners (Exhibit "FF"). This denial of the claim of the negates, rebukes and belies any and all or on the other inter-office the GSIS. 24. On April 14, 1975, the petitioners filed a case against the GSIS for the on of mm of money representing labor and materials used in the construction of houses caused by home buyers the intercession of Laigo Realty Corporation in the principal sum of P607,328.27. The complaint, docketed as Civil Case No. 4260 of the Court of First Instance of Pampanga, prayed for - (1) The sum of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED TWENTY EIGHT & 271100 PESOS (P607,328.27) in its current value due to inflation with legal interest from the date of extrajudicial demand; (2) the sum of FIFTY THOUSAND (P50,000.00) PESOS as attorney's fees; (3) such sum for exemplary damages as may be assess by this Honorable Court against the defendant; and (4) the costs of this suit (Vide pp. 91-95 of the instant Amended Petition) 25. On July 30, 1975, and within the extensions of time granted, the GSIS filed its Answer traversing the claims and alleging, among others, that the petitioners have no privity of contract


with the GSIS; that the petitioners have no cause of action; and that Laigo Realty Corporation which entered into the contracts with the petitioners is a necessary and indispensable party who should be included as a party to properly ventilate the issues and to avoid multiplicity of suits (pp. 96-101 of the instant Amended Petition). 26. After pre-trial was terminated the petitioners presented their evidence, and thereafter, under date of December 16, 1975, they filed their Plaintiffs' Formal Offer of Evidence (pp. 103-113 of the instant Amended Petition). 27. On February 20, 1976, the petitioners and the GSIS filed their "Joint Manifestation" which in substance is a stipulation of facts (pp. 114-116 of the instant Amended Petition). The petitioners agreed that the witnesses of the GSIS to be presented would testify on the following- a. The execution of the Deed of Quitclaim dated May 7, 1970, executed in favor of defendant GSIS by Laigo Realty notwithstanding the followed ownership." GSIS if they were presented evidence." (Pp. 379-391, Record. Corporation freeing said defendant from any and all claims arising out of the suppliers, contractors and house such as plaintiffs in the Palos Verdes Estate which now constitutes the GSIS Hills Subdivision b. At the time of the Extra-Judicial Foreclosure of the Estate Mortgage on November, 1971, conducted by defendant or Laigo properties, plaintiff's claims are not registered; c. Plaintiffs' services were contracted by Laigo Corporation and not by the defendant GSIS; d That defendant up to the present has not collected the house owner of the 63 houses built by the plaintiffs proceedings and consolidation of ownership The petitioners thus did not choose to cross-examine or dispute what they had agreed upon as the testimonies of the witnesses of the to testify; hence, they stand as uncontroverted evidence. 1 Significantly, the trial court's conclusions of fact are substantially as alleged by the GSIS above, except as to certain details which We deem immaterial in the light of the legal provisions and

principles upon which We believe the resolution of this controversy should be based. It may be stated in this connection, however, that the trial court made the following findings and conclusions as regards the amount petitioners are entitled to recover: The next issue that would then necessarily follow is: - How much are the plaintiffs entitled to be paid? Again, an examination of the plaintiffs' uncontroverted evidence disclose that as of the time they were ordered to 'cease and desist' from introducing any further improvement on the property, they had already constructed several houses valued (in common to them) in the total of P609,328.27 and for which amount representing the actual cost of construction of the houses (materials and labor already considered) as of those years of construction (1969-1970), they had not yet been fully paid; that upon consolidation of ownership of the entire Palos Verdes Estate Subdivision where said plaintiffs had introduced the improvements aforesaid in the GSIS, they made written request for payment of what was already then due them on the defendant GSIS - new owner of the premises but that their said request had fallen on deaf ears. Consequently, for having been compelled to litigate and to incur unnecessary expenses instead of given the opportunity of making use of the proceeds of their investment and labor in further investments and work, said plaintiffs are here now further invoking justice and equity on their side and praying that they be paid their afore-stated entitlement in the amount of P607,328.27 in the equivalent or present value of our Pesos as devaluated. Thus, through testimonial evidence now also standing on record unrebutted, said plaintiffs proceeded to show to the Court the effect of such devaluation of the currency on the prices of materials, as well as on their rights and claims, as follow: 1969-1970 1975 MATERIAL Cost Cost 1. White Sand Porac P9.00 per cu. m. P30.00 per cu. m


2. Crashed Gravel-Baliwag 15.00 per cu. m. 30.00 per cu. m. 193-195, Record.) 3. Cement 3.90 per bag 14.00 per bag Parenthetically, the following reprobation by the Court of 4. Lumber .36 to .42 per 1. 70 to 1.80 per Appeals of the foregoing posture of the trial court reveals how board foot board ft. much the same had evidently influenced said appellate court to 5. Nails . 75 per kilo 4.20 per kilo rule in favor of allowing respondent's appeal: 6. GI Sheets 1.00 per linear 4.20 to 4.50 per This Court finds no compelling reason to bar appellate review of foot linear foot the unprecedented judgment, mentioned at the outset, which 7. Paint 10.50 to 1 1.00 per 38.00 to 40.00 revalued upwards four-fold to repeat, four times — the amount of gallon per gallon plaintiffs' claim (as alleged in their complaint) representing 8. Iron bars 2.7 5 to 3. 00 15.00 actual costs of houses built by them for the former owner9. Toilet materials 110.00 to 120.00 410. 00 to 420. 00 mortgagor of the subdivision that, eventually, was acquired by Water closet, Phil. the GSIS as highest bidder at the foreclosure sale. Standard with seat cover It bears emphasis that "unjust enrichment", which was invoked by plaintiffs in suing the GSIS instead of the former owner and/or And indeed, this Court can take judicial notice of the fact that a the developer (which contracted with plaintiff in regard to the house costing, say P10,000.00 in 1969-1970, would now cost no houses in question), is manifest in the judgment sought to be less than P40,000.00. So that, considering that the generally elevated to this appellate court. For, under that judgment, accepted standard or ratio in the determination of the costs of plaintiffs stand to receive, from and at the expense of the GSIS, as materials and labor supplied and put in the construction by the new owner, and to keep for themselves as additional increment builder-contractors that the latter (labor) is 30% of that of the more than P 1.8 million OVER and ABOVE actual costs of materials former (cost of materials), a computation of plaintiffs dues as is, and labor that went into the building of said houses, according to or P607,328,27, would give this: their own allegations and evidence. Whether or not the trial court can, by the simple expedient of taking "judicial notice" of a. — Cost of materials P 467,175.50 inflation, quadruple the plaintiffs' claim, in the light of the Civil b. — Cost of labor 140,152 .50 Code provision (Art. 1250) authorizing revaluation only upon Total 607,328.00 proof of "extraordinary inflation or deflation of the currency" and of Republic Act No. 524 providing that obligation shall be In effect, by considering the aforesaid four times increase in said discharged in the currency that is legal tender at the time of materials costing P467,175.50, the same materials would now payment, is an important and far-reaching legal question that cost P1,868,702.00. By adding 30% of said amount of deserves further examination or review not only by this court but P1,868.702.00, or P560,610.60 for the cost of labor, to the said also, if need be, by the Supreme Court." (Pp. 31-32, Record.) cost of materials, the total amount to which plaintiffs would Truth to tell however, contrary to the contention of GSIS, the trial therefore, be justly and equitably entitled is the sum of court's four-fold award may not be said to be entirely baseless P2,429,312.60. And the facts and circumstances as proven, in the and arbitrary, much less based on no more than the judicial honest opinion of this Court as a court of law and equity, truly notice taken by His Honor that "a house costing, say P10,000 in warrant that this said amount be awarded to the plaintiffs. (pp. 1969-1970, would now cost no less than P40,000." That the trial 654 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

court did not award more than what petitioners had demanded in their complaint is clearly evidenced by their allegation in Paragraph 5 of their complaint regarding the effects of inflation as wen as by their prayer that they be paid "the sum of Six Hundred Seven Thousand Three Hundred Twenty-Eight and 27/100 Pesos (P607,328.27) in its current value due to inflation", as well as by the testimonial evidence referred to in detail in the decision in question, as can be seen in the portions thereof We have quoted above. Thus, We find and hold that the material facts in this case are beyond dispute and the only issues We have to resolve are legal ones. It is clear to Us that petitioners did construct, furnishing the materials and labor needed for the purpose the 63 houses that now belong to or are owned by respondent GSIS. It is alleged in Paragraphs 5 and 8 of petitioners' complaint that: 5. That during the period of the joint venture agreement being negotiated by the Government Service Insurance System and the Laigo Realty Corporation, the plaintiffs herein constructed residential house and other improvements at the said GSIS His Subdivision, furnishing materials, supplies, labor and miscellaneous services at their own expense, which costs of mass labor and miscellaneous services total the amount of P607,328.27, and which is broken down or itemized as follows: Amable C. Lumanlan ------------ Pepito Velasco -------------------- Apolonio de los Santos -------- Felipe Lumbang ------------------ Ramon Galang -------------------- That the foregoing expenditures and- claims are computed on the basis of actual costs of ma and labor as of the time of the construction; That owing to the inflation which is a matter of judicial notice, such costs of materials and labor is now reasonably assessed at very much more than the above-mentioned amount

xxx xxx xxx 8. That the construction of houses and improvements has greatly increased the value of the aforesaid defendant's property. (Pp. 71-72, Record.) The answer of GSIS to the foregoing allegations is as follows: 5. It specifically denies the allegations in paragraph 5, the truth being defendant is not liable for any of the materials, supplies and labor allegedly furnished and supplied by plaintiffs to Palos Verdes Estate Subdivision as the same pertain exclusively to Laigo Realty Corporation, since on 7 May 1970, Laigo Realty Corporation executed a Deed of Quitclaim and Undertaking, xerox copy of which is hereto attached as Annex "1" and made an integral part hereof, holding free and harmless defendant from claims of materialmen, contractor or any other person arising out of or having connection with the development of the said subdivision. Thus the "NOW, THEREFORE" clause of said Deed of Quitclaim and Undertaking provides: NO THEREFORE, for and in consideration of the above premises; and in the event of disapproval by the GSIS of its proposal to develop- the aforesaid property of ALTA FARMS, INC. into a subdivision, REALTY CORPORATION hereby forever quitclaims, releases and waives in favor of the GSIS its rights and interests in the aforesaid property of ALTA FARMS, INC. arising out of the development of the aforesaid property into a subdivision, and P309,187.76 further shall answer and pay for any claim of or liability to any 142,510.00 contractor, material furnisher, lot buyer, or any other person 60,325.51 arising out of or having connection with said subdivision 82,705.00 development. If the GSIS, for any reason, shall be held liable on 12,600.00 any such claims or liabilities or otherwise its mortgage hen be diminished, LAIGO REALTY CORPORATION further binds itself to indemnify the GSIS such sums corresponding to such claims or diminution. xxx xxx xxx 8. It admits the allegations in paragraph 8.(Pp. 76-77, Record.) In other words, apart from- admitting expressly that "the constructions of houses and improvements has greatly increased


the value" of the subdivision it now owns, nowhere in its statement of the material facts in Paragraph 5 of its answer relative to the allegations of the petitioners regarding the construction by them of the houses in dispute and the cost thereof to each of them does respondent deny said facts as not true. What GSIS limitedly alleged in its answer is the legal proposition that it is not liable therefor because of lack of contractual privity between it and petitioners. It may be safely said then that it does not now lie in the lips of GSIS to maintain that petitioners did not build the houses in question and that the cost thereof is different from what petitioners have stated in their complaint. What is more, the reliance of GSIS on the Deed of Quitclaim of May 7, 1970 is to Our mind misplaced. We have analyzed this document carefully, and We are of the considered view that it is actually evidence against GSIS. Even if what is unnatural in ordinary business or industrial experience were assumed, that is, that GSIS was unaware all along during the period of their construction of the work then being done by petitioners - albeit it is possible there was no express consent given to - by and thru the aforementioned deed of quitclaim, GSIS agreed to receive and did actually receive the benefits of what petitioners had accomplished or would accomplish under their contracts with Laigo., So much so, that the dispositive portion of the quitclaim dead does not really relieve GSIS from liability to petitioners. Properly viewed, GSIS virtually assumed under said deed, liability in regard to claims like those of petitioners who might not be paid by Laigo albeit said liability has been made subject to the reservation that it could seek indemnity from Laigo. GSIS received Alta Farms' proposal about the conversion of their piggery project into a subdivision (in which Laigo Realty's participation was mentioned) as early as February 5, 1970. It was only in November, 1970 that it issued its "cease and desist" order. From all indications, the jobs of petitioners were already practically finished then. Thus, in Paragraph 17 of its Comment on the petition herein, GSIS states:

17. While the properties were under foreclosure and even pending the consolidation of titles, certain lots were sold to installment basis, for which Laigo received P985,000.00, and 63 houses in various stages were constructed, among which are the houses allegedly constructed by the petitioners. (P. 387, Record.) And in the Joint Manifestation filed by the parties with the trial court as late as February 20, 1976, GSIS made it clear that "defendant (GSIS) up to the present has not collected from the house owners of the 63 houses built by the plaintiffs notwithstanding the foreclosure proceedings and consolidation 6f ownership." Again, it is thus obvious that GSIS assumed ownership of the houses built by petitioners and was benefited by the same, and the fact that it has not collected any payment from the "house owners" or the construction of the houses respectively occupied by them is of no moment insofar as its liability to petitioners is concerned. Surely, it is not pretended that those "house owners" would be allowed to enrich themselves at the expense of petitioners. Indeed, the term "house owners" is inappropriate, if only because in Paragraph 16 of its Comment on the petition herein, GSIS unequivocally state that "GSIS foreclosed the properties including all improvements (the houses in 1970" and, thereby, became the owner of said houses. Upon the foregoing factual premises, the legal issue that arises is whether or not GSIS is liable to the petitioners for the cost of the materials and labor furnished by them in construction of the 63 houses now owned by the GSIS and for the construction of which no payment has been made on the balance due petitioners. Our considered view is and We so hold that even in equity alone, GSIS should pay the petitioners. After all, it admits it has not collected from the ones who appear to be the buyers thereof, albeit it must be collecting the installments on the lots. All it has to do then is to pass on to them what it has to pay petitioners. In law, GSIS is, under the peculiar circumstances of this case, the owner of said houses. Pursuant to Article 1729 of the Civil Code: Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an action against the


owner up to the amount owing from the latter to the contractor at the time the claim is made. However, the following shall not prejudice the laborers, employees and furnishers of materials: 1) Payments made by the owner to the contractor before they are due; 2) Renunciation by the contractor of any amount due him from the owner. This article is subject to the provisions of special laws. (1597a) Laigo admittedly has not paid petitioners. The "bouncing" checks issued by it in their favor is mentioned by GSIS itself in its statement of the facts. We hold that upon this premise it is a fair construction of the Deed of Quitclaim aforementioned, that GSIS can be held liable to petitioners, without prejudice to its securing corresponding indemnity from Laigo. It is obvious from the terms of said deed that GSIS contemplated the possibility of its being liable for Laigo's account, otherwise, there was no need for the reservation. This is one such liability. In this connection while, indeed, Article 1729 refers to the laborers and materialmen themselves, under the peculiar circumstances of this case, it is but fair and just that petitioners be deemed as suing for the reimbursement of what they have already paid the laborers and materialmen, as otherwise they (petitioners) would be unduly prejudiced while either Laigo, GSIS or the occupants of the houses would enrich themselves at their expense. It is a bad law that would allow such a result. At this juncture, We need to add only that Article 1311 of the Civil Code which GSIS invokes is not applicable where the situation contemplated in Article 1729 obtains. The intention of the latter provision is to protect the laborers and the materialmen from being taken advantage of by unscrupulous contractors and from possible connivance between owners and contractors. Thus, a constructive vinculum or contractual privity is created by this provision, by way of exception to the principle underlying Article 1311 between the owner, on the one hand, and those who furnish labor and/or materials, on the other. As a matter of fact, insofar as the laborers are concerned, by a special law, Act No. 3959, they

are given added protection by requiring contractors to file bonds guaranteeing payment to them. And under Article 2242 of the Civil Code, paragraphs (3) and (4), claims of laborers and materialmen, respectively, enjoy preference among the creditors of the owner in regard to specific immovable property. As regards Article 525 of the Civil Code also invoked by GSIS, suffice it to say that this provision refers particularly to instances where the bad faith or the good faith of the builder is the decisive factor in determining liability. In the case at bar, there is no necessity to pass on the question of whether petitioners acted in good faith or bad faith, for the simple reason that under the Deed of Quitclaim, GSIS freely accepted the benefits of what they have accomplished. GSIS contends that Laigo should have been joined as defendant in this case. While petitioners could have done so, they were not under such obligation mandatorily. Under the circumstances of this case, Laigo is only a necessary party, not an indispensable one. And to allay GSIS, its right to secure reimbursement from Laigo is hereby reserved. Coming now to the amount for which GSIS is liable, We reiterate that, to be sure, there is evidence in the record, uncontradicted at that, regarding the lower value of money at the time the demand upon GSIS was made compared to that when petitioners furnished the labor and materials in question. We are not, however, inclined to go along with the trial court that the amount demanded should be multiplied four times. We believe that it being a matter of judicial notice that the prices of labor and material have substantially risen since 1970, it would be fair enough to make respondent liable for interest on the amount of the demand, which is supported by evidence and not effectively disputed by GSIS in its answer, at the rate of 12% per annum from the time petitioners filed their complaint below on April 14,1975. In addition, We hold that our award to petitioners of attorney's fees in the amount of Fifty Thousand (P50,00.00) Pesos would only be just and proper. As We view the position taken by GSIS in


this case, petitioners were compelled to litigate over a matter that could have been justly and equitably settled without having to go to court, particularly, when it is considered that under the Deed of Quitclaim several times mentioned earlier, GSIS freely accepted from Laigo the benefits of the expenses for labor and material incurred by petitioners in the houses in question, hence, as We have said above, GSIS had no legal basis for insisting that Article 1729 of the Civil Code does not apply to this case, it being indisputably the owner of said houses already. Besides, it must be borne in mind that the claims of petitioners are in the nature of claims of the laborers and materialmen themselves. Accordingly, Article 2208, paragraphs 2, 7 and 11, are applicable hereto. Indeed, the "house owners " or occupants who have not paid either petitioners or Laigo, or even the GSIS should not be allowed to enrich themselves at the expense of petitioners, and the most feasible way of avoiding such a result is for GSIS to Pay Petitioners and then pass on to said "house owners" what it would have to pay under this judgment. IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming the decision appealed from, with the modification that respondent GSIS shall pay petitioners the total amount of SIX HUNDRED SEVEN THOUSAND THREE HUNDRED TWENTY EIGHT AND 27/100 PESOS (P607,328.27), plus interest at 8% per annum from April 14, 1975 (which is less than that allowed by Circular No. 416 of the Central Bank dated July 29, 1974) until fully paid, the said sum to correspond separately to petitioners as follows: Amable C. Lumanlan P309,187.76 plus interest Pepito Velasco 142,510.00 Apolonio de log Santos 60,325.51 Felipe Lumbang 82,705.00 and Ramon Galang 12,600.00 plus Fifty Thousand (P50,000) Pesos as attorney's fees for an of them and the costs.

Barredo (Chairman), Antonio, Concepcion, Jr., Santos and Abad Santos, JJ., concur. Separate Opinions AQUINO, J., concurring: In the affirmance of the decision of the Court of Appeals but dissents as to the resolution of the merits of the case which has not been appealed to this Court. Separate Opinions AQUINO, J., concurring: In the affirmance of the decision of the Court of Appeals but dissents as to the resolution of the merits of the case which has not been appealed to this Court. Separate Opinions AQUINO, J., concurring: In the affirmance of the decision of the Court of Appeals but dissents as to the resolution of the merits of the case which has not been appealed to this Court. 129. G.R. No. 16454 September 29, 1921 GEORGE A. KAUFFMAN, plaintiff-appellee, vs. THE PHILIPPINE NATIONAL BANK, defendant-appellant. Roman J. Lacson for appellant.   Ross and Lawrence for appellee.


STREET, J.: At the time of the transaction which gave rise to this litigation the plaintiff, George A. Kauffman, was the president of a domestic corporation engaged chiefly in the exportation of hemp from the Philippine Islands and known as the Philippine Fiber and Produce Company, of which company the plaintiff apparently held in his own right nearly the entire issue of capital stock. On February 5, 1918, the board of directors of said company, declared a dividend of P100,000 from its surplus earnings for the year 1917, of which the plaintiff was entitled to the sum of P98,000. This amount was accordingly placed to his credit on the books of the company, and so remained until in October of the same year when an unsuccessful effort was made to transmit the whole, or a greater part thereof, to the plaintiff in New York City. In this connection it appears that on October 9, 1918, George B. Wicks, treasurer of the Philippine Fiber and Produce Company, presented himself in the exchange department of the Philippine National Bank in Manila and requested that a telegraphic transfer of $45,000 should be made to the plaintiff in New York City, upon account of the Philippine Fiber and Produce Company. He was informed that the total cost of said transfer, including exchange and cost of message, would be P90,355.50. Accordingly, Wicks, as treasurer of the Philippine Fiber and Produce Company, thereupon drew and delivered a check for that amount on the Philippine National Bank; and the same was accepted by the officer selling the exchange in payment of the transfer in question. As evidence of this transaction a document was made out and delivered to Wicks, which is referred to by the bank's assistant cashier as its official receipt. This memorandum receipt is in the following language: October 9th, 1918. CABLE TRANSFER BOUGHT FROM PHILIPPINE NATIONAL BANK, Manila, P.I. Stamp P18 Foreign Amount Rate $45,000. 3/8 % P90,337.50

Payable through Philippine National Bank, New York. To G. A. Kauffman, New York. Total P90,355.50. Account of Philippine Fiber and Produce Company. Sold to Messrs. Philippine Fiber and Produce Company, Manila. (Sgd.) Y LERMA, Manager, Foreign Department. On the same day the Philippine National Bank dispatched to its New York agency a cablegram to the following effect: Pay George A. Kauffman, New York, account Philippine Fiber Produce Co., $45,000. (Sgd.) PHILIPPINE NATIONAL BANK, Manila. Upon receiving this telegraphic message, the bank's representative in New York sent a cable message in reply suggesting the advisability of withholding this money from Kauffman, in view of his reluctance to accept certain bills of the Philippine Fiber and Produce Company. The Philippine National Bank acquiesced in this and on October 11 dispatched to its New York agency another message to withhold the Kauffman payment as suggested. Meanwhile Wicks, the treasurer of the Philippine Fiber and Produce Company, cabled to Kauffman in New York, advising him that $45,000 had been placed to his credit in the New York agency of the Philippine National Bank; and in response to this advice Kauffman presented himself at the office of the Philippine National Bank in New York City on October 15, 1918, and demanded the money. By this time, however, the message from the Philippine National Bank of October 11, directing the withholding of payment had been received in New York, and payment was therefore refused. In view of these facts, the plaintiff Kauffman instituted the present action in the Court of First Instance of the city of Manila to recover said sum, with interest and costs; and judgment having been there entered favorably to the plaintiff, the defendant appealed. Among additional facts pertinent to the case we note the circumstance that at the time of the transaction above-


mentioned, the Philippines Fiber and Produce Company did not have on deposit in the Philippine National Bank money adequate to pay the check for P90,355.50, which was delivered in payment of the telegraphic order; but the company did have credit to that extent, or more, for overdraft in current account, and the check in question was charged as an overdraft against the Philippine Fiber and Produce Company and has remained on the books of the bank as an interest-bearing item in the account of said company. It is furthermore noteworthy that no evidence has been introduced tending to show failure of consideration with respect to the amount paid for said telegraphic order. It is true that in the defendant's answer it is suggested that the failure of the bank to pay over the amount of this remittance to the plaintiff in New York City, pursuant to its agreement, was due to a desire to protect the bank in its relations with the Philippine Fiber and Produce Company, whose credit was secured at the bank by warehouse receipts on Philippine products; and it is alleged that after the exchange in question was sold the bank found that it did not have sufficient to warrant payment of the remittance. In view, however, of the failure of the bank to substantiate these allegations, or to offer any other proof showing failure of consideration, it must be assumed that the obligation of the bank was supported by adequate consideration. In this court the defense is mainly, if not exclusively, based upon the proposition that, inasmuch as the plaintiff Kauffman was not a party to the contract with the bank for the transmission of this credit, no right of action can be vested in him for the breach thereof. "In this situation," — we here quote the words of the appellant's brief, — "if there exists a cause of action against the defendant, it would not be in favor of the plaintiff who had taken no part at all in the transaction nor had entered into any contract with the plaintiff, but in favor of the Philippine Fiber and Produce Company, the party which contracted in its own name with the defendant." The question thus placed before us is one purely of law; and at the very threshold of the discussion it can be stated that the

provisions of the Negotiable Instruments Law can come into operation there must be a document in existence of the character described in section 1 of the Law; and no rights properly speaking arise in respect to said instrument until it is delivered. In the case before us there was an order, it is true, transmitted by the defendant bank to its New York branch, for the payment of a specified sum of money to George A. Kauffman. But this order was not made payable "to order or "to bearer," as required in subsection (d) of that Act; and inasmuch as it never left the possession of the bank, or its representative in New York City, there was no delivery in the sense intended in section 16 of the same Law. In this connection it is unnecessary to point out that the official receipt delivered by the bank to the purchaser of the telegraphic order, and already set out above, cannot itself be viewed in the light of a negotiable instrument, although it affords complete proof of the obligation actually assumed by the bank. Stated in bare simplicity the admitted facts show that the defendant bank for a valuable consideration paid by the Philippine Fiber and Produce Company agreed on October 9, 1918, to cause a sum of money to be paid to the plaintiff in New York City; and the question is whether the plaintiff can maintain an action against the bank for the nonperformance of said undertaking. In other words, is the lack of privity with the contract on the part of the plaintiff fatal to the maintenance of an action by him? The only express provision of law that has been cited as bearing directly on this question is the second paragraph of article 1257 of the Civil Code; and unless the present action can be maintained under the provision, the plaintiff admittedly has no case. This provision states an exception to the more general rule expressed in the first paragraph of the same article to the effect that contracts are productive of effects only between the parties who execute them; and in harmony with this general rule are numerous decisions of this court (Wolfson vs. Estate of Martinez, 20 Phil., 340; Ibañez de Aldecoa vs. Hongkong and Shanghai Banking Corporation, 22 Phil., 572, 584; Manila Railroad Co. vs.


Compañia Trasatlantica and Atlantic, Gulf and Pacific Co., 38 Phil., 873, 894.) The paragraph introducing the exception which we are now to consider is in these words: Should the contract contain any stipulation in favor of a third person, he may demand its fulfillment, provided he has given notice of his acceptance to the person bound before the stipulation has been revoked. (Art. 1257, par. 2, Civ. Code.) In the case of Uy Tam and Uy Yet vs. Leonard (30 Phil., 471), is found an elaborate dissertation upon the history and interpretation of the paragraph above quoted and so complete is the discussion contained in that opinion that it would be idle for us here to go over the same matter. Suffice it to say that Justice Trent, speaking for the court in that case, sums up its conclusions upon the conditions governing the right of the person for whose benefit a contract is made to maintain an action for the breach thereof in the following words: So, we believe the fairest test, in this jurisdiction at least, whereby to determine whether the interest of a third person in a contract is a stipulation pour autrui, or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract. If a third person claims an enforcible interest in the contract, the question must be settled by determining whether the contracting parties desired to tender him such an interest. Did they deliberately insert terms in their agreement with the avowed purpose of conferring a favor upon such third person? In resolving this question, of course, the ordinary rules of construction and interpretation of writings must be observed. (Uy Tam and Uy Yet vs. Leonard, supra.) Further on in the same opinion he adds: "In applying this test to a stipulation pour autrui, it matters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promise to the third person. That no such obligation exists may in some degree assist in determining whether the parties intended to benefit a third person, whether they

stipulated for him." (Uy Tam and Uy Yet vs. Leonard, supra.) In the light of the conclusion thus stated, the right of the plaintiff to maintain the present action is clear enough; for it is undeniable that the bank's promise to cause a definite sum of money to be paid to the plaintiff in New York City is a stipulation in his favor within the meaning of the paragraph above quoted; and the circumstances under which that promise was given disclose an evident intention on the part of the contracting parties that the plaintiff should have the money upon demand in New York City. The recognition of this unqualified right in the plaintiff to receive the money implies in our opinion the right in him to maintain an action to recover it; and indeed if the provision in question were not applicable to the facts now before us, it would be difficult to conceive of a case arising under it. It will be noted that under the paragraph cited a third person seeking to enforce compliance with a stipulation in his favor must signify his acceptance before it has been revoked. In this case the plaintiff clearly signified his acceptance to the bank by demanding payment; and although the Philippine National Bank had already directed its New York agency to withhold payment when this demand was made, the rights of the plaintiff cannot be considered to as there used, must be understood to imply revocation by the mutual consent of the contracting parties, or at least by direction of the party purchasing he exchange. In the course of the argument attention was directed to the case of Legniti vs. Mechanics, etc. Bank (130 N.E. Rep., 597), decided by the Court of Appeals of the State of New York on March 1, 1921, wherein it is held that, by selling a cable transfer of funds on a foreign country in ordinary course, a bank incurs a simple contractual obligation, and cannot be considered as holding the money which was paid for the transfer in the character of a specific trust. Thus, it was said, "Cable transfers, therefore, mean a method of transmitting money by cable wherein the seller engages that he has the balance at the point on which the payment is ordered and that on receipt of the cable directing the transfer his correspondent at such point will make payment to


the beneficiary described in the cable. All these transaction are matters of purchase and sale create no trust relationship." As we view it there is nothing in the decision referred to decisive of the question now before us, wish is merely that of the right of the beneficiary to maintain an action against the bank selling the transfer. Upon the considerations already stated, we are of the opinion that the right of action exists, and the judgment must be affirmed. It is so ordered, with costs against the appellant. Interest will be computed as prescribed in section 510 of the Code of Civil Procedure. Johnson, Araullo, Avanceña and Villamor, JJ., concur. 130. G.R. No. L-20853 May 29, 1967 BONIFACIO BROS., INC., ET AL., plaintiffs-appellants, vs. ENRIQUE MORA, ET AL., defendants-appellees. G. Magsaysay for plaintiffs-appellants.   Abad Santos and Pablo for defendant-appellee H. E. Reyes, Inc. J. P. Santilla and A. D. Hidalgo, Jr. for other defendant-appellee. CASTRO, J.: This is an appeal from the decision of the Court of First Instance of Manila, Branch XV, in civil case 48823, affirming the decision of the Municipal Court of Manila, declaring the H.S. Reyes, Inc. as having a better right than the Bonifacio Bros., Inc. and the Ayala Auto Parts Company, appellants herein, to the proceeds of motor insurance policy A-0615, in the sum of P2,002.73, issued by the State Bonding & Insurance Co. Inc., and directing payment of the said amount to the H. Reyes, Inc. Enrique Mora, owner of Oldsmobile sedan model 1956, bearing plate No. QC- mortgaged the same to the H.S. Reyes, Inc., with the condition that the former would insure the automobile with the

latter as beneficiary. The automobile was thereafter insured on June 23, 1959 with the State Bonding & Insurance Co., Inc., and motor car insurance policy A-0615 was issued to Enrique Mora, the pertinent provisions of which read: 1. The Company (referring to the State Bonding & Insurance Co., Inc.) will, subject to the Limits of Liability, indemnify the Insured against loss of or damages to the Motor Vehicle and its accessories and spare parts whilst thereon; (a) by accidental collision or overturning or collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear, x x x x x x x x x 2. At its own option the Company may pay in cash the amount of the loss or damage or may repair, reinstate, or replace the Motor Vehicle or any part thereof or its accessories or spare parts. The liability of the Company shall not exceed the value of the parts whichever is the less. The Insured's estimate of value stated in the schedule will be the maximum amount payable by the Company in respect of any claim for loss or damage.1äwphï1.ñët x x x x x x x x x 4. The Insured may authorize the repair of the Motor Vehicle necessitated by damage for which the Company may be liable under this Policy provided that: — (a) The estimated cost of such repair does not exceed the Authorized Repair Limit, (b) A detailed estimate of the cost is forwarded to the Company without delay, subject to the condition that "Loss, if any is payable to H.S. Reyes, Inc.," by virtue of the fact that said Oldsmobile sedan was mortgaged in favor of the said H.S. Reyes, Inc. and that under a clause in said insurance policy, any loss was made payable to the H.S. Reyes, Inc. as Mortgagee; x x x x x x x x x During the effectivity of the insurance contract, the car met with an accident. The insurance company then assigned the accident to the Bayne Adjustment Co. for investigation and appraisal of the damage. Enrique Mora, without the knowledge and consent of the H.S. Reyes, Inc., authorized the Bonifacio Bros. Inc. to furnish the labor and materials, some of which were supplied by the Ayala


Auto Parts Co. For the cost of labor and materials, Enrique Mora was billed at P2,102.73 through the H.H. Bayne Adjustment Co. The insurance company after claiming a franchise in the amount of P100, drew a check in the amount of P2,002.73, as proceeds of the insurance policy, payable to the order of Enrique Mora or H.S. Reyes,. Inc., and entrusted the check to the H.H. Bayne Adjustment Co. for disposition and delivery to the proper party. In the meantime, the car was delivered to Enrique Mora without the consent of the H.S. Reyes, Inc., and without payment to the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. of the cost of repairs and materials. Upon the theory that the insurance proceeds should be paid directly to them, the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. filed on May 8, 1961 a complaint with the Municipal Court of Manila against Enrique Mora and the State Bonding & Insurance Co., Inc. for the collection of the sum of P2,002.73 The insurance company filed its answer with a counterclaim for interpleader, requiring the Bonifacio Bros. Inc. and the H.S. Reyes, Inc. to interplead in order to determine who has better right to the insurance proceeds in question. Enrique Mora was declared in default for failure to appear at the hearing, and evidence against him was received ex parte. However, the counsel for the Bonifacio Bros. Inc., Ayala Auto Parts Co. and State Bonding & Insurance Co. Inc. submitted a stipulation of facts, on the basis of which are Municipal Court rendered a decision declaring the H.S. Reyes, Inc. as having a better right to the disputed amount and ordering State Bonding & Insurance Co. Inc. to pay to the H. S. Reyes, Inc. the said sum of P2,002.73. From this decision, the appellants elevated the case to the Court of First Instance of Manila which the stipulation of facts was reproduced. On October 19, 1962 the latter court rendered a decision, affirming the decision of the Municipal Court. The Bonifacio Bros. Inc. and the Ayala Auto Parts Co. moved for reconsideration of the decision, but the trial court denied the motion. Hence, this appeal. The main issue raised is whether there is privity of contract between the Bonifacio Bros. Inc. and the Ayala Auto Parts Co. on

the one hand and the insurance company on the other. The appellants argue that the insurance company and Enrique Mora are parties to the repair of the car as well as the towage thereof performed. The authority for this assertion is to be found, it is alleged, in paragraph 4 of the insurance contract which provides that "the insured may authorize the repair of the Motor Vehicle necessitated by damage for which the company may be liable under the policy provided that (a) the estimated cost of such repair does not exceed the Authorized Repair Limit, and (b) a detailed estimate of the cost is forwarded to the company without delay." It is stressed that the H.H. Bayne Adjustment Company's recommendation of payment of the appellants' bill for materials and repairs for which the latter drew a check for P2,002.73 indicates that Mora and the H.H. Bayne Adjustment Co. acted for and in representation of the insurance company. This argument is, in our view, beside the point, because from the undisputed facts and from the pleadings it will be seen that the appellants' alleged cause of action rests exclusively upon the terms of the insurance contract. The appellants seek to recover the insurance proceeds, and for this purpose, they rely upon paragraph 4 of the insurance contract document executed by and between the State Bonding & Insurance Company, Inc. and Enrique Mora. The appellants are not mentioned in the contract as parties thereto nor is there any clause or provision thereof from which we can infer that there is an obligation on the part of the insurance company to pay the cost of repairs directly to them. It is fundamental that contracts take effect only between the parties thereto, except in some specific instances provided by law where the contract contains some stipulation in favor of a third person.1 Such stipulation is known as stipulation pour autrui or a provision in favor of a third person not a pay to the contract. Under this doctrine, a third person is allowed to avail himself of a benefit granted to him by the terms of the contract, provided that the contracting parties have clearly and deliberately conferred a favor upon such person.2 Consequently, a third person not a party to the contract has no action against the parties thereto,


and cannot generally demand the enforcement of the same.3 The question of whether a third person has an enforcible interest in a contract, must be settled by determining whether the contracting parties intended to tender him such an interest by deliberately inserting terms in their agreement with the avowed purpose of conferring a favor upon such third person. In this connection, this Court has laid down the rule that the fairest test to determine whether the interest of a third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract.4 In the instant case the insurance contract does not contain any words or clauses to disclose an intent to give any benefit to any repairmen or materialmen in case of repair of the car in question. The parties to the insurance contract omitted such stipulation, which is a circumstance that supports the said conclusion. On the other hand, the "loss payable" clause of the insurance policy stipulates that "Loss, if any, is payable to H.S. Reyes, Inc." indicating that it was only the H.S. Reyes, Inc. which they intended to benefit. We likewise observe from the brief of the State Bonding & Insurance Company that it has vehemently opposed the assertion or pretension of the appellants that they are privy to the contract. If it were the intention of the insurance company to make itself liable to the repair shop or materialmen, it could have easily inserted in the contract a stipulation to that effect. To hold now that the original parties to the insurance contract intended to confer upon the appellants the benefit claimed by them would require us to ignore the indespensable requisite that a stipulation pour autrui must be clearly expressed by the parties, which we cannot do. As regards paragraph 4 of the insurance contract, a perusal thereof would show that instead of establishing privity between the appellants and the insurance company, such stipulation merely establishes the procedure that the insured has to follow in order to be entitled to indemnity for repair. This paragraph therefore should not be construed as bringing into existence in

favor of the appellants a right of action against the insurance company as such intention can never be inferred therefrom. Another cogent reason for not recognizing a right of action by the appellants against the insurance company is that "a policy of insurance is a distinct and independent contract between the insured and insurer, and third persons have no right either in a court of equity, or in a court of law, to the proceeds of it, unless there be some contract of trust, expressed or implied between the insured and third person."5 In this case, no contract of trust, expressed or implied exists. We, therefore, agree with the trial court that no cause of action exists in favor of the appellants in so far as the proceeds of insurance are concerned. The appellants' claim, if at all, is merely equitable in nature and must be made effective through Enrique Mora who entered into a contract with the Bonifacio Bros. Inc. This conclusion is deducible not only from the principle governing the operation and effect of insurance contracts in general, but is clearly covered by the express provisions of section 50 of the Insurance Act which read: The insurance shall be applied exclusively to the proper interests of the person in whose name it is made unless otherwise specified in the policy. The policy in question has been so framed that "Loss, if any, is payable to H.S. Reyes, Inc.," which unmistakably shows the intention of the parties. The final contention of the appellants is that the right of the H.S. Reyes, Inc. to the insurance proceeds arises only if there was loss and not where there is mere damage as in the instant case. Suffice it to say that any attempt to draw a distinction between "loss" and "damage" is uncalled for, because the word "loss" in insurance law embraces injury or damage. Loss in insurance, defined. — The injury or damage sustained by the insured in consequence of the happening of one or more of the accidents or misfortune against which the insurer, in consideration of the premium, has undertaken to indemnify the insured. (1 Bouv. Ins. No. 1215; Black's Law Dictionary; Cyclopedic Law Dictionary, cited in Martin's Phil. Commercial


Laws, Vol. 1, 1961 ed. p. 608). Indeed, according to sec. 120 of the Insurance Act, a loss may be either total or partial. Accordingly, the judgment appealed from is hereby affirmed, at appellants' cost. Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur. 131. G.R. No. L-27696 September 30, 1977 MIGUEL FLORENTINO, ROSARIO ENCARNACION de FLORENTINO, MANUEL ARCE, JOSE FLORENTINO, VICTORINO FLORENTINO, ANTONIO FLORENTINO, REMEDION ENCARNACION and SEVERINA ENCARNACION, petitioners-appellants, vs. SALVADOR ENCARNACION, SR., SALVADOR ENCARNACION, JR., and ANGEL ENCARNACION, oppositors to encumbrance-petitioners-appelles. Jose F. Singson and Miguel Florentino for appellants. Pedro Singson for appellees. GUERRERO, J.: Appeal from the decision of the Court of First Instance of Ilocos Sur, acting as a land registration court, in Land Registration case No. N-310. On May 22, 1964, the petitioners-appellants Miguel Florentino, Remedios Encarnacion de Florentino, Manuel Arce, Jose Florentino, Victorino Florentino, Antonio Florentino, Remedior, Encarnacion and Severina Encamacion, and the Petitinersappellees Salvador Encamacion, Sr., Salvador Encamacion, Jr. and Angel Encarnacion filed with the Court of First Instance of ilocos Sur an application for the registration under Act 496 of a parcel of agricultural land located at Barrio Lubong Dacquel Cabugao

Ilocos Sur. The application alleged among other things that the applicants are the common and pro-indiviso owners in fee simple of the said land with the improvements existing thereon; that to the best of their knowledge and belief, there is no mortgage, lien or encumbrance of any kind whatever affecting said land, nor any other person having any estate or interest thereon, legal or equitable, remainder, reservation or in expectancy; that said applicants had acquired the aforesaid land thru and by inheritance from their predecessors in interest, lately from their aunt, Doña Encarnacion Florentino who died in Vigan, Ilocos Sur in 1941, and for which the said land was adjudicated to them by virtue of the deed of extrajudicial partition dated August 24, 1947; that applicants Salvador Encarnacion, Jr. and Angel Encarnacion acquired their respective shares of the land thru purchase from the original heirs, Jesus, Caridad, Lourdes and Dolores surnamed Singson one hand and from Asuncion Florentino on the other. After due notice and publication, the Court set the application for hearing. No Opposition whatsoever was filed except that of the Director of Lands which was later withdrawn, thereby leaving the option unopposed. Thereupon, an order of general default was withdrawn against the whole world. Upon application of the asets the Clerk Of court was commission will and to have the evidence of the agents and or to submit the for the Court's for resolution. The crucial point in controversy in this registration case is centered in the stipulation marked Exhibit O-1 embodied in the deed of extrajudicial partition (Exhibit O) dated August 24, 1947 which states: Los productos de esta parcela de terreno situada en el Barrio Lubong Dacquel Cabugao Ilocos Sur, se destination para costear los tos de procesio de la Tercera Caida celebration y sermon de Siete Palbras Seis Estaciones de Cuaresma, procesion del Nino Jesus, tilaracion y conservacion de los mismos, construction le union camarin en conde se depositan los carros mesas y otras


cosas que seven para lot leiracion de Siete Palabras y otras cosas mas Lo que sobra de lihos productos despues de descontados todos los gastos se repartira nosotros los herederos. In his testimony during the trial, applicant Miguel Florentino asked the court to include the said stipulation (Exhibit O-1) as an encumbrance on the land sought to be registered, and cause the entry of the same on the face of the title that will finally be issued. Opposing its entry on the title as an encumbrance, petitionersappellee Salvador Encamacion, Sr., Salvador Encarnaciori, Jr. and Angel Encarriacion filed on October 3, 1966 a manifestation seeking to withdraw their application on their respective shares of the land sought to be registered. The withdrawal was opposed by the petitioners-appellants. The Court after hearing the motion for withdrawal and the opposition thereto issued on November 17, 1966 an order and for the purpose of ascertaining and implifying the issues therein stated that all the applicants admit the truth of the following; (1) That just after the death of Encarnacion FIorentino in 1941 up to last year and as had always been the case since time immomorial the products of the land made subiect matter of this land has been used in answering for the payment for the religious functions specified in the Deed Extrajudicial Partition belated August 24, 1947: (2) That this arrangement about the products answering for the comment of experisence for religions functions as mentioned above was not registered in the office of the Register of Deeds under Act No 3344, Act 496 or and, other system of registration; (3) That all the herein applicants know of the existence of his arrangement as specified in the Deed of Extra judicial Partition of A adjust 24, 1947; (4) That the Deed of Extrajudicial Partition of August 24, 194-, not signed by Angel Encarnacion or Salvador Encarnacion, Jr,. The court denied the petitioners-appellee motion to withdraw for lack of merit, and rendered a decision under date of November 29, 1966 confirming the title of the property in favor of the f appoints with their respective shares as follows:

Spouses Miguel Florentino and Rosario Encarnacion de Florentino, both of legal age, Filipinos, and residents of Vigan, Ilocos Sur, consisting of an undivided 31/297 and 8.25/297 portions, respectively; Manuel Arce, of legal age, Filipino, married to Remedios Pichay and resident of Vigan, Ilocos Sur, consisting of an undivided 66/297 portion; Salvador Encarnacion, Jr., of legal age, Filipino, married to Angelita Nagar and resident of Vigan, Ilocos Sur, consisting of an undivided 66/297; Jose Florentino, of legal age, Filipino, married to Salvacion Florendo and resident of 16 South Ninth Diliman, Quezon City, consisting of an undivided 33/297 portion; Angel Encarnacion, of legal age, Filipino, single and resident of 1514 Milagros St., Sta. Cruz, Manila, consisting of an undivided 33/297 portion; Victorino Florentino, of legal age, Filipino, married to Mercedes L. Encarnacion and resident of Vigan, Ilocos Sur, consisting of an undivided 17.5/297 portion; Antonio Florentino, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of an undivided 17.5/297; Salvador Encarnacion, Sr., of legal age, Filipino, married to Dolores Singson, consisting of an undivided 8.25/297; Remedios Encarnacion, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of an undivided 8.25/297 portion; and Severina Encarnacion, of legal age, Filipino, single and resident of Vigan, Ilocos Sur, consisting of 8.25/297 undivided portion. The court, after ruling "that the contention of the proponents of encumbrance is without merit bemuse, taking the self-imposed arrangement in favor of the Church as a pure and simple donation, the same is void for the that the donee here has riot accepted the donation (Art. 745, Civil Code) and for the further that, in the case of Salvador Encarnacion, Jr. and Angel Encarnacion, they had made no oral or written grant at all (Art. 748) as in fact they are even opposed to it," 1 held in the Positive portion, as follows:


In view of all these, therefore, and insofar as the question of encumbrance is concerned, let the religious expenses as herein specified be made and entered on the undivided shares, interests and participations of all the applicants in this case, except that of Salvador Encarnacion, Sr., Salvador Encarnacion, Jr. and Angel Encarnacion. On January 3, 1967, petitioners-appellants filed their Reply to the Opposition reiterating their previous arguments, and also attacking the junction of the registration court to pass upon the validity or invalidity of the agreement Exhibit O-1, alleging that such is specified only in an ordinary action and not proper in a land registration proceeding. The Motion for Reconsideration and of New Trial was denied on January 14, 1967 for lack of merit, but the court modified its earlier decision of November 29, 1966, to wit: This Court believes, and so holds, that the contention of the movants (proponents of the encumbrance) is without merit because the arrangement, stipulation or grant as embodied in Exhibit O (Escritura de Particion Extrajudicial), by whatever name it may be (called, whether donation, usufruct or ellemosynary gift, can be revoked as in fact the oppositors Salvador Encarnacion, Sr., who is the only one of the three oppositors who is a party to said Exhibit O (the two others, Salvador Encarnacion, Jr. and Angel Encarnacion no parties to it) did revoke it as shown by acts accompanying his refusal to have the same appear as an encumbrance on the title to be issued. In fact, legally, the same can also be ignored or discararded by will the three oppositors. The reasons are: First, if the said stipulation is pour bodies in Exhibit O-1 is to be viewed as a stipulation pour autrui the same cannot now be enforced because the Church in whose favor it was made has not communicated its acceptance to the oppositors before the latter revoked it. Says the 2nd par. of Art. 1311 of the New Civil Code: "If a contract should contain some stipulation in favor of a third person he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere

incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person." No evide nee has ever been submitted by the Church to show its clear acceptance of the grant before its revocation by the oppositor Salvador Encarnacion, Sr. (or of the two other oppositors, Salvador Encarnacion, Jr. and Angel Encarnacion, who didn't even make any giant, in the first place), and so not even the movants who have officiously taken into themselves the right to enforce the grant cannot now maintain any action to compel compliance with it. (Bank of the P.I. v. Concepcion y Hijos, Inc., 53 Phil. 806). Second, the Church in whose favor the stipulation or grant had apparently been made ought to be the proper party to compel the herein three oppositors to abide with the stipulation. But it has not made any appearance nor registered its opposition to the application even before Oct. 18, 1965 when an order of general default was issued. Third, the movants are not, in the contemplation of Section 2, Rule 3 of the Rules of Court, the real party in interest to raise the present issue; and Fourth, the movants having once alleged in their application for registration that the land is without encumbrance (par. 3 thereof), cannot now be alloted by the rules of pleading to contradict said allegation of theirs. (McDaniel v. Apacible, 44 Phil. 248) SO ORDERED. 2 After Motions for Reconsideration were denied by the court, the petitioners- appellants appealed directly to this Court pursuant to Rule 4 1, Rules of Court, raising the following assign of error: I. The lower court erred in concluding that the stipulation embodied in Exhibit O on religious expenses is just an arrangement stipulation, or grant revocable at the unilateral option of the coowners. II. The lower court erred in finding and concluding that the encumbrance or religious expenses embodied in Exhibit O, the extrajudicial partition between the co-heirs, is binding only on the appoints Miguel Florentino, Rosario Encarnacion de Florentino, Manuel Arce, Jose Florentino, Antonio Florentino,


Victorino Florentino, Remedios Encarnacion and Severina Encarnacion. III. The lower court as a registration court erred in passing upon the merits of the encumbrance (Exhibit O-1) as the sanie was never put to issue and as the question involved is an adjudication of rights of the parties. We find the first and second assignments of error impressed with merit and, therefore, tenable. The stipulation embodied in Exhibit O-1 on religious expenses is not revocable at the unilateral option of the co-owners and neither is it binding only on the petitionersappellants Miguel Florentino, Rosario Encarnacion de Florentino Manuel Arce, Jose Florentino, Victorino Florentino Antonio Florentino, Remedios Encarnacion and Severina E It is also binding on the oppositors-appellees Angel Encarnacion, The stipulation (Exhibit 411) in pan of an extrajudicial partition (Exh. O) duly agreed and signed by the parties, hence the sanie must bind the contracting parties thereto and its validity or compliance cannot be left to the with of one of them (Art. 1308, N.C.C.). Under Art 1311 of the New Civil Code, this stipulation takes effect between the parties, their assign and heirs. The article provides: Art. 1311. — Contracts take effect only between the parties, their assigns and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The heir is not liable beyond the value of the property he received from the decedent. If a contract should contain a stipulation in favor of a third person, he may demand its fulfillment provided he communicated his acceptance to the obligor before its revocation. A mere incidental benefit or interest of a person is not sufficient. The contracting parties must have clearly and deliberately conferred a favor upon a third person. The second paragraph of Article 1311 above-quoted states the law on stipulations pour autrui. Consent the nature and purpose of the motion (Exh. O-1), We hold that said stipulation is a station

pour autrui. A stipulation pour autrui is a stipulation in favor of a third person conferring a clear and deliberate favor upon him, and which stipulation is merely a part of a contract entered into by the parties, neither of whom acted as agent of the third person, and such third person and demand its fulfillment provoked that he communicates his to the obligor before it is revoked. 3 The requisites are: (1) that the stipulation in favor of a third person should be a part, not the whole, of the contract; (2) that the favorable stipulation should not be conditioned or compensated by any kind of obligation whatever; and (3) neither of the contracting bears the legal represented or authorization of third person. To constitute a valid stipulation pour autrui it must be the purpose and intent of the stipulating parties to benefit the third and it is not sufficient that the third person may be incidentally benefited by the stipulation. The fairest test to determine whether the interest of third person in a contract is a stipulation pour autrui or merely an incidental interest, is to rely upon the intention of the parties as disclosed by their contract. In applying this test, it meters not whether the stipulation is in the nature of a gift or whether there is an obligation owing from the promisee to the third person. That no such obsorption exists may in some degree assist in determining whether the parties intended to benefit a third person.4 In the case at bar, the determining point is whether the coowners intended to benefit the Church when in their extrajudicial partition of several parcels of land inherited by them from Doña Encarnacion Florendo they agreed that with respect to the land situated in Barrio Lubong Dacquel Cabugao Ilocos Sur, the fruits thereof shall serve to defray the religious expenses specified in Exhibit O-1. The evidence on record shows that the true intent of the parties is to confer a direct and material benefit upon the Church. The fruits of the aforesaid land were used thenceforth to defray the expenses of the Church in the preparation and celebration of the Holy Week, an annual Church function. Suffice it to say that were it not for Exhibit O-1, the Church would have


necessarily expended for this religious occasion, the annual relisgious procession during the Holy Wock and also for the repair and preservation of all the statutes, for the celebration of the Seven Last Word. We find that the trial court erred in holding that the stipulation, arrangement or grant (Exhibit O-1) is revocable at the option of the co-owners. While a stipulation in favor of a third person has no binding effect in itself before its acceptance by the party favored, the law does not provide when the third person must make his acceptance. As a rule, there is no time at such third person has after the time until the stipulation is revoked. Here, We find that the Church accepted the stipulation in its favor before it is sought to be revoked by some of the co-owners, namely the petitioners-appellants herein. It is not disputed that from the time of the with of Doña Encarnacion Florentino in 1941, as had always been the case since time immemorial up to a year before the firing of their application in May 1964, the Church had been enjoying the benefits of the stipulation. The enjoyment of benefits flowing therefrom for almost seventeen years without question from any quarters can only be construed as an implied acceptance by the Church of the stipulation pour autrui before its revocation. The acceptance does not have to be in any particular form, even when the stipulation is for the third person an act of liberality or generosity on the part of the promisor or promise. 5 It need not be made expressly and formally. Notification of acceptance, other than such as is involved in the making of demand, is unnecessary. 6 A trust constituted between two contracting parties for the benefit of a third person is not subject to the rules governing donation of real property. The beneficiary of a trust may demand performance of the obligation without having formally accepted the benefit of the this in a public document, upon mere acquiescence in the formation of the trust and acceptance under the second paragraph of Art. 1257 of the Civil Code. 7 Hence, the stipulation (Exhibit O-1) cannot now be revoked by

any of the stipulators at their own option. This must be so because of Article 1257, Civil Code and the cardinal rule of contracts that it has the force of law between the parties. 8 Thus, this Court ruled in Garcia v. Rita Legarda, Inc., 9 "Article 1309 is a virtual reproduction of Article 1256 of the Civil Code, so phrased to emphasize that the contract must bind both parties, based on the principles (1) that obligation arising from contracts have the force of law between the contracting parties; and (2) that there must be mutuality between the parties based on their principle equality, to which is repugnant to have one party bound by the contract leaving the other free therefrom." Consequently, Salvador Encarnacion, Sr. must bear with Exhibit O-1, being a signatory to the Deed of Extrajudicial Partition embodying such beneficial stipualtion. Likewise, with regards to Salvador, Jr. and Angel Encarnacion, they too are bound to the agreement. Being subsequent purchasers, they are privies or successors in interest; it is axiomatic that contracts are enforceable against the parties and their privies. 10 Furthermore, they are shown to have given their conformity to such agreement when they kept their peace in 1962 and 1963, having already bought their respective shares of the subject land but did not question the enforcement of the agreement as against them. They are also shown to have knowledge of Exhibit O-1 as they had admitted in a Deed of Real Mortgage executed by them on March 8, 1962 involving their shares of the subject land that, "This parcel of land is encumbered as evidenced by the document No. 420, page 94, Book 1, series 1947, executed by the heirs of the late Encarnacion Florentino, on August 26, 1947, before M. Francisco Ante, Notwy Public of Vigan, Ilocos Sur, in its page 10 of the said document of partition, and also by other documents." The annotation of Exhibit O-1 on the face of the title to be issued in this case is merely a guarantee of the continued enforcement and fulfillment of the beneficial stipulation. It is error for the lower court to rule that the petitioners-appellants are not the real parties in interest, but the Church. That one of the parties to a contract pour autrui is entitled to bring an action for its


enforcement or to prevent its breach is too clear to need any extensive discussion. Upon the other hand, that the contract involved contained a stipulation pour autrui amplifies this settled rule only in the sense that the third person for whose benefit the contract was entered into may also demand its fulfillment provoked he had communicated his acceptance thereof to the obligor before the stipulation in his favor is revoked. 11 Petitioners-appellants' third assignment of error is not welltaken. Firstly, the otherwise rigid rule that the jurisdiction of the Land Registration Court, being special and limited in character and proceedings thereon summary in nature, does not extend to cases involving issues properly litigable in other independent suits or ordinary civil actions, has time and again been relaxed in special and exceptional circumstances. (See Government of the Phil. Islands v. Serafica, 61 Phil. 93 (1934); Caoibes v. Sison, 102 Phil. 19 (1957); Luna v. Santos, 102 Phil. 588 (1957); Cruz v. Tan, 93 Phil. 348 (1953); Gurbax Singh Pabla & Co. v. Reyes, 92 Phil. 177 (1952). From these cases, it may be gleaned and gathered that the peculiarity of the exceptions is based not only on the fact that Land Registration Courts are likewise the same Courts of First Instance, but also the following premises (1) Mutual consent of the parties or their acquired in submitting the at aforesaid determination by the court in the registration; (2) Full opportunity given to the parties in the presentation of their respective skies of the issues and of the evidence in support thereto; (3) Consideration by the court that the evidence already of record is sufficient and adequate for rendering a decision upon these issues. 12 In the case at bar, the records clearly show that the second and third premism enumerated abow are fully mt. With regards to first premise, the petioners-appellants cannot claim that the issues anent Exhibit O-1 were not put in issue because this is contrary to their stand before the lower court where they took the initial step in praying for the court's determination of the merits of Exhibit O-1 as an encumbrance to be annotated on the title to be issued by such court. On the other hand, the petitioners-appellees who had the right to invoke the

limited jurisdiction of the registration court failed to do so but met the issues head-on. Secondly, for this very special reason, We win uphold the actuation of the lower court in determining the conflicting interests of the parties in the registration proceedings before it. This case has been languishing in our courts for thirteen tong years. To require that it be remanded to the lower court for another proceeding under its general jurisdiction is not in consonance with our avowed policy of speedy justice. It would not be amiss to note that if this case be remanded to the lower court, and should appeal again be made, the name issues will once more be raised before us hence, Our decision to resolve at once the issues in the instant petition. IN VIEW OF THE FOREGOING, the decision of the Court of First Instance of Ilocos Sur in Land Registration Case No. N-310 is affirmed but modified to allow the annotation of Exhibit O-1 as an encumbrance on the face of the title to be finally issued in favor of all the applications (herein appellants and herein appellees) in the registration proceedings below. No pronouncement as to cost. SO ORDERED. Teehankee (Chairman), Muñoz Palma, Fernandez, JJ., concur. 132. G.R. No. 74521 November 11, 1986 BANK OF AMERICA NT & SA, petitioner, vs. THE HON. FIRST CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT and AIR CARGO AND TRAVEL CORPORATION, respondents. Agcaoili & Associates for petitioner. Marcelo P. Villanuea for respondents. MELENCIO-HERRERA, J.:


As the Petition and the Comment submitted by private respondent Air Cargo and Travel Corporation (ACTC) have sufficiently argued the legal question involved in this case, the Court has resolved to give due course to the Petition, with private respondent's Comment being its Answer, and to consider this case submitted for decision. The basic relevant facts have been stated by respondent Appellate Court as follows: Shorn of non-essentials, the facts are: Plaintiff Air Cargo and Travel Corporation is the owner of Account Number 19842-01-2 with defendant Bank of America. Defendant Toshiyuki Minami, President of plaintiff corporation in Japan, is the owner of Account Number 24506-01-7 with defendant Bank. On March 10, 1981, the Bank received a tested telex advise from Kyowa Bank of Japan stating, ADVISE PAY USDLS 23,595. — TO YOUR A/C NBR 24506-01-7 OF A. C. TRAVEL CORPORATION MR. TOSHIYUKO MINAMI. and the Bank Credited the amount of US$23,595.00 to Account Number 24506-07-1 (should be 24506-01-7) owned, as aforesaid, by Minami. On March 12, 1981, Minami withdrew the sum of P180,000.00 the equivalent in Philippine Pesos of the sum of US$23,595.00 from the Bank on his Account Number 24506-07-1 (should be 24506-01-7) It may be explained that the "tested" telex advice is a message signed in "code". Evidently, there was a previous contractual agreement between Kyowa Bank of Japan (KYOWA) and Petitioner (BANKAMERICA) that, from time to time, KYOWA can ask BANKAMERICA to pay amounts to a third party (beneficiary) with BANKAMERICA afterwards billing KYOWA the indicated amount given to the beneficiary. To assure itself that an Order received from KYOWA really comes from KYOWA, it is usually agreed that KYOWA's signature will be in accordance with a confidential code. According to ACTC in its Comment, in the early part of 1981, it was Tokyo Tourist Corporation in Japan which applied with

Kyowa Bank, Ltd. also based in Tokyo, Japan, for telegraphic transfer of the sum of US$23,595.00 payable to ACTC's account with BANKAMERICA, Manila. When the tested telex was received on May 10, 1981, employees of BANKAMERICA noted its patent ambiguity. Notwithstanding, on the following day, BANKAMERICA credited the amount of US$23,595.00 to the account of Minami. ACTC claimed that the amount should have been credited to its account and demanded restitution, but BANKAMERICA refused. On February 18, 1982, ACTC filed suit for damages against BANKAMERICA and Minami before the Trial Court in Pasig for the failure of BANKAMERICA to restitute. Minami was declared in default. Thereafter, judgment was rendered with the following dispositive part: IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court upon a judicious and fair assessment of the testimonial and documentary evidences submitted by the parties is of the opinion and so holds that defendant Bank and defendant Minami must pay plaintiff, jointly and severally the following. 1. The sum of US$23,595.00 or in Philippine Currency at the current guiding rate of exchange which is P14.00 to the dollar, as and by way of actual damages with interest at the rate of twelve (12%) per cent per annum from the filing of the complaint until fully paid; 2. The sum of P50,000.00 as temperate and exemplary damages; 3. The sum of P10,000.00 as attorney's fees;; 4. The costs of this suit. SO ORDERED. Upon appeal taken by BANKAMERICA, Respondent Court "affirmed in toto, " except that the dollar-peso rate of ex-change would be that "at the time of payment." Said respondent Court: We must say that the Bank personnel were in fact confused or in doubts as to the real payee. The Senior Clerk who initially received the tested telex had called up Mr. Colegado, Mr. Ichiban, Miss Mayagama and Atty. Villanueva, all of plaintiff-appellee, but he received "no


answer."(Exh. 3; pp. 9-10, t.s.n., Dec. 2, 1982). Thereupon, the processor checked the alphabetical listings and he saw that the payee, Account Number 24506-01-7, matched the name appearing in the tested telex advise (p. 10, t.s.n., Dec. 2, 1981). The gross negligence then of appellant Bank may be sum (sic) up as follows; The words "A.C. TRAVEL CORPORATION MR. TOSHIYUKO MINAMI" engendered or cast doubt on the part of the Senior Clerk as to the real payee despite the "A.C. NBR 24506-01-7" and should have consulted higher officials of plaintiff before giving the advise to the processor who sent the same to the computer center for ultimate processing (p. 11, Appellant's Brief). The processor verified that Account Number 24506-01-7 belonged to TOSHIYUKO MINAMI' only and not to "A.C. TRAVEL CORPORATION MR. TOSHIYUKO MINAMI" and this circumstance should have moved the processor to be more prudent and to consult higher officials instead of sending the advise to the computer center for processing or crediting the remittance to the account of Toshiyuko Minami, (Emphasis supplied) We are constrained to reverse. It is our considered opinion that, in the tested telex, considered either as a patent ambiguity or as a latent ambiguity, the beneficiary is Minami. The mention of Account No. 24506-01-7, as well as the name of Minami, has to be given more weight than the mention of the name of ACTC. BANKAMERICA could not have very well disregarded that account number. It could also be that the mention of ACTC's name was a further identification of Minami, to prevent payment to a possible another "Toshiyuko Minami" who may not be connected with ACTC. On the other hand, it should be difficult to concede that, in the tested telex, Account No. 24506-01-7 was erroneously written and should be substituted by Account No. 19842-01-2 in the name of ACTC. In Vargas Plow Factory, Inc. vs. Central Bank, it was held that "the opening of a letter of credit in favor of the exporter becomes ultimately but the result of a stipulation pour autrui" (27 SCRA 84

[1969]). Similarly, when KYOWA asked BANK-AMERICA to pay an amount to a beneficiary (either ACTC or Minami), the contract was between KYOWA and BANK-AMERICA and it had a stipulation pour autrui. It should be recalled that the tested telex originated from KYOWA at the behest of Tokyo Tourist Corporation with whom ACTC had business dealings. Minami, on the other hand, was the liaison officer of ACTC in Japan. As the entity responsible for the tested telex was Tokyo Tourist Corporation, it can reasonably be concluded that if it had intended that the US$23,595.00 should be credited to ACTC, upon learning that the amount was credited to Minami, it should have gone, together with the representatives of ACTC, in protest to KYOWA and lodged a protest. Since that was not done, it could well be that Tokyo Tourist Corporation had really intended its remittance to be credited to Minami. The identity of the beneficiary should be in accordance with the identification made by KYOWA, and ACTC cannot question that identification as it is not a party to the arrangement between KYOWA and BANKAMERICA (see Manila Railroad Co. vs. Compañia Trasatlantica, 38 Phil. 875 [1918]). WHEREFORE, the Decision of Respondent Court, in its case ACG.R. CV No. 03985, is hereby reversed in so far as Bank of America, NT & SA is concerned. Without pronouncement as to costs. SO ORDERED. Yap (Chairman), Narvasa, Cruz and Paras, * JJ., concur. 133. G.R. No. L-40234 December 14, 1987 MARIMPERIO COMPAÑIA NAVIERA, S.A., petitioner, vs. COURT OF APPEALS and UNION IMPORT & EXPORT CORPORATION and PHILIPPINES TRADERS CORPORATION, respondents.


PARAS, J.: This is a petition for certiorari under Section 1, Rule 65 of the Rules of Court seeking the annulment and setting aside of the decision of the Court of Appeals * and promulgated on September 2, 1974 in CA-G.R. No. 48521-R entitled "Union Import and Export Corporation, et al., Plaintiffs-Appellees v. Marimperio Compañia Naviera, S.A., Defendant-Appellant", ordering petitioner to pay respondent the total sum of US $265,482.72 plus attorney's fees of US$100,000.00 and (b) the resolution of the said Court of Appeals in the same case, dated February 17, 1975 fixing the amount of attorney, s fees to Pl00,000.00 instead of $100,000.00 as erroneously stated in the decision but denying petitioner's motion for reconsideration and/or new trial. The dispositive portion of the decision sought to be annulled (Rollo, p. 215) reads as follows: For all the foregoing, and in accordance therewith, let judgment be entered (a) affirming the decision appealed from insofar as it directs the defendant-appellant: (1) to pay plaintiffs the sum of US $22,500.00 representing the remittance of plaintiffs to said defendant for the first 15-day hire of the vessel "SS PAXOI" including overtime and an overpayment of US $254.00; (2) to pay plaintiffs the sum of US $16,000.00, corresponding to the remittance of plaintiffs to defendant for the second 15-day hire of the aforesaid vessel; (3) to pay plaintiffs the sum of US $6,982.72, representing the cost of bunker oil, survey and watering of the said vessel; (4) to pay plaintiffs the sum of US $100,000.00 as and for attorney's fees; and, (b) reversing the portion granting commission to the intervenor-appellee and hereby dismissing the complaint-in-intervention. The order of the court a quo denying the plaintiffs' Motion for Partial Reconsideration, is likewise, affirmed, without any special pronouncement as to costs. The facts of the case as gathered from the amended decision of the lower court (Amended Record on Appeal, p. 352), are as follows: In 1964 Philippine Traders Corporation and Union Import and

Export Corporation entered into a joint business venture for the purchase of copra from Indonesia for sale in Europe. James Liu President and General Manager of the Union took charge of the European market and the chartering of a vessel to take the copra to Europe. Peter Yap of Philippine on the other hand, found one P.T. Karkam in Dumai Sumatra who had around 4,000 tons of copra for sale. Exequiel Toeg of Interocean was commissioned to look for a vessel and he found the vessel "SS Paxoi" of Marimperio available. Philippine and Union authorized Toeg to negotiate for its charter but with instructions to keep confidential the fact that they are the real charterers. Consequently on March 21, 1965, in London England, a "Uniform Time Charter" for the hire of vessel "Paxoi" was entered into by the owner, Marimperio Compania Naviera, S.A. through its agents N. & J. Vlassopulos Ltd. and Matthews Wrightson, Burbridge, Ltd. to be referred to simply as Matthews, representing Interocean Shipping Corporation, which was made to appear as charterer, although it merely acted in behalf of the real charterers, private respondents herein. The pertinent provisions or clauses of the Charter Party read: 1. The owners let, and the Charterers hire the Vessel for a period of 1 (one) trip via safe port or ports Hong Kong, Philippine Islands and/or INDONESIA from the time the Vessel is delivered and placed at the disposal of the Charterers on sailing HSINKANG ... . 4. The Charterers are to provide and pay for oil-fuel, water for boilers, port charges, pilotages ... . 6. The Charterers to pay as hire s.21 (Twenty-one Shillings per deadweights ton per 30 days or pro rata commencing in accordance with Clause 1 until her redelivery to the owners. Payment of hire to be made in cash as per Clause 40 without discount, every 15 days in advance. In default of payment of the Owners to have the right of withdrawing the vessel from the services of the Charterers, without noting any protest and without interference by any court or any formality whatsoever and without prejudice the Owners


may otherwise have on the Charterers under the Charter. 7. The Vessel to be redelivered on the expiration of the Charter in the same good order as when delivered to the Charterers (fair wear and tear expected) in the Charterer's option in ANTWERP HAMBURG RANGE. 20. The Charterers to have the option of subletting the Vessel, giving due notice to the Owners, but the original Charterers always to remain responsible to the Owners for due performance of the Charter. 29. Export and/or import permits for Charterers'cargo to the Charterers'risk and expense. Charterers to obtain and be responsible for all the necessary permits to enter and/or trade in and out of all ports during the currency of the Charter at their risk and expense. ... 33. Charterers to pay as overtime, bonus and premiums to Master, Officers and crew, the sum of 200 (Two Hundred Pounds) per month to be paid together with hire. 37. Bunkers on delivery as on board. Bunkers on redelivery maximum 110 tons. Prices of bunkers at 107' per long ton at both ends. 38. Upon sailing from each loading port, Master to cable SEASHIPS MANILA advising the quantity loaded and the time of completion. 40. The hire shall be payable in external sterling or at Charterers' option in U.S. dollars in London; - Williams Deacon's Vlassopulos Ltd., Account No. 861769. In view of the aforesaid Charter, on March 30, 1965 plaintiff Charterer cabled a firm offer to P.T. Karkam to buy the 4,000 tons of copra for U.S.$180.00 per ton, the same to be loaded either in April or May, 1965. The offer was accepted and plaintiffs opened two irrevocable letters of Credit in favor of P.T. Karkam On March 29, 1965, the Charterer was notified by letter by Vlassopulos through Matthews that the vessel "PAXOI" had sailed from Hsinkang at noontime on March 27, 196-5 and that it had left on hire at that time and date under the Uniform TimeCharter.

The Charterer was however twice in default in its payments which were supposed to have been done in advance. The first 15day hire comprising the period from March 27 to April 1-1, 1965 was paid despite follow-ups only on April 6, 1965 and the second 15-day hire for the period from April 12 to April 27, 1965 was paid also despite follow-ups only on April 26, 1965. On April 14, 1965 upon representation of Toeg, the Esso Standard Oil (Hongkong) Company supplied the vessel with 400 tons of bunker oil at a cost of US $6,982.73. Although the late payments for the charter of the vessel were received and acknowledged by Vlassopulos without comment or protest, said agent notified Matthews, by telex on April 23, 1965 that the shipowners in accordance with Clause 6 of the Charter Party were withdrawing the vessel from Charterer's service and holding said Charterer responsible for unpaid hirings and all legal claims. On April 29, 1965, the shipowners entered into another charter agreement with another Charterer, the Nederlansche Stoomvart of Amsterdam, the delivery date of which was around May 3, 1965 for a trip via Indonesia to Antwep/Hamburg at an increase charter cost. Meanwhile, the original Charterer again remitted on April 30, 1965, the amount corresponding to the 3rd 15-day hire of the vessel "PAXOI" but this time the remittance was refused. On May 3,1965, respondents Union Import and Export Corporation and Philippine Traders Corporation filed a complaint with the Court of First Instance of Manila, Branch VIII, against the Unknown Owners of the Vessel "SS Paxoi" for specific performance with prayer for preliminary attachment, alleging, among other things, that the defendants (unknown owners) through their duly authorized agent in London, the N & J Vlassopulos Ltd., ship brokers, entered into a contract of Uniform Time-Charter with the Interocean Shipping Company of Manila through the latter's duly authorized broker, the Overseas Steamship Co., Inc., for the Charter of the vessel SS PAXOI' under the terms and conditions appearing therein ...; that, immediately


thereafter, the Interocean Shipping Company sublet,the said vessel to the plaintiff Union Import & Export, Corporation which in turn sublet the same to the other plaintiff, the Philippine Traders Corporation (Amended Record on Appeal, p. 17). Respondents as plaintiffs in the complaint obtained a writ of preliminary attachment of vessel PAXOI' " which was anchored at Davao on May 5, 1969, upon the filing of the corresponding bond of P1,663,030.00 (Amended Record on Appeal, p. 27). However, the attachment was lifted on May 15, 1969 upon defendant's motion and filing of a counterbond for P1,663,030 (Amended Record on Appeal, p. 62). On May 11, 1965, the complaint was amended to Identify the defendant as Marimperio Compania Naviera S.A., petitioner herein (Amended Record on Appeal, p. 38). In answer to the amended complaint, by way of special defenses defendant (petitioner herein) alleged among others that the Charter Party covering its vessel "SS PAXOI" was entered into by defendant with Interocean Shipping Co. which is not a party in the complaint; that defendant has no agreement or relationship whatsoever with the plaintiffs; that plaintiffs are unknown to defendant; that the charter party entered into by defendant with the Interocean Shipping Co. over the vessel "SS PAXOI" does not authorize a sub-charter of said vessel to other parties; and that at any rate, any such sub-charter was without the knowledge or consent of defendant or defendant's agent, and therefore, has no effect and/or is not binding upon defendant. By way of counterclaim, defendant prayed that plaintiffs be ordered to pay defendant (1) the sum of 5,085.133d or its equivalent, in Philippine currency of P54,929.60, which the defendant failed to realize under the substitute charter, from May 3, 1965 to May 16, 1965, while the vessel was under attachment; (2) the sum of E68.7.10 or its equivalent of P7,132.83, Philippine currency, as premium for defendant's counterbond for the first year, and such other additional premiums that will have to be paid by defendant for additional premiums while the case is pending; and (3) a sum of not less than P200,000.00 for and as attomey's fees and

expenses of litigations (Amended Record on Appeal, p. 64). On March 16, 1966, respondent Interocean Shipping Corporation filed a complaint-in-intervention to collect what it claims to be its loss of income by way of commission and expenses in the amount of P15,000.00 and the sum of P2,000.00 for attorney's fees (Amended Record on Appeal, p. 87). In its amended answer to the complaint-in-intervention petitioner, by way of special defenses alleged that (1) the plaintiff-in-intervention, being the charterer, did not notify the defendant shipowner, petitioner, herein, about any alleged sub-charter of the vessel "SS PAXOI" to the plaintiffs; consequently, there is no privity of contract between defendant and plaintiffs and it follows that plaintiff-in-intervention, as charterer, is responsible for defendant shipowner for the proper performance of the charter party; (2) that the charter party provides that any dispute arising from the charter party should be referred to arbitration in London; that Charterer plaintiff-inintervention has not complied with this provision of the charter party; consequently its complaint-in intervention is premature; and (3) that the alleged commission of 2 1/2 and not become due for the reason, among others, that the charterer violated the contract, and the full hiring fee due the shipowner was not paid in accordance with the terms and conditions of the charter party. By way of counterclaim defendant shipowner charged the plaintiff-in-intervention attorney's fees and expenses of litigation in the sum of P10,000.00 (Amended Record on Appeal, p. 123). On November 22, 1969 the Court of First Instance of Manila, Branch VIII rendered its decision ** in favor of defendant Marimperio Compania Naviera, S.A., petitioner herein, and against plaintiffs Union Import and Export Corporation and Philippine Traders Corporation, respondents herein, dismissing the amended complaint, and ordering said plaintiff on the counterclaim to pay defendant, jointly and severally, the amount of f 8,011.38 or its equivalent in Philippine currency of P75,303.40, at the exchange rate of P9.40 to 1 for the unearned charter hire due to the attachment of the vessel "PAXOI" in Davao, plus premiums paid on the counterbond as of April 22,


1968 plus the telex and cable charges and the sum of P10,000.00 as attorney's fees and costs. The trial court dismissed the complaint-in-intervention, ordering the intervenor, on the counterclaim, to pay defendant the sum of P10,000.00 as attorney's fees, and the costs (Amended Record on Appeal, p. 315). Plaintiffs filed a Motion for Reconsideration and/or new trial of the decision of the trial court on December 23, 1969 (Amended Record on Appeal, p. 286); the intervenor filed its motion for reconsideration and/or new trial on January 7, 1970 (Amended Record on Appeal, p. 315). Acting on the two motions for reconsideration, the trial court reversed its stand in its amended decision dated January 24, 1978. The dispositive portion of the amended decision states: FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment for the plaintiffs Union Import & Export Corporation and Philin Traders Corporation, and plaintiff-in-intervention, Interocean Shipping Corporation, and consequently orders the defendant, Marimperio Compania Naveria S.A.: (1) To pay plaintiffs the sum of US$22,500.00 representing the remittance of plaintiffs to said defendant for the first 15-day hire of the vessel "SS PAXOI" including overtime and an overpayment of US$254.00; (2) To pay plaintiffs the sum of US$16,000.00 corresponding to the remittance of plaintiffs to defendant for the second 15-day hire of the aforesaid vessel; (3) To pay plaintiffs the sum of US$6,982.72 representing the cost of bunker oil, survey and watering of the said vessel; (4) To pay plaintiffs the sum of US$220,0,00.00 representing the unrealized profits; and (5) To pay plaintiffs the sum of P100,000.00, as and for attorney's fees (Moran, Comments on the Rules of Court, Vol. III, 1957 5d 644, citing Haussermann vs. Rahmayer, 12 Phil. 350; and others)" (Francisco vs. Matias, G.R. No. L-16349, January 31, 1964; Sison vs. Suntay, G.R. No. L-1000 . December 28, 1957). The Court further orders defendant to pay plaintiff-in-

intervention the amount of P15,450.44, representing the latter's commission as broker, with interest thereon at 6% per annum from the date of the filing of the complaint-in-intervention, until fully paid, plus the sum of P2,000.00 as attorney's fees. The Court finally orders the defendant to pay the costs. In view of the above conclusion, the Court orders the dismissal of the counterclaims filed by defendant against the plaintiffs and plaintiff-inintervention, as wen as its motion for the award of damages in connection with the issuance of the writ of preliminary attachment. Defendant (petitioner herein), filed a motion for reconsideration and/or new trial of the amended decision on February 19, 1970 (Amended Record on Appeal, p. 382). Meanwhile a new Judge was assigned to the Trial Court (Amended Record on Appeal, p. 541). On September 10, 1970 the trial court issued its order of September 10, 1970 *** denying defendant's motion for reconsideration (Amended Record on Appeal, p. 583). On Appeal, the Court of Appeals affirmed the amended decision of the lower court except the portion granting commission to the intervenor- appellee, which it reversed thereby dismissing the complaint-inintervention. Its two motions (1) for reconsideration and/or new trial and (2) for new trial having been denied by the Court of Appeals in its Resolution of February 17, 1975 which, however, fixed the amount of attorney's fees at P100,000.00 instead of $100,000.00 (Rollo, p. 81), petitioner filed with this Court its petition for review on certiorari on March 19, 197 5 (Rollo, p. 86). After deliberating on the petition, the Court resolved to require the respondents to comment thereon, in its resolution dated April 2, 1975 (rollo, p. 225). The comment on petition for review by certiorari was filed by respondents on April 21, 1975, praying that the petition for review by certiorari dated March 18, 1975 be dismissed for lack of merit Rollo p. 226). The reply to comment was filed on May 8, 1975 (Rollo, p. 259). The rejoinder to reply to comment was filed on May 13, 197 5 (Rollo, p. 264).


On October 20, 1975, the Court resolved (a) to give due course to the petition; (b) to treat the petition for review as a special civil action; and (c) to require both parties to submit their respective memoranda within thirty (30) days from notice hereof (Rollo, p. 27). Respondents filed their memoranda on January 27, 1976 (Rollo, p. 290); petitioner, on February 26, 1976 (Rollo, p. 338). Respondents' reply memorandum was filed on April 14, 1976 (Rollo, p. 413) and Rejoinder to respondents' reply memorandum was filed on May 28, 1976 (Rollo, p. 460). On June 11, 1976, the Court resolved to admit petitioner's rejoinder to respondents' reply memorandum and to declare this case submitted for decision (Rollo, p. 489). The main issues raised by petitioner are: 1. Whether or not respondents have the legal capacity to bring the suit for specific performance against petitioner based on the charter party, and 2. Whether or not the default of Charterer in the payment of the charter hire within the time agreed upon gives petitioner a right to rescind the charter party extra judicially. I. According to Article 1311 of the Civil Code, a contract takes effect between the parties who made it, and also their assigns and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. Since a contract may be violated only by the parties, thereto as against each other, in an action upon that contract, the real parties in interest, either as plaintiff or as defendant, must be parties to said contract. Therefore, a party who has not taken part in it cannot sue or be sued for performance or for cancellation thereof, unless he shows that he has a real interest affected thereby (Macias & Co. v. Warner Barners & Co., 43 Phil. 155 [1922] and Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125 [1951]; Coquia v. Fieldmen's Insurance Co., Inc., 26 SCRA 178 [1968]). It is undisputed that the charter party, basis of the complaint, was

entered into between petitioner Marimperio Compañia Naviera, S.A., through its duly authorized agent in London, the N & J Vlassopulos Ltd., and the Interocean Shipping Company of Manila through the latter's duly authorized broker, the Overseas Steamship Co., Inc., represented by Matthews, Wrightson Burbridge Ltd., for the Charter of the 'SS PAXOI' (Amended Complaint, Amended Record on Appeal, p. 33; Complaint-inIntervention, Amended Record on Appeal, p. 87). It is also alleged in both the Complaint (Amended Record on Appeal 18) and the Amended Complaint (Amended Record on Appeal, p. 39) that the Interocean Shipping Company sublet the said vessel to respondent Union Import and Export Corporation which in turn sublet the same to respondent Philippine Traders Corporation. It is admitted by respondents that the charterer is the Interocean Shipping Company. Even paragraph 3 of the complaint-inintervention alleges that respondents were given the use of the vessel "pursuant to paragraph 20 of the Uniform Time Charter ..." which precisely provides for the subletting of the vessel by the charterer (Rollo, p. 24). Furthermore, Article 652 of the Code of Commerce provides that the charter party shall contain, among others, the name, surname, and domicile of the charterer, and if he states that he is acting by commission, that of the person for whose account he makes the contract. It is obvious from the disclosure made in the charter party by the authorized broker, the Overseas Steamship Co., Inc., that the real charterer is the Interocean Shipping Company (which sublet the vessel to Union Import and Export Corporation which in turn sublet it to Philippine Traders Corporation). In a sub-lease, there are two leases and two distinct judicial relations although intimately connected and related to each other, unlike in a case of assignment of lease, where the lessee transmits absolutely his right, and his personality disappears; there only remains in the juridical relation two persons, the lessor and the assignee who is converted into a lessee (Moreno, Philippine Law Dictionary, 2nd ed., p. 594). In other words, in a contract of sub-lease, the personality of the lessee does not


disappear; he does not transmit absolutely his rights and obligations to the sub-lessee; and the sub-lessee generally does not have any direct action against the owner of the premises as lessor, to require the compliance of the obligations contracted with the plaintiff as lessee, or vice versa (10 Manresa, Spanish Civil Code, 438). However, there are at least two instances in the Civil Code which allow the lessor to bring an action directly (accion directa) against the sub-lessee (use and preservation of the premises under Art. 1651, and rentals under Article 1652). Art. 1651 reads: Without prejudice to his obligation toward the sub-lessor, the sub-lessee is bound to the lessor for all acts which refer to the use and preservation of the thing leased in the manner stipulated between the lessor and the lessee. Article 1652 reads: The sub-lessee is subsidiarily liable to the lessor for any rent due from the lessee. However, the sub-lessee shall not be responsible beyond the amount of rent due from him, in accordance with the terms of the sub-lease, at the time of the extra-judicial demand by the lessor. Payments of rent in advance by the sub-lessee shall be deemed not to have been made, so far as the lessor's claim is concerned, unless said payments were effected in virtue of the custom of the place. It will be noted however that in said two Articles it is not the sublessee, but the lessor, who can bring the action. In the instant case, it is clear that the sub-lessee as such cannot maintain the suit they filed with the trial court (See A. Maluenda and Co. v. Enriquez, 46 Phil. 916). In the law of agency "with an undisclosed principal, the Civil Code in Article 1883 reads: If an agent acts in his own name, the principal has no right of action against the persons with whom the agent has contracted; neither have such persons against the principal. In such case the agent is the one directly bound in favor of the

person with whom he has contracted, as if the transaction were his own, except when the contract involves things belonging to the principal. The provisions of this article shag be understood to be without prejudice to the actions between the principal and agent. While in the instant case, the true charterers of the vessel were the private respondents herein and they chartered the vessel through an intermediary which upon instructions from them did not disclose their names. Article 1883 cannot help the private respondents, because although they were the actual principals in the charter of the vessel, the law does not allow them to bring any action against the adverse party and vice, versa. II. The answer to the question of whether or not the default of charterer in the payment of the charter hire within the time agreed upon gives petitioner a right to rescind the charter party extrajudicially, is undoubtedly in the affirmative. Clause 6 of the Charter party specifically provides that the petitioner has the right to withdraw the vessel fromthe service of the charterers, without noting any protest and without interference of any court or any formality in the event that the charterer defaults in the payment of hire. The payment of hire was to be made every fifteen (1 5) days in advance. It is undisputed that the vessel "SS PAXOI" came on hire on March 27, 1965. On March 29, Vlassopulos notified by letter the charterer through Matthews of that fact, enclosing therein owner's debit note for a 15-day hire payable in advance. On March 30, 1965 the shipowner again notified Matthews that the payment for the first 15-day hire was overdue. Again on April 2 the shipowner telexed Matthews insisting on the payment, but it was only on April 7 that the amount of US $22,500.00 was remitted to Williams Deacons Bank, Ltd. through the Rizal Commercial Banking Corporation for the account of Vlassopulos, agent of petitioner, corresponding to the first 15-day hire from March 27 to April 11, 1965. On April 8, 1965, Vlassopulos acknowledged receipt of the


payment, again with a debit note for the second 15-day hire and overtime which was due on April 11, 1965. On April 23, 1965, Vlassopulos notified Matthews by telex that charterers were in default and in accordance with Clause 6 of the charter party, the vessel was being withdrawn from charterer's service, holding them responsible for unpaid hire and all other legal claims of the owner. Respondents remitted the sum of US$6,000.00 and US$10,000.00 to the bank only on April 26, 1965 representing payment for the second 15-day hire from April 12 to April 27, 1965, received and accepted by the payee, Vlassopulos without any comment or protest. Unquestionably, as of April 23, 1965, when Vlassopulos notified Matthews of the withdrawal of the vessel from the Charterers' service, the latter was already in default. Accordingly, under Clause 6 of the charter party the owners had the right to withdraw " SS PAXO I " from the service of charterers, which withdrawal they did. The question that now arises is whether or not petitioner can rescind the charter party extra-judicially. The answer is also in the affirmative. A contract is the law between the contracting parties, and when there is nothing in it which is contrary to law, morals, good customs, public policy or public order, the validity of the contract must be sustained (Consolidated Textile Mills, Inc. v. Reparations Commission, 22 SCRA 674 [19681; Lazo v. Republic Surety & Insurance Co., Inc., 31 SCRA 329 [1970]; Castro v. Court of Appeals, 99 SCRA 722 [1980]; Escano v. Court of Appeals, 100 SCRA 197 [1980]). A judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions (Enrile v. Court of Appeals, 29 SCRA 504 [1969]; University of the Philippines v. De los Angeles, 35 SCRA 102 [1970]; Palay, Inc. v. Clave, 124 SCRA 638 [1983]). PREMISES CONSIDERED, (1) the decision of the Court of Appeals affirming the amended decision of the Court of First Instance of Manila, Branch VIII, is hereby REVERSED and SET ASIDE except for that portion of the decision dismissing the complaint-in-

intervention; and (2) the original decision of the trial court is hereby REINSTATED. SO ORDERED. Teehankee, C.J., Narvasa, Cruz and Gancayco, JJ., concur. 134. G.R. No. L-13505 February 4, 1919 GEO. W. DAYWALT, plaintiff-appellant, vs. LA CORPORACION DE LOS PADRES AGUSTINOS RECOLETOS, ET AL., defendants-appellees. C. C. Cohn and Thos. D. Aitken for appellant. Crossfield & O'Brien for appellee. STREET, J.: In the year 1902, Teodorica Endencia, an unmarried woman, resident in the Province of Mindoro, executed a contract whereby she obligated herself to convey to Geo. W. Daywalt, a tract of land situated in the barrio of Mangarin, municipality of Bulalacao, now San Jose, in said province. It was agreed that a deed should be executed as soon as the title to the land should be perfected by proceedings in the Court of Land Registration and a Torrens certificate should be produced therefore in the name of Teodorica Endencia. A decree recognizing the right of Teodorica as owner was entered in said court in August 1906, but the Torrens certificate was not issued until later. The parties, however, met immediately upon the entering of this decree and made a new contract with a view to carrying their original agreement into effect. This new contract was executed in the form of a deed of conveyance and bears date of August 16, 1906. The stipulated price was fixed at P4,000, and the area of the land enclosed in the boundaries defined in the contract was stated to be 452 hectares and a fraction. The second contract was not immediately carried into effect for


the reason that the Torrens certificate was not yet obtainable and in fact said certificate was not issued until the period of performance contemplated in the contract had expired. Accordingly, upon October 3, 1908, the parties entered into still another agreement, superseding the old, by which Teodorica Endencia agreed upon receiving the Torrens title to the land in question, to deliver the same to the Hongkong and Shanghai Bank in Manila, to be forwarded to the Crocker National Bank in San Francisco, where it was to be delivered to the plaintiff upon payment of a balance of P3,100. The Torrens certificate was in time issued to Teodorica Endencia, but in the course of the proceedings relative to the registration of the land, it was found by official survey that the area of the tract inclosed in the boundaries stated in the contract was about 1.248 hectares of 452 hectares as stated in the contract. In view of this development Teodorica Endencia became reluctant to transfer the whole tract to the purchaser, asserting that she never intended to sell so large an amount of land and that she had been misinformed as to its area. This attitude of hers led to litigation in which Daywalt finally succeeded, upon appeal to the Supreme Court, in obtaining a decree for specific performance; and Teodorica Endencia was ordered to convey the entire tract of land to Daywalt pursuant to the contract of October 3, 1908, which contract was declared to be in full force and effect. This decree appears to have become finally effective in the early part of the year 1914.1 The defendant, La Corporacion de los Padres Recoletos, is a religious corporation, with its domicile in the city of Manila. Said corporation was formerly the owner of a large tract of land, known as the San Jose Estate, on the island of Mindoro, which was sold to the Government of the Philippine Islands in the year 1909. The same corporation was at this time also the owner of another estate on the same island immediately adjacent to the land which Teodorica Endencia had sold to Geo. W. Daywalt; and for many years the Recoletos Fathers had maintained large herds of cattle on the farms referred to. Their representative, charged

with management of these farms, was father Isidoro Sanz, himself a members of the order. Father Sanz had long been well acquainted with Teodorica Endencia and exerted over her an influence and ascendency due to his religious character as well as to the personal friendship which existed between them. Teodorica appears to be a woman of little personal force, easily subject to influence, and upon all the important matters of business was accustomed to seek, and was given, the advice of father Sanz and other members of his order with whom she came in contact. Father Sanz was fully aware of the existence of the contract of 1902 by which Teodorica Endencia agreed to sell her land to the plaintiff as well as of the later important developments connected with the history of that contract and the contract substituted successively for it; and in particular Father Sanz, as well as other members of the defendant corporation, knew of the existence of the contract of October 3, 1908, which, as we have already seen finally fixed the rights of the parties to the property in question. When the Torrens certificate was finally issued in 1909 in favor of Teodorica Endencia, she delivered it for safekeeping to the defendant corporation, and it was then taken to Manila where it remained in the custody and under the control of P. Juan Labarga the procurador and chief official of the defendant corporation, until the deliver thereof to the plaintiff was made compulsory by reason of the decree of the Supreme Court in 1914. When the defendant corporation sold the San Jose Estate, it was necessary to bring the cattle off of that property; and, in the first half of 1909, some 2,368 head were removed to the estate of the corporation immediately adjacent to the property which the plaintiff had purchased from Teodorica Endencia. As Teodorica still retained possession of said property Father Sanz entered into an arrangement with her whereby large numbers of cattle belonging to the defendant corporation were pastured upon said land during a period extending from June 1, 1909, to May 1, 1914. Under the first cause stated in the complaint in the present action the plaintiff seeks to recover from the defendant corporation the


sum of P24,000, as damages for the use and occupation of the land in question by reason of the pasturing of cattle thereon during the period stated. The trial court came to the conclusion that the defendant corporation was liable for damages by reason of the use and occupation of the premises in the manner stated; and fixed the amount to be recovered at P2,497. The plaintiff appealed and has assigned error to this part of the judgment of the court below, insisting that damages should have been awarded in a much larger sum and at least to the full extent of P24,000, the amount claimed in the complaint. As the defendant did not appeal, the property of allowing damages for the use and occupation of the land to the extent o P2,497, the amount awarded, is not now in question an the only thing here to be considered, in connection with this branch of the case, is whether the damages allowed under this head should be increased. The trial court rightly ignored the fact that the defendant corporation had paid Teodorica Endencia of ruse and occupation of the same land during the period in question at the rate of P425 per annum, inasmuch as the final decree of this court in the action for specific performance is conclusive against her right, and as the defendant corporation had notice of the rights of the plaintiff under this contract of purchase, it can not be permitted that the corporation should escape liability in this action by proving payment of rent to a person other than the true owner. With reference to the rate of which compensation should be estimated the trial court came to the following conclusion: As to the rate of the compensation, the plaintiff contends that the defendant corporation maintained at leas one thousand head of cattle on the land and that the pasturage was of the value of forty centavos per head monthly, or P4,800 annually, for the whole tract. The court can not accept this view. It is rather improbable that 1,248 hectares of wild Mindoro land would furnish sufficient pasturage for one thousand head of cattle during the entire year, and, considering the locality, the rate of forty centavos per head monthly seems too high. The evidence shows that after having

recovered possession of the land the plaintiff rented it to the defendant corporation for fifty centavos per hectares annually, the tenant to pay the taxes on the land, and this appears to be a reasonable rent. There is no reason to suppose that the land was worth more for grazing purposes during the period from 1909 to 1913, than it was at the later period. Upon this basis the plaintiff is entitled to damages in the sum of p2,497, and is under no obligation to reimburse the defendants for the land taxes paid by either of them during the period the land was occupied by the defendant corporation. It may be mentioned in this connection that the Lontok tract adjoining the land in question and containing over three thousand hectares appears to have been leased for only P1,000 a year, plus the taxes. From this it will be seen that the trial court estimated the rental value of the land for grazing purposes at 50 centavos per hectare per annum, and roughly adopted the period of four years as the time for which compensation at that rate should be made. As the court had already found that the defendant was liable for these damages from June, 1, 1909, to May 1, 1914, or a period of four years and eleven months, there seems some ground for the contention made in the appellant's first assignment of error that the court's computation was erroneous, even accepting the rule upon which the damages were assessed, as it is manifest that at the rate of 50 centavos per hectare per annum, the damages for four years and eleven months would be P3,090. Notwithstanding this circumstance, we are of the opinion that the damages assessed are sufficient to compensate the plaintiff for the use and occupation of the land during the whole time it was used. There is evidence in the record strongly tending to show that the wrongful use of the land by the defendant was not continuous throughout the year but was confined mostly to the reason when the forage obtainable on the land of the defendant corporation was not sufficient to maintain its cattle, for which reason it became necessary to allow them to go over to pasture on the land in question; and it is not clear that the whole of the land was used for pasturage at any time. Considerations of this


character probably led the trial court to adopt four years as roughly being the period during which compensation should be allowed. But whether this was advertently done or not, we see no sufficient reason, in the uncertainty of the record with reference to the number of the cattle grazed and the period when the land was used, for substituting our guess for the estimate made by the trial court. In the second cause of action stated in the complaint the plaintiff seeks to recover from the defendant corporation the sum of P500,000, as damages, on the ground that said corporation, for its own selfish purposes, unlawfully induced Teodorica Endencia to refrain from the performance of her contract for the sale of the land in question and to withhold delivery to the plaintiff of the Torrens title, and further, maliciously and without reasonable cause, maintained her in her defense to the action of specific performance which was finally decided in favor of the plaintiff in this court. The cause of action here stated is based on liability derived from the wrongful interference of the defendant in the performance of the contract between the plaintiff and Teodorica Endencia; and the large damages laid in the complaint were, according to the proof submitted by the plaintiff, incurred as a result of a combination of circumstances of the following nature: In 1911, it appears, the plaintiff, as the owner of the land which he had bought from Teodorica Endencia entered into a contract (Exhibit C) with S. B. Wakefield, of San Francisco, for the sale and disposal of said lands to a sugar growing and milling enterprise, the successful launching of which depended on the ability of Daywalt to get possession of the land and the Torrens certificate of title. In order to accomplish this end, the plaintiff returned to the Philippine Islands, communicated his arrangement to the defendant,, and made repeated efforts to secure the registered title for delivery in compliance with said agreement with Wakefield. Teodorica Endencia seems to have yielded her consent to the consummation of her contract, but the Torrens title was then in the possession of Padre Juan Labarga in Manila, who refused to deliver the document. Teodorica also was in the

end contract with the plaintiff, with the result that the plaintiff was kept out of possession until the Wakefield project for the establishment of a large sugar growing and milling enterprise fell through. In the light of what has happened in recent years in the sugar industry, we feel justified in saying that the project above referred to, if carried into effect, must inevitably have proved a great success. The determination of the issue presented in this second cause of action requires a consideration of two points. The first is whether a person who is not a party to a contract for the sale of land makes himself liable for damages to the vendee, beyond the value of the use and occupation, by colluding with the vendor and maintaining him in the effort to resist an action for specific performance. The second is whether the damages which the plaintiff seeks to recover under this head are too remote and speculative to be the subject of recovery. As preliminary to a consideration of the first of these questions, we deem it well it dispose of the contention that the members of the defendants corporation, in advising and prompting Teodorica Endencia not to comply with the contract of sale, were actuated by improper and malicious motives. The trial court found that this contention was not sustained, observing that while it was true that the circumstances pointed to an entire sympathy on the part of the defendant corporation with the efforts of Teodorica Endencia to defeat the plaintiff's claim to the land, the fact that its officials may have advised her not to carry the contract into effect would not constitute actionable interference with such contract. It may be added that when one considers the hardship that the ultimate performance of that contract entailed on the vendor, and the doubt in which the issue was involved — to the extent that the decision of the Court of the First Instance was unfavorable to the plaintiff and the Supreme Court itself was divided — the attitude of the defendant corporation, as exhibited in the conduct of its procurador, Juan Labarga, and other members of the order of the Recollect Fathers, is not difficult to understand. To our mind a fair conclusion on this feature of the case is that father


Juan Labarga and his associates believed in good faith that the contract cold not be enforced and that Teodorica would be wronged if it should be carried into effect. Any advice or assistance which they may have given was, therefore, prompted by no mean or improper motive. It is not, in our opinion, to be denied that Teodorica would have surrendered the documents of title and given possession of the land but for the influence and promptings of members of the defendants corporation. But we do not credit the idea that they were in any degree influenced to the giving of such advice by the desire to secure to themselves the paltry privilege of grazing their cattle upon the land in question to the prejudice of the just rights of the plaintiff. The attorney for the plaintiff maintains that, by interfering in the performance of the contract in question and obstructing the plaintiff in his efforts to secure the certificate of tittle to the land, the defendant corporation made itself a co-participant with Teodorica Endencia in the breach of said contract; and inasmuch as father Juan Labarga, at the time of said unlawful intervention between the contracting parties, was fully aware of the existence of the contract (Exhibit C) which the plaintiff had made with S. B. Wakefield, of San Francisco, it is insisted that the defendant corporation is liable for the loss consequent upon the failure of the project outlined in said contract. In this connection reliance is placed by the plaintiff upon certain American and English decisions in which it is held that a person who is a stranger to contract may, by an unjustifiable interference in the performance thereof, render himself liable for the damages consequent upon non-performance. It is said that the doctrine of these cases was recognized by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542); and we have been earnestly pressed to extend the rule there enunciated to the situation here presente. Somewhat more than half a century ago the English Court of the Queen's Bench saw its way clear to permit an action for damages to be maintained against a stranger to a contract wrongfully interfering in its performance. The leading case on this subject is

Lumley vs. Gye ([1853], 2 El. & Bl., 216). It there appeared that the plaintiff, as manager of a theatre, had entered into a contract with Miss Johanna Wagner, an opera singer,, whereby she bound herself for a period to sing in the plaintiff's theatre and nowhere else. The defendant, knowing of the existence of this contract, and, as the declaration alleged, "maliciously intending to injure the plaintiff," enticed and produced Miss Wagner to leave the plaintiff's employment. It was held that the plaintiff was entitled to recover damages. The right which was here recognized had its origin in a rule, long familiar to the courts of the common law, to the effect that any person who entices a servant from his employment is liable in damages to the master. The master's interest in the service rendered by his employee is here considered as a distinct subject of juridical right. It being thus accepted that it is a legal wrong to break up a relation of personal service, the question now arose whether it is illegal for one person to interfere with any contract relation subsisting between others. Prior to the decision of Lumley vs. Gye [supra] it had been supposed that the liability here under consideration was limited to the cases of the enticement of menial servants, apprentices, and others to whom the English Statutes of Laborers were applicable. But in the case cited the majority of the judges concurred in the opinion that the principle extended to all cases of hiring. This doctrine was followed by the Court of Appeal in Bowen vs. Hall ([1881], 6 Q. B., Div., 333); and in Temperton vs. Russell ([1893], Q. B., 715), it was held that the right of action for maliciously procuring a breach of contract is not confined to contracts for personal services, but extends to contracts in general. In that case the contract which the defendant had procured to be breached was a contract for the supply of building material. Malice in some form is generally supposed to be an essential ingredient in cases of interference with contract relations. But upon the authorities it is enough if the wrong-doer, having knowledge of the existence of the contract relations, in bad faith sets about to break it up. Whether his motive is to benefit himself


or gratify his spite by working mischief to the employer is immaterial. Malice in the sense of ill-will or spite is not essential. Upon the question as to what constitutes legal justification, a good illustration was put in the leading case. If a party enters into contract to go for another upon a journey to a remote and unhealthful climate, and a third person, with a bona fide purpose of benefiting the one who is under contract to go, dissuades him from the step, no action will lie. But if the advice is not disinterested and the persuasion is used for "the indirect purpose of benefiting the defendant at the expense of the plaintiff," the intermedler is liable if his advice is taken and the contract broken. The doctrine embodied in the cases just cited has sometimes been found useful, in the complicated relations of modern industry, as a means of restraining the activities of labor unions and industrial societies when improperly engaged in the promotion of strikes. An illustration of the application of the doctrine in question in a case of this kind is found in South Wales Miners Federation vs. Glamorgan Coal Co. ([1905]), A. C., 239). It there appeared that certain miners employed in the plaintiff's collieries, acting under the order of the executive council of the defendant federation, violated their contract with the plaintiff by abstaining from work on certain days. The federation and council acted without any actual malice or ill-will towards the plaintiff, and the only object of the order in question was that the price of coal might thereby be kept up, a factor which affected the miner's wage scale. It was held that no sufficient justification was shown and that the federation was liable. In the United States, the rule established in England by Lumley vs. Gye [supra] and subsequent cases is commonly accepted, though in a few of the States the broad idea that a stranger to a contract can be held liable upon its is rejected, and in these jurisdictions the doctrine, if accepted at all, is limited to the situation where the contract is strictly for personal service. (Boyson vs. Thorn, 98 Cal., 578; Chambers & Marshall vs. Baldwin 91 Ky., 121; Bourlier vs. Macauley, 91 Ky., 135; Glencoe Land & Gravel Co. vs. Hudson

Bros. Com. Co., 138 Mo., 439.) It should be observed in this connection that, according to the English and American authorities, no question can be made as to the liability to one who interferes with a contract existing between others by means which, under known legal cannons, can be denominated an unlawful means. Thus, if performance is prevented by force, intimidation, coercion, or threats, or by false or defamatory statements, or by nuisance or riot, the person using such unlawful means is, under all the authorities, liable for the damage which ensues. And in jurisdictions where the doctrine of Lumley vs. Gye [supra] is rejected, no liability can arise from a meddlesome and malicious interference with a contract relation unless some such unlawful means as those just indicated are used. (See cases last above cited.) This brings us to the decision made by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542). It there appeared that one Cuddy, the owner of a cinematographic film, let it under a rental contract to the plaintiff Gilchrist for a specified period of time. In violation of the terms of this agreement, Cuddy proceeded to turn over the film also under a rental contract, to the defendants Espejo and Zaldarriaga. Gilchrist thereupon restored to the Court of First Instance and produced an injunction restraining the defendants from exhibiting the film in question in their theater during the period specified in the contract of Cuddy with Gilchrist. Upon appeal to this court it was in effect held that the injunction was not improperly granted, although the defendants did not, at the time their contract was made, know the identity of the plaintiff as the person holding the prior contract but did know of the existence of a contract in favor of someone. It was also said arguendo, that the defendants would have been liable in damages under article 1902 of the Civil Code, if the action had been brought by the plaintiff to recover damages. The force of the opinion is, we think, somewhat weakened by the criticism contain in the concurring opinion, where it is said that the question of breach of contract by inducement was not really involved in the case. Taking the decision upon the point which


was rally decided, it is authority for the proposition that one who buys something which he knows has been sold to some other person can be restrained from using that thing to the prejudice of the person having the prior and better right. Translated into terms applicable to the case at bar, the decision in Gilchrist vs. Cuddy (29 Phil. Rep., 542), indicates that the defendant corporation, having notice of the sale of the land in question to Daywalt, might have been enjoined by the latter from using the property for grazing its cattle thereon. That the defendant corporation is also liable in this action for the damage resulting to the plaintiff from the wrongful use and occupation of the property has also been already determined. But it will be observed that in order to sustain this liability it is not necessary to resort to any subtle exegesis relative to the liability of a stranger to a contract for unlawful interference in the performance thereof. It is enough that defendant use the property with notice that the plaintiff had a prior and better right. Article 1902 of the Civil Code declares that any person who by an act or omission, characterized by fault or negligence, causes damage to another shall be liable for the damage so done. Ignoring so much of this article as relates to liability for negligence, we take the rule to be that a person is liable for damage done to another by any culpable act; and by "culpable act" we mean any act which is blameworthy when judged by accepted legal standards. The idea thus expressed is undoubtedly broad enough to include any rational conception of liability for the tortious acts likely to be developed in any society. Thus considered, it cannot be said that the doctrine of Lumley vs. Gye [supra] and related cases is repugnant to the principles of the civil law. Nevertheless, it must be admitted that the codes and jurisprudence of the civil law furnish a somewhat uncongenial field in which to propagate the idea that a stranger to a contract may sued for the breach thereof. Article 1257 of the Civil Code declares that contracts are binding only between the parties and

their privies. In conformity with this it has been held that a stranger to a contract has no right of action for the nonfulfillment of the contract except in the case especially contemplated in the second paragraph of the same article. (Uy Tam and Uy Yet vs. Leonard, 30 Phil. Rep., 471.) As observed by this court in Manila Railroad Co. vs. Compañia Transatlantica, R. G. No. 11318 (38 Phil. Rep., 875), a contract, when effectually entered into between certain parties, determines not only the character and extent of the liability of the contracting parties but also the person or entity by whom the obligation is exigible. The same idea should apparently be applicable with respect to the person against whom the obligation of the contract may be enforced; for it is evident that there must be a certain mutuality in the obligation, and if the stranger to a contract is not permitted to sue to enforce it, he cannot consistently be held liable upon it. If the two antagonistic ideas which we have just brought into juxtaposition are capable of reconciliation, the process must be accomplished by distinguishing clearly between the right of action arising from the improper interference with the contract by a stranger thereto, considered as an independent act generate of civil liability, and the right of action ex contractu against a party to the contract resulting from the breach thereof. However, we do not propose here to pursue the matter further, inasmuch as, for reasons presently to be stated, we are of the opinion that neither the doctrine of Lumley vs. Gye [supra] nor the application made of it by this court in Gilchrist vs. Cuddy (29 Phil. Rep., 542), affords any basis for the recovery of the damages which the plaintiff is supposed to have suffered by reason of his inability to comply with the terms of the Wakefield contract. Whatever may be the character of the liability which a stranger to a contract may incur by advising or assisting one of the parties to evade performance, there is one proposition upon which all must agree. This is, that the stranger cannot become more extensively liable in damages for the nonperformance of the contract than the party in whose behalf he intermeddles. To hold the stranger liable for damages in excess of those that could be recovered


against the immediate party to the contract would lead to results at once grotesque and unjust. In the case at bar, as Teodorica Endencia was the party directly bound by the contract, it is obvious that the liability of the defendant corporation, even admitting that it has made itself coparticipant in the breach of the contract, can in no even exceed hers. This leads us to consider at this point the extent of the liability of Teodorica Endencia to the plaintiff by reason of her failure to surrender the certificate of title and to place the plaintiff in possession. It should in the first place be noted that the liability of Teodorica Endencia for damages resulting from the breach of her contract with Daywalt was a proper subject for adjudication in the action for specific performance which Daywalt instituted against her in 1909 and which was litigated by him to a successful conclusion in this court, but without obtaining any special adjudication with reference to damages. Indemnification for damages resulting from the breach of a contract is a right inseparably annexed to every action for the fulfillment of the obligation (art. 1124, Civil Code); and its is clear that if damages are not sought or recovered in the action to enforce performance they cannot be recovered in an independent action. As to Teodorica Endencia, therefore, it should be considered that the right of action to recover damages for the breach of the contract in question was exhausted in the prior suit. However, her attorneys have not seen fit to interpose the defense of res judicata in her behalf; and as the defendant corporation was not a party to that action, and such defense could not in any event be of any avail to it, we proceed to consider the question of the liability of Teodorica Endencia for damages without refernce to this point. The most that can be said with refernce to the conduct of Teodorica Endencia is that she refused to carry out a contract for the sale of certain land and resisted to the last an action for specific performance in court. The result was that the plaintiff was prevented during a period of several years from exerting that control over the property which he was entitled to exert and was meanwhile unable to dispose of the property

advantageously. Now, what is the measure of damages for the wrongful detention of real property by the vender after the time has come for him to place the purchaser in possession? The damages ordinarily and normally recoverable against a vendor for failure to deliver land which he has contracted to deliver is the value of the use and occupation of the land for the time during which it is wrongfully withheld. And of course where the purchaser has not paid the purchaser money, a deduction may be made in respect to the interest on the money which constitutes the purchase price. Substantially the same rule holds with respect to the liability of a landlord who fails to put his tenant in possession pursuant to contract of lease. The measure of damages is the value of the leasehold interest, or use and occupation, less the stipulated rent, where this has not been paid. The rule that the measure of damages for the wrongful detention of land is normally to be found in the value of use and occupation is, we believe, one of the things that may be considered certain in the law (39 cyc., 1630; 24 Cyc., 1052 Sedgewick on Damages, Ninth ed., sec. 185.) — almost as wellsettled, indeed, as the rule that the measure of damages for the wrongful detention of money is to be found in the interest. We recognize the possibility that more extensive damages may be recovered where, at the time of the creation of the contractual obligation, the vendor, or lessor, is aware of the use to which the purchaser or lessee desires to put the property which is the subject of the contract, and the contract is made with the eyes of the vendor or lessor open to the possibility of the damage which may result to the other party from his own failure to give possession. The case before us is not this character, inasmuch as at the time when the rights of the parties under the contract were determined, nothing was known to any to them about the San Francisco capitalist who would be willing to back the project portrayed in Exhibit C. The extent of the liability for the breach of a contract must be determined in the light of the situation in existence at the time the contract is made; and the damages ordinarily recoverable are


in all events limited to such as might be reasonable are in all events limited to such as might be reasonably foreseen in the light of the facts then known to the contracting parties. Where the purchaser desires to protect himself, in the contingency of the failure of the vendor promptly to give possession, from the possibility of incurring other damages than such as the incident to the normal value of the use and occupation, he should cause to be inserted in the contract a clause providing for stipulated amount to the paid upon failure of the vendor to give possession; and not case has been called to our attention where, in the absence of such a stipulation, damages have been held to be recoverable by the purchaser in excess of the normal value of use and occupation. On the contrary, the most fundamental conceptions of the law relative to the assessment of damages are inconsistent with such idea. The principles governing this branch of the law were profoundly considered in the case Hadley vs. Baxendale (9 Exch., 341), decided in the English Court of Exchequer in 1854; and a few words relative to the principles governing will here be found instructive. The decision in that case is considered a leading authority in the jurisprudence of the common law. The plaintiffs in that case were proprietors of a mill in Gloucester, which was propelled by steam, and which was engaged in grinding and supplying meal and flour to customers. The shaft of the engine got broken, and it became necessarily that the broken shaft be sent to an engineer or foundry man at Greenwich, to serve as a model for casting or manufacturing another that would fit into the machinery. The broken shaft could be delivered at Greenwich on the second day after its receipts by the carrier it. It was delivered to the defendants, who were common carriers engaged in that business between these points, and who had told plaintiffs it would be delivered at Greenwich on the second day after its delivery to them, if delivered at a given hour. The carriers were informed that the mill was stopped, but were not informed of the special purpose for which the broken shaft was desired to forwarded, They were not told the mill would remain idle until

the new shaft would be returned, or that the new shaft could not be manufactured at Greenwich until the broken one arrived to serve as a model. There was delay beyond the two days in delivering the broken shaft at Greenwich, and a corresponding delay in starting the mill. No explanation of the delay was offered by the carriers. The suit was brought to recover damages for the lost profits of the mill, cause by the delay in delivering the broken shaft. It was held that the plaintiff could not recover. The discussion contained in the opinion of the court in that case leads to the conclusion that the damages recoverable in case of the breach of a contract are two sorts, namely, (1) the ordinary, natural, and in a sense necessary damage; and (2) special damages. Ordinary damages is found in all breaches of contract where the are no special circumstances to distinguish the case specially from other contracts. The consideration paid for an unperformed promise is an instance of this sort of damage. In all such cases the damages recoverable are such as naturally and generally would result from such a breach, "according to the usual course of things." In case involving only ordinary damage no discussion is ever indulged as to whether that damage was contemplated or not. This is conclusively presumed from the immediateness and inevitableness of the damage, and the recovery of such damage follows as a necessary legal consequence of the breach. Ordinary damage is assumed as a matter of law to be within the contemplation of the parties. Special damage, on the other hand, is such as follows less directly from the breach than ordinary damage. It is only found in case where some external condition, apart from the actual terms to the contract exists or intervenes, as it were, to give a turn to affairs and to increase damage in a way that the promisor, without actual notice of that external condition, could not reasonably be expected to foresee. Concerning this sort of damage, Hadley vs. Baxendale (1854) [supra] lays down the definite and just rule that before such damage can be recovered the plaintiff must show that the particular condition which made


the damage a possible and likely consequence of the breach was known to the defendant at the time the contract was made. The statement that special damages may be recovered where the likelihood of such damages flowing from the breach of the contract is contemplated and foreseen by the parties needs to be supplemented by a proposition which, though not enunciated in Hadley vs. Baxendale, is yet clearly to be drawn from subsequent cases. This is that where the damage which a plaintiff seeks to recover as special damage is so far speculative as to be in contemplation of law remote, notification of the special conditions which make that damage possible cannot render the defendant liable therefor. To bring damages which would ordinarily be treated as remote within the category of recoverable special damages, it is necessary that the condition should be made the subject of contract in such sense as to become an express or implied term of the engagement. Horne vs. Midland R. Co. (L. R., 8 C. P., 131) is a case where the damage which was sought to be recovered as special damage was really remote, and some of the judges rightly places the disallowance of the damage on the ground that to make such damage recoverable, it must so far have been within the contemplation of the parties as to form at least an implied term of the contract. But others proceeded on the idea that the notice given to the defendant was not sufficiently full and definite. The result was the same in either view. The facts in that case were as follows: The plaintiffs, shoe manufacturers at K, were under contract to supply by a certain day shoes to a firm in London for the French government. They delivered the shoes to a carrier in sufficient time for the goods to reach London at the time stipulated in the contract and informed the railroad agent that the shoes would be thrown back upon their hands if they did not reach the destination in time. The defendants negligently failed to forward the good in due season. The sale was therefore lost, and the market having fallen, the plaintiffs had to sell at a loss. In the preceding discussion we have considered the plaintiff's right chiefly against Teodorica Endencia; and what has been said

suffices in our opinion to demonstrate that the damages laid under the second cause of action in the complaint could not be recovered from her, first, because the damages laid under the second cause of action in the complaint could not be recovered from her, first, because the damages in question are special damages which were not within contemplation of the parties when the contract was made, and secondly, because said damages are too remote to be the subject of recovery. This conclusion is also necessarily fatal to the right of the plaintiff to recover such damages from the defendant corporation, for, as already suggested, by advising Teodorica not to perform the contract, said corporation could in no event render itself more extensively liable than the principle in the contract. Our conclusion is that the judgment of the trial court should be affirmed, and it is so ordered, with costs against the appellant. Arellano, C.J., Torres, Carson, Araullo, Malcolm, Avanceña and Moir, JJ., concur. 135. G.R. No. L-9356 February 18, 1915 C. S. GILCHRIST, plaintiff-appellee, vs. E. A. CUDDY, ET AL., defendants. JOSE FERNANDEZ ESPEJO and MARIANO ZALDARRIAGA, appellants. C. Lozano for appellants.  Bruce, Lawrence, Ross and Block for appellee. TRENT, J.: An appeal by the defendants, Jose Fernandez Espejo and Mariano Zaldarriaga, from a judgment of the Court of First Instance of Iloilo, dismissing their cross-complaint upon the merits for damages against the plaintiff for the alleged wrongful issuance of a mandatory and a preliminary injunction.


Upon the application of the appellee an ex parte mandatory injunction was issued on the 22d of May, 1913, directing the defendant, E. A. Cuddy, to send to the appellee a certain cinematograph film called "Zigomar" in compliance with an alleged contract which had been entered into between these two parties, and at the time an ex parte preliminary injunction was issued restraining the appellants from receiving and exhibiting in their theater the Zigomar until further orders of the court. On the 26th of that month the appellants appeared and moved the court to dissolve the preliminary injunction. When the case was called for trial on August 6, the appellee moved for the dismissal of the complaint "for the reason that there is no further necessity for the maintenance of the injunction." The motion was granted without objection as to Cuddy and denied as to the appellants in order to give them an opportunity to prove that the injunction were wrongfully issued and the amount of damages suffered by reason thereof. The pertinent part of the trial court's findings of fact in this case is as follows: It appears in this case that Cuddy was the owner of the film Zigomar and that on the 24th of April he rented it to C. S. Gilchrist for a week for P125, and it was to be delivered on the 26th of May, the week beginning that day. A few days prior to this Cuddy sent the money back to Gilchrist, which he had forwarded to him in Manila, saying that he had made other arrangements with his film. The other arrangements was the rental to these defendants Espejo and his partner for P350 for the week and the injunction was asked by Gilchrist against these parties from showing it for the week beginning the 26th of May. It appears from the testimony in this case, conclusively, that Cuddy willfully violated his contract, he being the owner of the picture, with Gilchrist because the defendants had offered him more for the same period. Mr. Espejo at the trial on the permanent injunction on the 26th of May admitted that he knew that Cuddy was the owner of the film. He was trying to get it through his agents Pathe Brothers in Manila. He is the agent of

the same concern in Iloilo. There is in evidence in this case on the trial today as well as on the 26th of May, letters showing that the Pathe Brothers in Manila advised this man on two different occasions not to contend for this film Zigomar because the rental price was prohibitive and assured him also that he could not get the film for about six weeks. The last of these letters was written on the 26th of April, which showed conclusively that he knew they had to get this film from Cuddy and from this letter that the agent in Manila could not get it, but he made Cuddy an offer himself and Cuddy accepted it because he was paying about three times as much as he had contracted with Gilchrist for. Therefore, in the opinion of this court, the defendants failed signally to show the injunction against the defendant was wrongfully procured. The appellants duly excepted to the order of the court denying their motion for new trial on the ground that the evidence was insufficient to justify the decision rendered. There is lacking from the record before us the deposition of the defendant Cuddy, which apparently throws light upon a contract entered into between him and the plaintiff Gilchrist. The contents of this deposition are discussed at length in the brief of the appellants and an endeavor is made to show that no such contract was entered into. The trial court, which had this deposition before it, found that there was a contract between Cuddy and Gilchrist. Not having the deposition in question before us, it is impossible to say how strongly it militates against this findings of fact. By a series of decisions we have construed section 143 and 497 (2) of the Code of Civil Procedure to require the production of all the evidence in this court. This is the duty of the appellant and, upon his failure to perform it, we decline to proceed with a review of the evidence. In such cases we rely entirely upon the pleadings and the findings of fact of the trial court and examine only such assigned errors as raise questions of law. (Ferrer vs. Neri Abejuela, 9 Phil. Rep., 324; Valle vs. Galera, 10 Phil. Rep., 619; Salvacion vs. Salvacion, 13 Phil. Rep., 366; Breta vs. Smith, Bell & Co., 15 Phil. Rep., 446; Arroyo vs. Yulo, 18 Phil. Rep., 236; Olsen & Co. vs. Matson, Lord & Belser Co., 19 Phil. Rep., 102; Blum vs.


Barretto, 19 Phil. Rep., 161; Cuyugan vs. Aguas, 19 Phil. Rep., 379; Mapa vs. Chaves, 20 Phil. Rep., 147; Mans vs. Garry, 20 Phil. Rep., 134.) It is true that some of the more recent of these cases make exceptions to the general rule. Thus, in Olsen & Co. vs. Matson, Lord & Belser Co., (19 Phil. Rep., 102), that portion of the evidence before us tended to show that grave injustice might result from a strict reliance upon the findings of fact contained in the judgment appealed from. We, therefore, gave the appellant an opportunity to explain the omission. But we required that such explanation must show a satisfactory reason for the omission, and that the missing portion of the evidence must be submitted within sixty days or cause shown for failing to do so. The other cases making exceptions to the rule are based upon peculiar circumstances which will seldom arise in practice and need not here be set forth, for the reason that they are wholly inapplicable to the present case. The appellants would be entitled to indulgence only under the doctrine of the Olsen case. But from that portion of the record before us, we are not inclined to believe that the missing deposition would be sufficient to justify us in reversing the findings of fact of the trial court that the contract in question had been made. There is in the record not only the positive and detailed testimony of Gilchrist to this effect, but there is also a letter of apology from Cuddy to Gilchrist in which the former enters into a lengthy explanation of his reasons for leasing the film to another party. The latter could only have been called forth by a broken contract with Gilchrist to lease the film to him. We, therefore, fail to find any reason for overlooking the omission of the defendants to bring up the missing portion of the evidence and, adhering to the general rule above referred to, proceed to examine the questions of law raised by the appellants. From the above-quoted findings of fact it is clear that Cuddy, a resident of Manila, was the owner of the "Zigomar;" that Gilchrist was the owner of a cinematograph theater in Iloilo; that in accordance with the terms of the contract entered into between Cuddy and Gilchrist the former leased to the latter the "Zigomar" for exhibition in his (Gilchrist's) theater for the week beginning

May 26, 1913; and that Cuddy willfully violate his contract in order that he might accept the appellant's offer of P350 for the film for the same period. Did the appellants know that they were inducing Cuddy to violate his contract with a third party when they induced him to accept the P350? Espejo admitted that he knew that Cuddy was the owner of the film. He received a letter from his agents in Manila dated April 26, assuring him that he could not get the film for about six weeks. The arrangement between Cuddy and the appellants for the exhibition of the film by the latter on the 26th of May were perfected after April 26, so that the six weeks would include and extend beyond May 26. The appellants must necessarily have known at the time they made their offer to Cuddy that the latter had booked or contracted the film for six weeks from April 26. Therefore, the inevitable conclusion is that the appellants knowingly induced Cuddy to violate his contract with another person. But there is no specific finding that the appellants knew the identity of the other party. So we must assume that they did not know that Gilchrist was the person who had contracted for the film. The appellants take the position that if the preliminary injunction had not been issued against them they could have exhibited the film in their theater for a number of days beginning May 26, and could have also subleased it to other theater owners in the nearby towns and, by so doing, could have cleared, during the life of their contract with Cuddy, the amount claimed as damages. Taking this view of the case, it will be unnecessary for us to inquire whether the mandatory injunction against Cuddy was properly issued or not. No question is raised with reference to the issuance of that injunction. The right on the part of Gilchrist to enter into a contract with Cuddy for the lease of the film must be fully recognized and admitted by all. That Cuddy was liable in an action for damages for the breach of that contract, there can be no doubt. Were the appellants likewise liable for interfering with the contract between Gilchrist and Cuddy, they not knowing at the time the identity of one of the contracting parties? The appellants claim


that they had a right to do what they did. The ground upon which the appellants base this contention is, that there was no valid and binding contract between Cuddy and Gilchrist and that, therefore, they had a right to compete with Gilchrist for the lease of the film, the right to compete being a justification for their acts. If there had been no contract between Cuddy and Gilchrist this defense would be tenable, but the mere right to compete could not justify the appellants in intentionally inducing Cuddy to take away the appellee's contractual rights. Chief Justice Wells in Walker vs. Cronin (107 Mass., 555), said: "Everyone has a right to enjoy the fruits and advantages of his own enterprise, industry, skill and credit. He has no right to be free from malicious and wanton interference, disturbance or annoyance. If disturbance or loss come as a result of competition, or the exercise of like rights by others, it is damnum absque injuria, unless some superior right by contract or otherwise is interfered with." In Read vs. Friendly Society of Operative Stonemasons ([1902] 2 K. B., 88), Darling, J., said: "I think the plaintiff has a cause of action against the defendants, unless the court is satisfied that, when they interfered with the contractual rights of plaintiff, the defendants had a sufficient justification for their interference; . . . for it is not a justification that `they acted bona fide in the best interests of the society of masons,' i. e., in their own interests. Nor is it enough that `they were not actuated by improper motives.' I think their sufficient justification for interference with plaintiff's right must be an equal or superior right in themselves, and that no one can legally excuse himself to a man, of whose contract he has procured the breach, on the ground that he acted on a wrong understanding of his own rights, or without malice, or bona fide, or in the best interests of himself, or even that he acted as an altruist, seeking only good of another and careless of his own advantage." (Quoted with approval in Beekman vs. Marsters, 195 Mass., 205.) It is said that the ground on which the liability of a third party for interfering with a contract between others rests, is that the

interference was malicious. The contrary view, however, is taken by the Supreme Court of the United States in the case of Angle vs. Railway Co. (151 U. S., 1). The only motive for interference by the third party in that case was the desire to make a profit to the injury of one of the parties of the contract. There was no malice in the case beyond the desire to make an unlawful gain to the detriment of one of the contracting parties. In the case at bar the only motive for the interference with the Gilchrist — Cuddy contract on the part of the appellants was a desire to make a profit by exhibiting the film in their theater. There was no malice beyond this desire; but this fact does not relieve them of the legal liability for interfering with that contract and causing its breach. It is, therefore, clear, under the above authorities, that they were liable to Gilchrist for the damages caused by their acts, unless they are relieved from such liability by reason of the fact that they did not know at the time the identity of the original lessee (Gilchrist) of the film. The liability of the appellants arises from unlawful acts and not from contractual obligations, as they were under no such obligations to induce Cuddy to violate his contract with Gilchrist. So that if the action of Gilchrist had been one for damages, it would be governed by chapter 2, title 16, book 4 of the Civil Code. Article 1902 of that code provides that a person who, by act or omission, causes damages to another when there is fault or negligence, shall be obliged to repair the damage do done. There is nothing in this article which requires as a condition precedent to the liability of a tort-feasor that he must know the identity of a person to whom he causes damages. In fact, the chapter wherein this article is found clearly shows that no such knowledge is required in order that the injured party may recover for the damage suffered. But the fact that the appellants' interference with the Gilchrist contract was actionable did not of itself entitle Gilchrist to sue out an injunction against them. The allowance of this remedy must be justified under section 164 of the Code of Civil Procedure, which specifies the circumstance under which an


injunction may issue. Upon the general doctrine of injunction we said in Devesa vs. Arbes (13 Phil. Rep., 273): An injunction is a "special remedy" adopted in that code (Act No. 190) from American practice, and originally borrowed from English legal procedure, which was there issued by the authority and under the seal of a court of equity, and limited, as in order cases where equitable relief is sought, to cases where there is no "plain, adequate, and complete remedy at law," which "will not be granted while the rights between the parties are undetermined, except in extraordinary cases where material and irreparable injury will be done," which cannot be compensated in damages, and where there will be no adequate remedy, and which will not, as a rule, be granted, to take property out of the possession of one party and put it into that of another whose title has not been established by law. We subsequently affirmed the doctrine of the Devesa case in Palafox vs. Madamba (19 Phil., Rep., 444), and we take this occasion of again affirming it, believing, as we do, that the indiscriminate use of injunctions should be discouraged. Does the fact that the appellants did not know at the time the identity of the original lessee of the film militate against Gilchrist's right to a preliminary injunction, although the appellant's incurred civil liability for damages for such interference? In the examination of the adjudicated cases, where in injunctions have been issued to restrain wrongful interference with contracts by strangers to such contracts, we have been unable to find any case where this precise question was involved, as in all of those cases which we have examined, the identity of both of the contracting parties was known to the tort-feasors. We might say, however, that this fact does not seem to have a controlling feature in those cases. There is nothing in section 164 of the Code of Civil Procedure which indicates, even remotely, that before an injunction may issue restraining the wrongful interference with contrast by strangers, the strangers must know the identity of both parties. It would seem that this is not essential, as injunctions frequently issue against municipal

corporations, public service corporations, public officers, and others to restrain the commission of acts which would tend to injuriously affect the rights of person whose identity the respondents could not possibly have known beforehand. This court has held that in a proper case injunction will issue at the instance of a private citizen to restrain ultra vires acts of public officials. (Severino vs. Governor-General, 16 Phil. Rep., 366.) So we proceed to the determination of the main question of whether or not the preliminary injunction ought to have been issued in this case. As a rule, injunctions are denied to those who have an adequate remedy at law. Where the choice is between the ordinary and the extraordinary processes of law, and the former are sufficient, the rule will not permit the use of the latter. (In re Debs, 158 U. S., 564.) If the injury is irreparable, the ordinary process is inadequate. In Wahle vs. Reinbach (76 Ill., 322), the supreme court of Illinois approved a definition of the term "irreparable injury" in the following language: "By `irreparable injury' is not meant such injury as is beyond the possibility of repair, or beyond possible compensation in damages, nor necessarily great injury or great damage, but that species of injury, whether great or small, that ought not to be submitted to on the one hand or inflicted on the other; and, because it is so large on the one hand, or so small on the other, is of such constant and frequent recurrence that no fair or reasonable redress can be had therefor in a court of law." (Quoted with approval in Nashville R. R. Co. vs. McConnell, 82 Fed., 65.) The case at bar is somewhat novel, as the only contract which was broken was that between Cuddy and Gilchrist, and the profits of the appellee depended upon the patronage of the public, for which it is conceded the appellants were at liberty to complete by all fair does not deter the application of remarked in the case of the "ticket scalpers" (82 Fed., 65), the novelty of the facts does not deter the application of equitable principles. This court takes judicial notice of the general character of a cinematograph or motion-picture theater. It is a quite modern


form of the play house, wherein, by means of an apparatus known as a cinematograph or cinematograph, a series of views representing closely successive phases of a moving object, are exhibited in rapid sequence, giving a picture which, owing to the persistence of vision, appears to the observer to be in continuous motion. (The Encyclopedia Britanica, vol. 6, p. 374.) The subjects which have lent themselves to the art of the photographer in this manner have increased enormously in recent years, as well as have the places where such exhibition are given. The attendance, and, consequently, the receipts, at one of these cinematograph or motion-picture theaters depends in no small degree upon the excellence of the photographs, and it is quite common for the proprietor of the theater to secure an especially attractive exhibit as his "feature film" and advertise it as such in order to attract the public. This feature film is depended upon to secure a larger attendance that if its place on the program were filled by other films of mediocre quality. It is evident that the failure to exhibit the feature film will reduce the receipts of the theater. Hence, Gilchrist was facing the immediate prospect of diminished profits by reason of the fact that the appellants had induced Cuddy to rent to them the film Gilchrist had counted upon as his feature film. It is quite apparent that to estimate with any decree of accuracy the damages which Gilchrist would likely suffer from such an event would be quite difficult if not impossible. If he allowed the appellants to exhibit the film in Iloilo, it would be useless for him to exhibit it again, as the desire of the public to witness the production would have been already satisfied. In this extremity, the appellee applied for and was granted, as we have indicated, a mandatory injunction against Cuddy requiring him to deliver the Zigomar to Gilchrist, and a preliminary injunction against the appellants restraining them from exhibiting that film in their theater during the weeks he (Gilchrist) had a right to exhibit it. These injunction saved the plaintiff harmless from damages due to the unwarranted interference of the defendants, as well as the difficult task which would have been set for the court of estimating them in case the appellants had been allowed

to carry out their illegal plans. As to whether or not the mandatory injunction should have been issued, we are not, as we have said, called upon to determine. So far as the preliminary injunction issued against the appellants is concerned, which prohibited them from exhibiting the Zigomar during the week which Gilchrist desired to exhibit it, we are of the opinion that the circumstances justified the issuance of that injunction in the discretion of the court. We are not lacking in authority to support our conclusion that the court was justified in issuing the preliminary injunction against the appellants. Upon the precise question as to whether injunction will issue to restrain wrongful interference with contracts by strangers to such contracts, it may be said that courts in the United States have usually granted such relief where the profits of the injured person are derived from his contractual relations with a large and indefinite number of individuals, thus reducing him to the necessity of proving in an action against the tort-feasor that the latter was responsible in each case for the broken contract, or else obliging him to institute individual suits against each contracting party and so exposing him to a multiplicity of suits. Sperry & Hutchinson Co. vs. Mechanics' Clothing Co. (128 Fed., 800); Sperry & Hutchinson Co. vs. Louis Weber & Co. (161 Fed., 219); Sperry & Hutchinson Co. vs. Pommer (199 Fed., 309); were all cases wherein the respondents were inducing retail merchants to break their contracts with the company for the sale of the latters' trading stamps. Injunction issued in each case restraining the respondents from interfering with such contracts. In the case of the Nashville R. R. Co. vs. McConnell (82 Fed., 65), the court, among other things, said: "One who wrongfully interferes in a contract between others, and, for the purpose of gain to himself induces one of the parties to break it, is liable to the party injured thereby; and his continued interference may be ground for an injunction where the injuries resulting will be irreparable." In Hamby & Toomer vs. Georgia Iron & Coal Co. (127 Ga., 792), it


appears that the respondents were interfering in a contract for prison labor, and the result would be, if they were successful, the shutting down of the petitioner's plant for an indefinite time. The court held that although there was no contention that the respondents were insolvent, the trial court did not abuse its discretion in granting a preliminary injunction against the respondents. In Beekman vs. Marsters (195 Mass., 205), the plaintiff had obtained from the Jamestown Hotel Corporation, conducting a hotel within the grounds of the Jamestown Exposition, a contract whereby he was made their exclusive agent for the New England States to solicit patronage for the hotel. The defendant induced the hotel corporation to break their contract with the plaintiff in order to allow him to act also as their agent in the New England States. The court held that an action for damages would not have afforded the plaintiff adequate relief, and that an injunction was proper compelling the defendant to desist from further interference with the plaintiff's exclusive contract with the hotel company. In Citizens' Light, Heat & Power Co. vs. Montgomery Light & Water Power Co. (171 Fed., 553), the court, while admitting that there are some authorities to the contrary, held that the current authority in the United States and England is that: The violation of a legal right committed knowingly is a cause of action, and that it is a violation of a legal right to interfere with contractual relations recognized by law, if there be no sufficient justification for the interference. (Quinn vs. Leatham, supra, 510; Angle vs. Chicago, etc., Ry. Co., 151 U. S., 1; 14 Sup. Ct., 240; 38 L. Ed., 55; Martens vs. Reilly, 109 Wis., 464, 84 N. W., 840; Rice vs. Manley, 66 N. Y., 82; 23 Am. Rep., 30; Bitterman vs. L. & N. R. R. Co., 207 U. S., 205; 28 Sup. Ct., 91; 52 L. Ed., 171; Beekman vs. Marsters, 195 Mass., 205; 80 N. E., 817; 11 L. R. A. [N. S.] 201; 122 Am. St. Rep., 232; South Wales Miners' Fed. vs. Glamorgan Coal Co., Appeal Cases, 1905, p. 239.) See also Nims on Unfair Business Competition, pp. 351- 371. In 3 Elliot on Contracts, section 2511, it is said: "Injunction is the

proper remedy to prevent a wrongful interference with contract by strangers to such contracts where the legal remedy is insufficient and the resulting injury is irreparable. And where there is a malicious interference with lawful and valid contracts a permanent injunction will ordinarily issue without proof of express malice. So, an injunction may be issued where the complainant to break their contracts with him by agreeing to indemnify who breaks his contracts of employment may be adjoined from including other employees to break their contracts and enter into new contracts with a new employer of the servant who first broke his contract. But the remedy by injunction cannot be used to restrain a legitimate competition, though such competition would involve the violation of a contract. Nor will equity ordinarily enjoin employees who have quit the service of their employer from attempting by proper argument to persuade others from taking their places so long as they do not resort to force or intimidations on obstruct the public thoroughfares." Beekman vs. Marster, supra, is practically on all fours with the case at bar in that there was only one contract in question and the profits of the injured person depended upon the patronage of the public. Hamby & Toomer vs. Georgia Iron & Coal Co., supra, is also similar to the case at bar in that there was only one contract, the interference of which was stopped by injunction. For the foregoing reasons the judgment is affirmed, with costs, against the appellants. Arellano, C.J., Torres, Carson and Araullo, JJ., concur. Separate Opinions MORELAND, J., concurring: The court seems to be of the opinion that the action is one for a permanent injunction; whereas, under my view of the case, it is one for specific performance. The facts are simple. C. S. Gilchrist, the plaintiff, proprietor of the Eagle Theater of Iloilo, contracted with E. A. Cuddy, one of the defendants, of Manila, for a film entitled "Zigomar or Eelskin, 3d series," to be exhibited in his theater in Iloilo during the week beginning May 26, 1913. Later,


the defendants Espejo and Zaldarriaga, who were also operating a theater in Iloilo, representing Pathe Freres, also obtained from Cuddy a contract for the exhibition of the film aforesaid in their theater in Iloilo during the same week. The plaintiff commenced this action against Cuddy and the defendants Espejo and Zaldarriaga for the specific performance of the contract with Cuddy. The complaint prays "that the court, by a mandatory injunction, order Cuddy to deliver, on the 24th of May, 1913, in accordance with the aforesaid contract, the said film 'Zigomar, 3d series, or Eelskin,' to the plaintiff Gilchrist, in accordance with the terms of the agreement, so that plaintiff can exhibit the same during the last week beginning May 26, 1913, in the Eagle Theater, in Iloilo; that the court issue a preliminary injunction against the defendants Espejo and Zaldarriaga prohibiting them from receiving, exhibiting, or using said film in Iloilo during the last week of May, 1913, or at any other time prior to the delivery to the plaintiff ; that, on the trial, said injunction be made perpetual and that Cuddy be ordered and commanded to specifically perform his contract with the plaintiff ." On the filing of the complaint the plaintiff made an application for a mandatory injunction compelling the defendant Cuddy to deliver to plaintiff the film in question by mailing it to him from Manila on the 24th of May so that it would reach Iloilo for exhibition on the 26th; and for a preliminary restraining order against the order two defendants prohibiting them from receiving or exhibiting the said film prior to its exhibition by plaintiff. The court, on this application, entered an order which provided that Cuddy should "not send said film 'Zigomar, 3d series, or Eelskin,' to the defendants Espejo and Zaldarriaga and that he should send it to the plaintiff, Gilchrist, on the 24th day of May, 1913, in the mail for Iloilo," This order was duly served on the defendants, including Cuddy, in whose possession the film still was, and, in compliance therewith Cuddy mailed the film to the plaintiff at Iloilo on the 24th of May. The latter duly received it and exhibited it without molestation during the week beginning

the 26th of May in accordance with the contract which he claimed to have made with Cuddy. The defendants Espejo and Zaldarriaga having received due notice of the issuance of the mandatory injunction and restraining order of the 22d of May, appeared before the court on the 26th of May and moved that the court vacate so much of the order as prohibited them from receiving and exhibiting the film. In other words, while the order of the 22d of May was composed of two parts, one a mandatory order for immediate specific performance of the plaintiff's contract with the defendant Cuddy, and the other a preliminary restraining order directed to Espejo and Zaldarriaga prohibiting them from receiving and exhibiting the film during the week beginning the 26th of May, their motion of the 26th of May referred exclusively to the injunction against them and touched in no way that portion of the order which required the immediate performance by Cuddy of his contract with Gilchrist. Indeed, the defendants Espejo and Zaldarriaga did not even except to the order requiring Cuddy to specifically perform his agreement with the plaintiff nor did they in any way make an objection to or show their disapproval of it. It was not excepted to or appealed from and is not before this court for review. The motion of Espejo and Zaldarriaga to vacate the injunction restraining them from receiving the film was denied on the 26th of May. After the termination of the week beginning May 26th, and after the exhibition of the film by the plaintiff in accordance with the alleged contract with Cuddy, the plaintiff came into court and moved that, in view of the fact that he had already obtained all that he desired to obtain or could obtain by his action, namely, the exhibition of the film in question during the week beginning May 26th, there was no reason for continuing it and moved for its dismissal. To this motion Cuddy consented and the action was dismissed as to him. But the other defendants objected to the dismissal of the action on the ground that they desired to present to the court evidence showing the damages which they had suffered by reason of the issuance of the


preliminary injunction prohibiting them from receiving and exhibiting the film in question during the week beginning May 26. The court sustained their objection and declined to dismiss the action as to them, and, on the 8th of August, heard the evidence as to damages. He denied defendants the relief asked for and dismissed their claim for damages. They thereupon took an appeal from that order, and that is the appeal which we have now before us and which is the subject of the opinion of the court with which I am concurring. We thus have this strange condition: An action for specific performance of a contract to deliver a film for exhibition during a given time. A preliminary mandatory injunction ordering the delivery of the film in accordance with the contract. The delivery of the film in accordance with the preliminary mandatory injunction. The actual exhibition of the film during the time specified in the contract. No objection to the issuance of the mandatory injunction, to the delivery of the film, or to the ground that the plaintiff had obtained full relief by means of the so-called preliminary remedy by virtue of which the contract was actually specifically performed before the action was tried. No objection or exception to the order requiring the specific performance of the contract. Under such conditions it is possible for the defendant Espejo and Zaldarriaga to secure damages for the wrongful issuance of the preliminary injunction directed against them even though it be admitted that it was erroneously issued and that there was no ground therefor whatever? It seems to me that it is not. At the time this action was begun the film, as we have seen, was in the possession of Cuddy and, while in his possession, he complied with a command of the court to deliver it to plaintiff. In pursuance of that command he delivered it to plaintiff, who used it during the time specified in his contract with Cuddy; or, in other words, he made such use of it as he desired and then returned it to Cuddy. This order and the delivery of the film under it were made in an action in which the defendants Espejo and Zaldarriaga were parties, without objection on their part and

without objection or exception to the order. The film having been delivered to defendants' competitor, the plaintiff, under a decree of the court to which they made no objection and took no exception and from which they have not appealed, what injury can they show by reason of the injunction restraining them from making use of the film? If they themselves, by their conduct, permitted the plaintiff to make it impossible for them to gain possession of the film and to use it, then the preliminary injunction produced no injury for the reason that no harm can result from restraining a party from doing a thing which, without such restraint, it would be impossible for him to do. Moreover, the order for the delivery of the film to plaintiff was a complete determination of the rights of the parties to the film which, while the court had no right to make, nevertheless, was valid and binding on all the parties, none of them objecting or taking exception thereto. Being a complete determination of the rights of the parties to the action, it should have been the first point attacked by the defendants, as it foreclosed them completely and, if left in force, eliminating every defense. This order was made on May 22d and was not excepted to or appealed from. On the 8th of August following the defendants appealed from the order dismissing their claim to damages but the order for the delivery of the film to plaintiff was final at that time and is now conclusive on this court. Section 143 of the Code of Civil Procedure, providing for appeals by bill of exceptions, provides that "upon the rendition of final judgment disposing of the action, either party shall have the right to perfect a bill of exceptions for a review by the Supreme Court of all rulings, orders, and judgment made in the action, to which the party has duly excepted at the time of making such ruling, order, or judgment." While the order for the delivery of the film to plaintiff was in one sense a preliminary order, it was in reality a final determination of the rights of the parties to the film, as it ordered the delivery thereof to plaintiff for his use. If it had been duly excepted to, its validity could have been attacked in an appeal from the final judgment thereafter entered in the action.


Not having been excepted to as required by the section just referred to, it became final and conclusive on all the parties to the action, and when, on the 8th day of August following, the defendants presented their claim for damages based on the alleged wrongful issuance of a temporary restraining order, the whole foundation of their claim had disappeared by virtue of the fact that the execution of the order of the 22d of May had left nothing for them to litigate. The trial court, on the 8th of August, would have been fully justified in refusing to hear the defendants on their claim for damages. Their right thereto had been adjudicated on the 22d of May and that adjudication had been duly put into execution without protest, objection or exception, and was, therefore, final and conclusive on them on the 8th of August. I have presented this concurring opinion in an attempt to prevent confusion, if any, which might arise from the theory on which the court decides this case. It seems to me impossible that the action can be one for a permanent injunction. The very nature of the case demonstrates that a permanent injunction is out of the question. The only thing that plaintiff desired was to be permitted to use the film for the week beginning the 26th of May. With the termination of that week his rights expired. After that time Cuddy was perfectly free to turn the film over to the defendants Espejo and Zaldarriaga for exhibition at any time. An injunction permanently prohibiting the defendants from exhibiting the film in Iloilo would have been unjustifiable, as it was something that plaintiff did not ask and did not want; and would have been an invasion of the rights of Cuddy as, after the termination of the week beginning May 26, he was at liberty, under his contract with plaintiff, to rent the film to the defendants Espejo and Zaldarriaga and permit its exhibition in Iloilo at any time. The plaintiff never asked to have defendants permanently enjoined from exhibiting the film in Iloilo and no party to the action has suggested such thing. The action is one for specific performance purely; and while the court granted plaintiff rights which should have been granted

only after a trial of the action, nevertheless, such right having been granted before trial and none of the defendants having made objection or taken exception thereto, and the order granting them having become final, such order became a final determination of the action, by reason of the nature of the action itself, the rights of the parties became thereby finally determined and the defendants Espejo and Zaldarriaga, being parties to the action, were precluded from further litigation relative to the subject matter of the controversy. No damages are claimed by reason of the issuance of the mandatory injunction under which the film was delivered to plaintiff and used by him during the week beginning the 26th of May. While the opinion says in the first paragraph that the action is "for damages against the plaintiff for the alleged wrongful issuance of a mandatory and preliminary injunction," the opinion also says in a latter portion that "It will be unnecessary for us to inquire whether the mandatory injunction against Cuddy was properly issued or not. No question is raised with reference to the issuance of that injunction;" and still later it is also stated that "as to whether or not the mandatory injunction should have been issued, we are not, as we have said, called upon to determine." I repeat that no objection was made by the defendants to the issuance of the mandatory injunction, no exception was taken to the order on which it was issued and no appeal has been taken therefrom. That order is now final and conclusive and was at the time this appeal was taken. That being so, the rights of the defendants were foreclosed thereby. The defendants Espejo and Zaldarriaga cannot now be heard to say that they were damaged by the issuance of the preliminary restraining injunction issued on the same day as the mandatory injunction. From what has been said it is clear, it seems to me, that the question of a breach of contract by inducement, which is substantially the only question discussed and decided, is not in the case in reality and, in my judgment, should not be touched upon. Courts will not proceed with a litigation and discuss and decided question which might possibly be involved in the case


when it clearly appears that there remains nothing about which to litigate, the whole subject matter of the original action having been settled and the parties having no real controversy to present. At the time the defendants Espejo and Zaldarriaga offered their claim for damages arising out of the wrongful issuance of the restraining order, there was nothing between them and the plaintiff to litigate, the rightfulness of plaintiff's demand having already been finally adjudicated and determined in the same action. 136. [G.R. No. L-8437. November 28, 1956.] ESTATE OF K. H. HEMADY, deceased, vs. LUZON SURETY CO., INC., claimant-Appellant. D E C I S I O N REYES, J. B. L., J.: Appeal by Luzon Surety Co., Inc., from an order of the Court of First Instance of Rizal, presided by Judge Hermogenes Caluag, dismissing its claim against the Estate of K. H. Hemady (Special Proceeding No. Q-293) for failure to state a cause of action. The Luzon Surety Co. had filed a claim against the Estate based on twenty different indemnity agreements, or counter bonds, each subscribed by a distinct principal and by the deceased K. H. Hemady, a surety solidary guarantor) in all of them, in consideration of the Luzon Surety Co.’s of having guaranteed, the various principals in favor of different creditors. The twenty counterbonds, or indemnity agreements, all contained the following stipulations:chanroblesvirtuallawlibrary “Premiums. — As consideration for this suretyship, the undersigned jointly and severally, agree to pay the COMPANY the sum of ________________ (P______) pesos, Philippines Currency, in advance as premium there of for every __________ months or fractions thereof, this ________ or any renewal or substitution

thereof is in effect. Indemnity. — The undersigned, jointly and severally, agree at all times to indemnify the COMPANY and keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs, stamps, taxes, penalties, charges, and expenses of whatsoever kind and nature which the COMPANY shall or may, at any time sustain or incur in consequence of having become surety upon this bond or any extension, renewal, substitution or alteration thereof made at the instance of the undersigned or any of them or any order executed on behalf of the undersigned or any of them; chan roblesvirtualawlibraryand to pay, reimburse and make good to the COMPANY, its successors and assigns, all sums and amount of money which it or its representatives shall pay or cause to be paid, or become liable to pay, on account of the undersigned or any of them, of whatsoever kind and nature, including 15% of the amount involved in the litigation or other matters growing out of or connected therewith for counsel or attorney’s fees, but in no case less than P25. It is hereby further agreed that in case of extension or renewal of this ________ we equally bind ourselves for the payment thereof under the same terms and conditions as above mentioned without the necessity of executing another indemnity agreement for the purpose and that we hereby equally waive our right to be notified of any renewal or extension of this ________ which may be granted under this indemnity agreement. Interest on amount paid by the Company. — Any and all sums of money so paid by the company shall bear interest at the rate of 12% per annum which interest, if not paid, will be accummulated and added to the capital quarterly order to earn the same interests as the capital and the total sum thereof, the capital and interest, shall be paid to the COMPANY as soon as the COMPANY shall have become liable therefore, whether it shall have paid out such sums of money or any part thereof or not. x x x x x x x x x Waiver. — It is hereby agreed upon by and between the undersigned that any question which may arise between them by


reason of this document and which has to be submitted for decision to Courts of Justice shall be brought before the Court of competent jurisdiction in the City of Manila, waiving for this purpose any other venue. Our right to be notified of the acceptance and approval of this indemnity agreement is hereby likewise waived. x x x x x x x x x Our Liability Hereunder. — It shall not be necessary for the COMPANY to bring suit against the principal upon his default, or to exhaust the property of the principal, but the liability hereunder of the undersigned indemnitor shall be jointly and severally, a primary one, the same as that of the principal, and shall be exigible immediately upon the occurrence of such default.” (Rec. App. pp. 98- 102.) The Luzon Surety Co., prayed for allowance, as a contingent claim, of the value of the twenty bonds it had executed in consideration of the counterbonds, and further asked for judgment for the unpaid premiums and documentary stamps affixed to the bonds, with 12 per cent interest thereon. Before answer was filed, and upon motion of the administratrix of Hemady’s estate, the lower court, by order of September 23, 1953, dismissed the claims of Luzon Surety Co., on two grounds:chanroblesvirtuallawlibrary (1) that the premiums due and cost of documentary stamps were not contemplated under the indemnity agreements to be a part of the undertaking of the guarantor (Hemady), since they were not liabilities incurred after the execution of the counterbonds; chan roblesvirtualawlibraryand (2) that “whatever losses may occur after Hemady’s death, are not chargeable to his estate, because upon his death he ceased to be guarantor.” Taking up the latter point first, since it is the one more far reaching in effects, the reasoning of the court below ran as follows:chanroblesvirtuallawlibrary “The administratrix further contends that upon the death of Hemady, his liability as a guarantor terminated, and therefore, in the absence of a showing that a loss or damage was suffered, the

claim cannot be considered contingent. This Court believes that there is merit in this contention and finds support in Article 2046 of the new Civil Code. It should be noted that a new requirement has been added for a person to qualify as a guarantor, that is:chanroblesvirtuallawlibrary integrity. As correctly pointed out by the Administratrix, integrity is something purely personal and is not transmissible. Upon the death of Hemady, his integrity was not transmitted to his estate or successors. Whatever loss therefore, may occur after Hemady’s death, are not chargeable to his estate because upon his death he ceased to be a guarantor. Another clear and strong indication that the surety company has exclusively relied on the personality, character, honesty and integrity of the now deceased K. H. Hemady, was the fact that in the printed form of the indemnity agreement there is a paragraph entitled ‘Security by way of first mortgage, which was expressly waived and renounced by the security company. The security company has not demanded from K. H. Hemady to comply with this requirement of giving security by way of first mortgage. In the supporting papers of the claim presented by Luzon Surety Company, no real property was mentioned in the list of properties mortgaged which appears at the back of the indemnity agreement.” (Rec. App., pp. 407-408). We find this reasoning untenable. Under the present Civil Code (Article 1311), as well as under the Civil Code of 1889 (Article 1257), the rule is that — “Contracts take effect only as between the parties, their assigns and heirs, except in the case where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law.” While in our successional system the responsibility of the heirs for the debts of their decedent cannot exceed the value of the inheritance they receive from him, the principle remains intact that these heirs succeed not only to the rights of the deceased but also to his obligations. Articles 774 and 776 of the New Civil Code (and Articles 659 and 661 of the preceding one) expressly so provide, thereby confirming Article 1311 already quoted.


“ART. 774. — Succession is a mode of acquisition by virtue of which the property, rights and obligations to the extent of the value of the inheritance, of a person are transmitted through his death to another or others either by his will or by operation of law.” “ART. 776. — The inheritance includes all the property, rights and obligations of a person which are not extinguished by his death.” In Mojica vs. Fernandez, 9 Phil. 403, this Supreme Court ruled:chanroblesvirtuallawlibrary “Under the Civil Code the heirs, by virtue of the rights of succession are subrogated to all the rights and obligations of the deceased (Article 661) and cannot be regarded as third parties with respect to a contract to which the deceased was a party, touching the estate of the deceased (Barrios vs. Dolor, 2 Phil. 44). x x x x x x x x x “The principle on which these decisions rest is not affected by the provisions of the new Code of Civil Procedure, and, in accordance with that principle, the heirs of a deceased person cannot be held to be “third persons” in relation to any contracts touching the real estate of their decedent which comes in to their hands by right of inheritance; chan roblesvirtualawlibrarythey take such property subject to all the obligations resting thereon in the hands of him from whom they derive their rights.” (See also Galasinao vs. Austria, 51 Off. Gaz. (No. 6) p. 2874 and de Guzman vs. Salak, 91 Phil., 265). The binding effect of contracts upon the heirs of the deceased party is not altered by the provision in our Rules of Court that money debts of a deceased must be liquidated and paid from his estate before the residue is distributed among said heirs (Rule 89). The reason is that whatever payment is thus made from the estate is ultimately a payment by the heirs and distributees, since the amount of the paid claim in fact diminishes or reduces the shares that the heirs would have been entitled to receive. Under our law, therefore, the general rule is that a party’s contractual rights and obligations are transmissible to the

successors. The rule is a consequence of the progressive “depersonalization” of patrimonial rights and duties that, as observed by Victorio Polacco, has characterized the history of these institutions. From the Roman concept of a relation from person to person, the obligation has evolved into a relation from patrimony to patrimony, with the persons occupying only a representative position, barring those rare cases where the obligation is strictly personal, i.e., is contracted intuitu personae, in consideration of its performance by a specific person and by no other. The transition is marked by the disappearance of the imprisonment for debt. Of the three exceptions fixed by Article 1311, the nature of the obligation of the surety or guarantor does not warrant the conclusion that his peculiar individual qualities are contemplated as a principal inducement for the contract. What did the creditor Luzon Surety Co. expect of K. H. Hemady when it accepted the latter as surety in the counterbonds? Nothing but the reimbursement of the moneys that the Luzon Surety Co. might have to disburse on account of the obligations of the principal debtors. This reimbursement is a payment of a sum of money, resulting from an obligation to give; chan roblesvirtualawlibraryand to the Luzon Surety Co., it was indifferent that the reimbursement should be made by Hemady himself or by some one else in his behalf, so long as the money was paid to it. The second exception of Article 1311, p. 1, is intransmissibility by stipulation of the parties. Being exceptional and contrary to the general rule, this intransmissibility should not be easily implied, but must be expressly established, or at the very least, clearly inferable from the provisions of the contract itself, and the text of the agreements sued upon nowhere indicate that they are nontransferable. “(b) Intransmisibilidad por pacto. — Lo general es la transmisibilidad de darechos y obligaciones; chan roblesvirtualawlibraryle excepcion, la intransmisibilidad. Mientras nada se diga en contrario impera el principio de la


transmision, como elemento natural a toda relacion juridica, salvo las personalisimas. Asi, para la no transmision, es menester el pacto expreso, porque si no, lo convenido entre partes trasciende a sus herederos. Siendo estos los continuadores de la personalidad del causante, sobre ellos recaen los efectos de los vinculos juridicos creados por sus antecesores, y para evitarlo, si asi se quiere, es indespensable convension terminante en tal sentido. Por su esencia, el derecho y la obligacion tienden a ir más allá de las personas que les dieron vida, y a ejercer presion sobre los sucesores de esa persona; chan roblesvirtualawlibrarycuando no se quiera esto, se impone una estipulacion limitativa expresamente de la transmisibilidad o de cuyos tirminos claramente se deduzca la concresion del concreto a las mismas personas que lo otorgon.” (Scaevola, Codigo Civil, Tomo XX, p. 541-542) (Emphasis supplied.) Because under the law (Article 1311), a person who enters into a contract is deemed to have contracted for himself and his heirs and assigns, it is unnecessary for him to expressly stipulate to that effect; chan roblesvirtualawlibraryhence, his failure to do so is no sign that he intended his bargain to terminate upon his death. Similarly, that the Luzon Surety Co., did not require bondsman Hemady to execute a mortgage indicates nothing more than the company’s faith and confidence in the financial stability of the surety, but not that his obligation was strictly personal. The third exception to the transmissibility of obligations under Article 1311 exists when they are “not transmissible by operation of law”. The provision makes reference to those cases where the law expresses that the rights or obligations are extinguished by death, as is the case in legal support (Article 300), parental authority (Article 327), usufruct (Article 603), contracts for a piece of work (Article 1726), partnership (Article 1830 and agency (Article 1919). By contract, the articles of the Civil Code that regulate guaranty or suretyship (Articles 2047 to 2084) contain no provision that the guaranty is extinguished upon the death of the guarantor or the surety.

The lower court sought to infer such a limitation from Art. 2056, to the effect that “one who is obliged to furnish a guarantor must present a person who possesses integrity, capacity to bind himself, and sufficient property to answer for the obligation which he guarantees”. It will be noted, however, that the law requires these qualities to be present only at the time of the perfection of the contract of guaranty. It is self-evident that once the contract has become perfected and binding, the supervening incapacity of the guarantor would not operate to exonerate him of the eventual liability he has contracted; chan roblesvirtualawlibraryand if that be true of his capacity to bind himself, it should also be true of his integrity, which is a quality mentioned in the article alongside the capacity. The foregoing concept is confirmed by the next Article 2057, that runs as follows:chanroblesvirtuallawlibrary “ART. 2057. — If the guarantor should be convicted in first instance of a crime involving dishonesty or should become insolvent, the creditor may demand another who has all the qualifications required in the preceding article. The case is excepted where the creditor has required and stipulated that a specified person should be guarantor.” From this article it should be immediately apparent that the supervening dishonesty of the guarantor (that is to say, the disappearance of his integrity after he has become bound) does not terminate the contract but merely entitles the creditor to demand a replacement of the guarantor. But the step remains optional in the creditor:chanroblesvirtuallawlibrary it is his right, not his duty; chan roblesvirtualawlibraryhe may waive it if he chooses, and hold the guarantor to his bargain. Hence Article 2057 of the present Civil Code is incompatible with the trial court’s stand that the requirement of integrity in the guarantor or surety makes the latter’s undertaking strictly personal, so linked to his individuality that the guaranty automatically terminates upon his death. The contracts of suretyship entered into by K. H. Hemady in favor of Luzon Surety Co. not being rendered intransmissible due to the


nature of the undertaking, nor by the stipulations of the contracts themselves, nor by provision of law, his eventual liability thereunder necessarily passed upon his death to his heirs. The contracts, therefore, give rise to contingent claims provable against his estate under section 5, Rule 87 (2 Moran, 1952 ed., p. 437; chan roblesvirtualawlibraryGaskell & Co. vs. Tan Sit, 43 Phil. 810, 814). “The most common example of the contigent claim is that which arises when a person is bound as surety or guarantor for a principal who is insolvent or dead. Under the ordinary contract of suretyship the surety has no claim whatever against his principal until he himself pays something by way of satisfaction upon the obligation which is secured. When he does this, there instantly arises in favor of the surety the right to compel the principal to exonerate the surety. But until the surety has contributed something to the payment of the debt, or has performed the secured obligation in whole or in part, he has no right of action against anybody — no claim that could be reduced to judgment. (May vs. Vann, 15 Pla., 553; chan roblesvirtualawlibraryGibson vs. Mithell, 16 Pla., 519; chan roblesvirtualawlibraryMaxey vs. Carter, 10 Yarg. [Tenn.], 521 Reeves vs. Pulliam, 7 Baxt. [Tenn.], 119; chan roblesvirtualawlibraryErnst vs. Nou, 63 Wis., 134.)” For Defendant administratrix it is averred that the above doctrine refers to a case where the surety files claims against the estate of the principal debtor; chan roblesvirtualawlibraryand it is urged that the rule does not apply to the case before us, where the late Hemady was a surety, not a principal debtor. The argument evinces a superficial view of the relations between parties. If under the Gaskell ruling, the Luzon Surety Co., as guarantor, could file a contingent claim against the estate of the principal debtors if the latter should die, there is absolutely no reason why it could not file such a claim against the estate of Hemady, since Hemady is a solidary co-debtor of his principals. What the Luzon Surety Co. may claim from the estate of a principal debtor it may equally claim from the estate of Hemady, since, in view of the existing solidarity, the latter does not even enjoy the benefit of

exhaustion of the assets of the principal debtor. The foregoing ruling is of course without prejudice to the remedies of the administratrix against the principal debtors under Articles 2071 and 2067 of the New Civil Code. Our conclusion is that the solidary guarantor’s liability is not extinguished by his death, and that in such event, the Luzon Surety Co., had the right to file against the estate a contingent claim for reimbursement. It becomes unnecessary now to discuss the estate’s liability for premiums and stamp taxes, because irrespective of the solution to this question, the Luzon Surety’s claim did state a cause of action, and its dismissal was erroneous. Wherefore, the order appealed from is reversed, and the records are ordered remanded to the court of origin, with instructions to proceed in accordance with law. Costs against the Administratrix- Appellee. SO ORDERED. 137. G.R. No. 120554 September 21, 1999 SO PING BUN, petitioner, vs. COURT OF APPEALS, TEK HUA ENTERPRISES CORP. and MANUEL C. TIONG, respondents. QUISUMBING, J.: This petition for certiorari challenges the Decision 1 of the Court of Appeals dated October 10, 1994, and the Resolution 2 dated June 5, 1995, in CA-G.R. CV No. 38784. The appellate court affirmed the decision of the Regional Trial Court of Manila, Branch 35, except for the award of attorney's fees, as follows: WHEREFORE, foregoing considered, the appeal of respondentappellant So Ping Bun for lack of merit is DISMISSED. The appealed decision dated April 20, 1992 of the court a quo is modified by reducing the attorney's fees awarded to plaintiff Tek Hua Enterprising Corporation from P500,000.00 to P200,000.00.


3

The facts are as follows: In 1963, Tek Hua Trading Co, through its managing partner, So Pek Giok, entered into lease agreements with lessor Dee C. Chuan & Sons Inc. (DCCSI). Subjects of four (4) lease contracts were premises located at Nos. 930, 930-Int., 924-B and 924-C, Soler Street, Binondo, Manila. Tek Hua used the areas to store its textiles. The contracts each had a one-year term. They provided that should the lessee continue to occupy the premises after the term, the lease shall be on a month-to-month basis. When the contracts expired, the parties did not renew the contracts, but Tek Hua continued to occupy the premises. In 1976, Tek Hua Trading Co. was dissolved. Later, the original members of Tek Hua Trading Co. including Manuel C. Tiong, formed Tek Hua Enterprising Corp., herein respondent corporation. So Pek Giok, managing partner of Tek Hua Trading, died in 1986. So Pek Giok's grandson, petitioner So Ping Bun, occupied the warehouse for his own textile business, Trendsetter Marketing. On August 1, 1989, lessor DCCSI sent letters addressed to Tek Hua Enterprises, informing the latter of the 25% increase in rent effective September 1, 1989. The rent increase was later on reduced to 20% effective January 1, 1990, upon other lessees' demand. Again on December 1, 1990, the lessor implemented a 30% rent increase. Enclosed in these letters were new lease contracts for signing. DCCSI warned that failure of the lessee to accomplish the contracts shall be deemed as lack of interest on the lessee's part, and agreement to the termination of the lease. Private respondents did not answer any of these letters. Still, the lease contracts were not rescinded. On March 1, 1991, private respondent Tiong sent a letter to petitioner which reads as follows: March 1, 1991 Mr. So Ping Bun 930 Soler Street Binondo, Manila

Dear Mr. So, Due to my closed (sic) business associate (sic) for three decades with your late grandfather Mr. So Pek Giok and late father, Mr. So Chong Bon, I allowed you temporarily to use the warehouse of Tek Hua Enterprising Corp. for several years to generate your personal business. Since I decided to go back into textile business, I need a warehouse immediately for my stocks. Therefore, please be advised to vacate all your stocks in Tek Hua Enterprising Corp. Warehouse. You are hereby given 14 days to vacate the premises unless you have good reasons that you have the right to stay. Otherwise, I will be constrained to take measure to protect my interest. Please give this urgent matter your preferential attention to avoid inconvenience on your part. Very truly yours, (Sgd) Manuel C. Tiong MANUEL C. TIONG President 4 Petitioner refused to vacate. On March 4, 1992, petitioner requested formal contracts of lease with DCCSI in favor Trendsetter Marketing. So Ping Bun claimed that after the death of his grandfather, So Pek Giok, he had been occupying the premises for his textile business and religiously paid rent. DCCSI acceded to petitioner's request. The lease contracts in favor of Trendsetter were executed. In the suit for injunction, private respondents pressed for the nullification of the lease contracts between DCCSI and petitioner. They also claimed damages. After trial, the trial court ruled: WHEREFORE, judgment is rendered: 1. Annulling the four Contracts of Lease (Exhibits A, A-1 to A-3, inclusive) all dated March 11, 1991, between defendant So Ping Bun, doing business under the name and style of "Trendsetter Marketing", and defendant Dee C. Chuan & Sons, Inc. over the premises located at Nos. 924-B, 924-C, 930 and 930, Int.,


respectively, Soler Street, Binondo Manila; 2. Making permanent the writ of preliminary injunction issued by this Court on June 21, 1991; 3. Ordering defendant So Ping Bun to pay the aggrieved party, plaintiff Tek Hua Enterprising Corporation, the sum of P500,000.00, for attorney's fees; 4. Dismissing the complaint, insofar as plaintiff Manuel C. Tiong is concerned, and the respective counterclaims of the defendant; 5. Ordering defendant So Ping Bun to pay the costs of this lawsuit; This judgment is without prejudice to the rights of plaintiff Tek Hua Enterprising Corporation and defendant Dee C. Chuan & Sons, Inc. to negotiate for the renewal of their lease contracts over the premises located at Nos. 930, 930-Int., 924-B and 924-C Soler Street, Binondo, Manila, under such terms and conditions as they agree upon, provided they are not contrary to law, public policy, public order, and morals. SO ORDERED. 5 Petitioner's motion for reconsideration of the above decision was denied. On appeal by So Ping Bun, the Court of Appeals upheld the trial court. On motion for reconsideration, the appellate court modified the decision by reducing the award of attorney's fees from five hundred thousand (P500,000.00) pesos to two hundred thousand (P200,000.00) pesos. Petitioner is now before the Court raising the following issues: I. WHETHER THE APPELLATE COURT ERRED IN AFFIRMING THE TRIAL COURT'S DECISION FINDING SO PING BUN GUILTY OF TORTUOUS INTERFERENCE OF CONTRACT? II. WHETHER THE APPELLATE COURT ERRED IN AWARDING ATTORNEY'S FEES OF P200,000.00 IN FAVOR OF PRIVATE RESPONDENTS. The foregoing issues involve, essentially, the correct interpretation of the applicable law on tortuous conduct, particularly unlawful interference with contract. We have to begin, obviously, with certain fundamental principles on torts

and damages. Damage is the loss, hurt, or harm which results from injury, and damages are the recompense or compensation awarded for the damage suffered. 6 One becomes liable in an action for damages for a nontrespassory invasion of another's interest in the private use and enjoyment of asset if (a) the other has property rights and privileges with respect to the use or enjoyment interfered with, (b) the invasion is substantial, (c) the defendant's conduct is a legal cause of the invasion, and (d) the invasion is either intentional and unreasonable or unintentional and actionable under general negligence rules. 7 The elements of tort interference are: (1) existence of a valid contract; (2) knowledge on the part of the third person of the existence of contract; and (3) interference of the third person is without legal justification or excuse. 8 A duty which the law of torts is concerned with is respect for the property of others, and a cause of action ex delicto may be predicated upon an unlawful interference by one person of the enjoyment by the other of his private property. 9 This may pertain to a situation where a third person induces a party to renege on or violate his undertaking under a contract. In the case before us, petitioner's Trendsetter Marketing asked DCCSI to execute lease contracts in its favor, and as a result petitioner deprived respondent corporation of the latter's property right. Clearly, and as correctly viewed by the appellate court, the three elements of tort interference abovementioned are present in the instant case. Authorities debate on whether interference may be justified where the defendant acts for the sole purpose of furthering his own financial or economic interest. 10 One view is that, as a general rule, justification for interfering with the business relations of another exists where the actor's motive is to benefit himself. Such justification does not exist where his sole motive is to cause harm to the other. Added to this, some authorities believe that it is not necessary that the interferer's interest outweigh that of the party whose rights are invaded, and that an


individual acts under an economic interest that is substantial, not merely de minimis, such that wrongful and malicious motives are negatived, for he acts in self-protection. 11 Moreover justification for protecting one's financial position should not be made to depend on a comparison of his economic interest in the subject matter with that of others. 12 It is sufficient if the impetus of his conduct lies in a proper business interest rather than in wrongful motives. 13 As early as Gilchrist vs. Cuddy, 14 we held that where there was no malice in the interference of a contract, and the impulse behind one's conduct lies in a proper business interest rather than in wrongful motives, a party cannot be a malicious interferer. Where the alleged interferer is financially interested, and such interest motivates his conduct, it cannot be said that he is an officious or malicious intermeddler. 15 In the instant case, it is clear that petitioner So Ping Bun prevailed upon DCCSI to lease the warehouse to his enterprise at the expense of respondent corporation. Though petitioner took interest in the property of respondent corporation and benefited from it, nothing on record imputes deliberate wrongful motives or malice on him. Sec. 1314 of the Civil Code categorically provides also that, "Any third person who induces another to violate his contract shall be liable for damages to the other contracting party." Petitioner argues that damage is an essential element of tort interference, and since the trial court and the appellate court ruled that private respondents were not entitled to actual, moral or exemplary damages, it follows that he ought to be absolved of any liability, including attorney's fees. It is true that the lower courts did not award damages, but this was only because the extent of damages was not quantifiable. We had a similar situation in Gilchrist, where it was difficult or impossible to determine the extent of damage and there was nothing on record to serve as basis thereof. In that case we refrained from awarding damages. We believe the same conclusion applies in this case.

While we do not encourage tort interferers seeking their economic interest to intrude into existing contracts at the expense of others, however, we find that the conduct herein complained of did not transcend the limits forbidding an obligatory award for damages in the absence of any malice. The business desire is there to make some gain to the detriment of the contracting parties. Lack of malice, however, precludes damages. But it does not relieve petitioner of the legal liability for entering into contracts and causing breach of existing ones. The respondent appellate court correctly confirmed the permanent injunction and nullification of the lease contracts between DCCSI and Trendsetter Marketing, without awarding damages. The injunction saved the respondents from further damage or injury caused by petitioner's interference. Lastly, the recovery of attorney's fees in the concept of actual or compensatory damages, is allowed under the circumstances provided for in Article 2208 of the Civil Code. 16 One such occasion is when the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest. 17 But we have consistently held that the award of considerable damages should have clear factual and legal bases. 18 In connection with attorney's fees, the award should be commensurate to the benefits that would have been derived from a favorable judgment. Settled is the rule that fairness of the award of damages by the trial court calls for appellate review such that the award if far too excessive can be reduced. 19 This ruling applies with equal force on the award of attorney's fees. In a long line of cases we said, "It is not sound policy to place in penalty on the right to litigate. To compel the defeated party to pay the fees of counsel for his successful opponent would throw wide open the door of temptation to the opposing party and his counsel to swell the fees to undue proportions." 20 Considering that the respondent corporation's lease contract, at the time when the cause of action accrued, ran only on a monthto-month basis whence before it was on a yearly basis, we find


even the reduced amount of attorney's fees ordered by the Court of Appeals still exorbitant in the light of prevailing jurisprudence. 21 Consequently, the amount of two hundred thousand (P200,000.00) awarded by respondent appellate court should be reduced to one hundred thousand (P100,000.00) pesos as the reasonable award or attorney's fees in favor of private respondent corporation. WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 38784 are hereby AFFIRMED, with MODIFICATION that the award of attorney's fees is reduced from two hundred thousand (P200,000.00) to one hundred thousand (P100,000.00) pesos. No pronouncement as to costs. SO ORDERED. 138. G.R. No. L-25494 June 14, 1972 NICOLAS SANCHEZ, plaintiff-appellee, vs. SEVERINA RIGOS, defendant-appellant. Santiago F. Bautista for plaintiff-appellee. Jesus G. Villamar for defendant-appellant. CONCEPCION, C.J.:p Appeal from a decision of the Court of First Instance of Nueva Ecija to the Court of Appeals, which certified the case to Us, upon the ground that it involves a question purely of law. The record shows that, on April 3, 1961, plaintiff Nicolas Sanchez and defendant Severina Rigos executed an instrument entitled "Option to Purchase," whereby Mrs. Rigos "agreed, promised and committed ... to sell" to Sanchez the sum of P1,510.00, a parcel of land situated in the barrios of Abar and Sibot, municipality of San Jose, province of Nueva Ecija, and more particularly described in Transfer Certificate of Title No. NT-12528 of said province,

within two (2) years from said date with the understanding that said option shall be deemed "terminated and elapsed," if "Sanchez shall fail to exercise his right to buy the property" within the stipulated period. Inasmuch as several tenders of payment of the sum of Pl,510.00, made by Sanchez within said period, were rejected by Mrs. Rigos, on March 12, 1963, the former deposited said amount with the Court of First Instance of Nueva Ecija and commenced against the latter the present action, for specific performance and damages. After the filing of defendant's answer — admitting some allegations of the complaint, denying other allegations thereof, and alleging, as special defense, that the contract between the parties "is a unilateral promise to sell, and the same being unsupported by any valuable consideration, by force of the New Civil Code, is null and void" — on February 11, 1964, both parties, assisted by their respective counsel, jointly moved for a judgment on the pleadings. Accordingly, on February 28, 1964, the lower court rendered judgment for Sanchez, ordering Mrs. Rigos to accept the sum judicially consigned by him and to execute, in his favor, the requisite deed of conveyance. Mrs. Rigos was, likewise, sentenced to pay P200.00, as attorney's fees, and other costs. Hence, this appeal by Mrs. Rigos. This case admittedly hinges on the proper application of Article 1479 of our Civil Code, which provides: 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. In his complaint, plaintiff alleges that, by virtue of the option under consideration, "defendant agreed and committed to sell" and "the plaintiff agreed and committed to buy" the land described in the option, copy of which was annexed to said pleading as Annex A thereof and is quoted on the margin. 1 Hence, plaintiff maintains that the promise contained in the contract is "reciprocally demandable," pursuant to the first paragraph of


said Article 1479. Although defendant had really "agreed, promised and committed" herself to sell the land to the plaintiff, it is not true that the latter had, in turn, "agreed and committed himself " to buy said property. Said Annex A does not bear out plaintiff's allegation to this effect. What is more, since Annex A has been made "an integral part" of his complaint, the provisions of said instrument form part "and parcel" 2 of said pleading. The option did not impose upon plaintiff the obligation to purchase defendant's property. Annex A is not a "contract to buy and sell." It merely granted plaintiff an "option" to buy. And both parties so understood it, as indicated by the caption, "Option to Purchase," given by them to said instrument. Under the provisions thereof, the defendant "agreed, promised and committed" herself to sell the land therein described to the plaintiff for P1,510.00, but there is nothing in the contract to indicate that her aforementioned agreement, promise and undertaking is supported by a consideration "distinct from the price" stipulated for the sale of the land. Relying upon Article 1354 of our Civil Code, the lower court presumed the existence of said consideration, and this would seem to be the main factor that influenced its decision in plaintiff's favor. It should be noted, however, that: (1) Article 1354 applies to contracts in general, whereas the second paragraph of Article 1479 refers to "sales" in particular, and, more specifically, to "an accepted unilateral promise to buy or to sell." In other words, Article 1479 is controlling in the case at bar. (2) In order that said unilateral promise may be "binding upon the promisor, Article 1479 requires the concurrence of a condition, namely, that the promise be "supported by a consideration distinct from the price." Accordingly, the promisee can not compel the promisor to comply with the promise, unless the former establishes the existence of said distinct consideration. In other words, the promisee has the burden of proving such consideration. Plaintiff herein has not even alleged the existence thereof in his complaint.

(3) Upon the other hand, defendant explicitly averred in her answer, and pleaded as a special defense, the absence of said consideration for her promise to sell and, by joining in the petition for a judgment on the pleadings, plaintiff has impliedly admitted the truth of said averment in defendant's answer. Indeed as early as March 14, 1908, it had been held, in Bauermann v. Casas, 3 that: One who prays for judgment on the pleadings without offering proof as to the truth of his own allegations, and without giving the opposing party an opportunity to introduce evidence, must be understood to admit the truth of all the material and relevant allegations of the opposing party, and to rest his motion for judgment on those allegations taken together with such of his own as are admitted in the pleadings. (La Yebana Company vs. Sevilla, 9 Phil. 210). (Emphasis supplied.) This view was reiterated in Evangelista v. De la Rosa 4 and Mercy's Incorporated v. Herminia Verde. 5 Squarely in point is Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., 6 from which We quote: The main contention of appellant is that the option granted to appellee to sell to it barge No. 10 for the sum of P30,000 under the terms stated above has no legal effect because it is not supported by any consideration and in support thereof it invokes article 1479 of the new Civil Code. The article provides: "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 sell a determinate thing for a price certain is binding upon the promisor if the promise is supported by a consideration distinct from the price." On the other hand, Appellee contends that, even granting that the "offer of option" is not supported by any consideration, that option became binding on appellant when the appellee gave notice to it of its acceptance, and that having accepted it within the period of option, the offer can no longer be withdrawn and in any event such withdrawal is ineffective. In support this contention, appellee invokes article 1324 of the Civil Code which


provides: "ART. 1324. When the offerer has allowed the offeree a certain period to accept, the offer may be withdrawn any time before acceptance by communicating such withdrawal, except when the option is founded upon consideration as something paid or promised." There is no question that under article 1479 of the new Civil Code "an option to sell," or "a promise to buy or to sell," as used in said article, to be valid must be "supported by a consideration distinct from the price." This is clearly inferred from the context of said article that a unilateral promise to buy or to sell, even if accepted, is only binding if supported by consideration. In other words, "an accepted unilateral promise can only have a binding effect if supported by a consideration which means that the option can still be withdrawn, even if accepted, if the same is not supported by any consideration. It is not disputed that the option is without consideration. It can therefore be withdrawn notwithstanding the acceptance of it by appellee. It is true that under article 1324 of the new Civil Code, the general rule regarding offer and acceptance is that, when the offerer gives to the offeree a certain period to accept, "the offer may be withdrawn at any time before acceptance" except when the option is founded upon consideration, but this general rule must be interpreted as modified by the provision of article 1479 above referred to, which applies to "a promise to buy and sell" specifically. As already stated, this rule requires that a promise to sell to be valid must be supported by a consideration distinct from the price. We are not oblivious of the existence of American authorities which hold that an offer, once accepted, cannot be withdrawn, regardless of whether it is supported or not by a consideration (12 Am. Jur. 528). These authorities, we note, uphold the general rule applicable to offer and acceptance as contained in our new Civil Code. But we are prevented from applying them in view of the specific provision embodied in article 1479. While under the "offer of option" in question appellant has assumed a clear

obligation to sell its barge to appellee and the option has been exercised in accordance with its terms, and there appears to be no valid or justifiable reason for appellant to withdraw its offer, this Court cannot adopt a different attitude because the law on the matter is clear. Our imperative duty is to apply it unless modified by Congress. However, this Court itself, in the case of Atkins, Kroll and Co., Inc. v. Cua Hian Tek, 8 decided later that Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., 9 saw no distinction between Articles 1324 and 1479 of the Civil Code and applied the former where a unilateral promise to sell similar to the one sued upon here was involved, treating such promise as an option which, although not binding as a contract in itself for lack of a separate consideration, nevertheless generated a bilateral contract of purchase and sale upon acceptance. Speaking through Associate Justice, later Chief Justice, Cesar Bengzon, this Court said: Furthermore, an option is unilateral: a promise to sell at the price fixed whenever the offeree should decide to exercise his option within the specified time. After accepting the promise and before he exercises his option, the holder of the option is not bound to buy. He is free either to buy or not to buy later. In this case, however, upon accepting herein petitioner's offer a bilateral promise to sell and to buy ensued, and the respondent ipso facto assumed the obligation of a purchaser. He did not just get the right subsequently to buy or not to buy. It was not a mere option then; it was a bilateral contract of sale. Lastly, even supposing that Exh. A granted an option which is not binding for lack of consideration, the authorities hold that: "If the option is given without a consideration, it is a mere offer of a contract of sale, which is not binding until accepted. If, however, acceptance is made before a withdrawal, it constitutes a binding contract of sale, even though the option was not supported by a sufficient consideration. ... . (77 Corpus Juris Secundum, p. 652. See also 27 Ruling Case Law 339 and cases cited.) "It can be taken for granted, as contended by the defendant, that


the option contract was not valid for lack of consideration. But it was, at least, an offer to sell, which was accepted by letter, and of the acceptance the offerer had knowledge before said offer was withdrawn. The concurrence of both acts — the offer and the acceptance — could at all events have generated a contract, if none there was before (arts. 1254 and 1262 of the Civil Code)." (Zayco vs. Serra, 44 Phil. 331.) In other words, since there may be no valid contract without a cause or consideration, the promisor is not bound by his promise and may, accordingly, withdraw it. Pending notice of its withdrawal, his accepted promise partakes, however, of the nature of an offer to sell which, if accepted, results in a perfected contract of sale. This view has the advantage of avoiding a conflict between Articles 1324 — on the general principles on contracts — and 1479 — on sales — of the Civil Code, in line with the cardinal rule of statutory construction that, in construing different provisions of one and the same law or code, such interpretation should be favored as will reconcile or harmonize said provisions and avoid a conflict between the same. Indeed, the presumption is that, in the process of drafting the Code, its author has maintained a consistent philosophy or position. Moreover, the decision in Southwestern Sugar & Molasses Co. v. Atlantic Gulf & Pacific Co., 10 holding that Art. 1324 is modified by Art. 1479 of the Civil Code, in effect, considers the latter as an exception to the former, and exceptions are not favored, unless the intention to the contrary is clear, and it is not so, insofar as said two (2) articles are concerned. What is more, the reference, in both the second paragraph of Art. 1479 and Art. 1324, to an option or promise supported by or founded upon a consideration, strongly suggests that the two (2) provisions intended to enforce or implement the same principle. Upon mature deliberation, the Court is of the considered opinion that it should, as it hereby reiterates the doctrine laid down in the Atkins, Kroll & Co. case, and that, insofar as inconsistent therewith, the view adhered to in the Southwestern Sugar &

Molasses Co. case should be deemed abandoned or modified. WHEREFORE, the decision appealed from is hereby affirmed, with costs against defendant-appellant Severina Rigos. It is so ordered. Reyes, J.B.L., Makalintal, Zaldivar, Teehankee, Barredo and Makasiar, JJ., concur.  Castro, J., took no part. 139. G.R. No. 73918 December 21, 1987 TONG BROTHERS CO., petitioner, vs. INTERMEDIATE APPELLATE COURT and JULIANO AND COMPANY, respondents. GUTIERREZ, JR., J.: This is a petition to review on certiorari the decision and order of the then Intermediate Appellate Court, now Court of Appeals, in AC-G.R. No. 68505 which awarded a total amount of P907,220.66 as damages, including attorney's fees, in favor of the private respondent. The petitioner is a registered general partnership engaged in the construction and repair of vessels with drydocking facilities at Recodo Zamboanga del Sur while the private respondent is a domestic corporation engaged in the coastwise shipping industry operating for that purpose the vessel M/S Zamboanga-J. Sometime in December, 1974, the private respondent allegedly contracted with the petitioner the annual drydocking and repair of the Zamboanga-J. On the ground that the petitioner did not complete and execute all the work necessary, essential and indispensable to rendering the vessel seaworthy resulting in its deterioration and total loss, the private respondent filed a complaint against the petitioner for specific performance and damages with the Court of First Instance of Cotabato. The petitioner denied that there was a perfected contract to


repair Zamboanga-J between the two parties. To prove its case against the petitioner, the private respondent tried to establish the following facts: xxx xxx xxx ... As the need arose, the plaintiff had its vessels drydocked for repairs at the dockyard of the defendant-appellant in Zamboanga City. This business relationship started in 1960's (t.s.n., March 11, 1980, p. 7). The procedure was for these vessels to be drydocked and repaired and after each job, a statement of account would be sent to the plaintiff-appellee, which remitted payments to the defendant-appellant in varying amounts (Exh. 9). Although Exhibit 9 consolidates the accounts pertaining to the Cotabato J and the Zamboanga-J, in point of fact, statements were separately prepared for said vessels. Because the business relationship between the parties herein had continued for over 10 years, the plaintiff-appellee enjoyed credit facilities from the defendant-appellant and the defendant performed repair work on the plaintiff's vessel without need of a formal written contract. On the strength of this relationship, the plaintiff, sometime in December, 1974 brought the Zamboanga-J to the defendant-appellant's dockyard. The defendant- appellant asked for a deposit of P15,000.00 but even without having received this amount that it had requested, the defendantappellant drydocked the vessel on December 27, 1974 (t.s.n., March 11, 1980, p. 8). The sum of P15,000.00 was received by the defendant on December 28, 1974 for which it issued two receipts, one for P5,000.00 and the other for P10,000.00 (Exhs. "A" and "B"). With this payment, the defendant commenced work on the Zamboanga-J by removing the rudders, pulled out tail shafts with propellers, etc., removed bottom hull planking in way of inspecting ribs, and replaced same with new plankings, etc. (t. s. n. Ibid, pp. 112, 126,134,135) The plaintiff, even before the Zamboanga-J was drydocked, also shipped various lumber materials to Zamboanga City to the defendant-appellant, through Luis Canto in accordance with

instructions from, and based on specifications of the defendant (Exhs. D, E, F, G, and all submarkings, t.s.n., February 14, 1978, pp. 25-30, pp. 31-34). For some excuse or other, the defendant did not continue the job on the Zamboanga-J. Instead, it undocked the vessel on February 4, 1975 and left it exposed to the elements where it remained until it became a total loss. This suit was therefore filed to call the defendant- appellant to account for its failure to comply with its obligation to repair the plaintiff-appellee's vessel which failure resulted in damages to the plaintiff- appellee. (pp. 36-37, Rollo) On the other hand, the petitioner denied responsibility for the total loss of the vessel M/S Zamboanga-J and stated the facts as follows: xxx xxx xxx ... Its business name is VARADERO DE RECODO. It used to repair the vessels owned by plaintiff-appellee. The last vessel of plaintiff-appellee which was drydocked at the VARADERO DE RECODO was Zamboanga- J. It was drydocked on December 27, 1974, after plaintiff-appellee paid P15,000.00, representing partial payment of its old accounts. Conformably with the written application filed by plaintiff-appellee with the Coast Guard, Zamboanga City, inspector Anton Casimero inspected the vessel Zamboanga-J on January 2, 1975. Present during the inspection were Messrs. Ricardo Tong and Joaquin Tong, representatives of defendant- appellant and Mr. Luis Canto representative of plaintiff-appellee. While admittedly the man of plaintiff-appellee in Zamboanga City, Mr. Luis Canto had no authority to enter into a contract with defendant-appellant for the repair of ZamboangaJ. Because of the extensive repair to be done on the vessel, defendant-appellant prepared a written contract for the signature of plaintiff-appellee's authorized representative. In said written contract, plaintiff-appellee was to have deposited with defendant-appellant the amount of P50,000.00, among others. Mr. Luis Canto man of plaintiff-appellee's in Zamboanga City, was informed on several occasions by defendant- appellant to get in touch with his employer in Cotabato City, the purpose being was


(sic) for plaintiff-appellee's representative to see for himself the extent of the deterioration of the vessel and to sign the written contract prepared by defendant-appellant. No authorized representative of plaintiff-appellee came to Zamboanga City. It sent, however, several telegrams to defendant-appellant demanding, among others, that defendant-appellant repair the Zamboanga-J, there being an earlier agreement between defendant-appellant and Mr. Protacio Juliano, authorized representative of plaintiff-appellee. On the other hand, defendant- appellant advised plaintiff- appellee to send its authorized representative to Zamboanga City to see for himself the extent of the deterioration of the vessel Zamboanga-J, and insisted, among others, that it had no contract with plaintiffappellee for the repair of Zamboanga-J. In addition thereto, plaintiff- appellee never bothered to secure the JOB ORDER from the Coast Guard, it being its duty to do so. The vessel was undocked on February 4, 1975, and the following day, defendantappellant sent plaintiff-appellee a Statement of Account in the amount of P13,134.95. Of this amount P9,800.00 represented expenses for dock rental and for the docking and undocking of the vessel. The balance of the amount represented expenses for labor and materials used in closing the open sections of the vessel. Without these latter expenses, the vessel Zamboanga-J could not have been REFLOATED. Zamboanga-J was not repaired and it is now a total loss. (pp. 2-4, Appellant's Brief). The lower court ruled in favor of the private respondent. The dispositive portion of the decision reads: WHEREFORE, the judgment is hereby entered in favor of JULIANO & COMPANY INCORPORATED and against the defendant TONG BROTHERS AND COMPANY who (sic) is ordered to pay the plaintiff the following: 1. To pay plaintiff the sum of FOUR HUNDRED AND FIFTY THOUSAND PESOS (P450,000.00), which is the value of the Zamboanga-J which is now a total loss; 2. To pay the plaintiff the sum of FIVE HUNDRED FORTY TWO THOUSAND TWO HUNDRED AND TWENTY PESOS AND SIXTY

SIX CENTAVOS (P 542,220.66) which is the unrealized net income of the ZAMBOANGA-J had the defendant repaired the same and finished the job; 3. To reimburse plaintiff the sum of TEN THOUSAND PESOS (P10,000.00) as reimbursement for what plaintiff had paid its counsel; 4. To reimburse plaintiff the sum of FIVE THOUSAND PESOS (P5,000.00) as reimbursement for the expenses incurred by the plaintiff in prosecuting the case and 5. To pay the costs of this suit. (Rollo,pp.34-35) Upon appeal, the then Intermediate Appellate Court affirmed the lower court's decision but reduced the value of the boat to P350,000.00. We initially denied the petition in a resolution dated May 5, 1986. Upon a motion for reconsideration, we set aside the resolution and gave due course to the petition. The petitioner assigns the following errors: I THE RESPONDENT INTERMEDIATE APPELLATE COURT ERRED IN FINDING THAT THERE WAS A PERFECTED CONTRACT FOR THE REPAIR OF THE VESSEL ZAMBOANGA-J AND THAT THE PROXIMATE CAUSE OF THE LOSS OF THE VESSEL WAS PETITIONER'S VIOLATION THEREOF. II THE RESPONDENT INTERMEDIATE APPELLATE COURT ERRED IN AWARDING EXCESSIVE DAMAGES TO PRIVATE RESPONDENT CONSIDERING THAT THE SUBJECT VESSEL WAS A WORLD WAR 11 DERELICT AND CONSIDERING FURTHER THAT THE RESPONDENT APPELLATE COURT FOUND AS A FACT THAT THE OWNER OF THE VESSEL WAS ALSO AT FAULT IN NOT MINIMIZING ITS LOSSES. III THE RESPONDENT INTERMEDIATE APPELLATE COURT ERRED IN FINDING THAT PETITIONER FAILED TO CONSIGN THE VESSEL UPON THE REFUSAL OF ITS OWNER TO ACCEPT ITS RETURN INSPITE OF THE EVIDENCE THAT THE VESSEL HAD


ALWAYS BEEN UNDER THE FULL CONTROL AND DIRECTION OF ITS OWNER. (Rollo, pp. 17-18). The decisive issue is whether or not there was a perfected contract between the petitioner and the private respondent to repair the vessel Zamboanga-J. The applicable laws on work done upon a vessel are the general rules on contract. A contract may be entered into in whatever form except where the law requires a document or other special form as in the contracts enumerated in Article 1388 of the Civil Code. The general rule, therefore, is that a contract may be oral or written. (Royal Lines, Inc. v. Court of Appeals, 143 SCRA 608). The appellate court, adopting the findings and conclusions of the lower court, ruled that there was a perfected contract for the repair of the vessel Zamboanga-J. It based its ruling on the following circumstances: 1) The previous transactions and business relationship between the two parties showed that they never executed written contracts for the repair of vessels owned by the private respondent; 2) The procedure for necessary repairs of the private respondent's vessels consisted only in the drydocking of the vessel at the petitioner's shipyard to be repaired by the latter after which the bill would be sent to the former for the payment; 3) In the case of the contract to repair Zamboanga-J, this vessel was accepted by the petitioner and it was drydocked on December 27, 1974; 4) A day after, or on December 28, 1974, the private respondent paid P15,000.00 in the form of two (2) checks as initial deposit for the repair of Zamboanga-J; 5) There was a job order from the Coast Guard as evidenced by the application for drydocking (Exhibit C) and the admitted inspection of the vessel by the Coast Guard in the presence of Mr. Joaquin Tong, a managing partner of the Veradero de Recodo the business name of the petitioner, and 6) The petitioner actually commenced the repair of the vessel when it removed the rudders and pulled out the tail shafts and did other things. The general rule is that the "jurisdiction of this Court in cases brought to us from the Court of Appeals is limited to reviewing

and revising the errors of law imputed to it, its findings of facts being conclusive. (Community Savings and Loan Association, Inc., et al. v. Court of Appeals, et al., G.R. No. 75786, August 31, 1987, citing De Gala-Sison v. Manalo, 8 SCRA 595; Goduco v. Court of Appeals, 14 SCRA 282; Ramirez Telephone Corporation v. Bank of America, 29 SCRA 171; Chua v. Court of Appeals, 33 SCRA 373.) There are, however, exceptions to this rule as when: ... (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 Court of Appeals went beyond the issues of the case and its findings are contrary to the admission of both appellant and appellees [Roque v. Buan, L-22459, Oct. 31, 1967, 21 SCRA 6481; (6) the findings of facto of the Court of Appeals are contrary to those of the trial court; (7) said findings of facts are conclusions without citation of specific evidence on which they are based; (8) the facts set forth in the petition as wen as in the petitioner's main and reply briefs are not disputed by the respondents [Garcia v. CA, L-26490, June 30, 1970, 33 SCRA 6221; and (9) when the finding of facts of the Court of Appeals is premised on the absence of evidence and is contradicted by evidence on record [Salazar v. Gutierrez, L21727, May 29, 1970, 33 SCRA 2431. (Tolentino v. De Jesus, 56 SCRA 167) The fact that the parties' previous contracts for the repair of the private respondent's vessels were an oral and that the procedure consisted merely in the vessels being drydocked at the petitioner's shipyard and after repair the petitioner would just send the bin to the private respondent, does not necessarily result in a conclusive presumption that all subsequent contracts between the parties of similar or allied nature should also be oral and the procedure be the same. An examination of the records reveals that there are circumstances overlooked by the appellate court which support the petitioner's contentions that — 1) there was no perfected contract between the parties to repair Zamboanga-J, and 2) the


proximate cause of the total loss of Zamboanga-J was the abandonment of the vessel by the private respondent. On January 2, 1975, during the inspection made by the Coast Guard inspector, Anton Casimero in the presence of Mr. Luis Canto the private respondent's representative, and Mr. Joaquin Tong, managing partner of the petitioner, it was found that the wooden boat had so deteriorated that in order to repair it, all the original ribs of the boat and the plankings must be removed and that, in effect, the repair would be a construction of a new boat. It was also established that the private respondent never paid on time during the parties' previous transactions and when the Zamboanga-J was drydocked at the petitioner's shipyard, the private respondent still owed P28,000.00 for previous jobs. In fact, the petitioner had filed a collection suit, Civil Case No. 281 (1728), against the private respondent with the Court of First Instance of Cotabato. These undisputed facts give credence to the petitioner's contention that before accepting the job request to repair Zamboanga-J, it wanted to have the private respondent sign a written contract with an initial downpayment of P50,000.00. According to the petitioner, the P15,000.00 was partial settlement of previous accounts. Taking into consideration the petitioner's previous experiences together with the private respondent's allegations, it is equally likely that the P15,000.00 paid by the latter on December 28, 1974 was only a condition precedent to the acceptance of Zamboanga-J for drydocking and not a downpayment for its repair. We agree with the petitioner in its contentions: ... That the payment of P15,000 on December 28, 1974 could not have possibly been for the repairs of the Zamboanga-J is confirmed no less than by the very findings of the trial court when it stated that 'the procedure that was followed was for the vessels of plaintiff (herein private respondent) to be drydocked and repaired and after (sic) job, the statements of account will be sent to plaintiff and in turn, the plaintiff will remit payment to the defendant (herein petitioner) in varying amounts' (p. 182, R.A.)

Following this reasoning, and concededly since the work on the Zamboanga-J had not yet even commenced, then the P15,000 payment on December 28, 1974 could only pertain to the partial settlement of private respondent's previous unpaid accounts. It is for this reason that the two receipts marked as Exhibits A and B issued on December 28,1974 for P15,000 made no specific mention that these were in payment for the repairs of the Zamboanga-J. As a matter of fact, private respondent admits that no such downpayment had been required for past repairs with the shipyard. Petitioner's submission is further strengthened when we consider that no estimate of the expenses for repairs to be incurred had as yet been made on the vessel Zamboanga-J on December 28, 1974 (one day after the vessel was admitted for drydocking) and petitioner would have no basis for requesting an immediate downpayment. The evidence shows that it was only on January 2, 1975 when a Coast Guard inspector conducted an ocular inspection of the vessel in the presence of Luis Canto private respondent's representative. Logically it was only at that time (January 2, 1975) that the shipyard was appraised of the work to be done on the vessel and for this reason, said petitioner demanded for a P50,000 downpayment, not P15,000 as claimed by private respondent. (p. 24, Rollo) Contrary to the findings of the appellate court, there was actually no job order issued by the Coast Guard. Exhibit "C" is merely the petitioner's application for an inspection of the boat addressed to the Coast Guard. Moreover, the removal of the rudders and pulling out of the tail shafts with propellers, done even before January 2, 1975, were standard operating procedures on the part of the petitioner to inspect the condition of the tail shafts and also the state of the rudders. This did not amount to a commencement of the repair of the vessel or a partial compliance with a contract to repair the vessel. Between January 14, 1975 to January 28, 1975, the two parties communicated with each other through telegrams. On January 14, 1975, Protacio Juliano, owner of the respondent


company sent the following telegram to the petitioner: PLEASE ADVISE EXTENT OF REPAIR FOR DRYDOCK ZAMBOANGA-J PER OUR AGREEMENT WIRE REPLY JULIANO (Exhibit J-2, p. 20, Folder of Exhibits) On January 16, 1975 Juliano again sent the following telegram to the petitioner: URGENTLY REQUIRE STATUS REPAIR ZAMBOANGA-J ADVISE COLLECT JULIANO (Exhibit J-3, p. 20, Folder of Exhibits) On January 17, 1975, the petitioner in turn sent the following telegram to Juliano NEED YOUR PRESENCE BEFORE WE START THE REPAIR FOR EVALUATION REGARDS VARADERO (Exhibit J-4, p. 20, Folder of Exhibits) On January 18, 1975, Juliano sent the following telegram to the petitioner: "REUR JAN 17 INSISTING ON PREVIOUS AGREEMENT MY PRESENCE NO LONGER NECESSARY PLEASE REPLY TOTO JULIANO (Exhibit J-5, p. 20, Folder of Exhibits) In reply to Juliano, the petitioner sent the following telegram in January 20, 1975: WE CANNOT START THE JOB ORDER WITHOUT YOUR PRESENCE TO DETERMINE THE EXTENT OF WORK VARADERO DE RECODO (Exhibit J-4, p. 21, Folder of Exhibits) On January 22, 1975, the petitioner sent another telegram to Protacio Juliano as follows: YOUR PRESENCE BADLY NEEDED UP TO FRIDAY IF NOT ARRIVED PRESUME NOT INTERESTED WITH THE REPAIR OF ZBGA-J STOP WILL COVER OPENED SECTION AND UNDOCK VARADERO DE RECODO (Exhibit 5-B, p. 23, Folder of Exhibits

In reply, Atty. Badoy, representing the private respondent, sent a telegram to the petitioner on January 23, 1975, to wit: RE-ZAMBOANGA-J PARTY CONCERNED OUT OF CITY ANYTHING YOU DO NOT IN ACCORDANCE WITH AGREEMENT IS SOLELY AT YOUR OWN RISK REGARDS ATTY. BADOY (Exhibit A, p. 23, Folder of Exhibits) On January 28, 1975, the petitioner sent another telegram to Juliano, to wit: REURTEL JANUARY 23 NO AGREEMENT AS TO THE EXTENT OF REPAIRS AND PAYMENT WILL UNDOCK VESSEL VARADERO DE RECODO (Exhibit J-7, p. 21, Folder of Exhibits) These series of communications show that there was no perfected contract to repair the vessel Zamboanga-J. The parties were aware of where they stood. Article 1315 of the Civil Code provides: Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. while Article 1319 thereof provides: Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer. As can be gleaned from the exchange of telegrams between the two parties, there was not yet a meeting of the minds as to the cause of the contract. The cause of a contract has been defined "as the essential reason which moves the contracting parties to enter into it (8 Manresa, 5th Edition, p. 450). In other words, the cause is the immediate, direct and proximate reason which justifies the creation of an obligation thru the will of the contracting parties (3 Castan, 4th Edition, p. 347)." (General Enterprises, Inc. v. Lianga Bay Logging Co., Inc., 11 SCRA 733, 739). For the private


respondent, the cause of the contract was the repair of its vessel Zamboanga-J while for the petitioner the cause would be its commitment to repair the vessel and make it seaworthy. The telegrams dated January 17, January 20, and January 28, 1975 sent by the petitioner to the private respondent, however, indicate that the former had not accepted the repair of Zamboanga-J, the reason being that the extent of the repair to be made necessitated a major expense so that the petitioner insisted on the presence of the private respondent for evaluation before it accepted the repair of the wooden vessel. That the petitioner had not yet consented to the contract is evident when on January 28, 1975, it sent a telegram stating: "... NO AGREEMENT AS TO THE EX TENT OF REPAIRS AND PAYMENT WILL UNDOCK VESSEL." The fact that the private respondent who received this telegram ignored it, confirms that there was no perfected contract to repair Zamboanga-J. It is to be noted that despite its knowledge of Zamboanga-J having been undocked as early as February 7, 1975 when the petitioner sent a telegram advising that Zamboanga-J undocked already, " the private respondent took no action to save its vessel. Instead, its officers and crew were ordered ashore and the vessel was left to rot and decay in the sea of Zamboanga. It was only on July 28, 1975, after the lapse of almost six months, that the private respondent tried to recover the value of its vessel from the petitioner. This prompted the petitioner to send another telegram to the private respondent on August 1, 1975, to wit: AS EARLY AS JANUARY VARADERO DEMANDED ZAMBOANGA-J OFFICERS YOUR MR CANTO TAKE ZAMBOANGA J OUT VARADERO PREMISES BUT YOUR OFFICERS CREW ABANDONED SAME PRESENTLY VARADERO PAYING SECURITY GUARDS AND DEMANDING REIMBURSEMENT ATTORNEY JESUS AQUINO COUNSEL VARADERO RECODO (Exhibit 5-C, p. 23, Folder of Exhibits) Under the circumstances, we rule that the proximate cause of the total loss of Zamboanga-J was the negligence of the private

respondent. Breach of contract by the appellant could not have been the proximate cause as there was no perfected contract between the parties to repair Zamboanga-J. Hence, the private respondent is not entitled to recover damages against the private respondent. We agree with the petitioner that: The loss of the vessel can be attributed only to the immediate and proximate negligence of private respondent who failed to exercise the diligence of a good father of a family. Because after the undocking on February 4, 1974: (1) the officers and the crew were allowed to depart; (2) no measures were taken to have the vessel repaired; (3) the vessel was left to the elements; (4) a marine surveyor was hired only six months later when the ship was already beyond repair, the subsequent loss can be attributed solely to the negligence of the owner. Consequently, petitioner should be totally absolved of any liability for the loss of Zamboanga-J as so provided under Article 2179 of the Civil Code. ART. 2179. When the plaintiff's own negligence was the immediate and proximate cause of his injury, he cannot recover damages. But if his negligence was only contributory, the immediate and proximate cause of the injury being the defendant's lack of due care, shall mitigate the damages to be awarded. (Emphasis supplied) The private respondent, as the shipowner, was in actual possession of the vessel all along even when it was on drydock and after it had been undocked. This is shown by the affidavit dated September 20, 1985 of the petitioner attached as Annex A to the Supplement to Motion for Reconsideration dated September 25, 1985 (Annex 1, Petition) and by the fact that the vessel had a thousand items by value to be safeguarded such as nautical instruments, bedding, kitchen utensil and the like. As a matter of fact, the crew of the vessel was on board when the Zamboanga-J was released from petitioner's shipyard on February 4, 1975. Respondent's witness Luis Canto even admitted that the subject vessel was afloat. For several months, private respondent allowed the Zamboanga-J to rot and


deteriorate by exposing it to the elements. The private respondent did not take any measure to save the ship but even ordered its crew to abandon it. The marine surveyor was dispatched only on September 1976 to inspect the Zamboanga-J which at that time was already a total loss. (p. 27, Rollo) The private respondent did not bother from January, 1975 to September, 1976 or for almost two years, to find out what happened to its vessel inspite of its full knowledge that the boat had been undocked and to take concrete steps to save and rehabilitate it. It relied completely on an alleged verbal understanding in order to get from the petitioner the full value of a functioning vessel and the income it claimed would have been earned for the next five years. Not only was a written agreement for the repair of the vessel, missing in this case but the petitioner formally refused to accept the job and to enter into the contract unless certain terms were met. Under the circumstances, we are constrained to rule that the respondent court committed reversible error. WHEREFORE, the instant petition is hereby GRANTED. The questioned decision is REVERSED AND SET ASIDE. The complaint in Civil Case No. 2446 of the then Court of First Instance of Cotabato is DISMISSED. SO ORDERED. Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur. 140. G.R. No. L-31018 June 29, 1973 LORENZO VELASCO AND SOCORRO J. VELASCO, petitioners, vs. HONORABLE COURT OF APPEALS and MAGDALENA ESTATE, INC., respondents. Napoleon G. Rama for petitioners. Dominador L. Reyes for private respondent.

CASTRO, J.: This is a petition for certiorari and mandamus filed by Lorenzo Velasco and Socorro J. Velasco (hereinafter referred to as the petitioners) against the resolution of the Court of Appeals dated June 28, 1969 in CA-G.R. 42376, which ordered the dismissal of the appeal interposed by the petitioners from a decision of the Court of First Instance of Quezon City on the ground that they had failed seasonably to file their printed record on appeal. Under date of November 3, 1968, the Court of First Instance of Quezon City, after hearing on the merits, rendered a decision in civil case 7761, dismissing the complaint filed by the petitioners against the Magdalena Estate, Inc. (hereinafter referred to as the respondent) for the purpose of compelling specific performance by the respondent of an alleged deed of sale of a parcel of residential land in favor of the petitioners. The basis for the dismissal of the complaint was that the alleged purchase and sale agreement "was not perfected". On November 18, 1968, after the perfection of their appeal to the Court of Appeals, the petitioners received a notice from the said court requiring them to file their printed record on appeal within sixty (60) days from receipt of said notice. This 60-day term was to expire on January 17, 1969. Allegedly under date of January 15, 1969, the petitioners allegedly sent to the Court of Appeals and to counsel for the respondent, by registered mail allegedly deposited personally by its mailing clerk, one Juanito D. Quiachon, at the Makati Post Office, a "Motion For Extension of Time To File Printed Record on Appeal." The extension of time was sought on the ground "of mechanical failures of the printing machines, and the voluminous printing jobs now pending with the Vera Printing Press. ..." On February 10, 1969, the petitioners filed their printed record on appeal in the Court of Appeals. Thereafter, the petitioners received from the respondent a motion filed on February 8, 1969 praying for the dismissal of the appeal on the ground that the petitioners had failed to file their printed record on appeal on


time. Acting on the said motion to dismiss the appeal, the Court of Appeals, on February 25, 1969, issued the following resolution: Upon consideration of the motion of counsel for defendantappellee praying on the grounds therein stated that the appeal be dismissed in accordance with Rules of Court, and of the opposition thereto filed by counsel for plaintiff-appellants, the Court RESOLVED to DENY the said motion to dismiss. Upon consideration of the registry-mailed motion of counsel for plaintiffs appellants praying on the grounds therein stated for an extension of 30 days from January 15, 1969 within which to file the printed record on appeal, the Court RESOLVED to GRANT the said motion and the printed record on appeal which has already been filed is ADMITTED. On March 11, 1969, the respondent prayed for a reconsideration of the above-mentioned resolution, averring that the Court of Appeals had been misled bythe petitioners' "deceitful allegation that they filed the printed record on appeal within the reglementary period," because according to a certification issued by the postmaster of Makati, Rizal, the records of the said post office failed to reveal that on January 15, 1969 — the date when their motion for extension of time to file the printed record on appeal was supposedly mailed by the petitioners — there was any letter deposited there by the petitioners' counsel. The petitioners opposed the motion for reconsideration. They submitted to the appellate court the registry receipts (numbered 0215 and 0216), both stampled January 15, 1969, which were issued by the receiving clerk of the registry section of the Makati Post Office covering the mails for the disputed motion for extension of time to file their printed record on appeal and the affidavit of its mailing clerk Juanito D. Quiachon, to prove that their motion for extension was timely filed and served on the Court of Appeals and the respondent, respectively. After several other pleadings and manifestations were filed by the parties relative to the issue raised by the respondent's above-mentioned motion for reconsideration, the Court of Appeals promulgated on June 28, 1969, its questioned resolution, the dispositive portion

of which reads as follows: WHEREFORE, the motion for reconsideration filed on March 11, 1969 is granted and appeal interposed by plaintiff-appellants from the judgment of the court below is hereby dismissed for their failure to file their printed Record on Appeal within the period authorized by this Court. Atty. Patrocino R. Corpuz [counsel of the petitioner] is required to show cause within ten (10) days from notice why he should not be suspended from the practice of his necessary investigation against Juanito D. Quiachon of the Salonga, Ordoñez, Yap, Sicat & Associates Law Office, Suite 319 337 Rufino Building, Ayala Avenue, Makati Post Office, to file the appropriate criminal action against them as may be warranted in the premises, and to report to this Court within thirty (30) days the action he has taken thereon. The foregoing desposition was based on the following findings of the Court of Appeals: An examination of the Rollo of this case, particularly the letter envelope on page 26 thereof, reveals that on January 15, 1969, plaintiffs supposedly mailed via registered mail from the Post Office of Makati, Rizal their motion for extension of 30 days from that date to file their printed Record on Appeal, under registered letter No. 0216. However, in an official certification, the Postmaster of Makati states that the records of his office disclose: (a) that there were no registered letters Nos. 0215 and 0216 from the Salonga, Ordoñez, Yap, Sicat & Associates addressed to Atty. Abraham F. Sarmiento, 202 Magdalena Building, España Ext., Quezon City, and to the Court of Appeals, Manila, respectively, that were posted in the Post Office of Makati, Rizal, on January 15, 1969; (b) that there is a registered letter numbered 215 but that the same was posted on January 3, 1969 by Enriqueta Amada of 7 Angel, Pasillo F-2, Cartimar, Pasay City, as sender, and Giral Amasan of Barrio Cabuniga-an, Sto. Niño, Samar, as addressee; and that there is also a registered letter numbered 216; but that the same was likewise posted on January 3, 1969 with E.B.A. Construction of 1049 Belbar Building, Metropolitan, Pasong Tamo, Makati, as sender, and Pres. R.


Nakaya of the United Pacific Trading Co., Ltd., 79, 6 Chamo, Nakatu, Yokohari, Japan, as addressee; (c) that on January 15, 1969, the registered letters posted at the Makati Post Office were numbered consecutively from 1001-2225, inclusive, and none of these letters was addressed to Atty. Abraham F. Sarmiento of to the Court of Appeals; (d) that in Registry Bill Book No. 30 for Quezon City as well as that Manila, corresponding to February 7, 1969, there are entries covering registered letters Nos. 0215 and 0216 for dispatch to Quezon City and Manila, respectively; however, such registry book for February 7, 1969 shows no letters with such numbers posted on the said date. The Acting Postmaster of the Commercial Center Post Office of Makati, Rizal, further certifies that "Registry Receipts Nos. 0215 and 0216 addressed to Atty. Abraham F. Sarmiento of the Magdalena Estate, Quezon City and the Honorable Court of Appeals, respectively, does not appear in our Registry Record Book which was allegedly posted at this office on January 15, 1969." From the foregoing, it is immediately apparent that the motion for extension of time to file their Record on Appeal supposedly mailed by the plaintiffs on January 15, 1969 was not really mailed on that date but evidently on a date much later than January 15, 1969. This is further confirmed by the affidavit of Flaviano Malindog, a letter carrier of the Makati Post Office, which defendant attached as Annex 1 to its supplemental reply to plaintiffs' opposition to the motion for reconsideration. In his said affidavit, Malindog swore among others: 'That on February 7, 1969, between 12:00 o'clock noon and 1:00 o'clock in the afternoon, JUANITO D. QUIACHON approached me at the Makati Post Office and talked to me about certain letters which his employer had asked him to mail and that I should help him do something about the matter; but I asked him what they were all about, and he told me that they were letters for the Court of Appeals and for Atty. Abraham Sarmiento and that his purpose was to show that they were posted on January 15, 1969; that I inquired further, and he said that the letters were not so

important and that his only concern was to have them post maker January 15, 1969; 'That believing the word of JUANITO D. QUIACHON that the letters were not really important I agreed to his request; whereupon, I got two (2) registry receipts from an old registry receipt booklet which is no longer being used and I numbered them 0215 for the letter addressed to Atty. Abraham Sarmiento in Quezon City and 0216 for the letter addressed to the Court of Appeals, Manila; that I placed the same numbering on the respective envelopes containing the letters; and that I also post maker them January 15, 1969; 'That to the best of my recollection I wrote the correct date of posting, February 7, 1969, on the back of one or both of the registry receipts above mentioned; 'That the correct date of posting, February 7, 1969 also appears in the Registry Bill Books for Quezon City and Manila where I entered the subject registered letters; Of course, plaintiff's counsel denies the sworn statement of Malindog and even presented the counter-affidavit of one of his clerk by the name of Juanito D. Quiachon. But between Malindog, whose sworn statement is manifestly a declaration against interest since he can be criminally prosecuted for falsification on the basis thereof, and that of Quiachon, whose statement is selfserving, we are very much inclined to give greater weight and credit to the former. Besides, plaintiffs have not refuted the facts disclosed in the two (2) official certifications above mentioned by the Postmakers of Makati, Rizal. These two (2) certifications alone, even without to move this Court to reconsider its resolution of February 25, 1969 and order the dismissal of this appeal. On September 5, 1969, after the rendition of the foregoing resolution, the Court of Appeals promulgated another, denying the motion for reconsideration of the petitioner, but, at the same time, accepting as satisfactory the explanation of Atty. Patrocino R. Corpuz why he should not be suspended from the practice of the legal profession.


On September 20, 1969, the First Assistant Fiscal of Rizal notified the Court of Appeals that he had found a prima facie case against Flaviano C. Malindog and would file the corresponding information for falsification of public documents against him. The said fiscal, however, dismissed the complaint against Quiachon for lack of sufficient evidence. The information subsequently filed against Malindog by the first Assistance Fiscal of Rizal reads as follow: That on or about the 7th day of February 1969, in the municipality of Makati, province of Rizal, and a place within the jurisdiction of this Honorable Court, the above-named accused, conspiring and confederating together and mutually helping and aiding with John Doe, whose true identity and present whereabout is still unknown, did then and there willfully, unlawfully and feloniously falsify two registry receipts which are public documents by reason of the fact that said registry receipts are printed in accordance with the standard forms prescribed by the Bureau of Posts, committed as follows: the above-named accused John Doe, on the date above-mentioned approached and induced the accused Malindog, a letter-carrier at the Makati Post Office, to postmark on Abraham Sarmiento in Quezon City, and the other to the Court of Appeals, Manila, and the accused Malindog, acceding to the inducement of, and in conspiracy with, his co-accused John Doe, did then and there willfully and feloniously falsify said registry receipts of the Makati Post Office on January 15, 1969, thereby making it appear that the said sealed envelopes addressed to Atty. Sarmiento and the Court of Appeals were actually posted, and causing it to appear that the Postmaster of Makati participated therein by posting said mail matters on January 15, 1969, when in truth and in fact he did not so participate. The petitioner contend that in promulgating its questioned resolution, the Court of Appeals acted without or in excess of jurisdiction, or with such whimsical and grave abuse of discretion as to amount to lack of jurisdiction, because (a) it declared that the motion for extension of time to file the printed record on

appeal was not mailed on January 15, 1969, when, in fact, it was mailed on the record on appeal was filed only on February 10, 1969, beyond the time authorized by the appellate court, when the truth is that the said date of filing was within the 30-day extension granted by it; (c) the adverse conclusion of the appellate court are not supported by the records of the case, because the said court ignored the affidavit of the mailing clerk of the petitioners' counsel, the registry receipts and postmarked envelopes (citing Henning v. Western Equipment, 62 Phil. 579, and Caltex Phil., Inc. v. Katipunan Labor Union, 52 O.G. 6209), and, instead, chose to rely upon the affidavit of the mail carrier Malindog, which affidavit was prepared by counsel for the respondent at the affiant himself so declared at the preliminary investigation at the Fiscal's office which absolved the petitioners' counsel mailing clerk Quiachon from any criminal liability; (d) section 1, Rule 50 of the Rules of Court, which enumerates the grounds upon which the Court of Appeals may dismiss an appeal, does not include as a ground the failure to file a printed record on appeal; (e) the said section does not state either that the mismailing of a motion to extend the time to file the printed record on appeal, assuming this to be the case, may be a basis for the dismissal of the appeal; (f) the Court of Appeals has no jurisdiction to revoke the extention of time to file the printed record on appeal it had granted to the petitioners based on a ground not specified in section 1, Rule 50 of the Rules of Court; and (g) the objection to an appeal may be waived as when the appellee has allowed the record on appeal to be printed and approved (citing Moran, Vol. II, p. 519). Some of the objections raised by the petitioners to the questioned resolution of the Court of Appeals are obviously matters involving the correct construction of our rules of procedure and, consequently, are proper subjects of an appeal by way of certiorari under Rule 45 of the Rules of Court, rather than a special civil action for certiorari under Rule 65. The petitioners, however, have correctly appreciated the nature of its objections and have asked this Court to treat the instant petition as an


appeal by way of certiorari under Rule 45 "in the event ... that this Honorable Supreme Court should deem that an appeal is an adequate remedy ..." The nature of the case at bar permits, in our view, a disquisition of both types of assignments. We do not share the view of the petitioners that the Court of Appeals acted without or in excess of jurisdiction or gravely abused its discretion in promulgating the questioned resolution. While it is true that stamped on the registry receipts 0215 and 0215 as well as on the envelopes covering the mails in question is the date "January 15, 1969," this, by itself, does not establish an unrebuttable presumption of the fact of date of mailing. Henning and Caltex, cited by the petitioners, are not in point because the specific adjective issue resolved in those cases was whether or not the date of mailing a pleading is to be considered as the date of its filing. The issue in the case at bar is whether or not the motion of the petitioners for extension of time to file the printed record on appeal was, in point of fact, mailed (and, therefore, filed) on January 15, 1969. In resolving this issue in favor of the respondent, this Court finds, after a careful study and appraisal of the pleadings, admissions and denials respectively adduced and made by the parties, that the Court of Appeals did not gravely abuse its discretion and did not act without or in excess of its jurisdiction. We share the view of the appellate court that the certifications issued by the two postmasters of Makati, Rizal and the sworn declaration of the mail carrier Malindog describing how the said registry receipts came to be issued, are worthy of belief. It will be observed that the said certifications explain clearly and in detail how it was improbable that the petitioners' counsel in the ordinary course of official business, while Malindog's sworn statement, which constitutes a very grave admission against his own interest, provides ample basis for a finding that where official duty was not performed it was at the behest of a person interested in the petitioners' side of the action below. That at the preliminary investigation at the Fiscal's office, Malindog failed to identify Quiachon as the person who induced him to issue falsified

receipts, contrary to what he declared in his affidavit, is of no moment since the findings of the inquest fiscal as reflected in the information for falsification filed against Malindog indicate that someone did induce Malindog to make and issue false registry receipts to the counsel for the petitioners. This Court held in Bello vs. Fernando 1 that the right to appeal is nota natural right nor a part of due process; it is merely a statutory privilege, and may be exercised only in the manner provided by law. In this connection, the Rule of Court expressly makes it the duty of an appellant to file a printed record on appeal with the Court of Appeals within sixty (60) record on appeal approved by the trial court has already been received by the said court. Thus, section 5 of Rule 46 states: Sec. 5. Duty of appellant upon receipt of notice. — It shall be the duty of the appellant within fifteen (15) days from the date of the notice referred to in the preceding section, to pay the clerk of the Court of Appeals the fee for the docketing of the appeal, and within sixty (60) days from such notice to submit to the court forty (40) printed copies of the record on appeal, together with proof of service of fifteen (15) printed copies thereof upon the appelee. As the petitioners failed to comply with the above-mentioned duty which the Rules of Court enjoins, and considering that, as found by the Court of Appeals, there was a deliberate effort on their part to mislead the said Court in grating them an extension of time within which to file their printed record on appeal, it stands to reason that the appellate court cannot be said to have abused its discretion or to have acted without or in excess of its jurisdiction in ordering the dismissal of their appeal. Our jurisprudence is replete with cases in which this Court dismissed an appeal on grounds not mentioned specifically in Section 1, Rule 50 of the Rules of Court. (See, for example, De la Cruz vs. Blanco, 73 Phil. 596 (1942); Government of the Philippines vs. Court of Appeals, 108 Phil. 86 (1960); Ferinion vs. Sta. Romana, L-25521, February 28, 1966, 16 SCRA 370, 375). It will likewise be noted that inasmuch as the petitioners' motion


for extension of the period to file the printed record on appeal was belated filed, then, it is as though the same were nonexistent, since as this Court has already stated in Baquiran vs. Court of Appeals, 2 "The motion for extension of the period for filing pleadings and papers in court must be made before the expiration of the period to be extended." The soundness of this dictum in matters of procedure is self-evident. For, were the doctrine otherwise, the uncertainties that would follow when litigants are left to determine and redetermine for themselves whether to seek further redress in court forthwith or take their own sweet time will result in litigations becoming more unreable than the very grievances they are intended to redness. The argument raised by the petitioner — that the objection to an appeal maybe waived, as when the appellee allows the record on appeal to be printed and approved — is likewise not meritorious considering that the respondent did file a motion in the Court of Appeals on February 8, 1969 praying for the dismissal of the below of the petitioners had not yet filed their record on appeal and, therefore, must be considered to have abandoned their appeal. In further assailing the questioned resolution of the Court of Appeals, the petitioners also point out that on the merits the equities of the instant case are in their favor. A reading of the record, however, persuades us that the judgment a quo is substantially correct and morally just. The appealed decision of the court a quo narrates both the alleged and proven facts of the dispute between the petitioners and the respondent, as follows: This is a suit for specific performance filed by Lorenzo Velasco against the Magdalena Estate, Inc. on the allegation that on November 29, 1962 the plaintiff and the defendant had entered into a contract of sale (Annex A of the complaint) by virtue of which the defendant offered to sell the plaintiff and the plaintiff in turn agreed to buy a parcel of land with an area of 2,059 square meters more particularly described as Lot 15, Block 7, Psd-6129, located at No. 39 corner 6th Street and Pacific Avenue,

New Manila, this City, for the total purchase price of P100,000.00. It is alleged by the plaintiff that the agreement was that the plaintiff was to give a down payment of P10,000.00 to be followed by P20,000.00 and the balance of P70,000.00 would be paid in installments, the equal monthly amortization of which was to be determined as soon as the P30,000.00 down payment had been completed. It is further alleged that the plaintiff paid down payment of P10,000.00 on November 29, 1962 as per receipt No. 207848 (Exh. "A")and that when on January 8, 1964 he tendered to the defendant the payment of the additional P20,000.00 to complete the P30,000.00 the defendant refused to accept and that eventually it likewise refused to execute a formal deed of sale obviously agreed upon. The plaintiff demands P25,000.00 exemplary damages, P2,000.00 actual damages and P7,000.00 attorney's fees. The defendant, in its Answer, denies that it has had any direct dealings, much less, contractual relations with the plaintiff regarding the property in question, and contends that the alleged contract described in the document attached to the complaint as Annex A is entirely unenforceable under the Statute of Frauds; that the truth of the matter is that a portion of the property in question was being leased by a certain Socorro Velasco who, on November 29, 1962, went to the office of the defendant indicated her desire to purchase the lot; that the defendant indicated its willingness to sell the property to her at the price of P100,000.00 under the condition that a down payment of P30,000.00 be made, P20,000.00 of which was to be paid on November 31, 1962, and that the balance of P70,000.00 including interest a 9% per annum was to be paid on installments for a period of ten years at the rate of P5,381.32 on June 30 and December of every year until the same shall have been fully paid; that on November 29, 1962 Socorro Velasco offered to pay P10,000.00 as initial payment instead of the agreed P20,000.00 but because the amount was short of the alleged P20,000.00 the same was accepted merely as deposited and upon request of Socorro Velasco the receipt was made in the name of her brother-in-law the plaintiff herein; that


Socorro Velasco failed to complete the down payment of P30,000.00 and neither has she paid any installments on the balance of P70,000.00 up to the present time; that it was only on January 8, 1964 that Socorro Velasco tendered payment of P20,000.00, which offer the defendant refused to accept because it had considered the offer to sell rescinded on account of her failure to complete the down payment on or before December 31, 1962. The lone witness for the plaintiff is Lorenzo Velasco, who exhibits the receipt, Exhibits A, issued in his favor by the Magdalena Estate, Inc., in the sum of P10,000.00 dated November 29, 1962. He also identifies a letter (Exh. B)of the Magdalena Estate, Inc. addressed to him and his reply thereto. He testifies that Socorro Velasco is his sister-in-law and that he had requested her to make the necessary contacts with defendant referring to the purchase of the property in question. Because he does not understand English well, he had authorized her to negotiate with the defendant in her whenever she went to the office of the defendant, and as a matter of fact, the receipt for the P10,000.00 down payment was issued in his favor. The plaintiff also depends on Exhibit A to prove that there was a perfected follows: "Earnest money for the purchase of Lot 15, Block 7, Psd-6129, Area 2,059 square meters including improvements thereon — P10,000.00." At the bottom of Exhibit A the following appears: "Agreed price: P100,000.00, P30,000.00 down payment, bal. in 10 years." To prove that the Magdalena Estate, Inc. had been dealing all along with him and not with his sister-in-law and that the Magdalena Estate, Inc. knew very well that he was the person interested in the lot in question and not his sister-in-law, the plaintiff offers in evidence five checks all drawn by him in favor of Magdalena Estate, Inc. for payment of the lease of the property. .... There does not seem to be any dispute regarding the fact that the Velasco family was leasing this property from the Magdalena Estate, Inc. since December 29, 1961; that the Velasco family sometime in 1962 offered to purchase the lot as a result of which

Lorenzo Velasco thru Socorro Velasco made the P10,000.00 deposit or, in the language of the defendant 'earnest money or down payment' as evidenced by Exhibit A. The only matter that remains to be decided is whether the talks between the Magdalena Estate, Inc. and Lorenzo Velasco either directly or thru his sister-in-law Socorro Velasco ever ripened into a consummated sale. It is the position of the defendant (1) that the sale was never consummated and (2) that the contract is unenforceable under the Statute of Frauds. The court a quo agreed with the respondent's (defendant therein) contention that no contract of sale was perfected because the minds of the parties did not meet "in regard to the manner of payment." The court a quo appraisal of this aspect of the action below is correct. The material averments contained in the petitioners' complaint themselves disclose a lack of complete "agreement in regard to the manner of payment" of the lot in question. The complaint states pertinently: 4. That plaintiff and defendant further agreed that the total down payment shall by P30,000.00, including the P10,000.00 partial payment mentioned in paragraph 3 hereof, and that upon completion of the said down payment of P30,000.00, the balance of P70,000.00 shall be said by the plaintiff to the defendant in 10 years from November 29, 1962; 5. That the time within the full down payment of the P30,000.00 was to be completed was not specified by the parties but the defendant was duly compensated during the said time prior to completion of the down payment of P30,000.00 by way of lease rentals on the house existing thereon which was earlier leased by defendant to the plaintiff's sister-in-law, Socorro J. Velasco, and which were duly paid to the defendant by checks drawn by plaintiff. It is not difficult to glean from the aforequoted averments that the petitioners themselves admit that they and the respondent still had to meet and agree on how and when the down-payment and the installment payments were to be paid. Such being the situation, it cannot, therefore, be said that a definite and firm


sales agreement between the parties had been perfected over the lot in question. Indeed, this Court has already ruled before that a definite agreement on the manner of payment of the purchase price is an essential element in the formation of a binding and unforceable contract of sale. 3 The fact, therefore, that the petitioners delivered to the respondent the sum of P10,000 as part of the down-payment that they had to pay cannot be considered as sufficient proof of the perfection of any purchase and sale agreement between the parties herein under article 1482 of the new Civil Code, as the petitioners themselves admit that some essential matter — the terms of payment — still had to be mutually covenanted. ACCORDINGLY, the instant petitioner is hereby denied. No pronouncement as to costs.

deeds of absolute sale executed between petitioner and Adela de Guzman Shotwell ("Adela"), her grandmother, are void and inexistent for being simulated and lacking consideration. The CA affirmed the Decision of the Regional Trial Court (RTC) of Quezon City, Branch 89, but deleted the holding of the latter that an implied trust existed.

The Facts Adela owned three (3) adjoining parcels of land in Scout Ojeda Street, Diliman, Quezon City, subdivided as Lots 32, 34 and 35-B (the "Properties"). Among the improvements on the Properties was Adela's house (also referred to as the "big house"). During her lifetime, Adela allowed her children, namely, Annie Shotwell Jalandoon, Carlos G. Shotwell ("Carlos Sr."), Anselmo G. Shotwell and Corazon S. Basset, and her grandchildren,4 the use and possession of the Properties and its improvements.5 Sometime in 1985 and 1987, Adela simulated the transfer of Lots 32 and Lot 34 to her two grandsons from Carlos Sr., namely, 141. G.R. No. 175483, October 14, 2015 Carlos V. Shotwell, Jr. ("Carlos Jr.") and Dennis V. Shotwell.6 As a consequence, Transfer Certificate of Title (TCT) No. 338708/PR VALENTINA S. CLEMENTE, Petitioner, v. THE COURT OF 9421 was issued over Lot 32 under the name of Carlos Jr., while APPEALS, ANNIE SHOTWELL JALANDOON, ET AL., TCT No. 366256/PR 9422 was issued over Lot 34 under the Respondents. name of Dennis.7 On the other hand, Lot 35-B remained with Adela and was covered by TCT No. 374531. It is undisputed that D E C I S I O N the transfers were never intended to vest title to Carlos Jr. and Dennis who both will return the lots to Adela when requested.8 JARDELEZA, J.: 1 On April 18, 1989, prior to Adela and petitioner's departure for This is a Petition for Review on Certiorari under Rule 45 of the the United States, Adela requested Carlos Jr. and Dennis to Revised Rules of Court filed by Valentina S. Clemente 2 execute a deed of reconveyance9 over Lots 32 and 34. The deed of ("petitioner") from the Decision of August 23, 2005 and the reconveyance was executed on the same day and was registered Resolution3 dated November 15, 2006 of the Court of Appeals with the Registry of Deeds on April 24, 1989.10 (CA) Eighth Division in CA-G.R. CV No. 70918. On April 25, 1989, Adela executed a deed of absolute sale11 over Petitioner assails the Decision of the CA which ruled that two (2) Lots 32 and 34, and their improvements, in favor of petitioner, 723 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

bearing on its face the price of P250,000.00. On the same day, Adela also executed a special power of attorney12 (SPA) in favor of petitioner. Petitioner's authority under the SPA included the power to administer, take charge and manage, for Adela's benefit, the Properties and all her other real and personal properties in the Philippines.13 The deed of absolute sale and the SPA were notarized on the same day by Atty. Dionilo D. Marfil in Quezon City.14 On April 29, 1989, Adela and petitioner left for the United States.15 When petitioner returned to the Philippines, she registered the sale over Lots 32 and 34 with the Registry of Deeds on September 25, 1989. TCT No. 19811 and TCT No. 19809 were then issued in the name of petitioner over Lots 32 and 34, respectively.16 On January 14, 1990, Adela died in the United States and was succeeded by her four children.17 Soon thereafter, petitioner sought to eject Annie and Carlos Sr., who were then staying on the Properties. Only then did Annie and Carlos Sr. learn of the transfer of titles to petitioner. Thus, on July 9, 1990, Annie, Carlos Sr. and Anselmo, represented by Annie, ("private respondents") filed a complaint for reconveyance of property18 against petitioner before Branch 89 of the RTC of Quezon City. It was docketed as Civil Case No. Q-906035 and titled "Annie S. Jalandoon, et al. v. Valentino. Clemente"19 In the course of the trial, private respondents discovered that Adela and petitioner executed another deed of absolute sale20 over Lot 35-B on April 25, 1989 (collectively with the deed of absolute sale over Lots 32 and 34, "Deeds of Absolute Sale"), bearing on its face the price of F60,000.00.21 This was notarized on the same date by one Orancio Generoso in Manila, but it was registered with the Registry of Deeds only on October 5, 1990.22 Thus, private respondents amended their complaint to include

Lot 35-B.23 In their amended complaint, private respondents sought nullification of the Deeds of Absolute Sale. They alleged that Adela only wanted to help petitioner travel to the United States, by making it appear that petitioner has ownership of the Properties. They further alleged that similar to the previous simulated transfers to Carlos Jr. and Dennis, petitioner also undertook and warranted to execute a deed of reconveyance in favor of the deceased over the Properties, if and when Adela should demand the same. They finally alleged that no consideration was given by petitioner to Adela in exchange for the simulated conveyances.24 On October 3, 1997, Carlos Sr. died and was substituted only by Dennis.25 In an order dated June 18, 1999, the case was dismissed with respect to Annie after she manifested her intention to withdraw as a party-plaintiff.26 Anselmo Shotwell also died without any compulsory heir on September 7, 2000. On February 26, 2001, the trial court promulgated a Decision27 in favor of private respondents. Its decretal portion reads:cralawlawlibrary WHEREFORE, premises considered, judgment is hereby rendered as follows: 1. Declaring null and void the Deeds of Absolute Sale both dated April 25, 1989 between the late Adela De Guzman Shotwell and the defendant;ChanRoblesVirtualawlibrary 2. Ordering the cancellation of Transfer Certificates of Title Nos. 19809, 19811 and 26558, all of the Registry of Deeds of Quezon City and in the name of defendant Valentina Clemente; and


3. Ordering the defendant to execute a Deed of Reconveyance in favor of the estate of the late Adela de Guzman Shotwell over the three (3) subject lots, respectively covered by Transfer Certificates of Title Nos. 19809, 19811 and 26558 of the Registry of Deeds of Quezon City; With costs against defendant. SO ORDERED.28chanrobleslaw On appeal, the CA affirmed with modification the Decision. The CA ruled that the Deeds of Absolute Sale were simulated. It also ruled that the conveyances of the Properties to petitioner were made without consideration and with no intention to have legal effect.29 The CA agreed with the trial court that the contemporaneous and subsequent acts of petitioner and her grandmother are enough to render the conveyances null and void on the ground of being simulated.30 The CA found that Adela retained and continued to exercise dominion over the Properties even after she executed the conveyances to petitioner.31 By contrast, petitioner did not exercise control over the properties because she continued to honor the decisions of Adela. The CA also affirmed the court a quo's finding that the conveyances were not supported by any consideration.32 Petitioner filed a Motion for Reconsideration33 dated September 12, 2005 but this was denied by the CA in its Resolution34 dated November 15, 2006. Hence, this petition. The petition raises the principal issue of whether or not the CA erred in affirming the decision of the trial court, that the Deeds of Absolute Sale between petitioner and her

late grandmother over the Properties are simulated and without consideration, and hence, void and inexistent.35 Ruling of the Court We deny the petition. In a Petition for Review on Certiorari under Rule 45, only questions of law may be entertained. Whether or not the CA erred in affirming the decision of the RTC that the Deeds of Absolute Sale between petitioner and her late grandmother are simulated and without consideration, and hence, void and inexistent, is a question of fact which is not within the province of a petition for review on certiorari under Rule 45 of the Revised Rules of Court. Section 1, Rule 45 of the Revised Rules of Court states that the petition filed shall raise only questions of law, which must be distinctly set forth. We have explained the difference between a question of fact and a question of law, to wit:cralawlawlibrary

A question of law arises when there is doubt as to what the law is on a certain state of facts, while there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts. For a question to be one of law, the same must not involve an examination of the probative value of the evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact.36chanrobleslaw Most of the issues raised by petitioner are questions of fact that invite a review of the evidence presented by the parties below. 725 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

We have repeatedly ruled that the issue on the genuineness of a deed of sale is essentially a question of fact.37 We are not a trier of facts and do not normally undertake the re-examination of the evidence presented by the contending parties during the trial of the case.38 This is especially true where the trial court's factual findings are adopted and affirmed by the CA as in the present case.39 Factual findings of the trial court affirmed by the CA are final and conclusive and may not be reviewed on appeal.40 While it is true that there are recognized exceptions41 to the general rule that only questions of law may be entertained in a Rule 45 petition, we find that there is none obtaining in this case. Nevertheless, and to erase any doubt on the correctness of the assailed ruling, we examined the records below and have arrived at the same conclusion. Petitioner has not been able to show that the lower courts committed error in appreciating the evidence of record. The Deeds of Absolute Sale between petitioner and the late Adela Shotwell are null and void for lack of consent and consideration. While the Deeds of Absolute Sale appear to be valid on their face, the courts are not completely precluded to consider evidence aliunde in determining the real intent of the parties. This is especially true when the validity of the contracts was put in issue by one of the parties in his pleadings.42 Here, private respondents assail the validity of the Deeds of Absolute Sale by alleging that they were simulated and lacked consideration. A. Simulated contract The Civil Code defines a contract as a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.43 Article 1318

provides that there is no contract unless the following requisites concur:cralawlawlibrary (1) Consent of the contracting parties; (2) Object certain which is the subject matter of the contract; and (3) Cause of the obligation which is established.chanrobleslaw All these elements must be present to constitute a valid contract; the absence of one renders the contract void. As one of the essential elements, consent when wanting makes the contract non-existent. Consent is manifested by the meeting of the offer and the acceptance of the thing and the cause, which are to constitute the contract.44 A contract of sale is perfected at the moment there is a meeting of the minds upon the thing that is the object of the contract, and upon the price.45 Here, there was no valid contract of sale between petitioner and Adela because their consent was absent. The contract of sale was a mere simulation. Simulation takes place when the parties do not really want the contract they have executed to produce the legal effects expressed by its wordings.46 Article 1345 of the Civil Code provides that the simulation of a contract may either be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. The case of Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberate M. Ureta47 is instructive on the matter of absolute simulation of contracts, viz:cralawlawlibrary

In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other 726 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

what they may have given under the contract...48 (Emphasis supplied)chanrobleslaw In short, in absolute simulation there appears to be a valid contract but there is actually none because the element of consent is lacking.49 This is so because the parties do not actually intend to be bound by the terms of the contract. In determining the true nature of a contract, the primary test is the intention of the parties. If the words of a contract appear to contravene the evident intention of the parties, the latter shall prevail. Such intention is determined not only from the express terms of their agreement, but also from the contemporaneous and subsequent acts of the parties.50 This is especially true in a claim of absolute simulation where a colorable contract is executed. In ruling that the Deeds of Absolute Sale were absolutely simulated, the lower courts considered the totality of the prior, contemporaneous and subsequent acts of the parties. The following circumstances led the RTC and the CA to conclude that the Deeds of Absolute Sale are simulated, and that the transfers were never intended to affect the juridical relation of the parties:chanRoblesvirtualLawlibrary a) There was no indication that Adela intended to alienate her properties in favor of petitioner. In fact, the letter of Adela to Dennis dated April 18, 198951 reveals that she has reserved the ownership of the Properties in favor of Dennis. b) Adela continued exercising acts of dominion and control over the properties, even after the execution of the Deeds of Absolute Sale, and though she lived abroad for a time. In Adela's letter dated August 25, 198952 to a certain Candy, she advised the latter to stay in the big house. Also, in petitioner's letter to her cousin Dennis dated July 3, 1989,53 she admitted that Adela continued to

be in charge of the Properties; that she has no "say" when it comes to the Properties; that she does not intend to claim exclusive ownership of Lot 35-B; and that she is aware that the ownership and control of the Properties are intended to be consolidated in Dennis. c) The SPA executed on the same day as the Deeds of Absolute Sale appointing petitioner as administratrix of Adela's properties, including the Properties, is repugnant to petitioner's claim that the ownership of the same had been transferred to her. d) The previous sales of the Properties to Dennis and Carlos, Jr. were simulated. This history, coupled with Adela's treatment of petitioner, and the surrounding circumstances of the sales, strongly show that Adela only granted petitioner the same favor she had granted to Dennis and Carlos Jr. The April 18, 1989 letter to Dennis convincingly shows Adela's intention to give him the Properties. Part of the letter reads: "Dennis, the two lot [sic] 32-34 at your said lower house will be at name yours [sic] plus the 35 part of Cora or Teens [sic] house are all under your name"54 Petitioner claims this letter was not properly identified and is thus, hearsay evidence. The records, however, show that the letter was admitted by the trial court in its Order dated February 24, 1993.55 While it is true that the letter is dated prior (or six days before to be exact) to the execution of the Deeds of Absolute Sale and is not conclusive that Adela did not change her mind, we find that the language of the letter is more consistent with the other pieces of evidence that show Adela never intended to relinquish ownership of the Properties to petitioner. In this regard, we see no compelling reason to depart from the findings of the trial court as there appears no grave abuse of discretion in its admission and consideration of the letter. Petitioner's letter to her cousin Dennis dated July 3, 1989 also


sufficiently establishes that Adela retained control over the Properties, even after the execution of the Deeds of Absolute Sale. Petitioner herself admitted that she was only following the orders of Adela, and that she has no claim over the Properties. We quote in verbatim the relevant part of the letter:cralawlawlibrary

Clearly, the submission of petitioner to the orders of Adela does not only show that the latter retained dominion over the Properties, but also that petitioner did not exercise acts of ownership over it. If at all, her actions only affirm the conclusion that she was merely an administratrix of the Properties by virtue of the SPA. On the SPA, petitioner claims the lower courts erred in holding that it is inconsistent with her claim of ownership. Petitioner claims that she has sufficiently explained that the SPA is not for the administration of the Properties, but for the reconstitution of their titles. We agree with the lower courts that the execution of an SPA for the administration of the Properties, on the same day the Deeds of Absolute Sale were executed, is antithetical to the relinquishment of ownership. The SPA shows that it is so worded as to leave no doubt that Adela is appointing petitioner as the administratrix of her properties in Scout Ojeda. Had the SPA been intended only to facilitate the processing of the reconstitution of the titles, there would have been no need to confer other powers of administration, such as the collection of debts, filing of suit, etc., to petitioner.59 In any case, the explanation given by petitioner that the SPA was executed so as only to facilitate the reconstitution of the titles of the Properties is not inconsistent with the idea of her being the administratrix of the Properties. On the other hand, the idea of assigning her as administratrix is not only inconsistent, but also repugnant, to the intention of selling and relinquishing ownership of the Properties. Petitioner next questions the lower courts' findings that the Deeds of Absolute Sale are simulated because the previous transfers to Adela's other grandchildren were also simulated. It may be true that, taken by itself, the fact that Adela had previously feigned the transfer of ownership of Lots 32 and 34 to her other grandchildren would not automatically mean that the

...Now, before I left going back here in Mla. Mommy Dela ask me to read your letter about the big house and lot, and I explained it to her. Now Mommy and Mommy Dela wants that the house is for everyone who will need to stay, well that is what they say. Alam mo naman, I have no "say" esp. when it comes with properties & you know that. Now kung ano gusto nila that goes. Now, to be honest Mommy was surprise [sic] bakit daw kailangan mawalan ng karapatan sa bahay eh Nanay daw nila iyon at tayo apo lang, Eh wala akong masasabi dyan, to be truthful to you, I only get the orders... Tapos, sinisingil pa ako ng P1,000 --para sa gate napinapagawa nya sa lot 35-B, eh hindi na lang ako kiimibo pero nagdamdam ako, imagine minsan na lang sya nakagawa ng bien sa akin at wala sa intention ko na suluhin ang 35-B, ganyan pa sya... Now tungkol sa iyo, alam ko meron ka rin lupa tapos yung bahay na malaki ikaw rin ang titira at magmamahala sa lahat. Anyway, itong bahay ko sa iyo rin, alam mo naman na I'm just making the kids grow a little older then we have to home in the states...56 (Emphasis supplied) chanrobleslaw Moreover, Adela's letter to petitioner's cousin Candy dated August 25, 1989 shows Adela's retention of dominion over the Properties even after the sales. In the letter, Adela even requested her granddaughter Candy to stay in the house rent and expense free.57 Petitioner claims that Candy and the house referred to in the letter were not identified. Records show, however, that petitioner has testified she has a cousin named Candy Shotwell who stayed at the "big house" since February 1989.58 728 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

subject Deeds of Absolute Sale are likewise void. The lower courts, however, did not rely solely on this fact, but considered it with the rest of the evidence, the totality of which reveals that Adela's intention was merely to feign the transfer to petitioner. The fact that unlike in the case of Dennis and Carlos, Jr., she was not asked by Adela to execute a deed of reconveyance, is of no moment. There was a considerable lapse of time from the moment of the transfer to Dennis and Carlos, Jr. of Lots 32 and 34 in 1985 and in 1987, respectively, and until the execution of the deed of reconveyance in 1989. Here, the alleged Deeds of Absolute Sale were executed in April 1989. Adela died in January 1990 in the United States. Given the short period of time between the alleged execution of the Deeds of Absolute Sale and the sudden demise of Adela, the fact that petitioner was not asked to execute a deed of reconveyance is understandable. This is because there was no chance at all to do so. Thus, the fact that she did not execute a deed of reconveyance does not help her case. We affirm the conclusion reached by the RTC and the CA that the evidence presented below prove that Adela did not intend to alienate the Properties in favor of petitioner, and that the transfers were merely a sham to accommodate petitioner in her travel abroad. Petitioner claims that we should consider that there is only one heir of the late Adela who is contesting the sale, and that out of the many transactions involving the decedent's other properties, the sale to petitioner is the only one being questioned. We are not convinced that these are material to the resolution of the case. As aptly passed upon by the CA in its assailed Resolution:cralawlawlibrary

a simulated contract may set up its inexistence. In this instant case, it does not matter if the contest is made by one, some or all of the heirs. Neither would the existence of other contracts which remain unquestioned deter an action for the nullity of an instrument. A contract is rendered meaningful and forceful by the intention of the parties relative thereto, and such intention can only be relevant to that particular contract which is produced or, as in this case, to that which is not produced. That the deed of sale in [petitioner's] favor has been held to be simulated is not indicative of the simulation of any other contract executed by the deceased Adela de Guzman Shotwell during her lifetime.60chanrobleslaw To this we add that other alleged transactions made by Adela cannot be used as evidence to prove the validity of the conveyances to petitioner. For one, we are not aware of any of these transactions or whether there are indeed other transactions. More importantly, the validity of these transactions does not prove directly or indirectly the validity of the conveyances in question. B. No consideration for the sale We also find no compelling reason to depart from the court a quo's finding that Adela never received the consideration stipulated in the simulated Deeds of Absolute Sale. Although on their face, the Deeds of Absolute Sale appear to be supported by valuable consideration, the RTC and the CA found that there was no money involved in the sale. The consideration in the Deeds of Absolute Sale was superimposed on the spaces therein, bearing a font type different from that used in the rest of the document.61 The lower courts also found that the duplicate originals of the Deeds of Absolute Sale bear a different entry with regard to the price.62

In a contest for the declaration of nullity of an instrument for being simulated, the number of contestants is not determinative of the propriety of the cause. Any person who is prejudiced by 729 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

Article 1471 of the Civil Code provides that "if the price is simulated, the sale is void." Where a deed of sale states that the purchase price has been paid but in fact has never been paid, the deed of sale is null and void for lack of consideration.63 Thus, although the contracts state that the purchase price of P250,000.00 and P60,000.00 were paid by petitioner to Adela for the Properties, the evidence shows that the contrary is true, because no money changed hands. Apart from her testimony, petitioner did not present proof that she paid for the Properties. There is no implied trust. We also affirm the CA's deletion of the pronouncement of the trial court as to the existence of an implied trust. The trial court found that a resulting trust, a form of implied trust based on Article 145364 of the Civil Code, was created between Adela and petitioner. Resulting trusts65 arise from the nature or circumstances of the consideration involved in a transaction whereby one person becomes invested with legal title but is obligated in equity to hold his title for the benefit of another.66 It is founded on the equitable doctrine that valuable consideration and not legal title is determinative of equitable title or interest and is always presumed to have been contemplated by the parties.67 Since the intent is not expressed in the instrument or deed of conveyance, it is to be found in the nature of the parties' transaction.68 Resulting trusts are thus describable as intention-enforcing trusts.69 An example of a resulting trust is Article 1453 of the Civil Code. We, however, agree with the CA that no implied trust can be generated by the simulated transfers because being fictitious or simulated, the transfers were null and void ab initio — from the very beginning — and thus vested no rights whatsoever in favor

of petitioner. That which is inexistent cannot give life to anything at all.70 Article 1453 contemplates that legal titles were validly vested in petitioner. Considering, however, that the sales lack not only the element of consent for being absolutely simulated, but also the element of consideration, these transactions are void and inexistent and produce no effect. Being null and void from the beginning, no transfer of title, both legal and beneficial, was ever effected to petitioner. In any case, regardless of the presence of an implied trust, this will not affect the disposition of the case. As void contracts do not produce any effect, the result will be the same in that the Properties will be reeonveyed to the estate of the late Adela de Guzman Shotwell. WHEREFORE, the petition is DENIED., SO ORDERED.chanroblesvirtuallawlibrary

142. PENTACAPITAL INVESTMENT CORPORATION, Petitioner, - versus - MAKILITO B. MAHINAY, Respondent. DECISION NACHURA, J.: 730 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

G.R.

Before us are two consolidated petitions for review on certiorari under Rule 45 of the Rules of Court filed by petitioner Pentacapital Investment Corporation. In G.R. No. 171736, petitioner assails the Court of Appeals (CA) Decision dated December 20, 2005 and Resolution dated March 1, 2006 in CAG.R. SP No. 74851; while in G.R. No. 181482, it assails the CA Decision dated October 4, 2007 and Resolution dated January 21, 2008 in CA-G.R. CV No. 86939. The Facts Petitioner filed a complaint for a sum of money against respondent Makilito Mahinay based on two separate loans obtained by the latter, amounting to P1,520,000.00 and P416,800.00, or a total amount of P1,936,800.00. These loans were evidenced by two promissory notes dated February 23, 1996. Despite repeated demands, respondent failed to pay the loans, hence, the complaint. In his Answer with Compulsory Counterclaim, respondent claimed that petitioner had no cause of action because the promissory notes on which its complaint was based were subject to a condition that did not occur. While admitting that he indeed signed the promissory notes, he insisted that he never took out a loan and that the notes were not intended to be evidences of indebtedness. By way of counterclaim, respondent prayed for the payment of moral and exemplary damages plus attorneys fees. Respondent explained that he was the counsel of Ciudad Real Development Inc. (CRDI). In 1994, Pentacapital Realty Corporation (Pentacapital Realty) offered to buy parcels of land known as the Molino Properties, owned by CRDI, located in Molino, Bacoor, Cavite. The Molino Properties, with a total area of

127,708 square meters, were sold at P400.00 per sq m. As the Molino Properties were the subject of a pending case, Pentacapital Realty paid only the down payment amounting to P12,000,000.00. CRDI allegedly instructed Pentacapital Realty to pay the formers creditors, including respondent who thus received a check worth P1,715,156.90. It was further agreed that the balance would be payable upon the submission of an Entry of Judgment showing that the case involving the Molino Properties had been decided in favor of CRDI. Respondent, Pentacapital Realty and CRDI allegedly agreed that respondent had a charging lien equivalent to 20% of the total consideration of the sale in the amount of P10,277,040.00. Pending the submission of the Entry of Judgment and as a sign of good faith, respondent purportedly returned the P1,715,156.90 check to Pentacapital Realty. However, the Molino Properties continued to be haunted by the seemingly interminable court actions initiated by different parties which thus prevented respondent from collecting his commission. On motion of respondent, the Regional Trial Court (RTC) allowed him to file a Third Party Complaint against CRDI, subject to the payment of docket fees. Admittedly, respondent earlier instituted an action for Specific Performance against Pentacapital Realty before the RTC of Cebu City, Branch 57, praying for the payment of his commission on the sale of the Molino Properties. In an Amended Complaint, respondent referred to the action he instituted as one of Preliminary Mandatory Injunction instead of Specific Performance. Acting on Pentacapital Realtys Motion to Dismiss, the RTC dismissed the case for lack of cause of action. The dismissal became final and executory. With the dismissal of the aforesaid case, respondent filed a Motion to Permit Supplemental Compulsory Counterclaim.


In addition to the damages that respondent prayed for in his compulsory counterclaim, he sought the payment of his commission amounting to P10,316,640.00, plus interest at the rate of 16% per annum, as well as attorneys fees equivalent to 12% of his principal claim. Respondent claimed that Pentacapital Realty is a 100% subsidiary of petitioner. Thus, although petitioner did not directly participate in the transaction between Pentacapital Realty, CRDI and respondent, the latters claim against petitioner was based on the doctrine of piercing the veil of corporate fiction. Simply stated, respondent alleged that petitioner and Pentacapital Realty are one and the same entity belonging to the Pentacapital Group of Companies. Over the opposition of petitioner, the RTC, in an Order dated August 22, 2002, allowed the filing of the supplemental counterclaim. Aggrieved, petitioner sought recourse in the CA through a special civil action for certiorari, seeking to reverse and set aside the RTC Order. The case was docketed as CA-G.R. SP No. 74851. On December 20, 2005, the CA rendered the assailed Decision dismissing the petition. The appellate court sustained the allowance of the supplemental compulsory counterclaim based on the allegations in respondents pleading. The CA further concluded that there was a logical relationship between the claims of petitioner in its complaint and those of respondent in his supplemental compulsory counterclaim. The CA declared that it was inconsequential that respondent did not clearly allege the facts required to pierce the corporate separateness of petitioner and its subsidiary, the Pentacapital Realty. Petitioner now comes before us in G.R. No. 171736, raising the following issues: A.

WHETHER RESPONDENT MAHINAY IS BARRED FROM ASSERTING THE CLAIM CONTAINED IN HIS SUPPLEMENTAL COMPULSORY COUNTERCLAIM ON THE GROUNDS OF (1) RES JUDICATA, (2) WILLFUL AND DELIBERATE FORUM SHOPPING, AND (3) FAILURE TO INTERPOSE SUCH CLAIM ON TIME PURSUANT TO SECTION 2 OF RULE 9 OF THE RULES OF COURT.

B

WHETHER RESPONDENT MAHINAYS SUPPLEMENTAL COMPULSORY COUNTERCLAIM IS ACTUALLY A THIRD-PARTY COMPLAINT AGAINST PENTACAPITAL REALTY, THE INTRODUCTION OF WHICH REQUIRES THE PAYMENT OF THE NECESSARY DOCKET FEES;

C.

ASSUMING FOR THE SAKE OF PURE ARGUMENT THAT IT IS PROPER TO PIERCE THE CORPORATE VEIL AND TO ALLOW RESPONDENT MAHINAY TO LODGE A SUPPLEMENTAL COMPULSORY COUNTERCLAIM AGAINST HEREIN PETITIONER PENTACAPITAL INVESTMENT FOR AN ALLEGED OBLIGATION OF ITS SUBSIDIARY, PENTACAPITAL REALTY, ON THE THEORY THAT THEY ARE ONE AND THE SAME COMPANY, WHETHER PENTACAPITAL REALTY SHOULD HAVE AT LEAST BEEN MADE


A PARTY TO THE CASE AS RULED BY THIS HONORABLE COURT IN FILMERCO COMMERCIAL CO., INC. VS. INTERMEDIATE APPELLATE COURT;

OBLIGATION AND FACILITATE PROCEDURAL WRONGDOING; AND

F. D.

WHETHER RESPONDENT MAHINAY SHOULD BE ALLOWED TO PRESENT EVIDENCE ON HIS SO-CALLED SUPPLEMENTAL COMPULSORY COUNTERCLAIM INASMUCH AS (1) RESPONDENT MAHINAYS PLEADINGS ARE BEREFT OF ANY ALLEGATIONS TO BUTTRESS THE MERGING OF PENTACAPITAL REALTY AND PENTACAPITAL INVESTMENT INTO ONE ENTITY AND THE CONSEQUENT IMPUTATION ON THE LATTER OF THE FORMERS SUPPOSED LIABILITY ON RESPONDENT MAHINAYS SUPPLEMENTAL COMPULSORY COUNTERCLAIM, AND (2) THE INCIDENTS ALLEGEDLY PERTAINING TO, AND WHICH WOULD THEREBY SUPPORT, THE PIERCING OF CORPORATE VEIL ARE NOT EVIDENTIARY MATTERS MATERIAL TO THE PROCEEDINGS BEFORE THE COURT A QUO CONSIDERING THAT THE SAME ARE BEYOND THE SCOPE OF THE PLEADINGS;

E.

WHETHER THE DOCTRINE OF PIERCING THE CORPORATE VEIL MAY BE INVOKED AND APPLIED IN ORDER TO EVADE AN

WHETHER PETITIONER PENTACAPITAL INVESTMENT COMMITTED FORUM SHOPPING WHEN IT FILED THE PRESENT PETITION DURING THE PENDENCY OF THE MOTION FOR RECONSIDERATION IT FILED BEFORE THE COURT A QUO AND, SUBSEQUENTLY, OF THE APPEAL BEFORE THE COURT OF APPEALS TO QUESTION THE JUDGMENT OF THE COURT A QUO.

There being no writ of injunction or Temporary Restraining Order (TRO), the proceedings before the RTC continued and respondent was allowed to present his evidence on his supplemental compulsory counterclaim. After trial on the merits, the RTC rendered a decision dated March 20, 2006, the dispositive portion of which reads: WHEREFORE, PREMISES CONSIDERED, plaintiffs complaint is hereby ordered dismissed for lack of merit. This court, instead, finds that defendant was able to prove


by a clear preponderance of evidence his cause of action against plaintiff as to defendants compulsory and supplemental counterclaims. That, therefore, this court hereby orders the plaintiff to pay unto defendant the following sums, to wit:

1. P1,715,156.90 representing the amount plaintiff is obligated to pay defendant as provided for in the deed of sale and the supplemental agreement, plus interest at the rate of 16% per annum, to be computed from September 23, 1998 until the said amount shall have been fully paid;

2. Php 10,316,640.00 representing defendants share of the proceeds of the sale of the Molino property (defendants charging lien) plus interest at the rate of 16% per annum, to be computed from September 23, 1998 until the said amount shall have been fully paid;

3. Php 50,000.00 as attorneys fees based on quantum meruit;

4. Php 50,000.00 litigation expenses, plus costs of suit.

This court finds it unnecessary to rule on the third party complaint, the relief prayed for therein being dependent on the possible award by this court of the relief of plaintiffs complaint.

On appeal, the CA, in CA-G.R. CV No. 86939, affirmed in toto the above decision. The CA found no basis for petitioner to collect the amount demanded, there being no perfected contract of loan for lack of consideration. As to respondents supplemental compulsory counterclaim, quoting the findings of the RTC, the appellate court held that respondent was able to prove by preponderance of evidence that it was the intent of Pentacapital Group of Companies and CRDI to give him P10,316,640.00 and P1,715,156.90. The CA likewise affirmed the award of interest at the rate of 16% per annum, plus damages. Unsatisfied, petitioner moved for reconsideration of the aforesaid Decision, but it was denied in a Resolutiondated January 21, 2008. Hence, the present petition in G.R. No. 181482, anchored on the following arguments: A. Considering that the inferences made in the present case are manifestly absurd, mistaken or impossible, and are even contrary to the admissions of respondent Mahinay, and inasmuch as the judgment is premised on a misapprehension of facts, this Honorable Court may validly take cognizance of the errors


relative to the findings of fact of both the Honorable Court of Appeals and the court a quo.

B. Respondent Mahinay is liable to petitioner PentaCapital Investment for the PhP1,936,800.00 loaned to him as well as for damages and attorneys fees.

1. The Honorable Court of Appeals erred in concluding that respondent Mahinay failed to receive the money he borrowed when there is not even any dispute as to the fact that respondent Mahinay did indeed receive the PhP1,936,800.00 from petitioner PentaCapital Investment. 2.. The Promissory Notes executed by respondent Mahinay are valid instruments and are binding upon him.

C. Petitioner PentaCapital Investment cannot be held liable on the supposed supplemental compulsory counterclaim of respondent Mahinay.

1.The findings of fact as well as the conclusions arrived at by the Court of Appeals in its decision were based on mistaken assumptions and on erroneous appreciation of the evidence on record. 2.There is no evidence on record to support the merging of PentaCapital Realty and petitioner PentaCapital Investment into one entity and the consequent imputation on the latter of the formers supposed liability on respondent Mahinays supplemental compulsory counterclaim. 3. Inasmuch as the claim of respondent Mahinay is supposedly against PentaCapital Realty, and considering that petitioner PentaCapital Investment is a separate, distinct entity from PentaCapital Realty, the latter should have been impleaded as it is an indispensable party. D. Assuming for the sake of pure argument that it is proper to disregard the corporate fiction and to consider herein petitioner PentaCapital Investment and its subsidiary, PentaCapital Realty, as one and the same entity, respondent Mahinays supplemental compulsory counterclaim must still necessarily fail. 1.The cause of action of respondent Mahinay, as contained in his supplemental compulsory counterclaim, is already barred by a prior judgment (res judicata). 2. Considering that the dismissal on the merits by the RTC Cebu of respondent Mahinays complaint against PentaCapital Realty for attorneys fees has attained finality, respondent Mahinay committed a willful act of forum shopping when he interposed the exact same claim in the proceedings a quo as a supposed supplemental compulsory counterclaim against what he claims to be one and the same company.


3.Respondent Mahinays supplemental compulsory counterclaim is actually a third party complaint against PentaCapital Realty; the filing thereof therefore requires the payment of the necessary docket fees. E. The doctrine of piercing the corporate veil is an equitable remedy which cannot and should not be invoked, much less applied, in order to evade an obligation and facilitate procedural wrongdoing. Simply put, the issues for resolution are: 1) whether the admission of respondents supplemental compulsory counterclaim is proper; 2) whether respondents counterclaim is barred by res judicata; and (3) whether petitioner is guilty of forum-shopping. The Courts Ruling Admission of Respondents Supplemental Compulsory Counterclaim The pertinent provision of the Rules of Court is Section 6 of Rule 10, which reads: Sec. 6. Supplemental pleadings. Upon motion of a party, the court may, upon reasonable notice and upon such terms as are just, permit him to serve a supplemental pleading setting forth transactions, occurrences or events which have happened since the date of the pleading sought to be supplemented. The adverse party may plead

thereto within ten (10) days from notice of the order admitting the supplemental pleading.

As a general rule, leave will be granted to a party who desires to file a supplemental pleading that alleges any material fact which happened or came within the partys knowledge after the original pleading was filed, such being the office of a supplemental pleading. The application of the rule would ensure that the entire controversy might be settled in one action, avoid unnecessary repetition of effort and unwarranted expense of litigants, broaden the scope of the issues in an action owing to the light thrown on it by facts, events and occurrences which have accrued after the filing of the original pleading, and bring into record the facts enlarging or charging the kind of relief to which plaintiff is entitled. It is the policy of the law to grant relief as far as possible for wrongs complained of, growing out of the same transaction and thus put an end to litigation. In his Motion to Permit Supplemental Compulsory Counterclaim, respondent admitted that, in his Answer with Compulsory Counterclaim, he claimed that, as one of the corporations composing the Pentacapital Group of Companies, petitioner is liable to him for P10,316,640.00, representing 20% attorneys fees and share in the proceeds of the sale transaction between Pentacapital Realty and CRDI. In the same pleading, he further admitted that he did not include this amount in his compulsory counterclaim because he had earlier commenced another action for the collection of the same amount against Pentacapital Realty before the RTC of Cebu. With the dismissal of the RTC-Cebu case, there was no more legal impediment for respondent to file the supplemental counterclaim. Moreover, in his Answer with Compulsory


Counterclaim, respondent already alleged that he demanded from Pentacapital Group of Companies to which petitioner supposedly belongs, the payment of his 20% commission. This, in fact, was what prompted respondent to file a complaint before the RTC-Cebu for preliminary mandatory injunction for the release of the said amount. Given these premises, it is obvious that the alleged obligation of petitioner already existed and was known to respondent at the time of the filing of his Answer with Counterclaim. He should have demanded payment of his commission and share in the proceeds of the sale in that Answer with Compulsory Counterclaim, but he did not. He is, therefore, proscribed from incorporating the same and making such demand via a supplemental pleading. The supplemental pleading must be based on matters arising subsequent to the filing of the original pleading related to the claim or defense presented therein, and founded on the same cause of action. Supplemental pleadings must state transactions, occurrences or events which took place since the time the pleading sought to be supplemented was filed. Even on the merits of the case, for reasons that will be discussed below, respondents counterclaim is doomed to fail. Petitioners Complaint In its complaint for sum of money, petitioner prayed that respondent be ordered to pay his obligation amounting to P1,936,800.00 plus interest and penalty charges, and attorneys fees. This obligation was evidenced by two promissory notes executed by respondent. Respondent, however, denied liability on the ground that his obligation was subject to a condition that did not occur. He explained that the promissory notes were dependent upon the happening of a remote event that the parties tried to anticipate at the time they transacted with each other,

and the event did not happen. He further insisted that he did not receive the proceeds of the loan. To ascertain whether or not respondent is bound by the promissory notes, it must be established that all the elements of a contract of loan are present. Like any other contract, a contract of loan is subject to the rules governing the requisites and validity of contracts in general. It is elementary in this jurisdiction that what determines the validity of a contract, in general, is the presence of the following elements: (1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation which is established. In this case, respondent denied liability on the ground that the promissory notes lacked consideration as he did not receive the proceeds of the loan. We cannot sustain his contention. Under Article 1354 of the Civil Code, it is presumed that consideration exists and is lawful unless the debtor proves the contrary. Moreover, under Section 3, Rule 131 of the Rules of Court, the following are disputable presumptions: (1) private transactions have been fair and regular; (2) the ordinary course of business has been followed; and (3) there was sufficient consideration for a contract. A presumption may operate against an adversary who has not introduced proof to rebut it. The effect of a legal presumption upon a burden of proof is to create the necessity of presenting evidence to meet the legal presumption or the prima facie case created thereby, and which, if no proof to the contrary is presented and offered, will prevail. The burden of proof remains where it is, but by the presumption, the one who has that burden is relieved for the time being from introducing evidence in support of the averment, because the presumption stands in the place of evidence unless rebutted.


In the present case, as proof of his claim of lack of consideration, respondent denied under oath that he owed petitioner a single centavo. He added that he did not apply for a loan and that when he signed the promissory notes, they were all blank forms and all the blank spaces were to be filled up only if the sale transaction over the subject properties would not push through because of a possible adverse decision in the civil cases involving them (the properties). He thus posits that since the sale pushed through, the promissory notes did not become effective. Contrary to the conclusions of the RTC and the CA, we find such proof insufficient to overcome the presumption of consideration. The presumption that a contract has sufficient consideration cannot be overthrown by the bare, uncorroborated and selfserving assertion of respondent that it has no consideration. The alleged lack of consideration must be shown by preponderance of evidence. As it now appears, the promissory notes clearly stated that respondent promised to pay petitioner P1,520,000.00 and P416,800.00, plus interests and penalty charges, a year after their execution. Nowhere in the notes was it stated that they were subject to a condition. As correctly observed by petitioner, respondent is not only a lawyer but a law professor as well. He is, therefore, legally presumed not only to exercise vigilance over his concerns but, more importantly, to know the legal and binding effects of promissory notes and the intricacies involving the execution of negotiable instruments including the need to execute an agreement to document extraneous collateral conditions and/or agreements, if truly there were such. This militates against respondents claim that there was indeed such an agreement. Thus, the promissory notes should be accepted as they appear on their face. Respondents liability is not negated by the fact that he has uncollected commissions from the sale of the Molino properties.

As the records of the case show, at the time of the execution of the promissory notes, the Molino properties were subject of various court actions commenced by different parties. Thus, the sale of the properties and, consequently, the payment of respondents commissions were put on hold. The non-payment of his commissions could very well be the reason why he obtained a loan from petitioner. In Sierra v. Court of Appeals, we held that: A promissory note is a solemn acknowledgment of a debt and a formal commitment to repay it on the date and under the conditions agreed upon by the borrower and the lender. A person who signs such an instrument is bound to honor it as a legitimate obligation duly assumed by him through the signature he affixes thereto as a token of his good faith. If he reneges on his promise without cause, he forfeits the sympathy and assistance of this Court and deserves instead its sharp repudiation.

Aside from the payment of the principal obligation of P1,936,800.00, the parties agreed that respondent pay interest at the rate of 25% from February 17, 1997 until fully paid. Such rate, however, is excessive and thus, void. Since the stipulation on the interest rate is void, it is as if there was no express contract thereon. To be sure, courts may reduce the interest rate as reason and equity demand. In this case, 12% interest is reasonable. The promissory notes likewise required the payment of a penalty charge of 3% per month or 36% per annum. We find


such rates unconscionable. This Court has recognized a penalty clause as an accessory obligation which the parties attach to a principal obligation for the purpose of ensuring the performance thereof by imposing on the debtor a special prestation (generally consisting of the payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled. However, a penalty charge of 3% per month is unconscionable; hence, we reduce it to 1% per month or 12% per annum, pursuant to Article 1229 of the Civil Code which states: 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.

Lastly, respondent promised to pay 25% of his outstanding obligations as attorneys fees in case of non-payment thereof. Attorneys fees here are in the nature of liquidated damages. As long as said stipulation does not contravene law, morals, or public order, it is strictly binding upon respondent. Nonetheless, courts are empowered to reduce such rate if the same is iniquitous or unconscionable pursuant to the above-quoted provision.This sentiment is echoed in Article 2227 of the Civil Code, to wit: Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably reduced if they are iniquitous or unconscionable. Hence, we reduce the stipulated attorneys fees from 25% to 10%.

Respondents Counterclaim and Supplemental Counterclaim The RTC, affirmed by the CA, granted respondents counterclaims as it applied the doctrine of piercing the veil of corporate fiction. It is undisputed that the parties to the contract of sale of the subject properties are Pentacapital Realty as the buyer, CRDI as the seller, and respondent as the agent of CRDI. Respondent insisted, and the RTC and the CA agreed, that petitioner, as the parent company of Pentacapital Realty, was aware of the sale transaction, and that it was the former who paid the consideration of the sale. Hence, they concluded that the two corporations should be treated as one entity. Petitioner assails the CA Decision sustaining the grant of respondents counterclaim and supplemental counterclaim on the following grounds: first, respondents claims are barred by res judicata, the same having been adjudicated with finality by the RTC-Cebu in Civil Case No. CEB-25032; second, piercing the veil of corporate fiction is without basis; third, the case is dismissible for failure to implead Pentacapital Realty as indispensable party; and last, respondents supplemental counterclaim is actually a third party complaint against Pentacapital Realty, the filing thereof requires the payment of the necessary docket fees. Petitioners contentions are meritorious. Res judicata means a matter adjudged; a thing judicially acted upon or decided; a thing or matter settled by judgment. It lays the rule that an existing final judgment or decree rendered on the merits, without fraud or collusion, by a court of competent jurisdiction, upon any matter within its jurisdiction, is conclusive of the rights of the parties or their privies, in all other actions or suits in the same or any other judicial tribunal of concurrent jurisdiction on the points and matters in issue in the first suit.


The requisites of res judicata are: The former judgment or order must be final; It must be a judgment on the merits; It must have been rendered by a court having jurisdiction over the subject matter and the parties; and There must be between the first and second actions, identity of parties, subject matter, and cause of action. These requisites are present in the instant case. It is undisputed that respondent instituted an action for Preliminary Mandatory Injunction against Pentacapital Realty, before the RTC of Cebu City, docketed as Civil Case No. CEB-25032. On motion of Pentacapital Realty, in an Order dated August 15, 2001, the court dismissed the complaint on two grounds: 1) non-payment of the correct filing fee considering that the complaint was actually a collection of sum of money although denominated as Preliminary Mandatory Injunction; and 2) lack of cause of action. The court treated the complaint as a collection suit because respondent was seeking the payment of his unpaid commission or share in the proceeds of the sale of the Molino Properties. Additionally, the RTC found that respondent had no cause of action against Pentacapital Realty, there being no privity of contract between them. Lastly, the court held that it was CRDI which agreed that 20% of the total consideration of the sale be paid and delivered to respondent. Instead of assailing the said Order, respondent filed his supplemental compulsory counterclaim, demanding again the payment of his commission, this time, against petitioner in the instant case. The Order, therefore, became final and executory. Respondents supplemental counterclaim against petitioner is anchored on the doctrine of piercing the veil of

corporate fiction. Obviously, after the dismissal of his complaint before the RTC-Cebu, he now proceeds against petitioner, through a counterclaim, on the basis of the same cause of action. Thus, if we follow respondents contention that petitioner and Pentacapital Realty are one and the same entity, the latter being a subsidiary of the former, respondent is barred from instituting the present case based on the principle of bar by prior judgment. The RTC-Cebu already made a definitive conclusion that Pentacapital Realty is not a privy to the contract between respondent and CRDI. It also categorically stated that it was CRDI which agreed to pay respondents commission equivalent to 20% of the proceeds of the sale. With these findings, and considering that petitioners alleged liability stems from its supposed relation with Pentacapital Realty, logic dictates that the findings of the RTC-Cebu, which had become final and executory, should bind petitioner. It is well-settled that when material facts or questions in issue in a former action were conclusively settled by a judgment rendered therein, such facts or questions constitute res judicata and may not again be litigated in a subsequent action between the same parties or their privies regardless of the form of the latter.Absolute identity of parties is not required, and where a shared identity of interest is shown by the identity of the relief sought by one person in a prior case and the second person in a subsequent case, such was deemed sufficient.There is identity of parties not only when the parties in the cases are the same, but also between those in privity with them. No other procedural law principle is indeed more settled than that once a judgment becomes final, it is no longer subject to change, revision, amendment, or reversal, except only for correction of clerical errors, or the making of nunc pro tunc entries which cause no prejudice to any party, or where the judgment itself is void. The underlying reason for the rule is twofold: (1) to avoid delay in the administration of justice and thus


make orderly the discharge of judicial business; and (2) to put judicial controversies to an end, at the risk of occasional errors, inasmuch as controversies cannot be allowed to drag on indefinitely and the rights and obligations of every litigant must not hang in suspense for an indefinite period of time. In view of the foregoing disquisitions, we find no necessity to discuss the other issues raised by petitioner. Forum Shopping For his part, respondent adopts the conclusions made by the RTC and the CA in granting his counterclaims. He adds that the petition should be dismissed on the ground of forumshopping. He argues that petitioner is guilty of forum-shopping by filing the petition for review (G.R. No. 181482), assailing the CA Decision dated October 4, 2007, despite the pendency of G.R. No. 171736 assailing the CA Decision dated December 20, 2005. We do not agree with respondent. Forum-shopping is the act 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. What is important in determining whether forum-shopping exists is the vexation caused the courts and parties-litigants by a party who asks different courts and/or administrative agencies to rule on the same or related causes and/or grant the same or substantially the same reliefs, in the process creating the possibility of conflicting decisions being rendered by the

different fora upon the same issues. Forum-shopping can be committed in three ways: (1) by filing multiple cases based on the same cause of action and with the same prayer, the previous case not having been resolved yet (where the ground for dismissal is litis pendentia); (2) by filing multiple cases based on the same cause of action and with the same prayer, the previous case having been finally resolved (where the ground for dismissal is res judicata); and (3) by filing multiple cases based on the same cause of action but with different prayers (splitting of causes of action, where the ground for dismissal is also either litis pendentia or res judicata). More particularly, the elements of forum-shopping are: (a) identity of parties or at least such parties that represent the same interests in both actions; (b) identity of rights asserted and reliefs prayed for, the relief being founded on the same facts; (c) 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 judicata in the action under consideration. These elements are not present in this case. In G.R. No. 171736, petitioner assails the propriety of the admission of respondents supplemental compulsory counterclaim; while in G.R. No. 181482, petitioner assails the grant of respondents supplemental compulsory counterclaim. In other words, the first case originated from an interlocutory order of the RTC, while the second case is an appeal from the decision of the court on the merits of the case. There is, therefore, no forum-shopping for the simple reason that the petition and the appeal involve two different and distinct issues. WHEREFORE, premises considered, the petitions are hereby GRANTED. The Decisions and Resolutions of the Court of Appeals dated December 20, 2005 and March 1, 2006, in CA-G.R. SP No.


74851, and October 4, 2007 and January 21, 2008, in CA-G.R. CV No. 86939, are REVERSED and SET ASIDE. Respondent Makilito B. Mahinay is ordered to pay petitioner Pentacapital Investment Corporation P1,936,800.00 plus 12% interest per annum, and 12% per annum penalty charge, starting February 17, 1997. He is likewise ordered to pay 10% of his outstanding obligation as attorneys fees. No pronouncement as to costs. SO ORDERED. 143. G.R. No. L-40597 June 29, 1979 AGUSTINO B. ONG YIU, petitioner, vs. HONORABLE COURT OF APPEALS and PHILIPPINE AIR LINES, INC., respondents. MELENCIO-HERRERA, J.: In this Petition for Review by Certiorari, petitioner, a practicing lawyer and businessman, seeks a reversal of the Decision of the Court of Appeals in CA-G.R. No. 45005-R, which reduced his claim for damages for breach of contract of transportation. The facts are as follows: On August 26, 1967, petitioner was a fare paying passenger of respondent Philippine Air Lines, Inc. (PAL), on board Flight No. 463-R, from Mactan Cebu, bound for Butuan City. He was scheduled to attend the trial of Civil Case No. 1005 and Spec. Procs. No. 1125 in the Court of First Instance, Branch II, thereat, set for hearing on August 28-31, 1967. As a passenger, he checked in one piece of luggage, a blue "maleta" for which he was issued Claim Check No. 2106-R (Exh. "A"). The plane left Mactan Airport, Cebu, at about 1:00 o'clock P.M., and arrived at Bancasi airport, Butuan City, at past 2:00 o'clock P.M., of the same day. Upon arrival, petitioner claimed his luggage but it could not be

found. According to petitioner, it was only after reacting indignantly to the loss that the matter was attended to by the porter clerk, Maximo Gomez, which, however, the latter denies, At about 3:00 o'clock P.M., PAL Butuan, sent a message to PAL, Cebu, inquiring about the missing luggage, which message was, in turn relayed in full to the Mactan Airport teletype operator at 3:45 P.M. (Exh. "2") that same afternoon. It must have been transmitted to Manila immediately, for at 3:59 that same afternoon, PAL Manila wired PAL Cebu advising that the luggage had been over carried to Manila aboard Flight No. 156 and that it would be forwarded to Cebu on Flight No. 345 of the same day. Instructions were also given that the luggage be immediately forwarded to Butuan City on the first available flight (Exh. "3"). At 5:00 P.M. of the same afternoon, PAL Cebu sent a message to PAL Butuan that the luggage would be forwarded on Fright No. 963 the following day, August 27, 196'(. However, this message was not received by PAL Butuan as all the personnel had already left since there were no more incoming flights that afternoon. In the meantime, petitioner was worried about the missing luggage because it contained vital documents needed for trial the next day. At 10:00 o'clock that evening, petitioner wired PAL Cebu demanding the delivery of his baggage before noon the next day, otherwise, he would hold PAL liable for damages, and stating that PAL's gross negligence had caused him undue inconvenience, worry, anxiety and extreme embarrassment (Exh. "B"). This telegram was received by the Cebu PAL supervisor but the latter felt no need to wire petitioner that his luggage had already been forwarded on the assumption that by the time the message reached Butuan City, the luggage would have arrived. Early in the morning of the next day, August 27, 1967, petitioner went to the Bancasi Airport to inquire about his luggage. He did not wait, however, for the morning flight which arrived at 10:00 o'clock that morning. This flight carried the missing luggage. The porter clerk, Maximo Gomez, paged petitioner, but the latter had already left. A certain Emilio Dagorro a driver of a "colorum" car, who also used to drive for petitioner, volunteered to take the


luggage to petitioner. As Maximo Gomez knew Dagorro to be the same driver used by petitioner whenever the latter was in Butuan City, Gomez took the luggage and placed it on the counter. Dagorro examined the lock, pressed it, and it opened. After calling the attention of Maximo Gomez, the "maleta" was opened, Gomez took a look at its contents, but did not touch them. Dagorro then delivered the "maleta" to petitioner, with the information that the lock was open. Upon inspection, petitioner found that a folder containing certain exhibits, transcripts and private documents in Civil Case No. 1005 and Sp. Procs. No. 1126 were missing, aside from two gift items for his parents-in-law. Petitioner refused to accept the luggage. Dagorro returned it to the porter clerk, Maximo Gomez, who sealed it and forwarded the same to PAL Cebu. Meanwhile, petitioner asked for postponement of the hearing of Civil Case No. 1005 due to loss of his documents, which was granted by the Court (Exhs. "C" and "C-1"). Petitioner returned to Cebu City on August 28, 1967. In a letter dated August 29, 1967 addressed to PAL, Cebu, petitioner called attention to his telegram (Exh. "D"), demanded that his luggage be produced intact, and that he be compensated in the sum of P250,000,00 for actual and moral damages within five days from receipt of the letter, otherwise, he would be left with no alternative but to file suit (Exh. "D"). On August 31, 1967, Messrs. de Leon, Navarsi, and Agustin, all of PAL Cebu, went to petitioner's office to deliver the "maleta". In the presence of Mr. Jose Yap and Atty. Manuel Maranga the contents were listed and receipted for by petitioner (Exh. "E"). On September 5, 1967, petitioner sent a tracer letter to PAL Cebu inquiring about the results of the investigation which Messrs. de Leon, Navarsi, and Agustin had promised to conduct to pinpoint responsibility for the unauthorized opening of the "maleta" (Exh. "F"). The following day, September 6, 1967, PAL sent its reply hereinunder quoted verbatim: Dear Atty. Ong Yiu:

This is with reference to your September 5, 1967, letter to Mr. Ricardo G. Paloma, Acting Manager, Southern Philippines. First of all, may we apologize for the delay in informing you of the result of our investigation since we visited you in your office last August 31, 1967. Since there are stations other than Cebu which are involved in your case, we have to communicate and await replies from them. We regret to inform you that to date we have not found the supposedly lost folder of papers nor have we been able to pinpoint the personnel who allegedly pilferred your baggage. You must realize that no inventory was taken of the cargo upon loading them on any plane. Consequently, we have no way of knowing the real contents of your baggage when same was loaded. We realized the inconvenience you encountered of this incident but we trust that you will give us another opportunity to be of better service to you. Very truly yours, PHILIPPINE AIR LINES, INC. (Sgd) JEREMIAS S. AGUSTIN Branch Supervisor Cebu (Exhibit G, Folder of Exhibits) 1 On September 13, 1967, petitioner filed a Complaint against PAL for damages for breach of contract of transportation with the Court of First Instance of Cebu, Branch V, docketed as Civil Case No. R-10188, which PAL traversed. After due trial, the lower Court found PAL to have acted in bad faith and with malice and declared petitioner entitled to moral damages in the sum of P80,000.00, exemplary damages of P30,000.00, attorney's fees of P5,000.00, and costs. Both parties appealed to the Court of Appeals — petitioner in so far as he was awarded only the sum of P80,000.00 as moral damages; and defendant because of the unfavorable judgment rendered against it. On August 22, 1974, the Court of Appeals,* finding that PAL was


guilty only of simple negligence, reversed the judgment of the trial Court granting petitioner moral and exemplary damages, but ordered PAL to pay plaintiff the sum of P100.00, the baggage liability assumed by it under the condition of carriage printed at the back of the ticket. Hence, this Petition for Review by Certiorari, filed on May 2, 1975, with petitioner making the following Assignments of Error: I. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING RESPONDENT PAL GUILTY ONLY OF SIMPLE NEGLIGENCE AND NOT BAD FAITH IN THE BREACH OF ITS CONTRACT OF TRANSPORTATION WITH PETITIONER. II. THE HONORABLE COURT OF APPEALS MISCONSTRUED THE EVIDENCE AND THE LAW WHEN IT REVERSED THE DECISION OF THE LOWER COURT AWARDING TO PETITIONER MORAL DAMAGES IN THE AMOUNT OF P80,000.00, EXEMPLARY DAMAGES OF P30,000.00, AND P5,000.00 REPRESENTING ATTORNEY'S FEES, AND ORDERED RESPONDENT PAL TO COMPENSATE PLAINTIFF THE SUM OF P100.00 ONLY, CONTRARY TO THE EXPLICIT PROVISIONS OF ARTICLES 2220, 2229, 2232 AND 2234 OF THE CIVIL CODE OF THE PHILIPPINES. On July 16, 1975, this Court gave due course to the Petition. There is no dispute that PAL incurred in delay in the delivery of petitioner's luggage. The question is the correctness of respondent Court's conclusion that there was no gross negligence on the part of PAL and that it had not acted fraudulently or in bad faith as to entitle petitioner to an award of moral and exemplary damages. From the facts of the case, we agree with respondent Court that PAL had not acted in bad faith. Bad faith means a breach of a known duty through some motive of interest or ill will. 2 It was the duty of PAL to look for petitioner's luggage which had been miscarried. PAL exerted due diligence in complying with such duty. As aptly stated by the appellate Court: We do not find any evidence of bad faith in this. On the contrary, We find that the defendant had exerted diligent effort to locate

plaintiff's baggage. The trial court saw evidence of bad faith because PAL sent the telegraphic message to Mactan only at 3:00 o'clock that same afternoon, despite plaintiff's indignation for the non-arrival of his baggage. The message was sent within less than one hour after plaintiff's luggage could not be located. Efforts had to be exerted to locate plaintiff's maleta. Then the Bancasi airport had to attend to other incoming passengers and to the outgoing passengers. Certainly, no evidence of bad faith can be inferred from these facts. Cebu office immediately wired Manila inquiring about the missing baggage of the plaintiff. At 3:59 P.M., Manila station agent at the domestic airport wired Cebu that the baggage was over carried to Manila. And this message was received in Cebu one minute thereafter, or at 4:00 P.M. The baggage was in fact sent back to Cebu City that same afternoon. His Honor stated that the fact that the message was sent at 3:59 P.M. from Manila and completely relayed to Mactan at 4:00 P.M., or within one minute, made the message appear spurious. This is a forced reasoning. A radio message of about 50 words can be completely transmitted in even less than one minute depending upon atmospheric conditions. Even if the message was sent from Manila or other distant places, the message can be received within a minute. that is a scientific fact which cannot be questioned. 3 Neither was the failure of PAL Cebu to reply to petitioner's rush telegram indicative of bad faith, The telegram (Exh. B) was dispatched by petitioner at around 10:00 P.M. of August 26, 1967. The PAL supervisor at Mactan Airport was notified of it only in the morning of the following day. At that time the luggage was already to be forwarded to Butuan City. There was no bad faith, therefore, in the assumption made by said supervisor that the plane carrying the bag would arrive at Butuan earlier than a reply telegram. Had petitioner waited or caused someone to wait at the Bancasi airport for the arrival of the morning flight, he would have been able to retrieve his luggage sooner. In the absence of a wrongful act or omission or of fraud or bad faith, petitioner is not entitled to moral damages.


Art. 2217. Moral damages include physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral damages may be recovered if they are the proximate result of the defendant's wrongful act of omission. Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. Petitioner is neither entitled to exemplary damages. In contracts, as provided for in Article 2232 of the Civil Code, exemplary damages can be granted if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner, which has not been proven in this case. Petitioner further contends that respondent Court committed grave error when it limited PAL's carriage liability to the amount of P100.00 as stipulated at the back of the ticket. In this connection, respondent Court opined: As a general proposition, the plaintiff's maleta having been pilfered while in the custody of the defendant, it is presumed that the defendant had been negligent. The liability, however, of PAL for the loss, in accordance with the stipulation written on the back of the ticket, Exhibit 12, is limited to P100.00 per baggage, plaintiff not having declared a greater value, and not having called the attention of the defendant on its true value and paid the tariff therefor. The validity of this stipulation is not questioned by the plaintiff. They are printed in reasonably and fairly big letters, and are easily readable. Moreover, plaintiff had been a frequent passenger of PAL from Cebu to Butuan City and back, and he, being a lawyer and businessman, must be fully aware of these conditions. 4 We agree with the foregoing finding. The pertinent Condition of Carriage printed at the back of the plane ticket reads: 8. BAGGAGE LIABILITY ... The total liability of the Carrier for lost

or damaged baggage of the passenger is LIMITED TO P100.00 for each ticket unless a passenger declares a higher valuation in excess of P100.00, but not in excess, however, of a total valuation of P1,000.00 and additional charges are paid pursuant to Carrier's tariffs. There is no dispute that petitioner did not declare any higher value for his luggage, much less did he pay any additional transportation charge. But petitioner argues that there is nothing in the evidence to show that he had actually entered into a contract with PAL limiting the latter's liability for loss or delay of the baggage of its passengers, and that Article 1750* of the Civil Code has not been complied with. While it may be true that petitioner had not signed the plane ticket (Exh. "12"), he is nevertheless bound by the provisions thereof. "Such provisions have been held to be a part of the contract of carriage, and valid and binding upon the passenger regardless of the latter's lack of knowledge or assent to the regulation". 5 It is what is known as a contract of "adhesion", in regards which it has been said that contracts of adhesion wherein one party imposes a ready made form of contract on the other, as the plane ticket in the case at bar, are contracts not entirely prohibited. The one who adheres to the contract is in reality free to reject it entirely; if he adheres, he gives his consent. 6 And as held in Randolph v. American Airlines, 103 Ohio App. 172, 144 N.E. 2d 878; Rosenchein vs. Trans World Airlines, Inc., 349 S.W. 2d 483, "a contract limiting liability upon an agreed valuation does not offend against the policy of the law forbidding one from contracting against his own negligence. Considering, therefore, that petitioner had failed to declare a higher value for his baggage, he cannot be permitted a recovery in excess of P100.00.Besides, passengers are advised not to place valuable items inside their baggage but "to avail of our V-cargo service " (Exh. "1"). I t is likewise to be noted that there is nothing in the evidence to show the actual value of the goods allegedly lost by petitioner.


There is another matter involved, raised as an error by PAL — the fact that on October 24, 1974 or two months after the promulgation of the Decision of the appellate Court, petitioner's widow filed a Motion for Substitution claiming that petitioner died on January 6, 1974 and that she only came to know of the adverse Decision on October 23, 1974 when petitioner's law partner informed her that he received copy of the Decision on August 28, 1974. Attached to her Motion was an Affidavit of petitioner's law partner reciting facts constitutive of excusable negligence. The appellate Court noting that all pleadings had been signed by petitioner himself allowed the widow "to take such steps as she or counsel may deem necessary." She then filed a Motion for Reconsideration over the opposition of PAL which alleged that the Court of Appeals Decision, promulgated on August 22, 1974, had already become final and executory since no appeal had been interposed therefrom within the reglementary period. Under the circumstances, considering the demise of petitioner himself, who acted as his own counsel, it is best that technicality yields to the interests of substantial justice. Besides, in the 'last analysis, no serious prejudice has been caused respondent PAL. In fine, we hold that the conclusions drawn by respondent Court from the evidence on record are not erroneous. WHEREFORE, for lack of merit, the instant Petition is hereby denied, and the judgment sought to be reviewed hereby affirmed in toto. No costs. SO ORDERED. Teehankee, (Chairman), Makasiar, Fernandez, Guerrero and De Castro, JJ., concur. 144. G.R. No. L-35721 October 12, 1987 WELDON CONSTRUCTION CORPORATION, petitioner,

vs. COURT OF APPEALS (Second Division) and MANUEL CANCIO, respondents. CORTES, J.: The present controversy arose from the construction of the Gay Theater building on the corner of Herran and Singalong Streets in Manila. Petitioner WELDON CONSTRUCTION CORPORATION sued the private respondent Manuel Cancio in the then Court of First Instance of Manila to recover P62,378.82 Pesos, which is ten per (10%) of the total cost of construction of the building, as commission, and P23,788.32 Pesos as cost of additional works thereon. The basis for the claim for commission is an alleged contract of supervision of construction between the theater owner Manuel Cancio, herein private respondent, and the petitioner's predecessors-in-interest, Weldon Construction, which the petitioner seeks to enforce. The private respondent refused to pay the amounts demanded on the ground that the Gay Theater building was constructed by Weldon Construction for the stipulated price of P600,000.00 Pesos which has already been fully paid. The irreconcilable positions taken by the parties brought the controversy before the courts. Two documents, Exhibit "A" and Exhibit "5," were produced by the plaintiff and the defendant, respectively, before the trial court. Plaintiff, herein petitioner sought the enforcement of the alleged contract of supervision contained in Exhibit "A," which is quoted below: March 7, 1961 Mr. & Mrs. Manuel Cancio c/o Goodwill Trading Co. Rizal Avenue, Manila Dear Mr. & Mrs. Cancio: We have the pleasure to offer your goodselves our services for the construction of your theater and office budding at Singalong corner Herran St., Manila per plans and specifications of Engr.


Filomeno Nunez. We shall handle the administration of the construction of your building under the following conditions: 1. The Owner shall transfer or advance an amount of TEN THOUSAND PESOS (P10,000.00) to serve as a revolving fund and to be replenished from time to time to take care of the cost and expenditures incurred for the proper prosecution of the work. Such cost to include the following items and to be at rates not higher than the standard paid in the locality of the work except with prior consent of the Owner: a. All materials necessary for the work; b. All payrolls including social security and other taxes related thereto; c. Salaries of employees stationed at the field office in whatever capacity employed. Employees engaged in expediting works or transportation of materials shall be considered as stationed in the field office; d. Traveling expenses of adrniniqtrator or employees incurred in discharging duties connected with this work; e. Permit fees, royalties, damages for infringement of patents, and cost of defending suits therefore and for deposits lost; f. Losses and expenses not compensated by insurance provided they have resulted from causes other than our fault or neglect. No such losses and expenses shall be included in the cost of the work for the purpose of determining the commission. In the event of loss from fire, flood, or other fortuitous events, we shall be put in charge of reconstruction and be paid for a fee proportionate to the work done; g. Minor expense, such as telegrams, telephone services and similar petty cash items; h. The amount of all subscontracts; i. Premiums on all bonds and insurance policies caned for the execution of the work; j. Rentals of all construction plant or parts thereof neressary in the execution of the work in accordance with rental agreements approved by the owner.

Transportation of said construction plants, costs of loading and unloading, cost of installation and removing thereof, and minor repairs and replacements of parts during its use on the work, in accordance with the terms of the said rental agreement. 2. That the Owner shall not reimburse from us the following expenditures: a. Salary of any person employed in our main office or in any regular established branch office, during the execution of the work; b. Overhead or general expenses of any kind, except as those which maybe expressly included in this Contract; c. Interest on capital employed either in plant or in expenditures on the work except as maybe expressly included in this contract. 3. That we shall be under the direct supervision of the Owner, and shad provide facilities for the Owner's representative to have access or inspection of the work whether it is in preparation or progress. 4. That we shall continuously maintain adequate protection of all works from damage and shall protect the Owner's property from injury or loss. We shall protect adjacent properties as provided by law. 5. That we shall receive a commission of Ten Percent (10%) of the total cost, to be paid upon submission of statement of cost. If the above conditions are satisfactory to you, you may sign your approval at the left corner provided for in this page. We shall submit an estimate of the whole project based on the plans as soon as possible. In as much (sic) as time is of the essence, may we proceed right away under the administrative (sic) basis. Respectfully yours, WELDON CONSTRUCTION (Sgd.) ANTONIO C. WONG Office Manager Private respondent Cancio resisted the petitioner's claims for commission and for the cost of "extra works" by producing Exhibit "5", a building contract providing for the construction of


the building in question for the stipulated price of P600,000.00 pesos which said private respondent had already paid to the petitioner's predecessor-in-interest. Exhibit "5" is reproduced as follows: BUILDING CONTRACT KNOW ALL MEN BY THESE PRESENTS: This contract, made and executed in the City of Manila, Philippines, this 30th day of March 1961 by and between: MR. MANUEL CANCIO, of legal age, married and residing at 711 Rizal Avenue, Manila, Philippines, hereinafter referred to as the Owner, - and - WELDON CONSTRUCTION, a construction firm, with main office at No. 1262 Rizal Avenue Extension, Caloocan, Rizal, Philippines, represented herein by its General Manager and proprietor Lucio Lee, hereinafter referred to as the Contractor, witnesseth: That, the Owner and the Contractor have agreed to the following terms and conditions: 1. The Contractor shall erect and build in a workmanlike manner and to the best of its ability a Cinema and Commercial Building located at Herran corner Singalong, Manila, in accordance with the plans and specifications agreed upon by the Owner and the Contractor, the latter being made an integral part hereof as Annex "A"; except the following: (a) Electrical Fixtures (b) Water pumps & Sump pumps (c) Drinking Fountains (d) Fire Fighting Equipments (e) Neon Lights (f) Air Conditioning (g) Chair (h) Curtain & Curtain Motors (i) Screen (j) Mezzanine along Singalong (Except that marked on plans noted.) (k) Contractors's Sales Tax

(l) Doors for Store Space (to be provided by tenant) (m) Third Storey (store space up to 2nd floor only) 2. The contractor shall supply the corresponding labor and materials on said construction which shall include plumbing, tinsmith, masonry, concreting, electrical, carpentry and painting, in accordance with the aformentioned plans and specifications (except as noted in Art. 1 above.) 3. The building permit shall be paid for by the Owner. 4. The Owner shall pay the Contractor the full amount of SIX HUNDRED THOUSAND (P600,000.00) PESOS, Philippine Currency, which payment the Owner shall pay in the basis of work accomplished based on the breakdown attached herewith marked Annex "B" and "C." Such payment shall be paid on the tenth day of every month. Ten percent retention of every payment shall be retained by the owner, to be paid upon completion of the project. 5. The Contractor recognizes that time is an essential element of this contract and, on this basis, agrees to finish the construction of the said Commercial-Cinema Building by November 30, 1961. Should the contractor fail to finish the said building by that date, he (the Contractor) shall indemnify the Owner the sum of SIX HUNDRED PESOS (P600.00) for each day of delay, as liquidated damages. Any extensions of the date of completion due to delays caused by force majeure or due to decision of Owner to hold in abeyance certain portions of work must be approved in writing by the Owner. 6. The Contractor shall secure from the proper authorities the certificate of final approval of the work completed in accordance with the plans and specifications, the same shall be given to the Owner upon the turnover of the work so completed. IN WITNESS WHEREOF, the parties have signed this Building Contract this 30th day of March, 1961, at Manila, Philippines. (Sgd.) MANUEL CANCIO (Sgd.) LUCIO A. LEE Owner Contractor With Marital Consent: (Sgd.) JUANA CANCIO


SIGNED IN THE PRESENCE OF: __________________ ______________________ The then Court of First, instance of Manila ruled that the agreement between the parties is a contract of supervision of construction found in Exhibit "A" and ordered the theater-owner Cancio to pay the ten per cent (10%) supervision fee or commission provided for in said contract (Record on Appeal, p. 91). On appeal by the defendant Cancio, the Court of Appeals reversed the lower court's Decision and dismissed the Complaint. The appellate court held that the transaction between the parties is a construction contract for a stipulated price contained in Exhibit "5" (Rollo, pp. 53-62 [Court of Appeals Decision]) The dispositive portion of the Court of Appeals Decision promulgated on December 23, 1971 reads: WHEREFORE, the judgment appealed from is reversed and set aside. Let another issue dismissing plaintiff's complaint and ordering ph&tiff to pay defendant-appellant P5,000.00 as moral damages, P4,000.00 as exemplary damages, and P4,000.00 as attorney's fees. Costs against plaintiff-appellee in both instances. SO ORDERED. (Rollo, p. 64) Both parties moved for the reconsideration of the aforesaid Decision. Plaintiff-appellee WELDON CONSTRUCTION CORPORATION assailed the Decision as a whole and reiterated its claims. Defendant-appellant sought an increase in the amount of damages and attomey's fees awarded. In a Resolution dated February 7, 1972, the same division of the Court of Appeals denied the two Motions for Reconsideration. Upon a Second Motion for Reconsideration filed by the plaintiff-appellee, the Court of Appeals modified its Decision of December 23, 1971 as follows: IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby maintain the decision of December 23, 1971, dismissing the plaintiff's complaint, with the modification that defendant's counterclaim are also dismissed, without pronouncement as to attorney's fees and costs. SO ORDERED. (Resolution, October 18, 1972; [Rollo, p. 124])

Not satisfied with the Resolution of its Second Motion for Reconsideration, plaintiff-appellee WELDON CONSTRUCTION CORPORATION elevated its case to this Tribunal by certiorari under Rule 45 of the Rules of Court. 1. The Court is called upon to ascertain whether or not a commission of ten per cent (10%) of the total cost of construction of the Gay Theater building should be paid by the private respondent pursuant to the alleged contract of supervision of construction which the petitioner seeks to enforce. Stated otherwise, the principal issue presented is whether the agreement between the parties is a contract of supervision of construction on commission basis, in which the case commission will be legally demandable, or a construction contract for a stipulated price which has already been consummated. The ancillary issue is whether or not the petitioner can recover the cost of additional works on the building. The task at hand entails the interpretation of the true agreement between the parties, which is in effect an inquiry into the "law" imposed by the parties upon their contractual relations. Since a contract is in the nature of "law" as between the parties and their successors-in-interest its interpretation necessarily involves a question of law (Melliza v. City of Iloilo, L-24732, April 30, 1968, 23 SCRA 477, 481) properly raised in this certiorari proceeding under Rule 45. 2. The facts are not disputed. It appears from the records that in 1961 Lucio Lee, whose name was later changed to Lucio Lee Rodriguez, was doing business under the trade name Weldon Construction, the predecessor-in-interest of the herein petitioner, WELDON CONSTRUCTION CORPORATION. The latter corporation was incorporated in July, 1963 as a closed corporation composed of Lucio Tee (owner of Weldon Construction), his wife, his sister and the latter's husband, and a cousin. The assets of Weldon Construction were transferred to, and its liabilities assumed by the new corporation. Hence, the instant case was brought by WELDON CONSTRUCTION CORPORATION as successor-in-interest of Weldon Construction and Lucio Lee.


Prior to March 7, 1961, Lucio Lee drafted plans for a theaterapartment building which private respondent Cancio intended to put up. Thereafter, on March 7, 1961, he submitted to the latter a proposal (Exhibit "A") for the supervision of the construction of said building on commission basis. The proposal was signed not by Lee but by his office manager, Antonio Wong. The private respondent never affixed his signature on the document. Among the provisions Contained in the proposal was the setting up of a revolving fund of P10,000.00 Pesos for the costs and expenditures to be incurred in the construction of the building, such as materials and labor among others (Exhibit "A", par. 1). The fund was to be replenished by the owner of the building from time to time (Id). The proposal also provided for the payment to Weldon Construction of a commission of ten per cent (10%) of the total cost of the building (Id., par. 5) Without having signed the proposal Exhibit "A" or any written agreement on the construction of the building, private respondent Cancio gave an advance payment of P10,000.00 Pesos. Then, on March 28, 1961, Lee submitted another proposal (Exhibit "4") this time for the construction of the same building at the stipulated price of P600,000.00 Pesos. Two days after, Lee sent the private respondent a prepared "Building Contract" (Exhibit "5") signed by him for the signature of the latter and those of the witnesses. Private respondent did not return the document to Lee, but the petitioner started the construction of the building. When the document (Exhibit "5") was later presented in court, it contained the signatures of Lee, as well as the signatures of Manuel Cancio, that of his wife, giving her marital consent, and those of two witnesses. As the construction of the theater building shifted to high gear, subsequent payments were made by respondent Cancio to Weldon Construction as per accomplishment in the varying amounts of P70,000.00 Pesos (Court of Appeals Decision, Rollo, p. 56; Exhibits "8-18"). The materials were bought and paid for by the contractor, although the invoices were in the name of the owner, evidently to avoid payment by the former of the three per

cent (3%) contractor's tax. (Court of Appeals Decision, Rollo, p. 59). The invoices, receipts of payment, vouchers and payrolls were not surrendered to the owner but were kept by the contractor. (Id. p. 57). Shortly after the completion of the theater building and its delivery to the owner, the latter completed the payment of the P600,000.00 contract price (CA Decision, Rollo, p. 59). However, Weldon Construction demanded the payment of P62,378.83 Pesos, as a commission of ten per cent (10%) of the total cost of construction and of P23,788.32 Pesos as the cost of the "extra works" on the building. The owner Cancio denied the existence of any agreement on the payment of commission and refused to pay the amounts demanded. Hence, this suit initiated by the WELDON CONSTRUCTION CORPORATION, the successor-in-interest of Lucio Lee and Weldon Construction. 3. A careful scrutiny of each and every term and stipulation in the two documents Exhibit "A" and Exhibit ""5" revealed two differences between them which are crucial to this case. One basic difference between the two agreements lies in the proposed consideration for the administration or supervision services. Proposed under Exhibit "A" was Ten Per cent (10%) of the total cost of construction (Exh. "A", par. 5) without a maximum amount set as a limit on that cost. In contrast, Exhibit "5" sets the stipulated price of the construction of the building at P600,000.00 Pesos, which is the consideration of the contract (Exhibit "5" par. 4). The other point of divergence is the manner in which the expenses for labor and materials are provided for. Exhibit "A", sets up a revolving fund of P10,000.00 Pesos to be paid by the Owner and to be replenished by him from time to time, which fund shall answer for the various costs of construction including labor and materials (Exh. "A" par. 1). No such fund is provided for in Exhibit "5" since the Contractor Weldon Construction binds itself to supply the labor and materials (Exh. "5", par. 2). The first proposal submitted by Weldon Construction for rendering service under a contract of supervision (Exhibit "A") is


simply that, a proposal. It never attained perfection as the contract between the parties. Only an absolute or unqualified acceptance of a definite offer manifests the consent necessary to perfect a contract (Article 1319, New Civil Code). The advance payment of P10,000.00 Pesos was not an unqualified acceptance of the offer contained in the first proposal (Exhibit "A") as in fact an entirely new proposal (Exhibit "4") was submitted by Weldon Construction subsequently. If, as claimed by the petitioner, the parties had already agreed upon a contract of supervision under Exhibit "A," why then was a second proposal made? Res ipsa loquitur. The existence of the second proposal belies the perfection of any contract arising from the first proposal . With regard to the second proposal (Exhibit "4") for the construction of the building at a stipulated price, the same was closely followed by the "Building Contract" (Exhibit "5") signed by Lee, setting forth m detail the proposed terms and stipulations. Although the petitioner claims that the contract was never returned to its predecessors-in-interest, it appears upon the face of the document (Exhibit "5") that the same was signed by the contracting parties and their witnesses. Petitioner does not question the authenticity of the signature of its predecessorsin-interest, Lucio Lee, appearing on the document (Exhibit "5"). Lee himself has admitted said signature as his. Petitioner, however, impugns the binding effect of the Building Contract (Exhibit "5") by assailing its due execution. It cans the attention of the Court to the conclusion of the trial court that the signature of the defendant (herein private respondent) and that of the witness Martinez were affixed on said contract after its purported date of execution on March 30, 1961 (Record on Appeal, pp. 89-90). Petitioner's position is untenable. Once a contract is shown to have been consummated or fully performed by the parties thereto, its existence and binding effect can no longer be disputed. It is irrelevant and immaterial to dispute the due execution of a contract. i.e.. the date of signing by one of the parties, if bath of them have in fact performed their obligations

thereunder and their respective signatures and those of their witnesses appear upon the face of the document. Thus, even as that the Building Contract in Exhibit "5", was signed by the private respondent only after the Gay Theater building had been completed and the stipulated price of P600,000.00 Pews fully paid, such fact can no longer negate the binding effect of that agreement if its existence and especially, its consummation can be established by other evidence, e.g. by the contemporaneous acts of the parties and their having performed their respective obligations pursuant to the agreement. As held in Kriedt v. E.C. McCullough & Co., 37 Phil. 474,480 (1918) . . . Acts done by the parties to a contract in the course of its performance am admissible in evidence upon the question of its meaning as being their own contemporaneous interpretation of its terms. (Cited in Manila Electric Company v. Court of Appeals, L-33794, May 31, 1982, 114 SCRA 173, 181) A similar pronouncement was made by the Court in Shell Company of the Philippines, Ltd. v. Firemen's Insurance CO. of Newark, 100 Phil. 757 (1957), to wit: To determine the nature of a contract courts do not have or are not bound to rely upon the name or title given it by the contracting parties, should there be a controversy as to what they really had intended to enter into, but the way the contracting parties do or perform their respective obligations, stipulated or agreed upon may be shown and inquired into, and should such performance conflict with the name given the contract by the parties, the former must prevail over the latter (cited in Borromeo v. Court of Appeals, L-22962, September 28, 1972, 47 SCRA 65, 74). Thus, the manner in which the parties conducted their transactions relating to the construction of the Gay Theater building indicates whether the parties had intended to be bound by a construction contract for a stipulated price or by any other agreement. The demandability of the amounts sought to be recovered by the petitioner will depend on the nature of that agreement.


In this case, the Court finds that the parties adhered to the terms and stipulations of the Building Contract (Exhibit "5"). After said contract hewing the signature of the contractor Lee was submitted for the signature of the respondent Cancio, subsequent payments were made by the latter in amounts ranging from P25,000.00 Pesos to P70,000.00 Pesos. Even granting that the P10,000.00 Pesos advance payment by the owner was set up as a revolving fund, these relatively large amounts could hardly be considered as mere replenishments of said initial amount. As correctly reasoned out in the Decision of the Court of Appeal (Rollo, p. 56), replenishments of the P10,000.00 - peso revolving fund could not exceed that amount. The remittances made by the building owner were actually partial payments of the contract price of P600,000.00 Pesos, the amount having been based on the actual accomplishment of the construction during the period covered by the payment. Thus, the receipts issued by Weldon Construction contained the words, "as per accomplishment" (Exhibits "8"-"18"). The aforecited acts of the parties with respect to said remittances are in consonance with paragraph 4 of the Building Contract (Exhibit "5"), to wit: xxx xxx xxx 4. The Owner shall pay the Contractor the full amount of SIX HUNDRED THOUSAND (PM,000.00) PESOS Philippine Currency, which payment the Owner shall pay in (sic) the basis of work accomplished based on breakdowns attached herewith marked Annex "B" and "C". Such payments shall be paid on the tenth of every month. Ten per cent retention of every payment shall be retained by the Owner, to be paid upon the completion of the project; xxx xxx xxx The inescapable conclusion is that Weldon Construction assumed the obligation to construct the building at the price fixed by the parties and to furnish both the labor and materials required for the project. It acted as an independent contractor within the meaning of Article 1713 of the New Civil Code, which states: ART. 1713. By the contract for a piece of work the contractor

binds himself to execute a piece of work for the employer, in consideration of a certain price or compensation. The contractor may either employ only his labor or skill or also furnish the materials. In view of all the foregoing considerations this Court finds that the agreement between the parties is the contract of construction for a stipulated price contained in Exhibit "5" which is akin to a contract for a piece of work defined in the aforequoted article. Both parties having fully performed their reciprocal obligations in accordance with said contract, petitioner is estopped from invoking an entirely different agreement so as to demand additional consideration. Once a contract has been consummated, there is nothing left to be done or to be demanded by the parties thereto. All obligations arising from the contract are extinguished. As set by the parties, the consideration for the construction of the Gay Theater building is P600,000.00 Pesos which amount has been fully paid by the private respondent. There is no basis for the petitioner's demand for the payment of P62,378.83 Pesos as commission of ten per cent (10%) of the total cost of construction. The denial of petitioner's claim for said amount is affirmed. 4. Since the contract between the parties has been established as a contract for a piece of work for a stipulated price the right of the contractor to recover the cost of additional works must be governed by Article 1724 quoted as follows: ART. 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and specifications agreed upon with the landowner can neither withdraw from the contract or demand an increase in the price on account of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provided: (1) Such change has been authorized by the proprietor in writing; and (2) The additional price to be paid to the contractor had been determined in writing by both parties.


This Court has found occasion to expound upon the nature of the requisites prescribed by Article 1724 in the case of San Diego v. Sayson, L-16258, August 31, 1961, 2 SCRA 1175, 1178-1179, which is in point: xxx xxx xxx It will be noted that whereas under the old article recovery for additional costs in a construction contract can be had if authorization to make such additions tan be proved, the amendment evidently requires that instead of merely' proving authorization, such authorization must be made in writing. The evident purpose of the amendment is to prevent litigation for additional costs incurred by reason of additions or changes in the original plans. Is this additional requirement of a written authorization, to be considered as a mere extension of the Statute of Frauds, or is it a substantive provision? That the requirement for a written authorization is not merely to prohibit admission or oral testimony against the objection of the adverse party, can be inferred from the fact that the provision is not included among those specified in the Statute of Frauds, Article 1403 of the Civil Code. As it does not appear to have been intended as an extension of the Statute of Frauds, it must have been adopted as a substantive provision or a condition precedent to recovery. xxx xxx xxx In addition to the owner's authorization for any change in the plans and specifications, Article 1724 requires that the additional price to be paid for the contractor be likewise reduced in writing. Compliance with the two requisites in Article 1724, a specific provision governing additional works, is a condition precedent to recovery (San Diego v. Sayson, supra). The absence of one or the other bars the recovery of additional costs. Neither the authority for the changes made nor the additional price to be paid therefor may be proved by any other evidence for purposes of recovery. In the case before this Court, the records do not yield any written authority for the changes made on the plans and specifications of the Gay Theater building. Neither can there be found any written agreement on the additional price to be paid for said "extra

works." While the trial court may have found in the instant case that the private respondent admitted his having requested the "extra works" done by the contractor (Record an Appeal, p. 66 [C.F.I. Decision]), this does not save the day for the petitioner. The private respondent claims that the contractor agreed to make the additions without additional cost. Expectedly, the petitioner vigorously denies said claim of the private respondent. This is precisely a misunderstanding between parties to a construction agreement which the lawmakers sought to avoid in prescribing the two requisites under Article 1724 (Report of the Code Commission, p. 148). And this case is a perfect example of a tedious litigation which had ensued between the parties as a result of such misunderstanding. Again, this is what the law endeavors to prevent (San Diego v. Sayson, supra). In the absence of a written authority by the owner for the changes in the plans and specifications of the building and of a written agreement between the parties on the additional price to be paid to the contractor, as required by Article 1724, the claim for the cost of additional works on the Gay Theater building must be denied. WHEREFORE, the judgment of the Court of Appeals in its Decision of December 23, 1971 which was upheld in its Resolution of October 18, 1972 dismissing the complaint filed by Weldon Construction Corporation is AFFIRMED. The modification by the Court of Appeals of said Decision in its Resolution of October 18, 1972 which dismissed the defendant's counterclaims is likewise AFFIRMED. Petition DISMISSED for lack of merit. SO ORDERED. 145. G.R. No. L-28360 January 27, 1983 C & C COMMERCIAL CORPORATION, plaintiff-appellee, vs.


ANTONIO C. MENOR, as Acting General Manager of the National Waterworks and Sewerage Authority, and MEMBERS OF THE COMMITTEE ON PREQUALIFICATION, NAWASA, defendants-appellants. Nicolas T. Benedicto, Jr., for plaintiff-appellee. Gov't. Corporate Counsel for defendants-appellants. AQUINO, J.: This case is about the requirement of a tax clearance certificate as a prerequisite for taking part in public biddings or contracts to sell supplies to any government agency. Judge Cloribel of the Court of First Instance of Manila in his decision dated March 1, 1967 in Civil Case No. 66750, a mandamus case, ordered the Acting General Manager of the National Waterworks and Sewerage Authority and the members of the Committee on Pre-Qualification to allow C & C Commercial Corporation to participate as a qualified bidder in the public bidding for the supply of asbestos cement pressure pipes to the Nawasa in spite of the fact that it had a pending tax case and had no tax clearance certificate. By virtue of that judgment, which became final because the Nawasa did not appeal, C & C Commercial Corporation took part in the bidding. When the bids were opened on May 18, 1967, it was found to be the lowest bidder. In a letter dated July 25, 1967, Antonio C. Menor, the acting general manager of the Nawasa, required C & C Commercial Corporation to submit the tax clearance certificate required in Presidential Administrative Order No, 66 dated June 26, 1967, 63 0. G. 6391, which reads as follows: Now, therefore, I, Ferdinand E. Marcos, President of the Philippines, by virtue of the powers vested in me by law, do hereby order the disqualification of any person, natural or juridical, with a pending case before the Bureau of Internal Revenue or the Bureau of Customs or criminal or civil case in court pending or finally decided against him or it involving nonpayment of any tax, duty or undertaking with the Government, to

participate in public biddings or in any contract with the Government or any of its subdivisions, branches or instrumentalities. including government-owned or controlled corporations, until after such case or cases are terminated in his or its favor, or unless the Secretary of Finance shall certify that such cases are pending and not decided without fault on the part of the taxpayer and the taxpayer submits bond for payment of taxes that may be assessed against him. Government offices entities and instrumentalities and local governments shall impose this condition and shall require, in addition, the latest certified copy of BIR Letter of Confirmation Form No. 19.65-E-I and BIR tax clearance Form No. 1761 as prerequisites to participation in any public bidding or execution of any contract with them. Violation of this order shall be a ground for administrative action. (pp. 8-9, Brief for defendantsappellants). Menor said that the requirement as to the tax clearance certificate was mandatory as held by the Government Corporate Counsel in his Opinion No. 159, Series of 1967. On that same date, July 25, 1967, or long after Judge Cloribel's judgment had been executed and when he had no more jurisdiction to amend it, C & C Commercial Corporation filed a motion in Civil Case No. 66750 wherein it prayed that the Nawasa officials be ordered to award to the said corporation the contract for the supply of asbestos cement pressure pipes, that they be restrained from awarding the contract to another bidder and that they be required to show cause why they should not be held in contempt of court. In effect, that motion was another petition for mandamus. Judge Cloribel in his order of August 23, 1967 granted the motion and ordered Menor and the other Nawasa officials to award within ten days from notice the contract to C & C Commercial Corporation as the lowest bidder. From that order, the Nawasa appealed to this Court. Judge Cloribel approved its record on appeal in his order of November 9, 1967. Realizing that the appeal would delay the award and that another


bidder might be given the contract, C & C Commercial Corporation filed in the lower court another petition for mandamus dated November 21, 1967 wherein it prayed that the Nawasa Board of Directors, its Committee of Awards and Menor, its acting general manager, be restrained from awarding the contract to another bidder and that they be ordered to award the contract to C & C Commercial Corporation (pp. 29-30, Rollo). That case, Civil Case No. 71346, was assigned to Judge Francisco Geronimo. In his order dated January 8, 1968, he denied the motion of C & C Commercial Corporation for a preliminary injunction. He said that the injunction would be inimical to the public interest (p. 37, Rollo). The Government Corporate Counsel in a manifestation dated January 15, 1968 apprised the lower court that the Nawasa board of directors in its resolution dated January 11, 1968 awarded the contract to Regal Trading Corporation as the "lowest complying bidder" (p. 38, Rollo). Menor in his letter of January 16, 1968 forwarded to the President of the Philippines for examination and review the contract entered into between the Nawasa and Regal Trading Corporation, acting in behalf of the Sumitomo Shoji Kaisha, Ltd., for the supply of asbestos cement pressure pipes worth $387,814.72 (p. 41, Rollo). The Presidential Economic Staff and the Office of the President approved the contract (p. 64, Rollo). Unable to get an injunction from Judge Geronimo, C & C Commercial Corporation sought recourse in this Court. In its ex parte motion of January 28, 1968, it asked this Court to enjoin the implementation of the said contract (p. 16, Rollo). The Nawasa opposed the motion on the ground that there was nothing more to be enjoined. Its counsel revealed in its opposition what C & C Commercial Corporation had suppressed: the fact that after Judge Geronimo had denied its petition for injunction C & C Commercial Corporation instituted another action (the third case) in the Court of First Instance at Pasig, Rizal (presided over by Judge Pedro Navarro), docketed as Civil Case No. 10572, wherein it sought a declaration of the nullity of the

award to Regal Trading Corporation. Judge Navarro in his order dated February 7, 1968 restrained Menor, the Nawasa, the Committee of Awards and Regal Trading Corporation "from going through" with the said contract and from opening the corresponding letter of credit until the injunction incident is resolved (pp. 58-59 and 80-81, Rollo). In contrast, this Court in its resolution of March 18, 1968 denied C & C Commercial Corporation's aforementioned motion for the issuance of an injunction. As the parties herein had already submitted their briefs, the appeal was submitted for decision. The issue is the propriety of Judge Cloribel's order compelling the Nawasa officials to award the said contract to C & C Commercial Corporation. It may be argued that the issue had become moot because the contract had already been awarded to Regal Trading Corporation in 1968 and at this late hour it can be presumed that the contract had been fully performed and implemented. Nevertheless, a ruling on the contentions of C & C Commercial Corporation is necessary, according to the Government Corporate Counsel, "if only to make the appellee-corporation stop playing around with our courts" (p. 70, Rollo). For the guidance of the bench and bar, we have to resolve the legal issues raised by the Nawasa. We hold that Judge Cloribel acted without jurisdiction and with grave abuse of discretion in issuing his erroneous order, directing that the Nawasa officials should award the contract to C & C Commercial Corporation. The order is erroneous and void for the following reasons: 1. The said order was an amendment of a judgment that had already been satisfied. The case was closed and terminated. Judge Cloribel had no right and authority to issue such an order after he had lost jurisdiction over the case. The award of the contract to C & C Commercial Corporation was not the lis mota in the mandamus case before Judge Cloribel. It was an extraneous matter that could not have been injected into that case nor resolved therein. What was in issue was whether C & C Commercial Corporation should be allowed to take part in the


bidding even if it had no tax clearance certificate. 2. The Nawasa was justified in not awarding the contract- to C & C Commercial Corporation because it had no tax clearance certificate. It had a pending tax case in the Bureau of Internal Revenue. The award to C & C Commercial Corporation would be in gross contravention of Administrative Order No. 66. That was the ruling in Nawasa vs. Reyes, L-28597, February 29, 1968, 22 SCRA 905, where the bidder was also the appellee herein, C & C Commercial Corporation. It was held therein that C & C Commercial Corporation was disqualified under the said order to take part in the bidding to supply the Nawasa with steel pipes because it had "tremendous tax liabilities". Under Administrative Order No. 66, the Nawasa officials would be subject to administrative disciplinary action if they awarded the contract to C & C Commercial Corporation in spite of its unsettled tax liabilities. The trial court erred in holding that Administrative Order No. 66 could not be given a retroactive effect to the bid of C & C Commercial Corporation which allegedly had been allowed to bid in prior transactions with the Nawasa in spite of its pending tax case, It erred because Administrative Order No. 66 (promulgated after Judge Cloribel had rendered his decision of March 1, 1967) covers not only the bidding but also the "execution of any contract with" the lowest bidder. In this case, at the time the said order was issued, no award had as yet been made and when the award was to be made, the said order was already in force. 3. Moreover, it was not the ministerial duty of the Nawasa officials to award the contract to C & C Commercial Corporation even if it was the lowest bidder, The Nawasa in its addendum No.1 to the invitation to bid dated July 6, 1966 reserved the right "to reject the bid of any bidder" (p. 35, Record on Appeal). Therefore, a bidder whose bid is rejected has no cause for complaint nor a right to dispute the award to another bidder (Esguerra & Sons vs. Aytona, 114 Phil. 1189; Surigao Mineral Reservation Board vs. Cloribel, L-27072, July 31, 1968, 24 SCRA

491). It should be noted that "advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bidder, unless the contrary appears" (Art. 1326, Civil Code). No such contrary intention appears in this case. WHEREFORE, the trial court's order is reversed and set aside with costs against C & C Commercial Corporation. SO ORDERED. Makasiar (Chairman), Concepcion, Jr., Guerrero and Escolin, JJ., concur. 146. G.R. No. L-48563 May 25, 1979 VICENTE E. TANG, petitioner, vs. HON. COURT OF APPEALS and PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondents. Ambrosio D. Go for petitioner. Ferry, De la Rosa, Deligero Salonga & Associates for private respondent. ABAD SANTOS, J.: This is a petition to review on certiorari of the decision of the Court of Appeals (CA-G.R. No. 55407-R, June 8, 1978) which affirmed the decision of the Court of First Instance of Manila in Civil Case No. 90062 wherein the petitioner herein was the plaintiff and Philippine American Life Insurance Co. the herein respondent was the defendant. The action was for the enforcement of two insurance policies that had been issued by the defendant company under the following circumstances. On September 25, 1965, Lee See Guat, a widow, 61 years old, and an illiterate who spoke only Chinese, applied for an insurance on her life for P60,000 with the respondent Company. The


application consisted of two parts, both in the English language. The second part of her application dealt with her state of health and because her answers indicated that she was healthy, the Company issued her Policy No. 0690397, effective October 23, 1965, with her nephew Vicente E. Tang, herein Petitioner, as her beneficiary, On November 15, 1965, Lee See Guat again applied with the respondent Company for an additional insurance on her life for P40,000. Considering that her first application had just been approved, no further medical examination was made but she was required to accomplish and submit Part I of the application which reads: "I/WE HEREBY DECLARE AND AGREE that all questions, statements answers contained herein, as well as those made to or to be made to the Medical Examiner in Part II are full, complete and true and bind all parties in interest under the policy herein applied for; that there shall be no contract of insurance unless a policy is issued on this application and the fun first premium thereon, according to the mode of payment specified in answer to question 4D above, actually paid during the lifetime and good health of the Proposed Insured." Moreover, her answers in Part II of her previous application were used in appraising her insurability for the second insurance. On November 28, 1965, Policy No. 695632 was issued to Lee See Guat with the same Vicente E. Tang as her beneficiary. On April 20, 1966, Lee See Guat died of lung cancer. Thereafter, the beneficiary of the two policies, Vicente E. Tang claimed for their face value in the amount of P100,000 which the insurance company refused to pay on the ground that the insured was guilty of concealment and misrepresentation at the time she applied for the two policies. Hence, the filing of Civil Case No. 90062 in the Court of First Instance of Manila which dismissed the claim because of the concealment practised by the insured in violation of the Insurance Law. On appeal, the Court of Appeals, affirmed the decision. In its decision, the Court of Appeals stated, inter alia: "There is no doubt that she deliberately concealed material facts about her

physical condition and history and/or conspired with whoever assisted her in relaying false information to the medical examiner, assuming that the examiner could not communicate directly with her." The issue in this appeal is the application of Art. 1332 of the Civil Code which stipulates: Art. 1332. When one of the parties is unable to read, or if the contract is in a language not understood by him, and mistake or fraud is alleged, the person enforcing the contract must show that the terms thereof have been fully explained to the former. According to the Code Commission: "This rule is especially necessary in the Philippines where unfortunately there is still a fairly large number of illiterates, and where documents are usually drawn up in English or Spanish." (Report of the Code Commission, p. 136.) Art. 1332 supplements Art. 24 of the Civil Code which provides that " In all contractual, property or other relations, when one of the parties is at a disadvantage on account of his moral dependence, ignorance, indigence, mental weakness, tender age or other handicap, the court must be vigilant for his protection. It is the position of the petitioner that because Lee See Guat was illiterate and spoke only Chinese, she could not be held guilty of concealment of her health history because the applications for insurance were in English and the insurer has not proved that the terms thereof had been fully explained to her. It should be noted that under Art. 1332 above quoted, the obligation to show that the terms of the contract had been fully explained to the party who is unable to read or understand the language of the contract, when fraud or mistake is alleged, devolves on the party seeking to enforce it. Here the insurance company is not seeking to enforce the contracts; on the contrary, it is seeking to avoid their performance. It is petitioner who is seeking to enforce them even as fraud or mistake is not alleged. Accordingly, respondent company was under no obligation to prove that the terms of the insurance contracts were fully explained to the other party. Even if we were to say that the


insurer is the one seeking the performance of the contracts by avoiding paying the claim, it has to be noted as above stated that there has been no imputation of mistake or fraud by the illiterate insured whose personality is represented by her beneficiary the petitioner herein. In sum, Art. 1332 is inapplicable to the case at bar. Considering the findings of both the CFI and Court of Appeals that the insured was guilty of concealment as to her state of health, we have to affirm. WHEREFORE, the decision of the Court of Appeals is hereby affirmed. No special pronouncement as to costs. SO ORDERED. Concepcion, Jr., and Santos, JJ., concur. Aquino, J., concurs in the result. 147. G.R. No. L-47661 July 31, 1987 JUANITO CARIÑO and CIRILA VICENCIO, petitioners, vs. COURT OF APPEALS, PABLO ENCABO and JUANITA DE LOS SANTOS, and LAND AUTHORITY, respondents. PADILLA, J.: Petition for certiorari filed by the spouses Juanito Cariño and Cirila Vicencio, seeking the review and reversal of the decision* of respondent Court of Appeals, dated 15 November 1977, in CAG.R. No. 49495-R which affirmed the decision of the Court of First Instance of Manila, Branch XXIII, Civil Case No. 57861, and its resolution, dated 6 January 1978, denying the petitioners' motion for reconsideration. The facts derived from the records are as follows: On 22 January 1954, Pablo Encabo formally applied with the Land Estates Division, Bureau of Lands, to purchase a parcel of land designated as Lot 1, Block 4, Plan Psd-24819, which was a part of the Tuason Estate purchased by the government pursuant

to the provisions of Commonwealth Act No. 539, for resale to bona fide tenants or occupants who are qualified to own public land in the Philippines.1 Thereafter, Encabo, through petitioner Cirila Vicencio, supposedly as "agent, " came to an agreement with Josue Quesada transferring rights over the lot to the latter, conditioned on approval by the Land Tenure Administration (LTA, for short). The husband of Cirila Vicencio (Juanito Cariño) is a relative of Quesada; Cirila Vicencio is also a "comadre" of Quesada's wife.2 The transfer of rights by Encabo to Quesada was not put in writing but payment of the price for the rights transferred was evidenced by receipts (Exhibits "A" and "B") on which Cirila Vicencio signed as a witness. On 30 July 1957, the LTA, unaware of the transfer of rights by Encabo to Quesada, adjudicated the lot in favor of Encabo, and the LTA and Encabo signed an "Agreement to Sell" (Exh. "G-1"). LTA later came to know about the "transfer" of rights from Encabo to Quesada. It disapproved the same on the ground that Quesada was not qualified to acquire the lot because he is already a lot owner.3 However, before the LTA's disapproval of the transfer of Encabo's rights to Quesada, the latter had entered into possession of the lot in question. Quesada had also allowed Cirila Vicencio to enter into possession and occupancy of the same lot.4 In November (undated) 1958, Encabo executed a Deed of Sale of House and Transfer of Rights (Exh. "D-1"), purportedly conveying to herein petitioners (Juanito Cariño and Cirila Vicencio), his rights over the lot, subject to approval of the LTA. On 17 December 1958, Encabo wrote a letter to the LTA (Exh. "1") requesting permission to transfer his rights. Another such request was made on 20 April 1960 (Exh. "2") but without making mention of who the transferee would be, just like in the first letter. On 18 April 1960, however, Encabo and Quesada executed a document wherein the latter purportedly resold to the former (Encabo) the house and the rights over the lot.5 On 19 April 1960, Juanito Cariño filed a petition with the LTA seeking approval of the transfer to herein petitioners of rights to


the lot in question on the basis of the Deed of Sale of House and Transfer of Rights executed by Pablo Encabo (Exh. "D-1"). The petition of Juanito Cariño was docketed as LTA Case No. 490, to which respondent Pablo Encabo objected and filed an Answer in opposition thereto. Essentially, both parties in LTA Case No. 490 (Encabo and the spouses Cariño) claimed the right to purchase the lot in question from the LTA. After the submission of their respective pleadings and evidence, the LTA rendered a decision holding that the status quo should be maintained. It reasoned out that "the authenticity of the alleged deed (Exh. "D-1") is not for this office to decide, as only the courts have that prerogative."6 The Cariños appealed the decision of the LTA to the Office of the President, which affirmed it. Motions for reconsideration were filed by the Cariño's but were denied, the last denial being contained in a letter dated 22 March 1963, signed by Acting Assistant Executive Secretary Juan S. Cancio.7 The Cariños refused to give up the possession of the lot despite the rulings of the LTA and the Office of the President; thereafter, the Encabos filed an action in the Court of First Instance of Manila to declare them as the owners of the lot and for the Cariños to deliver the possession of the lot itself, and to pay rentals for their occupancy of the properties plus attorney's fees. After hearing and trial, the lower court rendered decision in favor of the plaintiffs therein the Encabos now private respondents, the dispositive part of which reads as follows:8 WHEREFORE, the court renders judgment holding that the plaintiffs Pablo Encabo and his wife Juanita de los Santos Encabo are entitled to Lot No. 1, Block 4, Plan Psd-24819; that the deed of sale executed by the Land Authority on April 18, 1967, in favor of said spouses is hereby upheld; that the registration of the said deed of sale by the Register of Deeds of Manila and the issuance of Transfer Certificate of Title No. 87826 in favor of the plaintiffs Encabo are also upheld; that the order of this Court dated September 8, 1967, cancelling and declaring the said deed of sale without any effect is hereby set aside; that in the event that the

Register of Deeds, has already cancelled Certificate of Title No. 67825 as ordered by this Court in its order of September 8, 1967, the said Register of Deeds, upon payment of the required legal fees, is ordered to register again the Deed of Sale of Lot 1, Block 4, Plan Psd-24819 executed by the Land Authority on April 18, 1967, in favor of the plaintiffs Pablo Encabo and his wife Juanita de los Santos Encabo and issue in their favor a new certificate of title for the lot in question; that if Transfer Certificate of Title No. 87826 has not been cancelled by the Register of Deeds, the same shall remain valid and in full force and effect. The defendants spouses Juanito Cariño and Cirila Vicencio are declared the owners of the house constructed on the lot in question. They should remove the same within sixty (60) days after this judgment shall become final, otherwise, the same shall be ordered demolished. Plaintiffs and the Land Authority will recover costs from defendants Cariño. Not satisfied with the aforementioned decision of the Court of First Instance of Manila, the herein petitioners (as defendants therein) appealed the same to the Court of Appeals which, as earlier stated, affirmed the decision of the trial court in all respects. Hence, this petition for review filed by the petitioners. As a rule, factual-findings of the Appellate Court are binding on this Court.9 As held in Dra. Sofia L. Prudenciado v. Alliance Transport System, Inc. and Jose Layson, et al.:10 . . . . factual findings of the Court of Appeals are binding on the Supreme Court, but said findings are subject to scrutiny if such are diametrically opposed to those of the trial court. In the present case, the findings of fact and conclusions of the Court of First Instance and the Court of Appeals are not at variance; the same is true with the findings of fact of the LTA as submitted by the public respondent Land Authority.11 As was held in Buyco v. People,12 this Court on appeal by certiorari from the Court of Appeals, could not find otherwise where the Amnesty Commission, the Court of First Instance and the Court of Appeals all found, in effect, that the evidence did not show that


the appellant had acted in the manner contemplated by Amnesty Proclamation No. 8, after he had been given an opportunity to bring the homicide with which he was charged within its terms. As we see it, the only legal question that stands as the basis of this petition centers on whether the respondent Court of Appeals committed grave abuse of discretion in concluding that the Deed of Sale of House and Transfer of Rights (Exhibit D-1 "), on which the petitioners have based their application over the questioned lot, is simulated and, therefore, an inexistent deed of sale. This Court finds that there is substantial and convincing evidence that Exhibit "D-1" was a simulated deed of sale and transfer of rights, to warrant the affirmance of the decision of the respondent Court of Appeals. The characteristic of simulation is the fact that the apparent contract is not really desired or intended to produce legal effects nor in any way alter the judicial situation of the parties.13 Under the circumstances surrounding their transaction, the parties knew that the document Exhibit "D1" was at once fictitious and simulated where none of the parties intended to be bound thereby. The testimony of Cirila Vicencio during her direct examination was grossly inconsistent with her statements in the LTA administrative case which she previously filed. She testified in the lower court that she paid the Encabos five hundred pesos (P500.00) for the lot, whereas, in the LTA administrative case she said that it was one thousand pesos (P1,000.00).14 Aside from the purported Deed of Sale (Exhibit "D-1"), there is no other document which evidences the payment of a sum of money by Cariño to the Encabos for the disputed lot. Cirila Vicencio also testified in the lower court that Exhibit "D-1" was signed by Pablo and Juanita Encabo in Cariño's house at 4214 K Int. 8, Sociego, Sta. Mesa, whereas, in the LTA administrative case, she testified that it was signed in Las Pinas, Rizal, the residence of the Encabos.15 These inconsistencies in the testimony of the Cariños are badges of untruthfulness, showing that no actual and real sale of the lot in question took place between the Encabos and the Cariños. The testimony of a witness does not merit credibility or

inspire confidence where it is inconsistent and incompatible with his statements on other occasions concerning the same fact.16 Strongly indicative of the simulated character of Exhibit ,"D-1" is the fact that the Cariños could not produce the receipts evidencing their alleged payments to the Land Authority for the disputed lot, nor were they able to produce the Agreement to Sell (Exhibit "G-1"). According to Cirila Vicencio, Juana Encabo took from her the Agreement to Sell and the receipts of payments to the Land Authority in order to mortgage the land. The Cariños, who are the supposed vendees, did not even remonstrate or offer a word of objection to this act of the Encabos. Cirila Vicencio, on cross-examination, testified thus: Q. Do you have the receipts evidencing your payment? A. I have but Juana Encabo got them from me. Q. Why did she get the receipts from you? A. SHE REQUESTED ME TO SEND HER THE AGREEMENT TO SELL AND THE RECEIPTS FOR THE MONTHLY RENTALS BECAUSE ACCORDING TO HER SHE WOULD MORTGAGE THE DOCUMENTS. 17 x x x x x x x x x Q. If you claim to have purchased the property in question, why did you still permit the Encabos to mortgage the property? Atty. Olandesca: Objection, the question is vague. Court: Witness may answer. A. BECAUSE I AM THE KOMADRE OF THE YOUNG ENCABOS, SO I TRUSTED THEM. 18 Previously, on direct examination, the testimony of Cirila Vicencio, was quite different. She testified thus: Q. Do you have th receipts evidencing your payment? A. I have but Juana Encabo got them from me. Q. Why did she get the receipts from you? A. She requested me to lend her the Agreement to Sell and the receipts for the monthly rentals because according to her she would mortgage the documents.


Q. When did she borrow the documents from you? A. About 1960. Q. And what did you tell her? A. I got angry and was so worried about it. Q. Why were you worried? A. Because I was being embarassed to my neighbors. When they arrived in our house they brought a document with them and asked me to sign said document. Q. I am showing to you a document dated April 1960 marked as Ex. 4 (a Deed of Resale) between the Encabos and the Cariños) consisting of an original and three duplicate copies, do you recognize this document? A. This is the document they brought to me for signature. Q. When Juana Encabo went to see you asking you to sign the document, Exhibit 4 and you said that you were angry and embarassed, what did you do? A. I fainted because of my anger and embarassment. Q. Did you file any complaint with the LTA because of that? A. Yes, sir. 19 According to Cirila Vicencio, the receipts were borrowed one (1) week before the case was filed on 19 April 1960.20 It would appear then that she delivered to Mrs. Encabo all the papers relative to the disputed lot so that the latter can mortgage the same, despite the fact that there was already an obvious misunderstanding as to who was the real owner of the house and lot. If these papers relative to the lot were really in her possession, the reasons she gave for delivering them to the Encabos are varied. A more credible reason for the surrender of the papers was the one cited by the Cariños in their petition to the LTA (Exhibit 100), wherein they alleged "that due to evident machinations employed by the respondent upon the petitioner and by taking undue advantage of the latter's innocence and good faith in his dealings with the former, the respondent herein has maneuvered the petitioner into releasing to him the official receipts issued to the petitioner for the corresponding payments made on the lot. But these allegations were never pursued by the

petitioners in the lower court. Instead, they gave different versions which all the more weakened their stand. Granting that the papers relative to the lot were really in the possession of the Cariños, the fact that they were delivered by Cirila Vicencio to Juana Encabo, amounted to an act of complete ownership and control of the property by the Encabos. As held in Serrano v. CA,21 this Court finds it strange that respondent (Macaraya) would allow petitioner (Serrano) to receive the fruits of the subject property several months after he acquired absolute ownership of the same. This is contrary to the principle of ownership. The respondent Court also found as a fact that the names of the Cariños were not mentioned as the proposed transferees in the two applications with the LTA filed by Pablo Encabo for transfer of rights (at a time when the alleged "Deed of Sale and Transfer of Rights," Exhibit "D-1" was already executed in favor of the Cariños). These applications with the LTA were mere speculations on the part of the Encabos if they should desire to sell the lot later on (these applications were later withdrawn by the Encabos in a letter dated May 9, 1960 [Exhibit 113] and no inference can be made that they intended to transfer the lot specifically to the Cariños. If there were really an intent, then there was no reason which would stop the Encabos from putting the name of the Cariños as transferees, just like in the application to transfer to Quesada wherein the latter's name was specifically mentioned. All these appear to clearly indicate a positive lack of intention of the Encabos to transfer any right to the petitioners (Cariños). Another factor which leads the Court not to disturb the respondent Court's finding that Exhibit "D-1" is a simulated document is the fact that such document was executed in November 1958 while the Cariños petitioned the LTA to approve the transfer in their names of Encabos' rights to the lot on the basis of such deed of sale, only on 19 April 1960. The application was made just a day after 18 April 1960 when Josue Quesada resold to Encabo, for the same consideration of P1,500.00 the


house and rights to the lot previously conveyed by the latter to the former, pursuant to a previous agreement between Quesada and the Encabos, providing for such a resale should the transfer to Quesada of the Encabos' rights to the lot be disapproved by the LTA. Why did it take the petitioners that long to wait before they appealed with the LTA if they really believed that Exhibit "D-1" was valid and effective right from the time it was executed in November 1958? Such lack of eagerness on the part of the Cariños to apply with the LTA for the transfer of the lot into their name reveals their own conviction that the Deed of Sale is not real and effective between them and the Encabos. There is merit to the Encabos' claim that the simulated deed of sale in favor of the Cariños was executed in order to protect the money Quesada invested in the purchase of the rights to the lot in question, which transfer of said lot to his name was later on disapproved by the LTA. As can be gleaned from the testimony of Josue Quesada, he did this by putting Cirila Vicencio as the vendee in the stipulated Deed of Sale, when in fact, Encabo and Quesada meant her only as a dummy for the latter. To this effect Quesada testified, despite the warning given to him by the court that his statement might incriminate him.22 Such candor in the testimony of Quesada gives credibility to the Encabos claim. From the testimonies of the witnesses, it can be deduced that Cirila Vicencio was privy to all the transactions relating to the sale of the disputed lot between Encabo and Quesada so that it is entirely possible for Cirila Vicencio to have been used by Encabo and Quesada as their dummy in the simulated deed of sale and for Cirila Vicencio herself to lend a hand in the scheme so as to protect the interests of Quesada, and in the process, protect herself as she was occupying the disputed lot at the instance of Quesada. Even at the start, it was Cirila Vicencio who introduced Quesada to the Encabos in connection with a house and the right to the lot, which according to Cirila Vicencio, was being sold by Juanita de los Santos-Encabo. Not only that, Cirila Vicencio signed as a witness on Exhibits "A" and "B" which are the receipts of payment for the disputed lot by Quesada to Encabo.1avvphi1

The circumstances surrounding the execution of the document Exhibit "D-1" as recounted by the petitioners are bereft of credence. They are so weak that they lead to the conclusion that indeed, there was no real and actual Deed of Sale entered into. The petitioners herein have nothing else to support their claim over the disputed lot except for the Deed of Sale, Exhibit "D-1" which is even unnotarized, and the exact date of execution, unknown. Whereas, on the other hand, the private respondents clearly have a preponderance of evidence negating the validity of such deed. Contracts of sale are void and produce no effect whatsoever where the price, which appears therein as paid, has in fact never been paid by the vendee to the vendor.23 A sale of land without consideration, but intended merely to protect a party to a joint venture for the cash advances he was to make for the realty subdivision that the parties wanted to put up, is null and void.24 The law is clear on this matter. The Civil Code provides: Art. 1409. The following contracts are inexistent and void from the beginning: x x x x x x x x x (2) Those which are absolutely simulated or fictitious; x x x x x x x x x These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. Furthermore, even without going into the merits and/or validity of Exhibit "D-1", it is clear that there has been no legal transfer of rights in favor of the Cariños because neither the LTA nor the Land Authority has approved or given due course to such transfer of rights.25 The LTA never waived its right to approve the transfer of rights. It only ruled that the status quo will be maintained so long as the Court has not yet ruled on the authenticity of document Exhibit "D-1". The ownership of the lot by the Cariños is still contingent on the approval of the LTA upon their compliance with all the requirements of the latter. Since no approval or due course has yet been given by the LTA or LA to such transfer of rights, the document Exhibit "D-1" is not


enforceable against the latter. WHEREFORE, the petition is hereby DENIED for lack of merit. Costs against the petitioners. SO ORDERED. Yap, Melencio-Herrera, Paras and Sarmiento, JJ., concur. 148. G.R. No. L-32066 August 6, 1979 MANUEL LAGUNZAD, petitioner, vs. MARIA SOTO VDA. DE GONZALES and THE COURT OF APPEALS, respondents. Diosdado P. Peralta for petitioner. Manuel S. Tonogbanua for private respondent. MELENCIO-HERRERA, J.: Before us is a Petition for Review by certiorari of the Decision of the Court of Appeals in CA-G.R. No. 34703, promulgated on January 13, 1970, affirming the Decision of the Court of First Instance of Negros Occidental, dated June 30, 1964, in Civil Case No. 6414 entitled "Maria Soto Vda. de Gonzales vs. Manuel Lagunzad," for a Sum of Money and Attachment. The present controversy stems from a "Licensing Agreement" entered into by and between petitioner Manuel M. Lagunzad and private respondent Maria Soto Vda. de Gonzales on October 5, 1961, which contract petitioner claims to be null and void for having been entered into by him under duress, intimidation and undue influence. The antecedental facts follow: Sometime in August, 1961, petitioner Manuel Lagunzad, a newspaperman, began the production of a movie entitled "The Moises Padilla Story" under the name of his own business outfit, the "MML Productions." It was based mainly on the copyrighted but unpublished book of Atty. Ernesto Rodriguez, Jr., entitled "The Long Dark Night in

Negros" subtitled "The Moises Padilla Story," 1 the rights to which petitioner had purchased from Atty. Rodriguez in the amount of P2,000.00. 2 The book narrates the events which culminated in the murder of Moises Padilla sometime between November 11 and November 17, 1951. Padilla was then a mayoralty candidate of the Nacionalista Party (then the minority party) for the Municipality of Magallon, Negros Occidental, during the November, 1951 elections. Governor Rafael Lacson, a member of the Liberal Party then in power and his men were tried and convicted for that murder in People vs. Lacson, et al. 3 In the book, Moises Padilla is portrayed as "a martyr in contemporary political history." Although the emphasis of the movie was on the public life of Moises Padilla, there were portions which dealt with his private and family life including the portrayal in some scenes, of his mother, Maria Soto Vda. de Gonzales, private respondent herein, and of one "Auring" as his girl friend. 4 The movie was scheduled for a premiere showing on October 16, 1961, or at the very latest, before the November, 1961 elections. On October 3, 1961, petitioner received a telephone call from one Mrs. Nelly Amante, half-sister of Moises Padilla, objecting to the filming of the movie and the "exploitation" of his life. Shown the early "rushes" of the picture, Mrs. Amante and her sister, Mrs. Gavieres, objected to many portions thereof notwithstanding petitioner's explanation that the movie had been supervised by Ernesto Rodriguez, Jr., based on his book "The Long Dark Night in Negros." On October 5, 1961, Mrs. Amante, for and in behalf of her mother, private respondent, demanded in writing for certain changes, corrections and deletions in the movie. 5 Petitioner contends that he acceded to the demands because he had already invested heavily in the picture to the extent of mortgaging his properties, 6 in addition to the fact that he had to meet the scheduled target date of the premiere showing. On the same date, October 5, 1961, after some bargaining as to the amount to be paid, which was P50,000.00 at first, then reduced to P20,000.00, 7 petitioner and private respondent,


represented by her daughters and Atty. Ernesto Rodriguez, at the law office of Jalandoni and Jamir, executed a "Licensing Agreement" reading as follows: LICENSING AGREEMENT KNOW ALL MEN BY THESE PRESENTS: This Agreement, made and executed at the City of Manila, Philippines, this 5th day of October, 1961, by and between: MANUEL M. LAGUNZAD, of legal age, married, presently engaged in the business of producing motion pictures under the style of "MML Productions" with residence at 76 Central Boulevard, Quezon City and with offices at 301 Cu Unjieng Bldg., Escolta, Manila and hereinafter referred to as LICENSEE, — and — MARIA SOTO VDA. DE GONZALES, of legal age, widow, resident of the Municipality of Moises Padilla, Province of Negros Occidental, represented in this Act by her Attorneys-in-fact Atty. Ernesto Rodriguez, Jr. of legal age and resident of 393F-Buencamino St., San Miguel, Manila; Maria Nelly G. Amazite, of legal age and resident of 121 South 13, Quezon City; and Dolores G, Gavieres, of legal age, and resident of 511 San Rafael Street, Quiapo, Manila, also duly authorized and hereinafter referred to as LICENSOR, WITNESSETH: That, the LICENSEE is currently producing a motion picture entitled "The Moises Padilla Story" (hereinafter referred to as the PICTURE, for short) based on certain episodes in the life of Moises Padilla, now deceased: That the LICENSOR is the legitimate mother and only surviving compulsory heir of Moises Padilla, the latter not having married during his lifetime and having died without any descendants, legitimate or illegitimate; That, in the PICTURE and in all incidents thereof, such as scenarios, advertisements, etc., the LICENSEE has, without the prior consent and authority of LICENSOR, exploited the life story of Moises Padilla for pecuniary gain and other profit motives, and has, furthermore encroached upon the privacy of Moises Padilla's immediate family, and has in fact, included in the PICTURE'S cast,

persons portraying some of MOISES PADILLA's kin, including LICENSOR herself; That, for and in consideration of the foregoing premises and the other covenants and conditions hereunder stated, the LICENSOR hereby grants authority and permission to LICENSEE to exploit, use, and develop the life story of Moises Padilla for purposes of producing the PICTURE, and in connection with matters incidental to said production, such as advertising and the like, as well as authority and permission for the use of LICENSOR's name in the PICTURE and have herself portrayed therein, the authority and permission hereby granted, to retroact to the date when LICENSEE first committed any of the acts herein authorized. THE CONDITIONS AND OTHER COVENANTS OF THIS AGREEMENT ARE AS FOLLOWS: 1. For and in consideration of the authority and permission hereby granted by LICENSOR to LICENSEE, LICENSEE shall pay LICENSOR, through Atty. Lope E. Adriano at the Pelaez and Jalandoni Law Office, 6th Floor, Magsaysay Bldg., San Luis, Ermita, Manila, the following: a) The sum of TWENTY THOUSAND PESOS (P20,000.00), Philippine Currency, payable without need of further demand, as follows: P5,000.00 on or before Oct. 10, 1961; P10,000.00 on or before Oct. 31, 1961; and P5,000.00 on or before November 30, 1961. In default of the payment of any of these amounts as they fall due, the others become immediately due and demandable. b) A royalty in such amount corresponding to TWO AND A HALF PER CENTUM (2-½ %) of all gross income or receipts derived by, and/or for and in behalf of, LICENSEE as rentals and or percentage of box office receipts from exhibitors and others for the right to exploit, use, distribute and/or exhibit the picture anywhere here in the Philippines or abroad. 2) The LICENSEE agrees to keep complete, true and accurate books of accounts, contracts and vouchers relating to the exploitation, distribution and exhibition of the PICTURE, the bookings thereof and the rentals and gross receipts therefrom, and to give to LICENSOR and/or her accredited representatives,


full access at all reasonable times to all of the said books, accounts, records, vouchers and all other papers. 3) The LICENSEE shall furnish LICENSOR monthly statements in duplicate, showing in detail the gross receipts accruing from the picture, which monthly statements shall be delivered to the LICENSOR with reasonable promptness, and upon verification and approval of said statements by LICENSOR, the LICENSEE shall pay the corresponding royalties due to the LICENSOR. 4) The authority and permission herein granted is subject to the condition that LICENSEE shall change, delete, and/or correct such portions in the PICTURE as the LICENSOR may require, in writing before final printing of the PICTURE, and shall, furthermore, not be understood as a consent to anything in the picture that is, or tends to be, derogatory to the deceased MOISES PADILLA or to LICENSOR. 5) The LICENSOR shall not in any way be liable on any claim from third persons as a result of, or arising from, the manner by which the PICTURE is put together, nor on any claim arising from the production, distribution and exhibition of the PICTURE, and in the event of any such claim being asserted against LICENSOR, the LICENSEE undertakes to hold LICENSOR harmless thereon. 6) This agreement shall be binding upon the parties hereto, their representatives, administrators, successors and assigns. IN WITNESS WHEREOF, the parties have hereunto set their hands on the date and at the place first above stated. MARIA SOTO VDA. DE GONZALES MANUEL M. LAGUNZAD Licensor Licensee By: (Sgd.) ERNESTO R. RODRIGUEZ, Jr. (Sgd.) MARIA NELLY G. AMANTE (Sgd.) DOLORES G. GAVIERES Attorneys-in-fact SIGNED IN THE PRESENCE OF: LOPE E. ADRIANO ILLEGIBLE ACKNOWLEDGMENT Petitioner takes the position that he was pressured into signing

the Agreement because of private respondent's demand, through Mrs. Amante, for payment for the "exploitation" of the life story of Moises Padilla, otherwise, she would "call a press conference declaring the whole picture as a fake, fraud and a hoax and would denounce the whole thing in the press, radio, television and that they were going to Court to stop the picture." 8 On October 10, 1961, petitioner paid private respondent the amount of P5,000.00 but contends that he did so not pursuant to their Agreement but just to placate private respondent. 9 On October 14, 1961, the filming of the movie was completed. On October 16, 1961, a premiere showing was held at the Hollywood Theatre, Manila, with the Moises Padilla Society as its sponsor. 10 Subsequently, the movie was shown in different theaters all over the country. Because petitioner refused to pay any additional amounts pursuant to the Agreement, on December 22, 1961, private respondent instituted the present suit against him praying for judgment in her favor ordering petitioner 1) to pay her the amount of P15,000.00, with legal interest from the filing of the Complaint; 2) to render an accounting of the proceeds from the picture and to pay the corresponding 2-1/2% royalty therefrom; 3) to pay attorney's fees equivalent to 20% of the amounts claimed; and 4) to pay the costs. Traversing the Complaint, petitioner contended in his Answer that the episodes in the life of Moises Padilla depicted in the movie were matters of public knowledge and occurred at or about the same time that the deceased became and was a public figure; that private respondent has no property right over those incidents; that the Licensing Agreement was without valid cause or consideration and that he signed the same only because private respondent threatened him with unfounded and harassing action which would have delayed production; and that he paid private respondent the amount of P5,000.00 in October, 1961, only because of the coercion and threat employed upon him. By way of counterclaim, petitioner demanded that the Licensing Agreement be declared null and void for being without


any valid cause; that private respondent be ordered to return to him the amount of P5,000.00; and that he be paid P50,000.00 by way of moral damages, and P7,500.00 as attorney's fees. Private respondent duly filed her Answer to Counterclaim alleging that the transaction between her and petitioner was entered into freely and voluntarily. On June 30, 1964, the trial Court rendered a Decision, and decreed in its dispositive portion: WHEREFORE, judgment is hereby rendered ordering the defendant Manuel Lagunzad to pay the plaintiff the sum of P15,000.00 with interest at the rate of 6% per annum from December 22, 1961 up to its complete payment; to order the defendant to render an accounting of the gross income or proceeds derived from the exhibition, use and/or rental of the motion picture of "The Moises Padilla Story" and to pay the plaintiff 2- 1/2% of said gross income; to pay the plaintiff the amount equivalent to 20% of the amount due the plaintiff under the first cause of action as attorney's fees; and to pay the costs. On appeal to the Court of Appeals, the latter Court affirmed the judgment. Reconsideration having been denied by the Court, petitioner filed the instant Petition for Review on Certiorari. Initially, or on June 16, 1970, this Court denied the Petition for lack of merit, but resolved subsequently to give it due course after petitioner moved for reconsideration on the additional argument that the movie production was in exercise of the constitutional right of freedom of expression, and that the Licensing cement is a form of restraint on the freedom of speech and of the press. In his Brief, petitioner assigns the following errors to the appellate Court: I. THE COURT OF APPEALS ERRED IN EXERCISING JURISDICTION IN THE CASE BECAUSE THE JUDGMENT APPEALED FROM WAS INTERLOCUTORY IN NATURE AND CHARACTER; II. THE COURT OF APPEALS ERRED IN ITS FAILURE TO MAKE COMPLETE FINDINGS OF FACTS ON ALL ISSUES BEFORE IT;

III. THE COURT OF APPEALS ERRED IN NOT DECLARING THE LICENSING AGREEMENT, EXHIBIT "A", NULL AND VOID FOR LACK OF, OR FOR HAVING AN ILLEGAL CAUSE OR CONSIDERATION OF CONTRACT, PETITIONER HAVING PREVIOUSLY OBTAINED THE AUTHORITY AND/OR PERMISSION PURPOSELY GRANTED TO HIM BY RESPONDENT UNDER SAID LICENSING AGREEMENT; IV. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE LICENSING AGREEMENT, EXHIBIT "A", IS NULL AND VOID; RESPONDENT NOT HAVING HAD ANY PROPERTY NIGHTS OVER THE INCIDENTS IN THE LIFE OF MOISES PADILLA WHO WAS A PUBLIC FIGURE. V. THE COURT OF APPEALS ERRED IN NOT FINDING THAT THE LICENSING AGREEMENT, EXHIBIT "A", WAS NULL AND VOID, PETITIONER'S CONSENT HAVING BEEN PROCURED BY MEANS OF DURESS, INTIMIDATION AND UNDUE INFLUENCE; VI. THE COURT OF APPEALS, IN UPHOLDING THE RIGHT TO PRIVACY OF RESPONDENT AS DEFINED IN ART. 26 OF THE NEW CIVIL CODE OVER THE RIGHT OF PETITIONER TO FILM THE PUBLIC LIFE OF A PUBLIC FIGURE, INFRINGED UPON THE CONSTITUTIONAL RIGHT OF PETITIONER TO FREE SPEECH AND FREE PRESS. We find the assigned errors bereft of merit. Petitioner's contention that because an accounting had been ordered, respondent Court of Appeals did not have jurisdiction over the case as the Decision of the lower Court was not yet final and appealable, is untenable. The doctrine enunciated in Fuentebella vs. Carrascoso 11 relied upon by petitioner, which held that whether or not the action for accounting is the principal action or is merely incidental to another, the judgment requiring such accounting cannot be final, has been abandoned in Miranda vs. Court of Appeals 12 which ruled: For the guidance of bench and bar, the Court declares as abandoned the doctrine of Fuentebella vs. Carrascoso and adopts the opposite rule that judgments for recovery with accounting are final and appealable (without need of awaiting the


accounting) and would become final and executory if not appealed within the reglementary period. In other words, where there is complete adjudication and determination of the rights and obligations of the parties, as in the instant case, an order for accounting in that judgment does not affect its final character, said accounting being merely incidental to the judgment. Petitioner's contention that respondent Court failed to make complete findings of fact on all issues raised before it is without basis. A careful study of the Decision reveals that respondent Court has substantially and sufficiently complied with the injunction that a decision must state clearly and distinctly the facts and the law on which it is based. The rule remains that the ultimate test as to the sufficiency of a Court's findings of fact is "whether they are comprehensive enough and pertinent to the issues raised to provide a basis for decision." 13 The judgment sought to be reviewed sufficiently complies with this requirement. Neither do we agree with petitioner's submission that the Licensing Agreement is null and void for lack of, or for having an illegal cause or consideration. While it is true that petitioner had purchased the rights to the book entitled "The Moises Padilla Story," that did not dispense with the need for prior consent and authority from the deceased heirs to portray publicly episodes in said deceased's life and in that of his mother and the members of his family. As held in Schuyler v. Curtis, 14 "a privilege may be given the surviving relatives of a deceased person to protect his memory, but the privilege exists for the benefit of the living, to protect their feelings and to prevent a violation of their own rights in the character and memory of the deceased." Petitioner's averment that private respondent did not have any property right over the life of Moises Padilla since the latter was a public figure, is neither well taken. Being a public figure ipso facto does not automatically destroy in toto a person's right to privacy. The right to invade a person's privacy to disseminate public information does not extend to a fictional or novelized

representation of a person, no matter how public a figure he or she may be. 15 In the case at bar, while it is true that petitioner exerted efforts to present a true-to-life story of Moises Padilla, petitioner admits that he included a little romance in the film because without it, it would be a drab story of torture and brutality. 16 We also find it difficult to sustain petitioner's posture that his consent to the Licensing Agreement was procured thru duress, intimidation and undue influence exerted on him by private respondent and her daughters at a time when he had exhausted his financial resources, the premiere showing of the picture was imminent, and "time was of the essence." As held in Martinez vs. Hongkong & Shanghai Bank, 17 it is necessary to distinguish between real duress and the motive which is present when one gives his consent reluctantly. A contract is valid even though one of the parties entered into it against his own wish and desires, or even against his better judgment. In legal effect, there is no difference between a contract wherein one of the contracting parties exchanges one condition for another because he looks for greater profit or gain by reason of such change, and an agreement wherein one of the contracting parties agrees to accept the lesser of two disadvantages. In either case, he makes a choice free and untramelled and must accordingly abide by it. The Licensing Agreement has the force of law between the contracting parties and since its provisions are not contrary to law, morals, good customs, public order or public policy (Art. 1306, Civil Code), petitioner Should comply with it in good faith. Lastly, neither do we find merit in petitioner's contention that the Licensing Agreement infringes on the constitutional right of freedom of speech and of the press, in that, as a citizen and as a newspaperman, he had the right to express his thoughts in film on the public life of Moises Padilla without prior restraint. The right of freedom of expression, indeed, occupies a preferred position in the "hierarchy of civil liberties." 18 It is not, however, without limitations. As held in Gonzales vs. Commission on Elections, 27 SCRA 835, 858 (1969):


From the language of the specific constitutional provision, it would appear that the right is not susceptible of any limitation. No law may be passed abridging the freedom of speech and of the press. The realities of life in a complex society preclude however, a literal interpretation. Freedom of expression is not an absolute. It would be too much to insist that at all times and under all circumstances it should remain unfettered and unrestrained. There are other societal values that press for recognition. The prevailing doctrine is that the clear and present danger rule is such a limitation. Another criterion for permissible limitation on freedom of speech and of the press, which includes such vehicles of the mass media as radio, television and the movies, is the "balancing-of-interests test." 19 The principle i requires a court to take conscious and detailed consideration of the interplay of interests observable in a given situation or type of situation." 20 In the case at bar, the interests observable are the right to privacy asserted by respondent and the right of -freedom of expression invoked by petitioner. Taking into account the interplay of those interests, we hold that under the particular circumstances presented, and considering the obligations assumed in the Licensing Agreement entered into by petitioner, the validity of such agreement will have to be upheld particularly because the limits of freedom of expression are reached when expression touches upon matters of essentially private concern. WHEREFORE, the Petition for Review is denied and the judgment appealed from hereby affirmed. Costs against petitioner. SO ORDERED. Makasiar, Fernandez, Guerrero and De Castro, JJ., concur. Teehankee, (Chairman), J, concur in the result. 149. G.R. No. L-30771 May 28, 1984 LIAM LAW, plaintiff-appellee,

vs. OLYMPIC SAWMILL CO. and ELINO LEE CHI, defendantsappellants. Felizardo S.M. de Guzman for plaintiff-appellee. Mariano M. de Joya for defendants-appellants.

MELENCIO-HERRERA, J.: This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. The appeal was originally taken to the then Court of Appeals, which endorsed it to this instance stating that the issue involved was one of law. It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to defendant partnership and defendant Elino Lee Chi, as the managing partner. The loan became ultimately due on January 31, 1960, but was not paid on that date, with the debtors asking for an extension of three months, or up to April 30, 1960. On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00 was extended to April 30, 1960, but the obligation was increased by P6,000.00 as follows: That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine currency shall form part of the principal obligation to answer for attorney's fees, legal interest, and other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement. Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960, plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal obligation, but claimed that the additional P6,000.00 constituted usurious interest. Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a writ of Attachment on real and personal properties of defendants located at Karanglan, Nueva Ecija. After the Writ of Attachment was implemented, proceedings before the Trial Court versed principally in regards to the attachment.


On January 18, 1961, an Order was issued by the Trial Court stating that "after considering the manifestation of both counsel in Chambers, the Court hereby allows both parties to simultaneously submit a Motion for Summary Judgment. 1 The plaintiff filed his Motion for Summary Judgment on January 31, 1961, while defendants filed theirs on February 2, 196l. 2 On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10,000.00 plus the further sum of P6,000.00 by way of liquidated damages . . . with legal rate of interest on both amounts from April 30, 1960." It is from this judgment that defendants have appealed. We have decided to affirm. Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor proves the contrary". No evidentiary hearing having been held, it has to be concluded that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17, 1960, representing loss of interest income, attorney's fees and incidentals. The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00 constituted usurious interest. They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied specifically and under oath". 3 Section 9 of the Usury Law (Act 2655) provided: SEC. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property, seeds or agricultural products, charged or received in violation of the provisions of this Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. The foregoing provision envisages a complaint filed against an entity which has committed usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file

its answer under oath denying the allegation of usury, the defendant shall be deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is the defendant, not the plaintiff, who is alleging usury. Moreover, for sometime now, usury has been legally nonexistent. Interest can now be charged as lender and borrower may agree upon. 4 The Rules of Court in regards to allegations of usury, procedural in nature, should be considered repealed with retroactive effect. Statutes regulating the procedure of the courts will be construed as applicable to actions pending and undetermined at the time of their passage. Procedural laws are retrospective in that sense and to that extent. 5 ... Section 24(d), Republic Act No. 876, known as the Arbitration Law, which took effect on 19 December 1953, and may be retroactively applied to the case at bar because it is procedural in nature. ... 6 WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Plana, Relova, Gutierrez, Jr. and De la Fuente, JJ., concur. 150. G.R. No. L-61898 August 9, 1985 LAO SOK, petitioner vs. LYDIA SABAYSABAY, AMPARO MANGULAT, ROSITA SALVIEJO, NENITA RUINATA, VILMA CAPILLO, VIRGINIA SANORJO and THE NATIONAL LABOR RELATIONS COMMISSION, respondents. GUTIERREZ, JR., J.: This is a petition for review which seeks to set aside for grave


abuse of discretion the decision of the National Labor Relations Commission dated June 21, 1982 affirming the decision of Labor Arbiter Apolonio L. Reyes ordering the petitioner to pay the private respondents their separation pay. The undisputed facts are: Petitioner Lao Sok owned and operated the Shelton Department Store located at Carriedo Street, Quiapo, Manila. Private respondents, Lydia Sabaysabay, Amparo Mangulat, Rosita Salviejo, Nenita Ruinata, Vilma Capillo and Virginia Sanorjo were all salesladies of the department store with a daily wage of P14.00 each. On October 12, 1980, petitioner's store was razed by fire. He did not report the loss of jobs of the salesladies which resulted from the burning of his department store to the Regional Office of the Ministry of Labor. Petitioner promised the private respondents that he would transfer them to his other department stores. Several weeks passed but petitioner still did not fulfill his promise. The petitioner, however, told the respondents that he would give them their separation pay and other benefits due them as soon as he collected the insurance proceeds arising from his burned store. The private respondents accepted this offer of the petitioner. Petitioner later collected the proceeds of his insurance but he did not give the private respondents their separation pay and other benefits. Neither did he employ them in his other stores as earlier promised. On May 14, 1981, the private respondents filed a complaint with the Ministry of Labor and Employment charging the petitioner with illegal dismissal and non-payment of their separation pay, allowance and incentive leave pay. Labor Arbiter Apolonio L. Reyes required the parties to submit their position papers and on the basis of these position papers, he rendered a decision on July 23, 1981, the dispositive portion of which reads: WHEREFORE, judgment is rendered in favor of the complainants

and against the respondent, ordering the latter to pay the former their separation pay equivalent to one month salary for every year of service proportionate to their individual length of service with the respondents at legal rate of interest in the event that respondent failed or refused to pay the same within ten days from receipt thereof. Other issues are dismissed for being judicata. On October 2, 1981, the petitioner appealed said decision to the National Labor Relations Commission (NLRC). The NLRC affirmed the decision of the Labor Arbiter and dismissed the appeal. Petitioner moved for a reconsideration of the decision but the motion was likewise denied. Hence, this petition for review. The issue in this case is whether or not petitioner Lao Sok is obligated to pay the private respondents' separation pay. The petitioner contends that he may not be compelled to pay separation pay on the basis of his mere failure to make a report about the fire and the consequent dismissal of his employees which may be effected without prior clearance. Sections 10 and 11 (c), Rule XIV, Book V of the Labor Code provide: Sec. 10. Exception. — No clearance is required if the shutdown of establishment is due to serious accidents, fire, flood, typhoon, earthquakes, or other disaster, calamity or public emergencies, provided that the employer makes a report thereon to the Regional Office in accordance with the form prescribed by the Department. Sec. 11. When reports required. -Every employer shall submit a report to the Regional Office in accordance with the form prescribed by the Department on the following instances of termination of employment, suspension, layoff or shutdown which may be effected by the employer without prior clearance, within five (5) days thereafter: (a) ... (b) ... (c) All shutdowns or cessations of work or operations falling


under the exceptional circumstances specified in Section 10 hereof; xxx xxx xxx Compliance with the above rules is only an administrative matter and the failure to make a report does not make the dismissal illegal per se. But the employer who fails to file such report may be subjected to such administrative penalties or sanctions as may be duly provided. (Oceanic Bic Division (FFW) vs. Romero, 130 SCRA 392,405). However, the petitioner's obligation to pay severance compensation is not based on his failure to make a report or to ask for a prior clearance. Article 284 of the Labor Code provides for separation pay whenever there is a reduction of personnel caused by the closure of an establishment which is not intended to circumvent the provisions of the law. We also note that Book VI, Rule 1, Section 4 (b) of the Rules and Regulations Implementing the Labor Code provides: xxx xxx xxx (b) In case the establishment where the employee is to be reinstated has closed or ceased operations or where his former position no longer exists at the time of reinstatement for reasons not attributable to the fault of the employer, the employee shall be entitled to separation pay equivalent at least to one month salary or to one month salary for every year of service, whichever is higher, a fraction of at least six months being considered as one whole year. (emphasis supplied). The department store or the establishment where the six salesladies are employed has ceased operations and admittedly, it was due to reasons not attributable to the fault of the employer. But while we can not fault petitioner Lao Sok for the loss of his store due to a fortuitous event, his acts subsequent to the fire are equally deplorable as a termination without just cause. There is certainly a need to alleviate the plight of the employees who have lost their jobs or sources of livelihood as a result of the closure or cessation of operations of the establishment. Their being given the run around after the loss of their jobs and their being given

promises which could be fulfilled but which were not fulfilled aggravated the situation. That petitioner Lao Sok promised to give his employees their separation pay, as soon as he receives the insurance proceeds for his burned building was not rebutted. ln fact, it appears to have been undisputed until the petitioner filed his memorandum on December 6,1984. We quote with favor the Solicitor General's explanation: xxx xxx xxx ... It was in reality not a mere 'promise' as petitioner terms it but a contract, because all the essential requisites of a valid contract are present, to wit: (1) consent was freely given by the parties, (2) there was a subject matter, which is the payment of the separation pay of private respondents, and (3) a cause, which is the loss of job of private respondents who had been petitioner's salesladies for several years. ... . xxx xxx xxx Respondent NLRC, therefore, acted properly in ordering petitioner to give private respondents their separation pay as he was bound to comply with his contractual obligation which is the law between the parties (Phoenix Assurance Co. LTD. v. United States Lines, 22 SCRA 674). ... . Lao Sok made an offer which was duly accepted by the private respondents. There was, therefore, a meeting of the minds between two parties whereby one bound himself with respect to the other, to give something or to render some service (Article 1305, Civil Code). By the unconditional acceptance of the offer that they would be paid separation pay, a contract was therefore perfected. As held in the case of Herrera v. Auditor General, (102 Phil. 875): xxx xxx xxx ... the Government, through the Quezon City Engineer had as late as 1955 acknowledged the financial obligation of the Government, and even offered to pay it, and what is more, the offer was duly accepted by Herrera, thereby constituting a contract, and a renewal of the obligation. (emphasis supplied).


Petitioner contends that the contract though orally made is unenforceable since it does not comply with the Statute of Frauds. This contention has no merit. Contracts in whatever form they may have been entered into are binding on the parties unless form is essential for the validity and enforceability of that particular contract. (See Lopez v. Auditor General, 20 SCRA 655). We held in Shaffer v. Palma (22 SCRA 934): xxx xxx xxx ... Whether the agreement is in writing or not is a question of evidence. Nevertheless, even granting that the agreement is not in writing, this circumstance does not militate against the validity or enforceability of said agreement, because contracts are binding upon the parties in whatever form they may have been entered into unless the law requires otherwise. (Article 1356, Civil Code; Lopez v. The Auditor General, et al., L-25859, July 13, 1967; Pilar Gil Vdan de Murciano v. The Auditor General, et al., 103 Phil. 907). It is true that Article 1358 of the Civil Code provides that contracts involving more than P500.00 must appear in writing, but nothing is said therein that such requirement is necessary for their validity or enforceability. It has been held that the writing required under Article 1358 is merely for convenience, (Thunga Chui v. Que Bentac, 2 Phil. 561; Ng Hoc v. Tong Ho, 52 0,G., 4396) and so the agreement alleged in the amended complaint in the present case can be enforced even if it may not be in writing. The requirement of writing for the offer made by Lao Sok is only for convenience and not enforceability. In fact, the petitioner could be compelled to put the offer in writing, a step no longer necessary now because of this petition. Furthermore, it was also established that petitioner Lao Sok has other department stores where he promised to absorb the salesladies. He was likewise remiss in this obligation. There is Merit in the Solicitor General's submission that, in effect, the fire closed only a division or unit of Lao Sok's business. His entire

enterprise consisting of the operation of various department stores did not really close down or cease. We agree with the respondents that: xxx xxx xxx ... the record shows that petitioner voluntarily agreed to compensate private respondents for the loss of their jobs because they have been his salesladies for a long time; that he did this freely and spontaneously (Motion for Reconsideration, p. 88, record). He should not now, therefore, be allowed to renege on an obligation of his own making. To do so, would be unjust and unfair to the private respondents who took his word for it in good faith. The validity of that agreement must, consequently, be sustained (Jimeno v. Gacilago, 14 Phil. 16; Legarda v. Ongsiaco, 36 Phil. 185). Both the law and equity dictate that private respondents must be compensated for the loss of their jobs considering that they were kept waiting and hoping that they would be re-employed by the petitioner, if not paid their severance pay. WHEREFORE, the decision is hereby AFFIRMED and judgment is rendered in favor of private respondents, ordering the petitioner to pay the former their separation pay equivalent to one month salary for every year of service proportionate to their individual lengths of service with the petitioner. SO ORDERED. Melencio-Herrera, Plana, Relova, De la Fuente and Alampay, JJ., concur. Teehankee (Chairman), J., concurs in the result. 151. G.R. No. L-67742 October 29, 1987 MELITON GALLARDO and TERESA VILLANUEVA, petitioners, vs. HONORABLE INTERMEDIATE APPELLATE COURT,


MARTA VILLANUEVA VDA. DE AGANA, VISITACION AGANA KIPPING, PEDRO V. AGANA, MARCELO V. AGANA, JR., TERESITA AGANA SANTOS and JESUS V. AGANA, respondents. PARAS, J.: This is a petition for review on certiorari seeking to set aside or reverse the decision * of the Intermediate Appellate Court (now Court of Appeals) promulgated on May 22, 1984 in AC-G.R. CV No. 69946 entitled Meliton Gallardo and Teresa Villanueva v. Marta Villanueva vda. de Agana, et al. (Rollo, p. 37) affirming the decision ** of the Court of First Instance of Laguna 8th Judicial District, Branch II, Sta. Cruz, Laguna (now Regional Trial Court, Sta. Cruz, Laguna) dated January 20, 1982, which dismissed the complaint for Quieting of Title in Civil Case No. SC-1492 and declared the plaintiff's (petitioner's herein) Re-constituted Transfer Certificate of Title RT-6293 (No. 23350) as null and void (Record on Appeal, pp. 215-216). The dispositive portion of the questioned decision reads as follows: WHEREFORE, the appealed judgment is in full accord with the evidence and the law and is hereby therefore affirmed in all its part. Costs against plaintiff -appellants SO ORDERED. The subject matter of this controversy involves a parcel of land situated in Cavinti, Laguna consisting of 81,300 square meters, more or less, initially covered by an original Certificate of Title No. 2262, issued on April 2, 1924 owned and registered in the name of the late Pedro Villanueva (former Justice of the Peace of the Municipal Court, Cavinti, Laguna), pursuant to Decree No. 150562 issued in L.R.C. Cadastral Record No. 136, Cad. Case No. 1 (Record on Appeal; Answer, p. 28). Petitioners were nephew and niece of the late Pedro Villanueva and first cousin of the private respondent Marta Villanueva vda. de Agana, the latter being the daughter of Pedro Villanueva. On August 10, 1937, petitioner claimed that the aforestated land

was sold to them in a private document, an unnotarized deed of sale written in Tagalog (Annex "B" of the complaint) that was allegedly signed by the late Pedro Villanueva conveying and transfering the property in question in favor of the petitioners (Record on Appeal, Exhibit "B", pp. 9-10) which deed is reproduced as follows. Ako, Pedro Villanueva, 66 taong gulang, balo at nananahanan sa municipio ng Cavinti, lalawigang Laguna at Kapuluang Pilipinas, alang-alang sa halagang LIMANG DAANG PISO (P500.00) salaping filipino, na sa akin ibinayad ng mag-asawa ni Meliton Gallardo at Teresa Villanueva, tagarito rin sa nasabing municipio, lalawigang at kapulwan sa hinaharap ng kasulatan ay sinasaysay ko na aking inilillwat at pinagbili ng biling patuluyan sa nasabing mag-asawa Meliton Gallardo at Teresa Villanueva, sampo na sa kanilay mangagmamana at hahalili, ang aking isang palagay na lupa na nabubuo sa limang luang na tubigan, punlang kalahating kabang palay at saka dalatan o katihan na may isang kabang palay na hasik, tumatayo sa nayon ng Kanlurang Talaongan, sakop nitong municipio ng Cavinti at napapaloob sa mga hangganang sumusunod: HILAGAAN, Braulio Villanueva at Modesto Ribera SILANGAN, Braulio Villanueva. TIMUGAN, Braulio Villanueva, Ilog Kaliraya at Jacinto Toque KANLURAN, Jacinto Toque. Ang pagaaring ito ay tunay kong pananarili sapagkat aking nabili sa magkakapatid na Aniano Gallardo, Zacarias Gallardo at Perfecto Gallardo at natatala sa Registro ng Amillarmiento dito sa Cavinti sa ilalim ng Blg. 22888, at walang ano mang ipinagkakautang ni pinanagutan kaya at magagamit na nitong aking pinagbilhan ang kanilang matuwid na maipamana at mailiwa sa iba. Gayon ding sinasaysay ko na akoy umaakong mananagutan dito sa aking pinagbilhan, tungkol sa pagaaring ito na ang katibay ay aking ipagsasanggalang laban sa kanino mang maghahabol. Dapat tantoin, gayon man, na ang pagaaring ito ay registrado na sa Registro de la Propiedad nitong lalawigang Laguna, subalit at


sa isang kamalian ng pagkakasukat tungkol sa lawak at laki, ay hindi pa natutubos ang kanyang titulo, kaya at kung maisaayos na ang nasabing titulo ay saka na ipatatala sa pangalan nitong aking pinagbilhan upang lalong malagay sa katahimikan itong aking pinagbilhan. At sa katunayan ay nilagdaan ko ang kasulatang ito dito sa municipio ng Cavinti, Laguna, ngayong ika sampung araw ng Agosto taong isanglibo siyam na daan at tatlompu at pito (1937). (LGD) PEDRO VILLANUEVA Nagfirma sa hinaharap ni (LGD) BALTAZAR VILLANUEVA JUAN VILLANUEVA Subsequently, the Original Certificate of Title was cancelled on the basis of the private document of sale (Exhibit "B") and a new certificate of title was issued in the name of the petitioners covered by Transfer Certificate of Title No. RT- 6293 (No. 23350) on January 4, 1944, particularly describing the land as follows: A parcel of land (Lot No. 401 of the Cadastral Survey of Cavinti) with the improvements thereon, situated in the municipality of Cavinti, Bounded on the N and NE., by Lot No. 403; on the SE by Lot No. 393 and the Caliraya River; and on the SW by Lot No. 515. Area — Eighty One Thousand and Three Hundred (81,300) Square Meters, more or less. (Record on Appeal, Annex "A," pp. 7 and 9). During the Second World War, the records as well as the Office of the Register of Deeds of Laguna, where the original of their new transfer certificate of title was kept, were completely burned. Accordingly, by virtue of an Affidavit of Reconstitution dated December 2, 1958 (Record on Appeal, Annex "DD," pp. 41-42) and upon presentation of the Owner's Duplicate Certificate of Title, the title was administratively reconstituted and the Register of Deeds of Laguna issued Transfer Certificate of Title No. RT-6293 (No. 23350) in the name of the petitioners (Record on Appeal, Annex "B", pp. 7). On November 17, 1976, defendant Marta Villanueva together with Pedro Villanueva, Jr., and Restituto R. Villanueva executed

and filed an Affidavit of Adverse Claim with the Office of the Register of Deeds of Laguna (Record on Appeal, Annex "C", pp. 10-13). However, on December 6, 1976 a joint affidavit was filed by Pedro G. Villanueva, Jr. and Restituto Villanueva withdrawing their adverse claim on the said parcel of land, with the Office of the Register of Deeds of Laguna (Record on Appeal, Annex " D, " pp. 13-14). When petitioners learned of this Affidavit of Adverse Claim, attempt was made to settle said controversy amicably. Several demands made by herein petitioners upon private respondents Marta Vda. de Agana to withdraw her adverse claim, failed. On December 9, 1976, said private respondent executed a Deed of Conveyance and Release of Claim (Record on Appeal and Annex "AA", p. 35) wherein the parties agreed, among other things, to the following: That in consideration of the said transfer and conveyance over a 1,000 square meter portion mentioned in the next preceding paragraph, the VENDEE (Marta V. Agana) does hereby withdraw the adverse claim mentioned above; (Rollo, p. 119). However, when private respondent Marta Villanueva vda. de Agana refused to sign an Affidavit of Quit-claim (Exhibit "9; " Record on appeal, p. 195), petitioners instituted court suit against the private respondent and her husband, Dr. Marcelo S. Agana, Sr. by filing a complaint for Quieting of Title and Damages with the Court of First Instance of Laguna on February 3, 1977, demanding that their title over the questioned land be fortified by a declaration of ownership in their favor and avoiding the af/recited Deed of Conveyance and Release of Claim (Record on Appeal, pp. 1-7). Accordingly, private respondents in their answer countered that the Deed of Sale in Tagalog and petitioners' title over the land be declared void ab initio, among other demands (Record on Appeal, pp. 16-35). On January 20, 1982, the Court of First Instance of Laguna rendered its decision declaring the deed of sale of August 10, 1937, as well as the reconstituted transfer certificate of title of petitioners, void ab initio Record on Appeal, pp. 208-216).


The dispositive portion of said decision (Record on Appeal, pp. 215-216) reads as follows: WHEREFORE, judgment is hereby rendered in favor of the defendants and against the plaintiffs, as follows: a. declaring as null and void the private document dated August 10, 1937 written in Tagalog (Exhibit B); b. declaring as null and void plaintiffs' reconstituted Transfer Certificate of Title RT-6293 (No. 23350) (Exhibit F) and ordering the Register of Deeds of Laguna to issue a new reconstituted or to reinstate Original Certificate of Title No. 2262 issued on April 2, 1924 in the name of Pedro Villanueva within thirty (30) days from the finality of this decision; c. declaring the heirs of Pedro Villanueva as the owners of the property in litigation and ordering the plaintiffs and her agents and those acting for in their behalf to vacate the land in question and surrender the possession of the same to the heirs of the late Pedro Villanueva thru Marta V. Agana; d. declaring all buildings; plantings and improvements introduced by the plaintiffs forfeited in favor of' the defendants: e. ordering plaintiffs, jointly and severally, to pay the defendants the sum of P10,000.00 as moral and exemplary damages; f. ordering plaintiffs, jointly and severally, to pay defendants the sum of P5,000.00 as and for attorney's fees: and g. ordering plaintiffs, jointly and severally, to pay defendants the sum of P5,000.00 as litigation expenses; and costs of suit. SO ORDERED. Thus, petitioners filed notice of appeal on February 10, 1982, followed by an appeal made to the Intermediate Appellate Court. However, the Intermediate Appellate Court, on May 22, 1984, affirmed in toto the decision of the trial court. Hence, this petition. On August 30, 1984, the Court in its Resolution without giving due course to the petition required the respondents to comment on the said petition (Rollo, p. 50). However, the counsel for private respondents failed to file comment on the petition for review on certiorari within the period which expired on

September 17, 1984. Thus, in the Resolution of January 7, 1985 the Court, required counsel for petitioners to show cause why disciplinary action should not be taken against him (Rollo, p. 51). On February 23, 1985 respondents filed their comment (Rollo, p. 57). Considering respondents' comment as answer the petition was given due course and the parties were required to submit their respective memoranda (Rollo, p. 104). Private respondents and petitioners filed their respective memoranda on May 18, 1985 (Rollo, p. 117) and on June 7, 1985 (Rollo, p. 143) respectively. On July 1, 1985, the Court resolved to consider the case submitted for deliberation (Rollo, p. 168). Petitioners, however filed a Supplemental Memorandum, with leave of court on May 18, 1987 (Rollo, p. 169) which was noted by the court in its resolution dated June 19, 1987 (Rollo, p. 188). In its petition petitioners raised the following assignment of errors, to wit: I THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT B DOES NOT TRANSFER OWNERSHIP, THE SAME BEING NULL AND VOID. II THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANTSAPPELLANTS ARE NOT GUILTY OF LACHES. III THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF- APPELLANTS CANNOT ACQUIRE OWNERSHIP OF SUBJECT LAND BY PRESCRIPTION UPON THE PRINCIPLE THAT NO TITLE TO REGISTERED LAND IN DEROGATION OF THAT OF THE REGISTERED OWNER SHALL BE ACQUIRED BY PRESCRIPTION. IV THE TRIAL COURT ERRED IN NOT HOLDING THAT STATUTE OF LIMITATION HAS SET INTO THIS CASE; AND, V THE TRIAL COURT ERRED IN DECLARING TRANSFER CERTIFlCATE OF TITLE NO. RT-6293 AS NULL AND VOID. The pivotal issue in this case is whether or not there was a valid


reconstitution of Transfer Certificate of Title No. RT-6293 (No. 23350) issued in the names of petitioners. It is admitted that the land in question is formerly covered by Original Certificate of Title No. 2262, issued in the name of Pedro Villanueva and that the cancellation of said OCT No. 2262 and the issuance of the reconstituted Transfer Certificate of Title No. RT6293 (No. 23350) are based either on the Affidavit for Reconstitution of Teresa Villanueva and not of Pedro Villanueva, or the unnotarized deed of sale of August 10, 1937 (Annex "B" for plaintiffs), held void by the lower court and by the Court of Appeals. As a consequence TCT No. RT-6293 (No. 23350) was likewise held void ab initio. (Record on Appeal, p. 20). As to the validity of the Affidavit for Reconstitution, affiant Teresa Villanueva testified on December 19, 1980, that she did not know anything about the reconstitution of their title as it was their children who took charge of the same and that she never participated in the said reconstitution. In fact she never appeared before the Notary Public and this testimony was corroborated by the testimony of Eleuterio Rebenque, entry clerk in the Office of the Register of Deeds who never made any categorical affirmation that said Teresa Villanueva appeared at said office. (Rollo, p. 43). Consequently, the crux of the matter now centers on whether or not the unnotarized deed of sale purportedly executed on August 10, 1937 by the primitive owner Pedro Villanueva, in favor of petitioners, can be considered as a valid instrument for effecting the alienation by way of sale of a parcel of land registerd under the Torrens System. Corollary thereto, it becomes necessary to examine other matters surrounding the execution of the alleged document of sale (Exhibit B). Petitioners claim that the sale although not in a public document, is nevertheless valid and binding citing this Court's rulings in the cases of Cauto v. Cortes, 8 Phil. 459, 460; Guerrero v. Miguel, 10 Phil. 52, 53; Bucton v. Gabar 55 SCRA 499 wherein this Court ruled that even a verbal contract of sale of real estate produces legal effects between the parties.

The contention is unmeritorious. As the respondent court aptly stated in its decision: True, as argued by appellants, a private conveyance of registered property is valid as between the parties. However, the only right the vendee of registered property in a private document is to compel through court processes the vendor to execute a deed of conveyance sufficient in law for purposes of registration. Plaintiffs-appellants' reliance on Article 1356 of the Civil Code is unfortunate. The general rule enunciated in said Art. 1356 is that contracts are obligatory, in whatever form they may have been entered, provided all the essential requisites for their validity are present. The next sentence provides the exception, requiring a contract to be in some form when the law so requires for validity or enforceability. Said law is Section 127 of Act 496 which requires, among other things, that the conveyance be executed "before the judge of a court of record or clerk of a court of record or a notary public or a justice of the peace, who shall certify such acknowledgment substantially in form next hereinafter stated." Such law was violated in this case. The action of the Register of Deeds of Laguna in allowing the registration of the private deed of sale was unauthorized and did not lend a bit of validity to the defective private document of sale. With reference to the special law, Section 127 of the Land Registration Act, Act 496 (now Sec. 112 of P.D. No. 1529) provides: Sec. 127. Deeds of Conveyance, ... affecting lands, whether registered under this act or unregistered shall be sufficient in law when made substantially in accordance with the following forms, and shall be as effective to convey, encumber, ... or bind the lands as though made in accordance with the more prolix forms heretofore in use: Provided, That every such instrument shall be signed by the person or persons executing the same, in the presence of two witnesses, who shall sign the instrument as witnesses to the execution thereof, and shall be acknowledged to be his or their free act and deed by the person or persons executing the same, before the judge of a court of record or clerk of a court of


record, or a notary public, or a justice of the peace, who shall certify to such acknowledgement substantially in the form next hereinafter stated. (Emphasis supplied). It is therefore evident that Exhibit " E " in the case at bar is definitely not registerable under the Land Registration Act. Likewise noteworthy is the case of Pornellosa and Angels v. Land Tenure Administration and Guzman, 110 Phil. 986, where the Court ruled: The deed of sale (Exhibit A), allegedly executed by Vicente San Jose in favor of Pornellosa is a mere private document and does not conclusively establish their right to the parcel of land. WhiIe it is valid and binding upon the parties with respect to the sale of the house erected thereon, yet it is not sufficient to convey title or any right to the residential lot in litigation. Acts and contracts which have for their object the creation, transmission, modification or extinguishment of real rights over immovable property must appear in a public document. Upon consideration of the facts and circumstances surrounding the execution of the assailed document, the trial court found that said private document (Exhibit "B") was null and void and that it was signed by somebody else not Pedro Villanueva. Such findings of fact besides being based on the records, were sustained by the Court of Appeals. The contention that ownership over registered property may be acquired by prescription or adverse possession is absolutely without merit. No title to registered land in derogation of that of the registered owner shall be acquired by prescription or adverse possession. Prescription is unavailing not only against the registered owner but also against his hereditary successors (Umbay vs. Alecha, 135 SCRA 427 [1985]). The right to recover possession of registered land is imprescriptible because possession is a mere consequence of ownership (Umbay vs. Alecha, supra, citing Atun v. Nuñuz 97 Phil. 762; Manlapas and Tolentino v. Llorente, 48 Phil. 298, 308: J.M. Tuazon & Co., Inc. v. Aguirre, 117 Phil. 110, 113-114) where land has been registered under the Torrens System (Alarcon v. Bidin, 120 SCRA 390;

Umbay v. Alecha, supra) because the efficacy and integrity of the Torrens System must be protected (Director of Lands v. CA, 120 SCRA 370). As prescription is rightly regarded as a statute of repose whose objective is to suppress fraudulent and stale claims from springing up at great distances of time and suprising the parties or their representatives when the facts have become obscure from the lapse of time or the defective memory or death or removal of witnesses ( Senoan v. Sorongon, 136 SCRA 407 [1985]). In the matter of laches, the Court aptly stated in the case of Marcelo Sotto v. Pilar Teves, et al., 86 SCRA 155 [1978] that "in determining whether a delay in seeking to enforce a right constitutes laches, the existence of a confidential relationship between the parties is an important circumstance for consideration. A delay under such circumstance is not as strictly regarded as where the parties are strangers to each other. The doctrine of laches is not strictly applied between near relatives, and the fact that the parties are connected by ties of blood or marriage tends to excuse an otherwise unreasonable delay." In the case of Esso Standard Eastern, Inc. v. Alfonso Lim, 123 SCRA 464, 480 [1983]), the Court ruled that laches cannot be asserted by a mere possessor without claim of title, legal or equitable because for laches to exist, there should be a showing of delay in asserting the complainant's right. The complainant should have knowledge or notice of the defendant's conduct and an opportunity to institute a suit. Delay is not counted from the date the lot was sold to the buyer but from the time of entry of the defendant or from the time the complainant came to know of the occupancy for that is the only time it could possibly have demanded that he get out of the premises or could have instituted a suit. In the case at bar, it will be noted that what transpired was an administrative reconstitution, essentially exparte and without notice, thereby lending credence to the claim that private respondent Marta Agana was unaware of such reconstitution and possession until she discovered the same in the Office of the Register of Deeds in 1976. As such it cannot be


claimed that she slept on her right as from that time on, it is undeniable that she filed her adverse claim on the said lot. After a careful perusal of the case, there appears to be no cogent reason to disturb the findings of fact of the Court of Appeals which affirmed the findings of the trial court. PREMISES CONSIDERED, the petition is DENIED and the assailed decision of the Intermediate Appellate Court is AFFIRMED. SO ORDERED. 152. G.R. No. L-23351 March 13, 1968 CIRILO PAREDES, plaintiff-appellant, vs. JOSE L. ESPINO, defendant-appellee. Simeon Capule for plaintiff-appellant. Iñigo R. Peña for defendant-appellee. REYES, J.B.L., Actg. C.J.: Appeal from an order of the Court of First Instance of Palawan in its Civil Case No. 453, granting a motion to dismiss the complaint. Appellant Cirilo Parades had filed an action to compel defendant-appellee Jose L. Espino to execute a deed of sale and to pay damages. The complaint alleged that the defendant "had entered into the sale" to plaintiff of Lot No. 67 of the Puerto Princesa Cadastre at P4.00 a square meter; that the deal had been "closed by letter and telegram" but the actual execution of the deed of sale and payment of the price were deferred to the arrival of defendant at Puerto Princesa; that defendant upon arrival had

refused to execute the deed of sale altho plaintiff was able and willing to pay the price, and continued to refuse despite written demands of plaintiff; that as a result, plaintiff had lost expected profits from a resale of the property, and caused plaintiff mental anguish and suffering, for which reason the complaint prayed for specific performance and damages. Defendant filed a motion to dismiss upon the ground that the complaint stated no cause of action, and that the plaintiff's claim upon which the action was founded was unenforceable under the Statute of Frauds. Plaintiff opposed in writing the motion to dismiss and annexed to his opposition a copy of a letter purportedly signed by defendant (Annex "A"), wherein it was stated (Record on Appeal, pp. 19-20) — 106 GonzagaSt. Tuguegarao,Cagayan May18,1964 Mr.CiriloParedes Pto.Princesa,Palawan Dear Mr. Paredes: So far I received two letters from you, one dated April 17 and the other April 29, both 1964. In reply thereto, please be informed that after consulting with my wife, we both decided to accept your last offer of Four (P4.00) pesos per square meter of the lot which contains 1826 square meters and on cash basis.


In order that we can facilitate the transaction of the sale in question, we (Mrs. Espino and I), are going there (Puerto Princess, Pal.) to be there during the last week of the month, May. I will send you a telegram, as per your request, when I will reach Manila before taking the boat for Pto. Princess. As it is now, there is no schedule yet of the boats plying between Manila and Pto. Princess for next week. Plaintiff also appended as Annex "A-1", a telegram apparently from defendant advising plaintiff of his arrival by boat about the last week of May 1964 (Annex "A-1" Record on Appeal, p. 21), as well as a previous letter of defendant (Appendix B, Record on Appeal, p. 35) referring to the lot as the one covered by Certificate of Title No. 62. These allegations and documents notwithstanding, the Court below dismissed the complaint on the ground that there being no written contract, under Article 1403 of the Civil Code of the Philippines — Although the contract is valid in itself, the same can not be enforced by virtue of the Statute of Frauds. (Record on Appeal, p. 37).1äwphï1.ñët Plaintiff duly appealed to this Court. The sole issue here is whether enforcement of the contract pleaded in the complaint is barred by the Statute of Frauds; and the Court a quo plainly erred in holding that it was unenforceable. The Statute of Frauds, embodied in Article 1403 of the Civil Code of the Philippines, does not require that the contract itself

be in writing. The plain text of Article 1403, paragraph (2) is clear that a written note or memorandum, embodying the essentials of the contract and signed by the party charged, or his agent, suffices to make the verbal agreement enforceable, taking it out of the operation of the statute. Art. 1403. — The following contracts are unenforceable, unless they are ratified: (1) . . . (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents: x x x x x x x x x (e) An agreement for the leasing for a longer period than one year, or for the sale of real property or of an interest therein.1äwphï1.ñët x x x x x x x x x In the case at bar, the complaint in its paragraph 3 pleads that the deal had been closed by letter and telegram" (Record on Appeal, p. 2), and the letter referred to was evidently the one copy of which was appended as Exhibit A to plaintiff's opposition to the motion dismiss. This letter, transcribed above in part, together with that one marked as Appendix B, constitute an


adequate memorandum of the transaction. They are signed by the defendant-appellee; refer to the property sold as a lot in Puerto Princesa, Palawan, covered, by TCT No. 62; give its area as 1826 square meters and the purchase price of four (P4.00) pesos per square meter payable in cash. We have in them therefore, all the essential terms of the contract, and they satisfy the requirements of the Statute of Frauds. We have ruled in Berg vs. Magdalena Estate, Inc., 92 Phil. 110, 115, that a sufficient memorandum may be contained in two or more documents. Defendant-appellee argues that the authenticity of the letters has not been established. That is not necessary for the purpose of showing prima facie that the contract is enforceable. For as ruled by us in Shaffer vs. Palma, L-24115, March 1, 1968, whether the agreement is in writing or not, is a question of evidence; and the authenticity of the writing need not be established until the trial is held. The plaintiff having alleged that the contract is backed by letter and telegram, and the same being a sufficient memorandum, his cause of action is thereby established, especially since the defendant has not denied the letters in question. At any rate, if the Court below entertained any doubts about the existence of the written memorandum, it should have called for a preliminary hearing on that point, and not dismissed the complaint. WHEREFORE, the appealed order is hereby set aside, and the case remanded to the Court of origin for trial and decision. Costs against defendant-appellee Jose L. Espino. So ordered. 153. G.R. No. L-40258 September 11, 1980 LIM YHI LUYA, petitioner, vs.

COURT OF APPEALS and HIND SUGAR COMPANY respondents.

GUERRERO, J.: This is a Petition for Review by way of certiorari of the Decision of the Court of Appeals in CA-G.R. No. 51546-R entitled Lim Yhi Luya, Plaintiff-Appellee, versus Hind Sugar Company, DefendantAppellant, which reversed and modified the decision of the Court of First Instance of Pangasinan in favor of the plaintiff-appellee, now the herein petitioner. The antecedent facts may be stated as follows: Petitioner Lim Yhi Luya is a businessman, resident of Lingayen, Pangasinan where he operates a grocery store, hardware store and gasoline station. Private respondent Hind Sugar Company is engaged in the manufacturing and marketing of sugar, its principal office located in Manaoag, Pangasinan. Vice President and General Manager of respondent company is Atty. Emiliano Abalos. His assistant is Generoso Bongato, while the cashier and accountant of the company is Teodoro Garcia. Petitioner and private respondent since 1958 have had business dealings with each other, the company selling sugar to the petitioner and the latter has been supplying the company with diesoline, gasoline, muriatic acid, sulfuric acid, other supplies and materials ordered on credit. On November 12, 1970, petitioner received a telegram from Manager Abalos in the following tenor: "Please come tomorrow morning without fail." (Exh. "B"). The following day, November 13, 1970, petitioner proceeded to the company and in the office of Manager Abalos, the latter offered to sell sugar at P37.00 per picul. The parties agreed to the purchase of 4,085 piculs of sugar at P35.00 per picul. The specific terms of the contract are shown in Exhibit "a" as follows: CONTRACT OF SALE OF SUGAR Seller : Hind Sugar Company Manaoag, Pangasinan Buyer : Lim Yhi Luya Lingayen, Pangasinan


Quantity: Four Thousand Eighty-Five (4,085) piculs of Hind-2 sugar, 1969-70 crop Price : Thirty Five (?35.00) Pesos per picul, f.o.b. Manaoag Terms : Cash upon signing of this contract. Manaoag, Pangasina, Nov. 13, 1970. On the same day, November 13, 1970, in compliance with the contract, four delivery orders (Nos. 3054, 3055, 3056, and 3057) were issued to petitioner by cashier Garcia upon instructions of Manager Abalos covering the total quantity of sugar sold, 4,085 piculs. Between November 13, 1970 to January 27, 1971, petitioner withdrew from the company warehouse in varying quantities a total amount of 3,735 piculs under substitute delivery orders, leaving a balance of 350 piculs undelivered. On January 22, 1971, the question of payment cropped out between the parties. Petitioner claimed that he had paid P142,975.00 to the company officials, Cashier Garcia and Manager Abalos on November 13. 1970 and as proof of his payment, he referred to the contract Exhibit "A", particularly to the stipulation stating "Terms: Cash upon sing of this contract." Respondent company officials denied the claim of the petitioner, alleging that petitioner never paid for the sugar on November 13, 1970 or at any time thereafter. An audit report or examination of the books of the company made by External Auditor Victorino Daroya showed no payment by petitioner. On May 17, 1971, petitioner, as plaintiff below, filed the complaint against the defendant Hind Sugar Company, now the herein respondent, in Civil Case No. 14873 before the Court of First Instance of Pangasinan on six (6) causes of action, alleging — On his First Cause of Action: That defendant- appellant has unreasonably, unlawfully and maliciously refused and failed to deliver to him 350 piculs of the sugar he bought from it under their contract (Exh. "A") with a value of P12,250.00 altho the has already paid the full price thereof; On his Second Cause of Action: That defendant-appellant has

unreasonably, unlawfully and maliciously refused and failed to deliver to him 1,000 piculs of export sugar altho he has deposited to the account of the defendant-appellant the price thereof in the amount of P55,000.00 which the latter has already withdrawn, the agreed period of delivery which was January 27, 1971 having expired. On his Third Cause of Action: That defendant- appellant has refused, despite repeated demands, to release to him 160 piculs of Hind-3 sugar valued at P6,400.00, which he has already paid; On his Fourth Cause of Action: That despite his demands that defendant-appellant liquidate and pay its indebtedness to him in the amount of P60,602.30 for supplies of diesolene, gasoline, muriatic acid, sulfuric acid and other materials needed by it, exclusive of interest and attorney's fees, which were payable within 30 days from date of delivery, the defendant-appellant has refused to settle with him; On his Fifth Cause of Action: That defendant- appellant's willful, unjust, unreasonable, malicious and fraudulent refusal to pay its just obligations has caused him mental anguish, serious anxiety, wounded feelings, moral shock, social humiliation and similar injuries, entitling him to P50,000 in moral compensatory and exemplary damages, and on The Sixth Cause of Action: That he be paid the sum of P50,000 for attoney's fees and expenses of litigation. Answering the complaint, defendant-appellant alleges that — On the First Cause of Action: The contract marked as Exhibit "A" was duly executed but it stopped delivery of the last 350 piculs of sugar under said contract when plaintiff-appellee who has not paid any amount not even for the sugar already withdrawn by him, refused, inspite of demands, to pay the consideration mentioned in the contract claiming that he had already paid the full price stipulated therein. For this, parties had agreed to suspend further delivery of sugar under the contract until plaintiff-appellee could prove payment; On the Second Cause of Action: Altho plaintiff- appellee has deposited P55,000 on January 20, 1971 for export sugar, in view


of the occurrence of a controversy between the parties regarding the implementation of the Contract Exhibit "A", both parties came to the understanding that no delivery would be made until the question of payment of the 4,085 piculs of sugar mentioned in said contract shall have been satisfactorily settled between them. On the Third Cause of Action: The 160 piculs of Hind- 3 sugar referred to here is the remaining portion of 1,313 piculs purchased by plaintiff-appellee on June 3, 1970, and the unclaimed sugar was always ready for delivery but plaintiffappellee preferred withdrawing from the 4,085 piculs covered by the contract Exhibit "A" instead. On the Fourth Cause of Action: Plaintiff-appellee has in truth delivered supplies to defendant-appellant but the invoices mentioned in the complaint are not the same as the original delivery receipts signed by defendant- appellant's employee when supplies were received, and the figures contained therein are inaccurate. Moreover, such supplies were never payable on a 30-day-from-delivery term, but the standing practice was to offset their value against the costs of sugar purchased by plaintiffappellee, and On the Fifth and Sixth Causes of Action: Defendant-appellant denies the averments therein and alleges that the answers to such causes of action are fully covered by its answers to the first four causes of action. By way of Counterclaim, defendant-appellant prays that from the unpaid cost of the 3,085 piculs of sugar contracted and practically all taken by plaintiff-appellee amounting to P142,975.00, the value of the materials supplied amounting to P59,500.00, the P55,000.00 deposited to its account on January 20, 1971, and the amount of P6,080.00 representing the value of the 350 piculs of sugar unclaimed by plaintiff- appellee, after it was reprocessed- or a total of P132,830.30 — be off-set, and the balance in the amount of P10,144.70 in its favor be paid to it, and that plaintiff-appellee be required to pay, in addition thereto, another sum of P10,000.00 for and as attorney's fees and costs of litigation." 1

Answering the Counterclaim, plaintiff-appellee denied for being false and untrue the material allegations of paragraphs 1, 2, 3, 4, 5 and 6 of the Counterclaim and as special defenses, he alleges: (1) that defendant's counterclaim states no cause of action; and (2) that the complaint was filed by plaintiff because defendant has acted in gross and evident bad faith in refusing to satisfy plaintiff's plainly valid, just and demandable claim. At the pretrial conference, the parties submitted a partial stipulation of facts reproduced as follows: COMES NOW the parties in the above-entitled case, through counsel and respectfully submit the following Partial Stipulation of Facts and statement of the issues: 1. Plaintiff is of legal age, with capacity to sue and be sued and is a resident of Lingayen, Pangasinan whereas defendant is a corporation duly organized and existing in accordance with the laws of the Philippines likewise with capacity to sue and to be sued; 2. Defendant admits having executed on November 13, 1970 a Contract of Sale for 4,085 piculs of Hind-2 sugar, a xerox copy of which is attached to this Partial Stipulation of Facts and marked as Annex "1". The signature appearing in Annex "1" hereof above the typewritten name Emiliano L. Abalos is that of the Vice President and General Manager of defendant Hind Sugar Company, Mr. Emiliano L. Abalos and the signature appearing above the typewritten name Lim Yhi Luya appearing in Annex "1" hereof is that of the plaintiff herein; 3. On November 13, 1970, upon execution of the Contract of Sale marked as Annex "I" hereof, defendant delivered and issued to plaintiff four (4) delivery orders Nos. 3054, 3055, 3056 and 3057 marked respectively as Annexes "1", "2", "3" and "4" of defendant's Answer and attached to this Partial Stipulation of Facts as Annexes "2", "13", "4" and "5" hereof; 4. That on various occasions, the latest on January 23, 1971, the defendant delivered to the plaintiff on account of the contract, Annex "1" hereof and by virtue of the delivery orders issued by the defendant at the request of the plaintiff in substitution of the


delivery orders marked as Annexes "2", "3", "4" and "5", the substitute delivery orders hereto attached and marked as Annexes "6" to "110" inclusive (summarized herein under Annexes "111" to "114" inclusive), showing a total of 3,735 piculs of sugar already delivered and leaving a balance still undelivered by the defendant to the plaintiff of 350 piculs of Hind-2 sugar, covered by Delivery Orders Nos. 3252, 3254, 3255, 3256, 3257, 3258, 3259, 3260, 3230, 3232, and 3233, marked as Annexes "115" to "125", inclusive; 5. That the plaintiff deposited with the Consolidated Bank and Trust Corporation, Dagupan City Branch, in the name of the Hind Sugar Company, the sum of FIFTY FIVE THOUSAND PESOS (P55,000.00) on January 20, 1971; 6. That defendant issued to plaintiff a provisional receipt dated January 27, 1971 for said amount of P55,000.00 (FIFTY FIVE THOUSAND PESOS), copy of which is hereto attached as Annex 126"; 7. That on June 3, 1970, the defendant sold to the plaintiff 1,313 piculs of sugar at the rate of P40.00 per picul of H-2 sugar and P38.00 per picul of H-3 sugar, which plaintiff has fully paid per cash debit hereto attached as Annex "127", of which 160 piculs of H-3 sugar remain undelivered by the defendant to plaintiff; 8. That the plaintiff supplied the defendant with diesoline, gasoline, muriatic acid, sulphuric acid and other supplies and materials ordered by defendant from plaintiff on credit; 9. The plaintiff delivered to defendant on credit for the month of January, 197 1, supplies and materials in the amount of Pl 3,988.20 under invoices Nos. 6327, 6329, 6330, 6331, 6332, 6333 and 6334, marked as Annexes "128" to "134" inclusive; 10. The plaintiff delivered to defendant on credit for the month of February, 1971, supplies and materials in the amount of P23,455.10; 11. That in the month of March, 1971, plaintiff delivered to the defendant on credit supplies and materials worth P18,051.00; 12. That in the month of April, 1971, the plaintiff, delivered to defendant on credit, supplies and materials worth P5,098.00; 13.

The parties submit that the issues to be threshed out between the parties at the trial of this case are the following: (a) As to the first cause of action, the remaining issue is whether or not plaintiffs has paid to defendant the sum of P142,975.00 which is the purchase price of the 4,085 piculs of sugar subject to the contract of sale marked as Annex "I" hereof; (b) On the second cause of action, the issue is whether or not the plaintiff is entitled to the delivery by the defendant of 1,000 piculs of export sugar by virtue of the deposit on January 20, 1971 of the amount of P55,000.00; (c) On the third cause of action, issue is whether or not plaintiff is entitled to delivery by defendant of 160 piculs of Hind-3 sugar sold by defendant to plaintiff on June 3,1970; (d) On the fourth cause of action, the issue are (1) what business practice or practices if any were observed by the plaintiff and the defendant in their business dealings relative to the purchase of supplies and materials by the defendant from the plaintiff on credit; (2) what is the total amount due, if any, from the defendant to the plaintiff for supplies and materials delivered by plaintiff to defendant on credit; (3) whether the supplies and materials delivered by plaintiff to defendant were payable within thirty (30) days from date of delivery and overdue account to earn interests at the rate of 12% per annum an additional amount equivalent to 25% of the amount or value of the good in litigation as attorney's fees; (e) On the sixth cause of action, whether or not plaintiff is entitled to attorney's fees and expenses of litigation; (g) Whether defendant is entitled or not to any set off; (h) Whether defendant is entitled to attorney's fees. 14. The parties hereby reserve the right to present evidence on all other matters not herein stipulated. The trial Court has correctly surmised that the principal issue in this case is whether or not the plaintiff-appellee has paid the sum of P142,975.00 which is the purchase price of the 4,085 piculs of sugar covered by the contract of sale (Exhibit "A") between the parties. This Contract reads as follows:


CONTRACT OF SALE OF SUGAR (HIND-2) 1969-70 SELLER : HIND SUGAR COMPANY Manaoag, Pangasinan. BUYER : LIM YHI LUYA Lingayen, Pangasinan QUANTITY : Four Thousand Eighty Five (4,085) (Piculs of HIND-2 Sugar, 1969-70 Crop). PRICE : Thirty Five (P35.00) PESOS per picul F.O.B., Manaoag TERMS : Cash upon signing of this Contract Manaoag, Pangasinan, November 13,1970 HIND SUGAR COMPANY By: (SGD.) EMILIANO L. ABALOS (SGD.) LIM YHI LUYA Vice President & Gen. Mgr. (Buyer) (Seller) Plaintiff-appellee claimed during the trial that he has paid the said amount and when pressed to show his receipt of payment, he points to that portion of the contract which reads: "Terms: Cash upon signing of this Contract" as his receipt and evidence of payment. On the other hand, defendant-appellant maintained that plaintiff-appellee has not paid anything on the contract and the contract does not prove payment but merely created plaintiffappellee's obligation to pay. 2 After trial, the Court of First Instance of Pangasinan rendered judgment, the dispositive portion of which reads: WHEREFORE, this Court renders judgment as follows: (1) On he first cause of action, ordering the defendant to immediately deliver to plaintiff the 350 piculs of H-2 sugar or to pay plaintiff the sum of P12,250,00 plus legal rate of interest from November 13, 1970, until fully paid, giving unto the plaintiff the option to choose whether to receive the sugar or to receive the payment corresponding to the same;

(2) On the second cause of action, ordering the defendant to deliver immediately to the plaintiff the 1,000 piculs of export sugar or to pay the plaintiff the sum of P55,000.00 with legal rate of interest from January 20, 1971, but giving the option or choice to the plaintiff; (3) With respect to the third cause of action, ordering the defendant to deliver to the plaintiff the 160 piculs of H-3 sugar or to pay to plaintiff the sum of P6,400.00 with legal rate of interest from June 3, 1970 but with the option again belonging to the plaintiff; (4) On the fourth cause of action, ordering the defendant to pay to the plaintiff the sum of P60,592.30 with interest at 12% per annum from the filing of the complaint and to pay attorney's fees of 25% of the principal obligation, that is, the sum of P15,148.08; (5) On the fifth and sixth causes of action, ordering the defendant to pay to the plaintiff the sum of P25,000.00 as damages and to pay another sum of P15,000.00 as attorney's fees, the said fees referring to the first, second and third causes of action; and (6) Lastly, ordering the defendant to pay the costs of suit. SO ORDERED. Defendant Hind Sugar Company appealed to the Court of Appeals. The appellate court rendered the following judgment, thus — WHEREFORE, judgment is hereby rendered — (1) ordering plaintiff-appellee to pay defendant- appellant the sum of P130,725.00 which is the price of 3,735 piculs of sugar, at P35 a picul, which plaintiff has withdrawn and received as a result of the contract of sale Exhibit "A", and cancelling the obligation of defendant-appellant to deliver the remaining 350 piculs called for in said contract for failure of plaintiff-appellee to pay for the same; (2) finding the defendant-appellant liable to return to plaintiffappellee the latter's deposit of P55,000.00; (3) finding the defendant-appellant liable to pay plaintiffappellee the sum of P6,040.00 which was realized from reprocessing the 160 piculs of sugar paid for but intentionally not claimed by plaintiff-appellee;


(4) finding the defendant-appellant liable to plaintiff-appellee for the sum of P60,592.30 for materials and supplies which the latter supplied to it for the months of January, February, March, and April 1971. Provided, however, that the plaintiff-appellee may deduct the said amounts of P55,000.00, P6,080.00 and P60,592.30, totalling P121,672.30 in all, from his total obligation of P130,725.00 to the defendant-appellant, paying the latter in cash only the remaining balance of P9,052.70; and (5) ordering the plaintiff-appellee to pay defendant-appellant the further amount of P10,000.00 for and as attorney's fees. With costs against plaintiff-appellee. SO ORDERED. Plaintiff-appellee, now the herein petitioner, having filed a Motion for Reconsideration but denied by the respondent Court of Appeals, he now comes before Us with the instant Petition for Review of the decision. In reversing the judgment of the lower court on the first cause of action, the Court of Appeals said: Plaintiff-appellee claimed during the trial that he has paid the said amount and when pressed to show his receipt of payment, he points to that portion of the contract which reads: "Terms: Cash upon signing of this Contract" as his receipt and evidence of payment. On the other hand, defendant-appellant maintained that plaintiff- appellee has not paid anything on the contract and the contract does not prove payment but merely created plaintiffappellee's obligation to pay. 'We agree with defendant-appellant. The contract in its entirety proves no more than that there has been a meeting of the minds of the parties. The signing perfected the contract but did not ex propio vigore consummate it. It gave the parties the right to demand reciprocally the performance of the obligations assumed by each. The vendor assumed to deliver the amount of sugar sold while the vendee which is the plaintiff-appellee was to pay the contracted price upon the signing of the contract. The questioned portion of the contract does not say, and is not therefore an

evidence that plaintiff-appellee has paid or has performed his obligation to pay. Stated in another way, the provision of the Contract in question means that the payment of P142,975.00 IS TO FOLLOW or IS TO BE MADE (and NOT WAS MADE) upon the signing of said contract". The appellate court further declared that it cannot believe as true facts the testimony of the petitioner that he paid the sum of P142,975.000 around 1:30 o'clock in the afternoon of November 13, 1970 to Emiliano Abalos and Teodoro Garcia, in cash because he was asked to pay in cash, and the evidence of his payment was the contract (Exhibit "A") itself because the respondent company did not want to issue a separate receipt for his payment as the sugar sold belonged not to it but to ARCA. The court said that there is no reason for Emiliano Abalos to deny petitioner's claim of payment if that was really made, pointing to the evidence of close relationship between the parties which show that Emiliano Abalos went all the way to accommodate the petitioner by modifying the contract, changing the condition or mode of payment provided in Exhibit "A" even without changing the written contract itself. It would have been an affront on their friendship had Emiliano Abalos followed the suggestions of the trial court (that Abalos should have demanded that the contract be corrected in such a way that it does not appear that the 4,085 piculs of sugar was not really paid for or he should have put a note on the two copies of the contract that the 4,085 piculs of sugar were not then paid), the appellate court reasoned out. And according to the court, the explanation of Abalos in allowing or agreeing to release the delivery orders covering the 4,085 piculs of sugar sold even without payment by the petitioner (which explanation is not even pointed out or intimated in the decision) 'is a rational and very probable one. After holding that the claim of petitioner that he paid the P142,975.00 wholly in cash is improbable; that it, is simply not the way with businessmen because modern business moves on credit and checks; that it is unthinkable to a businessman to keep so, much money in his possession when petitioner banks with


several banking houses in Lingayen and Dagupan City and has always paid mostly in checks in previous and subsequent transactions, the court resolved, "We seriously doubt that as a successful businessman he will ever disregard sound business practice of keeping his cash in the bank, especially that, according to him it was not his money but one he has received in trust and for a certain A. Chang Trading in Makati." Petitioner contends that the appellate court erred, first in holding that the contract of sale of sugar executed by and between petitioner and respondent is not evidence that payment of the sugar had been made by the petitioner to respondent upon the signing of said contract; the Court of Appeals likewise erred in holding that it was incumbent upon the petitioner to produce a receipt' signed by respondent to prove that payment of the sugar covered by the contract of sale had in fact been made by petitioner to respondent; it erred in not holding that petitioner had already fully paid the respondent the sugar bought; and second, in reversing the decision of the trial court and in not affirming the same. The first error may be resolved by tile rules on the interpretation of contracts, and the second on the basis of whether the general rule, that findings of the appellate tribunal are binding and must be respected by Us must govern the case at bar or the wellestablished exceptions to said rule. At this juncture, it is well to lay down cardinal rules in the interpretation of contracts as provided in the New Civil Code, thus — 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 stipulation shall control. If the words appear to be contrary to the evident intention of the parties, the latter shall prevail over the former. Art. 1371. In order to judge the intention. Of the contracting parties, their contemporaneous and subsequent acts shall be principally considered. Art. 1375. Words which may have different significations shall be

understood in that which is most in keeping with the nature and object of the contract. Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the obscurity. According to the trial court, "(t)here is no question that the contract was signed on November 13, 1970, in the office of the Hind Sugar Company at Manaoag, Pangasinan. The contract itself is so clear and explicit that it cast no doubt as to its meaning. "Cash upon signing of this contract meaning to say, that once the contract was signed, the payment of the 4.085 piculs of sugar which is P142,975.00 was made. After the said contract was signed and as sustained by the plaintiff, he has already delivered the P142,975.00 in cash to the cashier of the defendan't, the said plaintiff was given all the delivery orders covering the 4,085 piculs of sugar sold and by the giving of the delivery orders to the plaintiff, the latter was entitled to withdraw all the 4,085 piculs sugar from the company's warehouse" This is also the stand of the petition. Contrari-wise, the appellate court castigates the "ex cathedra pronouncement of the trial court that the words 'Terms: Cash upon the signing of this contract' means that payment was made and the contract itself is the receipt evidencing payment", as not based on proven facts, adding further that the trial court "has taken the dubious, weak, unreliable and improbable statements of plaintiff-appellee for true, or for granted, and in so doing the trial court has fallen wittingly or unwittingly into the error of begging the question (petitio principii)." in other words, respondent company's interpretation of the contract was upheld. Considering the admitted fact that the contract of sale (Exhibit "A") was prepared in the office of respondent company by Generoso Bongato, Assistant to the Manager of the company, upon instruction of General Manager Emiliano L. Abalos who is a lawyer, and We are now confronted with the varying or conflicting interpretations of the parties thereto, the respondent company contending that the stipulation "Terms: Cash upon signing of this contract" does not mean that the agreement was a


cash transaction because no money was paid by the petitioner at the time of the signing thereof, whereas the petitioner insists that it was a cash transaction inasmuch as he paid cash amounting to P142,975.00 upon the signing of the contract, the payment having been made at around 1:30 in the afternoon of November 13, 1970 to the cashier, Teodoro Garcia, and Manager Abalos although the sale was agreed to in the morning of the same day, November 13, 1970, the conflicting interpretations have shrouded the stipulation with ambiguity or vagueness. Then, the cardinal rule should and must apply, which is that the interpretation shall not favor the party who caused the ambiguity (Art. 1377, New Civil Code). We rule that in the instant case, the interpretation to be taken shall not favor the respondent company since it is the party who caused the ambiguity in its preparation. We do not agree with the meaning of the provision in the contract ascribed by the respondent court in its decision that: "Stated in another way, the provision of the Contract in question means that the payment of the P142,975.00 IS TO FOLLOW or IS TO BE MADE (and NOT WAS MADE) upon the signing of said contract." As already drafted or drawn up, complete and finalized with all the signatures thereon of the contracting parties and presented in court as Exhibit "A" without any change whatsoever in the mode of payment, such provision plainly and simply means that the payment was in CASH, and not on CREDIT. The ambiguity raised by the use of the words or phrases in the questioned provision must be resolved and interpreted against the respondent company. In truth the stipulation in the contract which reads: "Terms: Cash upon signing of this contract" is very clear and simple in its meaning, leaving no doubt in Our minds upon the intention of the contracting parties, hence, the first rule of contract interpretation that the literal meaning of its stipulation shall control, is the governing rule at hand. Resorting to Webster's Third New International Dictionary, p. 2515, for the definition of the word "upon" which literally means, among others, "10a (1):

immediately following on; very soon after; ... b: on the occasion of at the time of; ... " the clear import of the stipulation is that payment was made on the occasion of or at the time of the signing of the contract and not that payment will follow the signing. We must adopt the former meaning because it is such an interpretation that would most adequately render the contract effectual, following Article 1373 of the New Civil Code which 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 effectua. The evidence for the petitioner establishes that after paying the cash consideration to Cashier Garcia and Manager Abalos, the parties signed the contract and thereafter a signed copy of said contract was given to petitioner and also the four (4) delivery orders covering the 4,085 piculs of sugar sold. The questioned stipulation recites exactly the act of payment which is the paying of the money on the occasion of or at the time of the signing. Respondent would have Us believe that the stipulation does not mean what it conveys because petitioner has not paid cash after the signing of the contract nor at any time thereafter. We cannot agree with the respondent for otherwise the sanctity of the written contract can easily be violated and impugned, for otherwise oral testimony would prevail over a written document to vary, alter or modify the written terms, and most importantly, respondent's interpretation would render the stipulation ineffectual as a mere agreement. Petitioner claims that Exh. "A" is the receipt of his payment of the P142,975.00 cash upon the signing of the contract. Respondent, on the other hand, insists that it is not a written acknowledgement or written admission of having received the sum of P142,975.00 and may not be considered a receipt for any purpose (Brief for the Respondent, p. 34), although he fully agrees with the proposition that any written acknowledgement or written admission of anything received is a receipt (same page 34). This is exactly what the trial court ruled that "It would be


redundant to discuss what are the forms of receipts, but anything evidencing or admitting payment in compliance with an obligation is a receipt and AS THE CONTRACT, EXH. A AS WELL AS THE SIGNED COPY, IS AN EVIDENCE OF PAYMENT OF THE P142,975.00 IT MUST BE CONSIDERED A RECEIPT FOR ALL PURPOSES" (Decision,. Record on Appeal, p. 60). We affirm the lower court's ruling. One fact that weighs heavily in support of the lower court's ruling is that respondent cannot show nor produce any document or record whatsoever that petitioner did not pay the consideration demanded in cash. While Manager Abalos claims that the mode of payment was altered or changed, there is no showing or proof that the contract, Exh. "A", was accordingly changed or altered. And neither was such alteration or change noted or recorded in the books of the respondent company. The trial court, justifying and supporting its judgment in favor of the petitioner, cites the following facts: (1) The liquidation sheet dated December 30, 1970, Exh. "O", prepared by the cashier of defendant company, more than a month after the transaction in question on November 13, 1970 does not charge the petitioner with any indebtedness to the respondent company of whatever amount, much less the amount of P142,975.00; instead, it appears from said Exhibit "O" that as of December 30, 1970, the company had two outstanding vales in favor of the petitioner: one for P18,000.00 obtained on December 1, 1970 and another for P8,800.00 taken on December 15, 1970; (2) that petitioner had always transacted with respondent company in cash and never on credit as admitted by Teodoro Garcia, cashier of the company; (3) that petitioner had been withdrawing sugar from the company at its warehouse after November 13, 1970 until January 23, 1971, totalling a quantity of 3,735 piculs of sugar by virtue of the contract Exhibit "A" without the company demanding from the petitioner either verbally or in writing the payment, even only partial of such a big amount (P142,975.00). The above facts show contemporaneous and subsequent acts of the parties in relation to the transaction between them as

embodied in the Contract of Sale of Sugar (Exh. "A") from which the intention of the contracting parties may be judged correctly. The trial court was correct in judging and deciding the intention of the parties from their actuations contemporaneous with and subsequent to the agreement for the sale of the sugar in question, and We sustain the trial court, applying Art. 1371, New Civil Code, supra. The most telling, crucial and significant act contemporaneous with and subsequent to the signing of the agreement embodied in Exhibit "A", which needs emphasis, is the delivery to the petitioner of four (4) delivery orders (Nos. 3054, 3055, 3056 and 3057) covering all the 4,035 piculs of sugar subject of the contract on November 13, 1970, the very day that the contract was entered into and signed by the parties. The delivery orders is admitted by the parties and included in the Partial Stipulation of Facts, paragraph 3 thereof. Viewed in the light of the established fact that all sugar transactions between petitioner and respondent are always in cash, as admitted by Teodoro Garcia who is the cashier of respondent company (Testimony of Teodoro Garcia, t.s.n., Estrada, Hearing, April 22, 1972, pp. 1819), the issuance of the four delivery orders is a clear confirmation of the fact that petitioner paid in cash the cost of the sugar in the amount of P142,975.00 on the very day that the contract was signed, November 13, 1970, which is also the day that the delivery orders were given to him by the cashier upon direct instruction from the manager. Furthermore, the issuance of and delivery to the petitioner buyer of the said four delivery orders covering all the 4,085 piculs of sugar placed the control and possession of the thing sold to the vendee, the herein petitioner, and pursuant to Article 1497 of the New Civil Code, the sugar sold is understood as delivered to the petitioner. The thing sold shall be understood as delivered when it is placed in the control and possession of the vendee. Therefore, when the thing subject of the sale is placed in the control and possession of the vendee, delivery is complete. (La Fuerza, Inc. vs. Court of Appeals, 23 SCRA 1217)


In the case at bar, at the moment the delivery orders were issued and given to the petitioner-vendee, there was a symbolic or feigned tradition of the sugar sold since the delivery orders are documents of title to goods which, under Article 1636, New Civil Code, includes any bill of lading, dock, warrant, quedan, or warehouse receipt or order for the delivery of goods, or any other document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, or authorizing or purporting to authorize the possessor of the document to transfer or receive, either by indorsement or by delivery, goods represented by such document. And when the petitioner-buyer withdrew from the respondent's warehouse, hauled and took delivery on various dates and varying quantities of sugar piculs to 3,735 piculs, there was actual delivery thereof which consummated the sale. It is not correct, therefore, for the respondent court to hold that "the contract in its entirety proves no more than that there has been a meeting of the minds of the parties." It is more than that because the parties did not end the agreement by simply signing the contract, Exhibit "A". The minds of the parties did not only come to a meeting but they continued to implement and consummate the same. It may be true, as the decision under review opined, that "the signing perfected the contract but did not ex propio vigore consummate it," if the parties stopped or desisted thereafter, but the issuance and delivery of the delivery orders covering the total quantity of sugar sold was a consummation of the agreement, more so when petitioner-buyer was allowed by respondent company's officials to substitute the four delivery orders Nos. 3054, 3055, 3056, and 3057 marked Annexes "2", "3", "4", and "5" with substitute delivery orders marked Annexes "6" to "110" showing a total of 3,735 piculs of sugar already delivered to the petitioner, leaving a small amount of 350 piculs still unwithdrawn for which petitioner filed the original complaint in Civil Case No. 14873 against the company for delivery. These facts which are not disputed showing that petitioner was allowed

to receive the delivery orders on November 13, 1970 immediately after the signing of the agreement on the same day and that he was further allowed on various dates between November 13,1970 to January 23, 1971 to take delivery in varying amounts totalling 3,735 piculs of sugar, have not been properly appreciated by respondent court, which failure or omission in Our mind constitute grave and prejudicial abuse of discretion. This brings Us to the consideration and resolution of the second assignment of error wherein petitioner contends that the exception to the general rule, and not the general rule itself on the finality of the findings of fact by the Court of Appeals, is applicable and must govern in the instant case. It is, of course, well-established that the general rule that the appellate court's findings of facts are binding and must be respected by Us, has recognized exceptions. In Ramos vs. Pepsi-Cola Bottling Co., et al., L-22533, February 9, 1967, 19 SCRA 289, We enumerated the following as exceptions to the general rule: 1. Where there is a grave abuse of discretion (Buyco vs. People, 95 Phil. 453); 2. When the finding is grounded entirely on speculation, surmises or conjectures (Joaquin vs. Navarro, 93 Phil 257); 3. When the inference made is manifestly mistaken, absurb or impossible (Luna vs. Linatoc, 74 Phil. 15); 4. When the judgment of the Court of Appeals was based on a misapprehension of facts (De la Cruz vs. Sosing, 94 Phil. 26); 5. When the factual findings are conflicting (Casica vs Villaseca, 101 Phil. 1205); or 6. When the Court of Appeals, in making its findings, went beyond the issues of the case and the same are contrary to the admissions of both appellant and appellee (Evangelists vs. Alto Surety & Insurance Co., 1139, April 23,1958). In Roque vs. Buan L-22459, October 31, 1967, 21 SCRA 642, We reversed the conclusion of the Court of Appeals, having found it to be: (1) contrary to the established facts; (2) an inference based


on mere assumption; (3) contrary to the res ipsa loquitur rule, and (4) not in conformity with the physical law of nature. And in Fortus vs. Novero, L-22370, June 29, 1968, 23 SCRA 1330, We ruled that in extreme cases calling for the exercise of Our supervisory jurisdiction, this Tribunal may disturb or reverse any particular finding of fact of the Court of Appeals should We find it to, be arbitrary or whimsical or entirely outside the issues raised by the parties in their respective pleadings. Again, in Bunyi vs. Reyes, L-28845, June 10, 1971, 39 SCRA 504, We reversed the factual findings of the appellate court based on an assumption unsuppoted, by the evidence on record. In Sotto vs. Teves, 86 SCRA 154, and Alsua-Betts, et al., vs. Court of Appeals, et al., 92 SCRA 332, We reiterated and listed the exceptions to the general rule. And considering that in the case at bar the findings of the Court of Appeals are contrary to those of the trial court, a minute scrutiny by the Supreme Court is in order, and resort to duly proven evidence becomes necessary. (Legaspi vs. Court of Appeals, L39877, Feb. 20, 1976, 69 SCRA 360, 364, citing Tolentino vs. De Jesus, et al., L-32797, March 27, 1974, 56 SCRA 167). There is merit to petitioner's contention that the appellate court misappreciated or misapprehended the import of the liquidation sheet marked Exhibit "O" which is a financial statement prepared by the cashier of the respondent company, Teodoro Garcia, barely two months after the contract under litigation was entered into, indicating the mutual obligations between the parties. Petitioner points out in said statement that he had no liability whatsoever to the company, much less the cost of the sugar he had bought on November 13, 1970. On the contrary, the statement contains outstanding "vales" of P18,000.00 and P8,800.00 taken by the. company and due to petitioner. The Court of Appeals said it is a fallacy to believe that Exhibit "O" is a liquidation of the periodic accounts of the parties when in fact, it is no more than the itemization on how the amount of P97,960.51 representing cost of supplies and materials from. the petitioner and two "vales' ".n the sum of P18,000.00 and P8,800.00 each, or

a total of P124,760.51 had been se off or deducted from two expected payments coming from the petitioner amounting to P140,259.41. In any event, whether Exhibit "O" is a liquidation sheet or itemization of supplies and materials for set-off or deduction, it is a customary and normal business practice to indicate and include all outstanding accounts, whether payable or receivable, pertaining to a particular customer or client at the close of the business year. This is a custom or usage which respondent court failed to consider and appreciate in the case at bar. We agree with the petitioner that the decision under review has overlooked matters of substance in the evaluation of the evidence. For one, it is an established fact that the transaction in question was no recorded-in the books of the respondent company. This is the clear testimony of Victorino Daroya, External Auditor of the Hind Sugar Company (t.s.n., Vinluan, p. 32, Hearing on May 13, 1972). And another significant fact, is that according to General Manager Emiliano Abalos, there was no document to show that the transaction was not cash upon signing of the contract, in his testimony at the hearing on May 22, 1972. (t.s.n., Estrada, pp. 35-36). The logical implication of the ruling of the respondent court which upheld the position of the respondent company that the purchase of sugar was not a cash transaction, is Chat the purchase was on credit. However, since it appears that the transaction was not recorded in the company books and there was no document showing it was not cash, the inference arises that the respondent company allowed, tolerated, and/or sanctioned a credit transaction to be unrecorded in the company books which is simply irregular, unbusiness-like and anomalous. For a corporation or company like the respondent engaged in the big business of sugar central, in the production and marketing as well as export of sugar, and in the present case involving more than a hundred thousand pesos, to keep no record of the transaction in question is blatantly, against ordinary business practice and procedure in bookkeeping or accounting. Whether


the explanation. of the respondent company's officials rests on close personal friendship or cordial attachment with a particular customer or client, the conclusion is inevitable that the appealed judgment is grounded on findings that are irrational, absurd and arbitrary because the court in effect sustained the version of the company officers who wantonly and recklessly violated a customary business rule of protecting first and above all the interest of the company they serve. In the evaluation and appreciation of the evidence on record, We find that the respondent court gave credence to the unsupported testimony of General Manager Emiliano Abalos that the term or mode of payment stipulated in the written contract, Exh. "A", had been changed by him to "payment as withdrawals are made." This is clear as testified to by Manager Abalos in the hearing on May 22, 1972, t.s.n., pp. 3839. The evidence, however, does not show nor is there proof that the contract, Exh. "A", was accordingly changed or altered from "cash upon signing of the contract" to "payment as withdrawals are made." In sustaining the oral testimony of Manager Abalos on the alleged change of payment, as against the written terms of the contract that it was cash payment, the respondent court held that "Emiliano Abalos went all the way to accommodate the plaintiff-appellee by modifying the contract, changing the condition or mode of payment provided in Exhibit "A" even without changing the written contract itself." This ruling of the court upholding the oral testimony and claim of Manager Abalos as against the written contract itself is a grave and prejudicial error in the appreciation of the evidence because it is a clear and flagrant disregard of the parol evidence rule (Section 7, Rule 130, Rev. Rules of Court) providing that: "When the terms of an agreement have been reduced to writing, it is to be considered as containing all such terms, and, therefore, there can be, between the parties and their successors in interest, no evidence of the terms of the agreement other than the contents of the writing, except in the following cases: (a) Where a mistake or imperfection of the writing, or its failure to express-the true

intent and agreement of the parties, or the validity of the agreement is put in issue by the pleadings; (b) When there is an intrinsic ambiguity in the writing. Petitioner faults and impeaches the conclusions of the appellate court as founded entirely on speculations, surmises or conjectures. Thus, he castigates the court's holding which ruled that "(t)he claim of plaintiff- appellee that he paid the P142,975.00 wholly in cash is improbable. It is simply not the way with businessmen. Modern business moves on credits and debts ..." and that "it is unthinkable to a businessman to keep cash all the time in his residence in Lingayen, even if he did not know when or how soon he would disburse it." The appealed decision questions: "Why would plaintiff-appellee be keeping so much cash in his possession and why should he pay P142,975.00 all in cash" and then concludes: "We cannot imagine plaintiffappellee taking the risk of loss of this money by keeping it in his house." The contention of the petitioner that the respondent court indulged in speculations and conjectures which are baseless, is impressed with merit. Truly, the very specific term of the contract specified cash payment. The instruction of General Manager Abalos to his assistant, Generoso Bongato, was particularized to the mode of payment which was "cash upon signing of this contract" and the instruction was duly obeyed and complied with. It is certainly whimsical and absurd for the Court of Appeals to speculate and surmise that petitioner ought not to have brought and produced the cash money and should not even have such cash money in his possession. A review of the appellate court's findings is, therefore, justified and warranted. Respondents court is also taken to task for ignoring or suppressing the testimony of Manuel Chua Lim, son of petitioner and a 24-year old graduate of Bachelor of Science in Commerce, major in Accounting, who accompanied his father to the cashier's office of respondent company and witnessed the payment of the money in cash by his father to the cashier, Teodoro Garcia, in the presence of Generoso Bongato and Manager Abalos, saw the


signing of the contract and that thereafter, the four (4) delivery orders were given to his father, including a signed copy of the contract, Exhibit "A". Admittedly, this piece of evidence which is clear, positive and convincing was never considered by the court which was its legal duty to evaluate and appreciate, considering that the presence of Manuel Chua Lim and his testimony was not directly denied nor disputed by any of the officials so named and their witnesses, Hence, We find petitioner's contention that the court's omission among other grave and serious prejudicial errors pointed by petitioner justify the reversal of the appealed judgment. to be tenable. We affirm the decision of the trial court in ruling that petitioner has paid in cash the sum of P142,975.00 to respondent company for the purchase of 4,085 piculs of H-2 sugar and is entitled to the delivery of 350 piculs of H-2 sugar or to be paid the sum of P12,250.00 plus legal interest from November 13, 1970 until fully paid, at the option of petitioner. On the second cause of action, the judgment of the appellate court is correct insofar as it orders the respondent company to return to the petitioner the latter's deposit of P55,000.00 but should be modified to include payment of legal interest from January 20, 1971 until fully paid and giving the option to petitioner either to receive the money or take delivery of 1,000 piculs of export sugar from respondent company. On the third cause of action, the appealed judgment is also correct but the same is likewise modified to include payment of legal interest on the sum of P6,400.00 from June 3, 1970 until fully paid, or to take delivery from respondent the 160 piculs of H-3 sugar, at the option of the petitioner. On the fourth cause of action, the judgment of the Court of Appeals finding respondent company liable to petitioner for the sum of P60,592.30 for materials and supplies which the latter supplied to it for the months of January, February, March and April, 1971 is also correct. The second portion under paragraph (4) of the judgment is set aside, as well as paragraph (5) thereof which ordered petitioner to pay attorney's fees,

In other words, the decision of the trial court being in accordance with the evidence established and the law applicable, the same is hereby reinstated in toto, WHEREFORE, IN VIEW OF THE FOREGOING, We hereby reverse and set aside paragraph (1) and the second portion of paragraph (4) of the appealed judgment, and modify the remaining portions of said judgment. Judgment is hereby rendered (1) On the first cause of action., ordering the respondent to immediately deliver to petitioner the 350 piculs of H-2 sugar or to pay petitioner the sum of P12,250.00 plus legal rate of interest from November 13, 1970, until fully paid. giving unto the petitioner the option to choose whether to receive the sugar or to receive the payment corresponding to the same: (2) On the second cause of action, ordering the respondent to deliver immediately to the petitioner the 1,000 piculs of export sugar or to pay the petitioner the sum of P55,000.00 with legal rate of interest from January 20, 1971, but giving the option or choice to the petitioner; (3) With respect to the third cause of action, ordering the respondent to deliver to the petitioner the 160 piculs of H-3 sugar or to pay to petitioner the sum of P6,400.00 with legal rate of interest from June 3. 1970, but the option again belonging to the petitioner; (4) On the fourth cause of action ordering the respondent to pay to the, petitioner the sum of P60,592.30 with interest at 12% per annum from the filing of the complaint and to pay attorney's fees of 25% of the principal obligation, that is, the sum of P15,143.08; (5) On the fifth and sixth causes of action, ordering the respondent to pay to the petitioner the sum of P25,000.00 as damages and to pay another sum of P15,000.00 as attorney's fees, the said fees referring to the first, second and third causes of action. Costs against respondent. SO ORDERED. Teehankee (Chairman), Makasiar, Fernandez and De Castro, JJ., concur.


154. G.R. No. L-20620 August 15, 1974 REPUBLIC OF THE PHILIPPINES, plaintiff-appellant, vs. CARMEN M. VDA. DE CASTELLVI, ET AL., defendantsappellees. Office of the Solicitor General for plaintiff-appellant. C.A. Mendoza & A. V. Raquiza and Alberto Cacnio & Associates for defendant-appellees. ZALDIVAR, J.:p Appeal from the decision of the Court of First Instance of Pampanga in its Civil Case No. 1623, an expropriation proceeding. Plaintiff-appellant, the Republic of the Philippines, (hereinafter referred to as the Republic) filed, on June 26, 1959, a complaint for eminent domain against defendant-appellee, Carmen M. Vda. de Castellvi, judicial administratrix of the estate of the late Alfonso de Castellvi (hereinafter referred to as Castellvi), over a parcel of land situated in the barrio of San Jose, Floridablanca, Pampanga, described as follows: A parcel of land, Lot No. 199-B Bureau of Lands Plan Swo 23666. Bounded on the NE by Maria Nieves Toledo-Gozun; on the SE by national road; on the SW by AFP reservation, and on the NW by AFP reservation. Containing an area of 759,299 square meters, more or less, and registered in the name of Alfonso Castellvi under TCT No. 13631 of the Register of Pampanga ...; and against defendant-appellee Maria Nieves Toledo Gozun (hereinafter referred to as Toledo-Gozun over two parcels of land described as follows: A parcel of land (Portion Lot Blk-1, Bureau of Lands Plan Psd, 26254. Bounded on the NE by Lot 3, on the SE by Lot 3; on the SW by Lot 1-B, Blk. 2 (equivalent to Lot 199-B Swo 23666; on the

NW by AFP military reservation. Containing an area of 450,273 square meters, more or less and registered in the name of Maria Nieves Toledo-Gozun under TCT No. 8708 of the Register of Deeds of Pampanga. ..., and A parcel of land (Portion of lot 3, Blk-1, Bureau of Lands Plan Psd 26254. Bounded on the NE by Lot No. 3, on the SE by school lot and national road, on the SW by Lot 1-B Blk 2 (equivalent to Lot 199-B Swo 23666), on the NW by Lot 1-B, Blk-1. Containing an area of 88,772 square meters, more or less, and registered in the name of Maria Nieves Toledo Gozun under TCT No. 8708 of the Register of Deeds of Pampanga, .... In its complaint, the Republic alleged, among other things, that the fair market value of the above-mentioned lands, according to the Committee on Appraisal for the Province of Pampanga, was not more than P2,000 per hectare, or a total market value of P259,669.10; and prayed, that the provisional value of the lands be fixed at P259.669.10, that the court authorizes plaintiff to take immediate possession of the lands upon deposit of that amount with the Provincial Treasurer of Pampanga; that the court appoints three commissioners to ascertain and report to the court the just compensation for the property sought to be expropriated, and that the court issues thereafter a final order of condemnation. On June 29, 1959 the trial court issued an order fixing the provisional value of the lands at P259,669.10. In her "motion to dismiss" filed on July 14, 1959, Castellvi alleged, among other things, that the land under her administration, being a residential land, had a fair market value of P15.00 per square meter, so it had a total market value of P11,389,485.00; that the Republic, through the Armed Forces of the Philippines, particularly the Philippine Air Force, had been, despite repeated demands, illegally occupying her property since July 1, 1956, thereby preventing her from using and disposing of it, thus causing her damages by way of unrealized profits. This defendant prayed that the complaint be dismissed, or that the Republic be ordered to pay her P15.00 per square meter, or a total of


P11,389,485.00, plus interest thereon at 6% per annum from July 1, 1956; that the Republic be ordered to pay her P5,000,000.00 as unrealized profits, and the costs of the suit. By order of the trial court, dated August, 1959, Amparo C. Diaz, Dolores G. viuda de Gil, Paloma Castellvi, Carmen Castellvi, Rafael Castellvi, Luis Castellvi, Natividad Castellvi de Raquiza, Jose Castellvi and Consuelo Castellvi were allowed to intervene as parties defendants. Subsequently, Joaquin V. Gozun, Jr., husband of defendant Nieves Toledo Gozun, was also allowed by the court to intervene as a party defendant. After the Republic had deposited with the Provincial Treasurer of Pampanga the amount of P259,669.10, the trial court ordered that the Republic be placed in possession of the lands. The Republic was actually placed in possession of the lands on August 10, 1959. 1 In her "motion to dismiss", dated October 22, 1959, ToledoGozun alleged, among other things, that her two parcels of land were residential lands, in fact a portion with an area of 343,303 square meters had already been subdivided into different lots for sale to the general public, and the remaining portion had already been set aside for expansion sites of the already completed subdivisions; that the fair market value of said lands was P15.00 per square meter, so they had a total market value of P8,085,675.00; and she prayed that the complaint be dismissed, or that she be paid the amount of P8,085,675.00, plus interest thereon at the rate of 6% per annum from October 13, 1959, and attorney's fees in the amount of P50,000.00. Intervenors Jose Castellvi and Consuelo Castellvi in their answer, filed on February 11, 1960, and also intervenor Joaquin Gozun, Jr., husband of defendant Maria Nieves Toledo-Gozun, in his motion to dismiss, dated May 27, 1960, all alleged that the value of the lands sought to be expropriated was at the rate of P15.00 per square meter. On November 4, 1959, the trial court authorized the Provincial Treasurer of Pampanga to pay defendant Toledo-Gozun the sum

of P107,609.00 as provisional value of her lands. 2 On May 16, 1960 the trial Court authorized the Provincial Treasurer of Pampanga to pay defendant Castellvi the amount of P151,859.80 as provisional value of the land under her administration, and ordered said defendant to deposit the amount with the Philippine National Bank under the supervision of the Deputy Clerk of Court. In another order of May 16, 1960 the trial Court entered an order of condemnation. 3 The trial Court appointed three commissioners: Atty. Amadeo Yuzon, Clerk of Court, as commissioner for the court; Atty. Felicisimo G. Pamandanan, counsel of the Philippine National Bank Branch at Floridablanca, for the plaintiff; and Atty. Leonardo F. Lansangan, Filipino legal counsel at Clark Air Base, for the defendants. The Commissioners, after having qualified themselves, proceeded to the performance of their duties. On March 15,1961 the Commissioners submitted their report and recommendation, wherein, after having determined that the lands sought to be expropriated were residential lands, they recommended unanimously that the lowest price that should be paid was P10.00 per square meter, for both the lands of Castellvi and Toledo-Gozun; that an additional P5,000.00 be paid to Toledo-Gozun for improvements found on her land; that legal interest on the compensation, computed from August 10, 1959, be paid after deducting the amounts already paid to the owners, and that no consequential damages be awarded. 4 The Commissioners' report was objected to by all the parties in the case — by defendants Castellvi and Toledo-Gozun, who insisted that the fair market value of their lands should be fixed at P15.00 per square meter; and by the Republic, which insisted that the price to be paid for the lands should be fixed at P0.20 per square meter. 5 After the parties-defendants and intervenors had filed their respective memoranda, and the Republic, after several extensions of time, had adopted as its memorandum its objections to the report of the Commissioners, the trial court, on May 26, 1961, rendered its decision 6 the dispositive portion of


which reads as follows: WHEREFORE, taking into account all the foregoing circumstances, and that the lands are titled, ... the rising trend of land values ..., and the lowered purchasing power of the Philippine peso, the court finds that the unanimous recommendation of the commissioners of ten (P10.00) pesos per square meter for the three lots of the defendants subject of this action is fair and just. xxx xxx xxx The plaintiff will pay 6% interest per annum on the total value of the lands of defendant Toledo-Gozun since (sic) the amount deposited as provisional value from August 10, 1959 until full payment is made to said defendant or deposit therefor is made in court. In respect to the defendant Castellvi, interest at 6% per annum will also be paid by the plaintiff to defendant Castellvi from July 1, 1956 when plaintiff commenced its illegal possession of the Castellvi land when the instant action had not yet been commenced to July 10, 1959 when the provisional value thereof was actually deposited in court, on the total value of the said (Castellvi) land as herein adjudged. The same rate of interest shall be paid from July 11, 1959 on the total value of the land herein adjudged minus the amount deposited as provisional value, or P151,859.80, such interest to run until full payment is made to said defendant or deposit therefor is made in court. All the intervenors having failed to produce evidence in support of their respective interventions, said interventions are ordered dismissed. The costs shall be charged to the plaintiff. On June 21, 1961 the Republic filed a motion for a new trial and/or reconsideration, upon the grounds of newly-discovered evidence, that the decision was not supported by the evidence, and that the decision was against the law, against which motion defendants Castellvi and Toledo-Gozun filed their respective oppositions. On July 8, 1961 when the motion of the Republic for new trial and/or reconsideration was called for hearing, the

Republic filed a supplemental motion for new trial upon the ground of additional newly-discovered evidence. This motion for new trial and/or reconsideration was denied by the court on July 12, 1961. On July 17, 1961 the Republic gave notice of its intention to appeal from the decision of May 26, 1961 and the order of July 12, 1961. Defendant Castellvi also filed, on July 17, 1961, her notice of appeal from the decision of the trial court. The Republic filed various ex-parte motions for extension of time within which to file its record on appeal. The Republic's record on appeal was finally submitted on December 6, 1961. Defendants Castellvi and Toledo-Gozun filed not only a joint opposition to the approval of the Republic's record on appeal, but also a joint memorandum in support of their opposition. The Republic also filed a memorandum in support of its prayer for the approval of its record on appeal. On December 27, 1961 the trial court issued an order declaring both the record on appeal filed by the Republic, and the record on appeal filed by defendant Castellvi as having been filed out of time, thereby dismissing both appeals. On January 11, 1962 the Republic filed a "motion to strike out the order of December 27, 1961 and for reconsideration", and subsequently an amended record on appeal, against which motion the defendants Castellvi and Toledo-Gozun filed their opposition. On July 26, 1962 the trial court issued an order, stating that "in the interest of expediency, the questions raised may be properly and finally determined by the Supreme Court," and at the same time it ordered the Solicitor General to submit a record on appeal containing copies of orders and pleadings specified therein. In an order dated November 19, 1962, the trial court approved the Republic's record on appeal as amended. Defendant Castellvi did not insist on her appeal. Defendant Toledo-Gozun did not appeal. The motion to dismiss the Republic's appeal was reiterated by appellees Castellvi and Toledo-Gozun before this Court, but this Court denied the motion.


In her motion of August 11, 1964, appellee Castellvi sought to increase the provisional value of her land. The Republic, in its comment on Castellvi's motion, opposed the same. This Court denied Castellvi's motion in a resolution dated October 2,1964. The motion of appellees, Castellvi and Toledo-Gozun, dated October 6, 1969, praying that they be authorized to mortgage the lands subject of expropriation, was denied by this Court or October 14, 1969. On February 14, 1972, Attys. Alberto Cacnio, and Associates, counsel for the estate of the late Don Alfonso de Castellvi in the expropriation proceedings, filed a notice of attorney's lien, stating that as per agreement with the administrator of the estate of Don Alfonso de Castellvi they shall receive by way of attorney's fees, "the sum equivalent to ten per centum of whatever the court may finally decide as the expropriated price of the property subject matter of the case." --------- Before this Court, the Republic contends that the lower court erred: 1. In finding the price of P10 per square meter of the lands subject of the instant proceedings as just compensation; 2. In holding that the "taking" of the properties under expropriation commenced with the filing of this action; 3. In ordering plaintiff-appellant to pay 6% interest on the adjudged value of the Castellvi property to start from July of 1956; 4. In denying plaintiff-appellant's motion for new trial based on newly discovered evidence. In its brief, the Republic discusses the second error assigned as the first issue to be considered. We shall follow the sequence of the Republic's discussion. 1. In support of the assigned error that the lower court erred in holding that the "taking" of the properties under expropriation commenced with the filing of the complaint in this case, the Republic argues that the "taking" should be reckoned from the year 1947 when by virtue of a special lease agreement between

the Republic and appellee Castellvi, the former was granted the "right and privilege" to buy the property should the lessor wish to terminate the lease, and that in the event of such sale, it was stipulated that the fair market value should be as of the time of occupancy; and that the permanent improvements amounting to more that half a million pesos constructed during a period of twelve years on the land, subject of expropriation, were indicative of an agreed pattern of permanency and stability of occupancy by the Philippine Air Force in the interest of national Security. 7 Appellee Castellvi, on the other hand, maintains that the "taking" of property under the power of eminent domain requires two essential elements, to wit: (1) entrance and occupation by condemn or upon the private property for more than a momentary or limited period, and (2) devoting it to a public use in such a way as to oust the owner and deprive him of all beneficial enjoyment of the property. This appellee argues that in the instant case the first element is wanting, for the contract of lease relied upon provides for a lease from year to year; that the second element is also wanting, because the Republic was paying the lessor Castellvi a monthly rental of P445.58; and that the contract of lease does not grant the Republic the "right and privilege" to buy the premises "at the value at the time of occupancy." 8 Appellee Toledo-Gozun did not comment on the Republic's argument in support of the second error assigned, because as far as she was concerned the Republic had not taken possession of her lands prior to August 10, 1959. 9 In order to better comprehend the issues raised in the appeal, in so far as the Castellvi property is concerned, it should be noted that the Castellvi property had been occupied by the Philippine Air Force since 1947 under a contract of lease, typified by the contract marked Exh. 4-Castellvi, the pertinent portions of which read: CONTRACT OF LEASE This AGREEMENT OF LEASE MADE AND ENTERED into by and


between INTESTATE ESTATE OF ALFONSO DE CASTELLVI, represented by CARMEN M. DE CASTELLVI, Judicial Administratrix ... hereinafter called the LESSOR and THE REPUBLIC OF THE PHILIPPINES represented by MAJ. GEN. CALIXTO DUQUE, Chief of Staff of the ARMED FORCES OF THE PHILIPPINES, hereinafter called the LESSEE, WITNESSETH: 1. For and in consideration of the rentals hereinafter reserved and the mutual terms, covenants and conditions of the parties, the LESSOR has, and by these presents does, lease and let unto the LESSEE the following described land together with the improvements thereon and appurtenances thereof, viz: Un Terreno, Lote No. 27 del Plano de subdivision Psu 34752, parte de la hacienda de Campauit, situado en el Barrio de San Jose, Municipio de Floridablanca Pampanga. ... midiendo una extension superficial de cuatro milliones once mil cuatro cientos trienta y cinco (4,001,435) [sic] metros cuadrados, mas o menos. Out of the above described property, 75.93 hectares thereof are actually occupied and covered by this contract. . Above lot is more particularly described in TCT No. 1016, province of Pampanga ... of which premises, the LESSOR warrants that he/she/they/is/are the registered owner(s) and with full authority to execute a contract of this nature. 2. The term of this lease shall be for the period beginning July 1, 1952 the date the premises were occupied by the PHILIPPINE AIR FORCE, AFP until June 30, 1953, subject to renewal for another year at the option of the LESSEE or unless sooner terminated by the LESSEE as hereinafter provided. 3. The LESSOR hereby warrants that the LESSEE shall have quiet, peaceful and undisturbed possession of the demised premises throughout the full term or period of this lease and the LESSOR undertakes without cost to the LESSEE to eject all trespassers, but should the LESSOR fail to do so, the LESSEE at its option may proceed to do so at the expense of the LESSOR. The LESSOR

further agrees that should he/she/they sell or encumber all or any part of the herein described premises during the period of this lease, any conveyance will be conditioned on the right of the LESSEE hereunder. 4. The LESSEE shall pay to the LESSOR as monthly rentals under this lease the sum of FOUR HUNDRED FIFTY-FIVE PESOS & 58/100 (P455.58) ... 5. The LESSEE may, at any time prior to the termination of this lease, use the property for any purpose or purposes and, at its own costs and expense make alteration, install facilities and fixtures and errect additions ... which facilities or fixtures ... so placed in, upon or attached to the said premises shall be and remain property of the LESSEE and may be removed therefrom by the LESSEE prior to the termination of this lease. The LESSEE shall surrender possession of the premises upon the expiration or termination of this lease and if so required by the LESSOR, shall return the premises in substantially the same condition as that existing at the time same were first occupied by the AFP, reasonable and ordinary wear and tear and damages by the elements or by circumstances over which the LESSEE has no control excepted: PROVIDED, that if the LESSOR so requires the return of the premises in such condition, the LESSOR shall give written notice thereof to the LESSEE at least twenty (20) days before the termination of the lease and provided, further, that should the LESSOR give notice within the time specified above, the LESSEE shall have the right and privilege to compensate the LESSOR at the fair value or the equivalent, in lieu of performance of its obligation, if any, to restore the premises. Fair value is to be determined as the value at the time of occupancy less fair wear and tear and depreciation during the period of this lease. 6. The LESSEE may terminate this lease at any time during the term hereof by giving written notice to the LESSOR at least thirty (30) days in advance ... 7. The LESSEE should not be responsible, except under special legislation for any damages to the premises by reason of combat operations, acts of GOD, the elements or other acts and deeds not


due to the negligence on the part of the LESSEE. 8. This LEASE AGREEMENT supersedes and voids any and all agreements and undertakings, oral or written, previously entered into between the parties covering the property herein leased, the same having been merged herein. This AGREEMENT may not be modified or altered except by instrument in writing only duly signed by the parties. 10 It was stipulated by the parties, that "the foregoing contract of lease (Exh. 4, Castellvi) is 'similar in terms and conditions, including the date', with the annual contracts entered into from year to year between defendant Castellvi and the Republic of the Philippines (p. 17, t.s.n., Vol. III)". 11 It is undisputed, therefore, that the Republic occupied Castellvi's land from July 1, 1947, by virtue of the above-mentioned contract, on a year to year basis (from July 1 of each year to June 30 of the succeeding year) under the terms and conditions therein stated. Before the expiration of the contract of lease on June 30, 1956 the Republic sought to renew the same but Castellvi refused. When the AFP refused to vacate the leased premises after the termination of the contract, on July 11, 1956, Castellvi wrote to the Chief of Staff, AFP, informing the latter that the heirs of the property had decided not to continue leasing the property in question because they had decided to subdivide the land for sale to the general public, demanding that the property be vacated within 30 days from receipt of the letter, and that the premises be returned in substantially the same condition as before occupancy (Exh. 5 — Castellvi). A follow-up letter was sent on January 12, 1957, demanding the delivery and return of the property within one month from said date (Exh. 6 Castellvi). On January 30, 1957, Lieutenant General Alfonso Arellano, Chief of Staff, answered the letter of Castellvi, saying that it was difficult for the army to vacate the premises in view of the permanent installations and other facilities worth almost P500,000.00 that were erected and already established on the property, and that, there being no other recourse, the acquisition of the property by means of expropriation proceedings would be recommended to

the President (Exhibit "7" — Castellvi). Defendant Castellvi then brought suit in the Court of First Instance of Pampanga, in Civil Case No. 1458, to eject the Philippine Air Force from the land. While this ejectment case was pending, the Republic instituted these expropriation proceedings, and, as stated earlier in this opinion, the Republic was placed in possession of the lands on August 10, 1959, On November 21, 1959, the Court of First Instance of Pampanga, dismissed Civil Case No. 1458, upon petition of the parties, in an order which, in part, reads as follows: 1. Plaintiff has agreed, as a matter of fact has already signed an agreement with defendants, whereby she has agreed to receive the rent of the lands, subject matter of the instant case from June 30, 1966 up to 1959 when the Philippine Air Force was placed in possession by virtue of an order of the Court upon depositing the provisional amount as fixed by the Provincial Appraisal Committee with the Provincial Treasurer of Pampanga; 2. That because of the above-cited agreement wherein the administratrix decided to get the rent corresponding to the rent from 1956 up to 1959 and considering that this action is one of illegal detainer and/or to recover the possession of said land by virtue of non-payment of rents, the instant case now has become moot and academic and/or by virtue of the agreement signed by plaintiff, she has waived her cause of action in the above-entitled case. 12 The Republic urges that the "taking " of Castellvi's property should be deemed as of the year 1947 by virtue of afore-quoted lease agreement. In American Jurisprudence, Vol. 26, 2nd edition, Section 157, on the subject of "Eminent Domain, we read the definition of "taking" (in eminent domain) as follows: Taking' under the power of eminent domain may be defined generally as entering upon private property for more than a momentary period, and, under the warrant or color of legal authority, devoting it to a public use, or otherwise informally appropriating or injuriously affecting it in such a way as substantially to oust the owner and deprive him of all beneficial


enjoyment thereof. 13 Pursuant to the aforecited authority, a number of circumstances must be present in the "taking" of property for purposes of eminent domain. First, the expropriator must enter a private property. This circumstance is present in the instant case, when by virtue of the lease agreement the Republic, through the AFP, took possession of the property of Castellvi. Second, the entrance into private property must be for more than a momentary period. "Momentary" means, "lasting but a moment; of but a moment's duration" (The Oxford English Dictionary, Volume VI, page 596); "lasting a very short time; transitory; having a very brief life; operative or recurring at every moment" (Webster's Third International Dictionary, 1963 edition.) The word "momentary" when applied to possession or occupancy of (real) property should be construed to mean "a limited period" — not indefinite or permanent. The aforecited lease contract was for a period of one year, renewable from year to year. The entry on the property, under the lease, is temporary, and considered transitory. The fact that the Republic, through the AFP, constructed some installations of a permanent nature does not alter the fact that the entry into the land was transitory, or intended to last a year, although renewable from year to year by consent of 'The owner of the land. By express provision of the lease agreement the Republic, as lessee, undertook to return the premises in substantially the same condition as at the time the property was first occupied by the AFP. It is claimed that the intention of the lessee was to occupy the land permanently, as may be inferred from the construction of permanent improvements. But this "intention" cannot prevail over the clear and express terms of the lease contract. Intent is to be deduced from the language employed by the parties, and the terms 'of the contract, when unambiguous, as in the instant case, are conclusive in the absence of averment and proof of mistake or fraud — the question being not what the intention was, but what is expressed in the language used. (City of Manila v. Rizal Park

Co., Inc., 53 Phil. 515, 525); Magdalena Estate, Inc. v. Myrick, 71 Phil. 344, 348). Moreover, in order to judge the intention of the contracting parties, their contemporaneous and subsequent acts shall be principally considered (Art. 1371, Civil Code). If the intention of the lessee (Republic) in 1947 was really to occupy permanently Castellvi's property, why was the contract of lease entered into on year to year basis? Why was the lease agreement renewed from year to year? Why did not the Republic expropriate this land of Castellvi in 1949 when, according to the Republic itself, it expropriated the other parcels of land that it occupied at the same time as the Castellvi land, for the purpose of converting them into a jet air base? 14 It might really have been the intention of the Republic to expropriate the lands in question at some future time, but certainly mere notice - much less an implied notice — of such intention on the part of the Republic to expropriate the lands in the future did not, and could not, bind the landowner, nor bind the land itself. The expropriation must be actually commenced in court (Republic vs. Baylosis, et al., 96 Phil. 461, 484). Third, the entry into the property should be under warrant or color of legal authority. This circumstance in the "taking" may be considered as present in the instant case, because the Republic entered the Castellvi property as lessee. Fourth, the property must be devoted to a public use or otherwise informally appropriated or injuriously affected. It may be conceded that the circumstance of the property being devoted to public use is present because the property was used by the air force of the AFP. Fifth, the utilization of the property for public use must be in such a way as to oust the owner and deprive him of all beneficial enjoyment of the property. In the instant case, the entry of the Republic into the property and its utilization of the same for public use did not oust Castellvi and deprive her of all beneficial enjoyment of the property. Castellvi remained as owner, and was continuously recognized as owner by the Republic, as shown by the renewal of the lease contract from year to year, and by the


provision in the lease contract whereby the Republic undertook to return the property to Castellvi when the lease was terminated. Neither was Castellvi deprived of all the beneficial enjoyment of the property, because the Republic was bound to pay, and had been paying, Castellvi the agreed monthly rentals until the time when it filed the complaint for eminent domain on June 26, 1959. It is clear, therefore, that the "taking" of Catellvi's property for purposes of eminent domain cannot be considered to have taken place in 1947 when the Republic commenced to occupy the property as lessee thereof. We find merit in the contention of Castellvi that two essential elements in the "taking" of property under the power of eminent domain, namely: (1) that the entrance and occupation by the condemnor must be for a permanent, or indefinite period, and (2) that in devoting the property to public use the owner was ousted from the property and deprived of its beneficial use, were not present when the Republic entered and occupied the Castellvi property in 1947. Untenable also is the Republic's contention that although the contract between the parties was one of lease on a year to year basis, it was "in reality a more or less permanent right to occupy the premises under the guise of lease with the 'right and privilege' to buy the property should the lessor wish to terminate the lease," and "the right to buy the property is merged as an integral part of the lease relationship ... so much so that the fair market value has been agreed upon, not, as of the time of purchase, but as of the time of occupancy" 15 We cannot accept the Republic's contention that a lease on a year to year basis can give rise to a permanent right to occupy, since by express legal provision a lease made for a determinate time, as was the lease of Castellvi's land in the instant case, ceases upon the day fixed, without need of a demand (Article 1669, Civil Code). Neither can it be said that the right of eminent domain may be exercised by simply leasing the premises to be expropriated (Rule 67, Section 1, Rules of Court). Nor can it be accepted that the Republic would enter into a contract of lease where its real intention was to buy,

or why the Republic should enter into a simulated contract of lease ("under the guise of lease", as expressed by counsel for the Republic) when all the time the Republic had the right of eminent domain, and could expropriate Castellvi's land if it wanted to without resorting to any guise whatsoever. Neither can we see how a right to buy could be merged in a contract of lease in the absence of any agreement between the parties to that effect. To sustain the contention of the Republic is to sanction a practice whereby in order to secure a low price for a land which the government intends to expropriate (or would eventually expropriate) it would first negotiate with the owner of the land to lease the land (for say ten or twenty years) then expropriate the same when the lease is about to terminate, then claim that the "taking" of the property for the purposes of the expropriation be reckoned as of the date when the Government started to occupy the property under the lease, and then assert that the value of the property being expropriated be reckoned as of the start of the lease, in spite of the fact that the value of the property, for many good reasons, had in the meantime increased during the period of the lease. This would be sanctioning what obviously is a deceptive scheme, which would have the effect of depriving the owner of the property of its true and fair market value at the time when the expropriation proceedings were actually instituted in court. The Republic's claim that it had the "right and privilege" to buy the property at the value that it had at the time when it first occupied the property as lessee nowhere appears in the lease contract. What was agreed expressly in paragraph No. 5 of the lease agreement was that, should the lessor require the lessee to return the premises in the same condition as at the time the same was first occupied by the AFP, the lessee would have the "right and privilege" (or option) of paying the lessor what it would fairly cost to put the premises in the same condition as it was at the commencement of the lease, in lieu of the lessee's performance of the undertaking to put the land in said condition. The "fair value" at the time of occupancy, mentioned in the lease agreement, does not refer to the value of the property if bought


by the lessee, but refers to the cost of restoring the property in the same condition as of the time when the lessee took possession of the property. Such fair value cannot refer to the purchase price, for purchase was never intended by the parties to the lease contract. It is a rule in the interpretation of contracts that "However general the terms of a contract may be, they shall not be understood to comprehend things that are distinct and cases that are different from those upon which the parties intended to agree" (Art. 1372, Civil Code). We hold, therefore, that the "taking" of the Castellvi property should not be reckoned as of the year 1947 when the Republic first occupied the same pursuant to the contract of lease, and that the just compensation to be paid for the Castellvi property should not be determined on the basis of the value of the property as of that year. The lower court did not commit an error when it held that the "taking" of the property under expropriation commenced with the filing of the complaint in this case. Under Section 4 of Rule 67 of the Rules of Court, 16 the "just compensation" is to be determined as of the date of the filing of the complaint. This Court has ruled that when the taking of the property sought to be expropriated coincides with the commencement of the expropriation proceedings, or takes place subsequent to the filing of the complaint for eminent domain, the just compensation should be determined as of the date of the filing of the complaint. (Republic vs. Philippine National Bank, L14158, April 12, 1961, 1 SCRA 957, 961-962). In the instant case, it is undisputed that the Republic was placed in possession of the Castellvi property, by authority of the court, on August 10, 1959. The "taking" of the Castellvi property for the purposes of determining the just compensation to be paid must, therefore, be reckoned as of June 26, 1959 when the complaint for eminent domain was filed. Regarding the two parcels of land of Toledo-Gozun, also sought to be expropriated, which had never been under lease to the Republic, the Republic was placed in possession of said lands, also by authority of the court, on August 10, 1959, The taking of

those lands, therefore, must also be reckoned as of June 26, 1959, the date of the filing of the complaint for eminent domain. 2. Regarding the first assigned error — discussed as the second issue — the Republic maintains that, even assuming that the value of the expropriated lands is to be determined as of June 26, 1959, the price of P10.00 per square meter fixed by the lower court "is not only exhorbitant but also unconscionable, and almost fantastic". On the other hand, both Castellvi and ToledoGozun maintain that their lands are residential lands with a fair market value of not less than P15.00 per square meter. The lower court found, and declared, that the lands of Castellvi and Toledo-Gozun are residential lands. The finding of the lower court is in consonance with the unanimous opinion of the three commissioners who, in their report to the court, declared that the lands are residential lands. The Republic assails the finding that the lands are residential, contending that the plans of the appellees to convert the lands into subdivision for residential purposes were only on paper, there being no overt acts on the part of the appellees which indicated that the subdivision project had been commenced, so that any compensation to be awarded on the basis of the plans would be speculative. The Republic's contention is not well taken. We find evidence showing that the lands in question had ceased to be devoted to the production of agricultural crops, that they had become adaptable for residential purposes, and that the appellees had actually taken steps to convert their lands into residential subdivisions even before the Republic filed the complaint for eminent domain. In the case of City of Manila vs. Corrales (32 Phil. 82, 98) this Court laid down basic guidelines in determining the value of the property expropriated for public purposes. This Court said: In determining the value of land appropriated for public purposes, the same consideration are to be regarded as in a sale of property between private parties. The inquiry, in such cases, must be what is the property worth in the market, viewed not merely with reference to the uses to which it is at the time applied, but


with reference to the uses to which it is plainly adapted, that is to say, What is it worth from its availability for valuable uses? So many and varied are the circumstances to be taken into account in determining the value of property condemned for public purposes, that it is practically impossible to formulate a rule to govern its appraisement in all cases. Exceptional circumstances will modify the most carefully guarded rule, but, as a general thing, we should say that the compensation of the owner is to be estimated by reference to the use for which the property is suitable, having regard to the existing business or wants of the community, or such as may be reasonably expected in the immediate future. (Miss. and Rum River Boom Co. vs. Patterson, 98 U.S., 403). In expropriation proceedings, therefore, the owner of the land has the right to its value for the use for which it would bring the most in the market. 17 The owner may thus show every advantage that his property possesses, present and prospective, in order that the price it could be sold for in the market may be satisfactorily determined. 18 The owner may also show that the property is suitable for division into village or town lots. 19 The trial court, therefore, correctly considered, among other circumstances, the proposed subdivision plans of the lands sought to be expropriated in finding that those lands are residential lots. This finding of the lower court is supported not only by the unanimous opinion of the commissioners, as embodied in their report, but also by the Provincial Appraisal Committee of the province of Pampanga composed of the Provincial Treasurer, the Provincial Auditor and the District Engineer. In the minutes of the meeting of the Provincial Appraisal Committee, held on May 14, 1959 (Exh. 13-Castellvi) We read in its Resolution No. 10 the following: 3. Since 1957 the land has been classified as residential in view of its proximity to the air base and due to the fact that it was not being devoted to agriculture. In fact, there is a plan to convert it into a subdivision for residential purposes. The taxes due on the property have been paid based on its classification as residential

land; The evidence shows that Castellvi broached the idea of subdividing her land into residential lots as early as July 11, 1956 in her letter to the Chief of Staff of the Armed Forces of the Philippines. (Exh. 5-Castellvi) As a matter of fact, the layout of the subdivision plan was tentatively approved by the National Planning Commission on September 7, 1956. (Exh. 8-Castellvi). The land of Castellvi had not been devoted to agriculture since 1947 when it was leased to the Philippine Army. In 1957 said land was classified as residential, and taxes based on its classification as residential had been paid since then (Exh. 13Castellvi). The location of the Castellvi land justifies its suitability for a residential subdivision. As found by the trial court, "It is at the left side of the entrance of the Basa Air Base and bounded on two sides by roads (Exh. 13-Castellvi), paragraphs 1 and 2, Exh. 12-Castellvi), the poblacion, (of Floridablanca) the municipal building, and the Pampanga Sugar Mills are closed by. The barrio schoolhouse and chapel are also near (T.S.N. November 23,1960, p. 68)." 20 The lands of Toledo-Gozun (Lot 1-B and Lot 3) are practically of the same condition as the land of Castellvi. The lands of ToledoGozun adjoin the land of Castellvi. They are also contiguous to the Basa Air Base, and are along the road. These lands are near the barrio schoolhouse, the barrio chapel, the Pampanga Sugar Mills, and the poblacion of Floridablanca (Exhs. 1, 3 and 4-ToledoGozun). As a matter of fact, regarding lot 1-B it had already been surveyed and subdivided, and its conversion into a residential subdivision was tentatively approved by the National Planning Commission on July 8, 1959 (Exhs. 5 and 6 Toledo-Gozun). As early as June, 1958, no less than 32 man connected with the Philippine Air Force among them commissioned officers, noncommission officers, and enlisted men had requested Mr. and Mrs. Joaquin D. Gozun to open a subdivision on their lands in question (Exhs. 8, 8-A to 8-ZZ-Toledo-Gozun). 21 We agree with the findings, and the conclusions, of the lower court that the lands that are the subject of expropriation in the


present case, as of August 10, 1959 when the same were taken possession of by the Republic, were residential lands and were adaptable for use as residential subdivisions. Indeed, the owners of these lands have the right to their value for the use for which they would bring the most in the market at the time the same were taken from them. The most important issue to be resolved in the present case relates to the question of what is the just compensation that should be paid to the appellees. The Republic asserts that the fair market value of the lands of the appellees is P.20 per square meter. The Republic cites the case of Republic vs. Narciso, et al., L-6594, which this Court decided on May 18, 1956. The Narciso case involved lands that belonged to Castellvi and Toledo-Gozun, and to one Donata Montemayor, which were expropriated by the Republic in 1949 and which are now the site of the Basa Air Base. In the Narciso case this Court fixed the fair market value at P.20 per square meter. The lands that are sought to be expropriated in the present case being contiguous to the lands involved in the Narciso case, it is the stand of the Republic that the price that should be fixed for the lands now in question should also be at P.20 per square meter. We can not sustain the stand of the Republic. We find that the price of P.20 per square meter, as fixed by this Court in the Narciso case, was based on the allegation of the defendants (owners) in their answer to the complaint for eminent domain in that case that the price of their lands was P2,000.00 per hectare and that was the price that they asked the court to pay them. This Court said, then, that the owners of the land could not be given more than what they had asked, notwithstanding the recommendation of the majority of the Commission on Appraisal — which was adopted by the trial court — that the fair market value of the lands was P3,000.00 per hectare. We also find that the price of P.20 per square meter in the Narciso case was considered the fair market value of the lands as of the year 1949 when the expropriation proceedings were instituted, and at that time the lands were classified as sugar lands, and assessed for taxation purposes at around P400.00 per hectare, or P.04 per

square meter. 22 While the lands involved in the present case, like the lands involved in the Narciso case, might have a fair market value of P.20 per square meter in 1949, it can not be denied that ten years later, in 1959, when the present proceedings were instituted, the value of those lands had increased considerably. The evidence shows that since 1949 those lands were no longer cultivated as sugar lands, and in 1959 those lands were already classified, and assessed for taxation purposes, as residential lands. In 1959 the land of Castellvi was assessed at P1.00 per square meter. 23 The Republic also points out that the Provincial Appraisal Committee of Pampanga, in its resolution No. 5 of February 15, 1957 (Exhibit D), recommended the sum of P.20 per square meter as the fair valuation of the Castellvi property. We find that this resolution was made by the Republic the basis in asking the court to fix the provisional value of the lands sought to be expropriated at P259,669.10, which was approved by the court. 24 It must be considered, however, that the amount fixed as the provisional value of the lands that are being expropriated does not necessarily represent the true and correct value of the land. The value is only "provisional" or "tentative", to serve as the basis for the immediate occupancy of the property being expropriated by the condemnor. The records show that this resolution No. 5 was repealed by the same Provincial Committee on Appraisal in its resolution No. 10 of May 14, 1959 (Exhibit 13-Castellvi). In that resolution No. 10, the appraisal committee stated that "The Committee has observed that the value of the land in this locality has increased since 1957 ...", and recommended the price of P1.50 per square meter. It follows, therefore, that, contrary to the stand of the Republic, that resolution No. 5 of the Provincial Appraisal Committee can not be made the basis for fixing the fair market value of the lands of Castellvi and Toledo-Gozun. The Republic further relied on the certification of the Acting Assistant Provincial Assessor of Pampanga, dated February 8, 1961 (Exhibit K), to the effect that in 1950 the lands of ToledoGozun were classified partly as sugar land and partly as urban


land, and that the sugar land was assessed at P.40 per square meter, while part of the urban land was assessed at P.40 per square meter and part at P.20 per square meter; and that in 1956 the Castellvi land was classified as sugar land and was assessed at P450.00 per hectare, or P.045 per square meter. We can not also consider this certification of the Acting Assistant Provincial Assessor as a basis for fixing the fair market value of the lands of Castellvi and Toledo-Gozun because, as the evidence shows, the lands in question, in 1957, were already classified and assessed for taxation purposes as residential lands. The certification of the assessor refers to the year 1950 as far as the lands of ToledoGozun are concerned, and to the year 1956 as far as the land of Castellvi is concerned. Moreover, this Court has held that the valuation fixed for the purposes of the assessment of the land for taxation purposes can not bind the landowner where the latter did not intervene in fixing it. 25 On the other hand, the Commissioners, appointed by the court to appraise the lands that were being expropriated, recommended to the court that the price of P10.00 per square meter would be the fair market value of the lands. The commissioners made their recommendation on the basis of their observation after several ocular inspections of the lands, of their own personal knowledge of land values in the province of Pampanga, of the testimonies of the owners of the land, and other witnesses, and of documentary evidence presented by the appellees. Both Castellvi and ToledoGozun testified that the fair market value of their respective land was at P15.00 per square meter. The documentary evidence considered by the commissioners consisted of deeds of sale of residential lands in the town of San Fernando and in Angeles City, in the province of Pampanga, which were sold at prices ranging from P8.00 to P20.00 per square meter (Exhibits 15, 16, 17, 18, 19, 20, 21, 22, 23-Castellvi). The commissioners also considered the decision in Civil Case No. 1531 of the Court of First Instance of Pampanga, entitled Republic vs. Sabina Tablante, which was expropriation case filed on January 13, 1959, involving a parcel of land adjacent to the Clark Air Base in Angeles City, where the

court fixed the price at P18.00 per square meter (Exhibit 14Castellvi). In their report, the commissioners, among other things, said: ... This expropriation case is specially pointed out, because the circumstances and factors involved therein are similar in many respects to the defendants' lands in this case. The land in Civil Case No. 1531 of this Court and the lands in the present case (Civil Case No. 1623) are both near the air bases, the Clark Air Base and the Basa Air Base respectively. There is a national road fronting them and are situated in a first-class municipality. As added advantage it may be said that the Basa Air Base land is very near the sugar mill at Del Carmen, Floridablanca, Pampanga, owned by the Pampanga Sugar Mills. Also just stone's throw away from the same lands is a beautiful vacation spot at Palacol, a sitio of the town of Floridablanca, which counts with a natural swimming pool for vacationists on weekends. These advantages are not found in the case of the Clark Air Base. The defendants' lands are nearer to the poblacion of Floridablanca then Clark Air Base is nearer (sic) to the poblacion of Angeles, Pampanga. The deeds of absolute sale, according to the undersigned commissioners, as well as the land in Civil Case No. 1531 are competent evidence, because they were executed during the year 1959 and before August 10 of the same year. More specifically so the land at Clark Air Base which coincidentally is the subject matter in the complaint in said Civil Case No. 1531, it having been filed on January 13, 1959 and the taking of the land involved therein was ordered by the Court of First Instance of Pampanga on January 15, 1959, several months before the lands in this case were taken by the plaintiffs .... From the above and considering further that the lowest as well as the highest price per square meter obtainable in the market of Pampanga relative to subdivision lots within its jurisdiction in the year 1959 is very well known by the Commissioners, the Commission finds that the lowest price that can be awarded to the lands in question is P10.00 per square meter. 26 The lower court did not altogether accept the findings of the


Commissioners based on the documentary evidence, but it considered the documentary evidence as basis for comparison in determining land values. The lower court arrived at the conclusion that "the unanimous recommendation of the commissioners of ten (P10.00) pesos per square meter for the three lots of the defendants subject of this action is fair and just". 27 In arriving at its conclusion, the lower court took into consideration, among other circumstances, that the lands are titled, that there is a rising trend of land values, and the lowered purchasing power of the Philippine peso. In the case of Manila Railroad Co. vs. Caligsihan, 40 Phil. 326, 328, this Court said: A court of first instance or, on appeal, the Supreme Court, may change or modify the report of the commissioners by increasing or reducing the amount of the award if the facts of the case so justify. While great weight is attached to the report of the commissioners, yet a court may substitute therefor its estimate of the value of the property as gathered from the record in certain cases, as, where the commissioners have applied illegal principles to the evidence submitted to them, or where they have disregarded a clear preponderance of evidence, or where the amount allowed is either palpably inadequate or excessive. 28 The report of the commissioners of appraisal in condemnation proceedings are not binding, but merely advisory in character, as far as the court is concerned. 29 In our analysis of the report of the commissioners, We find points that merit serious consideration in the determination of the just compensation that should be paid to Castellvi and Toledo-Gozun for their lands. It should be noted that the commissioners had made ocular inspections of the lands and had considered the nature and similarities of said lands in relation to the lands in other places in the province of Pampanga, like San Fernando and Angeles City. We cannot disregard the observations of the commissioners regarding the circumstances that make the lands in question suited for residential purposes — their location near the Basa Air Base, just like the lands in Angeles City that are near the Clark Air

Base, and the facilities that obtain because of their nearness to the big sugar central of the Pampanga Sugar mills, and to the flourishing first class town of Floridablanca. It is true that the lands in question are not in the territory of San Fernando and Angeles City, but, considering the facilities of modern communications, the town of Floridablanca may be considered practically adjacent to San Fernando and Angeles City. It is not out of place, therefore, to compare the land values in Floridablanca to the land values in San Fernando and Angeles City, and form an idea of the value of the lands in Floridablanca with reference to the land values in those two other communities. The important factor in expropriation proceeding is that the owner is awarded the just compensation for his property. We have carefully studied the record, and the evidence, in this case, and after considering the circumstances attending the lands in question We have arrived at the conclusion that the price of P10.00 per square meter, as recommended by the commissioners and adopted by the lower court, is quite high. It is Our considered view that the price of P5.00 per square meter would be a fair valuation of the lands in question and would constitute a just compensation to the owners thereof. In arriving at this conclusion We have particularly taken into consideration the resolution of the Provincial Committee on Appraisal of the province of Pampanga informing, among others, that in the year 1959 the land of Castellvi could be sold for from P3.00 to P4.00 per square meter, while the land of Toledo-Gozun could be sold for from P2.50 to P3.00 per square meter. The Court has weighed all the circumstances relating to this expropriations proceedings, and in fixing the price of the lands that are being expropriated the Court arrived at a happy medium between the price as recommended by the commissioners and approved by the court, and the price advocated by the Republic. This Court has also taken judicial notice of the fact that the value of the Philippine peso has considerably gone down since the year 1959. 30 Considering that the lands of Castellvi and Toledo-Gozun are


adjoining each other, and are of the same nature, the Court has deemed it proper to fix the same price for all these lands. 3. The third issue raised by the Republic relates to the payment of interest. The Republic maintains that the lower court erred when it ordered the Republic to pay Castellvi interest at the rate of 6% per annum on the total amount adjudged as the value of the land of Castellvi, from July 1, 1956 to July 10, 1959. We find merit in this assignment of error. In ordering the Republic to pay 6% interest on the total value of the land of Castellvi from July 1, 1956 to July 10, 1959, the lower court held that the Republic had illegally possessed the land of Castellvi from July 1, 1956, after its lease of the land had expired on June 30, 1956, until August 10, 1959 when the Republic was placed in possession of the land pursuant to the writ of possession issued by the court. What really happened was that the Republic continued to occupy the land of Castellvi after the expiration of its lease on June 30, 1956, so much so that Castellvi filed an ejectment case against the Republic in the Court of First Instance of Pampanga. 31 However, while that ejectment case was pending, the Republic filed the complaint for eminent domain in the present case and was placed in possession of the land on August 10, 1959, and because of the institution of the expropriation proceedings the ejectment case was later dismissed. In the order dismissing the ejectment case, the Court of First Instance of Pampanga said: Plaintiff has agreed, as a matter of fact has already signed an agreement with defendants, whereby she had agreed to receive the rent of the lands, subject matter of the instant case from June 30, 1956 up to 1959 when the Philippine Air Force was placed in possession by virtue of an order of the Court upon depositing the provisional amount as fixed by the Provincial Appraisal Committee with the Provincial Treasurer of Pampanga; ... If Castellvi had agreed to receive the rentals from June 30, 1956 to August 10, 1959, she should be considered as having allowed her land to be leased to the Republic until August 10, 1959, and

she could not at the same time be entitled to the payment of interest during the same period on the amount awarded her as the just compensation of her land. The Republic, therefore, should pay Castellvi interest at the rate of 6% per annum on the value of her land, minus the provisional value that was deposited, only from July 10, 1959 when it deposited in court the provisional value of the land. 4. The fourth error assigned by the Republic relates to the denial by the lower court of its motion for a new trial based on nearly discovered evidence. We do not find merit in this assignment of error. After the lower court had decided this case on May 26, 1961, the Republic filed a motion for a new trial, supplemented by another motion, both based upon the ground of newly discovered evidence. The alleged newly discovered evidence in the motion filed on June 21, 1961 was a deed of absolute sale-executed on January 25, 1961, showing that a certain Serafin Francisco had sold to Pablo L. Narciso a parcel of sugar land having an area of 100,000 square meters with a sugar quota of 100 piculs, covered by P.A. No. 1701, situated in Barrio Fortuna, Floridablanca, for P14,000, or P.14 per square meter. In the supplemental motion, the alleged newly discovered evidence were: (1) a deed of sale of some 35,000 square meters of land situated at Floridablanca for P7,500.00 (or about P.21 per square meter) executed in July, 1959, by the spouses Evelyn D. Laird and Cornelio G. Laird in favor of spouses Bienvenido S. Aguas and Josefina Q. Aguas; and (2) a deed of absolute sale of a parcel of land having an area of 4,120,101 square meters, including the sugar quota covered by Plantation Audit No. 161 1345, situated at Floridablanca, Pampanga, for P860.00 per hectare (a little less than P.09 per square meter) executed on October 22, 1957 by Jesus Toledo y Mendoza in favor of the Land Tenure Administration. We find that the lower court acted correctly when it denied the motions for a new trial. To warrant the granting of a new trial based on the ground of


newly discovered evidence, it must appear that the evidence was discovered after the trial; that even with the exercise of due diligence, the evidence could not have been discovered and produced at the trial; and that the evidence is of such a nature as to alter the result of the case if admitted. 32 The lower court correctly ruled that these requisites were not complied with. The lower court, in a well-reasoned order, found that the sales made by Serafin Francisco to Pablo Narciso and that made by Jesus Toledo to the Land Tenure Administration were immaterial and irrelevant, because those sales covered sugarlands with sugar quotas, while the lands sought to be expropriated in the instant case are residential lands. The lower court also concluded that the land sold by the spouses Laird to the spouses Aguas was a sugar land. We agree with the trial court. In eminent domain proceedings, in order that evidence as to the sale price of other lands may be admitted in evidence to prove the fair market value of the land sought to be expropriated, the lands must, among other things, be shown to be similar. But even assuming, gratia argumenti, that the lands mentioned in those deeds of sale were residential, the evidence would still not warrant the grant of a new trial, for said evidence could have been discovered and produced at the trial, and they cannot be considered newly discovered evidence as contemplated in Section 1(b) of Rule 37 of the Rules of Court. Regarding this point, the trial court said: The Court will now show that there was no reasonable diligence employed. The land described in the deed of sale executed by Serafin Francisco, copy of which is attached to the original motion, is covered by a Certificate of Title issued by the Office of the Register of Deeds of Pampanga. There is no question in the mind of the court but this document passed through the Office of the Register of Deeds for the purpose of transferring the title or annotating the sale on the certificate of title. It is true that Fiscal Lagman went to the Office of the Register of Deeds to check

conveyances which may be presented in the evidence in this case as it is now sought to be done by virtue of the motions at bar, Fiscal Lagman, one of the lawyers of the plaintiff, did not exercise reasonable diligence as required by the rules. The assertion that he only went to the office of the Register of Deeds 'now and then' to check the records in that office only shows the half-hazard [sic] manner by which the plaintiff looked for evidence to be presented during the hearing before the Commissioners, if it is at all true that Fiscal Lagman did what he is supposed to have done according to Solicitor Padua. It would have been the easiest matter for plaintiff to move for the issuance of a subpoena duces tecum directing the Register of Deeds of Pampanga to come to testify and to bring with him all documents found in his office pertaining to sales of land in Floridablanca adjacent to or near the lands in question executed or recorded from 1958 to the present. Even this elementary precaution was not done by plaintiff's numerous attorneys. The same can be said of the deeds of sale attached to the supplementary motion. They refer to lands covered by certificate of title issued by the Register of Deeds of Pampanga. For the same reason they could have been easily discovered if reasonable diligence has been exerted by the numerous lawyers of the plaintiff in this case. It is noteworthy that all these deeds of sale could be found in several government offices, namely, in the Office of the Register of Deeds of Pampanga, the Office of the Provincial Assessor of Pampanga, the Office of the Clerk of Court as a part of notarial reports of notaries public that acknowledged these documents, or in the archives of the National Library. In respect to Annex 'B' of the supplementary motion copy of the document could also be found in the Office of the Land Tenure Administration, another government entity. Any lawyer with a modicum of ability handling this expropriation case would have right away though [sic] of digging up documents diligently showing conveyances of lands near or around the parcels of land sought to be expropriated in this case in the offices that would have naturally come to his mind such as the offices mentioned


above, and had counsel for the movant really exercised the reasonable diligence required by the Rule' undoubtedly they would have been able to find these documents and/or caused the issuance of subpoena duces tecum. ... It is also recalled that during the hearing before the Court of the Report and Recommendation of the Commissioners and objection thereto, Solicitor Padua made the observation: I understand, Your Honor, that there was a sale that took place in this place of land recently where the land was sold for P0.20 which is contiguous to this land. The Court gave him permission to submit said document subject to the approval of the Court. ... This was before the decision was rendered, and later promulgated on May 26, 1961 or more than one month after Solicitor Padua made the above observation. He could have, therefore, checked up the alleged sale and moved for a reopening to adduce further evidence. He did not do so. He forgot to present the evidence at a more propitious time. Now, he seeks to introduce said evidence under the guise of newlydiscovered evidence. Unfortunately the Court cannot classify it as newly-discovered evidence, because tinder the circumstances, the correct qualification that can be given is 'forgotten evidence'. Forgotten however, is not newly-discovered evidence. 33 The granting or denial of a motion for new trial is, as a general rule, discretionary with the trial court, whose judgment should not be disturbed unless there is a clear showing of abuse of discretion. 34 We do not see any abuse of discretion on the part of the lower court when it denied the motions for a new trial. WHEREFORE, the decision appealed from is modified, as follows: (a) the lands of appellees Carmen Vda. de Castellvi and Maria Nieves Toledo-Gozun, as described in the complaint, are declared expropriated for public use; (b) the fair market value of the lands of the appellees is fixed at P5.00 per square meter; (c) the Republic must pay appellee Castellvi the sum of P3,796,495.00 as just compensation for her one parcel of land

that has an area of 759,299 square meters, minus the sum of P151,859.80 that she withdrew out of the amount that was deposited in court as the provisional value of the land, with interest at the rate of 6% per annum from July 10, 1959 until the day full payment is made or deposited in court; (d) the Republic must pay appellee Toledo-Gozun the sum of P2,695,225.00 as the just compensation for her two parcels of land that have a total area of 539,045 square meters, minus the sum of P107,809.00 that she withdrew out of the amount that was deposited in court as the provisional value of her lands, with interest at the rate of 6%, per annum from July 10, 1959 until the day full payment is made or deposited in court; (e) the attorney's lien of Atty. Alberto Cacnio is enforced; and (f) the costs should be paid by appellant Republic of the Philippines, as provided in Section 12, Rule 67, and in Section 13, Rule 141, of the Rules of Court. IT IS SO ORDERED. Makalintal, C.J., Barredo, Antonio, Esguerra, Fernandez, Muñoz Palma and Aquino, JJ., concur. Castro, Fernando, Teehankee and Makasiar, JJ., took no part. 155. G.R. No. L-31087 September 27, 1979 EASTERN SHIPPING LINES, INC., petitioner, vs. MARGARINE-VERKAUFS-UNION GmbH, respondent. Ross, Salcedo, Del Rosario, Bito & Misa for petitioner. Lichauco Picazo & Agcaoili for respondent. TEEHANKEE, Acting C.J.: The Court affirms the appealed judgment holding petitioner liable under the terms of its own bill of lading for the damage suffered by respondent's copra cargo on board petitioner's vessel, but sets aside the award of attorney's fees to respondent-


plaintiff for lack of any statement or reason in the lower court's judgment that would justify the award. Respondent corporation, a West German corporation not engaged in business in the Philippines, was the consignee of 500 long tons of Philippine copra in bulk with a total value of US$ 108,750.00 shipped from Cebu City on board petitioner's (a Philippine corporation) vessel, the SS "EASTERN PLANET" for discharge at Hamburg, Germany. Petitioner's bill of lading for the cargo provided as follows: ... Except as otherwise stated herein and in - the Charter Party, this contract shag be governed by the laws of the Flag of the Ship carrying the goods. In case of average, same shall be adjusted according to York-Antwerp Rules of 1950. While the vessel was off Gibraltar, a fire broke out aboard the and caused water damage to the copra shipment in the amount of US$ 591.38. Petitioner corporation rejected respondent's claim for payment of the and respondent filed on June 18, 1966 in the Manila court of first instance its complaint against petitioner as defendant for recovery of the same and US$ 250.00 - attorney's fees and expenses of litigation. After trial, the lower court rejected petitioner's defense that did not exceed 5% of respondent's interest in the cargo it was not liable under Philippine Law for the damage which I rendered judgment on April 25, 1969 "ordering the defendant, Eastern Shipping Lines, Inc. to pay to the plaintiff, Margarine-VerkaufsUnion GMBH, the sum of US$ 591.38, with interest at the legal rate from the date of the filing of the complaint until fully paid, plus US$ 250.00 as attorney's fees and the costs of the suit." In this review on questions of law, petitioner reiterates as its first assignment t of error its submittal that Article 848 of the Code of Commerce 1 which would bar claims for averages not exceeding 5% of the claimant's interest should be applied rather than the lower court's ruling that petitioner's bill of lading expressly contained "an agreement to the contrary," i.e. for the application of the York-Antwerp Rules which provide for respondent's fun recovery of the damage loss.

The Court finds no error and upholds the lower court's ruling sustaining respondent's damage claim although the amount thereof did not exceed 5% of respondent's interest in the cargo and would have been barred by the cited article of the Commerce Code. We hold that the lower court correctly ruled the cited codal article to be "not applicable in this particular case for the reason that the bill of lading (Exhibit "F") contains "an agreement to the contrary" for it is expressly provided in the last sentence of the first paragraph (Exhibit "1-A") that "In case of average, same shall be adjusted according to York-Antwerp Rules of 1950." The insertion of said condition is expressly authorized by Commonwealth Act No. 65 which has adopted in toto the U.S. Carriage of Goods by Sea Act. Now, it has not been shown that said rules limit the recovery of damage to cases within a certain percentage or proportion that said damage may bear to claimant's interest either in the vessel or cargo as provided in Article 848 of the Code of Commerce On the contrary, Rule 3 of said York-Antwerp Rules expressly states that "Damage done to a ship and cargo, or either of them, by water or otherwise, including damage by breaching or scuttling a burning ship, in extinguishing a fire on board the ship, shall be made good as general average. ... " There is a clear and irreconcilable inconsistency between the York-Antwerp Rules expressly adopted by the parties as their contract under the bill of lading which sustains respondent's claim and the codal article cited by petitioner which would bar the same. Furthermore, as correctly contended by respondent, what is here involved is a contract of adhesion as embodied in the printed bill of lading issued by petitioner for the shipment to which respondent as the consignee merely adhered, having no choice in the matter, and consequently, any ambiguity therein must be construed against petitioner as the author. We find, however, petitioner's second and only other assignment of error against the award of attorney's fees of US$ 250.00 to be well taken. The text of the lower court's decision stated no justification nor reason for the award of attorney's fees and


should therefore be disallowed. As restated in Buan vs. Camaganacan 2 , the general rule is that it is contrary to sound public policy to place a penalty on the right to litigate nor should attorney's fees be awarded everytime a party wins a lawsuit. Hence, Article 2208 of the Civil Code provides that "in the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered," save for the eleven exceptions therein expressly provided. Insofar as the present case is concerned, the lower court made no finding that it falls within any of the exceptions that would justify the award for attorney's fees, such as gross and evident bad faith in refusing to satisfy a plainly valid, just and demandable claim. Even under the broad eleventh exception of the cited article which allows the imposition of attorney's fees "in any other case where the court deems it just and equitable that attorney's fees and expenses of litigation should be recovered," the Court stressed in Buan, supra, that "the conclusion must be borne out by findings of facts and law. What is just and equitable in a given case is not a mere matter of feeling but of demonstration .... Hence, the exercise of judicial discretion in the award of attorney's fees under Article 2208 (11) of the Civil Code demands a factual, legal or equitable justification upon the basis of which the court exercises its discretion. Without such a justification, the award is a conclusion without a premise, its basis being improperly left to speculation and conjecture." The summary award of counsel's fees made in the appealed judgment must therefore be set aside. A final observation. The appealed judgment ordered petitioner to pay respondent the sum of US$591.38 with interest at the legal rate (which we hold to be the rate of six [6%] per cent under Article 2209 of the Civil Code in force at the time of the judgment of April 25, 1969) from the filing of the complaint on June 18, 1966 until fully paid. Petitioner did not appeal from nor question this portion of the judgment requiring that it pay respondentcreditor the damage claim with interest in U.S. currency (with reference to the general rule of discharging obligations in

Philippine currency measured at the prevailing rate of exchange 3 ). Consequently, we find no necessity to make any further pronouncement thereon. We merely affirm the judgment in U.S. currency in favor of respondent corporation, a foreign corporation not engaged in business herein, in view of petitioner's acquiescence therein and view the judgment as one wherein the lower court sentenced petitioner to pay and remit to respondent as a non-resident foreign corporation the amount due under the judgment in U S. currency. ACCORDINGLY, the appealed judgment is hereby affirmed with the modification that the award of attorney's fees is set aside. With costs against petitioner. Makasiar, Fernandez, Guerrero, De Castro and Melencio-Herrera, JJ., concur. 156. G.R. No. L-25650 June 11, 1975 ISIDORA L. CABALIW and SOLEDAD SADORRA, petitioners, vs. SOTERO SADORRA, ENCARNACION SADORRA, EMILIO ANTONIO, ESPERANZA RANJO, ANSELMO RALA, BASION VELASCO, IGNACIO SALMAZAN, and THE HONORABLE COURT OF APPEALS, respondents. Jose W. Diokno for petitioners. Angel A. Sison for respondents. MUNOZ PALMA, J.: Isidora Cabaliw was the wife of Benigno Sadorra by his second marriage solemnized on May 5, 1915, before the Justice of the Peace of Bayambang, Pangasinan. This couple had a daughter named Soledad Sadorra. During their marriage, the spouses acquired two (2) parcels of land situated in Iniangan, Dupax, Nueva Vizcaya. One parcel with an area of 14.4847 hectares was


acquired by a Sales Patent and covered by Original Certificate of Title No. 1 of the Land Records of Nueva Vizcaya issued in the name of Benigno Sadorra. The other piece of land of about 1-1/2 hectares and covered by Tax Declaration Nos. 6209 and 6642 was secured through purchase. Having been abandoned by her husband, Isidora Cabaliw instituted an action for support with the Court of First Instance of Manila, entitled "Isidora Cabaliw de Orden versus Benigno Sadorra" docketed therein as Civil Case No. 43193. On January 30, 1933, judgment was rendered requiring Benigno Sadorra to pay his wife, Isidora Cabaliw, the amount of P75.00 a month in terms of support as of January 1, 1933, and P150.00 in concept of attorney's fees and the costs. Unknown to Isidora Cabaliw, on August 19, 1933, Benigno Sadorra executed two (2) deeds of sale over the two parcels of land above described in favor of his son-in-law, Sotero Sadorra, the latter being married to Encarnacion Sadorra, a daughter of Benigno Sadorra by his first marriage. These deeds were duly registered and Original Certificate of Title No. 1 was cancelled and replaced with T.C.T. No. 522 of the Register of Deeds of Nueva Vizcaya. Because of the failure of her husband to comply with the judgment of support, Isidora Cabaliw filed in Civil Case 43192 a motion to cite Benigno Sadorra for contempt and the Court of First Instance of Manila in its Order of May 12, 1937, authorized Isidora to take possession of the conjugal property, to administer the same, and to avail herself of the fruits thereof in payment of the monthly support in arrears. With this order of the Court, Isidora proceeded to Nueva Vizcaya to take possession of the aforementioned parcels of land, and it was then that she discovered that her husband had sold them to his son-in-law Sotero. On February 1, 1940, Isidora filed with the Court of First Instance of Nueva Vizcaya Civil Case No. 449 against her husband and Sotero Sadorra for the recovery of the lands in question on the ground that the sale was fictitious; at the same time a notice of lis pendens was filed with the Register of Deeds of Nueva

Vizcaya. In May of 1940, Benigno Sadorra died. On June 7, 1948, the above-mentioned notice of lis pendens was cancelled by the Register of Deeds of Nueva Vizcaya upon the filing of an affidavit by Sotero Sadorra to the effect that Civil Case No. 449 had been decided in his favor and that he was adjudged the owner of the land covered by T.C.T. No. 522, but that his copy of the decision was lost during the war. On October 1, 1954, Isidora and her daughter Soledad filed with the Court of First Instance of Nueva Vizcaya Civil Case 634 to recover from the spouses Sotero and Encarnacion Sadorra the aforementioned two parcels of land; they also caused the annotation of a cautionary notice and notice of lis pendens over T.C.T. 522. 1 On November 22, 1955, the complaint was amended and named additional party-defendants were the children of Benigno Sadorra by his first marriage. The amended complaint prayed among others: (1) that the deeds of sale executed by Benigno Sadorra be declared null and void; (2) that defendant spouses Sotero and Encarnacion Sadorra be directed to yield the possession of the lands in question; and (3) that said lands be ordered partitioned among plaintiffs and defendants who are children by the first marriage of Benigno Sadorra in the proportions provided by law. 2 During the pendency of civil case 634 certain parties intervened claiming that they had purchased parts of the land covered by T.C.T. 522. After trial, the lower court rendered judgment and among other things: (1) declared the deeds of sale executed by Benigno Sadorra to be simulated and fictitious; (2) recognized and upheld the rights of the intervenor-purchasers who acquired their portions prior to the registration of the notice of lis pendens on October 1, 1954, but dismissed the claims of the intervenors who allegedly bought parts of the land subsequent thereto; and (3) ordered the partition of the remaining unsold lands between Isidora Cabaliw, Sotero Sadorra, on one hand and the children by


the first marriage of Benigno Sadorra on the other. 3 From the foregoing decision of the lower court in civil case 634 spouses Sotero and Encarnacion Sadorra appealed to the Court of Appeals and so did the intervenors whose claim were dismissed. (CA-G.R. No. 26956-R) On November 29, 1965, the appellate court by a vote of 3 to 2 reversed the decision of the trial court, and dismissed the amended complaint of Isidora Cabaliw. 4 Hence, this petition filed by Isidora Cabaliw and her daughter, Soledad Sadorra, for the Court to review the adverse judgment of the Court of Appeals. Several errors have been assigned by petitioners but the vital question upon which depends the outcome of this appeal is given in Error I, to wit: The Honorable Court of Appeals gravely erred in holding that the fraud could not be presumed in the transfer of the lots in question by the late Benigno Sadorra to his son-in-law Sotero Sadorra, even if this transfer was done shortly after judgment was rendered against the former and in favor of your petitioner Isidora Cabaliw. (p. 1, Petitioner's Brief) The Court of Appeals sustained the validity and efficacy of the deeds of sale executed by Benigno Sadorra in favor of his son-inlaw (Exhibits I and I-1) on the ground that these are public documents and as such are presumed by law to have been fair and legal; that the vendee Sotero Sadorra, is presumed to have acted in good faith, citing Art. 44, Spanish Civil Code, Art. 627 New Civil Code; that fraud is never presumed, and it is settled in this jurisdiction that strong and convincing evidence is necessary to overthrow the validity of an existing public instrument. The appellate court continued that inasmuch as under the old Civil Code in force at the time of the sale, the husband was empowered to dispose of the conjugal property without the consent of the wife, the sales made by Benigno Sadorra were valid, and the wife Isidora cannot now recover the property from the vendee. The judgment of the Court of Appeals cannot be sustained. The facts narrated in the first portion of this Decision which are not disputed, convincingly show or prove that the conveyances

made by Benigno Sadorra in favor of his son-in-law were fraudulent. For the heart of the matter is that about seven months after a judgment was rendered against him in Civil Case No. 43192 of the Court of First Instance of Manila and without paying any part of that judgment, Benigno Sadorra sold the only two parcels of land belonging to the conjugal partnership to his son-in-law. Such a sale even if made for a valuable consideration is presumed to be in fraud of the judgment creditor who in this case happens to be the offended wife. Article 1297 of the old Civil Code which was the law in force at the time of the transaction provides: 5 Contracts by virtue of which the debtor alienates property by gratuitous title are presumed to be made in fraud of creditors. Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment has been rendered in any instance or some writ of attachment has been issued. The decision or attachment need not refer to the property alienated and need not have been obtained by the party seeking rescission. (emphasis supplied) The above-quoted legal provision was totally disregarded by the appellate court, and there lies its basic error. We agree with petitioners that the parties here do not stand in equipoise, for the petitioners have in their favor, by a specific provision of law, the presumption of a fraudulent transaction which is not overcome by the mere fact that the deeds of sale in question were in the nature of public instruments. As well said in the dissenting opinion of Justice Magno Gatmaitan, the principle invoked by the majority opinion that to destroy the validity of an existing public document "strong and convincing evidence is necessary", operates "where the action was brought by one party against the other to impugn the contract ... but that rule can not operate and does not, where the case is one wherein the suit is not between the parties inter se but is one instituted by a third person, not a party to the contract but precisely the victim of it because executed to his prejudice and behind his back; neither law, nor justice, nor reason, nor logic, should so permit,


otherwise, in such a suit, the courts would be furnishing a most effective shield of defense to the aggressor." (pp. 30-31, CA Decision) Furthermore, the presumption of fraud established by the law in favor of petitioners is bolstered by other indicia of bad faith on the part of the vendor and vendee. Thus (1) the vendee is the son-in-law of the vendor. In the early case of Regalado vs. Luchsinger & Co., 5 Phil. 625, this Court held that the close relationship between the vendor and the vendee is one of the known badges of fraud. (2) At the time of the conveyance, the vendee, Sotero, was living with his father-in-law, the vendor, and he knew that there was a judgment directing the latter to give a monthly support to his wife Isidora and that his father-in-law was avoiding payment and execution of the judgment. 6 (3) It was known to the vendee that his father-in-law had no properties other than those two parcels of land which were being sold to him. 7 The fact that a vendor transfers all of his property to a third person when there is a judgment against him is a strong indication of a scheme to defraud one who may have a valid interest over his properties. 8 Added to the above circumstances is the undisputed fact that the vendee Sotero Sadorra secured the cancellation of the lis pendens on O.C.T. No. 1, which was annotated in 1940 at the instance of Isidora Cabaliw, and the issuance of a transfer certificate of title in his favor, by executing an affidavit, Exhibit H, on June 7, 1948, wherein he referred to Isidora as "the late Isidora Cabaliw' when he knew for a fact that she was alive, and alleged that Civil Case 449 of the Court of First Instance of Nueva Vizcaya was decided in his favor where in truth there was no such decision because the proceedings in said case were interrupted by the last world war. Such conduct of Sotero Sadorra reveals, as stated by the lower court, an "utter lack of sincerity and truthfulness" and belies his pretensions of good faith. On the part of the transferee, he did not present satisfactory and convincing evidence sufficient to overthrow the presumption and evidence of a fraudulent transaction. His is the burden of

rebutting the presumption of fraud established by law, and having failed to do so, the fraudulent nature of the conveyance in question prevails. 9 The decision of the Court of Appeals makes mention of Art. 1413 of the old Civil Code which authorizes the husband as administrator to alienate and bind by onerous title the property of the conjugal partnership without the consent of the wife, and by reason thereof, concludes that petitioner Isidora Cabaliw can not now seek annulment of the sale made by her husband. On this point, counsel for petitioners rightly claims that the lack of consent of the wife to the conveyances made by her husband was never invoked nor placed in issue before the trial court. What was claimed all along by plaintiff, Isidora Cabaliw now petitioner, was that the conveyances or deeds of sale were executed by her husband to avoid payment of the monthly support adjudged in her favor and to deprive her of the means to execute said judgment. In other words, petitioner seeks relief not so much as an aggrieved wife but more as a judgment creditor of Benigno Sadorra. Art. 1413 therefore is inapplicable; but even if it were, the result would be the same because the very article reserves to the wife the right to seek redress in court for alienations which prejudice her or her heirs. 10 The undisputed facts before Us clearly show that, the sales made by the husband were merely a scheme to place beyond the reach of the wife the only properties belonging to the conjugal partnership and deprive her of what rightly belongs to her and her only daughter Soledad. PREMISES CONSIDERED, We find merit to this Petition for Review and We set aside the decision of the appellate court for being contrary to the law applicable to the facts of the case. The decision of the trial court stands affirmed with costs against private respondents. So Ordered. Castro (Chairman), Makasiar, Esguerra and Martin, JJ., concur. Teehankee, J., took no part.


157. G.R. No. L-38303 May 30, 1988 HONGKONG & SHANGHAI BANKING CORPORATION, plaintiff-appellant, vs. RALPH PAULI and SPOUSES SALLY P. GARGANERA and MATEO GARGANERA, defendants-appellees. Siguion Reyna, Montecillo & Ongsiako for plaintiffappellant. Nordy P. Diploma for defendants-appellees. GRIÑO-AQUINO J.: This appealed case was preceded by three (3) other cases between the parties, to wit: 1) Civil Case No. 32799 Court of First Instance Manila On June 14, 1957, the Hongkong & Shanghai Banking Corporation filed a complaint against the defendant Ralph Pauli, to collect the sum of P258,964.15. It was docketed as Civil Case No. 32799 in the Court of First Instance of Manila. After the trial, judgment was rendered in favor of the Bank on June 2, 1959, the dispositive portion of which provided as follows: WHEREFORE, judgment is hereby rendered ordering defendant to pay to plaintiff the sum of P219,236.20 with legal interest thereon from June 14, 1957, until fully paid, and the costs. On appeal by the defendant debtor, the decision was upheld by the Supreme Court on March 31, 1962 in case G.R. No. L-15713. The decision having become final, the Bank endeavored to execute it but the writs of execution were returned unsatisfied because no leviable assets of Pauli could be located by the sheriffs. Unknown to the Hongkong & Shanghai Bank, Pauli had on January 8, 1957 purchased from the Philippine National Bank (PNB) a sugar cane plantation known as Hacienda Riverside (Lot No. 693 of Saravia Cadastre, Negros Occidental). To avoid

discovery of the transaction by his creditors, he did not register the deed of Sale. Six years later, on March 1, 1963, he fraudulently sold the hacienda to his daughter, defendantappellee Sally Garganera, and her husband Mateo Garganera. The sale was registered on March 5, 1963. Transfer Certificate of Title No. 34425 was issued to the Garganeras. 2) Civil Case No. 626 Court of First Instance Negros Occidental At the instance of Warner Barnes & Co., another creditor of Pauli, the sale to the Garganera spouses was declared fictitious for being in fraud of creditors by the Court of First Instance of Negros Occidental, Silay City, Branch VII, in its decision dated October 15, 1968 in Civil Case No. 262, entitled Warner Barnes & Co., Ltd. vs. Ralph Pauli and Spouses Mateo and Sally Garganera." The defendants appealed the decision to the Court of Appeals where it was docketed as CA-G.R. No. 43163-R. On December 18, 1969, the defendants entered into a compromise agreement with the Warner Barnes & Co., Ltd., by paying its judgment credit of P28,962.11 On the same date, December 18, 1969, they filed in the Court of Appeals a "Joint Motion to Dismiss" praying that the appealed case be dismissed with prejudice and that the decision of the Court of First Instance of Negros Occidental in Civil Case No. 262 be set aside." The Court of Appeals approved the compromise and dismissed the case, CA-GR No. 43163-R, on January 6, 1970 (p. 78, Records). 3) Civil Case No. 75319 Court of First Instance Manila Having discovered that the sugar plantation belonged to Paul, the Hongkong and Shanghai Bank filed on January 13, 1969 in the Court of First Instance of Manila a complaint for revival of the 1962 judgment in its favor in Civil Case No. 32799. The case was docketed as Civil Case No. 75319. A writ of preliminary attachment was issued against Pauli's, rights, interests and participation in Lot No. 693 of Cad. Survey of Saravia, covered by the Garganera's TCT No. T-34425. Pauli prayed for the dismissal of the complaint and the lifting of the order of attachment on Lot No. 693. Under the pretext of amicably settling Civil Case No. 75319,


defendant Ralph Pauli repeatedly postponed hearings of the case, to enable defendants-spouses, Sally P. Garganera and Mateo Garganera, to intervene in Civil Case No. 75319, which they did on October 21, 1969. On January 23, 1971, the Court rendered judgment in Civil Case No. 75319, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered: 1. Decreeing the revival of the judgment rendered on June, 2, 1959 in Civil Case No. 32799 of the Court of First Instance of Manila, entitled "Hongkong and Shanghai Banking Corporation, plaintiff, versus Ralph Pauli, defendant," as aimed by the Supreme Court in its decision promulgated on March 31, 1962 in Civil Case No. G.R. L-15713, entitled "Hongkong and Shanghai Banking Corporation, plaintiff-appellate, versus Ralph Pauli, defendantappellant; 2. Ordering defendant to pay to plaintiff the sum of P219,276.20 with legal interest thereon from June 14, 1957 until fully paid, and the costs; 3. Ordering the discharge of the attachment levied upon and annotated on Transfer Certificate of Title No. T-34425 of the land records of the Province of Negros Occidental in virtue of the writ issued in the above-entitled case on February 21, 1969; and 4. Dismissing all the claims for damages respectively interposed by the litigants therein. No appeal was taken by Pauli from this decision. Civil Case No. 465 Court of First Instance Negros Occidental On February 17, 1971, the Bank filed a new complaint against Pauli and the Garganeras which was docketed as Civil Case No. 465 in the Court of First Instance of Negros Occidental, Branch I, praying for annulment of the Conditional Sale as well as the Deed of Sale, of Hacienda Riverside to the Garganeras and also for annulment of Garganera's Certificate of Title No. T-34425. Pauli filed a Motion to Dismiss on the grounds of res judicata, prescription, waiver and abandonment of claim. The Garganeras filed a similar Motion to Dismiss dated March 17, 1971.

On June 15, 1971, the Court granted the motions to dismiss on the grounds of prescription of the action and res judicata. The plaintiff appealed to the Court of Appeals. The defendantsappellees, the spouses Mateo and Sally Garganera, with the conformity of the plaintiff-appellant, filed a motion to certify the appeal to this Court as only questions of law res judicata and prescription of the action- are involved. The Court of Appeals granted the motion. Has the action for annulment of the sale of Lot 693 to the Garganeras prescribed? Did prescription of the action commence to run from the registration of the sale, or from the discovery of the transaction by the Bank? When a transaction involves registered land, the four-year period fixed in Article 1391 within winch to bring an action for annulment of the deed, shall be computed from the registration of the conveyance (March 5, 1963) on the familiar theory that the registration of the document is constructive notice of the conveyance to the whole world (Armentia vs. Patriarca, 18 SCRA 1253; Avecilla vs. Yatco, 103 Phil. 666). Plaintiff's submission that the four-year period commenced to run from the date when the Bank obtained actual knowledge of the fraudulent sale of Pauli's land to the Garganeras (sometime in 1969) and that hence the four-year period for bringing an action to annul the sale had not yet expired when it filed the action for annullment on February 17, 1971, is unacceptable. That theory would diminish public faith in the integrity of torrens titles and impair commercial transactions involving registered lands for it would render uncertain the computation of the period for the prescription of such actions. Civil Case No. 465, the action for annulment of the Sale is not barred by res judicata, specifically, the prior judgment in Civil Case No. 75319, for revival of the judgment in the collection suit, Civil Case No. 32799, for the subject matter and causes of action in the two cases are different. The three (3) Identities required for the application of the bar by prior judgment: Identity of parties, of subject matter and causes of action, are lacking.


Nevertheless, as the plaintiff's right of action in Civil Case No. 465 had already prescribed, the trial court did not err in dismissing the case. WHEREFORE,finding no reversible error in the order dated June 15, 1971 of the trial court dismissing Civil Case No. 465, the same is hereby affirmed. SO ORDERED. 158. G.R. No. L-60174 February 16, 1983 EDUARDO FELIPE, HERMOGENA V. FELIPE AND VICENTE V. FELIPE, petitioners, vs. HEIRS OF MAXIMO ALDON, NAMELY: GIMENA ALMOSARA, SOFIA ALDON, SALVADOR ALDON, AND THE HONORABLE COURT OF APPEALS, respondents. Romulo D. San Juan for petitioner. Gerundino Castillejo for private respondent. ABAD SANTOS, J.: Maximo Aldon married Gimena Almosara in 1936. The spouses bought several pieces of land sometime between 1948 and 1950. In 1960-62, the lands were divided into three lots, 1370, 1371 and 1415 of the San Jacinto Public Land Subdivision, San Jacinto, Masbate. In 1951, Gimena Almosara sold the lots to the spouses Eduardo Felipe and Hermogena V. Felipe. The sale was made without the consent of her husband, Maximo. On April 26, 1976, the heirs of Maximo Aldon, namely his widow Gimena and their children Sofia and Salvador Aldon, filed a complaint in the Court of First Instance of Masbate against the Felipes. The complaint which was docketed as Civil Case No. 2372 alleged that the plaintiffs were the owners of Lots 1370, 1371 and 1415; that they had orally mortgaged the same to the

defendants; and an offer to redeem the mortgage had been refused so they filed the complaint in order to recover the three parcels of land. The defendants asserted that they had acquired the lots from the plaintiffs by purchase and subsequent delivery to them. The trial court sustained the claim of the defendants and rendered the following judgment: a. declaring the defendants to be the lawful owners of the property subject of the present litigation; b. declaring the complaint in the present action to be without merit and is therefore hereby ordered dismissed; c. ordering the plaintiffs to pay to the defendants the amount of P2,000.00 as reasonable attorney's fees and to pay the costs of the suit. The plaintiffs appealed the decision to the Court of Appeals which rendered the following judgment: PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and SET ASIDE, and a new one is hereby RENDERED, ordering the defendants-appellees to surrender the lots in question as well as the plaintiffs'-appellants' muniments of title thereof to said plaintiffs-appellants, to make an accounting of the produce derived from the lands including expenses incurred since 1951, and to solidarity turn over to the plaintiffs-appellants the NET monetary value of the profits, after deducting the sum of P1,800.00. No attorney's fees nor moral damages are awarded for lack of any legal justification therefor. No. costs. The ratio of the judgment is stated in the following paragraphs of the decision penned by Justice Edgardo L. Paras with the concurrence of Justices Venicio Escolin and Mariano A. Zosa: One of the principal issues in the case involves the nature of the aforementioned conveyance or transaction, with appellants claiming the same to be an oral contract of mortgage or antichresis, the redemption of which could be done anytime upon repayment of the P1,800.00 involved (incidentally the only thing written about the transaction is the aforementioned receipt re the P1,800). Upon the other hand, appellees claim that the


transaction was one of sale, accordingly, redemption was improper. The appellees claim that plaintiffs never conveyed the property because of a loan or mortgage or antichresis and that what really transpired was the execution of a contract of sale thru a private document designated as a 'Deed of Purchase and Sale' (Exhibit 1), the execution having been made by Gimena Almosara in favor of appellee Hermogena V. Felipe. After a study of this case, we have come to the conclusion that the appellants are entitled to recover the ownership of the lots in question. We so hold because although Exh. 1 concerning the sale made in 1951 of the disputed lots is, in Our opinion, not a forgery the fact is that the sale made by Gimena Almosara is invalid, having been executed without the needed consent of her husband, the lots being conjugal. Appellees' argument that this was an issue not raised in the pleadings is baseless, considering the fact that the complaint alleges that the parcels 'were purchased by plaintiff Gimena Almosara and her late husband Maximo Aldon' (the lots having been purchased during the existence of the marriage, the same are presumed conjugal) and inferentially, by force of law, could not, be disposed of by a wife without her husband's consent. The defendants are now the appellants in this petition for review. They invoke several grounds in seeking the reversal of the decision of the Court of Appeals. One of the grounds is factual in nature; petitioners claim that "respondent Court of Appeals has found as a fact that the 'Deed of Purchase and Sale' executed by respondent Gimena Almosara is not a forgery and therefore its authenticity and due execution is already beyond question." We cannot consider this ground because as a rule only questions of law are reviewed in proceedings under Rule 45 of the Rules of Court subject to well-defined exceptions not present in the instant case. The legal ground which deserves attention is the legal effect of a sale of lands belonging to the conjugal partnership made by the wife without the consent of the husband. It is useful at this point to re-state some elementary rules: The

husband is the administrator of the conjugal partnership. (Art. 165, Civil Code.) Subject to certain exceptions, the husband cannot alienate or encumber any real property of the conjugal partnership without the wife's consent. (Art. 166, Idem.) And the wife cannot bind the conjugal partnership without the husband's consent, except in cases provided by law. (Art. 172, Idem.) In the instant case, Gimena, the wife, sold lands belonging to the conjugal partnership without the consent of the husband and the sale is not covered by the phrase "except in cases provided by law." The Court of Appeals described the sale as "invalid" - a term which is imprecise when used in relation to contracts because the Civil Code uses specific names in designating defective contracts, namely: rescissible (Arts. 1380 et seq.), voidable (Arts. 1390 et seq.), unenforceable (Arts. 1403, et seq.), and void or inexistent (Arts. 1409 et seq.) The sale made by Gimena is certainly a defective contract but of what category? The answer: it is a voidable contract. According to Art. 1390 of the Civil Code, among the voidable contracts are "[T]hose where one of the parties is incapable of giving consent to the contract." (Par. 1.) In the instant caseGimena had no capacity to give consent to the contract of sale. The capacity to give consent belonged not even to the husband alone but to both spouses. The view that the contract made by Gimena is a voidable contract is supported by the legal provision that contracts entered by the husband without the consent of the wife when such consent is required, are annullable at her instance during the marriage and within ten years from the transaction questioned. (Art. 173, Civil Code.) Gimena's contract is not rescissible for in such contract all the essential elements are untainted but Gimena's consent was tainted. Neither can the contract be classified as unenforceable because it does not fit any of those described in Art. 1403 of the Civil Code. And finally, the contract cannot be void or inexistent because it is not one of those mentioned in Art. 1409 of the Civil Code. By process of elimination, it must perforce be a voidable


contract. The voidable contract of Gimena was subject to annulment by her husband only during the marriage because he was the victim who had an interest in the contract. Gimena, who was the party responsible for the defect, could not ask for its annulment. Their children could not likewise seek the annulment of the contract while the marriage subsisted because they merely had an inchoate right to the lands sold. The termination of the marriage and the dissolution of the conjugal partnership by the death of Maximo Aldon did not improve the situation of Gimena. What she could not do during the marriage, she could not do thereafter. The case of Sofia and Salvador Aldon is different. After the death of Maximo they acquired the right to question the defective contract insofar as it deprived them of their hereditary rights in their father's share in the lands. The father's share is one-half (1/2) of the lands and their share is two-thirds (2/3) thereof, one-third (1/3) pertaining to the widow. The petitioners have been in possession of the lands since 1951. It was only in 1976 when the respondents filed action to recover the lands. In the meantime, Maximo Aldon died. Two questions come to mind, namely: (1) Have the petitioners acquired the lands by acquisitive prescription? (2) Is the right of action of Sofia and Salvador Aldon barred by the statute of limitations? Anent the first question, We quote with approval the following statement of the Court of Appeals: We would like to state further that appellees [petitioners herein] could not have acquired ownership of the lots by prescription in view of what we regard as their bad faith. This bad faith is revealed by testimony to the effect that defendant-appellee Vicente V. Felipe (son of appellees Eduardo Felipe and Hermogena V. Felipe) attempted in December 1970 to have Gimena Almosara sign a ready-made document purporting to self the disputed lots to the appellees. This actuation clearly indicated that the appellees knew the lots did not still belong to them,

otherwise, why were they interested in a document of sale in their favor? Again why did Vicente V. Felipe tell Gimena that the purpose of the document was to obtain Gimena's consent to the construction of an irrigation pump on the lots in question? The only possible reason for purporting to obtain such consent is that the appellees knew the lots were not theirs. Why was there an attempted improvement (the irrigation tank) only in 1970? Why was the declaration of property made only in 1974? Why were no attempts made to obtain the husband's signature, despite the fact that Gimena and Hermogena were close relatives? An these indicate the bad faith of the appellees. Now then, even if we were to consider appellees' possession in bad faith as a possession in the concept of owners, this possession at the earliest started in 1951, hence the period for extraordinary prescription (30 years) had not yet lapsed when the present action was instituted on April 26, 1976. As to the second question, the children's cause of action accrued from the death of their father in 1959 and they had thirty (30) years to institute it (Art. 1141, Civil Code.) They filed action in 1976 which is well within the period. WHEREFORE, the decision of the Court of Appeals is hereby modified. Judgment is entered awarding to Sofia and Salvador Aldon their shares of the lands as stated in the body of this decision; and the petitioners as possessors in bad faith shall make an accounting of the fruits corresponding to the share aforementioned from 1959 and solidarity pay their value to Sofia and Salvador Aldon; costs against the petitioners. SO ORDERED. Concepcion Jr., Guerrero and De Castro, JJ., concur. Makasiar, (Chairman), J., In the result. Escolin J., took no part. 159. G.R. No. 75287


HOUSE INTERNATIONAL BUILDING TENANTS ASSOCIATION, INC., petitioner-plaintiff, vs. INTERMEDIATE APPELLATE COURT, CENTERTOWN MARKETING CORP., MANILA TOWERS DEVELOPMENT CORP., AND THE GOVERNMENT SERVICE INSURANCE SYSTEM, respondents-defendants.

CORTES, J.: Petitioner House International Building Tenants Association, Inc. (ASSOCIATION, for short) is a domestic non-stock, non-profit civic corporation, whose incorporators, directors and members constitute the great majority of more than a hundred heads of families who are tenants of long and good standing of the 14storey House International Building located at 777 Ongpin Street, Binondo, Manila. The land and the improvements thereon were formerly owned by Atty. Felipe Ang who mortgaged the same to the Government Service Insurance System (hereinafter referred to as GSIS) to secure payment of an obligation. After foreclosure of the mortgage and for failure of Ang to exercise his right of redemption over the foreclosed property, the ownership thereof was consolidated with the GSIS which subsequently sold it to Centertown Marketing Corporation (CENTERTOWN, for short) in a deed of conditional sale, without notice to the tenants of the building and without securing the prior clearance of the then Ministry of Human Settlements. As CENTERTOWN was not authorized by its Articles of Incorporation to engage in the real estate business, it organized a sister corporation, with almost an the same incorporators and stockholders, as CENTERTOWN'S, under the corporate name of Manila Towers Development Corporation (TOWERS, for short) for the primary purpose of engaging in the real estate business. Subsequently, CENTERTOWN assigned to its sister corporation TOWERS all its rights and obligations under the Deed of Conditional Sale, with the consent and approval of the GSIS. Thereafter, herein petitioner filed a complaint with the Regional

Trial Court of Manila against CENTERTOWN, TOWERS and GSIS for annulment of the deed of conditional sale and the subsequent assignment thereof by CENTERTOWN to TOWERS. The complaint alleged in part that the Deed of Conditional Sale is null and void ab initio for being ultra vires, since defendant CENTERTOWN is not qualified to acquire real estate property or to engage in real estate transactions. The court a quo * dismissed the complaint. Petitioner appealed to the Court of Appeals after its motion for reconsideration was denied by the trial court. The order of dismissal was affirmed by the appellate court in a decision dated 4 February 1986 in AC-GR CV No. 02691. ** Petitioner filed a motion for reconsideration, which was denied in a resolution dated 26 June 1986. Hence, this petition for review on certiorari. The main issues raised in the petition are: (1) whether petitioner has the personality to sue, on its own, as a corporation representing its members who are tenants of the House International Building, and (2) whether petitioner has a cause of action against respondents GSIS, CENTERTOWN and TOWERS. Section 2, Rule 3 of the Rules of Court provides: Sec. 2. Parties in interest. Every action must be prosecuted and defended in the name of the real party in interest. All persons having an interest in the subject of the action and in obtaining the relief amended shall be joined as plaintiffs. The real party in interest is the party who stands to be benefited or injured by the judgment or the party entitled to the avails of the suit. " Interest" within the meaning of the rule means material interest, an interest in issue and to be affected by the decree, as distinguished from mere interest in the question involved, or a mere incidental interest. Consequently, a person who is not a party to a contract and for whose benefit it was not expressly made cannot maintain an action thereon, notwithstanding that the contract, if performed by the parties to it, would incidentally inure to his benefit. (Francisco, the Revised Rules of Court in the Phil., Vol., 1, p. 126). In the present case, the real parties in interest are the tenants of


the House International Building and not the petitioner ASSOCIATION, which has a personality separate and distinct from that of its members and therefore it has the capacity to sue and be sued although it is composed of the tenants. Petitioner has not shown any real, actual, material, or substantial interest in the subject matter of the action. In this connection, the Court of Appeals properly observed: Appellant has sued in its name, but has not alleged any right belonging to it that was violated or any wrong that was committed. The reason is obvious, the benefits are not really meant for appellant but for the unnamed great majority" of its members who have allegedly been tenants of' long standing of the building in question. (Decision of Court of Appeals, p. 2). And, quoting from the Brief for the respondent-defendant GSIS, the Court of Appeals further said: Assuming arguendo, that the tenants have the alleged right, such rights of the tenants are personal and individual rights which can only be claimed by the tenants who must necessarily be the indispensable and real parties in interest and certainly not the plaintiff-appellant organization. (Ibid, p. 2.) With regard to the second main issue, the petitioner asserts that the Court of Appeals erred in ignoring the provisions of Art. 1409 of the Civil Code on void or inexistent contracts, the contract at bar being void, inexistent, and absolutely wanting in civil effects because "its consideration is illicit and/or the object violates some mandatory provisions of the laws." Cited to support this assertion are provisions of the 1973 constitution on eminent domain (Art. IV, sec. 2, also Art. XIV, sec. 3) agrarian reform (Art. XIV, sec. 12) and the Declaration of Principles and State Policies particularly those emphasizing the "stewardship concept, under which property is supposed to be held by the individual only as trustee for the people in general, who are its real owners." (Art. II, secs. 6 and 7). As bases for a declaration that the conditional sale between GSIS and CENTERTOWN is null and void for being contrary to law or public policy, the constitutional provisions are inapposite. Not

one of those provisions render unlawful the contract in question. Except for the prohibition against the taking of private property for public use without just compensation, the other provisions require implementing legislation to confer a legal right and impose a legal duty which can be judicially invoked. P.D. No. 1517 which confers a preferential right to tenants of long standing to acquire leased land on which they have constructed their houses. This has no application to the present case where the property involved is land and building belonging to the lessor. The petitioners likewise invoke our ruling in Mataas na Lupa Tenants Association Inc. et al. vs. Dimayuga, et. al. (G.R. L-32049, June 25, 1984, 130 SCRA 30) where we upheld the petitioners right of first refusal over land they had leased and occupied for more than ten (10) years and on which they had constructed their houses, a right given them under P.D. No. 1517 (and Proclamation No. 1967 of May 14, 1980). For two reasons this case gives the petitioners' case no support. In Mataas na Lupa the members of the ASSOCIATION were also plaintiffs in their individual capacity. This is not so in the present case. Furthermore, it is not the first time this issue has come before Us. In the case of Santos vs. Court of Appeals, G.R. L-60210, March 27,1984, 128 SCRA 428. We laid down the following doctrine. P.D. 1517 in referring to the pre-emptive or redemptive right of a lessee speaks only of urban land under lease on which a tenant has built a home and on which he has resided for ten years or more. If both the land and the building belong to the lessor, the right referred to hereinabove does not apply. The main thrust of the petitioner's challenge on the validity of the conditional sale is that the contract is ultra vires because the respondent CENTERTOWN is not qualified to acquire properties under its Articles of Incorporation. The petitioner has confused a void contract with an ultra vires contract which is merely voidable. We agree with the Court of Appeals that on this issue the provision of Art. 1397 of the Civil Code is in point, thus:


Art. 1397. The action for the annulment of contracts may be instituted by all who are thereby obliged principally or subsidiarily. Petitioner is neither a party nor a privy to the Deed of Conditional Sale and the assignment thereof: thus, it cannot assail the validity of the said contracts. In Ibañez vs. Hongkong and Shanghai Bank, we said: From these legal provisions it is deduced that it is the interest had in a given contract, that is the determining reason of the right which lies in favor of the party obligated principally or subsidiarily to enable him to bring an action for the nullity of the contract in which he intervened, and, therefore, he who has no right in a contract is not entitled to prosecute an action for nullity, for, according to the precedents established by the courts, the person who is not a party to a contract, nor has any cause of action or representation from those who intervened therein, is manifestly without right of action and personality such as to enable him to assail the validity of the contract. (Decisions of the supreme court of Spain, of April 18, 1901, and November 23, 1903, pronounced in cases requiring an application of the preinserted article 1302 of the Civil Code.) (22 Phil. 572; 584). In the decision sought to be reviewed We agree with the Court of Appeals that: The corollary issue is whether appellant has the personality to assail the validity of the conditional sale and its assignment. The answer is partly supplied by the above discussion: further arguments against the appellant are the provisions of the Civil Code which say that contracts take effect only between parties (Art. 131 1) hence the action for their annulment may be instituted only by those who are thereby obliged principally or subsidiarily (Art. 1397). Appellant is not privy to either the deed of conditional sale or the assignment. (Decision of Court of Appeals, p. 3). WHEREFORE, the petition is DENIED, with costs against the petitioner. SO ORDERED.

Fernan (Chairman), Gutierrez, Jr., Paras and Padilla, JJ., concur.  Bidin. J., took no part. 160. G.R. No. L-11311 May 28, 1958 MARTA C. ORTEGA, plaintiff-appellant, vs. DANIEL LEONARDO, defendant-appellee. Jose Ma. Reyes for appellant.   Tomas A. Leonardo for appellee. BENGZON, J.: Well known is the general rule in the Statute of Frauds precluding enforcement of oral contracts for the sale of land. Not so well known is exception concerning the partially executed contracts1 — least our jurisprudence offers few, if any, apposite illustrations. This appeal exemplifies such exception. Alleging partial performance, plaintiff sought to compel defendant to comply with their oral contract of sale of a parcel of land. Upon a motion to dismiss, the Manila court of first instance ordered dismissal following the above general rule. Hence this appeal. It should be sustained if the allegations of the complaint — which the motion to dismiss admitted — set out an instance of partial performance. Stripped of non-essentials, the complaint averred that long before and until her house had been completely destroyed during the liberation of the City of Manila, plaintiff occupied a parcel of land, designated as Lot 1, Block 3 etc. (hereinafter called Lot I) located at San Andres Street, Malate, Manila; that after liberation she re-occupied it; that when the administration and disposition of the said Lot I (together with other lots in the Ana Sarmiento Estate) were assigned by the Government to the Rural Progress Administration2 plaintiff asserted her right thereto (as occupant) for purposes of purchase; that defendant also asserted a similar


right, alleging occupancy of a portion of the land subsequent to plaintiff's; that during the investigation of such conflicting interests, defendant asked plaintiff to desist from pressing her claim and definitely promised that if and when he succeeded in getting title to Lot I3 , he would sell to her a portion thereof with an area of 55.60 square meters (particularly described) at the rate of P25.00 per square meter, provided she paid for the surveying and subdivision of the Lot and provided further that after he acquired title, she could continue holding the lot as tenant by paying a monthly rental of P10.00 until said portion shall have been segregated and the purchase price fully paid; that plaintiff accepted defendant's offer, and desisted from further claiming Lot I; that defendant finally acquired title thereto; that relying upon their agreement, plaintiff caused the survey and segregation of the portion which defendant had promised to sell incurring expenses therefor, said portion being now designated as Lot I-B in a duly prepared and approved subdivision plan; that in remodelling her son's house constructed on a lot adjoining Lot I she extended it over said Lot I-B; that after defendant had acquired Lot I plaintiff regularly paid him the monthly rental of P10.00; that in July 1954, after the plans of subdivision and segregation of the lot had been approved by the Bureau of Lands, plaintiff tendered to defendant the purchase price which the latter refused to accept, without cause or reason. The court below explained in its order of dismissal: It is admitted by both parties that an oral agreement to sell a piece of land is not enforceable. (Art. 1403, Civil Code, Section 21, Rule 123, Rules of Court.) Plaintiff, however, argues that the contract in question, although verbal, was partially performed because plaintiff desisted from claiming the portion of lot I in question due to the promise of defendant to transfer said portion to her after the issuance of title to defendant. The court thinks that even granting that plaintiff really desisted to claim not on oral promise to sell made by defendant, the oral promise to sell cannot be enforced. The desistance to claim is not a part of the contract of sale of the land. Only in essential part of the executory

contract will, if it has already been performed, make the verbal contract enforceable, payment of price being an essential part of the contract of sale. If the above means that partial performance of a sale contract occurs only when part of the purchase price is paid, it surely constitutes a defective statement of the law. American Jurisprudence in its title "Statute of Frauds" lists other acts of partial performance, such as possession, the making of improvements, rendition of services, payment of taxes, relinquishment of rights, etc. Thus, it is stated that "The continuance in possession may, in a proper case, be sufficiently referable to the parol contract of sale to constitute a part performance thereof. There may be additional acts or peculiar circumstances which sufficiently refer the possession to the contract. . . . Continued possession under an oral contract of sale, by one already in possession as a tenant, has been held a sufficient part performance, where accompanied by other acts which characterize the continued possession and refer it to the contract of purchase. Especially is this true where the circumstances of the case include the making of substantial, permanent, and valuable improvements." (49 American Jurisprudence — 44) It is also stated that "The making of valuable permanent improvements on the land by the purchaser, in pursuance of the agreement and with the knowledge of the vendor, has been said to be the strongest and the most unequivocal act of part performance by which a verbal contract to sell land is taken out of the statute of frauds, and is ordinarily an important element in such part performance. . . . Possession by the purchaser under a parol contract for the purchase of real property, together with his making valuable and permanent improvements on the property which are referable exclusively to the contract, in reliance on the contract, in the honest belief that he has a right to make them, and with the knowledge and consent or acquiescence of the vendor, is deemed a part performance of the contract. The entry into possession and the making of the improvements are held on


amount to such an alteration in the purchaser's position as will warrant the court's entering a degree of specific performance." (49 American Jurisprudence p.755, 756.) Again, it is stated that "A tender or offer of payment, declined by the vendor, has been said to be equivalent to actual payment, for the purposes of determining whether or not there has been a part performance of the contract. This is apparently true where the tender is by a purchaser who has made improvements. But the doctrine now generally accepted, that not even the payment of the purchase price, without something more, . . . is a sufficient part performance. (49 American Jurisprudence p. 772.) And the relinquishment of rights or the compromise thereof has likewise been held to constitute part performance. (See same title secs. 473, 474, 475.) In the light of the above four paragraphs, it would appear that the complaint in this case described several circumstance indicating partial performance: relinquishment of rights4 continued possession, building of improvements, tender of payment plus the surveying of the lot at plaintiff's expense and the payment of rentals. We shall not take, time to discuss whether one or the other or any two or three of them constituted sufficient performance to take the matter away from the operation of the Statute of Frauds. Enough to hold that the combination of all of them amounted to partial performance; and we do so line with the accepted basis of the doctrine, that it would be a fraud upon the plaintiff if the defendant were permitted to oppose performance of his part after he has allowed or induced the former to perform in reliance upon the agreement. (See 49 American Jurisprudence p. 725.) The paragraph immediately preceding will serve as our comment on the appellee's quotations from American Jurisprudence itself to the effect that "relinquishment" is not part performance, and that neither "surveying the land"5 nor tender of payment is sufficient. The precedents hereinabove transcribed oppose or explain away or qualify the appellee's citations. And at the risk of being repetitious we say: granting that none of the three

circumstances indicated by him, (relinquishment, survey, tender) would separately suffice, still the combination of the three with the others already mentioned, amounts to more than enough. Hence, as there was partial performance, the principle excluding parol contracts for the sale of realty, does not apply. The judgment will accordingly be reversed and the record remanded for further proceedings. With costs against appellee. Paras, C.J., Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Endencia and Felix, JJ., concur. 161. G.R. No. L-11231 May 12, 1958 ROSARIO CARBONNEL, plaintiff-appellant, vs. JOSE PONCIO, RAMON INFANTE, and EMMA INFANTE, defendants-appellees. Tolentino and Garcia and D. R. Cruz for appellant.   Guillermo B. Guevarra, Ricardo P. Guevarra and Emmanuel S. Tipon for appellees. CONCEPCION, J.: The issue in this case is whether the Statute of Frauds is applicable thereto. Plaintiff Rosario Carbonnel alleges, in her second amended complaint, filed with the Court of First Instance of Rizal, that, on January 27, 1955, she purchased from defendant Jose Poncio, at P9.50 a square meter, a parcel of land of about 195 square meters, more or less, located in San Juan del Monte, Rizal, known as Lot No. 13-B of subdivision plan Psd-19567, and more particularly described in Transfer Certificate of Title No. 5040 (now No. 37842), excluding the improvements thereon; that plaintiff paid P247.26 on account of the price and assumed Poncio's obligation with the Republic Savings Bank amounting to P1,177.48, with the understanding that the balance would be


payable upon execution of the corresponding deed of conveyance; that one of the conditions of the sale was that Poncio would continue staying in said land for one year, as stated in a document signed by him (and later marked as Exhibit A), a translation of which was attached to the said complaint: that Poncio refuses to execute the corresponding deed of sale, despite repeated demand; that plaintiff has thereby suffered damages in the sum of P5,000, aside from attorney's fees amounting to P1,000; that Poncio has conveyed the same property to defendants Ramon R. Infante and Emma L. Infante, who knew, of the first sale to plaintiff; and that the Infantes had thereby, caused damages to plaintiff in the sum of P5,000. Plaintiff prayed, therefore, that she be declared owner of the land in question; that the sale to the Infantes be annulled; that Poncio be required to execute the corresponding deed of conveyance in plaintiff's favor; that the Register of Deeds of Rizal be directed to issue the corresponding title in plaintiff's name; and that defendants be sentenced to pay damages. Defendants moved to dismiss said complaint upon the ground that plaintiff's claim is unenforceable under the Statute of Frauds, and that said pleading does not state facts sufficient to constitute a cause of action. The motion was denied, "without prejudice to considering, when this case is decided on the merits, whether the same falls under the Statute of Frauds." Thereafter, the Infantes filed an answer denying, most of the allegations of said complaint and alleged, by way of special defense, that they purchased the land in question in good faith, for value, and without knowledge of the alleged sale to plaintiff; and that plaintiff's claim is unenforceable under the Statute of Frauds. They, likewise, set up counterclaims for damages. In his answer, Poncio denied specifically some allegations of said complaint and alleged that he had no knowledge sufficient to form a belief as to the truth of the other averments therein. By way of special defenses, he alleged that he had consistently turned down several offers, made by plaintiff, to buy the land in question, at P15 a square meter, for he believes that it is worth

not less than P20 a square meter; that Mrs. Infante, likewise, tried to buy the land at P15 a square meter; that, on or about January 27, 1955, Poncio was advised by plaintiff that should she decide to buy the property at P20 a square meter, she would allow him to remain in the property for one year; that plaintiff then induced Poncio to sign a document, copy of which is probable, the one appended to the second amended complaint; that Poncio signed it "relying upon the statement of the plaintiff that the document was a permit for him to remain in the premises in the event that defendant decided to sell the property to the plaintiff at P20 a square meter"; that on January 30, 1955, Mrs. Infante improved her offer and he agreed to sell the land and its improvements to her for P3,535; that Poncio has not lost "his mind," to sell his property, worth at least P4,000, for the paltry sum of P1,177.48, the amount of his obligation to the Republic Savings Bank; and that plaintiff's action is barred by the Statute of Frauds. Poncio similarly set up a counterclaim for damages. As the case came up for trial on February 23, 1956 plaintiff introduced the testimony of one Constancio Meonada, who said that he is janitor of the Sto. Domingo Church and a high school, as well as auto-mechanic, graduate; that he has been and still is a paying boarder in plaintiff's house; that Poncio is his townmate, both being from Mahatao, Batanes; that, after making a rough draft, based upon data furnished by plaintiff, he typed Exhibit A, which is, in the Batanes dialect; that, thereafter, Poncio came to plaintiff's house, where he was shown Exhibit A; that after the witness had read its contents to Poncio and given him a copy thereof, Poncio signed Exhibit A and so did the plaintiff; that Meonada likewise signed at the foot of Exhibit A, as attesting witness; and that translated freely into English, Exhibit A, reads as follows: From this date, January 27, Jose Poncio may stay in this lot that I bought from him until one year without payment. After that one year and he cannot find any place where to transfer his house, he can also stay in this lot and he will pay according agreement. (t.s.n., p. 4.)


Then, taking the witness stand, plaintiff testified that she has known Poncio since childhood, he being related to her mother; that Poncio's lot adjoins her lot, in San Juan, Rizal; that one day Poncio told her that he wanted to sell his property; that, after both had agreed on its price, he said that his lot is mortgaged to the Republic savings Bank; and that at noon time, on the same day, he came back stating that both would "go to the bank to pay the balance in arrears." At this juncture, defense counsel moved to strike out the statement of the witness, invoking, in support of the motion, the Statute of Frauds. After an extended discussion, the parties agreed to submit memoranda and the hearing was suspended. Later on, the lower court issued an order dismissing plaintiff's complaint, without costs, upon the ground that her cause of action is unenforceable under the Statute of Frauds. The counterclaims were, also, dismissed. Hence, this appeal by plaintiff. We are of the opinion and so hold that the appeal is well taken. It is well settled in this jurisdiction that the Statute of Frauds is applicable only to executory contracts (Facturan vs. Sabanal, 81 Phil., 512), not to contracts that are totally or partially performed (Almirol, et al., vs. Monserrat, 48 Phil., 67, 70; Robles vs. Lizarraga Hermanos, 50 Phil., 387; Diana vs. Macalibo, 74 Phil., 70). Subject to a rule to the contrary followed in a few jurisdictions, it is the accepted view that part performance of a parol contract for the sale of real estate has the effect, subject to certain conditions concerning the nature and extent of the acts constituting performance and the right to equitable relief generally, of taking such contract from the operation of the statute of frauds, so that chancery may decree its specific performance or grant other equitable relief. It is well settled in Great Britain and in this country, with the exception of a few states, that a sufficient part performance by the purchaser under a parol contract for the sale of real estate removes the contract from the operation of the statute of frauds. (49 Am. Jur. 722-723.) In the words of former Chief Justice Moran: "The reason is simple. In executory contracts there is a wide field for fraud

because unless they be in writing there is no palpable evidence of the intention of the contracting parties. The statute has precisely been enacted to prevent fraud." (Comments on the Rules of Court, by Moran, Vol. III [1957 ed.], p. 178.) However, if a contract has been totally or partially performed, the exclusion of parol evidence would promote fraud or bad faith, for it would enable the defendant to keep the benefits already denied by him from the transaction in litigation, and, at the same time, evade the obligations, responsibilities or liabilities assumed or contracted by him thereby. For obvious reasons, it is not enough for a party to allege partial performance in order to hold that there has been such performance and to render a decision declaring that the Statute of Frauds is inapplicable. But neither is such party required to establish such partial performance by documentary proof before he could have the opportunity to introduce oral testimony on the transaction. Indeed, such oral testimony would usually be unnecessary if there were documents proving partial performance. Thus, the rejection of any and all testimonial evidence on partial performance, would nullify the rule that the Statute of Frauds is inapplicable to contracts which have been partly executed, and lead to the very evils that the statute seeks to prevent. The true basis of the doctrine of part performance according to the overwhelming weight of authority, is that it would be a fraud upon the plaintiff if the defendant were permitted to escape performance of his part of the oral agreement after he has permitted the plaintiff to perform in reliance upon the agreement. The oral contract is enforced in harmony with the principle that courts of equity will not allow the statute of frauds to be used as an instrument of fraud. In other words, the doctrine of part performance was established for the same purpose for which, the statute of frauds itself was enacted, namely, for the prevention of fraud, and arose from the necessity of preventing the statute from becoming an agent of fraud for it could not have been the intention of the statue to enable any party to commit a


fraud with impunity. (49 Am. Jur., 725-726; emphasis supplied.) When the party concerned has pleaded partial performance, such party is entitled to a reasonable chance to; establish by parol evidence the truth of this allegation, as well as the contract itself. "The recognition of the exceptional effect of part performance in taking an oral contract out of the statute of frauds involves the principle that oral evidence is admissible in such cases to prove both the contract and the part performance of the contract" (49 Am. Jur., 927). Upon submission of the case for decision on the merits, the Court should determine whether said allegation is true, bearing in mind that parol evidence is easier to concoct and more likely to be colored or inaccurate than documentary evidence. If the evidence of record fails to prove clearly that there has been partial performance, then the Court should apply the Statute of Frauds, if the cause of action involved falls within the purview thereof. If the Court is, however, convinced that the obligation in question has been partly executed and that the allegation of partial performance was not resorted to as a devise to circumvent the Statute, then the same should not be applied. Apart from the foregoing, there are in the case at bar several circumstances indicating that plaintiff's claim might not be entirely devoid of factual basis. Thus, for instance, Poncio admitted in his answer that plaintiff had offered several times to purchase his land. Again, there is Exhibit A, as document signed by the defendant. It is in the Batanes dialect, which, according to plaintiff's uncontradicted evidence, is the one spoken by, Poncio, he being a native of said region. Exhibit A states that Poncio would stay in the land sold by him to plaintiff for one year, from January 27, 1955, free of charge, and that, if he cannot find a place where to transfer his house thereon, he may remain in said lot under such terms as may be agreed upon. Incidentally, the allegation in Poncio's answer to the effect that he signed Exhibit A under the belief that it "was a permit for him to remain in the premises in the event" that "he decided to sell the property" to the plaintiff at

P20 a sq. m." is, on its face, somewhat difficult to believe. Indeed, if he had not decided as yet to sell the land to plaintiff, who, had never increased her offer of P15 a square meter, there was no reason for Poncio to get said, Permit from her. Upon the other hand, if plaintiff intended to mislead Poncio, she would have caused Exhibit A to be drafted, probably in English, instead of taking the trouble of seeing to it that it was written precisely in his native dialect, the Batanes. Moreover, Poncio's signature on Exhibit A suggests that he is neither illiterate nor so ignorant as to sign a document without reading its contents, apart from the fact that Meonada had read Exhibit A to him and given him a copy thereof, before he signed thereon, according to Meonada's uncontradicted testimony. Then, also, defendants say in their brief: The only allegation in plaintiff's complaint that bears any relation to her claim that there has been partial performance of the supposed contract of sale, is the notation of the sum of P247.26 in the bank book of defendant Jose Poncio. The noting or jotting down of the sum of P247.26 in the bank book of Jose Poncio does not prove the fact that said amount was the purchase price of the property in question. For all we knew, the sum of P247.26 which plaintiff claims to have paid to the Republic Savings Bank for the account of the defendant, assuming that the money paid to the, Republic Savings Bank came from the plaintiff, was the result of some usurious loan or accommodation, rather than earnest money or part payment of the land. Neither is a competent or satisfactory evidence to prove the conveyance on the land in question the fact that the bank book account of Jose Poncio happens to be in the possession of the plaintiff. (DefendantsAppellees' brief, pp. 25-26.) How shall we know why Poncio's bank deposit book is in plaintiff's possession or whether there is any relation between the P247.26 entry therein and the partial payment of P247.26 allegedly made by plaintiff to Poncio on account of the price of his land, if we do not allow the plaintiff to explain it on the witness stand? Without expressing any opinion on the merits of plaintiff's


claim, it is clear, therefore, that she is entitled, legally as well as from the viewpoint of equity, to an opportunity to introduce parol evidence in support of the allegations of her second amended complaint. Wherefore, the order appealed from is hereby set aside, and let this case be remanded to the lower court for further proceedings not inconsistent with this decision, with the costs of this instance against defendants-appellees. It is so ordered. Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Reyes, J.B.L., Endencia, and Felix,, JJ., concur. 162. G.R. No. L-8334 December 28, 1957 BIENVENIDO BABAO, ETC., plaintiff-appellee, vs. FLORENCIO PEREZ, ETC., ET AL., defendants-appellants. Ozaeta, Lichauco and Picazo for appellants.   Feria, Manglapuz and Associates for appellee. BAUTISTA ANGELO, J.: This is an action to recover one-half (½) of a parcel of land containing an area of 156 hectares situated in San Juan, Batangas, plus the value of the produce gathered thereon from August, 1947 until actual recovery and in the alternative, to recover the Sum of P47,000 representing reimbursement of the amount of useful and necessary expenses incurred to the clear and improve the aforesaid land. Plaintiff is the judicial administrator of the estate of the late Santiago Babao while defendant Florencio Perez is the judicial administrator of the estate of the late Celestina Perez. The other defendants are purchasers and actual owners of portions of the land which is sought to be recovered in the present litigation. The complaint alleges that Celestina Perez was in her lifetime the owner of the parcel of land in question which was not registered

either under Act 496 or under the Spanish Mortgage law: that sometime in 1924 when the deceased Santiago Babao married Maria Cleofe Perez, niece of Celestina Perez, the latter and the former entered into a verbal agreement whereby Santiago Babao bound himself to improve the land by leveling and clearing all the forest trees standing thereon and planting in lieu there of coconuts, rice, corn and other crops such as bananas and bamboo trees, and to act at the same time as administrator thereof during the lifetime of Celestina Perez, all expenses for labor, and materials to be at his cost, in consideration of which Celestina in turn bound herself to convey to Santiago Babao or, his wife ½ of land, together with all the improvements thereon upon her death; that pursuant to said verbal agreement, Santiago Babao in 1924 left his job as administrator of the Llana Estate in San Juan, Batangas for which he was receiving a salary of P150 a month, and started leveling and clearing the land having planted in an area of 50 hectares 50,000 coconuts trees, and rice and corn in another area of 70 hectares, leaving out only 50 hectares unimproved, all of which having been administered by him from 1924 to 1946; that for clearing and improving the portions of land above-mentioned, he incurred expenses amounting to P7,400 which added to his salary as administrator from l924 to 1946 at rate P150 a month mounting to P39,600, makes a total of P47,000; that in the violation of the aforesaid verbal agreement, Celestina Perez, acting through Leovigildo Perez, to whom she extended a power of Attorney to sell, sold few days before she died about 127 _«_ hectares of the land in question in consequence of which Santiago Babao was deprived of the possession and administration thereof from 1945. that said sales are fictitious and were made clear violation of the oral agreement made between Celestina Perez and Santiago Babao and as such the same are null and void; that Celestina Perez died on August 24, 1947 as a result of which intestate proceedings were instituted for the settlement of her estate and one Florencio Perez was named as judicial administrator; that Santiago Babao died on January 6, 1948 and as a consequence in estate


proceedings were instituted for the settlement of his estate and Bienvenido Babao failed to recover the ½ portion of the lane herein litigated, said estate would suffer an irreparable damage of not less than P366,700 representing fruits which it has failed to receive during the last 20 years. Wherefore, plaintiff played for the conveyance of ½ portion of the land in question and for annulment of the sales of the portion for having been made fictitiously, and in the alternative, for judgment in plaintiff's favor for the sum of P47,000 representing the amount of useful and necessary expenses incurred by Santiago Babao in improving the land in line with the oral agreement. Defendants denied plaintiff's claim that a verbal agreement was entered into between Celestina Perez Babao relative to the clearing, improving and administering the land belonging to the former having an area of 156 hectares, as well as the other claim that Santiago Babao had actually cleared and improve a great portion thereof at the cost at around P7,400. They alleged in 1924 and for many years prior thereto, the land in question had already been cleared and cultivated for agricultural purposes with an exception of a portion of 50 hectares: that said land was cleared and cultivated due partly to the effort made by Celestinas husband, Esteban de Villa, her overseers and tenants, and partly to the "trusco" system employed by them whereby persons were allowed to clear the land and plat thereon and from the harvest were compensated according to a graduated scale of division varying from year to year; that the coconut trees, banana plants and bamboo trees now standing thereon were planted not by Santiago Babao nor at his expenses but by the tenants of the spouses Esteban de Villa and Celestina Perez who were dully compensated according to the "trusco" system; that although Santiago Babao and Maria Cleofe Perez were married in 1924, the former did not have anything to do with the land in question to Esteban de Villa was then still living and actively managed the same with help of his overseer and tenants until he died in 1930; that it was only in that year when Santiago Babao began administering the land in the capacity of a nephew of Celestina

until 1935 when Celestina disgusted with the conduct of Santiago, left the company of Santiago and his wife and went to live with her nephew Bernardo Perez until her death in 1947; that since then Celestina Perez prohibited Santiago from interfering with the administration of the land and designated another person in his place, and for the work he did from 1930 to 1935, he was more than compensated because the proceeds of the harvests during said years were all given only to him and his wife and Celestina was given only what was barely sufficient for her maintenance. Defendants also alleged that the sales made by Celestina Perez through her attorney-in-fact Leovigildo Perez of several portions of the land were not fictitious is alleged but were made with full knowledge and authority of Celestina who executed in favor of Leovigildo Perez a power of Attorney under the authority notary public in the presence of Santiago Babao himself who did not interpose any objection to the execution of said power of attorney and, therefore, said sales are real, valid and genuine, having been executed in accordance with law. Defendants prayed that the complaint be dismissed with costs, after awarding to them moral damages in the amount that the court may deem proper to fix. After hearing, the court rendered in favor of the plaintiff and against the defendants, Wherefore, judgement is rendered in favor of the plaintiff and against the defendants, (1) Declaring the sales of Lupang Parang by and between the defendants, fraudulent and fictitious, null and void; (2) Ordering defendant Florencio Perea as administrator of the testate of the deceased Celestina Perez, to pay plaintiff the sum of P3,786.66 annually from August 25, 1947 until delivery of the land to the latter, with interest thereon at the rate of 6 per cent per annum from the date of the filing of the complaint; (3) Divesting the title of defendants over ½ of Lupang Parang both in quantity and quality and vesting title however in plaintiff pursuant to section 10 of Rule 39. To carry out this judgement,


the Clerk of Court is hereby appointed representative of this Court to designate a disinterested surveyor for the necessary survey and division, the expenses therefor to be defrayed half and half by plaintiff and Florencio Perez; (4) Ordering defendants to surrender the possession of the half adjudicated and vested in favor of the plaintiff after the same has been designated under the proceeding paragraph; and . (5) To pay the costs. Defendants in due time took the case on appeal to the Court of Appeals where the parties submitted their respective briefs within the reglementary period, and thereafter the court rendered judgment reversing in toto the decision appealed from and dismissing the case without pronouncement as to costs. But when its attention was called, thru a proper motion, that the court acted without jurisdiction because the amount involved was more than P50,000, the court in a resolution entered on August 14, 1954 set aside its decision and forwarded the case to us to have remanded to the Court of Appeals proved futile. While this case was pending in the lower court, counsel for appellants filed a motion to dismiss on the ground, amount others, but the alleged verbal agreement between Santiago Babao and Celestina Perez was enforceable under the Statute of frauds. The trial court denied this motion on the ground that it appears from the complaint "that Santiago fully complied with his part of the oral contract between the parties and that this is an action not only specific performance but also for damages." Consequently, the court held that the Statute of frauds cannot be invoked for the reason that "performance by one party of his part of the contract takes the case out of the statute." And pursuant to such ruling, when the case was tried on the merits, the court overruled to the introduction of oral testimony to prove the alleged verbal agreement. The important question then to be determined is whether or not the alleged verbal agreement falls within the prohibition of the Statute of frauds. This statute, formerly incorporated as Section 21 of Rule 123 of

our Rules of Court, is now found in Article 1403 of the new Civil Code, which provides, in so far as pertinent to this case, as follows:1awphi1.net In the following cases an agreement hereafter made shall be enforceable by action unless the same, or some note or memorandum thereof, be in writing, and subscribed by the party charged or by his agent, evidence therefore, of the agreement cannot be received without the writing, or secondary evidence of its contents; (a) An agreement that by its terms is not to be performed within a year from the making thereof. x x x x x x x x x (e) An agreement . . . for the sale of real property or of an interest therein. Appellants contends that the alleged verbal agreement falls under the paragraphs (a) and (c) above-quoted because the same may be considered as an agreement which by its terms is not to be performed within one year from the making thereof, or one which involves a sale of real property or of an interest therein. If this premise is correct, appellants contend, then the trial court erred in allowing the introduction of parole evidence to prove the alleged agreement over the vigorous objection of counsel for appellants. That the alleged verbal agreement is one which by its terms is not to be performed within one year is very apparent from the allegations of the complaint. Thus, it is therein alleged that the agreement was allegedly made in 1924 and by its terms Santiago Babao bound himself (1) to improve all the forest trees and planting thereon coconuts, rice, corn and other crops such as bananas and bamboo trees, and (2) to act at the same time as administrator of said land and improvements during the lifetime to Celestina Perez. And in consideration of such undertaking, Celestina Perez "bound herself to give and deliver, either to Santiago Babao or his wife Cleofe Perez, one-half (½) of the whole area of said land as improved with all the improvements thereon upon her death". It is also alleged in the complaint that


Celestina Perez died on August 24, 1947, or 23 years after the making of the alleged agreement while Santiago Babao died on January 6, 1948. From the above terms, therefore, it is not difficult to see that the undertaking assumed by Santiago Babao which was to clear, level and plant to coconut trees and other plants 156 hectares of forest land could not be accomplished in one year. In fact, the alleged improvements were supposedly accomplished during the lifetime of Celestina, which lasted over a period of 23 years, and even then not all was cleared and planted but only a portion thereof. Another part of his undertaking is that he is to administer the land during the lifetime of Celestina, and as we have already said, her death occurred 23 years after the agreement. But the trial court expressed the view that the statute does not apply because it assumed that Santiago Babao was fully complied with his part of the oral contract between the parties, and in its opinion "performance by one party of his part of the contract takes the case out of the statute." Even if his assumption were correct, still we find one flaw in its logic which fully nullifies it for it falls to consider that in order that a partial performance of the contract may take the case out of the operation of the statute, it must appear clear that the full performance has been made by one party within one year, as otherwise the statute would apply. Thus, the rule on this point is well stated in Corpus Juris in the following wise: Contracts which by their terms are not to be performed within one year, may be taken out of the statute through performance by one party thereto. All that is required in such case is complete performance within the year by one party, however many tears may have to elapse before the agreement is performed by the other party. But nothing less than full performance by one party will suffice, and it has been held that, if anything remains to be done after the expiration of the year besides the mere payment of money, the statute will apply." 1 (Emphasis supplied). It is not therefore correct to state that Santiago Babao has fully complied with his part within the year from the alleged contract in question.

When, in an oral contract which, by its terms, is to be performed within one year from the execution of the contracting parties has complied within the year with obligations imposed on him by said contract, the other party cannot avoid the fulfillment of those incumbent on him under the same contract by invoking the statute of frauds because the latter aims to prevent and not to protect fraud. (Shoemaker vs. La Tondeña, Inc. 68 Phil., 24.). The broad view is that the statute of Frauds applies only to agreements not to be performed on either side within a year from the making thereof. Agreements to be fully performed on one side within the year are taken out of the operation of the statute. (National Bank vs. Philippine Vegetable Oil Co., Phil., 857, 858.). Assuming arguendo that the agreement in question falls also under paragraph (a) of article 1403 of the new Civil Code, i.e., it is a contract or agreement for the sale of real property or of an interest therein, it cannot also be contended that the provision does not apply to the present case for the reason that there was part performance on the part of one of the parties. In this connection, it must be noted that this statute is one based on equity. It is based on equitable estoppel or estoppel by conduct. It operates only under certain specified conditions and when adequate relief of law is unavailable (49 Am. Jur., Statute of Frauds, Section 422, p. 727). And one of the requisites that need be present is that the agreement relied on must be certain, definite, clear, unambiguous and unequivocal in its terms before the statute may operate. Thus, the rule on this matter is as follows: The contract must be fully made and completed in every respect except for the writing required by the statute, in order to be enforceable on the ground of part performance. The parol agreement relied on must be certain, definite, clear, unambiguous, and unequivocal in its terms, particularly where the agreement is between parent and child, and be clearly established by the evidence. The requisite of clearness and definiteness extends to both the terms and the subject matter of


the contract. Also, the oral contract must be fair, reasonable and just in its provisions for equity to enforce it on the ground of part performance. If it would be inequitable to enforce the oral agreement, or if its specific enforcement would be harsh or oppressive upon the defendant, equity will withhold its aid. Clearly, the doctrine of part performance taking an oral contract out of the statute of frauds does not apply so as to support a suit for specific performance where both the equities and the statute support the defendant's case. (49 Am. Jur., p. 729.). The alleged agreement is far from complying with the above requirement for, according to the complaint, Santiago Babao bound himself to convert a big parcel of forest land of 156 hectares into a veritable farm planted to coconuts, rice, corn and other crops such as bananas and bamboo trees and to act as administrator of said farm during the lifetime of Celestina Perez, while the latter in turn bound herself to give either to Santiago or his wife ½ of the land as improved with all the improvements thereupon her death. This agreement is indeed vague and ambiguous for it does not specify how many hectares was to be planted to coconuts, how many to rice and corn, and what portion to bananas and bamboo trees. And as counsel for appellants puts it, "as the alleged contract stands, if Santiago Babao should plant one-half hectares to coconuts, one-half to rice, and another half hectare to corn, and the rest to bananas and bamboo trees, he would be entitled to receive one-half of 156 hectares, or 78 hectares, of land for his services. That certainly would be unfair and unheard of; no sane property owner would enter into such contract. It costs much more time, money, and labor to plant coconut trees than to plant bananas and bamboo trees; and it also costs less to convert forest land to rice and corn land than to convert it into a coconut plantation. On the part of Celestina Perez, her promise is also incapable of execution. How could she give and deliver one half of the land upon her death?" The terms of the alleged contract would appear more vague if we consider the testimony of Carlos Orense who claimed to have been present at the time the alleged agreement was made

between Celestina Perez and Santiago Babao for apparently the same does not run along the same line as the one claimed by appellee. This is what Orense said: "You, Santiago, leave the Llana estate and attend to this lupang parang. Have it cleared and planted to coconuts, for that land will eventually fall in your hands" (as translated from Tagalog), which runs counter with the claim of appellee. The agreement being vague and ambiguous, the doctrine of part performance cannot therefore be invoked to take this case out of the operation of the statute. Obviously, there can be no part performance until there is a definite and complete agreement between the parties. In order to warrant the specific enforcement of a parol contract for the sale of land, on the ground of part performance, all the essential terms of the contract must be established by competent proof, and shown to be definite, certain, clear, and unambiguous. And this clearness and definiteness must extend to both the terms and the subject matter of the contract. The rule that the court will not specifically enforce a contract for the sale of land unless its terms have been definitely understood and agreed upon by the parties, and established by the evidence, is especially applicable to oral contracts sought to be enforced on the ground of part performance. An oral contract, to be enforced on this ground, must at least have that degree of certainty which is required of written contracts sought to be specifically enforced.lawphi1.net The parol contract must be sufficiently clear and definite to render the precise acts which are to be performed thereunder clearly ascertainable. Its terms must be so clear and complete as to allow no reasonable doubt respecting its enforcement according to the understanding of the parties. (101 A.L.R., pp. 950-951). In this jurisdiction, as in the United States, the existence of an oral agreement or understanding such as that alleged in the complaint in the case at bar cannot be maintained on vague, uncertain, and indefinite testimony, against the reasonable presumption that prudent men who enter into such contracts will


execute them in writing, and comply with the formalities prescribed by law for the creation of a valid mortgage. But where the evidence as to the existence of such an understanding or agreement is clear, convincing and satisfactory, the same broad principles of equity operate on this jurisdiction as in the United States to compel the parties to live up to the terms of their contract. (Cuyugan vs. Santos, 34 Phil., 100, 101.). There is another flaw that we find in the decision of the court a quo. During the trial of this case, counsel for appellants objected the admission of the testimony of plaintiff Bernardo Babao and that of his mother Cleofe Perez as to what occurred between Celestina Perez and Santiago Babao, with regard to the agreement on the ground that their testimony was prohibited by section 26(c) of Rule 123 of the Rules of Court. This rule prohibits parties or assignors of parties to a case, or persons in whose behalf case is prosecuted, against an executor or administrator of a deceased person upon a claim or demand against the estate of such deceased person from testifying as to any matter of fact occurring before the death of such deceased person. But the court overruled the opposition saying that said rule did not apply where the complaint against the estate of a deceased person alleges fraud, citing the case of Ong Chua vs. Carr, 53 Phil., 980. Here again the court is in error because if in that case the witness was allowed to testify it was because the existence of fraud was first established by sufficient and competent evidence. Here, however, the alleged fraud is predicated upon the existence of the agreement itself which violates the rule of petitio principii. Evidently, the fraud to exist must be established by evidence aliunde and not by the same evidence which is to sought to be prevented. The infringement of the rule is evident. . . . The reason for this rule is that "if death has closed the lips of one party, the policy of the law is to close the lips of the other.' Another reason is that `the temptation to falsehood and concealment in such cases is considered too great to allow the surviving party to testify in his own behalf.' Accordingly, the incompetency applies whether the deceased died before or after

the commencement of the action against him, if at the time the testimony was given he was dead and cannot disprove it, since the reason for the prohibition, which is to discourage perjury, exists in both instances. (Moran, Comments on the Rules of Court, Vol. 3, 1952 Ed., p. 234.).lawphi1.net Having reached the conclusion that all the parol evidence of appellee was submitted in violation of the Statute of Frauds, or of the rule which prohibits testimony against deceased persons, we find unnecessary to discuss the other issues raised in appellants' brief. Wherefore, the decision appealed from is reversed, and the case is dismissed, with costs against appellee. Bengzon, Paras, C.J., Padilla, Reyes, A., Labrador, Reyes, J.B.L., and Endencia, JJ., concur. 163. G.R. No. L-5028 November 26, 1952 FELIPE CABAGUE and GERONIMO CABAGUE, plaintiffsappellants, vs. MATIAS AUXILIO and SOCORRO AUXILIO, defendantsappellees. Generoso F. Obusan for appellants.   Pedro M. Tagala for appellees. BENGZON, J.: According to the Rules of Court parol evidence is not admissible to prove an agreement made upon the consideration of marriage other than a mutual promise to marry.1 This litigation calls for application of that rule. In the justice of the peace court of Basud, Camarines Norte, Felipe Cabague and his son Geronimo sued the defendant Matias Auxilio and his daughter Socorro to recover damages resulting from defendants' refusal to carry out the previously agreed marriage


between Socorro and Geronimo. The complaint alleged, in short: (a) that defendants promised such marriage to plaintiffs, provided the latter would improve the defendants' house in Basud and spend for the wedding feast and the needs of the bride; (b) that relying upon such promises plaintiffs made the improvement and spent P700; and (c) that without cause defendants refused to honor their pledged word. The defendants moved to dismiss, arguing that the contract was oral, unenforceable under the rule of evidence hereinbefore mentioned. And the court dismissed the case. On appeal to the Court of First Instance, the plaintiffs reproduced their complaint and defendants reiterated their motion to dismiss. From an order of dismissal this appeal was perfected in due time and form. It should be observed preliminarily that, under the former rules of procedure, when the complaint did not state whether the contract sued on was in writing or not, the statute of frauds could be no ground for demurrer. Under the new Rules "defendant may now present a motion to dismiss on the ground that the contract was not in writing, even if such fact is not apparent on the face of the complaint. The fact may be proved by him." (Moran Rules of Court 2d ed. p. 139 Vol. I.) There is no question here that the transaction was not in writing. The only issue is whether it may be proved in court. The understanding between the plaintiffs on one side and the defendants on the other, really involves two kinds of agreement. One, the agreement between Felipe Cabague and the defendants in consideration of the marriage of Socorro and Geronimo. Another, the agreement between the two lovers, as "a mutual promise to marry". For breach of that mutual promise to marry, Geronimo may sue Socorro for damages. This is such action, and evidence of such mutual promise is admissible.2 However Felipe Cabague's action may not prosper, because it is to enforce an agreement in consideration of marriage. Evidently as to Felipe Cabague and Matias Auxilio this action could not be maintained on the theory of "mutual promise to marry".3 Neither may it be regarded as action by Felipe against Socorro "on a mutual

promise to marry." Consequently, we declare that Geronimo may continue his action against Socorro for such damages as may have resulted from her failure to carry out their mutual matrimonial promises. Wherefore this expediente will be returned to the lower court for further proceedings in accordance with this opinion. So ordered. Paras, C.J., Pablo, Padilla, Montemayor, Jugo, Bautista Angelo and Labrador, JJ., concur. 164. G.R. No. L-55048 May 27, 1981 SUGA SOTTO YUVIENCO, BRITANIA SOTTO, and MARCELINO SOTTO, petitioners, vs. HON. AUXENCIO C. DACUYCUY, Judge of the CFI of Leyte, DELY RODRIGUEZ, FELIPE ANG CRUZ, CONSTANCIA NOGAR, MANUEL GO, INOCENTES DIME, WILLY JULIO, JAIME YU, OSCAR DY, DY CHIU SENG, BENITO YOUNG, FERNANDO YU, SEBASTIAN YU, CARLOS UY, HOC CHUAN and MANUEL DY, respondents. BARREDO, J.:1äwphï1.ñët Petition for certiorari and prohibition to declare void for being in grave abuse of discretion the orders of respondent judge dated November 2, 1978 and August 29, 1980, in Civil Case No. 5759 of the Court of First Instance of Leyte, which denied the motion filed by petitioners to dismiss the complaint of private respondents for specific performance of an alleged agreement of sale of real property, the said motion being based on the grounds that the respondents' complaint states no cause of action and/or that the claim alleged therein is unenforceable under the Statute of Frauds. Finding initially prima facie merit in the petition, We required respondents to answer and We issued a temporary restraining


order on October 7, 1980 enjoining the execution of the questioned orders. In essence, the theory of petitioners is that while it is true that they did express willingness to sell to private respondents the subject property for P6,500,000 provided the latter made known their own decision to buy it not later than July 31, 1978, the respondents' reply that they were agreeable was not absolute, so much so that when ultimately petitioners' representative went to Cebu City with a prepared and duly signed contract for the purpose of perfecting and consummating the transaction, respondents and said representative found variance between the terms of payment stipulated in the prepared document and what respondents had in mind, hence the bankdraft which respondents were delivering to petit loners' representative was returned and the document remained unsigned by respondents. Hence the action below for specific performance. To be more specific, the parties do not dispute that on July 12, 1978, petitioners, thru a certain Pedro C. Gamboa, sent to respondents the following letter: Mr. Yao King Ong Life Bakery Tacloban City Dear Mr. Yao: 1äwphï1.ñët This refers to the Sotto property (land and building) situated at Tacloban City. My clients are willing to sell them at a total price of P6,500,000.00. While there are other parties who are interested to buy the property, I am giving you and the other occupants the preference, but such priority has to be exercised within a given number of days as I do not want to lose the opportunity if you are not interested. I am therefore gluing you and the rest of the occupants until July 31, 1978 within it which to decide whether you want to buy the property. If I do not hear from you by July 31, I will offer or close the deal with the other interested buyer. Thank you so much for the hospitality extended to me during my last trip to Tacloban, and I hope to hear from you very soon.

1äwphï1.ñët Very truly yours, Pedro C. Gamboa 1 (Page 9, Record.) Reacting to the foregoing letter, the following telegram was sent by "Yao King Ong & tenants" to Atty. Pedro Gamboa in Cebu City: Atty. Pedro Gamboa Room 314, Maria Cristina Bldg. Osmeña Boulevard, Cebu City Reurlet dated July 12 inform Dra. Yuvienco we agree to buy property proceed Tacloban to negotiate details 1äwphï1.ñët Yao King Ong & tenants (Page 10, Record.) Likewise uncontroverted is the fact that under date of July 27, 1978, Atty. Gamboa wired Yao King Ong in Tacloban City as follows: NLT YAO KING ONG LIFE BAKERY TACLOBAN CITY PROPOSAL ACCEPTED ARRIVING TUESDAY MORNING WITH CONTRACT PREPARE PAYMENT BANK DRAFT 1äwphï1.ñët ATTY. GAMBOA (Page 10, Id.) Now, Paragraph 10 of the complaint below of respondents alleges: 1äwphï1.ñët 10. That on August 1, 1978, defendant Pedro Gamboa arrived Tacloban City bringing with him the prepared contract to purchase and to sell referred to in his telegram dated July 27, 1978 (Annex 'D' hereof) for the purpose of closing the transactions referred to in paragraphs 8 and 9 hereof, however, to the complete surprise of plaintiffs, the defendant (except def. Tacloban City Ice Plant, Inc.) without giving notice to plaintiffs, changed the mode of payment with respect to the balance of P4,500,000.00 by imposing upon plaintiffs to pay same amount within thirty (30) days from execution of the contract instead of


the former term of ninety (90) days as stated in paragraph 8 hereof. (Pp. 10-11, Record.) Additionally and to reenforce their position, respondents alleged further in their complaint: 1äwphï1.ñët 8. That on July 12, 1978, defendants (except defendant Tacloban City Ice Plant, Inc.) finally sent a telegram letter to plaintiffs- tenants, through same Mr. Yao King Ong, notifying them that defendants are willing to sell the properties (lands and building) at a total price of P6,500,000.00, which herein plaintiffs-tenants have agreed to buy the said properties for said price; a copy of which letter is hereto attached as integral part hereof and marked as Annex 'C', and plaintiffs accepted the offer through a telegram dated July 25, 1978, sent to defendants (through defendant Pedro C. Gamboa), a copy of which telegram is hereto attached as integral part hereof and marked as Annex C-1 and as a consequence hereof. plaintiffs except plaintiff Tacloban - merchants' Realty Development Corporation) and defendants (except defendant Tacloban City Ice Plant. Inc.) agreed to the following terms and conditions respecting the payment of said purchase price, to wit: 1äwphï1.ñët P2,000,000.00 to be paid in full on the date of the execution of the contract; and the balance of P4,500,000.00 shall be fully paid within ninety (90) days thereafter; 9. That on July 27, 1978, defendants sent a telegram to plaintiff- tenants, through the latter's representative Mr. Yao King Ong, reiterating their acceptance to the agreement referred to in the next preceding paragraph hereof and notifying plaintiffs-tenants to prepare payment by bank drafts; which the latter readily complied with; a copy of which telegram is hereto attached as integral part hereof and marked as Annex "D"; (Pp 49-50, Record.) It was on the basis of the foregoing facts and allegations that herein petitioners filed their motion to dismiss alleging as main grounds: 1äwphï1.ñët I. That plaintiff, TACLOBAN MERCHANTS' REALTY DEVELOPMENT CORPORATION, amended complaint, does not

state a cause of action and the claim on which the action is founded is likewise unenforceable under the provisions of the Statute of Frauds. II. That as to the rest of the plaintiffs, their amended complaint does not state a cause of action and the claim on which the action is founded is likewise unenforceable under the provisions of the Statute of Frauds. (Page 81, Record.) With commendable knowledgeability and industry, respondent judge ruled negatively on the motion to dismiss, discoursing at length on the personality as real party-in-interest of respondent corporation, while passing lightly, however, on what to Us are the more substantial and decisive issues of whether or not the complaint sufficiently states a cause of action and whether or not the claim alleged therein is unenforceable under the Statute of Frauds, by holding thus: 1äwphï1.ñët The second ground of the motion to dismiss is that plaintiffs' claim is unenforceable under the Statute of Frauds. The defendants argued against this motion and asked the court to reject the objection for the simple reason that the contract of sale sued upon in this case is supported by letters and telegrams annexed to the complaint and other papers which will be presented during the trial. This contention of the defendants is not well taken. The plaintiffs having alleged that the contract is backed up by letters and telegrams, and the same being a sufficient memorandum, the complaint states a cause of action and they should be given a day in court and allowed to substantiate their allegations (Paredes vs. Espino, 22 SCRA 1000). To take a contract for the sale of land out of the Statute of Frauds a mere note or memorandum in writing subscribed by the vendor or his agent containing the name of the parties and a summary statement of the terms of the sale either expressly or by reference to something else is all that is required. The statute does not require a formal contract drawn up with technical exactness for the language of Par. 2 of Art. 1403 of the Philippine Civil Code is' ... an agreement ... or some note or memorandum


thereof,' thus recognizing a difference between the contract itself and the written evidence which the statute requires (Berg vs. Magdalena Estate, Inc., 92 Phil. 110; Ill Moran, Comments on the Rules of Court, 1952 ed. p. 187). See also Bautista's Monograph on the Statute of Frauds in 21 SCRA p. 250. (Pp. 110-111, Record) Our first task then is to dwell on the issue of whether or not in the light of the foregoing circumstances, the complaint in controversy states sufficiently a cause of action. This issue necessarily entails the determination of whether or not the plaintiffs have alleged facts adequately showing the existence of a perfected contract of sale between herein petitioners and the occupant represented by respondent Yao King Ong. In this respect, the governing legal provision is, of course, Article 1319 of the Civil Code which provides:1äwphï1.ñët ART. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are constitute the contract. The offer must be certain the acceptance absolute. A qualified acceptance constitute a counter-offer. Acceptance made by letter or telegram does not bind offerer except from the time it came to his knowledge. The contract, in a case, is presumed to have been entered into in the place where the offer was made. In the instant case, We can lay aside, for the moment, petitioners' contention that the letter of July 12, 1978 of Atty. Pedro C. Gamboa to respondents Yao King Ong and his companions constitute an offer that is "certain", although the petitioners claim that it was a mere expression of willingness to sell the subject property and not a direct offer of sale to said respondents. What We consider as more important and truly decisive is what is the correct juridical significance of the telegram of respondents instructing Atty. Gamboa to "proceed to Tacloban to negotiate details." We underline the word "negotiate" advisedly because to Our mind it is the key word that negates and makes it legally impossible for Us to hold that respondents' acceptance of petitioners' offer, assuming that it was a "certain" offer indeed, was the "absolute" one that Article 1319 above-quoted requires.

Dictionally, the implication of "to negotiate" is practically the opposite of the Idea that an agreement has been reached. Webster's Third International Dictionary, Vol. II (G. & C. Merriam Co., 1971 Philippine copyright) gives the meaning of negotiate as "to communicate or confer with another so as to arrive at the settlement of some matter; meet with another so as to arrive through discussion at some kind of agreement or compromise about something; — to arrange for or bring about through conference or discussion; work at or arrive at or settle upon by meetings and agreements or compromises — ". Importantly, it must be borne in mind that Yao King Ong's telegram simply says "we agree to buy property". It does not necessarily connote acceptance of the price but instead suggests that the details were to be subject of negotiation. Respondents now maintain that what the telegram refers to as "details" to be "negotiated" are mere "accidental elements", not the essential elements of the contract. They even invite attention to the fact that they have alleged in their complaint (Par. 6) that it was as early as "in the month of October, 1977 (that) negotiations between plaintiffs and defendants for the purchase and sale (in question) — were made, thus resulting to offers of same defendants and counter-offer of plaintiffs". But to Our mind such alleged facts precisely indicate the failure of any meeting of the minds of the parties, and it is only from the letter and telegrams above-quoted that one can determine whether or not such meeting of the minds did materialize. As We see it, what such allegations bring out in bold relief is that it was precisely because of their past failure to arrive at an agreement that petitioners had to put an end to the uncertainty by writing the letter of July 12, 1978. On the other hand, that respondents were all the time agreeable to buy the property may be conceded, but what impresses Us is that instead of "absolutely" accepting the "certain" offer — if there was one — of the petitioners, they still insisted on further negotiation of details. For anyone to read in the telegram of Yao that they accepted the price of P6,500,000.00 would be an inference not necessarily warranted by the words


"we agree to buy" and "proceed Tacloban to negotiate details". If indeed the details being left by them for further negotiations were merely accidental or formal ones, what need was there to say in the telegram that they had still "to negotiate (such) details", when, being unessential per their contention, they could have been just easily clarified and agreed upon when Atty. Gamboa would reach Tacloban? Anent the telegram of Atty. Gamboa of July 27, 1978, also quoted earlier above, We gather that it was in answer to the telegram of Yao. Considering that Yao was in Tacloban then while Atty. Gamboa was in Cebu, it is difficult to surmise that there was any communication of any kind between them during the intervening period, and none such is alleged anyway by respondents. Accordingly, the claim of respondents in paragraph 8 of their complaint below that there was an agreement of a down payment of P2 M, with the balance of P4.5M to be paid within 90 days afterwards is rather improbable to imagine to have actually happened. Respondents maintain that under existing jurisprudence relative to a motion to dismiss on the ground of failure of the complaint to state a cause of action, the movant-defendant is deemed to admit the factual allegations of the complaint, hence, petitioners cannot deny, for purposes of their motion, that such terms of payment had indeed been agreed upon. While such is the rule, those allegations do not detract from the fact that under Article 1319 of the Civil Code above-quoted, and judged in the light of the telegram-reply of Yao to Atty. Gamboa's letter of July 12, 1978, there was not an absolute acceptance, hence from that point of view, petitioners' contention that the complaint of respondents state no cause of action is correct. Nonetheless, the alleged subsequent agreement about the P2 M down and P4.5 M in 90 days may at best be deemed as a distinct cause of action. And placed against the insistence of petitioners, as demonstrated in the two deeds of sale taken by Atty. Gamboa to Tacloban, Annexes 9 and 10 of the answer of herein respondents, that there was no agreement about 90 days, an

issue of fact arose, which could warrant a trial in order for the trial court to determine whether or not there was such an agreement about the balance being payable in 90 days instead of the 30 days stipulated in Annexes 9 and 10 above-referred to. Our conclusion, therefore, is that although there was no perfected contract of sale in the light of the letter of Atty. Gamboa of July 12, 1978 and the letter-reply thereto of Yao; it being doubtful whether or not, under Article 1319 of the Civil Code, the said letter may be deemed as an offer to sell that is "certain", and more, the Yao telegram is far from being an "absolute" acceptance under said article, still there appears to be a cause of action alleged in Paragraphs 8 to 12 of the respondents' complaint, considering it is alleged therein that subsequent to the telegram of Yao, it was agreed that the petitioners would sell the property to respondents for P6.5 M, by paving P2 M down and the balance in 90 days and which agreement was allegedly violated when in the deeds prepared by Atty. Gamboa and taken to Tacloban, only 30 days were given to respondents. But the foregoing conclusion is not enough to carry the day for respondents. It only brings Us to the question of whether or not the claim for specific performance of respondents is enforceable under the Statute of Frauds. In this respect, We man, view the situation at hand from two angles, namely, (1) that the allegations contained in paragraphs 8 to 12 of respondents' complaint should be taken together with the documents already aforementioned and (2) that the said allegations constitute a separate and distinct cause of action. We hold that either way We view the situation, the conclusion is inescapable e that the claim of respondents that petitioners have unjustifiably refused to proceed with the sale to them of the property v in question is unenforceable under the Statute of Frauds. It is nowhere alleged in said paragraphs 8 to 12 of the complaint that there is any writing or memorandum, much less a duly signed agreement to the effect that the price of P6,500,000 fixed by petitioners for the real property herein involved was agreed to be paid not in cash but in installments as alleged by


respondents. The only documented indication of the non-whollycash payment extant in the record is that stipulated in Annexes 9 and 10 above-referred to, the deeds already signed by the petitioners and taken to Tacloban by Atty. Gamboa for the signatures of the respondents. In other words, the 90-day term for the balance of P4.5 M insisted upon by respondents choices not appear in any note, writing or memorandum signed by either the petitioners or any of them, not even by Atty. Gamboa. Hence, looking at the pose of respondents that there was a perfected agreement of purchase and sale between them and petitioners under which they would pay in installments of P2 M down and P4.5 M within ninety 90) days afterwards it is evident that such oral contract involving the "sale of real property" comes squarely under the Statute of Frauds (Article 1403, No. 2(e), Civil Code.) On the other score of considering the supposed agreement of paying installments as partly supported by the letter and t telegram earlier quoted herein, His Honor declared with well studied ratiocination, albeit legally inaccurate, that: 1äwphï1.ñët The next issue relate to the State of Frauds. It is contended that plaintiffs' action for specific performance to compel the defendants to execute a good and sufficient conveyance of the property in question (Sotto land and building) is unenforceable because there is no other note memorandum or writing except annexes "C", "C-l" and "D", which by themselves did not give birth to a contract to sell. The argument is not well founded. The rules of pleading limit the statement of the cause of action only to such operative facts as give rise to the right of action of the plaintiff to obtain relief against the wrongdoer. The details of probative matter or particulars of evidence, statements of law, inferences and arguments need not be stated. Thus, Sec. 1 of Rule 8 provides that 'every pleading shall contain in a methodical and logical form, a plain concise and direct statement of the ultimate facts on which the party pleading relies for his claim or defense, as the case may be, omitting the statement of mere evidentiary facts.' Exhibits need not be attached. The contract of sale sued upon in this case is supported by letters and telegrams annexed to the

complaint and plaintiffs have announced that they will present additional evidences during the trial to prove their cause of action. The plaintiffs having alleged that the contract is backed up by letters and telegrams, and the same being sufficient memorandum, the complaint states a cause of action and they should be given their day in court and allowed to substantiate their allegations (Parades vs. Espino, 22 SCRA 1000). (Pp 165166, Record.) The foregoing disquisition of respondent judge misses at least two (2) juridical substantive aspects of the Statute of Frauds insofar as sale of real property is concerned. First, His Honor assumed that the requirement of perfection of such kind of contract under Article 1475 of the Civil Code which provides that "(t)he contract of sale is perfected at the moment there is a meeting of the minds upon the thing which is the object of the contract and upon the price", the Statute would no longer apply as long as the total price or consideration is mentioned in some note or memorandum and there is no need of any indication of the manner in which such total price is to be paid. We cannot agree. In the reality of the economic world and the exacting demands of business interests monetary in character, payment on installments or staggered payment of the total price is entirely a different matter from cash payment, considering the unpredictable trends in the sudden fluctuation of the rate of interest. In other words, it is indisputable that the value of money - varies from day to day, hence the indispensability of providing in any sale of the terms of payment when not expressly or impliedly intended to be in cash. Thus, We hold that in any sale of real property on installments, the Statute of Frauds read together with the perfection requirements of Article 1475 of the Civil Code must be understood and applied in the sense that the idea of payment on installments must be in the requisite of a note or memorandum therein contemplated. Stated otherwise, the inessential elements" mentioned in the case of Parades vs. Espino, 22 SCRA 1000, relied upon by respondent judge must be deemed to


include the requirement just discussed when it comes to installment sales. There is nothing in the monograph re — the Statute of Frauds appearing in 21 SCRA 250 also cited by His Honor indicative of any contrary view to this ruling of Ours, for the essence and thrust of the said monograph refers only to the form of the note or memorandum which would comply with the Statute, and no doubt, while such note or memorandum need not be in one single document or writing and it can be in just sufficiently implicit tenor, imperatively the separate notes must, when put together', contain all the requisites of a perfected contract of sale. To put it the other way, under the Statute of Frauds, the contents of the note or memorandum, whether in one writing or in separate ones merely indicative for an adequate understanding of all the essential elements of the entire agreement, may be said to be the contract itself, except as to the form. Secondly, We are of the considered opinion that under the rules on proper pleading, the ruling of the trial court that, even if the allegation of the existence of a sale of real property in a complaint is challenged as barred from enforceability by the Statute of Frauds, the plaintiff may simply say there are documents, notes or memoranda without either quoting them in or annexing them to the complaint, as if holding an ace in the sleeves is not correct. To go directly to the point, for Us to sanction such a procedure is to tolerate and even encourage undue delay in litigation, for the simple reason that to await the stage of trial for the showing or presentation of the requisite documentary proof when it already exists and is asked to be produced by the adverse party would amount to unnecessarily postponing, with the concomitant waste of time and the prolongation of the proceedings, something that can immediately be evidenced and thereby determinable with decisiveness and precision by the court without further delay. In this connection, Moran observes that unlike when the ground of dismissal alleged is failure of the complaint to state a cause of action, a motion to dismiss invoking the Statute of Frauds may be filed even if the absence of compliance does not appear an the

face of the complaint. Such absence may be the subject of proof in the motion stage of the proceedings. (Moran, Comment on the Rules of Court, Vol. 1, p. 494, 1979 ed.) It follows then that when such a motion is filed and all the documents available to movant are before the court, and they are insufficient to comply with the Statute, it becomes incumbent upon the plaintiff, for the reasons of policy We have just' indicated regarding speedy administration of justice, to bring out what note or memorandum still exists in his possession in order to enable the court to expeditiously determine then and there the need for further proceedings. In other words, it would be inimical to the public interests in speedy justice for plaintiff to play hide and seek at his own convenience, particularly, when, as is quite apparent as in the instant case that chances are that there are no more writings, notes or memoranda of the installment agreement alleged by respondents. We cannot divine any reason why any such document would be withheld if they existed, except the unpermissible desire of the respondents to force the petitioners to undergo the ordeals, time, effort and expenses of a futile trial. In the foregoing premises, We find no alternative than to render judgment in favor of petitioners in this certiorari and prohibition case. If at all, appeal could be available if the petitioners subjected themselves to the trial ruled to be held by the trial court. We foresee even at this point, on the basis of what is both extant and implicit in the records, that no different result can be probable. We consider it as sufficiently a grave abuse of discretion warranting the special civil actions herein the failure of respondent judge to properly apply the laws on perfection of contracts in relation to the Statute of Frauds and the pertinent rules of pleading and practice, as We have discussed above. ACCORDINGLY, the impugned orders of respondent judge of November 2, 1978 and August 29, 1980 are hereby set aside and private respondents' amended complaint, Annex A of the petition, is hereby ordered dismissed and the restraining order heretofore issued by this Court on October 7, 1980 is declared permanent. Costs against respondents.


Guerrero,* Abad Santos and De Castro, JJ., concur.1äwphï1.ñët Mr. Justice Hermogenes Concepcion, Jr. is on leave. 165. [G.R. No. L-30786. February 20, 1984.] OLEGARIO B. CLARIN, Petitioner, v. ALBERTO L. RULONA and THE HONORABLE COURT OF APPEALS, Respondents. Bengzon, Villegas & Zarraga Law Office for Petitioner. Tirol, Tirol and Bernaldez & Tirol for Respondents. SYLLABUS 1. CIVIL LAW; CONTRACTS; SALES; PERFECTION THEREOF, CASE AT BAR. — A 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. Such contract is binding in whatever form it may have been entered into. Construing Exhibits A and B together, it can be seen that the petitioner agreed to sell and the respondent agreed to buy a definite object, that is, ten hectares of land which is part and parcel of Lot 20 PLD No. 4, owned in common by the petitioner and his sisters although the boundaries of the ten hectares would be delineated at a later date. The parties also agreed on a definite price which is P2,500.00. Exhibit B further shows that the petitioner has received from the respondent as initial payment, the amount of P800.00. Hence, it cannot be denied that there was a perfected contract of sale between the parties and that such contract was already partially executed when the petitioner received the initial

payment of P800.00. The latter’s acceptance of the payment clearly showed his consent to the contract thereby precluding him from rejecting its binding effect. 2. ID.; ID.; ID.; ID.; PARTIAL EXECUTION; EFFECTS. — With the contract being partially executed, the same is no longer covered by the requirements of the Statute of Frauds in order to be enforceable. Therefore, with the contract being valid and enforceable, the petitioner cannot avoid his obligation by interposing that Exhibit A is not a public document. On the contrary, under Article 1357 of the Civil Code, the petitioner can even be compelled by the respondent to execute a public document to embody their valid and enforceable contract. 3. ID.; PROPERTY; CO-OWNERSHIP; CO-OWNER CANNOT BIND PROPERTY OWNED IN COMMON. — Although as a co-owner, the petitioner cannot dispose of a specific portion of the land, his share shall be bound by the effect of the sale. This is anchored in Article 493 of the Civil Code. D E C I S I O N GUTIERREZ, JR., J.: This is a petition for review on certiorari of the decision of the Court of Appeals which affirmed the finding of the trial court that there was a perfected contract of sale between the petitioner and the respondent with regard to the ten (10) hectares of land constituting the petitioner’s share of Lot 20 PLD No. 4, Carmen Cadastre in Carmen, Bohol.chanrobles virtual lawlibrary On May 31, 1959 the petitioner executed two documents, namely, Exhibits "A" and "B" which respectively


provide:jgc:chanrobles.com.ph "TO WHOM THIS MAY CONCERN:jgc:chanrobles.com.ph "This is to authorize Mr. Gustavo Decasa, surveyor from Batuan, Bohol to survey on behalf of Mr. & Mrs. Alberto L. Rulona of Suba, Katipunan, Carmen, Bohol, a portion of the share of the undersigned of Lot 20 PLD No. 4 (Carmen Cadastre) from the CLARIN HERMANOS of which the undersigned is one of the heirs in a decision rendered in Cad. Case No. 20, Reg. Rec. No. 200 promulgated by Judge Hipolito Alo of the Court of First Instance of this province dated January 6, 1956; of the ten hectares (10) awarded to Mr. & Mrs. Alberto L. Rulona which the couple purchased from the undersigned for TWO THOUSAND FIVE HUNDRED PESOS (P2,500.00). The portion of land to be surveyed is situated where the house and vicinity of Mr. & Mrs. A. Rulona are located in said lot. (SGD.) OLEGARIO B. CLARIN (SGD.) ZOILA L. CLARIN "Received from Mr. Alberto Rulona of Carmen, Bohol, the sum of Eight Hundred (P800.00) Pesos as an initial payment for the ten hectares of land in Carmen, Bohol which he is going to purchase from the undersigned. The value of the land in question is P2,500.00."cralaw virtua1aw library Respondent Rulona filed a complaint for specific performance and recovery of improvements on the ground that the petitioner and his wife violated the terms of the agreement of sale "by returning by their own volition and without the consent of plaintiff, the amount of P1,100.00 in six postal money orders, covering the downpayment of P1,000.00 and first installment of P100.00."cralaw virtua1aw library

In his complaint, the respondent alleged that the petitioner sold ten hectares of his share of the disputed lot to him for P2,500.00. The conditions of the sale were that a downpayment of P1,000.00 was to be made and then the balance of P1,500.00 was to be paid in monthly installment of P100.00. As shown by Exhibit B, the respondent delivered to the petitioner a downpayment of P800.00 and on the first week of June the amount of P200.00 was also delivered thereby completing the downpayment of P1,000.00. On the first week of August, another delivery was made by the respondent in the amount of P100.00 as payment for the first installment. Respondent further alleged that despite repeated demands to let the sale continue and for the petitioner to take back the six postal money orders, the latter refused to comply.cralawnad In his answer, the petitioner alleged that while it is true that he had a projected contract of sale of a portion of land with the respondent, such was subject to the following conditions: (1) that the contract would be realized only if his co-heirs would give their consent to the sale of a specific portion of their common inheritance from the late Aniceto Clarin before partition of the said common property and (2) that should his co-heirs refuse to give their consent, the projected contract would be discontinued or would not be realized. Petitioner further contended that the respondent knew fully well the above terms and accepted them as conditions precedent to the perfection or consummation of the contract; that respondent delivered the amount of P1,000.00 as earnest money, subject to the above conditions and that the amount was returned by the petitioner upon his learning definitely that his co-heirs and co-owners refused to give their consent to the projected sale. The trial court rendered judgment in favor of the respondent on the ground that the contract of sale, Exhibit A, is a pure sale of a portion of Lot No. 20, containing an area of ten hectares for the sum of P2,500.00, and that the sale is not subject to any condition


nor is it vitiated by any flaw. Therefore, it declared the same binding upon the parties under Articles 1356 and 1458 of the Civil Code. The trial court also ruled that the fact that petitioner returned the sum of P1,100.00 paid by the respondent indicated an intention to rescind the contract. The court stated, however, that rescission under Article 1191 of the Civil Code can be authorized by the court only if either party violates his obligation. Since there had been no violation, the court ruled that the petitioner could not rescind the contract. Lastly, the court held that although as co-owner the petitioner could not dispose of a specific portion of the land, nevertheless, his share was bound by the effect of the sale.chanrobles lawlibrary : rednad On appeal, the Court of Appeals sustained the findings of the trial court, stating that:chanrob1es virtual 1aw library x x x ". . . We believe that the trial court did not incur any error when it arrived at the conclusion that there was a perfected contract of sale between the plaintiff and the defendant, for indeed the terms of the agreement (Exh. A) were clearly drafted in an equivocal manner that leaves no room for interpretation other than those terms contained therein, the real substance of which satisfied all the elements and requisites of a contract. Appellant, however, argues that Exhibit A was a mere authority to survey. It is not addressed to any definite party, it does not contain the proper heading, there is no statement of the manner of paying the purchase price, no personal circumstances of the parties, and it is not notarized. All these grounds relied upon to suit the theory of appellant, anchored as it were on a weak foundation, deserve scant consideration. Suffice it to state that a contract to be binding upon the contracting parties need not be notarized. Neither should it specify the manner of payment of the consideration nor should it specify the manner of payment of the

consideration nor should it contain the proper heading." (sic) It is maintained in this petition that the appellate court erred in holding there was a perfected contract of sale between the petitioner and the respondent, principally relying on Exhibit A and that even assuming that the latter were a perfected contract of sale, such was subject to a condition precedent with which there was no compliance. The petitioner alleges that the two documents introduced in evidence could not effectively convey title to the land because they were not public documents. Lastly, the petitioner contends that he could not have validly disposed of a definite portion of the community property and therefore, there arose a legal impossibility for him and the respondent to agree on a definite object.chanrobles.com.ph : virtual law library The petitioner’s contentions are without merit. While it is true that Exhibits A and B are, in themselves, not contracts of sale, they are, however, clear evidence that a contract of sale was perfected between the petitioner and the respondent and that such contract had already been partially fulfilled and executed. A 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. (Article 1475, Civil Code; Phil. Virginia Tobacco Administration v. De los Angeles, 87 SCRA 210). Such contract is binding in whatever form it may have been entered into. (Lopez v. Auditor General, 20 SCRA 655). Construing Exhibits A and B together, it can be seen that the petitioner agreed to sell and the respondent agreed to buy a definite object, that is, ten hectares of land which is part and parcel of Lot 20 PLD No. 4, owned in common by the petitioner and his sisters although the boundaries of the ten hectares would be delineated at a later date. The parties also agreed on a definite price which is P2,500.00. Exhibit B further shows that the petitioner has received from the respondent as initial payment,


the amount of P800.00. Hence, it cannot be denied that there was a perfected contract of sale between the parties and that such contract was already partially executed when the petitioner received the initial payment of P800.00. The latter’s acceptance of the payment clearly showed his consent to the contract thereby precluding him from rejecting its binding effect. (See Federation of United Namarco Distributors, Inc. v. National Marketing Corporation, 4 SCRA 884). With the contract being partially executed, the same is no longer covered by the requirements of the Statute of Frauds in order to be enforceable. (See Khan v. Asuncion, 19 SCRA 996). Therefore, with the contract being valid and enforceable, the petitioner cannot avoid his obligation by interposing that Exhibit A is not a public document. On the contrary, under Article 1357 of the Civil Code, the petitioner can even be compelled by the respondent to execute a public document to embody their valid and enforceable contract. The petitioner’s contention that he was only forced to receive money from the respondent due to the insistence of the latter merits little consideration. It is highly improbable that the respondent would give different sums on separate dates to the petitioner with no apparent reason, without a binding assurance from the latter that the disputed lot would be sold to him. We agree with the trial court and the appellate court that the payments were made in fulfillment of the conditions of the sale, namely, a downpayment of P1,000.00 and the balance of P1,500.00, to be paid in monthly installments of P100.00 each.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph We, therefore, find no error in the lower court’s holding that a contract of sale was perfected between the petitioner and the respondent and that the sale did not depend on a condition that the petitioner’s co-owners would have to agree to the sale. The latter finding is strengthened by the fact that although the

petitioner has been stressing that he made it clear to the respondent that the consent of his sisters as co-owners was necessary in order for the sale to push through, his letter to respondent marked Exhibit C stated another reason, to wit:jgc:chanrobles.com.ph "My dear Mr. Rulona:chanrob1es virtual 1aw library Replying to your letter of recent date, I deeply regret to inform you that my daughter, Alice, who is now in Manila, could not be convinced by me to sell the land in question, that is, the ten (10) hectares of land referred to in our tentative agreement. It is for this reason that I hereby authorize the bearer, Mr. Paciano Parmisano, to return to you in person the sum of One Thousand and One Hundred (P1,100.00) Pesos which you have paid in advance for the proposed sale of the land in question."cralaw virtua1aw library x x x The reasons given by the petitioner cannot operate against the validity of the contract in question. A contract is valid even though one of the parties entered into it against his better judgment. (See Lagunzad v. Vda. de Gonzales, 92 SCRA 476; citing Martinez v. Hongkong and Shanghai Bank, 15 Phil. 252). Finally, we agree with the lower court’s holding that although as a co-owner, the petitioner cannot dispose of a specific portion of the land, his share shall be bound by the effect of the sale. This is anchored in Article 493 of the Civil Code which provides:chanrob1es virtual 1aw library Art. 493. Each co-owner shall have the full ownership of his part and the fruits and benefits pertaining thereto, and he may therefore alienate, assign or mortgage it, and even substitute


another person in its enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage, with respect to the co-owners, shall be limited to the portion which may be alloted to him in the division upon the termination of the co-ownership. WHEREFORE, the petition is hereby DISMISSED for lack of merit. Costs against the petitioner. SO ORDERED. Melencio-Herrera Plana and Relova, JJ., concur. Teehankee, J., concurs in the result. 166. G.R. No. 74623 August 31, 1987 BISAYA LAND TRANSPORTATION CO., INC., ANTONIO V. CUENCO and BENJAMIN G. ROA, petitioners, vs. MARCIANO C. SANCHEZ AND THE HON. INTERMEDIATE APPELLATE COURT, respondents. PADILLA, J.: This is a petition for certiorari to review the decision * of respondent Intermediate Appellate Court, dated 25 April 1986, in AC-G.R. No. CV-01300 which affirmed the decision ** of the Regional Trial Court, 7th Judicial Region, Branch XII, Cebu City, dated 14 February 1983, in Civil Case No. R-18830 which was a suit for Specific Performance with Preliminary Injunction and Damages. Petitioner Bisaya Land Transportation Company, Inc. (BISTRANCO, for short) has been engaged in the shipping business, operating several passenger-cargo vessels, and among

the ports of call of these vessels has been Butuan City. As early as 1954, private respondent Marciano Sanchez (Sanchez, for short) was an employee of BISTRANCO, specifically, a quartermaster in one of its vessels, In 1959, he ceased to be an employee as he engaged in stevedoring services in the port of Butuan City and rendered steverdoring services for the vessels of BISTRANCO. 1 In May 1975, Sanchez was appointed by BISTRANCO as shipping agent in Butuan City for the vessel M/V Don Mariano. 2 The new Butuan City Agent 3 referred to in the letter "Exhibit "C" was Marciano Sanchez. Later, on 12 March 1976, when BISTRANCO was under receivership, Sanchez was appointed by its Receiver, Atty. Adolfo V. Amor, as acting shipping agent, also for M/V Doña Remedies, in addition to M/V Doña Filomena, in the port of Butuan City "pending the execution of the formal contract of agency. 4 When Sanchez was constituted as acting shipping agent, he received the same commission as his predecessor, one ONG YUI who received 10% for all freight and passenger revenues coming from Butuan City and 5 % for all freight going to Butuan. 5 Thereafter, or on 27 July 1976, a formal Contract of Agency, marked as Exhibit "F", was executed between BISTRANCO, represented by Receiver Atty. Adolfo V. Amor and Marciano C. Sanchez, represented by his authorized representative Exequiel Aranas. On 30 July 1976, after Sanchez found that Paragraph 16 of the Contract of agency was quite prejudicial to him, he executed with BISTRANCO a Supplemental Shipping Agency Contract, marked as Exhibit "G", which was duly signed by Receiver Atty. Adolfo V. Amor on behalf of BISTRANCO and Marciano C. Sanchez himself. 6 But, both the Contract of Agency and the Supplemental Shipping Agency Contract were never submitted by Atty. Adolfo Amor to the receivership court for its approval. By virtue of the Contract of Agency and the Supplemental Shipping Agency Contract (hereinafter referred to as Contracts), Sanchez performed his duties as shipping agent of BISTRANCO, and he received his corresponding commissions as such shipping agent. Pursuant to the Contracts, Sanchez leased a parcel of land


owned by Jose S. Mondejar which was used as the wharf and berthing facilities of BISTRANCO. 7 At an expense of more than P100,000.00, Sanchez constructed the wharf on the land he leased and the wharf was used to facilitate the loading and unloading of cargoes of the BISTRANCO vessels at the port of Butuan City from 1976 to December 1979. Sanchez also constructed a bodega at his wharf for use in connection with the shipping business of BISTRANCO. He constructed an office for the agency and, as of December 1979, he had an office force of 13 employees, all paid and maintained by him. Sanchez operated six (6) cargo trucks and one (1) jeep for the service of the shipping agency. As shipping agent, Sanchez put up billboards and other forms of advertisement to enhance the shipping business of BISTRANCO. He established good business relations with the business community of Butuan City. 8 In these endeavors, Sanchez succeeded in increasing the volume of the shipping business of BISTRANCO at the Butuan City port, so much so that his earnings on freight alone increased from an average of P8,535.00 a month in 1975 to an average of about P32,000.00 a month in the last seven months of 1979. 9 While the shipping business of BISTRANCO in Butuan City flourished, evidently to the mutual benefit of both parties, on 26 December 1979, co-petitioner Benjamin G. Roa, as Executive Vice-President of BISTRANCO, wrote Sanchez a letter 10 advising him that, effective 1 January 1980, BISTRANCO would commence operating its branch office in Butuan City. Prior to this, on 11 December 1979, Sanchez was invited to attend a meeting of the Board of Directors of BISTRANCO wherein he was told by copetitioner Antonio V. Cuenco that the Board was to open a branch office in Butuan City and he was asked what would be his proposals. Sanchez submitted his proposals in writing, marked as Exhibit "NN", but these were not acceptable to BISTRANCO. 11 Realizing that the letter, marked as Exhibit "FF", was in effect a repudiation of the Contracts, Sanchez filed an action for specific performance with preliminary injunction and damages with the Regional Trial Court of Cebu City on 28 December 1979.

Pursuant to the letter (Exhibit "FF"), BISTRANCO actually opened and operated a branch office in Butuan City on 15 January 1980. BISTRANCO through its new representative contacted the shippers in Butuan City and neighboring towns, advising them to transact their business directly with its new branch office in Butuan City. Under these circumstances, the business of Sanchez, as shipping agent of BISTRANCO in Butuan City, was seriously impaired and undermined He could not solicit as many passengers as he used to, because the passenger tickets issued to him by BISTRANCO were limited. The cargoes solicited by Sanchez were loaded on a "chance basis" because those that were solicited by the branch office were given priority. 12 After due hearing and their respective memorandum filed, the trial court rendered judgment in favor of Sanchez, the dispositive portion of which is quoted hereunder: 13 WHEREFORE, judgment is hereby rendered declaring the contracts, Exhibits "F" and "G", as valid and binding between the plaintiff and defendant BISTRANCO up to its expiry date on July 27, 1981, and ordering the defendant BISTRANCO to pay the plaintiff the total sum of FIVE HUNDRED EIGHTY EIGHT THOUSAND PESOS (P588,000.00) in concept of unearned commissions as well as damages, with interest at the legal rate counted from July 28, 1981 up to the time the amount is fully paid, and the further sum of P15,000.00 as attorney's fees, and the costs of this action. Thereafter, BISTRANCO appealed to the Court of Appeals which, as heretofore stated, affirmed the decision of the trial court in toto. Hence this Petition for certiorari brought to this Court, with the petitioners raising the following issues: 14 I CAN A COURT APPOINTED RECEIVER VALIDLY ENTER INTO A CONTRACT WITHOUT COURT APPROVAL? II IS THE OPENING BY BISTRANCO OF A BRANCH OFFICE IN BUTUAN CITY A VIOLATION OF THE CONTRACT OF AGENCY


AND SUPPLEMENTAL SHIPPING AGENCY CONTRACT EXHIBITS "F" and "G") ASSUMING THEM TO BE VALID? III WHAT EFFECT DID THE WORKING AGREEMENTS (EXHIBITS "S" and "U") HAVE ON AFORESAID QUESTIONED CONTRACTS? IV IS THE AWARD FOR UNEARNED COMMISSION AND DAMAGES JUSTIFIED? The general powers of a court-appointed receiver are provided in Section 7, Rule 59 of the Rules of Court. Under such rule, the receiver is "subject to the control of the court in which the action is pending" and he can "generally do such acts respecting the property as the court may authorize". The act of Receiver Amor in entering into a contract of agency with Sanchez is not one of the acts specifically allowed in the mentioned rule. While such act of Amor may be arguably implied from the power of the receiver to "take and keep possession of the property in controversy", and that the act of Amor is covered by the broad phrase that a receiver can "generally do such acts respecting the property as the court may authorize", still, it is necessary that the acts of the receiver have the approval or authorization of the court which appointed him as a receiver. As held in one case, 15 a courtappointed receiver cannot validly enter into a contract without the approval of the court. What then is the status of the Contracts which Receiver Amor entered into with Sanchez, without the approval of the court which appointed him receiver? Even the petitioners noticeably waver as to the exact status of these Contracts. The petitioners allege in their Memorandum 16 submitted to this Court that they are void contracts under Article 1409(l) of the Civil Code, whereas, in their Petition, 17 they labelled the contracts as unenforceable under Article 1403(l) of the Civil Code. The determination, therefore, of whether the questioned contracts are void or merely unenforceable is important, because of the settled distinction that a void and inexistent contract can not be ratified and become enforceable, whereas an

unenforceable contract may still be ratified and, thereafter, enforced. The petitioners allege that the Contracts are void, citing Article 1409(l) of the Civil Code which provides that contracts whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy, are inexistent and void from the beginning. In the case at bar, the contracts of agency were entered into for the management and operation of BISTRANCO's business in Butuan City. Said Contracts necessarily imposed obligations and liabilities on the contracting parties, thereby affecting the disposition of the assets and business of the company under receivership. But a perusal of the Contracts in question would show that there is nothing in their cause, object or purpose which renders them void. The purpose of the Contracts was to create an agency for BISTRANCO with Marciano Sanchez as its agent in Butuan City. Even as to the other provisions of the Contracts, there is nothing in their cause or object which can be said as contrary to law, morals, good customs, public order or public policy so as to render them void. On the other hand, paragraph 1. Article 1403 of the Civil Code provides that contracts "entered into in the name of another person by one who has been given no authority or legal representation, or who has acted beyond his powers" are unenforceable, unless they are ratified. In the case at bar, it is undisputed that Atty. Adolfo Amor was entrusted, as receiver, with the administration of BISTRANCO and it business. But the act of entering into a contract is one which requires the authorization of the court which appointed him receiver. Consequently, the questioned Contracts can rightfully be classified as unenforceable for having been entered into by one who had acted beyond his powers, due to Receiver Amor's failure to secure the court's approval of said Contracts. These unenforceable Contracts were nevertheless deemed ratified in the case at bar, based upon the facts and circumstances on record which have led this Court to conclude that BISTRANCO had actually ratified the questioned Contracts.


Private respondent Sanchez filed his complaint in the lower court on 28 December 1979. But on 10 January 1980, copetitioner Benjamin G. Roa, as Executive Vice-President of BISTRANCO, still sent Sanchez three (3) separate letters with the following contents: (3) reducing his passage commission from 10%, as he used to receive in the previous years, to 7-1/2% "as stated in the agency contract dated 27 July 1976, 18 (2) advising Sanchez that in view of "his failure to post a bond or such other securities acceptable to the company in the sum of P5,000.00 pursuant to par. 8 of the Contract executed by Sanchez the plaintiff with BISTRANCO on 27 July 1976, we are recalling all unused passage tickets issued your agency" and reminding him (Sanchez) also that "pursuant to par. 2 of aforementioned Contract, solicitation of cargo and passengers shall be undertaken by you strictly in accordance with the scheduled rates of the Company; 19 and (3) informing Sanchez that "we (petitioners) are abiding strictly with the terms of the contracts executed between Marciano C Sanchez, and Atty. Adolfo V Amor in behalf of BISTRANCO, etc. etc. 20 The three (3) letters of Benjamin G. Roa in effect recognized and gave efficacy to the Contracts in question. The declaration of Benjamin G. Roa that BISTRANCO did not have any knowledge about the Contracts before the complaint was filed on 28 December 1979 is contradicted by his own testimony that, as early as 14 December 1979, he was already looking for the contract, after he saw Exhibit "NN", wherein Sanchez requested the company "to abide with the terms of the contract which will expire on July 1981; 21 Besides, the pretended lack which will expire on July 1981 of knowledge of Benjamin G. Roa can not be equated with BISTRANCO's. It should be noted that Roa started to work for BISTRANCO only on 27 April 1979, 22 whereas, the Contracts were executed in 1976. The people who were more in a position to know about the Contracts, like the company officers and members of the board of directors at the time the Contracts were entered into, especially Antonio V. Cuenco, were never presented as witnesses. Aside from this, the company cannot deny its ratification of the

Contracts even before the time of Benjamin G. Roa, because when Atty. Fulveo Pelaez succeeded Atty. Adolfo Amor as Receiver, he was represented by BISTRANCO's shipping manager as having taken cognizance of these Contracts and sanctioned the acts of Sanchez as shipping agent of BISTRANCO in Butuan City. This is shown by a letter, 23 dated 15 February 1977, written by Capt. Federico Reyes, 24 the shipping manager of BISTRANCO at that time. The letter states that "the Receiver (Atty. Fulveo Pelaez) maintains that the previous agency contract remains and (sic) basically the same except that the rates of the agency commission were modified. Furthermore, it is clear that BISTRANCO received material benefits from the contracts of agency of Sanchez, based upon the monthly statements of income of BISTRANCO, upon which the commissions of Sanchez were based. 25 A perusal of the Contracts will also show that there is no single provision therein that can be said as prejudicial or not beneficial to BISTRANCO. As held in Savings v. Ball-Bearing Chain Co. 26 Not every act within the letter of an order can be sanctioned, nor everything done without the direction of the court condemned. The tests to be applied are: (1) was the act under investigation within the authority conferred by an order of court? (2) If so, was it performed with reference to the preservation of the estate, as a man of ordinary sagacity and prudence would have performed it under like circumstances? (3) If without authority, was it beneficial to the estate? Besides, in our considered opinion, the doctrine of estoppel precludes BISTRANCO from repudiating an obligation voluntarily assumed by it, after having accepted benefits therefrom. To countenance such, repudiation would be contrary to equity and would put a premium on fraud or misrepresentation, 27 which this Court will not sanction. Anent the issue of whether the Memorandum of Agreement and the Working Agreement (Exhibits "S" and "U") which were executed by the parties in this case on 4 February 1977 and 28 May 1979, respectively, novated the questioned Contracts, the


answer is also in the negative. BISTRANCO avers that Exhibit "S" substantially altered or changed the principal terms and conditions of Exhibits "F" and "G" on material points, such as, reduction of the rate of commission for freight and passage (from 10% to 7-1/2%), the manner of liquidation and remittance of collections of the agent, the mode of payment of the agent's commissions, and the term of the Contract which is from a period of 5 years to a term of 1 year renewable yearly upon mutual consent; and that Exhibit "U" ,furthermore, bolstered this novation theory. Novation is not equivalent or synonymous to mere alteration, modification or amendment. Novation is the substitution of a new obligation for an existing or old one, which is thereby extinguished. Novation takes place when the object or principal condition of an obligation is changed or altered. 28 Novation is never presumed; it must be explicitly stated or there must be a manifest incompatibility between the old and the new obligations in every aspect. 29 The test of incompatibility between two obligations or contracts, is whether or not they can stand together, each one having an independent existence. If they cannot, they are incompatible, and the later obligation novates the first. In the case at bar, it can be deduced that the Agreements, Exhibits "S" and "U", were not meant to novate the herein questioned contracts. Rather, the intent of the parties was to suspend some of the provisions of the Contracts for a period of one (1) year, during which, the provisions of the Agreements will prevail. As par. 8 of the Memorandum of Agreement provides: "It is in this spirit of cooperation with the Receiver to enable him to pay huge obligations of the company that the agent Marciano Sanchez has acceded to the request of Messrs. Miguel Cuenco and Antonio Cuenco to accept the reduction of his commissions." It would not be equitable to Sanchez to say now that the Contracts were extinguished and substituted by the Agreements. It would be tantamount to punishing Sanchez for the concessions he extended to BISTRANCO.

Besides, the changes were not really substantial to bring about a novation. The changes pointed out by BISTRANCO between the Contracts and the Agreements do not go into the essence of the cause or object of the former. Under the Agreements, Sanchez remains the agent of BISTRANCO in Butuan City. There is really no clear proof of incompatibility. In fact, the Contracts and the Agreements can be reconciled. The provisions of the Agreements which were more of changes on how to enforce the agency, prevailed during the period provided in them, but after their expiration, the conditions under the Contracts were implemented again. The term of the agency contract which was for a period of five (5) years still continued, until 27 July 1981. Considering that the contract of agency and the supplemental shipping agency contract are valid and binding between BISTRANCO and Sanchez, the former's opening of a branch in Butuan City was, in effect, a violation of the Contracts. Sanchez entered into the agency Contract because of the expected income and profits for himself. There could be no other motive from a businessman's point of view. A provision in the Supplemental Shipping Agency Contract reads: 6. That in consideration of the foregoing additional particular obligations of the AGENT, the COMPANY agrees not to appoint or employ another agent in Butuan City or in any of the City's neighboring towns without the written consent of the AGENT first obtained. (Exhibit "G ") The additional particular obligations referred to in Exhibit "G" were the putting up of an adequate agency office in Butuan City, the employment of canvassers of passengers and solicitors of cargoes, that the Agent shall provide at least two (2) cargo trucks and a private docking and berthing facilities for the vessels of the company, at the expense of Sanchez. Aside from this, Sanchez also had to spend for the lease of the wharf and the construction of the bodega at the wharf. It may be true that there is no express prohibition for BISTRANCO to open its branch in Butuan City. But, the very reason why BISTRANCO agreed not to employ or appoint another


agent in Butuan City was to prevent competition against Sanchez' agency, in order that he might recover what he invested and eventually maximize his profits. The opening by BISTRANCO of a branch in Butuan City virtually resulted in consequences to Sanchez worse than if another agent had been appointed. In effect, the opening of a branch office in Butuan City was a violation of the Contracts of agency. Article 1315 of the Civil Code provides: Contracts are perfected by mere consent, and from that moment the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. In the case at bar, good faith required that BISTRANCO refrain from opening its branch in Butuan City during the effectivity of the agency contract with Sanchez, or until 27 July 1981. Moreover, the opening of the branch office which, in effect, was a revocation of the contracts of agency is not sanctioned by law because the agency was the means by which Sanchez could fulfill his obligations under Exhibits "F" and "G". Article 1927 of the Civil Code, among others, provides: "An agency cannot be revoked if a bilateral contract depends upon it, or if it is the means of fulfilling an obligation already contracted". As to the issue of whether the award of P588,000.00 to Sanchez for unearned commissions and damages is justified, the answer is also in the affirmative, considering that BISTRANCO violated the Contracts of agency and that Sanchez, before the breach by BISTRANCO of said agency Contracts, was already earning an average monthly commission of P32,000.00, as shown by the statements of commissions prepared by BISTRANCO itself. WHEREFORE, the petition is denied. The decision of the respondent Court is affirmed. SO ORDERED. Yap (Chairman), Melencio-Herrera, Paras and Sarmiento, JJ., concur.

167. G.R. No. 175483, October 14, 2015 VALENTINA S. CLEMENTE, Petitioner, v. THE COURT OF APPEALS, ANNIE SHOTWELL JALANDOON, ET AL., Respondents. D E C I S I O N JARDELEZA, J.: This is a Petition for Review on Certiorari1 under Rule 45 of the Revised Rules of Court filed by Valentina S. Clemente ("petitioner") from the Decision2 of August 23, 2005 and the Resolution3 dated November 15, 2006 of the Court of Appeals (CA) Eighth Division in CA-G.R. CV No. 70918. Petitioner assails the Decision of the CA which ruled that two (2) deeds of absolute sale executed between petitioner and Adela de Guzman Shotwell ("Adela"), her grandmother, are void and inexistent for being simulated and lacking consideration. The CA affirmed the Decision of the Regional Trial Court (RTC) of Quezon City, Branch 89, but deleted the holding of the latter that an implied trust existed. The Facts

Adela owned three (3) adjoining parcels of land in Scout Ojeda Street, Diliman, Quezon City, subdivided as Lots 32, 34 and 35-B (the "Properties"). Among the improvements on the Properties was Adela's house (also referred to as the "big house"). During her lifetime, Adela allowed her children, namely, Annie Shotwell Jalandoon, Carlos G. Shotwell ("Carlos Sr."), Anselmo G. Shotwell and Corazon S. Basset, and her grandchildren,4 the use and 849 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

possession of the Properties and its improvements.5 Sometime in 1985 and 1987, Adela simulated the transfer of Lots 32 and Lot 34 to her two grandsons from Carlos Sr., namely, Carlos V. Shotwell, Jr. ("Carlos Jr.") and Dennis V. Shotwell.6 As a consequence, Transfer Certificate of Title (TCT) No. 338708/PR 9421 was issued over Lot 32 under the name of Carlos Jr., while TCT No. 366256/PR 9422 was issued over Lot 34 under the name of Dennis.7 On the other hand, Lot 35-B remained with Adela and was covered by TCT No. 374531. It is undisputed that the transfers were never intended to vest title to Carlos Jr. and Dennis who both will return the lots to Adela when requested.8 On April 18, 1989, prior to Adela and petitioner's departure for the United States, Adela requested Carlos Jr. and Dennis to execute a deed of reconveyance9 over Lots 32 and 34. The deed of reconveyance was executed on the same day and was registered with the Registry of Deeds on April 24, 1989.10 On April 25, 1989, Adela executed a deed of absolute sale11 over Lots 32 and 34, and their improvements, in favor of petitioner, bearing on its face the price of P250,000.00. On the same day, Adela also executed a special power of attorney12 (SPA) in favor of petitioner. Petitioner's authority under the SPA included the power to administer, take charge and manage, for Adela's benefit, the Properties and all her other real and personal properties in the Philippines.13 The deed of absolute sale and the SPA were notarized on the same day by Atty. Dionilo D. Marfil in Quezon City.14 On April 29, 1989, Adela and petitioner left for the United States.15 When petitioner returned to the Philippines, she registered the sale over Lots 32 and 34 with the Registry of Deeds on September 25, 1989. TCT No. 19811 and TCT No. 19809 were then issued in the name of petitioner over Lots 32 and 34, respectively.16

On January 14, 1990, Adela died in the United States and was succeeded by her four children.17 Soon thereafter, petitioner sought to eject Annie and Carlos Sr., who were then staying on the Properties. Only then did Annie and Carlos Sr. learn of the transfer of titles to petitioner. Thus, on July 9, 1990, Annie, Carlos Sr. and Anselmo, represented by Annie, ("private respondents") filed a complaint for reconveyance of property18 against petitioner before Branch 89 of the RTC of Quezon City. It was docketed as Civil Case No. Q-906035 and titled "Annie S. Jalandoon, et al. v. Valentino. Clemente"19 In the course of the trial, private respondents discovered that Adela and petitioner executed another deed of absolute sale20 over Lot 35-B on April 25, 1989 (collectively with the deed of absolute sale over Lots 32 and 34, "Deeds of Absolute Sale"), bearing on its face the price of F60,000.00.21 This was notarized on the same date by one Orancio Generoso in Manila, but it was registered with the Registry of Deeds only on October 5, 1990.22 Thus, private respondents amended their complaint to include Lot 35-B.23 In their amended complaint, private respondents sought nullification of the Deeds of Absolute Sale. They alleged that Adela only wanted to help petitioner travel to the United States, by making it appear that petitioner has ownership of the Properties. They further alleged that similar to the previous simulated transfers to Carlos Jr. and Dennis, petitioner also undertook and warranted to execute a deed of reconveyance in favor of the deceased over the Properties, if and when Adela should demand the same. They finally alleged that no consideration was given by petitioner to Adela in exchange for the simulated conveyances.24 On October 3, 1997, Carlos Sr. died and was substituted only by


Dennis.25 In an order dated June 18, 1999, the case was dismissed with respect to Annie after she manifested her intention to withdraw as a party-plaintiff.26 Anselmo Shotwell also died without any compulsory heir on September 7, 2000. On February 26, 2001, the trial court promulgated a Decision27 in favor of private respondents. Its decretal portion reads:cralawlawlibrary WHEREFORE, premises considered, judgment is hereby rendered as follows: 1. Declaring null and void the Deeds of Absolute Sale both dated April 25, 1989 between the late Adela De Guzman Shotwell and the defendant;ChanRoblesVirtualawlibrary 2. Ordering the cancellation of Transfer Certificates of Title Nos. 19809, 19811 and 26558, all of the Registry of Deeds of Quezon City and in the name of defendant Valentina Clemente; and 3. Ordering the defendant to execute a Deed of Reconveyance in favor of the estate of the late Adela de Guzman Shotwell over the three (3) subject lots, respectively covered by Transfer Certificates of Title Nos. 19809, 19811 and 26558 of the Registry of Deeds of Quezon City;

The CA agreed with the trial court that the contemporaneous and subsequent acts of petitioner and her grandmother are enough to render the conveyances null and void on the ground of being simulated.30 The CA found that Adela retained and continued to exercise dominion over the Properties even after she executed the conveyances to petitioner.31 By contrast, petitioner did not exercise control over the properties because she continued to honor the decisions of Adela. The CA also affirmed the court a quo's finding that the conveyances were not supported by any consideration.32 Petitioner filed a Motion for Reconsideration33 dated September 12, 2005 but this was denied by the CA in its Resolution34 dated November 15, 2006. Hence, this petition. The petition raises the principal issue of whether or not the CA erred in affirming the decision of the trial court, that the Deeds of Absolute Sale between petitioner and her late grandmother over the Properties are simulated and without consideration, and hence, void and inexistent.35 Ruling of the Court

We deny the petition. In a Petition for Review on Certiorari With costs against defendant. under Rule 45, only questions of law may be entertained. SO ORDERED.28chanrobleslaw Whether or not the CA erred in affirming the decision of the RTC On appeal, the CA affirmed with modification the Decision. The that the Deeds of Absolute Sale between petitioner and her late CA ruled that the Deeds of Absolute Sale were simulated. It also grandmother are simulated and without consideration, and ruled that the conveyances of the Properties to petitioner were hence, void and inexistent, is a question of fact which is not made without consideration and with no intention to have legal within the province of a petition for review on certiorari under effect.29 Rule 45 of the Revised Rules of Court. 851 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

Section 1, Rule 45 of the Revised Rules of Court states that the petition filed shall raise only questions of law, which must be distinctly set forth. We have explained the difference between a question of fact and a question of law, to wit:cralawlawlibrary

The Deeds of Absolute Sale between petitioner and the late Adela Shotwell are null and void for lack of consent and consideration. While the Deeds of Absolute Sale appear to be valid on their face, the courts are not completely precluded to consider evidence aliunde in determining the real intent of the parties. This is especially true when the validity of the contracts was put in issue by one of the parties in his pleadings.42 Here, private respondents assail the validity of the Deeds of Absolute Sale by alleging that they were simulated and lacked consideration. A. Simulated contract The Civil Code defines a contract as a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service.43 Article 1318 provides that there is no contract unless the following requisites concur:cralawlawlibrary

A question of law arises when there is doubt as to what the law is on a certain state of facts, while there is a question of fact when the doubt arises as to the truth or falsity of the alleged facts. For a question to be one of law, the same must not involve an examination of the probative value of the evidence presented by the litigants or any of them. The resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact.36chanrobleslaw Most of the issues raised by petitioner are questions of fact that invite a review of the evidence presented by the parties below. We have repeatedly ruled that the issue on the genuineness of a deed of sale is essentially a question of fact.37 We are not a trier of facts and do not normally undertake the re-examination of the (1) Consent of the contracting parties; evidence presented by the contending parties during the trial of (2) Object certain which is the subject matter of the contract; and 38 the case. This is especially true where the trial court's factual (3) Cause of the obligation which is established.chanrobleslaw findings are adopted and affirmed by the CA as in the present 39 case. Factual findings of the trial court affirmed by the CA are All these elements must be present to constitute a valid contract; 40 final and conclusive and may not be reviewed on appeal. While the absence of one renders the contract void. As one of the it is true that there are recognized exceptions41 to the general essential elements, consent when wanting makes the contract rule that only questions of law may be entertained in a Rule 45 non-existent. Consent is manifested by the meeting of the offer petition, we find that there is none obtaining in this case. and the acceptance of the thing and the cause, which are to constitute the contract.44 A contract of sale is perfected at the Nevertheless, and to erase any doubt on the correctness of the moment there is a meeting of the minds upon the thing that is the assailed ruling, we examined the records below and have arrived object of the contract, and upon the price.45 at the same conclusion. Petitioner has not been able to show that the lower courts committed error in appreciating the evidence of Here, there was no valid contract of sale between petitioner and record. Adela because their consent was absent. The contract of sale was a mere simulation. 852 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

Simulation takes place when the parties do not really want the contract they have executed to produce the legal effects expressed by its wordings.46 Article 1345 of the Civil Code provides that the simulation of a contract may either be absolute or relative. The former takes place when the parties do not intend to be bound at all; the latter, when the parties conceal their true agreement. The case of Heirs of Policronio M. Ureta, Sr. v. Heirs of Liberate M. Ureta47 is instructive on the matter of absolute simulation of contracts, viz:cralawlawlibrary

contemporaneous and subsequent acts of the parties. The following circumstances led the RTC and the CA to conclude that the Deeds of Absolute Sale are simulated, and that the transfers were never intended to affect the juridical relation of the parties:chanRoblesvirtualLawlibrary a) There was no indication that Adela intended to alienate her properties in favor of petitioner. In fact, the letter of Adela to Dennis dated April 18, 198951 reveals that she has reserved the ownership of the Properties in favor of Dennis. b) Adela continued exercising acts of dominion and control over the properties, even after the execution of the Deeds of Absolute Sale, and though she lived abroad for a time. In Adela's letter dated August 25, 198952 to a certain Candy, she advised the latter to stay in the big house. Also, in petitioner's letter to her cousin Dennis dated July 3, 1989,53 she admitted that Adela continued to be in charge of the Properties; that she has no "say" when it comes to the Properties; that she does not intend to claim exclusive ownership of Lot 35-B; and that she is aware that the ownership and control of the Properties are intended to be consolidated in Dennis. c) The SPA executed on the same day as the Deeds of Absolute Sale appointing petitioner as administratrix of Adela's properties, including the Properties, is repugnant to petitioner's claim that the ownership of the same had been transferred to her. d) The previous sales of the Properties to Dennis and Carlos, Jr. were simulated. This history, coupled with Adela's treatment of petitioner, and the surrounding circumstances of the sales, strongly show that Adela only granted petitioner the same favor she had granted to Dennis and Carlos Jr. The April 18, 1989 letter to Dennis convincingly shows Adela's intention to give him the Properties. Part of the letter reads:

In absolute simulation, there is a colorable contract but it has no substance as the parties have no intention to be bound by it. The main characteristic of an absolute simulation is that the apparent contract is not really desired or intended to produce legal effect or in any way alter the juridical situation of the parties. As a result, an absolutely simulated or fictitious contract is void, and the parties may recover from each other what they may have given under the contract...48 (Emphasis supplied)chanrobleslaw In short, in absolute simulation there appears to be a valid contract but there is actually none because the element of consent is lacking.49 This is so because the parties do not actually intend to be bound by the terms of the contract. In determining the true nature of a contract, the primary test is the intention of the parties. If the words of a contract appear to contravene the evident intention of the parties, the latter shall prevail. Such intention is determined not only from the express terms of their agreement, but also from the contemporaneous and subsequent acts of the parties.50 This is especially true in a claim of absolute simulation where a colorable contract is executed. In ruling that the Deeds of Absolute Sale were absolutely simulated, the lower courts considered the totality of the prior, 853 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

"Dennis, the two lot [sic] 32-34 at your said lower house will be at name yours [sic] plus the 35 part of Cora or Teens [sic] house are all under your name"54 Petitioner claims this letter was not properly identified and is thus, hearsay evidence. The records, however, show that the letter was admitted by the trial court in its Order dated February 24, 1993.55 While it is true that the letter is dated prior (or six days before to be exact) to the execution of the Deeds of Absolute Sale and is not conclusive that Adela did not change her mind, we find that the language of the letter is more consistent with the other pieces of evidence that show Adela never intended to relinquish ownership of the Properties to petitioner. In this regard, we see no compelling reason to depart from the findings of the trial court as there appears no grave abuse of discretion in its admission and consideration of the letter. Petitioner's letter to her cousin Dennis dated July 3, 1989 also sufficiently establishes that Adela retained control over the Properties, even after the execution of the Deeds of Absolute Sale. Petitioner herself admitted that she was only following the orders of Adela, and that she has no claim over the Properties. We quote in verbatim the relevant part of the letter:cralawlawlibrary

suluhin ang 35-B, ganyan pa sya... Now tungkol sa iyo, alam ko meron ka rin lupa tapos yung bahay na malaki ikaw rin ang titira at magmamahala sa lahat. Anyway, itong bahay ko sa iyo rin, alam mo naman na I'm just making the kids grow a little older then we have to home in the states...56 (Emphasis supplied) chanrobleslaw Moreover, Adela's letter to petitioner's cousin Candy dated August 25, 1989 shows Adela's retention of dominion over the Properties even after the sales. In the letter, Adela even requested her granddaughter Candy to stay in the house rent and expense free.57 Petitioner claims that Candy and the house referred to in the letter were not identified. Records show, however, that petitioner has testified she has a cousin named Candy Shotwell who stayed at the "big house" since February 1989.58 Clearly, the submission of petitioner to the orders of Adela does not only show that the latter retained dominion over the Properties, but also that petitioner did not exercise acts of ownership over it. If at all, her actions only affirm the conclusion that she was merely an administratrix of the Properties by virtue of the SPA. On the SPA, petitioner claims the lower courts erred in holding that it is inconsistent with her claim of ownership. Petitioner claims that she has sufficiently explained that the SPA is not for the administration of the Properties, but for the reconstitution of their titles. We agree with the lower courts that the execution of an SPA for the administration of the Properties, on the same day the Deeds of Absolute Sale were executed, is antithetical to the relinquishment of ownership. The SPA shows that it is so worded as to leave no doubt that Adela is appointing petitioner as the administratrix of her properties in Scout Ojeda. Had the SPA been

...Now, before I left going back here in Mla. Mommy Dela ask me to read your letter about the big house and lot, and I explained it to her. Now Mommy and Mommy Dela wants that the house is for everyone who will need to stay, well that is what they say. Alam mo naman, I have no "say" esp. when it comes with properties & you know that. Now kung ano gusto nila that goes. Now, to be honest Mommy was surprise [sic] bakit daw kailangan mawalan ng karapatan sa bahay eh Nanay daw nila iyon at tayo apo lang, Eh wala akong masasabi dyan, to be truthful to you, I only get the orders... Tapos, sinisingil pa ako ng P1,000 --para sa gate napinapagawa nya sa lot 35-B, eh hindi na lang ako kiimibo pero nagdamdam ako, imagine minsan na lang sya nakagawa ng bien sa akin at wala sa intention ko na 854 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

intended only to facilitate the processing of the reconstitution of the titles, there would have been no need to confer other powers of administration, such as the collection of debts, filing of suit, etc., to petitioner.59 In any case, the explanation given by petitioner that the SPA was executed so as only to facilitate the reconstitution of the titles of the Properties is not inconsistent with the idea of her being the administratrix of the Properties. On the other hand, the idea of assigning her as administratrix is not only inconsistent, but also repugnant, to the intention of selling and relinquishing ownership of the Properties. Petitioner next questions the lower courts' findings that the Deeds of Absolute Sale are simulated because the previous transfers to Adela's other grandchildren were also simulated. It may be true that, taken by itself, the fact that Adela had previously feigned the transfer of ownership of Lots 32 and 34 to her other grandchildren would not automatically mean that the subject Deeds of Absolute Sale are likewise void. The lower courts, however, did not rely solely on this fact, but considered it with the rest of the evidence, the totality of which reveals that Adela's intention was merely to feign the transfer to petitioner. The fact that unlike in the case of Dennis and Carlos, Jr., she was not asked by Adela to execute a deed of reconveyance, is of no moment. There was a considerable lapse of time from the moment of the transfer to Dennis and Carlos, Jr. of Lots 32 and 34 in 1985 and in 1987, respectively, and until the execution of the deed of reconveyance in 1989. Here, the alleged Deeds of Absolute Sale were executed in April 1989. Adela died in January 1990 in the United States. Given the short period of time between the alleged execution of the Deeds of Absolute Sale and the sudden demise of Adela, the fact that petitioner was not asked to execute a deed of reconveyance is understandable. This is because there was no chance at all to do so. Thus, the fact that she did not execute a deed of reconveyance does not help her case.

We affirm the conclusion reached by the RTC and the CA that the evidence presented below prove that Adela did not intend to alienate the Properties in favor of petitioner, and that the transfers were merely a sham to accommodate petitioner in her travel abroad. Petitioner claims that we should consider that there is only one heir of the late Adela who is contesting the sale, and that out of the many transactions involving the decedent's other properties, the sale to petitioner is the only one being questioned. We are not convinced that these are material to the resolution of the case. As aptly passed upon by the CA in its assailed Resolution:cralawlawlibrary

In a contest for the declaration of nullity of an instrument for being simulated, the number of contestants is not determinative of the propriety of the cause. Any person who is prejudiced by a simulated contract may set up its inexistence. In this instant case, it does not matter if the contest is made by one, some or all of the heirs. Neither would the existence of other contracts which remain unquestioned deter an action for the nullity of an instrument. A contract is rendered meaningful and forceful by the intention of the parties relative thereto, and such intention can only be relevant to that particular contract which is produced or, as in this case, to that which is not produced. That the deed of sale in [petitioner's] favor has been held to be simulated is not indicative of the simulation of any other contract executed by the deceased Adela de Guzman Shotwell during her lifetime.60chanrobleslaw To this we add that other alleged transactions made by Adela cannot be used as evidence to prove the validity of the conveyances to petitioner. For one, we are not aware of any of these transactions or whether there are indeed other transactions. More importantly, the validity of these transactions 855 | P a g e G l e n n C h u a . K a t r i n a O n g o c o . H a n n a h M a t t i E s p i n o s a . D o m i n i c k B o t o r C o l l a b o r a t i o n

does not prove directly or indirectly the validity of the conveyances in question. B. No consideration for the sale We also find no compelling reason to depart from the court a quo's finding that Adela never received the consideration stipulated in the simulated Deeds of Absolute Sale. Although on their face, the Deeds of Absolute Sale appear to be supported by valuable consideration, the RTC and the CA found that there was no money involved in the sale. The consideration in the Deeds of Absolute Sale was superimposed on the spaces therein, bearing a font type different from that used in the rest of the document.61 The lower courts also found that the duplicate originals of the Deeds of Absolute Sale bear a different entry with regard to the price.62 Article 1471 of the Civil Code provides that "if the price is simulated, the sale is void." Where a deed of sale states that the purchase price has been paid but in fact has never been paid, the deed of sale is null and void for lack of consideration.63 Thus, although the contracts state that the purchase price of P250,000.00 and P60,000.00 were paid by petitioner to Adela for the Properties, the evidence shows that the contrary is true, because no money changed hands. Apart from her testimony, petitioner did not present proof that she paid for the Properties. There is no implied trust. We also affirm the CA's deletion of the pronouncement of the trial court as to the existence of an implied trust. The trial court found that a resulting trust, a form of implied trust based on Article 145364 of the Civil Code, was created between Adela and petitioner.

Resulting trusts65 arise from the nature or circumstances of the consideration involved in a transaction whereby one person becomes invested with legal title but is obligated in equity to hold his title for the benefit of another.66 It is founded on the equitable doctrine that valuable consideration and not legal title is determinative of equitable title or interest and is always presumed to have been contemplated by the parties.67 Since the intent is not expressed in the instrument or deed of conveyance, it is to be found in the nature of the parties' transaction.68 Resulting trusts are thus describable as intention-enforcing trusts.69 An example of a resulting trust is Article 1453 of the Civil Code. We, however, agree with the CA that no implied trust can be generated by the simulated transfers because being fictitious or simulated, the transfers were null and void ab initio — from the very beginning — and thus vested no rights whatsoever in favor of petitioner. That which is inexistent cannot give life to anything at all.70 Article 1453 contemplates that legal titles were validly vested in petitioner. Considering, however, that the sales lack not only the element of consent for being absolutely simulated, but also the element of consideration, these transactions are void and inexistent and produce no effect. Being null and void from the beginning, no transfer of title, both legal and beneficial, was ever effected to petitioner. In any case, regardless of the presence of an implied trust, this will not affect the disposition of the case. As void contracts do not produce any effect, the result will be the same in that the Properties will be reeonveyed to the estate of the late Adela de Guzman Shotwell. WHEREFORE, the petition is DENIED.,


SO ORDERED. 168. [G.R. No. 126010. December 8, 1999] LUCITA ESTRELLA HERNANDEZ, petitioner vs. COURT OF APPEALS and MARIO C. HERNANDEZ, respondents. D E C I S I O N MENDOZA, J.: This is a petition for review on certiorari of the decision of the Court of Appeals, dated January 30, 1996, affirming the decision of the Regional Trial Court, Branch 18, Tagaytay City, dated April 10, 1993, which dismissed the petition for annulment of marriage filed by petitioner. Petitioner Lucita Estrella Hernandez and private respondent Mario C. Hernandez were married at the Silang Catholic Parish Church in Silang, Cavite on January 1, 1981 (Exh. A). Three children were born to them, namely, Maie, who was born on May 3, 1982 (Exh. B), Lyra, born on May 22, 1985 (Exh. C),[if !supportFootnotes][4][endif] and Marian, born on June 15, 1989 (Exh. D). On July 10, 1992, petitioner filed before the Regional Trial Court, Branch 18, Tagaytay City, a petition seeking the annulment of her marriage to private respondent on the ground of psychological incapacity of the latter. She alleged that from the time of their marriage up to the time of the filing of the suit, private respondent failed to perform his obligation to support the family and contribute to the management of the household, devoting most of his time engaging in drinking sprees with his friends. She further claimed that private respondent, after they were married, cohabited with another woman with whom he had an illegitimate child, while having affairs with different women, and that, because of his promiscuity, private respondent endangered her health by infecting her with a sexually

transmissible disease (STD). She averred that private respondent was irresponsible, immature and unprepared for the duties of a married life. Petitioner prayed that for having abandoned the family, private respondent be ordered to give support to their three children in the total amount of P9,000.00 every month; that she be awarded the custody of their children; and that she be adjudged as the sole owner of a parcel of land located at Don Gregorio Subdivision I in Bo. Bucal, Dasmarias, Cavite, purchased during the marriage, as well as the jeep which private respondent took with him when he left the conjugal home on June 12, 1992. On October 8, 1992, because of private respondents failure to file his answer, the trial court issued an order directing the assistant provincial prosecutor to conduct an investigation to determine if there was collusion between the parties.[ Only petitioner appeared at the investigation on November 5, 1992. Nevertheless, the prosecutor found no evidence of collusion and recommended that the case be set for trial. Based on the evidence presented by the petitioner, the facts are as follows: Petitioner and private respondent met in 1977 at the Philippine Christian University in Dasmarias, Cavite. Petitioner, who is five years older than private respondent, was then in her first year of teaching zoology and botany. Private respondent, a college freshman, was her student for two consecutive semesters. They became sweethearts in February 1979 when she was no longer private respondents teacher. On January 1, 1981, they were married. Private respondent continued his studies for two more years. His parents paid for his tuition fees, while petitioner provided his allowances and other financial needs. The family income came from petitioners salary as a faculty member of the Philippine Christian University. Petitioner augmented her earnings by selling Tupperware products, as well as engaging in the buy-and-sell of coffee, rice and polvoron. From 1983 up to 1986, as private respondent could not find a stable job, it was agreed that he would help petitioner in her


businesses by delivering orders to customers. However, because her husband was a spendthrift and had other women, petitioners business suffered. Private respondent often had smoking and drinking sprees with his friends and betted on fighting cocks. In 1982, after the birth of their first child, petitioner discovered two love letters written by a certain Realita Villena to private respondent. She knew Villena as a married student whose husband was working in Saudi Arabia. When petitioner confronted private respondent, he admitted having an extramarital affair with Villena. Petitioner then pleaded with Villena to end her relationship with private respondent. For his part, private respondent said he would end the affairs, but he did not keep his promise. Instead, he left the conjugal home and abandoned petitioner and their child. When private respondent came back, however, petitioner accepted him, despite private respondents infidelity in the hope of saving their marriage. Upon the recommendation of a family friend, private respondent was able to get a job at Reynolds Philippines, Inc. in San Agustin, Dasmarias, Cavite in 1986. However, private respondent was employed only until March 31, 1991, because he availed himself of the early retirement plan offered by the company. He received P53,000.00 in retirement pay, but instead of spending the amount for the needs of the family, private respondent spent the money on himself and consumed the entire amount within four months of his retirement. While private respondent worked at Reynolds Philippines, Inc., his smoking, drinking, gambling and womanizing became worse. Petitioner discovered that private respondent carried on relationships with different women. He had relations with a certain Edna who worked at Yazaki; Angie, who was an operator of a billiard hall; Tess, a Japayuki; Myrna Macatangay, a secretary at the Road Master Drivers School in Bayan, Dasmarias, Cavite, with whom he cohabited for quite a while; and, Ruth Oliva, by whom he had a daughter named Margie P. Oliva, born on September 15, 1989 (Exh. E) When petitioner confronted private respondent about his relationship with Tess, he beat her up, as a

result of which she was confined at the De la Salle University Medical Center in Dasmarias, Cavite on July 4-5, 1990 because of cerebral concussion (Exh. F) According to petitioner, private respondent engaged in extreme promiscuous conduct during the latter part of 1986. As a result, private respondent contracted gonorrhea and infected petitioner. They both received treatment at the Zapote Medical Specialists Center in Zapote, Bacoor, Cavite from October 22, 1986 until March 13, 1987 (Exhs. G & H). Petitioner averred that on one occasion of a heated argument, private respondent hit their eldest child who was then barely a year old. Private respondent is not close to any of their children as he was never affectionate and hardly spent time with them. On July 17, 1979, petitioner entered into a contract to sell (Exh. J)[if ! with F & C Realty Corporation whereby she agreed to buy from the latter a parcel of land at the Don Gregorio Heights Subdivision I in Bo. Bucal, Dasmarias, Cavite and placed a partial payment of P31,330.00. On May 26, 1987, after full payment of the amount of P51,067.10, inclusive of interests from monthly installments, a deed of absolute sale (Exh. K) was executed in her favor and TCT No. T-221529 (Exh. M) was duly issued. According to petitioner, on August 1, 1992, she sent a handwritten letter to private respondent expressing her frustration over the fact that her efforts to save their marriage proved futile. In her letter, petitioner also stated that she was allowing him to sell their owner-type jeepney and to divide the proceeds of the sale between the two of them. Petitioner also told private respondent of her intention to file a petition for the annulment of their marriage. It does not appear that private respondent ever replied to petitioners letter. By this time, he had already abandoned petitioner and their children. In October 1992, petitioner learned that private respondent left for the Middle East. Since then, private respondents whereabouts had been unknown. Ester Alfaro, petitioners childhood friend and co-teacher at


the Philippine Christian University, testified during the hearing on the petition for annulment. She said that sometime in June 1979, petitioner introduced private respondent to her (Alfaro) as the formers sweetheart. Alfaro said she was not impressed with private respondent who was her student in accounting. She observed private respondent to be fun-loving, spending most of his time with campus friends. In November 1980, when petitioner asked Alfaro to be one of the secondary sponsors at her forthcoming wedding, Alfaro wanted to dissuade petitioner from going through with the wedding because she thought private respondent was not ready for married life as he was then unemployed. True enough, although the couple appeared happy during the early part of their marriage, it was not long thereafter that private respondent started drinking with his friends and going home late at night. Alfaro corroborated petitioners claim that private respondent was a habitual drunkard who carried on relationships with different women and continued hanging out with his friends. She also confirmed that petitioner was once hospitalized because she was beaten up by private respondent. After the first year of petitioners marriage, Alfaro tried to talk to private respondent, but the latter accused her of meddling with their marital life. Alfaro said that private respondent was not close to his children and that he had abandoned petitioner. On April 10, 1993, the trial court rendered a decision dismissing the petition for annulment of marriage filed by petitioner. The pertinent portion of the decision reads: The Court can underscore the fact that the circumstances mentioned by the petitioner in support of her claim that respondent was psychologically incapacitated to marry her are among the grounds cited by the law as valid reasons for the grant of legal separation (Article 55 of the Family Code) - not as grounds for a declaration of nullity of marriages or annulment thereof. Thus, Article 55 of the same code reads as follows: Art. 55. A petition for legal separation may be filed on any of the following grounds: (1) Repeated physical violence or grossly abusive conduct

directed against the petitioner, a common child, or a child of the petitioner; . . . . (5) Drug addiction or habitual alcoholism of the respondent; . . . . (8) Sexual infidelity or perversion; . . . . (10) Abandonment of petitioner by respondent without justifiable cause for more than one year. . . . . If indeed Article 36 of the Family Code of the Philippines, which mentions psychological incapacity as a ground for the declaration of the nullity of a marriage, has intended to include the abovestated circumstances as constitutive of such incapacity, then the same would not have been enumerated as grounds for legal separation. In the same manner, this Court is not disposed to grant relief in favor of the petitioner under Article 46, paragraph (3) of the Family Code of the Philippines, as there is no dispute that the gonorrhea transmitted to the petitioner by respondent occurred sometime in 1986, or five (5) years after petitioners marriage with respondent was celebrated in 1981. The provisions of Article 46, paragraph (3) of the same law should be taken in conjunction with Article 45, paragraph (3) of the same code, and a careful reading of the two (2) provisions of the law would require the existence of this ground (fraud) at the time of the celebration of the marriage. Hence, the annulment of petitioners marriage with the respondent on this ground, as alleged and proved in the instant case, cannot be legally accepted by the Court. Petitioner appealed to the Court of Appeals which, on January 30, 1996, rendered its decision affirming the decision of the trial court. Citing the ruling in Santos v. Court of Appeals, the Court of Appeals held: It is clear in the above law and jurisprudence that the psychological incapacity of a spouse, as a ground for declaration


of nullity of marriage, must exist at the time of the celebration of marriage. More so, chronic sexual infidelity, abandonment, gambling and use of prohibited drugs are not grounds per se, of psychological incapacity of a spouse. We agree with the Solicitor General that petitioner-appellant failed to prove that her respondent-husband was psychologically incapacitated at the time of the celebration of the marriage. Certainly, petitioner-appellants declaration that at the time of their marriage her respondent-husbands character was on the borderline between a responsible person and the happy-golucky, could not constitute the psychological incapacity in contemplation of Article 36 of the Family Code. In fact, petitionerappellant herself ascribed said attitude to her respondenthusbands youth and very good looks, who was admittedly several years younger than petitioner-appellant who, herself, happened to be the college professor of her respondent-husband. Petitioner-appellant even described her respondent-husband not as a problem student but a normal one (p. 24, tsn, Dec. 8, 1992). The acts and attitudes complained of by petitioner-appellant happened after the marriage and there is no proof that the same have already existed at the time of the celebration of the marriage to constitute the psychological incapacity under Article 36 of the Family Code. Hence, this petition. Petitioner contends that the respondent Court of Appeals erred I. IN FINDING THAT THE PSYCHOLOGICAL INCAPACITY OF THE PRIVATE RESPONDENT TO COMPLY WITH HIS ESSENTIAL MARITAL OBLIGATIONS DID NOT EXIST FROM THE TIME OF THE CELEBRATION OF THE MARRIAGE. II. IN RULING THAT PRIVATE RESPONDENT WAS NOT PSYCHOLOGICALLY INCAPACITATED TO COMPLY WITH HIS ESSENTIAL MARITAL OBLIGATIONS. III. IN AFFIRMING THE DECISION OF THE TRIAL COURT DENYING THE AWARD OF PERMANENT CUSTODY OF THE CHILDREN TO PETITIONER. IV. IN AFFIRMING THE DECISION OF THE TRIAL COURT

DENYING THE PRAYER FOR ISSUANCE OF AN ORDER REQUIRING PRIVATE RESPONDENT TO GIVE SUPPORT TO THE THREE CHILDREN IN THE AMOUNT OF P3,000.00 PER CHILD. V. IN NOT DECLARING THE REAL PROPERTY ACQUIRED BY PETITIONER AS HER EXCLUSIVE PROPERTY. The issue in this case is whether or not the marriage of petitioner and private respondent should be annulled on the ground of private respondents psychological incapacity. Petitioner alleges that the Court of Appeals erred in holding that petitioner failed to show that private respondents psychological incapacity existed at the time of the celebration of the marriage. She argues that the fact that the acts of incapacity of private respondent became manifest only after the celebration of their marriage should not be a bar to the annulment of their marriage. Art. 36 of the Family Code states: A marriage contracted by any party who, at the time of the celebration, was psychologically incapacitated to comply with the essential marital obligations of marriage, shall likewise be void even if such incapacity becomes manifest only after its solemnization. In Santos v. Court of Appeals, we held: Psychological incapacity should refer to no less than a mental (not physical) incapacity that causes a party to be truly incognitive of the basic marital covenants that concomitantly must be assumed and discharged by the parties to the marriage which, as so expressed by Article 68 of the Family Code, include their mutual obligations to live together, observe love, respect and fidelity and render help and support. There is hardly any doubt that the intendment of the law has been to confine the meaning of psychological incapacity to the most serious cases of personality disorders clearly demonstrative of an utter insensitivity or inability to give meaning and significance to the marriage. This psychological condition must exist at the time the marriage is celebrated. The law does not evidently envision, upon the other hand, an inability of the spouse to have sexual relations


with the other. This conclusion is implicit under Article 54 of the Family Code which considers children conceived prior to the judicial declaration of nullity of the void marriage to be legitimate. The other forms of psychoses, if existing at the inception of marriage, like the state of a party being of unsound mind or concealment of drug addiction, habitual alcoholism, homosexuality or lesbianism, merely renders the marriage contract voidable pursuant to Article 46, Family Code. If drug addiction, habitual alcoholism, lesbianism or homosexuality should occur only during the marriage, they become mere grounds for legal separation under Article 55 of the Family Code. These provisions of the Code, however, do not necessarily preclude the possibility of these various circumstances being themselves, depending on the degree and severity of the disorder, indicia of psychological incapacity. Until further statutory and jurisprudential parameters are established, every circumstance that may have some bearing on the degree, extent, and other conditions of that incapacity must, in every case, be carefully examined and evaluated so that no precipitate and indiscriminate nullity is peremptorily decreed. The well-considered opinions of psychiatrists, psychologists, and persons with expertise in psychological disciplines might be helpful or even desirable. In the instant case, other than her self-serving declarations, petitioner failed to establish the fact that at the time they were married, private respondent was suffering from a psychological defect which in fact deprived him of the ability to assume the essential duties of marriage and its concomitant responsibilities. As the Court of Appeals pointed out, no evidence was presented to show that private respondent was not cognizant of the basic marital obligations. It was not sufficiently proved that private respondent was really incapable of fulfilling his duties due to some incapacity of a psychological nature, and not merely physical. Petitioner says that at the outset of their marriage, private respondent showed lack of drive to work for his family.

Private respondents parents and petitioner supported him through college. After his schooling, although he eventually found a job, he availed himself of the early retirement plan offered by his employer and spent the entire amount he received on himself. For a greater part of their marital life, private respondent was out of job and did not have the initiative to look for another. He indulged in vices and engaged in philandering, and later abandoned his family. Petitioner concludes that private respondents condition is incurable, causing the disintegration of their union and defeating the very objectives of marriage. However, private respondents alleged habitual alcoholism, sexual infidelity or perversion, and abandonment do not by themselves constitute grounds for finding that he is suffering from a psychological incapacity within the contemplation of the Family Code. It must be shown that these acts are manifestations of a disordered personality which make private respondent completely unable to discharge the essential obligations of the marital state, and not merely due to private respondents youth and self-conscious feeling of being handsome, as the appellate court held. As pointed out in Republic of the Philippines v. Court of Appeals: The root cause of the psychological incapacity must be: (a) medically or clinically identified, (b) alleged in the complaint, (c) sufficiently proven by experts and (d) clearly explained in the decision. Article 36 of the Family Code requires that the incapacity must be psychological not physical, although its manifestations and/or symptoms may be physical. The evidence must convince the court that the parties, or one of them, was mentally or physically ill to such an extent that the person could not have known the obligations he was assuming, or knowing them, could not have given valid assumption thereof. Although no example of such incapacity need be given here so as not to limit the application of the provision under the principle of ejusdem generis (citing Salita v. Magtolis, supra) nevertheless such root cause must be identified as a psychological illness and its incapacitating nature fully explained. Expert evidence may be


given by qualified psychiatrists and clinical psychologists. Moreover, expert testimony should have been presented to establish the precise cause of private respondents psychological incapacity, if any, in order to show that it existed at the inception of the marriage. The burden of proof to show the nullity of the marriage rests upon petitioner. The Court is mindful of the policy of the 1987 Constitution to protect and strengthen the family as the basic autonomous social institution and marriage as the foundation of the family. Thus, any doubt should be resolved in favor of the validity of the marriage. We, therefore, find no reason to reverse the ruling of respondent Court of Appeals whose conclusions, affirming the trial courts finding with regard to the non-existence of private respondents psychological incapacity at the time of the marriage, are entitled to great weight and even finality.Only where it is shown that such findings are whimsical, capricious, and arbitrary can these be overturned. The conclusion we have reached makes it unnecessary for us to pass upon petitioners contentions on the issue of permanent custody of children, the amount for their respective support, and the declaration of exclusive ownership of petitioner over the real property. These matters may more appropriately be litigated in a separate proceeding for legal separation, dissolution of property regime, and/or custody of children which petitioner may bring. WHEREFORE, the decision of the Court of Appeals is AFFIRMED. SO ORDERED. Bellosillo (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur. 169. G.R. No. L-35702 May 29, 1973 DOMINGO D. RUBIAS, plaintiff-appellant, vs.

ISAIAS BATILLER, defendant-appellee. Gregorio M. Rubias for plaintiff-appellant. Vicente R. Acsay for defendant-appellee. TEEHANKEE, J.: In this appeal certified by the Court of Appeals to this Court as involving purely legal questions, we affirm the dismissal order rendered by the Iloilo court of first instance after pre-trial and submittal of the pertinent documentary exhibits. Such dismissal was proper, plaintiff having no cause of action, since it was duly established in the record that the application for registration of the land in question filed by Francisco Militante, plaintiff's vendor and predecessor interest, had been dismissed by decision of 1952 of the land registration court as affirmed by final judgment in 1958 of the Court of Appeals and hence, there was no title or right to the land that could be transmitted by the purported sale to plaintiff. As late as 1964, the Iloilo court of first instance had in another case of ejectment likewise upheld by final judgment defendant's "better right to possess the land in question . having been in the actual possession thereof under a claim of title many years before Francisco Militante sold the land to the plaintiff." Furthermore, even assuming that Militante had anything to sell, the deed of sale executed in 1956 by him in favor of plaintiff at a time when plaintiff was concededly his counsel of record in the land registration case involving the very land in dispute (ultimately decided adversely against Militante by the Court of Appeals' 1958 judgment affirming the lower court's dismissal of Militante's application for registration) was properly declared inexistent and void by the lower court, as decreed by Article 1409 in relation to Article 1491 of the Civil Code. The appellate court, in its resolution of certification of 25 July 1972, gave the following backgrounder of the appeal at bar: On August 31, 1964, plaintiff Domingo D. Rubias, a lawyer, filed a suit to recover the ownership and possession of certain portions of lot under Psu-99791 located in Barrio General Luna, Barotac


Viejo, Iloilo which he bought from his father-in-law, Francisco Militante in 1956 against its present occupant defendant, Isaias Batiller, who illegally entered said portions of the lot on two occasions — in 1945 and in 1959. Plaintiff prayed also for damages and attorneys fees. (pp. 1-7, Record on Appeal). In his answer with counter-claim defendant claims the complaint of the plaintiff does not state a cause of action, the truth of the matter being that he and his predecessors-in-interest have always been in actual, open and continuous possession since time immemorial under claim of ownership of the portions of the lot in question and for the alleged malicious institution of the complaint he claims he has suffered moral damages in the amount of P 2,000.00, as well as the sum of P500.00 for attorney's fees. ... On December 9, 1964, the trial court issued a pre-trial order, after a pre-trial conference between the parties and their counsel which order reads as follows.. 'When this case was called for a pre-trial conference today, the plaintiff appeared assisted by himself and Atty. Gregorio M. Rubias. The defendant also appeared, assisted by his counsel Atty. Vicente R. Acsay. A. During the pre-trial conference, the parties have agreed that the following facts are attendant in this case and that they will no longer introduced any evidence, testimonial or documentary to prove them: 1. That Francisco Militante claimed ownership of a parcel of land located in the Barrio of General Luna, municipality of Barotac Viejo province of Iloilo, which he caused to be surveyed on July 18-31, 1934, whereby he was issued a plan Psu-99791 (Exhibit "B"). (The land claimed contained an area of 171:3561 hectares.) 2. Before the war with Japan, Francisco Militante filed with the Court of First Instance of Iloilo an application for the registration of the title of the land technically described in psu-99791 (Exh. "B") opposed by the Director of Lands, the Director of Forestry and other oppositors. However, during the war with Japan, the record of the case was lost before it was heard, so after the war Francisco Militante petitioned this court to reconstitute the

record of the case. The record was reconstituted on the Court of the First Instance of Iloilo and docketed as Land Case No. R-695, GLRO Rec. No. 54852. The Court of First Instance heard the land registration case on November 14, 1952, and after the trial this court dismissed the application for registration. The appellant, Francisco Militante, appealed from the decision of this Court to the Court of Appeals where the case was docketed as CA-GR No. 13497-R.. 3. Pending the disposal of the appeal in CA-GR No. 13497-R and more particularly on June 18, 1956, Francisco Militante sold to the plaintiff, Domingo Rubias the land technically described in psu99791 (Exh. "A"). The sale was duly recorded in the Office of the Register of Deeds for the province of Iloilo as Entry No. 13609 on July 11, 1960 (Exh. "A-1"). (NOTE: As per deed of sale, Exh. A, what Militante purportedly sold to plaintiff-appellant, his son-in-law, for the sum of P2,000.00 was "a parcel of untitled land having an area Of 144.9072 hectares ... surveyed under Psu 99791 ... (and) subject to the exclusions made by me, under (case) CA-i3497, Land Registration Case No. R-695, G.L.R.O. No. 54852, Court of First Instance of the province of Iloilo. These exclusions referred to portions of the original area of over 171 hectares originally claimed by Militante as applicant, but which he expressly recognized during the trial to pertain to some oppositors, such as the Bureau of Public Works and Bureau of Forestry and several other individual occupants and accordingly withdrew his application over the same. This is expressly made of record in Exh. A, which is the Court of Appeals' decision of 22 September 1958 confirming the land registration court's dismissal of Militante's application for registration.) 4. On September 22,1958 the Court of appeals in CA-G.R. No. 13497-R promulgated its judgment confirming the decision of this Court in Land Case No. R-695, GLRO Rec. No. 54852 which dismissed the application for Registration filed by Francisco Militante (Exh. "I"). 5. Domingo Rubias declared the land described in Exh. 'B' for


taxation purposes under Tax Dec. No. 8585 (Exh. "C") for 1957; Tax Dec. Nos. 9533 (Exh. "C-1") and 10019 (Exh. "C-3")for the year 1961; Tax Dec. No. 9868 (Exh. "C-2") for the year 1964, paying the land taxes under Tax Dec. No. 8585 and 9533 (Exh. "D", "D-1", "G-6"). 6. Francisco Militante immediate predecessor-in-interest of the plaintiff, has also declared the land for taxation purposes under Tax Dec. No. 5172 in 1940 (Exh. "E") for 1945; under Tax Dec. No. T-86 (Exh. "E-1") for 1948; under Tax Dec. No. 7122 (Exh. "2"), and paid the land taxes for 1940 (Exhs. "G" and "G-7"), for 1945 46 (Exh. "G-1") for 1947 (Exh. "G-2"), for 1947 & 1948 (Exh. "G3"), for 1948 (Exh. "G-4"), and for 1948 and 1949 (Exh. "G-5"). 7. Tax Declaration No. 2434 in the name of Liberato Demontaño for the land described therein (Exh. "F") was cancelled by Tax. Dec. No. 5172 of Francisco Militante (Exh. "E"). Liberato Demontaño paid the land tax under Tax Dec. No. 2434 on Dec. 20, 1939 for the years 1938 (50%) and 1959 (Exh. "H"). 8. The defendant had declared for taxation purposes Lot No. 2 of the Psu-155241 under Tax Dec. Not. 8583 for 1957 and a portion of Lot No. 2, Psu-155241, for 1945 under Tax Dec. No. 8584 (Exh. "2-A" Tax No. 8583 (Exh. "2") was revised by Tax Dec. No. 9498 in the name of the defendant (Exh. "2-B") and Tax Dec. No. 8584 (Exh. "2-A") was cancelled by Tax Dec. No. 9584 also in the name of the defendant (Exh. "2-C"). The defendant paid the land taxes for Lot 2, Psu-155241, on Nov. 9, 1960 for the years 1945 and 1946, for the year 1950, and for the year 1960 as shown by the certificate of the treasurer (Exh. "3"). The defendant may present to the Court other land taxes receipts for the payment of taxes for this lot. 9. The land claimed by the defendant as his own was surveyed on June 6 and 7,1956, and a plan approved by Director of Land on November 15, 1956 was issued, identified as Psu 155241 (Exh. "5"). 10. On April 22, 1960, the plaintiff filed forcible Entry and Detainer case against Isaias Batiller in the Justice of the Peace Court of Barotac Viejo Province of Iloilo (Exh. "4") to which the

defendant Isaias Batiller riled his answer on August 29, 1960 (Exh. "4-A"). The Municipal Court of Barotac Viejo after trial, decided the case on May 10, 1961 in favor of the defendant and against the plaintiff (Exh. "4-B"). The plaintiff appealed from the decision of the Municipal Court of Barotac Viejo which was docketed in this Court as Civil Case No. 5750 on June 3, 1961, to which the defendant, Isaias Batiller, on June 13, 1961 filed his answer (Exh. "4-C"). And this Court after the trial. decided the case on November 26, 1964, in favor of the defendant, Isaias Batiller and against the plaintiff (Exh. "4-D"). (NOTE: As per Exh. 4-B, which is the Iloilo court of first instance decision of 26 November 1964 dismissing plaintiff's therein complaint for ejectment against defendant, the iloilo court expressly found "that plaintiff's complaint is unjustified, intended to harass the defendant" and "that the defendant, Isaias Batiller, has a better right to possess the land in question described in Psu 155241 (Exh. "3"), Isaias Batiller having been in the actual physical possession thereof under a claim of title many years before Francisco Militante sold the land to the plaintiff-hereby dismissing plaintiff's complaint and ordering the plaintiff to pay the defendant attorney's fees ....") B. During the trial of this case on the merit, the plaintiff will prove by competent evidence the following: 1. That the land he purchased from Francisco Militante under Exh. "A" was formerly owned and possessed by Liberato Demontaño but that on September 6, 1919 the land was sold at public auction by virtue of a judgment in a Civil Case entitled "Edw J. Pflieder plaintiff vs. Liberato Demontaño Francisco Balladeros and Gregorio Yulo, defendants", of which Yap Pongco was the purchaser (Exh. "1-3"). The sale was registered in the Office of the Register of Deeds of Iloilo on August 4, 1920, under Primary Entry No. 69 (Exh. "1"), and a definite Deed of Sale was executed by Constantino A. Canto, provincial Sheriff of Iloilo, on Jan. 19, 1934 in favor of Yap Pongco (Exh. "I"), the sale having been registered in the Office of the Register of Deeds of Iloilo on February 10, 1934 (Exh. "1-1").


2. On September 22, 1934, Yap Pongco sold this land to Francisco Militante as evidenced by a notarial deed (Exh. "J") which was registered in the Registry of Deeds on May 13, 1940 (Exh. "J-1"). 3. That plaintiff suffered damages alleged in his complaint. C. Defendants, on the other hand will prove by competent evidence during the trial of this case the following facts: 1. That lot No. 2 of the Psu-1552 it (Exh. '5') was originally owned and possessed by Felipe Batiller, grandfather of the defendant Basilio Batiller, on the death of the former in 1920, as his sole heir. Isaias Batiller succeeded his father , Basilio Batiller, in the ownership and possession of the land in the year 1930, and since then up to the present, the land remains in the possession of the defendant, his possession being actual, open, public, peaceful and continuous in the concept of an owner, exclusive of any other rights and adverse to all other claimants. 2. That the alleged predecessors in interest of the plaintiff have never been in the actual possession of the land and that they never had any title thereto. 3. That Lot No. 2, Psu 155241, the subject of Free Patent application of the defendant has been approved. 4. The damages suffered by the defendant, as alleged in his counterclaim."' 1 The appellate court further related the developments of the case, as follows: On August 17, 1965, defendant's counsel manifested in open court that before any trial on the merit of the case could proceed he would file a motion to dismiss plaintiff's complaint which he did, alleging that plaintiff does not have cause of action against him because the property in dispute which he (plaintiff) allegedly bought from his father-in-law, Francisco Militante was the subject matter of LRC No. 695 filed in the CFI of Iloilo, which case was brought on appeal to this Court and docketed as CA-G.R. No. 13497-R in which aforesaid case plaintiff was the counsel on record of his father-in-law, Francisco Militante. Invoking Arts. 1409 and 1491 of the Civil Code which reads: 'Art. 1409. The following contracts are inexistent and void from

the beginning: xxx xxx xxx (7) Those expressly prohibited by law. 'ART. 1491. The following persons cannot acquire any purchase, even at a public auction, either in person of through the mediation of another: . xxx xxx xxx (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior courts, and other officers and employees connected with the administration of justice, the property and rights of in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring an assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession.' defendant claims that plaintiff could not have acquired any interest in the property in dispute as the contract he (plaintiff) had with Francisco Militante was inexistent and void. (See pp. 2231, Record on Appeal). Plaintiff strongly opposed defendant's motion to dismiss claiming that defendant can not invoke Articles 1409 and 1491 of the Civil Code as Article 1422 of the same Code provides that 'The defense of illegality of contracts is not available to third persons whose interests are not directly affected' (See pp. 32-35 Record on Appeal). On October 18, 1965, the lower court issued an order disclaiming plaintiffs complaint (pp. 42-49, Record on Appeal.) In the aforesaid order of dismissal the lower court practically agreed with defendant's contention that the contract (Exh. A) between plaintiff and Francism Militante was null and void. In due season plaintiff filed a motion for reconsideration (pp. 50-56 Record on Appeal) which was denied by the lower court on January 14, 1966 (p. 57, Record on Appeal). Hence, this appeal by plaintiff from the orders of October 18, 1965 and January 14, 1966. Plaintiff-appellant imputes to the lower court the following


errors: '1. The lower court erred in holding that the contract of sale between the plaintiff-appellant and his father-in-law, Francisco Militante, Sr., now deceased, of the property covered by Plan Psu99791, (Exh. "A") was void, not voidable because it was made when plaintiff-appellant was the counsel of the latter in the Land Registration case. '2. The lower court erred in holding that the defendant-appellee is an interested person to question the validity of the contract of sale between plaintiff-appellant and the deceased, Francisco Militante, Sr. '3. The lower court erred in entertaining the motion to dismiss of the defendant-appellee after he had already filed his answer, and after the termination of the pre-trial, when the said motion to dismiss raised a collateral question. '4. The lower court erred in dismissing the complaint of the plaintiff-appellant.' The appellate court concluded that plaintiffs "assignment of errors gives rise to two (2) legal posers — (1) whether or not the contract of sale between appellant and his father-in-law, the late Francisco Militante over the property subject of Plan Psu-99791 was void because it was made when plaintiff was counsel of his father-in-law in a land registration case involving the property in dispute; and (2) whether or not the lower court was correct in entertaining defendant-appellee's motion to dismiss after the latter had already filed his answer and after he (defendant) and plaintiff-appellant had agreed on some matters in a pre-trial conference. Hence, its elevation of the appeal to this Court as involving pure questions of law. It is at once evident from the foregoing narration that the pretrial conference held by the trial court at which the parties with their counsel agreed and stipulated on the material and relevant facts and submitted their respective documentary exhibits as referred to in the pre-trial order, supra, 2 practically amounted to a fulldress trial which placed on record all the facts and exhibits necessary for adjudication of the case.

The three points on which plaintiff reserved the presentation of evidence at the-trial dealing with the source of the alleged right and title of Francisco Militante's predecessors, supra, 3 actually are already made of record in the stipulated facts and admitted exhibits. The chain of Militante's alleged title and right to the land as supposedly traced back to Liberato Demontaño was actually asserted by Militante (and his vendee, lawyer and son-in-law, herein plaintiff) in the land registration case and rejected by the Iloilo land registration court which dismissed Militante's application for registration of the land. Such dismissal, as already stated, was affirmed by the final judgment in 1958 of the Court of Appeals. 4 The four points on which defendant on his part reserved the presentation of evidence at the trial dealing with his and his ancestors' continuous, open, public and peaceful possession in the concept of owner of the land and the Director of Lands' approval of his survey plan thereof, supra, 5 are likewise already duly established facts of record, in the land registration case as well as in the ejectment case wherein the Iloilo court of first instance recognized the superiority of defendant's right to the land as against plaintiff. No error was therefore committed by the lower court in dismissing plaintiff's complaint upon defendant's motion after the pre-trial. 1. The stipulated facts and exhibits of record indisputably established plaintiff's lack of cause of action and justified the outright dismissal of the complaint. Plaintiff's claim of ownership to the land in question was predicated on the sale thereof for P2,000.00 made in 1956 by his father-inlaw, Francisco Militante, in his favor, at a time when Militante's application for registration thereof had already been dismissed by the Iloilo land registration court and was pending appeal in the Court of Appeals. With the Court of Appeals' 1958 final judgment affirming the dismissal of Militante's application for registration, the lack of any rightful claim or title of Militante to the land was conclusively and


decisively judicially determined. Hence, there was no right or title to the land that could be transferred or sold by Militante's purported sale in 1956 in favor of plaintiff. Manifestly, then plaintiff's complaint against defendant, to be declared absolute owner of the land and to be restored to possession thereof with damages was bereft of any factual or legal basis. 2. No error could be attributed either to the lower court's holding that the purchase by a lawyer of the property in litigation from his client is categorically prohibited by Article 1491, paragraph (5) of the Philippine Civil Code, reproduced supra; 6 and that consequently, plaintiff's purchase of the property in litigation from his client (assuming that his client could sell the same since as already shown above, his client's claim to the property was defeated and rejected) was void and could produce no legal effect, by virtue of Article 1409, paragraph (7) of our Civil Code which provides that contracts "expressly prohibited or declared void by law' are "inexistent and that "(T)hese contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived." The 1911 case of Wolfson vs. Estate of Martinez 7 relied upon by plaintiff as holding that a sale of property in litigation to the party litigant's lawyer "is not void but voidable at the election of the vendor" was correctly held by the lower court to have been superseded by the later 1929 case of Director of Lands vs. Abagat. 8 In this later case of Abagat, the Court expressly cited two antecedent cases involving the same transaction of purchase of property in litigation by the lawyer which was expressly declared invalid under Article 1459 of the Civil Code of Spain (of which Article 1491 of our Civil Code of the Philippines is the counterpart) upon challenge thereof not by the vendor-client but by the adverse parties against whom the lawyer was to enforce his rights as vendee thus acquired. These two antecedent cases thus cited in Abagat clearly superseded (without so expressly stating the previous ruling in Wolfson:

The spouses, Juan Soriano and Vicente Macaraeg, were the owners of twelve parcels of land. Vicenta Macaraeg died in November, 1909, leaving a large number of collateral heirs but no descendants. Litigation between the surviving husband, Juan Soriano, and the heirs of Vicenta immediately arose, and the herein appellant Sisenando Palarca acted as Soriano's lawyer. On May 2, 1918, Soriano executed a deed for the aforesaid twelve parcels of land in favor of Sisenando Palarca and on the following day, May 3, 1918, Palarca filed an application for the registration of the land in the deed. After hearing, the Court of First Instance declared that the deed was invalid by virtue of the provisions of article 1459 of the Civil Code, which prohibits lawyers and solicitors from purchasing property rights involved in any litigation in which they take part by virtue of their profession. The application for registration was consequently denied, and upon appeal by Palarca to the Supreme Court, the judgement of the lower court was affirmed by a decision promulgated November 16,1925. (G.R. No. 24329, Palarca vs. Director of Lands, not reported.) In the meantime cadastral case No. 30 of the Province of Tarlac was instituted, and on August 21, 1923, Eleuteria Macaraeg, as administratrix of the estate of Vicente Macaraeg, filed claims for the parcels in question. Buenaventura Lavitoria administrator of the estate of Juan Soriano, did likewise and so did Sisenando Palarca. In a decision dated June 21, 1927, the Court of First Instance, Judge Carballo presiding, rendered judgment in favor of Palarea and ordered the registration of the land in his name. Upon appeal to this court by the administration of the estates of Juan Soriano and Vicente Macaraeg, the judgment of the court below was reversed and the land adjudicated to the two estates as conjugal property of the deceased spouses. (G.R. No. 28226, Director of Lands vs. Abagat, promulgated May 21, 1928, not reported.) 9 In the very case of Abagat itself, the Court, again affirming the invalidity and nullity of the lawyer's purchase of the land in litigation from his client, ordered the issuance of a writ of


possession for the return of the land by the lawyer to the adverse parties without reimbursement of the price paid by him and other expenses, and ruled that "the appellant Palarca is a lawyer and is presumed to know the law. He must, therefore, from the beginning, have been well aware of the defect in his title and is, consequently, a possessor in bad faith." As already stated, Wolfson and Abagat were decided with relation to Article 1459 of the Civil Code of Spain then adopted here, until it was superseded on August 30, 1950 by the Civil Code of the Philippines whose counterpart provision is Article 1491. Article 1491 of our Civil Code (like Article 1459 of the Spanish Civil Code) prohibits in its six paragraphs certain persons, by reason of the relation of trust or their peculiar control over the property, from acquiring such property in their trust or control either directly or indirectly and "even at a public or judicial auction," as follows: (1) guardians; (2) agents; (3) administrators; (4) public officers and employees; judicial officers and employees, prosecuting attorneys, and lawyers; and (6) others especially disqualified by law. In Wolfson which involved the sale and assignment of a money judgment by the client to the lawyer, Wolfson, whose right to so purchase the judgment was being challenged by the judgment debtor, the Court, through Justice Moreland, then expressly reserved decision on "whether or not the judgment in question actually falls within the prohibition of the article" and held only that the sale's "voidability can not be asserted by one not a party to the transaction or his representative," citing from Manresa 10 that "(C)onsidering the question from the point of view of the civil law, the view taken by the code, we must limit ourselves to classifying as void all acts done contrary to the express prohibition of the statute. Now then: As the code does not recognize such nullity by the mere operation of law, the nullity of the acts hereinbefore referred to must be asserted by the person having the necessary legal capacity to do so and decreed by a competent court." 11

The reason thus given by Manresa in considering such prohibited acquisitions under Article 1459 of the Spanish Civil Code as merely voidable at the instance and option of the vendor and not void — "that the Code does not recognize such nullity de pleno derecho" — is no longer true and applicable to our own Philippine Civil Code which does recognize the absolute nullity of contracts "whose cause, object, or purpose is contrary to law, morals, good customs, public order or public policy" or which are "expressly prohibited or declared void by law" and declares such contracts "inexistent and void from the beginning." 12 The Supreme Court of Spain and modern authors have likewise veered from Manresa's view of the Spanish codal provision itself. In its sentencia of 11 June 1966, the Supreme Court of Spain ruled that the prohibition of Article 1459 of the Spanish Civil Code is based on public policy, that violation of the prohibition contract cannot be validated by confirmation or ratification, holding that: ... la prohibicion que el articulo 1459 del C.C. establece respecto a los administradores y apoderados, la cual tiene conforme a la doctrina de esta Sala, contendia entre otras, en S. de 27-5-1959, un fundamento de orden moral lugar la violacion de esta a la nulidad de pleno derecho del acto o negocio celebrado, ... y prohibicion legal, afectante orden publico, no cabe con efecto alguno la aludida retification ... 13 The criterion of nullity of such prohibited contracts under Article 1459 of the Spanish Civil Code (Article 1491 of our Civil Code) as a matter of public order and policy as applied by the Supreme Court of Spain to administrators and agents in its above cited decision should certainly apply with greater reason to judges, judicial officers, fiscals and lawyers under paragraph 5 of the codal article. Citing the same decisions of the Supreme Court of Spain, Gullon Ballesteros, his "Curso de Derecho Civil, (Contratos Especiales)" (Madrid, 1968) p. 18, affirms that, with respect to Article 1459, Spanish Civil Code:. Que caracter tendra la compra que se realice por estas personas? Porsupuesto no cabe duda de que el caso (art.) 1459, 40 y 50, la


nulidad esabsoluta porque el motivo de la prohibicion es de orden publico. 14 Perez Gonzales in such view, stating that "Dado el caracter prohibitivo delprecepto, la consequencia de la infraccion es la nulidad radical y ex lege." 15 Castan, quoting Manresa's own observation that. "El fundamento do esta prohibicion es clarisimo. No sa trata con este precepto tan solo de guitar la ocasion al fraude; persiguese, ademasel proposito de rodear a las personas que intervienen en la administrcionde justicia de todos los retigios que necesitan pora ejercer su ministerio librandolos de toda suspecha, que aunque fuere in fundada, redundura endescredito de la institucion." 16 arrives at the contrary and now accepted view that "Puede considerace en nuestro derecho inexistente 'o radicalmente nulo el contrato en los siguentes cases: a) ...; b) cuando el contrato se ha celebrado en violacion de una prescripcion 'o prohibicion legal, fundada sobre motivos de orden publico (hipotesis del art. 4 del codigo) ..." 17 It is noteworthy that Caltan's rationale for his conclusion that fundamental consideration of public policy render void and inexistent such expressly prohibited purchase (e.g. by public officers and employees of government property intrusted to them and by justices, judges, fiscals and lawyers of property and rights in litigation and submitted to or handled by them, under Article 1491, paragraphs (4) and (5) of our Civil Code) has been adopted in a new article of our Civil Code, viz, Article 1409 declaring such prohibited contracts as "inexistent and void from the beginning." 18 Indeed, the nullity of such prohibited contracts is definite and permanent and cannot be cured by ratification. The public interest and public policy remain paramount and do not permit of compromise or ratification. In his aspect, the permanent disqualification of public and judicial officers and lawyers grounded on public policy differs from the first three cases of guardians, agents and administrators (Article 1491, Civil Code), as to whose transactions it had been opined that they may be

"ratified" by means of and in "the form of a new contact, in which cases its validity shall be determined only by the circumstances at the time the execution of such new contract. The causes of nullity which have ceased to exist cannot impair the validity of the new contract. Thus, the object which was illegal at the time of the first contract, may have already become lawful at the time of the ratification or second contract; or the service which was impossible may have become possible; or the intention which could not be ascertained may have been clarified by the parties. The ratification or second contract would then be valid from its execution; however, it does not retroact to the date of the first contract." 19 As applied to the case at bar, the lower court therefore properly acted upon defendant-appellant's motion to dismiss on the ground of nullity of plaintiff's alleged purchase of the land, since its juridical effects and plaintiff's alleged cause of action founded thereon were being asserted against defendant-appellant. The principles governing the nullity of such prohibited contracts and judicial declaration of their nullity have been well restated by Tolentino in his treatise on our Civil Code, as follows: Parties Affected. — Any person may invoke the in existence of the contract whenever juridical effects founded thereon are asserted against him. Thus, if there has been a void transfer of property, the transferor can recover it by the accion reinvindicatoria; and any prossessor may refuse to deliver it to the transferee, who cannot enforce the contract. Creditors may attach property of the debtor which has been alienated by the latter under a void contract; a mortgagee can allege the inexistence of a prior encumbrance; a debtor can assert the nullity of an assignment of credit as a defense to an action by the assignee. Action On Contract. — Even when the contract is void or inexistent, an action is necessary to declare its inexistence, when it has already been fulfilled. Nobody can take the law into his own hands; hence, the intervention of the competent court is necessary to declare the absolute nullity of the contract and to decree the restitution of what has been given under it. The


judgment, however, will retroact to the very day when the contract was entered into. If the void contract is still fully executory, no party need bring an action to declare its nullity; but if any party should bring an action to enforce it, the other party can simply set up the nullity as a defense. 20 ACCORDINGLY, the order of dismissal appealed from is hereby affirmed, with costs in all instances against plaintiff-appellant. So ordered. Makalintal, Zaldivar, Castro,. Fernando, Barredo, Makasiar, Antonio and Esguerra, JJ., concur. 170. G.R. No. L-25891 November 29, 1977 BENEDICTO M. JAVIER, as administrator of the Estate of Eusebio Cruz, petitioner, vs. DOMINGA VDA. DE CRUZ, and LEONILA, ROMAN, ELISEO, LIBERATA, and MELECIO, all surnamed CRUZ, respondents. Jose F. Aguirre for petitioner. Pedro A. Manzanares for respondents. FERNANDEZ, J.: This is an appeal by the plaintiff from the decision of the Court of First Instance of Rizal in Civil Case No. 5996 entitled "Benedicto M. Javier, etc. vs. Dominga Vda. de Cruz, et al." the dispositive part of which reads: IN VIEW OF THE FOREGOING, judgment is hereby rendered one in favor of the defendants and against the plaintiff dismissing the two above-entitled cases, dissolving the writ of preliminary injunction, ordering the plaintiff to pay attorney's fees in the sum of One Thousand Pesos (P1,000.00) and condemning the said plaintiff to pay the costs of suit.

IT IS ORDERED. Pasig, Rizal, August 29, 1962. (Sgd.) Andres Reyes ( /t/ ) ANDRES REYES Judge 1 The Court of Appeals, in a resolution promulgated on March 19, 1966 certified to the Supreme Court the case because "the value of the property in question is more than half a million pesos ..." hence "is beyond the jurisdiction of this Court." 2 On February 1, 1960 Benedicto M. Javier, as administrator of the Estate of Eusebio Cruz, instituted against Dominga Vda. de Cruz and her children Civil Case No. 5996 to declare null and void a deed of sale of a part of a parcel of land located in Barrio San Isidro, Taytay, Rizal containing an area of 182,959 square meters and assessed at P4,310.00 under Tax No. 9136 under Tax No. 9136 in the name of Estate of E. Cruz. The amended complaint stated that Eusebio Cruz, who died on February 2, 1941 at the age of 100 years without leaving any will nor compulsory heirs, was the absolute and exclusive owner of a parcel of mountainous and unimproved land situated in sitio Matogalo, Taytay, Rizal which he inherited from his forebears, described therein; that during his lifetime, Eusebio Cruz had been living with one Teodora Santos 'without the sanction of marriage"; that Teodora Santos had with her as distant relatives and protegees the brothers Gregorio Cruz and Justo Cruz; that Gregorio Cruz was the father of Delfin Cruz, deceased husband of defendant Dominga Vda. de Cruz and father of defendants Leonila, Roman, Eliseo, Leberata and Melecio, all surnamed Cruz; that on January 16, 1941 Delfin Cruz, by means of deceit and in collusion with persons among them his father Gregorio Cruz made Eusebio Cruz, who could read and write, stamp his thumbmark on a deed of sale of a portion of the land described in the complaint consisting of 26,577 square meters for the sum of P700.00 in favor of said Delfin Cruz; that at that time Delfin Cruz did not have theithin thirty days from submittal of the case for decision, but the validity of the law cannot be seriously challenged." 14 Petitioner fiscal, as already stated, filed the informations in the


ten cases with the Circuit Criminal Court rather than with the respondent judge's court to mitigate the latter court's caseload in accordance with the purpose of the Circuit Criminal Court law or at the request of the offended parties and complainants. Since the filing of the information or complaint "supplies -the occasion for the exercise of jurisdiction vested by law in a particular court" 15 and the law confers concurrent jurisdiction in the Circuit Criminal Court, the said court properly assumed jurisdiction over the said cases and there is no lawful basis for respondent judge's prayer that said cases be returned to his court "for the lawful actions which are needed on them" and to set at naught the judgments of conviction already rendered by the Circuit Criminal Court in some of the cases and the other proceedings therein. For administrative and record purposes, however, petitioner fiscal should have promptly and in due course advised the clerk of respondent judge's court that the informations had been filed with the Circuit Criminal Court. Petitioner fiscal recognized this oversight and duly "apologized humbly" to respondent judge and pleaded an "acute lack of personnel in his office" in extenuation. Under the circumstances and considering that petitioner was only discharging his duty according to his best lights, and could not be said to have in any way acted arbitrarily or in bad faith in filing the informations with the Circuit Criminal Court, his apology could have been graciously accepted by respondent judge with an admonition to exercise greater care in the future, in lieu of the unwarranted imposition of punitive fines in the total sum of P 1,000.00. ACCORDINGLY, the questioned contempt orders and fines imposed therein are annulled and set aside. Without costs. Makasiar, Muñoz Palma, Martin, Fernandez and Guerrero JJ., concur. 171. G.R. No. L-43668-69 July 31, 1978

POTENCIANO MENIL and wife CRISPINA NAYVE, petitioners, vs. COURT OF APPEALS, AGUEDA GARAN, FRANCISCO CALANIAS, MIGUEL NAYVE, JR., and DEVELOPMENT BANK OF THE PHILIPPINES, respondents. Bernardo O. Almeda for petitioners. Ismael Sanchez and Raul O. del Castillo for respondents. GUERRERO, J: Appeal by certiorari from the Resolution of the Court of Appeals 1 dated September 3, 1975 and from the Resolution of the same Court 2 dated January 16, 1976, resolving petitioner's motion for reconsideration of its Joint Decision, dated April 18, 1975, in CAG.R. No. 51242-R entitled "Potenciano Menil and Wife Crispina Nayve, Plaintiffs-Appellees, versus Francisco Calanias, et al., Defendant-Appellants" and CA-G.R. No. 51243-R entitled "Agueda Garan, Plaintiff-Appellant, versus Potenciano Menil et al., Defendants-Appellees," and which this Court had resolved to treat as a special civil action per Resolution dated May 14, 1976. The Resolution of January 16, 1976 sufficiently states the antecedents facts of the cases. On November 3, 1955, Agueda Garan obtained a homestead patent over the land in question. On February 4, 1956, Original Certificate of Title No. 220 was issued by the Register of Deeds of Surigao in her name pursuant to the homestead patent. On May 7, 1960, within the prohibitive 5-year period, Agueda Garan sold the land to movant Patenciano Manil for P415.00, as evidenced by a deed of sale bearing the same date. But, for reasons not revealed in the records, the contracting parties did not registered the deed of sale in the Registry of Deeds in Surigao. Original Certificate of Title No. 220 was not cancelled and the land remained registered in the name of Agueda Garan. On August 30, 1964, Agueda Garan executed another deeds of sale over the same parcel of land in favor of the same vendee,


Potenciano Menil, and for the same price P415.00. On August 30, 1965, the contracting parties registered the second deed of sale in the Registry of Deeds in Surigao. Original Certificate of Title No. 220 was cancelled, and Transfer Certificate of Title No. T-60, in lieu thereof, was issued in the name of Potenciano Menil. On February 28, 1966, Potenciano Menil mortgaged the land to the Development Bank of the Philippines to secure an agricultural loan which the former obtained fromthe latter. ... in the 1st Indorsement, dated May 26, 1965, of the Acting Chief, land Management Division of the Bureau of Lands to the Secretary of Agriculture and Natural Resources, (that) the former recommended to the latter the approval of the sale dated March 3, 1964; and the Officer-in-Charge, for and in the absence of the Undersecretary for Natural Resources, in his 2nd Indorsement, dated June 23, 1965, approved the same. Movant Potenciano Menil was notified on July 12, 1965 of the approval of the sale to Mm of the tract of land covered by OCT No. 220. Petitioners were in possession of the land in question until sometime in 1967 when private respondents Agueda Garan, Francisco Calanias, Miguel Nayve, Jr., Rufo Nayve, and Lucio Calanias forcibly took possession of the said land, and filed against petitioners Civil Case No. 1692 for "Quieting of Title" before Branch 11 of the Court of First Instance of Surigao del Norte. The said court dismissed the complaint, awarded damages to the petitioners, and granted the writ of execution prayed for by the latter. However, upon the claim that the above decision was silent on the issue of who are entitled to the possession of the land under litigation, the private respondents refused to vacate the land, thus, forcing petitioners to file on July 8, 1968 Civil Case No. 1810 for "Recovery of Possession" of the said land before Branch 1 of the same Court of First Instance of Surigao del Norte. On the other hand, during the pendency of Civil Case No. 1810, private respondents filed against the petitioners Civil Case No. 1816 for the reconveyance of the land litigated in Civil Case No. 1692 and

Civil Case No. 1810 before the same court. By agreement of the parties, Civil Case No. 1810 and Civil Case No. 1816 were jointly heard by the Court of First Instance of Surigao del Norte, Branch I. A joint judgment dated June 13. 1970 was rendered declaring that the decision in Civil Case No. 1692 clearly stated that the spouses Menil were legally entitled to the possession of the land, ordering private respondents to restore possession of the land in litigation to petitioners, and dismissing Civil Case No. 1816 for insufficiency of evidence. On a motion for reconsideration filed by the private respondents, the lower court ordered the reopening of the two cases, after the rehearing of which the said court affirmed the joint judgment dated June 13, 1970, but dismissed Civil Case No. 1816 insofar as the Development Bank of the Philippines was concerned. Private respondents appealed to the Court of Appeals. The appellate court in its Decision dated April 18, 1975 dismissed the appeal and affirmed the decision of the lower court, with a declaration that the decision in Civil Case No. 1692 was res judicata to Civil Case No. 1810 and Civil Case No. 1816. On a motion for reconsideration filed by private respondents, the appellate court set aside its Decision and rendered the Resolution dated September 3, 1975 which declared the sale of the homestead in question to petitioners as nun and void, ordered the cancellation of Transfer Certificate of Title No. T-60 and the mortgage in favor of the Development Bank of the Philippines, the re-issuance of Original Certificate of Title No. 220 in favor of homesteader Agueda Garan, and ordered Garan to reimburse Menil the sum of P415.00, the price of the sale, the interest thereon being declared compensated by the fruits Menil received from their possession of the properties. Petitioners and the Development Bank of the Philippines respectively moved to reconsider the said Resolution. Acting to said Motion for Reconsideration, the appellate court in its Resolution dated January 16, 1976 affirmed the Resolution dated September 3, 1975, denied petitioners' motion for reconsideration, but granted that of the Development Bank of the Philippines by declaring the


mortgage executed by petitioners over the land in favor of said bank as valid. Petitioners now filed this appeal by way of certiorari seeking that the Resolutions of the Court of Appeals dated September 3, 1975 and January 16, 1976 be set aside and that the Decision of the same court dated April 18, 1975 be revived. In the Resolution of September 3, 1975 which petitioners seek to set aside, the Court of Appeals said: In Our above-said decision. We expressed the view that the decision in Civil Case No. 1692 was on the merits because it was rendered after trial on the merits and therefore res judicata to the subsequent herein cases. After a thorough reading and review of the said decision in Civil Case No. 1692, however, We have voted to revise that view. The discussion in the latter decision is replete with unequivocal (sic) and contradictory opinions that it is quite difficult to comprehend what the trial judge's conclusion is. The main part of the dispositive portion, however, provides: WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of the defendant, Potenciano Menil, and against the herein plaintiffs dismissing the latter's complaint. To paraphrase, what was dismissed in said judgment was plaintiffs' complaint, not the action itself, as according to the discussion the action was not the proper one availed of. From this, it may be inferred that the intention of said trial judge was just to dismiss the complaint without prejudice to the filing of the proper action. We agree with the appellate court that the decision rendered in Civil Case No. 1692 was not res judicata to the subsequent cases, Civil Case No. 1810 and Civil Case No. 1816. The issue of the validity of the sale of the homestead land within the 5 year prohibitory period under Section 118 of the Public Land Act was not squarely raised and decided in said Civil Case No. 1692 which was brought only for "Quieting of Title." The more fundamental issue presented for Our resolution is: Who are entitled to the land under litigation?

It is not disputed by the parties that the contract of sale executed on May 7, 1960, having been executed less than 5 years from May 7, 1960, the date the homestead patent was awarded to private respondent Agueda Garan, is null and void for being violative of Section 118 of C.A. 141 [Public Land Act] which provides: Sec. 118. Except in favor of the government or any of its branches, units, or institutions, lands acquired under free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the approval of the application and for a term of five years from and after the date of issuance of the patent or grant, nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of said period, but the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations, or corporations. Petitioners contend, however, that the subsequent approval thereof by the Secretary of Agriculture and Natural Resources, and the execution of the confirmatory deed of sale on August 10, 1965, cured any defect that the first sale may have suffered. In finding such contention without merit, the appellate court in its Resolution dated September 3, 1975, which was substantially affirmed by its Resolution dated January 16, 1975, declared: This case is almost Identical with Manzano vs. Ocampo (I SCRA 69 1) where it was held; We therefore, hold that the sale in question is illegal and void for having been made within five years from the date of Manzano's patent, in violation of Section 118 of the Public Land Law, Being void from its inception, the approval thereof by the undersecretary of Agriculture and Natural Resources after the lapse of five years from Manzano's patent did not legalize the sale. (Santander v. Villanueva, G.R. No. L-6184, Feb. 28, 1958; Cadiz v. Nicolas, G.R. No. L-9198, Feb. 13, 1958). The result is that the homestead in question must be returned to Manzano's heirs, petitioners herein, who are, in turn, bound to restore to appellee Ocampo the sum of P3,000.00 received by Manzano as the price thereof. (Medel v. Eliazo, G.R. No. L-12617, Aug. 27, 1959, Santander vs. Villanueva, supra; Feb. 28, 1958). The fruits of the


land should equitable compensate the interest on the price. As to the execution of the confirmatory deed of sale, by proper analogy, the Supreme Court in the said case said: The law prohibiting any transfer or alienation of homestead land within five years from the issuance of the patent does not distinguish between executory and consummated sales; and it would hardly be in keeping with the primordial aim of this prohibition to preserve and keep in the family of the homesteader the piece of land that the state had gratuitously given to them, to hold valid a homestead sale actually perfected during the period of prohibition but with the execution of the formal deed of conveyance and the the delivery of possession of the land sold to the buyer deferred until after the expiration of the prohibitory period, purposely to circumvent the very law that prohibits and declares invalid such transaction to protect the homesteader and his family. To hold valid such arrangements would be to throw the door wide open to an possible fraudulent subterfuges and schemes that persons interested in land given to homesteaders may devise to circumvent and defeat the legal provision prohibiting their alienation within five years from the issuance of the homestead's patent. We are fully in accord with the conclusion of the appellate court that the issue presented in the case at bar is squarely resolved by the doctrine enunciated in the aforecited case of Manzano v. Ocampo, supra. Indeed, We cannot discern in the case at bar any new element or matter which may possibly bar the application of the ruling in Manzano v. Ocampo as contended by the petitioners. It cannot be claimed that there are two contracts: one which is undisputably null and void, and another, having been executed after the lapse of the 5-year prohibitory period, which is valid. The second contract of sale executed on March 3, 1964 is admittedly a confirmatory deed of sale. Even the petitioners concede this point. 3 Inasmuch as the contract of sale executed on May 7, 1960 is void for it is expressly prohibited or declared void by law [CA- 141, Section 118], it therefore cannot be confirmed nor ratified. Article 1409 of the New Civil Code states:

Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object, or purpose is contrary to law, morals, good customs, public order or public policy; (2) Those which are absolutely simulated or fictitious; (3) Those whose cause or object did not exist at the time of the transaction; (4) Those whose object is outside the commerce of men; (5) Those which contemplate an impossible service; (6) Those where the intention of the parties relative to the principal object of the contract cannot be ascertained; (7) Those expressly prohibited or declared void by law. These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived. Further, noteworthy is the fact that the second contract of sale over the said homestead in favor of the same vendee, petitioner Potenciano Menil, is for the same price of P415.00. Clearly, the unvarying term of the said contract is ample manifestation that the same is simulated and that no object or consideration passed between the parties to the contract. It is evident from the whole record of the case that the homestead had long been in the possession of the vendees upon the execution of the first contract of sale on May 7, 1960; likewise, the amount of P415.00 had long been paid to Agueda Garan on that same occasion. We find no evidence to the contrary. With respect to the Resolution of January 16, 1976 of the respondent appellate court, likewise assailed by petitioners, which granted the motion for reconsideration of the Development Bank of the Philippines and declared the mortgage executed by Potenciano Menil over the land in favor of said Bank to be valid, We hold that petitioners are liable for the payment of the agricultural loan obtained by them from the Bank for which the land was mortgaged by them as security. IN VIEW OF THE FOREGOING, the Resolution of September 3, 1975 as modified by the Resolution of January 16, 1976 is affirmed. Judgment is hereby rendered:


(1) Declaring null and void the sale of the homestead under litigation to petitioners Potenciano Menil and wife, Crispina Nayve; (2) Ordering the Register of Deeds of Surigao del Norte to cancel Transfer Certificate of Title No. T-60, and to re-issue Original Certificate of Title No. 220 in the name of private respondent Agueda Garan, subject to the mortgage executed by petitioner Potenciano Menil in favor of private respondent Development Bank of the Philippines which is hereby declared valid, and ordered to be annotated on said Original Certificate of Title by the said Register of Deeds; (3) Ordering petitioners Potenciano Menil and wife, Crispina Nayve, to reimburse respondent Agueda Garan the sum of P415.00, the price of the sale, the interest thereon being compensated by the fruits petitioners Potenciano Menil and wife, Crispina Nayve, received from their possession of the homestead; (4) Ordering petitioners to pay the agricultural loan obtained by them from the Development Bank of the Philippines for which the land had been mortgaged as collateral. This judgment is without prejudice to any appropriate action the Government may take against private respondent Agueda Garan pursuant to Section 124 of C. A. 141. No pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Makasiar, Muñoz Palma and Fernandez, JJ., concur. 172. G.R. No. L-26096 February 27, 1979 THE DIRECTOR OF LANDS, petitioner, vs. SILVERETRA ABABA, ET AL., claimants, JUAN LARRAZABAL, MARTA C. DE LARRAZABAL, MAXIMO ABAROQUEZ and ANASTACIA CABIGAS, petitionersappellants, ALBERTO FERNANDEZ, adverse claimant-

appellee. Juanito Ll. Abao for petitioners-appellants. Alberto R Fernandez in his own behalf. MAKASIAR, J.: This is an appeal from the order of the Court of First Instance of Cebu dated March 19, 1966 denying the petition for the cancellation of an adverse claim registered by the adverse claimant on the transfer certificate of title of the petitioners. The adverse claimant, Atty. Alberto B. Fernandez was retained as counsel by petitioner, Maximo Abarquez, in Civil Case No. R-6573 of the Court of First Instance of Cebu, entitled "Maximo Abarquez vs. Agripina Abarquez", for the annulment of a contract of sale with right of repurchase and for the recovery of the land which was the subject matter thereof. The Court of First Instance of Cebu rendered a decision on May 29, 1961 adverse to the petitioner and so he appealed to the Court of Appeals. Litigating as a pauper in the lower court and engaging the services of his lawyer on a contingent basis, petitioner, liable to compensate his lawyer whom he also retained for his appeal executed a document on June 10, 1961 in the Cebuano-Visayan dialect whereby he obliged himself to give to his lawyer one-half (1/2) of whatever he might recover from Lots 5600 and 5602 should the appeal prosper. The contents of the document as translated are as follows: AGREEMENT KNOW ALL MEN BY THESE PRESENTS: That I, MAXIMO ABARQUEZ, Plaintiff in Case No. R-6573 of the Court of First Instance of Cebu, make known through this agreement that for the services rendered by Atty. Alberto B. Fernandez who is my lawyer in this case, if the appeal is won up to the Supreme Court, I Promise and will guarantee that I win give to said lawyer one-half (1/2) of what I may recover from the estate of my father in Lots No. 5600 and 5602 which are located at Bulacao Pardo, City of Cebu. That with respect to any money which may be adjudged to me from Agripina Abarquez, except


'Attorney's Fees', the same shall pertain to me and not to said lawyer. IN WITNESS WHEREOF, I have caused my right thumb. mark to be affixed hereto this 10th of June, 1961, at the City of Cebu. THUMBMARK MAXIMO ABARQUEZ (p. 5, Petitioner-Appellant's Brief, p. 26, rec.) The real Property sought to be recovered in Civil Case No. R6573 was actually the share of the petitioner in Lots 5600 and 5602, which were part of the estate of his deceased parents and which were partitioned the heirs which included petitioner Maximo Abarquez and his elder sister Agripina Abarquez, the defendant in said civil case. This partition was made pursuant to a project of partition approved by the Court which provided am other that Lots Nos. 5600 and 5602 were to be divided into three equal Parts, one third of which shall be given to Maximo Abarquez. However, Agripina Abarquez the share of her brother stating that the latter executed an instrument of pacto de retro prior to the partition conveying to her any or all rights in the estate of their parents. Petitioner discovered later that the claim of his sister over his share was based on an instrument he was believe all along to be a mere acknowledgment of the receipt of P700.00 which his sister gave to him as a consideration for g care of their father during the latter's illness and never an instrument of pacto de retro. Hence, he instituted an action to annul the alleged instrument of pacto de retro. The Court of Appeals in a decision promulgated on August 27, 1963 reversed the decision of the lower court and annulled the dead of pacto de retro. Appellee Agripina Abarquez filed a motion for reconsideration but the same was denied in a resolution dated January 7, 1964 (p. 66, Record on Appeal; p. 13, Rec.) and the judgment became final and executory on January 22,1964. Subsequently, Transfer Certificate of Title No. 31841 was issued on May 19,1965 in the name of Maximo Abarquez, married to Anastacia Cabigas, over his adjudged share in Lots Nos. 5600 and

5602 containing an area of 4,085 square meters (p. 110, ROA; p. 13, rec.). These parcels of land later by the subject matter of the adverse claim filed by the claimant. The case having been resolved and title having been issued to petitioner, adverse claimant waited for petitioner to comply with ha obligation under the document executed by him on June 10, 1961 by delivering the one-half (½) portion of the said parcels of land. Petitioner refused to comply with his obligation and instead offered to sell the whole parcels of land covered by TCT No. 31841 to petitioner-spouses Juan Larrazabal and Marta C. de Larrazabal. Upon being informed of the intention of the petitioner, adverse t claimant immediately took stops to protect his interest by filing with the trial court a motion to annotate Ins attorney's lien on TCT No. 31841 on June 10, 1965 and by notifying the prospective buyers of his claim over the one-half portion of the parcels of land. Realizing later that the motion to annotate attorney's lien was a wrong remedy, as it was not within the purview of Section 37, rule 138 of the Revised Rule of Court, but before the same was by the trial court, adverse t by an affidavit of adverse claim on July 19, 1965 with the Register of Deeds of Cebu (p. 14, ROA; p. 13, rec.). By virtue of the petition of mid affidavit the adverse claim for one-half (½) of the lots covered by the June 10, 1961 document was annotated on TCT No. 31841. Notwithstanding the annotation of the adverse claim, petitionerspouse Maximo Abarquez and Anastacia Cabigas conveyed by deed of absolute sale on July 29, 1965 two-thirds (2/3) of the lands covered by TCT No. 31841 to petitioner-spouses Juan Larrazabal and Marta C. de Larrazabal. When the new transfer certificate of title No. 32996 was issued, the annotation of adverse claim on TCT No. 31841 necessarily had to appear on the new transfer certificate of title. This adverse claim on TCT No. 32996 became the subject of cancellation proceedings filed by herein petitioner-spouses on March 7, 1966 with the Court of First Instance of Cebu (p. 2 ROA; p. 13, rec.). The adverse


claimant, Atty. Alberto B. Fernandez, filed his opposition to the petition for cancellation on March 18, 1966 (p. 20, ROA; p. 13 rec.). The trial court resolved the issue on March 19, 1966, when it declared that: ...the petition to cancel the adverse claim should be denied. The admission by the petitioners that the lawyers (Attys. Fernandez and Batiguin) are entitled to only one-third of the lot described in Transfer Certificate of Title No. 32966 is the best proof of the authority to maintain said adverse claim (p. 57, ROA; p. 13, rec.). Petitioner-spouses decided to appeal the order of dismissal to this Court and correspondingly filed the notice of appeal on April 1, 1966 with the trial court. On April 2, 1966, petitioner-spouses filed the appeal bond and subsequently filed the record on appeal on April 6, 1966. The records of the case were forwarded to this Court through the Land Registration Commission of Manila and were received by this Court on May 5, 1966. Counsel for the petitioner-spouses filed the printed record on appeal on July 12, 1966. Required to file the appellants' brief, counsel filed one on August 29, 1966 while that of the appellee was filed on October 1, 1966 after having been granted an extension to file his brief. The case was submitted for decision on December 1, 1966. Counsel for the petitioners filed a motion to expunge appellees' brief on December 8, 1966 for having been filed beyond the reglementary period, but the same was denied by this Court in a resolution dated February 13, 1967. The pivotal issue to be resolved in the instant case is the validity or nullity of the registration of the adverse claim of Atty. Fernandez, resolution of which in turn hinges on the question of whether or not the contract for a contingent fee, basis of the interest of Atty. Fernandez, is prohibited by the Article 1491 of the New Civil Code and Canon 13 of the Canons of Professional Ethics. Petitioners contend that a contract for a contingent fee violates Article 1491 because it involves an assignment of a property subject of litigation. That article provides:

Article 1491. The following persons cannot acquire by purchase even at a public or judicial auction, either in person or through the petition of another. xxx xxx xxx (5) Justices, judges, prosecuting attorneys, clerks of superior and inferior and other o and employees connected with the administration of justice, the property and rights in litigation or levied upon an execution before the court within whose jurisdiction or territory they exercise their respective functions; this prohibition includes the act of acquiring by assignment and shall apply to lawyers, with respect to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession (Emphasis supplied). This contention is without merit. Article 1491 prohibits only the sale or assignment between the lawyer and his client, of property which is the subject of litigation. As WE have already stated. "The prohibition in said article a only to applies stated: " The prohibition in said article applies only to a sale or assignment to the lawyer by his client of the property which is the subject of litigation. In other words, for the prohibition to operate, the sale or t of the property must take place during the pendency of the litigation involving the property" (Rosario Vda. de Laig vs. Court of Appeals, et al., L-26882, November 21, 1978). Likewise, under American Law, the prohibition does not apply to "cases where after completion of litigation the lawyer accepts on account of his fee, an interest the assets realized by the litigation" (Drinker, Henry S., Legal Ethics, p. 100 [1953], citing App. A, 280; N.Y. Ciu 714). "There is a clear distraction between such cases and one in which the lawyer speculates on the outcome of the matter in which he is employed" (Drinker, supra, p. 100 citing A.B.A. Op. 279). A contract for a contingent fee is not covered by Article 1491 because the tranfer or assignment of the property in litigation takes effect only after the finality of a favorable judgment. In the instant case, the attorney's fees of Atty. Fernandez, consisting of one-half (1/2) of whatever Maximo Abarquez might recover from


his share in the lots in question, is contingent upon the success of the appeal. Hence, the payment of the attorney's fees, that is, the transfer or assignment of one-half (1/2) of the property in litigation will take place only if the appeal prospers. Therefore, the tranfer actually takes effect after the finality of a favorable judgment rendered on appeal and not during the pendency of the litigation involving the property in question. Consequently, the contract for a contingent fee is not covered by Article 1491. While Spanish civilists differ in their views on the above issue — whether or not a contingent fee contract (quota litis agreement) is covered by Article 1491 — with Manresa advancing that it is covered, thus: Se ha discutido si en la incapacidad de Ion Procumdam y Abogados asta o el pecto de quota litis. Consiste este, como es sabido, en la estipulacion de que el Abogado o el Procurador ban de hacer suyos una parte alicuota de In cona que se li m la son es favorable. Con es te concepto a la vista, es para nosortros que el articulo que comentamos no menciona ese pacto; pero como la incapacidad de los Abogados y Procuradores se extinede al acto de adquirir por cesion; y la efectividad del pacto de quota litis implica necesariamente una cesion, estimamos que con solo el num. 5 del articulo 1459 podria con exito la nulidad de ese pacto tradicionalmente considerado como ilicito. xxx xxx xxx Debe tenerse tambien en cuenta, respecto del ultimo parrafo del articulo 1459, la sentencia del Tribunal Supreme de 25 Enero de 1902, que delcara que si bien el procurador no puede adquirir para si los bienes, en cuanto a los cuales tiene incapacidad, puede adquirirlos para otra persona en quien no concurra incapacidad alguna (Manresa, Comentarios al Codigo Civil Español, Tomo X, p. 110 [4a ed., 1931] emphasis supplied). Castan, maintaining that it is not covered, opines thus; C. Prohibiciones impuestas a las personas encargadas, mas o menos directamente, de la administracion de justicia.—El mismo art. 1,459 del Codigo civil prohibe a los Magistrados, Jueces, individuos del Minesterio fiscal, Secretarios de Tribunales y

Juzgados y Oficiales de Justicia adquirir por compra (aunque sea en subasta publica o judicial, por si ni por persona alguna intermedia). 'Los bienes y derechos que estuviesen en litigio ante el Tribunal en cuya jurisdicion on teritorio ejercieran sus respectivas funciones, extendiendo se esta prohibicion al acto de adquirir por cesion', y siendo tambien extensiva ' Alos Abogados y Procuradores respecto a los bienes y derecho que fueran objeto del un litigio en que intervengan pos su profession y oficio.' El fundamento de esta prohibicion es clarismo. No solo se trata— dice Manresa—de quitar la ocasion al fraude; persiguese, ademas, el proposito de rodear a las personas que intervienen en la administracion de justicia de todos los prestigios que necesitan para ejercer su ministerio, librando los de toda sospecha, que, aunque fuere infundada, redundaria en descredito de la institucion. Por no dor lugar a recelos de ninguna clase, admite el Codigo (en el apartado penutimo del art. 1.459) algunos casos en que, por excepcion, no se aplica el pricipio prohibitivo de que venimos hablando. Tales son los de que se trate de acciones hereditarias entre coheredero, de cesion en pago de creditos, o de garantia de los bienes que posean los funcionarios de justicia. Algunos autores (Goyena, Manresa, Valverde) creen que en la prohibicion del art. 1.459 esta comprendido el pacto de quota litis (o sea el convenio por el cual se concede al Abogado o Procurador, para el caso de obtener sentencia favorable una parte alicuota de la cosa o cantidad que se litiga), porque dicho pacto supone la venta o cesion de una parte de la cosa o drecho que es objecto del litigio. Pero Mucius Scaevola oberva, conrazon, que en el repetido pacto no hay propiamente caso de compraventa ni de cesion de derechos, y bastan para estimario nulo otros preceptos del Codigo como los relativos a la ilicitud de la causa (Castan, Derecho Civil Espñol, Tomo 4, pp. 68-69, [9a ed., 1956], emphasis supplied). The Supreme Court of Spain, in its sentencia of 12 November 1917, has ruled that Article 1459 of the Spanish Civil Code (Article 1491 of our Civil Code) does not apply to a contract for a


contingent fee because it is not contrary to morals or to law, holding that: ... que no es susceptible de aplicarse el precepto contenido en el num. 5 del art. 1.459 a un contrato en el que se restrigen los honorarios de un Abogado a un tanto por ciento de lo que se obtuviera en el litigio, cosa no repudiada por la moral ni por la ley (Tolentino, Civil Code of the Philippines, p. 35, Vol. V [1959]; Castan, supra; Manresa, supra). In the Philippines, among the Filipino commentators, only Justice Capistrano ventured to state his view on the said issue, thus: The incapacity to purchase or acquire by assignment, which the law also extends to lawyers with t to the property and rights which may be the object of any litigation in which they may take part by virtue of their profession, also covers contracts for professional services quota litis. Such contracts, however, have been declared valid by the Supreme Court" (Capistrano, Civil Code of the Philippines, p. 44, Vol. IV [1951]). Dr. Tolentino merely restated the views of Castan and Manresa as well as the state of jurisprudence in Spain, as follows: Attorneys-at-law—Some writers, like Goyena, Manresa and Valverde believe that this article covers quota litis agreements, under which a lawyer is to be given an aliquot part of the property or amount in litigation if he should win the case for his client. Scaevola and Castan, however, believe that such a contract does not involve a sale or assignment of right but it may be void under other articles of the Code, such as those referring to illicit cause- On the other hand the Spanish Supreme Court has held that this article is not applicable to a contract which limits the fees of a lawyer to a certain percentage of what may be recovered in litigation, as this is not contrary to moral or to law. (Tolentino, Civil Code of the Philippines, p. 35, Vol. V [1959]; Castan, supra, Emphasis supplied). Petitioners her contend that a contract for a contingent fee violates the Canons of Professional Ethics. this is likewise without merit This posture of petitioners overlooked Canon 13 of the Canons which expressly contingent fees by way of exception to

Canon 10 upon which petitioners relied. For while Canon 10 prohibits a lawyer from purchasing ...any interest in the subject matter of the litigation which he is conducting", Canon 13, on the other hand, allowed a reasonable contingent fee contract, thus: "A contract for a con. tangent fee where sanctioned by law, should be reasonable under all the circumstances of the ca including the risk and uncertainty of the compensation, but should always be subject to the supervision of a court, as to its reasonableness." As pointed out by an authority on Legal Ethics: Every lawyer is intensely interested in the successful outcome of his case, not only as affecting his reputation, but also his compensation. Canon 13 specifically permits the lawyer to contract for a con tangent fee which of itself, negatives the thought that the Canons preclude the lawyer's having a stake in his litigation. As pointed out by Professor Cheatham on page 170 n. of his Case Book, there is an inescapable conflict of interest between lawyer and client in the matter of fees. Nor despite some statements to the con in Committee opinions, is it believed that, particularly in view of Canon 13, Canon 10 precludes in every case an arrangement to make the lawyer's fee payable only out of the results of the litigation. The distinction is between buying an interest in the litigation as a speculation which Canon 10 condemns and agreeing, in a case which the lawyer undertakes primarily in his professional capacity, to accept his compensation contingent on the outcome (Drinker, Henry S Legal Ethics, p. 99, [1953], Emphasis supplied). These Canons of Professional Ethics have already received "judicial recognition by being cited and applied by the Supreme Court of the Philippines in its opinion" Malcolm, Legal and Judicial Ethics, p. 9 [1949]). And they have likewise been considered sources of Legal Ethics. More importantly, the American Bar Association, through Chairman Howe of the Ethics Committee, opined that "The Canons of Professional Ethics are legislative expressions of professional opinion ABA Op. 37 [1912])" [See footnote 25, Drinker, Legal Ethics, p. 27]. Therefore, the Canons have some binding effect


Likewise, it must be noted that this Court has already recognized this type of a contract as early as the case of Ulanday vs. Manila Railroad Co. (45 PhiL 540 [1923]), where WE held that "contingent fees are not prohibited in the Philippines, and since impliedly sanctioned by law 'Should be under the supervision of the court in order that clients may be protected from unjust charges' (Canons of Profession 1 Ethics)". The same doctrine was subsequently reiterated in Grey vs. Insular Lumber Co. (97 PhiL 833 [1955]) and Recto vs. Harden (100 PhiL 427 [1956]). In the 1967 case of Albano vs. Ramos (20 SCRA 171 [19671), the attorney was allowed to recover in a separate action her attomey's fee of one-third (1/3) of the lands and damages recovered as stipulated in the contingent fee contract. And this Court in the recent case of Rosario Vda de Laig vs. Court of Appeals, et al. (supra), which involved a contingent fee of one-half (½) of the property in question, held than ,contingent fees are recognized in this i jurisdiction (Canon 13 of the Canons of Professional Ethics adopted by the Philippine Bar association in 1917 [Appendix B, Revised Rules of Court)), which contingent fees may be a portion of the property in litigation." Contracts of this nature are permitted because they redound to the benefit of the poor client and the lawyer "especially in cases where the client has meritorious cause of action, but no means with which to pay for legal services unless he can, with the sanction of law, make a contract for a contingent fee to be paid out of the proceeds of the litigation" (Francisco, Legal Ethics, p. 294 [1949], citing Lipscomb vs. Adams 91 S.W. 1046, 1048 [1949]). Oftentimes, contingent fees are the only means by which the poor and helpless can redress for injuries sustained and have their rights vindicated. Thus: The reason for allowing compensation for professional services based on contingent fees is that if a person could not secure counsel by a promise of large fees in case of success, to be derived from the subject matter of the suit, it would often place the poor in such a condition as to amount to a practical denial of justice. It not infrequently happens that person are injured through the

negligence or willful misconduct of others, but by reason of poverty are unable to employ counsel to assert their rights. In such event their only means of redress lies in gratuitous service, which is rarely given, or in their ability to find some one who will conduct the case for a contingent fee. That relations of this king are often abused by speculative attorneys or that suits of this character are turned into a sort of commercial traffic by the lawyer, does not destroy the beneficial result to one who is so poor to employ counsel (id, at p. 293, citing Warvelle, Legal Ethics, p. 92, Emphasis supplied). Justice George Malcolm, writing on contingent fees, also stated that: ... the system of contingent compensation has the merit of affording to certain classes of persons the opportunity to procure the prosecution of their claims which otherwise would be beyond their means. In many cases in the United States and the Philippines, the contingent fee is socially necessary (Malcolm, Legal and Judicial Ethics, p. 55 [1949], emphasis supplied). Stressing further the importance of contingent fees, Professor Max Radin of the University of California, said that: The contingent fee certainly increases the possibility that vexatious and unfounded suits will be brought. On the other hand, it makes possible the enforcement of legitimate claims which otherwise would be abandoned because of the poverty of the claimants. Of these two possibilities, the social advantage seems clearly on the side of the contingent fee. It may in fact be added by way of reply to the first objection that vexations and unfounded suits have been brought by men who could and did pay substantial attorney's fees for that purpose (Radin, Contingent Fees in California, 28 Cal. L. Rev. 587, 589 [1940], emphasis supplied). Finally, a contingent fee contract is always subject to the supervision of the courts with respect to the stipulated amount and may be reduced or nullified. So that in the event that there is any undue influence or fraud in the execution of the contract or that the fee is excessive, the client is not without remedy because


the court will amply protect him. As held in the case of Grey vs. Insular Lumber Co., supra, citing the case of Ulanday vs. Manila Railroad Co., supra: Where it is shown that the contract for a contingent fee was obtained by any undue influence of the attorney over the client, or by any fraud or imposition, or that the compensation is so clearly excessive as to amount to extortion, the court win in a proper case protect the aggrieved party. In the present case, there is no iota of proof to show that Atty. Fernandez had exerted any undue influence or had Perpetrated fraud on, or had in any manner taken advantage of his client, Maximo Abarquez. And, the compensation of one-half of the lots in question is not excessive nor unconscionable considering the contingent nature of the attorney's fees. With these considerations, WE find that the contract for a contingent fee in question is not violative of the Canons of Professional Ethics. Consequently, both under the provisions of Article 1491 and Canons 10 and 13 of the Canons of Profession Ethics, a contract for a contingent fee is valid In resolving now the issue of the validity or nullity for the registration of the adverse claim, Section 110 of the Land Registration Act (Act 496) should be considered. Under d section, an adverse claim may be registered only by.. Whoever claims any part or interest in registered land adverse to the registered owner, arising subsequent to the date of the o registration ... if no other provision is made in this Act for registering the same ... The contract for a contingent fee, being valid, vested in Atty Fernandez an interest or right over the lots in question to the extent of one-half thereof. Said interest became vested in Atty. Fernandez after the case was won on appeal because only then did the assignment of the one-half (½) portion of the lots in question became effective and binding. So that when he filed his affidavit of adverse claim his interest was already an existing one. There was therefore a valid interest in the lots to be registered in favor of Atty. Fernandez adverse to Mo Abarquez.

Moreover, the interest or claim of Atty. Fernandez in the lots in question arose long after the original petition which took place many years ago. And, there is no other provision of the Land Registration Act under which the interest or claim may be registered except as an adverse claim under Section 110 thereof. The interest or claim cannot be registered as an attorney's charging lien. The lower court was correct in denying the motion to annotate the attomey's lien. A charging lien under Section 37, Rule 138 of the Revised Rules of Court is limited only to money judgments and not to judgments for the annulment of a contract or for delivery of real property as in the instant case. Said Section provides that: Section 37. An attorney shall have a lien upon the funds, documents and papers of his client which have lawfully come into his oppossession and may retain the same until his lawful fees and disbursements have been paid, and may apply such funds to the satisfaction thereof. He shall also have a lien to the same extent upon all judgments, for the payment of money, and executions issued in pursuance of such judgments, which he has secured in a litigation of his client ... (emphasis supplied). Therefore, as an interest in registered land, the only adequate remedy open to Atty. Fernandez is to register such interest as an adverse claim. Consequently, there being a substantial compliance with Section 110 of Act 496, the registration of the adverse claim is held to be valid. Being valid, its registration should not be cancelled because as WE have already stated, "it is only when such claim is found unmeritorious that the registration thereof may be cancelled" (Paz Ty Sin Tei vs. Jose Lee Dy Piao 103 Phil. 867 [1958]). The one-half (½) interest of Atty. Fernandez in the lots in question should therefore be respected. Indeed, he has a better right than petitioner-spouses, Juan Larrazabal and Marta C. de Larrazabal. They purchased their two-thirds (2/3) interest in the lots in question with the knowledge of the adverse claim of Atty. Fernandez. The adverse claim was annotated on the old transfer certificate of title and was later annotated on the new transfer


certificate of title issued to them. As held by this Court: The annotation of an adverse claim is a measure designed to protect the interest of a person over a piece of real property where the registration of such interest or right is not otherwise provided for by the Land Registration Act, and serves as a notice and warning to third parties dealing with said property that someone is claiming an interest on the same or a better right than the registered owner thereof (Sanchez, Jr. vs. Court of Appeals, 69 SCRA 332 [1976]; Paz Ty Sin Tei vs. Jose Le Dy Piao supra). Having purchased the property with the knowledge of the adverse claim, they are therefore in bad faith. Consequently, they are estopped from questioning the validity of the adverse claim. WHEREFORE, THE DECISION OF THE LOWER COURT DENYING THE PETITION FOR THE CANCELLATION OF THE ADVERSE CLAIM SHOULD BE, AS IT IS HEREBY AFFIRMED, WITH COSTS AGAINST PETITIONER-APPELLANTS JUAN LARRAZABAL AND MARTA C. DE LARRAZABAL. SO ORDERED. 173. G.R. No. L-45645 June 28, 1983 FRANCISCO A. TONGOY, for himself and as Judicial Administrator of the Estate of the Late Luis D. Tongoy and Ma. Rosario Araneta Vda. de Tongoy, petitioners, vs. THE HONORABLE COURT OF APPEALS, MERCEDES T. SONORA, JUAN T. SONORA, JESUS T. SONORA, TRINIDAD T. SONORA, RICARDO P. TONGOY, CRESENCIANO P. TONGOY, AMADO P. TONGOY, and NORBERTO P. TONGOY, respondents. Tañada, Sanchez, Tanada & Tanada Law Office for petitioners. Reyes & Pablo Law Office for respondents.

MAKASIAR, J.: This is a petition for certiorari, to review the decision of respondent Court of Appeals in CA-G.R. No. 45336-R, entitled "Mercedes T. Sonora, et al. versus Francisco A. Tongoy, et al.", promulgated on December 3, 1975. The antecedent facts which are not controverted are quoted in the questioned decision, as follows: The case is basically an action for reconveyance respecting two (2) parcels of land in Bacolod City. The first is Lot No. 1397 of the Cadastral Survey of Bacolod, otherwise known as Hacienda Pulo, containing an area of 727,650 square meters and originally registered under Original Certificate of Title No. 2947 in the names of Francisco Tongoy, Jose Tongoy, Ana Tongoy, Teresa Tongoy and Jovita Tongoy in pro-indiviso equal shares. Said coowners were all children of the late Juan Aniceto Tongoy. The second is Lot No. 1395 of the Cadastral Survey of Bacolod, briefly referred to as Cuaycong property, containing an area of 163,754 square meters, and formerly covered by Original Certificate of Title No. 2674 in the name of Basilisa Cuaycong. Of the original registered co-owners of Hacienda Pulo, three died without issue, namely: Jose Tongoy, who died a widower on March 11, 1961; Ama Tongoy, who also died single on February 6, 1957, and Teresa Tongoy who also died single on November 3, 1949. The other two registered co-owners, namely, Francisco Tongoy and Jovita Tongoy, were survived by children. Francisco Tongoy, who died on September 15, 1926, had six children; Patricio D. Tongoy and Luis D. Tongoy by the first marriage; Amado P. Tongoy, Ricardo P. Tongoy; Cresenciano P. Tongoy and Norberto P. Tongoy by his second wife Antonina Pabello whom he subsequently married sometime after the birth of their children. For her part, Jovita Tongoy (Jovita Tongoy de Sonora), who died on May 14, 1915, had four children: Mercedes T. Sonora, Juan T. Sonora, Jesus T. Sonora and Trinidad T. Sonora. By the time this case was commenced, the late Francisco Tongoy's aforesaid two children by his first marriage, Patricio D.


Tongoy and Luis D. Tongoy, have themselves died. It is claimed that Patricio D. Tongoy left three acknowledged natural children named Fernando, Estrella and Salvacion, all surnamed Tongoy. On the other hand, there is no question that Luis D. Tongoy left behind a son, Francisco A. Tongoy, and a surviving spouse, Ma. Rosario Araneta Vda. de Tongoy. The following antecedents are also undisputed, though by no means equally submitted as the complete facts, nor seen in Identical lights: On April 17, 1918, Hacienda Pulo was mortgaged by its registered co-owners to the Philippine National Bank (PNB), Bacolod Branch, as security for a loan of P11,000.00 payable in ten (10) years at 8% interest per annum. The mortgagors however were unable to keep up with the yearly amortizations, as a result of which the PNB instituted judicial foreclosure proceedings over Hacienda Pulo on June 18, 1931. To avoid foreclosure, one of the co-owners and mortgagors, Jose Tongoy, proposed to the PNB an amortization plan that would enable them to liquidate their account. But, on December 23, 1932, the PNB Branch Manager in Bacolod advised Jose Tongoy by letter that the latter's proposal was rejected and that the foreclosure suit had to continue. As a matter of fact, the suit was pursued to finality up to the Supreme Court which affirmed on July 31, 1935 the decision of the CFI giving the PNB the right to foreclose the mortgage on Hacienda Pulo. In the meantime, Patricio D. Tongoy and Luis Tongoy executed on April 29, 1933 a Declaration of Inheritance wherein they declared themselves as the only heirs of the late Francisco Tongoy and thereby entitled to the latter's share in Hacienda Pulo. On March 13, 1934, Ana Tongoy, Teresa Tongoy, Mercedes Sonora, Trinidad Sonora, Juan Sonora and Patricio Tongoy executed an "Escritura de Venta" (Exh. 2 or Exh. W), which by its terms transferred for consideration their rights and interests over Hacienda Pulo in favor of Luis D. Tongoy. Thereafter, on October 23, 1935 and November 5, 1935, respectively, Jesus Sonora and Jose Tongoy followed suit by each executing a similar "Escritura de Venta" (Exhs. 3 or DD and 5 or AA) pertaining to their corresponding

rights and interests over Hacienda Pulo in favor also of Luis D. Tongoy. In the case of Jose Tongoy, the execution of the "Escritura de Venta" (Exh. 5 or AA) was preceded by the execution on October 14, 1935 of an Assignment of Rights (Exh. 4 or Z) in favor of Luis D. Tongoy by the Pacific Commercial Company as judgment lien-holder (subordinate to the PNB mortgage) of Jose Tongoy's share in Hacienda Pulo. On the basis of the foregoing documents, Hacienda Pulo was placed on November 8, 1935 in the name of Luis D. Tongoy, married to Maria Rosario Araneta, under Transfer Certificate of "Title No. 20154 (Exh. 20). In the following year, the title of the adjacent Cuaycong property also came under the name of Luis D. Tongoy, married to Maria Rosario Araneta, per Transfer Certificate of Title No. 21522, by virtue of an "Escritura de Venta" (Exh. 6) executed in his favor by the owner Basilisa Cuaycong on June 22, 1936 purportedly for P4,000.00. On June 26, 1936, Luis D. Tongoy executed a real estate mortgage over the Cuaycong property in favor of the PNB, Bacolod Branch, as security for loan of P4,500.00. Three days thereafter, on June 29, 1936, he also executed a real estate mortgage over Hacienda Pulo in favor of the same bank to secure an indebtedness of P21,000.00, payable for a period of fifteen (15) years at 8% per annum. After two decades, on April 17, 1956, Luis D. Tongoy paid off all his obligations with the PNB, amounting to a balance of P34,410.00, including the mortgage obligations on the Cuaycong property and Hacienda Pulo. However, it was only on April 22, 1958 that a release of real estate mortgage was executed by the bank in favor of Luis D. Tongoy. On February 5, 1966, Luis D. Tongoy died at the Lourdes Hospital in Manila, leaving as heirs his wife Maria Rosario Araneta and his son Francisco A. Tongoy. Just before his death, however, Luis D. Tongoy received a letter from Jesus T. Sonora, dated January 26, 1966, demanding the return of the shares in the properties to the co-owners. Not long after the death of Luis D. Tongoy, the case now before Us was instituted in the court below on complaint filed on June 2, 1966 by Mercedes T. Sonora, Juan T. Sonora ** , Jesus T. Sonora,


Trinidad T. Sonora, Ricardo P. Tongoy and Cresenciano P. Tongoy. Named principally as defendants were Francisco A. Tongoy, for himself and as judicial administrator of the estate of the late Luis D. Tongoy, and Maria Rosario Araneta Vda. de Tongoy. Also impleaded as defendants, because of their unwillingness to join as plaintiffs were Amado P. Tongoy, Norberto P. Tongoy ** and Fernando P. Tongoy. Alleging in sum that plaintiffs and/or their predecessors transferred their interests on the two lots in question to Luis D. Tongoy by means of simulated sales, pursuant to a trust arrangement whereby the latter would return such interests after the mortgage obligations thereon had been settled, the complaint prayed that 'judgment be rendered in favor of the plaintiffs and against the defendants- (a) Declaring that the HACIENDA PULO, Lot 1397-B-3 now covered by T.C.T. No. 29152, Bacolod City, and the former Cuaycong property, Lot 1395 now covered by T.C.T. No. T-824 (RT-4049) (21522), Bacolod City, as trust estate belonging to the plaintiffs and the defendants in the proportion set forth in Par. 26 of this complaint; (b) Ordering the Register of Deeds of Bacolod City to cancel T.C.T. No. 29152 and T.C.T. No. T-824 (RT-4049) (21522), Bacolod City, and to issue new ones in the names of the plaintiffs and defendants in the proportions set forth in Par. 26 thereof, based on the original area of HACIENDA PULO; (c) Ordering the defendants Francisco A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy to render an accounting to the plaintiffs of the income of the above two properties from the year 1958 to the present and to deliver to each plaintiff his corresponding share with legal interest thereon from 1958 and until the same shall have been fully paid; (d) Ordering the defendants Francisco Tongoy and Ma. Rosario Araneta Vda. de Tongoy to pay to the plaintiffs as and for attorney's fees an amount equivalent to twenty-four per cent (24%) of the rightful shares of the plaintiffs over the original HACIENDA PULO and the Cuaycong property, including the income thereof from 1958 to the present; and

(e) Ordering the defendants Francisco A. Tongoy and Ma. Rosario Vda. de Tongoy to pay the costs of this suit. Plaintiffs also pray for such other and further remedies just and equitable in the premises. Defendants Francisco A. Tongoy and Ma. Rosario Vda. de Tongoy filed separate answers, denying in effect plaintiffs' causes of action, and maintaining, among others, that the sale to Luis D. Tongoy of the two lots in question was genuine and for a valuable consideration, and that no trust agreement of whatever nature existed between him and the plaintiffs. As affirmative defenses, defendants also raised laches, prescription, estoppel, and the statute of frauds against plaintiffs. Answering defendants counter claimed for damages against plaintiffs for allegedly bringing an unfounded and malicious complaint. For their part, defendants Norberto Tongoy and Amado Tongoy filed an answer under oath, admitting every allegation of the complaint. On the other hand, defendant Fernando Tongoy originally joined Francisco A. Tongoy in the latter's answer, but after the case was submitted and was pending decision, the former filed a verified answer also admitting every allegation of the complaint. Meanwhile, before the case went to trial, a motion to intervene as defendants was filed by and was granted to Salvacion Tongoy and Estrella Tongoy, alleging they were sisters of the full blood of Fernando Tongoy. Said intervenors filed an answer similarly admitting every allegation of the complaint. After trial on the merits, the lower court rendered its decision on October 15, 1968 finding the existence of an implied trust in favor of plaintiffs, but at the same time holding their action for reconveyance barred by prescription, except in the case of Amado P. Tongoy, Ricardo P. Tongoy, Cresenciano P. Tongoy, and Norberto P. Tongoy, who were adjudged entitled to reconveyance of their corresponding shares in the property left by their father Francisco Tongoy having been excluded therefrom in the partition had during their minority, and not having otherwise signed any deed of transfer over such shares. The dispositive


portion of the decision reads: IN VIEW OF ALL THE FOREGOING considerations, judgment is hereby rendered dismissing the complaint, with respect to Mercedes, Juan, Jesus and Trinidad, all surnamed Sonora. The defendants Francisco Tongoy and Rosario Araneta Vda. de Tongoy are hereby ordered to reconvey the proportionate shares of Ricardo P., Cresenciano P., Amado P., and Norberto P., all surnamed Tongoy in Hda. Pulo and the Cuaycong property. Without damages and costs. SO ORDERED. Upon motion of plaintiffs, the foregoing dispositive portion of the decision was subsequently clarified by the trial court through its order of January 9, 1969 in the following tenor: Considering the motion for clarification of decision dated November 7, 1968 and the opposition thereto, and with the view to avoid further controversy with respect to the share of each heir, the dispositive portion of the decision is hereby clarified in the sense that, the proportionate legal share of Amado P. Tongoy, Ricardo P. Tongoy, Cresenciano P. Tongoy and the heirs of Norberto P. Tongoy, in Hda. Pulo and Cuaycong property consist of 4/5 of the whole trust estate, leaving 1/5 of the same to the heirs of Luis D. Tongoy. SO ORDERED. (pp. 157-166, Vol. I, rec.). Both parties appealed the decision of the lower court to respondent appellate court. Plaintiffs-appellants Mercedes T. Sonora, Jesus T. Sonora, Trinidad T. Sonora and the heirs of Juan T. Sonora questioned the lower court's decision dismissing their complaint on ground of prescription, and assailed it insofar as it held that the agreement created among the Tongoy-Sonora family in 1931 was an implied, and not an express, trust; that their action had prescribed; that the defendants-appellants were not ordered to render an accounting of the fruits and income of the properties in trust; and that defendants were not ordered to pay the attorney's fees of plaintiffs- appellants. For their part, defendants-appellants Francisco A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy not only refuted the errors assigned by

plaintiffs-appellants, but also assailed the findings that there was preponderance of evidence in support of the existence of an implied trust; that Ricardo P. Tongoy, Amado P. Tongoy and Norberto P. Tongoy are the legitimate half-brothers of the late Luis D. Tongoy; that their shares in Hacienda Pulo and Cuaycong property should be reconveyed to them by defendantsappellants; and that an execution was ordered pending appeal. On December 3, 1975, respondent court rendered the questioned decision, the dispositive portion of which is as follows: WHEREFORE, judgment is hereby rendered modifying the judgment and Orders appealed from by ordering Maria Rosario Araneta Vda. de Tongoy and Francisco A. Tongoy. — 1) To reconvey to Mercedes T. Sonora, Juan T. Sonora (as substituted and represented by his heirs), Jesus T. Sonora and Trinidad T. Sonora each a 7/60th portion of both Hacienda Pulo and the Cuaycong property, based on their original shares; 2) To reconvey to Ricardo P. Tongoy, Cresenciano P. Tongoy, Amado P. Tongoy and Norberto P. Tongoy as substituted and represented by his heirs each a 14/135th portion of both Hacienda Pulo and the Cuaycong property, also based on their original shares; provided that the 12 hectares already reconveyed to them by virtue of the Order for execution pending appeal of the judgment shall be duly deducted; 3) To render an accounting to the parties named in pars. 1 and 2 above with respect to the income of Hacienda Pulo and the Cuaycong property from May 5, 1958 up to the time the reconveyances as herein directed are made; and to deliver or pay to each of said parties their proportionate shares of the income, if any, with legal interest thereon from the date of filing of the complaint in this case, January 26, 1966, until the same is paid; 4) To pay unto the parties mentioned in par. 1 above attorney's fees in the sum of P 20,000.00; and 5) To pay the costs. SO ORDERED (pp. 207-208, Vol. 1, rec.). Petitioners Francisco A. Tongoy and Ma. Rosario Araneta Vda. de Tongoy (defendants-appellants) have come before Us on petition


for review on certiorari with the following assignments of errors (pp. 23-24, Brief for Petitioners): I. The Court of Appeals erred in finding that there was a trust constituted on Hacienda Pulo. II. The Court of Appeals erred in finding that the purchase price for the Cuaycong property was paid by Jose Tongoy and that said property was also covered by a trust in favor of respondents. III. Conceding, for the sake of argument, that respondents have adequately proven an implied trust in their favor, the Court of Appeals erred in not finding that the rights of respondents have prescribed, or are barred by laches. IV. The Court of Appeals erred in finding that the respondents Tongoy are the legitimated children of Francisco Tongoy. V. Granting arguendo that respondents Tongoy are the legitimated children of Francisco Tongoy, the Court of Appeals erred in not finding that their action against petitioners has prescribed. VI. The Court of Appeals erred in ordering petitioners to pay attorney's fees of P 20,000.00. VII. The Court of Appeals erred in declaring that execution pending appeal in favor of respondents Tongoys was justified. I It appears to US that the first and second errors assigned by petitioners are questions of fact which are beyond OUR power to review. Thus, as found by the respondent Court of Appeals: xxx xxx xxx We shall consider first the appeal interposed by plaintiffsappellants. The basic issues underlying the disputed errors raised suggest themselves as follows: 1) whether or not the conveyance respecting the questioned lots made in favor of Luis D. Tongoy in 1934 and 1935 were conceived pursuant to a trust agreement among the parties; 2) if so, whether the trust created was an express or implied trust; and 3) if the trust was not an express trust, whether the action to enforce it has prescribed. The first two issues indicated above will be considered together

as a matter of logical necessity, being so closely interlocked. To begin with, the trial court found and ruled that the transfers made in favor of Luis D. Tongoy were clothed with an implied trust, arriving at this conclusion as follows: The Court finds that there is preponderance of evidence in support of the existence of constructive, implied or tacit trust. The hacienda could have been leased to third persons and the rentals would have been sufficient to liquidate the outstanding obligation in favor of the Philippine National Bank. But the coowners agreed to give the administration of the property to Atty. Luis D. Tongoy, so that the latter can continue giving support to the Tongoy-Sonora family and at the same time, pay the amortization in favor of the Philippine National Bank, in the same manner that Jose Tongoy did. And of course, if the administration is successful, Luis D. Tongoy would benefit with the profits of the hacienda. Simulated deeds of conveyance in favor of Luis D. Tongoy were executed to facilitate and expedite the transaction with the Philippine National Bank. Luis D. Tongoy supported the Tongoy-Sonora family, defrayed the expenses of Dr. Jesus Sonora and Atty. Ricardo P. Tongoy, in their studies. Luis Tongoy even gave Sonoras their shares in the "beneficacion" although the "beneficacion" were included in the deeds of sale. The amount of consideration of the one-fifth (15) share of Jose Tongoy is one hundred (P 100,00) pesos only. Likewise the consideration of the sale of the interests of the Pacific Commercial Company is only P100.00 despite the fact that Jose Tongoy paid in full his indebtedness in favor of said company. The letter of Luis D. Tongoy dated November 5, 1935 (Exhibit 'BB-1') is very significant, the tenor of which is quoted hereunder: Dear Brother Jose: Herewith is the deed which the bank sent for us to sign. The bank made me pay the Pacific the sum of P100.00 so as not to sell anymore the land in public auction. This deed is for the purpose of dispensing with the transfer of title to the land in the name of the bank, this way we will avoid many expenses. Yours,


Luis D. Tongoy Jose Tongoy signed the deed because he incurred the obligation with the Pacific and paid it. In releasing the second mortgage, Luis Tongoy paid only P100.00 and the deed was in favor of Luis Tongoy. This was done in order "to avoid many expenses " of both Jose and Luis as obviously referred to in the word "WE". Those two transactions with nominal considerations are irrefutable and palpable evidence of the existence of constructive or implied trust. Another significant factor in support of the existence of constructive trust is the fact that in 1933-34, when proposals for amicable settlement with the Philippine National Bank were being formulated and considered, Luis D. Tongoy was yet a neophite (sic) in the practice of law, and he was still a bachelor. It was proven that it was Jose Tongoy, the administrator of Hda. Pulo, who provided for his expenses when he studied law, when he married Maria Araneta, the latter's property were leased and the rentals were not sufficient to cover all the considerations stated in the deeds of sale executed by the co-owners of Hda. Pulo, no matter how inadequate were the amounts so stated. These circumstances fortified the assertion of Judge Arboleda that Luis D. Tongoy at that time was in no condition to pay the purchase price of the property sold, But the Court considers the evidence of execution of express trust agreement insufficient. Express trust agreement was never mentioned in the plaintiffs' pleadings nor its existence asserted during the pre-trial hearings. It was only during the trial on the merits when Atty. Eduardo P. Arboleda went on to testify that he prepared the deed of trust agreement. Indeed the most formidable weapon the plaintiff could have used in destroying the "impregnable walls of the defense castle consisting of public documents" is testimony of Atty. Eduardo P. Arboleda. He is most qualified and in a knowable position to testify as to the truth of the existence of the trust agreement, because he was not only the partner of the late Luis D. Tongoy in their practice of law especially during the time he prepared

and/or notarized the deeds of sale but he was also his colleague in the City Council. But however forceful would be the impact of his testimony, it did not go beyond the establishment of constructive or implied trust agreement. In the first place, if it is true that written trust agreement was prepared by him and signed by Luis D. Tongoy for the security of the vendor, why is it that only two copies of the agreement were prepared, one copy furnished Jose Tongoy and the other kept by Luis Tongoy, instead of making five copies and furnished copy to each co-owner, or at least one copy would have been kept by him? Why is it that when Atty. Arboleda invited Mrs. Maria Rosario Araneta Vda. de Tongoy and her son to see him in his house, Atty. Arboleda did not reveal or mention the fact of the existence of a written trust agreement signed by the late Luis D. Tongoy? The revelation of the existence of a written trust agreement would have been a vital and controlling factor in the amicable settlement of the case, which Atty. Arboleda would have played an effective role as an unbiased mediator. Why did not Atty. Arboleda state the precise context of the written agreement; its form and the language it was written, knowing as he should, the rigid requirements of proving the contents of a lost document. It is strange that when Mrs. Maria Rosario Araneta Vda. de Tongoy and her son were in the house of Atty. Arboleda, in compliance with his invitation for the supposed friendly settlement of the case, Atty. Arboleda did not even submit proposals for equitable arbitration of the case. On the other hand, according to Mrs. Tongoy, Mrs. Arboleda intimated her desire to have Atty. Arboleda be taken in. The Court refuses to believe that Judge Arboleda was aware of the alleged intimations of Mrs. Arboleda, otherwise he would not have tolerated or permitted her to indulge in such an embarrassing and uncalled for intrusion. The plaintiffs evidently took such ungainly insinuations with levity so much so that they did not think it necessary to bring Mrs. Arboleda to Court to refute this fact. The parties, on either side of this appeal take issue with the conclusion that there was an implied trust, one side maintaining


that no trust existed at all, the other that the trust was an express trust. To begin with, We do not think the trial court erred in its ultimate conclusion that the transfers of the two lots in question made in favor of the late Luis D. Tongoy by his co-owners in 1933 and 1934 created an implied trust in favor of the latter. While, on one hand, the evidence presented by plaintiffs-appellants to prove an express trust agreement accompanying the aforesaid transfers of the lots are incompetent, if not inadequate, the record bears sufficiently clear and convincing evidence that the transfers were only simulated to enable Luis D. Tongoy to save Hacienda Pulo from foreclosure for the benefit of the co-owners, including himself. Referring in more detail to the evidence on the supposed express trust, it is true that plaintiffs- appellants Jesus T. Sonora, Ricardo P. Tongoy, Mercedes T. Sonora and Trinidad T. Sonora have testified with some vividness on the holding of a family conference in December 1931 among the co-owners of Hacienda Pulo to decide on steps to be taken vis-a-vis the impending foreclosure of the hacienda by the PNB upon the unpaid mortgage obligation thereon. Accordingly, the co-owners had agreed to entrust the administration and management of Hacienda Pulo to Luis D. Tongoy who had newly emerged as the lawyer in the family. Thereafter, on the representation of Luis D. Tongoy that the bank wanted to deal with only one person it being inconvenient at time to transact with many persons, specially when some had to be out of town the co-owners agreed to make simulated transfers of their participation in Hacienda Pulo to him. As the evidence stands, even if the same were competent, it does not appear that there was an express agreement among the co-owners for Luis D. Tongoy to hold Hacienda Pulo in trust, although from all the circumstances just indicated such a trust may be implied under the law (Art. 1453, Civil Code; also see Cuaycong vs. Cuaycong, L-21616, December 11, 1967, 21 SCRA 1192, 1197-1198). But, whatever may be the nature of the trust suggested in the testimonies adverted to, the same are incompetent as proof thereof anent the timely

objections of defendants-appellees to the introduction of such testimonial evidence on the basis of the survivorship rule. The witnesses being themselves parties to the instant case, suing the representatives of the deceased Luis D. Tongoy upon a demand against the latter's estate, said witnesses are barred by the objections of defendants-appellees from testifying on matters of fact occurring before the death of the deceased (Sec. 20[a], Rule 130), more particularly where such occurrences consist of verbal agreements or statements made by or in the presence of the deceased. Neither has the existence of the alleged contra-documento-- by which Luis D. Tongoy supposedly acknowledged the transfers to be simulated and bound himself to return the shares of his coowners after the mortgage on the Hacienda had been dischargedbeen satisfactorily established to merit consideration as proof of the supposed express trust. We can hardly add to the sound observations of the trial court in rejecting the evidence to the effect as insufficient, except to note further that at least plaintiffsappellants Mercedes T. Sonora and Trinidad T. Sonora have testified having been apprised of the document and its contents when Luis D. Tongoy supposedly delivered one copy to Jose Tongoy. And yet as the trial court noted, no express trust agreement was ever mentioned in plaintiffs-appellants' pleadings or at the pre-trial. Nevertheless, there is on record enough convincing evidence not barred by the survivorship rule, that the transfers made by the co-owners in favor of Luis D. Tongoy were simulated and that an implied or resulting trust thereby came into existence, binding the latter to make reconveyance of the co-owners' shares after the mortgage indebtedness on Hacienda Pulo has been discharged. Thus it appears beyond doubt that Hacienda Pulo has been the source of livelihood to the co-owners and their dependents, when the subject transfers were made. It is most unlikely that all of the several other co-owners should have come at the same time to one mind about disposing of their participation in the hacienda, when the same counted so much in


their subsistence and self-esteem. Only extreme necessity would have forced the co-owners to act in unison towards earnestly parting with their shares, taking into account the meager considerations mentioned in the deeds of transfer which at their most generous gave to each co-owner only P2,000.00 for a 1/5 part of the hacienda. As it appears to Us, the impending foreclosure on the mortgage for P11,000.00 could not have created such necessity. Independent of testimony to the effect, it is not hard to surmise that the hacienda could have been leased to others on terms that would have satisfied the mortgage obligation. Moreover, as it turned out, the PNB was amenable, and did actually accede, to a restructuring of the mortgage loan in favor of Luis D. Tongoy, thereby saving the hacienda from foreclosure. As a matter of fact, the co-owners must have been posted on the attitude of the bank regarding the overdue mortgage loan, and its willingness to renew or restructure the same upon certain conditions. Under such circumstances, it is more reasonable to conclude that there was no compelling reason for the other co-owners to sell out their birthrights to Luis D. Tongoy, and that the purported transfers were, as claimed by them in reality simulated pursuant to the suggestion that the bank wanted to deal with only one person. In fact, as recited in the Escritura de Venta (Exh. AA) executed between Luis. D. Tongoy and Jose Tongoy, it appears that the series of transfers made in favor of the former by the co-owners of Hacienda Pulo followed and was made pursuant to a prior arrangement made with the PNB by Luis D. Tongoy to redeem the shares or participation of his co-owners. That this was readily assented to in the anxiety to save and preserve Hacienda Pulo for all its coowners appears very likely anent undisputed evidence that the said co-owners had been used to entrusting the management thereof to one among them, dating back to the time of Francisco Tongoy who once acted as administrator, followed by Jose Tongoy, before Luis D. Tongoy himself took over the hacienda. Strongly supported the theory that the transfers were only simulated to enable Luis D. Tongoy (to) have effective control

and management of the hacienda for the benefit of all the coowners is preponderant evidence to the effect that he was in no financial condition at the time to purchase the hacienda. Witness Eduardo Arboleda who was a law partner of Luis D. Tongoy when the transfers were made, and who is not a party in this case, emphatically testified that Luis D. Tongoy could not have produced the money required for the purchase from his law practice then. On the other hand, the suggestion that his wife Ma. Rosario Araneta had enough income from her landed properties to sufficiently augment Luis D. Tongoy's income from his practice is belied by evidence that such properties were leased, and the rentals collected in advance, for eleven (11) crop years beginning 1931 (Exh. EEE), when they were not yet married. The financial incapacity of Luis D. Tongoy intertwines, and together gains strength, with proof that the co-owners as transferors in the several deeds of sale did not receive the considerations stated therein. In addition to the testimony of the notary public, Eduardo P. Arboleda, that no consideration as recited in the deeds of transfer were ever paid in his presence, all the transferors who testified including Jesus T. Sonora, Mercedes T. Sonora and Trinidad T. Sonora-all denied having received the respective considerations allegedly given them. While said transferors are parties in this case, it has been held that the survivorship rule has no application where the testimony offered is to the effect that a thing did not occur (Natz vs. Agbulos, CAG.R. No. 4098-R, January 13, 1951; Mendoza v. C. Vda. de Goitia, 54 Phil. 557, cited by Mora, Comments on the Rules of Court, 1970 ed., Vol. 5, p. 174). Also of some significance is the fact that the deeds of transfer executed by Ana Tongoy, Teresa Tongoy, Mercedes Sonora, Trinidad Sonora, Juan Sonora, and Patricio Tongoy (Exh. W) as well as that by Jesus Sonora (Exh. DD) did not even bother to clarify whether Luis D. Tongoy as transferee of his co-owners' share was assuming the indebtedness owing to the PNB upon the mortgage on Hacienda Pulo. In an honest-to-goodness sale, it would have been most unlikely that the transferors would have


paid no attention to this detail, least of all where, as in this case, the transfers were apparently prompted by the inability of the co-owners to discharge the mortgage obligation and were being pressed for payment. Furthermore, the tenor of the letter from Luis D. Tongoy to Jose Tongoy, dated November 5, 1935 (Exhibit Bb-1), as heretofore quoted with portions of the decision on appeal, is very revealing of the fact that the steps taken to place Hacienda Pulo in the name of Luis D. Tongoy were made for the benefit not only of himself but for the other co-owners as well. Thus, the letter ends with the clause-"this way we will avoid many expenses. Finally, it is not without significance that the co-owners and their dependents continued to survive apparently from the sustenance from Hacienda Pulo for a long time following the alleged transfers in favor of Luis D. Tongoy. In fact, it does not appear possible that Jesus T. Sonora and Ricardo P. Tongoy could have finished medicine and law, respectively, without support from Luis D. Tongoy as administrator of the common property. All the foregoing, considered together, constitute clear and convincing evidence that the transfers made in favor of Luis D. Tongoy by his co- owners were only simulated, under circumstances giving rise to an implied or resulting trust whereby Luis D. Tongoy is bound to hold title in trust for the benefit of his co-owners (cf. de Buencamino, et al. vs. De Matias, et al., L-19397, April 30, 1966, 16 SCRA 849)" [pp. 170-181, Vol. I, rec.]. The Court of Appeals found enough convincing evidence not barred by the aforecited survivorship rule to the effect that the transfers made by the co- owners in favor of Luis D. Tongoy were simulated. All these findings of fact, as a general rule, are conclusive upon US and beyond OUR power to review. It has been well-settled that the jurisdiction of the Supreme Court in cases brought to IT from the Court of Appeals is limited to reviewing and revising errors of law imputed to it, its findings of fact being conclusive as a matter of general principle (Chan vs. C.A., 33 SCRA 737, 744; Alquiza vs.

Alquiza, 22 SCRA 494, 497). The proofs submitted by petitioners do not place the factual findings of the Court of Appeals under any of the recognized exceptions to the aforesaid general rule. I The initial crucial issue therefore is-whether or not the rights of herein respondents over subject properties, which were the subjects of simulated or fictitious transactions, have already prescribed. The negative answer to the aforesaid query is found in Articles 1409 and 1410 of the New Civil Code. Said provisions state thus: Art. 1409. The following contracts are inexistent and void from the beginning: xxx xxx xxx 2) Those which are absolutely simulated or fictitious; xxx xxx xxx These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived (emphasis supplied). Art. 1410. The action or defense for the declaration of the inexistence of a contract does not prescribe. The characteristic of simulation is the fact that the apparent contract is not really desired nor intended to produce legal effects nor in any way alter the juridical situation of the parties. Thus, where a person, in order to place his property beyond the reach of his creditors, simulates a transfer of it to another, he does not really intend to divest himself of his title and control of the property; hence, the deed of transfer is but a sham. This characteristic of simulation was defined by this Court in the case of Rodriguez vs. Rodriguez, No. L-23002, July 31, 1967, 20 SCRA 908. A void or inexistent contract is one which has no force and effect from the very beginning, as if it had never been entered into, and which cannot be validated either by time or by ratification (p. 592, Civil Code of the Philippines, Vol. IV, Tolentino, 1973 Ed.). Avoid contract produces no effect whatsoever either against or in favor of anyone; hence, it does not create, modify or extinguish


the juridical relation to which it refers (p. 594, Tolentino, supra). The following are the most fundamental characteristics of void or inexistent contracts: 1) As a general rule, they produce no legal effects whatsoever in accordance with the principle "quod nullum est nullum producit effectum." 2) They are not susceptible of ratification. 3) The right to set up the defense of inexistence or absolute nullity cannot be waived or renounced. 4) The action or defense for the declaration of their inexistence or absolute nullity is imprescriptible. 5) The inexistence or absolute nullity of a contract cannot be invoked by a person whose interests are not directly affected (p. 444, Comments and Jurisprudence on Obligations and Contracts, Jurado, 1969 Ed.; emphasis supplied). The nullity of these contracts is definite and cannot be cured by ratification. The nullity is permanent, even if the cause thereof has ceased to exist, or even when the parties have complied with the contract spontaneously (p. 595, Tolentino, supra). In Eugenio vs. Perdido, et al., No. L-7083, May 19, 1955, 97 Phil. 41, this Court thus reiterated: Under the existing classification, such contract would be "inexisting" and the "action or defense for declaration' of such inexistence "does not prescribe' (Art. 14 10 New Civil Code). While it is true that this is a new provision of the New Civil Code, it is nevertheless a principle recognized since Tipton vs. Velasco, 6 Phil. 67 that "mere lapse of time cannot give efficacy to contracts that are null and void. Consistently, this Court held that 11 where the sale of a homestead is nun and void, the action to recover the same does not prescribe because mere lapse of time cannot give efficacy to the contracts that are null and void and inexistent" (Angeles, et al. vs. Court of Appeals, et al., No. L-11024, January 31, 1958, 102 Phil. 1006). In the much later case of Guiang vs. Kintanar (Nos. L-49634-36, July 25, 1981, 106 SCRA 49), this Court enunciated thus:

It is of no consequence, pursuant to the same article, that petitioners, the Guiang spouses, executed on August 21, 1975, apparently in ratification of the impugned agreement, the deeds of sale covering the two lots already referred to and that petitioners actually received in part or in whole the money consideration stipulated therein, for according to the same Article 1409, contracts contemplated therein, as the one We are dealing with, "cannot be ratified nor the defense of its illegality be waived." Neither it it material, much less decisive, that petitioners had not earlier judicially moved to have the same annulled or set aside. Under Article 1410 of the Civil Code, (t)he action or defense for declaration of the inexistence of a contract does not prescribe. Evidently, therefore, the deeds of transfer executed in favor of Luis Tongoy were from the very beginning absolutely simulated or fictitious, since the same were made merely for the purpose of restructuring the mortgage over the subject properties and thus preventing the foreclosure by the PNB. Considering the law and jurisprudence on simulated or fictitious contracts as aforestated, the within action for reconveyance instituted by herein respondents which is anchored on the said simulated deeds of transfer cannot and should not be barred by prescription. No amount of time could accord validity or efficacy to such fictitious transactions, the defect of which is permanent. There is no implied trust that was generated by the simulated transfers; because being fictitious or simulated, the transfers were null and void ab initio-from the very beginning and thus vested no rights whatsoever in favor of Luis Tongoy or his heirs. That which is inexistent cannot give life to anything at all. II But even assuming arguendo that such an implied trust exists between Luis Tongoy as trustee and the private respondents as cestui que trust, still the rights of private respondents to claim reconveyance is not barred by prescription or laches. Petitioners maintain that, even conceding that respondents have adequately proven an implied trust in their favor, their rights


have already prescribed, since actions to enforce an implied trust created under the old Civil Code prescribes in ten years. Under Act No. 190, whose statute of limitation would apply if there were an implied trust as in this case, the longest period of extinctive prescription was only ten years (Salao vs. Salao, 70 SCRA 84; Diaz vs. Gorricho and Aguado, 103 Phil. 261, 226). On the other hand, private respondents contend that prescription cannot operate against the cestui que trust in favor of the trustee, and that actions against a trustee to recover trust property held by him are imprescriptible (Manalang vs. Canlas, 50 OG 1980). They also cite other pre-war cases to bolster this contention, among which are: Camacho vs. Municipality of Baliwag, 28 Phil. 46; Uy vs. Cho Jan Ling, 19 Phil. 202 [pls. see pp. 258-259, Brief for Respondents, p. 398, rec.]. They further allege that possession of a trustee is, in law, possession of the cestui que trust and, therefore, it cannot be a good ground for title by prescription (Laguna vs. Levantino, 71 Phil. 566; Cortez vs. Oliva, 33 Phil. 480, cited on p. 261, Brief for Respondents, supra). The rule now obtaining in this jurisdiction is aptly discussed in the case of Bueno vs. Reyes (27 SCRA 1179, 1183), where the Court through then Mr. Justice Makalintal, held: While there are some decisions which hold that an action upon a trust is imprescriptible, without distinguishing between express and implied trusts, the better rule, as laid down by this Court in other decisions, is that prescription does supervene where the trust is merely an implied one. The reason has been expressed by Mr. Justice J.B.L. Reyes in J.M. Tuazon and Co., Inc. vs. Magdangal, 4 SCRA 84, 88, as follows: Under Section 40 of the Old Code of Civil Procedure, all actions for recovery of real property prescribe in ten years, excepting only actions based on continuing or subsisting trusts that were considered by section 38 as imprescriptible. As held in the case of Diaz vs. Gorricho, L-11229, March 29, 1958, however, the continuing or subsisting trusts contemplated in Sec. 38 of the Code of Civil Procedure referred only to express unrepudiated trusts, and did not include constructive trusts (that are imposed

by law) where no fiduciary relation exists and the trustee does not recognize the trust at all. This doctrine has been reiterated in the latter case of Escay vs. C.A. (61 SCRA 370, 387), where WE held that implied or constructive trusts prescribe in ten years. "The prescriptibility of an action for reconveyance based on implied or constructive trust, is now a settled question in this jurisdiction. It prescribes in ten years" (Boñaga vs. Soler, et al., 2 SCRA 755; J.M. Tuazon and Co., Inc. vs. Magdangal, 4 SCRA 88, special attention to footnotes). Following such proposition that an action for reconveyance such as the instant case is subject to prescription in ten years, both the trial court and respondent appellate court are correct in applying the ten-year prescriptive period. The question, however, is, from what time should such period be counted? The facts of the case at bar reveal that the title to Hacienda Pulo was registered in the name of Luis D. Tongoy with the issuance of TCT No. 20154 on November 8, 1935; that the title to the adjacent Cuaycong property was transferred to Luis D. Tongoy with the issuance of TCT No. 21522 on June 22, 1936. The properties were mortgaged in the year 1936 by said Luis D. Tongoy for P4,500.00 and P 21,000.00, respectively, for a period of fifteen years; that the mortgage obligations to the PNB were fully paid on April 17, 1956; that the release of mortgage was recorded in the Registry of Deeds on May 5, 1958; and that the case for reconveyance was filed in the trial court on June 2, 1966. Considering that the implied trust resulted from the simulated sales which were made for the purpose of enabling the transferee, Luis D. Tongoy, to save the properties from foreclosure for the benefit of the co-owners, it would not do to apply the theory of constructive notice resulting from the registration in the trustee's name. Hence, the ten-year prescriptive period should not be counted from the date of registration in the name of the trustee, as contemplated in the earlier case of Juan vs. Zuñiga (4 SCRA 1221). Rather, it should be counted from the date of recording of the release of mortgage in


the Registry of Deeds, on which date May 5, 1958 — the cestui que trust were charged with the knowledge of the settlement of the mortgage obligation, the attainment of the purpose for which the trust was constituted. Indeed, as respondent Court of Appeals had correctly held: ... as already indicated, the ten-year prescriptive period for bringing the action to enforce the trust or for reconveyance of plaintiffs-appellants" shares should be toned from the registration of the release of the mortgage obligation, since only by that time could plaintiffs-appellants be charged with constructive knowledge of the liquidation of the mortgage obligations, when it became incumbent upon them to expect and demand the return of their shares, there being no proof that plaintiffs-appellants otherwise learned of the payment of the obligation earlier. More precisely then the prescriptive period should be reckoned from May 5, 1958 when the release of the mortgage was recorded in the Registry of Deeds, which is to say that the present complaint was still filed within the period on June 4, 1966 (p. 35 of questioned Decision, on p. 191, rec.). Consequently, petitioner Francisco A. Tongoy as successor-ininterest and/or administrator of the estate of the late Luis D. Tongoy, is under obligation to return the shares of his co-heirs and co-owners in the subject properties and, until it is done, to render an accounting of the fruits thereof from the time that the obligation to make a return arose, which in this case should be May 5, 1958, the date of registration of the document of release of mortgage. Hence, WE find no evidence of abuse of discretion on the part of respondent Court of Appeals when it ordered such accounting from May 5, 1958, as well as the imposition of legal interest on the fruits and income corresponding to the shares that should have been returned to the private respondents, from the date of actual demand which has been determined to have been made on January 26, 1966 by the demand letter (Exh. TT) of respondent Jesus T. Sonora to deceased Luis D. Tongoy. III

With respect to the award of attorney's fees in the sum of P20,000.00, the same appears to have been properly made, considering that private respondents were unnecessarily compelled to litigate (Flordelis vs. Mar, 114 SCRA 41; Sarsosa Vda. de Barsobin vs. Cuenco, 113 SCRA 547; Phil. Air Lines vs. C.A., 106 SCRA 393). As pointed out in the questioned decision of the Court of Appeals: As for the claim for attorney's fees, the same appears to be well taken in the light of the findings WE have made considering that prevailing plaintiffs- appellants were forced to litigate to enforce their rights, and that equity under all the circumstances so dictate, said plaintiffs-appellants should recover attorney's fees in a reasonable amount. We deem P20,000.00 adequate for the purpose (p. 36 of Decision, p. 151, rec.). IV The remaining assignement of error dwells on the question of whether or not respondents Amado, Ricardo, Cresenciano and Norberto, all surnamed Tongoy, may be considered legitimated by virtue of the marriage of their parents, Francisco Tongoy and Antonina Pabello, subsequent to their births and shortly before Francisco died on September 15, 1926. Petitioners maintain that since the said respondents were never acknowledged by their father, they could not have been legitimated by the subsequent marriage of their parents, much less could they inherit from the estate of their father, the predecessor-in-interest of Luis D. Tongoy, who is admittedly the half brother of the said respondents. Both the trial court and the respondent appellate court have found overwhelming evidence to sustain the following conclusions: that Amado P. Tongoy, Ricardo P. Tongoy, Cresenciano P. Tongoy and Norberto P. Tongoy were born illegitimate to Antonina Pabello on August 19, 1910 (Exh. A), August 12,1914 (Exh. B), December 1, 1915 (Exhs. C and C- 1) and August 4, 1922 (Exh. D), respectively; that Francisco Tongoy was their father; that said Francisco Tongoy had before them two legitimate children by his first wife, namely, Luis D. Tongoy and


Patricio D. Tongoy; that Francisco Tongoy and Antonina Pabello were married sometime before his death on September 15, 1926 (Exh. H); that shortly thereafter, Luis D. Tongoy and Patricio D. Tongoy executed an Extra-Judicial Declaration of Heirs, leaving out their half-brothers Amado, Ricardo, Cresenciano, and Norberto, who were then still minors; that respondents Amado, Ricardo, Cresenciano and Norberto were known and accepted by the whole clan as children of Francisco; that they had lived in Hacienda Pulo with their parents, but when they went to school, they stayed in the old family home at Washington Street, Bacolod, together with their grandmother, Agatona Tongoy, as well as with the Sonoras and with Luis and Patricio Tongoy; that everybody in Bacolod knew them to be part of the TongoySonora clan; and that Luis D. Tongoy as administrator of Hacienda Pulo, also spent for the education of Ricardo Tongoy until he became a lawyer; and that even petitioners admit the fact that they were half-brothers of the late Luis D. Tongoy. The bone of contention, however, hinges on the absence of an acknowledgment through any of the modes recognized by the Old Civil Code (please see Articles 131 and 135 of the Old Civil Code), such that legitimation could not have taken place in view of the provisions of Art. 121 of the same Code which states that "children shall be considered legitimated by a subsequent marriage only when they have been acknowledged by the parents before or after the celebration thereof." Of course, the overwhelming evidence found by respondent Court of Appeals conclusively shows that respondents Amado, Ricardo, Cresenciano and Norberto have been in continuous possession of the status of natural, or even legitimated, children. Still, it recognizes the fact that such continuous possession of status is not, per se, a sufficient acknowledgment but only a ground to compel recognition (Alabat vs. Alabat, 21 SCRA 1479; Pua vs. Chan, 21 SCRA 753; Larena vs. Rubio, 43 Phil. 1017). Be that as it may, WE cannot but agree with the liberal view taken by respondent Court of Appeals when it said: ... It does seem equally manifest, however, that defendants-

appellants stand on a purely technical point in the light of the overwhelming evidence that appellees were natural children of Francisco Tongoy and Antonina Pabello, and were treated as legitimate children not only by their parents but also by the entire clan. Indeed, it does not make much sense that appellees should be deprived of their hereditary rights as undoubted natural children of their father, when the only plausible reason that the latter could have had in mind when he married his second wife Antonina Pabello just over a month before his death was to give legitimate status to their children. It is not in keeping with the more liberal attitude taken by the New Civil Code towards illegitimate children and the more compassionate trend of the New Society to insist on a very literal application of the law in requiring the formalities of compulsory acknowledgment, when the only result is to unjustly deprive children who are otherwise entitled to hereditary rights. From the very nature of things, it is hardly to be expected of appellees, having been reared as legitimate children by their parents and treated as such by everybody, to bring an action to compel their parents to acknowledge them. In the hitherto cited case of Ramos vs. Ramos, supra, the Supreme Court showed the way out of patent injustice and inequity that might result in some cases simply because of the implacable insistence on the technical amenities for acknowledgment. Thus, it held — Unacknowledged natural children have no rights whatsoever (Buenaventura vs. Urbano, 5 Phil. 1; Siguiong vs. Siguiong, 8 Phil. 5, 11; Infante vs. Figueras, 4 Phil. 738; Crisolo vs. Macadaeg, 94 Phil. 862). The fact that the plaintiffs, as natural children of Martin Ramos, received shares in his estate implied that they were acknowledged. Obviously, defendants Agustin Ramos and Granada Ramos and the late Jose Ramos and members of his family had treated them as his children. Presumably, that fact was well-known in the community. Under the circumstances, Agustin Ramos and Granada Ramos and the heirs of Jose Ramos, are estopped from attacking plaintiffs' status as acknowledged natural children (See Arts. 283 [4] and 2666 [3], New Civil Code).


[Ramos vs. Ramos, supra]. With the same logic, estoppel should also operate in this case in favor of appellees, considering, as already explained in detail, that they have always been treated as acknowledged and legitimated children of the second marriage of Francisco Tongoy, not only by their presumed parents who raised them as their children, but also by the entire Tongoy-Sonora clan, including Luis D. Tongoy himself who had furnished sustenance to the clan in his capacity as administrator of Hacienda Pulo and had in fact supported the law studies of appellee Ricardo P. Tongoy in Manila, the same way he did with Jesus T. Sonora in his medical studies. As already pointed out, even defendants-appellants have not questioned the fact that appellees are half-brothers of Luis D. Tongoy. As a matter of fact, that are really children of Francisco Tongoy and Antonina Pabello, and only the technicality that their acknowledgment as natural children has not been formalized in any of the modes prescribed by law appears to stand in the way of granting them their hereditary rights. But estoppel, as already indicated, precludes defendants-appellants from attacking appellees' status as acknowledged natural or legitimated children of Francisco Tongoy. In addition to estoppel, this is decidedly one instance when technicality should give way to conscience, equity and justice (cf. Vda. de Sta. Ana vs. Rivera, L-22070, October 29, 1966,18 SCRA 588) [pp. 196-198, Vol. 1, rec.]. It is time that WE, too, take a liberal view in favor of natural children who, because they enjoy the blessings and privileges of an acknowledged natural child and even of a legitimated child, found it rather awkward, if not unnecessary, to institute an action for recognition against their natural parents, who, without their asking, have been showering them with the same love, care and material support as are accorded to legitimate children. The right to participate in their father's inheritance should necessarily follow. The contention that the rights of the said respondents — Tongoys have prescribed, is without merit. The death of Francisco Tongoy having occurred on September 15, 1926, the

provisions of the Spanish Civil Code is applicable to this case, following the doctrine laid down in Villaluz vs. Neme (7 SCRA 27) where this Court, through Mr. Justice Paredes, held: Considering that Maria Rocabo died (on February 17, 1937) during the regime of the Spanish Civil Code, the distribution of her properties should be governed by said Code, wherein it is provided that between co-heirs, the act to demand the partition of the inheritance does not prescribe (Art. 1965 [Old Civil Code]; Baysa, et al. vs. Baysa, 53 Off. Gaz. 7272). Verily, the 3 living sisters were possessing the property as administratices of the other co-heirs, plaintiffs-appellants herein, who have the right to vindicate their inheritance regardless of the lapse of time (Sevilla vs. De los Angeles, L- 7745, 51 Off. Gaz. 5590, and cases cited therein). Even following the more recent doctrine enunciated in Gerona vs. de Guzman (11 SCRA 153) that "an action for reconveyance of real property based upon a constructive or implied trust, resulting from fraud, may be barred by the statute of limitations" (Candelaria vs. Romero, L-12149, Sept. 30, 1960; Alzona vs. Capunita, L-10220, Feb. 28, 1962)", and that "the action therefor may be filed within four years from the discovery of the fraud x x x", said period may not be applied to this case in view of its peculiar circumstances. The registration of the properties in the name of Luis D. Tongoy on November 8, 1935 cannot be considered as constructive notice to the whole world of the fraud. It will be noted that the foreclosure on the original mortgage over Hacienda Pulo was instituted by PNB as early as June 18, 1931, from which time the members of the Tongoy-Sonora clan had been in constant conference to save the property. At that time all the respondents-Tongoys were still minors (except Amado, who was already 23 years old then), so that there could be truth to the allegation that their exclusion in the Declaration of Inheritance executed by Patricio and Luis Tongoy on April 29, 1933 was made to facilitate matters-as part of the general plan arrived at after the family conferences to transfer the administration of the property to the latter. The events that followed were obviously in


pursuance of such plan, thus: March 13, 1934 — An Escritura de Venta (Exh. 2 or W) was executed in favor of Luis D. Tongoy by Ana Tongoy, Teresa Tongoy, Mercedes Sonora, Trinidad Sonora, Juan Sonora and Patricio Tongoy, transferring their rights and interests over Hacienda Pulo to the former. October 23, 1935 — An Escritura de Venta (Exh. 3 or DD) was executed by Jesus Sonora, likewise transferring his rights and interests over Hacienda Pulo to Luis D. Tongoy; November 5, 1935 — An Escritura de Venta (Exh. 5 or AA) was also executed by Jose Tongoy in favor of Luis D. Tongoy for the same purpose; (Note: This was preceded by the execution on October 14, 1935 of an Assignment of Rights [4 or Z) in favor of Luis D. Tongoy by the Pacific Commercial Company as judgment lien-holder [subordinate of the PNB mortgage] of Jose Tongoy on Hacienda Pulo November 5, 1935 — Hacienda Pulo was placed in the name of Luis D. Tongoy married to Ma. Rosario Araneta with the issuance of TCT 20154 (Exh. 20); June 22, 1936 — An Escritura de Venta was executed by Basilisa Cuaycong over the Cuaycong property in favor of Luis D. Tongoy, thereby resulting in the issuance of TCT No. 21522 in the name of Luis D. Tongoy married to Ma. Rosario Araneta; June 26, 1936 — Luis D. Tongoy executed a real estate mortgage over the Cuaycong property in favor of the PNB to secure a loan of P4,500.00; and June 29, 1936 — Luis D. Tongoy executed a real estate mortgage over Hacienda Pulo to secure a loan of P21,000.00 payable for fifteen years. When the mortgages were constituted, respondents Cresenciano Tongoy and Norberto Tongoy were still minors, while respondent Amado Tongoy became of age on August 19, 1931, and Ricardo Tongoy attained majority age on August 12, 1935. Still, considering that such transfer of the properties in the name of Luis D. Tongoy was made in pursuance of the master plan to save them from foreclosure, the said respondents were

precluded from doing anything to assert their rights. It was only upon failure of the herein petitioner, as administrator and/or successor-in-interest of Luis D. Tongoy, to return the properties that the prescriptive period should begin to run. As above demonstrated, the prescriptive period is ten year-from the date of recording on May 5, 1958 of the release of mortgage in the Registry of Deeds. WHEREFORE, THE JUDGMENT APPEALED FROM IS HEREBY AFFIRMED IN TOTO. SO ORDERED. Guerrero and Escolin, JJ., concur. Aquino and Abad Santos, JJ., concurs in the result. Concepcion, Jr., and De Castro, JJ., took no part. 174. G.R. No. L-64693 April 27, 1984 LITA ENTERPRISES, INC., petitioner, vs. SECOND CIVIL CASES DIVISION, INTERMEDIATE APPELLATE COURT, NICASIO M. OCAMPO and FRANCISCA P. GARCIA, respondents. Manuel A. Concordia for petitioner. Nicasio Ocampo for himself and on behalf of his correspondents. ESCOLIN, J.:ñé+.£ªwph!1 "Ex pacto illicito non oritur actio" [No action arises out of an illicit bargain] is the tune-honored maxim that must be applied to the parties in the case at bar. Having entered into an illegal contract, neither can seek relief from the courts, and each must bear the consequences of his acts. The factual background of this case is undisputed. Sometime in 1966, the spouses Nicasio M. Ocampo and Francisca Garcia, herein private respondents, purchased in installment


from the Delta Motor Sales Corporation five (5) Toyota Corona Standard cars to be used as taxicabs. Since they had no franchise to operate taxicabs, they contracted with petitioner Lita Enterprises, Inc., through its representative, Manuel Concordia, for the use of the latter's certificate of public convenience in consideration of an initial payment of P1,000.00 and a monthly rental of P200.00 per taxicab unit. To effectuate Id agreement, the aforesaid cars were registered in the name of petitioner Lita Enterprises, Inc, Possession, however, remained with tile spouses Ocampo who operated and maintained the same under the name Acme Taxi, petitioner's trade name. About a year later, on March 18, 1967, one of said taxicabs driven by their employee, Emeterio Martin, collided with a motorcycle whose driver, one Florante Galvez, died from the head injuries sustained therefrom. A criminal case was eventually filed against the driver Emeterio Martin, while a civil case for damages was instituted by Rosita Sebastian Vda. de Galvez, heir of the victim, against Lita Enterprises, Inc., as registered owner of the taxicab in the latter case, Civil Case No. 72067 of the Court of First Instance of Manila, petitioner Lita Enterprises, Inc. was adjudged liable for damages in the amount of P25,000.00 and P7,000.00 for attorney's fees. This decision having become final, a writ of execution was issued. One of the vehicles of respondent spouses with Engine No. 2R914472 was levied upon and sold at public auction for 12,150.00 to one Sonnie Cortez, the highest bidder. Another car with Engine No. 2R-915036 was likewise levied upon and sold at public auction for P8,000.00 to a certain Mr. Lopez. Thereafter, in March 1973, respondent Nicasio Ocampo decided to register his taxicabs in his name. He requested the manager of petitioner Lita Enterprises, Inc. to turn over the registration papers to him, but the latter allegedly refused. Hence, he and his wife filed a complaint against Lita Enterprises, Inc., Rosita Sebastian Vda. de Galvez, Visayan Surety & Insurance Co. and the Sheriff of Manila for reconveyance of motor vehicles with damages, docketed as Civil Case No. 90988 of the Court of First

Instance of Manila. Trial on the merits ensued and on July 22, 1975, the said court rendered a decision, the dispositive portion of which reads: têñ.£îhqwâ£ WHEREFORE, the complaint is hereby dismissed as far as defendants Rosita Sebastian Vda. de Galvez, Visayan Surety & Insurance Company and the Sheriff of Manila are concerned. Defendant Lita Enterprises, Inc., is ordered to transfer the registration certificate of the three Toyota cars not levied upon with Engine Nos. 2R-230026, 2R-688740 and 2R-585884 [Exhs. A, B, C and D] by executing a deed of conveyance in favor of the plaintiff. Plaintiff is, however, ordered to pay Lita Enterprises, Inc., the rentals in arrears for the certificate of convenience from March 1973 up to May 1973 at the rate of P200 a month per unit for the three cars. (Annex A, Record on Appeal, p. 102-103, Rollo) Petitioner Lita Enterprises, Inc. moved for reconsideration of the decision, but the same was denied by the court a quo on October 27, 1975. (p. 121, Ibid.) On appeal by petitioner, docketed as CA-G.R. No. 59157-R, the Intermediate Appellate Court modified the decision by including as part of its dispositive portion another paragraph, to wit: têñ.£îhqwâ£ In the event the condition of the three Toyota rears will no longer serve the purpose of the deed of conveyance because of their deterioration, or because they are no longer serviceable, or because they are no longer available, then Lita Enterprises, Inc. is ordered to pay the plaintiffs their fair market value as of July 22, 1975. (Annex "D", p. 167, Rollo.) Its first and second motions for reconsideration having been denied, petitioner came to Us, praying that: têñ.£îhqwâ£ 1. ... 2. ... after legal proceedings, decision be rendered or resolution be issued, reversing, annulling or amending the decision of public respondent so that: (a) the additional paragraph added by the public respondent to the DECISION of the lower court (CFI) be deleted;


(b) that private respondents be declared liable to petitioner for whatever amount the latter has paid or was declared liable (in Civil Case No. 72067) of the Court of First Instance of Manila to Rosita Sebastian Vda. de Galvez, as heir of the victim Florante Galvez, who died as a result ot the gross negligence of private respondents' driver while driving one private respondents' taxicabs. (p. 39, Rollo.) Unquestionably, the parties herein operated under an arrangement, comonly known as the "kabit system", whereby a person who has been granted a certificate of convenience allows another person who owns motors vehicles to operate under such franchise for a fee. A certificate of public convenience is a special privilege conferred by the government . Abuse of this privilege by the grantees thereof cannot be countenanced. The "kabit system" has been Identified as one of the root causes of the prevalence of graft and corruption in the government transportation offices. In the words of Chief Justice Makalintal, 1 "this is a pernicious system that cannot be too severely condemned. It constitutes an imposition upon the goo faith of the government. Although not outrightly penalized as a criminal offense, the "kabit system" is invariably recognized as being contrary to public policy and, therefore, void and inexistent under Article 1409 of the Civil Code, It is a fundamental principle that the court will not aid either party to enforce an illegal contract, but will leave them both where it finds them. Upon this premise, it was flagrant error on the part of both the trial and appellate courts to have accorded the parties relief from their predicament. Article 1412 of the Civil Code denies them such aid. It provides:têñ.£îhqwâ£ ART. 1412. if the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed; (1) when the fault, is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking. The defect of inexistence of a contract is permanent and incurable, and cannot be cured by ratification or by prescription.

As this Court said in Eugenio v. Perdido, 2 "the mere lapse of time cannot give efficacy to contracts that are null void." The principle of in pari delicto is well known not only in this jurisdiction but also in the United States where common law prevails. Under American jurisdiction, the doctrine is stated thus: "The proposition is universal that no action arises, in equity or at law, from an illegal contract; no suit can be maintained for its specific performance, or to recover the property agreed to be sold or delivered, or damages for its property agreed to be sold or delivered, or damages for its violation. The rule has sometimes been laid down as though it was equally universal, that where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the other." 3 Although certain exceptions to the rule are provided by law, We see no cogent reason why the full force of the rule should not be applied in the instant case. WHEREFORE, all proceedings had in Civil Case No. 90988 entitled "Nicasio Ocampo and Francisca P. Garcia, Plaintiffs, versus Lita Enterprises, Inc., et al., Defendants" of the Court of First Instance of Manila and CA-G.R. No. 59157-R entitled "Nicasio Ocampo and Francisca P. Garica, Plaintiffs-Appellees, versus Lita Enterprises, Inc., Defendant-Appellant," of the Intermediate Appellate Court, as well as the decisions rendered therein are hereby annuleled and set aside. No costs. SO ORDERED.1äwphï1.ñët Feranando, C.J., Teehankee, Makasiar, Concepcion, Jr., Guerrero, Abad Santos, De Castro, Melencio-Herrera, Plana, Relova, Gutierrez, Jr. and De la Fuente, JJ., concur. Aquino, J., took no part. 175. G.R. No. L-66696 July 14, 1986 FRANCISCA ARSENAL and REMEDIO ARSENAL, petitioners, vs.


THE INTERMEDIATE APPELLATE COURT, HEIRS OF TORCUATO SURALTA, and SPOUSES FILOMENO PALAOS and MAHINA LAGWAS, respondents. Ruben Gamolo for respondent Filomeno Palaos. GUTIERREZ, JR., J.: The question to be resolved in this case is who among the two alleged purchasers of a four-hectare portion of land granted in homestead has acquired a valid title thereto. The facts as stated by the trial court are: On January 7, 1954, the defendant Filomeno Palaos secured OCT No. P-290 (Exh. A) from the Register of Deeds of Bukidnon for Lot 81, Pls-112, consisting of 87,829 sq. m. more or less, situated at former barrio of Kitaotao now a municipality of Bukidnon, by virtue of Homestead Patent No. V-23602 granted to him. On September 10, 1957, said Filomeno Palaos and his wife Mahina Lagwas executed in favor of the plaintiff, Torcuato Suralta, sold four (4) hectares of the land embraced in his Torrens Certificate for the sum of P 890.00, Philippine Currency, by means of a deed of acknowledged before a Notary (Exh. C). Plaintiff Suralta immediately took possession of the four-hectare portion of Lot 81 above-mentioned cultivated and worked the same openly, continuously and peacefully up to the present time in concept of owner thereof. He built a house and introduced permanent improvements thereon now valued at no less than P20,000.00. Sometime in 1964, the defendant-spouses Francisca Arsenal and Remedio Arsenal became tenants of an adjoining land owned by Eusebio Pabualan that is separated from the land in question only by a public road. They also came to know the plaintiff as their neighbor who became their compadre later, and saw him very often working and cultivating the land in question. In the course of their relationship the plaintiff came to know of their intention to buy the remaining land of Filomeno Palaos (t.s.n., pp. 13-14, 45-47). On March 14, 1967, said Filomeno Palaos and his wife executed a

notarial Deed of Sale (Exh. 1 for the defendant) in consideration of the amount of P800.00, Philippine Currency, supposedly for the remaining three (3) hectares of their land without knowing that the document covered the entirety of Lot 81 including the four-hectare portion previously deeded by them to the plaintiff. The deed of sale was presented to the Office of the Commission on National Integration at Malaybalay for approval because Palaos and his wife belong to the cultural minorities and unlettered. The field representative and inspector of that office subsequently approved the same (Exh. K and Exh. 2) without inspecting the land to determine the actual occupants thereon. The defendants Arsenal took possession of the three-hectare portion of Lot 81 after their purchase and have cultivated the same up to the present time but they never disturbed the plaintiff's possession over the four-hectare portion that he had purchased in 1957. On March 28, 1967, Francisca Arsenal caused the tax declaration of the entire lot to be transferred in her name (Exh. 6). The plaintiff learned of the transfer of the tax declaration to Francisca Arsenal and because of their good relations at the time, he agreed with Arsenal to contribute in the payment of the land taxes and paid yearly from 1968 to 1973 the amount of P10.00 corresponding to his four-hectare portion to Francisca Arsenal (Exhs. F, F-1, G, G-1, H, and H-1). On July 11, 1973, the plaintiff presented his Sales Contract in the Office of the Register of Deeds but it was refused registration for having been executed within the prohibitive period of five years from the issuance of the patent. In order to cure the defect, he caused Filomeno Palaos to sign a new Sales Contract (Exh. D) in his favor before Deputy Clerk of Court Florentina Villanueva covering the same four-hectare portion of Lot 81. In August 1973, the plaintiff caused the segregation of his portion from the rest of the land by Geodetic Engineer Benito P. Balbuena, who conducted the subdivision survey without protest from Francisca Arsenal who was notified thereof. The subdivision plan (Exh. E) was approved by the Commissioner of Land Registration on April 18, 1974.


In December 1973, however, the plaintiff saw for the first time the Deed of Sale embracing the whole Lot 81 signed by Filomeno Palaos in favor of Francisca Arsenal. Immediately he asked Palaos for explanation but the latter told him that he sold only three hectares to Arsenal. Plaintiff approached Francisca Arsenal for a satisfactory arrangement but she insisted on abiding by her contract. Because of their disagreement, Francisca Arsenal registered her Deed of Sale on December 6, 1973 and obtained Transfer Certificate of Title No. T-7879 (Exh. E) for the entire Lot 81 without the knowledge of the plaintiff. On January 7, 1974, the plaintiff sent a telegram (Exh. 1) to the Secretary of Agriculture and Natural Resources requesting suspensions of the approval of the sale executed by Filomeno Palaos in favor of Francisca Arsenal, not knowing that the latter had already secured a transfer certificate of title from the Register of Deeds. In the middle part of said month of January 1974, plaintiff however learned of the cancellation of the original certificate of title of Palaos and the issuance of the Transfer Certificate to Arsenal so he sought the help of the municipal authorities of Kitaotao to reach an amicable settlement with Francisca Arsenal who, on the other hand, refused to entertain all overture to that effect. ... . On March 6, 1974, Torcuato Suralta filed a case against Filomeno Palaos, Mahina Lagwas, Francisca Arsenal, Remedio Arsenal and the Register of Deeds of Bukidnon for the annulment of Transfer Certificate of Title No. T-7879 issued to the Arsenals insofar as it covers the four-hectare portion previously sold to him. In answer to the complaint, the Arsenals denied previous knowledge of the sale to Suralta of the land in question. As a special defense, they assailed the validity of the purchase by Suralta in 1957, pointing to the prohibition contained in the Public Land Law against its disposal within the period of five years from the issuance of the homestead patent. They also questioned the legality of the sale made to Suralta in 1957 by Filomeno Palaos and Mahina Lagwas for not having been

approved by the Commission on National Integration despite the fact that Palaos and his wife belong to the cultural minorities, are illiterates, and do not understand the English language in which the deed of sale in favor of Suralta was written. In their answer, the spouses Filomeno Palaos and Mahina Lagwas sustained the sale made by them to Suralta. They alleged that they verbally sold one hectare to one Tiburcio Tadena and sold the remaining 3.7829 hectares to the Arsenals. They stated that they informed the Arsenals about the previous sale of four hectares to Suralta. They also claimed that the Arsenals took undue advantage of their ignorance and illiteracy and caused them to sign the document of sale so as to include the entire 87,829 sq. m.covered by their original title. On May 4, 1976, the trial court rendered judgment in favor of Suralta. It imputed bad faith to the Arsenals and declared them disqualified to avail of the protection afforded by the provisions of the Civil Code to innocent purchasers although they registered their purchase ahead of Suralta. The court held that: xxx xxx xxx The defendants Arsenal could not also avail of the prohibition in the Public Land Act against the disposal of any land granted to a citizen under that law because the benefit of said prohibition does not inure to any third party. Only the government could have filed the adequate proceedings for confiscation of the land for violation of the condition of the grant by Palaos. Moreover, a verbal sale of land is valid and effective as between the parties to the agreement and Filomeno Palaos had reaffirmed the sale he made in favor of the plaintiff in 1957 by executing another instrument in 1973 to cure whatever defects which may have affected their formal contract. Likewise, Francisca Arsenal cannot take advantage of the lack of approval by the Commission on National Integration of the sale made by Filomeno Palaos in favor of plaintiff Torcuato Suralta. Only the latter, in whose favor the protection is afforded, could contest the document on the ground, as Francisca Arsenal was


not a party to said contract and even if she is also a member of the cultural minority for being only half a native of Bukidnon because she and her husband who is from Cebu are both literates. On appeal to the Intermediate Appellate Court, the aforestated decision was affirmed in toto on October 24, 1983. The Court maintained that: The disquisition of the lower court having been made mainly upon assessment of the facts as borne by the testimonies of witnesses presented as resolved in a long line of decisions, this Court is loath to overturn findings of facts of the court a quo, which is more in a position to determine their truth or falsity, having heard the witnesses testify ... . On March 20, 1984, the spouses Arsenal went to this Court in a petition for review on certiorari assigning the following alleged errors of the court below: I THE INTERMEDIATE APPELLATE COURT ERRED IN NOT DISMISSING THE APPEALED CASE FOR LACK OF CAUSE OF ACTION. II THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE TRIAL COURT'S ARGUMENT TO THE EFFECT THAT THE BENEFIT OF THE PROHIBITION IN THE PUBLIC LAND LAW AGAINST THE DISPOSAL OF ANY LAND GRANTED TO A CITIZEN UNDER THAT LAW DOES NOT INSURE TO ANY THIRD PARTY, HENCE, PETITIONERS COULD NOT AVAIL OF THE SAID PROHIBITION. III THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE TRIAL COURT'S ARGUMENT THAT THE PETITIONERS COULD NOT TAKE ADVANTAGE OF THE LACK OF APPROVAL BY THE COMMISSION ON NATIONAL INTEGRATION OF THE SALE MADE BY RESPONDENT TORCUATO SURALTA. IV THE INTERMEDIATE APPELLATE COURT ERRED IN GIVING TOO MUCH WEIGHT TO THE ALLEGED BAD FAITH OF PETITIONERS.

V THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE DECISION OF THE TRIAL COURT DECLARING RESPONDENT TORCUATO SURALTA TO BE THE LEGITIMATE OWNER OF THE DISPUTED LAND AND IN ORDERING THE REGISTER OF DEEDS OF BUKIDNON TO CANCEL TCT NO. T-7879 AND ORDERING THE ISSUANCE OF ANOTHER TITLE FOR THE PORTION DESIGNATED AS LOT 8l-A OF THE SUBDIVISION PLAN LRC-PLD-198451. VI THE INTERMEDIATE APPELLATE COURT ERRED IN AFFIRMING THE AWARD OF MORAL DAMAGES AND ATTORNEY's FEES TO PRIVATE RESPONDENTS. In resisting respondent Suralta's claim, the petitioners rely heavily on the nullity of the contract of sale executed in 1957 between the respondents Palaos and Suralta. They allege that because the previous sale was void from the beginning, it cannot be ratified and "No amount of bad faith on the part of the petitioners could make it valid and enforceable in the courts of law." These arguments are impressed with merit. The law on the matter which is the Public Land Act (Commonwealth Act No. 141, as amended) provides: Sec. 118. Except in favor, of the Government or any of its branches, units or institutions, lands acquired under free patent or homestead provisions shall not be subject to encumbrance or alienation from the date of the approval of the application and for a term of five years from and after the date of issuance of the patent or grant nor shall they become liable to the satisfaction of any debt contracted prior to the expiration of said period, but the improvements or crops on the land may be mortgaged or pledged to qualified persons, associations, or corporations. No alienation, transfer, or conveyance of any homestead after five years and before twenty-five years after issuance of title shall be valid without the approval of the Secretary of Agriculture and Natural Resources, which approval shall not be denied except on constitutional and legal ground (As amended by Com. Act No.


456, approved June 8, 1939). xxx xxx xxx Sec. 120. Conveyance and encumbrance made by persons belonging to the so-called 'non-Christian Filipinos' or national cultural minorities, when proper, shall be valid if the person making the conveyance or encumbrance is able to read and can understand the language in which the instrument or conveyance or encumbrance is written. Conveyances and encumbrances made by illiterate non-Christians or literate non-Christians where the instrument of conveyance is in a language not understood by the said literate non-Christian shall not be valid unless duly approved by the Chairman of the Commission on National Integration. (As amended by Rep. Act No. 3872, approved June 18, 1964). xxx xxx xxx Sec. 124. Any acquisition, conveyance, alienation, transfer, or other contract made or executed in violation of any of the provisions of sections one hundred and eighteen, one hundred and twenty, one hundred and twenty-one, one hundred and twenty-two, and one hundred twenty-three of this Act shall be unlawful and null and void from its execution and shall produce the effect of annulling and cancelling the grant, title, patent, or permit originally issued, recognized or confirmed, actually or presumptively, and cause the reversion of the property and its improvements to the State. The above provisions of law are clear and explicit. A contract which purports of alienate, transfer, convey or encumber any homestead within the prohibitory period of five years from the date of the issuance of the patent is void from its execution. In a number of cases, this Court has held that such provision is mandatory (De los Santos v. Roman Catholic Church of Midsayap, 94 Phil. 405). Under the provisions of the Civil Code, a void contract is inexistent from the beginning. It cannot be ratified neither can the right to set up the defense of its illegality be waived. (Art. 1409, Civil Code).

To further distinguish this contract from the other kinds of contract, a commentator has stated that: The right to set up the nullity of a void or non-existent contract is not limited to the parties as in the case of annullable or voidable contracts; it is extended to third persons who are directly affected by the contract. (Tolentino, Civil Code of the Philippines, Vol. IV, p. 604, [1973]). Any person may invoke the inexistence of the contract whenever juridical effects founded thereon are asserted against him. (Id. p. 595). Concededly, the contract of sale executed between the respondents Palaos and Suralta in 1957 is void. It was entered into three (3) years and eight (8) months after the grant of the homestead patent to the respondent Palaos in 1954. Being void, the foregoing principles and rulings are applicable. Thus, it was erroneous for the trial court to declare that the benefit of the prohibition in the Public Land Act "does not inure to any third party." Such a sweeping declaration does not find support in the law or in precedents. A third person who is directly affected by a void contract may set up its nullity. In this case, it is precisely the petitioners' interest in the disputed land which is in question. As to whether or not the execution by the respondents Palaos and Suralta of another instrument in 1973 cured the defects in their previous contract, we reiterate the rule that an alienation or sale of a homestead executed within the five-year prohibitory period is void and cannot be confirmed or ratified. This Court has on several occasions ruled on the nature of a confirmatory sale and the public policy which proscribes it. In the case of Menil v. Court of Appeals (84 SCRA 413), we stated that: It cannot be claimed that there are two contracts: one which is undisputably null and void, and another, having been executed after the lapse of the 5-year prohibitory period, which is valid. The second contract of sale executed on March 3, 1964 is admittedly a confirmatory deed of sale. Even the petitioners concede this point. (Record on Appeal, pp. 55-56). Inasmuch as


the contract of sale executed on May 7, 1960 is void for it is expressly prohibited or declared void by law (CA 141, Section 118), it therefore cannot be confirmed nor ratified. ... . xxx xxx xxx Further, noteworthy is the fact that the second contract of sale over the said homestead in favor of the same vendee, petitioner Potenciano Menil, is for the same price of P415.00. Clearly, the unvarying term of the said contract is ample manifestation that the same is simulated and that no object or consideration passed between the parties to the contract. It is evident from the whole record of the case that the homestead had long been in the possession of the vendees upon the execution of the first contract of sale on May 7, 1960; likewise, the amount of P415.00 had long been paid to Agueda Garan on that same occasion. ... In another case, Manzano v. Ocampo (1 SCRA 691, 697), where the sale was perfected during the prohibitory period but the formal deed of conveyance was executed after such period, this Court ruled that: xxx xxx xxx ... This execution of the formal deed after the expiration of the prohibitory period did not and could not legalize a contract that was void from its inception. Nor was this formal deed of sale 'a totally distinct transaction from the promissory note and the deed of mortgage', as found by the Court of Appeals, for it was executed only in compliance and fulfillment of the vendor's previous promise, under the perfected sale of January 4, 1938, to execute in favor of his vendee the formal act of conveyance after the lapse of the period of inhibition of five years from the date of the homestead patent. What is more, the execution of the formal deed of conveyance was postponed by the parties precisely to circumvent the legal prohibition of their sale. The law prohibiting any transfer or alienation of homestead land within five years from the issuance of the patent does not distinguish between executory and consummated sales; and it would hardly be in keeping with the primordial aim of this prohibition to preserve and keep in the family of the

homesteader the piece of land that the State had gratuitously given to them, (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic Church of .Midsayap, G.R. No. L-6088, Feb. 25, 1954.) to hold valid a homestead sale actually perfected during the period of prohibition but with the execution of the formal deed of conveyance and the delivery of possession of the land sold to the buyer deferred until after the expiration of the prohibitory period, purposely to circumvent the very law that prohibits and declares invalid such transaction to protect the homesteader and his family. To hold valid such arrangements would be to throw the door wide open to all possible fraudulent subterfuges and schemes that persons interested in land given to homesteaders may devise to circumvent and defeat the legal provision prohibiting their alienation within five years from the issuance of the homestead's patent. The respondents Palaos and Suralta admitted that they executed the subsequent contract of sole in 1973 in order to cure the defects of their previous contract. The terms of the second contract corroborate this fact as it can easily be seen from its terms that no new consideration passed between them. The second contract of sale being merely confirmatory, it produces no effect and can not be binding. Notwithstanding the above circumstances of the case, however, we still think that the petitioners' claim to the land must fail. The petitioner's view that the court erred in giving too much weight to their alleged bad faith has no merit. The issue of bad faith constitutes the fundamental barrier to their claim of ownership. The finding of bad faith by the lower court is binding on us since it is not the function of this Court to analyze and review evidence on this point all over again (Sweet Lines, Inc. v. Court of Appeals, 121 SCRA 769) but only to determine its substantiality (Dela Concepcion v. Mindanao Portland Cement Corporation, 127 SCRA 647). In this case, there is substantial evidence to sustain the verdict of bad faith. We find several significant findings of facts made by the


courts below, which were not disputed by the petitioners, crucial to its affirmance. First of all, we agree with the lower court that it is unusual for the petitioners, who have, been occupying the disputed land for four years with respondent Suralta to believe, without first verifying the fact, that the latter was a mere mortgagee of the portion of the land he occupies. Second, it is unlikely that the entire 8.7879 hectares of land was sold to them for only P800,00 in 1967 considering that in 1957, a four-hectare portion of the same was sold to the respondent Suralta for P819.00. The increased value of real properties through the years and the disparity of the land area show a price for the land too inadequate for a sale allegedly done in good faith and for value. Third, contrary to the usual conduct of good faith purchasers for value, the petitioners actively encouraged the respondent Suralta to believe that they were co-owners of the land. There was no dispute that the petitioners, without informing the respondent Suralta of their title to the land, kept the latter in peaceful possession of the land he occupies and received annual real estate tax contributions from him. It was only in 1973 when the respondent Suralta discovered the petitioners' title to the land and insisted on a settlement of the adverse claim that the petitioners registered their deed of sale and secured a transfer certificate of title in their favor. Clearly, the petitioners were in bad faith in including the entire area of the land in their deed of sale. They cannot be entitled to the four-hectare portion of the land for lack of consideration. To uphold their claim of ownership over that portion of land would be contrary to the well-entrenched principle against unjust enrichment consecrated in our Civil Code to the end that in cases not foreseen by the lawmaker, no one may unjustly benefit himself to the prejudice of another (Report of the Code Commission, p. 41). Who then is entitled to the portion of the land which is under litigation?

The peculiar circumstances of the case seem to make a categorical pronouncement on the case difficult. At first blush, the equities of the case seem to lean in favor of the respondent Suralta who, since 1957, has been in possession of the land which was almost acquired in an underhanded manner by the petitioners. We cannot, however, gloss over the fact that the respondent Suralta was himself guilty of transgressing the law by entering, in 1957, into a transaction clearly prohibited by law. It is a long standing principle that equity follows the law. Courts exercising equity jurisdiction are bound by rules of law and have no arbitrary discretion to disregard them. Equitable reasons will not control against any well-settled rule of law or public policy (McCurdy v. County of Shiawassee, 118 N.W. 625). Thus, equity cannot give validity to a void contract. If, on the basis of equity, we uphold the respondent Suralta's claim over the land which is anchored on the contracts previously executed we would in effect be giving life to a void contract. There is another observation worthy of consideration. This Court has ruled in a number of cases that the reversion of a public land grant to the government is effected only at the instance of the Government itself (Gacayan v. Leano, 121 SCRA 260; Gonzalo Puyat & Sons, Inc. v. De las Ama and Aliño, 74 Phil. 3). The reversion contemplated in the Public Land Act is not automatic. The Government has to take action to cancel the patent and the certificate of title in order that the land involved may be reverted to it (Villacorta v. Ulanday, 73 Phil. 655). Considering that this is an ordinary civil action in which the Government has not been included as a party and in view of the settled jurisprudence, we rule against the automatic reversion of the land in question to the State. Lastly, in cases where the homestead has been the subject of void conveyances, the law still regards the original owner as the rightful owner subject to escheat proceedings by the State. In the Menil and Monzano cases earlier cited, this Court awarded the land back to the original owner notwithstanding the fact that he was equally guilty with the vendee in circumventing the law. This


is so because this Court has consistently held that "the pari delicto doctrine may not be invoked in a case of this kind since it would run counter to an avowed fundamental policy of the State, that the forfeiture of a homestead is a matter between the State and the grantee or his heirs, and that until the State had taken steps to annul the grant and asserts title to the homestead the purchaser is, as against the vendor or his heirs, no more entitled to keep the land than any intruder." (Acierto et al. v. De los Santos, et al. 95 Phil. 887; de los Santos v. Roman Catholic Church of Midsayap, et al., supra) We should stress that the vendors of the homestead are unlettered members of a tribe belonging to the cultural minorities. We see, however, a distinguishing factor in this case that sets it apart from the above cases. The original owners in this case, the respondent Palaos and his wife, have never disaffirmed the contracts executed between them and the respondent Suralta. More than that, they expressly sustained the title of the latter in court and failed to show any interest in recovering the land. Nonetheless, we apply our earlier rulings because we believe that as in pari delicto may not be invoked to defeat the policy of the State neither may the doctrine of estoppel give a validating effect to a void contract. Indeed, it is generally considered that as between parties to a contract, validity cannot be given to it by estoppel if it is prohibited by law or is against public policy (19 Am. Jur. 802). It is not within the competence of any citizen to barter away what public policy by law seeks to preserve (Gonzalo Puyat & Sons, Inc. v. De los Amas and Aliño, supra). Of course, this pronouncement covers only the previous transactions between the respondents. We cannot pass upon any new contract, between the same parties involving the same land if this is their clear intention. Any new transaction, however, would be subject to whatever steps the Government may take for the reversion of the property to it. With the resolution of the principal issues and in view of our own conclusions of facts and law, we hold untenable the lower court's award of moral damages, attorney's fees and litigation expenses.

WHEREFORE, the decision of the Intermediate Appellate Court is REVERSED and SET ASIDE. Judgment is hereby rendered: (a) Declaring null and void the sale of the four-hectare portion of the homestead to respondent Torcuato Suralta and his heirs; (b) Declaring null and void the sale of the same portion of land to the petitioners Francisca Arsenal and Remedio Arsenal: (c) Ordering the Register of Deeds of Bukidnon to cancel Transfer Certificate of Title No. T-7879 as to the disputed four-hectare portion and to reissue an Original Certificate of Title for the portion designated as Lot 81-A of the Subdivision Plan LRC-PLD198451 prepared by Geodetic Engineer Benito P. Balbuena and approved by the Commission on Land Registration, in favor of the respondents Filomeno Palaos and Mahina Lagwas; (d) Ordering the respondents Filomeno Palaos and Mahina Lagwas to reimburse the heirs of the respondent Torcuato Suralta the sum of EIGHT HUNDRED NINETY PESOS (P890.00), the price of the sale. The value of any improvements made on the land and the interests on the purchase price are compensated by the fruits the respondent Suralta and his heirs received from their long possession of the homestead. This judgment is without prejudice to any appropriate action the Government may take against the respondents Filomeno Palaos and Mahina Lagwas pursuant to Section 124 of Commonwealth Act No. 141, as amended. SO ORDERED. Feria (Chairman), Fernan, Alampay and Paras, JJ., concur. 176. G.R. No. L-45038 April 30, 1987 MANOTOK REALTY, INC., petitioner, vs. THE HON. COURT OF APPEALS and FELIPE MADLANGAWA, respondents. Romeo J. Calejo for petitioner.


Mantanggot C. Gunigundo for private respondent. GUTIERREZ, JR., J.: This is a petition for certiorari by way of appeal seeking to set aside the decision of the Court of Appeals which upheld the dismissal of the petitioner's complaint for reinvidicatory action with damages against the private respondent and ordered the petitioner to accept the payment of the balance of P2,551.85 from said respondent, and thereafter, to execute the corresponding deed of sale of Lot 227, Block I in favor of the latter. The private respondent Felipe Madlangawa claims that he has been occupying a parcel of land in the Clara de Tambunting de Legarda Subdivision since 1949 upon permission being obtained from Andres Ladores, then an overseer of the subdivision, with the understanding that the respondent would eventually buy the lot. On April 2, 1950, the owner of the lot, Clara Tambunting, died and her entire estate, including her paraphernal properties which covered the lot occupied by the private respondent were placed under custodia legis. On April 22, 1950, the private respondent made a deposit for the said lot in the sum of P1,500.00 which was received by Vicente Legarda, husband of the late owner. As evidenced by the receipt issued by Vicente Legarda, the lot consisted of an area of 240 square meters and was sold at P30.00 per square meter. There, thus, remained an unpaid balance of P5,700.00 but the private respondent did not pay or was unable to pay this balance because after the death of the testatrix, Clara Tambunting de Legarda, her heirs could not settle their differences. Apart from the initial deposit, no further payments were made from 1950. On April 28, 1950, Don Vicente Legarda was appointed as a special administrator of the estate. Meanwhile the private respondent remained in possession of the lot in question. Subsequently, the petitioner became the successful bidder and vendee of the Tambunting de Legarda Subdivision consisting of 44 parcels of land spread out in the districts of Tondo and Sta.

Cruz, Manila, pursuant to the deeds of sale executed in its favor by the Philippine Trust Company on March 13 and 20, 1959, as administrator of the Testate Estate of Clara Tambunting de Legarda, in Special Proceeding No. 10809 of the Manila probate court. The lot in dispute was one of those covered by the sale. The Deed of Sale, among others, provided for the following terms and conditions: 1. — The VENDEE assumes the risk and expenses of ejecting the tenants or squatters on the said parcels of land if it decides to eject them. Any rentals or damages that may be due or collectible from the said tenants or squatters for the period subsequent to the date of this deed of sale shall belong to the VENDEE but rentals due from the said tenants or squatters prior to the execution of this deed of sale shall belong to the VENDOR. xxx xxx xxxx x x 3. — The VENDEE renounces the right to warranty in case of eviction with the knowledge of the risks of eviction and assumes its consequences with respect not only to the lots subject-of the above mentioned cases and claims but also with respect to any other lots subject of contracts of sale or promises to sell that may have been executed by the deceased, Clara Tambunting de Legarda and/or Vicente L. Legarda, and it hereby relieves the estate of Clara Tambunting de Legarda and the Philippine Trust Company, in its capacity as Administrator thereof, of any and all liability with respect thereto in case of eviction. All sums of money that have been paid to the deceased Clara Tambunting de Legarda and/or Vicente L. Legarda and/or the administrator of Clara Tambunting de Legarda on account of the purchase price of said lots shall belong to the estate, but any sums of money that are or may be due as the balance of the purchase price of said lots shall belong to the VENDEE. (pp. 27-28, Rollo). xxx xxx xxx In its effort to clear the Tambunting Subdivision of its squatters and occupants, the petitioner caused the publication of several notices in the Manila Times issues of January 1, 1966 and the Taliba issues of January 2, and March 16, 1966, advising the


occupants to vacate their respective premises, otherwise, court action with damages would follow. In addition to these notices by publication, the petitioner sent circulars to the occupants to vacate. The private respondent was one of the many occupants who refused to vacate the lots they were occupying, so that on April 26, 1968, the petitioner filed the action below to recover the said lot. The trial court dismissed the petitioner's action after finding that the Identity of the parcel of land described in the complaint had not been sufficiently established as the very same piece of land in the material and physical possession of the private respondent. On appeal, the respondent Court of Appeals found the Identity of the lot sought to be recovered by the petitioner to be the same as that in the physical possession of the private respondent and ruled that the only right remaining to the petitioner is to enforce the collection of the balance because accordingly, it stepped into the shoes of its predecessor; and that since the area now in possession of the petitioner which is that involved in the present case is only 115 square meters, the balance after deducting the deposit of P1,500.00 is P2,551.85, and as per order of the Court of First Instance of Manila, the said balance should be paid in 18 equal monthly installments. In this petition, the petitioner maintains that the Court of Appeals committed a reversible error in holding that the sale by Don Vicente Legarda in favor of the private respondent is valid, binding, and enforceable against the petitioner. The petitioner contends that since there is no dispute that the property in question was the paraphernal property of Clara Tambunting, who died on April 2, 1950, Vicente Legarda had no authority whatsoever to sell the said property to the private respondent on May 12, 1950 since the former was appointed as administrator of the estate of Clara Tambunting only on August 28, 1950. Therefore, the questioned sale could not have bound Clara Tambunting's estate because the vendor Vicente Legarda neither acted as the owner nor the administrator of the subject

property when the alleged sale took place. As regards the provision in the deed of sale which it executed with the Philippine Trust Company wherein it bound itself to respect the contracts of sale or promises to sell that may have been executed by Vicente Legarda and renounced the right to warranty in case of eviction, the petitioner argues that this re-required respect only for those valid sales executed by the deceased Clara Tambunting and by persons vested with authority to act on behalf of the estate. On the other hand, the private respondent contends that the aforequoted provisions of the deed of sale are a declaration or admission against the interest of the petitioner, and shows that the acts of Vicente Legarda had been ratified by the Philippine Trust Company and approved by the probate court. The petitioner, therefore, is allegedly estopped from questioning the authority of Vicente Legarda in selling the property in dispute. It is an undisputed fact that the lot in dispute is the paraphernal property of Dona Clara Tambunting and that at the time of the sale thereof, the owner was already dead. Thus, the only question to be resolved in this petition is: in what capacity did the husband of the deceased, Don Vicente Legarda, dispose of the lot? Articles 136 and 137 of the Civil Code of the Philippines provide: Art. 136. The wife retains the ownership of the paraphernal property. Art. 137. The wife shall have the administration of the paraphernal property, unless she delivers the same to the husband by means of a public instrument empowering him to administer it. In this case, the public instrument shall be recorded in the Registry of Property. As for the movables, the husband shall give adequate security. There is nothing in the records that wig show that Don Vicente Legarda was the administrator of the paraphernal properties of Dona Clara Tambunting during the lifetime of the latter. Thus, it cannot be said that the sale which was entered into by the private respondent and Don Vicente Legarda had its inception before the


death of Dona Clara Tambunting and was entered into by the former for and on behalf of the latter, but was only consummated after her death. Don Vicente Legarda, therefore, could not have validly disposed of the lot in dispute as a continuing administrator of the paraphernal properties of Dona Clara Tambunting. It is also undisputed that the probate court appointed Don Vicente Legarda as administrator of the estate only on August 28, 1950, more than three months after the questioned sale had taken place. We are, therefore, led to the inevitable conclusion that the sale between Don Vicente Legarda and the private respondent is void ab initio, the former being neither an owner nor administrator of the subject property. Such being the case, the sale cannot be the subject of the ratification by the Philippine Trust Company or the probate court. As was held in the case of Arsenal v. Intermediate Appellate Court (143 SCRA 40, 49): Under the provisions of the Civil Code, a void contract is inexistent from the beginning. It cannot be ratified neither can the right to set up the defense of its illegality be waived. (Art. 1409, Civil Code . To further distinguish this contract from the other kinds of contract, a commentator has stated that. The right to set up the nullity of a void or non-existent contract is not limited to the parties as in the case of annuable or voidable contracts, it is extended to third persons who are directly affected by the contract. (Tolentino, Civil Code of the Philippines, Vol. IV, p. 604, [1973]). Any person may invoke the inexistence of the contract whenever juridical affects founded thereon are asserted against him. (Id. P. 595). Section 1, Rule 89 of the Revised Rules of Court provides for the procedure on how a property in custodia legis can be disposed of by sale: Order of sale of personalty. — Upon the application of the executor or administrator, and on written notice to the heirs and

other persons interested, the court may order the whole or a part of the personal estate to be sold, if it appears necessary for the purpose of paying debts, expenses of administration, or legacies, or for the preservation of the property. After the appointment of Don Vicente Legarda as administrator of the estate of Dona Clara Tambunting, he should have applied before the probate court for authority to sell the disputed property in favor of the private respondent. If the probate court approved the request, then Don Vicente Legarda would have been able to execute a valid deed of sale in favor of the respondent. Unfortunately, there was no effort on the part of the administrator to comply with the above-quoted rule of procedure nor on that of the respondent to protect his interests or to pay the balance of the installments to the court appointed administrator. As was held in Kline v. Shoup (226 Pacific Reporter 729, 731), which we find applicable in the case at bar: There are, however, certain steps to be taken in the administration of an estate which the law deems of sufficient importance to have placed without the power of the probate court to effect under the jurisdiction acquired over the general subject matter by law and over the estate and those interested therein, by the filing and due service of the petition for the appointment of an administrator and the order of appointment and issuance of letters, and at least one of such steps is the sale of the real property of an estate for the payment of the debts of the deceased. C.S. 7603, provides that — No sale of any property of an estate of a decedent is valid unless made under order of the probate court. ... From the foregoing, it cannot be denied that the law recognizes the issuance of an order of sale as an indispensable requisite in effecting a valid sale of the property of a decedent's estate. ... Considering the location of the disputed lot, we find a monthly rental of Twenty Centavos (P0.20) per square meter to be more than fair to the private respondent for his use of the premises. The petitioner, however, should return the P 1,500.00 received


by Mr. Legarda, with legal interest, to the respondent. WHEREFORE, IN VIEW OF THE FOREGOING, the decision appealed from is hereby REVERSED and SET ASIDE. The private respondent is ordered to SURRENDER the material and physical possession of Lot No. 277, Block I to the petitioner and to pay the latter the rentals as stated above from May, 1950 until he surrenders the said lot. The petitioner shall reimburse the private respondent the amount of P1,500.00 with legal interest from May, 1950 or offset said amount from the rentals due to it. Costs against the private respondent. SO ORDERED. Fernan (Chairman), Paras, Padilla, Bidin and Cortes, JJ , concur. 177. G.R. No. 73564 March 25, 1988 CORNELIA CLANOR VDA. DE PORTUGAL, FRANCISCO C. PORTUGAL, PETRONA C. PORTUGAL, CLARITA PORTUGAL, LETICIA PORTUGAL, and BENEDICTO PORTUGAL, JR., petitioners, vs. INTERMEDIATE APPELLATE COURT and HUGO C. PORTUGAL, respondents. SARMIENTO, J.: Seeking the reversal of the decision 1 dated October 21, 1985 of the former Intermediate Appellate Court in CA-G.R. CV No. 70247, entitled "Cornelia Clanor Vda. de Portugal, et al. vs. Hugo Portugal, and the reinstatement of the decision 2 in their favor, dated June 30, 1980, of the Court of First Instance of Cavite in Civil Case No. NC-699 entitled "Cornelia Vda. de Portugal, et al. vs. Hugo Portugal," the petitioners now come to us by way of this petition for review by certiorari. The factual background that gave rise to the present controversy is summarized as follows:

Petitioner Cornelia Clanor and her late husband Pascual Portugal, during the lifetime of the latter, were able to accumulate several parcels of real property. Among these were a parcel of residential land situated in Poblacion, Gen. Trias, Cavite, designated as Lot No. 3201, consisting of 2,069 square meters, more or less, and covered by T.C.T. No. RT-9355, in their names, and an agricultural land located at Pasong Kawayan, Gen. Trias, Cavite, with an area of 43,587 square meters, more or less, known as Lot No. 2337, and also registered in their names under T.C.T. No. RT-9356 of the Registry of Deeds for the Province of Cavite. Sometime in January, 1967, the private respondent Hugo Portugal, a son of the spouses, borrowed from his mother, Cornelia, the certificates of title to the above-mentioned parcels of land on the pretext that he had to use them in securing a loan that he was negotiating. Cornelia, the loving and helpful mother that she was, assented and delivered the titles to her son. The matter was never again brought up until after Pascual Portugal died on November 17, 1974. (Cornelia herself died on November 12, 1987.) When the other heirs of the deceased Pascual Portugal, the petitioners herein, for the purposes of executing an extrajudicial partition of Pascual's estate, wished to have all the properties of the spouses collated, Cornelia asked the private respondent for the return of the two titles she previously loaned, Hugo manifested that the said titles no longer exist. When further questioned, Hugo showed the petitioners Transfer Certificate of Title T.C.T. No. 23539 registered in his and his brother Emiliano Portugal's names, and which new T.C.T. cancelled the two previous ones. This falsification was triggered by a deed of sale by which the spouses Pascual Portugal and Cornelia Clanor purportedly sold for P8,000.00 the two parcels of land adverted to earlier to their two sons, Hugo and Emiliano. Confronted by his mother of this fraud, Emiliano denied any participation. And to show his good faith, Emiliano caused the reconveyance of Lot No. 2337 previously covered by TCT No. RT-9356 and which was conveyed to him in the void deed of sale. Hugo, on the other hand, refused to make the necessary restitution thus compelling the


petitioners, his mother and his other brothers and sisters, to institute an action for the annulment of the controversial deed of sale and the reconveyance of the title over Lot No. 3201 (the residential land). After hearing, the trial court rendered its decision, the dispositive portion of which reads: xxx xxx xxx WHEREFORE, under our present perspectives, judgment is hereby rendered; and the Court hereby declares inoperative the Deed of Sale (Exhibit A and Exhibit 1) and all its appertaining and subsequent documents corresponding with Transfer Certificate of Title No. T-23539 of the Register of Deeds for the Province of Cavite, as well as all subsequent Transfer Certificates of Title which may have been produced corresponding to the parcels of land, subject matter hereof. SO ORDERED. 3 From this decision, Hugo Portugal, the private respondent herein and the defendant in the trial court, appealed to the respondent appellate court which reversed, hence the present petition. The issues raised by the petitioners are: 1. Whether or not the present action has prescribed; 2. Whether or not the respondent court was justified in disturbing the trial court's findings on the credibility of the witnesses presented during the trial; and 3. Whether or not the appellate court could entertain the defense of prescription which was not raised by the private respondents in their answer to the complaint nor in a motion to dismiss. We find the petition meritorious. There is really nothing novel in this case as an the issues raised had been, on several occasions, ruled upon by the Court. Apropos the first issue, which is the timeliness of the action, the trial court correctly ruled that the action instituted by the petitioners has not yet prescribed. Be that as it may, the conclusion was reached through an erroneous rationalization, i.e., the case is purely for reconveyance based on an implied or constructive trust. Obviously, the trial court failed to consider the lack of consideration or cause in the purported deed of sale by which the

residential lot was allegedly transferred to the private respondent by his parents. On the other hand, the respondent Intermediate Appellate Court held that since the action for reconveyance was fathered by a fraudulent deed of sale, Article 1391 of the Civil Code which lays down the rule that an action to annul a contract based on fraud prescribes in four years, applies. Hence, according to the respondent court, as more than four years had elapsed from January 23, 1967 when the assailed deed was registered and the petitioners' cause of action supposedly accrued, the suit has already become stale when it was commenced on October 26, 1976, in the Court of First Instance of Cavite. For reasons shortly to be shown, we can not give our imprimatur to either view. The case at bar is not purely an action for reconveyance based on an implied or constructive trust. Neither is it one for the annullment of a fraudulent contract. A closer scrutiny of the records of the case readily supports a finding that fraud and mistake are not the only vices present in the assailed contract of sale as held by the trial court. More than these, the alleged contract of sale is vitiated by the total absence of a valid cause or consideration. The petitioners in their complaint, assert that they, particularly Cornelia, never knew of the existence of the questioned deed of sale. They claim that they came to know of the supposed sale only after the private respondent, upon their repeated entreaties to produce and return the owner's duplicate copy of the transfer certificate of title covering the two parcels of land, showed to them the controversial deed. And their claim was immeasurably bolstered when the private respondent's codefendant below, his brother Emiliano Portugal, who was allegedly his co-vendee in the transaction, disclaimed any knowledge or participation therein. If this is so, and this is not contradicted by the decisions of the courts below, the inevitable implication of the allegations is that contrary to the recitals found in the assailed deed, no consideration was ever paid at all by the private respondent. Applying the provisions of Articles 1350, 1352, and 1409 of the new Civil Code in relation to the


indispensable requisite of a valid cause or consideration in any contract, and what constitutes a void or inexistent contract, we rule that the disputed deed of sale is void ab initio or inexistent, not merely voidable. And it is provided in Article 1410 of the Civil Code, that '(T)he action or defense for the declaration of the inexistence of a contract does not prescribe. But even if the action of the petitioners is for reconveyance of the parcel of land based on an implied or constructive trust, still it has been seasonably filed. For as heretofore stated, it is now settled that actions of this nature prescribe in ten years, the point of reference being the date of registration of the deed or the date of the issuance of the certificate of titIe over the property. 4 In this case, the petitioner commenced the instant action for reconveyance in the trial court on October 26, 1976, or less than ten years from January 23, 1967 when the deed of sale was registered with the Register of Deeds. 5 Clearly, even on this basis alone, the present action has not yet prescribed. On the credibility of witnesses presented in court, there is no doubt that the trial court's findings on this score deserves full respect and we do not have any reason to disturb it here now. 6 After all, the trial court judge is in a better position to make that appreciation for having heard personally the witnesses and observed their deportment and manner of testifying during the trial. 7 The exceptions to this time honored policy are: when the trial court plainly overlooked certain facts of substantial import and value which if only correctly considered by the court might change the outcome of the case; 8 and, if the judge who rendered the decision was not the one who heard the evidence. 9 Neither of these exceptions is present here. Therefore, the respondent appellate court's ruling questioning the credibility of petitioner Cornelia Clanor Vda. de Portugal must be reversed. Anent the last issue raised by the petitioner, we have already ruled that the defense of prescription although not raised by the defendant may nevertheless be passed upon by the court when its presence is plainly apparent on the face of the complaint itself. 10 At any rate, in view of our earlier finding that the deed of sale

in controversy is not simply fraudulent but void ab initio or inexistent our ruling on this third issue would not have any material bearing on the overall outcome of this petition. The petitioner's action remains to be seasonably instituted. WHEREFORE, the petition is hereby GRANTED; the Decision dated October 21, 1985 and the Resolution dated January 24, 1986 of the Intermediate Appellate Court are hereby REVERSED and SET ASIDE; the deed of sale dated January 23, 1967 evidencing the sale of Lot No. 3201 to private respondent Hugo Portugal is declared VOID AB INITIO; and the private respondent is ORDERED to reconvey to petitioners the title over the said Lot No. 3201 which is now under TCT No. T-23539. Costs against the private respondent. SO ORDERED. Yap (Chairman), Melencio-Herrera, Paras and Padilla, JJ., concur. 178. G.R. No. L-54538 April 25, 1985 HEIRS OF SPOUSES LUIS YANAS and MARIA AGLIMOT, represented by Abraham Yanas, petitioners, vs. HEIRS OF SPOUSES ANTONIO ACAYLAR and GELACIA ACAYLAR, namely, Antonio, Jr., Cecilia, Godofredo, Pacita, Corazon and Loreta, all surnamed Acaylar, and COURT OF APPEALS, respondents. Litigating & Lingating Law Office for petitioners. Edgar Baguio for private respondents. AQUINO, Jr., J.: This case is about the validity of the sale of land executed by Luis Yanas, an illiterate Subano. Yanas, also known as Sulung Subano, had occupied, even before 1926, Lot No. 5408 with an area of 13 hectares located at Sitio Dionom (Lower Gumay), Barrio Sianib, Pinan (Dipolog), Zamboanga del Norte (Exh. L). Through lawyer


Leoncio S. Hamoy, Yanas claimed the lot in the cadastral proceeding. It is adjacent to the Dionom Creek and is about two kilometers from the national highway. He planted the land to rice, corn, coconuts and fruit trees. He built houses thereon. He declared it for tax purposes in his name. Judge Manalac on September 30, 1941 issued Decree No. N-11330 adjudicating Lot No. 5408 to Yanas "married to Maria Aglimot" (Exh. C). Lawyer Valeriano S. Concha, Sr., an adjoining owner of Yanas since 1946, who became clerk of court, testified that Yanas had always occupied the lot since 1946 up to his death in 1962 (103 tsn June 4, 1970). His son filed an adverse claim for Yanas. On August 7,1950 Yanas thumbmarked in Dapitan a deed of sale and conveyance wherein he purportedly sold to Antonio L. Acaylar of Dapitan for P200 his 13-hectare land. The sale was notarized on the following day, August 8. An instrumental witness was lawyer Hamoy. The sale was approved by Governor Felipe B. Azcuna on May 15, 1953 or 33 months after the sale. It is the theory of the heirs of Yanas that that deed of sale is fictitious and fraudulent because what Yanas thumbmarked on August 7, 1950 was supposed to be a receipt attesting that he owed Hamoy P 200 for his legal services. Hamoy allegedly taking advantage of his illiteracy, made Yanas affix his thumbmark to a deed of sale in English (Exh. 2). The decree issued by Judge Manalac in 1941 was registered only on June 5, 1954. On that day, OCT No. 64 was issued to Yanas. On December 21, 1954 Acaylar registered the 1950 deed of sale. He obtained TCT No. T-3338 (Exh. 5). How Acaylar came to have possession of the owner's duplicate of OCT No. 64 and why it was not delivered to Yanas are not shown in the record. When Yanas discovered that his title was cancelled, he caused on August 28, 1958 an adverse claim to be annotated on Acaylar's title. He stated in his adverse claim that he never sold his land and that the price of P200 was grossly inadequate because the land was worth not less than P6,000 (Exh. D). Yanas died in 1962. His widow, Maria Aglimot, also a Subano, and

his children filed in 1963 an action to declare void Acaylar's title. A notice of lis pendens was annotated on that title. Aglimot died in 1965. The trial court found the sale to be valid and binding. The Appellate Court affirmed the trial court's decision. The heirs of Yanas appealed to this Court. They contend that the Appellate Court erred in not holding that the deed of sale was fabricated and simulated and, therefore, void ab initio and that Maria Aglimot as surviving spouse could recover the lot. The heirs of Acaylar, through counsel who did not take part in the trial, maintain that the sale was "true and faithful" and that the widow had no right to recover one-half of the lot. We hold that the sale was fictitious and fraudulent. Among the badges of fraud and fictitiousness taken collectively are the following: (1) the fact that the sale is in English, the alleged vendor being illiterate; (2) the fact that his wife did not join in the sale and that her name is indicated in the deed as "Maria S. Yanas" when the truth is that her correct name is Maria Aglimot Yanas; (3) the obvious inadequacy of P200 as price for a 13hectare land (P15.40 a hectare); (4) the notarization of the sale on the day following the alleged thumbmarking of the document; (5) the failure to state the boundaries of the lot sold; (6) the fact that the governor approved it more than two years after the alleged sale; (7) its registration more than three years later, and (8) the fact that the Acaylars were able to occupy only four hectares out of the 13 hectares and were eventually forcibly ousted therefrom by the children and agents of the vendor. It was not a fair and regular transaction done in the ordinary course of business. The grave flaws in the evidence for defendants Acaylar are the patent contradictions in the testimonies of Antonio L. Acaylar and lawyer Hamoy, their principal witnesses on the validity of the sale. Acaylar testified that he signed the deed of sale and that one Tupas was an instrumental witness (12-13 tsn May 4, 1970). The truth is that Acaylar never signed the deed and Tupas was not a witness. The instrumental witnesses were Hamoy and Paulino


Empeynado. Hamoy at first testified on November 20, 1968 that on August 7, 1950 he was a witness in the deed of sale (Exh. 2 and 6) executed by Yanas who had requested him to look for a buyer of his lot (122-124 tsn). That means that Hamoy met Yanas in August 1950. More than a year later, or on June 22, 1970, Hamoy, testifying as a rebuttal witness for Acaylar, declared on direct and crossexamination that he last saw Yanas in 1946 (103-106). He absurdly stated that his name appears as an instrumental witness in the deed of sale but he testified: "That is my name but I did not sign that" (107). The deed of sale (Exh. 2 and 6) appears as Document No. 113, page 57, Book 3, series of 1950 of Jose G. Empeynado's notarial register. Teofisto Realiza, the clerk in charge of the court archives, testified on November 10, 1966 that Document No. 113 is an affidavit of Lorenzo Bajamunde, not a deed of sale signed by Yanas (4-5 tsn). However, five days later, or on November 15, 1966, he issued a certified copy of the deed of sale, Exhibit 2, to Acaylar's lawyer. Presumably, the deed of sale was a part of the notarial report of Empeynado but he did not enter the sale in his notarial book. The fact that the alleged sale took place in 1950 and the action to have it declared void or inexistent was filed in 1963 is immaterial. The action or defense for the declaration of the inexistence of a contract does not prescribe (Art. 1410, Civil Code). WHEREFORE, the decisions of the trial court and the Court of Appeals are reversed and set aside. The heirs of Luis Yanas are declared the owners of Lot No. 5408 of the Dipolog cadastre entitled to the possession thereof. SO ORDERED. Makasiar (Chairman), Abad Santos, Escolin and Cuevas, JJ., concur. Justice Concepcion is on leave.

179. G.R. No. L-33048 April 16, 1982 EPIFANIA SARSOSA VDA. DE BARSOBIA and PACITA W. VALLAR, petitioners, vs. VICTORIANO T. CUENCO, respondent. MELENCIO-HERRERA, J.: Sought to be reviewed herein is the judgment dated August 18, 1970, of the Court of Appeals, 1 rendered in CA-G.R. No. 41318-R, entitled "Victoriano T. Cuenco, Plaintiff-appellant, vs. Epifania Sarsosa Vda. de Barsobia and Pacita W. Vallar, Defendants- appellees, " declaring Victoriano T. Cuenco (now the respondent) as the absolute owner of the coconut land in question. The lot in controversy is a one-half portion (on the northern side) of two adjoining parcels of coconut land located at Barrio Mancapagao, Sagay, Camiguin, Misamis Oriental (now Camiguin province), with an area of 29,150 square meters, more or less. 2 The entire land was owned previously by a certain Leocadia Balisado, who had sold it to the spouses Patricio Barsobia (now deceased) and Epifania Sarsosa, one of the petitioners herein. They are Filipino citizens. On September 5, 1936, Epifania Sarsosa then a widow, sold the land in controversy to a Chinese, Ong King Po, for the sum of P1,050.00 (Exhibit "B"). Ong King Po took actual possession and enjoyed the fruits thereof. On August 5, 1961, Ong King Po sold the litigated property to Victoriano T. Cuenco (respondent herein), a naturalized Filipino, for the sum of P5,000.00 (Exhibit "A"). Respondent immediately took actual possession and harvested the fruits therefrom. On March 6, 1962, Epifania "usurped" the controverted property, and on July 26, 1962, Epifania (through her only daughter and child, Emeteria Barsobia), sold a one-half (1/2) portion of the land in question to Pacita W. Vallar, the other petitioner herein (Exhibit "2"). Epifania claimed that it was not her intention to sell


the land to Ong King Po and that she signed the document of sale merely to evidence her indebtedness to the latter in the amount of P1,050.00. Epifania has been in possession ever since except for the portion sold to the other petitioner Pacita. On September 19, 1962, respondent filed a Forcible Entry case against Epifania before the Municipal Court of Sagay, Camiguin. The case was dismissed for lack of jurisdiction since, as the laws then stood, the question of possession could not be properly determined without first settling that of ownership. On December 27, 1966, respondent instituted before the Court of First Instance of Misamis Oriental a Complaint for recovery of possession and ownership of the litigated land, against Epifania and Pacita Vallar (hereinafter referred to simply as petitioners). In their Answer below, petitioners insisted that they were the owners and possessors of the litigated land; that its sale to Ong King Po, a Chinese, was inexistent and/or void ab initio; and that the deed of sale between them was only an evidence of Epifania's indebtedness to Ong King Po. The trial Court rendered judgment: 1. Dismissing the complaint with costs against plaintiff (respondent herein). 2. Declaring the two Deeds of Sale, Exhibits A and B, respectively, inexistent and void from the beginning; and 3. Declaring defendant Pacita W. Vallar as the lawful owner and possessor of the portion of land she bought from Emeteria Barsobia (pp. 57, 67, Record.) 3 On appeal, the Court of Appeals reversed the aforementioned Decision and decreed instead that respondent was the owner of the litigated property, thus: xxx xxx xxx In view of all the foregoing considerations, the judgment appealed from is hereby reversed. In lieu thereof, we render judgment: (a) Declaring the plaintiff-appellant Victoriano T. Cuenco the absolute owner of the land in question, with the right of possession thereof;

(b) Ordering the defendants-appellees to restore the possession of said land to the plaintiff; (c) Dismissing the defendants' counterclaim; (d) Condemning the defendants to pay to the plaintiff the sum of P10,000.00 representing the latter's share from the sale of copra which he failed to receive since March, 1962 when he was deprived of his possession over the land, and which defendants illegally appropriated it to their own use and benefit, plus legal interest from the filing of the complaint until fully paid; plus P2,000.00 representing expenses and attorney's fees; (e) Sentencing the defendants to pay the costs. SO ORDERED. 4 Following the denial of their Motion for Reconsideration, petitioners filed the instant Petition for Review on certiorari with this Court on January 21, 1971. Petitioners claim that the Court of Appeals erred: I. ... when it reversed the judgment of the trial court declaring petitioner Pacita W. Vallar as the lawful possessor and owner of the portion of land she purchased from Emeteria Barsobia, not a party to this case, there being no evidence against her. II ... when it included petitioner Pacita W. Vallar to pay P10,000.00, with legal interest from the filing of the complaint, representing respondent's share in the harvest and to pay the costs, there being no evidence against her. III. ... when it condemned petitioners to pay P2,000.00 representing expenses and attorney's fees, there being no factual, legal and equitable justification. IV. ... in not applying the rule on pari delicto to the facts of the case or the doctrine enunciated ... in the case of Philippine Banking Corporation vs. Lui She, L-17587, September 12, 1967, to ... Petitioner Epifania Sarsosa Vda. de Barsobia. V. ... in denying, for lack of sufficient merits, petitioners' motion for rehearing or reconsideration of its decision. 5 As the facts stand, a parcel of coconut land was sold by its Filipino owner, petitioner Epifania, to a Chinese, Ong King Po, and by the latter to a naturalized Filipino, respondent herein. In the


meantime, the Filipino owner had unilaterally repudiated the sale she had made to the Chinese and had resold the property to another Filipino. The basic issue is: Who is the rightful owner of the property? There should be no question that the sale of the land in question in 1936 by Epifania to Ong King Po was inexistent and void from the beginning (Art. 1409 [7], Civil Code) 6 because it was a contract executed against the mandatory provision of the 1935 Constitution, which is an expression of public policy to conserve lands for the Filipinos. Said provision reads: Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals, corporations, or associations, qualified to acquire or hold lands of the public domain. 7 Had this been a suit between Epifania and Ong King Po, she could have been declared entitled to the litigated land on the basis, as claimed, of the ruling in Philippine Banking Corporation vs. Lui She, 8 reading: ... For another thing, and this is not only cogent but also important. Article 1416 of the Civil Code provides as an exception to the rule on pari delicto that when the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has sold or delivered. ... But the factual set-up has changed. The litigated property is now in the hands of a naturalized Filipino. It is no longer owned by a disqualified vendee. Respondent, as a naturalized citizen, was constitutionally qualified to own the subject property. There would be no more public policy to be served in allowing petitioner Epifania to recover the land as it is already in the hands of a qualified person. Applying by analogy the ruling of this Court in Vasquez vs. Giap and Li Seng Giap & Sons: 9 ... if the ban on aliens from acquiring not only agricultural but also urban lands, as construed by this Court in the Krivenko case, is to preserve the nation's lands for future generations of

Filipinos, that aim or purpose would not be thwarted but achieved by making lawful the acquisition of real estate by aliens who became Filipino citizens by naturalization. While, strictly speaking, Ong King Po, private respondent's vendor, had no rights of ownership to transmit, it is likewise inescapable that petitioner Epifania had slept on her rights for 26 years from 1936 to 1962. By her long inaction or inexcusable neglect, she should be held barred from asserting her claim to the litigated property (Sotto vs. Teves, 86 SCRA 157 [1978]). Laches has been defined as the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. (Tijam, et al. vs. Sibonghanoy, et al., No. L-21450, April 15, 1968, 23 SCRA 29, 35). (cited in Sotto vs. Teves, 86 SCRA 154 [1978]). Respondent, therefore, must be declared to be the rightful owner of the property. The award of actual damages in respondent's favor of P10,000.00, as well as of attorney's fees and expenses of litigation of P2,000.00, is justified. Respondent was deprived of the possession of his land and the enjoyment of its fruits from March, 1962. The Court of Appeals fixed respondent's share of the sale of copra at P10,000.00 for eight years at four (4) harvests a year. The accuracy of this finding has not been disputed. However, we find merit in the assigned error that petitioner, Pacita Vallar, should not be held also liable for actual damages to respondent. In the absence of contrary proof, she, too, must be considered as a vendee in good faith of petitioner Epifania. The award of attorney's fees and litigation expenses in the sum of P2,000.00 in respondent's favor is in order considering that both petitioners compelled respondent to litigate for the protection of his interests. Moreover, the amount is reasonable. 10 WHEREFORE, except for that portion holding petitioner, Pacita W. Vallar, also liable for damages of P10,000.00, the appealed


judgment is hereby affirmed. Costs against petitioners. SO ORDERED. Teehankee (Chairman), Makasiar, Fernandez, Guerrero and Plana, JJ., concur. 180. G.R. No. L-36731 January 27, 1983 VICENTE GODINEZ, ET AL., plaintiffs-appellants, vs. FONG PAK LUEN ET AL., defendants, TRINIDAD S. NAVATA, defendant-appellee. Dominador Sobrevinas for plaintiffs-appellants. Muss S. Inquerto for defendant-appellee GUTIERREZ, JR., J.: The plaintiffs filed this case to recover a parcel of land sold by their father, now deceased, to Fong Pak Luen, an alien, on the ground that the sale was null and void ab initio since it violates applicable provisions of the Constitution and the Civil Code. The order of the Court of First Instance of Sulu dismissing the complaint was appealed to the Court of Appeals but the latter court certified the appeal to us since only pure questions of law were raised by the appellants. The facts of the case were summarized by the Court of Appeals as follows: On September 30, 1966, the plaintiffs filed a complaint in the Court of First Instance of Sulu alleging among others that they are the heirs of Jose Godinez who was married to Martina Alvarez Godinez sometime in 1910; that during the marriage of their parents the said parents acquired a parcel of land lot No. 94 of Jolo townsite with an area of 3,665 square meters as evidenced by Original Certificate of Title No. 179 (D -155) in the name of Jose Godinez; that their mother died sometime in 1938 leaving

the plaintiffs as their sole surviving heirs; that on November 27, 1941, without the knowledge of the plaintiffs, the said Jose Godinez, for valuable consideration, sold the aforesaid parcel of land to the defendant Fong Pak Luen, a Chinese citizen, which transaction is contrary to law and in violation of the Civil Code because the latter being an alien who is inhibited by law to purchase real property; that Transfer Certificate Title No. 884 was then issued by the Register of Deeds to the said defendant, which is null and void ab initio since the transaction constituted a non-existent contract; that on January 11, 1963, said defendant Fong Pak Luen executed a power of attorney in favor of his codefendant Kwan Pun Ming, also an alien, who conveyed and sold the above described parcel of land to co-defendant Trinidad S. Navata, who is aware of and with full knowledge that Fong Pak Luen is a Chinese citizen as well as Kwan Pun Ming, who under the law are prohibited and disqualified to acquire real property in this jurisdiction; that defendant Fong Pak Luen has not acquired any title or interest in said parcel of land as the purported contract of sale executed by Jose Godinez alone was contrary to law and considered non- existent, so much so that the alleged attorney-in-fact, defendant Kwan Pun Ming had not conveyed any title or interest over said property and defendant Navata had not acquired anything from said grantor and as a consequence Transfer Certificate of Title No. 1322, which was issued by the Register of Deeds in favor of the latter is null and void ab initio,- that since one-half of the said property is conjugal property inherited by the plaintiffs from their mother, Jose Godinez could -not have legally conveyed the entire property; that notwithstanding repeated demands on said defendant to surrender to plaintiffs the said property she refused and still refuses to do so to the great damage and prejudice of the plaintiffs; and that they were constrained to engage the services of counsel in the sum of P2,000.00.1äwphï1.ñët The plaintiffs thus pray that they be adjudged as the owners of the parcel of land in question and that Transfer Certificate of Title RT-90 (T-884) issued in the name of defendant Fong Pak Luen be declared null


and void ab initio; and that the power of attorney issued in the name of Kwan Pun Ming, as well as Transfer Certificate of Title No. 'L322 issued in the name of defendant Navata be likewise declared null and void, with costs against defendants. On August 18, 1966, the defendant Register of Deeds filed an answer claiming that he was not yet the register of deeds then; that it was only the ministerial duty of his office to issue the title in favor of the defendant Navata once he was determined the registerability of the documents presented to his office. On October 20, 1966, the defendant Navata filed her answer with the affirmative defenses and counterclaim alleging among others that the complaint does not state a cause of action since it appears from the allegation that the property is registered in the name of Jose Godinez so that as his sole property he may dispose of the same; that the cause of action has been barred by the statute of limitations as the alleged document of sale executed by Jose Godinez on November 27, 1941, conveyed the property to defendant Fong Pak Luen as a result of which a title was issued to said defendant; that under Article 1144 (1) of the Civil Code, an action based upon a written contract must be brought within 10 years from the time the right of action accrues; that the right of action accrued on November 27, 1941 but the complaint was filed only on September 30, 1966, beyond the 10 year period provided for by law; that the torrens title in the name of defendant Navata is indefeasible who acquired the property from defendant Fong Pak Luen who had been in possession of the property since 1941 and thereafter defendant Navata had possessed the same for the last 25 years including the possession of Fong Pak Luen; that the complaint is intended to harass the defendant as a civic leader and respectable member of the community as a result of which she suffered moral damages of P100,000.00, P2,500.00 for attorney's fees and P500.00 expenses of litigation, hence, said defendant prays that the complaint be dismissed and that her counterclaim be granted, with costs against the plaintiffs. On November 24, 1967, the plaintiffs filed an answer to the affirmative defenses and counter-claim. As the

defendants Fong Pak Luen and Kwan Pun Ming are residing outside the Philippines, the trial court upon motion issued an order of April 17, 1967, for the service of summons on said defendants by publication. No answer has been filed by said defendants. On December 2, 196 7, the court issued an order as follows: Both parties having agreed to the suggestion of the Court that they submit their supplemental pleadings to support both motion and opposition and after submittal of the same the said motion to dismiss which is an affirmative defense alleged in the complaint is deemed submitted. Failure of both parties or either party to submit their supplemental pleadings on or about December 9, the Court will resolve the case. On November 29, 1968, the trial court issued an order missing the complaint without pronouncement as to costs. (Record on Appeal, pp. 31- 37). A motion for reconsideration of this order was filed by the plaintiffs on December 12, 196F, which was denied by the trial court in an order of July 11, 1969, (Rec. on Appeal, pp. 38, 43, 45, 47). The plaintiffs now interpose this appeal with the following assignments of errors: I. The trial court erred in dismissing plaintiffs-appellants' complaint on the ground of prescription of action, applying Art. 1144 (1) New Civil Code on the basis of defendant Trinidad S. Navata's affirmative defense of prescription in her answer treated as a motion to dismiss. II. The trial court erred in denying plaintiffs-appellants' motion for reconsideration of the order of dismissal. III. The trial court erred in not ordering this case to be tried on the merits." The appellants contend that the lower court erred in dismissing the complaint on the ground that their cause of action has prescribed. While the issue raised appears to be only the applicability of the law governing prescription, the real question before us is whether or not the heirs of a person who sold a parcel of land to an alien in violation of a constitutional prohibition may recover the property if it had, in the meantime,


been conveyed to a Filipino citizen qualified to own and possess it. The question is not a novel one. Judicial precedents indicate fairly clearly how the question should be resolved. There can be no dispute that the sale in 1941 by Jose Godinez of his residential lot acquired from the Bureau of Lands as part of the Jolo townsite to Fong Pak Luen, a Chinese citizen residing in Hongkong, was violative of Section 5, Article XIII of the 1935 Constitution which provided: Sec. 5. Save in cases of hereditary succession, no private agricultural land will be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines. The meaning of the above provision was fully discussed in Krivenko v. Register of Deeds of Manila (79 Phil. 461) which also detailed the evolution of the provision in the public land laws, Act No. 2874 and Commonwealth Act No. 141. The Krivenko ruling that "under the Constitution aliens may not acquire private or agricultural lands, including residential lands" is a declaration of an imperative constitutional policy. Consequently, prescription may never be invoked to defend that which the Constitution prohibits. However, we see no necessity from the facts of this case to pass upon the nature of the contract of sale executed by Jose Godinez and Fong Pak Luen whether void ab initio, illegal per se or merely pro-exhibited.** It is enough to stress that insofar as the vendee is concerned, prescription is unavailing. But neither can the vendor or his heirs rely on an argument based on imprescriptibility because the land sold in 1941 is now in the hands of a Filipino citizen against whom the constitutional prescription was never intended to apply. The lower court erred in treating the case as one involving simply the application of the statute of limitations. From the fact that prescription may not be used to defend a contract which the Constitution prohibits, it does not necessarily follow that the appellants may be allowed to recover the property sold to an alien. As earlier mentioned, Fong Pak Luen,

the disqualified alien vendee later sold the same property to Trinidad S. Navata, a Filipino citizen qualified to acquire real property. In Vasquez v. Li Seng Giap and Li Seng Giap & Sons (96 Phil. 447), where the alien vendee later sold the property to a Filipino corporation, this Court, in affirming a judgment dismissing the complaint to rescind the sale of real property to the defendant Li Seng Giap on January 22, 1940, on the ground that the vendee was an alien and under the Constitution incapable to own and hold title to lands, held: In Caoile vs. Yu Chiao 49 Qff Gaz., 4321; Talento vs. Makiki 49 Off. Gaz., 4331; Bautista vs. Uy 49 Off. Gaz., 4336; Rellosa vs. Gaw Chee 49 Off. Gaz., 4345 and Mercado vs. Go Bio, 49 Off. Gaz., 5360, the majority of this Court has ruled that in sales of real estate to aliens incapable of holding title thereto by virtue of the provisions of the Constitution (Section 5, Article XIII Krivenko vs. Register of Deeds, 44 Off. Gaz., 471) both the vendor and the vendee are deemed to have committed the constitutional violation and being thus in pari delicto the courts will not afford protection to either party. (Article 1305, old Civil Code; Article 1411, new Civil Code) From this ruling three Justices dissented. (Mr. Justice Pablo, Mr. Justice Alex. Reyes and the writer. See Caoile vs. Yu Chiao Talento vs. Makiki Bautista us. Uy, Rellosa vs. Gaw Chee and Mercado vs. Go Bio). supra. The action is not of rescission because it is not postulated upon any of the grounds provided for in Article 1291 of the old Civil Code and because the action of rescission involves lesion or damage and seeks to repair it. It is an action for annulment under Chapter VI, Title II, Book 11, on nullity of contracts, based on a defect in the contract which invalidates it independently of such lesion or damages. (Manresa, Commentarios al Codigo Civil Espanol Vol. VIII, p. 698, 4th ed.) It is very likely that the majority of this Court proceeded upon that theory when it applied the in pari delicto rule referred to above. In the United States the rule is that in a sale of real estate to an alien disqualified to hold title thereto the vendor divests himself


of the title to such real estate and has no recourse against the vendee despite the latter's disability on account of alienage to hold title to such real estate and the vendee may hold it against the whole world except as against the State. It is only the State that is entitled by proceedings in the nature of office found to have a forfeiture or escheat declared against the vendee who is incapable of holding title to the real estate sold and conveyed to him. Abrams vs. State, 88 Pac. 327; Craig vs. Leslie et al., 4 Law, Ed. 460; 3 Wheat, 563, 589590; Cross vs. Del Valle, 1 Wall, [U.S.] 513; 17 Law. Ed., 515; Governeur vs. Robertson, 11 Wheat, 332, 6 Law. Ed., 488.) However, if the State does not commence such proceedings and in the meantime the alien becomes naturalized citizen, the State is deemed to have waived its right to escheat the real property and the title of the alien thereto becomes lawful and valid as of the date of its conveyance or transfer to him. (Osterman vs. Baldwin, 6 Wall, 116, 18 Law. ed. 730; Manuel vs. Wulff, 152 U.S. 505, 38 Law. ed. 532; Pembroke vs. Houston, 79, SW 470; Fioerella vs. Jones, 259 SW 782. The rule in the United States that in a sale of real estate to an alien disqualified to hold title thereto, the vendor divests himself of the title to such real estate and is not permitted to sue for the annulment Of his Contract, is also the rule under the Civil Code. ... Article 1302 of the old Civil Code provides: ... Persons sui juris cannot, however, avail themselves of the incapacity of those with whom they contracted; ... xxx xxx xxx . . . (I)f the ban on aliens from acquiring not only agricultural but, also urban lands, as construed by this Court in the Krivenko case, is to preserve the nation's land for future generations of Filipinos, that aim or purpose would not be thwarted but achieved by making lawful the acquisition of real estate by aliens who became Filipino citizens by naturalization. The title to the parcel of land of the vendee, a naturalized Filipino citizen, being valid that of the domestic corporation to which the parcel of land has been transferred, must also be valid, 96.67 per cent of its capital stock being owned by Filipinos.

Herrera v. Luy Kim Guan (SCRA 406) reiterated the above ruling by declaring that where land is sold to a Chinese citizen, who later sold it to a Filipino, the sale to the latter cannot be impugned. The appellants cannot find solace from Philippine Banking Corporation v. Lui She (21 SCRA 52) which relaxed the pari delicto doctrine to allow the heirs or successors-in-interest, in appropriate cases, to recover that which their predecessors sold to aliens. Only recently, in Sarsosa vda. de Barsobia v. Cuenco (113 SCRA 547) we had occasion to pass upon a factual situation substantially similar to the one in the instant case. We ruled: But the factual set-up has changed. The litigated property is now in the hands of a naturalized Filipino. It is no longer owned by a disqualified vendee. Respondent, as a naturalized citizen, was constitutionally qualified to own the subject property. There would be no more public policy to be served in allowing petitioner Epifania to recover the land as it is already in the hands of a qualified person. Applying by analogy the ruling of this Court in Vasquez vs. Giap & Sons: (.96 Phil. 447 [1955]) ... if the ban on aliens from acquiring not only agricultural but also urban lands, as construed by this Court in the Krivenko case, is to preserve the nation's lands for future generations of Filipinos, that aim or purpose would not be thwarted but achieved by making lawful the acquisition of real estate by aliens who became Filipino citizens by naturalization. While, strictly speaking, Ong King Po, private respondent's vendor, had no rights of ownership to transmit, it is likewise in escapable that petitioner Epifania had slept on her rights for 26 years from 1936 to 1962. By her long inaction or inexcusable neglect, she should be held barred from asserting her claim to the litigated property (Sotto vs. Teves, 86 SCRA 157 [1978]) Laches has been defined as the failure or neglect, for an unreasonable and unexplained length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or ommission to assert a right within a reasonable


time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it. (Tijam, et al. vs. Sibonghanoy, et al., No. L-21450, April 15, 1968, 23 SCRA 29, 35).' (Cited in Sotto vs. Teves, 86 SCRA 154 [1978]). Respondent, therefore, must be declared to be the rightful owner of the property. In the light of the above considerations, we find the second and third assignments of errors without merit. Respondent Navata, the titled owner of the property is declared the rightful owner. WHEREFORE, the instant appeal is hereby denied. The orders dismissing the complaint and denying the motion for reconsideration are affirmed. SO ORDERED. Teehankee (Chairman), Melencio-Herrera, Plana, Vasquez and Relova, JJ., concur. 181. G.R. No. L-31606 March 28, 1983 DONATO REYES YAP and MELITONA MARAVILLAS, petitioners, vs. HON. EZEKIEL S. GRAGEDA, as Judge of the Court of First Instance of Albay and JOSE A. RICO, respondents. Jose P. Oira for petitioners. Rodolfo A. Madrid for respondents. GUTIERREZ, JR., J.: We are asked in this petition to review the amended decision of the respondent court which declared as absolutely null and void the sale of a residential lot in Guinobatan, Albay to a Chinese national and ordered its reconveyance to the vendors thirty years after the sale inspite of the fact that the vendee had been a naturalized Filipino citizen for fifteen years at the time. We grant the petition. The questioned decision and the order

amending it are reversed and set aside. The facts are not disputed. On April 12, 1939, Maximino Rico, for and in his own behalf and that of the minors Maria Rico, Filomeno Rico, Prisco Rico, and Lourdes' Rico, executed a Deed of Absolute Sale (Annex 'A' to the complaint) over Lot 339 and a portion of Lot 327 in favor of the petitioner Donato Reyes Yap who was then a Chinese national. Respondent Jose A. Rico is the eldest son of Maximino Rico, one of the vendors in Annex 'A'. Subsequently, the petitioner as vendee caused the registration of the instrument of sale and the cancellation of Original Certificates of Title Nos. 29332 and 29410 and the consequent issuance in his favor of Transfer Certificate of Title No. T-2433 covering the two lots subject matter of the Contract of Sale. After the lapse of nearly fifteen years from and after the execution of the deed of absolute sale, Donato Reyes Yap was admitted as a Filipino citizen and allowed to take his oath of allegiance to the Republic of the Philippines. He was, thereafter, issued Certificate of Naturalization No. 7, File No. 19 of the Court of First Instance of Albay. On December 1, 1967, the petitioner ceded the major portion of Lot No. 327 consisting of 1,078 square meters which he acquired by purchase under the deed of sale in favor of his engineer son, Felix Yap, who was also a Filipino citizen because of the Filipino citizenship of his mother and the naturalization of his father Donato Reyes Yap. Subsequently, Lourdes Rico, aunt and co-heir of respondent Jose A. Rico. sold the remaining portion of Lot 327 to the petitioner who had his rights thereon duly registered under Act 496. Petitioner, Donato Reyes Yap, has been in possession of the lots in question since 1939, openly, publicly, continuously, and adversely in the concept of owner until the present time. The petitioner has one surviving son by his first marriage to a Filipino wife. He has five children by his second marriage also to a Filipina and has a total of 23 grandchildren all of whom are Filipino citizens.


The respondent court considered Section 5, Article XIII of the 1935 Constitution that "no private agricultural land shall be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines" to be an absolute and unqualified prohibition and, therefore, ruled that a conveyance contrary to it would not be validated nor its void nature altered by the subsequent naturalization of the vendee. The dispositive portion of the amended decision reads: WHEREFORE, in view of all the foregoing, the Contract of Sale embodied in the 'Escritura de Compra Venta' which is attached to the Complaint as Annex 'A', is hereby declared null and void ab initio and without any legal force and effect. The action to recover Lot 339 of the Cadastral Survey of Guinobatan, Albay, covered by Transfer Certificate of Title No. T2433. and Lot 327 covered by the same Transfer Certificate of Title, is hereby granted to plaintiff, upon payment of the consideration price of P150.00 and declaring plaintiff as the lawful owner and entitled to the possession thereof. Defendant Donato Reyes Yap is hereby ordered to produce his Transfer Certificate of Title No. T-2433 to the Register of Deeds of Albay, so as to enable said office to make the due and proper annotations on said title as well as in the original of the declaration of nullity as herein adjudged. Let Transfer Certificate of Title issued to plaintiff, concerning said Lots 339 and 327 of the Cadastral Survey of Guinobatan, Albay. COSTS AGAINST DEFENDANTS. The rulings in Vasquez v.Leng Seng Giap et al. (96 Phil. 447) and Sarosa Vda. de Bersabia v. Cuenco (113 SCRA 547) sustain the petitioner's contentions. We stated in Sarosa Vda de Bersabia: There should be no question that the sale of the land in question in 1936 by Epifania to Ong King Po was inexistent and void from the beginning (Art. 1409 [7], Civil Code) because it was a contract executed against the mandatory provision of the 1935 Constitution, which is an expression of public policy to conserve lands for the Filipinos. Said provision reads:

Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to in. individuals, corporations, or associations, qualified to acquire or hold lands of the public domain. Had this been a suit between Epifania and Ong King Po she could have been declared entitled to the litigated land on the basis, as claimed, of the ruling in Philippine Banking Corporation vs. Lui She, reading: ... For another thing, and this is not only cogent but also important. Article 1416 of the Civil Code provides as an exception to the rule on pari delicto that when the agreement is not illegal per se but is merely prohibited, and the prohibition by the law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has sold or delivered. ... But the factual set-up has changed. The litigated property is now in the hands of a naturalized Filipino. It is no longer owned by a disqualified vendee. Respondent, as a naturalized citizen, was constitutionally qualified to own the subject property. There would be no more public policy to be served in allowing petitioner Epifania to recover the land as it is already in the hands of a qualified person. Applying by analogy the ruling of this Court in Vasquez vs. Giap and Leng Seng Giap & Sons: ... if the ban on aliens from acquiring not only agricultural but also urban lands, as construed by this Court in the Krivenko case, is to preserve the nation's lands for future generations of Filipinos, that aim or purpose would not be thwarted but achieved by making lawful the acquisition of real estate by aliens who became Filipino citizens by naturalization. Only recently, we had occasion to reiterate the above rulings in Vicente Godines v. Fong Pak Luen, et al. (G.R. No. L-36731, January 27, 1983). WHEREFORE, the amended judgment of the respondent court is hereby REVERSED and SET ASIDE. The complaint is DISMISSED. SO ORDERED.


182. G.R. No. L-31831 April 28, 1983 JESUS PINEDA, petitioner, vs. JOSE V. DELA RAMA and COURT OF APPEALS, respondents. Rosauro Alvarez for petitioner. Arturo Zialcita for respondents. GUTIERREZ, JR., J.: This is a petition to review on certiorari a decision of the Court of Appeals which declared petitioner Jesus Pineda liable on his promissory note for P9,300.00 and directed him to pay attorney's fees of P400.00 to private respondent, Jose V. dela Rama. Dela Rama is a practising lawyer whose services were retained by Pineda for the purpose of making representations with the chairman and general manager of the National Rice and Corn Administration (NARIC) to stop or delay the institution of criminal charges against Pineda who allegedly misappropriated 11,000 cavans of palay deposited at his ricemill in Concepcion, Tarlac. The NARIC general manager was allegedly an intimate friend of Dela Rama. According to Dela Rama, petitioner Pineda has used up all his funds to buy a big hacienda in Mindoro and, therefore, borrowed the P9,300.00 subject of his complaint for collection. In addition to filling the suit to collect the loan evidenced by the matured promissory note, Dela Rama also sued to collect P5,000.00 attorney's fees for legal services rendered as Pineda's counsel in the case being investigated by NARIC. The Court of First Instance of Manila decided Civil Case No. 45762 in favor of petitioner Pineda. The court believed the evidence of Pineda that he signed the promissory note for P9,300.00 only because Dela Rama had told him that this amount

had already been advanced to grease the palms of the 'Chairman and General Manager of NARIC in order to save Pineda from criminal prosecution. The court stated: xxx xxx xxx ... The Court, after hearing the testimonies of the witness and examining the exhibits in question, finds that Exhibit A proves that the defendant himself did not receive the amount stated therein, because according to said exhibit that amount was advanced by the plaintiff in connection with the defendant's case, entirely contradicting the testimony of the plaintiff himself, who stated in open Court that he gave the amount in cash in two installments to the defendant. The Court is more inclined to believe the contents of Exhibit A, than the testimony of the plaintiff. On this particular matter, the defendant has established that the plaintiff made him believe that he was giving money to the authorities of the NARIC to grease their palms to suspend the prosecution of the defendant, but the defendant, upon inquiry, found out that none of the authorities has received that amount, and there was no case that was ever contemplated to be filed against him. It clearly follows, therefore, that the amount involved in this Exhibit A was imaginary. It was given to the defendant, not to somebody else. The purpose for which the amount was intended was illegal. However, the Court believes that plaintiff was able to get from the defendant the amount of P3,000.00 on October 7, as shown by the check issued by the defendant, Exhibit 2, and the letter, Exhibit 7, was antedated October 6, as per plaintiff's wishes to show that defendant was indebted for P3,000.00 when, as a matter of fact, such amount was produced in order to grease the palms of the NARIC officials for withholding an imaginary criminal case. Such amount was never given to such officials nor was there any contemplated case against the defendant. The purpose for which such amount was intended was indeed illegal. The trial court rendered judgment as follows: WHEREFORE, the Court finds by a preponderance of evidence


that the amount of P9,300.00 evidenced by Exhibit A was not received by the defendant, nor given to any party for the defendant's benefit.Consequently, the plaintiff has no right to recover said amount. The amount of P3,000.00 was given by the defendant to grease the palms of the NARIC officials. The purpose was illegal, null and void. Besides, it was not given at all, nor was it true that there was a contemplated case against the defendant. Such amount should be returned to the defendant. The services rendered by the plaintiff to the defendant is worth only P400.00, taking into consideration that the plaintiff received an airconditioner and six sacks of rice. The court orders that the plaintiff should return to the defendant the amount of P3,000.00, minus P400.00 plus costs. The Court of Appeals reversed the decision of the trial court on a finding that Pineda, being a person of more than average intelligence, astute in business, and wise in the ways of men would not "sign any document or paper with his name unless he was fully aware of the contents and important thereof, knowing as he must have known that the language and practices of business and of trade and commerce call to account every careless or thoughtless word or deed." The appellate court stated: No rule is more fundamental and by men of honor and goodwill more dearly cherished, than that which declares that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Corollary to and in furtherance of this principle, Section 24 of the Negotiable instruments Law (Act No. 2031) explicitly provides that every negotiable instrument is deemed prima facie to have been issued for a valuable consideration, and every person whose signature appears thereon to have become a party thereto for value. We find this petition meritorious. The Court of Appeals relied on the efficacy of the promissory note for its decision, citing Section 24 of the Negotiable Instruments Law which reads:

SECTION 24. Presumption of consideration.—Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value. The Court of Appeals' reliance on the above provision is misplaced. The presumption that a negotiable instrument is issued for a valuable consideration is only puma facie. It can be rebutted by proof to the contrary. (Bank of the Philippine Islands v. Laguna Coconut Oil Co. et al., 48 Phil. 5). According to Dela Rama, he loaned the P9,300.00 to Pineda in two installments on two occasions five days apart - first loan for P5,000.00 and second loan for P4,300.00, both given in cash. He also alleged that previously he loaned P3,000.00 but Pineda paid this other loan two days afterward. These allegations of Dela Rama are belied by the promissory note itself. The second sentence of the note reads - "This represents the cash advances made by him in connection with my case for which he is my attorney-inlaw." The terms of the note sustain the version of Pineda that he signed the P9,300.00 promissory note because he believed Dela Rama's story that these amounts had already been advanced by Dela Rama and given as gifts for NARIC officials. Dela Rama himself admits that Pineda engaged his services to delay by one month the filing of the NARIC case against Pineda while the latter was trying to work out an amicable settlement. There is no question that Dela Rama was indeed a close friend of then NARIC Administrator Jose Rodriquez having worked with him in the Philippine consulate at Hongkong and that Dela Rama made what he calls "proper representations" with Rodriguez and with other NARIC officials in connection with the investigation of the criminal charges against Pineda. We agree with the trial court which believed Pineda. It is indeed unusual for a lawyer to lend money to his client whom he had known for only three months, with no security for the loan and on interest. Dela Rama testified that he did not even know what Pineda was going to do with the money he borrowed from him.


The petitioner had just purchased a hacienda in Mindoro for P210,000.00, owned sugar and rice lands in Tarlac of around 800 hectares, and had P60,000.00 deposits in three banks when he executed the note. It is more logical to believe that Pineda would not borrow P5,000.00 and P4,300.00 five days apart from a man whom he calls a "fixer" and whom he had known for only three months. There is no dispute that an air-conditioning unit valued at P1,250.00 was purchased by Pineda's son and given to Dela Rama although the latter claims he paid P1,250.00 for the unit when he received it. Pineda, however, alleged that he gave the airconditioning unit because Dela Rama told him that Dr. Rodriguez was asking for one air-conditioning machine of 1.5 horsepower for the latter's NARIC office. Pineda further testified that six cavans of first class rice also intended for the NARIC Chairman and General Manager, together with the airconditioning unit, never reached Dr. Rodriguez but were kept by the lawyer. Considering the foregoing, we agree with the trial court that the promissory note was executed for an illegal consideration. Articles 1409 and 1412 of the Civil Code in part, provide: Art. 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order and public policy; xxx xxx xxx Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: (1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking. xxx xxx xxx Whether or not the supposed cash advances reached their destination is of no moment. The consideration for the promissory note - to influence public officers in the performance of their duties - is contrary to law and public policy. The

promissory note is void ab initio and no cause of action for the collection cases can arise from it. WHEREFORE, the decision of the Court of Appeals is SET ASIDE. The complaint and the counterclaim in Civil Case No. 45762 are both DISMISSED. SO ORDERED. Teehankee (Chairman), Melencio-Herrera, Plana, Vasquez and Relova, JJ., concur. 183. G.R. No. L-11240 December 18, 1957 CONCHITA LIGUEZ, petitioner, vs. THE HONORABLE COURT OF APPEALS, MARIA NGO VDA. DE LOPEZ, ET AL., respondents. Ruiz, Ruiz and Ruiz for appellant. Laurel Law Offices for appellees. REYES, J.B.L., J.: From a decision of the Court of Appeals, affirming that of the Court of First Instance of Davao dismissing her complaint for recovery of land, Conchita Liguez has resorted to this Court, praying that the aforesaid decision be reversed on points of law. We granted certiorari on October 9, 1956. The case began upon complaint filed by petitioner-appellant against the widow and heirs of the late Salvador P. Lopez to recover a parcel of 51.84 hectares of land, situated in barrio Bogac-Linot, of the municipality of Mati, Province of Davao. Plaintiff averred to be its legal owner, pursuant to a deed of donation of said land, executed in her favor by the late owner, Salvador P. Lopez, on 18 May 1943. The defense interposed was that the donation was null and void for having an illicit causa or consideration, which was the plaintiff's entering into marital relations with Salvador P. Lopez, a married man; and that the


property had been adjudicated to the appellees as heirs of Lopez by the court of First Instance, since 1949. The Court of Appeals found that the deed of donation was prepared by the Justice of the Peace of Mati, Davao, before whom it was signed and ratified on the date aforesaid. At the time, the appellant Liguez was a minor, only 16 years of age. While the deed recites— That the DONOR, Salvador P. Lopez, for and in the consideration of his love and affection for the said DONEE, Conchita Liguez, and also for the good and valuable services rendered to the DONOR by the DONEE, does by these presents, voluntarily give grant and donate to the said donee, etc. (Paragraph 2, Exhibit "A") the Court of Appeals found that when the donation was made, Lopez had been living with the parents of appellant for barely a month; that the donation was made in view of the desire of Salvador P. Lopez, a man of mature years, to have sexual relations with appellant Conchita Liguez; that Lopez had confessed to his love for appellant to the instrumental witnesses, with the remark that her parents would not allow Lopez to live with her unless he first donated the land in question; that after the donation, Conchita Liguez and Salvador P. Lopez lived together in the house that was built upon the latter's orders, until Lopez was killed on July 1st, 1943, by some guerrillas who believed him to be proJapanese. It was also ascertained by the Court of Appeals that the donated land originally belonged to the conjugal partnership of Salvador P. Lopez and his wife, Maria Ngo; that the latter had met and berated Conchita for living maritally with her husband, sometime during June of 1943; that the widow and children of Lopez were in possession of the land and made improvements thereon; that the land was assessed in the tax rolls first in the name of Lopez and later in that of his widow.; and that the deed of donation was never recorded. Upon these facts, the Court of Appeals held that the deed of donation was inoperative, and null and void (1) because the husband, Lopez, had no right to donate conjugal property to the

plaintiff appellant; and (2) because the donation was tainted with illegal cause or consideration, of which donor and donee were participants. Appellant vigorously contends that the Court of First Instance as well as the Court of Appeals erred in holding the donation void for having an illicit cause or consideration. It is argued that under Article 1274 of the Civil Code of 1889 (which was the governing law in 1948, when the donation was executed), "in contracts of pure beneficence the consideration is the liberality of the donor", and that liberality per se can never be illegal, since it is neither against law or morals or public policy. The flaw in this argument lies in ignoring that under Article 1274, liberality of the do or is deemed causa in those contracts that are of "pure" beneficence; that is to say, contracts designed solely and exclusively to procure the welfare of the beneficiary, without any intent of producing any satisfaction for the donor; contracts, in other words, in which the idea of self-interest is totally absent on the part of the transferor. For this very reason, the same Article 1274 provides that in remuneratory contracts, the consideration is the service or benefit for which the remuneration is given; causa is not liberality in these cases because the contract or conveyance is not made out of pure beneficence, but "solvendi animo." In consonance with this view, this Supreme Court in Philippine Long Distance Co. vs. Jeturian * G.R. L-7756, July 30, 1955, like the Supreme Court of Spain in its decision of 16 Feb. 1899, has ruled that bonuses granted to employees to excite their zeal and efficiency, with consequent benefit for the employer, do not constitute donation having liberality for a consideration. Here the facts as found by the Court of Appeals (and which we can not vary) demonstrate that in making the donation in question, the late Salvador P. Lopez was not moved exclusively by the desire to benefit appellant Conchita Liguez, but also to secure her cohabiting with him, so that he could gratify his sexual impulses. This is clear from the confession of Lopez to the witnesses Rodriguez and Ragay, that he was in love with appellant, but her parents would not agree unless he donated the


land in question to her. Actually, therefore, the donation was but one part of an onerous transaction (at least with appellant's parents) that must be viewed in its totality. Thus considered, the conveyance was clearly predicated upon an illicit causa. Appellant seeks to differentiate between the alleged liberality of Lopez, as causa for the donation in her favor, and his desire for cohabiting with appellant, as motives that impelled him to make the donation, and quotes from Manresa and the jurisprudence of this Court on the distinction that must be maintained between causa and motives (De Jesus vs. Urrutia and Co., 33 Phil. 171). It is well to note, however that Manresa himself (Vol. 8, pp. 641-642), while maintaining the distinction and upholding the inoperativeness of the motives of the parties to determine the validity of the contract, expressly excepts from the rule those contracts that are conditioned upon the attainment of the motives of either party. . . . distincion importantisima, que impide anular el contrato por la sola influencia de los motivos a no ser que se hubiera subordinando al cumplimiento de estos como condiciones la eficacia de aquel. The same view is held by the Supreme Court of Spain, in its decisions of February 4, 1941, and December 4, 1946, holding that the motive may be regarded as causa when it predetermines the purpose of the contract. In the present case, it is scarcely disputable that Lopez would not have conveyed the property in question had he known that appellant would refuse to cohabit with him; so that the cohabitation was an implied condition to the donation, and being unlawful, necessarily tainted the donation itself. The Court of Appeals rejected the appellant's claim on the basis of the well- known rule "in pari delicto non oritur actio" as embodied in Article 1306 of 1889 (reproduced in Article 1412 of the new Civil Code): ART. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed:

(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue of the contract, or demand the performance of the other's undertaking; (2) When only one of the contracting parties is at fault, he cannot recover, what he has given by reason of the contract, or ask for fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he has given without any obligation to comply with his promise. In our opinion, the Court of Appeals erred in applying to the present case the pari delicto rule. First, because it can not be said that both parties here had equal guilt when we consider that as against the deceased Salvador P. Lopez, who was a man advanced in years and mature experience, the appellant was a mere minor, 16 years of age, when the donation was made; that there is no finding made by the Court of Appeals that she was fully aware of the terms of the bargain entered into by and Lopez and her parents; that, her acceptance in the deed of donation (which was authorized by Article 626 of the Old Civil Code) did not necessarily imply knowledge of conditions and terms not set forth therein; and that the substance of the testimony of the instrumental witnesses is that it was the appellant's parents who insisted on the donation before allowing her to live with Lopez. These facts are more suggestive of seduction than of immoral bargaining on the part of appellant. It must not be forgotten that illegality is not presumed, but must be duly and adequately proved. In the second place, the rule that parties to an illegal contract, if equally guilty, will not be aided by the law but will both be left where it finds them, has been interpreted by this Court as barring the party from pleading the illegality of the bargain either as a cause of action or as a defense. Memo auditor propriam turpitudinem allegans. Said this Court in Perez vs. Herranz, 7 Phil. 695-696: It is unnecessary to determine whether a vessel for which a certificate and license have been fraudulently obtained incurs forfeiture under these or any other provisions of this act. It is


enough for this case that the statute prohibits such an arrangement as that between the plaintiff and defendant so as to render illegal both the arrangement itself and all contracts between the parties growing out of it. It does not, however, follow that the plaintiff can succeed in this action. There are two answers to his claim as urged in his brief. It is a familiar principle that the courts will not aid either party to enforce an illegal contract, but will leave them both where it finds them; but where the plaintiff can establish a cause of action without exposing its illegality, the vice does not affect his right to recover. The American authorities cited by the plaintiff fully sustain this doctrine. The principle applies equally to a defense. The law in those islands applicable to the case is found in article 1305 of the Civil Code, shutting out from relief either of the two guilty parties to an illegal or vicious contract. In the case at bar the plaintiff could establish prima facie his sole ownership by the bill of sale from Smith, Bell and Co. and the official registration. The defendant, on his part, might overthrow this title by proof through a certain subsequent agreement between him and the plaintiff, dated March 16, 1902, that they had become owners in common of the vessel, 'the agreement not disclosing the illegal motive for placing the formal title in the plaintiff. Such an ownership is not in itself prohibited, for the United States courts recognize the equitable ownership of a vessel as against the holder of a legal title, where the arrangement is not one in fraud of the law. (Weston vs. Penniman, Federal Case 17455; Scudder vs. Calais Steamboat Company, Federal Case 12566.). On this proof, the defendant being a part owner of the vessel, would have defeated the action for its exclusive possession by the plaintiff. The burden would then be cast upon the plaintiff to show the illegality of the arrangement, which the cases cited he would not be allowed to do. The rule was reaffirmed in Lima vs. Lini Chu Kao, 51 Phil. 477. The situation confronting us is exactly analogous. The appellant seeks recovery of the disputed land on the strength of a donation

regular on its face. To defeat its effect, the appellees must plead and prove that the same is illegal. But such plea on the part of the Lopez heirs is not receivable, since Lopez, himself, if living, would be barred from setting up that plea; and his heirs, as his privies and successors in interest, can have no better rights than Lopez himself. Appellees, as successors of the late donor, being thus precluded from pleading the defense of immorality or illegal causa of the donation, the total or partial ineffectiveness of the same must be decided by different legal principles. In this regard, the Court of Appeals correctly held that Lopez could not donate the entirety of the property in litigation, to the prejudice of his wife Maria Ngo, because said property was conjugal in character and the right of the husband to donate community property is strictly limited by law (Civil Code of 1889, Arts. 1409, 1415, 1413; Baello vs. Villanueva, 54 Phil. 213). ART. 1409. The conjugal partnership shall also be chargeable with anything which may have been given or promised by the husband alone to the children born of the marriage in order to obtain employment for them or give then, a profession or by both spouses by common consent, should they not have stipulated that such expenditures should be borne in whole or in part by the separate property of one of them.". ART. 1415. The husband may dispose of the property of the conjugal partnership for the purposes mentioned in Article 1409.) ART. 1413. In addition to his powers as manager the husband may for a valuable consideration alienate and encumber the property of the conjugal partnership without the consent of the wife. The text of the articles makes it plain that the donation made by the husband in contravention of law is not void in its entirety, but only in so far as it prejudices the interest of the wife. In this regard, as Manresa points out (Commentaries, 5th Ed., pp. 650651, 652-653), the law asks no distinction between gratuitous transfers and conveyances for a consideration.


Puede la mujer como proprietaria hacer anular las donaciones aun durante el matrimonio? Esta es, en suma, la cuestion, reducida a determinar si la distinta naturaleza entre los actos a titulo oneroso y los actos a titulo lucrativo, y sus especiales y diversas circunstancias, pueden motivar una solucion diferente en cuanto a la epoca en que la mujer he de reclamar y obtener la nulidad del acto; cuestion que no deja de ser interesantisima.lawphi1.net El Codigo, a pesar de la variacion que ha introducido en el proyecto de 1851, poniendo como segundo parrafo del articulo 1.413, o como limitacion de las enajenaciones u obligaciones a titulo oneroso, lo que era una limitacion general de todos los actos del marido, muestra, sin embargo, que no ha variado de criterio y que para el las donaciones deben en todo equipararse a cualquier otro acto ilegal o frraudulento de caracter oneroso, al decir en el art. 1.419: "Tambien se traera a colacion en el inventario de la sociedad— el importe de las donaciones y enajenaciones que deban considerarse ilegales o fraudulentas, con sujecion al art. 1.413.' (Debio tambien citarse el articulo 1.415, que es el que habla de donaciones.)lawphi1.net "En resumen: el marido solo puede donar los bienes gananciales dentro de los limites marcados en el art. 1.415. Sin embargo, solo la mujer o sus herederos pueden reclamar contra la valides de la donacion, pues solo en su interes establece la prohibicion. La mujer o sus herederos, para poder dejar sin efecto el acto, han de sufrir verdadero perjuicio, entendiendose que no le hay hasta, tanto que, terminada por cualquier causa la sociedad de gananciales, y hecha su liquidacion, no pueda imputarse lo donado al haber por cualquier concepto del marido, ni obtener en su consecuencia la mujer la dibida indemnizacion. La donacioni reviste por tanto legalmente, una eficacia condicional, y en armonia con este caracter, deben fijarse los efectos de la misma con relacion a los adquirentes y a los terceros poseedores, teniendo, en su caso, en cuenta lo dispuesto en la ley Hipotecaria. Para prevenir todo perjuicio, puede la mujer, durante el matrimonio inmediatamente al acto, hacer constar ante los

Tribunales su existencia y solicitor medidas de precaucion, como ya se ha dicho. Para evitarlo en lo sucesivo, y cuando las circunstancias lo requieran, puede instar la declaracion de prodigalidad. To determine the prejudice to the widow, it must be shown that the value of her share in the property donated can not be paid out of the husband's share of the community profits. The requisite data, however, are not available to us and necessitate a remand of the records to the court of origin that settled the estate of the late Salvador P. Lopez. The situation of the children and forced heirs of Lopez approximates that of the widow. As privies of their parent, they are barred from invoking the illegality of the donation. But their right to a legitime out of his estate is not thereby affected, since the legitime is granted them by the law itself, over and above the wishes of the deceased. Hence, the forced heirs are entitled to have the donation set aside in so far as in officious: i.e., in excess of the portion of free disposal (Civil Code of 1889, Articles 636, 654) computed as provided in Articles 818 and 819, and bearing in mind that "collationable gifts" under Article 818 should include gifts made not only in favor of the forced heirs, but even those made in favor of strangers, as decided by the Supreme Court of Spain in its decisions of 4 May 1899 and 16 June 1902. So that in computing the legitimes, the value of the property to herein appellant, Conchita Liguez, should be considered part of the donor's estate. Once again, only the court of origin has the requisite date to determine whether the donation is inofficious or not. With regard to the improvements in the land in question, the same should be governed by the rules of accession and possession in good faith, it being undisputed that the widow and heirs of Lopez were unaware of the donation in favor of the appellant when the improvements were made. The appellees, relying on Galion vs. Garayes, 53 Phil. 43, contend that by her failure to appear at the liquidation proceedings of the estate of Salvador P. Lopez in July 1943, the appellant has


forfeited her right to uphold the donation if the prejudice to the widow Maria Ngo resulting from the donation could be made good out of the husband's share in the conjugal profits. It is also argued that appellant was guilty of laches in failing to enforce her rights as donee until 1951. This line of argument overlooks the capital fact that in 1943, appellant was still a minor of sixteen; and she did not reach the age of majority until 1948. Hence, her action in 1951 was only delayed three years. Nor could she be properly expected to intervene in the settlement of the estate of Lopez: first, because she was a minor during the great part of the proceedings; second, because she was not given notice thereof ; and third, because the donation did not make her a creditor of the estate. As we have ruled in Lopez vs. Olbes, 15 Phil. 547-548: The prima facie donation inter vivos and its acceptance by the donees having been proved by means of a public instrument, and the donor having been duly notified of said acceptance, the contract is perfect and obligatory and it is perfectly in order to demand its fulfillment, unless an exception is proved which is based on some legal reason opportunely alleged by the donor or her heirs. So long as the donation in question has not been judicially proved and declared to be null, inefficacious, or irregular, the land donated is of the absolute ownership of the donees and consequently, does not form a part of the property of the estate of the deceased Martina Lopez; wherefore the action instituted demanding compliance with the contract, the delivery by the deforciant of the land donated, or that it be, prohibited to disturb the right of the donees, should not be considered as incidental to the probate proceedings aforementioned. The case of Galion vs. Gayares, supra, is not in point. First, because that case involved a stimulated transfer that case have no effect, while a donation with illegal causa may produce effects under certain circumstances where the parties are not of equal guilt; and again, because the transferee in the Galion case took the property subject to lis pendens notice, that in this case does not exist.

In view of the foregoing, the decisions appealed from are reversed and set aside, and the appellant Conchita Liguez declared entitled to so much of the donated property as may be found, upon proper liquidation, not to prejudice the share of the widow Maria Ngo in the conjugal partnership with Salvador P. Lopez or the legitimes of the forced heirs of the latter. The records are ordered remanded to the court of origin for further proceedings in accordance with this opinion. Costs against appellees. So ordered. Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, and Endencia, JJ., concur. 184. G.R. No. L-17587 September 12, 1967 PHILIPPINE BANKING CORPORATION, representing the estate of JUSTINA SANTOS Y CANON FAUSTINO, deceased, plaintiff-appellant, vs. LUI SHE in her own behalf and as administratrix of the intestate estate of Wong Heng, deceased, defendantappellant. Nicanor S. Sison for plaintiff-appellant.   Ozaeta, Gibbs & Ozaeta for defendant-appellant. CASTRO, J.: Justina Santos y Canon Faustino and her sister Lorenzo were the owners in common of a piece of land in Manila. This parcel, with an area of 2,582.30 square meters, is located on Rizal Avenue and opens into Florentino Torres street at the back and Katubusan street on one side. In it are two residential houses with entrance on Florentino Torres street and the Hen Wah Restaurant with entrance on Rizal Avenue. The sisters lived in one of the houses, while Wong Heng, a Chinese, lived with his family in the restaurant. Wong had been a long-time lessee of a portion of the


property, paying a monthly rental of P2,620. On September 22, 1957 Justina Santos became the owner of the entire property as her sister died with no other heir. Then already well advanced in years, being at the time 90 years old, blind, crippled and an invalid, she was left with no other relative to live with. Her only companions in the house were her 17 dogs and 8 maids. Her otherwise dreary existence was brightened now and then by the visits of Wong's four children who had become the joy of her life. Wong himself was the trusted man to whom she delivered various amounts for safekeeping, including rentals from her property at the corner of Ongpin and Salazar streets and the rentals which Wong himself paid as lessee of a part of the Rizal Avenue property. Wong also took care of the payment; in her behalf, of taxes, lawyers' fees, funeral expenses, masses, salaries of maids and security guard, and her household expenses. "In grateful acknowledgment of the personal services of the lessee to her," Justina Santos executed on November 15, 1957 a contract of lease (Plff Exh. 3) in favor of Wong, covering the portion then already leased to him and another portion fronting Florentino Torres street. The lease was for 50 years, although the lessee was given the right to withdraw at any time from the agreement; the monthly rental was P3,120. The contract covered an area of 1,124 square meters. Ten days later (November 25), the contract was amended (Plff Exh. 4) so as to make it cover the entire property, including the portion on which the house of Justina Santos stood, at an additional monthly rental of P360. For his part Wong undertook to pay, out of the rental due from him, an amount not exceeding P1,000 a month for the food of her dogs and the salaries of her maids. On December 21 she executed another contract (Plff Exh. 7) giving Wong the option to buy the leased premises for P120,000, payable within ten years at a monthly installment of P1,000. The option, written in Tagalog, imposed on him the obligation to pay for the food of the dogs and the salaries of the maids in her household, the charge not to exceed P1,800 a month. The option

was conditioned on his obtaining Philippine citizenship, a petition for which was then pending in the Court of First Instance of Rizal. It appears, however, that this application for naturalization was withdrawn when it was discovered that he was not a resident of Rizal. On October 28, 1958 she filed a petition to adopt him and his children on the erroneous belief that adoption would confer on them Philippine citizenship. The error was discovered and the proceedings were abandoned. On November 18, 1958 she executed two other contracts, one (Plff Exh. 5) extending the term of the lease to 99 years, and another (Plff Exh. 6) fixing the term of the option of 50 years. Both contracts are written in Tagalog. In two wills executed on August 24 and 29, 1959 (Def Exhs. 285 & 279), she bade her legatees to respect the contracts she had entered into with Wong, but in a codicil (Plff Exh. 17) of a later date (November 4, 1959) she appears to have a change of heart. Claiming that the various contracts were made by her because of machinations and inducements practiced by him, she now directed her executor to secure the annulment of the contracts. On November 18 the present action was filed in the Court of First Instance of Manila. The complaint alleged that the contracts were obtained by Wong "through fraud, misrepresentation, inequitable conduct, undue influence and abuse of confidence and trust of and (by) taking advantage of the helplessness of the plaintiff and were made to circumvent the constitutional provision prohibiting aliens from acquiring lands in the Philippines and also of the Philippine Naturalization Laws." The court was asked to direct the Register of Deeds of Manila to cancel the registration of the contracts and to order Wong to pay Justina Santos the additional rent of P3,120 a month from November 15, 1957 on the allegation that the reasonable rental of the leased premises was P6,240 a month. In his answer, Wong admitted that he enjoyed her trust and confidence as proof of which he volunteered the information that, in addition to the sum of P3,000 which he said she had delivered to him for safekeeping, another sum of P22,000 had been


deposited in a joint account which he had with one of her maids. But he denied having taken advantage of her trust in order to secure the execution of the contracts in question. As counterclaim he sought the recovery of P9,210.49 which he said she owed him for advances. Wong's admission of the receipt of P22,000 and P3,000 was the cue for the filing of an amended complaint. Thus on June 9, 1960, aside from the nullity of the contracts, the collection of various amounts allegedly delivered on different occasions was sought. These amounts and the dates of their delivery are P33,724.27 (Nov. 4, 1957); P7,344.42 (Dec. 1, 1957); P10,000 (Dec. 6, 1957); P22,000 and P3,000 (as admitted in his answer). An accounting of the rentals from the Ongpin and Rizal Avenue properties was also demanded. In the meantime as a result of a petition for guardianship filed in the Juvenile and Domestic Relations Court, the Security Bank & Trust Co. was appointed guardian of the properties of Justina Santos, while Ephraim G. Gochangco was appointed guardian of her person. In his answer, Wong insisted that the various contracts were freely and voluntarily entered into by the parties. He likewise disclaimed knowledge of the sum of P33,724.27, admitted receipt of P7,344.42 and P10,000, but contended that these amounts had been spent in accordance with the instructions of Justina Santos; he expressed readiness to comply with any order that the court might make with respect to the sums of P22,000 in the bank and P3,000 in his possession. The case was heard, after which the lower court rendered judgment as follows: [A]ll the documents mentioned in the first cause of action, with the exception of the first which is the lease contract of 15 November 1957, are declared null and void; Wong Heng is condemned to pay unto plaintiff thru guardian of her property the sum of P55,554.25 with legal interest from the date of the filing of the amended complaint; he is also ordered to pay the sum of P3,120.00 for every month of his occupation as lessee

under the document of lease herein sustained, from 15 November 1959, and the moneys he has consigned since then shall be imputed to that; costs against Wong Heng. From this judgment both parties appealed directly to this Court. After the case was submitted for decision, both parties died, Wong Heng on October 21, 1962 and Justina Santos on December 28, 1964. Wong was substituted by his wife, Lui She, the other defendant in this case, while Justina Santos was substituted by the Philippine Banking Corporation. Justina Santos maintained — now reiterated by the Philippine Banking Corporation — that the lease contract (Plff Exh. 3) should have been annulled along with the four other contracts (Plff Exhs. 4-7) because it lacks mutuality; because it included a portion which, at the time, was in custodia legis; because the contract was obtained in violation of the fiduciary relations of the parties; because her consent was obtained through undue influence, fraud and misrepresentation; and because the lease contract, like the rest of the contracts, is absolutely simulated. Paragraph 5 of the lease contract states that "The lessee may at any time withdraw from this agreement." It is claimed that this stipulation offends article 1308 of the Civil Code which provides that "the contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them." We have had occasion to delineate the scope and application of article 1308 in the early case of Taylor v. Uy Tieng Piao.1 We said in that case: Article 1256 [now art. 1308] of the Civil Code in our opinion creates no impediment to the insertion in a contract for personal service of a resolutory condition permitting the cancellation of the contract by one of the parties. Such a stipulation, as can be readily seen, does not make either the validity or the fulfillment of the contract dependent upon the will of the party to whom is conceded the privilege of cancellation; for where the contracting parties have agreed that such option shall exist, the exercise of the option is as much in the fulfillment of the contract as any other act which may have been the subject of agreement. Indeed,


the cancellation of a contract in accordance with conditions agreed upon beforehand is fulfillment.2 And so it was held in Melencio v. Dy Tiao Lay 3 that a "provision in a lease contract that the lessee, at any time before he erected any building on the land, might rescind the lease, can hardly be regarded as a violation of article 1256 [now art. 1308] of the Civil Code." The case of Singson Encarnacion v. Baldomar 4 cannot be cited in support of the claim of want of mutuality, because of a difference in factual setting. In that case, the lessees argued that they could occupy the premises as long as they paid the rent. This is of course untenable, for as this Court said, "If this defense were to be allowed, so long as defendants elected to continue the lease by continuing the payment of the rentals, the owner would never be able to discontinue it; conversely, although the owner should desire the lease to continue the lessees could effectively thwart his purpose if they should prefer to terminate the contract by the simple expedient of stopping payment of the rentals." Here, in contrast, the right of the lessee to continue the lease or to terminate it is so circumscribed by the term of the contract that it cannot be said that the continuance of the lease depends upon his will. At any rate, even if no term had been fixed in the agreement, this case would at most justify the fixing of a period5 but not the annulment of the contract. Nor is there merit in the claim that as the portion of the property formerly owned by the sister of Justina Santos was still in the process of settlement in the probate court at the time it was leased, the lease is invalid as to such portion. Justina Santos became the owner of the entire property upon the death of her sister Lorenzo on September 22, 1957 by force of article 777 of the Civil Code. Hence, when she leased the property on November 15, she did so already as owner thereof. As this Court explained in upholding the sale made by an heir of a property under judicial administration: That the land could not ordinarily be levied upon while in custodia legis does not mean that one of the heirs may not sell the

right, interest or participation which he has or might have in the lands under administration. The ordinary execution of property in custodia legis is prohibited in order to avoid interference with the possession by the court. But the sale made by an heir of his share in an inheritance, subject to the result of the pending administration, in no wise stands in the way of such administration.6 It is next contended that the lease contract was obtained by Wong in violation of his fiduciary relationship with Justina Santos, contrary to article 1646, in relation to article 1941 of the Civil Code, which disqualifies "agents (from leasing) the property whose administration or sale may have been entrusted to them." But Wong was never an agent of Justina Santos. The relationship of the parties, although admittedly close and confidential, did not amount to an agency so as to bring the case within the prohibition of the law. Just the same, it is argued that Wong so completely dominated her life and affairs that the contracts express not her will but only his. Counsel for Justina Santos cites the testimony of Atty. Tomas S. Yumol who said that he prepared the lease contract on the basis of data given to him by Wong and that she told him that "whatever Mr. Wong wants must be followed."7 The testimony of Atty. Yumol cannot be read out of context in order to warrant a finding that Wong practically dictated the terms of the contract. What this witness said was: Q Did you explain carefully to your client, Doña Justina, the contents of this document before she signed it? A I explained to her each and every one of these conditions and I also told her these conditions were quite onerous for her, I don't really know if I have expressed my opinion, but I told her that we would rather not execute any contract anymore, but to hold it as it was before, on a verbal month to month contract of lease. Q But, she did not follow your advice, and she went with the contract just the same? A She agreed first . . . Q Agreed what?


A Agreed with my objectives that it is really onerous and that I was really right, but after that, I was called again by her and she told me to follow the wishes of Mr. Wong Heng. x x x x x x x x x Q So, as far as consent is concerned, you were satisfied that this document was perfectly proper? x x x x x x x x x A Your Honor, if I have to express my personal opinion, I would say she is not, because, as I said before, she told me — "Whatever Mr. Wong wants must be followed."8 Wong might indeed have supplied the data which Atty. Yumol embodied in the lease contract, but to say this is not to detract from the binding force of the contract. For the contract was fully explained to Justina Santos by her own lawyer. One incident, related by the same witness, makes clear that she voluntarily consented to the lease contract. This witness said that the original term fixed for the lease was 99 years but that as he doubted the validity of a lease to an alien for that length of time, he tried to persuade her to enter instead into a lease on a monthto-month basis. She was, however, firm and unyielding. Instead of heeding the advice of the lawyer, she ordered him, "Just follow Mr. Wong Heng."9 Recounting the incident, Atty. Yumol declared on cross examination: Considering her age, ninety (90) years old at the time and her condition, she is a wealthy woman, it is just natural when she said "This is what I want and this will be done." In particular reference to this contract of lease, when I said "This is not proper," she said — "You just go ahead, you prepare that, I am the owner, and if there is any illegality, I am the only one that can question the illegality."10 Atty. Yumol further testified that she signed the lease contract in the presence of her close friend, Hermenegilda Lao, and her maid, Natividad Luna, who was constantly by her side.11 Any of them could have testified on the undue influence that Wong supposedly wielded over Justina Santos, but neither of them was presented as a witness. The truth is that even after giving his

client time to think the matter over, the lawyer could not make her change her mind. This persuaded the lower court to uphold the validity of the lease contract against the claim that it was procured through undue influence. Indeed, the charge of undue influence in this case rests on a mere inference12 drawn from the fact that Justina Santos could not read (as she was blind) and did not understand the English language in which the contract is written, but that inference has been overcome by her own evidence. Nor is there merit in the claim that her consent to the lease contract, as well as to the rest of the contracts in question, was given out of a mistaken sense of gratitude to Wong who, she was made to believe, had saved her and her sister from a fire that destroyed their house during the liberation of Manila. For while a witness claimed that the sisters were saved by other persons (the brothers Edilberto and Mariano Sta. Ana)13 it was Justina Santos herself who, according to her own witness, Benjamin C. Alonzo, said "very emphatically" that she and her sister would have perished in the fire had it not been for Wong.14 Hence the recital in the deed of conditional option (Plff Exh. 7) that "[I]tong si Wong Heng ang siyang nagligtas sa aming dalawang magkapatid sa halos ay tiyak na kamatayan", and the equally emphatic avowal of gratitude in the lease contract (Plff Exh. 3). As it was with the lease contract (Plff Exh. 3), so it was with the rest of the contracts (Plff Exhs. 4-7) — the consent of Justina Santos was given freely and voluntarily. As Atty. Alonzo, testifying for her, said: [I]n nearly all documents, it was either Mr. Wong Heng or Judge Torres and/or both. When we had conferences, they used to tell me what the documents should contain. But, as I said, I would always ask the old woman about them and invariably the old woman used to tell me: "That's okay. It's all right."15 But the lower court set aside all the contracts, with the exception of the lease contract of November 15, 1957, on the ground that they are contrary to the expressed wish of Justina Santos and that their considerations are fictitious. Wong stated in his deposition


that he did not pay P360 a month for the additional premises leased to him, because she did not want him to, but the trial court did not believe him. Neither did it believe his statement that he paid P1,000 as consideration for each of the contracts (namely, the option to buy the leased premises, the extension of the lease to 99 years, and the fixing of the term of the option at 50 years), but that the amount was returned to him by her for safekeeping. Instead, the court relied on the testimony of Atty. Alonzo in reaching the conclusion that the contracts are void for want of consideration. Atty. Alonzo declared that he saw no money paid at the time of the execution of the documents, but his negative testimony does not rule out the possibility that the considerations were paid at some other time as the contracts in fact recite. What is more, the consideration need not pass from one party to the other at the time a contract is executed because the promise of one is the consideration for the other.16 With respect to the lower court's finding that in all probability Justina Santos could not have intended to part with her property while she was alive nor even to lease it in its entirety as her house was built on it, suffice it to quote the testimony of her own witness and lawyer who prepared the contracts (Plff Exhs. 4-7) in question, Atty. Alonzo: The ambition of the old woman, before her death, according to her revelation to me, was to see to it that these properties be enjoyed, even to own them, by Wong Heng because Doña Justina told me that she did not have any relatives, near or far, and she considered Wong Heng as a son and his children her grandchildren; especially her consolation in life was when she would hear the children reciting prayers in Tagalog.17 She was very emphatic in the care of the seventeen (17) dogs and of the maids who helped her much, and she told me to see to it that no one could disturb Wong Heng from those properties. That is why we thought of the ninety-nine (99) years lease; we thought of adoption, believing that thru adoption Wong Heng might acquire Filipino citizenship; being the adopted child of a Filipino

citizen.18 This is not to say, however, that the contracts (Plff Exhs. 3-7) are valid. For the testimony just quoted, while dispelling doubt as to the intention of Justina Santos, at the same time gives the clue to what we view as a scheme to circumvent the Constitutional prohibition against the transfer of lands to aliens. "The illicit purpose then becomes the illegal causa"19 rendering the contracts void. Taken singly, the contracts show nothing that is necessarily illegal, but considered collectively, they reveal an insidious pattern to subvert by indirection what the Constitution directly prohibits. To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to buy real property on condition that he is granted Philippine citizenship. As this Court said in Krivenko v. Register of Deeds:20 [A]liens are not completely excluded by the Constitution from the use of lands for residential purposes. Since their residence in the Philippines is temporary, they may be granted temporary rights such as a lease contract which is not forbidden by the Constitution. Should they desire to remain here forever and share our fortunes and misfortunes, Filipino citizenship is not impossible to acquire. But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the Filipino owner cannot sell or otherwise dispose of his property,21 this to last for 50 years, then it becomes clear that the arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only of the right to enjoy the land ( jus possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to dispose of it ( jus disponendi) — rights the sum total of which make up ownership. It is just as if today the possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this case did within the space of one year, with the result that Justina Santos' ownership of her property was reduced to a hollow concept. If this can be done, then the


Constitutional ban against alien landholding in the Philippines, as announced in Krivenko v. Register of Deeds,22 is indeed in grave peril. It does not follow from what has been said, however, that because the parties are in pari delicto they will be left where they are, without relief. For one thing, the original parties who were guilty of a violation of the fundamental charter have died and have since been substituted by their administrators to whom it would be unjust to impute their guilt.23 For another thing, and this is not only cogent but also important, article 1416 of the Civil Code provides, as an exception to the rule on pari delicto, that "When the agreement is not illegal per se but is merely prohibited, and the prohibition by law is designed for the protection of the plaintiff, he may, if public policy is thereby enhanced, recover what he has paid or delivered." The Constitutional provision that "Save in cases of hereditary succession, no private agricultural land shall be transferred or assigned except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain in the Philippines"24 is an expression of public policy to conserve lands for the Filipinos. As this Court said in Krivenko: It is well to note at this juncture that in the present case we have no choice. We are construing the Constitution as it is and not as we may desire it to be. Perhaps the effect of our construction is to preclude aliens admitted freely into the Philippines from owning sites where they may build their homes. But if this is the solemn mandate of the Constitution, we will not attempt to compromise it even in the name of amity or equity . . . . For all the foregoing, we hold that under the Constitution aliens may not acquire private or public agricultural lands, including residential lands, and, accordingly, judgment is affirmed, without costs.25 That policy would be defeated and its continued violation sanctioned if, instead of setting the contracts aside and ordering the restoration of the land to the estate of the deceased Justina Santos, this Court should apply the general rule of pari delicto. To

the extent that our ruling in this case conflicts with that laid down in Rellosa v. Gaw Chee Hun 26 and subsequent similar cases, the latter must be considered as pro tanto qualified. The claim for increased rentals and attorney's fees, made in behalf of Justina Santos, must be denied for lack of merit. And what of the various amounts which Wong received in trust from her? It appears that he kept two classes of accounts, one pertaining to amount which she entrusted to him from time to time, and another pertaining to rentals from the Ongpin property and from the Rizal Avenue property, which he himself was leasing. With respect to the first account, the evidence shows that he received P33,724.27 on November 8, 1957 (Plff Exh. 16); P7,354.42 on December 1, 1957 (Plff Exh. 13); P10,000 on December 6, 1957 (Plff Exh. 14) ; and P18,928.50 on August 26, 1959 (Def. Exh. 246), or a total of P70,007.19. He claims, however, that he settled his accounts and that the last amount of P18,928.50 was in fact payment to him of what in the liquidation was found to be due to him. He made disbursements from this account to discharge Justina Santos' obligations for taxes, attorneys' fees, funeral services and security guard services, but the checks (Def Exhs. 247-278) drawn by him for this purpose amount to only P38,442.84.27 Besides, if he had really settled his accounts with her on August 26, 1959, we cannot understand why he still had P22,000 in the bank and P3,000 in his possession, or a total of P25,000. In his answer, he offered to pay this amount if the court so directed him. On these two grounds, therefore, his claim of liquidation and settlement of accounts must be rejected. After subtracting P38,442.84 (expenditures) from P70,007.19 (receipts), there is a difference of P31,564 which, added to the amount of P25,000, leaves a balance of P56,564.3528 in favor of Justina Santos. As to the second account, the evidence shows that the monthly income from the Ongpin property until its sale in Rizal Avenue July, 1959 was P1,000, and that from the Rizal Avenue property,


of which Wong was the lessee, was P3,120. Against this account the household expenses and disbursements for the care of the 17 dogs and the salaries of the 8 maids of Justina Santos were charged. This account is contained in a notebook (Def. Exh. 6) which shows a balance of P9,210.49 in favor of Wong. But it is claimed that the rental from both the Ongpin and Rizal Avenue properties was more than enough to pay for her monthly expenses and that, as a matter of fact, there should be a balance in her favor. The lower court did not allow either party to recover against the other. Said the court: [T]he documents bear the earmarks of genuineness; the trouble is that they were made only by Francisco Wong and Antonia Matias, nick-named Toning, — which was the way she signed the loose sheets, and there is no clear proof that Doña Justina had authorized these two to act for her in such liquidation; on the contrary if the result of that was a deficit as alleged and sought to be there shown, of P9,210.49, that was not what Doña Justina apparently understood for as the Court understands her statement to the Honorable Judge of the Juvenile Court . . . the reason why she preferred to stay in her home was because there she did not incur in any debts . . . this being the case, . . . the Court will not adjudicate in favor of Wong Heng on his counterclaim; on the other hand, while it is claimed that the expenses were much less than the rentals and there in fact should be a superavit, . . . this Court must concede that daily expenses are not easy to compute, for this reason, the Court faced with the choice of the two alternatives will choose the middle course which after all is permitted by the rules of proof, Sec. 69, Rule 123 for in the ordinary course of things, a person will live within his income so that the conclusion of the Court will be that there is neither deficit nor superavit and will let the matter rest here. Both parties on appeal reiterate their respective claims but we agree with the lower court that both claims should be denied. Aside from the reasons given by the court, we think that the claim of Justina Santos totalling P37,235, as rentals due to her after deducting various expenses, should be rejected as the evidence is

none too clear about the amounts spent by Wong for food29 masses30 and salaries of her maids.31 His claim for P9,210.49 must likewise be rejected as his averment of liquidation is belied by his own admission that even as late as 1960 he still had P22,000 in the bank and P3,000 in his possession. ACCORDINGLY, the contracts in question (Plff Exhs. 3-7) are annulled and set aside; the land subject-matter of the contracts is ordered returned to the estate of Justina Santos as represented by the Philippine Banking Corporation; Wong Heng (as substituted by the defendant-appellant Lui She) is ordered to pay the Philippine Banking Corporation the sum of P56,564.35, with legal interest from the date of the filing of the amended complaint; and the amounts consigned in court by Wong Heng shall be applied to the payment of rental from November 15, 1959 until the premises shall have been vacated by his heirs. Costs against the defendant-appellant. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Angeles, JJ., concur. 185. G.R. No. L-45255 November 14, 1986 HEIRS OF MARCIANA G. AVILA, petitioners, vs. HON. COURT OF APPEALS, and ALADINO CH. BACARRISAS, respondents. Ruben M. Orteza for petitioner. Abeto D. Salcedo for private respondent. PARAS, J.: This is a petition for review on certiorari of the October 6, 1976 Decision of the Court of Appeals in CA-G.R. No. SP-05598 (Aladino Ch. Bacarrisas vs. Hon. Benjamin K. Gorospe, et al), granting certiorari and setting aside the Order of respondent Judge dated May 24, 1976.


In 1939, the Court of First Instance of Misamis Oriental, as a cadastral court, adjudicated Lots 594 and 828 of the Cadastral Survey of Cagayan to Paz Chavez. But because Paz Chavez failed to pay the property taxes of Lot 594, the government offered the same for sale at a public auction. Marciana G. Avila, a teacher, wife of Leonardo Avila and the mother of the herein petitioners, participated in and won the bidding. Despite the provision of Section 579 of the Revised Administrative Code prohibiting public school teachers from buying delinquent properties, nobody, not even the government questioned her participation in said auction sale. In fact on February 20, 1940, after the expiration of the redemption period, the Provincial Treasurer executed in her favor the final bill of sale. (Rollo, pp. 10-11). Sometime in 1947, OCT Nos. 100 and 101, covering said Lots 594 and 828, were issued in favor of Paz Chavez. In opposition thereto, private respondents filed a petition for review of the decrees on August 25, 1947 at the Court of First Instance of Misamis Oriental, Branch II, in Cadastral Case No. 17, Lot No. 594 entitled "The Director of Lands, Applicant v. Atanacia Abalde, et al., Claimants in Re: Petition for Review of Decree, Marciana G. Avila, Petitioner vs. Paz Chavez, Respondents." After hearing on the merits, the Cadastral Court promulgated a Decision, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered SETTING ASIDE the decision of this Court of December 13, 1940, which adjudicated the lots in question in favor of respondent Paz Chavez, and declaring NULL and VOID Decrees Nos. 433 and 434 issued by the Chief of Land Registration Office on June 19, 1947 as well as the certification of title covering Lots Nos. 594 and 828 of the Cadastral Survey of Cagayan issued by the Register of Deeds. Judgment is also hereby rendered adjudicating said Lot No. 594 to the heirs of the late Marciana G. Avila, namely: ..., all residents of Malaybalay, Bukidnon, and Lot 828 of the same cadastre to Leonardo Avila, Sr., also of Malaybalay, subject to whatever RIGHTS OF WAY or EASEMENTS which the government of the Philippines or any of its instrumentalities may have acquire over

said Lots. The Clerk of Court is hereby directed to send copies of this decision to the Chief of the Land Registration Commission, the Provincial Fiscal the Provincial Treasurer, and the Director of Lands. Once this decision has become final, the Chief of Land Registration Commission shall issue the corresponding decrees and certificate of title in favor of the above-mentioned heirs of Marciana G. Avila and in favor of Leonardo Avila, Sr. Paz Chavez appealed the said decision with the Court of Appeals, docketed therein as CA-G.R. No. 38129-R. The Court of Appeals rendered a Decision on March 20, 1974, the pertinent portion of which, reads: The legal prohibition cited, therefore, would taint the title of Marciana G. Avila over Lot 594, with a flaw sufficient to make said title not proper for registration, specially as against the government, who has not (sic) impleaded in the proceedings, on the petition for review of the decree, to be heard as to whether it would resist the registration of said lot in favor of Marciana G. Avila. In view of the foregoing, judgment is hereby rendered modifying the decision appealed from by disallowing the registration of Lot No. 594 in the name of Marciana G. Avila, but affirming said decision in all other respects, with costs against appellant. Let a copy of this decision be furnished the Solicitor General and the Provincial Fiscal of Misamis Oriental for their information and guidance. (Rollo, pp. 11-12). Upon remand of the records to the Court below, Avila moved for execution, and a writ of possession which was opposed by Paz Chavez, who was succeeded by the herein private respondent Aladino Ch. Bacarrisas on the alleged ground that he has the actual and physical possession of Lot 594 where his residential house has stood since 1946. Private respondent's Urgent Motion for Correction of Writ of Execution having been denied, a certiorari and mandamus with preliminary injunction suit was filed with the Court of Appeals, which was docketed therein as CA-SP-05598, alleging, among


other things, that inasmuch as the Court of Appeals in CA-G.R. No. 38129-R modified the trial court's decision by disallowing the registration of Lot 594 in favor of the Avilas, the latter have no interest, right, claims, title or participation in Lot No. 594 to which they could claim possession. (Petitioner's Brief, Rollo, pp. 61-63). On said petition, the Court of Appeals, in a Decision dated October 6, 1976, declared: CONSIDERING: That decision of cadastral court adjudicating Lot 594 was "disallowed" by this Court of Appeals, the fact that said decision had also annulled the decree and title of Chavez to the same in the petition for review, in the mind of tills Court, did not produce the effect of adjudicating, in categorical terms, the possession of Lot 594 in favor of Avila, there is nothing in the dispositive part nor even in the body of the decision of this CAG.R. No. 38129-R that says that, and since the question here presented is whether or not cadastral court should place Avila in possession thru a writ of execution, and since the writ of execution is nothing more, nothing less, than a writ of possession, and since that writ is given only to the party in the land registration or cadastral case in whose favor decree had been issued, Manlapas v. Liorente, 48 Phil. 298, or if not a decree, at least, a judgment of confirmation of title, Director of Lands v. CFI of Tarlac, 51 Phil. 806,-this must mean that when respondent Court herein issued the writ of execution as to Lot 594, there really was no legal basis for the same; for Avila had not secured a decree, nor a judgment of confirmation of title over said Lot 594, since from the fact that this Court of Appeals had affirmed the decision of cadastral court annulling Chavez (Bacarrisas) to Lot 594, it would not follow that this Court of Appeals had decreed, or in the least, adjudged, that it was Avila who was the owner entitled to its possession, the conclusion can not follow from the premise; therefore the writ of execution as to Lot 594 has to be ruled to have been improvidently issued, and there being no other adequate relief available unto Bacarrisas, the remedy of certiorari by him chosen was correct. IN VIEW WHEREOF, this Court is constrained to grant as it now

grants certiorari, order sought to be annulled is set aside, with costs against respondent Avila. (Rollo, pp. 27-28). Petitioners filed a motion for reconsideration but the same was denied by the Court of Appeals in a Resolution dated November 29, 1976. Hence, this petition (Rollo, pp. 9-22). Respondent filed his Comment on February 28, 1977 (Ibid, pp. 34-37) in compliance with the resolution of the First Division of this Court dated January 31, 1977 (Ibid., p. 33). In a Resolution dated March 7, 1977, the First Division of this Court resolved to give due course to the petition (Ibid., p. 43). On March 20, 1977, petitioners filed their Brief (Ibid., pp. 58-72) while respondent filed his Brief on July 6, 1977 (Ibid., pp. 83-92) and petitioners their Reply Brief on August 17, 1977 (Ibid., pp. 100-107). In a Resolution dated August 29, 1977, the First Division of this Court resolved to declare this case submitted for decision (Ibid., p. 110.) The petitioners assigned the following alleged errors of the Court of Appeals- 1. THE HON. COURT OF APPEALS IN CA-G.R. SP-05598, OCTOBER 6, 1976, THE QUESTIONED DECISION, ERRED BECAUSE, WHEREAS SAID COURT PREVIOUSLY IN CA-G.R. No. L-38129-R, MARCH, 1974, MODIFIED THE DECISION OF THE COURT OF FIRST INSTANCE OF MISAMIS ORIENTAL BY DISALLOWING ONLY THE REGISTRATION OF LOT 594 BUT AFFIRMED THE ADJUDICATION THEREOF TO THE PETITIONERS, IN THE PRESENT QUESTIONED DECISION SAID COURT VIRTUALLY MODIFIED FURTHER THE PREVIOUS DECISION WHICH HAD LONG BECOME FINAL BY DISALLOWING BOTH THE REGISTRATION AND ADJUDICATION OF LOT 594; 2. THE HON. COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONERS ARE NOT ENTITLED TO POSSESSION OF LOT 594 BECAUSE, SINCE PETITIONERS' TITLE WAS RECOGNIZED BY SAID COURT PREVIOUSLY IN CA-G.R. NO. L-38129-R, MARCH, 1974, IT FOLLOWS THAT THEY ARE ENTITLED TO POSSESS LOT


594; 3. THE HON. COURT OF APPEALS ERRED IN THAT TO DENY POSSESSION OF LOT 594 TO THE PETITIONERS WHO WON IN CADASTRAL CASE NO. 17 OF THE COURT OF FIRST INSTANCE OF MISAMIS ORIENTAL, IS TO MAKE THE LOSERS IN SAID CASETHE PREDECESSOR-IN-INTEREST OF PRIVATE RESPONDENT WHOSE DECREES NOS. 433 and 434 COVERING LOTS 594 AND 828 WERE ORDERED CANCELLED FOR BEING NULL AND VOID, AS THE WINNER, A SITUATION MOST UNJUST AND UNFAIR; AND 4. THE HON COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT CORRECTLY CHOSE THE REMEDY OF certiorari FOR THE REASON THAT THERE IS NOTHING AT ALL IN THE RECORDS TO SHOW AN EXERCISE OF GRAVE ABUSE OF DISCRETION OR WHIMSICAL AND ARBITRARY EXERCISE THEREOF. The pivotal issue in this case is who has the right of possession of the land in question. Petitioners seek to distinguish between registration and adjudication of land under the Torrens System, claiming that in the March 20, 1974 Decision of the Court of Appeals in CA-G.R. No. 38129-R, registration of Lot No. 594 in favor of the late Marciana G. Avila was disallowed, but the adjudication thereof in her favor, was affirmed. In effect, it is their view that ownership and possession are separated in aforesaid decision, so that they assert that they are entitled to the possession of Lot 594, although they are not entitled to its registration in their names. Such contention is without merit. While it is true that Marciana Avila, their mother and predecessor-in-interest, purchased the questioned property at a public auction conducted by the government; paid the purchase price; and was issued a final bill of sale after the expiration of the redemption period, it is however undisputed that such purchase was prohibited under Section 579 of the Revised Administrative Code, as amended, which provides: Section 579. Inhibition against purchase of property at tax sale.-

Official and employees of the Government of the Republic of the Philippines are prohibited from purchasing, directly or indirectly, from the Government, any property sold by the Government for the non-payment of any public tax. Any such purchase by a public official or employee shall be void. Thus, the sale to her of Lot 594 is void. On the other hand, under Article 1409 of the Civil Code, a void contract is inexistent from the beginning. It cannot be ratified neither can the right to set up the defense of its illegality be waived. (Arsenal, et al. vs, The Intermediate Appellate Court. et al., G.R. No. 66696, July 14, 1986). Moreover, Marciana Avila was a party to an illegal transaction, and therefore, under Art. 1412 of the Civil Code, she cannot recover what she has given by reason of the contract or ask for the fulfillment of what has been promised her. Furthermore, in a registration case, the judgment confirming the title of the applicant and ordering its registration in his name necessarily carries with it the delivery of possession which is an inherent element of the right of ownership. (Abulocion et al. v. CFI of Iloilo, et al., 100 Phil. 553 [1956]). Hence, a writ of possession may be issued not only against the person who has been defeated in a registration case but also against anyone unlawfully and adversely occupying the land or any portion thereof during the land registration proceedings up to the issuance of the final decree. It is the duty of the registration court to issue said writ when asked for by the successful claimant. (Demorar v. Ibañez, etc., et al., 97 Phil. 72 [1955]; Abulocion et al v. CFI of Iloilo, et al., supra). Under the circumstances, possession cannot be claimed by petitioners, because their predecessor-in-interest besides being at fault is not the successful claimant in the registration proceedings and hence not entitled to a writ of possession. As correctly stated by the Court of Appeals when respondent Court issued the writ of execution as to Lot 594, there really was no legal basis for the same, for Avila had not secured a decree, nor a judgment of confirmation of title over said lot.


Much less can possession be claimed by private respondents as it is undisputed that the land in question has been the subject of a tax sale of delinquent property with a final bill of sale. Neither did the government file any claim for possession; nor appear to be impleaded in any of the actions or petitions before the Courts, Its only interest in the land in question appears to be in the collection of taxes. Consequently, the situation is evidently one of failure of ownership because of the violation of Section 579 of the Administrative Code. Otherwise stated, the property apparently has no owner. Under the principle that the State is the ultimate proprietor of land within its jurisdiction, subject land may be escheated in favor of the government upon filing of appropriate actions for reversion or escheat under Section 5, Rule 91 of the Rules of Court relative to properties alienated in violation of any statute. As to the last issue, it has already been ruled that certiorari is proper where the trial court has already issued a writ of execution of the questioned judgment, the issuance being a question of law. (Vda. de Sayman vs. Court of Appeals, 121 SCRA 650). PREMISES CONSIDERED, the October 6,1976 Decision of the Court of Appeals is hereby AFFIRMED. SO ORDERED. 186. G.R. No. L-65510 March 9, 1987 TEJA MARKETING AND/OR ANGEL JAUCIAN, petitioner, vs. HONORABLE INTERMEDIATE APPELLATE COURT * AND PEDRO N. NALE, respondents. Cirilo A. Diaz, Jr. for petitioner. Henry V. Briguera for private respondent.

PARAS, J.: "'Ex pacto illicito' non oritur actio" (No action arises out of illicit bargain) is the time-honored maxim that must be applied to the parties in the case at bar. Having entered into an illegal contract, neither can seek relief from the courts, and each must bear the consequences of his acts." (Lita Enterprises vs. IAC, 129 SCRA 81.) The factual background of this case is undisputed. The same is narrated by the respondent court in its now assailed decision, as follows: On May 9, 1975, the defendant bought from the plaintiff a motorcycle with complete accessories and a sidecar in the total consideration of P8,000.00 as shown by Invoice No. 144 (Exh. "A"). Out of the total purchase price the defendant gave a downpayment of P1,700.00 with a promise that he would pay plaintiff the balance within sixty days. The defendant, however, failed to comply with his promise and so upon his own request, the period of paying the balance was extended to one year in monthly installments until January 1976 when he stopped paying anymore. The plaintiff made demands but just the same the defendant failed to comply with the same thus forcing the plaintiff to consult a lawyer and file this action for his damage in the amount of P546.21 for attorney's fees and P100.00 for expenses of litigation. The plaintiff also claims that as of February 20, 1978, the total account of the defendant was already P2,731.06 as shown in a statement of account (Exhibit. "B"). This amount includes not only the balance of P1,700.00 but an additional 12% interest per annum on the said balance from January 26, 1976 to February 27, 1978; a 2% service charge; and P 546.21 representing attorney's fees. In this particular transaction a chattel mortgage (Exhibit 1) was constituted as a security for the payment of the balance of the purchase price. It has been the practice of financing firms that whenever there is a balance of the purchase price the registration papers of the motor vehicle subject of the sale are not given to the buyer. The records of the LTC show that the motorcycle sold


to the defendant was first mortgaged to the Teja Marketing by Angel Jaucian though the Teja Marketing and Angel Jaucian are one and the same, because it was made to appear that way only as the defendant had no franchise of his own and he attached the unit to the plaintiff's MCH Line. The agreement also of the parties here was for the plaintiff to undertake the yearly registration of the motorcycle with the Land Transportation Commission. Pursuant to this agreement the defendant on February 22, 1976 gave the plaintiff P90.00, the P8.00 would be for the mortgage fee and the P82.00 for the registration fee of the motorcycle. The plaintiff, however failed to register the motorcycle on that year on the ground that the defendant failed to comply with some requirements such as the payment of the insurance premiums and the bringing of the motorcycle to the LTC for stenciling, the plaintiff saying that the defendant was hiding the motorcycle from him. Lastly, the plaintiff explained also that though the ownership of the motorcycle was already transferred to the defendant the vehicle was still mortgaged with the consent of the defendant to the Rural Bank of Camaligan for the reason that all motorcycle purchased from the plaintiff on credit was rediscounted with the bank. On his part the defendant did not dispute the sale and the outstanding balance of P1,700. 00 still payable to the plaintiff. The defendant was persuaded to buy from the plaintiff the motorcycle with the side car because of the condition that the plaintiff would be the one to register every year the motorcycle with the Land Transportation Commission. In 1976, however, the plaintfff failed to register both the chattel mortgage and the motorcycle with the LTC notwithstanding the fact that the defendant gave him P90.00 for mortgage fee and registration fee and had the motorcycle insured with La Perla Compana de Seguros (Exhibit "6") as shown also by the Certificate of cover (Exhibit "3"). Because of this failure of the plaintiff to comply with his obligation to register the motorcycle the defendant suffered damages when he failed to claim any insurance indemnity which would amount to no less than P15,000.00 for

the more than two times that the motorcycle figured in accidents aside from the loss of the daily income of P15.00 as boundary fee beginning October 1976 when the motorcycle was impounded by the LTC for not being registered. The defendant disputed the claim of the plaintiff that he was hiding from the plaintiff the motorcycle resulting in its not being registered. The truth being that the motorcycle was being used for transporting passengers and it kept on travelling from one place to another. The motor vehicle sold to him was mortgaged by the plaintiff with the Rural Bank of Camaligan without his consent and knowledge and the defendant was not even given a copy of the mortgage deed. The defendant claims that it is not true that the motorcycle was mortgaged because of rediscounting for rediscounting is only true with Rural Banks and the Central Bank. The defendant puts the blame on the plaintiff for not registering the motorcycle with the LTC and for not giving him the registration papers inspite of demands made. Finally, the evidence of the defendant shows that because of the filing of this case he was forced to retain the services of a lawyer for a fee on not less than P1,000.00. xxx xxx xxx ... it also appears and the Court so finds that defendant purchased the motorcycle in question, particularly for the purpose of engaging and using the same in the transportation business and for this purpose said trimobile unit was attached to the plaintiffs transportation line who had the franchise, so much so that in the registration certificate, the plaintiff appears to be the owner of the unit. Furthermore, it appears to have been agreed, further between the plaintiff and the defendant, that plaintiff would undertake the yearly registration of the unit in question with the LTC. Thus, for the registration of the unit for the year 1976, per agreement, the defendant gave to the plaintiff the amount of P82.00 for its registration, as well as the insurance coverage of the unit. Eventually, petitioner Teja Marketing and/or Angel Jaucian filed an action for "Sum of Money with Damages" against private


respondent Pedro N. Nale in the City Court of Naga City. The City Court rendered judgment in favor of petitioner, the dispositive portion of which reads: WHEREFORE, decision is hereby rendered dismissing the counterclaim and ordering the defendant to pay plaintiff the sum of P1,700.00 representing the unpaid balance of the purchase price with legal rate of interest from the date of the filing of the complaint until the same is fully paid; to pay plaintiff the sum of P546.21 as attorney's fees; to pay plaintiff the sum of P200.00 as expenses of litigation; and to pay the costs. SO ORDERED. On appeal to the Court of First Instance of Camarines Sur, the decision was affirmed in toto. Private respondent filed a petition for review with the Intermediate Appellate Court and on July 18, 1983 the said Court promulgated its decision, the pertinent portion of which reads — However, as the purchase of the motorcycle for operation as a trimobile under the franchise of the private respondent Jaucian, pursuant to what is commonly known as the "kabit system", without the prior approval of the Board of Transportation (formerly the Public Service Commission) was an illegal transaction involving the fictitious registration of the motor vehicle in the name of the private respondent so that he may traffic with the privileges of his franchise, or certificate of public convenience, to operate a tricycle service, the parties being in pari delicto, neither of them may bring an action against the other to enforce their illegal contract [Art. 1412 (a), Civil Code]. xxx xxx xxx WHEREFORE, the decision under review is hereby set aside. The complaint of respondent Teja Marketing and/or Angel Jaucian, as well as the counterclaim of petitioner Pedro Nale in Civil Case No. 1153 of the Court of First Instance of Camarines Sur (formerly Civil Case No. 5856 of the City Court of Naga City) are dismissed. No pronouncement as to costs. SO ORDERED. The decision is now before Us on a petition for review, petitioner

Teja Marketing and/or Angel Jaucian presenting a lone assignment of error — whether or not respondent court erred in applying the doctrine of "pari delicto." We find the petition devoid of merit. Unquestionably, the parties herein operated under an arrangement, commonly known as the "kabit system" whereby a person who has been granted a certificate of public convenience allows another person who owns motor vehicles to operate under such franchise for a fee. A certificate of public convenience is a special privilege conferred by the government. Abuse of this privilege by the grantees thereof cannot be countenanced. The "kabit system" has been Identified as one of the root causes of the prevalence of graft and corruption in the government transportation offices. Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being contrary to public policy and, therefore, void and in existent under Article 1409 of the Civil Code. It is a fundamental principle that the court will not aid either party to enforce an illegal contract, but will leave both where it finds then. Upon this premise it would be error to accord the parties relief from their predicament. Article 1412 of the Civil Code denies them such aid. It provides: Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall be observed: 1. When the fault is on the part of both contracting parties, neither may recover that he has given by virtue of the contract, or demand, the performance of the other's undertaking. The defect of in existence of a contract is permanent and cannot be cured by ratification or by prescription. The mere lapse of time cannot give efficacy to contracts that are null and void. WHEREFORE, the petition is hereby dismissed for lack of merit. The assailed decision of the Intermediate Appellate Court (now the Court of Appeals) is AFFIRMED. No costs. SO ORDERED. Fernan (Chairman), Gutierrez, Jr., Padilla, Bidin and Cortez, JJ.,


concur. Alampay, J., took no part. 187. G.R. No. L-23559 October 4, 1971 AURELIO G. BRIONES, plaintiff-appellee, vs. PRIMITIVO P. CAMMAYO, ET AL., defendants-appellants. Carlos J. Antiporda for plaintiff-appellee. Manuel A. Cammayo for defendants-appellants. DIZON, J.: On February 22, 1962, Aurelio G. Briones filed an action in the Municipal Court of Manila against Primitivo, Nicasio, Pedro, Hilario and Artemio, all surnamed Cammayo, to recover from them, jointly and severally, the amount of P1,500.00, plus damages, attorney's fees and costs of suit. The defendants answered the complaint with specific denials and the following special defenses and compulsory counterclaim: ...; By way of — SPECIAL DEFENSES Defendants allege: 4. Defendants executed the real estate mortgage, Annex "A" of the complaint, as security for the loan of P1,200.00 given to defendant Primitivo P. Cammayo upon the usurious agreement that defendant pays to the plaintiff and that the plaintiff reserve and secure, as in fact plaintiff reserved and secured himself, out of the alleged loan of P1,500.00 as interest the sum of P300.00 for one year; 5. That although the mortgage contract, Annex "A" was executed for securing the payment of P1,500.00 for a period of one year, without interest, the truth and the real fact is that plaintiff delivered to the defendant Primitivo P. Cammayo only the sum of

P1,200.00 and withheld the sum of P300.00 which was intended as advance interest for one year; 6. That on account of said loan of P1,200.00, defendant Primitivo P. Cammayo paid to the plaintiff during the period from October 1955 to July 1956 the total sum of P330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part payment of the account but as in interest of the said loan for an extension of another term of one year; 7. That said contract of loan entered into between plaintiff and defendant Primitivo P. Cammayo is a usurious contract and is contrary to law, morals, good customs, public order or public policy and is, therefore, in existent and void from the beginning (Art. 1407 Civil Code); And as — COMPULSORY COUNTERCLAIM Defendants replead all their allegations in the preceding paragraphs; 8. That plaintiff, by taking and receiving interest in excess of that allowed by law, with full intention to violate the law, at the expense of the defendants, committed a flagrant violation of Act 2655, otherwise known as the Usury Law, causing the defendants damages and attorney's fees, the amount of which will be proven at the trial; 9. That this is the second time this same case is filed before this court, the first having been previously filed and docketed in this court as Civil Case No. 75845 (Branch VII) and the same was dismissed by the Court of First Instance of Manila on July 13, 1961 in Civil Case No. 43121 (Branch XVII) and for repeatedly bringing this case to the court, harassing and persecuting defendants in that manner, defendants have suffered mental anguish and anxiety for which they should be compensated for moral damages. On September 7, 1962, Briones filed an unverified reply in which he merely denied the allegations of the counterclaim. Thereupon the defendants moved for the rendition of a summary judgment on the ground that, upon the record, there was no genuine issue


of fact between the parties. The Municipal Court granted the motion and rendered judgment sentencing the defendants to pay the plaintiff the sum of P1,500.00, with interests thereon at the legal rate from February 22, 1962, plus the sum of P150.00 as attorney's fees. From this judgment, the defendants appealed to the Court of First Instance of Manila where, according to the appealed decision, "defendant has asked for summary judgment and plaintiff has agreed to the same." (Record on Appeal p. 21). Having found the motion for summary judgment to be in order, the court then, proceeded to render judgment as follows: Judgment is, therefore, rendered, ordering Defendant to pay plaintiff the sum of P1,180.00 with interest thereon at the legal rate from October 16, 1962 until fully paid. This judgment represents Defendant's debt of P1,500.00 less usurious interest of P120.00 and the additional sum of P200.00 as attorney's fees or a total deduction of P320.00. Plaintiff shall pay the costs. In the present appeal defendants claim that the trial court erred in sentencing them to pay the principal of the loan notwithstanding its finding that the same was tainted with usury, and erred likewise in not dismissing the case. It is not now disputed that the contract of loan in question was tainted with usury. The only questions to be resolved, therefore, are firstly, whether the creditor is entitled to collect from the debtor the amount representing the principal obligation; secondly, in the affirmative, if he is entitled to collect interests thereon, and if so, at what rate. The Usury Law penalizes any person or corporation who, for any loan or renewal thereof or forbearance, shall collect or receive a higher rate or greater sum or value than is allowed by law, and provides further that, in such case, the debtor may recover the whole interest, commissions, premiums, penalties and surcharges paid or delivered, with costs and attorney's fees, in an appropriate action against his creditor, within two (2) years after such payment or delivery (Section 6, Act 2655, as amended by Acts 3291 and 3998). Construing the above provision, We held in Go Chioco vs.

Martinez, 45 Phil. 256 that even if the contract of loan is declared usurious the creditor is entitled to collect the money actually loaned and the legal interest due thereon. In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court likewise declared that, in any event, the debtor in a usurious contract of loan should pay the creditor the amount which he justly owes him citing in support of this ruling its previous decisions in Go Chioco Supra, Aguilar vs. Rubiato, et al., 40 Phil. 570, and Delgado vs. Duque Valgona, 44 Phil. 739. In all the above cited cases it was recognized and held that under Act 2655 a usurious contract is void; that the creditor had no right of action to recover the interest in excess of the lawful rate; but that this did not mean that the debtor may keep the principal received by him as loan — thus unjustly enriching himself to the damage of the creditor. Then in Lopez and Javelona vs. El Hogar Filipino, 47 249, We also held that the standing jurisprudence of this Court on the question under consideration was clearly to the effect that the Usury Law, by its letter and spirit, did not deprive the lender of his right to recover from the borrower the money actually loaned to and enjoyed by the latter. This Court went further to say that the Usury Law did not provide for the forfeiture of the capital in favor of the debtor in usurious contracts, and that while the forfeiture might appear to be convenient as a drastic measure to eradicate the evil of usury, the legal question involved should not be resolved on the basis of convenience. Other cases upholding the same principle are Palileo vs. Cosio, 97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964, 10 SCRA 199, 200-202. In the latter We expressly held that when a contract is found to be tainted with usury "the only right of the respondent (creditor) ... was merely to collect the amount of the loan, plus interest due thereon." The view has been expressed, however, that the ruling thus consistently adhered to should now be abandoned because Article 1957 of the new Civil Code — a subsequent law — provides that contracts and stipulations, under any cloak or


device whatever, intended to circumvent the laws against usury, shall be void, and that in such cases "the power may recover in accordance with the laws on usury." From this the conclusion is drawn that the whole contract is void and that, therefore, the creditor has no right to recover — not even his capital. The meaning and scope of our ruling in the cases mentioned heretofore is clearly stated, and the view referred to in the preceding paragraph is adequately answered, in Angel Jose, etc. vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the question of whether a creditor in a usurious contract may or may not recover the principal of the loan, and, in the affirmative, whether or not he may also recover interest thereon at the legal rate, We said the following: ... . The court found that there remained due from defendants an unpaid principal amount of P20,287.50; that plaintiff charged usurious interests, of which P1,048.15 had actually been deducted in advance by plaintiff from the loan; that said amount of P1,048.15 should therefore be deducted from the unpaid principal of P20,287.50, leaving a balance of P19,247.35 still payable to the plaintiff. Said court held that notwithstanding the usurious interests charged, plaintiff is not barred from collecting the principal of the loan or its balance of P19,247.35. Accordingly, it stated in the dispositive portion of the decision, thus: WHEREFORE, judgment is hereby rendered, ordering the defendant partnership to pay to the plaintiff the amount of P19,247.35, with legal interest thereon from May 29, 1964 until paid, plus an additional sum of P2,000.00 as damages for attorney's fee; and, in case the assets of defendant partnership be insufficient to satisfy this judgment in full, ordering the defendant David Syjueco to pay to the plaintiff one-half (½) of the unsatisfied portion of this judgment. With costs against the defendants. Appealing directly to Us, defendants raise two questions of law: (1) In a loan with usurious interest, may the creditor recover the principal of the loan? (2) Should attorney's fees be awarded in

plaintiff's favor? Great reliance is made by appellants on Art. 1411 of the New Civil Code which states: ART. 1411. When the nullity proceeds from the illegality of the cause or object of the contract, and the act constitutes a criminal offense, both parties being in pari delicto, they shall have no action against each other, and both shall be prosecuted. Moreover, the provisions of the Penal Code relative to the disposal of effects or instruments of a crime shall be applicable to the things or the price of the contract. This rule shall be applicable when only one of the parties is guilty; but the innocent one may claim what he has given, and shall not be bound to comply with his promise. Since, according to the appellants, a usurious loan is void due to illegality of cause or object, the rule of pari delicto expressed in Article 1411, supra, applies, so that neither party can bring action against each other. Said rule, however, appellants add, is modified as to the borrower, by express provision of the law (Art. 1413, New Civil Code), allowing the borrower to recover interest paid in excess of the interest allowed by the Usury Law. As to the lender, no exception is made to the rule; hence, he cannot recover on the contract. So — they continue — the New Civil Code provisions must be upheld as against the Usury Law, under which a loan with usurious interest is not totally void, because of Article 1961 of the New Civil Code, that: "Usurious contracts shall be governed by the Usury Law and other special laws, so far as they are not inconsistent with this Code. (Emphasis ours.) . We do not agree with such reasoning, Article 1411 of the New Civil Code is not new; it is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as amended), a loan with usurious interest is not totally void only as to the interest. True, as stated in Article 1411 of the New Civil Code, the rule of pari delicto applies where a contract's nullity proceeds from illegality of the cause or object of said contract.


However, appellants fail to consider that a contract of loan with usurious interest consists of principal and accessory stipulations; the principal one is to pay the debt; the accessory stipulation is to pay interest thereon. And said two stipulations are divisible in the sense that the former can still stand without the latter. Article 1273, Civil Code, attests to this: "The renunciation of the principal debt shall extinguish the accessory obligations; but the waiver of the latter shall leave the former in force." The question therefore to resolve is whether the illegal terms as to payment of interest likewise renders a nullity the legal terms as to payments of the principal debt. Article 1420 of the New Civil Code provides in this regard: "In case of a divisible contract, if the illegal terms can be separated from the legal ones, the latter may be enforced." In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the only one that is illegal. Neither is there a conflict between the New Civil Code and the Usury Law. Under the latter, in Sec. 6, any person who for a loan shall have paid a higher rate or greater sum or value than is allowed in said law, may recover the whole interest paid. The New Civil Code, in Article 1413 states: "Interest paid in excess of the interest allowed by the usury laws may be recovered by the debtor, with interest thereon from the date of payment." Article 1413, in speaking of "interest paid in excess of the interest allowed by the usury laws" means the whole usurious interest; that is, in a loan of P1,000, with interest of 20% per annum or P200 for one year, if the borrower pays said P200, the whole P200 is the usurious interest, not just that part thereof in excess of the interest allowed by law. It is in this case that the law does not allow division. The whole stipulation as to interest is void, since payment of said interest is illegal. The only change effected,

therefore, by Article 1413, New Civil Code, is not to provide for the recovery of the interest paid in excess of that allowed by law, which the Usury Law already provided for, but to add that the same can be recovered "with interest thereon from the date of payment." The foregoing interpretation is reached with the philosophy of usury legislation in mind; to discourage stipulations on usurious interest, said stipulations are treated as wholly void, so that the loan becomes one without stipulation as to payment of interest. It should not, however, be interpreted to mean forfeiture even of the principal, for this would unjustly enrich the borrower at the expense of the lender. Furthermore, penal sanctions are available against a usurious lender, as a further deterrence to usury. The principal debt remaining without stipulation for payment of interest can thus be recovered by judicial action. And in case of such demand, and the debtor incurs in delay, the debt earns interest from the date of the demand (in this case from the filing of the complaint). Such interest is not due to stipulation, for there was none, the same being void. Rather, it is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay, he has to pay interest by way of damages (Art. 2209, Civil Code). The court a quo therefore, did not err in ordering defendants to pay the principal debt with interest thereon at the legal rate, from the date of filing of the complaint. In answer to the contention that the forfeiture of the principal of the usurious loan is necessary to punish the usurer, We say this: Under the Usury Law there is already provision for adequate punishment for the usurer namely, criminal prosecution where, if convicted, he may be sentence to pay a fine of not less than P50 nor more than P500, or imprisonment of not less than 30 days nor more than one year, or both, in the discretion of the court. He may further be sentenced to return the entire sum received as interest, with subsidiary imprisonment in case of non-payment thereof. lt is, of course, to be assumed that this last penalty may be imposed only if the return of the entire sum received as interest had not yet been the subject of judgment in a civil action


involving the usurious contract of load. In arriving at the above conclusion We also considered our decision in Mulet vs. The People of the Philippines (73 Phil. p. 60), but found that the same does not apply to the present case. The facts therein involved were as follows: On July 25, 1929, Alejandra Rubillos and Espectacion Rubillos secured from petitioner Miguel Mulet a loan of P550, payable within 5 years at 30 per cent interest per annum. In the deed of mortgage executed by the Rubillos as a security; the sum of P1,375 was made to appear as the capital of the loan. This amount obviously represented the actual loan of P550 and the total interest of P825 computed at 30 per cent per annum for 5 years. Within four years of following the execution of the mortgage, the debtors made partial payments aggregating P278.27, on account of interest. Thereafter, the debtors paid the whole capital of P550, due to petitioner's promise to condone the unpaid interest upon payment of such capital. But to their surprise, petitioner informed them that they were still indebted in the sum of P546.73 which represented the balance of the usurious interest. And in consideration of this amount, petitioner pressed upon the debtors to execute in October, 1933, in his favor, a deed of sale with pacto de retro of a parcel of land, in substitution of the original mortgage which was cancelled. From the date of the execution of the new deed up to 1936, petitioner received, as his share of the products of the land, the total sum of P480. Prosecuted on November 18, 1936, for the violation of the Usury Law, petitioner was convicted by the trial court, and on appeal, the judgment was affirmed by the Court of Appeals. The instant petition for certiorari is directed at that portion of the decision of the appellate court ordering petitioner to return to the offended parties the sum of P373.27, representing interests received by him in excess of that allowed by law. It was Mulet's claim that, as the amount of P373.27 had been paid more than two years prior to the filing of the complaint for usury against him, its return could no longer be ordered in accordance with the prescriptive period provided therefor in Section 6 of the

Usury Law. Said amount was made up of the usurious interest amounting to P278.27 paid to Mulet, in cash, and the sum of P480.00 paid to him in kind, from the total of which two amounts 14% interest allowed by law — amounting to P385.85 — was deducted. Our decision was that Mulet should return the amount of P480.00 which represented the value of the produce of the land sold to him under pacto de retro which, with the unpaid balance of the usurious interest, was the consideration of the transaction — meaning the pacto de retro sale. This Court then said: ... . This last amount is not usurious interest on the capital of the loan but the value of the produce of the land sold to petitioner under pacto de retro with the unpaid balance of the usurious interest (P546.73) as the consideration of the transaction. This consideration, because contrary to law, is illicit, and the contract which results therefrom, null and void. (Art. 1275, Civil Code). And, under the provisions of article 1305, in connection with article 1303, of the Civil Code, when the nullity of a contract arises from the illegality of the consideration which in itself constitutes a felony, the guilty party shall be subject to criminal proceeding while the innocent party may recover whatever he has given, including the fruits thereof. (emphasis supplied). It is clear, therefore, that in the Mulet case, the principal of the obligation had been fully paid by the debtor to the creditor; that the latter was not sentenced to pay it back to the former, and that what this Court declared recoverable by the debtor were only the usurious interest paid as well as the fruits of the property sold under pacto de retro. IN VIEW OF THE FOREGOING, the decision, appealed from is modified in the sense that appellee may recover from appellant the principal of the loan (P1,180.00) only, with interest thereon at the legal rate of 6% per annum from the date of the filing of the complaint. With costs. Makalintal, Zaldivar, Teehankee, Villamor and Makasiar, JJ., concur.


Case Compilation OBLICON Civil Law Review 2 (Atty. Uribe)-Part1.pdf

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