G.R. No.

138814 April 16, 2009

MAKATI STOCK EXCHANGE, INC., MA. VIVIAN YUCHENGCO, ADOLFO M. DUARTE, MYRON
C. PAPA, NORBERTO C. NAZARENO, GEORGE UY-TIOCO, ANTONIO A. LOPA, RAMON B.
ARNAIZ, LUIS J.L. VIRATA, and ANTONIO GARCIA, JR. Petitioners,
vs.
MIGUEL V. CAMPOS, substituted by JULIA ORTIGAS VDA. DE CAMPOS,1 Respondent.

DECISION

CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the Decision2 dated
11 February 1997 and Resolution dated 18 May 1999 of the Court of Appeals in CA-G.R. SP No.
38455.

The facts of the case are as follows:

SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V. Campos,
who filed with the Securities, Investigation and Clearing Department (SICD) of the Securities and
Exchange Commission (SEC), a Petition against herein petitioners Makati Stock Exchange, Inc.
(MKSE) and MKSE directors, Ma. Vivian Yuchengco, Adolfo M. Duarte, Myron C. Papa, Norberto C.
Nazareno, George Uy-Tioco, Antonio A, Lopa, Ramon B. Arnaiz, Luis J.L. Virata, and Antonio
Garcia, Jr. Respondent, in said Petition, sought: (1) the nullification of the Resolution dated 3 June
1993 of the MKSE Board of Directors, which allegedly deprived him of his right to participate equally
in the allocation of Initial Public Offerings (IPO) of corporations registered with MKSE; (2) the
delivery of the IPO shares he was allegedly deprived of, for which he would pay IPO prices; and (3)
the payment of ₱2 million as moral damages, ₱1 million as exemplary damages, and ₱500,000.00
as attorney’s fees and litigation expenses.

On 14 February 1994, the SICD issued an Order granting respondent’s prayer for the issuance of a
Temporary Restraining Order to enjoin petitioners from implementing or enforcing the 3 June 1993
Resolution of the MKSE Board of Directors.

The SICD subsequently issued another Order on 10 March 1994 granting respondent’s application
for a Writ of Preliminary Injunction, to continuously enjoin, during the pendency of SEC Case No. 02-
94-4678, the implementation or enforcement of the MKSE Board Resolution in question. Petitioners
assailed this SICD Order dated 10 March 1994 in a Petition for Certiorari filed with the SEC en banc,
docketed as SEC-EB No. 393.

On 11 March 1994, petitioners filed a Motion to Dismiss respondent’s Petition in SEC Case No. 02-
94-4678, based on the following grounds: (1) the Petition became moot due to the cancellation of the
license of MKSE; (2) the SICD had no jurisdiction over the Petition; and (3) the Petition failed to state
a cause of action.

The SICD denied petitioner’s Motion to Dismiss in an Order dated 4 May 1994. Petitioners again
challenged the 4 May 1994 Order of SICD before the SEC en banc through another Petition for
Certiorari, docketed as SEC-EB No. 403.

In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March 1994
Order of SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in favor of
respondent. Likewise, in an Order dated 14 August 1995 in SEC-EB No. 403, the SEC en banc
annulled the 4 May 1994 Order of SICD in SEC Case No. 02-94-4678 denying petitioners’ Motion to
Dismiss, and accordingly ordered the dismissal of respondent’s Petition before the SICD.

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the SEC
en banc dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No. 403,
respectively. Respondent’s Petition before the appellate court was docketed as CA-G.R. SP No.
38455.

On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No. 38455,
granting respondent’s Petition for Certiorari, thus:
WHEREFORE, the petition in so far as it prays for annulment of the Orders dated May 31, 1995 and
August 14, 1995 in SEC-EB Case Nos. 393 and 403 is GRANTED. The said orders are hereby
rendered null and void and set aside.

Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by the
Court of Appeals in a Resolution dated 18 May 1999.

Hence, the present Petition for Review raising the following arguments:

I.

THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK
OR EXCESS OF JURISDICTION WHEN IT DISMISSED THE PETITION FILED BY RESPONDENT
BECAUSE ON ITS FACE, IT FAILED TO STATE A CAUSE OF ACTION.

II.

THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF RESPONDENT WAS A MERE

ACCOMMODATION GIVEN TO HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI STOCK
EXCHANGE, INC.

III.

THE COURT OF APPEALS ERRED IN HOLDING THAT THE SEC EN BANC COMMITTED GRAVE
ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT
MADE AN EXTENDED INQUIRY AND PROCEEDED TO MAKE A DETERMINATION AS TO THE
TRUTH OF RESPONDENT’S ALLEGATIONS IN HIS PETITION AND USED AS BASIS THE
EVIDENCE ADDUCED DURING THE HEARING ON THE APPLICATION FOR THE WRIT OF
PRELIMINARY INJUNCTION TO DETERMINE THE EXISTENCE OR VALIDITY OF A STATED
CAUSE OF ACTION.

IV.

IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE BOUGHT BY THE BROKERS

FOR THEMSELVES BUT ARE TO BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE,
RESPONDENT’S CLAIM FOR DAMAGES IS ILLUSORY AND HIS PETITION A NUISANCE SUIT.3

On 18 September 2001, counsel for respondent manifested to this Court that his client died on 7
May 2001. In a Resolution dated 24 October 2001, the Court directed the substitution of respondent
by his surviving spouse, Julia Ortigas vda. de Campos.

Petitioners want this Court to affirm the dismissal by the SEC en banc of respondent’s Petition in
SEC Case No. 02-94-4678 for failure to state a cause of action. On the other hand, respondent
insists on the sufficiency of his Petition and seeks the continuation of the proceedings before the
SICD.

A cause of action is the act or omission by which a party violates a right of another.4 A complaint
states a cause of action where it contains three essential elements of a cause of action, namely: (1)
the legal right of the plaintiff, (2) the correlative obligation of the defendant, and (3) the act or
omission of the defendant in violation of said legal right. If these elements are absent, the complaint
becomes vulnerable to dismissal on the ground of failure to state a cause of action.

If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is
regarded as having hypothetically admitted all the averments thereof. The test of sufficiency of the
facts found in a complaint as constituting a cause of action is whether or not admitting the facts
alleged, the court can render a valid judgment upon the same in accordance with the prayer thereof.
The hypothetical admission extends to the relevant and material facts well pleaded in the complaint
and inferences fairly deducible therefrom. Hence, if the allegations in the complaint furnish sufficient
basis by which the complaint can be maintained, the same should not be dismissed regardless of
the defense that may be assessed by the defendant.5

Given the foregoing, the issue of whether respondent’s Petition in SEC Case No. 02-94-4678
sufficiently states a cause of action may be alternatively stated as whether, hypothetically admitting
to be true the allegations in respondent’s Petition in SEC Case No. 02-94-4678, the SICD may
render a valid judgment in accordance with the prayer of said Petition.

A reading of the exact text of respondent’s Petition in SEC Case No. 02-94-4678 is, therefore,
unavoidable. Pertinent portions of the said Petition reads:

7. In recognition of petitioner’s invaluable services, the general membership of respondent

corporation [MKSE] passed a resolution sometime in 1989 amending its Articles of Incorporation, to
include the following provision therein:

"ELEVENTH – WHEREAS, Mr. Miguel Campos is the only surviving incorporator of the Makati Stock
Exchange, Inc. who has maintained his membership;

"WHEREAS, he has unselfishly served the Exchange in various capacities, as governor from 1977
to the present and as President from 1972 to 1976 and again as President from 1988 to the present;

"WHEREAS, such dedicated service and leadership which has contributed to the advancement and
well being not only of the Exchange and its members but also to the Securities industry, needs to be
recognized and appreciated;

"WHEREAS, as such, the Board of Governors in its meeting held on February 09, 1989 has
correspondingly adopted a resolution recognizing his valuable service to the Exchange, reward the
same, and preserve for posterity such recognition by proposing a resolution to the membership body
which would make him as Chairman Emeritus for life and install in the Exchange premises a
commemorative bronze plaque in his honor;

"NOW, THEREFORE, for and in consideration of the above premises, the position of the "Chairman
Emeritus" to be occupied by Mr. Miguel Campos during his lifetime and irregardless of his continued
membership in the Exchange with the Privilege to attend all membership meetings as well as the
meetings of the Board of Governors of the Exchange, is hereby created."

8. Hence, to this day, petitioner is not only an active member of the respondent corporation, but its
Chairman Emeritus as well.

9. Correspondingly, at all times material to this petition, as an active member and Chairman
Emeritus of respondent corporation, petitioner has always enjoyed the right given to all the other
members to participate equally in the Initial Public Offerings (IPOs for brevity) of corporations.

10. IPOs are shares of corporations offered for sale to the public, prior to the listing in the trading
floor of the country’s two stock exchanges. Normally, Twenty Five Percent (25%) of these shares are
divided equally between the two stock exchanges which in turn divide these equally among their
members, who pay therefor at the offering price.

11. However, on June 3, 1993, during a meeting of the Board of Directors of respondent-corporation,
individual respondents passed a resolution to stop giving petitioner the IPOs he is entitled to, based
on the ground that these shares were allegedly benefiting Gerardo O. Lanuza, Jr., who these
individual respondents wanted to get even with, for having filed cases before the Securities and
Exchange (SEC) for their disqualification as member of the Board of Directors of respondent
corporation.

12. Hence, from June 3, 1993 up to the present time, petitioner has been deprived of his right to
subscribe to the IPOs of corporations listing in the stock market at their offering prices.

13. The collective act of the individual respondents in depriving petitioner of his right to a share in the
IPOs for the aforementioned reason, is unjust, dishonest and done in bad faith, causing petitioner
substantial financial damage.6

There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of
respondent, particularly, respondent’s alleged right to subscribe to the IPOs of corporations listed in
the stock market at their offering prices; and stipulates the correlative obligation of petitioners to
respect respondent’s right, specifically, by continuing to allow respondent to subscribe to the IPOs of
corporations listed in the stock market at their offering prices.
However, the terms right and obligation in respondent’s Petition are not magic words that would
automatically lead to the conclusion that such Petition sufficiently states a cause of action. Right and
obligation are legal terms with specific legal meaning. A right is a claim or title to an interest in
anything whatsoever that is enforceable by law.7 An obligation is defined in the Civil Code as a
juridical necessity to give, to do or not to do.8 For every right enjoyed by any person, there is a
corresponding obligation on the part of another person to respect such right. Thus, Justice J.B.L.
Reyes offers9 the definition given by Arias Ramos as a more complete definition:

An obligation is a juridical relation whereby a person (called the creditor) may demand from another
(called the debtor) the observance of a determinative conduct (the giving, doing or not doing), and in
case of breach, may demand satisfaction from the assets of the latter.

The Civil Code enumerates the sources of obligations:

Art. 1157. Obligations arise from:

(1) Law;

(2) Contracts;

(3) Quasi-contracts;

(4) Acts or omissions punished by law; and

(5) Quasi-delicts.

Therefore, an obligation imposed on a person, and the corresponding right granted to another, must
be rooted in at least one of these five sources. The mere assertion of a right and claim of an
obligation in an initiatory pleading, whether a Complaint or Petition, without identifying the basis or
source thereof, is merely a conclusion of fact and law. A pleading should state the ultimate facts
essential to the rights of action or defense asserted, as distinguished from mere conclusions of fact
or conclusions of law.10 Thus, a Complaint or Petition filed by a person claiming a right to the Office
of the President of this Republic, but without stating the source of his purported right, cannot be said
to have sufficiently stated a cause of action. Also, a person claiming to be the owner of a parcel of
land cannot merely state that he has a right to the ownership thereof, but must likewise assert in the
Complaint either a mode of acquisition of ownership or at least a certificate of title in his name.

In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondent’s right
to subscribe to the IPOs of corporations listed in the stock market at their offering prices, and
petitioners’ obligation to continue respecting and observing such right, the Petition utterly failed to lay
down the source or basis of respondent’s right and/or petitioners’ obligation.

Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in 1989,
granting him the position of Chairman Emeritus of MKSE for life. However, there is nothing in the
said Petition from which the Court can deduce that respondent, by virtue of his position as Chairman
Emeritus of MKSE, was granted by law, contract, or any other legal source, the right to subscribe to
the IPOs of corporations listed in the stock market at their offering prices.

A meticulous review of the Petition reveals that the allocation of IPO shares was merely alleged to
have been done in accord with a practice normally observed by the members of the stock exchange,
to wit:

IPOs are shares of corporations offered for sale to the public, prior to their listing in the trading floor
of the country’s two stock exchanges. Normally, Twenty-Five Percent (25%) of these shares are
divided equally between the two stock exchanges which in turn divide these equally among their
members, who pay therefor at the offering price.11 (Emphasis supplied)

A practice or custom is, as a general rule, not a source of a legally demandable or enforceable
right.12 Indeed, in labor cases, benefits which were voluntarily given by the employer, and which
have ripened into company practice, are considered as rights that cannot be diminished by the
employer.13 Nevertheless, even in such cases, the source of the employees’ right is not custom, but
ultimately, the law, since Article 100 of the Labor Code explicitly prohibits elimination or diminution of
benefits.
There is no such law in this case that converts the practice of allocating IPO shares to MKSE
members, for subscription at their offering prices, into an enforceable or demandable right. Thus,
even if it is hypothetically admitted that normally, twenty five percent (25%) of the IPOs are divided
equally between the two stock exchanges -- which, in turn, divide their respective allocation equally
among their members, including the Chairman Emeritus, who pay for IPO shares at the offering
price -- the Court cannot grant respondent’s prayer for damages which allegedly resulted from the
MKSE Board Resolution dated 3 June 1993 deviating from said practice by no longer allocating any
shares to respondent.

Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678
should be dismissed for failure to state a cause of action. It does not matter that the SEC en banc, in
its Order dated 14 August 1995 in SEC-EB No. 403, overstepped its bounds by not limiting itself to
the issue of whether respondent’s Petition before the SICD sufficiently stated a cause of action. The
SEC en banc may have been mistaken in considering extraneous evidence in granting petitioners’
Motion to Dismiss, but its discussion thereof are merely superfluous and obiter dictum. In the main,
the SEC en banc did correctly dismiss the Petition in SEC Case No. 02-94-4678 for its failure to
state the basis for respondent’s alleged right, to wit:

Private respondent Campos has failed to establish the basis or authority for his alleged right to
participate equally in the IPO allocations of the Exchange. He cited paragraph 11 of the amended
articles of incorporation of the Exchange in support of his position but a careful reading of the said
provision shows nothing therein that would bear out his claim. The provision merely created the
position of chairman emeritus of the Exchange but it mentioned nothing about conferring upon the
occupant thereof the right to receive IPO allocations.14

With the dismissal of respondent’s Petition in SEC Case No. 02-94-4678, there is no more need for
this Court to resolve the propriety of the issuance by SCID of a writ of preliminary injunction in said
case.

WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11 February
1997 and its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are REVERSED and SET
ASIDE. The Orders dated 31 May 1995 and 14 August 1995 of the Securities and Exchange
Commission en banc in SEC-EB Case No. 393 and No. 403, respectively, are hereby reinstated. No
pronouncement as to costs.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ ANTONIO EDUARDO B. NACHURA

Associate Justice Associate Justice

DIOSDADO M. PERALTA
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division
G.R. No. 177056 September 18, 2009

THE OFFICE OF THE SOLICITOR GENERAL, Petitioner,

vs.
AYALA LAND INCORPORATED, ROBINSON'S LAND CORPORATION, SHANGRI-LA PLAZA
CORPORATION and SM PRIME HOLDINGS, INC., Respondents.

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari,1 under Rule 45 of the Revised Rules of Court,
filed by petitioner Office of the Solicitor General (OSG), seeking the reversal and setting aside of the
Decision2 dated 25 January 2007 of the Court of Appeals in CA-G.R. CV No. 76298, which affirmed
in toto the Joint Decision3 dated 29 May 2002 of the Regional Trial Court (RTC) of Makati City,
Branch 138, in Civil Cases No. 00-1208 and No. 00-1210; and (2) the Resolution4 dated 14 March
2007 of the appellate court in the same case which denied the Motion for Reconsideration of the
OSG. The RTC adjudged that respondents Ayala Land Incorporated (Ayala Land), Robinsons Land
Corporation (Robinsons), Shangri-la Plaza Corporation (Shangri-la), and SM Prime Holdings, Inc.
(SM Prime) could not be obliged to provide free parking spaces in their malls to their patrons and the
general public.

Respondents Ayala Land, Robinsons, and Shangri-la maintain and operate shopping malls in
various locations in Metro Manila. Respondent SM Prime constructs, operates, and leases out
commercial buildings and other structures, among which, are SM City, Manila; SM Centerpoint, Sta.
Mesa, Manila; SM City, North Avenue, Quezon City; and SM Southmall, Las Piñas.

The shopping malls operated or leased out by respondents have parking facilities for all kinds of
motor vehicles, either by way of parking spaces inside the mall buildings or in separate buildings
and/or adjacent lots that are solely devoted for use as parking spaces. Respondents Ayala Land,
Robinsons, and SM Prime spent for the construction of their own parking facilities. Respondent
Shangri-la is renting its parking facilities, consisting of land and building specifically used as parking
spaces, which were constructed for the lessor’s account.

Respondents expend for the maintenance and administration of their respective parking facilities.
They provide security personnel to protect the vehicles parked in their parking facilities and maintain
order within the area. In turn, they collect the following parking fees from the persons making use of
their parking facilities, regardless of whether said persons are mall patrons or not:

Respondent Parking Fees

Ayala Land On weekdays, ₱25.00 for the first four hours and
₱10.00 for every succeeding hour; on weekends, flat
rate of ₱25.00 per day
Robinsons ₱20.00 for the first three hours and ₱10.00 for every
succeeding hour
Shangri-la Flat rate of ₱30.00 per day
SM Prime ₱10.00 to ₱20.00 (depending on whether the parking
space is outdoors or indoors) for the first three hours
and 59 minutes, and ₱10.00 for every succeeding
hour or fraction thereof

The parking tickets or cards issued by respondents to vehicle owners contain the stipulation that
respondents shall not be responsible for any loss or damage to the vehicles parked in respondents’
parking facilities.

In 1999, the Senate Committees on Trade and Commerce and on Justice and Human Rights
conducted a joint investigation for the following purposes: (1) to inquire into the legality of the
prevalent practice of shopping malls of charging parking fees; (2) assuming arguendo that the
collection of parking fees was legally authorized, to find out the basis and reasonableness of the
parking rates charged by shopping malls; and (3) to determine the legality of the policy of shopping
malls of denying liability in cases of theft, robbery, or carnapping, by invoking the waiver clause at
the back of the parking tickets. Said Senate Committees invited the top executives of respondents,
who operate the major malls in the country; the officials from the Department of Trade and Industry
(DTI), Department of Public Works and Highways (DPWH), Metro Manila Development Authority
(MMDA), and other local government officials; and the Philippine Motorists Association (PMA) as
representative of the consumers’ group.

After three public hearings held on 30 September, 3 November, and 1 December 1999, the afore-
mentioned Senate Committees jointly issued Senate Committee Report No. 2255 on 2 May 2000, in
which they concluded:

In view of the foregoing, the Committees find that the collection of parking fees by shopping malls is
contrary to the National Building Code and is therefor [sic] illegal. While it is true that the Code
merely requires malls to provide parking spaces, without specifying whether it is free or not, both
Committees believe that the reasonable and logical interpretation of the Code is that the parking
spaces are for free. This interpretation is not only reasonable and logical but finds support in the
actual practice in other countries like the United States of America where parking spaces owned and
operated by mall owners are free of charge.

Figuratively speaking, the Code has "expropriated" the land for parking – something similar to the
subdivision law which require developers to devote so much of the land area for parks.

Moreover, Article II of R.A. No. 9734 (Consumer Act of the Philippines) provides that "it is the policy
of the State to protect the interest of the consumers, promote the general welfare and establish
standards of conduct for business and industry." Obviously, a contrary interpretation (i.e., justifying
the collection of parking fees) would be going against the declared policy of R.A. 7394.

Section 201 of the National Building Code gives the responsibility for the administration and
enforcement of the provisions of the Code, including the imposition of penalties for administrative
violations thereof to the Secretary of Public Works. This set up, however, is not being carried out in
reality.

In the position paper submitted by the Metropolitan Manila Development Authority (MMDA), its
chairman, Jejomar C. Binay, accurately pointed out that the Secretary of the DPWH is responsible
for the implementation/enforcement of the National Building Code. After the enactment of the Local
Government Code of 1991, the local government units (LGU’s) were tasked to discharge the
regulatory powers of the DPWH. Hence, in the local level, the Building Officials enforce all rules/
regulations formulated by the DPWH relative to all building plans, specifications and designs
including parking space requirements. There is, however, no single national department or agency
directly tasked to supervise the enforcement of the provisions of the Code on parking,
notwithstanding the national character of the law.6

Senate Committee Report No. 225, thus, contained the following recommendations:

In light of the foregoing, the Committees on Trade and Commerce and Justice and Human Rights
hereby recommend the following:

1. The Office of the Solicitor General should institute the necessary action to enjoin the
collection of parking fees as well as to enforce the penal sanction provisions of the National
Building Code. The Office of the Solicitor General should likewise study how refund can be
exacted from mall owners who continue to collect parking fees.

2. The Department of Trade and Industry pursuant to the provisions of R.A. No. 7394,
otherwise known as the Consumer Act of the Philippines should enforce the provisions of the
Code relative to parking. Towards this end, the DTI should formulate the necessary
implementing rules and regulations on parking in shopping malls, with prior consultations
with the local government units where these are located. Furthermore, the DTI, in
coordination with the DPWH, should be empowered to regulate and supervise the
construction and maintenance of parking establishments.

3. Finally, Congress should amend and update the National Building Code to expressly
prohibit shopping malls from collecting parking fees by at the same time, prohibit them from
invoking the waiver of liability.7
Respondent SM Prime thereafter received information that, pursuant to Senate Committee Report
No. 225, the DPWH Secretary and the local building officials of Manila, Quezon City, and Las Piñas
intended to institute, through the OSG, an action to enjoin respondent SM Prime and similar
establishments from collecting parking fees, and to impose upon said establishments penal
sanctions under Presidential Decree No. 1096, otherwise known as the National Building Code of
the Philippines (National Building Code), and its Implementing Rules and Regulations (IRR). With
the threatened action against it, respondent SM Prime filed, on 3 October 2000, a Petition for
Declaratory Relief8 under Rule 63 of the Revised Rules of Court, against the DPWH Secretary and
local building officials of Manila, Quezon City, and Las Piñas. Said Petition was docketed as Civil
Case No. 00-1208 and assigned to the RTC of Makati City, Branch 138, presided over by Judge
Sixto Marella, Jr. (Judge Marella). In its Petition, respondent SM Prime prayed for judgment:

a) Declaring Rule XIX of the Implementing Rules and Regulations of the National Building
Code as ultra vires, hence, unconstitutional and void;

b) Declaring [herein respondent SM Prime]’s clear legal right to lease parking spaces
appurtenant to its department stores, malls, shopping centers and other commercial
establishments; and

c) Declaring the National Building Code of the Philippines Implementing Rules and
Regulations as ineffective, not having been published once a week for three (3) consecutive
weeks in a newspaper of general circulation, as prescribed by Section 211 of Presidential
Decree No. 1096.

[Respondent SM Prime] further prays for such other reliefs as may be deemed just and equitable
under the premises.9

The very next day, 4 October 2000, the OSG filed a Petition for Declaratory Relief and Injunction
(with Prayer for Temporary Restraining Order and Writ of Preliminary Injunction)10 against
respondents. This Petition was docketed as Civil Case No. 00-1210 and raffled to the RTC of
Makati, Branch 135, presided over by Judge Francisco B. Ibay (Judge Ibay). Petitioner prayed that
the RTC:

1. After summary hearing, a temporary restraining order and a writ of preliminary injunction
be issued restraining respondents from collecting parking fees from their customers; and

2. After hearing, judgment be rendered declaring that the practice of respondents in charging
parking fees is violative of the National Building Code and its Implementing Rules and
Regulations and is therefore invalid, and making permanent any injunctive writ issued in this
case.

Other reliefs just and equitable under the premises are likewise prayed for.11

On 23 October 2000, Judge Ibay of the RTC of Makati City, Branch 135, issued an Order
consolidating Civil Case No. 00-1210 with Civil Case No. 00-1208 pending before Judge Marella of
RTC of Makati, Branch 138.

As a result of the pre-trial conference held on the morning of 8 August 2001, the RTC issued a Pre-
Trial Order12 of even date which limited the issues to be resolved in Civil Cases No. 00-1208 and No.
00-1210 to the following:

1. Capacity of the plaintiff [OSG] in Civil Case No. 00-1210 to institute the present
proceedings and relative thereto whether the controversy in the collection of parking fees by
mall owners is a matter of public welfare.

2. Whether declaratory relief is proper.

3. Whether respondent Ayala Land, Robinsons, Shangri-La and SM Prime are obligated to
provide parking spaces in their malls for the use of their patrons or the public in general, free
of charge.

4. Entitlement of the parties of [sic] award of damages.13

On 29 May 2002, the RTC rendered its Joint Decision in Civil Cases No. 00-1208 and No. 00-1210.

The RTC resolved the first two issues affirmatively. It ruled that the OSG can initiate Civil Case No.
00-1210 under Presidential Decree No. 478 and the Administrative Code of 1987.14 It also found that
all the requisites for an action for declaratory relief were present, to wit:

The requisites for an action for declaratory relief are: (a) there is a justiciable controversy; (b) the
controversy is between persons whose interests are adverse; (c) the party seeking the relief has a
legal interest in the controversy; and (d) the issue involved is ripe for judicial determination.

SM, the petitioner in Civil Case No. 001-1208 [sic] is a mall operator who stands to be affected
directly by the position taken by the government officials sued namely the Secretary of Public
Highways and the Building Officials of the local government units where it operates shopping malls.
The OSG on the other hand acts on a matter of public interest and has taken a position adverse to
that of the mall owners whom it sued. The construction of new and bigger malls has been
announced, a matter which the Court can take judicial notice and the unsettled issue of whether mall
operators should provide parking facilities, free of charge needs to be resolved.15

As to the third and most contentious issue, the RTC pronounced that:

The Building Code, which is the enabling law and the Implementing Rules and Regulations do not
impose that parking spaces shall be provided by the mall owners free of charge. Absent such
directive[,] Ayala Land, Robinsons, Shangri-la and SM [Prime] are under no obligation to provide
them for free. Article 1158 of the Civil Code is clear:

"Obligations derived from law are not presumed. Only those expressly determined in this Code or in
special laws are demandable and shall be regulated by the precepts of the law which establishes
them; and as to what has not been foreseen, by the provisions of this Book (1090).["]

xxxx

The provision on ratios of parking slots to several variables, like shopping floor area or customer
area found in Rule XIX of the Implementing Rules and Regulations cannot be construed as a
directive to provide free parking spaces, because the enabling law, the Building Code does not so
provide. x x x.

To compel Ayala Land, Robinsons, Shangri-La and SM [Prime] to provide parking spaces for free
can be considered as an unlawful taking of property right without just compensation.

Parking spaces in shopping malls are privately owned and for their use, the mall operators collect
fees. The legal relationship could be either lease or deposit. In either case[,] the mall owners have
the right to collect money which translates into income. Should parking spaces be made free, this
right of mall owners shall be gone. This, without just compensation. Further, loss of effective control
over their property will ensue which is frowned upon by law.

The presence of parking spaces can be viewed in another light. They can be looked at as necessary
facilities to entice the public to increase patronage of their malls because without parking spaces,
going to their malls will be inconvenient. These are[,] however[,] business considerations which mall
operators will have to decide for themselves. They are not sufficient to justify a legal conclusion, as
the OSG would like the Court to adopt that it is the obligation of the mall owners to provide parking
spaces for free.16

The RTC then held that there was no sufficient evidence to justify any award for damages.

The RTC finally decreed in its 29 May 2002 Joint Decision in Civil Cases No. 00-1208 and No. 00-
1210 that:

FOR THE REASONS GIVEN, the Court declares that Ayala Land[,] Inc., Robinsons Land
Corporation, Shangri-la Plaza Corporation and SM Prime Holdings[,] Inc. are not obligated to provide
parking spaces in their malls for the use of their patrons or public in general, free of charge.

All counterclaims in Civil Case No. 00-1210 are dismissed.

No pronouncement as to costs.17

CA-G.R. CV No. 76298 involved the separate appeals of the OSG18 and respondent SM Prime19 filed
with the Court of Appeals. The sole assignment of error of the OSG in its Appellant’s Brief was:

THE TRIAL COURT ERRED IN HOLDING THAT THE NATIONAL BUILDING CODE DID NOT
INTEND MALL PARKING SPACES TO BE FREE OF CHARGE[;]20

while the four errors assigned by respondent SM Prime in its Appellant’s Brief were:

THE TRIAL COURT ERRED IN FAILING TO DECLARE RULE XIX OF THE IMPLEMENTING
RULES AS HAVING BEEN ENACTED ULTRA VIRES, HENCE, UNCONSTITUTIONAL AND VOID.

II

THE TRIAL COURT ERRED IN FAILING TO DECLARE THE IMPLEMENTING RULES

INEFFECTIVE FOR NOT HAVING BEEN PUBLISHED AS REQUIRED BY LAW.

III

THE TRIAL COURT ERRED IN FAILING TO DISMISS THE OSG’S PETITION FOR
DECLARATORY RELIEF AND INJUNCTION FOR FAILURE TO EXHAUST ADMINISTRATIVE
REMEDIES.

IV

THE TRIAL COURT ERRED IN FAILING TO DECLARE THAT THE OSG HAS NO LEGAL
CAPACITY TO SUE AND/OR THAT IT IS NOT A REAL PARTY-IN-INTEREST IN THE INSTANT
CASE.21

Respondent Robinsons filed a Motion to Dismiss Appeal of the OSG on the ground that the lone
issue raised therein involved a pure question of law, not reviewable by the Court of Appeals.

The Court of Appeals promulgated its Decision in CA-G.R. CV No. 76298 on 25 January 2007. The
appellate court agreed with respondent Robinsons that the appeal of the OSG should suffer the fate
of dismissal, since "the issue on whether or not the National Building Code and its implementing
rules require shopping mall operators to provide parking facilities to the public for free" was evidently
a question of law. Even so, since CA-G.R. CV No. 76298 also included the appeal of respondent SM
Prime, which raised issues worthy of consideration, and in order to satisfy the demands of
substantial justice, the Court of Appeals proceeded to rule on the merits of the case.

In its Decision, the Court of Appeals affirmed the capacity of the OSG to initiate Civil Case No. 00-
1210 before the RTC as the legal representative of the government,22 and as the one deputized by
the Senate of the Republic of the Philippines through Senate Committee Report No. 225.

The Court of Appeals rejected the contention of respondent SM Prime that the OSG failed to
exhaust administrative remedies. The appellate court explained that an administrative review is not a
condition precedent to judicial relief where the question in dispute is purely a legal one, and nothing
of an administrative nature is to be or can be done.

The Court of Appeals likewise refused to rule on the validity of the IRR of the National Building
Code, as such issue was not among those the parties had agreed to be resolved by the RTC during
the pre-trial conference for Civil Cases No. 00-1208 and No. 00-1210. Issues cannot be raised for
the first time on appeal. Furthermore, the appellate court found that the controversy could be settled
on other grounds, without touching on the issue of the validity of the IRR. It referred to the settled
rule that courts should refrain from passing upon the constitutionality of a law or implementing rules,
because of the principle that bars judicial inquiry into a constitutional question, unless the resolution
thereof is indispensable to the determination of the case.
Lastly, the Court of Appeals declared that Section 803 of the National Building Code and Rule XIX of
the IRR were clear and needed no further construction. Said provisions were only intended to control
the occupancy or congestion of areas and structures. In the absence of any express and clear
provision of law, respondents could not be obliged and expected to provide parking slots free of
charge.

The fallo of the 25 January 2007 Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the instant appeals are DENIED. Accordingly, appealed
Decision is hereby AFFIRMED in toto.23

In its Resolution issued on 14 March 2007, the Court of Appeals denied the Motion for
Reconsideration of the OSG, finding that the grounds relied upon by the latter had already been
carefully considered, evaluated, and passed upon by the appellate court, and there was no strong
and cogent reason to modify much less reverse the assailed judgment.

The OSG now comes before this Court, via the instant Petition for Review, with a single assignment
of error:

THE COURT OF APPEALS SERIOUSLY ERRED IN AFFIRMING THE RULING OF THE LOWER
COURT THAT RESPONDENTS ARE NOT OBLIGED TO PROVIDE FREE PARKING SPACES TO
THEIR CUSTOMERS OR THE PUBLIC.24

The OSG argues that respondents are mandated to provide free parking by Section 803 of the
National Building Code and Rule XIX of the IRR.

According to Section 803 of the National Building Code:

SECTION 803. Percentage of Site Occupancy

(a) Maximum site occupancy shall be governed by the use, type of construction, and height
of the building and the use, area, nature, and location of the site; and subject to the
provisions of the local zoning requirements and in accordance with the rules and regulations
promulgated by the Secretary.

In connection therewith, Rule XIX of the old IRR,25 provides:

RULE XIX – PARKING AND LOADING SPACE REQUIREMENTS

Pursuant to Section 803 of the National Building Code (PD 1096) providing for maximum site
occupancy, the following provisions on parking and loading space requirements shall be observed:

1. The parking space ratings listed below are minimum off-street requirements for specific
uses/occupancies for buildings/structures:

1.1 The size of an average automobile parking slot shall be computed as 2.4 meters by 5.00 meters
for perpendicular or diagonal parking, 2.00 meters by 6.00 meters for parallel parking. A truck or bus
parking/loading slot shall be computed at a minimum of 3.60 meters by 12.00 meters. The parking
slot shall be drawn to scale and the total number of which shall be indicated on the plans and
specified whether or not parking accommodations, are attendant-managed. (See Section 2 for
computation of parking requirements).

xxxx

1.7 Neighborhood shopping center – 1 slot/100 sq. m. of shopping floor area

The OSG avers that the aforequoted provisions should be read together with Section 102 of the
National Building Code, which declares:

SECTION 102. Declaration of Policy

It is hereby declared to be the policy of the State to safeguard life, health, property, and public
welfare, consistent with the principles of sound environmental management and control; and to this
end, make it the purpose of this Code to provide for all buildings and structures, a framework of
minimum standards and requirements to regulate and control their location, site, design, quality of
materials, construction, use, occupancy, and maintenance.

The requirement of free-of-charge parking, the OSG argues, greatly contributes to the aim of
safeguarding "life, health, property, and public welfare, consistent with the principles of sound
environmental management and control." Adequate parking spaces would contribute greatly to
alleviating traffic congestion when complemented by quick and easy access thereto because of free-
charge parking. Moreover, the power to regulate and control the use, occupancy, and maintenance
of buildings and structures carries with it the power to impose fees and, conversely, to control --
partially or, as in this case, absolutely -- the imposition of such fees.

The Court finds no merit in the present Petition.

The explicit directive of the afore-quoted statutory and regulatory provisions, garnered from a plain
reading thereof, is that respondents, as operators/lessors of neighborhood shopping centers, should
provide parking and loading spaces, in accordance with the minimum ratio of one slot per 100
square meters of shopping floor area. There is nothing therein pertaining to the collection (or non-
collection) of parking fees by respondents. In fact, the term "parking fees" cannot even be found at
all in the entire National Building Code and its IRR.

Statutory construction has it that if a statute is clear and unequivocal, it must be given its literal
meaning and applied without any attempt at interpretation.26 Since Section 803 of the National
Building Code and Rule XIX of its IRR do not mention parking fees, then simply, said provisions do
not regulate the collection of the same. The RTC and the Court of Appeals correctly applied Article
1158 of the New Civil Code, which states:

Art. 1158. Obligations derived from law are not presumed. Only those expressly determined in this
Code or in special laws are demandable, and shall be regulated by the precepts of the law which
establishes them; and as to what has not been foreseen, by the provisions of this Book. (Emphasis
ours.)

Hence, in order to bring the matter of parking fees within the ambit of the National Building Code and
its IRR, the OSG had to resort to specious and feeble argumentation, in which the Court cannot
concur.

The OSG cannot rely on Section 102 of the National Building Code to expand the coverage of
Section 803 of the same Code and Rule XIX of the IRR, so as to include the regulation of parking
fees. The OSG limits its citation to the first part of Section 102 of the National Building Code
declaring the policy of the State "to safeguard life, health, property, and public welfare, consistent
with the principles of sound environmental management and control"; but totally ignores the second
part of said provision, which reads, "and to this end, make it the purpose of this Code to provide for
all buildings and structures, a framework of minimum standards and requirements to regulate and
control their location, site, design, quality of materials, construction, use, occupancy, and
maintenance." While the first part of Section 102 of the National Building Code lays down the State
policy, it is the second part thereof that explains how said policy shall be carried out in the Code.
Section 102 of the National Building Code is not an all-encompassing grant of regulatory power to
the DPWH Secretary and local building officials in the name of life, health, property, and public
welfare. On the contrary, it limits the regulatory power of said officials to ensuring that the minimum
standards and requirements for all buildings and structures, as set forth in the National Building
Code, are complied with.

Consequently, the OSG cannot claim that in addition to fixing the minimum requirements for parking
spaces for buildings, Rule XIX of the IRR also mandates that such parking spaces be provided by
building owners free of charge. If Rule XIX is not covered by the enabling law, then it cannot be
added to or included in the implementing rules. The rule-making power of administrative agencies
must be confined to details for regulating the mode or proceedings to carry into effect the law as it
has been enacted, and it cannot be extended to amend or expand the statutory requirements or to
embrace matters not covered by the statute. Administrative regulations must always be in harmony
with the provisions of the law because any resulting discrepancy between the two will always be
resolved in favor of the basic law.27
From the RTC all the way to this Court, the OSG repeatedly referred to Republic v. Gonzales28 and
City of Ozamis v. Lumapas29 to support its position that the State has the power to regulate parking
spaces to promote the health, safety, and welfare of the public; and it is by virtue of said power that
respondents may be required to provide free parking facilities. The OSG, though, failed to consider
the substantial differences in the factual and legal backgrounds of these two cases from those of the
Petition at bar.

In Republic, the Municipality of Malabon sought to eject the occupants of two parcels of land of the
public domain to give way to a road-widening project. It was in this context that the Court
pronounced:

Indiscriminate parking along F. Sevilla Boulevard and other main thoroughfares was prevalent; this,
of course, caused the build up of traffic in the surrounding area to the great discomfort and
inconvenience of the public who use the streets. Traffic congestion constitutes a threat to the health,
welfare, safety and convenience of the people and it can only be substantially relieved by widening
streets and providing adequate parking areas.

The Court, in City of Ozamis, declared that the City had been clothed with full power to control and
regulate its streets for the purpose of promoting public health, safety and welfare. The City can
regulate the time, place, and manner of parking in the streets and public places; and charge minimal
fees for the street parking to cover the expenses for supervision, inspection and control, to ensure
the smooth flow of traffic in the environs of the public market, and for the safety and convenience of
the public.

Republic and City of Ozamis involved parking in the local streets; in contrast, the present case deals
with privately owned parking facilities available for use by the general public. In Republic and City of
Ozamis, the concerned local governments regulated parking pursuant to their power to control and
regulate their streets; in the instant case, the DPWH Secretary and local building officials regulate
parking pursuant to their authority to ensure compliance with the minimum standards and
requirements under the National Building Code and its IRR. With the difference in subject matters
and the bases for the regulatory powers being invoked, Republic and City of Ozamis do not
constitute precedents for this case.

Indeed, Republic and City of Ozamis both contain pronouncements that weaken the position of the
OSG in the case at bar. In Republic, the Court, instead of placing the burden on private persons to
provide parking facilities to the general public, mentioned the trend in other jurisdictions wherein the
municipal governments themselves took the initiative to make more parking spaces available so as
to alleviate the traffic problems, thus:

Under the Land Transportation and Traffic Code, parking in designated areas along public streets or
highways is allowed which clearly indicates that provision for parking spaces serves a useful
purpose. In other jurisdictions where traffic is at least as voluminous as here, the provision by
municipal governments of parking space is not limited to parking along public streets or highways.
There has been a marked trend to build off-street parking facilities with the view to removing parked
cars from the streets. While the provision of off-street parking facilities or carparks has been
commonly undertaken by private enterprise, municipal governments have been constrained to put
up carparks in response to public necessity where private enterprise had failed to keep up with the
growing public demand. American courts have upheld the right of municipal governments to
construct off-street parking facilities as clearly redounding to the public benefit.30

In City of Ozamis, the Court authorized the collection by the City of minimal fees for the parking of
vehicles along the streets: so why then should the Court now preclude respondents from collecting
from the public a fee for the use of the mall parking facilities? Undoubtedly, respondents also incur
expenses in the maintenance and operation of the mall parking facilities, such as electric
consumption, compensation for parking attendants and security, and upkeep of the physical
structures.

It is not sufficient for the OSG to claim that "the power to regulate and control the use, occupancy,
and maintenance of buildings and structures carries with it the power to impose fees and,
conversely, to control, partially or, as in this case, absolutely, the imposition of such fees." Firstly, the
fees within the power of regulatory agencies to impose are regulatory fees. It has been settled law in
this jurisdiction that this broad and all-compassing governmental competence to restrict rights of
liberty and property carries with it the undeniable power to collect a regulatory fee. It looks to the
enactment of specific measures that govern the relations not only as between individuals but also as
between private parties and the political society.31 True, if the regulatory agencies have the power to
impose regulatory fees, then conversely, they also have the power to remove the same. Even so, it
is worthy to note that the present case does not involve the imposition by the DPWH Secretary and
local building officials of regulatory fees upon respondents; but the collection by respondents of
parking fees from persons who use the mall parking facilities. Secondly, assuming arguendo that the
DPWH Secretary and local building officials do have regulatory powers over the collection of parking
fees for the use of privately owned parking facilities, they cannot allow or prohibit such collection
arbitrarily or whimsically. Whether allowing or prohibiting the collection of such parking fees, the
action of the DPWH Secretary and local building officials must pass the test of classic
reasonableness and propriety of the measures or means in the promotion of the ends sought to be
accomplished.32

Keeping in mind the aforementioned test of reasonableness and propriety of measures or means,
the Court notes that Section 803 of the National Building Code falls under Chapter 8 on Light and
Ventilation. Evidently, the Code deems it necessary to regulate site occupancy to ensure that there
is proper lighting and ventilation in every building. Pursuant thereto, Rule XIX of the IRR requires
that a building, depending on its specific use and/or floor area, should provide a minimum number of
parking spaces. The Court, however, fails to see the connection between regulating site occupancy
to ensure proper light and ventilation in every building vis-à-vis regulating the collection by building
owners of fees for the use of their parking spaces. Contrary to the averment of the OSG, the former
does not necessarily include or imply the latter. It totally escapes this Court how lighting and
ventilation conditions at the malls could be affected by the fact that parking facilities thereat are free
or paid for.

The OSG attempts to provide the missing link by arguing that:

Under Section 803 of the National Building Code, complimentary parking spaces are required to
enhance light and ventilation, that is, to avoid traffic congestion in areas surrounding the building,
which certainly affects the ventilation within the building itself, which otherwise, the annexed parking
spaces would have served. Free-of-charge parking avoids traffic congestion by ensuring quick and
easy access of legitimate shoppers to off-street parking spaces annexed to the malls, and thereby
removing the vehicles of these legitimate shoppers off the busy streets near the commercial
establishments.33

The Court is unconvinced. The National Building Code regulates buildings, by setting the minimum
specifications and requirements for the same. It does not concern itself with traffic congestion in
areas surrounding the building. It is already a stretch to say that the National Building Code and its
IRR also intend to solve the problem of traffic congestion around the buildings so as to ensure that
the said buildings shall have adequate lighting and ventilation. Moreover, the Court cannot simply
assume, as the OSG has apparently done, that the traffic congestion in areas around the malls is
due to the fact that respondents charge for their parking facilities, thus, forcing vehicle owners to just
park in the streets. The Court notes that despite the fees charged by respondents, vehicle owners
still use the mall parking facilities, which are even fully occupied on some days. Vehicle owners may
be parking in the streets only because there are not enough parking spaces in the malls, and not
because they are deterred by the parking fees charged by respondents. Free parking spaces at the
malls may even have the opposite effect from what the OSG envisioned: more people may be
encouraged by the free parking to bring their own vehicles, instead of taking public transport, to the
malls; as a result, the parking facilities would become full sooner, leaving more vehicles without
parking spaces in the malls and parked in the streets instead, causing even more traffic congestion.

Without using the term outright, the OSG is actually invoking police power to justify the regulation by
the State, through the DPWH Secretary and local building officials, of privately owned parking
facilities, including the collection by the owners/operators of such facilities of parking fees from the
public for the use thereof. The Court finds, however, that in totally prohibiting respondents from
collecting parking fees from the public for the use of the mall parking facilities, the State would be
acting beyond the bounds of police power.

Police power is the power of promoting the public welfare by restraining and regulating the use of
liberty and property. It is usually exerted in order to merely regulate the use and enjoyment of the
property of the owner. The power to regulate, however, does not include the power to prohibit. A
fortiori, the power to regulate does not include the power to confiscate. Police power does not
involve the taking or confiscation of property, with the exception of a few cases where there is a
necessity to confiscate private property in order to destroy it for the purpose of protecting peace and
order and of promoting the general welfare; for instance, the confiscation of an illegally possessed
article, such as opium and firearms. 34

When there is a taking or confiscation of private property for public use, the State is no longer
exercising police power, but another of its inherent powers, namely, eminent domain. Eminent
domain enables the State to forcibly acquire private lands intended for public use upon payment of
just compensation to the owner.35

Normally, 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 only to impose a burden upon the owner of condemned property, without loss of title
and possession.36 It is a settled rule that neither acquisition of title nor total destruction of value is
essential to taking. It is usually in cases where title remains with the private owner that inquiry should
be made to determine whether the impairment of a property is merely regulated or amounts to a
compensable taking. A regulation that deprives any person of the profitable use of his property
constitutes a taking and entitles him to compensation, unless the invasion of rights is so slight as to
permit the regulation to be justified under the police power. Similarly, a police regulation that
unreasonably restricts the right to use business property for business purposes amounts to a taking
of private property, and the owner may recover therefor.37

Although in the present case, title to and/or possession of the parking facilities remain/s with
respondents, the prohibition against their collection of parking fees from the public, for the use of
said facilities, is already tantamount to a taking or confiscation of their properties. The State is not
only requiring that respondents devote a portion of the latter’s properties for use as parking spaces,
but is also mandating that they give the public access to said parking spaces for free. Such is
already an excessive intrusion into the property rights of respondents. Not only are they being
deprived of the right to use a portion of their properties as they wish, they are further prohibited from
profiting from its use or even just recovering therefrom the expenses for the maintenance and
operation of the required parking facilities.

The ruling of this Court in City Government of Quezon City v. Judge Ericta38 is edifying. Therein, the
City Government of Quezon City passed an ordinance obliging private cemeteries within its
jurisdiction to set aside at least six percent of their total area for charity, that is, for burial grounds of
deceased paupers. According to the Court, the ordinance in question was null and void, for it
authorized the taking of private property without just compensation:

There is no reasonable relation between the setting aside of at least six (6) percent of the total area
of all private cemeteries for charity burial grounds of deceased paupers and the promotion of' health,
morals, good order, safety, or the general welfare of the people. The ordinance is actually a taking
without compensation of a certain area from a private cemetery to benefit paupers who are charges
of the municipal corporation. Instead of' building or maintaining a public cemetery for this purpose,
the city passes the burden to private cemeteries.

'The expropriation without compensation of a portion of private cemeteries is not covered by Section
12(t) of Republic Act 537, the Revised Charter of Quezon City which empowers the city council to
prohibit the burial of the dead within the center of population of the city and to provide for their burial
in a proper place subject to the provisions of general law regulating burial grounds and cemeteries.
When the Local Government Code, Batas Pambansa Blg. 337 provides in Section 177(q) that a
sangguniang panlungsod may "provide for the burial of the dead in such place and in such manner
as prescribed by law or ordinance" it simply authorizes the city to provide its own city owned land or
to buy or expropriate private properties to construct public cemeteries. This has been the law, and
practise in the past. It continues to the present. Expropriation, however, requires payment of just
compensation. The questioned ordinance is different from laws and regulations requiring owners of
subdivisions to set aside certain areas for streets, parks, playgrounds, and other public facilities from
the land they sell to buyers of subdivision lots. The necessities of public safety, health, and
convenience are very clear from said requirements which are intended to insure the development of
communities with salubrious and wholesome environments. The beneficiaries of the regulation, in
turn, are made to pay by the subdivision developer when individual lots are sold to homeowners.

In conclusion, the total prohibition against the collection by respondents of parking fees from persons
who use the mall parking facilities has no basis in the National Building Code or its IRR. The State
also cannot impose the same prohibition by generally invoking police power, since said prohibition
amounts to a taking of respondents’ property without payment of just compensation.
Given the foregoing, the Court finds no more need to address the issue persistently raised by
respondent SM Prime concerning the unconstitutionality of Rule XIX of the IRR. In addition, the said
issue was not among those that the parties, during the pre-trial conference for Civil Cases No. 12-08
and No. 00-1210, agreed to submit for resolution of the RTC. It is likewise axiomatic that the
constitutionality of a law, a regulation, an ordinance or an act will not be resolved by courts if the
controversy can be, as in this case it has been, settled on other grounds.39

WHEREFORE, the instant Petition for Review on Certiorari is hereby DENIED. The Decision dated
25 January 2007 and Resolution dated 14 March 2007 of the Court of Appeals in CA-G.R. CV No.
76298, affirming in toto the Joint Decision dated 29 May 2002 of the Regional Trial Court of Makati
City, Branch 138, in Civil Cases No. 00-1208 and No. 00-1210 are hereby AFFIRMED. No costs.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice
G.R. No. 170498 January 9, 2013

METROPOLITAN BANK & TRUST COMPANY, Petitioner,

vs.
ABSOLUTE MANAGEMENT CORPORATION, Respondent.

DECISION

BRION, J.:

We resolve petitioner Metropolitan Bank & Trust Company's (Metro bank's) petition for review on
certiorari1 seeking the reversal of the decision2 dated August 25, 2005 and the resolution3 dated
November 17, 2005 of the Court of Appeals (CA) in CA-G.R. SP No. 86336. The assailed decision
affirmed the order4 dated May 7, 2004 of the Regional Trial Court (RTC) of Quezon City, Branch 80.
The RTC had denied the admission of Metrobank's Fourth-Party Complaint5 against the Estate of
Jose L. Chua for being a money claim that falls under Section 5, Rule 86 of the Rules of Court; the
claim should have been filed in the pending judicial settlement of Chua’s estate before the RTC of
Pasay City. The CA affirmed the RTC’s order based on the same ground.

Factual Antecedents

On October 5, 2000, Sherwood Holdings Corporation, Inc. (SHCI) filed a complaint for sum of money
against Absolute Management Corporation (AMC). The complaint was docketed as Civil Case No.
Q-00-42105 and was assigned to the RTC of Quezon City, Branch 80.6

SHCI alleged in its complaint that it made advance payments to AMC for the purchase of 27,000
pieces of plywood and 16,500 plyboards in the sum of ₱12,277,500.00, covered by Metrobank
Check Nos. 1407668502, 140768507, 140768530, 140768531, 140768532, 140768533 and
140768534. These checks were all crossed, and were all made payable to AMC. They were given to
Chua, AMC’s General Manager, in 1998.7

Chua died in 1999, 8 and a special proceeding for the settlement of his estate was commenced
before the RTC of Pasay City. This proceeding was pending at the time AMC filed its answer with
counterclaims and third-party complaint.9

SHCI made demands on AMC, after Chua’s death, for allegedly undelivered items worth
₱8,331,700.00. According to AMC, these transactions could not be found in its records. Upon
investigation, AMC discovered that in 1998, Chua received from SHCI 18 Metrobank checks worth
₱31,807,500.00. These were all payable to AMC and were crossed or "for payee’s account only."10

In its answer with counterclaims and third-party complaint,11 AMC averred that it had no knowledge
of Chua’s transactions with SHCI and it did not receive any money from the latter. AMC also asked
the RTC to hold Metrobank liable for the subject checks in case it is adjudged liable to SHCI.

Metrobank filed a motion for bill of particulars,12 seeking to clarify certain ambiguous statements in
AMC’s answer. The RTC granted the motion but AMC failed to submit the required bill of particulars.
Hence, Metrobank filed a motion to strike out the third-party complaint.13

In the meantime, Metrobank filed a motion to dismiss14 against AMC on the ground that the latter
engaged in prohibited forum shopping. According to Metrobank, AMC’s claim against it is the same
claim that it raised against Chua’s estate in Special Proceedings No. 99-0023 before the RTC of
Pasay City, Branch 112. The RTC subsequently denied this motion.15

The RTC of Quezon City opted to defer consideration16 of Metrobank’s motion to strike out third-
party complaint17 and it instead granted AMC’s motion for leave to serve written interrogatories on
the third-party defendant.18 While Metrobank filed its answer to the written interrogatories, AMC was
again directed by the RTC, in an order19 dated August 13, 2003, to submit its bill of particulars.
Instead, AMC filed a motion for reconsideration20 which was denied in an order21 dated October 28,
2003. AMC still did not file its bill of particulars. The RTC, on the other hand, did not act on
Metrobank’s motion to strike out AMC’s third-party complaint.22
In its answer23 dated December 1, 2003, Metrobank admitted that it deposited the checks in question
to the account of Ayala Lumber and Hardware, a sole proprietorship Chua owned and managed.
The deposit was allegedly done with the knowledge and consent of AMC. According to

Metrobank, Chua then gave the assurance that the arrangement for the handling of the checks
carried AMC’s consent. Chua also submitted documents showing his position and interest in AMC.
These documents, as well as AMC’s admission in its answer that it allowed Chua to manage AMC
with a relative free hand, show that it knew of Chua’s arrangement with Metrobank. Further, Chua’s
records show that the proceeds of the checks were remitted to AMC which cannot therefore now
claim that it did not receive these proceeds.

Metrobank also raised the defense of estoppel. According to Metrobank, AMC had knowledge of its
arrangements with Chua for several years. Despite this arrangement, AMC did not object to nor did it
call the attention of Metrobank about Chua’s alleged lack of authority to deposit the checks in Ayala
Lumber and Hardware’s account. At this point, AMC is already estopped from questioning Chua’s
authority to deposit these checks in Ayala Lumber and Hardware’s account.

Lastly, Metrobank asserted that AMC gave Chua unbridled control in managing AMC’s affairs. This
measure of control amounted to gross negligence that was the proximate cause of the loss that AMC
must now bear.

Subsequently, Metrobank filed a motion for leave to admit fourth-party complaint24 against Chua’s
estate. It alleged that Chua’s estate should reimburse Metrobank in case it would be held liable in
the third-party complaint filed against it by AMC.

The RTC’s Ruling

In an order25 dated May 7, 2004, the RTC denied Metrobank’s motion. It likewise denied Metrobank’s
motion for reconsideration in an order26 dated July 7, 2004.

The RTC categorized Metrobank’s allegation in the fourth-party complaint as a "cobro de lo

indebido"27 – a kind of quasi-contract that mandates recovery of what has been improperly paid.
Quasi-contracts fall within the concept of implied contracts that must be included in the claims
required to be filed with the judicial settlement of the deceased’s estate under Section 5, Rule 86 of
the Rules of Court. As such claim, it should have been filed in Special Proceedings No. 99-0023, not
before the RTC as a fourth-party complaint. The RTC, acting in the exercise of its general
jurisdiction, does not have the authority to adjudicate the fourth-party complaint. As a trial court
hearing an ordinary action, it cannot resolve matters pertaining to special proceedings because the
latter is subject to specific rules.

Metrobank responded to the RTC ruling by filing a petition for certiorari28 under Rule 65 before the
CA.

The CA’s Ruling

The CA affirmed the RTC’s ruling that Metrobank’s fourth-party complaint should have been filed in
Special Proceedings No. 99-0023.29 According to the CA, the relief that Metrobank prayed for was
based on a quasi-contract and was a money claim categorized as an implied contract that should be
filed under Section 5, Rule 86 of the Rules of Court.

Based on the statutory construction principle of lex specialis derogat generali, the CA held that
Section 5, Rule 86 of the Rules of Court is a special provision that should prevail over the general
provisions of Section 11, Rule 6 of the Rules of Court. The latter applies to money claims in ordinary
actions while a money claim against a person already deceased falls under the settlement of his
estate that is governed by the rules on special proceedings. If at all, rules for ordinary actions only
apply suppletorily to special proceedings.

The Present Petition

In its present petition for review on certiorari,30 Metrobank asserts that it should be allowed to file a
fourth-party complaint against Chua’s estate in the proceedings before the RTC; its fourth-party
complaint was filed merely to enforce its right to be reimbursed by Chua’s estate in case Metrobank
is held liable to AMC. Hence, Section 11, Rule 6 of the Rules of Court should apply.
AMC, in its comment,31 maintains the line that the CA and the RTC rulings should be followed, i.e.,
that Metrobank’s claim is a quasi-contract that should be filed as a claim under Section 5, Rule 86 of
the Rules of Court.

AMC also challenges the form of Metrobank’s petition for failure to comply with Section 4, Rule 45 of
the Rules of Court. This provision requires petitions filed before the Supreme Court to be
accompanied by "such material portions of the record as would support the petition."

According to AMC, the petition’s annexes are mostly Metrobank’s pleadings and court issuances. It
did not append all relevant AMC pleadings before the RTC and the CA. For this reason, the petition
should have been dismissed outright.

Issues

The parties’ arguments, properly joined, present to us the following issues:

1) Whether the petition for review on certiorari filed by Metrobank before the Supreme Court
complies with Section 4, Rule 45 of the Rules of Court; and

2) Whether Metrobank’s fourth-party complaint against Chua’s estate should be allowed.

The Court’s Ruling

The Present Petition Complies With Section 4, Rule 45 of the Rules of Court

AMC posits that Metrobank’s failure to append relevant AMC pleadings submitted to the RTC and to
the CA violated Section 4, Rule 45 of the Rules of Court,32 and is a sufficient ground to dismiss the
petition under Section 5, Rule 45 of the Rules of Court.33

We disagree with AMC’s position.

In F.A.T. Kee Computer Systems, Inc. v. Online Networks International, Inc.,34 Online Networks
International, Inc. similarly assailed F.A.T. Kee Computer Systems, Inc.’s failure to attach the
transcript of stenographic notes (TSN) of the RTC proceedings, and claimed this omission to be a
violation of Section 4, Rule 45 of the Rules of Court that warranted the petition’s dismissal. The
Court held that the defect was not fatal, as the TSN of the proceedings before the RTC forms part of
the records of the case. Thus, there was no incurable omission that warranted the outright dismissal
of the petition.

The Court significantly pointed out in F.A.T. Kee that the requirement in Section 4, Rule 45 of the
Rules of Court is not meant to be an absolute rule whose violation would automatically lead to the
petition’s dismissal.35 The Rules of Court has not been intended to be totally rigid. In fact, the Rules
of Court provides that the Supreme Court "may require or allow the filing of such pleadings, briefs,
memoranda or documents as it may deem necessary within such periods and under such conditions
as it may consider appropriate";36 and "[i]f the petition is given due course, the Supreme Court may
require the elevation of the complete record of the case or specified parts thereof within fifteen (15)
days from notice."37 These provisions are in keeping with the overriding standard that procedural
rules should be liberally construed to promote their objective and to assist the parties in obtaining a
just, speedy and inexpensive determination of every action or proceeding.38

Under this guiding principle, we do not see Metrobank’s omission to be a fatal one that should
warrant the petition’s outright dismissal. To be sure, the omission to submit the adverse party’s
pleadings in a petition before the Court is not a commendable practice as it may lead to an unduly
biased narration of facts and arguments that masks the real issues before the Court. Such skewed
presentation could lead to the waste of the Court’s time in sifting through the maze of the parties’
narrations of facts and arguments and is a danger the Rules of Court seeks to avoid.

Our examination of Metrobank’s petition shows that it contains AMC’s opposition to its motion to
admit fourth-party complaint among its annexes. The rest of the pleadings have been subsequently
submitted as attachments in Metrobank’s Reply. A reading of these pleadings shows that their
arguments are the same as those stated in the orders of the trial court and the Court of Appeals.
Thus, even if Metrobank’s petition did not contain some of AMC’s pleadings, the Court still had the
benefit of a clear narration of facts and arguments according to both parties’ perspectives. In this
broader view, the mischief that the Rules of Court seeks to avoid has not really been present. If at
all, the omission is not a grievous one that the spirit of liberality cannot address.

The Merits of the Main Issue

The main issue poses to us two essential points that must be addressed. First, are quasi-contracts
included in claims that should be filed pursuant to Rule 86, Section 5 of the Rules of Court? Second,
if so, is Metrobank’s claim against the Estate of Jose Chua based on a quasi-contract?

Quasi-contracts are included in

claims that should be filed under Rule
86, Section 5 of the Rules of Court

In Maclan v. Garcia,39 Gabriel Maclan filed a civil case to recover from Ruben Garcia the necessary
expenses he spent as possessor of a piece of land. Garcia acquired the land as an heir of its
previous owner. He set up the defense that this claim should have been filed in the special
proceedings to settle the estate of his predecessor. Maclan, on the other hand, contended that his
claim arises from law and not from contract, express or implied. Thus, it need not be filed in the
settlement of the estate of Garcia’s predecessor, as mandated by Section 5, Rule 87 of the Rules of
Court (now Section 5, Rule 86).

The Court held under these facts that a claim for necessary expenses spent as previous possessor
of the land is a kind of quasi-contract. Citing Leung Ben v. O’Brien,40 it explained that the term
"implied contracts," as used in our remedial law, originated from the common law where obligations
derived from quasi-contracts and from law are both considered as implied contracts. Thus, the term
quasi-contract is included in the concept "implied contracts" as used in the Rules of Court.
Accordingly, liabilities of the deceased arising from quasi-contracts should be filed as claims in the
settlement of his estate, as provided in Section 5, Rule 86 of the Rules of Court.41

Metrobank’s fourth-party complaint is

based on quasi-contract

Both the RTC and the CA described Metrobank’s claim against Chua’s estate as one based on
quasi-contract. A quasi-contract involves a juridical relation that the law creates on the basis of
certain voluntary, unilateral and lawful acts of a person, to avoid unjust enrichment.42 The Civil Code
provides an enumeration of quasi-contracts,43 but the list is not exhaustive and merely provides
examples.44

According to the CA, Metrobank’s fourth-party complaint falls under the quasi-contracts enunciated
in Article 2154 of the Civil Code.45 Article 2154 embodies the concept "solutio indebiti" which arises
when something is delivered through mistake to a person who has no right to demand it. It obligates
the latter to return what has been received through mistake.46

Solutio indebiti, as defined in Article 2154 of the Civil Code, has two indispensable requisites: first,
that something has been unduly delivered through mistake; and second, that something was
received when there was no right to demand it.47

In its fourth-party complaint, Metrobank claims that Chua’s estate should reimburse it if it becomes
liable on the checks that it deposited to Ayala Lumber and Hardware’s account upon Chua’s
instructions.

This fulfills the requisites of solutio indebiti. First, Metrobank acted in a manner akin to a mistake
when it deposited the AMC checks to Ayala Lumber and Hardware’s account; because of Chua’s
control over AMC’s operations, Metrobank assumed that the checks payable to AMC could be
deposited to Ayala Lumber and Hardware’s account. Second, Ayala Lumber and Hardware had no
right to demand and receive the checks that were deposited to its account; despite Chua’s control
over AMC and Ayala Lumber and Hardware, the two entities are distinct, and checks exclusively and
expressly payable to one cannot be deposited in the account of the other. This disjunct created an
obligation on the part of Ayala Lumber and Hardware, through its sole proprietor, Chua, to return the
amount of these checks to Metrobank.

The Court notes, however, that its description of Metrobank’s fourth-party complaint as a
claimclosely analogous to solutio indebiti is only to determine the validity of the lower courts’ orders
denying it. It is not an adjudication determining the liability of Chua’s estate against Metrobank. The
appropriate trial court should still determine whether Metrobank has a lawful claim against Chua’s
estate based on quasi-contract.

Metrobank’s fourth-party complaint,

as a contingent claim, falls within the
claims that should be filed under
Section 5, Rule 86 of the Rules of
Court

A distinctive character of Metrobank’s fourth-party complaint is its contingent nature – the claim
depends on the possibility that Metrobank would be adjudged liable to AMC, a future event that may
or may not happen. This characteristic unmistakably marks the complaint as a contingent one that
must be included in the claims falling under the terms of Section 5, Rule 86 of the Rules of Court:

Sec. 5. Claims which must be filed under the notice. If not filed, barred; exceptions. – All claims for
money against the decedent, arising from contract, express or implied, whether the same be due,
not due, or contingent, all claims for funeral expenses and expenses for the last sickness of the
decedent, and judgment for money against the decedent, must be filed within the time limited in the
notice. [italics ours]

Specific provisions of Section 5, Rule

86 of the Rules of Court prevail over
general provisions of Section 11, Rule
6 of the Rules of Court

Metrobank argues that Section 11, Rule 6 of the Rules of Court should apply because it impleaded
Chua’s estate for reimbursement in the same transaction upon which it has been sued by AMC. On
this point, the Court supports the conclusion of the CA, to wit:

Notably, a comparison of the respective provisions of Section 11, Rule 6 and Section 5, Rule 86 of
the Rules of Court readily shows that Section 11, Rule 6 applies to ordinary civil actions while
Section 5, Rule 86 specifically applies to money claims against the estate. The specific provisions of
Section 5, Rule 86 x x x must therefore prevail over the general provisions of Section 11, Rule 6.48

We read with approval the CA’s use of the statutory construction principle of lex specialis derogat
generali, leading to the conclusion that the specific provisions of Section 5, Rule 86 of the Rules of
Court should prevail over the general provisions of Section 11, Rule 6 of the Rules of Court; the
settlement of the estate of deceased persons (where claims against the deceased should be filed) is
primarily governed by the rules on special proceedings, while the rules provided for ordinary claims,
including Section 11, Rule 6 ofthe Rules of Court, merely apply suppletorily.49

In sum, on all counts in the considerations material to the issues posed, the resolution points to the
affirmation of the assailed CA decision and resolution. Metrobank's claim in its fourth-party complaint
against Chua's estate is based on quasi-contract. It is also a contingent claim that depends on
another event. Both belong to the category of claims against a deceased person that should be filed
under Section 5, Rule 86 of the Rules of Comi and, as such, should have been so filed in Special
Proceedings No. 99-0023.

WHEREFORE, premises considered, we hereby DENY the petition for lack of merit. The decision of
the Court of Appeals dated August 25, 2005, holding that the Regional Trial Court of Quezon City,
Branch 80, did not commit grave abuse of discretion in denying Metropolitan Bank & Trust
Company's motion for leave to admit fourth-party complaint Is

AFFIRMED. Costs against Metropolitan Bank & Trust Company.

SO ORDERED.

ARTURO D. BRION
Associate Justice

WE CONCUR:
 ANTONIO T. CARPIO
Associate Justice
Chairperson

MARIANO C. DEL CASTILLO JOSE PORTUGAL PEREZ

Associate Justice Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division
G.R. No. 120138 September 5, 1997

MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. JOCSON, JR.,

MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR AZURA and EDGARDO D.
PABALAN, petitioners,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, TORMIL REALTY &
DEVELOPMENT CORPORATION, ANTONIO P. TORRES, JR., MA. CRISTINA T. CARLOS, MA.
LUISA T. MORALES and DANTE D. MORALES, respondents.

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of the Revised Rules of Court,
petitioners seek to annul the decision of the Court of Appeals in CA-G.R. SP. No. 31748 dated
23 May 1994 and its subsequent resolution dated 10 May 1995 denying petitioners' motion for
reconsideration.

The present case involves two separate but interrelated conflicts. The facts leading to the
first controversy are as follows:

The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of
Tormil Realty & Development Corporation while private respondents who are the children of
Judge Torres' deceased brother Antonio A. Torres, constituted the minority stockholders. In
particular, their respective shareholdings and positions in the corporation were as follows:

Name of Stockholder Number of Percentage Position(s)

Shares

Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair

Milagros P. Torres 33,430 19.10 Dir./Treasurer
Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.
Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.
Antonio P. Torres, Jr. 8,290 4.73 Director
Ma. Jacinta P. Torres 8,290 4.73 Director
Ma. Luisa T. Morales 7,790 4.45 Director
Dante D. Morales 500 .28 Director1

In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an "estate planning"
scheme under which he assigned to Tormil Realty & Development Corporation (Tormil for brevity)
various real properties he owned and his shares of stock in other corporations in exchange for
225,972 Tormil Realty shares. Hence, on various dates in July and August of 1984, ten (10) deeds
of assignment were executed by the late Judge Torres:

ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO BE

ISSUED

1. July 13, 1984 TCT 81834 Quezon City 13,252

TCT 144240 Quezon City

2. July 13, 1984 TCT 77008 Manila

TCT 65689 Manila 78,493
TCT 109200 Manila

3. July 13, 1984 TCT 374079 Makati 8,307

4. July 24, 1984 TCT 41527 Pasay

TCT 41528 Pasay 9,855
TCT 41529 Pasay

5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000

 6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737

7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283

8. Aug. 07, 1984 China banking Corp. Stocks 6,300

9. Aug. 20, 1984 Ayala Corp. Stocks 7,468

10. Aug. 29, 1984 Ayala Fund Stocks 1,322

———
225,9722

Consequently, the aforelisted properties were duly recorded in the inventory of assets of Tormil
Realty and the revenues generated by the said properties were correspondingly entered in the
corporation's books of account and financial records.

Likewise, all the assigned parcels of land were duly registered with the respective Register of Deeds
in the name of Tormil Realty, except for the ones located in Makati and Pasay City.

At the time of the assignments and exchange, however, only 225,000 Tormil Realty shares remained
unsubscribed, all of which were duly issued to and received by Judge Torres (as evidenced by stock
certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25).3

Due to the insufficient number of shares of stock issued to Judge Torres and the alleged refusal of
private respondents to approve the needed increase in the corporation's authorized capital stock (to
cover the shortage of 972 shares due to Judge Torres under the "estate planning" scheme), on 11
September 1986, Judge Torres revoked the two (2) deeds of assignment covering the properties in
Makati and Pasay City.4

Noting the disappearance of the Makati and Pasay City properties from the corporation's inventory of
assets and financial records private respondents, on 31 March 1987, were constrained to file a
complaint with the Securities and Exchange Commission (SEC) docketed as SEC Case No. 3153 to
compel Judge Torres to deliver to Tormil corporation the two (2) deeds of assignment covering the
aforementioned Makati and Pasay City properties which he had unilaterally revoked and to cause
the registration of the corresponding titles in the name of Tormil. Private respondents alleged that
following the disappearance of the properties from the corporation's inventory of assets, they found
that on October 24, 1986, Judge Torres, together with Edgardo Pabalan and Graciano Tobias, then
General Manager and legal counsel, respectively, of Tormil, formed and organized a corporation
named "Torres-Pabalan Realty and Development Corporation" and that as part of Judge Torres'
contribution to the new corporation, he executed in its favor a Deed of Assignment conveying the
same Makati and Pasay City properties he had earlier transferred to Tormil.

The second controversy — involving the same parties — concerned the election of the 1987
corporate board of directors.

The 1987 annual stockholders meeting and election of directors of Tormil corporation was scheduled
on 25 March 1987 in compliance with the provisions of its by-laws.

Pursuant thereto, Judge Torres assigned from his own shares, one (l) share each to petitioners
Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares were in the nature of
"qualifying shares," for the sole purpose of meeting the legal requirement to be able to elect them
(Tobias and company) to the Board of Directors as Torres' nominees.

The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030, 029, 028,
027, 026 and at the back of each certificate the following inscription is found:

The present certificate and/or the one share it represents, conformably to the
purpose and intention of the Deed of Assignment dated March 6, 1987, is not held by
me under any claim of ownership and I acknowledge that I hold the same merely as
trustee of Judge Manuel A. Torres, Jr. and for the sole purpose of qualifying me as
Director;
 (Signature of Assignee)5

The reason behind the aforestated action was to remedy the "inequitable lopsided set-up obtaining
in the corporation, where, notwithstanding his controlling interest in the corporation, the late Judge
held only a single seat in the nine-member Board of Directors and was, therefore, at the mercy of the
minority, a combination of any two (2) of whom would suffice to overrule the majority stockholder in
the Board's decision making functions." 6

On 25 March 1987, the annual stockholders meeting was held as scheduled. What transpired
therein was ably narrated by Attys. Benito Cataran and Bayani De los Reyes, the official
representatives dispatched by the SEC to observe the proceedings (upon request of the late Judge
Torres) in their report dated 27 March 1987:

xxx xxx xxx

The undersigned arrived at 1:55 p.m. in the place of the meeting, a residential
bungalow in Urdaneta Village, Makati, Metro Manila. Upon arrival, Josefina Torres
introduced us to the stockholders namely: Milagros Torres, Antonio Torres, Jr., Ma.
Luisa Morales, Ma. Cristina Carlos and Ma. Jacinta Torres. Antonio Torres, Jr.
questioned our authority and personality to appear in the meeting claiming subject
corporation is a family and private firm. We explained that our appearance there was
merely in response to the request of Manuel Torres, Jr. and that SEC has jurisdiction
over all registered corporations. Manuel Torres, Jr., a septuagenarian, argued that as
holder of the major and controlling shares, he approved of our attendance in the
meeting.

At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty. Graciano Tobias,
Atty. Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia, and Atty. Augustus Cesar
Azura arrived. Atty. Azura told the body that they came as counsels of Manuel
Torres, Jr. and as stockholders having assigned qualifying shares by Manuel Torres,
Jr.

The stockholders' meeting started at 2:45 p.m. with Mr. Pabalan presiding after
verbally authorized by Manuel Torres, Jr., the President and Chairman of the
Board. The secretary when asked about the quorum, said that there was more than a
quorum. Mr. Pabalan distributed copies of the president's report and the financial
statements. Antonio Torres, Jr. requested time to study the said reports and brought
out the question of auditing the finances of the corporation which he claimed was
approved previously by the board. Heated arguments ensued which also touched on
family matters. Antonio Torres, Jr. moved for the suspension of the meeting but
Manuel Torres, Jr. voted for the continuation of the proceedings.

Mr. Pabalan suggested that the opinion of the SEC representatives be asked on the
propriety of suspending the meeting but Antonio Torres, Jr. objected reasoning out
that we were just observers.

When the Chairman called for the election of directors, the Secretary refused to write
down the names of nominees prompting Atty. Azura to initiate the appointment of
Atty. Jocson, Jr. as Acting Secretary.

Antonio Torres, Jr. nominated the present members of the Board. At this juncture,
Milagros Torres cried out and told the group of Manuel Torres, Jr. to leave the house.

Manuel Torres, Jr., together with his lawyers-stockholders went to the residence of
Ma. Jacinta Torres in San Miguel Village, Makati, Metro Manila. The undersigned
joined them since the group with Manuel Torres, Jr. the one who requested for
S.E.C. observers, represented the majority of the outstanding capital stock and still
constituted a quorum.

At the resumption of the meeting, the following were nominated and elected as
directors for the year 1987-1988:

1. Manuel Torres, Jr.

 2. Ma. Jacinta Torres

3. Edgardo Pabalan

4. Graciano Tobias

5. Rodolfo Jocson, Jr.

6. Melvin Jurisprudencia

7. Augustus Cesar Azura

8. Josefina Torres

9. Dante Morales

After the election, it was resolved that after the meeting, the new board of directors
shall convene for the election of officers.

xxx xxx xxx7

Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC (SEC Case
No. 3161) praying in the main, that the election of petitioners to the Board of Directors be annulled.

Private respondents alleged that the petitioners-nominees were not legitimate stockholders of Tormil
because the assignment of shares to them violated the minority stockholders' right of pre-emption as
provided in the corporation's articles and by-laws.

Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint hearing and
adjudication.

On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor of private
respondents. The dispositive portion thereof states, thus:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering and directing the respondents, particularly respondent Manuel A. Torres,

Jr., to turn over and deliver to TORMIL through its Corporate Secretary, Ma. Cristina
T. Carlos: (a) the originals of the Deeds of Assignment dated July 13 and 24, 1984
together with the owner's duplicates of Transfer Certificates of Title Nos. 374079 of
the Registry of Deeds for Makati, and 41527, 41528 and 41529 of the Registry of
Deeds for Pasay City and/or to cause the formal registration and transfer of title in
and over such real properties in favor of TORMIL with the proper government
agency; (b) all corporate books of account, records and papers as may be necessary
for the conduct of a comprehensive audit examination, and to allow the examination
and inspection of such accounting books, papers and records by any or all of the
corporate directors, officers and stockholders and/or their duly authorized
representatives or auditors;

2. Declaring as permanent and final the writ of preliminary injunction issued by the
Hearing Panel on February 13, 1989;

3. Declaring as null and void the election and appointment of respondents to the
Board of Directors and executive positions of TORMIL held on March 25, 1987, and
all their acts and resolutions made for and in behalf of TORMIL by authority of and
pursuant to such invalid appointment & election held on March 25, 1987;

4. Ordering the respondents jointly and severally, to pay the complainants the sum of
ONE HUNDRED THOUSAND PESOS (P100,000.00) as and by way of attorney's
fees.8
Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339). Thereafter, on 3
April 1991, during the pendency of said appeal, petitioner Manuel A. Torres, Jr. died. However,
notice thereof was brought to the attention of the SEC not by petitioners' counsel but by private
respondents in a Manifestation dated 24 April 1991.9

On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no administrator
or legal representative of the late Judge Torres' estate has yet been appointed by the Regional Trial
Court of Makati where Sp. Proc. No. M-1768 ("In Matter of the Issuance of the Last Will and
Testament of Manuel A Torres, Jr.") was pending. Two similar motions for suspension were filed by
petitioners on 28 June 1993 and 9 July 1993.

On 19 July 1993, the SEC en banc issued an Order denying petitioners' aforecited motions on the
following ground:

Before the filing of these motions, the Commission en banc had already completed
all proceedings and had likewise ruled on the merits of the appealed cases. Viewed
in this light, we thus feel that there is nothing left to be done except to deny these
motions to suspend proceedings. 10

On the same date, the SEC en banc rendered a decision, the dispositive portion of which reads,
thus:

WHEREFORE, premises considered, the appealed decision of the hearing panel is

hereby affirmed and all motions pending before us incident to this appealed case are
necessarily DISMISSED.

SO ORDERED. 11

Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of Appeals by
way of a petition for review (docketed as CA-G.R. SP No. 31748).

On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of which states:

WHEREFORE, the petition for review is DISMISSED and the appealed decision is
accordingly affirmed.

SO ORDERED. 12

From the said decision, petitioners filed a motion for reconsideration which was denied in a
resolution issued by the Court of Appeals dated 10 May 1995. 13

Insisting on their cause, petitioners filed the present petition for review alleging that the Court of
Appeals committed the following errors in its decision:

(1)

WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A FULL LENGTH
DECISION, WITHOUT THE EVIDENCE AND THE ORIGINAL RECORD OF S.E.C.
— AC NO. 339 BEING PROPERLY BROUGHT BEFORE IT FOR REVIEW AND RE-
EXAMINATION, AN OMISSION RESULTING IN A CLEAR TRANSGRESSION OR
CURTAILMENT OF THE RIGHTS OF THE HEREIN PETITIONERS TO
PROCEDURAL DUE PROCESS;

(2)

WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE RESPONDENT

S.E.C., WHICH IS VOID FOR HAVING BEEN RENDERED WITHOUT THE
PROPER SUBSTITUTION OF THE DECEASED PRINCIPAL PARTY-
RESPONDENT IN S.E.C.-AC NO. 339 AND CONSEQUENTLY, FOR WANT OF
JURISDICTION OVER THE SAID DECEASED'S TESTATE ESTATE, AND
MOREOVER, WHEN IT SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY ITS
APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM GESTIO;
 (3)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE

ORIGINAL RECORD OF S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN
RE-EXAMINED, THAT S.E.C. CASE NO. 3153 INVOLVED A SITUATION WHERE
PERFORMANCE WAS IMPOSSIBLE (AS CONTEMPLATED UNDER ARTICLE
1191 OF THE CIVIL CODE) AND WAS NOT A MERE CASE OF LESION OR
INADEQUACY OF CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO
ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT S.E.C.; and,

(4)

WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE AND THE

ORIGINAL RECORD OF S.E.C. — AC NO. 339 NOT HAVING ACTUALLY BEEN
EXAMINED, THAT THE RECORDING BY THE LATE JUDGE MANUEL A.
TORRES, JR. OF THE QUESTIONED ASSIGNMENT OF QUALIFYING SHARES
TO HIS NOMINEES, WAS AFFIRMED IN THE STOCK AND TRANSFER BOOK BY
AN ACTING CORPORATE SECRETARY AND MOREOVER, THAT ACTUAL
NOTICE OF SAID ASSIGNMENT WAS TIMELY MADE TO THE OTHER
STOCKHOLDERS. 14

We shall resolve the issues in seriatim.

Petitioners insist that the failure to transmit the original records to the Court of Appeals deprived
them of procedural due process. Without the evidence and the original records of the proceedings
before the SEC, the Court of Appeals, petitioners adamantly state, could not have possibly made a
proper appreciation and correct determination of the issues, particularly the factual issues, they had
raised on appeal. Petitioners also assert that since the Court of Appeals allegedly gave due course
to their petition, the original records should have been forwarded to said court.

Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27 February 1991)
which provides that:

8. WHEN PETITION GIVEN DUE COURSE. — The Court of Appeals shall give due
course to the petition only when it shows prima facie that the court, commission,
board, office or agency concerned has committed errors of fact or law that would
warrant reversal or modification of the order, ruling or decision sought to be
reviewed. The findings of fact of the court commission, board, office or agency
concerned when supported by substantial evidence shall be final.

xxx xxx xxx

11. TRANSMITTAL OF RECORD. — Within fifteen (15) days from notice that the
petition has been given due course, the court, commission, board, office or agency
concerned shall transmit to the Court of Appeals the original or a certified copy of the
entire record of the proceeding under review. The record to be transmitted may be
abridged by agreement of all parties to the proceeding. The Court of Appeals may
require or permit subsequent correction or addition to the record.

Petitioners contend that the Court of Appeals had given due course to their petition as allegedly
indicated by the following acts:

a) it granted the restraining order applied for by the herein petitioners,

and after hearing, also the writ of preliminary injunction sought by
them; under the original SC Circular No. 1-91, a petition for review
may be given due course at the onset (paragraph 8) upon a
mere prima facie finding of errors of fact or law having been
committed, and such prima facie finding is but consistent with the
grant of the extra-ordinary writ of preliminary injunction;
 b) it required the parties to submit "simultaneous memoranda" in its
resolution dated October 15, 1993 (this is in addition to the comment
required to be filed by the respondents) and furthermore declared in
the same resolution that the petition will be decided "on the merits,"
instead of outrightly dismissing the same;

c) it rendered a full length decision, wherein: (aa) it expressly

declared the respondent S.E.C. as having erred in denying the
pertinent motions to suspend proceedings; (bb) it declared the
supposed error as having become a non-issue when the respondent
C.A. "proceeded to hear (the) appeal"; (cc) it formulated and applied
its own theory of negotiorum gestio in justifying the non-substitution of
the deceased principal party in S.E.C. — AC No. 339 and moreover,
its theory of di minimis non curat lex (this, without first determining the
true extent of and the correct legal characterization of the so-called
"shortage" of Tormil shares;
and, (dd) it expressly affirmed the assailed decision of respondent
S.E.C. 15

Petitioners' contention is unmeritorious.

There is nothing on record to show that the Court of Appeals gave due course to the petition. The
fact alone that the Court of Appeals issued a restraining order and a writ of preliminary injunction
and required the parties to submit their respective memoranda does not indicate that the petition
was given due course. The office of an injunction is merely to preserve the status quo pending the
disposition of the case. The court can require the submission of memoranda in support of the
respective claims and positions of the parties without necessarily giving due course to the petition.
The matter of whether or not to give due course to a petition lies in the discretion of the court.

It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised Administrative
Circular No. 1-95 (which took effect on 1 June 1995) wherein the procedure for appeals from quasi-
judicial agencies to the Court of Appeals was clarified thus:

10. Due course. — If upon the filing of the comment or such other pleadings or
documents as may be required or allowed by the Court of Appeals or upon the
expiration of the period for the filing thereof, and on the bases of the petition or the
record the Court of Appeals finds prima facie that the court or agency concerned has
committed errors of fact or law that would warrant reversal or modification of the
award, judgment, final order or resolution sought to be reviewed, it may give due
course to the petition; otherwise, it shall dismiss the same. The findings of fact of the
court or agency concerned, when supported by substantial evidence, shall be binding
on the Court of Appeals.

11. Transmittal of record. — Within fifteen (15) days from notice that the petition has
been given due course, the Court of Appeals may require the court or agency
concerned to transmit the original or a legible certified true copy of the entire record
of the proceeding under review. The record to be transmitted may be abridged by
agreement of all parties to the proceeding. The Court of Appeals may require or
permit subsequent correction of or addition to the record. (Emphasis ours.)

The aforecited circular now formalizes the correct practice and clearly states that in resolving
appeals from quasi judicial agencies, it is within the discretion of the Court of Appeals to have the
original records of the proceedings under review be transmitted to it. In this connection petitioners'
claim that the Court of Appeals could not have decided the case on the merits without the records
being brought before it is patently lame. Indubitably, the Court of Appeals decided the case on the
basis of the uncontroverted facts and admissions contained in the pleadings, that is, the petition,
comment, reply, rejoinder, memoranda, etc. filed by the parties.

II

Petitioners contend that the decisions of the SEC and the Court of Appeals are null and void for
being rendered without the necessary substitution of parties (for the deceased petitioner Manuel A.
Torres, Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules of Court, which provides as
follows:
 Sec. 17. Death of party. — After a party dies and the claim is not thereby
extinguished, the court shall order, upon proper notice, the legal representative of the
deceased to appear and to be substituted for the deceased, within a period of thirty
(30) days, or within such time as may be granted. If the legal representative fails to
appear within said time, the court may order the opposing party to procure the
appointment of a legal representative of the deceased within a time to be specified
by the court, and the representative shall immediately appear for and on behalf of the
interest of the deceased. The court charges involved in procuring such appointment,
if defrayed by the opposing party, may be recovered as costs. The heirs of the
deceased may be allowed to be substituted for the deceased, without requiring the
appointment of an executor or administrator and the court may appoint guardian ad
litem for the minor heirs.

Petitioners insist that the SEC en banc should have granted the motions to suspend they filed based
as they were on the ground that the Regional Trial Court of Makati, where the probate of the late
Judge Torres' will was pending, had yet to appoint an administrator or legal representative of his
estate.

We are not unaware of the principle underlying the aforequoted provision:

It has been held that when a party dies in an action that survives, and no order is
issued by the Court for the appearance of the legal representative or of the heirs of
the deceased to be substituted for the deceased, and as a matter of fact no such
substitution has ever been effected, the trial held by the court without such legal
representative or heirs, and the judgment rendered after such trial, are null and void
because the court acquired no jurisdiction over the persons of the legal
representative or of the heirs upon whom the trial and the judgment are not binding. 16

As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before the
Regional Trial Court of Makati for the ante-mortem probate of his holographic will which he had
executed on 31 October 1986. Testifying in the said proceedings, Judge Torres confirmed his
appointment of petitioner Edgardo D. Pabalan as the sole executor of his will and administrator of his
estate. The proceedings, however, were opposed by the same parties, herein private respondents
Antonio P. Torres, Jr., Ma. Luisa T. Morales and Ma. Cristina T. Carlos, 17 who are nephew and
nieces of Judge Torres, being the children of his late brother Antonio A. Torres.

It can readily be observed therefore that the parties involved in the present controversy are virtually
the same parties fighting over the representation of the late Judge Torres' estate. It should be
recalled that the purpose behind the rule on substitution of parties is the protection of the right of
every party to due process. It is to ensure that the deceased party would continue to be properly
represented in the suit through the duly appointed legal representative of his estate. In the present
case, this purpose has been substantially fulfilled (despite the lack of formal substitution) in view of
the peculiar fact that both proceedings involve practically the same parties. Both parties have been
fiercely fighting in the probate proceedings of Judge Torres' holographic will for appointment as legal
representative of his estate. Since both parties claim interests over the estate, the rights of the
estate were expected to be fully protected in the proceedings before the SEC en banc and the Court
of Appeals. In either case, whoever shall be appointed legal representative of Judge Torres' estate
(petitioner Pabalan or private respondents) would no longer be a stranger to the present case, the
said parties having voluntarily submitted to the jurisdiction of the SEC and the Court of Appeals and
having thoroughly participated in the proceedings.

The foregoing rationate finds support in the recent case of Vda. de Salazar v. CA, 18 wherein the
Court expounded thus:

The need for substitution of heirs is based on the right to due process accruing to
every party in any proceeding. The rationale underlying this requirement in case a
party dies during the pendency of proceedings of a nature not extinguished by such
death, is that . . . the exercise of judicial power to hear and determine a cause
implicitly presupposes in the trial court, amongst other essentials, jurisdiction over
the persons of the parties. That jurisdiction was inevitably impaired upon the death of
the protestee pending the proceedings below such that unless and until a legal
representative is for him duly named and within the jurisdiction of the trial court, no
adjudication in the cause could have been accorded any validity or binding effect
upon any party, in representation of the deceased, without trenching upon the
 fundamental right to a day in court which is the very essence of the constitutionally
enshrined guarantee of due process.

We are not unaware of several cases where we have ruled that a party having died
in an action that survives, the trial held by the court without appearance of the
deceased's legal representative or substitution of heirs and the judgment rendered
after such trial, are null and void because the court acquired no jurisdiction over the
persons of the legal representatives or of the heirs upon whom the trial and the
judgment would be binding. This general rule notwithstanding, in denying petitioner's
motion for reconsideration, the Court of Appeals correctly ruled that formal
substitution of heirs is not necessary when the heirs themselves voluntarily
appeared, participated in the case and presented evidence in defense of deceased
defendant. Attending the case at bench, after all, are these particular circumstances
which negate petitioner's belated and seemingly ostensible claim of violation of her
rights to due process. We should not lose sight of the principle underlying the general
rule that formal substitution of heirs must be effectuated for them to be bound by a
subsequent judgment. Such had been the general rule established not because the
rule on substitution of heirs and that on appointment of a legal representative are
jurisdictional requirements per se but because non-compliance therewith results in
the undeniable violation of the right to due process of those who, though not duly
notified of the proceedings, are substantially affected by the decision rendered
therein . . . .

It is appropriate to mention here that when Judge Torres died on April 3, 1991, the SEC en banc had
already fully heard the parties and what remained was the evaluation of the evidence and rendition
of the judgment.

Further, petitioners filed their motions to suspend proceedings only after more than two (2) years
from the death of Judge Torres. Petitioners' counsel was even remiss in his duty under Sec. 16, Rule
3 of the Revised Rules of Court. 19 Instead, it was private respondents who informed the SEC of
Judge Torres' death through a manifestation dated 24 April 1991.

For the SEC en banc to have suspended the proceedings to await the appointment of the legal
representative by the estate was impractical and would have caused undue delay in the proceedings
and a denial of justice. There is no telling when the probate court will decide the issue, which may
still be appealed to the higher courts.

In any case, there has been no final disposition of the properties of the late Judge Torres before the
SEC. On the contrary, the decision of the SEC en banc as affirmed by the Court of Appeals served
to protect and preserve his estate. Consequently, the rule that when a party dies, he should be
substituted by his legal representative to protect the interests of his estate in observance of due
process was not violated in this case in view of its peculiar situation where the estate was fully
protected by the presence of the parties who claim interests therein either as directors, stockholders
or heirs.

Finally, we agree with petitioners' contention that the principle of negotiorum gestio 20 does not apply
in the present case. Said principle explicitly covers abandoned or neglected property or business.

III

Petitioners find legal basis for Judge Torres' act of revoking the assignment of his properties in
Makati and Pasay City to Tormil corporation by relying on Art. 1191 of the Civil Code which provides
that:

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.

Petitioners' contentions cannot be sustained. We see no justifiable reason to disturb the findings of
SEC, as affirmed by the Court of Appeals:

We sustain the ruling of respondent SEC in the decision appealed from (Rollo, pp.
45-46) that —

. . . the shortage of 972 shares would not be valid ground for

respondent Torres to unilaterally revoke the deeds of assignment he
had executed on July 13, 1984 and July 24, 1984 wherein he
voluntarily assigned to TORMIL real properties covered by TCT No.
374079 (Makati) and TCT No. 41527, 41528 and 41529 (Pasay)
respectively.

A comparison of the number of shares that respondent Torres

received from TORMIL by virtue of the "deeds of assignment" and the
stock certificates issued by the latter to the former readily shows that
TORMIL had substantially performed what was expected of it. In fact,
the first two issuances were in satisfaction to the properties being
revoked by respondent Torres. Hence, the shortage of 972 shares
would never be a valid ground for the revocation of the deeds
covering Pasay and Quezon City properties.

In Universal Food Corp. vs. CA, the Supreme Court held:

The general rule is that rescission of a contract will

not be permitted for a slight or carnal breach, but only
for such substantial and fundamental breach as would
defeat the very object of the parties in making the
agreement.

The shortage of 972 shares definitely is not substantial and

fundamental breach as would defeat the very object of the parties in
entering into contract. Art. 1355 of the Civil Code also provides:
"Except in cases specified by law, lesion or inadequacy of cause shall
not invalidate a contract, unless there has been fraud, mistake or
undue influences." There being no fraud, mistake or undue influence
exerted on respondent Torres by TORMIL and the latter having
already issued to the former of its 225,000 unissued shares, the most
logical course of action is to declare as null and void the deed of
revocation executed by respondent Torres. (Rollo, pp. 45-46.) 21

The aforequoted Civil Code provision does not apply in this particular situation for the obvious
reason that a specific number of shares of stock (as evidenced by stock certificates) had already
been issued to the late Judge Torres in exchange for his Makati and Pasay City properties. The
records thus disclose:

DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF

ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE*

1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd

TCT 144240 Quezon City)

2. July 13, 1984 TCT 77008 Manila)

TCT 65689 Manila) 78,493 2nd
TCT 102200 Manila)

3. July 13, 1984 TCT 374079 Makati 8,307 1st

 4. July 24, 1984 TCT 41527 Pasay
TCT 41528 Pasay) 9,855 4th
TCT 41529 Pasay)

5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th

6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th

7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th

8. August 7, 1984 China Banking Corp. Stocks 6,300 6th

9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th

10. August 29, 1984 Ayala Fund Stocks 1,322.1)

—————
TOTAL 225,972.3

*Order of stock certificate issuances by TORMIL to respondent Torres relative to the

Deeds of Assignment he executed sometime in July and August, 1984. 22 (Emphasis
ours.)

Moreover, we agree with the contention of the Solicitor General that the shortage of shares should
not have affected the assignment of the Makati and Pasay City properties which were executed in 13
and 24 July 1984 and the consideration for which have been duly paid or fulfilled but should have
been applied logically to the last assignment of property — Judge Torres' Ayala Fund shares —
which was executed on 29 August 1984. 23

IV

Petitioners insist that the assignment of "qualifying shares" to the nominees of the late Judge Torres
(herein petitioners) does not partake of the real nature of a transfer or conveyance of shares of stock
as would call for the "imposition of stringent requirements (with respect to the) recording of the
transfer of said shares." Anyway, petitioners add, there was substantial compliance with the above-
stated requirement since said assignments were entered by the late Judge Torres himself in the
corporation's stock and transfer book on 6 March 1987, prior to the 25 March 1987 annual
stockholders meeting and which entries were confirmed on 8 March 1987 by petitioner Azura who
was appointed Assistant Corporate Secretary by Judge Torres.

Petitioners further argue that:

10.10. Certainly, there is no legal or just basis for the respondent S.E.C. to penalize
the late Judge Torres by invalidating the questioned entries in the stock and transfer
book, simply because he initially made those entries (they were later affirmed by an
acting corporate secretary) and because the stock and transfer book was in his
possession instead of the elected corporate secretary, if the background facts herein-
before narrated and the serious animosities that then reigned between the deceased
Judge and his relatives are to be taken into account;

xxx xxx xxx

10.12. Indeed it was a practice in the corporate respondent, a family corporation with
only a measly number of stockholders, for the late judge to have personal custody of
corporate records; as president, chairman and majority stockholder, he had the
prerogative of designating an acting corporate secretary or to himself make the
needed entries, in instances where the regular secretary, who is a mere subordinate,
is unavailable or intentionally defaults, which was the situation that obtained
immediately prior to the 1987 annual stockholders meeting of Tormil, as the late
Judge Torres had so indicated in the stock and transfer book in the form of the
entries now in question;
 10.13. Surely, it would have been futile nay foolish for him to have insisted under
those circumstances, for the regular secretary, who was then part of a group ranged
against him, to make the entries of the assignments in favor of his nominees; 24

Petitioners' contentions lack merit.

It is precisely the brewing family discord between Judge Torres and private respondents — his
nephew and nieces that should have placed Judge Torres on his guard. He should have been more
careful in ensuring that his actions (particularly the assignment of qualifying shares to his nominees)
comply with the requirements of the law. Petitioners cannot use the flimsy excuse that it would have
been a vain attempt to force the incumbent corporate secretary to register the aforestated
assignments in the stock and transfer book because the latter belonged to the opposite faction. It is
the corporate secretary's duty and obligation to register valid transfers of stocks and if said corporate
officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel
performance. 25 In other words, there are remedies within the law that petitioners could have availed
of, instead of taking the law in their own hands, as the cliche goes.

Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:

We likewise sustain respondent SEC when it ruled, interpreting Section 74 of the

Corporation Code, as follows (Rollo, p. 45):

In the absence of (any) provision to the contrary, the corporate

secretary is the custodian of corporate records. Corollarily, he keeps
the stock and transfer book and makes proper and necessary entries
therein.

Contrary to the generally accepted corporate practice, the stock and

transfer book of TORMIL was not kept by Ms. Maria Cristina T.
Carlos, the corporate secretary but by respondent Torres, the
President and Chairman of the Board of Directors of TORMIL. In
contravention to the above cited provision, the stock and transfer
book was not kept at the principal office of the corporation either but
at the place of respondent Torres.

These being the obtaining circumstances, any entries made in the

stock and transfer book on March 8, 1987 by respondent Torres of an
alleged transfer of nominal shares to Pabalan and Co. cannot
therefore be given any valid effect. Where the entries made are not
valid, Pabalan and Co. cannot therefore be considered stockholders
of record of TORMIL. Because they are not stockholders, they cannot
therefore be elected as directors of TORMIL. To rule otherwise would
not only encourage violation of clear mandate of Sec. 74 of the
Corporation Code that stock and transfer book shall be kept in the
principal office of the corporation but would likewise open the flood
gates of confusion in the corporation as to who has the proper
custody of the stock and transfer book and who are the real
stockholders of records of a certain corporation as any holder of the
stock and transfer book, though not the corporate secretary, at
pleasure would make entries therein.

The fact that respondent Torres holds 81.28% of the outstanding

capital stock of TORMIL is of no moment and is not a license for him
to arrogate unto himself a duty lodged to (sic) the corporate
secretary. 26

All corporations, big or small, must abide by the provisions of the Corporation Code. Being a simple
family corporation is not an exemption. Such corporations cannot have rules and practices other
than those established by law.

WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED.

SO ORDERED.
Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
G.R. No. 97995 January 21, 1993

PHILIPPINE NATIONAL BANK, petitioner,

vs.
COURT OF APPEALS AND B.P. MATA AND CO., INC., respondents.

Roland A. Niedo for petitioner.

Benjamin C. Santos Law Office for respondent.

ROMERO, J.:

Rarely is this Court confronted with a case calling for the delineation in broad strokes of the
distinctions between such closely allied concepts as the quasi-contract called "solutio indebiti" under
the venerable Spanish Civil Code and the species of implied trust denominated "constructive trusts,"
commonly regarded as of Anglo-American origin. Such a case is the one presented to us now which
has highlighted more of the affinity and less of the dissimilarity between the two concepts as to lead
the legal scholar into the error of interchanging the two. Presented below are the factual
circumstances that brought into juxtaposition the twin institutions of the Civil Law quasi-contract and
the Anglo-American trust.

Private Respondent B.P. Mata & Co. Inc. (Mata), is a private corporation engaged in providing goods
and services to shipping companies. Since 1966, it has acted as a manning or crewing agent for
several foreign firms, one of which is Star Kist Foods, Inc., USA (Star Kist). As part of their
agreement, Mata makes advances for the crew's medical expenses, National Seaman's Board fees,
Seaman's Welfare fund, and standby fees and for the crew's basic personal needs. Subsequently,
Mata sends monthly billings to its foreign principal Star Kist, which in turn reimburses Mata by
sending a telegraphic transfer through banks for credit to the latter's account.

Against this background, on February 21, 1975, Security Pacific National Bank (SEPAC) of Los
Angeles which had an agency arrangement with Philippine National Bank (PNB), transmitted a cable
message to the International Department of PNB to pay the amount of US$14,000 to Mata by
crediting the latter's account with the Insular Bank of Asia and America (IBAA), per order of Star Kist.
Upon receipt of this cabled message on February 24, 1975, PNB's International Department noticed
an error and sent a service message to SEPAC Bank. The latter replied with instructions that the
amount of US$14,000 should only be for US$1,400.

On the basis of the cable message dated February 24, 1975 Cashier's Check No. 269522 in the
amount of US$1,400 (P9,772.95) representing reimbursement from Star Kist, was issued by the Star
Kist for the account of Mata on February 25, 1975 through the Insular Bank of Asia and America
(IBAA).

However, fourteen days after or on March 11, 1975, PNB effected another payment through
Cashier's Check No. 270271 in the amount of US$14,000 (P97,878.60) purporting to be another
transmittal of reimbursement from Star Kist, private respondent's foreign principal.

Six years later, or more specifically, on May 13, 1981, PNB requested Mata for refund of US$14,000
(P97,878.60) after it discovered its error in effecting the second payment.

On February 4, 1982, PNB filed a civil case for collection and refund of US$14,000 against Mata
arguing that based on a constructive trust under Article 1456 of the Civil Code, it has a right to
recover the said amount it erroneously credited to respondent Mata.1

After trial, the Regional Trial Court of Manila rendered judgment dismissing the complaint ruling that
the instant case falls squarely under Article 2154 on solutio indebiti and not under Article 1456 on
constructive trust. The lower court ruled out constructive trust, applying strictly the technical
definition of a trust as "a right of property, real or personal, held by one party for the benefit of
another; that there is a fiduciary relation between a trustee and a cestui que trust as regards certain
property, real, personal, money or choses in action."2
In affirming the lower court, the appellate court added in its opinion that under Article 2154 on solutio
indebiti, the person who makes the payment is the one who commits the mistake vis-a-vis the
recipient who is unaware of such a mistake.3 Consequently, recipient is duty bound to return the
amount paid by mistake. But the appellate court concluded that petitioner's demand for the return of
US$14,000 cannot prosper because its cause of action had already prescribed under Article 1145,
paragraph 2 of the Civil Code which states:

The following actions must be commenced within six years:

xxx xxx xxx

(2) Upon a quasi-contract.

This is because petitioner's complaint was filed only on February 4, 1982, almost seven
years after March 11, 1975 when petitioner mistakenly made payment to private respondent.

Hence, the instant petition for certiorari proceeding seeking to annul the decision of the appellate
court on the basis that Mata's obligation to return US$14,000 is governed, in the alternative, by
either Article 1456 on constructive trust or Article 2154 of the Civil Code on quasi-contract.4

Article 1456 of the Civil Code provides:

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.

On the other hand, Article 2154 states:

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.

Petitioner naturally opts for an interpretation under constructive trust as its action filed on February 4,
1982 can still prosper, as it is well within the prescriptive period of ten (10) years as provided by
Article 1144, paragraph 2 of the Civil Code.5

If it is to be construed as a case of payment by mistake or solutio indebiti, then the prescriptive

period for quasi-contracts of six years applies, as provided by Article 1145. As pointed out by the
appellate court, petitioner's cause of action thereunder shall have prescribed, having been brought
almost seven years after the cause of action accrued. However, even assuming that the instant case
constitutes a constructive trust and prescription has not set in, the present action has already been
barred by laches.

To recall, trusts are either express or implied. While express trusts are created by the intention of the
trustor or of the parties, implied trusts come into being by operation of law.6 Implied trusts are those
which, without being expressed, are deducible from the nature of the transaction as matters of intent
or which are superinduced on the transaction by operation of law as matters of equity, independently
of the particular intention of the parties.7

In turn, implied trusts are subdivided into resulting and constructive trusts. 8 A resulting trust is a trust
raised by implication of law and presumed always to have been contemplated by the parties, the
intention of which is found in the nature of the transaction, but not expressed in the deed or
instrument of conveyance. 9 Examples of resulting trusts are found in Articles 1448 to 1455 of the
Civil Code.10 On the other hand, a constructive trust is one not created by words either expressly or
impliedly, but by construction of equity in order to satisfy the demands of justice. An example of a
constructive trust is Article 1456 quoted above. 11

A deeper analysis of Article 1456 reveals that it is not a trust in the technical sense 12 for in a typical
trust, confidence is reposed in one person who is named a trustee for the benefit of another who is
called the cestui que trust, respecting property which is held by the trustee for the benefit of
the cestui que trust.13 A constructive trust, unlike an express trust, does not emanate from, or
generate a fiduciary relation. While in an express trust, a beneficiary and a trustee are linked by
confidential or fiduciary relations, in a constructive trust, there is neither a promise nor any fiduciary
relation to speak of and the so-called trustee neither accepts any trust nor intends holding the
property for the beneficiary.14

In the case at bar, Mata, in receiving the US$14,000 in its account through IBAA, had no intent of
holding the same for a supposed beneficiary or cestui que trust, namely PNB. But under Article
1456, the law construes a trust, namely a constructive trust, for the benefit of the person from whom
the property comes, in this case PNB, for reasons of justice and equity.

At this juncture, a historical note on the codal provisions on trust and quasi-contracts is in order.

Originally, under the Spanish Civil Code, there were only two kinds of quasi contracts: negotiorum
gestio and solutio indebiti. But the Code Commission, mindful of the position of the eminent Spanish
jurist, Manresa, that "the number of quasi contracts may be indefinite," added Section 3 entitled
"Other Quasi-Contracts."15

Moreover, even as Article 2142 of the Civil Code defines a quasi-contract, the succeeding article
provides that: "The provisions for quasi-contracts in this Chapter do not exclude other quasi-
contracts which may come within the purview of the preceding article."16

Indubitably, the Civil Code does not confine itself exclusively to the quasi-contracts enumerated from
Articles 2144 to 2175 but is open to the possibility that, absent a pre-existing relationship, there
being neither crime nor quasi-delict, a quasi-contractual relation may be forced upon the parties to
avoid a case of unjust enrichment.17 There being no express consent, in the sense of a meeting of
minds between the parties, there is no contract to speak of. However, in view of the peculiar
circumstances or factual environment, consent is presumed to the end that a recipient of benefits or
favors resulting from lawful, voluntary and unilateral acts of another may not be unjustly enriched at
the expense of another.

Undoubtedly, the instant case fulfills the indispensable requisites of solutio indebiti as defined in
Article 2154 that something (in this case money) has been received when there was no right to
demand it and (2) the same was unduly delivered through mistake. There is a presumption that there
was a mistake in the payment "if something which had never been due or had already been
paid was delivered; but he from whom the return is claimed may prove that the delivery was made
out of liberality or for any other just cause."18

In the case at bar, a payment in the corrected amount of US$1,400 through Cashier's Check No.
269522 had already been made by PNB for the account of Mata on February 25, 1975. Strangely,
however, fourteen days later, PNB effected another payment through Cashier's Check No. 270271 in
the amount of US$14,000, this time purporting to be another transmittal of reimbursement from Star
Kist, private respondent's foreign principal.

While the principle of undue enrichment or solutio indebiti, is not new, having been incorporated in
the subject on quasi-contracts in Title XVI of Book IV of the Spanish Civil Code entitled "Obligations
incurred without contract,"19 the chapter on Trusts is fairly recent, having been introduced by the
Code Commission in 1949. Although the concept of trusts is nowhere to be found in the Spanish
Civil Code, the framers of our present Civil Code incorporated implied trusts, which includes
constructive trusts, on top of quasi-contracts, both of which embody the principle of equity above
strict legalism.20

In analyzing the law on trusts, it would be instructive to refer to Anglo-American jurisprudence on the
subject. Under American Law, a court of equity does not consider a constructive trustee for all
purposes as though he were in reality a trustee; although it will force him to return the property, it will
not impose upon him the numerous fiduciary obligations ordinarily demanded from a trustee of an
express trust.21 It must be borne in mind that in an express trust, the trustee has active duties of
management while in a constructive trust, the duty is merely to surrender the property.

Still applying American case law, quasi-contractual obligations give rise to a personal liability
ordinarily enforceable by an action at law, while constructive trusts are enforceable by a proceeding
in equity to compel the defendant to surrender specific property. To be sure, the distinction is more
procedural than substantive.22

Further reflection on these concepts reveals that a constructive "trust" is as much a misnomer as a
"quasi-contract," so far removed are they from trusts and contracts proper, respectively. In the case
of a constructive trust, as in the case of quasi-contract, a relationship is "forced" by operation of law
upon the parties, not because of any intention on their part but in order to prevent unjust enrichment,
thus giving rise to certain obligations not within the contemplation of the parties.23

Although we are not quite in accord with the opinion that "the trusts known to American and English
equity jurisprudence are derived from the fidei commissa of the Roman Law,"24 it is safe to state that
their roots are firmly grounded on such Civil Law principles are expressed in the Latin maxim, "Nemo
cum alterius detrimento locupletari potest," 25 particularly the concept of constructive trust.

Returning to the instant case, while petitioner may indeed opt to avail of an action to enforce a
constructive trust or the quasi-contract of solutio indebiti, it has been deprived of a choice, for
prescription has effectively blocked quasi-contract as an alternative, leaving only constructive trust
as the feasible option.

Petitioner argues that the lower and appellate courts cannot indulge in semantics by holding that in
Article 1456 the recipient commits the mistake while in Article 2154, the recipient commits no
mistake. 26 On the other hand, private respondent, invoking the appellate court's reasoning, would
impress upon us that under Article 1456, there can be no mutual mistake. Consequently, private
respondent contends that the case at bar is one of solutio indebiti and not a constructive trust.

We agree with petitioner's stand that under Article 1456, the law does not make any distinction since
mutual mistake is a possibility on either side — on the side of either the grantor or the
grantee.27 Thus, it was error to conclude that in a constructive trust, only the person obtaining the
property commits a mistake. This is because it is also possible that a grantor, like PNB in the case at
hand, may commit the mistake.

Proceeding now to the issue of whether or not petitioner may still claim the US$14,000 it erroneously
paid private respondent under a constructive trust, we rule in the negative. Although we are aware
that only seven (7) years lapsed after petitioner erroneously credited private respondent with the
said amount and that under Article 1144, petitioner is well within the prescriptive period for the
enforcement of a constructive or implied trust, we rule that petitioner's claim cannot prosper since it
is already barred by laches. It is a well-settled rule now that an action to enforce an implied trust,
whether resulting or constructive, may be barred not only by prescription but also by laches. 28

While prescription is concerned with the fact of delay, laches deals with the effect of unreasonable
delay.29 It is amazing that it took petitioner almost seven years before it discovered that it had
erroneously paid private respondent. Petitioner would attribute its mistake to the heavy volume of
international transactions handled by the Cable and Remittance Division of the International
Department of PNB. Such specious reasoning is not persuasive. It is unbelievable for a bank, and a
government bank at that, which regularly publishes its balanced financial statements annually or
more frequently, by the quarter, to notice its error only seven years later. As a universal bank with
worldwide operations, PNB cannot afford to commit such costly mistakes. Moreover, as between
parties where negligence is imputable to one and not to the other, the former must perforce bear the
consequences of its neglect. Hence, petitioner should bear the cost of its own negligence.

WHEREFORE, the decision of the Court of Appeals dismissing petitioner's claim against private
respondent is AFFIRMED.

Costs against petitioner.

SO ORDERED.

Bidin, Davide, Jr. and Melo, JJ., concur.

Gutierrez, Jr., J., concurs in the result.

G.R. No. 152411 September 29, 2004

UNIVERSITY OF THE PHILIPPINES, petitioner,

vs.
PHILAB INDUSTRIES, INC., respondent.

DECISION

CALLEJO, SR., J.:

Before the Court is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-
G.R. CV No. 44209, as well as its Resolution2 denying the petitioner’s motion for the reconsideration
thereof. Themo1 mo2 Court of Appeals set aside the Decision3 of Branch 150 of the Regional Trial Court
(RTC) of Makati City, which dismissed the complaint of the respondent against the petitioner for sum
of money and damages.

The Facts of the Case

Sometime in 1979, the University of the Philippines (UP) decided to construct an integrated system
of research organization known as the Research Complex. As part of the project, laboratory
equipment and furniture were purchased for the National Institute of Biotechnology and Applied
Microbiology (BIOTECH) at the UP Los Baños. Providentially, the Ferdinand E. Marcos Foundation
(FEMF) came forward and agreed to fund the acquisition of the laboratory furniture, including the
fabrication thereof.

Renato E. Lirio, the Executive Assistant of the FEMF, gave the go-signal to BIOTECH to contact a
corporation to accomplish the project. On July 23, 1982, Dr. William Padolina, the Executive Deputy
Director of BIOTECH, arranged for Philippine Laboratory Industries, Inc. (PHILAB), to fabricate the
laboratory furniture and deliver the same to BIOTECH for the BIOTECH Building Project, for the
account of the FEMF. Lirio directed Padolina to give the go-signal to PHILAB to proceed with the
fabrication of the laboratory furniture, and requested Padolina to forward the contract of the project
to FEMF for its approval.

On July 13, 1982, Padolina wrote Lirio and requested for the issuance of the purchase order and
downpayment for the office and laboratory furniture for the project, thus:

1. Supply and Installation of Laboratory furniture for the BIOTECH Building

Project
Amount : P2,934,068.90
Supplier : Philippine Laboratory Furniture Co.,
College, Laguna
Attention : Mr. Hector C. Navasero
President
Downpayment : 40% or ₱1,173,627.56
2. Fabrication and Supply of office furniture for the BIOTECH Building Project
Amount : P573,375.00
Supplier : Trans-Oriental Woodworks, Inc.
1st Avenue, Bagumbayan Tanyag, Taguig, Metro
Manila
Downpayment : 50% or ₱286,687.504

Padolina assured Lirio that the contract would be prepared as soon as possible before the issuance
of the purchase orders and the downpayment for the goods, and would be transmitted to the FEMF
as soon as possible.

In a Letter dated July 23, 1982, Padolina informed Hector Navasero, the President of PHILAB, to
proceed with the fabrication of the laboratory furniture, per the directive of FEMF Executive Assistant
Lirio. Padolina also requested for copies of the shop drawings and a sample contract5 for the project,
and that such contract and drawings had to be finalized before the down payment could be remitted
to the PHILAB the following week. However, PHILAB failed to forward any sample contract.

Subsequently, PHILAB made partial deliveries of office and laboratory furniture to BIOTECH after
having been duly inspected by their representatives and FEMF Executive Assistant Lirio.

On August 24, 1982, FEMF remitted ₱600,000 to PHILAB as downpayment for the laboratory
furniture for the BIOTECH project, for which PHILAB issued Official Receipt No. 253 to FEMF. On
October 22, 1982, FEMF made another partial payment of ₱800,000 to PHILAB, for which the latter
issued Official Receipt No. 256 to FEMF. The remittances were in the form of checks drawn by
FEMF and delivered to PHILAB, through Padolina.

On October 16, 1982, UP, through Emil Q. Javier, the Chancellor of UP Los Baños and FEMF,
represented by its Executive Officer, Rolando Gapud, executed a Memorandum of Agreement
(MOA) in which FEMF agreed to grant financial support and donate sums of money to UP for the
construction of buildings, installation of laboratory and other capitalization for the project, not to
exceed ₱29,000,000.00. The obligations of FEMF under the MOA are the following:

ARTICLE II

OBLIGATIONS OF THE FOUNDATION

2.1. The FOUNDATION, in carrying out its principal objectives of promoting philantrophic and
scientific projects through financial support to such projects that will contribute to the
country’s economic development, shall grant such financial support and donate such sums of
money to the RESEARCH COMPLEX as may be necessary for the construction of buildings,
installation of laboratories, setting up of offices and physical plants and facilities and other
capital investment of the RESEARCH COMPLEX and/or any of its component Research
Institutes not to exceed ₱29 Million. For this purpose, the FOUNDATION shall:

(a) Acquire and donate to the UNIVERSITY the site for the RESEARCH COMPLEX;
and

(b) Donate or cause to be donated to the UNIVERSITY the sum of TWENTY-NINE

MILLION PESOS (₱29,000,000.00) for the construction of the buildings of the
National Institutes of Biotechnology and Applied Microbiology (BIOTECH) and the
installation of their laboratories and their physical plants and other facilities to enable
them to commence operations.

2.2. In addition, the FOUNDATION shall, subject to the approval of the Board of Trustees of
the FOUNDATION, continue to support the activities of the RESEARCH COMPLEX by way
of recurrent additional grants and donations for specific research and development projects
which may be mutually agreed upon and, from time to time, additional grants and donations
of such amounts as may be necessary to provide the RESEARCH COMPLEX and/or any of
its Research Institutes with operational flexibility especially with regard to incentives to staff
purchase of equipment/facilities, travel abroad, recruitment of local and expatriate staff and
such other activities and inputs which are difficult to obtain under usual government rules
and regulations.6

The Board of Regents of the UP approved the MOA on November 25, 1982.7

In the meantime, Navasero promised to submit the contract for the installation of laboratory furniture
to BIOTECH, by January 12, 1983. However, Navasero failed to do so. In a Letter dated February 1,
1983, BIOTECH reminded Navasero of the need to submit the contract so that it could be submitted
to FEMF for its evaluation and approval.8 Instead of submitting the said contract, PHILAB submitted
to BIOTECH an accomplishment report on the project as of February 28, 1983, and requested
payment thereon.9 By May 1983, PHILAB had completed 78% of the project, amounting to
₱2,288,573.74 out of the total cost of ₱2,934,068.90. The FEMF had already paid forty percent
(40%) of the total cost of the project. On May 12, 1983, Padolina wrote Lirio and furnished him the
progress billing from PHILAB.10 On August 11, 1983, the FEMF made another partial payment of
₱836,119.52 representing the already delivered laboratory and office furniture after the requisite
inspection and verification thereof by representatives from the BIOTECH, FEMF, and PHILAB. The
payment was made in the form of a check, for which PHILAB issued Official Receipt No. 202 to
FEMF through Padolina.11

On July 1, 1984, PHILAB submitted to BIOTECH Invoice No. 01643 in the amount of ₱702,939.40
for the final payment of laboratory furniture. Representatives from BIOTECH, PHILAB, and Lirio for
the FEMF, conducted a verification of the accomplishment of the work and confirmed the same.
BIOTECH forwarded the invoice to Lirio on December 18, 1984 for its payment.12 Lirio, in turn,
forwarded the invoice to Gapud, presumably sometime in the early part of 1985. However, the FEMF
failed to pay the bill. PHILAB reiterated its request for payment through a letter on May 9,
1985.13 BIOTECH again wrote Lirio on March 21, 1985, requesting the payment of PHILAB’s bill.14 It
sent another letter to Gapud, on November 22, 1985, again appealing for the payment of PHILAB’s
bill.15 In a Letter to BIOTECH dated December 5, 1985, PHILAB requested payment of ₱702,939.40
plus interest thereon of ₱224,940.61.16 There was, however, no response from the FEMF. On
February 24, 1986, PHILAB wrote BIOTECH, appealing for the payment of its bill even on
installment basis.17

President Marcos was ousted from office during the February 1986 EDSA Revolution. On March 26,
1986, Navasero wrote BIOTECH requesting for its much-needed assistance for the payment of the
balance already due plus interest of ₱295,234.55 for its fabrication and supply of laboratory
furniture.18

On April 22, 1986, PHILAB wrote President Corazon C. Aquino asking her help to secure the
payment of the amount due from the FEMF.19 The letter was referred to then Budget Minister Alberto
Romulo, who referred the letter to then UP President Edgardo Angara on June 9, 1986. On
September 30, 1986, Raul P. de Guzman, the Chancellor of UP Los Baños, wrote then Chairman of
the Presidential Commission on Good Government (PCGG) Jovito Salonga, submitting PHILAB’s
claim to be officially entered as "accounts payable" as soon as the assets of FEMF were liquidated
by the PCGG.20

In the meantime, the PCGG wrote UP requesting for a copy of the relevant contract and the MOA for
its perusal.21

Chancellor De Guzman wrote Navasero requesting for a copy of the contract executed between
PHILAB and FEMF. In a Letter dated October 20, 1987, Navasero informed De Guzman that
PHILAB and FEMF did not execute any contract regarding the fabrication and delivery of laboratory
furniture to BIOTECH.

Exasperated, PHILAB filed a complaint for sum of money and damages against UP. In the
complaint, PHILAB prayed that it be paid the following:

(1) PESOS: SEVEN HUNDRED TWO THOUSAND NINE HUNDRED THIRTY NINE &
40/100 (₱702,939.40) plus an additional amount (as shall be determined during the hearing)
to cover the actual cost of money which at the time of transaction the value of the peso was
eleven to a dollar (₱11.00:$1) and twenty seven (27%) percent interest on the total amount
from August 1982 until fully paid;

(2) PESOS: ONE HUNDRED THOUSAND (₱100,000.00) exemplary damages;

(3) FIFTY THOUSAND [PESOS] (₱50,000.00) as and for attorney’s fees; and

(4) Cost of suit.22

PHILAB alleged, inter alia, that:

3. Sometime in August 1982, defendant, through its officials, particularly MR. WILLIAM
PADOLINA, Director, asked plaintiff to supply and install several laboratory furnitures and
equipment at BIOTECH, a research laboratory of herein defendant located at its campus in
College, Laguna, for a total contract price of PESOS: TWO MILLION NINE HUNDRED
THIRTY-NINE THOUSAND FIFTY-EIGHT & 90/100 (₱2,939,058.90);

4. After the completion of the delivery and installation of said laboratory furnitures and
equipment at defendant’s BIOTECH Laboratory, defendant paid three (3) times on
installment basis:
 a) ₱600,000.00 as per Official Receipt No. 253 dated August 24, 1982;

b) ₱800,000.00 as per Official Receipt No. 256 dated October 22, 1982;

c) ₱836,119.52 as per Official Receipt No. 202 dated August 11, 1983;

thus leaving a balance of PESOS: SEVEN HUNDRED TWO THOUSAND NINE HUNDRED
THIRTY-NINE & 40/100 (₱702,939.40).

5. That notwithstanding repeated demands for the past eight years, defendant arrogantly and
maliciously made plaintiff believe that it was going to pay the balance aforestated, that was
why plaintiff’s President and General Manager himself, HECTOR C. NAVASERO, personally
went to and from UP Los Baños to talk with defendant’s responsible officers in the hope of
expecting payment, when, in truth and in fact, defendant had no intention to pay whatsoever
right from the start on a misplaced ground of technicalities. Some of plaintiff’s demand letters
since year 1983 up to the present are hereto attached as Annexes A, B, C, D, E, F, G, and H
hereof;

6. That by reason of defendant’s malicious, evil and unnecessary misrepresentations that it

was going to pay its obligation and asking plaintiff so many red tapes and requirements to
submit, compliance of all of which took plaintiff almost eight (8) years to finish, when, in truth
and in fact, defendant had no intention to pay, defendant should be ordered to pay plaintiff
no less than PESOS: ONE HUNDRED THOUSAND (₱100,000.00) exemplary damages, so
that other government institutions may be warned that they must not unjustly enrich
themselves at the expense of the people they serve.23

In its answer, UP denied liability and alleged that PHILAB had no cause of action against it because
it was merely the donee/beneficiary of the laboratory furniture in the BIOTECH; and that the FEMF,
which funded the project, was liable to the PHILAB for the purchase price of the laboratory furniture.
UP specifically denied obliging itself to pay for the laboratory furniture supplied by PHILAB.

After due proceedings, the trial court rendered judgment dismissing the complaint without prejudice
to PHILAB’s recourse against the FEMF. The fallo of the decision reads:

WHEREFORE, this case is hereby DISMISSED for lack of merit without prejudice to
plaintiff's recourse to the assets of the Marcos Foundation for the unpaid balance of
₱792,939.49.

SO ORDERED.24

Undaunted, PHILAB appealed to the Court of Appeals (CA) alleging that the trial court erred in
finding that:

1. the contract for the supply and installation of subject laboratory furniture and equipment
was between PHILAB and the Marcos Foundation; and,

2. the Marcos Foundation, not the University of the Philippines, is liable to pay the
respondent the balance of the purchase price.25

The CA reversed and set aside the decision of the RTC and held that there was never a contract
between FEMF and PHILAB. Consequently, PHILAB could not be bound by the MOA between the
FEMF and UP since it was never a party thereto. The appellate court ruled that, although UP did not
bind itself to pay for the laboratory furniture; nevertheless, it is liable to PHILAB under the maxim:
"No one should unjustly enrich himself at the expense of another."

The Present Petition

Upon the denial of its motion for reconsideration of the appellate court’s decision, UP, now the
petitioner, filed its petition for review contending that:

I. THE COURT OF APPEALS ERRED WHEN IT FAILED TO APPLY THE LAW ON

CONTRACTS BETWEEN PHILAB AND THE MARCOS FOUNDATION.
 II. THE COURT OF APPEALS ERRED IN APPLYING THE LEGAL PRINCIPLE OF UNJUST
ENRICHMENT WHEN IT HELD THAT THE UNIVERSITY, AND NOT THE MARCOS
FOUNDATION, IS LIABLE TO PHILAB.26

Prefatorily, the doctrinal rule is that pure questions of facts may not be the subject of appeal by
certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as this mode of appeal is generally
restricted to questions of law.27 However, this rule is not absolute. The Court may review the factual
findings of the CA should they be contrary to those of the trial court.28 Correspondingly, this Court
may review findings of facts when the judgment of the CA is premised on a misapprehension of
facts.29

On the first assigned error, the petitioner argues that the CA overlooked the evidentiary effect and
substance of the corresponding letters and communications which support the statements of the
witnesses showing affirmatively that an implied contract of sale existed between PHILAB and the
FEMF. The petitioner furthermore asserts that no contract existed between it and the respondent as
it could not have entered into any agreement without the requisite public bidding and a formal written
contract.

The respondent, on the other hand, submits that the CA did not err in not applying the law on
contracts between the respondent and the FEMF. It, likewise, attests that it was never privy to the
MOA entered into between the petitioner and the FEMF. The respondent adds that what the FEMF
donated was a sum of money equivalent to ₱29,000,000, and not the laboratory equipment supplied
by it to the petitioner. The respondent submits that the petitioner, being the recipient of the laboratory
furniture, should not enrich itself at the expense of the respondent.

The petition is meritorious.

It bears stressing that the respondent’s cause of action is one for sum of money predicated on the
alleged promise of the petitioner to pay for the purchase price of the furniture, which, despite
demands, the petitioner failed to do. However, the respondent failed to prove that the petitioner ever
obliged itself to pay for the laboratory furniture supplied by it. Hence, the respondent is not entitled to
its claim against the petitioner.

There is no dispute that the respondent is not privy to the MOA executed by the petitioner and
FEMF; hence, it is not bound by the said agreement. Contracts take effect only between the parties
and their assigns.30 A contract cannot be binding upon and cannot be enforced against one who is
not a party to it, even if he is aware of such contract and has acted with knowledge
thereof.31 Likewise admitted by the parties, is the fact that there was no written contract executed by
the petitioner, the respondent and FEMF relating to the fabrication and delivery of office and
laboratory furniture to the BIOTECH. Even the CA failed to specifically declare that the petitioner and
the respondent entered into a contract of sale over the said laboratory furniture. The parties are in
accord that the FEMF had remitted to the respondent partial payments via checks drawn and issued
by the FEMF to the respondent, through Padolina, in the total amount of ₱2,288,573.74 out of the
total cost of the project of ₱2,934,068.90 and that the respondent received the said checks and
issued receipts therefor to the FEMF. There is also no controversy that the petitioner did not pay a
single centavo for the said furniture delivered by the respondent that the petitioner had been using
ever since.

We agree with the petitioner that, based on the records, an implied-in-fact contract of sale was
entered into between the respondent and FEMF. A contract implied in fact is one implied from facts
and circumstances showing a mutual intention to contract. It arises where the intention of the parties
is not expressed, but an agreement in fact creating an obligation. It is a contract, the existence and
terms of which are manifested by conduct and not by direct or explicit words between parties but is
to be deduced from conduct of the parties, language used, or things done by them, or other pertinent
circumstances attending the transaction. To create contracts implied in fact, circumstances must
warrant inference that one expected compensation and the other to pay.32 An implied-in-fact contract
requires the parties’ intent to enter into a contract; it is a true contract.33 The conduct of the parties is
to be viewed as a reasonable man would view it, to determine the existence or not of an implied-in-
fact contract.34 The totality of the acts/conducts of the parties must be considered to determine their
intention. An implied-in-fact contract will not arise unless the meeting of minds is indicated by some
intelligent conduct, act or sign.35

In this case, the respondent was aware, from the time Padolina contacted it for the fabrication and
supply of the laboratory furniture until the go-signal was given to it to fabricate and deliver the
furniture to BIOTECH as beneficiary, that the FEMF was to pay for the same. Indeed, Padolina
asked the respondent to prepare the draft of the contract to be received by the FEMF prior to the
execution of the parties (the respondent and FEMF), but somehow, the respondent failed to prepare
one. The respondent knew that the petitioner was merely the donee-beneficiary of the laboratory
furniture and not the buyer; nor was it liable for the payment of the purchase price thereof. From the
inception, the FEMF paid for the bills and statement of accounts of the respondent, for which the
latter unconditionally issued receipts to and under the name of the FEMF. Indeed, witness Lirio
testified:

Q: Now, did you know, Mr. Witness, if PHILAB Industries was aware that it was the Marcos
Foundation who would be paying for this particular transaction for the completion of this
particular transaction?

A: I think they are fully aware.

Q: What is your basis for saying so?

A: First, I think they were appraised by Dr. Padolina. Secondly, there were occasions during
our inspection in Los Baños, at the installation site, there were occasions, two or three
occasions, when we met with Mr. Navasero who is the President, I think, or manager of
PHILAB, and we appraised him that it was really between the foundation and him to which
includes (sic) the construction company constructing the building. He is fully aware that it is
the foundation who (sic) engaged them and issued the payments.36

The respondent, in its Letter dated March 26, 1986, informed the petitioner and sought its assistance
for the collection of the amount due from the FEMF:

Dear Dr. Padolina:

May we request for your much-needed assistance in the payment of the balance still due us
on the laboratory furniture we supplied and installed two years ago?

Business is still slow and we will appreciate having these funds as soon as possible to keep
up our operations.

We look forward to hearing from you regarding this matter.

Very truly yours,

PHILAB INDUSTRIES, INC.37

The respondent even wrote former President Aquino seeking her assistance for the payment of the
amount due, in which the respondent admitted it tried to collect from her predecessor, namely, the
former President Ferdinand E. Marcos:

YOUR EXCELLENCY:

At the instance of the national government, subject laboratory furnitures were supplied by our
company to the National Institute of Biotechnology & Applied Microbiology (BIOTECH),
University of the Philippines, Los Baños, Laguna, in 1984.

Out of the total contract price of PESOS: TWO MILLION NINE HUNDRED THIRTY-NINE
THOUSAND FIFTY-EIGHT & 90/100 (₱2,939,058.90), the previous administration had so far
paid us the sum of ₱2,236,119.52 thus leaving a balance of PESOS: ONE MILLION FOUR
HUNDRED TWELVE THOUSAND SEVEN HUNDRED FORTY-EIGHT & 61/100
(₱1,412.748.61) inclusive of interest of 24% per annum and 30% exchange rate adjustment.

On several occasions, we have tried to collect this amount from your predecessor, the latest
of which was subject invoice (01643) we submitted to DR. W. PADOLINA, deputy director of
BIOTECH. But this, notwithstanding, our claim has remained unacted upon up to now. Copy
of said invoice is hereto attached for easy reference.
 Now that your excellency is the head of our government, we sincerely hope that payment of
this obligation will soon be made as this is one project the Republic of the Philippines has
use of and derives benefit from.38

Admittedly, the respondent sent to the petitioner its bills and statements of accounts for the
payments of the laboratory furniture it delivered to the petitioner which the petitioner, through
Padolina, transmitted to the FEMF for its payment. However, the FEMF failed to pay the last
statement of account of the respondent because of the onset of the EDSA upheaval. It was only
when the respondent lost all hope of collecting its claim from the government and/or the PCGG did it
file the complaint against the petitioner for the collection of the payment of its last delivery of
laboratory furniture.

We reject the ruling of the CA holding the petitioner liable for the claim of the respondent based on
the maxim that no one should enrich itself at the expense of another.

Unjust enrichment claims do not lie simply because one party benefits from the efforts or obligations
of others, but instead it must be shown that a party was unjustly enriched in the sense that the term
unjustly could mean illegally or unlawfully.39

Moreover, to substantiate a claim for unjust enrichment, the claimant must unequivocally prove that
another party knowingly received something of value to which he was not entitled and that the state
of affairs are such that it would be unjust for the person to keep the benefit.40 Unjust enrichment is a
term used to depict result or effect of failure to make remuneration of or for property or benefits
received under circumstances that give rise to legal or equitable obligation to account for them; to be
entitled to remuneration, one must confer benefit by mistake, fraud, coercion, or request.41 Unjust
enrichment is not itself a theory of reconvey. Rather, it is a prerequisite for the enforcement of the
doctrine of restitution.42

Article 22 of the New Civil Code reads:

Every person who, through an act of performance by another, or any other means, acquires
or comes into possession of something at the expense of the latter without just or legal
ground, shall return the same to him. (Boldface supplied)

In order that accion in rem verso may prosper, the essential elements must be present: (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.43

An accion in rem verso is considered merely an auxiliary action, available only when there is no
other remedy on contract, quasi-contract, crime, and quasi-delict. If there is an obtainable action
under any other institution of positive law, that action must be resorted to, and the principle of accion
in rem verso will not lie.44

The essential requisites for the application of Article 22 of the New Civil Code do not obtain in this
case. The respondent had a remedy against the FEMF via an action based on an implied-in-fact
contract with the FEMF for the payment of its claim. The petitioner legally acquired the laboratory
furniture under the MOA with FEMF; hence, it is entitled to keep the laboratory furniture.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The assailed Decision of the Court
of Appeals is REVERSED AND SET ASIDE. The Decision of the Regional Trial Court, Makati City,
Branch 150, is REINSTATED. No costs.

SO ORDERED.

Puno, Austria-Martinez, Tinga, and Chico-Nazario*, JJ., concur.

G.R. No. 187240 October 15, 2014

CARLOS A. LORIA, Petitioner,

vs.
LUDOLFO P. MUÑOZ, JR. Respondent.

DECISION

LEONEN, J.:

No person should unjustly enrich himself or herself at the expense of another.

This is a petition for review on certiorari1 to set aside the Court of Appeals' decision2 and
resolution3 in CA-G.R. CV No. 81882. The Court of Appeals ordered petitioner Carlos A. Loria to pay
respondent Ludolfo P. Muñoz, Jr. ₱2,000,000.00 in actual damages with 12% interest per year from
the filing of the complaint until full payment.4

The facts of this case are as follows:

Ludolfo P. Muñoz, Jr. (Muñoz) filed a complaint for sum of money and damages with an application
for issuance of a writ of preliminary attachment against Carlos A. Loria (Loria) with the Regional Trial
Court of Legazpi City.5

In his complaint, Muñoz alleged that he has been engaged in construction under the name, "Ludolfo
P. Muñoz, Jr. Construction." In August 2000, Loria visited Muñoz in his office in Doña Maria
Subdivision in Daraga, Albay. He invited Muñoz to advance ₱2,000,000.00 for a subcontract of a
₱50,000,000.00 river-dredging project in Guinobatan.6

Loria represented that he would makearrangements such that Elizaldy Co, owner of Sunwest
Construction and Development Corporation, would turn out to be the lowest bidder for the project.
Elizaldy Co would pay ₱8,000,000.00 to ensure the project’s award to Sunwest. After the award to
Sunwest, Sunwest would subcontract 20% or ₱10,000,000.00 worth of the project to Muñoz.7

Since Muñoz had known Loria for five years, Muñoz accepted Loria’s proposal.8

On October 2, 2000, Muñoz requested Allied Bank to release ₱3,000,000.00 from his joint account
withhis business partner, Christopher Co, to a certain Grace delos Santos (delos Santos). Loria then
obtained the money from delos Santos.9

Four days later, ₱1,800,000.00 of the ₱3,000,000.00 was returned to Muñoz.10

On January 10, 2001, Loria collectedMuñoz’s ₱800,000.00 balance. After deducting Loria’s personal
loans from Muñoz, Muñoz issued a check to Loria for ₱481,800.00. Loria acknowledged receiving
this amount from Muñoz.11

The project to dredge the Masarawag and San Francisco Rivers in Guinobatan was subjected to
public bidding. The project was awarded to the lowest bidder, Sunwest Construction and
Development Corporation.12

Sunwest allegedly finished dredging the Masarawag and San Francisco Rivers without
subcontracting Muñoz.13 With the project allegedly finished, Muñozdemanded Loria to return his
₱2,000,000.00. Loria, however, did not return the money.14

Muñoz first charged Loria and Elizaldy Co with estafa. This criminal case was dismissed by the
Municipal Trial Court of Daraga, Albay for lack of probable cause.15

Muñoz then filed the complaint for sum of money. The case was raffled to Branch 6 and presidedby
Judge Vladimir B. Brusola.16

Loria answered Muñoz’s complaint. He admitted receiving ₱481,800.00 from Muñoz but argued that
the complaint did not state a cause of action against him. According to Loria, he followed up the
project’s approval with the Central Office of the Department of Public Works and Highways as the
parties agreed upon. He was, therefore, entitled to his representation expenses.17

Loria also argued that Muñoz was guilty of forum shopping. Muñoz first filed a criminal complaint for
estafa against him and Elizaldy Co, which complaint the Municipal Trial Court of Daraga, Albay
dismissed. The subsequently filed complaint for sum of money, allegedly a complaint to recover the
civil aspect of the estafa case, must, therefore, be dismissed as argued by Loria.18

During pre-trial, the parties agreed to litigate the sole issue of whether Loria is liable to Muñoz for
₱2,000,000.00.19

According to the trial court, Muñoz established with preponderant evidence that Loria received
₱2,000,000.00 from Muñoz for a subcontract of the river-dredging project. Since no part of the
project was subcontracted to Muñoz, Loria must return the ₱2,000,000.00 he received, or he would
be "unduly enriching himself at the expense of [Muñoz]."20

On the claim of forum shopping, the trial court ruled that Loria’s obligation to return the 2,000,000.00
did not arise from criminal liability. Muñoz may, therefore, file a civil action to recover his
₱2,000,000.00.21

As to the prayer for issuance of a writ of preliminary attachment, the trial court denied the prayer for
lack of sufficient basis.22

Thus, in the decision23 dated January 30, 2004, the trial court ordered Loria to return the
₱2,000,000.00 toMuñoz as actual damages with 12% interest from the filing of the complaint until
the amount’s full payment. The trial court likewise ordered Loria to pay Muñoz ₱100,000.00 in
attorney’s fees, ₱25,000.00 in litigation expenses, and ₱25,000.00 in exemplary damages with costs
against Loria.24

Loria appealed to the Court of Appeals, arguing that Muñoz failed to establish his receipt of the
₱2,000,000.00. Specifically, Muñoz failed to establish that he obtained ₱3,000,000.00from a certain
Grace delos Santos. Loria also appealed the award of attorney’s fees, litigation expenses, and
exemplary damages for having no basis in fact and in law.25

The Court of Appeals sustained the trial court’s factual findings. In ruling that Loria received the net
amount of ₱2,000,000.00 from Muñoz, the Court of Appeals referred to Muñoz’s testimony that he
ordered Allied Bank to release ₱3,000,000.00 from his joint account with Christopher Co to a certain
Grace delos Santos.26 Loria then obtained the money from delos Santos and confirmed with Muñoz
his receipt of the money.27 This testimony, according to the appellate court, was supported by Exhibit
"C," a check voucher the trial court admitted inevidence. Loria signed this check voucher and
acknowledged receiving ₱1,200,000.00 on October 2, 2000 and ₱800,000.00 on January 10, 2001,
ora total of ₱2,000,000.00.28

Considering that Muñoz did not benefit from paying Loria ₱2,000,000.00, the appellate court ruled
that Loria must return the money to Muñoz under the principle of unjust enrichment.29

The appellate court, however, ruled that Muñoz failed to show his right to exemplary damages and
attorney’s fees.30

Thus, in the decision31 dated October 23, 2008, the Court of Appeals affirmed the trial court’s
decision but deleted the award of exemplary damages and attorney’s fees.32 The appellate court
likewise denied Loria’s motion for reconsideration in the resolution33 dated March 12, 2009.

Loria filed a petition for review on certiorari34 with this court, arguing that the principle of unjust
enrichment does not apply in this case. As the trial and appellate courts found, Muñoz paid Loria
₱2,000,000.00 for a subcontract of a government project. The parties’ agreement, therefore, was
void for being contrary to law, specifically, the Anti-Graft and Corrupt Practices Act, the Revised
Penal Code, and Section 6 of Presidential Decree No. 1594. The agreement was likewise contrary to
the public policy of public or open competitive bidding of government contracts.35

Since the parties’ agreement was void, Loria argues that the parties were in pari delicto, and Muñoz
should not be allowed to recover the money he gave under the contract.36
On the finding that he received a net amount of ₱2,000,000.00 from Muñoz, Loria maintains that
Muñoz failed to prove his receipt of ₱3,000,000.00 through a certain Grace delos Santos.37

In the resolution38 dated June 3, 2009, thiscourt ordered Muñoz to comment on Loria’s petition.

In his comment,39 Muñoz argues that Loria’s petition raises questions of fact and law that the trial and
appellate courts have already passed upon and resolved in his favor. He prays that this court deny
Loria’s petition for raising questions of fact.

Loria replied40 to the comment, arguing thathe raised only questions of law in his petition. 41 Even
assuming that he raised questions of fact, Loria argues that this does not warrant the automatic
dismissal of his petition since the trial and appellate courts allegedly erred inruling for Muñoz. 42

On October 8, 2010, the parties filed their joint motion to render judgment based on the compromise
agreement.43 In their compromise agreement,44 the parties declared that thiscase "was a product of a
mere misunderstanding."45 To amicably settle their dispute, the parties agreed to waive all their
claims, rights, and interests against each other.46

This court denied the joint motion for lack of merit in the resolution47 dated December 15, 2010.

The issues for our resolution are the following:

I. Whether Loria initially obtained ₱3,000,000.00 from a certain Grace delos Santos

II. Whether Loria is liable for ₱2,000,000.00 to Muñoz

We rule for Muñoz and deny Loria’s petition for review on certiorari.

Whether Loria initially received 3,000,000.00 is a question of fact not proper in a petition for review
on certiorari

We first address Loria’s contention that Muñoz failed to prove his initial receipt of ₱3,000,000.00.
This is a question of fact the trial and appellate courts have already resolved. In a Rule 45 petition,
we do not address questions of fact, questions which require us to ruleon "the truth or falsehood of
alleged facts."48 Under Section 1, Rule 45 of the Rules of Court, we only entertain questions of law —
questions as to the applicable law given a set of facts49 — in a petition for review on certiorari:

Section 1. Filing of petition with Supreme Court.

A party desiring to appeal by certiorari from a judgment or final order or resolution of the Court of
Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law,
may file withthe Supreme Court a verified petition for review on certiorari. The petition shall raise
only questions of lawwhich must be distinctly set forth. (Emphasis supplied)50

We may review questions of fact in a Rule 45 petition:

. . . (1) when the findings are grounded entirely on speculations, surmises, or conjectures; (2) when
the inference made is manifestly mistaken, absurd, or impossible; (3) when there is a grave abuse of
discretion; (4) when the judgment is based on misappreciation of facts; (5) when the findings of fact
are conflicting; (6) when in making its findings, the same are contrary to the admissions of both
appellant and appellee; (7) the findings are contrary to those of the trial court; (8) when the findings
are conclusions without citation of specific evidence on which they are based; (9) the facts set forth
in the petition as well as in petitioner’s main and reply briefs are not disputed by respondent; and
(10) the findings of fact are premised on the supposed absence of evidence and contradicted by the
evidence on record.51 [Emphases omitted]

Loria failed to convince us why we should make an exception in this case.

During trial, Muñoz testified thathe ordered Allied Bank to release ₱3,000,000.00 from his joint
account withChristopher Co to a certain Grace delos Santos.52 Loria then obtained the money from
delos Santos and confirmed with Muñoz his receipt of the amount.53 ₱1,800,000.00 was
subsequently returned to Muñoz, leaving a ₱1,200,000.00 balance with Loria. This testimony was
supported by Exhibit "C," the check voucher where Loria acknowledged receiving ₱1,200,000.00
from Muñoz.54

We agree that these pieces ofevidence duly prove Loria’s initial receipt of ₱3,000,000.00. We will not
disturb this finding.

II

Loria must return Munoz’s ₱2,000,000.00 under the principle of unjust enrichment

Under Article 22 of the Civil Codeof the Philippines, "every person who through an act of
performance by another, or any other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same to him." There is unjust
enrichment "when a person unjustly retains a benefit to the loss of another, or when a person retains
money orproperty of another against the fundamental principles of justice, equity and good
conscience."55

The principle of unjust enrichment has two conditions. First, a person must have been benefited
without a real or valid basis or justification. Second, the benefit was derived at another person’s
expense or damage.56

In this case, Loria received ₱2,000,000.00 from Muñoz for a subcontract of a government projectto
dredge the Masarawag and San Francisco Rivers in Guinobatan, Albay. However, contrary to the
parties’ agreement, Muñoz was not subcontracted for the project. Nevertheless, Loria retained the
₱2,000,000.00.

Thus, Loria was unjustly enriched. He retained Muñoz’s money without valid basis or justification.
Under Article 22 of the Civil Code of the Philippines, Loria must return the ₱2,000,000.00 to Muñoz.

Contrary to Loria’s claim, Section 6 of the Presidential Decree No. 1594 does not prevent Muñoz
from recovering his money.

Under Section 6 of the Presidential Decree No. 1594,57 a contractor shall not subcontract a part or
interestin a government infrastructure project without the approval of the relevant department
secretary:

Section 6. Assignment and Contract.The contractor shall not assign, transfer, pledge, subcontract
ormake any other disposition of the contract or any part or interest therein except with the approval
of the Minister of Public Works, Transportation and Communications, the Minister of Public
Highways, or the Minister of Energy, as the case may be. Approval of the subcontract shall not
relieve the main contractor from any liability or obligation under his contract with the Government nor
shall it create any contractual relation between the subcontractor and the Government.

A subcontract, therefore, is void only if not approved by the department secretary.

In this case, it is premature to rule on the legality of the parties’ agreement precisely becausethe
subcontract did not push through. No actual agreement was proven in evidence.The Secretary of
Public Works and Highways could have approved the subcontract, which is allowed under Section 6
of the Presidential Decree No. 1594.

At any rate, even assuming that there was a subcontracting arrangement between Sunwest
Construction and Development Corporation and Muñoz, this court has allowed recovery under a void
subcontract as an exception to the in pari delicto doctrine.

In Gonzalo v. Tarnate, Jr.,58 the Department of Public Works and Highways (DPWH) awarded the
contractto Dominador Gonzalo to improve the Sadsadan-Maba-ay section of the Mountain Province
Road. Gonzalo then subcontracted the supply of materials and labor to John Tarnate, Jr. without the
approval of the Secretary of Public Works and Highways. The parties agreed to a total subcontract
fee of 12% of the project’s contract price.59
Tarnate, Jr. also rented equipment to Gonzalo. In a deed of assignment, the parties agreed to a
retention fee of 10% of Gonzalo’s total collection from the Department of Public Works and
Highways, or 233,526.13, as rent for the equipment. They then submitted the deed of assignment to
the Department for approval.60

Subsequently, Tarnate, Jr. learned that Gonzalo filed with the Department of Public Works and
Highways an affidavit to unilaterally cancel the deed of assignment. Gonzalo also collected the
retention fee from the Department.61

Tarnate, Jr. demanded payment for the rent of the equipment, but Gonzalo ignored his demand. He
thenfiled a complaint for sum of money and damages with the Regional Trial Court of Mountain
Province to collect on the 10% retention fee.62

In his defense, Gonzalo argued thatthe subcontract was void for being contrary to law, specifically,
Section 6 of the Presidential Decree No. 1594. Since the deed of assignment "was a mere product of
the subcontract,"63 the deed of assignment was likewise void. With Tarnate, Jr. "fully aware of the
illegality and ineffectuality of the deed of assignment," 64 Gonzalo contended that Tarnate, Jr. could not
collect on the retention fee under the principle of in pari delicto. 65

This court ruled that the subcontract was void for being contrary to law. Under Section 6 of the
Presidential Decree No. 1594, a contractor shall not subcontract the implementation of a
government infrastructure project without the approval of the relevant department secretary.66 Since
Gonzalo subcontracted the project to Tarnate, Jr. without the approvalof the Secretary of Public
Works and Highways, the subcontract was void, including the deed of assignment, which "sprung
from the subcontract."67

Generally, parties to an illegal contract may not recover what they gave under the contract. 68 Under
the doctrine of in pari delicto, "no action arises, in equity or at law, from anillegal contract[.] No suit
can be maintained for its specific performance, or to recover the property agreed to be sold or
delivered, or the money agreed to be paid, or damages for its violation[.]" 69 Nevertheless, this court
allowed Tarnate, Jr. to recover 10% of the retention fee. According to this court,"the application of
the doctrine of in pari delictois not always rigid." 70 An exception to the doctrine is "when its application
contravenes well-established public policy."71 In Gonzalo, this court ruled that "the prevention of unjust
enrichment is a recognized public policy of the State."72 It is, therefore, an exception to the application
of the in pari delicto doctrine. This court explained:

. . . the application of the doctrine of in pari delicto is not always rigid. An accepted exception arises
when its application contravenes wellestablished public policy. In this jurisdiction, public policy has
been defined as "that principle of the law which holds that no subject or citizen can lawfully do that
which has a tendency to be injurious to the public or against the public good."

Unjust enrichment exists, according to Hulst v. PR Builders, Inc., "when a person unjustly retains a
benefit at the loss of another, or when a person retains money or property of another against the
fundamental principles of justice, equity and good conscience." The prevention of unjust enrichment
is a recognized public policy of the State, for Article 22 of the Civil Code explicitly provides that
"[e]veryperson who through an act of performance by another, or any other means, acquires or
comes into possession of something at the expense of the latter without just or legal ground, shall
return the same to him." It is well to note that Article 22 "is part of the chapter of the Civil Code on
Human Relations, the provisions of which were formulated as basic principles to be observed for the
rightful relationship between human beings and for the stability of the social order; designed to
indicate certain norms that spring from the fountain of good conscience;guides for human conduct
that should run as golden threads through society to the end that law may approach its supreme
ideal which is the sway and dominance of justice."73 (Citations omitted)

Given that Tarnate, Jr. performed his obligations under the subcontract and the deed of assignment,
this court ruled that he was entitled to the agreed fee. According to this court, Gonzalo "would be
unjustly enriched at the expense of Tarnate if the latter was tobe barred from recovering because of
the rigid application of the doctrine of in pari delicto."74

In this case, both the trial and appellate courts found that Loria received ₱2,000,000.00 from Muñoz
for a subcontract of the river-dredging project. Loria never denied that hefailed to fulfill his agreement
with Muñoz. Throughout the case’s proceedings, Loria failed to justify why he has the right to retain
Muñoz’s ₱2,000,000.00. As the Court of Appeals ruled, "it was not shown that [Muñoz] benefited
from the delivery of the amount of ₱2,000,000.00 to [Loria]." 75
Loria, therefore, is retaining the ₱2,000,000.00 without just or legal ground. This cannot be done.
Under Article 22 of the Civil Code of the Philippines, he must return the ₱2,000,000.00 to Muñoz.

This court notes the possible irregularities in these transactions. At the very least, there appears to
have been an attempt to circumvent our procurement laws. If petitioner indeed had the authority of
Sunwest Construction and Development Corporation, it is strange that Loria could have guaranteed
a bidding result. If he did not have any true dealing with Sunwest Construction, then his is an
elaborate scheme to cause financiers to lose their hard-earned money for nothing. WHEREFORE,
the petition for review on certiorari is DENIED. The Court of Appeals' decision and resolution in CA-
GR. CV No. 81882 are AFFIRMED with MODIFICATION as to interest rate. Petitioner Carlos A.
Loria shall pay respondent Ludolfo P. Mufioi, Jr. ₱2,000,000.00 in actual damages, with interest of
12% interest per annum from the filing of the complaint until June 30, 2013, and 6% interest per
annum from July 1, 2013 until full payment.76

Let a copy of this decision be SERVED on the Office of the Ombudsman and the Department of
Justice for their appropriate actions.

SO ORDERED.

MARVIC M.V.F. LEONEN

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice
Chairperson

JOSE CATRAL MENDOZA BIENVENIDO L. REYES*

Associate Justice Associate Justice

ESTELA M. PERLAS-BERNABE*
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division
G.R. No. 170928 September 11, 2007

VICENTE S. ALMARIO, Petitioner,

vs.
PHILIPPINE AIRLINES, INC., Respondent.

DECISION

CARPIO MORALES, J.:

On October 21, 1988, petitioner, Vicente S. Almario (Almario), was hired by respondent, Philippine
Airlines, Inc. (PAL), as a Boeing 747 Systems Engineer.

On April 28, 1995, Almario, then about 39 years of age1 and a Boeing 737 (B-737) First Officer at
PAL, successfully bid for the higher position of Airbus 300 (A-300) First Officer.2 Since said higher
position required additional training, he underwent, at PAL’s expense, more than five months of
training consisting of ground schooling in Manila and flight simulation in Melbourne, Australia.3

After completing the training course, Almario served as A-300 First Officer of PAL, but after eight
months of service as such or on September 16, 1996, he tendered his resignation, for "personal
reasons," effective October 15, 1996.4

On September 27, 1996, PAL’s Vice President for Flight Operations sent Almario a letter, the
pertinent portions of which read:

xxxx

2. Our records show that you have been trained by the Company as A300 First Officer starting on 04
September 1995 and have completed said training on 08 February 1996. As you are aware the
Company invested heavily on your professional training in the estimated amount of PHP786,713.00
on the basis that you continue to serve the Company for a definite period of time which is
approximately three (3) years or thirty-six (36) months.

3. In view of the foregoing, we urge you to reconsider your proposed resignation otherwise you will
be required to reimburse the Company an amount equivalent to the cost of your professional training
and the damaged [sic] caused to the Company.5 (Emphasis and underscoring supplied)

Despite receipt of the letter, Almario pushed through with his resignation.

By letter of October 9, 1996, Almario’s counsel sought PAL’s explanation behind its September 27,
1996 letter considering that Almario "did not sign anything regarding any reimbursement."6 PAL did
not reply, prompting Almario’s counsel to send two letters dated January 6, 1997 and February 10,
1997 following-up PAL’s reply, as well as the release of Almario’s clearances which he needed to
avail of his benefits.7

On February 11, 1997, PAL filed a Complaint8 against Almario before the Makati Regional Trial
Court (RTC), for reimbursement of ₱851,107 worth of training costs, attorney’s fees equivalent to
20% of the said amount, and costs of litigation. PAL invoked the existence of an innominate contract
of do ut facias (I give that you may do) with Almario in that by spending for his training, he would
render service to it until the costs of training were recovered in at least three (3) years.9 Almario
having resigned before the 3-year period, PAL prayed that he should be ordered to reimburse the
costs for his training.

In his Answer with Special and Affirmative Defenses and Compulsory Counterclaims,10 Almario
denied the existence of any agreement with PAL that he would have to render service to it for three
years after his training failing which he would reimburse the training costs. He pointed out that the
1991-1994 Collective Bargaining Agreement (CBA) between PAL and the Airline Pilot’s Association
of the Philippines (ALPAP), of which he was a member,11 carried no such agreement.

Almario thus prayed for the award of actual damages on account of PAL’s withholding of the
necessary clearances which he needed in order to obtain his lawful benefits, and moral and
exemplary damages for malicious prosecution and unjust harassment.12
PAL, in its Reply to Defendant’s Answer and Answer to Counterclaim,13 argued as follows:

The right of PAL to be reimbursed for training expenses is based on Article XXIII, Section 1 of the
1991-1994 Collective Bargaining Agreement (CBA, for brevity) and which was taken from the
decision of the Secretary of Labor.

[The Secretary of Labor] ruled that a pilot should remain in the position where he is upon reaching
the age of fifty-seven (57), irrespective of whether or not he has previously qualified in the
Company’s turbo-jet operations. The rationale behind this is that a pilot who will be compulsorily
retired at age sixty (60) should no longer be burdened with training for a new position.

Thus, Article XXIII, Section 1 of the CBA provide[s]:

"Pilots fifty-seven (57) years of age shall be frozen in their position. Pilots who are less than fifty-
seven (57) years of age provided they have previously qualified in any company’s turbo-jet aircraft
shall be permitted to occupy any position in the company’s turbo-jet fleet.

The reason why pilots who are 57 years of age are no longer qualified to bid for a higher position is
because they have only three (3) years left before the mandatory retirement age [of 60] and to send
them to training at that age, PAL would no longer be able to recover whatever training expenses it
will have to incur.

Simply put, the foregoing provision clearly and unequivocally recognizes the prohibitive training cost
principle such that it will take a period of at least three (3) years before PAL could recover from the
training expenses it incurred.14 (Emphasis and underscoring supplied)

By Decision15 of October 25, 2000, Branch 147 of the Makati RTC, finding no provision in the CBA
between PAL and ALPAP stipulating that a pilot who underwent a training course for the position of
A-300 First Officer must serve PAL for at least three years failing which he should reimburse the
training expenses, rendered judgment in favor of Almario.

The trial court denied Almario’s claim for moral damages, however.16 It denied too Almario’s claim for
the monetary equivalent of his family trip pass benefits (worth US$49,824), it holding that the same
had been forfeited as he did not avail of them within one year from the date of his separation.

Thus the trial court disposed:

WHEREFORE, in view of the foregoing, the Court hereby renders judgment in favor of defendant
Vicente Almario and against the plaintiff:

1- Dismissing the plaintiff’s complaint;

2- Ordering the plaintiff to pay the defendant:

a- the amount of ₱312,425.00 as actual damages with legal interest from the filing of
the counterclaim;

b- the amount of ₱500,000.00 as exemplary damages;

c- the amount of ₱150,000.00 as attorney’s fees;

d- the costs of the suit.

SO ORDERED.17

On appeal by both parties,18 the Court of Appeals, by Decision19 dated March 31, 2005, reversed the
trial court’s decision. It found Almario liable under the CBA between PAL and ALPAP and, in any
event, under Article 22 of the Civil Code. Thus it disposed:

WHEREFORE, the appealed Decision is REVERSED and SET ASIDE. In lieu thereof, a new
judgment is hereby ENTERED, as follows: (a) Appellee Vicente Almario is hereby ordered to pay
appellant Philippine Airlines, Inc. the sum of Five Hundred Fifty Nine Thousand, Seven Hundred
[T]hirty Nine & 9/100 Pesos (₱559, 739.90) with six percent (6%) interest as above-computed; and
(b) the award of exemplary damages and attorney’s fees in favor of appellee is
hereby DELETED.20 (Emphasis in the original; underscoring supplied)

His Motion for Reconsideration21 having been denied,22 Almario filed the instant Petition for Certiorari
[sic] (Under Rule 45),23 raising the following issues:

A. Whether the Court of Appeals committed reversible error in interpreting the Collective
Bargaining Agreement between Philippine Airlines, Inc. (PAL) and the Airline Pilots
Association of the Philippines (ALPAP) as an ordinary civil law contract applying ordinary
contract law principles which is contrary to the ruling of the Supreme Court in Samahang
Manggagawa sa Top Form Manufacturing-United Workers of the Philippines (SMTFM-UWP)
v. NLRC and, therefore, erroneously reading into the CBA a clause that was not agreed to
during the negotiation and not expressly stated in the CBA;

B. Whether the Court of Appeals committed reversible error in holding that Article 22 of the
Civil Code can be applied to recover training costs which were never agreed to nor included
as reimbursable expenses under the CBA;

C. Whether the availing by petitioner of a required training is a legal ground justifying the
entitlement to a benefit and therefore, negating claims of unjust enrichment;

D. Whether the failure of private respondent to honor and provide the Family Trip Pass
Benefit in the equivalent amount of US$ 49,824.00 which petitioner and his family were not
able to avail of within the one (1) year from date of separation due to the actions of PAL
amounts to unjust enrichment;

E. Whether or not respondent is liable for malicious prosecution[.]24 (Underscoring supplied)

Almario insists on the absence of any written contract or explicit provision in the CBA obliging him to
reimburse the costs incurred by PAL for his training. And he argues:

[T]here can be no unjust enrichment because petitioner was entitled to the benefit of training when
his bid was accepted, and x x x PAL did not suffer any injury because the failure to include a
reimbursement provision in the CBA was freely entered into by the negotiating parties;

xxxx

It is not disputed that the petitioner merely entered a bid for a higher position, and that when he was
accepted based on seniority and qualification, the position was awarded to him. It is also not
disputed that petitioner [had] not asked, requested, or demanded for the training. It came when his
bid was accepted by PAL;

Because the training was provided when the bid was accepted, the acceptance of the bid was the
basis and legal ground for the training;

Therefore, since there is a legal ground for the entitlement of the training, contrary to the ruling of the
Court of Appeals, there can be no unjust enrichment;25 (Underscoring supplied)

The petition fails.

As reflected in the above-enumerated issues raised by Almario, he cites the case of Samahang
Manggagawa sa Top Form Manufacturing-United Workers of the Philippines (SMTFM-UWP) v.
NLRC26 (Manggagawa) in support of his claim that the appellate court erred in interpreting the CBA
as an ordinary civil law contract and in reading into it "a clause that was not agreed to during the
negotiation and not expressly stated in the CBA."

On the contrary, the ruling in Manggagawa supports PAL’s position. Thus this Court held:

The CBA is the law between the contracting parties – the collective bargaining representative and
the employer-company. Compliance with a CBA is mandated by the expressed policy to give
protection to labor. In the same vein, CBA provisions should be "construed liberally rather than
narrowly and technically, and the courts must place a practical and realistic construction upon it,
giving due consideration to the context in which it is negotiated and purpose which it is intended to
serve." This is founded on the dictum that a CBA is not an ordinary contract but one impressed with
public interest. It goes without saying, however, that only provisions embodied in the CBA should be
so interpreted and complied with. Where a proposal raised by a contracting party does not find print
in the CBA, it is not a part thereof and the proponent has no claim whatsoever to its
implementation.27 (Emphasis and underscoring supplied)

In N.S. Case No. 11-506-87, "In re Labor Dispute at the Philippine Airlines, Inc.," the Secretary of the
Department of Labor and Employment (DOLE), passing on the failure of PAL and ALPAP to agree
on the terms and conditions for the renewal of their CBA which expired on December 31, 1987 and
construing Section 1 of Article XXIII of the 1985-1987 CBA, held:

xxxx

Section 1, Article XXIII of the 1985-1987 CBA provides:

Pilots fifty-five (55) years of age or over who have not previously qualified in any Company turbo-jet
aircraft shall not be permitted to bid into the Company’s turbo-jet operations. Pilots fifty-five (55)
years of age or over who have previously qualified in the company’s turbo-jet operations may be by-
passed at Company option, however, any such pilot shall be paid the by-pass pay effective upon the
date a junior pilot starts to occupy the bidded position.

x x x PAL x x x proposed to amend the provision in this wise:

The compulsory retirement age for all pilots is sixty (60) years. Pilots who reach the age of fifty-five
(55) years and over without having previously qualified in any Company turbo-jet aircraft shall not be
permitted to occupy any position in the Company’s turbo-jet fleet. Pilots fifty-four (54) years of age
and over are ineligible for promotion to any position in Group I. Pilots reaching the age of fifty-five
(55) shall be frozen in the position they currently occupy at that time and shall be ineligible for any
further movement to any other positions.

PAL’s contention is basically premised on prohibitive training costs. The return on this investment in
the form of the pilot promoted is allegedly five (5) years. Considering the pilot’s age, the chances of
full recovery [are] asserted to be quite slim.

ALPAP opposed the proposal and argued that the training cost is offset by the pilot’s maturity,
expertise and experience.

By way of compromise, we rule that a pilot should remain in the position where he is upon reaching
age fifty-seven (57), irrespective of whether or not he has previously qualified in the Company’s
turbo-jet operations. The rationale behind this is that a pilot who will be compulsorily retired at age
sixty (60) should no longer be burdened with training for a new position. But if a pilot is only at age
fifty-five (55), and promotional positions are available, he should still be considered and promoted if
qualified, provided he has previously qualified in any company turbo-jet aircraft. In the latter case,
the prohibitive training costs are more than offset by the maturity, expertise, and experience of the
pilot.

Thus, the provision on age limit should now read:

Pilots fifty-seven (57) years of age shall be frozen in their positions. Pilots fifty-five (55) [sic] years of
age provided they have previously qualified in any company turbo-jet aircraft shall be permitted to
occupy any position in the company’s turbo-jet fleet.28 (Emphasis and underscoring supplied)

The above-quoted provision of Section 1 of Article XXIII of the 1985-1987 CBA, as construed by the
DOLE Secretary, was substantially incorporated in the 1991-1994 CBA between PAL and
ALPAP29 as follows:

Pilots fifty-seven (57) years of age shall be frozen in their position. Pilots who are less than fifty-
seven (57) years of age provided they have previously qualified in any company’s turbo-jet aircraft
shall be permitted to occupy any position in the company’s turbo-jet fleet.30

The same section of Article XXIII of the 1991-1994 CBA was reproduced in the 1994-2000 CBA.31
Arturo Gabanton, PAL’s Senior Vice President for Flight Operations, testifying on PAL’s "policy or
practice" on underwriting the training costs of its pilots at the time Almario was trained, with the
"expectation" of benefiting therefrom "in order to recover the cost of training," explained:

Atty. Parinas:

Q: At the time the defendant was accepted for training as A300 First Officer, would you know what
was the governing policy or practice of Philippine Airlines that was being employed regarding the
training cost[s] for the pilots?

Witness:

A: The company has to spend for the training of the pilots and after that the company expecting that
services will be rendered in order to recover the cost[s] of training.

Atty. Parinas:

Q: You stated that the pilot must serve the company after completing the training, for how long after
completing the training?

Witness:

A: At least for three (3) years.

Atty. Parinas:

Q: What is your basis in saying that a pilot must serve the company after completing the training?

Witness:

A: That is embodied in the Collective Bargaining Agreement between Philippine Airlines and the
Airline Pilot Association of the Philippines.32

xxxx

Atty. Parinas:

Q: Can you point to the provision in this agreement relating to the three (3) year period you stated a
while ago?

NOTE: Witness going over the document shown to him by counsel.

Witness:

A: It is on page 99 of the Collective Bargaining Agreement, Article 23, Miscellaneous.

Atty. Parinas: I would like to manifest that this provision pointed out by the witness is already marked
as Exhibit B-1 by the plaintiff.

xxxx

[Atty. Parinas]

Q: Mr. witness, Exhibit B-1 states in part that "Pilots, 57 years of age shall be frozen in their position.
Pilots who are less than 57 years of age provided they have been previously qualified in any
company’s Turbo-Jet Aircraft shall be permitted to occupy any position in the company’s Turbo-jet
Fleet", why do you say this is the basis for the three (3) year period within which a pilot must render
service to the company after completing the training?

[Witness]
A: The reason why 57 years old is placed here in the Collective Bargaining Agreement [is that] it is
expected that you serve the position for three (3) years because the retirement age is at 60,
therefore, if you are past 57 years old, it will fall short of the three (3) years recovery period for the
company. So it was established that [anyone] past 57 years old will not be allowed to train for
another position.33 (Emphasis and underscoring supplied)

It bears noting that when Almario took the training course, he was about 39 years old, 21 years away
from the retirement age of 60. Hence, with the maturity, expertise, and experience he gained from
the training course, he was expected to serve PAL for at least three years to offset "the prohibitive
costs" thereof.

The pertinent provision of the CBA and its rationale aside, contrary to Almario’s claim, Article 22 of
the Civil Code which reads:

Art. 22. Every person who through an act of performance by another, or any other means, acquires
or comes into possession of something at the expense of the latter without just or legal ground, shall
return the same to him,

applies.

This provision on unjust enrichment recognizes the principle that one may not enrich himself at the
expense of another. An authority on Civil Law34 writes on the subject, viz:

Enrichment of the defendant consists in every patrimonial, physical, or moral advantage, so long as
it is appreciable in money. It may consist of some positive pecuniary value incorporated into the
patrimony of the defendant, such as: (1) the enjoyment of a thing belonging to the plaintiff; (2) the
benefits from service rendered by the plaintiff to the defendant; (3) the acquisition of a right, whether
real or personal; (4) the increase of value of property of the defendant; (5) the improvement of a right
of the defendant, such as the acquisition of a right of preference; (6) the recognition of the existence
of a right in the defendant; and (7) the improvement of the conditions of life of the defendant.

xxxx

The enrichment of the defendant must have a correlative prejudice, disadvantage, or injury to the
plaintiff. This prejudice may consist, not only of the loss of property or the deprivation of its
enjoyment, but also of non-payment of compensation for a prestation or service rendered to the
defendant without intent to donate on the part of the plaintiff, or the failure to acquire something
which the latter would have obtained. The injury to the plaintiff, however, need not be the cause of
the enrichment of the defendant. It is enough that there be some relation between them, that the
enrichment of the defendant would not have been produced had it not been for the fact from which
the injury to the plaintiff is derived. (Underscoring supplied)35

Admittedly, PAL invested for the training of Almario to enable him to acquire a higher level of skill,
proficiency, or technical competence so that he could efficiently discharge the position of A-300 First
Officer. Given that, PAL expected to recover the training costs by availing of Almario’s services for at
least three years. The expectation of PAL was not fully realized, however, due to Almario’s
resignation after only eight months of service following the completion of his training course. He
cannot, therefore, refuse to reimburse the costs of training without violating the principle of unjust
enrichment.

Following the computation by the appellate court which was arrived at by offsetting the respective
claims of the parties, viz:

Training Cost P851,107.00

Less: Appellee's corresponding 8 months
Service after training [P850,107.00
divided by 36 months (3 years)
= P23,640.86 x 8 months] 189,126.88

Equals P661,980.12
 Less: Accrued Benefits 102,240.22

Net Reimbursable Amount or

P559,739.9036
Appellee's Outstanding Account
*****************

Almario must pay PAL the sum of ₱559,739.90, to bear the legal interest rate of 6% per annum from
the filing of PAL’s complaint on February 11, 1997 until the finality of this decision.

In light of the foregoing discussions on the main issue, the Court finds it unnecessary to dwell on the
other issues raised by Almario. Suffice it to state that the appellate court’s disposition thereof is, as
its decision reflects, well-taken.

WHEREFORE, the petition is DENIED and the decision appealed from is AFFIRMED.

Costs against petitioner.

SO ORDERED.

CONCHITA CARPIO MORALES

Associate Justice

WE CONCUR:

(ON LEAVE)
LEONARDO A. QUISUMBING*
Associate Justice
Chairperson

ANTONIO T. CARPIO***
ANGELINA SANDOVAL-GUTIERREZ**
Associate Justice
Associate Justice
Acting Chairperson

DANTE O. TINGA PRESBITERO J. VELASCO, JR.

Associate Justice Associate Justice

ATTESTATION

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

ANTONIO T. CARPIO
Associate Justice

Acting Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s Attestation, I
certify that the conclusions in the above decision were reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice
G.R. Nos. 167274-75 September 11, 2013

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.

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

G.R. No. 192576

FORTUNE TOBACCO CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VELASCO, JR., J.:

Fortune Tobacco Corporation (FTC), as petitioner in G.R. No. 192576,1 assails and seeks the
reversal of the Decision of the Court of Tax Appeals (CTA) En Banc dated March 12, 2010, as
effectively reiterated in a Resolution of June 11, 2010, both rendered in C.T.A. EB No. 530 entitled
Fortune Tobacco Corporation v. Commissioner of Internal Revenue. The assailed issuances
affirmed the Resolution of the CTA First Division dated June 4, 2009, denying the Motion for
Issuance of Additional Writ of Execution filed by herein petitioner in CTA Case Nos. 6365, 6383 &
6612, and the Resolution dated August 10, 2009 which denied its Motion for Reconsideration.

The present appellate proceedings traces its origin from and finds context in the July 21, 2008
Decision2 of the Court in G.R. Nos. 167274-75, an appeal thereto interposed by the Commissioner of
Internal Revenue (BIR Commissioner) from the consolidated Decision and Resolution issued by the
Court of Appeals on September 28, 2004 and March 1, 2005, respectively, in CA-G.R. SP Nos.
80675 and 83165. The decretal part of the July 21, 2008 Decision reads:

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No.
80675, dated 28 September 2004,and its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.

SO ORDERED.3 (Emphasis supplied.)

The antecedent facts, as summarized by the CTA in its adverted March 12, 2010 Decision, are as
follows:

FTC (herein petitioner Fortune Tobacco Corporation) is engaged in manufacturing or producing

cigarette brands with tax rate classification based on net retail price prescribed as follows:

Brand Tax Rate

Champion M 100 ₱1.00
Salem M 100 ₱1.00

Salem M King ₱1.00

Camel F King ₱1.00

Camel Lights Box 20’s ₱1.00

Camel Filters Box 20’s ₱1.00
Winston F King ₱5.00
Winston Lights ₱5.00

Prior to January 1, 1997, the aforesaid cigarette brands were subject to ad-valorem tax under
Section 142 of the 1977 Tax Code, as amended. However, upon the effectivity of Republic Act (R.A.)
No. 8240on January 1, 1997, a shift from ad valorem tax system to the specific tax system was
adopted imposing excise taxes on cigarette brands under Section 142 thereof, now renumbered as
Section 145 of the 1997 Tax Code, stating the following pertinent provision:

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A.
No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. x x x
The rates of excise tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4) hereof, shall
be increased by twelve percent (12%) on January 1, 2000.

Upon the Commissioner’s recommendation, the Secretary of Finance, issued Revenue Regulations
(RR) No. 17-99 dated December 16,1999 for the purpose of implementing the provision for a 12%
increase of excise tax on, among others, cigars and cigarettes packed by machines by January 1,
2000. RR No. 17-99 provides that the new specific tax rate for any existing brand of cigars,
cigarettes packed by machine x x x shall not be lower than the excise tax that is actually being paid
prior to January 1, 2000.

FTC paid excise taxes on all its cigarettes manufactured and removed from its place of production
for the following period:

PERIOD PAYMENT
January 1, 2000 to ₱585,705,250.00
January 31, 2000
February 1, 2000 to ₱19,366,783,535.00
December 31, 2001
January 1, 2002 to ₱11,359,578,560.00
December 31, 2002

FTC subsequently sought administrative redress for refund before the Commissioner on the
following dates:

PERIOD ADMINISTRATIVE AMOUNT

FILING OF CLAIM CLAIMED
January 1, 2000 to February 7, 2000 ₱35,651,410.00
January 31, 2000
February 1, 2000 Various claims filed from ₱644,735,615.00
to December 31, March 21, 2000 –
2001 January 28, 2002
January 1, 2002 to February 3, 2003 ₱355,385,920.00
December 31, 2002

(CTA En Banc Decision,

Annex "A," Petition, pp. 2-4)

2. Since the claim for refund was not acted upon, petitioner filed on December 11, 2001 and
January 30, 2002, respectively, Petitions for Review before the Court of Tax Appeals (CTA)
docketed as CTA Case Nos. 6365 and 6383 questioning the validity of Revenue Regulations
No.17-99 with claims for refund in the amounts ₱35,651,410.00 and ₱644,735,615.00,
respectively.

These amounts represented overpaid excise taxes for the periods from January 1, 2000 to
January 31, 2000 and February 1, 2000 to December 31, 2001, respectively (Ibid., pp. 4-5).

3. In separate Decision dated October 21, 2002, the CTA in Division ordered the
Commissioner of Internal Revenue (respondent herein) to refund to petitioner the
erroneously paid excise taxes in the amounts of ₱35,651,410.00 for the period covering
January 1, 2000 to January 31, 2000 (CTA Case No. 6365) and ₱644,735,615.00 for the
period February 1, 2000 to December 31, 2001 (CTA Case No.6383) (Ibid.).
4. Respondent filed a motion for reconsideration of the Decision dated October 21, 2002
covering CTA Case Nos. 6365 and 6383which was granted in the Resolution dated July 15,
2003.

5. Subsequently, petitioner filed another petition docketed as CTA Case No. 6612
questioning the validity of Revenue Regulations No.17-99 with a prayer for the refund of
overpaid excise tax amounting to₱355,385,920.00, covering the period from January 1, 2002
to December 31, 2002 (Ibid., p. 5).

6. Petitioner thereafter filed a consolidated Motion for Reconsideration of the Resolution

dated July 15, 2003 (Ibid., pp. 5-6).

7. The CTA in Division issued Resolution dated November 4,2003 which reversed the
Resolution dated July 15, 2003 and ordered respondent to refund to petitioner the amounts
of 35,651,410.00 for the period covering January 1 to January 31, 2000 and
₱644,735,615.00 for the period covering February 1, 2000 to December 31, 2001, or in the
aggregate amount of ₱680,387,025.00, representing erroneously paid excise taxes (Ibid., p.
6).

8. In its Decision dated December 4, 2003, the CTA in Division in Case No. 6612 declared
RR No. 17-99 invalid and contrary to Section 145 of the 1997 National Internal Revenue
Code (NIRC). The Court ordered respondent to refund to petitioner the amount of
₱355,385,920.00 representing overpaid excise taxes for the period covering January 1, 2002
to December 21, 2002 (Ibid.)

9. Respondent filed a motion for reconsideration of the Decision dated December 4, 2003 but
this was denied in the Resolution dated March 17, 2004 (Ibid.)

10. On December 10, 2003, respondent Commissioner filed a Petition for Review with the
Court of Appeals (CA) questioning the CTA Resolution dated November 4, 2003 which was
issued in CTA Case Nos. 6365 and 6383. The case was docketed as CA-G.R. SP No.80675
(Ibid.).

11. On April 28, 2004, respondent Commissioner filed another appeal before the CA
questioning the CTA Decision dated December 4, 2003 issued in CTA Case No. 6612. The
case was docketed as CA-G.R. SP No. 83165 (Ibid., p. 7).

12. Thereafter, petitioner filed a Consolidated Motion for Execution Pending Appeal before
the CTA for CTA Case Nos. 6365 and 6383 and an Amended Motion for Execution Pending
Appeal for CTA Case No. 6612 (Ibid.).

13. The motions were denied in the CTA Resolutions dated August 2, 2004 and August 3,
2004, respectively. The CTA in Division pointed out that Section 12, Rule 43 of the1997
Rules of Civil Procedure should be interpreted with Section 18 of R.A. 1125 which provides
that CTA rulings become final and conclusive only where there is no perfected appeal.
Considering that respondent filed an appeal with the CA, the CTA in Division’s rulings
granting the amounts of ₱355,385,920.00 and ₱680,387,025.00 were not yet final and
executory (Ibid.).

14. In the consolidated CA Decision dated September 28,2004 issued in CA-G.R. SP Nos.
80675 (CTA Case Nos. 6365 and6383) and 83165 (CTA Case No. 6612), the appellate court
denied respondent’s petitions and affirmed petitioner’s refund claims in the amounts of
₱680,387,025.00 (CTA Case Nos. 6365 and 6383) and₱355,385,920.00 (CTA Case No.
6612), respectively (Ibid., p. 8).

15. Respondent filed a motion for reconsideration of the CA Decision dated September 28,
2004 but this was denied in the CA’s Resolution dated March 1, 2005 (Ibid.).

16. Respondent, filed a Petition for Review on Certiorari docketed as G.R. Nos. 167274-75
on May 4, 2005 before the Honorable Court. On June 22, 2005, a Supplemental Petition for
Review was filed and the petitions were consolidated (Ibid.).
 17. In its Decision dated July 21, 2008 in G.R. Nos. 167274-75, the Honorable Court affirmed
the findings of the CA granting petitioner’s claim for refund. The dispositive portion of said
Decision reads:

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. SP
No.80675, dated 28 September 2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.

SO ORDERED.

Commissioner of Internal
Revenue vs. Fortune Tobacco
Corporation, 559 SCRA 160
(2008)

18. On January 23, 2009, petitioner filed a motion for execution praying for the issuance of a writ of
execution of the Decision of the Honorable Court in G.R. Nos. 167274-75 dated July 21, 2008 which
was recorded in the Book of Entries of Judgments on November 6, 2008(Ibid., p. 10).

Petitioner’s prayer was for the CTA to order the BIR to pay/refund the amounts adjudged by the
CTA, as follows:

a) CTA Case No. 6612 under the Decision 04 December 2003 – the amount of Three
Hundred Fifty Five Million Three Hundred Eighty Five Thousand Nine Hundred Twenty
Pesos (₱355,385,920.00).

b) CTA Case Nos. 6365 and 6383 under the Decisions dated 21 October 2002 and
Resolution dated 04 November 2003 – the amount of Six Hundred Eighty Million Three
Hundred Eighty Seven Thousand Twenty Five Pesos (₱680,387,025.00).

(Petition, p. 11)

19. On April 14, 2009, the CTA issued a Writ of Execution, which reads:

You are hereby ORDERED TO REFUND in favor of the petitioner FORTUNE TOBACCO
CORPORATION, pursuant to the Supreme Court Decision in the above-entitled case (SC G.R.
167274-75),dated July 21, 2008, which has become final and executory on November 6, 2008, by
virtue of the Entry of Judgment by the Supreme Court on said dated, which reads as follows:

xxxx

the amounts of ₱35,651,410.00 (C.T.A Case No. 6365) and ₱644,735,615.00 (C.T.A Case No.
6383) or a total of ₱680,387,025.00 representing petitioners’ erroneously paid excise taxes for the
periods January 1-31, 2000 and February 1, 2000 to December 31, 2001,respectively under CA
G.R. SP No. 80675 (C.T.A. Case No. 6365 and C.T.A. Case No. 6383).

(CTA – 1st Division

Resolution dated June 04,
2009, pp. 2-3)

20. On April 21, 2009, petitioner filed a motion for the issuance of an additional writ of
execution praying that the CTA order the Commissioner of Internal Revenue to pay petitioner
the amount of Three Hundred Fifty-Five Million Three Hundred Eighty Five Thousand Nine
Hundred Twenty Pesos (₱355,385,920.00) representing the amount of tax to be refunded in
C.T.A. Case No. 6612 under its Decision dated December 4, 2003 and affirmed by the
Honorable Court in its Decision dated July 21, 2008 (Petition, p. 12, CTA Decision dated
March 12, 2010, supra, p. 10).

21. In the CTA Resolution dated June 4, 2009, the CTA denied petitioner’s Motion for the
Issuance of Additional Writ of Execution (Ibid., p. 11).

22. Petitioner filed a motion for reconsideration of the Resolution dated June 4, 2009, but this
was denied in the CTA Resolution dated August 10, 2009 (Ibid.).
 The dispositive portion of the Resolution reads:

WHEREFORE, premises considered, the instant" Motion for Reconsideration" is hereby

DENIED for lack of merit.

23. Aggrieved by the Decision, petitioner filed a petition for review before the CTA En Banc
docketed as CTA EB Case No. 530,raising the following arguments, to wit:

The Honorable Court of Tax Appeals seriously erred contrary to law and jurisprudence when
it held in the assailed decision and resolution that petitioner Fortune Tobacco Corporation is
not entitled to the writ of execution covering the decision in CTA Case No. 6612.

The Decision of the Court of Tax Appeals in CTA Case Nos. 6365, 6383 and 6612 has
become final and executory.

The Decision of the Honorable Supreme Court in GR Nos. 167274-75 covers both CA GR
SP No. 80675 and 83165.

24. The CTA En Banc, in the Decision dated March 12, 2010,dismissed said petition for
review. The dispositive portion of said Decision reads:

WHEREFORE, premises considered, the Petition for Review is DISMISSED. The

Resolutions dated June 4,2009 and August 10, 2009 are AFFIRMED.

SO ORDERED.

(Annex "A," Petition, p. 16)

25. Petitioner filed a Motion for Leave to file Motion for Reconsideration with attached Motion
for Reconsideration but this was denied in the CTA En Banc’s Resolution dated June 11,
2010. The dispositive portion of said Resolution reads:

WHEREFORE, premises considered, petitioner’s Motion for Leave to file attached Motion for
Reconsideration and its Motion for Reconsideration are hereby DENIED for lack of merit.

SO ORDERED.4 (Emphasis supplied.)

Undeterred by the rebuff from the CTA, petitioner FTC has come to this Court via a petition for
review, the recourse docketed as G.R. 192576,thereat praying in essence that an order issue (a)
directing the CTA to issue an additional writ of execution directing the Bureau of Internal
Revenue(BIR) to pay FTC the amount of tax refund (₱355,385,920.00) as adjudged in CTA Case
No. 6612 and (b) clarifying that the Court’s Decision in G.R. Nos. 167274-75 applies to the
affirmatory ruling of the CA in CA G.R. S₱80675 and CA G.R. SP No. 83165. FTC predicates its
instant petition on two (2) stated grounds, viz.:

The Decision of the Honorable Supreme Court in S.C. GR Nos.167274-75, which has become final
and executory, affirmed the Decision of the Court of Tax Appeals in CTA Case Nos. 6365, 6383 and
6612 and to the Decision of the Court of Appeals in CA G.R. SP No. 80675 and CAG.R. SP No.
83165.

II

The writ of execution prayed for and pertaining to CTA Case No.6612 and CA G.R. SP No. 83165 is
consistent with the decision of the Supreme Court in GR Nos. 167274-75.

The petition is meritorious. But before delving on the merits of this recourse, certain undisputed
predicates have to be laid and basic premises restated to explain the consolidation of G.R. Nos.
167274-75 and G.R. No.192576, thus:
 1. As may be recalled, FTC filed before the CTA three (3) separate petitions for refund
covering three different periods involving varying amounts as hereunder indicated:

a) CTA Case No. 6365 (Jan. 1 to Jan. 31, 2000) for ₱35,651,410.00;

b) CTA Case No. 6383 (Feb. 1, 2000 to Dec. 31, 2001) for ₱644,735,615.00; and

c) CTA Case No. 6612 (Jan. 1 to Dec. 31, 2002) for 355,385,92

In three (3) separate decisions/resolutions, the CTA found the claims for refund for the
amounts aforestated valid and thus ordered the payment thereof.

2. From the adverse ruling of the CTA in the three (3) cases, the BIR Commissioner went to
the CA on a petition for review assailing in CA-G.R.SP No. 80675 the CTA
decision/resolution pertaining to consolidated CTA Case Nos. 6365 & 6383. A similar
petition, docketed as CA G.R. SP No.83165, was subsequently filed assailing the CTA
decision/resolution on CTA Case No. 6612.

3. Eventually, the CA, by Decision dated September 4, 2004, denied the Commissioner’s
consolidated petition for review. The appellate Court also denied the Commissioner’s motion
for reconsideration on March 1,2005.

4. It is upon the foregoing state of things that the Commissioner came to this Court in G.R.
Nos. 167274-75 to defeat FTC’s claim for refund thus granted initially by the CTA and then
by the CA in CA-G.R. SP No. 80675and CA-G.R. SP No. 83165.

By Decision dated July 21, 2008, the Court found against the Commissioner, disposing as follows:

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No.
80675, dated 28 September 2004,and its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.

SO ORDERED.5 (Emphasis supplied.)

From the foregoing narration, two critical facts are at once apparent. First , the BIR Commissioner
came to this Court on a petition for review in G.R. Nos. 167274-75 to set aside the consolidated
decision of the CA in CA-G.R. SP No. 80675 and CA-G.R. SP No. 83165. Second, while the Court’s
Decision dated July 21, 2008 in G.R. Nos. 167274-75 denied the Commissioner’s petition for review,
necessarily implying that the CA’s appealed consolidated decision is affirmed in toto, the fallo of that
decidendi makes no mention or even alludes to the appealed CA decision in CA-G.R. No. 83165,
albeit the main decision’s recital of facts made particular reference to that appealed CA decision. In
fine, there exists an apparent in consistency between the dispositive portion and the body of the
main decision, which ideally should have been addressed before the finality of the said decision.

Owing to the foregoing aberration, but cognizant of the fact that the process of clarifying the
dispositive portion in G.R. Nos. 167274-75 should be acted upon in the main case, the Court, by
Resolution6 dated February 25,2013 ordered the consolidation of this petition (G.R. No. 192576) with
G.R. Nos. 167274-75, to be assigned to any of the members of the Division who participated in the
rendition of the decision.

Now to the crux of the controversy.

Petitioner FTC posits that the CTA should have issued the desired additional writ of execution in
CTA Case No. 6612 since the body of the Decision of this Court in G.R. Nos. 167274-75
encompasses both CA G.R. Case No. 80675 which covers CTA Case Nos. 6365 and 6383 and CA
G.R. Case No. 83165 which embraces CTA Case No. 6612. While the fallo of the Decision dated
July 21, 2008 in G.R. Case Nos. 167274-75 did not indeed specifically mention CA G.R. SP No.
83165, petitioner FTC would nonetheless maintain that such a slip is but an inadvertent omission in
the fallo. For the text of the July 21, 2008 Decision, FTC adds, clearly reveals that said CA case was
intended to be included in the disposition of the case.

Respondent Commissioner, on the other hand, argues that per the CTA, no reversible error may be
attributed to the tax court in rejecting, without more, the prayer for the additional writ of execution
pertaining to CTA Case No. 6612, subject of CA G.R. SP No. 83165. For the purpose, the
Commissioner cited a catena of cases on the limits of a writ of execution. It is pointed out that such
writ must conform to the judgment to be executed; its enforcement may not vary the terms of the
judgment it seeks to enforce, nor go beyond its terms. As further asseverated, "whatever may be
found in the body of the decision can only be considered as part of the reasons or conclusions of the
court and while they may serve as guide or enlightenment to determine the ratio decidendi, what is
controlling is what appears in the dispositive part of the decision."7

Respondent Commissioner’s posture on the tenability of the CTA’s assailed denial action is correct.
As it were, CTA did no more than simply apply established jurisprudence that a writ of execution
issued by the court of origin tasked to implement the final decision in the case handled by it cannot
go beyond the contents of the dispositive portion of the decision sought to be implemented. The
execution of a judgment is purely a ministerial phase of adjudication. The executing court is without
power its own, to tinker let alone vary the explicit wordings of the dispositive portion, as couched.

But the state of things under the premises ought not to remain uncorrected. And the BIR cannot
plausibly raise a valid objection for such approach. That bureau knew where it was coming from
when it appealed, first before the CA then to this Court, the award of refund to FTC and the rationale
underpinning the award. It cannot plausibly, in all good faith, seek refuge on the basis of slip on the
formulation of the fallo of a decision to evade a duty. On the other hand, FTC has discharged its
burden of establishing its entitlement to the tax refund in the total amount indicated in its underlying
petitions for refund filed with the CTA. The successive favorable rulings of the tax court, the
appellate court and finally this Court in G.R. Nos. 167274-75 say as much. Accordingly, the Court, in
the higher interest of justice and orderly proceedings should make the corresponding clarification on
the fallo of its July 21, 2008 Decision in G.R. Case Nos.162274-75. It is an established rule that
when the dispositive portion of a judgment, which has meanwhile become final and executory,
contains a clerical error or an ambiguity arising from a inadvertent omission, such error or ambiguity
may be clarified by reference to the body of the decision itself.

After a scrutiny of the body of the aforesaid July 21, 2008 Decision, the Court finds it necessary to
render a judgment nunc pro tunc and address an error in the fallo of said decision. The office of a
judgment nunc pro tunc is to record some act of the court done at a former time which was not then
carried into the record, and the power of a court to make such entries is restricted to placing upon
the record evidence of judicial action which has actually been taken.9 The object of a judgment nunc
pro tunc is not the rendering of a new judgment and the ascertainment and determination of new
rights, but is one placing in proper form on the record, that has been previously rendered, to make it
speak the truth, so as to make it show what the judicial action really was, not to correct judicial
errors, such as to render a judgment which the court ought to have rendered, in place of the one it
did erroneously render, not to supply non-action by the court, however erroneous the judgment may
have been.10 The Court would thus have the record reflect the deliberations and discussions had on
the issue. In this particular case it is a correction of a clerical, not a judicial error. The body of the
decision in question is clear proof that the fallo must be corrected, to properly convey the ruling of
this Court.

We thus declare that the dispositive portion of said decision should be clarified to include CA G.R.
SP No. 83165 which affirmed the December 4,2003 Decision of the Court of Tax Appeals in CTA
Case No. 6612, for the following reasons, heretofore summarized:

1. The petition for review on certiorari in G.R. Nos. 167274-75filed by respondent CIR sought
the reversal of the September 28, 2004Decision of the Court of Appeals rendered in the
consolidated cases of CA-G.R. SP No. 80675 and CA-G.R. SP No. 83165, thus:Hence, this
petition for review on certiorari under Rule 45 of the Rules of Court which seeks the
nullification of the Court of Appeals’ (1)Decision promulgated on September 28, 2004 in CA-
G.R. SP No. 80675and CA-G.R. SP No. 83165, both entitled "Commissioner of Internal
Revenue vs. Fortune Tobacco Corporation," denying the CIR’s petition and affirming the
assailed decisions and resolutions of the Court of Tax Appeals (CTA) in CTA Cases Nos.
6365, 6383 and 6612; and (2)Resolution dated March 1, 2005 denying petitioner’s motion for
reconsideration of the said decision."11

Earlier on, it was made clear that respondent CIR questioned the Decision of the CTA dated
October 21, 2002 in CTA Case Nos. 6365 and 6383 in CA G.R. SP No. 80675 before the
Court of Appeals. In CA G.R. SP No. 83165, the Commissioner also assailed the Decision of
the CTA dated December 4, 2003 in CTA Case No. 66l2 also before the same appellate
court. The two CA cases were later consolidated. Since the appellate court rendered its
 September 28, 2004 Decision in the consolidated cases of CAG.R. SP Nos. 80675 and
83165, what reached and was challenged before this Court in G.R. Nos. 167274-75 is the
ruling of the Court of Appeals in both cases. When this Court rendered its July 21, 2008
Decision, the ruling necessarily embraced both CA G.R. SP Case Nos. 80675 and 83165
and adjudicated the respective rights of the parties. Clearly then, there was indeed an
inadvertence in not specifying in the fallo of our July 21, 2008Decision that the September
28, 2004 CA Decision included not only CAG.R. SP No. 80675 but also CA G.R. SP No.
83165 since the two cases were merged prior to the issuance of the September 28, 2004
Decision.

Given the above perspective, the inclusion of CA G.R. SP Case No.83165 in the fallo of the
Decision dated July 21, 2008 is very much in order and is in keeping with the imperatives of
fairness.

2. The very contents of the body of the Decision dated July 21,2008 rendered by this Court in
G.R. Nos. 167274-75 undoubtedly reveal that both CA G.R. SP No. 80675 and CA G.R. SP
No. 83165 were the subject matter of the petition therein. And as FTC would point out at
every turn, the Court’s Decision passed upon and decided the merits of the September
28,2004 Decision of the Court of Appeals in the consolidated cases of CA G.R.SP Case Nos.
80675 and 83165 and necessarily CA G.R. SP No. 83165 was included in our disposition of
G.R. Nos. 167274-75. We quote the pertinent portions of the said decision:

The following undisputed facts, summarized by the Court of Appeals, are quoted in the
assailed Decision dated 28 September 2004:

CAG.R. SP No. 80675

xxxx

Petitioner FTC is the manufacturer/producer of, among others, the following cigarette brands,
with tax rate classification based on net retail price prescribed by Annex "D" to R.A. No.
4280, to wit:

Brand Tax Rate

Champion M 100 ₱1.00

Salem M 100 ₱1.00

Salem M King ₱1.00
Camel F King ₱1.00

Camel Lights Box 20’s ₱1.00

Camel Filters Box 20’s ₱1.00
Winston F Kings ₱5.00
Winston Lights ₱5.00

Immediately prior to January 1, 1997, the above-mentioned cigarette brands were subject to ad
valorem tax pursuant to then Section142 of the Tax Code of 1977, as amended. However, on
January 1, 1997,R.A. No. 8240 took effect whereby a shift from the ad valorem tax (AVT)system to
the specific tax system was made and subjecting the aforesaid cigarette brands to specific tax under
Section 142 thereof, now renumbered as Sec. 145 of the Tax Code of 1997, pertinent provisions of
which are quoted thus:

xxxx

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be
increased by twelve percent (12%) on January 1, 2000. (Emphasis supplied.)

xxxx
To implement the provisions for a twelve percent (12%) increase of excise tax on, among others,
cigars and cigarettes packed by machines by January 1, 2000, the Secretary of Finance, xxx issued
Revenue Regulations [RR] No. 17-99, dated December 16, 1999, which provides the increase on
the applicable tax rates on cigar and cigarettes x x x.

[tax rates deleted]

Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1 thereof, "(t)hat
the new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled
spirits, wines and fermented liquor shall not be lower than the excise tax that is actually being paid
prior to January 1, 2000."

For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands
manufactured and removed in the total amounts of ₱585,705,250.00.

On February 7, 2000, petitioner filed with respondent’s Appellate Division a claim for refund or tax
credit of its purportedly overpaid excise tax for the month of January 2000 in the amount of
₱35,651,410.00.

On June 21, 2001, petitioner filed with respondent’s Legal Service a letter dated June 20, 2001
reiterating all the claims for refund/tax credit of its overpaid excise taxes filed on various dates,
including the present claim for the month of January 2000 in the amount of ₱35,651,410.00.

As there was no action on the part of the respondent, petitioner filed the instant petition for review
with this Court on December 11, 2001,in order to comply with the two-year period for filing a claim
for refund.

xxxx

CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the said case questions the CTA’s
December 4, 2003 decision in CTA Case No.6612 granting respondent’s claim for refund of the
amount of ₱355,385,920.00 representing erroneously or illegally collected specific taxes covering
the period January 1, 2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying
a reconsideration thereof.

xxxx

However, on consolidated motions for reconsideration filed by the respondent in CTA Case Nos.
6363 and 6383, the July 15, 2002 resolution was set aside, and the Tax Court ruled, this time with a
semblance of finality, that the respondent is entitled to the refund claimed. Hence, in are solution
dated November 4, 2003, the tax court reinstated its December 21, 2002 Decision and disposed as
follows:

WHEREFORE, our Decisions in CTA Case Nos.6365 and 6383 are hereby REINSTATED.
Accordingly, respondent is hereby ORDERED to REFUND petitioner the total amount of
₱680,387,025.00 representing erroneously paid excise taxes for the period January 1, 2000 to
January 31, 2000 and February 1,2000 to December 31, 2001.

SO ORDERED.

Meanwhile, on December 4, 2003, the CTA rendered a decision in CTA Case No. 6612 granting the
prayer for the refund of the amount of ₱355,385,920.00 representing overpaid excise tax for the
period covering January 1, 2002 to December 31, 2002. The tax court disposed of the case as
follows:

IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED. Accordingly, respondent is
hereby ORDERED to REFUND to petitioner the amount of ₱355,385,920.00 representing overpaid
excise tax for the period covering January 1, 2002 to December 31, 2002.

SO ORDERED.
Petitioner sought reconsideration of the decision, but the same was denied in a Resolution dated
March 17, 2004. (Emphasis supplied; citations omitted.)

The Commissioner appealed the aforesaid decisions of the CTA. The petition questioning the grant
of refund in the amount of ₱680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas that
assailing the grant of refund in the amount of ₱355,385,920.00 was docketed as CA-G.R. SP No.
83165. The petitions were consolidated and eventually denied by the CA. The appellate court also
denied reconsideration in its Resolution dated 1 March 2005.

In its Memorandum 22 dated November 2006, filed on behalf of the Commissioner, the Office of the
Solicitor General (OSG) seeks to convince the Court that the literal interpretation given by the CTA
and the CA of Section 145 of the Tax Code of 1997 (Tax Code) would lead to a lower tax imposable
on 1 January 2000 than that imposable during the transition period. Instead of an increase of 12% in
the tax rate effective on 1 January 2000 as allegedly mandated by the Tax Code, the appellate
court’s ruling would result in a significant decrease in the tax rate by as much as 66%.

xxxx

Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and must, therefore, be
construed strictly against the taxpayer, such as Fortune Tobacco. In its Memorandum dated 10
November 2006, Fortune Tobacco argues that the CTA and the CA merely followed the letter of the
law when they ruled that the basis for the 12% increase in the tax rate should be the net retail price
of the cigarettes in the market as outlined in paragraph C, sub par. (1)-(4), Section 145 of the Tax
Code. The Commissioner allegedly has gone beyond his delegated rule-making power when he
promulgated, enforced and implemented RR No. 17-99,which effectively created a separate
classification for cigarettes based on the excise tax "actually being paid prior to January 1, 2000."

xxxx

This entire controversy revolves around the interplay between Section 145 of the Tax Code and RR
17-99. The main issue is an inquiry into whether the revenue regulation has exceeded the allowable
limits of legislative delegation.

xxxx

Revenue Regulation 17-99, which was issued pursuant to the unquestioned authority of the
Secretary of Finance to promulgate rules and regulations for the effective implementation of the Tax
Code, interprets the above-quoted provision and reflects the 12% increase in excise taxes in the
following manner:

[table on tax rates deleted]

This table reflects Section 145 of the Tax Code insofar as it mandates a 12% increase effective on 1
January 2000 based on the taxes indicated under paragraph C, sub-paragraph (1)-(4). However, RR
No.17-99 went further and added that "The new specific tax rate for any existing brand of cigars,
cigarettes packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the
excise tax that is actually being paid prior to January 1, 2000."

Parenthetically, Section 145 states that during the transition period ,i.e., within the next three (3)
years from the effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be
lower than the tax due from each brand on 1 October 1996. This qualification, however, is
conspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettes
packed by machine, among others, effective on 1 January 2000. Clearly and unmistakably, Section
145mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase
effective on 1 January 2000 without regard to whether the revenue collection starting from this
period may turn out to be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase becomes effective shall not be
lower than the tax actually paid prior to 1January 2000, RR No. 17-99 effectively imposes a tax
which is the higher amount between the ad valorem tax being paid at the end of the three (3)-year
transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by
12%—a situation not supported by the plain wording of Section 145 of the Tax Code.
This is not the first time that national revenue officials had ventured in the area of unauthorized
administrative legislation.

In Commissioner of Internal Revenue v. Reyes, respondent was not informed in writing of the law
and the facts on which the assessment of estate taxes was made pursuant to Section 228 of the
1997 Tax Code, as amended by Republic Act (R.A.) No. 8424. She was merely notified of the
findings by the Commissioner, who had simply relied upon the old provisions of the law and RR No.
12-85 which was based on the old provision of the law. The Court held that in case of discrepancy
between the law as amended and the implementing regulation based on the old law, the former
necessarily prevails. The law must still be followed, even though the existing tax regulation at that
time provided for a different procedure.

xxxx

In the case at bar, the OSG’s argument that by 1 January 2000, the excise tax on cigarettes should
be the higher tax imposed under the specific tax system and the tax imposed under the

ad valorem tax system plus the 12% increase imposed by paragraph 5, Section 145 of the Tax
Code, is an unsuccessful attempt to justify what is clearly an impermissible incursion into the limits of
administrative legislation. Such an interpretation is not supported by the clear language of the law
and is obviously only meant to validate the OSG’s thesis that Section 145 of the Tax Code is
ambiguous and admits of several interpretations.

The contention that the increase of 12% starting on 1 January 2000 does not apply to the brands of
cigarettes listed under Annex "D" is likewise unmeritorious, absurd even. Paragraph 8, Section 145of
the Tax Code simply states that, "The classification of each brand of cigarettes based on its average
net retail price as of October 1, 1996, as set forth in Annex ‘D’, shall remain in force until revised by
Congress." This declaration certainly does not lend itself to the interpretation given to it by the OSG.
As plainly worded, the average net retail prices of the listed brands under Annex "D," which classify
cigarettes according to their net retail price into low, medium or high, obviously remain the bases for
the application of the increase in excise tax rates effective on 1 January 2000.

The foregoing leads us to conclude that RR No. 17-99 is indeed indefensibly flawed. The
Commissioner cannot seek refuge in his claim that the purpose behind the passage of the Tax Code
is to generate additional revenues for the government. Revenue generation has undoubtedly been a
major consideration in the passage of the Tax Code. However, as borne by the legislative record,
the shift from the ad valorem system to the specific tax system is likewise meant to promote fair
competition among the players in the industries concerned, to ensure an equitable distribution of the
tax burden and to simplify tax administration by classifying cigarettes x x x into high, medium and
low- priced based on their net retail price and accordingly graduating tax rates.

xxxx

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No.
80675, dated 28 September 2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No
pronouncement as to costs.

SO ORDERED.12

The July 21, 2008 Decision in G.R. Nos. 167274-75 brings into sharp focus the following facts and
proceedings:

1. It specifically mentioned CA G.R. SP No. 80675 and CA G.R.SP No. 83165 as the subject
matter of the decision on p. 2 and p. 7,respectively.

2. It traced the history of CTA Case Nos. 6365 and 6383 from the time the CTA peremptorily
resolved the twin refund suits to the appeal of the decisions thereat to the Court of Appeals
via a petition docketed as CA-G.R. SP No. 80675 and eventually to this Court in G.R. Nos.
167274-75. It likewise narrated the events connected with CTA Case No. 6612 to the time
the decision in said case was appealed to the Court of Appeals in CA-G.R.SP No. 83165,
consolidated with CA G.R. SP No. 80675 and later decided by the appellate court. It cited the
appeal from the CA decision by the BIR Commissioner to this Court in G.R. Nos. 167274-75.
 3. It resolved in the negative the main issue presented in both CA-G.R. SP No. 80675 and
CA-G.R. SP No. 83165 as to whether or not the last paragraph of Section 1 of Revenue
Regulation No. 17-99 is in accordance with the pertinent provisions of Republic Act No.
8240, now incorporated in Section 145 of the Tax Code of 1997.

4. The very disposition in the fallo in G.R. Case Nos. 167274-75 that "the petition is denied"
and that the "Decision of the Court of Appeals x x x dated 28 September 2004 and its
Resolution dated 1 March 2005 are affirmed" reflects an intention that CA G.R. SP No.
83165 should have been stated therein, being one of the cases subject of the September 28,
2004 CA Decision.

The legality of Revenue Regulation No. 17-99 is the only determinative issue resolved by the July
21, 2008 Decision which was the very same issue resolved by the CA in the consolidated CA-G.R.
SP Nos.80675 and 83165 and exactly the same issue in CTA Nos. 6365, 6383 and 6612.

From the foregoing cogent reasons, We conclude that CA-G.R. SP No. 83165 should be included in
the fallo of the July 21, 2008 decision.

It is established jurisprudence that "the only portion of the decision which becomes the subject of
execution and determines what is ordained is the dispositive part, the body of the decision being
considered as the reasons or conclusions of the Court, rather than its adjudication."13

In the case of Ong Ching Kian Chung v. China National Cereals Oil and Foodstuffs Import and
Export Corporation, the Court noted two (2)exceptions to the rule that the fallo prevails over the body
of the opinion, viz:

(a) where there is ambiguity or uncertainty, the body of the opinion may be referred to for
purposes of construing the judgment because the dispositive part of a decision must find
support from the decision’s ratio decidendi;

(b) where extensive and explicit discussion and settlement of the issue is found in the body
of the decision.14

Both exceptions obtain in the present case. We find that there is an ambiguity in the fallo of Our July
21, 2008 Decision in G.R. Nos. 167274-75 considering that the propriety of the CA holding in CA-
G.R. SP No.83165 formed part of the core issues raised in G.R. Case Nos. 167274-75, but
unfortunately was left out in the all-important decretal portion of the judgment. The fallo of Our July
21, 2008 Decision should, therefore, be correspondingly corrected.

For sure, the CTA cannot, as the Commissioner argues, be faulted for denying petitioner FTC’s
Motion for Additional Writ of Execution filed in CTA Case Nos. 6365, 6383 and 6612 and for denying
petitioner’s Motion for Reconsideration for it has no power nor authority to deviate from the wording
of the dispositive portion of Our July 21, 2008 Decision in G.R. Nos. 167274-75. To reiterate, the
CTA simply followed the all too familiar doctrine that "when there is a conflict between the dispositive
portion of the decision and the body thereof, the dispositive portion controls irrespective what
appears in the body of the decision."15 Veering away from the fallo might even be viewed as irregular
and may give rise to a charge of breach of the Code of Judicial Conduct. Nevertheless, it behooves
this Court for reasons articulated earlier to grant relief to petitioner FTC by way of clarifying Our July
21, 2008 Decision. This corrective step constitutes, in the final analysis, a continuation of the
proceedings in G.R. Case Nos. 167274-75. And it is the right thing to do under the premises. If the
BIR, or other government taxing agencies for that matter, expects taxpayers to observe fairness,
honesty, transparency and accountability in paying their taxes, it must, to borrow from BPI Family
Savings Bank, Inc. v Court of Appeals16 hold itself against the same standard in refunding excess
payments or illegal exactions. As a necessary corollary, when the taxpayer’s entitlement to are fund
stands undisputed, the State should not misuse technicalities and legalisms, however exalted, to
keep money not belonging to it.17 As we stressed in G.R. Nos. 167274-75, the government is not
exempt from the application of solutio indebiti, a basic postulate proscribing one, including the State,
from enriching himself or herself at the expense of another.18 So it must be here.

WHEREFORE, the petition is GRANTED. The dispositive portion of the Court’s July 21, 2008
Decision in G.R. Nos. 167274-75 is corrected to reflect the inclusion of CA G.R. SP No. 83165
therein. As amended, the fallo of the aforesaid decision shall read:
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in the consolidated
cases of CA- G.R. SP No. 80675 and 83165 dated 28 September 2004, and its Resolution, dated 1
March 2005, are AFFIRMED. No pronouncement as to costs.

The Decision of the Court of Tax Appeals (CTA) En Banc dated March 12, 2010 and the Resolution
dated June 11, 2010 in CTA EB No. 530 entitled "Fortune Tobacco Corporation vs. Commissioner of
Internal Revenue" as well as the Resolutions dated June 4, 2009 and August 10, 2009which denied
the Motion for Issuance of Additional Writ of Execution of the CTA First Division in CTA Cases Nos.
6365, 6383 and 6612 are SETASIDE. The CTA is ORDERED to issue a writ of execution directing
the respondent CIR to pay petitioner Fortune Tobacco Corporation the amount of tax refund of
₱355,385,920.00 as adjudged in CTA Case No. 6612.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

WE CONCUR:

DIOSDADO M. PERALTA
Associate Justice

ROBERTO A. ABAD JOSE CATRAL MENDOZA

Associate Justice Associate Justice

MARVIC MARIO VICTOR F. LEONEN

Associate Justice

ATTESTATION

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

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, l
certify that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

MARIA LOURDES P. A. SERENO

Chief Justice
G.R. No. 160379 August 14, 2009

REPUBLIC OF THE PHILIPPINES THROUGH THE DEPARTMENT OF PUBLIC WORKS AND

HIGHWAYS, Petitioner,
vs.
COURT OF APPEALS and ROSARIO RODRIGUEZ REYES, Respondents.

DECISION

CARPIO, J.:

The Case

This is a petition for review1 of the Court of Appeals’ Decision2 dated 15 November 2002 and
Resolution dated 17 September 2003 in CA-G.R. CV No. 50358. The Court of Appeals affirmed with
modifications the Amended Decision of the Regional Trial Court of Cagayan de Oro City, Branch 19
(RTC).

The Antecedent Facts

Private respondent Rosario Rodriguez Reyes is the absolute owner of a parcel of land identified as
Lot 849-B and covered by TCT No. T-7194. The 1,043-square meter lot is situated on Claro M.
Recto and Osmeña Streets, Cagayan de Oro City.

On 6 November 1990, private respondent received a letter from petitioner Republic of the
Philippines, through the Department of Public Works and Highways (DPWH), requesting permission
to enter into a portion of private respondent’s lot consisting of 663 square meters, and to begin
construction of the Osmeña Street extension road. On 20 December 1990, petitioner took
possession of private respondent’s property without initiating expropriation proceedings.
Consequently, on 4 and 7 January 1991, private respondent sent letters to the DPWH stating her
objection to the taking of her property. On 16 May 1991, private respondent sent a letter to the City
Appraisal Committee (CAC) rejecting the latter’s appraisal of the subject property, to wit:3

Declared Tax Market Value Recommended Description

Owner Declaration 1981 Schedule Appraised Value
No.
Rosario 90066 ₱400/sq.m. ₱4,000/sq.m. 1 to 20 meters from
Reyes Claro M. Recto Super
Highway
₱3,200/sq.m. 21 to 40 meters from
Claro M. Recto Super
Highway
₱2,400/sq.m. 41 to 60 meters from
Claro M. Recto Super
Highway

In the same letter, private respondent requested the City Assessor for a reappraisal of her property,
but said request was denied.4

On 17 March 1992 , private respondent filed with the Regional Trial Court (RTC) of Cagayan de Oro
City a complaint claiming just compensation and damages against petitioner.

On 30 June 1993, the RTC appointed three commissioners5 to determine the subject property’s fair
market value, as well as the consequential benefits and damages of its expropriation. On 15
September 1993, one of the three commissioners, Provincial Assessor Corazon Beltran, submitted
to the RTC a separate report, the dispositive portion of which reads:

WHEREFORE, the undersigned deems it only to be just, fair and reasonable to adopt the market
value of FOUR THOUSAND PESOS (₱4,000.00) per square meter as the highest price obtaining
and prevailing in 1990, the time of the taking of the property subject of the above entitled case, and
fairly reasonable also to impose an additional value equivalent to 5% of the market value as fixed for
severance fee.6

On 13 April 1994, the scheduled hearing was reset to 19 May 1994, to give private respondent
(plaintiff) time to consider the offer of petitioner (defendant) to amicably settle the case and to accept
the just compensation of ₱3,200 per square meter, or a total of ₱2,212,600, for the 663-square
meter portion of private respondent’s lot.7

On 16 May 1994, private respondent filed with the RTC an "Urgent Motion to Deposit The Amount of
₱2,121,600 in Court," alleging that petitioner’s counsel previously manifested in open court that the
amount of ₱2,121,600 was ready for release should the amount be acceptable to private
respondent, and praying that said amount of ₱2,121,600 be deposited by petitioner with the trial
court.8 The RTC granted the motion in an Order dated 16 June 1994.9 However, it was only on 21
October 1994 that petitioner deposited with the RTC Clerk of Court a Landbank check amounting to
₱2,121,600 as just compensation.10

On 16 June 1994, the RTC ordered the commissioners to submit their report as soon as possible,
but until the scheduled hearing on 15 July 1994, the commissioners still failed to submit their report.
Upon motion of private respondent, the RTC issued an order appointing a new set of
commissioners.11

On 11 October 1994, the new commissioners submitted their report, the pertinent portions of which
provide, thus:

COMMISSIONERS’ REPORT

xxx

The property litigated upon is strategically located along Recto Avenue (National Highway) which is
a commercial district. Fronting it across the national highway is the Cagayan Coca Cola Plant and
the Shell Gasoline Station. It adjoins an establishment known as the Palana Grocery Store and after
it is the Northern Mindanao Development Bank. Three Hundred (300) meters to the west of plaintiff’s
property is the gigantic structure of the Gaisano City department store along Recto Avenue and
Corrales Avenue Extension. Towards the eastern direction of the property are banking institution
buildings and the Ororama Superstore along the national highway (Recto Avenue) and the Limketkai
Commercial Complex.

For purpose of affording a fair assessment of the market value of plaintiff’s property, the herein
Commissioners have divided the whole parcel of land into three parts, viz:

1. Front portion along Recto Avenue measuring 21.52 meters from south to 347.66
north ------------- SQM
2. Middle portion with a measurement of 21.52 meters --------------------------------- 347.66
------------- SQM
3. Rear/back portion with a measurement of 21.52 meters ---------------------------- 347.66
--------- SQM
TOTAL AREA: ------- 1,043 SQM

Taking into consideration, among others, the location of the property and a research of the prevailing
prices of lots proximate to and/or near the vicinity of plaintiff's property, the undersigned
Commissioners respectfully recommend to the Honorable Court the following valuation, to wit:

(CURRENT VALUE)

1. Front portion along Recto Avenue with a measurement of 21.52 meters from south to
north with an area of 347.66 square meters at ₱18,000.00 to ₱20,000.00 per square meter;

2. Middle portion with a measurement of 21.52 meters containing an area of 347.66 square
meters at ₱16,000.00 to ₱18,000.00 per square meter;

3. Rear/back portion measuring 21.52 meters with an area of 347.66 square meters at
₱14,000.00 to ₱16,000.00 per square meter;
VALUATION AS OF 1990

1. Front Portion - ₱10,000.00 to ₱12,000.00 per square meter;

2. Middle Portion- ₱8,000.00 to ₱10,000.00 per square meter;

3. Rear Portion - ₱6,000.00 to ₱8,000.00 per square meter;

The undersigned Commissioners would however like to bring to the attention of the Honorable Court
that in the subdivision plan prepared by the City Engineer’s Office, the whole of plaintiff’s property
was subdivided into three (3) lots designated as follows:

Lot 849-B-1 (Road Lot)-83 square meters;

Lot 849-B-2 (Road Lot traversed by the RCDP Osmeña Extension Street)-663 SQM;

Lot 849-B-3 remaining portion with an area of 297 square meters;

In effect, what has been taken over and used by the defendant is not only 663 square meters but
746 square meters, more or less, which includes Lot No. 849-B-1.

On the other hand, the remaining portion left to the plaintiff, Lot No. 849-B-3 will not actually be 297
square meters. If we deduct the setback area from Osmeña Extension Street, the usable/buildable
area left to the plaintiff would only be a little over 50 square meters. This portion would not command
a good price if sold. Neither is it ideal for purposes of any building construction because aside from
its being a very small strip of land, the shape is triangular.12

The Trial Court’s Ruling

On 2 June 1995, the RTC rendered a Decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
declaring the former as having the right to retain 590 square meters of the property covered by TCT
No. T-7194, and ordering the latter to return 210 square meters of the 663 square meters taken; that
defendants are solidarily liable to pay the sum of ₱5,526,000.00, the fair market value of 1990 (sic),
as just compensation for the 536 square meters taken for the Osmeña street extension; to pay
₱185,000.00 representing damages for 37 months computed at the rate of ₱5,000.00 per month
from the filing of this case; and Attorney’s fees of ₱10,000.00 plus costs of suit.

Plaintiff herein is ordered to forthwith defray the expenses to be incurred in undertaking the road
construction of the 210 square meters which the defendants will later on provide along the right
portion of her property.

SO ORDERED.13

On 15 June 1995, the RTC rendered an Amended Decision with the following dispositive portion,
thus:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
declaring the former as having the right to retain 590 square meters of the property covered by TCT
No. T-7194, and ordering the latter to return 293 square meters of the 746 square meters taken; that
defendants are solidarily liable to pay the sum of ₱4,696,000.00, the fair market value of 1990 (sic),
as just compensation for the 453 square meters taken for the Osmeña Street extension; to pay
₱185,000.00 representing damages for 37 months computed at the rate of ₱5,000.00 per month
from the filing of this case; and Attorney’s fees of ₱10,000.00 plus costs of suit.

Plaintiff herein is ordered to forthwith defray the expenses to be incurred in undertaking the road
construction of the 293 square meters which the defendants will later on provide along the right
portion of her property.

SO ORDERED.14
 The Court of Appeals’ Ruling

On appeal by petitioner, the Court of Appeals rendered judgment,15 affirming with modifications the
decision of the RTC. The Court of Appeals found that the commissioners’ recommendations on just
compensation were not supported by valid documents. Also, it was unclear in the RTC decision
whether the trial court merely adopted the commissioners’ recommendations or the court made its
own independent valuation of the subject property. Thus, the Court of Appeals held that a
reconvening of the commissioners or an appointment of new commissioners to determine just
compensation was necessary. The appellate court further held that the trial court’s order for
petitioner’s return of the 293-square meter lot had no legal basis and was no longer feasible since
the lot was already part of the completed Sergio Osmeña extension road. Moreover, consequential
damages should be awarded in lieu of actual damages for private respondent’s alleged loss of
income from the remaining 297-square meter lot. We quote the dispositive portion of the Court of
Appeals’ decision below.

WHEREFORE , the appealed judgment is hereby MODIFIED.

1. The case is REMANDED to the trial court which is ordered to reconvene the
commissioners or appoint new commissioners to determine, in accordance with this
Decision, the amount of just compensation due to plaintiff-appellee Rosario Rodriguez Reyes
for the 746 square meters of land taken from her and consequential damages to the 297-
square meter portion left.

2. Defendant-appellant DWPH16 is ordered to pay plaintiff-appellee the following amounts:

a. the balance, if any, of just compensation to be finally determined after deducting

the amount of ₱2,161,600.0017 DPWH previously advanced and deposited with the
trial court;

b. 6% legal interest per annum on the amount it provisionally deposited from the time
of taking up to the time it is deposited with the trial court on October 21, 1994; and on
the balance, if any, from the time of taking on December 20, 1990 until fully paid;

c. attorney’s fees of ₱20,000.00.

3. Defendant-appellant City Government of Cagayan de Oro is relieved from any liability;

4. The award of ₱185,000.00 as actual damages is deleted;

5. No pronouncement as to costs.

SO ORDERED.18

Petitioner filed a Motion for Reconsideration, but this was denied by the Court of Appeals in its
Resolution of 17 September 2003.19

Hence, this appeal.

The Issues

Petitioner raises the following issues:

1. Whether the Court of Appeals erred in ordering the remand of the case to the trial court, to
order the reconvening of the commissioners or appointment of new commissioners to
determine the consequential damages for the remaining 297- square meter lot; and

2. Whether the Court of Appeals erred in ordering petitioner to pay attorney’s fees.

The Court’s Ruling

We find the appeal unmeritorious.

On whether the Court of Appeals erred in ordering the
remand of the case to the trial court to order the reconvening
of the commissioners or appointment of new commissioners
to determine the consequential damages for the remaining
297-square meter lot

Eminent domain is the authority and right of the State, as sovereign, to take private property for
public use upon observance of due process of law and payment ofjust compensation.20 The
Constitution provides that, "[p]rivate property shall not be taken for public use without just
compensation."21

Just compensation is the full and fair equivalent of the property sought to be expropriated.22 Among
the factors to be considered in arriving at the fair market value of the property are the cost of
acquisition, the current value of like properties, its actual or potential uses, and in the particular case
of lands, their size, shape, location, and the tax declarations thereon.23 The measure is not the
taker’s gain but the owner’s loss.24 To be just, the compensation must be fair not only to the owner
but also to the taker.25

J ust compensation is based on the price or value of the property at the time it was taken from the
owner and appropriated by the government.26 However, if the government takes possession before
the institution of expropriation proceedings, the value should be fixed as of the time of the taking of
said possession, not of the filing of the complaint. The value at the time of the filing of the complaint
should be the basis for the determination of the value when the taking of the property involved
coincides with or is subsequent to the commencement of the proceedings.27

The procedure for determining just compensation is set forth in Rule 67 of the 1997 Rules of Civil
Procedure. Section 5 of Rule 67 partly states that "[u]pon the rendition of the order of expropriation,
the court shall appoint not more than three (3) competent and disinterested persons as
commissioners to ascertain and report to the court the just compensation for the property sought to
be taken." However, we held in Republic v. Court of Appeals28 that Rule 67 presupposes a prior filing
of complaint for eminent domain with the appropriate court by the expropriator. If no such complaint
is filed, the expropriator is considered to have violated procedural requirements, and hence, waived
the usual procedure prescribed in Rule 67, including the appointment of commissioners to ascertain
just compensation.29 In National Power Corporation v. Court of Appeals,30 we clarified that when
there is no action for expropriation and the case involves only a complaint for damages or just
compensation, the provisions of the Rules of Court on ascertainment of just compensation (i.e.,
provisions of Rule 67) are no longer applicable, and a trial before commissioners is dispensable,
thus:

In this case, NPC appropriated Pobre’s Property without resort to expropriation proceedings. NPC
dismissed its own complaint for the second expropriation. At no point did NPC institute expropriation
proceedings for the lots outside the 5,554 square-meter portion subject of the second expropriation.
The only issues that the trial court had to settle were the amount of just compensation and damages
that NPC had to pay Pobre.

This case ceased to be an action for expropriation when NPC dismissed its complaint for
expropriation. Since this case has been reduced to a simple case of recovery of damages, the
provisions of the Rules of Court on the ascertainment of the just compensation to be paid were no
longer applicable. A trial before commissioners, for instance, was dispensable.31

In this case, petitioner took possession of the subject property without initiating expropriation
proceedings. Consequently, private respondent filed the instant case for just compensation and
damages. To determine just compensation, the trial court appointed three commissioners pursuant
to Section 5 of Rule 67 of the 1997 Rules of Civil Procedure. None of the parties objected to such
appointment.

The trial court’s appointment of commissioners in this particular case is not improper. The
appointment was done mainly to aid the trial court in determining just compensation, and it was not
opposed by the parties. Besides, the trial court is not bound by the commissioners’ recommended
valuation of the subject property. The court has the discretion on whether to adopt the
commissioners’ valuation or to substitute its own estimate of the value as gathered from the
records.32
However, we agree with the appellate court that the trial court’s decision is not clear as to its basis
for ascertaining just compensation. The trial court mentioned in its decision the valuations in the
reports of the City Appraisal Committee and of the commissioners appointed pursuant to Rule 67.
But whether the trial court considered these valuations in arriving at the just compensation, or the
court made its own independent valuation based on the records, was obscure in the decision. The
trial court simply gave the total amount of just compensation due to the property owner without
laying down its basis. Thus, there is no way to determine whether the adjudged just compensation is
based on competent evidence. For this reason alone, a remand of the case to the trial court for
proper determination of just compensation is in order. In National Power Corporation v.
Bongbong,33 we held that although the determination of just compensation lies within the trial court’s
discretion, it should not be done arbitrarily or capriciously. The decision of the trial court must be
based on all established rules, correct legal principles, and competent evidence.34 The court is
proscribed from basing its judgment on speculations and surmises.35

Petitioner questions the appellate court’s decision to remand the case to determine the
consequential damages for the remaining 297-square meter lot of private respondent. Petitioner
contends that no consequential damages may be awarded as the remaining lot was "not actually
taken" by the DPWH, and to award consequential damages for the lot which was retained by the
owner is tantamount to unjust enrichment on the part of the latter.

Petitioner’s contention is unmeritorious.

No actual taking of the remaining portion of the real property is necessary to grant consequential
damages. If as a result of the expropriation made by petitioner, the remaining lot (i.e., the 297-
square meter lot) of private respondent suffers from an impairment or decrease in value,
consequential damages may be awarded to private respondent. On the other hand, if the
expropriation results to benefits to the remaining lot of private respondent, these consequential
benefits36 may be deducted from the awarded consequential damages, if any, or from the market
value of the expropriated property. We held in B.H. Berkenkotter & Co. v. Court of Appeals37 that:

To determine just compensation, the trial court should first ascertain the market value of the
property, to which should be added the consequential damages after deducting therefrom the
consequential benefits which may arise from the expropriation. If the consequential benefits exceed
the consequential damages, these items should be disregarded altogether as the basic value of the
property should be paid in every case.

Section 6 of Rule 67 of the Rules of Civil Procedure provides:

x x x The commissioners shall assess the consequential damages to the property not taken and
deduct from such consequential damages the consequential benefits to be derived by the owner
from the public use or purpose of the property taken, the operation of its franchise by the corporation
or the carrying on of the business of the corporation or person taking the property. But in no case
shall the consequential benefits assessed exceed the consequential damages assessed, or the
owner be deprived of the actual value of his property so taken.

An award of consequential damages for property not taken is not tantamount to unjust enrichment of
the property owner. There is unjust enrichment "when a person unjustly retains a benefit to the loss
of another, or when a person retains money or property of another against the fundamental
principles of justice, equity and good conscience."38 Article 22 of the Civil Code provides that "[e]very
person who through an act of performance by another, or any other means, acquires or comes into
possession of something at the expense of the latter without just or legal ground, shall return the
same to him." The principle of unjust enrichment under Article 22 requires two conditions: (1) that a
person is benefited without a valid basis or justification, and (2) that such benefit is derived at
another’s expense or damage.39 There is no unjust enrichment when the person who will benefit has
a valid claim to such benefit.40

As stated, consequential damages are awarded if as a result of the expropriation, the remaining
property of the owner suffers from an impairment or decrease in value. Thus, there is a valid basis
for the grant of consequential damages to the property owner, and no unjust enrichment can result
therefrom.

On whether the Court of Appeals erred

in ordering petitioner to pay attorney’s fees.
The Court of Appeals did not err in granting attorney’s fees to private respondent. Article 2208(2) of
the New Civil Code provides that attorney’s fees may be awarded:

xxx

(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.

xxx

Attorney’s fees may be awarded by a court if one who claims it is compelled to litigate with third
persons or to incur expenses to protect one’s interest by reason of an unjustified act or omission on
the part of the party from whom it is sought.41 In this case, petitioner took possession of private
respondent’s real property without initiating expropriation proceedings, and over the latter’s
objection. As a result, private respondent was compelled to litigate and incur expenses to protect her
interests over her property. Thus, the appellate court’s award of attorney’s fees is proper, viz:

We find, however, the award of attorney’s fees in plaintiff-appellee’s favor justified. x x x It is

admitted that defendant-appellant DPWH neglected to file the appropriate expropriation proceedings
before taking over plaintiff-appellee’s land. That their road contractor no longer has any portion to
work on except on plaintiff-appellee’s property is no justification for the precipitate taking of her lot. It
is incumbent upon defendant-appellant DPWH to foresee whether private lands will be affected by
their project and to file appropriate expropriation proceedings if necessary. They did not do so. Thus,
plaintiff-appellee was constrained to institute the instant suit to protect her rights.42

WHEREFORE, we DENY the petition. We AFFIRM the Court of Appeals’ Decision dated 15
November 2002 and Resolution dated 17 September 2003 in CA-G.R. CV No. 50358.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

RENATO C. CORONA TERESITA J. LEONARDO-DE CASTRO

Associate Justice Associate Justice

LUCAS P. BERSAMIN
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion
of the Court’s Division.

REYNATO S. PUNO
Chief Justice
G.R. No. 967 May 19, 1903

DARIO AND GAUDENCIO ELEIZEGUI, plaintiffs-appellees,

vs.
THE MANILA LAWN TENNIS CLUB, defendant-appellant.

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.

Mapa and Ladd, JJ., concur.

Torres, J., disqualified.

Separate Opinions

WILLARD, J., concurring:

I concur in the foregoing opinion so far as it holds that article 1581 has no application to the case
and that the action can not be maintained. But as to the application of article 1128 I do not concur.
That article is as follows:

Should the obligation not fix a period, but it can be inferred from its nature and circumstances
that there was an intention to grant it to the debtor, the courts shall fix the duration of the
same.

The court shall also fix the duration of the period when it may have been left to the will of the
debtor.

The court has applied the last paragraph of the article to the case of a lease. But, applying the first
paragraph to leases, we have a direct conflict between this article and article 1581. Let us suppose
the lease of a house for 50 pesos a month. Nothing is said about the number of months during which
the lessee shall occupy it. If article 1581 is applicable to this case, the law fixes the duration of the
term and the courts have no power to change it. If article 1128 is applied to it, the courts fix the
duration of the lease without reference to article 1581. It will, I think, be agreed by everyone that
article 1581 is the law applicable to the case, and that article 1128 has nothing to do with it.

It seems clear that both parts of the article must refer to the same kind of obligations. The first
paragraph relates to obligations in which the parties have named no period, the second to the same
kind of obligations in which the period is left to the will of the debtor. If the first paragraph is not
applicable to leases, the second is not.

The whole article was, I think, intended to apply generally to unilateral contracts — to those in which
the creditor had parted with something of value, leaving it to the debtor to say when it should be
returned. In such cases the debtor might never return it, and the creditor might thus be deprived of
his property and entirely defeated in his rights. It was to prevent such a wrong that the article was
adopted. But it has no application to this case. The plaintiffs are not deprived of their rights. They get
every month the value which they themselves put upon the use of the property. The time of the
payment of this rent has not been left by the contract to the will of the debtor. It is expressly provided
in the contract that it shall be paid "within the first five days after the expiration of each month."

Article 1255 of the Civil Code is as follows:

The contracting parties may make the agreement and establish the clauses and conditions
which they may deem advisable, provided they are not in contravention of law, morals, or
public order.

That the parties to this contract distinctly agreed that the defendant should have this property so long
as he was willing to pay 25 pesos a month for it, is undisputed.

I find nothing in the Code to show that when a natural person is the tenant such an agreement would
be contrary to law, morality, or public policy. In such a case the contract would terminate at the death
of the tenant. Such is the doctrine of the French Cour de Cassation. (Houet vs. Lamarge, July 20,
1840.)
The tenant is the only person who has been given the right to say how long the contract shall
continue. That right is personal to him, and is not property in such a sense as to pass to his heirs.

In this case the question is made more difficult by the fact that the tenant is said to be juridical
person, and it is said that the lease is therefore a perpetual one. Just what kind of a partnership or
association the defendant is does not appear, and without knowing what kind of an entity it is we can
not say that this contract is a perpetual lease. Even if the defendant has perpetual succession, the
lease would not necessarily last forever. A breach of any one of the obligations imposed upon the
lessee by article 1555 of the Civil Code would give the landlord the right to terminate it.

The Lawphil Project - Arellano Law Foundation

G.R. No. 170141 April 22, 2008

JAPAN AIRLINES, petitioner,

vs.
JESUS SIMANGAN, respondent.

DECISION

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 well-matched 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 non-performance 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.

SO ORDERED.

RUBEN T. REYES
Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case
was assigned to the writer of the opinion of the Court's Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

CERTIFICATION

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

REYNATO S. PUNO
Chief Justice
G.R. No. 141968 February 12, 2001

THE INTERNATIONAL CORPORATE BANK (now UNION BANK OF THE

PHILIPPINES), petitioner,
vs.
SPS. FRANCIS S. GUECO and MA. LUZ E. GUECO, respondents.

KAPUNAN, J.:

The respondent Gueco Spouses obtained a loan from petitioner International Corporate Bank (now
Union Bank of the Philippines) to purchase a car - a Nissan Sentra 1600 4DR, 1989 Model. In
consideration thereof, the Spouses executed promissory notes which were payable in monthly
installments and chattel mortgage over the car to serve as security for the notes.

The Spouses defaulted in payment of installments. Consequently, the Bank filed on August 7, 1995
a civil action docketed as Civil Case No. 658-95 for "Sum of Money with Prayer for a Writ of
Replevin"1 before the Metropolitan Trial Court of Pasay City, Branch 45.2 On August 25, 1995, Dr.
Francis Gueco was served summons and was fetched by the sheriff and representative of the bank
for a meeting in the bank premises. Desi Tomas, the Bank's Assistant Vice President demanded
payment of the amount of P184,000.00 which represents the unpaid balance for the car loan. After
some negotiations and computation, the amount was lowered to P154,000.00, However, as a result
of the non-payment of the reduced amount on that date, the car was detained inside the bank's
compound.

On August 28, 1995, Dr. Gueco went to the bank and talked with its Administrative Support, Auto
Loans/Credit Card Collection Head, Jefferson Rivera. The negotiations resulted in the further
reduction of the outstanding loan to P150,000.00.

On August 29, 1995, Dr. Gueco delivered a manager's check in amount of P150,000.00 but the car
was not released because of his refusal to sign the Joint Motion to Dismiss. It is the contention of the
Gueco spouses and their counsel that Dr. Gueco need not sign the motion for joint dismissal
considering that they had not yet filed their Answer. Petitioner, however, insisted that the joint motion
to dismiss is standard operating procedure in their bank to effect a compromise and to preclude
future filing of claims, counterclaims or suits for damages.

After several demand letters and meetings with bank representatives, the respondents Gueco
spouses initiated a civil action for damages before the Metropolitan Trial Court of Quezon City,
Branch 33. The Metropolitan Trial Court dismissed the complaint for lack of merit.3

On appeal to the Regional Trial Court, Branch 227 of Quezon City, the decision of the Metropolitan
Trial Court was reversed. In its decision, the RTC held that there was a meeting of the minds
between the parties as to the reduction of the amount of indebtedness and the release of the car but
said agreement did not include the signing of the joint motion to dismiss as a condition sine qua
non for the effectivity of the compromise. The court further ordered the bank:

1. to return immediately the subject car to the appellants in good working condition; Appellee
may deposit the Manager's check - the proceeds of which have long been under the control
of the issuing bank in favor of the appellee since its issuance, whereas the funds have long
been paid by appellants to .secure said Manager's Check, over which appellants have no
control;

2. to pay the appellants the sum of P50,000.00 as moral damages; P25,000.00 as exemplary
damages, and P25,000.00 as attorney's fees, and

3. to pay the cost of suit.

In other respect, the decision of the Metropolitan Trial Court Branch 33 is hereby
AFFIRMED.4

The case was elevated to the Court of Appeals, which on February 17, 2000, issued the assailed
decision, the decretal portion of which reads:
 WHEREFORE, premises considered, the petition for review on certiorari is hereby DENIED
and the Decision of the Regional Trial Court of Quezon City, Branch 227, in Civil Case No.
Q-97-31176, for lack of any reversible error, is AFFIRMED in toto. Costs against petitioner.

SO ORDERED.5

The Court of Appeals essentially relied on the respect accorded to the finality of the findings of facts
by the lower court and on the latter's finding of the existence of fraud which constitutes the basis for
the award of damages.

The petitioner comes to this Court by way of petition for review on certiorari under Rule 45 of the
Rules of Court, raising the following assigned errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO AGREEMENT

WITH RESPECT TO THE EXECUTION OF THE JOINT MOTION TO DISMISS AS A
CONDITION FOR THE COMPROMISE AGREEMENT.

II

THE COURT OF APPEALS ERRED IN GRANTING MORAL AND EXEMPLARY DAMAGES

AND ATTORNEY'S FEES IN FAVOR OF THE RESPONDENTS.

III

THE COURT OF APPEALS ERRED IN HOLDING THAT THE PETITIONER RETURN THE
SUBJECT CAR TO THE RESPONDENTS, WITHOUT MAKING ANY PROVISION FOR THE
ISSUANCE OF THE NEW MANAGER'S/CASHIER'S CHECK BY THE RESPONDENTS IN
FAVOR OF THE PETITIONER IN LIEU OF THE ORIGINAL CASHIER'S CHECK THAT
ALREADY BECAME STALE.6

As to the first issue, we find for the respondents. The issue as to what constitutes the terms of the
oral compromise or any subsequent novation is a question of fact that was resolved by the Regional
Trial Court and the Court of Appeals in favor of respondents. It is well settled that the findings of fact
of the lower court, especially when affirmed by the Court of Appeals, are binding upon this
Court.7 While there are exceptions to this rule,8 the present case does not fall under anyone of them,
the petitioner's claim to the contrary, notwithstanding.

Being an affirmative allegation, petitioner has the burden of evidence to prove his claim that the oral
compromise entered into by the parties on August 28, 1995 included the stipulation that the parties
would jointly file a motion to dismiss. This petitioner failed to do. Notably, even the Metropolitan Trial
Court, while ruling in favor of the petitioner and thereby dismissing the complaint, did not make a
factual finding that the compromise agreement included the condition of the signing of a joint motion
to dismiss.

The Court of Appeals made the factual findings in this wise:

In support of its claim, petitioner presented the testimony of Mr. Jefferson Rivera who related
that respondent Dr. Gueco was aware that the signing of the draft of the Joint Motion to
Dismiss was one of the conditions set by the bank for the acceptance of the reduced amount
of indebtedness and the release of the car. (TSN, October 23, 1996, pp. 17-21, Rollo, pp. 18,
5). Respondents, however, maintained that no such condition was ever discussed during
their meeting of August 28, 1995 (Rollo, p. 32).

The trial court, whose factual findings are entitled to respect since it has the 'opportunity to
directly observe the witnesses and to determine by their demeanor on the stand the
probative value of their testimonies' (People vs. Yadao, et al. 216 SCRA 1, 7 [1992]), failed
to make a categorical finding on the issue. In dismissing the claim of damages of the
respondents, it merely observed that respondents are not entitled to indemnity since it was
their unjustified reluctance to sign of the Joint Motion to Dismiss that delayed the release of
the car. The trial court opined, thus:
 'As regards the third issue, plaintiffs' claim for damages is unavailing. First, the
plaintiffs could have avoided the renting of another car and could have avoided this
litigation had he signed the Joint Motion to Dismiss. While it is true that herein
defendant can unilaterally dismiss the case for collection of sum of money with
replevin, it is equally true that there is nothing wrong for the plaintiff to affix his
signature in the Joint Motion to Dismiss, for after all, the dismissal of the case against
him is for his own good and benefit. In fact, the signing of the Joint Motion to Dismiss
gives the plaintiff three (3) advantages. First, he will recover his car. Second, he will
pay his obligation to the bank on its reduced amount of P150,000.00 instead of its
original claim of P184,985.09. And third, the case against him will be dismissed.
Plaintiffs, likewise, are not entitled to the award of moral damages and exemplary
damages as there is no showing that the defendant bank acted fraudulently or in bad
faith.' (Rollo, p. 15)

The Court has noted, however, that the trial court, in its findings of facts, clearly indicated
that the agreement of the parties on August 28, 1995 was merely for the lowering of the
price, hence -

'xxx On August 28, 1995, bank representative Jefferson Rivera and plaintiff entered
into an oral compromise agreement, whereby the original claim of the bank of
P184,985.09 was reduced to P150,000.00 and that upon payment of which, plaintiff
was informed that the subject motor vehicle would be released to him.' (Rollo, p. 12)

The lower court, on the other hand, expressly made a finding that petitioner failed to include
the aforesaid signing of the Joint Motion to Dismiss as part of the agreement. In dismissing
petitioner's claim, the lower court declared, thus:

'If it is true, as the appellees allege, that the signing of the joint motion was a
condition sine qua non for the reduction of the appellants' obligation, it is only
reasonable and logical to assume that the joint motion should have been shown to
Dr. Gueco in the August 28, 1995 meeting. Why Dr. Gueco was not given a copy of
the joint motion that day of August 28, 1995, for his family or legal counsel to see to
be brought signed, together with the P150,000.00 in manager's check form to be
submitted on the following day on August 29, 1995? (sic) [I]s a question whereby the
answer up to now eludes this Court's comprehension. The appellees would like this
Court to believe that Dr Gueco was informed by Mr. Rivera Rivera of the bank
requirement of signing the joint motion on August 28, 1995 but he did not bother to
show a copy thereof to his family or legal counsel that day August 28, 1995. This part
of the theory of appellee is too complicated for any simple oral agreement. The idea
of a Joint Motion to Dismiss being signed as a condition to the pushing through a
deal surfaced only on August 29, 1995.

'This Court is not convinced by the appellees' posturing. Such claim rests on too
slender a frame, being inconsistent with human experience. Considering the effect of
the signing of the Joint Motion to Dismiss on the appellants' substantive right, it is
more in accord with human experience to expect Dr. Gueco, upon being shown the
Joint Motion to Dismiss, to refuse to pay the Manager's Check and for the bank to
refuse to accept the manager's check. The only logical explanation for this inaction is
that Dr. Gueco was not shown the Joint Motion to Dismiss in the meeting of August
28, 1995, bolstering his claim that its signing was never put into consideration in
reaching a compromise.' xxx.9

We see no reason to reverse.

Anent the issue of award of damages, we find the claim of petitioner meritorious. In finding the
petitioner liable for damages, both .the Regional Trial Court and the Court of Appeals ruled that there
was fraud on the part of the petitioner. The CA thus declared:

The lower court's finding of fraud which became the basis of the award of damages was
likewise sufficiently proven. Fraud under Article 1170 of the Civil Code of the Philippines, as
amended is the 'deliberate and intentional evasion of the normal fulfillment of obligation'
When petitioner refused to release the car despite respondent's tender of payment in the
form of a manager's check, the former intentionally evaded its obligation and thereby
became liable for moral and exemplary damages, as well as attorney's fees.10
We disagree.

Fraud has been defined as the deliberate intention to cause damage or prejudice. It is the voluntary
execution of a wrongful act, or a willful omission, knowing and intending the effects which naturally
and necessarily arise from such act or omission; the fraud referred to in Article 1170 of the Civil
Code is the deliberate and intentional evasion of the normal fulfillment of obligation.11 We fail to see
how the act of the petitioner bank in requiring the respondent to sign the joint motion to dismiss
could constitute as fraud. True, petitioner may have been remiss in informing Dr. Gueco that the
signing of a joint motion to dismiss is a standard operating procedure of petitioner bank. However,
this can not in anyway have prejudiced Dr. Gueco. The motion to dismiss was in fact also for the
benefit of Dr. Gueco, as the case filed by petitioner against it before the lower court would be
dismissed with prejudice. The whole point of the parties entering into the compromise agreement
was in order that Dr. Gueco would pay his outstanding account and in return petitioner would return
the car and drop the case for money and replevin before the Metropolitan Trial Court. The joint
motion to dismiss was but a natural consequence of the compromise agreement and simply stated
that Dr. Gueco had fully settled his obligation, hence, the dismissal of the case. Petitioner's act of
requiring Dr. Gueco to sign the joint motion to dismiss can not be said to be a deliberate attempt on
the part of petitioner to renege on the compromise agreement of the parties. It should, likewise, be
noted that in cases of breach of contract, moral damages may only be awarded when the breach
was attended by fraud or bad faith.12 The law presumes good faith. Dr. Gueco failed to present an
iota of evidence to overcome this presumption. In fact, the act of petitioner bank in lowering the debt
of Dr. Gueco from P184,000.00 to P150,000.00 is indicative of its good faith and sincere desire to
settle the case. If respondent did suffer any damage, as a result of the withholding of his car by
petitioner, he has only himself to blame. Necessarily, the claim for exemplary damages must fait. In
no way, may the conduct of petitioner be characterized as "wanton, fraudulent, reckless, oppressive
or malevolent."13

We, likewise, find for the petitioner with respect to the third assigned error. In the meeting of August
29, 1995, respondent Dr. Gueco delivered a manager's check representing the reduced amount of
P150,000.00. Said check was given to Mr. Rivera, a representative of respondent bank. However,
since Dr. Gueco refused to sign the joint motion to dismiss, he was made to execute a statement to
the effect that he was withholding the payment of the check.14 Subsequently, in a letter addressed to
Ms. Desi Tomas, vice president of the bank, dated September 4, 1995, Dr. Gueco instructed the
bank to disregard the 'hold order" letter and demanded the immediate release of his car,15 to which
the former replied that the condition of signing the joint motion to dismiss must be satisfied and that
they had kept the check which could be claimed by Dr. Gueco anytime.16 While there is controversy
as to whether the document evidencing the order to hold payment of the check was formally offered
as evidence by petitioners,17 it appears from the pleadings that said check has not been encashed.

The decision of the Regional Trial Court, which was affirmed in toto by the Court of Appeals, orders
the petitioner:

1. to return immediately the subject car to the appellants in good working condition. Appellee
may deposit the Manager's Check - the proceeds of which have long been under the control
of the issuing bank in favor of the appellee since its issuance, whereas the funds have long
been paid by appellants to secure said Manager's Check over which appellants have no
control.18

Respondents would make us hold that petitioner should return the car or its value and that the latter,
because of its own negligence, should suffer the loss occasioned by the fact that the check had
become stale.19 It is their position that delivery of the manager's check produced the effect of
payment20 and, thus, petitioner was negligent in opting not to deposit or use said check. Rudimentary
sense of justice and fair play would not countenance respondents' position.

A stale check is one which has not been presented for payment within a reasonable time after its
issue. It is valueless and, therefore, should not be paid. Under the negotiable instruments law, an
instrument not payable on demand must be presented for payment on the day it falls due. When the
instrument is payable on demand, presentment must be made within a reasonable time after its
issue. In the case of a bill of exchange, presentment is sufficient if made within a reasonable time
after the last negotiation thereof.21

A check must be presented for payment within a reasonable time after its issue,22 and in determining
what is a "reasonable time," regard is to be had to the nature of the instrument, the usage of trade or
business with respect to such instruments, and the facts of the particular case.23 The test is whether
the payee employed such diligence as a prudent man exercises in his own affairs.24 This is because
the nature and theory behind the use of a check points to its immediate use and payability. In a
case, a check payable on demand which was long overdue by about two and a half (2-1/2) years
was considered a stale check.25 Failure of a payee to encash a check for more than ten (10) years
undoubtedly resulted in the check becoming stale.26 Thus, even a delay of one (1) week27 or two (2)
days,28 under the specific circumstances of the cited cases constituted unreasonable time as a
matter of law.

In the case at bar, however, the check involved is not an ordinary bill of exchange but a manager's
check. A manager's check is one drawn by the bank's manager upon the bank itself. It is similar to a
cashier's check both as to effect and use. A cashier's check is a check of the bank's cashier on his
own or another check. In effect, it is a bill of exchange drawn by the cashier of a bank upon the bank
itself, and accepted in advance by the act of its issuance.29 It is really the bank's own check and may
be treated as a promissory note with the bank as a maker.30 The check becomes the primary
obligation of the bank which issues it and constitutes its written promise to pay upon demand. The
mere issuance of it is considered an acceptance thereof. If treated as promissory note, the drawer
would be the maker and in which case the holder need not prove presentment for payment or
present the bill to the drawee for acceptance.31

Even assuming that presentment is needed, failure to present for payment within a reasonable time
will result to the discharge of the drawer only to the extent of the loss caused by the delay.32 Failure
to present on time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to an
acknowledgment of liability in the sum stated in the check. In this case, the Gueco spouses have not
alleged, much less shown that they or the bank which issued the manager's check has suffered
damage or loss caused by the delay or non-presentment. Definitely, the original obligation to pay
certainly has not been erased.

It has been held that, if the check had become stale, it becomes imperative that the circumstances
that caused its non-presentment be determined.33 In the case at bar, there is no doubt that the
petitioner bank held on the check and refused to encash the same because of the controversy
surrounding the signing of the joint motion to dismiss. We see no bad faith or negligence in this
position taken by the Bank.

WHEREFORE, premises considered, the petition for review is given due course. The decision of the
Court of Appeals affirming the decision of the Regional Trial Court is SET ASIDE. Respondents are
further ordered to pay the original obligation amounting to P150,000.00 to the petitioner upon
surrender or cancellation of the manager's check in the latter's possession, afterwhich, petitioner is
to return the subject motor vehicle in good working condition.

SO ORDERED.

Davide, Jr., Puno, Pardo, and Ynares-Santiago, JJ., concur.

G.R. No. 159280 May 18, 2004

AUGUSTO SIM, JR., petitioner,

vs.
HON. COURT OF APPEALS and The PEOPLE OF THE PHILIPPINES, respondents.

DECISION

YNARES-SANTIAGO, J.:

On appeal by petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure is a
Decision1 by the Court of Appeals (CA) dated May 21, 2003 affirming with modification the
Decision2 of the Regional Trial Court (RTC) of Manila, Branch 34, finding petitioner Augusto Sim, Jr.
and co-accused Elison Villaflor guilty beyond reasonable doubt of estafa under Article 315,
paragraph 2 (a) of the Revised Penal Code, instead of Article 315, paragraph 1 (b) thereof, as well
as its Resolution3 dated August 1, 2003 denying appellant’s Motion for Reconsideration. Petitioner
and co-accused Elison Villaflor were sentenced to suffer an indeterminate prison term of four (4)
years and two (2) months of prisión correccional, as minimum, to twenty (20) years of reclusión
temporal, as maximum, and to indemnify the private complainant Jay Byron Ilagan the sum of
P480,000.00 representing the amount paid for the purchase of the car that was impounded by the
authorities.

Elison Villaflor and Augusto Sim, Jr., were formally charged with the crime of Estafa in an
Information dated September 6, 1999 which reads:4

That on or about May 2, 1998, in the City of Manila, Philippines, the said accused, conspiring
and confederating together and mutually helping one another, did then and there willfully,
unlawfully and feloniously defraud Jay Byron Ilagan in the following manner, to wit: the said
accused by means of false manifestations which they made to said Jay Byron Ilagan to the
effect that they are selling one (1) colored green Nissan Pathfinder pick-up with motor
number PD27-555735 bearing Plate No. BCF-620 in the amount of P480,000.00 registered
in the name of Henry Austria, and by means of other similar deceits, induced and succeeded
in inducing said Jay Byron Ilagan to give and deliver, as in fact he gave and delivered to said
accused the amount of P480,000.00 on the strength of said manifestations and
representations, said accused well knowing that the same were false and fraudulent, as the
said car is a stolen car and they are not the owner, and were made solely, to obtain, as in
fact they did obtain the amount of P480,000.00 which amount once in their possession, with
intent to defraud, willfully, unlawfully and feloniously misappropriated, misapplied and
converted to their own personal use and benefit, to the damage and prejudice of said Jay
Byron Ilagan in the aforesaid amount of P350,000.00, Philippine currency.

Contrary to law.

Private complainant Jay Byron Ilagan is a tire supplier whose store, Marfi Tire Supply, is
located along the highway at San Pablo City, Laguna. He had been dealing with accused
Elison Villaflor for twenty years, as the latter is engaged in the same business of selling tires
and rims at 39 C-3 Road, Dagat-Dagatan, Caloocan City.

In March 1998, private complainant talked to Elison somewhere in Tondo, Manila, and
expressed his interest in buying a vehicle. Elison told him that he knew someone who sells
vehicles at a cheap price, and that he had bought a Toyota Tamaraw FX at lower than the
market price. Private complainant then asked Elison to ask if there was an Isuzu pick-up for
sale. A month later, Elison called private complainant to inform him that he was able to find a
1997 Nissan Pathfinder. They agreed to inspect the vehicle together as private complainant
wanted to buy it before his birthday on May 31, 1998.5

On April 30, 1998, only Elison went to Dagupan City to get the Nissan Pathfinder from his friend,
petitioner Augusto Sim, Jr. Petitioner told Elison that the Nissan Pathfinder was given to him by a
customer in payment of a debt and had been used only for a year.

Elison brought the 1997 Nissan Pathfinder to San Pablo City. Private complainant at first did not like
the vehicle since it was not the brand he was looking for. Elison said that his kumpadre would look at
the vehicle as the latter was also interested in it.6
Private complainant decided to buy the 1997 Nissan Pathfinder at the agreed price of P480,000.00.
The amount was paid in five checks issued by Fe Ilagan under her account at Solidbank-San Pablo
Branch. One check was dated May 6, 1998 in the sum of P350,000.00, and four checks in the sum
of P32,500.00 each was dated June 6, July 6, August 6 and September 6, all in 1998.7

Elison gave private complainant photocopies of the Certificate of Registration (C.R.) and Official
Receipt (O.R.) issued by the Land Transportation Office (LTO) showing the name of the owner as
one Henry Austria. While waiting for the processing of the papers, the vehicle was parked at private
complainant’s place. After a week, Elison brought the deed of sale which private complainant signed
without the signature of the owner, Henry Austria. After private complainant signed the deed of sale,
he gave it back to Elison to be brought back to Dagupan City for signing by the owner/vendor and
transfer of registration in the name of private complainant.8

On June 7, 1998, Elison returned and delivered to private complainant the deed of sale signed by
the owner/vendor, together with the new C.R. and O.R. issued by the LTO of Lingayen, Pangasinan
in the name of private complainant.9

The checks given by private complainant in payment of the vehicle were deposited by petitioner in
his name at Solidbank-Dagupan Branch. All five checks were debited in favor of petitioner. After
receiving the registration papers from Elison, private complainant was eventually able to use the
Nissan Pathfinder.10

On October 28, 1998, private complainant’s vehicle was apprehended by Anti-Carnapping

operatives of the Philippine National Police (ANCAR NCRTMO). The vehicle and its registration
papers were inspected and thereafter brought to Camp Crame. It turned out that the vehicle was a
"hot car" as it had been reported stolen on November 29, 1997 by its real owner, Golf Construction
of the Philippines, Inc. pursuant to the Alarm Sheet issued by the PNP Traffic Management Group.11

Private complainant accompanied the ANCAR operatives to the residence of Elison. He went with
them to Camp Crame, and named petitioner as the owner of the vehicle. However, they were not
able to locate petitioner right away. Meanwhile, the vehicle was impounded by the authorities. The
investigation revealed that its original motor and chassis numbers were replaced and/or tampered
but its Production Number remained intact. Eventually, the real description of the vehicle was fully
established and identified by no less than the manufacturer/assembler of the unit, Universal Motors
Corporation.12

Private complainant spoke with Elison about the possible recovery of the money paid by him for the
confiscated vehicle. On November 30, 1998, private complainant met petitioner for the first time.
Petitioner signed a Promissory Note with Deed of Undertaking whereby he obligated himself to pay
private complainant the amount of P480,000.00 plus attorney’s fees of P50,000.00 in scheduled
installments. Petitioner issued a check in the amount of P75,000.00 but private complainant did not
encash it, thinking that if he does, petitioner would not pay him anymore. Private complainant was
unable to recover the money paid by him to petitioner.13

Thereafter, Elison and petitioner were charged with estafa under a criminal information dated
September 6, 1999. Elison was arraigned on September 17, 1999; while petitioner was arraigned on
June 1, 2000. Both pleaded "not guilty."

After trial, the trial court convicted both Elison and petitioner of the crime of estafa under Art. 315,
par. 1 (b) of the Revised Penal Code. On appeal, the Court of Appeals affirmed the trial court’s
judgment with the modification that appellants should be convicted of estafa under Art. 315, par. 2
(a).

Hence, this petition for review on certiorari, assigning the following errors:

THE HONORABLE COURT OF APPEALS, WITH DUE RESPECT, COMMITTED

REVERSIBLE ERROR WHEN IT RULED THAT CONSPIRACY IS PRESENT CONTRARY
TO THE EVIDENCE ON RECORD.

II
 THE HONORABLE COURT OF APPEALS, WITH DUE RESPECT, COMMITTED
REVERSIBLE ERROR WHEN IT FAILED TO RULE ON THE ACQUITTAL OF HEREIN
PETITIONER.

Two issues are presented before this Court: (1) Whether there was conspiracy between petitioner
and Elison Villaflor in defrauding private complainant Jay Byron Ilagan; and (2) Whether petitioner is
guilty beyond reasonable doubt of the crime of estafa under Art. 315, par. 2 (a) of the Revised Penal
Code.

On the first assignment of error, petitioner argues that there is no conspiracy between him and co-
accused. He points that it was only co-accused Elison Villaflor who dealt with private complainant.
The latter had not even met him before he was allegedly forced to sign the amicable agreement.

Petitioner further alleges that contrary to the findings of the appellate court, there is no convincing
evidence to show that petitioner performed any previous or simultaneous act with Elison in
committing the offense against private complainant. The witnesses presented by the prosecution did
not show or prove that petitioner directly participated in the commission of the offense or performed
an act which would show community of purpose with Elison.

Petitioner’s argument is bereft of merit.

Even in the absence of direct evidence of prior agreement to commit the crime, conspiracy may be
deduced from the acts of the perpetrators before, during and after the commission of the crime,
which are indicative of a common design, concerted action and concurrence of
sentiments.14 Conspiracy is deemed implied when the malefactors have a common purpose and
were united in its execution. Spontaneous agreement or active cooperation by all perpetrators at the
moment of the commission of the crime is sufficient to create joint criminal responsibility.15

In Erquiaga v. Court of Appeals,16 we ruled that conspiracy, as a rule, has to be established with the
same quantum of proof as the crime itself and shown as clearly as the commission of the crime.
However, conspiracy need not be shown by direct evidence, but may take the form of circumstances
which, if taken together, would conclusively show that the accused came to an agreement to commit
a crime and decided to carry it out with their full cooperation and participation.

As correctly pointed out by the appellate court, petitioner’s actions in relation to the fraudulent sale of
the Nissan Pathfinder to private complainant clearly established conspiracy as alleged in the
information, which acts transcend mere knowledge or friendship with co-accused
Elison.17 Notwithstanding the fact that it was only Elison who dealt with or personally transacted with
private complainant until the time the sale was consummated, by his own testimony petitioner
admitted all the acts by which he actively cooperated and not merely acquiesced in perpetrating the
fraud upon private complainant.18 That petitioner is a conspirator having joint criminal design with
Elison is evident from the fact that as between them, both knew that petitioner was the person selling
the vehicle under the false pretense that a certain Henry Austria was the registered
owner.19 Petitioner, together with Elison, clearly deceived private complainant in order to defraud him
in the amount of P480,000.00, to the latter’s damage and prejudice. In addition, the acts of petitioner
in deliberately misrepresenting himself to private complainant as having the necessary authority to
possess and sell to the latter the vehicle so that he could collect from him P480,000.00 only to
renege on that promise and for failure to reimburse the said amount he collected from private
complainant, despite demand, amount to estafa punishable under Art. 315, par. 2 (a).

The Court of Appeals, in affirming the findings of fact of the trial court, aptly observed:20

That conviction under the afore-cited provision is more proper is evident from the trial court’s
finding that appellant Augusto Sim, Jr. from the very beginning was aware that the subject
vehicle was not his nor given to him in payment of debt as he made appellant Villaflor to
believe. Nonetheless, appellant Villaflor was not absolved from liability, having actively
conspired with appellant Augusto Sim, Jr. to convince private complainant to purchase the
Pathfinder upon their false pretense and representation that said vehicle was being sold
by its real owner, Henry Austria, the name appearing in the registration papers and deed of
sale under circumstances clearly showing their knowledge that the status of said vehicle is
dubious or anomalous, as in fact it turned out to be a "hot car" or had been stolen/carnapped
from its true owner. The totality of the evidence indicates a common or joint design, purpose
and objective of the accused-appellants to defraud private complainant who parted with his
 money upon the belief that there is no problem regarding the ownership of the Pathfinder
sold to him by the appellants.

The trial court rejected the argument of the defense that it was private complainant who supposedly
had the vehicle and its registration papers checked at Camp Crame before buying the same. It
pointed out that verification would have been difficult considering that the motor and chassis
numbers in the registration papers are correct but the name of the owner appearing therein is false.

Elison’s false pretense in holding out that he had authorization from the owner to sell the 1997
Nissan Pathfinder was made in conjunction with petitioner’s fraudulent misrepresentation that he
was legally entitled to possess the aforesaid vehicle. The evidence shows that petitioner and Elison
acted in conspiracy to deceive private complainant into buying a stolen Nissan Pathfinder, thereby
defrauding the latter in the amount of P480,000.00, and upon their false pretense and representation
as to the real status of the vehicle, i.e., that said unit is in fact being sold by its true owner Henry
Austria and that Augusto Sim, Jr. in whose name the checks were issued had the authority or right to
sell the same. After a few months, the vehicle sold was apprehended and impounded by police
authorities for being stolen or carnapped which resulted in pecuniary damage to private complainant
who had demanded the return of his money from petitioner and Elison.21 The evidence of the
prosecution satisfactorily established the fraudulent acts and representations which induced private
complainant to part with his money for which he suffered damage and loss when the vehicle sold to
him by petitioner and Elison was recovered by its true owner through operatives of the police anti-
carnapping group.22

On the second assignment of error, petitioner contends that the evidence is not sufficient to prove
petitioner’s guilt beyond reasonable doubt for the crime of estafa under Art. 315, par. 2 (a) of the
Revised Penal Code.

Petitioner’s contention is untenable.

While the trial court charged and convicted petitioner and his co-accused of estafa under Art. 315,
par. 1 (b) of the Revised Penal Code, the appellate court modified the lower court’s decision by
convicting them of the same crime under Art. 315, par. 2 (a).

Regardless of whether petitioner is charged or convicted under either par. 1 (b) or par. 2 (a) of Art.
315 of the Revised Penal Code, he would still be guilty of estafa because damage and deceit, which
are essential elements of the crime, have been established by proof beyond reasonable doubt. False
pretenses or fraudulent acts were committed prior to or simultaneous with the commission of the
fraud by falsely pretending to possess property. In this case, false pretenses or fraudulent acts were
employed prior to or simultaneously with the commission of the fraud by falsely pretending to
possess the 1997 Nissan Pathfinder, where damage and deceit have been established by proof
beyond reasonable doubt.

Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in damage to another, or by which an undue and unconscientious advantage is
taken of another. It is a generic term embracing all multifarious means which human ingenuity can
device, and which are resorted to by one individual to secure an advantage over another by false
suggestions or by suppression of truth and includes all surprise, trick, cunning, dissembling and any
unfair way by which another is cheated. Deceit is a species of fraud.23

Swindling or estafa by means of false pretenses or fraudulent acts executed prior to or

simultaneously with the commission of the fraud is committed "[b]y using fictitious name, or falsely
pretending to possess power, influence, qualifications, property, credit, agency, business or
imaginary transactions, or by other similar deceits."24

The elements of estafa under Art. 315, par. 2 (a) are: (1) There must be a false pretense, fraudulent
act or fraudulent means; (2) Such false pretense, fraudulent act or fraudulent means must be made
or executed prior to or simultaneously with the commission of the fraud; (3) The offended party must
have relied on the false pretense, fraudulent act or fraudulent means, that is, he was induced to part
with his money or property because of the false pretense, fraudulent act or fraudulent means; (4) As
a result thereof, the offended party suffered damage.25

These four elements are present in the instant case: (1) False pretenses were employed by
petitioner and his co-accused to deceive private complainant into purchasing the stolen Nissan
Pathfinder; (2) False pretenses were employed prior to, and simultaneously with, the fraudulent sale
of the Nissan Pathfinder; (3) Private complainant relied on false pretenses of petitioner and co-
accused, inducing him to part with his money due to the misrepresentation employed by the
perpetrators of the fraud; and (4) As a result of false pretenses and misrepresentations by petitioner
and co-accused, private complainant suffered damages in the amount of P480,000.00.

Furthermore, we find no cogent reason to disturb the findings of the trial court, which is in the best
position to make an assessment of the witnesses’ credibility and to appreciate complainants’
truthfulness, honesty and candor.26 Factual findings of trial courts, as well as their assessment of the
credibility of witnesses, are entitled to great weight and respect by this Court more so when these
are affirmed by the Court of Appeals.27 As against the positive and categorical testimonies of the
complainant, petitioner’s mere denial cannot prevail.

The proper imposable penalty for the crime of estafa under Art. 315, par. 2 (a) is prisión
correccional in its maximum period to prisión mayor in its minimum period, if the amount of the fraud
is over P12,000.00 but does not exceed P22,000.00, and if such amount exceeds the latter sum, the
penalty shall be imposed in its maximum period, adding one (1) year for each additional P10,000.00;
but the total penalty which may be imposed shall not exceed twenty (20) years. In such cases, the
penalty shall be termed prisión mayor or reclusión temporal, as the case may be.

Under the Indeterminate Sentence Law,28 if the offense is punished by the Revised Penal Code, the
court shall sentence the accused to an indeterminate penalty, the maximum term of which shall be
that which, in view of the attending circumstances, could be properly imposed under the rules of the
Revised Penal Code, and the minimum term of which shall be within the range of the penalty next
lower to that prescribed by the Code for the offense. The penalty next lower should be based on the
penalty prescribed by the Code for the offense, without first considering any modifying circumstance
attendant to the commission of the crime. The determination of the minimum penalty is left by law to
the sound discretion of the court and can be anywhere within the range of the penalty next lower
without any reference to the periods into which it might be subdivided. The modifying circumstances
are considered only in the imposition of the maximum term of the indeterminate sentence.

In the present case, petitioner defrauded private complainant in the amount of P480,000.00. The fact
that the amount involved in the case at bar exceeds P22,000.00 should not be considered in the
initial determination of the indeterminate penalty; instead, the matter should be so taken as
analogous to modifying circumstances in the imposition of the maximum term of the full
indeterminate sentence. This legal interpretation accords with the rule that penal laws should be
construed in favor of the accused.29

The maximum penalty to be imposed on petitioner should be taken from the maximum period of the
penalty under Art. 315, which is reclusión temporal, since the amount defrauded exceeds
P22,000.00, adding one year for each additional P10,000.00, but the total penalty which may be
imposed should not exceed twenty (20) years.

Since the penalty prescribed by law for the crime of estafa under Art. 31530 is prisión mayor in its
minimum period if the amount of the fraud exceeds P22,000.00, the minimum term should be within
the range of the penalty next lower to that prescribed by the Code for the offense, which is prisión
correccional in its maximum period. Hence, the minimum period of the penalty should be from four
(4) years, two (2) months and one (1) day to six (6) years. The determination of the minimum penalty
is left by law to the sound discretion of the court and can be anywhere within the range of the penalty
next lower without any reference to the periods into which it might be subdivided.

We are convinced that the appropriate penalty in accordance with law that can best serve the ends
of justice in the case at bar should range from four (4) years, two (2) months and one (1) day
of prisión correccional, as minimum, to twenty years of reclusión temporal, as maximum, for the
crime of estafa under Art. 315, par. 2 (a) of the Revised Penal Code.

WHEREFORE, the May 21, 2003 Decision and August 1, 2003 Resolution of the Court of Appeals
is AFFIRMED with MODIFICATION as to the penalty imposed. Appellant Augusto Sim, Jr. is
sentenced to an indeterminate prison term of four (4) years, two (2) months and one (1) day
of prisión correccional, as minimum, to twenty (20) years of reclusión temporal, as maximum, for the
crime of estafa under Art. 315, par. 2 (a). He is further ordered to indemnify the private complainant
Jay Byron Ilagan, jointly and severally with Elison Villaflor, the sum of P480,000.00 with interest of
twelve percent (12%) per annum until fully paid.
Costs against petitioner.

SO ORDERED.

Davide, Jr.*, Panganiban**, Carpio, and Azcuna, JJ., concur.

G.R. No. 138334 August 25, 2003

ESTELA L. CRISOSTOMO, Petitioner,

vs.
The Court of Appeals and CARAVAN TRAVEL & TOURS INTERNATIONAL, INC., Respondents.

DECISION

YNARES-SANTIAGO, J.:

In May 1991, petitioner Estela L. Crisostomo contracted the services of respondent Caravan Travel
and Tours International, Inc. to arrange and facilitate her booking, ticketing and accommodation in a
tour dubbed "Jewels of Europe". The package tour included the countries of England, Holland,
Germany, Austria, Liechstenstein, Switzerland and France at a total cost of P74,322.70. Petitioner
was given a 5% discount on the amount, which included airfare, and the booking fee was also
waived because petitioner’s niece, Meriam Menor, was respondent company’s ticketing manager.

Pursuant to said contract, Menor went to her aunt’s residence on June 12, 1991 – a Wednesday – to
deliver petitioner’s travel documents and plane tickets. Petitioner, in turn, gave Menor the full
payment for the package tour. Menor then told her to be at the Ninoy Aquino International Airport
(NAIA) on Saturday, two hours before her flight on board British Airways.

Without checking her travel documents, petitioner went to NAIA on Saturday, June 15, 1991, to take
the flight for the first leg of her journey from Manila to Hongkong. To petitioner’s dismay, she
discovered that the flight she was supposed to take had already departed the previous day. She
learned that her plane ticket was for the flight scheduled on June 14, 1991. She thus called up
Menor to complain.

Subsequently, Menor prevailed upon petitioner to take another tour – the "British Pageant" – which
included England, Scotland and Wales in its itinerary. For this tour package, petitioner was asked
anew to pay US$785.00 or P20,881.00 (at the then prevailing exchange rate of P26.60). She gave
respondent US$300 or P7,980.00 as partial payment and commenced the trip in July 1991.

Upon petitioner’s return from Europe, she demanded from respondent the reimbursement of
P61,421.70, representing the difference between the sum she paid for "Jewels of Europe" and the
amount she owed respondent for the "British Pageant" tour. Despite several demands, respondent
company refused to reimburse the amount, contending that the same was non-refundable.1 Petitioner
was thus constrained to file a complaint against respondent for breach of contract of carriage and
damages, which was docketed as Civil Case No. 92-133 and raffled to Branch 59 of the Regional
Trial Court of Makati City.

In her complaint,2 petitioner alleged that her failure to join "Jewels of Europe" was due to
respondent’s fault since it did not clearly indicate the departure date on the plane ticket. Respondent
was also negligent in informing her of the wrong flight schedule through its employee Menor. She
insisted that the "British Pageant" was merely a substitute for the "Jewels of Europe" tour, such that
the cost of the former should be properly set-off against the sum paid for the latter.

For its part, respondent company, through its Operations Manager, Concepcion Chipeco, denied
responsibility for petitioner’s failure to join the first tour. Chipeco insisted that petitioner was informed
of the correct departure date, which was clearly and legibly printed on the plane ticket. The travel
documents were given to petitioner two days ahead of the scheduled trip. Petitioner had only herself
to blame for missing the flight, as she did not bother to read or confirm her flight schedule as printed
on the ticket.

Respondent explained that it can no longer reimburse the amount paid for "Jewels of Europe",
considering that the same had already been remitted to its principal in Singapore, Lotus Travel Ltd.,
which had already billed the same even if petitioner did not join the tour. Lotus’ European tour
organizer, Insight International Tours Ltd., determines the cost of a package tour based on a
minimum number of projected participants. For this reason, it is accepted industry practice to
disallow refund for individuals who failed to take a booked tour.3

Lastly, respondent maintained that the "British Pageant" was not a substitute for the package tour
that petitioner missed. This tour was independently procured by petitioner after realizing that she
made a mistake in missing her flight for "Jewels of Europe". Petitioner was allowed to make a partial
payment of only US$300.00 for the second tour because her niece was then an employee of the
travel agency. Consequently, respondent prayed that petitioner be ordered to pay the balance of
P12,901.00 for the "British Pageant" package tour.

After due proceedings, the trial court rendered a decision,4 the dispositive part of which reads:

WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Ordering the defendant to return and/or refund to the plaintiff the amount of Fifty Three
Thousand Nine Hundred Eighty Nine Pesos and Forty Three Centavos (P53,989.43) with
legal interest thereon at the rate of twelve percent (12%) per annum starting January 16,
1992, the date when the complaint was filed;

2. Ordering the defendant to pay the plaintiff the amount of Five Thousand (P5,000.00)
Pesos as and for reasonable attorney’s fees;

3. Dismissing the defendant’s counterclaim, for lack of merit; and

4. With costs against the defendant.

SO ORDERED.5

The trial court held that respondent was negligent in erroneously advising petitioner of her departure
date through its employee, Menor, who was not presented as witness to rebut petitioner’s testimony.
However, petitioner should have verified the exact date and time of departure by looking at her ticket
and should have simply not relied on Menor’s verbal representation. The trial court thus declared
that petitioner was guilty of contributory negligence and accordingly, deducted 10% from the amount
being claimed as refund.

Respondent appealed to the Court of Appeals, which likewise found both parties to be at fault.
However, the appellate court held that petitioner is more negligent than respondent because as a
lawyer and well-traveled person, she should have known better than to simply rely on what was told
to her. This being so, she is not entitled to any form of damages. Petitioner also forfeited her right to
the "Jewels of Europe" tour and must therefore pay respondent the balance of the price for the
"British Pageant" tour. The dispositive portion of the judgment appealed from reads as follows:

WHEREFORE, premises considered, the decision of the Regional Trial Court dated October 26,
1995 is hereby REVERSED and SET ASIDE. A new judgment is hereby ENTERED requiring the
plaintiff-appellee to pay to the defendant-appellant the amount of P12,901.00, representing the
balance of the price of the British Pageant Package Tour, the same to earn legal interest at the rate
of SIX PERCENT (6%) per annum, to be computed from the time the counterclaim was filed until the
finality of this decision. After this decision becomes final and executory, the rate of TWELVE
PERCENT (12%) interest per annum shall be additionally imposed on the total obligation until
payment thereof is satisfied. The award of attorney’s fees is DELETED. Costs against the plaintiff-
appellee.

SO ORDERED.6

Upon denial of her motion for reconsideration,7 petitioner filed the instant petition under Rule 45 on
the following grounds:

It is respectfully submitted that the Honorable Court of Appeals committed a reversible error
in reversing and setting aside the decision of the trial court by ruling that the petitioner is not
entitled to a refund of the cost of unavailed "Jewels of Europe" tour she being equally, if not
more, negligent than the private respondent, for in the contract of carriage the common
carrier is obliged to observe utmost care and extra-ordinary diligence which is higher in
degree than the ordinary diligence required of the passenger. Thus, even if the petitioner and
private respondent were both negligent, the petitioner cannot be considered to be equally, or
worse, more guilty than the private respondent. At best, petitioner’s negligence is only
 contributory while the private respondent [is guilty] of gross negligence making the principle
of pari delicto inapplicable in the case;

II

The Honorable Court of Appeals also erred in not ruling that the "Jewels of Europe" tour was
not indivisible and the amount paid therefor refundable;

III

The Honorable Court erred in not granting to the petitioner the consequential damages due
her as a result of breach of contract of carriage.8

Petitioner contends that respondent did not observe the standard of care required of a common
carrier when it informed her wrongly of the flight schedule. She could not be deemed more negligent
than respondent since the latter is required by law to exercise extraordinary diligence in the
fulfillment of its obligation. If she were negligent at all, the same is merely contributory and not the
proximate cause of the damage she suffered. Her loss could only be attributed to respondent as it
was the direct consequence of its employee’s gross negligence.

Petitioner’s contention has no merit.

By definition, a contract of carriage or transportation is one whereby a certain person or association

of persons obligate themselves to transport persons, things, or news from one place to another for a
fixed price.9 Such person or association of persons are regarded as carriers and are classified as
private or special carriers and common or public carriers. 10 A common carrier is defined under Article
1732 of the Civil Code as persons, corporations, firms or associations engaged in the business of
carrying or transporting passengers or goods or both, by land, water or air, for compensation,
offering their services to the public.

It is obvious from the above definition that respondent is not an entity engaged in the business of
transporting either passengers or goods and is therefore, neither a private nor a common carrier.
Respondent did not undertake to transport petitioner from one place to another since its covenant
with its customers is simply to make travel arrangements in their behalf. Respondent’s services as a
travel agency include procuring tickets and facilitating travel permits or visas as well as booking
customers for tours.

While petitioner concededly bought her plane ticket through the efforts of respondent company, this
does not mean that the latter ipso facto is a common carrier. At most, respondent acted merely as
an agent of the airline, with whom petitioner ultimately contracted for her carriage to Europe.
Respondent’s obligation to petitioner in this regard was simply to see to it that petitioner was
properly booked with the airline for the appointed date and time. Her transport to the place of
destination, meanwhile, pertained directly to the airline.

The object of petitioner’s contractual relation with respondent is the latter’s service of arranging and
facilitating petitioner’s booking, ticketing and accommodation in the package tour. In contrast, the
object of a contract of carriage is the transportation of passengers or goods. It is in this sense that
the contract between the parties in this case was an ordinary one for services and not one of
carriage. Petitioner’s submission is premised on a wrong assumption.

The nature of the contractual relation between petitioner and respondent is determinative of the
degree of care required in the performance of the latter’s obligation under the contract. For reasons
of public policy, a common carrier in a contract of carriage is bound by law to carry passengers as
far as human care and foresight can provide using the utmost diligence of very cautious persons and
with due regard for all the circumstances.11 As earlier stated, however, respondent is not a common
carrier but a travel agency. It is thus not bound under the law to observe extraordinary diligence in
the performance of its obligation, as petitioner claims.

Since the contract between the parties is an ordinary one for services, the standard of care required
of respondent is that of a good father of a family under Article 1173 of the Civil Code.12 This connotes
reasonable care consistent with that which an ordinarily prudent person would have observed when
confronted with a similar situation. The test to determine whether negligence attended the
performance of an obligation is: did the defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent person would have used in the same
situation? If not, then he is guilty of negligence.13

In the case at bar, the lower court found Menor negligent when she allegedly informed petitioner of
the wrong day of departure. Petitioner’s testimony was accepted as indubitable evidence of Menor’s
alleged negligent act since respondent did not call Menor to the witness stand to refute the
allegation. The lower court applied the presumption under Rule 131, Section 3 (e)14 of the Rules of
Court that evidence willfully suppressed would be adverse if produced and thus considered
petitioner’s uncontradicted testimony to be sufficient proof of her claim.

On the other hand, respondent has consistently denied that Menor was negligent and maintains that
petitioner’s assertion is belied by the evidence on record. The date and time of departure was legibly
written on the plane ticket and the travel papers were delivered two days in advance precisely so
that petitioner could prepare for the trip. It performed all its obligations to enable petitioner to join the
tour and exercised due diligence in its dealings with the latter.

We agree with respondent.

Respondent’s failure to present Menor as witness to rebut petitioner’s testimony could not give rise
to an inference unfavorable to the former. Menor was already working in France at the time of the
filing of the complaint,15 thereby making it physically impossible for respondent to present her as a
witness. Then too, even if it were possible for respondent to secure Menor’s testimony, the
presumption under Rule 131, Section 3(e) would still not apply. The opportunity and possibility for
obtaining Menor’s testimony belonged to both parties, considering that Menor was not just
respondent’s employee, but also petitioner’s niece. It was thus error for the lower court to invoke the
presumption that respondent willfully suppressed evidence under Rule 131, Section 3(e). Said
presumption would logically be inoperative if the evidence is not intentionally omitted but is simply
unavailable, or when the same could have been obtained by both parties.16

In sum, we do not agree with the finding of the lower court that Menor’s negligence concurred with
the negligence of petitioner and resultantly caused damage to the latter. Menor’s negligence was not
sufficiently proved, considering that the only evidence presented on this score was petitioner’s
uncorroborated narration of the events. It is well-settled that the party alleging a fact has the burden
of proving it and a mere allegation cannot take the place of evidence.17 If the plaintiff, upon whom
rests the burden of proving his cause of action, fails to show in a satisfactory manner facts upon
which he bases his claim, the defendant is under no obligation to prove his exception or defense.18

Contrary to petitioner’s claim, the evidence on record shows that respondent exercised due diligence
in performing its obligations under the contract and followed standard procedure in rendering its
services to petitioner. As correctly observed by the lower court, the plane ticket 19 issued to petitioner
clearly reflected the departure date and time, contrary to petitioner’s contention. The travel
documents, consisting of the tour itinerary, vouchers and instructions, were likewise delivered to
petitioner two days prior to the trip. Respondent also properly booked petitioner for the tour,
prepared the necessary documents and procured the plane tickets. It arranged petitioner’s hotel
accommodation as well as food, land transfers and sightseeing excursions, in accordance with its
avowed undertaking.

Therefore, it is clear that respondent performed its prestation under the contract as well as
everything else that was essential to book petitioner for the tour. Had petitioner exercised due
diligence in the conduct of her affairs, there would have been no reason for her to miss the flight.
Needless to say, after the travel papers were delivered to petitioner, it became incumbent upon her
to take ordinary care of her concerns. This undoubtedly would require that she at least read the
documents in order to assure herself of the important details regarding the trip.

The negligence of the obligor in the performance of the obligation renders him liable for damages for
the resulting loss suffered by the obligee. Fault or negligence of the obligor consists in his failure to
exercise due care and prudence in the performance of the obligation as the nature of the obligation
so demands.20 There is no fixed standard of diligence applicable to each and every contractual
obligation and each case must be determined upon its particular facts. The degree of diligence
required depends on the circumstances of the specific obligation and whether one has been
negligent is a question of fact that is to be determined after taking into account the particulars of
each case.21
The lower court declared that respondent’s employee was negligent. This factual finding, however, is
not supported by the evidence on record. While factual findings below are generally conclusive upon
this court, the rule is subject to certain exceptions, as when the trial court overlooked,
misunderstood, or misapplied some facts or circumstances of weight and substance which will affect
the result of the case.22

In the case at bar, the evidence on record shows that respondent company performed its duty
diligently and did not commit any contractual breach. Hence, petitioner cannot recover and must
bear her own damage.

WHEREFORE, the instant petition is DENIED for lack of merit. The decision of the Court of Appeals
in CA-G.R. CV No. 51932 is AFFIRMED. Accordingly, petitioner is ordered to pay respondent the
amount of P12,901.00 representing the balance of the price of the British Pageant Package Tour,
with legal interest thereon at the rate of 6% per annum, to be computed from the time the
counterclaim was filed until the finality of this Decision. After this Decision becomes final and
executory, the rate of 12% per annum shall be imposed until the obligation is fully settled, this interim
period being deemed to be by then an equivalent to a forbearance of credit.23

SO ORDERED.

Davide, Jr., C.J., (Chairman), Vitug, Carpio, and Azcuna, JJ., concur.
G.R. No. 158768 February 12, 2008

TITAN-IKEDA CONSTRUCTION & DEVELOPMENT CORPORATION, petitioner,

vs.
PRIMETOWN PROPERTY GROUP, INC., respondent.

DECISION

CORONA, J.:

This petition for review on certiorari1 seeks to set aside the decision of the Court of Appeals (CA) in
CA-G.R. CV No. 613532 and its resolution3 denying reconsideration.

In 1992, respondent Primetown Property Group, Inc. awarded the contract for the structural
works4 of its 32-storey Makati Prime Tower (MPT) to petitioner Titan-Ikeda Construction and
Development Corporation.5 The parties formalized their agreement in a construction contract6 dated
February 4, 1993.7

Upon the completion of MPT's structural works, respondent awarded the P130,000,000 contract for
the tower's architectural works8 (project) to petitioner. Thus, on January 31, 1994, the parties
executed a supplemental agreement.9 The salient portions thereof were:

1. the [project] shall cover the scope of work of the detailed construction bid plans and
specifications and bid documents dated 28 September 1993, attached and forming an
integral part hereof as Annex A.

2. the contract price for the said works shall be P130 million.

3. the payment terms shall be "full swapping" or full payment in condominium units. The
condominium units earmarked for the [petitioner] are shown in the attached Annex B.

4. the [respondent] shall transfer and surrender to [petitioner] the condominium units
abovestated in accordance with the following schedule:

(a) 80% of units — upon posting and acceptance by [respondent] of the performance
bond [and]

(b) 20% or remaining balance — upon completion of the project as provided in the
construction contract and simultaneous with the posting by [petitioner] of the
reglementary guarantee bond.

5. the contract period shall be fifteen (15) months reckoned from the release of the
condominium certificates of title (CCTs) covering eighty percent (80%) of the units
transferable to [petitioner] as aforesaid[.]

Significantly, the supplemental agreement adopted those provisions of the construction contract
which it did not specifically discuss or provide for.10 Among those carried over was the designation of
GEMM Construction Corporation (GEMM) as the project's construction manager.11

Petitioner started working on the project in February 1994.

On June 30, 1994, respondent executed a deed of sale12 (covering 114 condominium units and 20
parking slots of the MPT collectively valued by the parties at P112,416,716.88)13 in favor of petitioner
pursuant to the "full-swapping" payment provision of the supplemental agreement.

Shortly thereafter, petitioner sold some of its units to third persons.14

In September 1995, respondent engaged the services of Integratech, Inc. (ITI), an engineering
consultancy firm, to evaluate the progress of the project.15 In its September 7, 1995 report,16 ITI
informed respondent that petitioner, at that point, had only accomplished 31.89% of the project (or
was 11 months and six days behind schedule).17
Meanwhile, petitioner and respondent were discussing the possibility of the latter’s take over of the
project’s supervision. Despite ongoing negotiations, respondent did not obtain petitioner’s consent in
hiring ITI as the project’s construction manager. Neither did it inform petitioner of ITI’s September 7,
1995 report.

On October 12, 1995, petitioner sought to confirm respondent's plan to take over the project.18 Its
letter stated:

The mutual agreement arrived at sometime in the last week of August 1995 for [respondent]
to take over the construction supervision of the balance of the [project] from [petitioner's]
[e]ngineering staff and complete [the] same by December 31, 1995 as promised by
[petitioner's] engineer.

The [petitioner's] accomplished works as of this date of [t]ake over is of acceptable quality in
materials and workmanship.

This mutual agreement on the take over should not be misconstrued in any other way
except that the take over is part of the long range plan of [respondent] that [petitioner],
in the spirit of cooperation, agreed to hand over the construction supervision to [respondent]
as requested. (emphasis supplied)19

Engineers Antonio Co, general construction manager of respondent, and Luzon Y. Tablante, project
manager of petitioner, signed the letter.

Integratech’s (ITI’s) Report

In its September 7, 1995 report, ITI estimated that petitioner should have accomplished 48.71% of
the project as of the October 12, 1995 takeover date.20 Petitioner repudiated this figure21 but
qualifiedly admitted that it did not finish the project.22 Records showed that respondent did not merely
take over the supervision of the project but took full control thereof.23

Petitioner consequently conducted an inventory.24 On the basis thereof, petitioner demanded from
respondent the payment of its balance amounting to P1,779,744.85.25

On February 19, 1996, petitioner sent a second letter to respondent demanding P2,023,876.25. This
new figure included the cost of materials (P244,331.40) petitioner advanced from December 5, 1995
to January 26, 1996.26

On November 22, 1996, petitioner demanded from respondent the delivery of MPT's management
certificate27 and the keys to the condominium units and the payment of its (respondent's) balance.28

Because respondent ignored petitioner's demand, petitioner, on December 9, 1996, filed a complaint
for specific performance29 in the Housing and Land Use Regulatory Board (HLURB).

While the complaint for specific performance was pending in the HLURB, respondent sent a demand
letter to petitioner asking it to reimburse the actual costs incurred in finishing the project
(or P69,785,923.47).30 In view of the pendency of the HLURB case, petitioner did not heed
respondent's demands.

On April 29, 1997, the HLURB rendered a decision in favor of petitioner.31 It ruled that the instrument
executed on June 30, 1994 was a deed of absolute sale because the conveyance of the
condominium units and parking slots was not subject to any condition.32 Thus, it ordered respondent
to issue MPT’s management certificate and to deliver the keys to the condominium units to
petitioner.33 Respondent did not appeal this decision. Consequently, a writ of execution was issued
upon its finality.34

Undaunted by the finality of the HLURB decision, respondent filed a complaint for collection of sum
of money35 against petitioner in the Regional Trial Court (RTC) of Makati City, Branch 58 on July 2,
1997. It prayed for the reimbursement of the value of the project’s unfinished portion amounting
to P66,677,000.36

During trial, the RTC found that because respondent modified the MPT's architectural design,
petitioner had to adjust the scope of work.37 Moreover, respondent belatedly informed petitioner of
those modifications. It also failed to deliver the concrete mix and rebars according to schedule. For
this reason, petitioner was not responsible for the project's delay.38 The trial court thus allowed
petitioner to set-off respondent's other outstanding liabilities with respondent’s excess payment in
the project.39 It concluded that respondent owed petitioner P2,023,876.25.40 In addition, because
respondent refused to deliver the keys to the condominium units and the management certificate to
petitioner, the RTC found that petitioner lost rental income amounting to US$1,665,260.41 The
dispositive portion of the RTC decision stated:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered dismissing

[respondent's] [c]omplaint for lack of merit. On the other hand, finding preponderance of
evidence to sustain [petitioner's] counterclaim, judgment is hereby rendered in favor of
[petitioner] ordering [respondent] to pay the former:

1. The unpaid balance of the consideration for [petitioner's] services in [the project] in the
amount of P2,023,867.25 with legal interest from the date of demand until fully paid;

2. Compensatory damages in the amount of US$1,665,260 or its peso equivalent at the

current foreign exchange rate representing lost rental income due only as of July 1997 and
the accrued lost earnings from then on until the date of actual payment, with legal interest
from the date of demand until fully paid; and

3. Attorney's fees in the amount of P100,000 as acceptance fee, P1,000 appearance fee per
hearing and 25% of the total amount awarded to [petitioner].

With costs against the [respondent].

SO ORDERED.42

Respondent appealed the RTC decision to the CA.43 The appellate court found that respondent fully
performed its obligation when it executed the June 30, 1994 deed of absolute sale in favor of
petitioner.44 Moreover, ITI's report clearly established that petitioner had completed only 48.71% of
the project as of October 12, 1995, the takeover date. Not only did it incur delay in the performance
of its obligation but petitioner also failed to finish the project. The CA ruled that respondent was
entitled to recover the value of the unfinished portion of the project under the principle of unjust
enrichment.45 Thus:

WHEREFORE, the appealed decision is REVERSED and a new one entered dismissing
[petitioner's] counterclaims of P2,023,867.25 representing unpaid balance for [its] services in
[the project]; US$1,665,260 as accrued lost earnings, and attorney's fees. [Petitioner] is
hereby ordered to return to [respondent] the amount of P66,677,000 representing the value
of unfinished [portion of the project], plus legal interest thereon until fully paid. Upon payment
by [petitioner] of the aforementioned amount, [respondent] is hereby ordered to deliver the
keys and [m]anagement [c]ertificate of the [Makati Prime Tower] paid to [petitioner] as
consideration for the [project].46

Petitioner moved for reconsideration but it was denied. Hence, this petition.

Petitioner contends that the CA erred in giving weight to ITI's report because the project evaluation
was commissioned only by respondent,47 in disregard of industry practice. Project evaluations are
agreed upon by the parties and conducted by a disinterested third party.48

We grant the petition.

Review of Conflicting Factual Findings

As a general rule, only questions of law may be raised in a petition for review on certiorari. Factual
issues are entertained only in exceptional cases such as where the findings of fact of the CA and the
trial court are conflicting.49

Here, a glaring contradiction exists between the factual findings of the RTC and the CA. The trial
court found that respondent contributed to the project's delay because it belatedly communicated the
modifications and failed to deliver the necessary materials on time. The CA, however, found that
petitioner incurred delay in the performance of its obligation. It relied on ITI's report which stated that
petitioner had accomplished only 48.71% of the project as of October 12, 1995.

January 31, 1994 Supplemental Agreement Was Extinguished

A contract is a meeting of the minds between two persons whereby one binds himself, with respect
to the other, to give something or to render some service.50 This case involved two contracts entered
into by the parties with regard to the project.

The parties first entered into a contract for a piece of work51 when they executed the supplemental
agreement. Petitioner as contractor bound itself to execute the project for respondent, the
owner/developer, in consideration of a price certain (P130,000,000). The supplemental agreement
was reciprocal in nature because the obligation of respondent to pay the entire contract price
depended on the obligation of petitioner to complete the project (and vice versa).

Thereafter, the parties entered into a second contract. They agreed to extinguish the supplemental
agreement as evidenced by the October 12, 1995 letter-agreement which was duly acknowledged
by their respective representatives.52

While the October 12, 1995 letter-agreement stated that respondent was to take over merely the
supervision of the project, it actually took over the whole project itself. In fact, respondent
subsequently hired two contractors in petitioner's stead.53 Moreover, petitioner's project engineer at
site only monitored the progress of architectural works undertaken in its condominium
units.54 Petitioner never objected to this arrangement; hence, it voluntarily surrendered its
participation in the project. Moreover, it judicially admitted in its answer that respondent took over the
entire project, not merely its supervision, pursuant to its (respondent’s) long-range plans.55

Because the parties agreed to extinguish the supplemental agreement, they were no longer required
to fully perform their respective obligations. Petitioner was relieved of its obligation to complete the
project while respondent was freed of its obligation to pay the entire contract price. However,
respondent, by executing the June 30, 1994 deed of absolute sale, was deemed to have
paid P112,416,716.88. Nevertheless, because petitioner applied part of what it received to
respondent’s outstanding liabilities,56 it admitted overpayment.

Because petitioner acknowledged that it had been overpaid, it was obliged to return the excess to
respondent. Embodying the principle of solutio indebiti, Article 2154 of the Civil Code provides:

Article 2154. 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.

For the extra-contractual obligation of solutio indebiti to arise, the following requisites must be
proven:

1. the absence of a right to collect the excess sums and

2. the payment was made by mistake.57

With regard to the first requisite, because the supplemental agreement had been extinguished by the
mutual agreement of the parties, petitioner became entitled only to the cost of services it actually
rendered (i.e., that fraction of the project cost in proportion to the percentage of its actual
accomplishment in the project). It was not entitled to the excess (or extent of overpayment).

On the second requisite, Article 2163 of the Civil Code provides:

Article 2163. It is presumed that there was a mistake in the payment if something which
had never been due or had already been paid was delivered; but, he from whom the return
is claimed may prove that the delivery was made out of liberality or for any other just cause.
(emphasis supplied)

In this instance, respondent paid part of the contract price under the assumption that petitioner
would complete the project within the stipulated period. However, after the supplemental agreement
was extinguished, petitioner ceased working on the project. Therefore, the compensation petitioner
received in excess of the cost of its actual accomplishment as of October 12, 1995 was never due.
The condominium units and parking slots corresponding to the said excess were mistakenly
delivered by respondent and were therefore not due to petitioner.

Stated simply, respondent erroneously delivered excess units to petitioner and the latter, pursuant to
Article 2154, was obliged to the return them to respondent.58 Article 2160 of the Civil Code provides:

Article 2160. He who in good faith accepts an undue payment of a thing certain and
determinate shall only be responsible for the impairment or loss of the same or its
accessories and accessions insofar as he has thereby been benefited. If he has alienated it,
he shall return the price or assign the action to collect the sum.

One who receives payment by mistake in good faith is, as a general rule, only liable to return the
thing delivered.59 If he benefited therefrom, he is also liable for the impairment or loss of the thing
delivered and its accessories and accessions.60 If he sold the thing delivered, he should either
deliver the proceeds of the sale or assign the action to collect to the other party.61

The situation is, however, complicated by the following facts:

a) the basis of the valuation (P112,416,716.99) of the condominium units and parking slots
covered by the June 30, 1994 deed of sale is unknown;

b) the percentage of petitioner's actual accomplishment in the project has not been
determined and

c) the records of this case do not show the actual number of condominium units and parking
slots sold by petitioners.

Because this Court is not a trier of facts, the determination of these matters should be remanded to
the RTC for reception of further evidence.

The RTC must first determine the percentage of the project petitioner actually completed and its
proportionate cost.62 This will be the amount due to petitioner. Thereafter, based on the stipulated
valuation in the June 30, 1994 deed of sale, the RTC shall determine how many condominium units
and parking slots correspond to the amount due to petitioner. It will only be the management
certificate and the keys to these units that petitioner will be entitled to. The remaining units, having
been mistakenly delivered by respondent, will therefore be the subject of solutio indebiti.

What exactly must petitioner give back to respondent? Under Article 2160 in relation to Article 2154,
it should return to respondent the condominium units and parking slots in excess of the value of its
actual accomplishment (i.e., the amount due to it) as of October 12, 1995. If these properties include
units and/or slots already sold to third persons, petitioner shall deliver the proceeds of the sale
thereof or assign the actions for collection to respondent as required by Article 2160.

Delay In The Completion Of The Project

Mora or delay is the failure to perform the obligation in due time because of dolo (malice)
or culpa (negligence).63 A debtor is deemed to have violated his obligation to the creditor from the
time the latter makes a demand. Once the creditor makes a demand, the debtor incurs mora or
delay.64

The construction contract65 provided a procedure for protesting delay:

Article XIV

DELAYS AND ABANDONMENT

15.1. If at any time during the effectivity of this contract, [PETITIONER] shall incur
unreasonable delay or slippages of more than fifteen percent (15%) of the scheduled
work program, [RESPONDENT] should notify [PETITIONER] in writing to accelerate the
work and reduce, if not erase, slippage. If after the lapse of sixty (60) days from receipt of
such notice, [PETITIONER] fails to rectify the delay or slippage, [RESPONDENT] shall have
the right to terminate this contract except in cases where the same was caused by force
majeure. "FORCE MAJEURE" as contemplated herein, and in determination of delay
 includes, but is not limited to, typhoon, flood, earthquake, coup d'etat, rebellion, sedition,
transport strike, stoppage of work, mass public action that prevents workers from reporting
for work, and such other causes beyond [PETITIONER'S] control.66 (emphasis supplied)

xxx xxx xxx

Respondent never sent petitioner a written demand asking it to accelerate work on the project and
reduce, if not eliminate, slippage. If delay had truly been the reason why respondent took over the
project, it would have sent a written demand as required by the construction contract. Moreover,
according to the October 12, 1995 letter-agreement, respondent took over the project for the sole
reason that such move was part of its (respondent's) long-term plan.

Respondent, on the other hand, relied on ITI's September 7, 1995 report. The construction contract
named GEMM, not ITI, as construction manager.67 Because petitioner did not consent to the change
of the designated construction manager, ITI's September 7, 1995 report could not bind it.

In view of the foregoing, we hold that petitioner did not incur delay in the performance of its
obligation.

Recovery Of Additional Costs Resulting From Changes

The supplemental agreement was a contract for a stipulated price.68 In such contracts, the recovery
of additional costs (incurred due to changes in plans or specifications) is governed by Article 1724 of
the Civil Code.

Article 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 nor demand an increase in the price on account of
higher cost of labor or materials, save when there has been a change in 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 has been determined in writing by both
parties.

In Powton Conglomerate, Inc. v. Agcolicol,69 we reiterated that a claim for the cost of additional work
arising from changes in the scope of work can only be allowed upon the:

1. written authority from the developer/owner ordering/allowing the changes in work; and

2. written agreement of parties with regard to the increase in cost (or price) due to the
change in work or design modification. 70

Furthermore:

Compliance with the two requisites of Article 1724, a specific provision governing
additional works, is a condition precedent of the recovery. 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.71 (emphasis supplied)

Petitioner submitted neither one. In addition, petitioner’s project coordinator Estellita Garcia testified
that respondent never approved any change order.72 Thus, under Article 1724 and pursuant to our
ruling in Powton Conglomerate, Inc., petitioner cannot recover the cost it incurred in effecting the
design modifications. A contractor who fails to secure the owner or developer's written authority to
changes in the work or written assent to the additional cost to be incurred cannot invoke the principle
of unjust enrichment.73

Recovery Of Compensatory Damages

Indemnification for damages comprehends not only the loss suffered (actual damages or damnum
emergens) but also the claimant's lost profits (compensatory damages or lucrum cessans). For
compensatory damages to be awarded, it is necessary to prove the actual amount of the alleged
loss by preponderance of evidence.74

The RTC awarded compensatory damages based on the rental pool rates submitted by
petitioner75 and on the premise that all those units would have been leased had respondent only
finished the project by December 31, 1995.76 However, other than bare assertions, petitioner
submitted no proof that the rental pool was in fact able to lease out the units. We thus hold that the
"losses" sustained by petitioner were merely speculative and there was no basis for the award.

Remand Of Other Claims

Since respondent did not repudiate petitioner's other claims stated in the inventory77 in the RTC and
CA, it is estopped from questioning the validity thereof.78 However, because some of petitioner's
claims have been disallowed, we remand the records of this case to the RTC for the computation of
respondent's liability.79

WHEREFORE, the petition is hereby GRANTED.

The March 15, 2002 decision and May 29, 2003 resolution of the Court of Appeals in CA-G.R. CV
No. 61353 and the August 5, 1998 decision of the Regional Trial Court, Branch 58, Makati City in
Civil Case No. 97-1501 are hereby SET ASIDE. New judgment is entered:

1. ordering petitioner Titan-Ikeda Construction and Development Corporation to return to respondent

Primetown Property Group, Inc. the condominium units and parking slots corresponding to the
payment made in excess of the proportionate (project) cost of its actual accomplishment as of
October 12, 1995, subject to its (petitioner’s) allowable claims as stated in the inventory and

2. dismissing petitioner Titan-Ikeda Construction and Development Corporation’s claims for the cost
of additional work (or change order) and damages.

The records of this case are remanded to the Regional Trial Court of Makati City, Branch 58 for:

1. the reception of additional evidence to determine

(a) the percentage of the architectural work actually completed by petitioner Titan-Ikeda
Construction and Development Corporation as of October 12, 1995 on the Makati Prime
Tower and

(b) the number of condominium units and parking slots sold by petitioner Titan-Ikeda
Construction and Development Corporation to third persons;

2. the computation of petitioner Titan-Ikeda Construction and Development Corporation's

actual liability to respondent Primetown Property Group, Inc. or vice-versa, and the
determination of imposable interests and/or penalties, if any.

SO ORDERED.

RENATO C. CORONA
Associate Justice
G.R. No. 153004 November 5, 2004

SANTOS VENTURA HOCORMA FOUNDATION, INC., petitioner,

vs.
ERNESTO V. SANTOS and RIVERLAND, INC., respondents.

DECISION

QUISUMBING, J.:

Subject of the present petition for review on certiorari is the Decision,1 dated January 30, 2002, as
well as the April 12, 2002, Resolution2 of the Court of Appeals in CA-G.R. CV No. 55122. The
appellate court reversed the Decision,3 dated October 4, 1996, of the Regional Trial Court of Makati
City, Branch 148, in Civil Case No. 95-811, and likewise denied petitioner's Motion for
Reconsideration.

The facts of this case are undisputed.

Ernesto V. Santos and Santos Ventura Hocorma Foundation, Inc. (SVHFI) were the plaintiff and
defendant, respectively, in several civil cases filed in different courts in the Philippines. On October
26, 1990, the parties executed a Compromise Agreement4 which amicably ended all their pending
litigations. The pertinent portions of the Agreement read as follows:

1. Defendant Foundation shall pay Plaintiff Santos P14.5 Million in the following manner:

a. P1.5 Million immediately upon the execution of this agreement;

b. The balance of P13 Million shall be paid, whether in one lump sum or in
installments, at the discretion of the Foundation, within a period of not more than two
(2) years from the execution of this agreement; provided, however, that in the event
that the Foundation does not pay the whole or any part of such balance, the same
shall be paid with the corresponding portion of the land or real properties subject of
the aforesaid cases and previously covered by the notices of lis pendens, under such
terms and conditions as to area, valuation, and location mutually acceptable to both
parties; but in no case shall the payment of such balance be later than two (2) years
from the date of this agreement; otherwise, payment of any unpaid portion shall only
be in the form of land aforesaid;

2. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million),
plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. 88-743, 1413OR,
TC-1024, 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. 4968
(C.A.-G.R. No. 26598) and 88-45366 (C.A.-G.R. No. 24304) respectively and for the
immediate lifting of the aforesaid various notices of lis pendens on the real properties
aforementioned (by signing herein attached corresponding documents, for such lifting);
provided, however, that in the event that defendant Foundation shall sell or dispose of any of
the lands previously subject of lis pendens, the proceeds of any such sale, or any part
thereof as may be required, shall be partially devoted to the payment of the Foundation's
obligations under this agreement as may still be subsisting and payable at the time of any
such sale or sales;

...

5. Failure of compliance of any of the foregoing terms and conditions by either or both parties
to this agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a
writ of execution for the enforcement of this agreement. [Emphasis supplied]5
In compliance with the Compromise Agreement, respondent Santos moved for the dismissal of the
aforesaid civil cases. He also caused the lifting of the notices of lis pendens on the real properties
involved. For its part, petitioner SVHFI, paid P1.5 million to respondent Santos, leaving a balance of
P13 million.

Subsequently, petitioner SVHFI sold to Development Exchange Livelihood Corporation two real
properties, which were previously subjects of lis pendens. Discovering the disposition made by the
petitioner, respondent Santos sent a letter to the petitioner demanding the payment of the remaining
P13 million, which was ignored by the latter. Meanwhile, on September 30, 1991, the Regional Trial
Court of Makati City, Branch 62, issued a Decision6 approving the compromise agreement.

On October 28, 1992, respondent Santos sent another letter to petitioner inquiring when it would pay
the balance of P13 million. There was no response from petitioner. Consequently, respondent
Santos applied with the Regional Trial Court of Makati City, Branch 62, for the issuance of a writ of
execution of its compromise judgment dated September 30, 1991. The RTC granted the writ. Thus,
on March 10, 1993, the Sheriff levied on the real properties of petitioner, which were formerly
subjects of the lis pendens. Petitioner, however, filed numerous motions to block the enforcement of
the said writ. The challenge of the execution of the aforesaid compromise judgment even reached
the Supreme Court. All these efforts, however, were futile.

On November 22, 1994, petitioner's real properties located in Mabalacat, Pampanga were
auctioned. In the said auction, Riverland, Inc. was the highest bidder for P12 million and it was
issued a Certificate of Sale covering the real properties subject of the auction sale. Subsequently,
another auction sale was held on February 8, 1995, for the sale of real properties of petitioner in
Bacolod City. Again, Riverland, Inc. was the highest bidder. The Certificates of Sale issued for both
properties provided for the right of redemption within one year from the date of registration of the
said properties.

On June 2, 1995, Santos and Riverland Inc. filed a Complaint for Declaratory Relief and
Damages7 alleging that there was delay on the part of petitioner in paying the balance of P13 million.
They further alleged that under the Compromise Agreement, the obligation became due on October
26, 1992, but payment of the remaining P12 million was effected only on November 22, 1994. Thus,
respondents prayed that petitioner be ordered to pay legal interest on the obligation, penalty,
attorney's fees and costs of litigation. Furthermore, they prayed that the aforesaid sales be declared
final and not subject to legal redemption.

In its Answer,8 petitioner countered that respondents have no cause of action against it since it had
fully paid its obligation to the latter. It further claimed that the alleged delay in the payment of the
balance was due to its valid exercise of its rights to protect its interests as provided under the Rules.
Petitioner counterclaimed for attorney's fees and exemplary damages.

On October 4, 1996, the trial court rendered a Decision9 dismissing herein respondents' complaint
and ordering them to pay attorney's fees and exemplary damages to petitioner. Respondents then
appealed to the Court of Appeals. The appellate court reversed the ruling of the trial court:

WHEREFORE, finding merit in the appeal, the appealed Decision is hereby REVERSED and
judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and
Riverland, Inc.: (1) legal interest on the principal amount of P13 million at the rate of 12% per
annum from the date of demand on October 28, 1992 up to the date of actual payment of the
whole obligation; and (2) P20,000 as attorney's fees and costs of suit.

SO ORDERED.

Hence this petition for review on certiorari where petitioner assigns the following issues:

WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR

WHEN IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS, MR.
SANTOS AND RIVERLAND, INC., NOTWITHSTANDING THE FACT THAT NEITHER IN
THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF HON.
JUDGE DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT
 II

WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL

IN[T]EREST IN FAVOR OF THE RESPONDENTS, MR. SANTOS AND RIVERLAND, INC.,
NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE PETITIONER TO
RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO AN
OBLIGATION TO PAY IN KIND – DELIVERY OF REAL PROPERTIES OWNED BY THE
PETITIONER – WHICH HAD BEEN FULLY PERFORMED

III

WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF

INTEREST BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE
AGREEMENT, WHICH BECAME THE LAW AMONG THE PARTIES10

The only issue to be resolved is whether the respondents are entitled to legal interest.

Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not
provide for the payment of interest, the legal interest by way of penalty on account of fault or delay
shall not be due and payable, considering that the obligation or loan, on which the payment of legal
interest could be based, has been superseded by the compromise agreement.11 Furthermore, the
petitioner argues that the respondents are barred by res judicata from seeking legal interest on
account of the waiver clause in the duly approved compromise agreement.12 Article 4 of the
compromise agreement provides:

Plaintiff Santos waives and renounces any and all other claims that he and his family may
have on the defendant Foundation arising from and in connection with the aforesaid civil
cases, and defendant Foundation, on the other hand, also waives and renounces any and all
claims that it may have against plaintiff Santos in connection with such cases.13 [Emphasis
supplied.]

Lastly, petitioner alleges that since the compromise agreement did not provide for a period within
which the obligation will become due and demandable, it is incumbent upon respondent Santos to
ask for judicial intervention for purposes of fixing the period. It is only when a fixed period exists that
the legal interests can be computed.

Respondents profer that their right to damages is based on delay in the payment of the obligation
provided in the Compromise Agreement. The Compromise Agreement provides that payment must
be made within the two-year period from its execution. This was approved by the trial court and
became the law governing their contract. Respondents posit that petitioner's failure to comply
entitles them to damages, by way of interest.14

The petition lacks merit.

A compromise is a contract whereby the parties, by making reciprocal concessions, avoid a litigation
or put an end to one already commenced.15 It is an agreement between two or more persons, who, for
preventing or putting an end to a lawsuit, adjust their difficulties by mutual consent in the manner
which they agree on, and which everyone of them prefers in the hope of gaining, balanced by the
danger of losing.16

The general rule is that a compromise has upon the parties the effect and authority of res judicata,
with respect to the matter definitely stated therein, or which by implication from its terms should be
deemed to have been included therein.17 This holds true even if the agreement has not been judicially
approved.18

In the case at bar, the Compromise Agreement was entered into by the parties on October 26,
1990.19 It was judicially approved on September 30, 1991.20 Applying existing jurisprudence, the
compromise agreement as a consensual contract became binding between the parties upon its
execution and not upon its court approval. From the time a compromise is validly entered into, it
becomes the source of the rights and obligations of the parties thereto. The purpose of the
compromise is precisely to replace and terminate controverted claims.21
In accordance with the compromise agreement, the respondents asked for the dismissal of the
pending civil cases. The petitioner, on the other hand, paid the initial P1.5 million upon the execution
of the agreement. This act of the petitioner showed that it acknowledges that the agreement was
immediately executory and enforceable upon its execution.

As to the remaining P13 million, the terms and conditions of the compromise agreement are clear
and unambiguous. It provides:

...

b. The balance of P13 Million shall be paid, whether in one lump sum or in installments, at
the discretion of the Foundation, within a period of not more than two (2) years from the
execution of this agreement…22 [Emphasis supplied.]

...

The two-year period must be counted from October 26, 1990, the date of execution of the
compromise agreement, and not on the judicial approval of the compromise agreement on
September 30, 1991. When respondents wrote a demand letter to petitioner on October 28, 1992,
the obligation was already due and demandable. When the petitioner failed to pay its due obligation
after the demand was made, it incurred delay.

Article 1169 of the New Civil Code provides:

Those obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation. [Emphasis supplied]

Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of
obligations. It is the non-fulfillment of the obligation with respect to time.23

In order for the debtor to be in default, it is necessary that the following requisites be present: (1) that
the obligation be demandable and already liquidated; (2) that the debtor delays performance; and (3)
that the creditor requires the performance judicially or extrajudicially.24

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

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

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

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

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

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated January 30, 2002 of the
Court of Appeals and its April 12, 2002 Resolution in CA-G.R. CV No. 55122 are AFFIRMED. Costs
against petitioner.
SO ORDERED.

Davide, Jr. C.J. (Chairman), Ynares-Santiago and Carpio, JJ., concur.

Azcuna, J., on leave.
G.R. No. 149140 September 12, 2006

VICTORIA ONG, petitioner,

vs.
ERNESTO BOGÑALBAL1 and HON. COURT OF APPEALS, respondents.

DECISION

CHICO-NAZARIO, J.:

In this Special Civil Action for Certiorari under Rule 65 of the Rules of Court, petitioner seeks the
nullification of a 22 May 2001 Court of Appeals Resolution denying her Motion for Reconsideration of
a 31 March 2000 Decision.2

The Court of Appeals found the facts to be as follows:

On January 2, 1995, [herein respondent] Ernesto Bogñalbal, an architect-contractor doing

business under the name and style of E.B. Bogñalbal Construction, entered into an "Owner-
Contractor Agreement" with [herein petitioner] Victoria Ong, a businesswoman, for the
construction of a proposed boutique owned by the latter to be known as Les Galeries de
Paris located at the 3rd Floor of the Shangri-La Plaza, Epifanio Delos Santos Avenue corner
Shaw Boulevard, Mandaluyong City (Exhibits "A" and "1", pp. 100-102, ibid). The agreement
provides that in consideration of the sum of two hundred thousand pesos (P200,000.00), the
contractor agrees to furnish labor, tools and equipment to complete the work on the boutique
as per specification within forty-five (45) days excluding Sundays from the date of delivery of
the construction materials. Payment by the owner shall be made by progress billing to be
collected every two (2) weeks based on the accomplishment of work value submitted by the
contractor to the owner as certified for payment by the architect assigned on site. The
agreement likewise provides for a change order as a result of fluctuation in the cost of labor.
Moreover, should the owner require the contractor to perform work over and above that
required, the additional cost shall be added to the contract amount and if ordered to omit
work as required by their agreement, the cost of work omitted shall be deducted from the
contract amount.

Actual work on the project commenced on January 19, 1995. For work accomplished during
the period January 19 to 28, 1995, [respondent Bogñalbal] submitted and was paid his
progress billing no. 1 in the sum of P35,950.00 equivalent to 17.975% of the total job to be
performed (Exh. "E", p. 106, ibid). Partial billing nos. 2 and 3 for the period from January 29
to February 15, 1995 and February 16 to March 3, 1995 in the sum of P69,000.00 and
P41,500.00, equivalent to 34.65% and 20.63% of the total job, respectively, were likewise
made to respondent and paid for by the latter (Exhs. "F" and "G", pp. 107-108, ibid.).

It is with respect to progress billing no. 4 that the present controversy arose. When
[respondent Bogñalbal] submitted the fourth progress billing on March 31, 1995 for the
period covering March 4 to 18, 1995, in the sum of P30,950.00 equivalent to 15.47% of the
total job (Exh. "B", p. 103, ibid.), [petitioner Ong] refused to pay the same. As in the previous
three billings, the fourth billing was first evaluated and recommended for payment by
Supervising Architect John Noel R. Cano, an employee of Balce-Sindac and Associates, the
principal designer of the [petitioner Ong's] boutique (Exh. "H-1", p. 110, ibid.).

The reason for [petitioner Ong's] refusal to pay the fourth (4th) progress billing is not clear on
the record. It is [respondent Bogñalbal's] contention that [petitioner Ong] refused to pay since
she was insisting that the flooring, which she asked to be changed from vinyl tiles to kenzo
flooring where polyurethane is to be used as coating, be first completed within three (3) days
from April 22, 1995. [Respondent Bogñalbal], however, insisted that the same is not possible
because the floor needed to be cured first to avoid adverse chemical reaction of the
polyurethane on the color of the flooring. Due to the insistence of [petitioner Ong] that the
flooring be finished in time for the arrival of the furniture from abroad, [respondent Bogñalbal]
proceeded with the work but the rushed work resulted in the reddish reaction of the
polyurethane on the floor, which was not acceptable to respondent (TSN, March 28, 1996,
pp. 30-32; June 21, 1996, pp. 15-18).

On the other hand, [petitioner Ong] contends that her refusal to pay was because the fourth
billing was allegedly in excess and over the value of the work accomplished during the
 period. To settle the matter, the parties purportedly met whereby [respondent Bogñalbal]
supposedly agreed to finish the kenzo flooring on or before April 24, 1995 before [petitioner
Ong] would pay the fourth (4th) progress billing. However, instead of complying with his
commitment, [respondent Bogñalbal] abandoned the project on April 24, 1995 when it
became apparent that he could not complete the kenzo flooring on the date agreed upon.

Due to [petitioner Ong's] continued refusal to pay [respondent Bogñalbal's] fourth (4th)
progress billing despite written demands from his counsel (Exhs. "C" and "D", pp. 104-105,
ibid), the latter was constrained to file an action for sum of money with damages with the
Metropolitan Trial Court (MeTC) of Caloocan City.

The complaint, which was docketed as Civil Case No. 22143 and raffled to Branch 49 of the
court, prayed for actual damages in the total sum of P50,450.00 representing P30,950.00
(4th progress billing), P16,000.00 on the change order from vinyl tiles to kenzo flooring and
an unidentified amount. It likewise prayed for moral and exemplary damages, as well as
attorney's fees.

In her answer with counterclaim, [petitioner Ong] refused payment of the fourth (4th)
progress billing since [respondent Bogñalbal] failed to perform what was incumbent upon him
under their agreement, but instead abandoned the job to her great damage and prejudice. As
to the P16,000.00 value of the change order, she alleged that the same was premature since
she had never received any billing for said change order duly certified for payment and
approved by the Architect assigned on site. Besides, [petitioner Ong] averred that the
P16,000.00 being charged by [respondent Bogñalbal] was grossly disproportionate with the
quantity of the work actually accomplished by the former. By way of counterclaim, [petitioner
Ong] prayed for actual damages by reason of [respondent Bogñalbal's] refusal to finish the
job agreed upon which forced her to hire a new contractor to complete the same for which
she paid the sum of P78,000.00 and for loss of business opportunity in the amount of
P50,000.00. She likewise prayed for moral, exemplary and liquidated damages, as well as
attorney's fees.

After trial on the merits, the [MeTC], in a Decision dated June 18, 1998, ruled in favor of
[respondent Bogñalbal,] awarding to him the sum of P30,950.00 representing the fourth
progress billing, P13,000.00 representing the value of the accomplished work on the kenzo
flooring, P15,000.00 as attorney's fees, P20,000.00 and P25,000.00 as moral and exemplary
damages, respectively (p. 175, ibid.).

Aggrieved by the decision of the court, [petitioner Ong] elevated the case on appeal to the
Regional Trial Court (RTC) of Caloocan City. The appeal was docketed as Civil Case No. C-
18466 and raffled to Branch 126 thereof.

The court a quo, after requiring the parties to submit their respective memoranda, reversed
and set aside the ruling of the MTC and rendered judgment in favor of [petitioner Ong] in a
Decision dated February 18, 1999 (p. 407, ibid.). It is worthy to note that although the RTC
ruled in favor of [petitioner Ong], it did not specify the relief granted to her in the dispositive
portion of its decision.3

Respondent Bogñalbal then filed a Petition for Review with the Court of Appeals. On 31 March 2000,
the Court of Appeals granted the Petition, disposing of the case as follows:

WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The

Decision of the Regional Trial Court dated February 18, 1999 is REVERSED and SET
ASIDE, and the Decision of the Metropolitan Trial Court dated June 18, 1998
is REINSTATED. No pronouncement as to costs.4

The dispositive portion of the reinstated 18 June 1998 Metropolitan Trial Court (MeTC) Decision is
as follows:

WHEREFORE, after a careful consideration of the foregoing evidence, the Court finds the
same to strongly preponderates (sic) in favor of the plaintiff and hereby orders defendant
Victoria Ong to pay plaintiff Ernesto Bognalbal the amount of THIRTY THOUSAND NINE
HUNDRED FIFTY PESOS (P30,950.00) representing the value of his accomplished work for
the period from March 4 to March 18, 1995, the amount of (P13,000.00) THIRTEEN
THOUSAND PESOS representing the value of his accomplished work on the kenzo flooring
 equivalent to 60% of the agreed fee of P25,000.00 minus the amount of P2,000.00 paid
under the third progress billing, the amount of FIFTEEN THOUSAND (P15,000.00) PESOS
as and for attorney's fees, the amount of TWENTY THOUSAND (P20,000.00) PESOS AS
MORAL damages and the amount of TWENTY-FIVE THOUSAND (P25,000.00) PESOS as
exemplary damages. Defendant is further ordered to pay the costs of this suit.

For lack of sufficient basis, the counterclaim of the defendant is hereby dismissed.5

On 22 May 2001, the Court of Appeals denied petitioner Ong's Motion for Reconsideration in the
assailed Resolution, a copy of which was received by petitioner, through counsel, on 11 June 2001.

In the instant Petition for Certiorari, filed on 10 August 2001, petitioner Ong alleges that:

THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF DISCRETION

AMOUNTING TO LACK OF JURISDICTION IN DENYING THE MOTION FOR
RECONSIDERATION AND IN RESOLVING THE ABOVE-ENTITLED CASE IN FAVOR OF
THE PRIVATE RESPONDENT.6

Propriety/Impropriety of Special Civil Action

for Certiorari under Rule 65

Petitioner claims that a special civil action for certiorari is proper since appeal by certiorari under
Rule 45 is limited only to questions of law. This is wrong. The writ of certiorari is proper to correct
errors of jurisdiction committed by the lower court, or grave abuse of discretion which is tantamount
to lack of jurisdiction. Where the error is not one of jurisdiction but an error of law or fact which is a
mistake of judgment, appeal is the remedy.7

It is true that, as a general rule, in the exercise of the Supreme Court's power of review, the Court is
not a trier of facts and does not normally undertake the re-examination of the evidence presented by
the contending parties during the trial of the case considering that the findings of facts of the Court of
Appeals are conclusive and binding on the Court. However, the Court had recognized several
exceptions to this rule, to wit: (1) when the findings are grounded entirely on speculation, surmises
or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts;
(5) when the findings of facts are conflicting; (6) when in making its findings the Court of Appeals
went beyond the issues of the case, or its findings are contrary to the admissions of both the
appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings
are conclusions without citation of specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondent; (10) when the findings of fact are premised on the supposed absence of evidence and
contradicted by the evidence on record; and (11) when the Court of Appeals manifestly overlooked
certain relevant facts not disputed by the parties, which, if properly considered, would justify a
different conclusion.8

If the allegedly erroneous findings of fact by the Court of Appeals amounts to grave abuse of
discretion amounting to lack of or excess of jurisdiction, the proper remedy would indeed be a
petition for certiorari under Rule 65. However, if the allegedly erroneous findings of fact constitute
only a mistake of judgment, the proper remedy is a petition for review on certiorari under Rule 45.
Since the petition filed in the case at bar is one under Rule 65, we would be constrained to dismiss
the same if we find a mere error of judgment.

Credibility of Architect Noel Cano

The contract between petitioner and respondent provides:

4.01 Progress Billing will commence 15 days after the Contractor receive[s] the notice to
proceed from the Owner.

4.02 Balance will be collected every 2-weeks, based on the accomplishment of work value
submitted by the contractor to the Owner and to be certified for payment by the architect
assigned on site.
 4.03 Final and full payment of the consideration herein above-mentioned shall be made by
the owner to the contractor upon fulfilling the condition set forth and approved by the
architect assigned on site.9

Pursuant thereto, the architect on site, Architect John Noel Cano, certified for payment four progress
billings, which petitioner Ong paid on the following dates10:

Partial Date Sent Covered Amount Part of Project Date of Date of Full
Progress Period Accomplished Partial Payment
Billing (contract Payment
price: P 200,000.00)
1st 28 January 19-28 P 35,950.00 17.975 % --- 6 February
1995 January 1995
2nd 15 February 29 January P 69,300.00 34.650 % 22 February 4 March
1995 to 15 1995 1995
February
3rd 8 March 16 February P 41,500.00 20.750 % 24 March 6 April 1995
1995 to 3 March 1995
4th 31 March 4-18 March P 30,950.00 15.475 % --- ---
1995
Total P 181,700.00 88.850 %

As earlier stated, this controversy arose with respect to the fourth partial billing. Petitioner Ong
claims that the fourth partial billing is not yet due and demandable, since only 60% of the work has
been accomplished. Petitioner Ong claims that Architect Cano's certification as to the
accomplishment of the work cannot be trusted, since Architect Cano was allegedly biased in favor of
respondent Bogñalbal.11

Petitioner Ong claims that "Arch. Cano was an associate of [respondent Bogñalbal] in his
construction business, and because of this, he was partial, biased and unprofessional about his
work."12 Petitioner Ong adds that work was conducted on the job site seven days a week, but
Architect Cano was present only twice or thrice a week, and therefore "[h]e was in no position to
determine whether or not [respondent Bogñalbal] performed as claimed."13

The afore-quoted Article 4.02 of the Owner-Contractor Agreement between petitioner Ong and
respondent Bogñalbal, which provides that the "[b]alance shall be collected every 2-weeks, based on
the accomplishment of work value submitted by the contractor to the Owner and to be certified for
payment by the architect on site,"14 makes the second paragraph of the following provision of the
Civil Code applicable:

Art. 1730. If it is agreed that the work shall be accomplished to the satisfaction of the
proprietor, it is understood that in case of disagreement the question shall be subject to
expert judgment.

If the work is subject to the approval of a third person, his decision shall be final, except in
case of fraud or manifest error.

The existence of fraud or manifest error, being an exception to the finality of the decision of a third
person under Article 1730, should be adequately proven by petitioner Ong.

Petitioner Ong, however, miserably failed to prove the same. Petitioner Ong's allegation that "the
certifications may have been purposely doctored or engineered in such a fashion as to unduly favor
[respondent Bogñalbal], in the desire of Architect Cano to return a favor or repay a debt of
gratitude"15 is a bare speculation that cannot be given any credence. It is utterly inappropriate for
petitioner Ong to paint Architect Cano as "biased, partial, and unprofessional" just because Architect
Cano's architectural firm, Balce-Sindac & Associates, was allegedly recommended to her by
respondent Bogñalbal. The fact remains that it was petitioner Ong and Balce-Sindac & Associates
which had privity of contract with each other, petitioner Ong having contracted with the latter firm for
its project architectural design and plan. Balce-Sindac & Associates, in turn, assigned Architect
Cano as supervising architect on site. The alleged recommendation by respondent Bogñalbal is
enormously inadequate to prove bad faith on the part of Architect Cano. Good faith is always
presumed.16 It is the one who alleges bad faith who has the burden to prove the same.17
Neither was petitioner able to prove manifest error on the part of Architect Cano. The presence of
Architect Cano only twice or thrice a week was not adequately proven to have made him
incompetent to determine the completion of the project. Determination of project completion requires
inspection of a product rather than a process. Besides, whereas Architect Cano provided a detailed
progress report that substantiate respondent Bogñalbal's allegation that 88.45% of the project had
been accomplished,18 petitioner Ong was not able to demonstrate her repeated claim that only 60%
of the project has been completed.19 Petitioner Ong alleged that the same was admitted by
respondent Bogñalbal in the pleadings filed with this Court,20 but we were unable to find any such
admission. It seems that petitioner Ong was referring to the Kenzo flooring, 60% of which
respondent claims to have finished.21

Time and again, this Court has ruled that the findings of the lower court respecting the credibility of
witnesses are accorded great weight and respect since it had the opportunity to observe the
demeanor of the witnesses as they testified before the court. Unless substantial facts and
circumstances have been overlooked or misunderstood by the latter which, if considered, would
materially affect the result of the case, this Court will undauntedly sustain the findings of the lower
court.22 In the case at bar, the credibility of Architect Cano was upheld by the MeTC, which had the
opportunity to observe Architect Cano's demeanor as he testified. Neither the Court of Appeals, nor
the RTC, questioned such credibility, the RTC having ruled in favor of petitioner Ong pursuant to an
interpretation of law.23

Alleged novation of the Owner-Contractor Agreement

Petitioner Ong also claims, as a defense against payment of the fourth progress billing, that "the only
reason why the fourth billing was not paid was because [respondent Bogñalbal] himself agreed and
committed to collect the fourth progress billing after he completed the Kenzo flooring."24 Petitioner
Ong claims that, because of this promise, her obligation to pay respondent Bogñalbal has not yet
become due and demandable.25

The Court of Appeals rejected this argument, ruling that respondent Bogñalbal's stoppage of work on
the project prior to its completion cannot justify petitioner Ong's refusal to pay the fourth progress
billing and the value of respondent Bogñalbal's accomplished work on the Kenzo flooring. On the
contrary, according to the Court of Appeals, respondent Bogñalbal was justified to refuse to continue
the project due to petitioner Ong's failure to pay the fourth progress billing.26 According to the Court
of Appeals:

Records reveal that [herein respondent Bogñalbal] submitted his fourth (4th) progress billing
for work accomplished on [herein petitioner Ong's] boutique for the period covering March 4
to 18, 1995 (Exh. "B", ibid.). Said billing was in accordance with the parties' agreement that it
will be collected every two (2) weeks, based on the accomplishment of work value submitted
by the contractor to the owner and certified for payment by the architect assigned on site
(Article 4.02, Owner-contractor Agreement; Exh. "A-1", p. 101, ibid.). However, [petitioner
Ong], immediately upon her receipt of said billing, refused to pay the same since it was
allegedly "in excess and over the value of the work accomplished during the period." This
was, in fact, part of the statement/findings of the facts of the lower court's decision (p. 2, RTC
Decision; p. 400, ibid.).

[Petitioner Ong], at the very outset, refused to pay the fourth (4th) billing despite actual work
accomplished on her botique which was certified by the architect on site, John Noel Cano, all
in accordance with the agreement of the parties. [Respondent Bogñalbal's] eventual
decision not to proceed anymore with the contract cannot be used as a reason to
justify [petitioner Ong's] refusal to pay her obligation. This notwithstanding the
parties' supposed verbal agreement that collection of said billing will be held on
abeyance until after [respondent Bogñalbal] finished the work on the kenzo flooring
which [petitioner Ong] requested to be changed from its original plan of vinyl tile
flooring. The proven fact is that there was work accomplished on [petitioner Ong's] boutique
equivalent to the bill being charged her in the fourth (4th) progress billing in accordance with
their contract. While the fourth (4th) billing covered the accomplished work therefor as
certified by the architect assigned on site, the agreement as to the kenzo flooring is subject
to another bill covered by the change order. (Emphasis supplied.)27

The Court of Appeals is in error. If the parties indeed had a verbal agreement that collection of said
billing will be held on abeyance until after respondent Bogñalbal finished the work on the Kenzo
flooring, there would have been a novation of petitioner Ong's obligation to pay the price covered by
the fourth billing by changing the principal conditions therefor. This falls under the first type of
novation under Article 1291 of the Civil Code which provides:

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.

While the subject of novation is, in the Civil Code, included in Book IV, Title I, Chapter 4, which
refers to extinguishment of obligations, the effect of novation may be partial or total. There is partial
novation when there is only a modification or change in some principal conditions of the obligation. It
is total, when the obligation is completely extinguished.28 Also, the term principal conditions in Article
1291 should be construed to include a change in the period to comply with the obligation. Such a
change in the period would only be a partial novation, since the period merely affects the
performance, not the creation of the obligation.29

If petitioner Ong's allegation was true, then the fourth partial billing's principal condition -- that the
"(b)alance shall be collected every 2-weeks, based on the accomplishment of work value submitted
by the contractor to the Owner and to be certified for payment by the architect assigned on site"30 –
would have been modified to include another condition, that of the finishing of the Kenzo flooring by
respondent Bogñalbal.

As previously discussed, the Court of Appeals did not bother to review the evidence on petitioner
Ong's allegation of respondent Bogñalbal's promise to finish the Kenzo flooring before the fourth
progress billing shall be paid. The Court of Appeals instead brushed off the contention with its
explanation that "[respondent Bogñalbal's] eventual decision not to proceed anymore with the
contract cannot be used as a reason to justify [petitioner Ong's] refusal to pay her obligation, x x x
notwithstanding the parties' supposed verbal agreement that collection of said billing will be held on
abeyance until after [respondent Bogñalbal] finished the work on the kenzo flooring which [petitioner
Ong] requested to be changed from its original plan of vinyl tile flooring."

Novation is never presumed. Unless it is clearly shown either by express agreement of the parties or
by acts of equivalent import, this defense will never be allowed.31

The evidence preponderates in favor of respondent Bogñalbal that there had been no novation of
the contract. At best, what was proven was a grudging accommodation on the part of respondent
Bogñalbal to continue working on the project despite petitioner Ong's failure to pay the fourth
progress billing. Respondent Bogñalbal's fourth partial billing demand letters dated 21 April 1995 and
15 May 1995, both of which were served upon petitioner Ong after the alleged 20 April 1995
meeting,32 is inconsistent with the theory that the meeting had produced a novation of the petitioner
Ong's obligation to pay the subject billing.

More importantly, assuming that there was indeed a novation of the obligation of petitioner Ong to
pay the fourth billing so as to include as additional condition the completion of the Kenzo flooring,
such new condition would, nevertheless, be deemed fulfilled. This is pursuant to Article 1186 of the
Civil Code, which provides:

Article 1186. The condition shall be deemed fulfilled when the obligor voluntarily prevents its
fulfillment.

According to petitioner Ong herself:

Petitioner sent [respondent Bogñalbal] letters demanding that he should return to the jobsite
with his people and comply with his commitment. When the demand letters were ignored,
petitioner was constrained to hire the services of another contractor, for which she had to
unnecessarily incur expenses in the amount of P78,000.00. But just the same, the
completion of the project was delayed for eighty two (82) days, which also caused petitioner
additional damages.33
The Civil Code indeed provides that, "(i)f 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 be
undone."34 There is no question, however, that such allegation constitutes an admission that
Petitioner Ong had voluntarily prevented the fulfillment of the condition which should have given rise
to her obligation to pay the amount of the fourth billing. Respondent Bogñalbal would no longer have
the opportunity to finish the Kenzo flooring if another contractor had already finished the same. Such
condition would, hence, be deemed fulfilled under Article 1186 of the Civil Code, and, therefore,
petitioner Ong's obligation to pay the amount of the fourth billing has been converted to a pure
obligation.

Authority of respondent Bogñalbal to abandon work

This Court has held that, even if respondent Bogñalbal unjustifiably withdrew from the project,
petitioner Ong's obligation is nevertheless due and demandable because of the third-party
certification by Architect Cano on the completion of the fourth project billing as required by their
contract. This Court has also held that petitioner Ong has not sufficiently proven the alleged contract
novation adding a new condition for her payment of the fourth progress billing.

The following arguments of petitioner Ong are already inconsequential as to whether she should be
held liable for the fourth billing: (1) that the power to resolve contracts under Article 119135 of the
Civil Code cannot be invoked extrajudicially in the absence of stipulation to the contrary;36 (2) that
petitioner never rushed respondent Bogñalbal to complete the Kenzo flooring in three days;37 (3) and
that respondent Bogñalbal failed to complete the Kenzo flooring on time because of his
incompetence.38 All these arguments merely amplify petitioner Ong's primary contention that
respondent Bogñalbal was not justified in abandoning the project.39

The issue of whether or not respondent Bogñalbal is justified in abandoning the project is relevant to
the resolution of petitioner Ong's counterclaim against respondent Bogñalbal.

The Court rules in favor of petitioner Ong on this score. There is nothing in the record which would
justify respondent Bogñalbal's act of abandoning the project.

However, contrary to the finding of the RTC, Article 1724 is inapplicable to this case. Article 1724
provides:

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 nor 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 has been determined in writing by both
parties.

According to the RTC, the exception in Article 1724 (change in plans and specifications authorized
by the proprietor in writing, and the additional price therefor being determined by the proprietor in
writing) applies only with respect to the prohibition to "demand an increase in the price on account of
the higher cost of labor or materials" and not with respect to the prohibition to "withdraw from the
contract." There is therefore no exception allowed by law insofar as withdrawal from the contract is
concerned, and, hence, respondent Bogñalbal cannot claim the change order as a justification for
his abandonment of the project. 40

This is incorrect. According to this Court in Arenas v. Court of Appeals,41 Article 1724 contemplates
disputes arising from increased costs of labor and materials. Article 1724 should, therefore, be read
as to prohibit a contractor from perpetrating two acts: (1) withdrawing from the contract on account of
the higher cost of the labor or materials; and (2) demanding an increase in the price on account of
the higher cost of the labor or materials.42 This focus on disputes arising from increased cost of labor
and materials is even more evident when the origin of Article 1754 is reviewed. Article 1754 of the
1950 Civil Code is based on Article 159343 of the Spanish Civil Code, which states:
 Art. 1593. An architect or contractor who, for a lump sum, undertakes the construction of a
building, or any other work to be done in accordance with a plan agreed upon with the owner
of the ground, may not demand an increase of the price, even if the cost of the materials or
labor has increased; but he may do so when any change increasing the work is made in the
plans, provided the owner has given his consent thereto.

Article 1593 of the Spanish Civil Code did not contain a similar prohibition against abandonment,
and was entirely focused on its apparent objective to providing an exception to the rule that a
contracting party cannot unilaterally amend (by increasing the contract price) the contract despite
supervening circumstances.

Neither party is claiming that the abandonment arose from increased costs of labor and materials.
Petitioner Ong claims that respondent Bogñalbal failed to complete the Kenzo flooring on time
because of his incompetence.44 Respondent Bogñalbal claims, on the other hand, that he
abandoned the work because of petitioner Ong's continuing refusal to pay the fourth progress billing
in violation of their contract.45 Since the dispute has nothing to do with increased costs of labor and
materials, Article 1724 is not applicable.46

Thus, it is the general rules on contracts which are applicable. Expounding on the argument by
respondent Bogñalbal, the Court of Appeals held:

It should be noted that the power to rescind obligations is implied in reciprocal ones, in case
one of the obligors should not comply with what is incumbent upon him (par. 1, Art. 1191,
Civil Code).

[Herein petitioner Ong's] breach of contract was her failure to pay what she was legally
bound to pay under her contract with [respondent Bogñalbal]. Payment, being the very
consideration of the contract, is certainly not a mere casual or slight breach but a very
substantial and fundamental breach as to defeat the object of the parties making the
agreement, due to which rescission of the contract may be had (Ang vs. Court of Appeals,
170 SCRA 286, 296). [Petitioner Ong's] contention that [respondent Bogñalbal] should have
had more capital to absorb a little delay in her payment is not quite tenable (TSN, June 21
1996; p. 7).47

This Court, however, has held in Tan v. Court of Appeals,48 that:

[T]he power to rescind obligations is implied in reciprocal ones in case one of the obligors
should not comply with what is incumbent upon him x x x. However, it is equally settled that,
in the absence of a stipulation to the contrary, this power must be invoked judicially; it
cannot be exercised solely on a party's own judgment that the other has committed a
breach of the obligation. Where there is nothing in the contract empowering [a party]
to rescind it without resort to the courts, [such party's] action in unilaterally
terminating the contract x x x is unjustified.

In the case at bar, there is nothing in the Owner-Contractor Agreement empowering either party to
rescind it without resort to the courts. Hence, respondent Bogñalbal's unilateral termination the
contract without a court action is unjustified.

Petitioner Ong's Counterclaim

Since respondent Bogñalbal is unjustified in abandoning the project, should this Court award
damages to petitioner Ong? Considering that both parties committed a breach of their respective
obligations, Article 1192 of the Civil Code is on all fours:

Art. 1192. In case both parties have committed a breach of the obligation, the liability of the
first infractor shall be equitably tempered by the courts. If it cannot be determined which of
the parties first violated the contract, the same shall be deemed extinguished, and each shall
bear his own damages.

Under this provision, the second infractor is not liable for damages at all;49 the damages for the
second breach, which would have been payable by the second infractor to the first infractor, being
compensated instead by the mitigation of the first infractor's liability for damages arising from his
earlier breach. The first infractor, on the other hand, is liable for damages, but the same shall be
equitably tempered by the courts, since the second infractor also derived or thought he would derive
some advantage by his own act or neglect.50 Article 2215, however, seems contradictory, as it gives
the court the option whether or not to equitably mitigate the damages, and does not take into
account which infractor first committed breach:

Art. 2215. In contracts, quasi-contracts, and quasi-delicts, the court may equitably mitigate
the damages under circumstances other than the case referred to in the preceding
article,51 as in the following instances:

(1) That the plaintiff himself has contravened the terms of the contract; x x x

It is a cardinal principle that a statute must be so construed as to harmonize all apparent conflicts,
and give effect to all its provisions whenever possible.52

Articles 1192 and 2215 of the Civil Code are not irreconcilably conflicting. The plaintiff referred to in
Article 2215(1) should be deemed to be the second infractor, while the one whose liability for
damages may be mitigated is the first infractor. Furthermore, the directions to equitably temper the
liability of the first infractor in Articles 1192 and 2215 are both subject to the discretion of the court,
despite the word "shall" in Article 1192, in the sense that it is for the courts to decide what is
equitable under the circumstances.

In the case at bar, both respondent Bogñalbal and petitioner Ong claim that it was the other party
who first committed a breach of contractual obligations.53 Considering this Court's finding that there
had been no contract novation requiring respondent Bogñalbal to finish the Kenzo flooring before the
fourth progress billing shall be paid, it is crystal clear that it was petitioner Ong who first violated the
contract. As such, it is petitioner Ong who is liable to pay damages, which may, however, be
reduced, depending on what is equitable under the circumstances. On the other hand, since
respondent Bogñalbal is the second infractor, he is not liable for damages in petitioner Ong's
counterclaim.

Care must, however, be judiciously taken when applying Article 1192 of the Civil Code to contracts
such as this where there has been partial performance on the part of either or both reciprocal
obligors. Article 1192, in making the first infractor liable for mitigated damages and in exempting the
second infractor from liability for damages, presupposes that the contracting parties are on equal
footing with respect to their reciprocal principal obligations. Actual damages representing
deficiencies in the performance of the principal obligation should be taken out of the equation.54

In the case at bar, the partial performance of respondent Bogñalbal (88.85%55 of the original contract
and 60% of the Kenzo flooring) is more than the partial payment of petitioner Ong (73.375%56 of the
original contract and 0% of the Kenzo flooring).

For reference, the MeTC Decision, which was reinstated by the Court of Appeals, awarded the
following to respondent Bogñalbal:

Value of accomplished work on the original contract P 30,950.00

for the period 4 to 18 March 1995:
Value of accomplished work on the Kenzo flooring P 13,000.00
(60% of the agreed fee of P 25,000, minus P2,000
paid under the third progress billing)
Moral damages P 20,000.00
Exemplary damages P 25,000.00
TOTAL P 88,950.00

Petitioner Ong should first be obliged to pay the value of the accomplished work (P30,950.00
and P13,000.00), before the damage scheme under Article 1192 of the Civil Code is applied.
Therefore, this Court would have been limited to determining how much of the moral and exemplary
damages, for which petitioner Ong is liable, may be mitigated by the amount of damages caused by
respondent Bogñalbal, as provided under Article 1192.

As earlier discussed, however, this mitigation is subject to the discretion of the court, depending on
what is equitable under the circumstances. It would have been within this Court's power to mitigate
the moral and exemplary damages for which petitioner Ong is liable if she had only filed an ordinary
appeal under Rule 45 of the Rules of Court. It would be an exaggeration to consider such non-
mitigation by the Court of Appeals as grave abuse of discretion leading to lack of or excess of
jurisdiction, which would have been reviewable by this Court in a certiorari proceeding under Rule
65.57 Grave abuse of discretion implies a capricious and whimsical exercise of judgment as is
equivalent to lack of jurisdiction, or, when the power is exercised in an arbitrary or despotic manner
by reason of passion or personal hostility, and it must be so patent and gross as to amount to an
evasion of positive duty enjoined or to act at all in contemplation of law.58 Mere abuse of discretion is
not enough -- it must be grave.59

All of the foregoing shows that while there had been some errors of law on the part of the Court of
Appeals, the Petition would still fail even if it were a Petition for Review under Rule 45. With more
reason is this Court constrained to dismiss a Petition for Certiorari under Rule 65, which requires not
a mere error in judgment, but a grave abuse of discretion amounting to lack of or excess of
jurisdiction.

Finally, this Court notices that the prayer in the instant Petition for Certiorari only seeks to nullify the
Resolution of the Court of Appeals on petitioner Ong's Motion for Reconsideration, without praying
for the nullification of the Decision itself sought to be reconsidered. The reason seems to be the fact
that petitioner Ong, through counsel, received the Decision more than sixty days prior to the filing of
the Petition. A Petition seeking to nullify such Decision was, thus, perceived to be violative of Section
4, Rule 65 of the 1997 Rules of Civil Procedure, which originally provides:

SEC. 4. Where petition filed. – The petition may be filed not later than sixty (60) days from
notice of the judgment, order or resolution sought to be assailed in the Supreme Court or, if it
relates to the acts or omissions of a lower court or of a corporation, board, officer or person,
in the Regional Trial Court exercising jurisdiction over the territorial area as defined by the
Supreme Court. It may also be filed in the Court of Appeals whether or not the same is in aid
of its appellate jurisdiction, x x x.

Section 4, Rule 65 was, however, amended on 1 September 2000, several months before the filing
of this Petition, to insert the following provision:

In case a motion for reconsideration or new trial is timely filed, whether such motion is
required or not, the sixty (60) day period shall be counted from notice of the denial of said
motion.

This insertion gives petitioner Ong a fresh 60-day period to assail the Decision via a Petition
for Certiorari, which is what this Petition really seeks and which is how this Court has treated the
same.

WHEREFORE, the Decision of the Court of Appeals reinstating the Decision of the Metropolitan Trial
Court holding petitioner Victoria Ong liable for damages is affirmed. The instant Petition
for Certiorari is hereby DISMISSED for lack of merit. Costs against petitioner.

SO ORDERED.

Panganiban, C.J., Chairperson, Ynares-Santiago, Austria-Martinez, Callejo, Sr., J.J., concur.

G.R. No. L-15645 January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,

vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.

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.

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.
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., Plaintiffs-Appellees, 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.

Yap (Chairman), Paras and Sarmiento, JJ., concur.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in
actions for breach of contract, as in this case, where the breach has been wanton and reckless,
tantamount to bad faith.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in
actions for breach of contract, as in this case, where the breach has been wanton and reckless,
tantamount to bad faith.

Footnotes

* Penned by Justice Serafin E. Camilon, with the concurrence of Justices Crisolito

Pascual, Jose C. Campos, Jr. and Desiderio P. Jurado.

1 Rollo at 8.

2 Rollo at 9-10.

3 Rollo at 14,

4 Rollo at 13.
G.R. No. 117190 January 2, 1997

JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND
GENERAL MERCHANDISING, petitioner,
vs.
COURT OF APPEALS and VICENTE HERCE JR., respondents.

BELLOSILLO, J.:

This case involves the proper interpretation of the contract entered into between the parties.

Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style
J.M.T. Engineering and General Merchandising proposed to respondent Vicente Herce Jr. to
construct a windmill system for him. After some negotiations they agreed on the construction of the
windmill for a consideration of P60,000.00 with a one-year guaranty from the date of completion and
acceptance by respondent Herce Jr. of the project. Pursuant to the agreement respondent paid
petitioner a down payment of P30,000.00 and an installment payment of P15,000.00, leaving a
balance of P15,000.00.

On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a
complaint to collect the amount. In his Answer before the trial court respondent denied the claim
saying that he had already paid this amount to the San Pedro General Merchandising Inc. (SPGMI)
which constructed the deep well to which the windmill system was to be connected. According to
respondent, since the deep well formed part of the system the payment he tendered to SPGMI
should be credited to his account by petitioner. Moreover, assuming that he owed petitioner a
balance of P15,000.00, this should be offset by the defects in the windmill system which caused the
structure to collapse after a strong wind hit their place.1

Petitioner denied that the construction of a deep well was included in the agreement to build the
windmill system, for the contract price of P60,000.00 was solely for the windmill assembly and its
installation, exclusive of other incidental materials needed for the project. He also disowned any
obligation to repair or reconstruct the system and insisted that he delivered it in good and working
condition to respondent who accepted the same without protest. Besides, its collapse was
attributable to a typhoon, a force majeure, which relieved him of any liability.

In finding for plaintiff, the trial court held that the construction of the deep well was not part of the
windmill project as evidenced clearly by the letter proposals submitted by petitioner to respondent.2 It
noted that "[i]f the intention of the parties is to include the construction of the deep well in the project,
the same should be stated in the proposals. In the absence of such an agreement, it could be safely
concluded that the construction of the deep well is not a part of the project undertaken by the
plaintiff."3 With respect to the repair of the windmill, the trial court found that "there is no clear and
convincing proof that the windmill system fell down due to the defect of the construction."4

The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was
included in the agreement of the parties because the term "deep well" was mentioned in both
proposals. It also gave credence to the testimony of respondent's witness Guillermo Pili, the
proprietor of SPGMI which installed the deep well, that petitioner Tanguilig told him that the cost of
constructing the deep well would be deducted from the contract price of P60,000.00. Upon these
premises the appellate court concluded that respondent's payment of P15,000.00 to SPGMI should
be applied to his remaining balance with petitioner thus effectively extinguishing his contractual
obligation. However, it rejected petitioner's claim of force majeure and ordered the latter to
reconstruct the windmill in accordance with the stipulated one-year guaranty.

His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks
relief from this Court. He raises two issues: firstly, whether the agreement to construct the windmill
system included the installation of a deep well and, secondly, whether petitioner is under obligation
to reconstruct the windmill after it collapsed.

We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the installation of a deep
well was not included in the proposals of petitioner to construct a windmill system for respondent.
There were in fact two (2) proposals: one dated 19 May 1987 which pegged the contract price at
P87,000.00 (Exh. "1"). This was rejected by respondent. The other was submitted three days
later, i.e., on 22 May 1987 which contained more specifications but proposed a lower contract price
of P60,000.00 (Exh. "A"). The latter proposal was accepted by respondent and the construction
immediately followed. The pertinent portions of the first letter-proposal (Exh. "1") are reproduced
hereunder —

In connection with your Windmill System and Installation, we would like to quote to you as
follows:

One (1) Set — Windmill suitable for 2 inches diameter deepwell, 2 HP,
capacity, 14 feet in diameter, with 20 pieces blade, Tower 40 feet high,
including mechanism which is not advisable to operate during extra-intensity
wind. Excluding cylinder pump.

UNIT CONTRACT PRICE

P87,000.00

The second letter-proposal (Exh. "A") provides as follows:

In connection with your Windmill system, Supply of Labor Materials and Installation, operated
water pump, we would like to quote to you as
follows —

One (1) set — Windmill assembly for 2 inches or 3 inches deep-well pump, 6
Stroke, 14 feet diameter, 1-lot blade materials, 40 feet Tower complete with
standard appurtenances up to Cylinder pump, shafting U.S. adjustable
International Metal.

One (1) lot — Angle bar, G.I. pipe, Reducer Coupling, Elbow Gate valve,
cross Tee coupling.

One (1) lot — Float valve.

One (1) lot — Concreting materials foundation.

F. O. B. Laguna
Contract Price P60,000.00

Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely.
Neither is there an itemization or description of the materials to be used in constructing the deep
well. There is absolutely no mention in the two (2) documents that a deep well pump is a component
of the proposed windmill system. The contract prices fixed in both proposals cover only the features
specifically described therein and no other. While the words "deep well" and "deep well pump" are
mentioned in both, these do not indicate that a deep well is part of the windmill system. They merely
describe the type of deep well pump for which the proposed windmill would be suitable. As correctly
pointed out by petitioner, the words "deep well" preceded by the prepositions "for" and "suitable for"
were meant only to convey the idea that the proposed windmill would be appropriate for a deep well
pump with a diameter of 2 to 3 inches. For if the real intent of petitioner was to include a deep well in
the agreement to construct a windmill, he would have used instead the conjunctions "and" or "with."
Since the terms of the instruments are clear and leave no doubt as to their meaning they should not
be disturbed.

Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall
be accorded primordial consideration5 and, in case
of doubt, their contemporaneous and subsequent acts shall be principally considered.6 An
examination of such contemporaneous and subsequent acts of respondent as well as the attendant
circumstances does not persuade us to uphold him.

Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the
installation of a deep well pump. He contends that since petitioner did not have the capacity to install
the pump the latter agreed to have a third party do the work the cost of which was to be deducted
from the contract price. To prove his point, he presented Guillermo Pili of SPGMI who declared that
petitioner Tanguilig approached him with a letter from respondent Herce Jr. asking him to build a
deep well pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig."7

We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a
letter is unsubstantiated. The alleged letter was never presented in court by private respondent for
reasons known only to him. But granting that this written communication existed, it could not have
simply contained a request for Pili to install a deep well; it would have also mentioned the party who
would pay for the undertaking. It strains credulity that respondent would keep silent on this matter
and leave it all to petitioner Tanguilig to verbally convey to Pili that the deep well was part of the
windmill construction and that its payment would come from the contract price of P60,000.00.

We find it also unusual that Pili would readily consent to build a deep well the payment for which
would come supposedly from the windmill contract price on the mere representation of petitioner,
whom he had never met before, without a written commitment at least from the former. For if indeed
the deep well were part of the windmill project, the contract for its installation would have been
strictly a matter between petitioner and Pili himself with the former assuming the obligation to pay
the price. That it was respondent Herce Jr. himself who paid for the deep well by handing over to Pili
the amount of P15,000.00 clearly indicates that the contract for the deep well was not part of the
windmill project but a separate agreement between respondent and Pili. Besides, if the price of
P60,000.00 included the deep well, the obligation of respondent was to pay the entire amount to
petitioner without prejudice to any action that Guillermo Pili or SPGMI may take, if any, against the
latter. Significantly, when asked why he tendered payment directly to Pili and not to petitioner,
respondent explained, rather lamely, that he did it "because he has (sic) the money, so (he) just paid
the money in his possession."8

Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is
clear that "payment shall be made to the person in whose favor the obligation has been constituted,
or his successor in interest, or any person authorized to receive it,"9 it does not appear from the
record that Pili and/or SPGMI was so authorized.

Respondent cannot claim the benefit of the law concerning "payments made by a third person." 10 The
Civil Code provisions do not apply in the instant case because no creditor-debtor relationship
between petitioner and Guillermo Pili and/or SPGMI has been established regarding the construction
of the deep well. Specifically, witness Pili did not testify that he entered into a contract with petitioner
for the construction of respondent's deep well. If SPGMI was really commissioned by petitioner to
construct the deep well, an agreement particularly to this effect should have been entered into.

The contemporaneous and subsequent acts of the parties concerned effectively belie
respondent's assertions. These circumstances only show that the construction of the well by
SPGMI was for the sole account of respondent and that petitioner merely supervised the
installation of the well because the windmill was to be connected to it. There is no legal nor
factual basis by which this Court can impose upon petitioner an obligation he did not
expressly assume nor ratify.

The second issue is not a novel one. In a long line of cases 11 this Court has consistently held
that in order for a party to claim exemption from liability by reason of fortuitous event under
Art. 1174 of the Civil Code the event should be the sole and proximate cause of the loss or
destruction of the object of the contract. In Nakpil vs. Court of Appeals,12 four (4) requisites
must concur: (a) the cause of the breach of the obligation must be independent of the will of
the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be
such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and,
(d) the debtor must be free from any participation in or aggravation of the injury to the
creditor.

Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event.
Interestingly, the evidence does not disclose that there was actually a typhoon on the day the
windmill collapsed. Petitioner merely stated that there was a "strong wind." But a strong wind
in this case cannot be fortuitous — unforeseeable nor unavoidable. On the contrary, a strong
wind should be present in places where windmills are constructed, otherwise the windmills
will not turn.
The appellate court correctly observed that "given the newly-constructed windmill system,
the same would not have collapsed had there been no inherent defect in it which could only
be attributable to the appellee."13 It emphasized that respondent had in his favor the
presumption that "things have happened according to the ordinary course of nature and the
ordinary habits of life."14 This presumption has not been rebutted by petitioner.

Finally, petitioner's argument that private respondent was already in default in the payment
of his outstanding balance of P15,000.00 and hence should bear his own loss, is untenable.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not
ready to comply in a proper manner with what is incumbent upon him.15 When the windmill
failed to function properly it became incumbent upon petitioner to institute the proper repairs
in accordance with the guaranty stated in the contract. Thus, respondent cannot be said to
have incurred in delay; instead, it is petitioner who should bear the expenses for the
reconstruction of the windmill. Article 1167 of the Civil Code is explicit on this point that if a
person obliged to do something fails to do it, the same shall be executed at his cost.

WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is

directed to pay petitioner JACINTO M. TANGUILIG the balance of P15,000.00 with interest
at the legal rate from the date of the filing of the complaint. In return, petitioner is ordered to
"reconstruct subject defective windmill system, in accordance with the one-year
guaranty"16 and to complete the same within three (3) months from the finality of this
decision.

SO ORDERED.

Padilla, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.

G.R. No. 133107 March 25, 1999

RIZAL COMMERCIAL BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS and FELIPE LUSTRE, respondents.

KAPUNAN, J.:

A simple telephone call and an ounce of good faith on the part of petitioner could have prevented the
present controversy.

On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota
Shaw, Inc. for which he made a down payment of P164,620.00, the balance of the purchase price to
be paid in 24 equal monthly installments. Private respondent thus issued 24 postdated checks for
the amount of P14,976.00 each. The first was dated April 10, 1991; subsequent checks were dated
every 10th day of each succeeding month.

To secure the balance, private respondent executed a promissory note 1 and a contract of chattel
mortgage 2 over the vehicle in favor of Toyota Shaw, Inc. The contract of chattel mortgage, in
paragraph 11 thereof, provided for an acceleration clause stating that should the mortgagor default
in the payment of any installment, the whole amount remaining unpaid shall become due. In
addition, the mortgagor shall be liable for 25% of the principal due as liquidated damages.

On March 14, 1991, Toyota Shaw, Inc. assigned all its rights and interests in the chattel mortgage to
petitioner Rizal Commercial Banking Corporation (RCBC).

All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by
RCBC from private respondent's account, except for RCBC Check No. 279805 representing the
payment for August 10, 1991, which was unsigned. Previously, the amount represented by RCBC
Check No. 279805 was debited from private respondent's account but was later recalled and re-
credited, to him. Because of the recall, the last two checks, dated February 10, 1993 and March 10,
1993, were no longer presented for payment. This was purportedly in conformity with petitioner
bank's procedure that once a client's account was forwarded to its account representative, all
remaining checks outstanding as of the date the account was forwarded were no longer presented
for patent.

On the theory that respondent defaulted in his payments, the check representing the payment for
August 10, 1991 being unsigned, petitioner, in a letter dated January 21, 1993, demanded from
private respondent the payment of the balance of the debt, including liquidated damages. The latter
refused, prompting petitioner to file an action for replevin and damages before the Pasay City
Regional Trial Court (RTC). Private respondent, in his Answer, interposed a counterclaim for
damages.

After trial, the. RTC 3 rendered a decision disposing of the case as follows:

WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:

I. The complaint; for lack of cause of action, is hereby DISMISSED and plaintiff
RCBC is hereby ordered,

A. To accept the payment equivalent to the three

checks amounting to a total of P44,938.00, without
interest.

B. To release/cancel the mortgage on the car . . .

upon payment of the amount of P44,938.00, without
interest.

C. To pay the cost of suit.

II. On The Counterclaim.

 A. Plaintiff RCBC to pay Atty. Lustre the amount of
P200,000.00 as moral damages.

B. RCBC to pay P100,000.00 as exemplary damages.

C. RCBC to pay Atty. Obispo P50,000.00 as

Attorney's fees. Atty. Lustre is not entitled to any fee
for lawyering for himself.

All awards for damages are subject to payment of fees to be

assessed by the Clerk of Court, RTC, Pasay City.

SO ORDERED.

On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:

We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a
contract of adhesion — that is, one wherein a party, usually a corporation, prepares
the stipulations in the contract, while the other party merely affixes his signature or
his "adhesion" thereto . . . — is to be strictly construed against appellant bank which
prepared the form Contract . . . Hence . . . paragraph 11 of the Chattel Mortgage
contract [containing the acceleration clause] should be construed to cover only
deliberate and advertent failure on the part of the mortgagor to pay an amortization
as it became due in line with the consistent holding of the Supreme Court construing
obscurities and ambiguities in the restrictive sense against the drafter thereof . . . in
the light of Article 1377 of the Civil Code.

In the case at bench, plaintiff-appellant's imputation of default to defendant-appellee

rested solely on the fact that the 5th check issued by appellee . . . was recalled for
lack of signature. However, the check was recalled only after the amount covered
thereby had been deducted from defendant-appellee's account, as shown by the
testimony of plaintiff's own witness Francisco Bulatao who was in charge of the
preparation of the list and trial balances of bank customers ........ The "default" was
therefore not a case of failure to pay, the check being sufficiently funded, and which
amount was in fact already debited [sic] from appellee's account by the appellant
bank which subsequently re-credited the amount to defendant-appelle's account for
lack of signature. All these actions RCBC did on its own without notifying defendant
until sixteen (16) months later when it wrote its demand letter dated January 21,
1993.

Clearly, appellant bank was remiss in the performance, of its functions for it could
have easily called the defendant's attention to the lack of signature on the check and
sent the check to or summoned, the latter to affix his signature. It is also to be noted
that the demand letter contains no explanation as to how defendant-appellee
incurred arrearages in the amount of P66,255.70, which is why defendant-appellee
made a protest notation thereon.

Notably, all the other checks issued by the appellee dated subsequent to August 10,
1991 and dated earlier than the demand letter, were duly encashed. This fact should
have already prompted the appellant bank to review its action relative to the
unsigned check ....... 4

We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil
Code, which states:

The interpretation of obscure words or stipulations in a contract shall

not favor the party who caused the obscurity.

It bears stressing that a contract of adhesion is just as binding as ordinary contracts. 5 It is true that
we have, on occasion, struck down such contracts as void when the weaker party is imposed upon
in dealing with the dominant bargaining party and is reduced to the alternative of taking it or leaving
it, completely deprived of the opportunity to bargain on equal footing. 6 Nevertheless, contracts of
adhesion are not invalid per se; 7 they are not entirely prohibited. 8 The one who adheres to the
contract is in reality free to reject it entirely; if he adheres, he gives his consent. 9

While ambiguities in a contract of adhesion are to be construed against the party that prepared the
same, 10 this rule applies only if the stipulations in such contract are obscure or ambiguous. If the
terms thereof are clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulations shall control. 11 In the latter case, there would be no need for
construction. 12

Here, the terms of paragraph 11 of the Chattel Mortgage Contract 13 are clear. Said paragraph states:

11. In case the MORTGAGOR fails to pay any of the installments, or to pay the
interest that may be due as provided in the said promissory note, the whole amount
remaining unpaid therein shall immediately become due and payable and the
mortgage on the property (ies) herein-above described may be foreclosed by the
MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce
collection of the obligation hereby secured, and in either case the MORTGAGOR
further agrees to pay the MORTGAGEE an additional sum of 25% of the principal
due and unpaid, as liquidated damages, which said sum shall become part thereof.
The MORTGAGOR hereby waives reimbursement of the amount heretofore paid by
him/it to the MORTGAGEE.

The above terms leave no room for construction. All that is required is the application thereof.

Petitioner claims that private respondent's check representing the fifth installment was "not
encashed," 14 such that the installment for August 1991 was not paid. By virtue of paragraph 11
above, petitioner submits that it "was justified in treating the entire balance of the obligation as due
and
demandable." 15 Despite demand by petitioner, however, private respondent refused to pay the
balance of the debt. Petitioner, in sum imputes delay on the part of private respondent.

We do not subscribe to petitioner's theory.

Art. 170 of the Civil Code states that those who in the performance of their obligations are guilty of
delay are liable for damages. The delay in the performance of the obligation, however, must be
either malicious or negligent.16 Thus, assuming that private respondent was guilty of delay in the
payment of the value of unsigned check, private respondent cannot be held liable for damages.
There is no imputation, much less evidence, that private respondent acted with malice or negligence
in failing to sign the check. Indeed, we agree with the Court of Appeals finding that such omission
was mere "in advertence" on the part of private respondent. Toyota salesperson Jorge Geronimo
testified that he even verified whether private respondent had signed all the checks and in fact
returned three or four unsigned checks to him for signing:

Atty. Obispo:

After these receipts were issued, what else did you do about the
transaction?

A: During our transaction with Atty. Lustre, I found out when he

issued to me the 24 checks, I found out 3 to 4 checks are unsigned
and I asked him to signed these checks.

Atty. Obispo:

What did you do?

A: I asked him to sign the checks. After signing the checks, I

reviewed again all the documents, after I reviewed all the documents
and found out that all are completed and the down payments was
completed, we realed to him the car. 17

Even when the checks were delivered to petitioner, it did not object to the unsigned check. In
view of the lack of malice or negligence on the part of private respondent, petitioner's blind
 and mechanical invocation of paragraph 11 of the contract of chattel mortgage was
unwarranted.

Petitioner's conduct, in the light of the circumstances of this case, can only be described as
mercenary. Petitioner had already debited the value of the unsigned check from private respondent's
account only to re-credit it much later to him. Thereafter, petitioner encashed checks subsequently
dated, then abruptly refused to encash the last two. More than a year after the date of the unsigned
check, petitioner, claiming delay and invoking paragraph 11, demanded from private respondent
payment of the value of said check and that of the last two checks, including liquidated damages. As
pointed out by the trial court, this whole controversy could have been avoided if only petitioner
bothered to call up private respondent and ask him to sign the check. Good faith not only in
compliance with its contractual obligations, 18 but also in observance of the standard in human
relations, for every person "to act with justice, give everyone his due, and observe honesty and good
faith." 19 behooved the bank to do so.

Failing thus, petitioner is liable for damages caused to private respondent. 20 These include moral
damages for the mental anguish, serious anxiety, besmirched reputation, wounded feelings and
social humiliation suffered by the latter. 21 The trial court found that private respondent was:

[a] client who has shared transactions for over twenty years with a bank....... The
shabby treatment given the defendant is unpardonable since he was put to shame
and embarrassment after the case was filed in Court. He is a lawyer in his own right,
married to another member of the bar. He sired children who are all professionals in
their chosen field. He is known to the community of golfers with whom he gravitates.
Surely the filing of the case made defendant feel so bad and bothered.

To deter others from emulating petitioner's callous example, we affirm the award of exemplary
damages. 22 As exemplary damages are warranted, so are attorney's fees. 23

We, however, find excessive the amount of damages awarded by the trial court in favor of private
respondent with respect to his counterclaims and, accordingly, reduce the same as follows:

(a) Moral damages — from P200,000.00 to P100,000.00

(b) Exemplary damages — from P100,000.00 to P75,000.00

(c) Attorney's fees — from P50,000.00 to P 30,000.00

WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Davide, Jr., C.J., Melo and Pardo, JJ., concur.

G.R. No. 129760 December 29, 1998

RICARDO CHENG, petitioner,

vs.
RAMON B. GENATO and ERNESTO R. DA JOSE & SOCORRO DA JOSE, respondents.

MARTINEZ, J.:

This petition for review on certiorari seeks to annul and set aside the Decision of the Court of
Appeals (CA) 1 dated July 7, 1997 in CA-G.R. No. CV No. 44706 entitled "Ricardo Cheng,
plaintiff-appellee vs. Ramon B. Genato, defendant-appellant, Ernesto R. Da Jose & Socorro B.
Da Jose, Intervenors-Appellants" which reversed the ruling of the Regional Trial Court,
Branch 96 of Quezon City dated January 18, 1994. The dispositive portion of the CA Decision
reads:

WHEREFORE, based on the foregoing, appealed decision is hereby

REVERSED and SET ASIDE and judgment is rendered ordering;

1. The dismissal of the complaint;

2. The cancellation of the annotations of the defendant-appellant's Affidavit to

Annul Contract to Sell and plaintiff-appellee's Notice of Adverse Claim in the
subject TCT's, namely, TCT No. T-76.196 (M) and TCT No. T-76.197 (M);

3. Payment by the intervenors-appellants of the remaining balance of the

purchase price pursuant to their agreement with the defendant-appellant to
suspend encashment of the three post-dated checks issued since 1989.

4. Ordering the execution by the defendant-appellant Genato of the Deed of

Absolute Sale over the subject two lots covered by TCT No. T-76.196 (M) and
TCT No. T-76.197 (M) in favor of intervenors-appellants Spouses Da Jose;

5. The return by defendant-appellant Genato of the P50,000.00 paid to him by

the plaintiff-appellee Cheng, and

6. Payment by plaintiff-appellee Cheng of moral damages to herein

intervenors-appellants Da Jose of P100,000.00, exemplary damages of
P50,000.00, attorney's fees of P50,000.00, and costs of suit; and to defendant-
appellant, of P100,000.00 in exemplary damages, P50,000.00 in attorney's fees.
The amounts payable to the defendant-appellant may be compensated by
plaintiff appellee with the amount ordered under the immediately foregoing
paragraph which defendant-appellant has to pay the plaintiff-appellee.

SO ORDERED. 2

The antecedents of the case are as follows:

Respondent Ramon B. Genato (Genato) is the owner of two parcels of land located at
Paradise Farms, San Jose del Monte, Bulacan covered by TCT No. T-76.196 (M) 3 and TCT No.
T-76.197 (M) 4 with an aggregate area of 35,821square meters, more or less.

On September 6, 1989, respondent Genato entered into an agreement with respondent-

spouses Ernesto R. Da Jose and Socorro B. Da Jose (Da Jose spouses) over the above-
mentioned two parcels of land. The agreement culminated in the execution of a contract to
sell for which the purchase price was P80.00 per square meter. The contract was in a public
instrument and was duly annotated at the back of the two certificates of title on the same day.
Clauses 1and 3 thereof provide:

1. That the purchase price shall be EIGHTY (P80.00) PESOS, Philippine

Currency per square meter, of which the amount of FIFTY THOUSAND
 (P50,000.00) PESOS shall be paid by the VENDEE to the VENDOR as partial
down payment at the time of execution of this Contract to Sell.

xxx xxx xxx

3. That the VENDEE, Thirty (30) DAYS after the execution of this contract, and
only after having satisfactorily verified and confirmed the truth and
authenticity of documents, and that no restrictions, limitations, and
developments imposed on and/or affecting the property subject of this
contract shall be detrimental to his interest, the VENDEE shall pay to the
VENDOR, NINE HUNDRED FIFTY THOUSAND (P950,00.00) PESOS. Philippine
Currency, representing the full payment of the agreed Down Payment, after
which complete possession of the property shall be given to the VENDEE to
enable him to prepare the premises and any development therein.

On October 4, 1989, the Da Jose spouses, not having finished verifying the titles mentioned
in clause 3 as aforequoted, asked for and was granted by respondent Genato an extension of
another 30 days — or until November 5, 1989. However, according to Genato, the extension
was granted on condition that a new set of documents is made seven (7) days from October
4, 1989. 6 This was denied by the Da Jose spouses.

Pending the effectivity of the aforesaid extension period, and without due notice to the Da
Jose spouses, Genato executed an Affidavit to Annul the Contract to Sell, 7 on October 13,
1989. Moreover, no annotation of the said affidavit at the back of his titles was made right
away. The affidavit contained, inter alia, the following paragraphs;

xxx xxx xxx

That it was agreed between the parties that the agreed downpayment of
P950,000.00 shall be paid thirty (30) days after the execution of the Contract,
that is on or before October 6, 1989;

The supposed VENDEES failed to pay the said full downpayment even up to
this writing, a breach of contract;

That this affidavit is being executed to Annul the aforesaid Contract to Sell for
the vendee having committed a breach of contract for not having complied
with the obligation as provided in the Contract to Sell; 8

On October 24, 1989, herein petitioner Ricardo Cheng (Cheng) went to Genato's residence
and expressed interest in buying the subject properties. On that occasion, Genato showed to
Ricardo Cheng copies of his transfer certificates of title and the annotations at the back
thereof of his contract to sell with the Da Jose spouses. Genato also showed him the
aforementioned Affidavit to Annul the Contract to Sell which has not been annotated at the
back of the titles.

Despite these, Cheng went ahead and issued a check for P50,000.00 upon the assurance by
Genato that the previous contract with the Da Jose spouses will be annulled for which
Genato issued a handwritten receipt (Exh. "D"), written in this wise:

10/24/89

Received from Ricardo Cheng

the Sum of Fifty Thousand Only (P50.000-)

as partial for T-76196 (M)

T-76197 (M) area 35.821 Sq.m.

Paradise Farm, Gaya-Gaya, San Jose Del Monte

 P70/m2 Bulacan

plus C. G. T. etc.

Check # 470393 (SGD.) Ramon B. Genato

10/24/89 9

On October 25, 1989, Genato deposited Cheng's check. On the same day, Cheng called up
Genato reminding him to register the affidavit to annul the contract to sell. 10

The following day, or on October 26, 1989, acting on Cheng's request, Genato caused the
registration of the Affidavit to Annul the Contract to Sell in the Registry of Deeds,
Meycauayan, Bulacan as primary entry No. 262702. 11

While the Da Jose spouses were at the Office of the Registry of Deeds of Meycauayan,
Bulacan on October 27, 1989, they met Genato by coincidence. It was only then that the Da
Jose spouses discovered about the affidavit to annul their contract. The latter were shocked
at the disclosure and protested against the rescission of their contract. After being reminded
that he (Genato) had given them (Da Jose spouses) an additional 30-day period to finish their
verification of his titles, that the period was still in effect, and that they were willing and able
to pay the balance of the agreed down payment, later on in the day, Genato decided to
continue the Contract he had with them. The agreement to continue with their contract was
formalized in a conforme letter dated October 27, 1989.

Thereafter, Ramon Genato advised Ricardo Cheng of his decision to continue his contract
with the Da Jose spouses and the return of Cheng's P50,000.00 check. Consequently, on
October 30, 1989, Cheng's lawyer sent a letter 12 to Genato demanding compliance with their
agreement to sell the property to him stating that the contract to sell between him and Genato
was already perfected and threatening legal action.

On November 2, 1989, Genato sent a letter 13 to Cheng (Exh. "6") enclosing a BPI Cashier's
Check for P50,000.00 and expressed regret for his inability to "consummate his transaction"
with him. After having received the letter of Genato on November 4, 1989, Cheng, however,
returned the said check to the former via RCPI telegram 14 dated November 6, 1989, reiterating
that "our contract to sell your property had already been perfected."

Meanwhile, also on November 2, 1989, Cheng executed an affidavit of adverse claim 15 and
had it annotated on the subject TCT's.

On the same day, consistent with the decision of Genato and the Da Jose spouses to
continue with their Contract to Sell of September 6, 1989, the Da Jose spouses paid Genato
the complete down payment of P950,000.00 and delivered to him three (3) postdated checks
(all dated May 6, 1990, the stipulated due date) in the total amount of P1,865,680.00 to cover
full payment of the balance of the agreed purchase price. However, due to the filing of the
pendency of this case, the three (3) postdated checks have not been encashed.

On December 8, 1989, Cheng instituted a complaint 16 for specific performance to compel

Genato to execute a deed of sale to him of the subject properties plus damages and prayer
for preliminary attachment. In his complaint, Cheng averred that the P50,000.00 check he
gave was a partial payment to the total agreed purchase price of the subject properties and
considered as an earnest money for which Genato acceded. Thus, their contract was already
perfected.

In Answer 17 thereto, Genato alleged that the agreement was only a simple receipt of an
option-bid deposit, and never stated that it was a partial payment, nor is it an earnest money
and that it was subject to condition that the prior contract with the Da Jose spouses be first
cancelled.

The Da Jose spouses, in their Answer in Intervention, 18 asserted that they have a superior
right to the property as first buyers. They alleged that the unilateral cancellation of the
Contract to Sell was without effect and void. They also cited Cheng's bad faith as a buyer
being duly informed by Genato of the existing annotated Contract to Sell on the titles.
After trial on the merits, the lower court ruled that the receipt issued by Genato to Cheng
unerringly meant a sale and not just a priority or an option to buy. It cannot be true that the
transaction was subjected to some condition or reservation, like the priority in favor of the Da
Jose spouses as first buyer because, if it were otherwise, the receipt would have provided
such material condition or reservation, especially as it was Genato himself who had made the
receipt in his own hand. It also opined that there was a valid rescission of the Contract to Sell
by virtue of the Affidavit to Annul the Contract to Sell. Time was of the essence in the
execution of the agreement between Genato and Cheng, under this circumstance demand,
extrajudicial or judicial, is not necessary. It falls under the exception to the rule provided in
Article 1169 19 of the Civil Code. The right of Genato to unilaterally rescind the contract is said
to be under Article 1191 20 of the Civil Code. Additionally, after reference was made to the
substance of the agreement between Genato and the Da Jose spouses, the lower court also
concluded that Cheng should be preferred over the intervenors-Da Jose spouses in the
purchase of the subject properties. Thus, on January 18, 1994 the trial court rendered its
decision the decretal portion of which reads:

WHEREFORE, judgment is hereby rendered:

1. Declaring the contract to sell dated September 6, 1989 executed between

defendant Ramon Genato, as vendor, and intervenors Spouses Ernesto and
Socorro Da Jose, as vendees, resolved and rescinded in accordance with Art.
1191, Civil Code, by virtue of defendant's affidavit to annul contract to sell
dated October 13, 1989 and as the consequence of intervenors' failure to
execute within seven (7) days from October 4, 1989 another contract to sell
pursuant to their mutual agreement with defendant;

2. Ordering defendant to return to the intervenors the sum of P1,000,000.00,

plus interest at the legal rate from November 2, 1989 until full payment;

3. Directing defendant to return to the intervenors the three (3) postdated

checks immediately upon finality of this judgment;

4. Commanding defendant to execute with and in favor of the plaintiff Ricardo

Cheng, as vendee, a deed of conveyance and sale of the real properties
described and covered in Transfer Certificates of Title No. T-76-196 (M) and T-
76.197 (M) of the Registry of Deeds of Bulacan, Meycauayan Branch, at the rate
of P70.000/square meter, less the amount of P50,000.00 alreaddy paid to
defendant, which is considered as part of the purchase price, with the plaintiff
being liable for payment of the capital gains taxes and other expenses of the
transfer pursuant to the agreement to sell dated October 24, 1989; and

5 Ordering defendant to pay the plaintiff and the intervenors as follows:

a/ P50,000.00, as nominal damages, to plaintiff;

b/ P50,000.00, as nominal damages, to

intervenors;

c/ P20,000.00, as and for attorney's fees, to

plaintiff;

d/ P20,000.00, as and for attorney's fees, to

intervenors; and

e/ Cost of the suit.

xxx xxx xxx

Not satisfied with the aforesaid decision, herein respondents Ramon Genato and Da Jose
spouses appealed to the court a quo which reversed such judgment and ruled that the prior
contract to sell in favor of the Da Jose spouses was not validly rescinded; that the
subsequent contract to sell between Genato and Cheng, embodied in the handwritten receipt,
was without force and effect due to the failure to rescind the prior contract; and that Cheng
should pay damages to the respondents herein being found to be in bad faith.

Hence this petition.21

This petition for review, assails the Court of Appeals' Decision on the following grounds: (1)
that the Da Jose spouses' Contract to Sell has been validly rescinded or resolved; (2) that
Ricardo Cheng's own contract with Genato was not just a contract to sell but one of
conditional contract of sale which gave him better rights, thus precluding the application of
the rule on double sales under Article 1544, Civil Code; and (3) that, in any case, it was error
to hold him liable for damages.

The petition must be denied for failure to show that the Court of Appeals committed a
reversible error which would warrant a contrary ruling.

No reversible error can be ascribed to the ruling of the Court of Appeals that there was no
valid and effective rescission or resolution of the Da Jose spouses Contract to Sell, contrary
to petitioner's contentions and the trial court's erroneous ruling.

In a Contract to Sell, the payment of the purchase price is a positive suspensive condition,
the failure of which is not a breach, casual or serious, but a situation that prevents the
obligation of the vendor to convey title from acquiring an obligatory force.22 It is one where
the happening of the event gives rise to an obligation. Thus, for its non-fulfillment there will
be no contract to speak of, the obligor having failed to perform the suspensive condition
which enforces a juridical relation. In fact with this circumstance, there can be no rescission
of an obligation that is still non-existent, the suspensive condition not having occurred as
yet.23 Emphasis should be made that the breach contemplated in Article 1191 of the New Civil
Code is the obligor's failure to comply with an obligation already extant, not a failure of a
condition to render binding that obligation.24

Obviously, the foregoing jurisprudence cannot be made to apply to the situation in the
instant case because no default can be ascribed to the Da Jose spouses since the 30-day
extension period has not yet expired. The Da Jose spouses' contention that no further
condition was agreed when they were granted the 30-days extension period from October 7,
1989 in connection with clause 3 of their contract to sell dated September 6, 1989 should be
upheld for the following reason, to wit; firstly, If this were not true, Genato could not have
been persuaded to continue his contract with them and later on agree to accept the full
settlement of the purchase price knowing fully well that he himself imposed such sine qua
non condition in order for the extension to be valid; secondly, Genato could have
immediately annotated his affidavit to annul the contract to sell on his title when it was
executed on October 13, 1989 and not only on October 26, 1989 after Cheng reminded him of
the annotation; thirdly, Genato could have sent at least a notice of such fact, there being no
stipulation authorizing him for automatic rescission, so as to finally clear the encumbrance
on his titles and make it available to other would be buyers. It likewise settles the holding of
the trial court that Genato "needed money urgently."

Even assuming in gratia argumenti that the Da Jose spouses defaulted, as claimed by
Genato, in their Contract to Sell, the execution by Genato of the affidavit to annul the contract
is not even called for. For with or without the aforesaid affidavit their non-payment to
complete the full downpayment of the purchase price ipso facto avoids their contract to sell,
it being subjected to a suspensive condition. When a contract is subject to a suspensive
condition, its birth or effectivity can take place only if and when the event which constitutes
the condition happens or is fulfilled.25 If the suspensive condition does not take place, the
parties would stand as if the conditional obligation had never
existed. 26

Nevertheless, this being so Genato is not relieved from the giving of a notice, verbal or
written, to the Da Jose spouses for his decision to rescind their contract. In many
cases,27 even though we upheld the validity of a stipulation in a contract to sell authorizing
automatic rescission for a violation of its terms and conditions, at least a written notice must
be sent to the defaulter informing him of the same. The act of a party in treating a contract as
cancelled should be made known to the other.28 For such act is always provisional. It is
always subject to scrutiny and review by the courts in case the alleged defaulter brings the
matter to the proper courts. In University of the Philippines vs. De Los Angeles,29 this Court
stressed and we quote:

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).

This rule validates, both in equity and justice, contracts such as the one at bat, in order to
avoid and prevent the defaulting party from assuming the offer as still in effect due to the
obligee's tolerance for such non-fulfillment. Resultantly, litigations of this sort shall be
prevented and the relations among would-be parties may be preserved. Thus, Ricardo
Cheng's contention that the Contract to Sell between Genato and the Da Jose spouses was
rescinded or resolved due to Genato's unilateral rescission finds no support in this case.

Anent the issue on the nature of the agreement between Cheng and Genato, the records of
this case are replete with admissions30 that Cheng believed it to be one of a Contract to Sell
and not one of Conditional Contract of Sale which he, in a transparent turn-around, now
pleads in this Petition. This ambivalent stance of Cheng is even noted by the appellate court,
thus:

At the outset, this Court notes that plaintiff-appellee was inconsistent in

characterizing the contract he allegedly entered into. In his complaint.31 Cheng
alleged that the P50,000.00 down payment was earnest money. And next, his
testimony32 was offered to prove that the transaction between him and Genato
on October 24, 1989 was actually a perfected contract to sell.33

Settled is the rule that an issue which was not raised during the trial in the court below
cannot be raised for the first time on appeal.34 Issues of fact and arguments not adequately
brought to the attention of the trial court need not be and ordinarily will not be considered by
a reviewing court as they cannot be raised for the first time on appeal.35 In fact, both courts
below correctly held that the receipt which was the result of their agreement, is a contract to
sell. This was, in fact Cheng's contention in his pleadings before said courts. This patent
twist only operates against Cheng's posture which is indicative of the weakness of his claim.

But even if we are to assume that the receipt, Exh. "D," is to be treated as a conditional
contract of sale, it did not acquire any obligatory force since it was subject to suspensive
condition that the earlier contract to sell between Genato and the Da Jose spouses should
first be cancelled or rescinded — a condition never met, as Genato, to his credit, upon
realizing his error, redeemed himself by respecting and maintaining his earlier contract with
the Da Jose spouses. In fact, a careful reading of the receipt, Exh. "D," alone would not even
show that a conditional contract of sale has been entered by Genato and Cheng. When the
requisites of a valid contract of sale are lacking in said receipt, therefore the "sale" is neither
valid or enfoceable.36

To support his now new theory that the transaction was a conditional contract of sale,
petitioner invokes the case of Coronel vs. Court of Appeals 37 as the law that should govern
their Petition. We do not agree. Apparently, the factual milieu in Coronel is not on all fours
with those in the case at bar.

In Coronel, this Court found that the petitioners therein clearly intended to transfer title to the
buyer which petitioner themselves admitted in their pleading. The agreement of the parties
therein was definitively outlined in the "Receipt of Down Payment" both as to property, the
purchase price, the delivery of the seller of the property and the manner of the transfer of title
subject to the specific condition that upon the transfer in their names of the subject property
the Coronels will execute the deed of absolute sale.
Whereas, in the instant case, even by a careful perusal of the receipt, Exh. "D," alone such
kind of circumstances cannot be ascertained without however resorting to the exceptions of
the Rule on Parol Evidence.

To our mind, the trial court and the appellate court correctly held that the agreement between
Genato and Cheng is a contract to sell, which was, in fact, petitioner connection in his
pleadings before the said courts. Consequently, both to mind, which read:

Art. 1544. If the same thing should have been sold to different vendees, the
ownership shall be transferred to the person who may have first taken
possession thereof in good faith, if it should be movable property.

Should it be immovable property, the ownership shall belong to the person

acquiring it who in good faith first recorded it in the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who
in good faith was first in possession; and in the absence thereof, to the person
who presents he oldest title, provided there is good faith.

However, a meticulous reading of the aforequoted provision shows that said law is not
apropos to the instant case. This provision connotes that the following circumstances must
concur:

(a) The two (or more) sales transactions in issue must pertain to exactly the
same subject matter, and must be valid sales transactions.

(b) The two (or more) buyers at odds over the rightful ownership of the subject
matter must each represent conflicting interests; and

(c) The two (or more) buyers at odds over the rightful ownership of the subject
matter must each have bought from the very same seller.

These situations obviously are lacking in a contract to sell for neither a transfer of ownership
nor a sales transaction has been consummated. The contract to be binding upon the obligee
or the vendor depends upon the fulfillment or non-fulfillment of an event.

Notwithstanding this contrary finding with the appellate court, we are of the view that the
governing principle of Article 1544, Civil Code, should apply in this situation.
Jurisprudence38 teaches us that the governing principle is PRIMUS TEMPORE, PORTIOR
JURE (first in time, stronger in right). For not only was the contract between herein
respondents first in time; it was also registered long before petitioner's intrusion as a second
buyer. This principle only applies when the special rules provided in the aforcited article of
the Civil Code do not apply or fit the specific circumstances mandated under said law or by
jurisprudence interpreting the article.

The rule exacted by Article 1544 of the Civil Code for the second buyer to be able to displace
the first buyer are:

(1) that the second buyer must show that he acted in good faith (i.e. in ignorance of the first
sale and of the first buyer's rights) from the time of acquisition until title is transferred to him
by registration or failing registration, by delivery of possession; 39

(2) the second buyer must show continuing good faith and innocence or lack of knowledge of
the first sale until his contract ripens into full ownership through prior registration as
provided by law.40

Thus, in the case at bar, the knowledge gained by the Da Jose spouses, as first buyers, of the
new agreement between Cheng and Genato will not defeat their rights as first buyers except
where Cheng, as second buyer, registers or annotates his transaction or agreement on the
title of the subject properties in good faith ahead of the Da Jose spouses. Moreover, although
the Da Jose spouses, as first buyers, knew of the second transaction it will not bar them from
availing of their rights granted by law, among them, to register first their agreement as
against the second buyer.
In contrast, knowledge gained by Cheng of the first transaction between the Da Jose spouses
and Genato defeats his rights even if he is first to register the second transaction, since such
knowledge taints his prior registration with bad faith.

"Registration", as defined by Soler and Castillo, means any entry made in the books of the
registry, including both registration in its ordinary and strict sense, and cancellation,
annotation, and even marginal notes.41 In its strict acceptation, it is the entry made in the
registry which records solemnly and permanently the right of ownership and other real
rights.42 We have ruled43 before that when a Deed of Sale is inscribed in the registry of property
on the original document itself, what was done with respect to said entries or annotations
and marginal notes amounted to a registration of the sale. In this light, we see no reason why
we should not give priority in right the annotation made by the Da Jose spouses with respect
to their Contract to Sell dated September 6, 1989.

Moreover, registration alone in such cases without good faith is not sufficient. Good faith
must concur with registration for such prior right to be enforceable. In the instant case, the
annotation made by the Da Jose spouses on the titles of Genato of their "Contract To Sell"
more than satisfies this requirement. Whereas in the case of Genato's agreement with Cheng
such is unavailing. For even before the receipt, Exh. "D," was issued to Cheng information of
such pre-existing agreement has been brought to his knowledge which did not deter him
from pursuing his agreement with Genato. We give credence to the factual finding of the
appellate court that "Cheng himself admitted that it was he who sought Genato in order to
inquire about the property and offered to buy the same.44 And since Cheng was fully aware, or
could have been if he had chosen to inquire, of the rights of the Da Jose spouses under the
Contract to Sell duly annotated on the transfer certificates of titles of Genato, it now becomes
unnecessary to further elaborate in detail the fact that he is indeed in bad faith in entering
into such agreement. As we have held in Leung Yee vs. F.L. Strong Machinery Co.:45

One who purchases real estate with knowledge of a defect . . . of title in his
vendor cannot claim that he has acquired title thereto in good faith as against .
. . . an interest therein; and the same rule must be applied to one who has
knowledge of facts which should have put him upon such inquiry and
investigation as might be necessary to acquaint him with the defects in the title
of his vendor. A purchaser cannot close his eyes to facts which should put a
reasonable man upon his guard, and then claim that he acted in good faith
under the belief that there was no defect in the title of the vendor. His mere
refusal to believe that such defect exists, or his willful closing of his eyes to
the possibility of the existence of a defect in his vendor's title, will not make
him an innocent purchaser for value, if it afterwards develops that the title was
in fact defective, and it appears that he had such notice of the defect as would
have led to its discovery had he acted with that measure of precaution which
may reasonably be required of a prudent man in a like situation. Good faith, or
lack of it, is in its last analysis a question of intention; but in ascertaining the
intention by which one is actuated on a given occasion, we are necessarily
controlled by the evidence as to the conduct and outward acts by which alone
the inward motive may with safety, be determined. So it is that "the honesty of
intention," "the honest lawful intent," which constitutes good faith implies a
"freedom from knowledge and circumstances which ought to put a person on
inquiry," and so it is that proof of such knowledge overcomes the presumption
of good faith in which the courts always indulge in the absence of the proof to
the contrary. "Good faith, or the want of it, is not a visible, tangible fact that
can be seen or touched, but rather a state or condition of mind which can only
be judge of by actual or fancied tokens or signs." (Wilder vs. Gilman, 55 Vt.
504, 505; Cf. Cardenas vs. Miller, 108 Cal., 250; Breaux-Renoudet, Cypress
Lumber Co. vs. Shadel, 52 La. Ann., 2094-2098; Pinkerton Bros. Co. vs.
Bromely, 119 Mich., 8, 10, 17.) (Emphasis ours)

Damages were awarded by the appellate court on the basis of its finding that petitioner "was
in bad faith when he filed the suit for specific performance knowing fully well that his
agreement with Genato did not push through.46 Such bad faith, coupled with his wrongful
interference with the contractual relations between Genato and the Da Jose spouses, which
culminated in his filing of the present suit and thereby creating what the counsel for the
respondents describes as "a prolonged and economically unhealthy gridlock47 on both the
land itself and the respondents' rights provides ample basis for the damages awarded. Based
on these overwhelming evidence of bad faith on the part of herein petitioner Ricardo Cheng,
we find that the award of damages made by the appellate court is in order.

WHEREFORE, premises considered, the instant petition for review is DENIED and the
assailed decision is hereby AFFIRMED EN TOTO.

SO ORDERED.

Belosillo, Puno and Mendoza, JJ., concur.

G.R. No. 157318 August 9, 2006

GENEROSO V. VILLANUEVA and RAUL C. VILLANUEVA, JR., Petitioners,

vs.
ESTATE OF GERARDO L. GONZAGA/MA. VILLA GONZAGA, in her capacity as
Administratrix, Respondents.

DECISION

PUNO, J.:

Before us is a petition for review on certiorari assailing the Decision dated January 16, 2003 1 of the
Court of Appeals in CA-G.R. CV No. 46865 which affirmed with modification the Decision dated
December 29, 1993 2 of the Regional Trial Court (RTC) of Bacolod City in Civil Case No. 6552. The
RTC-Bacolod City declared the Memorandum of Agreement (MOA) between petitioners and
respondents as rescinded, and ordered petitioners to pay moral damages and attorney’s fees to
respondents. The Court of Appeals deleted the award for moral damages.

The antecedent facts are as follows:

On January 15, 1990, petitioners Generoso Villanueva and Raul Villanueva, Jr., business
entrepreneurs engaged in the operation of transloading stations and sugar trading, and respondent
Estate of Gerardo L. Gonzaga, represented by its Judicial Administratrix, respondent Ma. Villa J.
Gonzaga, executed a MOA 3 which reads:

KNOW ALL MEN BY THESE PRESENTS:

This Memorandum made and entered into by and between:

THE ESTATE OF GERARDO L. GONZAGA represented in the act by its Administratrix, MA. VILLA
J. GONZAGA, Filipino, of legal age, widow and resident of Bacolod City, hereinafter referred to as
the FIRST PARTY,

-and-

RAUL VILLANUEVA, JR. and GENEROSO V. VILLANUEVA, Filipinos, of legal age, married and
residents of Bacolod City, hereinafter jointly referred to as the SECOND PARTY.

W I T N E S S E T H:

1. WHEREAS, the FIRST PARTY is the true and lawful owner of a parcel of land, Lot No. 1362,
covered by TCT No. T-131872 situated at Brgy. Granada, Bacolod City and known as Hda. San
Dionisio Norte;

2. WHEREAS, the aforesaid property is presently mortgaged with the Philippine National Bank
(PNB) as collateral for a loan;

3. WHEREAS, the aforesaid property is already subdivided into sub-lots although separate titles for
each lot is not yet issued;

4. WHEREAS, the herein SECOND PARTY agrees to purchase portions of the aforesaid property
equivalent to 3,240 sq. meters which portions are designated as Lots Nos. 28, 29, 30, 31, 32, 33, 34,
35, 36, 37, 38 & 39 in phase 11 of the subdivision plan;

5. WHEREAS, the SECOND PARTY agrees to purchase the aforesaid lots at the price of ONE
HUNDRED FIFTY (P150.00) PESOS per sq. meter or for a total price of FOUR HUNDRED EIGHTY
SIX THOUSAND (P486,000.00) PESOS subject to the following conditions:

A.) That the FIRST PARTY shall cause the release of the aforementioned lots from the Philippine
National Bank (PNB) at the earliest possible time.

B.) That the SECOND PARTY agrees to pay the amount of P486,000.00 as follows:
P100,000.00 - upon the signing of this

agreement.

P191,600.00 - on or before January 10,

1990.

P194,400.00 - upon the approval by the

PNB of the release of the

lots.

C.) That it is hereby agreed that the ONE HUNDRED THOUSAND (P100,000.00) PESOS down
payment shall at the same time be considered as earnest money which shall be forfeited in the event
the SECOND PARTY withdraws from this agreement.

D.) That upon payment of 60% of the purchase price, the SECOND PARTY may start to introduce
improvements in the area if they so desire.

E.) That upon the release by the Philippine National Bank (PNB) of the lots subject of this
agreement, the FIRST PARTY shall immediately execute a Deed of Sale in favor of the SECOND
PARTY. All expenses for documentation and capital gains shall be borne by the FIRST PARTY,
while expenses for transfer of title to the SECOND PARTY shall be borne by the latter.

IN WITNESS WHEREOF, the parties have hereunto set their hands this 15th day of January, 1990
in this City of Bacolod, Philippines. [emphases added]

As stipulated in the agreement, petitioners introduced improvements after paying P291,600.00

constituting sixty (60%) percent of the total purchase price of the lots. Petitioners then requested
permission from respondent Administratrix to use the premises for the next milling season.
Respondent refused on the ground that petitioners cannot use the premises until full payment of the
purchase price. Petitioners informed respondent that their immediate use of the premises was
absolutely necessary and that any delay will cause them substantial damages. Respondent
remained firm in her refusal, and demanded that petitioners stop using the lots as a transloading
station to service the Victorias Milling Company unless they pay the full purchase price. In a letter-
reply dated April 5, 1991, petitioners assured respondent of their readiness to pay the balance but
reminded respondent of her obligation to redeem the lots from mortgage with the Philippine National
Bank (PNB). [4]Petitioners gave respondent ten (10) days within which to do so. [5]

On April 10, 1991, respondent Administratrix wrote petitioners informing them that the PNB had
agreed to release the lots from mortgage. She demanded payment of the balance of the purchase
price. Enclosed with the demand letter was the PNB’s letter of approval dated April 8,
1991, 6 marked as Exhibit "3-B," which reads -

Mrs. Ma. Villa J. Gonzaga

Judicial Administratrix

Int. Est. of Gerardo L. Gonzaga

La Salle Subdivision

Bacolod City

Dear Mrs. Gonzaga:

We are pleased to inform you that your request for the partial release of securities, particularly the
3,240 sq. m. agricultural land x x x covered by TCT No. T-31113 has been approved by our Senior
Management Credit Committee I on April 1, 1991 subject to the following conditions:
1. The sale be approved by the Court insofar as the interest of the estate is concerned;

2. Payment of two (2) annual amortizations of the restructured accounts in addition to P50,000.00 to
be derived from sale of lot sought to be released;

3. Such terms and conditions that our Legal Dept. may impose to protect the interest of the Bank.

Please see us for the preparation of the covering documents. [emphases added]

Very truly yours,

(signed)

CECILIA S. GAYENALO

Asst. Manager

In their letter-reply dated April 18, 1991, 7 petitioners demanded that respondent show the clean titles
to the lots first before they pay the balance of the purchase price. Respondent merely reiterated the
demand for payment. Petitioners stood pat on their demand.

On May 28, 1991, respondent Administratrix executed a Deed of Rescission rescinding the MOA on
two grounds: (1) petitioners failed to pay the balance of the purchase price despite notice of the lots’
release from mortgage, and (2) petitioners violated the MOA by using the lots as a transloading
station without permission from the respondents.

In their Letter dated June 13, 1991, petitioners, through counsel, formally demanded the production
of the titles to the lots before they pay the balance of the purchase price. The demand was ignored.
Consequently, on June 19, 1991, petitioners filed a complaint against respondents for breach of
contract, specific performance and damages before the RTC-Bacolod City, docketed as Civil Case
No. 6552. Petitioners alleged that respondents delayed performance of their obligation by
unreasonably failing to secure the release of the lots from mortgage with the PNB within the earliest
possible time, as stipulated in the MOA. Petitioners prayed that respondents be ordered to produce
the clean titles to the lots before they pay the balance of the purchase price.

The trial court decided the case in favor of respondents. The dispositive portion of the decision
reads-

(1) Declaring the Memorandum of Agreement, Exh. "C" rescinded; consequently ownership and
possession of Lots 28 to 39, inclusive, of Phase II of the subdivision plan covered by TCT No. T-
31113 are hereby restored to defendants, and defendants (sic) are thereby ordered to vacate the
premises of said lots;

(2) Ordering plaintiffs to jointly and severally pay defendants: P20,000.00 as moral damages;
and P15,000.00 as attorney’s fees;

(3) Ordering defendants to solidarily pay or refund plaintiffs: the sum of P100,000.00 paid by the
latter as down payment on the aforesaid Memorandum of Agreement on December 18, 1989, with
legal interest at 6% per annum from said date up to and until the amount is fully paid or refunded;
and another sum of P191,600.00 paid by the latter to the former in connection with the said
Memorandum of Agreement on January 10, 1990, with the same rate of interest at 6% per annum
from said date up to and until the amount is fully paid or refunded; and

(4) Condemning plaintiffs to pay the cost of suit. [8]

Petitioners filed a petition for review before the Court of Appeals. On January 16, 2003, the Court of
Appeals affirmed the trial court’s decision but deleted the award for moral damages on the ground
that petitioners were not guilty of bad faith in refusing to pay the balance of the purchase
price. 9 Hence, this petition.

Petitioners raise the following issues:

1. Whether x x x respondents failed to comply with their reciprocal obligation of securing the release
of the subject lots from mortgage indebtedness with the Philippine National Bank.

2. Whether x x x the delivery of the titles corresponding to the twelve (12) lots subject of the
Memorandum of Agreement is a precondition to the payment by the petitioners of the balance of the
consideration.

3. Whether x x x petitioners did incur (sic) delay in the performance of their reciprocal obligation
under the Memorandum of Agreement.

4. Whether x x x there is legal, or even a factual, ground for the rescission of the Memorandum of
Agreement. 10

We will resolve first the procedural objections raised by the respondents.

Respondents contend that the petition should be dismissed for late filing, and irregular execution of
the affidavit of service attached to the petition. Respondents allege that the petition was filed late as
there was no evidence to show that petitioners’ motion for extension of time to file the petition has
been granted by the Court. Petitioners allegedly received a copy of the assailed Court of Appeals’
decision on January 28, 2003 but filed the petition for review on March 12, 2003 only, contrary to
Section 2, Rule 45 of the 1997 Rules of Civil Procedure. 11 In addition, the Affidavit of Service
attached to the petition was irregularly executed on March 13, 2003, a day after the petition has
been filed in Court.

Respondents’ contentions are not meritorious. The records show that petitioners’ motion for 30 days’
extension of time to file the petition for review has been granted in our Resolution dated March 26,
2003. Petitioners were given thirty (30) days from the expiration of the original period, or until March
13, 2003, within which to file the petition for review. Although our resolution is dated after the
extension prayed for has already expired, we specifically conditioned the grant of extension upon the
timeliness of the filing of the petition and payment by petitioners of the correct docket and other filing
fees. Petitioners did so. The petition for review was posted by registered mail on March 13, 2003, as
shown by the date appearing on the first page of the original copy of the petition filed with the
Court. [12]The Affidavit of Service was thus regularly executed on March 13, 2003, the same day
that the petition was posted by registered mail. No reason exists therefore for the dismissal of the
petition on technical grounds, as respondents erroneously contend.

On the merits of the case, we agree with the petitioners that the Court of Appeals erred in ruling that
respondents had already fulfilled their obligation to cause the release of the lots from mortgage with
the PNB at the time they demanded payment of the balance of the purchase price. The finding of the
appellate court is refuted by Exh. "3-B" and by the testimonial evidence on record.

A reading of Exhibit "3-B," 13 which is the PNB’s letter of approval dated April 8, 1991, clearly shows
that the approval was conditional. Three (3) conditions were laid down by the bank before the lots
could be finally released from mortgage. The three conditions were: (1) that respondents secure
approval of the sale from the intestate court insofar as the interest of the estate is concerned; (2) that
respondents pay two annual amortizations of their restructured accounts with the PNB
plus P50,000.00 to be derived from the sale of the lots sought to be released; and (3) that
respondents comply with such other terms and conditions as the PNB’s Legal Department may
impose. Cecilia S. Gayenalo, the Assistant Manager of PNB Bacolod City Branch, herself testified
that it was in July 1991 that the final release papers were prepared by the bank because it was only
at that time that respondents complied with the three conditions. 14 It was therefore premature for
respondents to demand payment of the balance of the purchase price from the petitioners in April
1991 and, failing in that, to "rescind" the MOA in May 1991.

Moreover, there is no legal basis for the rescission. The remedy of rescission under Art. 1191 of the
Civil Code 15 is predicated on a breach of faith by the other party that violates the reciprocity between
them. 16 We have held in numerous cases that the remedy does not apply to contracts to sell. 17 We
explained the reason in Santos v. Court of Appeals, 18 viz -

x x x [I]n a contract to sell, title remains with the vendor and does not pass on to the vendee until the
purchase price is paid in full. Thus, in a contract to sell, the payment of the purchase price is a
positive suspensive condition. Failure to pay the price agreed upon is not a mere breach, casual or
serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an
obligatory force. This is entirely different from the situation in a contract of sale, where non-payment
of the price is a negative resolutory condition. The effects in law are not identical. In a contract of
sale, the vendor has lost ownership of the thing sold and cannot recover it, unless the contract of
sale is rescinded and set aside. In a contract to sell, however, the vendor remains the owner for as
long as the vendee has not complied fully with the condition of paying the purchase price. If the
vendor should eject the vendee for failure to meet the condition precedent, he is enforcing the
contract and not rescinding it. x x x x Article 1592 speaks of non-payment of the purchase price as a
resolutory condition. It does not apply to a contract to sell. As to Article 1191, it is subordinated to the
provisions of Article 1592 when applied to sales of immovable property. Neither provision is
applicable [to a contract to sell]. (emphasis added)

The MOA between petitioners and respondents is a conditional contract to sell. Ownership over the
lots is not to pass to the petitioners until full payment of the purchase price. Petitioners’ obligation to
pay, in turn, is conditioned upon the release of the lots from mortgage with the PNB to be secured by
the respondents. Although there was no express provision regarding reserved ownership until full
payment of the purchase price, the intent of the parties in this regard is evident from the provision
that a deed of absolute sale shall be executed only when the lots have been released from mortgage
and the balance paid by petitioners. Since ownership has not been transferred, no further legal
action need have been taken by the respondents, except an action to recover possession in case
petitioners refuse to voluntarily surrender the lots. 19

The records show that the lots were finally released from mortgage in July 1991. Petitioners have
always expressed readiness to pay the balance of the purchase price once that is achieved. Hence,
petitioners should be allowed to pay the balance now, if they so desire, since it is established that
respondents’ demand for them to pay in April 1991 was premature. However, petitioners may not
demand production by the respondents of the titles to the lots as a condition for their payment. It was
not required under the MOA. The MOA merely states that petitioners shall pay the balance "upon
approval by the PNB of the release of the lots" from mortgage. Petitioners may not add further
conditions now. Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. 20

IN VIEW WHEREOF, the petition is GRANTED. The assailed Decision dated January 16, 2003 of
the Court of Appeals in CA-G.R. CV No. 46865 is REVERSED and SET ASIDE. Petitioners and
respondents are restored to the status quo ante before the execution of the Deed of Rescission
dated May 28, 1991which is declared of no legal effect.

SO ORDERED.

REYNATO S. PUNO
Associate Justice

WE CONCUR:
G.R. No. 119466 November 25, 1999

SALVADOR ADORABLE and LIGAYA ADORABLE, petitioners,

vs.
COURT OF APPEALS, HON. JOSE O. RAMOS, FRANCISCO BARENG and SATURNINO
BARENG, respondents.

MENDOZA, J.:

This is a petition for review under Rule 45 of the decision 1 of the Court of Appeals, dated January 6,
1995, sustaining the dismissal by Branch 24 of the Regional Trial Court, Echague, Isabela, of the
complaint filed by petitioners, spouses Salvador and Ligaya Adorable, for lack of cause of action.

The facts are as follows:

Private respondent Saturnino Bareng was the registered owner of two parcels of land, one identified
as Lot No. 661-D-5-A, with an area of 20,000 sq. m., covered by TCT No. T-162837, and the other
known as Lot No. 661-E, with an area of 4.0628 hectares, covered by TCT No. T-60814, both of
which are in San Fabian, Echague, Isabela. Petitioners were lessees of a 200 sq. m. portion of Lot
No. 661-D-5-A.

On April 29, 1985, Saturnino Bareng and his son, private respondent Francisco Bareng, obtained a
loan from petitioners amounting to twenty six thousand pesos (P26,000), in consideration of which
they promised to transfer the possession and enjoyment of the fruits of Lot No. 661-E.

On August 3, 1986, Saturnino sold to his son Francisco 18,500 sq. m. of Lot No. 661-D-5-A. The
conveyance was annotated on the back of TCT No.
T-162873. In turn, Francisco sold on August 27, 1986 to private respondent Jose Ramos 3,000 sq.
m. of the lot. The portion of land being rented to petitioners was included in the portion sold to Jose
Ramos. The deeds of sale evidencing the conveyances were not registered in the office of the
register of deeds.

As the Barengs failed to pay their loan, petitioners complained to Police Captain Rodolfo Saet of the
Integrated National Police (INP) of Echague through whose mediation a Compromise Agreement
was executed between Francisco Bareng and the Adorables whereby the former acknowledged his
indebtedness of P56,385.00 which he promised to pay on or before July 15, 1987. When the
maturity date arrived, however, Francisco Bareng failed to pay. A demand letter was sent to
Francisco Bareng, but he refused to pay.

Petitioners, learning of the sale made by Francisco Bareng to Jose Ramos, then filed a complaint
with the Regional Trial Court, Branch 24, Echague, Isabela for the annulment or rescission of the
sale on the ground that the sale was fraudulently prepared and executed.

During trial, petitioners presented as witness Jose Ramos. After his testimony; the next hearing was
set on August 4 and 5, 1990. On said hearing dates, however, petitioners were absent. The trial
court therefore ordered the presentation of evidence for petitioners terminated and allowed private
respondents to present their evidence ex parte. On February 15, 1991, the trial court rendered
judgment dismissing the complaint for lack of cause of action, declaring the contract of sale between
Francisco Bareng and Jose Ramos valid and ordering Francisco Bareng to pay the amount he owed
petitioners.

On appeal, the Court of Appeals affirmed the decision of the Regional Trial Court, with modification
as to the amount of Francisco Bareng's debt to petitioners.

Hence, this petition for review, raising the following issues: (1) whether the Court of Appeals erred in
dismissing the complaint for lack of cause of action; (2) whether petitioners enjoyed legal preference
to purchase the lots they lease; and (3) whether the Court of Appeals erred in sustaining the lower
court's order terminating petitioners' presentation of evidence and allowing private respondents to
present their evidence ex parte.
In sustaining the decision of the trial court dismissing the complaint for lack of cause of action, the
Court of Appeals premised its decision on Rule 3, §2 of the former Rules of Court which provided:

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 demanded shall be joined as plaintiffs. All persons who
claim an interest in the controversy or who are necessary to a complete
determination or settlement of the questions involved therein shall be joined as
defendants.

A real party in interest is one who would be benefited or injured by the judgment, or who is entitled to
the avails of the suit. "Interest," within the meaning of this rule, should be material, directly in issue
and to be affected by the decree, as distinguished from a mere incidental interest or in the question
involved. 2 Otherwise put, an action shall be prosecuted in the name of the party who, by the
substantive law, has the right sought to be enforced. 3

Petitioners anchor their interest on their right as creditors of Francisco Bareng, as well as on their
claim of preference over the sale of the contested
lot. 4 They contend that the sale between Francisco Bareng and Jose Ramos prejudiced their
interests over the property as creditors of Francisco Bareng. Moreover, they claim that, under
Commonwealth Act No. 539, they have a preferential right, as tenants or lessees, to purchase the
land in question.

The petition has no merit.

First. We hold that, as creditors, petitioners do not have such material interest as to allow them to
sue for rescission of the contract of sale. At the outset, petitioners' right against private respondents
is only a personal right to receive payment for the loan; it is not a real right over the lot subject of the
deed of sale.

A personal right is the power of one person to demand of another, as a definite passive subject, the
fulfillment of a prestation to give, to do, or not to do. On the other hand, a real right is the power
belonging to a person over a specific thing, without a passive subject individually determined,
against whom such right may be personally exercised. 5 In this case, while petitioners have an
interest in securing payment of the loan they extended, their right to seek payment does not in any
manner attach to a particular portion of the patrimony of their debtor, Francisco Bareng.

Nor can we sustain petitioners' claim that the sale was made in fraud of creditors. Art. 1177 of the
Civil Code provides:

The creditors, after having pursued the property in possession of the debtor to satisfy
their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn
the actions which the debtor may have done to defraud them. (Emphasis added)

Thus, the following successive measures must be taken by a creditor before he may bring an action
for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor through levying
by attachment and execution upon all the property of the debtor, except such as are exempt by law
from execution; (2) exercise all the rights and actions of the debtor, save those personal to him
(accion subrogatoria); and (3) seek rescission of the contracts executed by the debtor in fraud of
their rights (accion pauliana). Without availing of the first and second remedies, i.e., exhausting the
properties of the debtor or subrogating themselves in Francisco Bareng's transmissible rights and
actions, petitioners simply undertook the third measure and filed an action for annulment of the sale.
This cannot be done.

Indeed, an action for rescission is a subsidiary remedy; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. 6 Thus, Art. 1380 of
the Civil Code provides:

The following contracts are rescissible:

xxx xxx xxx

 (3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;

Petitioners have not shown that they have no other means of enforcing their credit. As the Court of
Appeals pointed out in its decision:

In this case, plaintiffs-appellants had not even commenced an action against

defendants-appellees Bareng for the collection of the alleged indebtedness.
Plaintiffs-appellants had not even tried to exhaust the property of defendants-
appellees Bareng. Plaintiffs-appellants, in seeking for the rescission of the contracts
of sale entered into between defendants-appellees, failed to show and prove that
defendants-appellees Bareng had no other property, either at the time of the sale or
at the time this action was filed, out of which they could have collected this (sic)
debts.

Second. Nor do petitioners enjoy any preference to buy the questioned property. In Aldecoa
v. Hongkong and Shanghai Banking Corporation, 7 it was held that in order that one who is not
obligated in a contract either principally or subsidiarily may maintain an action for nullifying the same,
his complaint must show the injury that would positively result to him from the contract in which he
has not intervened, with regard at least to one of the contracting parties.

Petitioners attempt to establish such legal injury through a claim of preference created under C.A.
No. 539, the pertinent provision of which provides:

Sec. 1. The President of the Philippines is authorized to acquire private lands or any
interest therein, through purchase or expropriation, and to subdivide the same into
home lots or small farms for resale at reasonable prices and under such conditions
as he may fix to their bona fide tenants or occupants or to private individuals who will
work the lands themselves and who are qualified to acquire and own lands in the
Philippines.

This statute was passed to implement Art. XIII, §4 of the 1935 Constitution which provided that "The
Congress may authorize, upon payment of just compensation, the expropriation of lands to be
subdivided into small lots and conveyed at cost to individuals." It is obvious that neither under this
provision of the former Constitution nor that of C.A. No. 539 can petitioners claim any right since the
grant of preference therein applies only to bona fide tenants, after the expropriation or purchase by
the government of the land they are occupying. 8 Petitioners are not tenants of the land in question in
this case. Nor has the land been acquired by the government for their benefit.

Third. Finally, we hold that no error was committed by the Court of Appeals in affirming the order of
the trial court terminating the presentation of petitioners' evidence and allowing private respondents
to proceed with theirs because of petitioners' failure to present further evidence at the scheduled
dates of trial.

Petitioners contend that since their counsel holds office in Makati, the latter's failure to appear at the
trial in Isabela at the scheduled date of hearing should have been treated by the court with a "sense
of fairness." 9

This is more a plea for compassion rather than explanation based on reason. We cannot find grave
abuse of discretion simply because a court decides to proceed with the trial of a case rather than
postpone the hearing to another day, because of the absence of a party. That the absence of a party
during trial constitutes waiver of his right to present evidence and cross-examine the opponent's
witnesses is firmly supported by jurisprudence. 10 To constitute grave abuse of discretion amounting
to lack or excess of jurisdiction, the refusal of the court to postpone the hearing must be
characterized by arbitrariness or capriciousness. Here, as correctly noted by the Court of Appeals,
petitioners' counsel was duly notified through registered mail of the scheduled trials. 11 His only
excuse for his failure to appear at the scheduled hearings is that he "comes from Makati." This
excuse might hold water if counsel was simply late in arriving in the courtroom. But this was not the
case. He did not appear at all.

WHEREFORE, the petition for review is DENIED, and the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.

Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.

G.R. No. 134685 November 19, 1999

MARIA ANTONIA SIGUAN, petitioner,

vs.
ROSA LIM, LINDE LIM, INGRID LIM and NEIL LIM, respondents.

DAVIDE, JR., C.J.:

May the Deed of Donation executed by respondent Rosa Lim (hereafter LIM) in favor of her children
be rescinded for being in fraud of her alleged creditor, petitioner Maria Antonia Siguan? This is the
pivotal issue to be resolved in this petition for review on certiorari under Rule 45 of the Revised
Rules of Court.

The relevant facts, as borne out of the records, are as follows:

On 25 and 26 August 1990, LIM issued two Metrobank checks in the sums of P300,000 and
P241,668, respectively, payable to "cash." Upon presentment by petitioner with the drawee bank, the
checks were dishonored for the reason "account closed." Demands to make good the checks proved
futile. As a consequence, a criminal case for violation of Batas Pambansa Blg. 22, docketed as
Criminal Cases Nos. 22127-28, were filed by petitioner against LIM with Branch 23 of the Regional
Trial Court (RTC) of Cebu City. In its decision 1 dated 29 December 1992, the court a quo convicted
LIM as charged. The case is pending before this Court for review and docketed as G.R. No. 134685.

It also appears that on 31 July 1990 LIM was convicted of estafa by the RTC of Quezon City in
Criminal Case No. Q-89-2216 2 filed by a certain Victoria Suarez. This decision was affirmed by the
Court of Appeals. On appeal, however, this Court, in a decision 3 promulgated on 7 April 1997,
acquitted LIM but held her civilly liable in the amount of P169,000, as actual damages, plus legal
interest.

Meanwhile, on 2 July 1991, a Deed of Donation 4 conveying the following parcels of land and
purportedly executed by LIM on 10 August 1989 in favor of her children, Linde, Ingrid and Neil, was
registered with the Office of the Register of Deeds of Cebu City:

(1) a parcel of land situated at Barrio Lahug, Cebu City, containing an

area of 563 sq. m. and covered by TCT No. 93433;

(2) a parcel of land situated at Barrio Lahug, Cebu City, containing an

area of 600 sq. m. and covered by TCT No. 93434;

(3) a parcel of land situated at Cebu City containing an area of 368

sq. m. and covered by TCT No. 87019; and

(4) a parcel of land situated at Cebu City, Cebu containing an area of

511 sq. m. and covered by TCT No. 87020.

New transfer certificates of title were thereafter issued in the names of the donees. 5

On 23 June 1993, petitioner filed an accion pauliana against LIM and her children before Branch 18
of the RTC of Cebu City to rescind the questioned Deed of Donation and to declare as null and void
the new transfer certificates of title issued for the lots covered by the questioned Deed. The
complaint was docketed as Civil Case No. CEB-14181. Petitioner claimed therein that sometime in
July 1991, LIM, through a Deed of Donation, fraudulently transferred all her real property to her
children in bad faith and in fraud of creditors, including her; that LIM conspired and confederated
with her children in antedating the questioned Deed of Donation, to petitioner's and other creditors'
prejudice; and that LIM, at the time of the fraudulent conveyance, left no sufficient properties to pay
her obligations.

On the other hand, LIM denied any liability to petitioner. She claimed that her convictions in Criminal
Cases Nos. 22127-28 were erroneous, which was the reason why she appealed said decision to the
Court of Appeals. As regards the questioned Deed of Donation, she maintained that it was not
antedated but was made in good faith at a time when she had sufficient property. Finally, she
alleged that the Deed of Donation was registered only on 2 July 1991 because she was seriously ill.

In its decision of 31 December 1994, 6 the trial court ordered the rescission of the questioned deed of
donation; (2) declared null and void the transfer certificates of title issued in the names of private
respondents Linde, Ingrid and Neil Lim; (3) ordered the Register of Deeds of Cebu City to cancel
said titles and to reinstate the previous titles in the name of Rosa Lim; and (4) directed the LIMs to
pay the petitioner, jointly and severally, the sum of P10,000 as moral damages; P10,000 as
attorney's fees; and P5,000 as expenses of litigation.

On appeal, the Court of Appeals, in a decision 7 promulgated on 20 February 1998, reversed the
decision of the trial court and dismissed petitioner's accion pauliana. It held that two of the requisites
for filing an accion pauliana were absent, namely, (1) there must be a credit existing prior to the
celebration of the contract; and (2) there must be a fraud, or at least the intent to commit fraud, to
the prejudice of the creditor seeking the rescission.

According to the Court of Appeals, the Deed of Donation, which was executed and acknowledged
before a notary public, appears on its face to have been executed on 10 August 1989. Under
Section 23 of Rule 132 of the Rules of Court, the questioned Deed, being a public document, is
evidence of the fact which gave rise to its execution and of the date thereof. No antedating of the
Deed of Donation was made, there being no convincing evidence on record to indicate that the
notary public and the parties did antedate it. Since LIM's indebtedness to petitioner was incurred in
August 1990, or a year after the execution of the Deed of Donation, the first requirement for accion
pauliana was not met.

Anent petitioner's contention that assuming that the Deed of Donation was not antedated it was
nevertheless in fraud of creditors because Victoria Suarez became LIM's creditor on 8 October 1987,
the Court of Appeals found the same untenable, for the rule is basic that the fraud must prejudice the
creditor seeking the rescission.

Her motion for reconsideration having been denied, petitioner came to this Court and submits the
following issue:

WHETHER OR NOT THE DEED OF DONATION, EXH. 1, WAS ENTERED INTO IN

FRAUD OF [THE] CREDITORS OF RESPONDENT ROSA [LIM].

Petitioner argues that the finding of the Court of Appeals that the Deed of Donation was not in fraud
of creditors is contrary to well-settled jurisprudence laid down by this Court as early as 1912 in the
case of Oria v. McMicking, 8 which enumerated the various circumstances indicating the existence of
fraud in a transaction. She reiterates her arguments below, and adds that another fact found by the
trial court and admitted by the parties but untouched by the Court of Appeals is the existence of a
prior final judgment against LIM in Criminal Case No. Q-89-2216 declaring Victoria Suarez as LIM's
judgment creditor before the execution of the Deed of Donation.

Petitioner further argues that the Court of Appeals incorrectly applied or interpreted Section
23, 9 Rule 132 of the Rules of Court, in holding that "being a public document, the said deed of
donation is evidence of the fact which gave rise to its execution and of the date of the latter." Said
provision should be read with Section 30 10 of the same Rule which provides that notarial documents
are prima facie evidence of their execution, not "of the facts which gave rise to their execution and of
the date of the latter."

Finally, petitioner avers that the Court of Appeals overlooked Article 759 of the New Civil Code,
which provides: "The donation is always presumed to be in fraud of creditors when at the time of the
execution thereof the donor did not reserve sufficient property to pay his debts prior to the donation."
In this case, LIM made no reservation of sufficient property to pay her creditors prior to the execution
of the Deed of Donation.

On the other hand, respondents argue that (a) having agreed on the law and requisites of accion
pauliana, petitioner cannot take shelter under a different law; (b) petitioner cannot invoke the credit
of Victoria Suarez, who is not a party to this case, to support her accion pauliana; (c) the Court of
Appeals correctly applied or interpreted Section 23 of Rule 132 of the Rules of Court; (d) petitioner
failed to present convincing evidence that the Deed of Donation was antedated and executed in
fraud of petitioner; and (e) the Court of Appeals correctly struck down the awards of damages,
attorney's fees and expenses of litigation because there is no factual basis therefor in the body of the
trial court's decision.

The primordial issue for resolution is whether the questioned Deed of Donation was made in fraud of
petitioner and, therefore, rescissible. A corollary issue is whether the awards of damages, attorney's
fees and expenses of litigation are proper.

We resolve these issues in the negative.

The rule is well settled that the jurisdiction of this Court in cases brought before it from the Court of
Appeals via Rule 45 of the Rules of Court is limited to reviewing errors of law. Findings of fact of the
latter court are conclusive, except in a number of instances. 11 In the case at bar, one of the
recognized exceptions warranting a review by this Court of the factual findings of the Court of
Appeals exists, to wit, the factual findings and conclusions of the lower court and Court of Appeals
are conflicting, especially on the issue of whether the Deed of Donation in question was in fraud of
creditors.

Art. 1381 of the Civil Code enumerates the contracts which are rescissible, and among them are
"those contracts undertaken in fraud of creditors when the latter cannot in any other manner collect
the claims due them."

The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to
prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit
prior to the alienation, 12 although demandable later; (2) the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy
his claim; 13 (4) the act being impugned is fraudulent; 14 (5) the third person who received the property
conveyed, if it is by onerous title, has been an accomplice in the fraud. 15

The general rule is that rescission requires the existence of creditors at the time of the alleged
fraudulent alienation, and this must be proved as one of the bases of the judicial pronouncement
setting aside the contract. 16 Without any prior existing debt, there can neither be injury nor fraud.
While it is necessary that the credit of the plaintiff in the accion pauliana must exist prior to the
fraudulent alienation, the date of the judgment enforcing it is immaterial. Even if the judgment be
subsequent to the alienation, it is merely declaratory, with retroactive effect to the date when the
credit was constituted. 17

In the instant case, the alleged debt of LIM in favor of petitioner was incurred in August 1990, while
the deed of donation was purportedly executed on 10 August 1989.

We are not convinced with the allegation of the petitioner that the questioned deed was antedated to
make it appear that it was made prior to petitioner's credit. Notably, that deed is a public document, it
having been acknowledged before a notary public. 18 As such, it is evidence of the fact which gave
rise to its execution and of its date, pursuant to Section 23, Rule 132 of the Rules of Court.

Petitioner's contention that the public documents referred to in said Section 23 are only those entries
in public records made in the performance of a duty by a public officer does not hold water. Section
23 reads:

Sec. 23. Public documents as evidence. — Documents consisting of entries in public

records made in the performance of a duty by a public officer are prima
facie evidence of the facts therein stated. All other public documents are evidence,
even against a third person, of the fact which gave rise to their execution and of the
date of the latter. (Emphasis supplied).

The phrase "all other public documents" in the second sentence of Section 23 means those public
documents other than the entries in public records made in the performance of a duty by a public
officer. And these include notarial documents, like the subject deed of donation. Section 19, Rule
132 of the Rules of Court provides:

Sec. 19. Classes of docum/ents. — For the purpose of their presentation in evidence,
documents are either public or private.

Public documents are:

 (a) . . .

(b) Documents acknowledged before a notary public except last wills and
testaments. . . .

It bears repeating that notarial documents, except last wills and testaments, are public documents
and are evidence of the facts that gave rise to their execution and of their date.

In the present case, the fact that the questioned Deed was registered only on 2 July 1991 is not
enough to overcome the presumption as to the truthfulness of the statement of the date in the
questioned deed, which is 10 August 1989. Petitioner's claim against LIM was constituted only in
August 1990, or a year after the questioned alienation. Thus, the first two requisites for the
rescission of contracts are absent.

Even assuming arguendo that petitioner became a creditor of LIM prior to the celebration of the
contract of donation, still her action for rescission would not fare well because the third requisite was
not met. Under Article 1381 of the Civil Code, contracts entered into in fraud of creditors may be
rescinded only when the creditors cannot in any manner collect the claims due them. Also, Article
1383 of the same Code provides that the action for rescission is but a subsidiary remedy which
cannot be instituted except when the party suffering damage has no other legal means to obtain
reparation for the same. The term "subsidiary remedy" has been defined as "the exhaustion of all
remedies by the prejudiced creditor to collect claims due him before rescission is resorted to." 19 It is,
therefore, "essential that the party asking for rescission prove that he has exhausted all other legal
means to obtain satisfaction of his claim. 20 Petitioner neither alleged nor proved that she did so. On
this score, her action for the rescission of the questioned deed is not maintainable even if the fraud
charged actually did exist." 21

The fourth requisite for an accion pauliana to prosper is not present either.

Art. 1387, first paragraph, of the Civil Code provides: "All contracts by virtue of which the debtor
alienates property by gratuitous title are presumed to have been entered into in fraud of creditors
when the donor did not reserve sufficient property to pay all debts contracted before the donation.
Likewise, Article 759 of the same Code, second paragraph, states that the donation is always
presumed to be in fraud of creditors when at the time thereof the donor did not reserve sufficient
property to pay his debts prior to the donation.

For this presumption of fraud to apply, it must be established that the donor did not leave adequate
properties which creditors might have recourse for the collection of their credits existing before the
execution of the donation.

As earlier discussed, petitioner's alleged credit existed only a year after the deed of donation was
executed. She cannot, therefore, be said to have been prejudiced or defrauded by such alienation.
Besides, the evidence disclose that as of 10 August 1989, when the deed of donation was executed,
LIM had the following properties:

(1) A parcel of land containing an area of 220 square meters,

together with the house constructed thereon, situated in Sto. Niño
Village, Mandaue City, Cebu, registered in the name of Rosa Lim and
covered by TCT No. 19706; 22

(2) A parcel of land located in Benros Subdivision, Lawa-an, Talisay,

Cebu; 23

(3) A parcel of land containing an area of 2.152 hectares, with

coconut trees thereon, situated at Hindag-an, St. Bernard, Southern
Leyte, and covered by Tax Declaration No. 13572. 24

(4) A parcel of land containing an area of 3.6 hectares, with coconut

trees thereon, situated at Hindag-an, St. Bernard, Southern Leyte,
and covered by Tax Declaration No. 13571. 25

During her cross-examination, LIM declared that the house and lot mentioned in no. 1 was bought by
her in the amount of about P800,000 to P900,000. 26 Thus:
 ATTY. FLORIDO:

Q These properties at the Sto. Niño Village, how much did you
acquire this property?

A Including the residential house P800,000.00 to P900,000.00.

Q How about the lot which includes the house. How much was the
price in the Deed of Sale of the house and lot at Sto. Niño Violage
[sic]?

A I forgot.

Q How much did you pay for it?

A That is P800,000.00 to P900,000.00.

Petitioner did not adduce any evidence that the price of said property was lower. Anent the
property in no. 2, LIM testified that she sold it in 1990. 27 As to the properties in nos. 3 and 4,
the total market value stated in the tax declarations dated 23 November 1993 was
P56,871.60. Aside from these tax declarations, petitioner did not present evidence that would
indicate the actual market value of said properties. It was not, therefore, sufficiently
established that the properties left behind by LIM were not sufficient to cover her debts
existing before the donation was made. Hence, the presumption of fraud will not come into
play.

Nevertheless, a creditor need not depend solely upon the presumption laid down in Articles 759 and
1387 of the Civil Code. Under the third paragraph of Article 1387, the design to defraud may be
proved in any other manner recognized by the law of evidence. Thus in the consideration of whether
certain transfers are fraudulent, the Court has laid down specific rules by which the character of the
transaction may be determined. The following have been denominated by the Court as badges of
fraud:

(1) The fact that the consideration of the conveyance is fictitious or is

inadequate;

(2) A transfer made by a debtor after suit has begun and while it is
pending against him;

(3) A sale upon credit by an insolvent debtor;

(4) Evidence of large indebtedness or complete insolvency;

(5) The transfer of all or nearly all of his property by a debtor,

especially when he is insolvent or greatly embarrassed financially;

(6) The fact that the transfer is made between father and son, when
there are present other of the above circumstances; and

(7) The failure of the vendee to take exclusive possession of all the
property. 28

The above enumeration, however, is not an exclusive list. The circumstances evidencing fraud are
as varied as the men who perpetrate the fraud in each case. This Court has therefore declined to
define it, reserving the liberty to deal with it under whatever form it may present itself. 29

Petitioner failed to discharge the burden of proving any of the circumstances enumerated above or
any other circumstance from which fraud can be inferred. Accordingly, since the four requirements
for the rescission of a gratuitous contract are not present in this case, petitioner's action must fail.

In her further attempt to support her action for rescission, petitioner brings to our attention the 31
July 1990 Decision 30 of the RTC of Quezon City, Branch 92, in Criminal Case No. Q-89-2216. LIM
was therein held guilty of estafa and was ordered to pay complainant Victoria Suarez the sum of
P169,000 for the obligation LIM incurred on 8 October 1987. This decision was affirmed by the Court
of Appeals. Upon appeal, however, this Court acquitted LIM of estafa but held her civilly liable for
P169,000 as actual damages.

It should be noted that the complainant in that case, Victoria Suarez, albeit a creditor prior to the
questioned alienation, is not a party to this accion pauliana. Article 1384 of the Civil Code provides
that rescission shall only be to the extent necessary to cover the damages caused. Under this
Article, only the creditor who brought the action for rescission can benefit from the rescission; those
who are strangers to the action cannot benefit from its effects. 31 And the revocation is only to the
extent of the plaintiff creditor's unsatisfied credit; as to the excess, the alienation is
maintained. 32 Thus, petitioner cannot invoke the credit of Suarez to justify rescission of the subject
deed of donation.

Now on the propriety of the trial court's awards of moral damages, attorney's fees and expenses of
litigation in favor of the petitioner. We have pored over the records and found no factual or legal
basis therefor. The trial court made these awards in the dispositive portion of its decision without
stating, however, any justification for the same in the ratio decidendi. Hence, the Court of Appeals
correctly deleted these awards for want of basis in fact, law or equity.

WHEREFORE, the petition is hereby DISMISSED and the challenged decision of the Court of
Appeals in CA-G.R. CV. No. 50091 is AFFIRMED in toto.

No pronouncement as to costs.

SO ORDERED.

Puno, Kapunan, Pardo and Ynares-Santiago, JJ., concur.

G.R. No. 173349 February 9, 2011

SAMUEL U. LEE and PAULINE LEE and ASIATRUST DEVELOPMENT BANK, INC., Petitioners,
vs.
BANGKOK BANK PUBLIC COMPANY, LIMITED, Respondent.

DECISION

VELASCO, JR., J.:

The Case

In this Petition for Review on Certiorari under Rule 45, petitioners assail the March 15, 2006
Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 79362, which reversed and set aside the
April 21, 2003 Decision2 of the Regional Trial Court (RTC), Branch 73 in Antipolo City, in Civil Case
No. 99-5388, entitled Bangkok Bank Public Company Limited v. Spouses Samuel U. Lee and
Pauline Lee and Asiatrust Development Bank for the Rescission of Real Estate Mortgage (REM),
Annulment of Foreclosure Sale, Cancellation of Titles and Damages. They assail also the June 29,
2006 CA Resolution denying their motion for reconsideration.

The Facts

Midas Diversified Export Corporation (MDEC) and Manila Home Textile, Inc. (MHI) entered into two
separate Credit Line Agreements (CLAs) with Respondent Bangkok Bank Public Company, Limited
(Bangkok Bank) on November 29, 1995 and April 17, 1996, respectively.3 MDEC and MHI are
owned and controlled by the Lee family: Thelma U. Lee, Maybelle L. Lim, Daniel U. Lee and Samuel
U. Lee (Samuel).4 Both corporations have interlocking directors and management led by the Lee
family; and engaged in the manufacturing and export of garments, ladies’ bags and apparel.

Bangkok Bank required guarantees from the Lee family for the two CLAs. Consequently, the Lee
family executed guarantees in favor of Bangkok Bank on December 1, 1995 for the CLA for MDEC
and on April 17, 1996 for the CLA of MHI. Under the guarantees, the Lee family irrevocably and
unconditionally guaranteed, as principal debtors, the payment of any and all indebtedness of MDEC
and MHI with Bangkok Bank.5 Prior to the granting of the CLAs, Bangkok Bank conducted a property
check on the Lee family and required Samuel to submit a list of his properties. Bangkok Bank,
however, did not require the setting aside, as collateral, of any particular property to answer for any
future unpaid obligation.6 Subsequently, MDEC and MHI made several availments from the CLAs. In
time, the advances, which MDEC and MHI had taken out from the CLAs, amounted to three million
dollars (USD 3,000,000).7

On July 25, 1996, MDEC was likewise granted a loan facility by Asiatrust Development Bank, Inc.
(Asiatrust).8 This facility had an available credit line of forty million pesos (PhP 40,000,000) for letters
of credit, advances on bills and export packing; and a separate credit line of two million dollars (USD
2,000,000) for bills purchase.9

In the meantime, in May 1997, Samuel bought several parcels of land in Cupang, Antipolo, and later
entered into a joint venture with Louisville Realty and Development Corporation to develop the
properties into a residential subdivision, called Louisville Subdivision.10 These properties in Cupang,
Antipolo are the subject properties in the instant case (Antipolo properties) and are covered by
Transfer Certificate of Title (TCT) Nos. 329663 to 329511 of the Registry of Deeds of Rizal in
Marikina City (RD).11

Throughout 1997, MDEC availed itself of the omnibus credit line granted by Asiatrust on three
occasions: ten million pesos (PhP 10,000,000) to mature on July 15, 1997; eleven million pesos
(PhP 11,000,000) to mature on February 6, 1998; and another ten million pesos (PhP 10,000,000) to
mature on February 20, 1998. In the same year, particularly in August 1997, when MDEC had
defaulted in the payment of its loan that matured on July 15, 1997, Asiatrust initiated negotiations
with MDEC and required the Lee family to provide additional collateral that would secure the loan. In
December 1997, the negotiation was concluded when Asiatrust had agreed to Samuel’s proposition
that he would mortgage the subject Antipolo properties to secure the loan, and therefore execute a
REM over the properties.12 While the titles of the Antipolo properties had been delivered by Samuel
to Asiatrust and the REM had been executed in January 1998, spouses Samuel and Pauline Lee
(spouses Lee) were requested to sign a new deed of mortgage on February 23, 1998, and, thus, it
was only on that date that the said mortgage was actually notarized, registered, and annotated at the
back of the titles.13

Similarly, MDEC and MHI initially had made payments with their CLAs until they defaulted and
incurred aggregate obligations to Bangkok Bank in the amount of USD 1,998,554.60 for MDEC and
USD 800,000 for MHI.14 Similarly, the Lee corporations defaulted in their obligations with other
creditors. For example, Security Bank Corporation (SBC) filed a case against the Lee family for a
sum of money resulting from the nonpayment of obligations before the RTC, Branch 132 in Makati
City, entitled Security Bank Corporation v. Duty Free Superstore, Inc., Daniel U. Lee, Samuel U. Lee
and Jacqueline M. Lee, docketed as Civil Case No. 98-196. On January 30, 1998, the RTC in Civil
Case No. 98-196 issued a Writ of Preliminary Attachment in favor of SBC, granting attachment of the
defendants’ real and personal properties.15 The writ, however, was neither registered nor annotated
on the titles of the subject Antipolo properties at the RD.

On February 16, 1998, MDEC, MHI, and three other corporations owned by the Lee family filed
before the Securities and Exchange Commission (SEC) a Consolidated Petition for the Declaration
of a State of Suspension of Payments and for Appointment of a Management
Committee/Rehabilitation Receiver.16 Said petition acknowledged, among others, MDEC and MHI’s
indebtedness with Bangkok Bank, and admitted that matured and maturing obligations could not be
met due to liquidity problems. The petition likewise had a list of creditors to whom the corporations
remain indebted, which included Asiatrust.17 The petition stated that the Lee family and their
corporations had more than sufficient properties to cover all liabilities to their creditors; and
presented a list of all their properties including the subject properties located in Antipolo, Rizal.
Notably, the list of properties attached to the petition indicated that the subject Antipolo properties of
the spouses Lee had already been earmarked, or that they had already served as security, for
MDEC’s unpaid obligation with Asiatrust.18

On February 20, 1998, the SEC issued a Suspension Order enjoining the Lee corporations from
disposing of their property in any manner except in the ordinary course of business, and from
making any payments outside the legitimate expenses of their business during the pendency of the
petition.19

On March 12, 1998, Bangkok Bank instituted an action before the RTC, Branch 141 in Makati City to
recover the loans extended to MDEC and MHI under the guarantees, docketed as Civil Case No. 98-
628.20 Bangkok Bank’s application for the issuance of a writ of preliminary attachment was
granted through the Orders dated March 17 and 18, 1998, covering the properties of the Lee
family in Antipolo, Cavite, Quezon City, and Baguio, among others.21

While enforcing the writs of preliminary attachment, Bangkok Bank discovered that the spouses Lee
had executed a REM over the subject Antipolo properties in favor of Asiatrust; and that the REM had
previously been annotated on the titles.22 Thus, the writs of preliminary attachment were also
inscribed at the back of the TCTs covering the subject Antipolo properties, next to the annotation of
the REM.

With MDEC still unable to make payments on its defaulting loans with Asiatrust, the latter foreclosed
the subject mortgaged Antipolo properties. On April 15, 1998, Asiatrust won as the highest bidder at
the auction sale, purchasing the said properties for PhP 20,864,735.23 Thereafter, Asiatrust still filed
an action against MDEC and the spouses Lee to collect the deficiency amounting to at least PhP
14,800,000. Up until the filing of the memoranda by the parties before this Court, the said action
remained pending before the CA.24

Subsequently, the sale was registered on April 21, 1998.25 Believing the REM and the foreclosure
sale to be fraudulent, Bangkok Bank did not redeem the subject properties. As there had been no
effort to redeem the properties, consequently, the TCTs covering the subject properties were
consolidated in the name of Asiatrust on April 30, 1999, and 120 new titles were issued in the name
of Asiatrust without the annotation of the writs of preliminary attachment, which were deemed
canceled.26

Among the 120 titles foreclosed by Asiatrust in Louisville Subdivision in Antipolo, only 12 properties
were sold for a maximum price of PhP 250,000 for a house and lot, and 108 titles remained.
Asiatrust was still unable to sell them and convert them into cash. From then on, Asiatrust
maintained security services and paid the real estate taxes of the subject Antipolo properties, among
others.
On July 20, 1999, Bangkok Bank filed the instant case before the RTC, Branch 73 in Antipolo City,
docketed as Civil Case No. 99-5388 for the rescission of the REM over the subject properties,
annulment of the April 15, 1998 foreclosure sale, cancellation of the new TCTs issued in favor of
Asiatrust, and damages amounting to PhP 600,000. In its action, Bangkok Bank alleged, among
others, that the presumption of fraud under Article 1387 of the Civil Code applies, considering that a
writ of preliminary attachment was issued in January 1998 in favor of SBC against Samuel. It also
claimed that collusion and fraud transpired between the spouses Lee and Asiatrust in the execution
of the REM. On August 5, 1999, Bangkok Bank amended its complaint to implead the RD.

Meanwhile, on March 23, 2000, the RTC, Branch 141 in Makati City in Civil Case No. 98-628
rendered a Partial Decision in favor of Bangkok Bank, ordering the Lee family, pursuant to the
guarantees, to pay USD 1,998,554.60 for the CLA of MDEC and USD 800,000 for the CLA of MHI,
with the corresponding 12% interest per annum from the date of the filing of the complaint, i.e., on
March 12, 1998, until fully paid.

But Bangkok Bank had only levied on the execution of the partial decision, some old equipment,
office fixtures and furniture, garments, textiles, and other small production equipment with an
approximate aggregate value of PhP 600,000.27 Considering the total liabilities of the Lee family to
Bangkok Bank, the levied properties were insufficient to satisfy the partial judgment in Civil Case No.
98-628.

The Ruling of the RTC

After due hearing with the parties presenting their evidence, on April 21, 2003, the RTC rendered a
Decision dismissing the case, the fallo reading:

WHEREFORE, premises considered, the instant case is hereby dismissed for lack of merit.

No findings as to the counterclaim of the defendants for insufficiency of evidence to support the
claim.

SO ORDERED.28

In dismissing the instant case, the trial court found no concrete proof of the alleged fraud committed
by the Lee family and Asiatrust, more so, that of a collusion or conspiracy between them.
Consequently, it ruled that Art. 1381(3) of the Civil Code does not apply. Moreover, it noted that
Bangkok Bank has not proved that it cannot in any manner collect its claims from the Lee family. For
one, it held that Bangkok Bank chose not to exercise its right of redemption over the subject
properties; for another, the subject properties were not the only properties of the Lee family as
admitted by Bangkok Bank’s sole witness, Susan Capalaran.

The RTC explained that a mortgage contract is an onerous undertaking to secure payment of an
obligation and cannot be considered as a gratuitous alienation; thus, Art. 1387 of the Civil Code
does not apply.29 Finally, it held that neither fraud nor a violation of the SEC suspension order can
result from the execution of the REM and the foreclosure of the subject properties, because
according to the testimony of Bangkok Bank’s sole witness, the subject properties are not covered
by the SEC Suspension Order for which reason Bangkok Bank filed an action to attach them. As the
subject properties are not covered by the SEC Suspension Order, the RTC held that there is nothing
that precludes the spouses Lee from mortgaging them to Asiatrust.30

The Ruling of the CA

Aggrieved, Bangkok Bank appealed the trial court’s decision before the CA; and on March 15, 2006,
the appellate court rendered the assailed decision, which granted the appeal, and reversed and set
aside the RTC decision. The decretal portion reads:

WHEREFORE, premises considered, the instant appeal is hereby GRANTED. The assailed
Decision dated April 21, 2003 of the trial court is REVERSED and SET ASIDE. A new judgment is
rendered ordering the:

1. Rescission of the Real Estate Mortgage over Appellees-spouses Lee’s Antipolo properties
in favor of appellee Asiatrust;
 2. Annulment of the Foreclosure Sale conducted on April 15, 1998;

3. Cancellation of the Transfer Certificate of Titles in the name of Asiatrust; and

4. Reversion of the titles in favor of appellees-spouses Lee.

No costs.

SO ORDERED.31

In reversing and setting aside the RTC decision, the CA held as crucial the Letter dated April 4, 1998
sent by the counsel of the Midas Group of Companies to the Office of the Clerk of Court and Ex-
Officio Sheriff of the trial court relative to the extra-judicial foreclosure of the REM scheduled on April
15, 1998. The letter assailed said proceeding as bereft of legal and factual bases in the light of the
February 20, 1998 Suspension Order of the SEC.32 It held that the present counsel of petitioner-
spouses Lee cannot take a 360-degree turn as regards their predecessor’s position, for Bangkok
Bank merely adopted petitioners’ earlier stance. Thus, the CA ruled that petitioner-spouses Lee are
in estoppel in pais, under Art. 1431 of the Civil Code and Section 2(a) of Rule 131 of the Revised
Rules on Evidence.

The CA found that the subject Antipolo properties, though personal assets of the spouses Lee, are
covered by the February 20, 1998 Suspension Order of the SEC, since they are included in the list
submitted to SEC by the Lee family; and that Samuel is a guarantor of the loans incurred by MDEC
and MHI from Bangkok Bank. It ruled that Samuel, being a guarantor, is jointly and severally liable to
Bangkok Bank for the corporate debts of MDEC and MHI, as he divested himself from the protection
of the limited liability doctrine, which, the CA held, was shown (1) through the inclusion of the said
subject Antipolo properties in the list submitted to the SEC; and (2) by Samuel, through the
guarantees that he executed, thus voluntarily binding himself to the payment of the loans incurred
from Bangkok Bank.

The CA also rejected petitioners’ claim that the subject properties were allotted to Asiatrust. It
reasoned that if the subject properties were indeed allotted to Asiatrust, then these would not have
been included in the list of properties submitted to the SEC. It added that the absence of any
encumbrance annotated on the TCTs or any document appurtenant to it prior to the January 30,
1998 writ of preliminary attachment issued in Civil Case No. 98-196 and the February 20, 1998
Suspension Order further belies petitioners’ claim. The CA held that fraud was perpetrated through
the REM executed and registered on February 23, 1998 pursuant to the presumption in the second
paragraph of Art. 1387 of the Civil Code, which provides that "alienations by onerous title are also
presumed fraudulent when made by persons against whom x x x some writ of attachment has been
issued." Consequently, the spouses Lee filed the instant petition.

The Issues

I.

Whether or not Bangkok Bank can maintain an action to rescind the REM on the subject Antipolo
properties despite its failure to exhaust all legal remedies to satisfy its claim.

II.

Whether or not properties owned by private individuals should be covered by a suspension order
issued by the SEC in an action for suspension of payments.

III.

Whether or not a surety or guarantor is guilty of defrauding creditors for executing a REM in favor of
one creditor prior to the filing of a Petition for Suspension of Payments.33

The Court’s Ruling

The core issue is whether the February 23, 1998 REM executed over the subject Antipolo properties
and the April 15, 1998 foreclosure sale were committed in fraud of petitioners’ other creditors, and,
as a consequence of such fraud, the questioned mortgage could, therefore, be rescinded.
Petitioners allege that no fraud exists.

The petition is meritorious.

Prevailing and applicable SEC laws

At the outset, it must be noted that at the time the Consolidated Petition for the Declaration of a
State of Suspension of Payments and for Appointment of a Management Committee/Rehabilitation
Receiver was filed before the SEC on February 16, 1998 by MDEC, MHI, and three other
corporations owned by the Lee family, Batas Pambansa Blg. (BP) 178 or the then Revised
Securities Act was the primary governing law along with Presidential Decree No. (PD) 902-A, as
amended, and the Corporation Code of the Philippines. Pertinently, among others, the SEC was also
covered by the Investment House Law (PD 129), the Financing Company Act under Republic Act.
No. (RA) 2626, the Foreign Investments Act (RA 7042), and the Liberalized Foreign Investments Act
(RA 8179). And subsequent to the filing of the instant case, the Securitization Act of 2004 (RA 9267)
and the Lending Company Regularization Act of 2007 (RA 9474) were also enacted.

PD 902-A,34 however, was further amended by RA 8799 or the Securities Regulation Code,
approved on July 19, 2000 by President Joseph Estrada.35 Under Sec. 5.2 of RA 8799,36 the SEC’s
original and exclusive jurisdiction over all cases enumerated under Sec. 5 of PD 902-A37 was
transferred to the appropriate RTC. RA 8799, Sec. 5.2, however, expressly stated as an exception,
that the "[t]he Commission shall retain jurisdiction over pending suspension of payment/rehabilitation
cases filed as of 30 June 2000 until finally disposed." Accordingly, the Consolidated Petition for the
Declaration of a State of Suspension of Payments and for Appointment of a Management
Committee/Rehabilitation Receiver filed on February 16, 1998 by MDEC, MHI and three other
corporations owned by the Lee family, remained under the jurisdiction of the SEC until finally
disposed of pursuant to the last sentence of Sec. 5.2 of RA 8799.

The subject properties are not under the purview of the SEC Suspension Order

Pivotal to the resolution of the instant case is whether the subject properties owned by the spouses
Lee were subject to the February 20, 1998 SEC Suspension Order. On the one hand, the CA held
and found these to be subject to the Suspension Order. The RTC, on the other hand, found
contrariwise in that the assailed REM and foreclosure sale did not violate the SEC Suspension
Order.

A review of the applicable laws and existing jurisprudence would show that the subject properties
owned by the spouses Lee were not subject to the February 20, 1998 SEC Suspension Order.

PD 902-A vested the SEC with jurisdiction on petitions for suspension of payments only on
corporations, partnerships and associations; not on individual persons

The SEC’s jurisdiction is evident from the statutorily vested power of jurisdiction, supervision and
control by the SEC over all corporations, partnerships or associations, which are grantees of primary
franchise, license or permit issued by the government to operate in the Philippines, and its then
original and exclusive jurisdiction over petitions for suspension of payments of said entities. Secs. 3
and 5 of PD 902-A pertinently provides, thus:

Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over all
corporations, partnerships or associations, who are the grantees of primary franchise and/or a
license or permit issued by the government to operate in the Philippines; and in the exercise of its
authority, it shall have the power to enlist the aid and support of any and all enforcement agencies of
the government, civil or military.

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:

xxxx
(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension
of payments in cases where the corporation, partnership or association possesses sufficient property
to cover all its debts but foresees the impossibility of meeting them when they respectively fall due or
in cases where the corporation, partnership or association has no sufficient assets to cover its
liabilities, but is under the management of a Rehabilitation Receiver or Management Committee
created pursuant to this Decree. (Emphasis Ours.)

It can be clearly gleaned from the above provisions that in cases of petitions for the suspension of
payments, the SEC has jurisdiction over corporations, partnerships and associations, which are
grantees of primary franchise or license or permit issued by the government to operate in the
Philippines, and their properties. And it is indubitably clear from the aforequoted Sec. 5(d) that only
corporations, partnerships and associations—NOT private individuals—can file with the SEC,
petitions for declaration in a state of suspension of payments. Thus, it logically follows that the SEC
does not have jurisdiction to entertain petitions for suspension of payments filed by parties other
than corporations, partnerships or associations. Indeed, settled is the rule that it is axiomatic that
jurisdiction is the authority to hear and determine a cause, which is conferred by law and not by the
policy of any court or agency.38

Private individuals and their privately owned properties cannot be placed under the jurisdiction of the
SEC in a petition for suspension of payments

In Chung Ka Bio v. Intermediate Appellate Court,39 this Court resolved in the negative the issue of
whether private individuals can file with the SEC petitions for declaration in a state of suspension of
payments. We held that Sec. 5(d) of PD 902-A clearly does not allow a mere individual to file the
petition, which is limited to "corporations, partnerships or associations." Besides, We pointed out that
the SEC, being a mere administrative agency, is a tribunal of limited jurisdiction and, as such, can
only exercise those powers, which are specifically granted to them by their enabling statutes. We,
thus, concluded that where no authority is granted to hear petitions of individuals for suspension of
payments, such petitions are beyond the competence of the SEC. In short, the SEC has no
jurisdiction over private individuals relative to any petition for suspension of payments, whether the
private individual is a petitioner or a co-petitioner. We have said time and again that the SEC’s
"jurisdiction is limited only to corporations and corporate assets;" it has no jurisdiction over the
properties of private individuals or natural persons, even if they are the corporation’s officers or
sureties.40 We have, thus, consistently applied this ruling to the subsequent Ong v. Philippine
Commercial International Bank,41 Modern Paper Products, Inc. v. Court of Appeals,42 and Union
Bank of the Philippines v. Court of Appeals.43

Here, it is undisputed that the petition for suspension of payments was collectively filed by the five
corporations owned by the Lee family. It is likewise undisputed that together with the consolidated
petition is a list of properties, which included the subject Antipolo properties owned by Samuel and
Pauline Lee. The fact, however, that the subject properties were included in the list submitted to the
SEC does not confer jurisdiction on the SEC over such properties. It is apparent that even if the
members of the Lee family are joined as co-petitioners with the five corporations, still, this could not
confer jurisdiction on the SEC over the Lee family members—as private individuals—nor could this
affect their privately owned properties.

Further, the fact that the debts of MDEC and MHI to Bangkok Bank are secured by the Lee family
through the guarantees will not likewise put the Lee family and their privately owned properties
under the jurisdiction of the SEC through the consolidated petition for suspension of payments.

Therefore, the February 20, 1998 Suspension Order issued by the SEC did not and could not have
included the subject properties. The RTC correctly grasped this point that the disposition of the
subject properties did not violate the suspension order.

Bangkok Bank cannot take both opposing stances

Certainly, Bangkok Bank cannot take opposite positions at the same time. On the one hand, it
instituted Civil Case No. 98-628 before the RTC, Branch 141 in Makati City on March 12, 1998—
almost a month after the filing of the consolidated petition before the SEC and the issuance of the
February 20, 1998 Suspension Order in order to recover the loans extended to MDEC and MHI
under the guarantees. In it, Bangkok Bank contended that the subject lots were not part of the
properties under the jurisdiction of the SEC in the case for suspension of payments. But, on the
other hand, Bangkok Bank claims that the Antipolo properties are subject to the February 20, 1998
SEC Suspension Order, and, therefore, cannot be mortgaged by the spouses Lee to Asiatrust. By
saying that the subject Antipolo properties are not under the jurisdiction of the SEC that is hearing
the consolidated petition for suspension of payments, it necessarily follows that the same properties
could not be subject to the SEC Suspension Order. This admission is also very clear in the
statement made by Bangkok Bank’s sole witness, Susan Capalaran:44

Q: In other words, by your filing of an action in Makati on March 12, 1998, you are in effect saying
that the properties owned by the individual stockholders are not covered by the Suspension Order of
the Securities and Exchange Commission?

Susan Capalaran: Yes.

The allegations of fraud in the instant petition

At the heart of the present controversy is the allegation of fraud by Bangkok Bank against the
spouses Lee and Asiatrust. It is in this regard that the issue of fraud shall be examined here in detail.
Preliminary matters, such as the applicable laws and their interpretation, shall first be explained. And
subsequently, in order to fully appreciate the allegations of fraud by Bangkok Bank, they shall be
discussed in three parts: (1) the existence of fraud on the part of the spouses Lee; (2) the existence
of fraud on the part of Asiatrust; and separately, (3) the existence of collusion on the part of the
spouses Lee and Asiatrust. It is imperative to expound on these points separately in order to
illustrate that the mere existence of fraud on the part of one party, i.e., the spouses Lee (against
whom some judgment or some writ of attachment has been issued),45 does not necessarily result in
the rescission of a supposed alienation, if there is any.

The presumption of fraud under Art. 1387 of the Civil Code does not apply in the present case

Under Art. 1381(3) of the Civil Code, contracts, which were "undertaken in fraud of creditors when
the latter cannot in any other manner collect the claims due them," are rescissible. Art. 1387 of the
Code states when an act is presumed to be fraudulent, thus:

Art. 1387. All contracts by virtue of which the debtor alienates property by gratuitous title are
presumed to have been entered in fraud of creditors, when the donor did not reserve sufficient
property to pay all debts contracted before the donation.

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 the rescission.

In addition to these presumptions, the design to defraud creditors may be proved in any other
manner recognized by the law of evidence.

It is with regard to the foregoing provisions that the CA anchored its ruling of the existence of a
presumption of fraud in the instant case. This presumption, however, finds no application to this
case.

The presumption of fraud established under Art. 1387 does not apply to registered lands IF "the
judgment or attachment made is not also registered."46 In Abaya v. Enriquez,47 Abaya was able to
obtain a judgment against Enriquez for a sum of money, and the judgment was partially unsatisfied
after Enriquez made a partial payment. The judgment and the writ of execution, however, was never
annotated on the titles of the registered lands owned by Enriquez.48 Subsequently, Enriquez sold the
said lands. In an action for rescission instituted by Abaya, the Court ruled that the presumption of
fraud does not apply as the judgment and the attachment have not been registered and annotated
on the title.49 The Court held:

Where the judgment rendered against the defendant x x x has not been entered in the records of the
register of deeds, relative to an immovable belonging to the judgment debtor, the subsequent sale of
said property by the latter, shall not be rescinded upon the ground of fraud, unless the complicity of
the buyer in the fraud imputed to said vendor is established by other means than the presumption of
fraud x x x.50

In this case, prior to the annotation of the REM on February 23, 1998, SBC was able to successfully
acquire a writ of preliminary attachment in its favor against the spouses Lee on January 30, 1998 in
a case for a sum of money for nonpayment of its obligation. Bangkok Bank alleges that because of
this, the presumption of fraud under Art. 1387 of the Civil Code applies. But while a judgment was
made against the spouses Lee in favor of SBC on January 30, 1998, this, however, was not
annotated on the titles of the subject properties. In fact, there is no showing that the judgment has
ever been annotated on the titles of the subject properties. As established in the facts, there were
only two annotations at the back of the titles of the Antipolo properties: first, the REM executed in
favor of Asiatrust on February 23, 1998; and second, the writ of preliminary attachment in favor of
Bangkok Bank on March 18, 1998. Considering that the earlier SBC judgment or attachment was
not, and in fact never was, annotated on the titles of the subject Antipolo properties, prior to the
execution of the REM, the presumption of fraud under Art. 1387 of the Code clearly cannot apply.

Even assuming that Art. 1387 of the Code applies, the execution of a mortgage is not contemplated
within the meaning of alienation by onerous title under the said provision

Under Art. 1387 of the Code, fraud is presumed only in alienations by onerous title of a person
against whom a judgment or attachment has been issued. The term, alienation, connotes the
"transfer of the property and possession of lands, tenements, or other things, from one person to
another."51 This term is "particularly applied to absolute conveyances of real property" and must
involve a "complete transfer from one person to another."52 A mortgage does not contemplate a
transfer or an absolute conveyance of a real property.53 It is "an interest in land created by a written
instrument providing security for the performance of a duty or the payment of a debt."54 When a
debtor mortgages his property, he "merely subjects it to a lien but ownership thereof is not parted
with."55 It is merely a lien that neither creates a title nor an estate.56 It is, therefore, certainly not the
alienation by onerous title that is contemplated in Art. 1387 where fraud is to be presumed.

In this very action, Bangkok Bank claims that when the spouses Lee executed the REM in favor of
Asiatrust, the presumption of fraud under Art. 1387 became applicable. We hold in the negative. As
We have plainly discussed, a mortgage is not that which is contemplated in the term "alienation" that
would make the presumption of fraud under Art. 1387 apply. It requires a full and absolute
conveyance or transfer of property from one person to another, such as that in the form of a sale. As
elucidated earlier, a mortgage merely creates a lien on the property that would afford the
mortgagee/creditor greater security in the obligation of the mortgagor/debtor. This being so, as the
REM is not the alienation contemplated in Art. 1387 of the Code, the presumption of fraud cannot
apply.

In any case, the application of the presumption of fraud under Art. 1387, if applicable, could only be
made to apply to the spouses Lee as the person against whom a judgment or writ of attachment has
been issued; not to Asiatrust

A careful reading of Art. 1387 of the Code vis-à-vis its Art. 1385 would plainly show that the
presumption of fraud in case of alienations by onerous title only applies to the person who made
such alienation, and against whom some judgment has been rendered in any instance or some writ
of attachment has been issued. A third person is not and should not be automatically presumed to
be in fraud or in collusion with the judgment debtor. In allowing rescission in case of an alienation by
onerous title, the third person who received the property conveyed should likewise be a party to the
fraud.57 As clarified by Art. 1385(2) of the Code, so long as the person who is in legal possession of
the property did not act in bad faith, rescission cannot take place. Thus, in all instances, as to the
third person in legal possession of the questioned property, good faith is presumed. Accordingly, it is
upon the person who alleges bad faith or fraud that rests the burden of proof.58

Asiatrust, being a third person in good faith, should not be automatically presumed to have acted
fraudulently by the mere execution of the REM over the subject Antipolo properties, there being no
evidence of fraud or bad faith. Regrettably, in ratiocinating that fraud was committed by both the
spouses Lee and Asiatrust, the CA merely anchored its holding on the presumption espoused under
Art. 1387 of the Code,59 nothing more.

The alleged fraud on the part of the spouses Lee was not proved and substantiated

It appears that the argument of Bangkok Bank on the existence of fraud on the part of the spouses
Lee60 revolves around the application of the presumption of fraud under Art. 1387 of the
Code.61 Bangkok Bank failed to substantiate its allegations by presenting clear and convincing proof
that the spouses Lee indeed committed fraud in mortgaging the subject properties to Asiatrust, and
instead anchored its existence of the presumption under Art. 1387. This cannot stand before this
Court.
On the contrary, the spouses Lee proved the absence of fraud on their part. During trial, the spouses
Lee and Asiatrust were able to substantially establish that, indeed, a loan agreement has been
existing between them since 1996 and that MDEC made use of it on several occasions in 1997. It
has likewise been established that, as MDEC defaulted in its payment of the loan that matured in
1997, the parties began negotiations as to how MDEC could secure the loans. It was concluded in
December 1997 upon Samuel’s proposal that his Antipolo properties be used to secure MDEC’s
loans by means of a mortgage. This settlement has been agreed upon even before any action was
filed against the Lee corporations in 1998. These facts have been established during trial without
any controversy.

No deception could have been used by the spouses Lee in including in the list of properties, which
they submitted to the SEC, the subject Antipolo properties. First, it is undisputed that the list of
properties submitted by the Lee corporations to the SEC clearly indicated that the subject Antipolo
properties have already been earmarked, or have already been serving as security, for its loan
obligations with Asiatrust. Second, MDEC, through its counsel, truly believed in good faith that the
inclusion of the spouses Lee’s private properties in the list submitted to the SEC is valid and regular.
As can be seen in the letter sent by the counsel of the Midas Group of Companies to the Office of
the Clerk of Court and Ex-Officio Sheriff of the Antipolo RTC on April 4, 1998, at the time when the
subject Antipolo properties were being foreclosed by Asiatrust, its counsel vigorously countered the
actions of Asiatrust and stated that the subject Antipolo properties cannot be foreclosed pursuant to
the SEC Suspension Order.62 And as discussed infra, the alleged collusion between the spouses
Lee and Asiatrust appears to be a mere figment of imagination.

In any case, the facts show no presence of fraud on the part of Asiatrust; therefore, the REM was
not a sham

Even pushing further to say that the REM was executed by the spouses Lee to defraud creditors, the
REM cannot be rescinded and shall, therefore, stand, as Asiatrust—the third party, in favor of which
the REM was executed, and which subsequently foreclosed the subject properties—acted in good
faith and without any badge of fraud. As a general rule, whether the person, against whom a
judgment was made or some writ of attachment was issued, acted with or without fraud, so long as
the third person who is in legal possession of the property in question did not act with fraud and in
bad faith, an action for rescission cannot prosper. Art. 1385 of the Civil Code explicitly states this,
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 obliged to restore.

Neither shall rescission take place when the things which are the object of the contract are legally in
the possession of third persons who did not act in bad faith. (Emphasis Ours.)

As to who or which entity is in legal possession of a property, the registration in the Registry of
Deeds of the subject property under the name of a third person indicates the legal possession of that
person.63 In this case, Asiatrust is in the legal possession of the subject Antipolo properties after the
titles under the name of Spouses Lee have been canceled, and new TCTs have been issued on
April 20, 1999, under the name of Asiatrust. What is more, 12 title out of the 120 titles in the Antipolo
properties in question have already been sold to different persons, which make them in legal
possession of the properties. It is, thus, established that Asiatrust and the 12 other unnamed
persons are in legal possession of the subject Antipolo properties; and it is imperative to prove that
they legally took possession of them in good faith and without any badge of fraud.

Now, as to whether Asiatrust acted with fraud or bad faith, Bangkok Bank failed to present any clear
and convincing evidence that would ascertain its existence.

Contracts in fraud of creditors are those executed with the intention to prejudice the rights of
creditors. They should not be confused with those entered into without such mal-intent, even if, as a
direct consequence, a creditor may suffer some damage. More so it is, when the allegation involves
not only fraud on the part of the debtor, but also that of another creditor. In determining whether or
not a certain conveying contract is fraudulent, what comes to mind first is the question of whether the
conveyance was a bona fide transaction or a trick and contrivance to defeat creditors.64 Haste alone
in the foreclosure of the mortgage does not constitute the existence of fraud. Considering that the
totality of circumstances clearly manifests the want of fraud and bad faith on the part of the parties to
the REM in question, consequently, the REM cannot be rescinded.
In this case, it is clearly established that there was a bona fide transaction between the spouses Lee
and Asiatrust that necessitated the negotiations resulting from the former’s default in the payment of
its obligations; and which brought about the execution of the REM to secure their pre-existing
obligations. Particularly on the part of Asiatrust, the testimonies of Shirley Benedicto, its Vice-
President, who was part of the bank’s account management group tasked to ensure the proper
management of loans from its inception up to its collection, and of Atty. Neriza San Juan, the bank’s
former Vice-President, and Head of its Credit Support Services and Legal Services Groups, amply
proved the existence of good faith and dismissed the allegation of fraud. Asiatrust was able to
establish (1) the existence of a loan agreement through a loan facility/credit line between Asiatrust
and MDEC since July 25, 1996, which was guaranteed by the Lee family, including Samuel; (2) the
advances made by MDEC throughout 1997, which amounted to an aggregate sum of PhP
31,000,000; (3) the default in payment of MDEC on its maturing loans; and (4) the negotiations,
which took place between Asiatrust and Samuel on behalf of MDEC that led, in December 1997, to
the agreement for Samuel to mortgage the subject Antipolo properties to secure the defaulting loan
and the loans, which were yet to mature.65 And as the last advances made by MDEC matured on
February 20, 1998, it was just timely and appropriate for Asiatrust to foreclose the subject properties
on April 15, 1998 in order to ensure that it is paid of the obligations, which MDEC owed to it. In this
case, Asiatrust was left with only one clear and practicable means by which it could be paid of
MDEC’s obligations, i.e., by foreclosing the mortgaged properties. After all, "[t]he only right of a
mortgagee in case of non-payment of a debt secured by mortgage would be to foreclose the
mortgage and have the encumbered property sold to satisfy the outstanding indebtedness."66

Conversely, Asiatrust did not sleep on its rights as a mortgage creditor of MDEC by foreclosing the
mortgage on the spouses Lee’s Antipolo properties. On the contrary, it is odd but worth noting that
Bangkok Bank never acted on its rights as creditor at the soonest possible time. It could have
asserted it rights as creditor at the time when the Lee family’s corporations started to default in their
payments of the loans as early as October 1997.67 When Bangkok Bank finally instituted an action
against the Lee family on March 12, 1998 to collect the outstanding obligations of MDEC and MHI, a
writ of preliminary attachment was issued by the Makati RTC in the same month covering the
properties of the Lee family, including the subject Antipolo properties. And while enforcing the said
writ, Bangkok Bank discovered the existing REM that had already been annotated on the titles of the
subject Antipolo properties. But Bangkok Bank did nothing upon its knowledge and discovery.
Worse, even at the time of the foreclosure and the redemption period, or until April 30, 1999,
Bangkok Bank likewise did not act on the alleged fraudulent execution of the REM; nor did it redeem
the subject properties. Rather, it was only on July 20, 1999 that Bangkok Bank seems to have
belatedly realized that the subject Antipolo properties could properly be another means by which it
could be paid of the defaulting obligations of MDEC and MHI. Interestingly, even on the elevation of
this case to Us, Bangkok Bank’s counsel had to move for four extensions, totaling to 52 days within
which to file a comment on the instant petition, and has been warned for it.68 Asiatrust cannot be
faulted for acting with prudence, in good faith, and without any badge of fraud in the creation of the
REM and in the foreclosure of the mortgage to ensure the satisfaction of the debts owed to it by
MDEC. Bangkok Bank should have likewise done so at the earliest possible opportunity.

Furthermore, Asiatrust, in good faith, conducted the necessary diligence and meticulousness
expected of it. During cross-examination, Atty. San Juan established that when the spouses Lee
offered the subject Antipolo properties as collateral, Asiatrust had them appraised and required the
spouses Lee to submit a photocopy of the titles, location map, and the relevant tax declarations,
which was forwarded to its Appraisal Team. She further explained that credit investigation is a
continuing annual process since the bank considers the market information in connection with the
account of the borrower.69 Indeed:

The mortgagee has a right to rely in good faith on what appears on the certificate of title of the
mortgagor to the property given as security and in the absence of anything to excite suspicion, he is
under no obligation to look beyond the certificate and investigate the title of the mortgagor appearing
on the fact of the certificate. Accordingly, the right or lien of an innocent mortgagee for value upon
the mortgaged property must be respected and protected, even if the mortgagor obtained his title
through fraud. The remedy of the persons prejudiced is to bring an action for damages against the
person who caused the fraud x x x.70

There was no collusion between the spouses Lee and Asiatrust

Besides the fact that individually, fraud was not sufficiently and convincingly established on the part
of the spouses Lee and Asiatrust, Bangkok Bank’s allegation of collusion between them was likewise
unsubstantiated and therefore untenable.
First, even after the subject Antipolo properties were foreclosed by Asiatrust, Asiatrust sought the
recovery of the deficiency amounting to at least PhP 14,800,000. And until the filing of the
memoranda by the parties before this Court, the said action remains pending before the CA.71

Second, Asiatrust filed a criminal case against Samuel for violation of BP 22.72 At the time of the
filing of the petition for review, the case was still pending before the Metropolitan Trial Court of
Quezon City.73 Later, at the time of the filing of the spouses Lee’s Memorandum, it was indicated that
it has already been dismissed.

Third, contrary to the CA’s appreciation of the facts,74 the letter sent by Atty. Macam, counsel of the
Midas Group of Companies, actually strengthens the proof that no collusion existed between the
parties. Acting on the interest of MDEC, Atty. Macam sent a letter to the Clerk of Court and the Ex-
Officio Sheriff of the Antipolo RTC, arguing that the subject Antipolo properties cannot be foreclosed
as they are the subject of an existing SEC Suspension Order.75 In fact, counsel for MDEC alleged
that the foreclosure sale was illegal.76 On the other hand, when the Ex-Officio Sheriff presented a
copy of the letter to Asiatrust and asked the latter to comment, Asiatrust categorically stated that the
subject properties could not be made a subject of the SEC Suspension Order, they being properties
of the spouses Lee, natural persons outside the jurisdiction of the SEC.77 In fact, it was Bangkok
Bank’s sole witness, Capalaran, who firmly agreed that, indeed, the subject properties are not
covered by the Suspension Order that is why Bangkok Bank, too, filed an action against the spouses
Lee on March 12, 1998 and sought the attachment of the said properties.78

With all the foregoing facts strongly established, We confirm the absence of fraud, bad faith, and
collusion between the spouses Lee and Asiatrust.

The requisite (1) good faith on the part of the third person and (2) fraud, necessary for an action to
rescind under Art. 1381 of the Civil Code, were not complied with

In Siguan v. Lim,79 this Court held that in an action to rescind under Art. 1381, the following
requisites must exist:

The action to rescind contracts in fraud of creditors is known as accion pauliana. For this action to
prosper, the following requisites must be present: (1) the plaintiff asking for rescission has a credit
prior to the alienation, although demandable later; (2) the debtor has made a subsequent contract
conveying a patrimonial benefit to a third person; (3) the creditor has no other legal remedy to satisfy
his claim; (4) the act being impugned is fraudulent; (5) the third person who received the property
conveyed, if it is by onerous title, has been an accomplice in the fraud. (Emphasis Ours; citations
omitted.)

Considering the discussions previously expounded, the extant records show that the fourth and fifth
requisites enumerated above are absent.

As between Asiatrust and Bangkok Bank, the former has a better right over the subject Antipolo
properties, it being the first to annotate its lien on the titles of the properties

It is evidently a well-settled and elementary principle that the rights of the first mortgage creditor or
mortgagee over the mortgaged properties are superior to those of a subsequent attaching creditor
and other junior mortgagees.80

In this case, it is a fact that the REM was annotated on the titles of the subject Antipolo properties
ahead of the writs of preliminary attachment issued in favor of Bangkok Bank. In fact, it was admitted
by Bangkok Bank that it only knew of the existing mortgage that has already been annotated at the
back of the subject titles when it sought the annotation of the writs of preliminary
attachment.81 Therefore, as between Asiatrust as mortgage creditor and Bangkok Bank as attaching
creditor, it is apparent that the former has a superior right over the latter.

Besides, "as between two persons who both stand to suffer loss, the possessor of the property
should be preferred in that possession, the ownership having been transferred by delivery."82 In this
case, Asiatrust, being the entity with legal possession of the subject Antipolo properties, should be
preferred in that possession. In addition, 12 of the titles in question have already been sold to 12
different persons, whose identities have not been introduced in the instant case and who have not
been impleaded as parties. As these persons have been in legal possession of the said properties
and are in good faith, their ownership and possession, should not be disturbed.
The redemption period has already lapsed

Sec. 27, Rule 39 of the Rules of Court states the persons who may redeem a real property sold,
thus:

Sec. 27. Who may redeem real property so sold.

Real property sold as provided in the last preceding section, or any part thereof sold separately, may
be redeemed in the manner hereinafter provided, by the following persons:

(a) The judgment obligor, or his successor in interest in the whole or any part of the property;

(b) A creditor having a lien by virtue of an attachment, judgment or mortgage on the

property sold, or on some part thereof, subsequent to the lien under which the property was
sold. Such redeeming creditor is termed a redemptioner. (Emphasis Ours.)

From the foregoing rule, it is clear that Bangkok Bank, as an attaching creditor, has the right to
redeem the subject Antipolo properties that were foreclosed by Asiatrust.83

In determining the period within which to redeem the foreclosed Antipolo properties in the present
case, RA 337 or the General Banking Act84 finds application. Pertinently, its Sec. 78 states:

Sec. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on
real estate which is security for any loan granted before the passage of this Act or under the
provisions of this Act, the mortgagor or debtor whose real property has been sold at public auction,
judicially or extrajudicially, for the full or partial payment of an obligation to any bank, banking, or
credit institution, within the purview of this Act, shall have the right, within one year after the sale of
the real estate as a result of the foreclosure of the respective mortgage, to redeem the property by
paying the amount fixed by the court in the order of execution, with interest thereon at the rate
specified in the mortgage, and all the costs and other judicial expenses incurred by the bank or
institution concerned by reason of the execution and sale and as a result of the custody of said
property less the income received from the property. However, the purchaser at the auction sale
concerned shall have the right to enter upon and take possession of such property immediately after
the date of the confirmation of the auction sale and administer the same in accordance with law.
(Emphasis Ours.)

In this case, the auction sale took place on April 15, 1998 and was registered with the RD on April
21, 1998. Subsequently, on April 30, 1999, a date already and certainly beyond the one-year
redemption period provided by law, new titles were issued in favor of Asiatrust.85 Apparently,
Bangkok Bank chose not to exercise its right of redemption over the subject Antipolo properties.

Even as a general rule, "[t]he period of redemption is not tolled by the filing of a complaint or petition
for annulment of the mortgage and the foreclosure sale conducted pursuant to the said
mortgage,"86 Bangkok Bank, however, filed its action for rescission way beyond the expiration of the
said redemption period on July 20, 1999. After the expiration of the redemption period, Asiatrust as
purchaser, therefore, became the absolute owner of the subject properties, and whose rights
necessarily include the right to be in the legal possession of the properties.87

As a final note, in ruling for Bangkok Bank, the CA strangely did not even delve upon any fact that
could have ascertained the allegation of fraud from which Bangkok Bank based its arguments. Quite
the opposite, the RTC discussed in detail the facts and testimonies presented by the parties, upon
which its finding of the absence of fraud was based. Indeed, factual findings by the trial court are
afforded great weight by this Court especially when supported by substantial evidence on record.88

While prejudice to Bangkok Bank ultimately resulted in the series of inopportune events that led to
the present case, it cannot be denied that no clear, satisfactory and convincing evidence was
presented to show fraud on the part of both the spouses Lee and Asiatrust. Nor was bad faith on the
part of Asiatrust and the 12 other subsequent purchasers established. Accordingly, the REM
annotated on the titles of the subject Antipolo properties and the subsequent foreclosure of the same
properties cannot and should not be rescinded.
Wherefore, premises considered, the petition is hereby GRANTED. Accordingly, the CA’s March 15,
2006 Decision and June 29, 2006 Resolution in CA-G.R. CV No. 79362 are REVERSED and SET
ASIDE. The RTC’s April 21, 2003 Decision in Civil Case No. 99-5388 is hereby REINSTATED.

No pronouncement as to costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice
G.R. No. L-57339 December 29, 1983

AIR FRANCE, petitioner,

vs.
HONORABLE COURT OF APPEALS, JOSE G. GANA (Deceased), CLARA A. GANA, RAMON
GANA, MANUEL GANA, MARIA TERESA GANA, ROBERTO GANA, JAIME JAVIER GANA,
CLOTILDE VDA. DE AREVALO, and EMILY SAN JUAN, respondents.

Benjamin S. Valte for petitioner.

Napoleon Garcia for private respondents.

MELENCIO-HERRERA, J.:

In this petition for review on certiorari, petitioner AIR FRANCE assails the Decision of then
respondent Court of Appeals 1 promulgated on 15 December 1980 in CA-G.R. No. 58164-R, entitled
"Jose G. Gana, et al. vs. Sociedad Nacionale Air France", which reversed the Trial Court's judgment
dismissing the Complaint of private respondents for damages arising from breach of contract of
carriage, and awarding instead P90,000.00 as moral damages.

Sometime in February, 1970, the late Jose G. Gana and his family, numbering nine (the GANAS),
purchased from AIR FRANCE through Imperial Travels, Incorporated, a duly authorized travel agent,
nine (9) "open-dated" air passage tickets for the Manila/Osaka/Tokyo/Manila route. The GANAS paid
a total of US$2,528.85 for their economy and first class fares. Said tickets were bought at the then
prevailing exchange rate of P3.90 per US$1.00. The GANAS also paid travel taxes of P100.00 for
each passenger.

On 24 April 1970, AIR FRANCE exchanged or substituted the aforementioned tickets with other
tickets for the same route. At this time, the GANAS were booked for the Manila/Osaka segment on
AIR FRANCE Flight 184 for 8 May 1970, and for the Tokyo/Manila return trip on AIR FRANCE Flight
187 on 22 May 1970. The aforesaid tickets were valid until 8 May 1971, the date written under the
printed words "Non valuable apres de (meaning, "not valid after the").

The GANAS did not depart on 8 May 1970.

Sometime in January, 1971, Jose Gana sought the assistance of Teresita Manucdoc, a Secretary of
the Sta. Clara Lumber Company where Jose Gana was the Director and Treasurer, for the extension
of the validity of their tickets, which were due to expire on 8 May 1971. Teresita enlisted the help of
Lee Ella Manager of the Philippine Travel Bureau, who used to handle travel arrangements for the
personnel of the Sta. Clara Lumber Company. Ella sent the tickets to Cesar Rillo, Office Manager of
AIR FRANCE. The tickets were returned to Ella who was informed that extension was not possible
unless the fare differentials resulting from the increase in fares triggered by an increase of the
exchange rate of the US dollar to the Philippine peso and the increased travel tax were first paid.
Ella then returned the tickets to Teresita and informed her of the impossibility of extension.

In the meantime, the GANAS had scheduled their departure on 7 May 1971 or one day before the
expiry date. In the morning of the very day of their scheduled departure on the first leg of their trip,
Teresita requested travel agent Ella to arrange the revalidation of the tickets. Ella gave the same
negative answer and warned her that although the tickets could be used by the GANAS if they left
on 7 May 1971, the tickets would no longer be valid for the rest of their trip because the tickets would
then have expired on 8 May 1971. Teresita replied that it will be up to the GANAS to make the
arrangements. With that assurance, Ella on his own, attached to the tickets validating stickers for the
Osaka/Tokyo flight, one a JAL. sticker and the other an SAS (Scandinavian Airways System) sticker.
The SAS sticker indicates thereon that it was "Reevaluated by: the Philippine Travel Bureau, Branch
No. 2" (as shown by a circular rubber stamp) and signed "Ador", and the date is handwritten in the
center of the circle. Then appear under printed headings the notations: JL. 108 (Flight), 16 May
(Date), 1040 (Time), OK (status). Apparently, Ella made no more attempt to contact AIR FRANCE as
there was no more time.
Notwithstanding the warnings, the GANAS departed from Manila in the afternoon of 7 May 1971 on
board AIR FRANCE Flight 184 for Osaka, Japan. There is no question with respect to this leg of the
trip.

However, for the Osaka/Tokyo flight on 17 May 1971, Japan Airlines refused to honor the tickets
because of their expiration, and the GANAS had to purchase new tickets. They encountered the
same difficulty with respect to their return trip to Manila as AIR FRANCE also refused to honor their
tickets. They were able to return only after pre-payment in Manila, through their relatives, of the
readjusted rates. They finally flew back to Manila on separate Air France Frights on 19 May 1971 for
Jose Gana and 26 May 1971 for the rest of the family.

On 25 August 1971, the GANAS commenced before the then Court of First Instance of Manila,
Branch III, Civil Case No. 84111 for damages arising from breach of contract of carriage.

AIR FRANCE traversed the material allegations of the Complaint and alleged that the GANAS
brought upon themselves the predicament they found themselves in and assumed the consequential
risks; that travel agent Ella's affixing of validating stickers on the tickets without the knowledge and
consent of AIR FRANCE, violated airline tariff rules and regulations and was beyond the scope of his
authority as a travel agent; and that AIR FRANCE was not guilty of any fraudulent conduct or bad
faith.

On 29 May 1975, the Trial Court dismissed the Complaint based on Partial and Additional
Stipulations of Fact as wen as on the documentary and testimonial evidence.

The GANAS appealed to respondent Appellate Court. During the pendency of the appeal, Jose
Gana, the principal plaintiff, died.

On 15 December 1980, respondent Appellate Court set aside and reversed the Trial Court's
judgment in a Decision, which decreed:

WHEREFORE, the decision appealed from is set aside. Air France is hereby ordered
to pay appellants moral damages in the total sum of NINETY THOUSAND PESOS
(P90,000.00) plus costs.

SO ORDERED. 2

Reconsideration sought by AIR FRANCE was denied, hence, petitioner's recourse before this
instance, to which we gave due course.

The crucial issue is whether or not, under the environmental milieu the GANAS have made out a
case for breach of contract of carriage entitling them to an award of damages.

We are constrained to reverse respondent Appellate Court's affirmative ruling thereon.

Pursuant to tariff rules and regulations of the International Air Transportation Association (IATA),
included in paragraphs 9, 10, and 11 of the Stipulations of Fact between the parties in the Trial
Court, dated 31 March 1973, an airplane ticket is valid for one year. "The passenger must undertake
the final portion of his journey by departing from the last point at which he has made a voluntary stop
before the expiry of this limit (parag. 3.1.2. ) ... That is the time allowed a passenger to begin and to
complete his trip (parags. 3.2 and 3.3.) ..... A ticket can no longer be used for travel if its validity has
expired before the passenger completes his trip (parag. 3.5.1.) .... To complete the trip, the
passenger must purchase a new ticket for the remaining portion of the journey" (ibid.) 3

From the foregoing rules, it is clear that AIR FRANCE cannot be faulted for breach of contract when
it dishonored the tickets of the GANAS after 8 May 1971 since those tickets expired on said date;
nor when it required the GANAS to buy new tickets or have their tickets re-issued for the
Tokyo/Manila segment of their trip. Neither can it be said that, when upon sale of the new tickets, it
imposed additional charges representing fare differentials, it was motivated by self-interest or unjust
enrichment considering that an increase of fares took effect, as authorized by the Civil Aeronautics
Board (CAB) in April, 1971. This procedure is well in accord with the IATA tariff rules which provide:

6. TARIFF RULES
 7. APPLICABLE FARE ON THE DATE OF DEPARTURE

3.1 General Rule.

All journeys must be charged for at the fare (or charge) in effect on the date on which
transportation commences from the point of origin. Any ticket sold prior to a change
of fare or charge (increase or decrease) occurring between the date of
commencement of the journey, is subject to the above general rule and must be
adjusted accordingly. A new ticket must be issued and the difference is to be
collected or refunded as the case may be. No adjustment is necessary if the increase
or decrease in fare (or charge) occurs when the journey is already commenced. 4

The GANAS cannot defend by contending lack of knowledge of those rules since the evidence bears
out that Teresita, who handled travel arrangements for the GANAS, was duly informed by travel
agent Ella of the advice of Reno, the Office Manager of Air France, that the tickets in question could
not be extended beyond the period of their validity without paying the fare differentials and additional
travel taxes brought about by the increased fare rate and travel taxes.

ATTY. VALTE

Q What did you tell Mrs. Manucdoc, in turn after being told this by Mr.
Rillo?

A I told her, because that is the reason why they accepted again the
tickets when we returned the tickets spin, that they could not be
extended. They could be extended by paying the additional fare,
additional tax and additional exchange during that time.

Q You said so to Mrs. Manucdoc?

A Yes, sir." ... 5

The ruling relied on by respondent Appellate Court, therefore, in KLM. vs. Court of Appeals, 65
SCRA 237 (1975), holding that it would be unfair to charge respondents therein with automatic
knowledge or notice of conditions in contracts of adhesion, is inapplicable. To all legal intents and
purposes, Teresita was the agent of the GANAS and notice to her of the rejection of the request for
extension of the validity of the tickets was notice to the GANAS, her principals.

The SAS validating sticker for the Osaka/Tokyo flight affixed by Era showing reservations for JAL.
Flight 108 for 16 May 1971, without clearing the same with AIR FRANCE allegedly because of the
imminent departure of the GANAS on the same day so that he could not get in touch with Air
France 6 was certainly in contravention of IATA rules although as he had explained, he did so upon
Teresita's assurance that for the onward flight from Osaka and return, the GANAS would make other
arrangements.

Q Referring you to page 33 of the transcript of the last session, I had

this question which reads as follows: 'But did she say anything to you
when you said that the tickets were about to expire?' Your answer
was: 'I am the one who asked her. At that time I told her if the tickets
being used ... I was telling her what about their bookings on the
return. What about their travel on the return? She told me it is up for
the Ganas to make the arrangement.' May I know from you what did
you mean by this testimony of yours?

A That was on the day when they were asking me on May 7, 1971
when they were checking the tickets. I told Mrs. Manucdoc that I was
going to get the tickets. I asked her what about the tickets onward
from the return from Tokyo, and her answer was it is up for the Ganas
to make the arrangement, because I told her that they could leave on
the seventh, but they could take care of that when they arrived in
Osaka.

Q What do you mean?

 A The Ganas will make the arrangement from Osaka, Tokyo and
Manila.

Q What arrangement?

A The arrangement for the airline because the tickets would expire on
May 7, and they insisted on leaving. I asked Mrs. Manucdoc what
about the return onward portion because they would be travelling to
Osaka, and her answer was, it is up to for the Ganas to make the
arrangement.

Q Exactly what were the words of Mrs. Manucdoc when you told her
that? If you can remember, what were her exact words?

A Her words only, it is up for the Ganas to make the arrangement.

Q This was in Tagalog or in English?

A I think it was in English ..... 7

The circumstances that AIR FRANCE personnel at the ticket counter in the airport allowed the
GANAS to leave is not tantamount to an implied ratification of travel agent Ella's irregular actuations.
It should be recalled that the GANAS left in Manila the day before the expiry date of their tickets and
that "other arrangements" were to be made with respect to the remaining segments. Besides, the
validating stickers that Ella affixed on his own merely reflect the status of reservations on the
specified flight and could not legally serve to extend the validity of a ticket or revive an expired one.

The conclusion is inevitable that the GANAS brought upon themselves the predicament they were in
for having insisted on using tickets that were due to expire in an effort, perhaps, to beat the deadline
and in the thought that by commencing the trip the day before the expiry date, they could complete
the trip even thereafter. It should be recalled that AIR FRANCE was even unaware of the validating
SAS and JAL. stickers that Ella had affixed spuriously. Consequently, Japan Air Lines and AIR
FRANCE merely acted within their contractual rights when they dishonored the tickets on the
remaining segments of the trip and when AIR FRANCE demanded payment of the adjusted fare
rates and travel taxes for the Tokyo/Manila flight.

WHEREFORE, the judgment under review is hereby reversed and set aside, and the Amended
Complaint filed by private respondents hereby dismissed.

No costs.

SO ORDERED.

Teehankee (Chairman), Plana, Relova and Gutierrez, Jr., JJ., concur.

G.R. No. 135645 March 8, 2002

THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., petitioner,

vs.
MGG MARINE SERVICES, INC. and DOROTEO GAERLAN, respondents.

KAPUNAN, J.:

This petition for review seeks the reversal of the Decision, dated September 23, 1998, of the Court
of Appeals in CA-G.R. CV No. 43915,1 which absolved private respondents MCG Marine Services,
Inc. and Doroteo Gaerlan of any liability regarding the loss of the cargo belonging to San Miguel
Corporation due to the sinking of the M/V Peatheray Patrick-G owned by Gaerlan with MCG Marine
Services, Inc. as agent.

On March 1, 1987, San Miguel Corporation insured several beer bottle cases with an aggregate
value of P5,836,222.80 with petitioner Philippine American General Insurance Company.2 The cargo
were loaded on board the M/V Peatheray Patrick-G to be transported from Mandaue City to Bislig,
Surigao del Sur.

After having been cleared by the Coast Guard Station in Cebu the previous day, the vessel left the
port of Mandaue City for Bislig, Surigao del Sur on March 2, 1987. The weather was calm when the
vessel started its voyage.

The following day, March 3, 1987, M/V Peatheray Patrick-G listed and subsequently sunk off Cawit
Point, Cortes, Surigao del Sur. As a consequence thereof, the cargo belonging to San Miguel
Corporation was lost.

Subsequently, San Miguel Corporation claimed the amount of its loss from petitioner.

Upon petitioner's request, on March 18, 1987, Mr. Eduardo Sayo, a surveyor from the Manila
Adjusters and Surveyors Co., went to Taganauan Island, Cortes, Surigao del Sur where the vessel
was cast ashore, to investigate the circumstances surrounding the loss of the cargo. In his report,
Mr. Sayo stated that the vessel was structurally sound and that he did not see any damage or crack
thereon. He concluded that the proximate cause of the listing and subsequent sinking of the vessel
was the shifting of ballast water from starboard to portside. The said shifting of ballast water
allegedly affected the stability of the M/V Peatheray Patrick-G.

Thereafter, petitioner paid San Miguel Corporation the full amount of P5,836,222.80 pursuant to the
terms of their insurance contract.

On November 3, 1987, petitioner as subrogee of San Miguel Corporation filed with the Regional Trial
Court (RTC) of Makati City a case for collection against private respondents to recover the amount it
paid to San Miguel Corporation for the loss of the latter's cargo.

Meanwhile, the Board of Marine Inquiry conducted its own investigation of the sinking of the M/V
Peatheray Patrick-G to determine whether or not the captain and crew of the vessel should be held
responsible for the incident.3 On May 11, 1989, the Board rendered its decision exonerating the
captain and crew of the ill-fated vessel for any administrative liability. It found that the cause of the
sinking of the vessel was the existence of strong winds and enormous waves in Surigao del Sur, a
fortuitous event that could not have been for seen at the time the M/V Peatheray Patrick-G left the
port of Mandaue City. It was further held by the Board that said fortuitous event was the proximate
and only cause of the vessel's sinking.

On April 15, 1993, the RTC of Makati City, Branch 134, promulgated its Decision finding private
respondents solidarily liable for the loss of San Miguel Corporation's cargo and ordering them to pay
petitioner the full amount of the lost cargo plus legal interest, attorney's fees and costs of suit.4

Private respondents appealed the trial court's decision to the Court of Appeals. On September 23,
1998, the appellate court issued the assailed Decision, which reversed the ruling of the RTC. It held
that private respondents could not be held liable for the loss of San Miguel Corporation's cargo
because said loss occurred as a consequence of a fortuitous event, and that such fortuitous event
was the proximate and only cause of the loss.5
Petitioner thus filed the present petition, contending that:

(A)

IN REVERSING AND SETTING ASIDE THE DECISION OF RTC BR. 134 OF MAKATI CITY
ON THE BASIS OF THE FINDINGS OF THE BOARD OF MARINE INQUIRY, APPELLATE
COURT DECIDED THE CASE AT BAR NOT IN ACCORD WITH LAW OR WITH THE
APPLICABLE DECISIONS OF THE HONORABLE COURT;

(B)

IN REVERSING THE TRIAL COURT'S DECISION, THE APPELLATE COURT GRAVELY

ERRED IN CONTRADICTING AND IN DISTURBING THE FINDINGS OF THE FORMER;

(C)

THE APPELLATE COURT GRAVELY ERRED IN REVERSING THE DECISION OF THE

TRIAL COURT AND IN DISMISSING THE COMPLAINT.6

Common carriers, from the nature of their business and for reasons of public policy, are mandated to
observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers
transported by them.7 Owing to this high degree of diligence required of them, common carriers, as a
general rule, are presumed to have been at fault or negligent if the goods transported by them are
lost, destroyed or if the same deteriorated.8

However, this presumption of fault or negligence does not arise in the cases enumerated under
Article 1734 of the Civil Code:

Common carriers are responsible for the loss, destruction, or deterioration of the goods,
unless the same is due to any of the following causes only:

(1) Flood, storm, earthquake, lightning or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority.

In order that a common carrier may be absolved from liability where the loss, destruction or
deterioration of the goods is due to a natural disaster or calamity, it must further be shown that the
such natural disaster or calamity was the proximate and only cause of the loss;9 there must be "an
entire exclusion of human agency from the cause of the injury of the loss."10

Moreover, even in cases where a natural disaster is the proximate and only cause of the loss, a
common carrier is still required to exercise due diligence to prevent or minimize loss before, during
and after the occurrence of the natural disaster, for it to be exempt from liability under the law for the
loss of the goods.11 If a common carrier fails to exercise due diligence--or that ordinary care which
the circumstances of the particular case demand12 -- to preserve and protect the goods carried by it
on the occasion of a natural disaster, it will be deemed to have been negligent, and the loss will not
be considered as having been due to a natural disaster under Article 1734 (1).

In the case at bar, the issues may be narrowed down to whether the loss of the cargo was due to the
occurrence of a natural disaster, and if so, whether such natural disaster was the sole and proximate
cause of the loss or whether private respondents were partly to blame for failing to exercise due
diligence to prevent the loss of the cargo.

The parties do not dispute that on the day the M/V Peatheray Patrick-G sunk, said vessel
encountered strong winds and huge waves ranging from six to ten feet in height. The vessel listed at
the port side and eventually sunk at Cawit Point, Cortes, Surigao del Sur.
The Court of Appeals, citing the decision of the Board of Marine Inquiry in the administrative case
against the vessel's crew (BMI--646-87), found that the loss of the cargo was due solely to the
existence of a fortuitous event, particularly the presence of strong winds and huge waves at Cortes,
Surigao del Sur on March 3, 1987:

xxx

III. WHAT WAS THE PROXIMATE CAUSE OF SINKING?

Evidence shows that when "LCT Peatheray Patrick-G" left the port of Mandawe, Cebu for
Bislig, Surigao del Sur on March 2, 1987 the Captain had observed the fair atmospheric
condition of the area of the pier and confirmed this good weather condition with the Coast
Guard Detachment of Mandawe City. However, on March 3, 1987 at about 10:00 o'clock in
the evening, when the vessel had already passed Surigao Strait. the vessel started to
experience waves as high as 6 to 7 feet and that the Northeasterly wind was blowing at
about five (5) knot velocity. At about 11:00 o'clock P.M. when the vessel was already about
4.5 miles off Cawit Point, Cortes, Surigao del Sur, the vessel was discovered to be listing 15
degrees to port side and that the strength of the wind had increased to 15 knots and the
waves were about ten (10) feet high [Ramilo TSN 10-27-87 p. 32). Immediately thereafter,
emergency measures were taken by the crew. The officers had suspected that a leak or
crack might had developed at the bottom hull particularly below one or two of the empty wing
tanks at port side serving as buoyancy tanks resulting in ingress of sea water in the tanks
was confirmed when the Captain ordered to use the cargo pump. The suction valves to the
said tanks of port side were opened in order to suck or draw out any amount of water that
entered into the tanks. The suction pressure of the pump had drawn out sea water in large
quantity indicating therefore, that a leak or crack had developed in the hull as the vessel was
continuously batted and pounded by the huge waves. Bailing out of the water through the
pump was done continuously in an effort of the crew to prevent the vessel from sinking. but
then efforts were in vain. The vessel still continued to list even more despite the continuous
pumping and discharging of sea water from the wing tanks indicating that the amount of the
ingress of sea water was greater in volume that that was being discharged by the pump.
Considering therefore, the location of the suspected source of the ingress of sea water which
was a crack or hole at the bottom hull below the buoyancy tank's port side which was not
accessible (sic) for the crew to check or control the flow of sea water into the said tank. The
accumulation of sea water aggravated by the continuous pounding, rolling and pitching of the
vessel against huge waves and strong northeasterly wind, the Captain then had no other
recourse except to order abandonship to save their lives.13

The presence of a crack in the ill-fated vessel through which water seeped in was confirmed by the
Greutzman Divers who were commissioned by the private respondents to conduct an underwater
survey and inspection of the vessel to determine the cause and circumstances of its sinking. In its
report, Greutzman Divers stated that "along the port side platings, a small hole and two separate
cracks were found at about midship."14

The findings of the Board of Marine Inquiry indicate that the attendance of strong winds and huge
waves while the M/V Peatheray Patrick-G was sailing through Cortes, Surigao del Norte on March 3,
1987 was indeed fortuitous. A fortuitous event has been defined as one which could not be foreseen,
or which though foreseen, is inevitable.15 An event is considered fortuitous if the following elements
concur:

xxx (a) the cause of the unforeseen and unexpected occurrence, or the failure of the debtor
to comply with his obligations, must be independent of human will; (b) it must be impossible
to foresee the event which 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 his obligation in a normal manner; and (d) the obligor must be free from any
participation in the aggravation of the injury resulting to the creditor. xxx16

In the case at bar, it was adequately shown that before the M/V Peatheray Patrick-G left the port of
Mandaue City, the Captain confirmed with the Coast Guard that the weather condition would permit
the safe travel of the vessel to Bislig, Surigao del Sur. Thus, he could not be expected to have
foreseen the unfavorable weather condition that awaited the vessel in Cortes, Surigao del Sur. It was
the presence of the strong winds and enormous waves which caused the vessel to list, keel over,
and consequently lose the cargo contained therein. The appellate court likewise found that there
was no negligence on the part of the crew of the M/V Peatheray Patrick-G, citing the following
portion of the decision of the Board of Marine Inquiry:

I. WAS LCT PEATHERAY PATRICK-G SEAWORTHY WHEN SHE LEFT THE PORT OF
MANDAWE, CEBU AND AT THE TIME OF SINKING?

Evidence clearly shows that the vessel was propelled with three (3) diesel engines of 250
BHP each or a total of 750 BHP. It had three (3) propellers which were operating
satisfactorily from the time the vessel left the port of Mandawe up to the time when the hull
on the double bottom tank was heavily floaded (sic) by uncontrollable entry of sea water
resulting in the stoppage of engines. The vessel was also equipped with operating generator
pumps for emergency cases. This equipment was also operating satisfactorily up to the time
when the engine room was heavily floaded (sic) with sea water. Further, the vessel had
undergone emergency drydocking and repair before the accident occurred (sic) on
November 9, 1986 at Trigon Shipyard, San Fernando, Cebu as shown by the billing for the
Drydocking and Repair and certificate of Inspection No. 2588-86 issued by the Philippine
coast Guard on December 5, 1986 which expired on November 8, 1987.

LCT Peatheray Patrick-G was skippered by Mr. Manuel P. Ramilo, competent and
experienced licensed Major Patron who had been in command of the vessel for more than
three (3) years from July 1984 up to the time of sinking March 3, 1987. His Chief Mate Mr.
Mariano Alalin also a licensed Major Patron had been the Chief Mate of " LCT Peatheray
Patrick-G" for one year and three months at the time of the accident. Further Chief Mate
Alalin had commanded a tanker vessel named M/T Mercedes of MGM Corporation for
almost two (2) years from 1983-1985 (Alalin TSN-4-13-88 pp. 32-33).

That the vessel was granted SOLAS clearance by the Philippine Coast Guard on March 1,
1987 to depart from Mandawe City for Bislig, Surigao del Sur as evidenced by a certification
issued to D.C. Gaerlan Oil Products by Coast Guard Station Cebu dated December 23,
1987.

Based on the foregoing circumstances, "LCT Peatheray Patrick-G" should be considered

seaworthy vessel at the time she undertook that fateful voyage on March 2, 1987.

To be seaworthy, a vessel must not only be staunch and fit in the hull for the voyage to be
undertaken but also must be properly equipped and for that purpose there is a duty upon the
owner to provide a competent master and a crew adequate in number and competent for
their duty and equals in disposition and seamanship to the ordinary in that calling. (Ralph
299 F-52, 1924 AMC 942). American President 2td v. Ren Fen Fed 629. AMC 1723 LCA 9
CAL 1924).17

Overloading was also eliminated as a possible cause of the sinking of the vessel, as the evidence
showed that its freeboard clearance was substantially greater than the authorized freeboard
clearance.18

Although the Board of Marine Inquiry ruled only on the administrative liability of the captain and crew
of the M/V Peatheray Patrick-G, it had to conduct a thorough investigation of the circumstances
surrounding the sinking of the vessel and the loss of its cargo in order to determine their
responsibility, if any. The results of its investigation as embodied in its decision on the administrative
case clearly indicate that the loss of the cargo was due solely to the attendance of strong winds and
huge waves which caused the vessel accumulate water, tilt to the port side and to eventually keel
over. There was thus no error on the part of the Court of Appeals in relying on the factual findings of
the Board of Marine Inquiry, for such factual findings, being supported by substantial evidence are
persuasive, considering that said administrative body is an expert in matters concerning marine
casualties.19

Since the presence of strong winds and enormous waves at Cortes, Surigao del Sur on March 3,
1987 was shown to be the proximate and only cause of the sinking of the M/V Peatheray Patrick-G
and the loss of the cargo belonging to San Miguel Corporation, private respondents cannot be held
liable for the said loss.

WHEREFORE, the assailed Decision of the Court of Appeals is hereby AFFIRMED and the petition
is hereby DENIED.
SO ORDERED.

Davide, Jr., C.J., Puno, and Ynares-Santiago, JJ., concur.

G.R. No. 177921 December 4, 2013

METRO CONCAST STEEL CORPORATION, SPOUSES JOSE S. DYCHIAO AND TIUOH YAN,
SPOUSES GUILLERMO AND MERCEDES DYCHIAO, AND SPOUSES VICENTE AND
FILOMENA DYCHIAO, Petitioners,
vs.
ALLIED BANK CORPORATION, Respondent.

RESOLUTION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated February 12, 2007 and the
Resolution3 dated May 10, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86896 which
reversed and set aside the Decision4 dated January 17, 2006 of the Regional Trial Court of Makati,
Branch 57 (RTC) in Civil Case No. 00-1563, thereby ordering petitioners Metro Concast Steel
Corporation (Metro Concast), Spouses Jose S. Dychiao and Tiu Oh Yan, Spouses Guillermo and
Mercedes Dychiao, and Spouses Vicente and Filomena Duchiao (individual petitioners) to solidarily
pay respondent Allied Bank Corporation (Allied Bank) the aggregate amount of ₱51,064,094.28, with
applicable interests and penalty charges.

The Facts

On various dates and for different amounts, Metro Concast, a corporation duly organized and
existing under and by virtue of Philippine laws and engaged in the business of manufacturing
steel,5 through its officers, herein individual petitioners, obtained several loans from Allied Bank.
These loan transactions were covered by a promissory note and separate letters of credit/trust
receipts, the details of which are as follows:

Date Document Amount

December 13, 1996 Promissory Note No. 96-213016 ₱2,000,000.00
November 7, 1995 Trust Receipt No. 96-2023657 ₱608,603.04
May 13, 1996 Trust Receipt No. 96-9605228 ₱3,753,777.40

May 24, 1996 Trust Receipt No. 96-9605249 ₱4,602,648.08

March 21, 1997 Trust Receipt No. 97-20472410 ₱7,289,757.79

June 7, 1996 Trust Receipt No. 96-20328011 ₱17,340,360.73
July 26, 1995 Trust Receipt No. 95-20194312 ₱670,709.24
August 31, 1995 Trust Receipt No. 95-20205313 ₱313,797.41

November 16, 1995 Trust Receipt No. 96-20243914 ₱13,015,109.87

July 3, 1996 Trust Receipt No. 96-20355215 ₱401,608.89
June 20, 1995 Trust Receipt No. 95-20171016 ₱750,089.25
December 13, 1995 Trust Receipt No. 96-37908917 ₱92,919.00
December 13, 1995 Trust Receipt No. 96/20258118 ₱224,713.58

The interest rate under Promissory Note No. 96-21301 was pegged at 15.25% per annum (p.a.),
with penalty charge of 3% per month in case of default; while the twelve (12) trust receipts uniformly
provided for an interest rate of 14% p.a. and 1% penalty charge. By way of security, the individual
petitioners executed several Continuing Guaranty/Comprehensive Surety Agreements 19 in favor of
Allied Bank. Petitioners failed to settle their obligations under the aforementioned promissory note
and trust receipts, hence, Allied Bank, through counsel, sent them demand letters, 20 all dated
December 10, 1998, seeking payment of the total amount of ₱51,064,093.62, but to no avail. Thus,
Allied Bank was prompted to file a complaint for collection of sum of money21 (subject complaint)
against petitioners before the RTC, docketed as Civil Case No. 00-1563. In their second22 Amended
Answer,23 petitioners admitted their indebtedness to Allied Bank but denied liability for the interests
and penalties charged, claiming to have paid the total sum of ₱65,073,055.73 by way of interest
charges for the period covering 1992 to 1997.24

They also alleged that the economic reverses suffered by the Philippine economy in 1998 as well as
the devaluation of the peso against the US dollar contributed greatly to the downfall of the steel
industry, directly affecting the business of Metro Concast and eventually leading to its cessation.
Hence, in order to settle their debts with Allied Bank, petitioners offered the sale of Metro Concast’s
remaining assets, consisting of machineries and equipment, to Allied Bank, which the latter,
however, refused. Instead, Allied Bank advised them to sell the equipment and apply the proceeds
of the sale to their outstanding obligations. Accordingly, petitioners offered the equipment for sale,
but since there were no takers, the equipment was reduced into ferro scrap or scrap metal over the
years. In 2002, Peakstar Oil Corporation (Peakstar), represented by one Crisanta Camiling
(Camiling), expressed interest in buying the scrap metal. During the negotiations with Peakstar,
petitioners claimed that Atty. Peter Saw (Atty. Saw), a member of Allied Bank’s legal department,
acted as the latter’s agent. Eventually, with the alleged conformity of Allied Bank, through Atty. Saw,
a Memorandum of Agreement25 dated November 8, 2002 (MoA) was drawn between Metro Concast,
represented by petitioner Jose Dychiao, and Peakstar, through Camiling, under which Peakstar
obligated itself to purchase the scrap metal for a total consideration of ₱34,000,000.00, payable as
follows:

(a) ₱4,000,000.00 by way of earnest money – ₱2,000,000.00 to be paid in cash and the
other ₱2,000,000.00 to be paid in two (2) post-dated checks of ₱1,000,000.00 each;26 and

(b) the balance of ₱30,000,000.00 to be paid in ten (10) monthly installments of

₱3,000,000.00, secured by bank guarantees from Bankwise, Inc. (Bankwise) in the form of
separate post-dated checks.27

Unfortunately, Peakstar reneged on all its obligations under the MoA. In this regard, petitioners
asseverated that:

(a) their failure to pay their outstanding loan obligations to Allied Bank must be considered as
force majeure ; and

(b) since Allied Bank was the party that accepted the terms and conditions of payment
proposed by Peakstar, petitioners must therefore be deemed to have settled their obligations
to Allied Bank. To bolster their defense, petitioner Jose Dychiao (Jose Dychiao)
testified28 during trial that it was Atty. Saw himself who drafted the MoA and subsequently
received29 the ₱2,000,000.00 cash and the two (2) Bankwise post-dated checks worth
₱1,000,000.00 each from Camiling. However, Atty. Saw turned over only the two (2) checks
and ₱1,500,000.00 in cash to the wife of Jose Dychiao.30

Claiming that the subject complaint was falsely and maliciously filed, petitioners prayed for the award
of moral damages in the amount of ₱20,000,000.00 in favor of Metro Concast and at least
₱25,000,000.00 for each individual petitioner, ₱25,000,000.00 as exemplary damages,
₱1,000,000.00 as attorney’s fees, ₱500,000.00 for other litigation expenses, including costs of suit.

The RTC Ruling

After trial on the merits, the RTC, in a Decision31 dated January 17, 2006, dismissed the subject
complaint, holding that the "causes of action sued upon had been paid or otherwise extinguished." It
ruled that since Allied Bank was duly represented by its agent, Atty. Saw, in all the negotiations and
transactions with Peakstar – considering that Atty. Saw

(a) drafted the MoA,

(b) accepted the bank guarantee issued by Bankwise, and

(c) was apprised of developments regarding the sale and disposition of the scrap metal –
then it stands to reason that the MoA between Metro Concast and Peakstar was binding
upon said bank.

The CA Ruling
Allied Bank appealed to the CA which, in a Decision32 dated February 12, 2007, reversed and set
aside the ruling of the RTC, ratiocinating that there was "no legal basis in fact and in law to declare
that when Bankwise reneged its guarantee under the [MoA], herein [petitioners] should be deemed
to be discharged from their obligations lawfully incurred in favor of [Allied Bank]."33

The CA examined the MoA executed between Metro Concast, as seller of the ferro scrap, and
Peakstar, as the buyer thereof, and found that the same did not indicate that Allied Bank intervened
or was a party thereto. It also pointed out the fact that the post-dated checks pursuant to the MoA
were issued in favor of Jose Dychiao. Likewise, the CA found no sufficient evidence on record
showing that Atty. Saw was duly and legally authorized to act for and on behalf of Allied Bank,
opining that the RTC was "indulging in hypothesis and speculation"34 when it made a contrary
pronouncement. While Atty. Saw received the earnest money from Peakstar, the receipt was signed
by him on behalf of Jose Dychiao.35

It also added that "[i]n the final analysis, the aforesaid checks and receipts were signed by [Atty.]
Saw either as representative of [petitioners] or as partner of the latter’s legal counsel, and not in
anyway as representative of [Allied Bank]."36

Consequently, the CA granted the appeal and directed petitioners to solidarily pay Allied Bank their
corresponding obligations under the aforementioned promissory note and trust receipts, plus
interests, penalty charges and attorney’s fees. Petitioners sought reconsideration37 which was,
however, denied in a Resolution38 dated May 10, 2007. Hence, this petition.

The Issue Before the Court

At the core of the present controversy is the sole issue of whether or not the loan obligations
incurred by the petitioners under the subject promissory note and various trust receipts have already
been extinguished.

The Court’s Ruling

Article 1231 of the Civil Code states that obligations are extinguished either by payment or
performance, the loss of the thing due, the condonation or remission of the debt, the confusion or
merger of the rights of creditor and debtor, compensation or novation.

In the present case, petitioners essentially argue that their loan obligations to Allied Bank had
already been extinguished due to Peakstar’s failure to perform its own obligations to Metro Concast
pursuant to the MoA. Petitioners classify Peakstar’s default as a form of force majeure in the sense
that they have, beyond their control, lost the funds they expected to have received from the Peakstar
(due to the MoA) which they would, in turn, use to pay their own loan obligations to Allied Bank.
They further state that Allied Bank was equally bound by Metro Concast’s MoA with Peakstar since
its agent, Atty. Saw, actively represented it during the negotiations and execution of the said
agreement. Petitioners’ arguments are untenable. At the outset, the Court must dispel the notion that
the MoA would have any relevance to the performance of petitioners’ obligations to Allied Bank. The
MoA is a sale of assets contract, while petitioners’ obligations to Allied Bank arose from various loan
transactions. Absent any showing that the terms and conditions of the latter transactions have been,
in any way, modified or novated by the terms and conditions in the MoA, said contracts should be
treated separately and distinctly from each other, such that the existence, performance or breach of
one would not depend on the existence, performance or breach of the other. In the foregoing
respect, the issue on whether or not Allied Bank expressed its conformity to the assets sale
transaction between Metro Concast and Peakstar (as evidenced by the MoA) is actually irrelevant to
the issues related to petitioners’ loan obligations to the bank. Besides, as the CA pointed out, the
fact of Allied Bank’s representation has not been proven in this case and hence, cannot be deemed
as a sustainable defense to exculpate petitioners from their loan obligations to Allied Bank. Now,
anent petitioners’ reliance on force majeure, suffice it to state that Peakstar’s breach of its
obligations to Metro Concast arising from the MoA cannot be classified as a fortuitous event under
jurisprudential formulation. As discussed in Sicam v. Jorge:39

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. 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.40 (Emphases supplied)

While it may be argued that Peakstar’s breach of the MoA was unforseen by petitioners, the same
us clearly not "impossible"to foresee or even an event which is independent of human will." Neither
has it been shown that said occurrence rendered it impossible for petitioners to pay their loan
obligations to Allied Bank and thus, negates the former’s force majeure theory altogether. In any
case, as earlier stated, the performance or breach of the MoA bears no relation to the performance
or breach of the subject loan transactions, they being separate and distinct sources of obligations.
The fact of the matter is that petitioners’ loan obligations to Allied Bank remain subsisting for the
basic reason that the former has not been able to prove that the same had already been paid 41 or, in
any way, extinguished. In this regard, petitioners’ liability, as adjudged by the CA, must perforce
stand. Considering, however, that Allied Bank’s extra-judicial demand on petitioners appears to have
been made only on December 10, 1998, the computation of the applicable interests and penalty
charges should be reckoned only from such date.

WHEREFORE, the petition is DENIED. The Decision dated February 12, 2007 and Resolution dated
May 10, 2007 of the Court of Appeals in CA-G.R. CV No. 86896 are hereby AFFIRMED with
MODIFICATION reckoning the applicable interests and penalty charges from the date of the
extrajudicial demand or on December 10, 1998. The rest of the appellate court’s dispositions stand.

SO ORDERED.

ESTELA M. PERLAS-BERNABE
Associate Justice
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 third-party

defendants (except Roman Ozaeta) to pay the plaintiff, jointly and severally,
the sum of P989,335.68 with interest at the legal rate from November 29, 1968,
the date of the filing of the complaint until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;

(d) Dismissing the defendant's and third-party defendants' counterclaims for

lack of merit;

(e) Ordering defendant United Construction Co., Inc. and third-party

defendants (except Roman Ozaeta) to pay the costs in equal shares.

SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).

The dispositive portion of the decision of the Court of Appeals reads:

WHEREFORE, the judgment appealed from is modified to include an award of

P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with
interest at the legal rate from 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 third-party defendant for damages for having included
Juan J. Carlos, President of the United Construction Co., Inc. as party defendant.

On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F.
Nakpil presented a written stipulation which reads:

1. That in relation to defendants' answer with counterclaims and third- party

complaints and the third-party defendants Nakpil & Sons' answer thereto, the
plaintiff need not amend its complaint by including the said Juan F. Nakpil &
Sons and Juan F. Nakpil personally as parties defendant.

2. That in the event (unexpected by the undersigned) that the Court should find
after the trial that the above-named defendants Juan J. Carlos and United
Construction Co., Inc. are free from any blame and liability for the collapse of
the PBA Building, and should further find that the collapse of said building was
due to defects and/or inadequacy of the plans, designs, and specifications p
by the third-party defendants, or in the event that the Court may find Juan F.
Nakpil and Sons and/or Juan F. Nakpil contributorily negligent or in any way
jointly and solidarily liable with the defendants, judgment may be rendered in
whole or in part. as the case may be, against Juan F. Nakpil & Sons and/or
Juan F. Nakpil in favor of the plaintiff to all intents and purposes as if plaintiff's
complaint has been duly amended by including the said Juan F. Nakpil & Sons
 and Juan F. Nakpil as parties defendant and by alleging causes of action
against them including, among others, the defects or inadequacy of the plans,
designs, and specifications prepared by them and/or failure in the performance
of their contract with plaintiff.

3. Both parties hereby jointly petition this Honorable Court to approve this
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).

Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which
among others, the parties agreed to refer the technical issues involved in the case to a
Commissioner. Mr. Andres O. Hizon, who was ultimately appointed by the trial court,
assumed his office as Commissioner, charged with the duty to try the following issues:

1. Whether the damage sustained by the PBA building during the August 2,
1968 earthquake had been caused, directly or indirectly, by:

(a) The inadequacies or defects in the plans and specifications prepared by

third-party defendants;

(b) The deviations, if any, made by the defendants from said plans and
specifications and how said deviations contributed to the damage sustained;

(c) The alleged failure of defendants to observe the requisite quality of

materials and workmanship in the construction of the building;

(d) The alleged failure to exercise the requisite degree of supervision expected
of the architect, the contractor and/or the owner of the building;

(e) An act of God or a fortuitous event; and

(f) Any other cause not herein above specified.

2. If the cause of the damage suffered by the building arose from a

combination of the above-enumerated factors, the degree or proportion in
which each individual factor contributed to the damage sustained;

3. Whether the building is now a total loss and should be completely

demolished or whether it may still be repaired and restored to a tenantable
condition. In the latter case, the determination of the cost of such restoration
or repair, and the value of any remaining construction, such as the foundation,
which may still be utilized or availed of (Record on Appeal, pp. 275-276; Rollo,
L-47851, p. 169).

Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues
were tried by the Court.

Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may
topple down in case of a strong earthquake. The motions were opposed by the defendants
and the matter was referred to the Commissioner. Finally, on April 30, 1979 the building was
authorized to be demolished at the expense of the plaintiff, but not another earthquake of
high intensity on April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970,
caused further damage to the property. The actual demolition was undertaken by the buyer of
the damaged building. (Record on Appeal, pp. 278-280; Ibid.)

After the protracted hearings, the Commissioner eventually submitted his report on
September 25, 1970 with the findings that while the damage sustained by the PBA building
was caused directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3
they were also caused by the defects in the plans and specifications prepared by the third-
party defendants' architects, deviations from said plans and specifications by the defendant
contractors and failure of the latter to observe the requisite workmanship in the construction
of the building and of the contractors, architects and even the owners to exercise the
requisite degree of supervision in the construction of subject building.
All the parties registered their objections to aforesaid findings which in turn were answered
by the Commissioner.

The trial court agreed with the findings of the Commissioner except as to the holding that the
owner is charged with full nine supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).

Thus, on September 21, 1971, the lower court rendered the assailed decision which was
modified by the Intermediate Appellate Court on November 28, 1977.

All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence,
these petitions.

On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers,
and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus
curiae. They proposed to present a position paper on the liability of architects when a
building collapses and to submit likewise a critical analysis with computations on the
divergent views on the design and plans as submitted by the experts procured by the parties.
The motion having been granted, the amicus curiae were granted a period of 60 days within
which to submit their position.

After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.

The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.

The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion
that the defects in the plans and specifications indeed existed.

Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No.
4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the
defects in the 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. 1174-1175).

Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate
cause of the damage was the act of God. To be exempt from liability for loss because of an
act of God, he must be free from any previous negligence or misconduct by which that loss
or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129;
Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604;
Lasam v. Smith, 45 Phil. 657).

The negligence of the defendant and the third-party defendants petitioners was established
beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant
United Construction Co., Inc. was found to have made substantial deviations from the plans
and specifications. and to have failed to observe the requisite workmanship in the
construction as well as to exercise the requisite degree of supervision; while the third-party
defendants were found to have inadequacies or defects in the plans and specifications
prepared by them. As correctly assessed by both courts, the defects in the construction and
in the plans and specifications were the proximate causes that rendered the PBA building
unable to withstand the earthquake of August 2, 1968. For this reason the defendant and
third-party defendants cannot claim exemption from liability. (Decision, Court of Appeals, pp.
30-31).
It is well settled that the findings of facts of the Court of Appeals are conclusive on the
parties and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs.
Sandiganbayan, January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding
grounded entirely on speculation, surmise and conjectures; (2) the inference made is
manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on
misapprehension of facts; (5) the findings of fact are conflicting , (6) the Court of Appeals
went beyond the issues of the case and its findings are contrary to the admissions of both
appellant and appellees (Ramos vs. Pepsi-Cola Bottling Co., February 8, 1967, 19 SCRA 289,
291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651); (7) the findings of facts of the
Court of Appeals are contrary to those of the trial court; (8) said findings of facts are
conclusions without citation of specific evidence on which they are based; (9) the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of Appeals,
July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is premised
on the supposed absence of evidence and is contradicted by evidence on record (Salazar vs.
Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).

It is evident that the case at bar does not fall under any of the exceptions above-mentioned.
On the contrary, the records show that the lower court spared no effort in arriving at the
correct appreciation of facts by the referral of technical issues to a Commissioner chosen by
the parties whose findings and conclusions remained convincingly unrebutted by the
intervenors/amicus curiae who were allowed to intervene in the Supreme Court.

In any event, the relevant and logical observations of the trial court as affirmed by the Court
of Appeals that "while it is not possible to state with certainty that the building would not
have collapsed were those defects not present, the fact remains that several buildings in the
same area withstood the earthquake to which the building of the plaintiff was similarly
subjected," cannot be ignored.

The next issue to be resolved is the amount of damages to be awarded to the PBA for the
partial collapse (and eventual complete collapse) of its building.

The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore it to
tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However,
while the trial court awarded the PBA said amount as damages, plus unrealized rental income
for one-half year, the Court of Appeals modified the amount by awarding in favor of PBA an
additional sum of P200,000.00 representing the damage suffered by the PBA building as a
result of another earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).

The PBA in its brief insists that the proper award should be P1,830,000.00 representing the
total value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the
NAKPILS and UNITED question the additional award of P200,000.00 in favor of the PBA (L-
47851, NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further
urges that the unrealized rental income awarded to it should not be limited to a period of one-
half year but should be computed on a continuing basis at the rate of P178,671.76 a year until
the judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11
Assignment of Errors, p. 19).

The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial
and it is undisputed that the building could then still be repaired and restored to its
tenantable condition. The PBA, however, in view of its lack of needed funding, was unable,
thru no fault of its own, to have the building repaired. UNITED, on the other hand, spent
P13,661.28 to shore up the building after the August 2, 1968 earthquake (L-47896, CA
Decision, p. 46). Because of the earthquake on April 7, 1970, the trial court after the needed
consultations, authorized the total demolition of the building (L-47896, Vol. 1, pp. 53-54).

There should be no question that the NAKPILS and UNITED are liable for the damage
resulting from the partial and eventual collapse of the PBA building as a result of the
earthquakes.
We quote with approval the following from the erudite decision penned by Justice Hugo E.
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of
the Court of Appeals:

There is no question that an earthquake and other forces of nature such as

cyclones, drought, floods, lightning, and perils of the sea are acts of God. It
does not necessarily follow, however, that specific losses and suffering
resulting from the occurrence of these natural force are also acts of God. We
are not convinced on the basis of the evidence on record that from the
thousands of structures in Manila, God singled out the blameless PBA building
in Intramuros and around six or seven other buildings in various parts of the
city for collapse or severe damage and that God alone was responsible for the
damages and losses thus suffered.

The record is replete with evidence of defects and deficiencies in the designs
and plans, defective construction, poor workmanship, deviation from plans
and specifications and other imperfections. These deficiencies are attributable
to negligent men and not to a perfect God.

The act-of-God arguments of the defendants- appellants and third party

defendants-appellants presented in their briefs are premised on legal
generalizations or speculations and on theological fatalism both of which
ignore the plain facts. The lengthy discussion of United on ordinary
earthquakes and unusually strong earthquakes and on ordinary fortuitous
events and extraordinary fortuitous events leads to its argument that the
August 2, 1968 earthquake was of such an overwhelming and destructive
character that by its own force and independent of the particular negligence
alleged, the injury would have been produced. If we follow this line of
speculative reasoning, we will be forced to conclude that under such a
situation scores of buildings in the vicinity and in other parts of Manila would
have toppled down. Following the same line of reasoning, Nakpil and Sons
alleges that the designs were adequate in accordance with pre-August 2, 1968
knowledge and appear inadequate only in the light of engineering information
acquired after the earthquake. If this were so, hundreds of ancient buildings
which survived the earthquake better than the two-year old PBA building must
have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to earth explanation of the
collapse. The failure of the PBA building, as a unique and distinct construction
with no reference or comparison to other buildings, to weather the severe
earthquake forces was traced to design deficiencies and defective
construction, factors which are neither mysterious nor esoteric. The
theological allusion of appellant United that God acts in mysterious ways His
wonders to perform impresses us to be inappropriate. The evidence reveals
defects and deficiencies in design and construction. There is no mystery about
these acts of negligence. The collapse of the PBA building was no wonder
performed by God. It was a result of the imperfections in the work of the
architects and the people in the construction company. More relevant to our
mind is the lesson from the parable of the wise man in the Sermon on the
Mount "which built his house upon a rock; and the rain descended and the
floods came and the winds blew and beat upon that house; and it fen not; for it
was founded upon a rock" and of the "foolish upon the sand. And the rain
descended and man which built his house the floods came, and the winds
blew, and beat upon that house; and it fell and great was the fall of it. (St.
Matthew 7: 24-27)." The requirement that a building should withstand rains,
floods, winds, earthquakes, and natural forces is precisely the reason why we
have professional experts like architects, and engineers. Designs and
constructions vary under varying circumstances and conditions but the
requirement to design and build well does not change.

The findings of the lower Court on the cause of the collapse are more rational
and accurate. Instead of laying the blame solely on the motions and forces
generated by the earthquake, it also examined the ability of the PBA building,
as designed and constructed, to withstand and successfully weather those
forces.

The evidence sufficiently supports a conclusion that the negligence and fault
of both United and Nakpil and Sons, not a mysterious act of an inscrutable
God, were responsible for the damages. The Report of the Commissioner,
Plaintiff's Objections to the Report, Third Party Defendants' Objections to the
Report, Defendants' Objections to the Report, Commissioner's Answer to the
various Objections, Plaintiffs' Reply to the Commissioner's Answer,
Defendants' Reply to the Commissioner's Answer, Counter-Reply to
Defendants' Reply, and Third-Party Defendants' Reply to the Commissioner's
Report not to mention the exhibits and the testimonies show that the main
arguments raised on appeal were already raised during the trial and fully
considered by the lower Court. A reiteration of these same arguments on
appeal fails to convince us that we should reverse or disturb the lower Court's
factual findings and its conclusions drawn from the facts, among them:

The Commissioner also found merit in the allegations of the defendants as to

the physical evidence before and after the earthquake showing the inadequacy
of design, to wit:

Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;

a. Increase the inertia forces that move the building laterally toward the Manila
Fire Department.

b. Create another stiffness imbalance.

3. The embedded 4" diameter cast iron down spout on all exterior columns
reduces the cross-sectional area of each of the columns and the strength
thereof.

4. Two front corners, A7 and D7 columns were very much less reinforced.

Physical Evidence After the Earthquake, Proving Inadequacy of design;

1. Column A7 suffered the severest fracture and maximum sagging. Also D7.

2. There are more damages in the front part of the building than towards the
rear, not only in columns but also in slabs.

3. Building leaned and sagged more on the front part of the building.

4. Floors showed maximum sagging on the sides and toward the front corner
parts of the building.

5. There was a lateral displacement of the building of about 8", Maximum

sagging occurs at the column A7 where the floor is lower by 80 cm. than the
highest slab level.

6. Slab at the corner column D7 sagged by 38 cm.

The Commissioner concluded that there were deficiencies or defects in the

design, plans and specifications of the PBA building which 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 earthquake-
resistant design and construction.

We shall first classify and consider defects which may have appreciable
bearing or relation to' the earthquake-resistant property of the building.

As heretofore mentioned, details which insure ductility at or near the

connections between columns and girders are desirable in earthquake
resistant design and construction. The omission of spirals and ties or hoops at
the bottom and/or tops of columns contributed greatly to the loss of
earthquake-resistant strength. The plans and specifications required that these
spirals and ties be carried from the floor level to the bottom reinforcement of
the deeper beam (p. 1, Specifications, p. 970, Reference 11). There were several
clear evidences where this was not done especially in some of the ground floor
columns which failed.

There were also unmistakable evidences that the spacings of the spirals and
ties in the columns were in many cases greater than those called for in the
plans and specifications resulting again in loss of earthquake-resistant
strength. The assertion of the engineering experts for the defendants that the
improper spacings and the cutting of the spirals did not result in loss of
strength in the column cannot be maintained and is certainly contrary to the
general principles of column design and construction. And even granting that
there be no loss in strength at the yield point (an assumption which is very
doubtful) the cutting or improper spacings of spirals will certainly result in the
loss of the plastic range or ductility in the column and it is precisely this
plastic range or ductility which is desirable and needed for earthquake-
resistant strength.

There is no excuse for the cavity or hollow portion in the column A4, second
floor, and although this column did not fail, this is certainly an evidence on the
part of the contractor of poor construction.

The effect of eccentricities in the columns which were measured at about 2 1/2
inches maximum may be approximated in relation to column loads and column
and beam moments. The main effect of eccentricity is to change the beam or
girder span. The effect on the measured eccentricity of 2 inches, therefore, is
to increase or diminish the column load by a maximum of about 1% and to
increase or diminish the column or beam movements by about a maximum of
2%. While these can certainly be absorbed within the factor of safety, they
nevertheless diminish said factor of safety.

The cutting of the spirals in column A5, ground floor is the subject of great
contention between the parties and deserves special consideration.

The proper placing of the main reinforcements and spirals in column A5,
ground floor, is the responsibility of the general contractor which is the UCCI.
The burden of proof, therefore, that this cutting was done by others is upon the
defendants. Other than a strong allegation and assertion that it is the plumber
or his men who may have done the cutting (and this was flatly denied by the
plumber) no conclusive proof was presented. The engineering experts for the
defendants asserted that they could have no motivation for cutting the bar
because they can simply replace the spirals by wrapping around a new set of
spirals. This is not quite correct. There is evidence to show that the pouring of
concrete for columns was sometimes done through the beam and girder
reinforcements which were already in place as in the case of column A4
second floor. If the reinforcement for the girder and column is to subsequently
wrap around the spirals, this would not do for the elasticity of steel would
prevent the making of tight column spirals and loose or improper spirals would
result. The proper way is to produce correct spirals down from the top of the
main column bars, a procedure which can not be done if either the beam or
girder reinforcement is already in place. The engineering experts for the
defendants strongly assert and apparently believe that the cutting of the
spirals did not materially diminish the strength of the column. This belief
together with the difficulty of slipping the spirals on the top of the column once
the beam reinforcement is in place may be a sufficient motivation for the
cutting of the spirals themselves. The defendants, therefore, should be held
responsible for the consequences arising from the loss of strength or ductility
in column A5 which may have contributed to the damages sustained by the
building.

The lack of proper length of splicing of spirals was also proven in the visible
spirals of the columns where spalling of the concrete cover had taken place.
This lack of proper splicing contributed in a small measure to the loss of
strength.

The effects of all the other proven and visible defects although nor can
certainly be accumulated so that they can contribute to an appreciable loss in
earthquake-resistant strength. The engineering experts for the defendants
submitted an estimate on some of these defects in the amount of a few
percent. If accumulated, therefore, including the effect of eccentricity in the
 column the loss in strength due to these minor defects may run to as much as
ten percent.

To recapitulate: the omission or lack of spirals and ties at the bottom and/or at
the top of some of the ground floor columns contributed greatly to the collapse
of the PBA building since it is at these points where the greater part of the
failure occurred. The liability for the cutting of the spirals in column A5, ground
floor, in the considered opinion of the Commissioner rests on the shoulders of
the defendants and the loss of strength in this column contributed to the
damage which occurred.

It is reasonable to conclude, therefore, that the proven defects, deficiencies

and violations of the plans and specifications of the PBA building contributed
to the damages which resulted during the earthquake of August 2, 1968 and
the vice of these defects and deficiencies is that they not only increase but
also aggravate the weakness mentioned in the design of the structure. In other
words, these defects and deficiencies not only tend to add but also to multiply
the effects of the shortcomings in the design of the building. We may say,
therefore, that the defects and deficiencies in the construction contributed
greatly to the damage which occurred.

Since the execution and supervision of the construction work in the hands of
the contractor is direct and positive, the presence of existence of all the major
defects and deficiencies noted and proven manifests an element of negligence
which may amount to imprudence in the construction work. (pp. 42-49,
Commissioners Report).

As the parties most directly concerned with this portion of the Commissioner's report, the
defendants voiced their objections to the same on the grounds that the Commissioner should
have specified the defects found by him to be "meritorious"; that the Commissioner failed to
indicate the number of cases where the spirals and ties were not carried from the floor level
to the bottom reinforcement of the deeper beam, or where the spacing of the 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).

SO ORDERED.

Feria (Chairman), Fernan, Alampay and Cruz, JJ., concur.

G.R. No. L-48757 May 30, 1988

MAURO GANZON, petitioner,

vs.
COURT OF APPEALS and GELACIO E. TUMAMBING, respondents.

Antonio B. Abinoja for petitioner.

Quijano, Arroyo & Padilla Law Office for respondents.

SARMIENTO, J.:

The private respondent instituted in the Court of First Instance of Manila 1 an action against the petitioner for damages based on culpa
contractual. The antecedent facts, as found by the respondent Court, 2 are undisputed:

On November 28, 1956, Gelacio Tumambing contracted the services of Mauro B. Ganzon to haul
305 tons of scrap iron from Mariveles, Bataan, to the port of Manila on board the lighter LCT
"Batman" (Exhibit 1, Stipulation of Facts, Amended Record on Appeal, p. 38). Pursuant to that
agreement, Mauro B. Ganzon sent his lighter "Batman" to Mariveles where it docked in three feet of
water (t.s.n., September 28, 1972, p. 31). On December 1, 1956, Gelacio Tumambing delivered the
scrap iron to defendant Filomeno Niza, captain of the lighter, for loading which was actually begun
on the same date by the crew of the lighter under the captain's supervision. When about half of the
scrap iron was already loaded (t.s.n., December 14, 1972, p. 20), Mayor Jose Advincula of
Mariveles, Bataan, arrived and demanded P5,000.00 from Gelacio Tumambing. The latter resisted
the shakedown and after a heated argument between them, Mayor Jose Advincula drew his gun and
fired at Gelacio Tumambing (t.s.n., March 19, 1971, p. 9; September 28, 1972, pp. 6-7). The
gunshot was not fatal but Tumambing had to be taken to a hospital in Balanga, Bataan, for treatment
(t.s.n., March 19, 1971, p. 13; September 28, 1972, p. 15).

After sometime, the loading of the scrap iron was resumed. But on December 4, 1956, Acting Mayor
Basilio Rub, accompanied by three policemen, ordered captain Filomeno Niza and his crew to dump
the scrap iron (t.s.n., June 16, 1972, pp. 8-9) where the lighter was docked (t.s.n., September 28,
1972, p. 31). The rest was brought to the compound of NASSCO (Record on Appeal, pp. 20-22).
Later on Acting Mayor Rub issued a receipt stating that the Municipality of Mariveles had taken
custody of the scrap iron (Stipulation of Facts, Record on Appeal, p. 40; t.s.n., September 28, 1972,
p. 10.)

On the basis of the above findings, the respondent Court rendered a decision, the dispositive portion
of which states:

WHEREFORE, the decision appealed from is hereby reversed and set aside and a
new one entered ordering defendant-appellee Mauro Ganzon to pay plaintiff-
appellant Gelacio E. Tumambimg the sum of P5,895.00 as actual damages, the sum
of P5,000.00 as exemplary damages, and the amount of P2,000.00 as attorney's
fees. Costs against defendant-appellee Ganzon. 3

In this petition for review on certiorari, the alleged errors in the decision of the Court of Appeals are:

THE COURT OF APPEALS FINDING THE HEREIN PETITIONER GUILTY OF BREACH OF THE
CONTRACT OF TRANSPORTATION AND IN IMPOSING A LIABILITY AGAINST HIM
COMMENCING FROM THE TIME THE SCRAP WAS PLACED IN HIS CUSTODY AND CONTROL
HAVE NO BASIS IN FACT AND IN LAW.

II

THE APPELLATE COURT ERRED IN CONDEMNING THE PETITIONER FOR THE ACTS OF HIS
EMPLOYEES IN DUMPING THE SCRAP INTO THE SEA DESPITE THAT IT WAS ORDERED BY
THE LOCAL GOVERNMENT OFFICIAL WITHOUT HIS PARTICIPATION.
III

THE APPELLATE COURT FAILED TO CONSIDER THAT THE LOSS OF THE SCRAP WAS DUE
TO A FORTUITOUS EVENT AND THE PETITIONER IS THEREFORE NOT LIABLE FOR LOSSES
AS A CONSEQUENCE THEREOF. 4

The petitioner, in his first assignment of error, insists that the scrap iron had not been unconditionally
placed under his custody and control to make him liable. However, he completely agrees with the
respondent Court's finding that on December 1, 1956, the private respondent delivered the scraps to
Captain Filomeno Niza for loading in the lighter "Batman," That the petitioner, thru his employees,
actually received the scraps is freely admitted. Significantly, there is not the slightest allegation or
showing of any condition, qualification, or restriction accompanying the delivery by the private
respondent-shipper of the scraps, or the receipt of the same by the petitioner. On the contrary, soon
after the scraps were delivered to, and received by the petitioner-common carrier, loading was
commenced.

By the said act of delivery, the scraps were unconditionally placed in the possession and control of
the common carrier, and upon their receipt by the carrier for transportation, the contract of carriage
was deemed perfected. Consequently, the petitioner-carrier's extraordinary responsibility for the
loss, destruction or deterioration of the goods commenced. Pursuant to Art. 1736, such extraordinary
responsibility would cease only upon the delivery, actual or constructive, by the carrier to the
consignee, or to the person who has a right to receive them. 5 The fact that part of the shipment had
not been loaded on board the lighter did not impair the said contract of transportation as the goods
remained in the custody and control of the carrier, albeit still unloaded.

The petitioner has failed to show that the loss of the scraps was due to any of the following causes
enumerated in Article 1734 of the Civil Code, namely:

(1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

(2) Act of the public enemy in war, whether international or civil;

(3) Act or omission of the shipper or owner of the goods;

(4) The character of the goods or defects in the packing or in the containers;

(5) Order or act of competent public authority.

Hence, the petitioner is presumed to have been at fault or to have acted negligently. 6 By reason of
this presumption, the court is not even required to make an express finding of fault or negligence
before it could hold the petitioner answerable for the breach of the contract of carriage. Still, the
petitioner could have been exempted from any liability had he been able to prove that he observed
extraordinary diligence in the vigilance over the goods in his custody, according to all the
circumstances of the case, or that the loss was due to an unforeseen event or to force majeure. As it
was, there was hardly any attempt on the part of the petitioner to prove that he exercised such
extraordinary diligence.

It is in the second and third assignments of error where the petitioner maintains that he is exempt
from any liability because the loss of the scraps was due mainly to the intervention of the municipal
officials of Mariveles which constitutes a caso fortuito as defined in Article 1174 of the Civil Code. 7

We cannot sustain the theory of caso fortuito. In the courts below, the petitioner's defense was that
the loss of the scraps was due to an "order or act of competent public authority," and this contention
was correctly passed upon by the Court of Appeals which ruled that:

... In the second place, before the appellee Ganzon could be absolved from
responsibility on the ground that he was ordered by competent public authority to
unload the scrap iron, it must be shown that Acting Mayor Basilio Rub had the power
to issue the disputed order, or that it was lawful, or that it was issued under legal
process of authority. The appellee failed to establish this. Indeed, no authority or
power of the acting mayor to issue such an order was given in evidence. Neither has
it been shown that the cargo of scrap iron belonged to the Municipality of Mariveles.
What we have in the record is the stipulation of the parties that the cargo of scrap
 iron was accilmillated by the appellant through separate purchases here and there
from private individuals (Record on Appeal, pp. 38-39). The fact remains that the
order given by the acting mayor to dump the scrap iron into the sea was part of the
pressure applied by Mayor Jose Advincula to shakedown the appellant for
P5,000.00. The order of the acting mayor did not constitute valid authority for
appellee Mauro Ganzon and his representatives to carry out.

Now the petitioner is changing his theory to caso fortuito. Such a change of theory on appeal we
cannot, however, allow. In any case, the intervention of the municipal officials was not In any case,
of a character that would render impossible the fulfillment by the carrier of its obligation. The
petitioner was not duty bound to obey the illegal order to dump into the sea the scrap iron. Moreover,
there is absence of sufficient proof that the issuance of the same order was attended with such force
or intimidation as to completely overpower the will of the petitioner's employees. The mere difficulty
in the fullfilment of the obligation is not considered force majeure. We agree with the private
respondent that the scraps could have been properly unloaded at the shore or at the NASSCO
compound, so that after the dispute with the local officials concerned was settled, the scraps could
then be delivered in accordance with the contract of carriage.

There is no incompatibility between the Civil Code provisions on common carriers and Articles
361 8 and 362 9 of the Code of Commerce which were the basis for this Court's ruling in Government
of the Philippine Islands vs. Ynchausti & Co.10 and which the petitioner invokes in tills petition. For
Art. 1735 of the Civil Code, conversely stated, means that the shipper will suffer the losses and
deterioration arising from the causes enumerated in Art. 1734; and in these instances, the burden of
proving that damages were caused by the fault or negligence of the carrier rests upon him. However,
the carrier must first establish that the loss or deterioration was occasioned by one of the excepted
causes or was due to an unforeseen event or to force majeure. Be that as it may, insofar as Art. 362
appears to require of the carrier only ordinary diligence, the same is .deemed to have been modified
by Art. 1733 of the Civil Code.

Finding the award of actual and exemplary damages to be proper, the same will not be disturbed by
us. Besides, these were not sufficiently controverted by the petitioner.

WHEREFORE, the petition is DENIED; the assailed decision of the Court of Appeals is hereby
AFFIRMED. Costs against the petitioner.

This decision is IMMEDIATELY EXECUTORY.

Yap, C.J., Paras and Padilla, JJ., concur.

Separate Opinions

MELENCIO-HERRERA, J., dissenting:

I am constrained to dissent.

It is my view that petitioner can not be held liable in damages for the loss and destruction of the
scrap iron. The loss of said cargo was due to an excepted cause an 'order or act of competent public
authority" (Article 1734[5], Civil Code).

The loading of the scrap iron on the lighter had to be suspended because of Municipal Mayor Jose
Advincula's intervention, who was a "competent public authority." Petitioner had no control over the
situation as, in fact, Tumambing himself, the owner of the cargo, was impotent to stop the "act' of
said official and even suffered a gunshot wound on the occasion.

When loading was resumed, this time it was Acting Mayor Basilio Rub, accompanied by three
policemen, who ordered the dumping of the scrap iron into the sea right where the lighter was
docked in three feet of water. Again, could the captain of the lighter and his crew have defied said
order?

Through the "order" or "act" of "competent public authority," therefore, the performance of a
contractual obligation was rendered impossible. The scrap iron that was dumped into the sea was
"destroyed" while the rest of the cargo was "seized." The seizure is evidenced by the receipt issues
by Acting Mayor Rub stating that the Municipality of Mariveles had taken custody of the scrap iron.
Apparently, therefore, the seizure and destruction of the goods was done under legal process or
authority so that petitioner should be freed from responsibility.

Art. 1743. If through order of public authority the goods are seized or destroyed, the
common carrier is not responsible, provided said public authority had power to issue
the order.

Separate Opinions

MELENCIO-HERRERA, J., dissenting:

I am constrained to dissent.

It is my view that petitioner can not be held liable in damages for the loss and destruction of the
scrap iron. The loss of said cargo was due to an excepted cause an 'order or act of competent public
authority" (Article 1734[5], Civil Code).

The loading of the scrap iron on the lighter had to be suspended because of Municipal Mayor Jose
Advincula's intervention, who was a "competent public authority." Petitioner had no control over the
situation as, in fact, Tumambing himself, the owner of the cargo, was impotent to stop the "act' of
said official and even suffered a gunshot wound on the occasion.

When loading was resumed, this time it was Acting Mayor Basilio Rub, accompanied by three
policemen, who ordered the dumping of the scrap iron into the sea right where the lighter was
docked in three feet of water. Again, could the captain of the lighter and his crew have defied said
order?

Through the "order" or "act" of "competent public authority," therefore, the performance of a
contractual obligation was rendered impossible. The scrap iron that was dumped into the sea was
"destroyed" while the rest of the cargo was "seized." The seizure is evidenced by the receipt issues
by Acting Mayor Rub stating that the Municipality of Mariveles had taken custody of the scrap iron.
Apparently, therefore, the seizure and destruction of the goods was done under legal process or
authority so that petitioner should be freed from responsibility.

Art. 1743. If through order of public authority the goods are seized or destroyed, the
common carrier is not responsible, provided said public authority had power to issue
the order.

Footnotes

1 Presided by Judge Jesus P. Morfe

2 Pascual, Chairman, ponente; Agrava and Climaco, JJ., concurring.

3 Decision, 9; Rollo 19.

4 Petitioner's Brief, 3, 7, 9; Rollo, 41.

5 Article 1736, Civil Code of the Philippines:

Art. 1736. The extraordinary responsibility of the common carriers lasts from the time
the goods are unconditionally placed in the possession of, and received by the
carrier for transportation until the same are delivered, actually or constructively, by
the carrier to the consignee, or to the person who has a right to receive them, without
prejudice to the provisions of article 1738.

6 Article 1735, supra.

Art. 1735. In all cases other than those mentioned in Nos. 1, 2, 3, 4, and 5 of the
preceding article, if the goods are lost, destroyed or deteriorated, common carriers
are presumed to have been at fault or to have acted negligently, unless they prove
that they observed extraordinary diligence as required in Article 1733.

7 Art. 11 74, supra:

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 for foreseen were inevitable.

8 Article 361, Code of Commerce:

Art. 361. The merchandise shall be transported at the

risk and venture of the shipper, if the contrary has not
been expressly stipulated.

As a consequence, all the losses and deterioration

which the goods may suffer during the transportation
by reason of fortuitous event, force majeure, or the
inherent nature and defect of the goods, shall be for
the account and risk of the shipper.

Proof of these accidents is incumbent upon the

carrier.

9 Article 362, Code of Commerce:

Art. 362. Nevertheless, the carrier shall be liable for

the losses and damages resulting from the causes
mentioned in the preceding article if it is proved, as
against him, that they arose through his negligence or
by reason of his having failed to take the precautions
which usage has established among careful persons,
unless the shipper has committed fraud in the bill of
lading, representing the goods to be of a kind or
quality different from what they really were.

If, notwithstanding the precautions referred to in to

article, the goods transported run the risk of being
lost, on account of their nature or by reason of
unavoidable accident, there being no time for their
owners to dispose of them, the carrier may proceed to
sell them, placing them for this purpose at the
disposal of the judicial authority or of the officials
designated by special provisions.

10 No. 14191, September 29, 1919, 40 Phil. 219.

G.R. No. 157906 November 2, 2006

JOAQUINITA P. CAPILI, Petitioner,

vs.
SPS. DOMINADOR CARDAÑA and ROSALITA CARDAÑA, Respondents.

DECISION

QUISUMBING, J.:

Before us is a petition for review assailing the Decision1 dated October 18, 2002 of the Court of
Appeals in CA-G.R. CV. No. 54412, declaring petitioner liable for negligence that resulted in the
death of Jasmin Cardaña, a school child aged 12, enrolled in Grade 6, of San Roque Elementary
School, where petitioner is the principal. Likewise assailed is the Resolution2 dated March 20, 2003
denying reconsideration.

The facts are as follows:

On February 1, 1993, Jasmin Cardaña was walking along the perimeter fence of the San Roque
Elementary School when a branch of a caimito tree located within the school premises fell on her,
causing her instantaneous death. Thus, her parents - Dominador and Rosalita Cardaña - filed a case
for damages before the Regional Trial Court of Palo, Leyte against petitioner.

The Cardañas alleged in their complaint that even as early as December 15, 1992, a resident of
the barangay, Eufronio Lerios, reported on the possible danger the tree posed to passersby. Lerios
even pointed to the petitioner the tree that stood near the principal’s office. The Cardañas averred
that petitioner’s gross negligence and lack of foresight caused the death of their daughter.

Petitioner denied the accusation and said that at that time Lerios had only offered to buy the tree.
She also denied knowing that the tree was dead and rotting. To prove her point, she presented
witnesses who attested that she had brought up the offer of Lerios to the other teachers during a
meeting on December 15, 1992 and assigned Remedios Palaña to negotiate the sale.

In a Decision3 dated February 5, 1996, the trial court dismissed the complaint for failure of the
respondents to establish negligence on the part of the petitioner.

On appeal, the Court of Appeals reversed the trial court’s decision. The appellate court found the
appellee (herein petitioner) liable for Jasmin’s death, as follows:

Foregoing premises considered, the instant appeal is GRANTED. Appellee Joaquinita Capili is
hereby declared liable for negligence resulting to the death of Jasmin D. Cardaña. She is hereby
ordered to indemnify appellants, parents of Jasmin, the following amounts:

1. For the life of Jasmin D. Cardaña P50,000.00;

2. For burial expenses 15,010.00;

3. For moral damages 50,000.00;

4. For attorney’s fees and litigation 10,000.00.

expenses

SO ORDERED.4

Petitioner’s motion for reconsideration was denied. Petitioner now comes before us submitting the
following issues for our resolution:

WHETHER OR NOT THE COURT OF APPEALS VIS-À-VIS THE SET OF FACTS STATED
IN THE CHALLENGED DECISION, ERRED IN FINDING THE PETITIONER NEGLIGENT
AND THEREFORE LIABLE FOR DAMAGES UNDER ARTICLE 2206 OF THE CIVIL CODE
 AND IN ORDERING THE PETITIONER TO PAY DAMAGES TO THE RESPONDENTS;
AND

II

WHETHER OR NOT THE COURT OF APPEALS ERRED IN DENYING PETITIONER’S

MOTION FOR RECONSIDERATION.5

On the other hand, respondents posit the following issue:

Whether or not the Decision of the Honorable Court of Appeals, Twelfth Division, in CA G.R. CV. No.
54412 promulgated on October 18, 2002 … should be affirmed and respected, thus remain
undisturbed.6

Primarily, the issue is whether petitioner is negligent and liable for the death of Jasmin Cardaña.

Petitioner asserts that she was not negligent about the disposal of the tree since she had assigned
her next-in-rank, Palaña, to see to its disposal; that despite her physical inspection of the school
grounds, she did not observe any indication that the tree was already rotten nor did any of her 15
teachers inform her that the tree was already rotten;7 and that moral damages should not be granted
against her since there was no fraud nor bad faith on her part.

On the other hand, respondents insist that petitioner knew that the tree was dead and rotting, yet,
she did not exercise reasonable care and caution which an ordinary prudent person would have
done in the same situation.

To begin, we have to point out that whether petitioner was negligent or not is a question of fact which
is generally not proper in a petition for review, and when this determination is supported by
substantial evidence, it becomes conclusive and binding on this Court.8 However, there is an
exception, that is, when the findings of the Court of Appeals are incongruent with the findings of the
lower court.9 In our view, the exception finds application in the present case.

The trial court gave credence to the claim of petitioner that she had no knowledge that the tree was
already dead and rotting and that Lerios merely informed her that he was going to buy the tree for
firewood. It ruled that petitioner exercised the degree of care and vigilance which the circumstances
require and that there was an absence of evidence that would require her to use a higher standard
of care more than that required by the attendant circumstances.10 The Court of Appeals, on the other
hand, ruled that petitioner should have known of the condition of the tree by its mere sighting and
that no matter how hectic her schedule was, she should have had the tree removed and not merely
delegated the task to Palaña. The appellate court ruled that the dead caimito tree was a nuisance
that should have been removed soon after petitioner had chanced upon it.11

A negligent act is an inadvertent act; it may be merely carelessly done from a lack of ordinary
prudence and may be one which creates a situation involving an unreasonable risk to another
because of the expectable action of the other, a third person, an animal, or a force of nature. A
negligent act is one from which an ordinary prudent person in the actor’s position, in the same or
similar circumstances, would foresee such an appreciable risk of harm to others as to cause him not
to do the act or to do it in a more careful manner.12

The probability that the branches of a dead and rotting tree could fall and harm someone is clearly a
danger that is foreseeable. As the school principal, petitioner was tasked to see to the maintenance
of the school grounds and safety of the children within the school and its premises. That she was
unaware of the rotten state of a tree whose falling branch had caused the death of a child speaks ill
of her discharge of the responsibility of her position.

In every tort case filed under Article 2176 of the Civil Code, plaintiff has to prove by a preponderance
of evidence: (1) the damages suffered by the plaintiff; (2) the fault or negligence of the defendant or
some other person for whose act he must respond; and (3) the connection of cause and effect
between the fault or negligence and the damages incurred.13

The fact, however, that respondents’ daughter, Jasmin, died as a result of the dead and rotting tree
within the school’s premises shows that the tree was indeed an obvious danger to anyone passing
by and calls for application of the principle of res ipsa loquitur.
The doctrine of res ipsa loquitur applies where (1) the accident was of such character as to warrant
an inference that it would not have happened except for the defendant’s negligence; (2) the accident
must have been caused by an agency or instrumentality within the exclusive management or control
of the person charged with the negligence complained of; and (3) the accident must not have been
due to any voluntary action or contribution on the part of the person injured.14

The effect of the doctrine of res ipsa loquitur is to warrant a presumption or inference that the mere
falling of the branch of the dead and rotting tree which caused the death of respondents’ daughter
was a result of petitioner’s negligence, being in charge of the school.

In the case of D.M. Consunji, Inc. v. Court of Appeals,15 this Court held:

…As a rule of evidence, the doctrine of res ipsa loquitur is peculiar to the law of negligence which
recognizes that prima facie negligence may be established without direct proof and furnishes a
substitute for specific proof of negligence.

The concept of res ipsa loquitur has been explained in this wise:

While negligence is not ordinarily inferred or presumed, and while the mere happening of an
accident or injury will not generally give rise to an inference or presumption that it was due to
negligence on defendant’s part, under the doctrine of res ipsa loquitur, which means, literally, the
thing or transaction speaks for itself, or in one jurisdiction, that the thing or instrumentality speaks for
itself, the facts or circumstances accompanying an injury may be such as to raise a presumption, or
at least permit an inference of negligence on the part of the defendant, or some other person who is
charged with negligence.

x x x where it is shown that the thing or instrumentality which caused the injury complained of was
under the control or management of the defendant, and that the occurrence resulting in the injury
was such as in the ordinary course of things would not happen if those who had its control or
management used proper care, there is sufficient evidence, or, as sometimes stated, reasonable
evidence, in the absence of explanation by the defendant, that the injury arose from or was caused
by the defendant’s want of care.

The procedural effect of the doctrine of res ipsa loquitur is that petitioner’s negligence is presumed
once respondents established the requisites for the doctrine to apply. Once respondents made out
a prima facie case of all requisites, the burden shifts to petitioner to explain. The presumption or
inference may be rebutted or overcome by other evidence and, under appropriate circumstances a
disputable presumption, such as that of due care or innocence, may outweigh the inference.16

Was petitioner’s explanation as to why she failed to have the tree removed immediately sufficient to
exculpate her?

As the school principal, petitioner was tasked to see to the maintenance of the school grounds and
safety of the children within the school and its premises. That she was unaware of the rotten state of
the tree calls for an explanation on her part as to why she failed to be vigilant.

Petitioner contends she was unaware of the state of the dead and rotting tree because Lerios merely
offered to buy the tree and did not inform her of its condition. Neither did any of her teachers inform
her that the tree was an imminent danger to anyone. She argues that she could not see the
immediate danger posed by the tree by its mere sighting even as she and the other teachers
conducted ground inspections. She further argues that, even if she should have been aware of the
danger, she exercised her duty by assigning the disposition of the tree to another teacher.

We find petitioner’s explanation wanting. As school principal, petitioner is expected to oversee the
safety of the school’s premises. The fact that she failed to see the immediate danger posed by the
dead and rotting tree shows she failed to exercise the responsibility demanded by her position.

Moreover, even if petitioner had assigned disposal of the tree to another teacher, she exercises
supervision over her assignee.17 The record shows that more than a month had lapsed from the time
petitioner gave instruction to her assistant Palaña on December 15, 1992, to the time the incident
occurred on February 1, 1993. Clearly, she failed to check seasonably if the danger posed by the
rotting tree had been removed. Thus, we cannot accept her defense of lack of negligence.
Lastly, petitioner questions the award of moral damages. Moral damages are awarded if the
following elements exist in the case: (1) an injury clearly sustained by the claimant; (2) a culpable act
or omission factually established; (3) a wrongful act or omission by 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 of the Civil Code.18 However, the person claiming moral damages
must prove the existence of bad faith by clear and convincing evidence for the law always presumes
good faith. It is not enough that one merely suffered sleepless nights, mental anguish, and serious
anxiety as the result of the actuations of the other party. Invariably, such action must be shown to
have been willfully done in bad faith or with ill motive.19 Under the circumstances, we have to
concede that petitioner was not motivated by bad faith or ill motive vis-à-vis respondents’ daughter’s
death. The award of moral damages is therefore not proper.

In line with applicable jurisprudence, we sustain the award by the Court of Appeals of ₱50,000 as
indemnity for the death of Jasmin,20 and ₱15,010 as reimbursement of her burial expenses.21

WHEREFORE, the petition is DENIED. The Decision dated October 18, 2002 and the Resolution
dated March 20, 2003, of the Court of Appeals in CA-G.R. CV. No. 54412 are AFFIRMED with
MODIFICATION such that the award of moral damages is hereby deleted.

Costs against petitioner.

SO ORDERED.

LEONARDO A. QUISUMBING
Associate Justice
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.

DECISION

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.

xxxx

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.

xxxx

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.
 xxxx

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.

xxxx

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 third-party. 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 above-
mentioned amounts awarded to petitioner.

SO ORDERED.

CONSUELO YNARES-SANTIAGO
Associate Justice
G.R. No. 183628 April 7, 2010

DANIEL T. SO, Petitioner,

vs.
FOOD FEST LAND, INC. Respondent

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

G.R. No. 183670

FOOD FEST LAND, INC., Petitioner,

vs.
DANIEL T. SO, Respondent.

DECISION

CARPIO MORALES, J.:

Food Fest Land Inc. (Food Fest) entered into a September 14, 1999 Contract of Lease1 with Daniel
T. So (So) over a commercial space in San Antonio Village, Makati City for a period of three years
(1999-2002) on which Food Fest intended to operate a Kentucky Fried Chicken carry out branch.

Before forging the lease contract, the parties entered into a preliminary agreement dated July 1,
1999, the pertinent portion of which stated:

The lease shall not become binding upon us unless and until the government agencies concerned
shall authorize, permit or license us to open and maintain our business at the proposed Lease
Premises. We shall promptly make an application for permits, licenses and authority for our business
and shall exercise due diligence to obtain it, provided, however, that you shall assist us by
submitting such documents and papers and comply with such other requirements as the
governmental agencies may impose. We shall give notice to you when the permits, license and
authorities have been obtained. We shall also notify you if any of the required permits, licenses and
authorities shall not be be (sic) given or granted within fifteen days (15) from your conform
(sic)hereto. In such case, the agreement may be canceled and all rights and obligations hereunder
shall cease.2 (underscoring supplied)

While Food Fest was able to secure the necessary licenses and permits for the year 1999, it failed to
commence business operations. For the year 2000, Food Fest’s application for renewal of barangay
business clearance was "held in abeyance until further study of [its] kitchen facilities."3

As the barangay business clearance is a prerequisite to the processing of other permits, licenses
and authority by the city government, Food Fest was unable to operate. Fearing further business
losses, Food Fest, by its claim, communicated its intent to terminate the lease contract to So who,
however, did not accede and instead offered to help Food Fest secure authorization from the
barangay. On So’s advice, Food Fest wrote requests addressed to city officials for assistance to
facilitate renewal.

In August 2000, Food Fest, for the second time, purportedly informed So of its intent to terminate the
lease, and it in fact stopped paying rent.

So later sent a November 22, 2000 demand letter to Food Fest for the payment of rental arrearages
and reiterated his offer to help it secure clearance from the barangay. Thus So wrote: "With regard to
securing permits from the barangay & the City Hall, [with] which I am trying to help you, some form
of representation, maybe not in cash, would definitely help in forging a longer term
relationship."4 Food Fest demurred to the offer.

By letter of March 26, 2001,5 So again demanded payment of rentals from Food Fest from
September 2000 to March 2001 amounting to ₱123,200.00. Food Fest denied any liability, however,
and started to remove its fixtures and equipment from the premises.

On April 2, 2001, So sent Food Fest a Final Notice of Termination with demand to pay and to
vacate.6
On April 26, 2001, So filed a complaint for ejectment and damages against Food Fest before the
Metropolitan Trial Court (MeTC) of Makati City.

Branch 64 of the MeTC, by Decision of July 4, 2005,7 rendered judgment in favor of So, disposing as
follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against defendant, Food Fest Land, Inc., as follows:

a. Ordering the defendant to pay the unpaid rentals from August 2000 until March 2001 with
penalties accrued thereon. The security deposit in the sum of Sixty Four Thousand Pesos
(Php64,000.00) is forfeited in favor of the plaintiff;

b. Ordering the defendant to pay liquidated damages in a sum equivalent to 25% of the total
sum due and demandable;

c. Ordering the defendant to pay the plaintiff a sum equivalent to 25% of the total claim as
and for attorney’s fees; and

d. The costs of suit.

SO ORDERED.8

On appeal, Branch 143 of the Regional Trial Court (RTC), by Decision of November 30,
2006,9 reversed the MeTC Decision, disposing as follows:

WHEREFORE, premises considered, the judgment of the lower court dated 04 July 2005 is hereby
REVERSED and SET ASIDE, ordering plaintiff Daniel T. So to pay defendant Food Fest the amount
of Thirty Two Thousand Pesos (₱32,000.00) as reimbursement for rentals paid for the months of
July and August 2000; Twenty Thousand Pesos (₱20,000.00) as exemplary damages; Twenty
Thousand Pesos (₱20,000.00) as attorney’s fees and costs of suit.

SO ORDERED.10

In reversing the MeTC, the RTC found that Food Fest already vacated the leased premises before
So filed the complaint for ejectment; and whereas possession is the only issue for resolution in an
ejectment case, So’s cause of action only pertained to collection of the rental arrears.

As to So’s claim for payment of arrears, the RTC noted that since the claim exceeded the
jurisdictional amount over which it can cognize, the RTC, applying Sec. 8, Rule 40 of the Rules of
Court,11 treated the case as if it was originally filed with it.

On the merits, the RTC held that Food Fest’s failure to secure the authority to commence business
operations resulted in the termination of its contractual obligations to So, including the obligation to
pay rent.

On petition for review, the Court of Appeals, by Decision of April 18, 2008,12 upheld the RTC’s
jurisdiction over the complaint. It, however, declared that Food Fest’s obligation to pay rent
was not extinguished upon its failure to secure permits to operate. Thus, it disposed:

WHEREFORE, premises considered, the assailed decision dated November 30, 2006 of the RTC,
Branch 143, Makati City is hereby REVERSED and SET ASIDE, ordering respondent FFLI to pay
petitioner Daniel T. So the following:

1. Unpaid rentals from August 2000 until March 31, 2001 with penalties accrued thereon.
The security deposit is forfeited in favor of petitioner So;

2. Temperate damages in the amount of P50,000.00;

3. P20,000.00 as attorney’s fees; and

4. Costs of suit.
SO ORDERED.13

The parties’ respective motions for reconsideration having been denied, they filed their respective
petitions before this Court which, by Resolution of October 6, 2008, resolved to consolidate G.R. No.
183628 (Daniel T. So vs. Food Fest Land, Inc.) with G.R. No. 183670 (Food Fest Land, Inc. vs.
Daniel T. So).

So maintains that the MeTC had jurisdiction over his complaint for ejectment. For, So contends,
Food Fest did not vacate the leased premises before his filing (on April 26, 2001) of the complaint.

So admitted in his Complaint, however, that Food Fest started pulling out equipment and other
machineries from the premises even before the final notice was received by it on April 2, 2001.

13. In or the last few days of March 2001, defendant FOOD FEST LAND, INC. started to remove
and pull out its equipment, appliances, fittings, furnishings, movable articles and other accessories
and facilities that it had earlier placed and installed in the leased premises, but due to its wanton lack
of care in doing so, so much damage and destruction was caused to the leased premises, resulting
in the breakage of and damage to the concrete walls and partition in the building as well as the steel
gate leading to the leased premises and other parts of the building and its premises.14 (emphasis
and underscoring supplied)

Two elements are paramount in possession – there must be occupancy, apprehension or taking,
and there must be intent to possess.15 In the present case, given the immediately quoted allegation-
admission of So, intent to possess was not present on Food Fest’s part.

In another vein, So claims that Food Fest did not exercise care in removing the installations and
fixtures, thereby causing destruction to the premises to thus entitle him to damages, as well as to
damages corresponding to unrealized profits (lucrum cessans) to answer for the period during which
the unit was not rented out.

Unrealized profits fall under the category of actual or compensatory damages. If there exists a basis
for a reasonable expectation that profits would have continued to be generated had there been no
breach of contract, indemnification for damages based on such expected profits is proper. This is,
however, subject to the rule that a party is entitled to an adequate compensation only for such
pecuniary loss suffered by him as he has duly proved.16

Other than the photographs evincing damage to the premises, no evidence was proffered to show
So’s entitlement to unrealized profits. That the leased unit was not subsequently leased is not solely
attributable to Food Fest. As borne by the records, no renovation was undertaken by So for almost
three years following Food Fest’s vacation of the premises in 2001. The quotations issued by
construction companies for purposes of renovation were issued only in 2004.

So is not without recourse under the lease contract, however. Thus the pertinent provisions of the
lease contract provide:

7. LIABILITY OF LESSEE FOR DAMAGES- LESSEE hereby agrees that any damage to the leased
premises or its appurtenances caused by said LESSEE or its agents, employees, customers, guests
or any other person without the fault of LESSOR shall be LESSEE’s sole responsibility and liability,
which damage shall, upon demand by LESSOR be repaired promptly at its expense.

16. TERMINATION OF THE LEASE- LESSEE agrees to return and surrender the leased premises
at the expiration of the term of this lease in as good condition as reasonable wear and tear will
permit and without delay whatsoever, devoid of all occupants, furniture, machinery, equipment and
signages, articles and effects of any kind, other than such alterations or improvements which cannot
be removed without damaging the leased premises.

23. PENALTY CLAUSE – Any and all accounts payable by LESSEE under this Contract of Lease
and other charges which may be claimed against LESSEE, but not paid by LESSEE to LESSOR
within fifteen (15) days from due date shall be subject to penalty charges of ONE PERCENT (1%)
per month from due date until the account is paid in full.

23.1. Should LESSOR be compelled to seek judicial relief against LESSEE the latter shall, in
addition to any other claim for damages pay as liquidated damages to LESSOR an amount
equivalent to twenty-five percent (25%) of the amount due, but in no case less than P500.00: and
an attorney’s fee in the amount equivalent to 25% of the amount claimed but in no case less than
P3,000.00 as well as all expenses of litigation.17

Respecting So’s claim for renovation expenses, the same must be denied absent proof as to the
actual cost of renovation. Only firm offers or quotations from construction companies are in the
records. Following Article 2224 of the Civil Code,18 however, the appellate court’s award of
temperate damages is in order.

This Court notes that the appellate court did not award liquidated damages in contravention of the
contract. As for the appellate court’s award of ₱20,000.00 as attorney’s fees, the contractual
stipulation should prevail.

As for Food Fest’s invocation of the principle of rebus sic stantibus as enunciated in Article 1267 of
the Civil Code to render the lease contract functus officio, and consequently release it from
responsibility to pay rentals, the Court is not persuaded. Article 1267 provides:

Article 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.

This article, which enunciates the doctrine of unforeseen events, is not, however, an absolute
application of the principle of rebus sic stantibus, which would endanger the security of contractual
relations. The parties to the contract must be presumed to have assumed the risks of unfavorable
developments. It is, therefore, only in absolutely exceptional changes of circumstances that equity
demands assistance for the debtor.19

Food Fest claims that its failure to secure the necessary business permits and licenses rendered the
impossibility and non-materialization of its purpose in entering into the contract of lease, in support of
which it cites the earlier-quoted portion of the preliminary agreement dated July 1, 1999 of the
parties.20

The cause or essential purpose in a contract of lease is the use or enjoyment of a thing.21 A party’s
motive or particular purpose in entering into a contract does not affect the validity or existence of the
contract; an exception is when the realization of such motive or particular purpose has been made a
condition upon which the contract is made to depend. The exception does not apply here.

It is clear that the condition set forth in the preliminary agreement pertains to the initial application of
Food Fest for the permits, licenses and authority to operate. It should not be construed to apply to
Food Fest’s subsequent applications. Consider the following qualification in the preliminary
agreement:

xxx We shall also notify you if any of the required permits, licenses and authorities shall not be be
(sic) given or granted within fifteen days (15) from your conform (sic) hereto. In such case, the
agreement may be canceled and all rights and obligations hereunder shall cease.22 (underscoring
supplied)

Food Fest was able to secure the permits, licenses and authority to operate when the lease contract
was executed. Its failure to renew these permits, licenses and authority for the succeeding
year, does not, however, suffice to declare the lease functus officio, nor can it be construed as an
unforeseen event to warrant the application of Article 1267.

Contracts, once perfected, are binding between the contracting parties. Obligations arising therefrom
have the force of law and should be complied with in good faith. Food Fest cannot renege from the
obligations it has freely assumed when it signed the lease contract.

WHEREFORE, the Court of Appeals Decision of April 18, 2008 is AFFIRMED with MODIFICATION.

Food Fest is ORDERED to pay So liquidated damages in the amount equivalent to 25% of the total
sum due and demandable. Further, So is ORDERED to pay attorney’s fees in the amount equivalent
to 25% of the total sum due and demandable. In all other respects, the decision is AFFIRMED.

SO ORDERED.
CONCHITA CARPIO MORALES
Associate Justice