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FRANKLIN G. GACAL and CORAZON M.

GACAL, the latter assisted by her husband,


FRANKLIN
G.
GACAL,
petitioners,
vs.
PHILIPPINE AIR LINES, INC., and THE HONORABLE PEDRO SAMSON C. ANIMAS, in his
capacity as PRESIDING JUDGE of the COURT OF FIRST INSTANCE OF SOUTH COTABATO,
BRANCH I, respondents.
PARAS, J.:
This is a, petition for review on certiorari of the decision of the Court of First Instance of
South Cotabato, Branch 1, * promulgated on August 26, 1980 dismissing three (3)
consolidated cases for damages: Civil Case No. 1701, Civil Case No. 1773 and Civil Case No.
1797 (Rollo, p. 35).
The facts, as found by respondent court, are as follows:
Plaintiffs Franklin G. Gacal and his wife, Corazon M. Gacal, Bonifacio S.
Anislag and his wife, Mansueta L. Anislag, and the late Elma de Guzman,
were then passengers boarding defendant's BAC 1-11 at Davao Airport
for a flight to Manila, not knowing that on the same flight, Macalinog,
Taurac Pendatum known as Commander Zapata, Nasser Omar, Liling
Pusuan Radia, Dimantong Dimarosing and Mike Randa, all of Marawi City
and members of the Moro National Liberation Front (MNLF), were their
co-passengers, three (3) armed with grenades, two (2) with .45 caliber
pistols, and one with a .22 caliber pistol. Ten (10) minutes after take off
at about 2:30 in the afternoon, the hijackers brandishing their respective
firearms announced the hijacking of the aircraft and directed its pilot to
fly to Libya. With the pilot explaining to them especially to its leader,
Commander Zapata, of the inherent fuel limitations of the plane and that
they are not rated for international flights, the hijackers directed the pilot
to fly to Sabah. With the same explanation, they relented and directed
the aircraft to land at Zamboanga Airport, Zamboanga City for refueling.
The aircraft landed at 3:00 o'clock in the afternoon of May 21, 1976 at
Zamboanga Airport. When the plane began to taxi at the runway, it was
met by two armored cars of the military with machine guns pointed at
the plane, and it stopped there. The rebels thru its commander
demanded that a DC-aircraft take them to Libya with the President of the
defendant company as hostage and that they be given $375,000 and six
(6) armalites, otherwise they will blow up the plane if their demands will
not be met by the government and Philippine Air Lines. Meanwhile, the
passengers were not served any food nor water and it was only on May
23, a Sunday, at about 1:00 o'clock in the afternoon that they were
served 1/4 slice of a sandwich and 1/10 cup of PAL water. After that,
relatives of the hijackers were allowed to board the plane but
immediately after they alighted therefrom, an armored car bumped the
stairs. That commenced the battle between the military and the hijackers
which led ultimately to the liberation of the surviving crew and the
passengers, with the final score of ten (10) passengers and three (3)
hijackers dead on the spot and three (3) hijackers captured.

City Fiscal Franklin G. Gacal was unhurt. Mrs. Corazon M. Gacal suffered
injuries in the course of her jumping out of the plane when it was
peppered with bullets by the army and after two (2) hand grenades
exploded inside the plane. She was hospitalized at General Santos
Doctors Hospital, General Santos City, for two (2) days, spending P245.60
for hospital and medical expenses, Assistant City Fiscal Bonifacio S.
Anislag also escaped unhurt but Mrs. Anislag suffered a fracture at the
radial bone of her left elbow for which she was hospitalized and operated
on at the San Pedro Hospital, Davao City, and therefore, at Davao
Regional Hospital, Davao City, spending P4,500.00. Elma de Guzman died
because of that battle. Hence, the action of damages instituted by the
plaintiffs demanding the following damages, to wit:
Civil Case No. 1701
City Fiscal Franklin G. Gacal and Mrs. Corazon M.
Gacal actual damages: P245.60 for hospital and
medical expenses of Mrs Gacal; P8,995.00 for their
personal belongings which were lost and not
recovered; P50,000.00 each for moral damages; and
P5,000.00 for attorney's fees, apart from the prayer
for an award of exemplary damages (Record, pp. 4-6,
Civil Case No. 1701).
Civil Case No. 1773
xxx xxx xxx
Civil Case No. 1797
xxx xxx xxx
The trial court, on August 26, 1980, dismissed the complaints finding that all the damages
sustained in the premises were attributed to force majeure.
On September 12, 1980 the spouses Franklin G. Gacal and Corazon M. Gacal, plaintiffs in Civil
Case No. 1701, filed a notice of appeal with the lower court on pure questions of law (Rollo,
p. 55) and the petition for review on certiorari was filed with this Court on October 20, 1980
(Rollo, p. 30).
The Court gave due course to the petition (Rollo, p. 147) and both parties filed their
respective briefs but petitioner failed to file reply brief which was noted by the Court in the
resolution dated May 3, 1982 (Rollo, p. 183).
Petitioners alleged that the main cause of the unfortunate incident is the gross, wanton and
inexcusable negligence of respondent Airline personnel in their failure to frisk the passengers

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adequately in order to discover hidden weapons in the bodies of the six (6) hijackers. They
claimed that despite the prevalence of skyjacking, PAL did not use a metal detector which is
the most effective means of discovering potential skyjackers among the passengers (Rollo,
pp. 6-7).
Respondent Airline averred that in the performance of its obligation to safely transport
passengers as far as human care and foresight can provide, it has exercised the utmost
diligence of a very cautious person with due regard to all circumstances, but the security
checks and measures and surveillance precautions in all flights, including the inspection of
baggages and cargo and frisking of passengers at the Davao Airport were performed and
rendered solely by military personnel who under appropriate authority had assumed
exclusive jurisdiction over the same in all airports in the Philippines.
Similarly, the negotiations with the hijackers were a purely government matter and a military
operation, handled by and subject to the absolute and exclusive jurisdiction of the military
authorities. Hence, it concluded that the accident that befell RP-C1161 was caused by
fortuitous event, force majeure and other causes beyond the control of the respondent
Airline.
The determinative issue in this case is whether or not hijacking or air piracy during martial
law and under the circumstances obtaining herein, is a caso fortuito or force majeure which
would exempt an aircraft from payment of damages to its passengers whose lives were put
in jeopardy and whose personal belongings were lost during the incident.
Under the Civil Code, common carriers are required to exercise extraordinary diligence in
their vigilance over the goods and for the safety of passengers transported by them,
according to all the circumstances of each case (Article 1733). They are presumed at fault or
to have acted negligently whenever a passenger dies or is injured (Philippine Airlines, Inc. v.
National Labor Relations Commission, 124 SCRA 583 [1983]) or for the loss, destruction or
deterioration of goods in cases other than those enumerated in Article 1734 of the Civil Code
(Eastern Shipping Lines, Inc. v. Intermediate Appellate Court, 150 SCRA 463 [1987]).
The source of a common carrier's legal liability is the contract of carriage, and by entering
into said contract, it binds itself to carry the passengers safely as far as human care and
foresight can provide. There is breach of this obligation if it fails to exert extraordinary
diligence according to all the circumstances of the case in exercise of the utmost diligence of
a very cautious person (Isaac v. Ammen Transportation Co., 101 Phil. 1046 [1957]; Juntilla v.
Fontanar, 136 SCRA 624 [1985]).
It is the duty of a common carrier to overcome the presumption of negligence (Philippine
National Railways v. Court of Appeals, 139 SCRA 87 [1985]) and it must be shown that the
carrier had observed the required extraordinary diligence of a very cautious person as far as
human care and foresight can provide or that the accident was caused by a fortuitous event
(Estrada v. Consolacion, 71 SCRA 523 [1976]). Thus, as ruled by this Court, no person shall be
responsible for those "events which could not be foreseen or which though foreseen were
inevitable. (Article 1174, Civil Code). The term is synonymous with caso fortuito (Lasam v.

Smith, 45 Phil. 657 [1924]) which is of the same sense as "force majeure" (Words and Phrases
Permanent Edition, Vol. 17, p. 362).
In order to constitute a caso fortuito or force majeure that would exempt a person from
liability under Article 1174 of the Civil Code, it is necessary that the following elements must
concur: (a) the cause of the breach of the obligation must be independent of the human will
(the will of the debtor or the obligor); (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 (Lasam v. Smith, 45 Phil. 657 [1924]; Austria v. Court
of Appeals, 39 SCRA 527 [1971]; Estrada v. Consolacion, supra; Vasquez v. Court of Appeals,
138 SCRA 553 [1985]; Juan F. Nakpil & Sons v. Court of Appeals, 144 SCRA 596 [1986]). Caso
fortuito or force majeure, by definition, are extraordinary events not foreseeable or
avoidable, events that could not be foreseen, or which, though foreseen, are inevitable. 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 (Republic v. Luzon
Stevedoring Corporation, 21 SCRA 279 [1967]).
Applying the above guidelines to the case at bar, the failure to transport petitioners safely
from Davao to Manila was due to the skyjacking incident staged by six (6) passengers of the
same plane, all members of the Moro National Liberation Front (MNLF), without any
connection with private respondent, hence, independent of the will of either the PAL or of its
passengers.
Under normal circumstances, PAL might have foreseen the skyjacking incident which could
have been avoided had there been a more thorough frisking of passengers and inspection of
baggages as authorized by R.A. No. 6235. But the incident in question occurred during
Martial Law where there was a military take-over of airport security including the frisking of
passengers and the inspection of their luggage preparatory to boarding domestic and
international flights. In fact military take-over was specifically announced on October 20,
1973 by General Jose L. Rancudo, Commanding General of the Philippine Air Force in a letter
to Brig. Gen. Jesus Singson, then Director of the Civil Aeronautics Administration (Rollo, pp.
71-72) later confirmed shortly before the hijacking incident of May 21, 1976 by Letter of
Instruction No. 399 issued on April 28, 1976 (Rollo, p. 72).
Otherwise stated, these events rendered it impossible for PAL to perform its obligations in a
nominal manner and obviously it cannot be faulted with negligence in the performance of
duty taken over by the Armed Forces of the Philippines to the exclusion of the former.
Finally, there is no dispute that the fourth element has also been satisfied. Consequently the
existence of force majeure has been established exempting respondent PAL from the
payment of damages to its passengers who suffered death or injuries in their persons and for
loss of their baggages. PREMISES CONSIDERED, the petition is hereby DISMISSED for lack of
merit and the decision of the Court of First Instance of South Cotabato, Branch I is hereby
AFFIRMED.SO ORDERED.

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G.R. No. L-82619 September 15, 1993


PHILIPPINE
AIRLINES,
vs.
COURT OF APPEALS and PEDRO ZAPATOS, respondents.

INC.,

petitioner,

Leighton R. Liazon for petitioner.


Balmes L. Ocampo for private respondent.

BELLOSILLO, J.:
This petition for review in certiorari seeks to annul and set aside the decision of the then
Intermediate Appellant Court, 1 now Court of Appeals, dated 28 February 1985, in AC-G.R. CV
No. 69327 ("Pedro Zapatos v. Philippine Airlines, Inc.") affirming the decision of the then
Court of first Instance, now Regional Trial Court, declaring Philippine Airlines, Inc., liable in
damages for breach of contract.
On 25 November 1976, private respondent filed a complaint for damages for breach of
contract of carriage 2 against Philippine Airlines, Inc. (PAL), before the then Court of First
Instance, now Regional Trial Court, of Misamis Occidental, at Ozamiz City. According to him,
on 2 August 1976, he was among the twenty-one (21) passengers of PAL Flight 477 that took
off from Cebu bound for Ozamiz City. The routing of this flight was Cebu-Ozamiz-Cotabato.
While on flight and just about fifteen (15) minutes before landing at Ozamiz City, the pilot
received a radio message that the airport was closed due to heavy rains and inclement
weather and that he should proceed to Cotabato City instead.
Upon arrival at Cotabato City, the PAL Station Agent informed the passengers of their options
to return to Cebu on flight 560 of the same day and thence to Ozamiz City on 4 August 1975,
or take the next flight to Cebu the following day, or remain at Cotabato and take the next
available flight to Ozamiz City on 5 August 1975. 3 The Station Agent likewise informed them
that Flight 560 bound for Manila would make a stop-over at Cebu to bring some of the
diverted passengers; that there were only six (6) seats available as there were already
confirmed passengers for Manila; and, that the basis for priority would be the check-in
sequence at Cebu.
Private respondent chose to return to Cebu but was not accommodated because he checkedin as passenger No. 9 on Flight 477. He insisted on being given priority over the confirmed
passengers in the accommodation, but the Station Agent refused private respondent's
demand explaining that the latter's predicament was not due to PAL's own doing but to be a
force majeure. 4
Private respondent tried to stop the departure of Flight 560 as his personal belongings,
including a package containing a camera which a certain Miwa from Japan asked him to

deliver to Mrs. Fe Obid of Gingoog City, were still on board. His plea fell on deaf ears. PAL
then issued to private respondent a free ticket to Iligan city, which the latter received under
protest. 5 Private respondent was left at the airport and could not even hitch a ride in the
Ford Fiera loaded with PAL personnel. 6 PAL neither provided private respondent with
transportation from the airport to the city proper nor food and accommodation for his stay
in Cotabato City.
The following day, private respondent purchased a PAL ticket to Iligan City. He informed PAL
personnel that he would not use the free ticket because he was filing a case against PAL. 7 In
Iligan City, private respondent hired a car from the airport to Kolambugan, Lanao del Norte,
reaching Ozamiz City by crossing the bay in a launch. 8 His personal effects including the
camera, which were valued at P2,000.00 were no longer recovered.
On 13 January 1977, PAL filed its answer denying that it unjustifiably refused to
accommodate private respondent. 9 It alleged that there was simply no more seat for private
respondent on Flight 560 since there were only six (6) seats available and the priority of
accommodation on Flight 560 was based on the check-in sequence in Cebu; that the first six
(6) priority passengers on Flight 477 chose to take Flight 560; that its Station Agent explained
in a courteous and polite manner to all passengers the reason for PAL's inability to transport
all of them back to Cebu; that the stranded passengers agreed to avail of the options and had
their respective tickets exchanged for their onward trips; that it was
only the private respondent who insisted on being given priority in the accommodation; that
pieces of checked-in baggage and had carried items of the Ozamiz City passengers were
removed from the aircraft; that the reason for their pilot's inability to land at Ozamis City
airport was because the runway was wet due to rains thus posing a threat to the safety of
both passengers and aircraft; and, that such reason of force majeure was a valid justification
for the pilot to bypass Ozamiz City and proceed directly to Cotabato City.
On 4 June 1981, the trial court rendered its decision 10 the dispositive portion of which states:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff and against the defendant Philippine AirLines, Inc.
ordering the latter to pay:
(1) As actual damages, the sum of Two Hundred Pesos
(P200.00) representing plaintiff's expenses for transportation,
food and accommodation during his stranded stay at Cotabato
City; the sum of Forty-Eight Pesos (P48.00) representing his
flight fare from Cotabato City to Iligan city; the sum of Five
Hundred Pesos (P500.00) representing plaintiff's transportation
expenses from Iligan City to Ozamiz City; and the sum of Five
Thousand Pesos (P5,000.00) as loss of business opportunities
during his stranded stay in Cotabato City;
(2) As moral damages, the sum of Fifty Thousand Pesos
(P50,000.00) for plaintiff's hurt feelings, serious anxiety, mental
anguish and unkind and discourteous treatment perpetrated by

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defendant's employees during his stay as stranded passenger in


Cotabato City;
(3) As exemplary damages, the sum of Ten Thousand Pesos
(P10,000.00) to set a precedent to the defendant airline that it
shall provide means to give comfort and convenience to
stranded passengers;
(4) The sum of Three Thousand Pesos (P3,000.00) as attorney's
fees;

all amounting to a conservative amount of thirty thousand


(P30,000.00) Pesos.
To substantiate this aspect of apathy, private respondent testified 15
A I did not even notice that I was I think the
last passenger or the last person out of the
PAL employees and army personnel that
were left there. I did not notice that when I
was already outside of the building after
our conversation.

(5) To pay the costs of this suit.


Q What did you do next?
PAL appealed to the Court of Appeals which on 28 February 1985, finding no reversible error,
affirmed the judgment of the court a quo. 11
PAL then sought recourse to this Court by way of a petition for review on certiorari 12 upon
the following issues: (1) Can the Court of Appeals render a decision finding petitioner (then
defendant-appellant in the court below) negligent and, consequently, liable for damages on a
question of substance which was neither raised on a question nor proved at the trial? (2) Can
the Court of Appeals award actual and moral damages contrary to the evidence and
established jurisprudence? 13
An assiduous examination of the records yields no valid reason for reversal of the judgment
on appeal; only a modification of its disposition.

A I banished (sic) because it seems that


there was a war not far from the airport.
The sound of guns and the soldiers were
plenty.
Q After that what did you do?
A I tried to look for a transportation that
could bring me down to the City of
Cotabato.
Q Were you able to go there?

In its petition, PAL vigorously maintains that private respondent's principal cause of action
was its alleged denial of private respondent's demand for priority over the confirmed
passengers on Flight 560. Likewise, PAL points out that the complaint did not impute to PAL
neglect in failing to attend to the needs of the diverted passengers; and, that the question of
negligence was not and never put in issue by the pleadings or proved at the trial.
Contrary to the above arguments, private respondent's amended complaint touched on PAL's
indifference and inattention to his predicament. The pertinent portion of the amended
complaint 14 reads:
10. That by virtue of the refusal of the defendant through its
agent in Cotabato to accommodate (sic) and allow the plaintiff
to take and board the plane back to Cebu, and by accomodating
(sic) and allowing passengers from Cotabato for Cebu in his
stead and place, thus forcing the plaintiff against his will, to be
left and stranded in Cotabato, exposed to the peril and danger
of muslim rebels plundering at the time, the plaintiff, as a
consequence, (have) suffered mental anguish, mental torture,
social humiliation, bismirched reputation and wounded feeling,

A I was at about 7:00 o'clock in the evening


more or less and it was a private jeep that I
boarded. I was even questioned why I and
who am (sic) I then. Then I explained my
side that I am (sic) stranded passenger.
Then they brought me downtown at
Cotabato.
Q During your conversation with the
Manager were you not offered any vehicle
or transportation to Cotabato airport
downtown?
A In fact I told him (Manager) now I am bypassed passenger here which is not my
destination what can you offer me. Then
they answered, "it is not my fault. Let us
forget that."

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Q In other words when the Manager told


you that offer was there a vehicle ready?
A Not yet. Not long after that the Ford Fiera
loaded with PAL personnel was passing by
going to the City of Cotabato and I stopped
it to take me a ride because there was no
more available transportation but I was not
accommodated.
Significantly, PAL did not seem to mind the introduction of evidence which focused on its
alleged negligence in caring for its stranded passengers. Well-settled is the rule in evidence
that the protest or objection against the admission of evidence should be presented at the
time the evidence is offered, and that the proper time to make protest or objection to the
admissibility of evidence is when the question is presented to the witness or at the time the
answer thereto is given. 16 There being no objection, such evidence becomes property of the
case and all the parties are amenable to any favorable or unfavorable effects resulting from
the evidence. 17
PAL instead attempted to rebut the aforequoted testimony. In the process, it failed to
substantiate its counter allegation for want of concrete proof 18
Atty. Rubin O. Rivera PAL's counsel:
Q You said PAL refused to help you when
you were in Cotabato, is that right?
Private respondent:
A Yes.
Q Did you ask them to help you regarding
any offer of transportation or of any other
matter asked of them?
A Yes, he (PAL PERSONNEL) said what is? It
is not our fault.
Q Are you not aware that one fellow
passenger even claimed that he was given
Hotel accommodation because they have
no money?
xxx xxx xxx

A No, sir, that was never offered to me. I


said, I tried to stop them but they were
already riding that PAL pick-up jeep, and I
was not accommodated.
Having joined in the issue over the alleged lack of care it exhibited towards its passengers,
PAL cannot now turn around and feign surprise at the outcome of the case. When issues not
raised by the pleadings are tried by express or implied consent of the parties, they shall be
treated in all respects as if they had been raised in the pleadings. 19
With regard to the award of damages affirmed by the appellate court, PAL argues that the
same is unfounded. It asserts that it should not be charged with the task of looking after the
passengers' comfort and convenience because the diversion of the flight was due to a
fortuitous event, and that if made liable, an added burden is given to PAL which is over and
beyond its duties under the contract of carriage. It submits that granting arguendo that
negligence exists, PAL cannot be liable in damages in the absence of fraud or bad faith; that
private respondent failed to apprise PAL of the nature of his trip and possible business losses;
and, that private respondent himself is to be blamed for unreasonably refusing to use the
free ticket which PAL issued.
The contract of air carriage is a peculiar one. Being imbued with public interest, the law
requires common carriers to carry the passengers safely as far as human care and foresight
can provide, using the utmost diligence of very cautious persons, with due regard for all the
circumstances. 20 In Air France v. Carrascoso, 21 we held that
A contract to transport passengers is quite different in kind and
degree from any other contractual relation. And this, because
of the relation which an air carrier sustains with the public. Its
business is mainly with the travelling public. It invites people to
avail of the comforts and advantages it offers. The contract of
air carriage, therefore, generates a relation attended with a
public duty . . . . ( emphasis supplied).
The position taken by PAL in this case clearly illustrates its failure to grasp the exacting
standard required by law. Undisputably, PAL's diversion of its flight due to inclement weather
was a fortuitous event. Nonetheless, such occurrence did not terminate PAL's contract with
its passengers. Being in the business of air carriage and the sole one to operate in the
country, PAL is deemed equipped to deal with situations as in the case at bar. What we said
in one case once again must be stressed, i.e., the relation of carrier and passenger continues
until the latter has been landed at the port of destination and has left the carrier's premises.
22 Hence, PAL necessarily would still have to exercise extraordinary diligence in safeguarding
the comfort, convenience and safety of its stranded passengers until they have reached their
final destination. On this score, PAL grossly failed considering the then ongoing battle
between government forces and Muslim rebels in Cotabato City and the fact that the private
respondent was a stranger to the place. As the appellate court correctly ruled

Page | 5

While the failure of plaintiff in the first instance to reach his


destination at Ozamis City in accordance with the contract of
carriage was due to the closure of the airport on account of rain
and inclement weather which was radioed to defendant 15
minutes before landing, it has not been disputed by defendant
airline that Ozamis City has no all-weather airport and has to
cancel its flight to Ozamis City or by-pass it in the event of
inclement weather. Knowing this fact, it becomes the duty of
defendant to provide all means of comfort and convenience to
its passengers when they would have to be left in a strange
place in case of such by-passing. The steps taken by defendant
airline company towards this end has not been put in evidence,
especially for those 7 others who were not accommodated in
the return trip to Cebu, only 6 of the 21 having been so
accommodated. It appears that plaintiff had to leave on the
next flight 2 days later. If the cause of non-fulfillment of the
contract is due to a fortuitous event, it has to be the sole and
only cause (Art. 1755 CC., Art. 1733 C.C.) Since part of the
failure to comply with the obligation of common carrier to
deliver its passengers safely to their destination lay in the
defendant's failure to provide comfort and convenience to its
stranded passengers using extra-ordinary diligence, the cause
of non-fulfillment is not solely and exclusively due to fortuitous
event, but due to something which defendant airline could
have prevented, defendant becomes liable to plaintiff. 23

tickets too. The rest of the diverted pax had left earlier after
being assured their tickets will be ready the following day. 24
Aforesaid Report being an entry in the course of business is prima facie evidence of the facts
therein stated. Private respondent, apart from his testimony, did not offer any controverting
evidence. If indeed PAL omitted to give information about the options available to its
diverted passengers, it would have been deluged with complaints. But, only private
respondent complained
Atty. Rivera (for PAL)
Q I understand from you Mr. Zapatos that
at the time you were waiting at Cotabato
Airport for the decision of PAL, you were
not informed of the decision until after the
airplane left is that correct?
A Yes.
COURT:
Q What do you mean by "yes"? You meant
you were not informed?
A Yes, I was not informed of their decision,
that they will only accommodate few
passengers.

While we find PAL remiss in its duty of extending utmost care to private respondent while
being stranded in Cotabato City, there is no sufficient basis to conclude that PAL failed to
inform him about his non-accommodation on Flight 560, or that it was inattentive to his
queries relative thereto.

Q Aside from you there were many other


stranded passengers?

On 3 August 1975, the Station Agent reported to his Branch Manager in Cotabato City that
3. Of the fifteen stranded passengers two pax elected to take
F478 on August 05, three pax opted to take F442 August 03.
The remaining ten (10) including subject requested that they be
instead accommodated (sic) on F446 CBO-IGN the following day
where they intended to take the surface transportation to OZC.
Mr. Pedro Zapatos had by then been very vocal and boiceterous
(sic) at the counter and we tactfully managed to steer him
inside the Station Agent's office. Mr. Pedro Zapatos then
adamantly insisted that all the diverted passengers should have
been given priority over the originating passengers of F560
whether confirmed or otherwise. We explained our policies and
after awhile he seemed pacified and thereafter took his ticket
(in-lieued (sic) to CBO-IGN, COCON basis), at the counter in the
presence of five other passengers who were waiting for their

A I believed, yes.
Q And you want us to believe that PAL did
not explain (to) any of these passengers
about the decision regarding those who will
board the aircraft back to Cebu?
A No, Sir.
Q Despite these facts Mr. Zapatos did any of
the other passengers complained (sic)
regarding that incident?
xxx xxx xxx

Page | 6

A There were plenty of argument and I was


one of those talking about my case.

amusements that will serve to alleviate the moral suffering he has undergone by reason of
the defendant's culpable action. 29

Q Did you hear anybody complained (sic)


that he has not been informed of the
decision before the plane left for Cebu?

With regard to the award of actual damages in the amount of P5,000.00 representing private
respondent's alleged business losses occasioned by his stay at Cotabato City, we find the
same unwarranted. Private respondent's testimony that he had a scheduled business
"transaction of shark liver oil supposedly to have been consummated on August 3, 1975 in
the morning" and that "since (private respondent) was out for nearly two weeks I missed to
buy about 10 barrels of shark liver oil," 30 are purely speculative. Actual or compensatory
damages cannot be presumed but must be duly proved with reasonable degree of certainty.
A court cannot rely on speculation, conjecture or guesswork as to the fact and amount of
damages, but must depend upon competent proof that they have suffered and on evidence
of the actual amount thereof. 31

A No. 25
Admittedly, private respondent's insistence on being given priority in accommodation was
unreasonable considering the fortuitous event and that there was a sequence to be observed
in the booking, i.e., in the order the passengers checked-in at their port of origin. His
intransigence in fact was the main cause for his having to stay at the airport longer than was
necessary.
Atty. Rivera:
Q And, you were saying that despite the
fact that according to your testimony there
were at least 16 passengers who were
stranded there in Cotabato airport
according to your testimony, and later you
said that there were no other people left
there at that time, is that correct?
A Yes, I did not see anyone there around. I
think I was the only civilian who was left
there.

WHEREFORE the decision appealed from is AFFIRMED with modification however that the
award of moral damages of Fifty Thousand Pesos (P50,000.00) is reduced to Ten Thousand
Pesos (P10,000.00) while the exemplary damages of Ten Thousand Pesos (P10,000.00) is also
reduced to Five Thousand Pesos (P5,000.00). The award of actual damages in the amount
Five Thousand Pesos (P5,000.00) representing business losses occasioned by private
respondent's being stranded in Cotabato City is deleted.
SO ORDERED.

[G.R. No. 126389. July 10, 1998]

Q Why is it that it took you long time to


leave that place?

SOUTHEASTERN COLLEGE, INC., petitioner, vs. COURT OF APPEALS, JUANITA DE JESUS VDA.
DE DIMAANO, EMERITA DIMAANO, REMEDIOS DIMAANO, CONSOLACION
DIMAANO and MILAGROS DIMAANO, respondents.

A Because I was arguing with the PAL


personnel. 26

DECISION
PURISIMA, J.:

Anent the plaint that PAL employees were disrespectful and inattentive toward private
respondent, the records are bereft of evidence to support the same. Thus, the ruling of
respondent Court of Appeals in this regard is without basis. 27 On the contrary, private
respondent was attended to not only by the personnel of PAL but also by its Manager." 28
In the light of these findings, we find the award of moral damages of Fifty Thousand Pesos
(P50,000.00) unreasonably excessive; hence, we reduce the same to Ten Thousand Pesos
(P10,000.00). Conformably herewith, the award of exemplary damages is also reduced to five
Thousand Pesos (5,000.00). Moral damages are not intended to enrich the private
respondent. They are awarded only to enable the injured party to obtain means, diversion or

Petition for review under Rule 45 of the Rules of Court seeking to set aside the
Decisioni promulgated on July 31, 1996, and Resolutionii dated September 12, 1996 of the
Court of Appealsiii in CA-G.R. No. 41422, entitled Juanita de Jesus vda. de Dimaano, et al. vs.
Southeastern College, Inc., which reduced the moral damages awarded below from
P1,000,000.00 to P200,000.00.iv The Resolution under attack denied petitioners motion for
reconsideration.
Private respondents are owners of a house at 326 College Road, Pasay City, while
petitioner owns a four-storey school building along the same College Road. On October 11,
1989, at about 6:30 in the morning, a powerful typhoon Saling hit Metro Manila. Buffeted

Page | 7

by very strong winds, the roof of petitioners building was partly ripped off and blown away,
landing on and destroying portions of the roofing of private respondents house. After the
typhoon had passed, an ocular inspection of the destroyed buildings was conducted by a
team of engineers headed by the city building official, Engr. Jesus L. Reyna. Pertinent aspects
of the latters Reportv dated October 18, 1989 stated, as follows:
5. One of the factors that may have led to this calamitous event is the
formation of the buildings in the area and the general direction of the wind.
Situated in the peripheral lot is an almost U-shaped formation of 4-storey
building. Thus, with the strong winds having a westerly direction, the general
formation of the buildings becomes a big funnel-like structure, the one situated
along College Road, receiving the heaviest impact of the strong winds. Hence,
there are portions of the roofing, those located on both ends of the building,
which remained intact after the storm.
6. Another factor and perhaps the most likely reason for the dislodging of
the roofings structural trusses is the improper anchorage of the said trusses to the
roof beams. The 1/2 diameter steel bars embedded on the concrete roof beams
which serve as truss anchorage are not bolted nor nailed to the trusses. Still,
there are other steel bars which were not even bent to the trusses, thus, those
trusses are not anchored at all to the roof beams.

a) P117,116.00, as actual damages, plus litigation expenses;


b) P1,000,000.00 as moral damages;
c) P100,000.00 as attorneys fees;
d) Costs of the instant suit.
The claim for exemplary damages is denied for the reason that the
defendants (sic) did not act in a wanton fraudulent, reckless, oppressive or
malevolent manner.
In its appeal to the Court of Appeals, petitioner assigned as errors, viii that:
I
THE TRIAL COURT ERRED IN HOLDING THAT TYPHOON SALING, AS AN ACT
OF GOD, IS NOT THE SOLE AND ABSOLUTE REASON FOR THE RIPPING-OFF OF
THE SMALL PORTION OF THE ROOF OF SOUTHEASTERNS FOUR (4) STOREY
SCHOOL BUILDING.
II
THE TRIAL COURT ERRED IN HOLDING THAT THE CONSTRUCTION OF THE
ROOF OF DEFENDANTS SCHOOL BUILDING WAS FAULTY NOTWITHSTANDING
THE ADMISSION THAT THERE WERE TYPHOONS BEFORE BUT NOT AS GRAVE AS
TYPHOON SALING WHICH IS THE DIRECT AND PROXIMATE CAUSE OF THE
INCIDENT.

It then recommended that to avoid any further loss and damage to lives, limbs and property
of persons living in the vicinity, the fourth floor of subject school building be declared as a
structural hazard.
In their Complaintvi before the Regional Trial Court of Pasay City, Branch 117, for
damages based on culpa aquiliana, private respondents alleged that the damage to their
house rendered the same uninhabitable, forcing them to stay temporarily in others houses.
And so they sought to recover from petitioner P117,116.00, as actual damages,
P1,000,000.00, as moral damages, P300,000.00, as exemplary damages and P100,000.00, for
and as attorneys fees; plus costs.
In its Answer, petitioner averred that subject school building had withstood several
devastating typhoons and other calamities in the past, without its roofing or any portion
thereof giving way; that it has not been remiss in its responsibility to see to it that said school
building, which houses school children, faculty members, and employees, is in tip-top
condition; and furthermore, typhoon Saling was an act of God and therefore beyond
human control such that petitioner cannot be answerable for the damages wrought
thereby, absent any negligence on its part.
The trial court, giving credence to the ocular inspection report to the effect that subject
school building had a defective roofing structure, found that, while typhoon Saling was
accompanied by strong winds, the damage to private respondents house could have been
avoided if the construction of the roof of [petitioners] building was not faulty. The
dispositive portion of the lower courts decisionvii reads thus:
WHEREFORE, in view of the foregoing, the Court renders judgment (sic) in
favor of the plaintiff (sic) and against the defendants, (sic) ordering the latter to
pay jointly and severally the former as follows:

III
THE TRIAL COURT ERRED IN AWARDING ACTUAL AND MORAL DAMAGES AS
WELL AS ATTORNEYS FEES AND LITIGATION EXPENSES AND COSTS OF SUIT TO
DIMAANOS WHEN THEY HAVE NOT INCURRED ACTUAL DAMAGES AT ALL AS
DIMAANOS HAVE ALREADY SOLD THEIR PROPERTY, AN INTERVENING EVENT
THAT RENDERS THIS CASE MOOT AND ACADEMIC.
IV
THE TRIAL COURT ERRED IN ORDERING THE ISSUANCE OF THE WRIT OF
EXECUTION INSPITE OF THE PERFECTION OF SOUTHEASTERNS APPEAL WHEN
THERE IS NO COMPELLING REASON FOR THE ISSUANCE THERETO.
As mentioned earlier, respondent Court of Appeals affirmed with modification the trial
courts disposition by reducing the award of moral damages from P1,000,000.00 to
P200,000.00. Hence, petitioners resort to this Court, raising for resolution the issues of:
1. Whether or not the award of actual damage [sic] to respondent
Dimaanos on the basis of speculation or conjecture, without proof or receipts of
actual damage, [sic] legally feasible or justified.
2. Whether or not the award of moral damages to respondent Dimaanos,
without the latter having suffered, actual damage has legal basis.
3. Whether or not respondent Dimaanos who are no longer the owner of

Page | 8

the property, subject matter of the case, during its pendency, has the right to
pursue their complaint against petitioner when the case was already rendered
moot and academic by the sale of the property to third party.

when affirmed by the appellate court, are binding and conclusive upon this Court. xiv After a
careful scrutiny of the records and the pleadings submitted by the parties, we find exception
to this rule and hold that the lower courts misappreciated the evidence proffered.

4. Whether or not the award of attorneys fees when the case was already
moot and academic [sic] legally justified.

There is no question that a typhoon or storm is a fortuitous event, a natural occurrence


which may be foreseen but is unavoidable despite any amount of foresight, diligence or
care.xv In order to be exempt from liability arising from any adverse consequence
engendered thereby, there should have been no human participation amounting to a
negligent act.xvi In other words, the person seeking exoneration from liability must not be
guilty of negligence. Negligence, as commonly understood, is conduct which naturally or
reasonably creates undue risk or harm to others. It may be the failure to observe that degree
of care, precaution, and vigilance which the circumstances justly demand, xvii or the omission
to do something which a prudent and reasonable man, guided by considerations which
ordinarily regulate the conduct of human affairs, would do.xviii From these premises, we
proceed to determine whether petitioner was negligent, such that if it were not, the damage
caused to private respondents house could have been avoided?

5. Whether or not petitioner is liable for damage caused to others by


typhoon Saling being an act of God.
6. Whether or not the issuance of a writ of execution pending appeal, exparte or without hearing, has support in law.
The pivot of inquiry here, determinative of the other issues, is whether the damage on
the roof of the building of private respondents resulting from the impact of the falling
portions of the school buildings roof ripped off by the strong winds of typhoon Saling, was,
within legal contemplation, due to fortuitous event? If so, petitioner cannot be held liable
for the damages suffered by the private respondents. This conclusion finds support in Article
1174 of the Civil Code, which provides:
Art 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation requires
the assumption of risk, no person shall be responsible for those events which
could not be foreseen, or which, though foreseen, were inevitable.
The antecedent of fortuitous event or caso fortuito is found in the Partidas which
defines it as an event which takes place by accident and could not have been foreseen.ix
Escriche elaborates it as an unexpected event or act of God which could neither be foreseen
nor resisted.x Civilist Arturo M. Tolentino adds that [f]ortuitous events may be produced by
two general causes: (1) by nature, such as earthquakes, storms, floods, epidemics, fires, etc.
and (2) by the act of man, such as an armed invasion, attack by bandits, governmental
prohibitions, robbery, etc.xi
In order that a fortuitous event may exempt a person from liability, it is necessary that
he be free from any previous negligence or misconduct by reason of which the loss may have
been occasioned.xii An act of God cannot be invoked for the protection of a person who has
been guilty of gross negligence in not trying to forestall its possible adverse consequences.
When a persons negligence concurs with an act of God in producing damage or injury to
another, such person is not exempt from liability by showing that the immediate or
proximate cause of the damage or injury was a fortuitous event. When the effect is found
to be partly the result of the participation of man whether it be from active intervention, or
neglect, or failure to act the whole occurrence is hereby humanized, and removed from the
rules applicable to acts of God.xiii
In the case under consideration, the lower court accorded full credence to the finding
of the investigating team that subject school buildings roofing had no sufficient anchorage
to hold it in position especially when battered by strong winds. Based on such finding, the
trial court imputed negligence to petitioner and adjudged it liable for damages to private
respondents.
After a thorough study and evaluation of the evidence on record, this Court believes
otherwise, notwithstanding the general rule that factual findings by the trial court, especially

At the outset, it bears emphasizing that a person claiming damages for the negligence
of another has the burden of proving the existence of fault or negligence causative of his
injury or loss. The facts constitutive of negligence must be affirmatively established by
competent evidence,xix not merely by presumptions and conclusions without basis in fact.
Private respondents, in establishing the culpability of petitioner, merely relied on the
aforementioned report submitted by a team which made an ocular inspection of petitioners
school building after the typhoon. As the term imparts, an ocular inspection is one by means
of actual sight or viewing.xx What is visual to the eye though, is not always reflective of the
real cause behind. For instance, one who hears a gunshot and then sees a wounded person,
cannot always definitely conclude that a third person shot the victim. It could have been
self-inflicted or caused accidentally by a stray bullet. The relationship of cause and effect
must be clearly shown.
In the present case, other than the said ocular inspection, no investigation was
conducted to determine the real cause of the partial unroofing of petitioners school
building. Private respondents did not even show that the plans, specifications and design of
said school building were deficient and defective. Neither did they prove any substantial
deviation from the approved plans and specifications. Nor did they conclusively establish
that the construction of such building was basically flawed. xxi
On the other hand, petitioner elicited from one of the witnesses of private
respondents, city building official Jesus Reyna, that the original plans and design of
petitioners school building were approved prior to its construction. Engr. Reyna admitted
that it was a legal requirement before the construction of any building to obtain a permit
from the city building official (city engineer, prior to the passage of the Building Act of 1977).
In like manner, after construction of the building, a certification must be secured from the
same official attesting to the readiness for occupancy of the edifice. Having obtained both
building permit and certificate of occupancy, these are, at the very least, prima facie
evidence of the regular and proper construction of subject school building. xxii
Furthermore, when part of its roof needed repairs of the damage inflicted by typhoon
Saling, the same city official gave the go-signal for such repairs without any deviation
from the original design and subsequently, authorized the use of the entire fourth floor of

Page | 9

the same building. These only prove that subject building suffers from no structural defect,
contrary to the report that its U-shaped form was structurally defective. Having given his
unqualified imprimatur, the city building official is presumed to have properly performed his
dutiesxxiii in connection therewith.
In addition, petitioner presented its vice president for finance and administration who
testified that an annual maintenance inspection and repair of subject school building were
regularly undertaken. Petitioner was even willing to present its maintenance supervisor to
attest to the extent of such regular inspection but private respondents agreed to dispense
with his testimony and simply stipulated that it would be corroborative of the vice
presidents narration.
Moreover, the city building official, who has been in the city government service since
1974, admitted in open court that no complaint regarding any defect on the same structure
has ever been lodged before his office prior to the institution of the case at bench. It is a
matter of judicial notice that typhoons are common occurrences in this country. If subject
school buildings roofing was not firmly anchored to its trusses, obviously, it could not have
withstood long years and several typhoons even stronger than Saling.
In light of the foregoing, we find no clear and convincing evidence to sustain the
judgment of the appellate court. We thus hold that petitioner has not been shown negligent
or at fault regarding the construction and maintenance of its school building in question and
that typhoon Saling was the proximate cause of the damage suffered by private
respondents house.
With this disposition on the pivotal issue, private respondents claim for actual and
moral damages as well as attorneys fees must fail. xxiv Petitioner cannot be made to answer
for a purely fortuitous event.xxv More so because no bad faith or willful act to cause damage
was alleged and proven to warrant moral damages.
Private respondents failed to adduce adequate and competent proof of the pecuniary
loss they actually incurred.xxvi It is not enough that the damage be capable of proof but must
be actually proved with a reasonable degree of certainty, pointing out specific facts that
afford a basis for measuring whatever compensatory damages are borne. xxvii Private
respondents merely submitted an estimated amount needed for the repair of the roof of
their subject building. What is more, whether the necessary repairs were caused ONLY by
petitioners alleged negligence in the maintenance of its school building, or included the
ordinary wear and tear of the house itself, is an essential question that remains
indeterminable.
The Court deems unnecessary to resolve the other issues posed by petitioner.
As regards the sixth issue, however, the writ of execution issued on April 1, 1993 by the
trial court is hereby nullified and set aside. Private respondents are ordered to reimburse
any amount or return to petitioner any property which they may have received by virtue of
the enforcement of said writ.
WHEREFORE, the petition is GRANTED and the challenged Decision is REVERSED. The
complaint of private respondents in Civil Case No. 7314 before the trial court a quo is
ordered DISMISSED and the writ of execution issued on April 1, 1993 in said case is SET
ASIDE. Accordingly, private respondents are ORDERED to return to petitioner any amount or

property received by them by virtue of said writ. Costs against the private respondents.
SO ORDERED.
G.R. No. 147324

May 25, 2004

PHILIPPINE
COMMUNICATIONS
SATELLITE
CORPORATION,
petitioner,
vs.
GLOBE TELECOM, INC. (formerly Globe Mckay Cable and Radio Corporation), respondents.
GLOBE
TELECOM,
INC.,
vs.
PHILIPPINE COMMUNICATION SATELLITE CORPORATION, respondent.

petitioner,

TINGA, J.:
Before the Court are two Petitions for Review assailing the Decision of the Court of Appeals,
dated 27 February 2001, in CA-G.R. CV No. 63619.1
The facts of the case are undisputed.
For several years prior to 1991, Globe Mckay Cable and Radio Corporation, now Globe
Telecom, Inc. (Globe), had been engaged in the coordination of the provision of various
communication facilities for the military bases of the United States of America (US) in Clark
Air Base, Angeles, Pampanga and Subic Naval Base in Cubi Point, Zambales. The said
communication facilities were installed and configured for the exclusive use of the US
Defense Communications Agency (USDCA), and for security reasons, were operated only by
its personnel or those of American companies contracted by it to operate said facilities. The
USDCA contracted with said American companies, and the latter, in turn, contracted with
Globe for the use of the communication facilities. Globe, on the other hand, contracted with
local service providers such as the Philippine Communications Satellite Corporation
(Philcomsat) for the provision of the communication facilities.
On 07 May 1991, Philcomsat and Globe entered into an Agreement whereby Philcomsat
obligated itself to establish, operate and provide an IBS Standard B earth station (earth
station) within Cubi Point for the exclusive use of the USDCA.2 The term of the contract was
for 60 months, or five (5) years.3 In turn, Globe promised to pay Philcomsat monthly rentals
for each leased circuit involved.4
At the time of the execution of the Agreement, both parties knew that the Military Bases
Agreement between the Republic of the Philippines and the US (RP-US Military Bases
Agreement), which was the basis for the occupancy of the Clark Air Base and Subic Naval
Base in Cubi Point, was to expire in 1991. Under Section 25, Article XVIII of the 1987
Constitution, foreign military bases, troops or facilities, which include those located at the US
Naval Facility in Cubi Point, shall not be allowed in the Philippines unless a new treaty is duly
concurred in by the Senate and ratified by a majority of the votes cast by the people in a

Page | 10

national referendum when the Congress so requires, and such new treaty is recognized as
such by the US Government.
Subsequently, Philcomsat installed and established the earth station at Cubi Point and the
USDCA made use of the same.
On 16 September 1991, the Senate passed and adopted Senate Resolution No. 141,
expressing its decision not to concur in the ratification of the Treaty of Friendship,
Cooperation and Security and its Supplementary Agreements that was supposed to extend
the term of the use by the US of Subic Naval Base, among others. 5 The last two paragraphs of
the Resolution state:
FINDING that the Treaty constitutes a defective framework for the
continuing relationship between the two countries in the spirit of
friendship, cooperation and sovereign equality: Now, therefore, be it
Resolved by the Senate, as it is hereby resolved, To express its decision
not to concur in the ratification of the Treaty of Friendship, Cooperation
and Security and its Supplementary Agreements, at the same time
reaffirming its desire to continue friendly relations with the government
and people of the United States of America.6

Agreement even after [Globe] shall have discontinue[d] the use of the earth station after
November 08, 1992."7 Philcomsat referred to Section 7 of the Agreement, stating as follows:
7. DISCONTINUANCE OF SERVICE
Should [Globe] decide to discontinue with the use of the earth station
after it has been put into operation, a written notice shall be served to
PHILCOMSAT at least sixty (60) days prior to the expected date of
termination. Notwithstanding the non-use of the earth station, [Globe]
shall continue to pay PHILCOMSAT for the rental of the actual number of
T1 circuits in use, but in no case shall be less than the first two (2) T1
circuits, for the remaining life of the agreement. However, should
PHILCOMSAT make use or sell the earth station subject to this
agreement, the obligation of [Globe] to pay the rental for the remaining
life of the agreement shall be at such monthly rate as may be agreed
upon by the parties.8
After the US military forces left Subic Naval Base, Philcomsat sent Globe a letter dated 24
November 1993 demanding payment of its outstanding obligations under the Agreement
amounting to US$4,910,136.00 plus interest and attorneys fees. However, Globe refused to
heed Philcomsats demand.

On 31 December 1991, the Philippine Government sent a Note Verbale to the US


Government through the US Embassy, notifying it of the Philippines termination of the RPUS Military Bases Agreement. The Note Verbale stated that since the RP-US Military Bases
Agreement, as amended, shall terminate on 31 December 1992, the withdrawal of all US
military forces from Subic Naval Base should be completed by said date.

On 27 January 1995, Philcomsat filed with the Regional Trial Court of Makati a Complaint
against Globe, praying that the latter be ordered to pay liquidated damages under the
Agreement, with legal interest, exemplary damages, attorneys fees and costs of suit. The
case was raffled to Branch 59 of said court.

In a letter dated 06 August 1992, Globe notified Philcomsat of its intention to discontinue the
use of the earth station effective 08 November 1992 in view of the withdrawal of US military
personnel from Subic Naval Base after the termination of the RP-US Military Bases
Agreement. Globe invoked as basis for the letter of termination Section 8 (Default) of the
Agreement, which provides:

Globe filed an Answer to the Complaint, insisting that it was constrained to end the
Agreement due to the termination of the RP-US Military Bases Agreement and the nonratification by the Senate of the Treaty of Friendship and Cooperation, which events
constituted force majeure under the Agreement. Globe explained that the occurrence of said
events exempted it from paying rentals for the remaining period of the Agreement.

Neither party shall be held liable or deemed to be in default for any


failure to perform its obligation under this Agreement if such failure
results directly or indirectly from force majeure or fortuitous event.
Either party is thus precluded from performing its obligation until such
force majeure or fortuitous event shall terminate. For the purpose of this
paragraph, force majeure shall mean circumstances beyond the control
of the party involved including, but not limited to, any law, order,
regulation, direction or request of the Government of the Philippines,
strikes or other labor difficulties, insurrection riots, national emergencies,
war, acts of public enemies, fire, floods, typhoons or other catastrophies
or acts of God.

On 05 January 1999, the trial court rendered its Decision, the dispositive portion of which
reads:

Philcomsat sent a reply letter dated 10 August 1992 to Globe, stating that "we expect [Globe]
to know its commitment to pay the stipulated rentals for the remaining terms of the

WHEREFORE, premises considered, judgment is hereby rendered as


follows:
1. Ordering the defendant to pay the plaintiff the amount of
Ninety Two Thousand Two Hundred Thirty Eight US Dollars
(US$92,238.00) or its equivalent in Philippine Currency
(computed at the exchange rate prevailing at the time of
compliance or payment) representing rentals for the month of
December 1992 with interest thereon at the legal rate of

Page | 11

twelve percent (12%) per annum starting December 1992 until


the amount is fully paid;

amounting to US$92,238.00 plus interest, considering that the US military forces and
personnel completely withdrew from Cubi Point only on 31 December 1992.10

2. Ordering the defendant to pay the plaintiff the amount of


Three Hundred Thousand (P300,000.00) Pesos as and for
attorneys fees;

Both parties filed their respective Petitions for Review assailing the Decision of the Court of
Appeals.
In G.R. No. 147324,11 petitioner Philcomsat raises the following assignments of error:

3. Ordering the DISMISSAL of defendants counterclaim for lack


of merit; and
4. With costs against the defendant.
SO ORDERED.9
Both parties appealed the trial courts Decision to the Court of Appeals.
Philcomsat claimed that the trial court erred in ruling that: (1) the non-ratification by the
Senate of the Treaty of Friendship, Cooperation and Security and its Supplementary
Agreements constitutes force majeure which exempts Globe from complying with its
obligations under the Agreement; (2) Globe is not liable to pay the rentals for the remainder
of the term of the Agreement; and (3) Globe is not liable to Philcomsat for exemplary
damages.
Globe, on the other hand, contended that the RTC erred in holding it liable for payment of
rent of the earth station for December 1992 and of attorneys fees. It explained that it
terminated Philcomsats services on 08 November 1992; hence, it had no reason to pay for
rentals beyond that date.
On 27 February 2001, the Court of Appeals promulgated its Decision dismissing Philcomsats
appeal for lack of merit and affirming the trial courts finding that certain events constituting
force majeure under Section 8 the Agreement occurred and justified the non-payment by
Globe of rentals for the remainder of the term of the Agreement.
The appellate court ruled that the non-ratification by the Senate of the Treaty of Friendship,
Cooperation and Security, and its Supplementary Agreements, and the termination by the
Philippine Government of the RP-US Military Bases Agreement effective 31 December 1991
as stated in the Philippine Governments Note Verbale to the US Government, are acts,
directions, or requests of the Government of the Philippines which constitute force majeure.
In addition, there were circumstances beyond the control of the parties, such as the issuance
of a formal order by Cdr. Walter Corliss of the US Navy, the issuance of the letter notification
from ATT and the complete withdrawal of all US military forces and personnel from Cubi
Point, which prevented further use of the earth station under the Agreement.
However, the Court of Appeals ruled that although Globe sought to terminate Philcomsats
services by 08 November 1992, it is still liable to pay rentals for the December 1992,

A. THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING A


DEFINITION OF FORCE MAJEURE DIFFERENT FROM WHAT ITS LEGAL
DEFINITION FOUND IN ARTICLE 1174 OF THE CIVIL CODE, PROVIDES, SO
AS TO EXEMPT GLOBE TELECOM FROM COMPLYING WITH ITS
OBLIGATIONS UNDER THE SUBJECT AGREEMENT.
B. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE
TELECOM IS NOT LIABLE TO PHILCOMSAT FOR RENTALS FOR THE
REMAINING TERM OF THE AGREEMENT, DESPITE THE CLEAR TENOR OF
SECTION 7 OF THE AGREEMENT.
C. THE HONORABLE OCURT OF APPEALS ERRED IN DELETING THE TRIAL
COURTS AWARD OF ATTORNEYS FEES IN FAVOR OF PHILCOMSAT.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT GLOBE
TELECOM IS NOT LIABLE TO PHILCOMSAT FOR EXEMPLARY DAMAGES.12
Philcomsat argues that the termination of the RP-US Military Bases Agreement cannot be
considered a fortuitous event because the happening thereof was foreseeable. Although the
Agreement was freely entered into by both parties, Section 8 should be deemed ineffective
because it is contrary to Article 1174 of the Civil Code. Philcomsat posits the view that the
validity of the parties definition of force majeure in Section 8 of the Agreement as
"circumstances beyond the control of the party involved including, but not limited to, any
law, order, regulation, direction or request of the Government of the Philippines, strikes or
other labor difficulties, insurrection riots, national emergencies, war, acts of public enemies,
fire, floods, typhoons or other catastrophies or acts of God," should be deemed subject to
Article 1174 which defines fortuitous events as events which could not be foreseen, or which,
though foreseen, were inevitable.13
Philcomsat further claims that the Court of Appeals erred in holding that Globe is not liable
to pay for the rental of the earth station for the entire term of the Agreement because it runs
counter to what was plainly stipulated by the parties in Section 7 thereof. Moreover, said
ruling is inconsistent with the appellate courts pronouncement that Globe is liable to pay
rentals for December 1992 even though it terminated Philcomsats services effective 08
November 1992, because the US military and personnel completely withdrew from Cubi
Point only in December 1992. Philcomsat points out that it was Globe which proposed the
five-year term of the Agreement, and that the other provisions of the Agreement, such as

Page | 12

Section 4.114 thereof, evince the intent of Globe to be bound to pay rentals for the entire
five-year term.15
Philcomsat also maintains that contrary to the appellate courts findings, it is entitled to
attorneys fees and exemplary damages.16
In its Comment to Philcomsats Petition, Globe asserts that Section 8 of the Agreement is not
contrary to Article 1174 of the Civil Code because said provision does not prohibit parties to a
contract from providing for other instances when they would be exempt from fulfilling their
contractual obligations. Globe also claims that the termination of the RP-US Military Bases
Agreement constitutes force majeure and exempts it from complying with its obligations
under the Agreement.17 On the issue of the propriety of awarding attorneys fees and
exemplary damages to Philcomsat, Globe maintains that Philcomsat is not entitled thereto
because in refusing to pay rentals for the remainder of the term of the Agreement, Globe
only acted in accordance with its rights.18
In G.R. No. 147334,19 Globe, the petitioner therein, contends that the Court of Appeals erred
in finding it liable for the amount of US$92,238.00, representing rentals for December 1992,
since Philcomsats services were actually terminated on 08 November 1992.20
In its Comment, Philcomsat claims that Globes petition should be dismissed as it raises a
factual issue which is not cognizable by the Court in a petition for review on certiorari.21
On 15 August 2001, the Court issued a Resolution giving due course to Philcomsats Petition
in G.R. No.
147324 and required the parties to submit their respective

memoranda.22

There is no merit is Philcomsats argument that Section 8 of the Agreement cannot be given
effect because the enumeration of events constituting force majeure therein unduly expands
the concept of a fortuitous event under Article 1174 of the Civil Code and is therefore invalid.
In support of its position, Philcomsat contends that under Article 1174 of the Civil Code, an
event must be unforeseen in order to exempt a party to a contract from complying with its
obligations therein. It insists that since the expiration of the RP-US Military Bases Agreement,
the non-ratification of the Treaty of Friendship, Cooperation and Security and the withdrawal
of US military forces and personnel from Cubi Point were not unforeseeable, but were
possibilities known to it and Globe at the time they entered into the Agreement, such events
cannot exempt Globe from performing its obligation of paying rentals for the entire five-year
term thereof.
However, Article 1174, which exempts an obligor from liability on account of fortuitous
events or force majeure, refers not only to events that are unforeseeable, but also to those
which are foreseeable, but inevitable:
Art. 1174. Except in cases specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which,
could not be foreseen, or which, though foreseen were inevitable.
A fortuitous event under Article 1174 may either be an "act of God," or natural occurrences
such as floods or typhoons,24 or an "act of man," such as riots, strikes or wars.25
Philcomsat and Globe agreed in Section 8 of the Agreement that the following events shall be
deemed events constituting force majeure:

Similarly, on 20 August 2001, the Court issued a Resolution giving due course to the Petition
filed by Globe in G.R. No. 147334 and required both parties to submit their memoranda.23

1. Any law, order, regulation, direction or request of the Philippine


Government;

Philcomsat and Globe thereafter filed their respective Consolidated Memoranda in the two
cases, reiterating their arguments in their respective petitions.

2. Strikes or other labor difficulties;


3. Insurrection;

The Court is tasked to resolve the following issues: (1) whether the termination of the RP-US
Military Bases Agreement, the non-ratification of the Treaty of Friendship, Cooperation and
Security, and the consequent withdrawal of US military forces and personnel from Cubi Point
constitute force majeure which would exempt Globe from complying with its obligation to
pay rentals under its Agreement with Philcomsat; (2) whether Globe is liable to pay rentals
under the Agreement for the month of December 1992; and (3) whether Philcomsat is
entitled to attorneys fees and exemplary damages.
No reversible error was committed by the Court of Appeals in issuing the assailed Decision;
hence the petitions are denied.

4. Riots;
5. National emergencies;
6. War;
7. Acts of public enemies;
8. Fire, floods, typhoons or other catastrophies or acts of God;

Page | 13

9. Other circumstances beyond the control of the parties.


Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the
parties. There is nothing in the enumeration that runs contrary to, or expands, the concept of
a fortuitous event under Article 1174.
Furthermore, under Article 130626 of the Civil Code, parties to a contract may establish such
stipulations, clauses, terms and conditions as they may deem fit, as long as the same do not
run counter to the law, morals, good customs, public order or public policy.27
Article 1159 of the Civil Code also provides that "[o]bligations arising from contracts have the
force of law between the contracting parties and should be complied with in good faith." 28
Courts cannot stipulate for the parties nor amend their agreement where the same does not
contravene law, morals, good customs, public order or public policy, for to do so would be to
alter the real intent of the parties, and would run contrary to the function of the courts to
give force and effect thereto.29
Not being contrary to law, morals, good customs, public order, or public policy, Section 8 of
the Agreement which Philcomsat and Globe freely agreed upon has the force of law between
them.30
In order that Globe may be exempt from non-compliance with its obligation to pay rentals
under Section 8, the concurrence of the following elements must be established: (1) the
event must be independent of the human will; (2) the occurrence must render it impossible
for the debtor to fulfill the obligation in a normal manner; and (3) the obligor must be free of
participation in, or aggravation of, the injury to the creditor.31
The Court agrees with the Court of Appeals and the trial court that the abovementioned
requisites are present in the instant case. Philcomsat and Globe had no control over the nonrenewal of the term of the RP-US Military Bases Agreement when the same expired in 1991,
because the prerogative to ratify the treaty extending the life thereof belonged to the
Senate. Neither did the parties have control over the subsequent withdrawal of the US
military forces and personnel from Cubi Point in December 1992:
Obviously the non-ratification by the Senate of the RP-US Military Bases
Agreement (and its Supplemental Agreements) under its Resolution No.
141. (Exhibit "2") on September 16, 1991 is beyond the control of the
parties. This resolution was followed by the sending on December 31,
1991 o[f] a "Note Verbale" (Exhibit "3") by the Philippine Government to
the US Government notifying the latter of the formers termination of the
RP-US Military Bases Agreement (as amended) on 31 December 1992 and
that accordingly, the withdrawal of all U.S. military forces from Subic
Naval Base should be completed by said date. Subsequently, defendant
[Globe] received a formal order from Cdr. Walter F. Corliss II Commander
USN dated July 31, 1992 and a notification from ATT dated July 29, 1992
to terminate the provision of T1s services (via an IBS Standard B Earth
Station) effective November 08, 1992. Plaintiff [Philcomsat] was

furnished with copies of the said order and letter by the defendant on
August 06, 1992.
Resolution No. 141 of the Philippine Senate and the Note Verbale of the
Philippine Government to the US Government are acts, direction or
request of the Government of the Philippines and circumstances beyond
the control of the defendant. The formal order from Cdr. Walter Corliss of
the USN, the letter notification from ATT and the complete withdrawal of
all the military forces and personnel from Cubi Point in the year-end 1992
are also acts and circumstances beyond the control of the defendant.
Considering the foregoing, the Court finds and so holds that the aforenarrated circumstances constitute "force majeure or fortuitous event(s)
as defined under paragraph 8 of the Agreement.

From the foregoing, the Court finds that the defendant is exempted from
paying the rentals for the facility for the remaining term of the contract.
As a consequence of the termination of the RP-US Military Bases
Agreement (as amended) the continued stay of all US Military forces and
personnel from Subic Naval Base would no longer be allowed, hence,
plaintiff would no longer be in any position to render the service it was
obligated under the Agreement. To put it blantly (sic), since the US
military forces and personnel left or withdrew from Cubi Point in the year
end December 1992, there was no longer any necessity for the plaintiff to
continue maintaining the IBS facility. 32 (Emphasis in the original.)
The aforementioned events made impossible the continuation of the Agreement until the
end of its five-year term without fault on the part of either party. The Court of Appeals was
thus correct in ruling that the happening of such fortuitous events rendered Globe exempt
from payment of rentals for the remainder of the term of the Agreement.
Moreover, it would be unjust to require Globe to continue paying rentals even though
Philcomsat cannot be compelled to perform its corresponding obligation under the
Agreement. As noted by the appellate court:
We also point out the sheer inequity of PHILCOMSATs position.
PHILCOMSAT would like to charge GLOBE rentals for the balance of the
lease term without there being any corresponding telecommunications
service subject of the lease. It will be grossly unfair and iniquitous to hold
GLOBE liable for lease charges for a service that was not and could not
have been rendered due to an act of the government which was clearly
beyond GLOBEs control. The binding effect of a contract on both parties
is based on the principle that the obligations arising from contracts have

Page | 14

the force of law between the contracting parties, and there must be
mutuality between them based essentially on their equality under which
it is repugnant to have one party bound by the contract while leaving the
other party free therefrom (Allied Banking Corporation v. Court of
Appeals, 284 SCRA 357).33
With respect to the issue of whether Globe is liable for payment of rentals for the month of
December 1992, the Court likewise affirms the appellate courts ruling that Globe should pay
the same.
Although Globe alleged that it terminated the Agreement with Philcomsat effective 08
November 1992 pursuant to the formal order issued by Cdr. Corliss of the US Navy, the date
when they actually ceased using the earth station subject of the Agreement was not
established during the trial.34 However, the trial court found that the US military forces and
personnel completely withdrew from Cubi Point only on 31 December 1992.35 Thus, until that
date, the USDCA had control over the earth station and had the option of using the same.
Furthermore, Philcomsat could not have removed or rendered ineffective said
communication facility until after 31 December 1992 because Cubi Point was accessible only
to US naval personnel up to that time. Hence, the Court of Appeals did not err when it
affirmed the trial courts ruling that Globe is liable for payment of rentals until December
1992.
Neither did the appellate court commit any error in holding that Philcomsat is not entitled to
attorneys fees and exemplary damages.
The award of attorneys fees is the exception rather than the rule, and must be supported by
factual, legal and equitable justifications.36 In previously decided cases, the Court awarded
attorneys fees where a party acted in gross and evident bad faith in refusing to satisfy the
other partys claims and compelled the former to litigate to protect his rights; 37 when the
action filed is clearly unfounded,38 or where moral or exemplary damages are awarded.39
However, in cases where both parties have legitimate claims against each other and no party
actually prevailed, such as in the present case where the claims of both parties were
sustained in part, an award of attorneys fees would not be warranted.40
Exemplary damages may be awarded in cases involving contracts or quasi-contracts, if the
erring party acted in a wanton, fraudulent, reckless, oppressive or malevolent manner.41 In
the present case, it was not shown that Globe acted wantonly or oppressively in not heeding
Philcomsats demands for payment of rentals. It was established during the trial of the case
before the trial court that Globe had valid grounds for refusing to comply with its contractual
obligations after 1992.
WHEREFORE, the Petitions are DENIED for lack of merit. The assailed Decision of the Court of
Appeals in CA-G.R. CV No. 63619 is AFFIRMED.
SO ORDERED.

G.R. No. 147839

June 8, 2006

GAISANO
CAGAYAN,
INC.
vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

Petitioner,

AUSTRIA-MARTINEZ, J.:
Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000
of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated
August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322
and upheld the causes of action for damages of Insurance Company of North America
(respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April
11, 2001 which denied petitioner's motion for reconsideration.
The factual background of the case is as follows:
Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss
(Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi
Strauss & Co.. IMC and LSPI separately obtained from respondent fire insurance policies with
book debt endorsements. The insurance policies provide for coverage on "book debts in
connection with ready-made clothing materials which have been sold or delivered to various
customers and dealers of the Insured anywhere in the Philippines."2 The policies defined
book debts as the "unpaid account still appearing in the Book of Account of the Insured 45
days after the time of the loss covered under this Policy."3 The policies also provide for the
following conditions:
1. Warranted that the Company shall not be liable for any unpaid account
in respect of the merchandise sold and delivered by the Insured which
are outstanding at the date of loss for a period in excess of six (6) months
from the date of the covering invoice or actual delivery of the
merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve
(12) days after the close of every calendar month all amount shown in
their books of accounts as unpaid and thus become receivable item from
their customers and dealers. x x x4
xxxx
Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991,
the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed
by fire. Included in the items lost or destroyed in the fire were stocks of ready-made clothing
materials sold and delivered by IMC and LSPI.

Page | 15

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges
that IMC and LSPI filed with respondent their claims under their respective fire insurance
policies with book debt endorsements; that as of February 25, 1991, the unpaid accounts of
petitioner on the sale and delivery of ready-made clothing materials with IMC was
P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of IMC
and LSPI and, by virtue thereof, respondent was subrogated to their rights against petitioner;
that respondent made several demands for payment upon petitioner but these went
unheeded.5
In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be
held liable because the property covered by the insurance policies were destroyed due to
fortuities event or force majeure; that respondent's right of subrogation has no basis
inasmuch as there was no breach of contract committed by it since the loss was due to fire
which it could not prevent or foresee; that IMC and LSPI never communicated to it that they
insured their properties; that it never consented to paying the claim of the insured. 6
At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial
on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It
held that the fire was purely accidental; that the cause of the fire was not attributable to the
negligence of the petitioner; that it has not been established that petitioner is the debtor of
IMC and LSPI; that since the sales invoices state that "it is further agreed that merely for
purpose of securing the payment of purchase price, the above-described merchandise
remains the property of the vendor until the purchase price is fully paid", IMC and LSPI
retained ownership of the delivered goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its
decision setting aside the decision of the RTC. The dispositive portion of the decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and
a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:
1. the amount of P2,119,205.60 representing the amount paid by the
plaintiff-appellant to the insured Inter Capitol Marketing Corporation,
plus legal interest from the time of demand until fully paid;
2. the amount of P535,613.00 representing the amount paid by the
plaintiff-appellant to the insured Levi Strauss Phil., Inc., plus legal interest
from the time of demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the
nature, quantity and cost of the thing sold; that loss of the goods in the fire must be borne by
petitioner since the proviso contained in the sales invoices is an exception under Article 1504
(1) of the Civil Code, to the general rule that if the thing is lost by a fortuitous event, the risk
is borne by the owner of the thing at the time the loss under the principle of res perit
domino; that petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but
the payment of its unpaid account and as such the obligation to pay is not extinguished, even
if the fire is considered a fortuitous event; that by subrogation, the insurer has the right to go
against petitioner; that, being a fire insurance with book debt endorsements, what was
insured was the vendor's interest as a creditor.11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution
dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following Assignment of
Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE
WAS ONE OVER CREDIT.
THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN
THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION
UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14
Anent the first error, petitioner contends that the insurance in the present case cannot be
deemed to be over credit since an insurance "on credit" belies not only the nature of fire
insurance but the express terms of the policies; that it was not credit that was insured since
respondent paid on the occasion of the loss of the insured goods to fire and not because of
the non-payment by petitioner of any obligation; that, even if the insurance is deemed as
one over credit, there was no loss as the accounts were not yet due since no prior demands
were made by IMC and LSPI against petitioner for payment of the debt and such demands
came from respondent only after it had already paid IMC and LSPI under the fire insurance
policies.15
As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer
IMC and LSPI assumed the risk of loss when they secured fire insurance policies over the
goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor of
respondent as no valid insurance could be maintained thereon by IMC and LSPI since all risk
had transferred to petitioner upon delivery of the goods; that petitioner was not privy to the
insurance contract or the payment between respondent and its insured nor was its consent
or approval ever secured; that this lack of privity forecloses any real interest on the part of

Page | 16

respondent in the obligation to pay, limiting its interest to keeping the insured goods safe
from fire.
For its part, respondent counters that while ownership over the ready- made clothing
materials was transferred upon delivery to petitioner, IMC and LSPI have insurable interest
over said goods as creditors who stand to suffer direct pecuniary loss from its destruction by
fire; that petitioner is liable for loss of the ready-made clothing materials since it failed to
overcome the presumption of liability under Article 126516 of the Civil Code; that the fire was
caused through petitioner's negligence in failing to provide stringent measures of caution,
care and maintenance on its property because electric wires do not usually short circuit
unless there are defects in their installation or when there is lack of proper maintenance and
supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing
to pay respondent's valid claim and should be liable to respondent for contracted lawyer's
fees, litigation expenses and cost of suit.17
As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before
it from the CA is limited to reviewing questions of law which involves no examination of the
probative value of the evidence presented by the litigants or any of them. 18 The Supreme
Court is not a trier of facts; it is not its function to analyze or weigh evidence all over again. 19
Accordingly, findings of fact of the appellate court are generally conclusive on the Supreme
Court.20
Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be
resolved by this Court, such as: (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 CA 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 CA manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different conclusion. 21 Exceptions (4),
(5), (7), and (11) apply to the present petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that
the CA erred in construing a fire insurance policy on book debts as one covering the unpaid
accounts of IMC and LSPI since such insurance applies to loss of the ready-made clothing
materials sold and delivered to petitioner.

delivered to various customers and dealers of the Insured anywhere in the Philippines." 23 ;
and defined book debts as the "unpaid account still appearing in the Book of Account of the
Insured 45 days after the time of the loss covered under this Policy."24 Nowhere is it provided
in the questioned insurance policies that the subject of the insurance is the goods sold and
delivered to the customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not justify an
attempt to read into it any alleged intention of the parties, the terms are to be understood
literally just as they appear on the face of the contract.25 Thus, what were insured against
were the accounts of IMC and LSPI with petitioner which remained unpaid 45 days after the
loss through fire, and not the loss or destruction of the goods delivered.
Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of
the goods by stipulating in the sales invoices that "[i]t is further agreed that merely for
purpose of securing the payment of the purchase price the above described merchandise
remains the property of the vendor until the purchase price thereof is fully paid." 26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership
therein is transferred to the buyer, but when the ownership therein is transferred to the
buyer the goods are at the buyer's risk whether actual delivery has been made or not, except
that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in
pursuance of the contract and the ownership in the goods has been retained by the seller
merely to secure performance by the buyer of his obligations under the contract, the goods
are at the buyer's risk from the time of such delivery; (Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the
risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods
delivered.

The Court disagrees with petitioner's stand.

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest
until full payment of the value of the delivered goods. Unlike the civil law concept of res perit
domino, where ownership is the basis for consideration of who bears the risk of loss, in
property insurance, one's interest is not determined by concept of title, but whether insured
has substantial economic interest in the property.28

It is well-settled that when the words of a contract are plain and readily understood, there is
no room for construction.22 In this case, the questioned insurance policies provide coverage
for "book debts in connection with ready-made clothing materials which have been sold or

Section 13 of our Insurance Code defines insurable interest as "every interest in property,
whether real or personal, or any relation thereto, or liability in respect thereof, of such
nature that a contemplated peril might directly damnify the insured." Parenthetically, under

Page | 17

Section 14 of the same Code, an insurable interest in property may consist in: (a) an existing
interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled
with an existing interest in that out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property interest in,
or a lien upon, or possession of, the subject matter of the insurance, and neither the title nor
a beneficial interest is requisite to the existence of such an interest, it is sufficient that the
insured is so situated with reference to the property that he would be liable to loss should it
be injured or destroyed by the peril against which it is insured. 29 Anyone has an insurable
interest in property who derives a benefit from its existence or would suffer loss from its
destruction.30 Indeed, a vendor or seller retains an insurable interest in the property sold so
long as he has any interest therein, in other words, so long as he would suffer by its
destruction, as where he has a vendor's lien.31 In this case, the insurable interest of IMC and
LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days after the
time of the loss covered by the policies.

With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C22"38 show that petitioner has an outstanding account with IMC in the amount of
P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit "F"40 is
the subrogation receipt executed by IMC in favor of respondent upon receipt of the
insurance proceeds. All these documents have been properly identified, presented and
marked as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not
only the relationship of respondent as insurer and IMC as the insured, but also the amount
paid to settle the insurance claim. The right of subrogation accrues simply upon payment by
the insurance company of the insurance claim.41 Respondent's action against petitioner is
squarely sanctioned by Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. x x x

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner failed to refute respondent's evidence.

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article
117432 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article
1504 (1) of the Civil Code.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No
evidentiary weight can be given to Exhibit "F Levi Strauss", 42 a letter dated April 23, 1991
from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of
petitioner's unpaid account with LSPI. It only confirms the loss of Levi's products in the
amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire
but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire.
Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the
CA, where the obligation consists in the payment of money, the failure of the debtor to make
the payment even by reason of a fortuitous event shall not relieve him of his liability. 33 The
rationale for this is that the rule that an obligor should be held exempt from liability when
the loss occurs thru a fortuitous event only holds true when the obligation consists in the
delivery of a determinate thing and there is no stipulation holding him liable even in case of
fortuitous event. It does not apply when the obligation is pecuniary in nature.34
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation." If the obligation
is generic in the sense that the object thereof is designated merely by its class or genus
without any particular designation or physical segregation from all others of the same class,
the loss or destruction of anything of the same kind even without the debtor's fault and
before he has incurred in delay will not have the effect of extinguishing the obligation. 35 This
rule is based on the principle that the genus of a thing can never perish. Genus nunquan
perit.36 An obligation to pay money is generic; therefore, it is not excused by fortuitous loss
of any specific property of the debtor.37
Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to
this case. What is relevant here is whether it has been established that petitioner has
outstanding accounts with IMC and LSPI.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation
receipt was offered in evidence. Thus, there is no evidence that respondent has been
subrogated to any right which LSPI may have against petitioner. Failure to substantiate the
claim of subrogation is fatal to petitioner's case for recovery of the amount of P535,613.00.
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000
and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are
AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to
respondent is DELETED for lack of factual basis.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 159617

August 8, 2007

ROBERTO C. SICAM and AGENCIA de


vs.
LULU V. JORGE and CESAR JORGE, respondents.

R.C.

SICAM,

INC.,

petitioners,

DECISION

Page | 18

AUSTRIA-MARTINEZ, J.:

Respondents subsequently filed an Amended Complaint to include petitioner corporation.

Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr. (petitioner
Sicam) and Agencia de R.C. Sicam, Inc. (petitioner corporation) seeking to annul the Decision1
of the Court of Appeals dated March 31, 2003, and its Resolution 2 dated August 8, 2003, in
CA G.R. CV No. 56633.

Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned considering


that he is not the real party-in-interest. Respondents opposed the same. The RTC denied the
motion in an Order dated November 8, 1989.5

It appears that on different dates from September to October 1987, Lulu V. Jorge
(respondent Lulu) pawned several pieces of jewelry with Agencia de R. C. Sicam located at
No. 17 Aguirre Ave., BF Homes Paraaque, Metro Manila, to secure a loan in the total
amount of P59,500.00.
On October 19, 1987, two armed men entered the pawnshop and took away whatever cash
and jewelry were found inside the pawnshop vault. The incident was entered in the police
blotter of the Southern Police District, Paraaque Police Station as follows:
Investigation shows that at above TDPO, while victims were inside the
office, two (2) male unidentified persons entered into the said office with
guns drawn. Suspects(sic) (1) went straight inside and poked his gun
toward Romeo Sicam and thereby tied him with an electric wire while
suspects (sic) (2) poked his gun toward Divina Mata and Isabelita
Rodriguez and ordered them to lay (sic) face flat on the floor. Suspects
asked forcibly the case and assorted pawned jewelries items mentioned
above.
Suspects after taking the money and jewelries fled on board a Marson
Toyota unidentified plate number.3
Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing her of the
loss of her jewelry due to the robbery incident in the pawnshop. On November 2, 1987,
respondent Lulu then wrote a letter4 to petitioner Sicam expressing disbelief stating that
when the robbery happened, all jewelry pawned were deposited with Far East Bank near the
pawnshop since it had been the practice that before they could withdraw, advance notice
must be given to the pawnshop so it could withdraw the jewelry from the bank. Respondent
Lulu then requested petitioner Sicam to prepare the pawned jewelry for withdrawal on
November 6, 1987 but petitioner Sicam failed to return the jewelry.
On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge, filed a
complaint against petitioner Sicam with the Regional Trial Court of Makati seeking
indemnification for the loss of pawned jewelry and payment of actual, moral and exemplary
damages as well as attorney's fees. The case was docketed as Civil Case No. 88-2035.
Petitioner Sicam filed his Answer contending that he is not the real party-in-interest as the
pawnshop was incorporated on April 20, 1987 and known as Agencia de R.C. Sicam, Inc; that
petitioner corporation had exercised due care and diligence in the safekeeping of the articles
pledged with it and could not be made liable for an event that is fortuitous.

After trial on the merits, the RTC rendered its Decision6 dated January 12, 1993, dismissing
respondents complaint as well as petitioners counterclaim. The RTC held that petitioner
Sicam could not be made personally liable for a claim arising out of a corporate transaction;
that in the Amended Complaint of respondents, they asserted that "plaintiff pawned
assorted jewelries in defendants' pawnshop"; and that as a consequence of the separate
juridical personality of a corporation, the corporate debt or credit is not the debt or credit of
a stockholder.
The RTC further ruled that petitioner corporation could not be held liable for the loss of the
pawned jewelry since it had not been rebutted by respondents that the loss of the pledged
pieces of jewelry in the possession of the corporation was occasioned by armed robbery; that
robbery is a fortuitous event which exempts the victim from liability for the loss, citing the
case of Austria v. Court of Appeals;7 and that the parties transaction was that of a pledgor
and pledgee and under Art. 1174 of the Civil Code, the pawnshop as a pledgee is not
responsible for those events which could not be foreseen.
Respondents appealed the RTC Decision to the CA. In a Decision dated March 31, 2003, the
CA reversed the RTC, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the instant Appeal is GRANTED, and
the Decision dated January 12, 1993,of the Regional Trial Court of Makati,
Branch 62, is hereby REVERSED and SET ASIDE, ordering the appellees to
pay appellants the actual value of the lost jewelry amounting to
P272,000.00, and attorney' fees of P27,200.00.8
In finding petitioner Sicam liable together with petitioner corporation, the CA applied the
doctrine of piercing the veil of corporate entity reasoning that respondents were misled into
thinking that they were dealing with the pawnshop owned by petitioner Sicam as all the
pawnshop tickets issued to them bear the words "Agencia de R.C. Sicam"; and that there was
no indication on the pawnshop tickets that it was the petitioner corporation that owned the
pawnshop which explained why respondents had to amend their complaint impleading
petitioner corporation.
The CA further held that the corresponding diligence required of a pawnshop is that it should
take steps to secure and protect the pledged items and should take steps to insure itself
against the loss of articles which are entrusted to its custody as it derives earnings from the
pawnshop trade which petitioners failed to do; that Austria is not applicable to this case
since the robbery incident happened in 1961 when the criminality had not as yet reached the
levels attained in the present day; that they are at least guilty of contributory negligence and
should be held liable for the loss of jewelries; and that robberies and hold-ups are
foreseeable risks in that those engaged in the pawnshop business are expected to foresee.

Page | 19

The CA concluded that both petitioners should be jointly and severally held liable to
respondents for the loss of the pawned jewelry.

was discouraged by the Central Bank (CB) since CB rules provide that they
can only store the pawned articles in a vault inside the pawnshop
premises and no other place;

Petitioners motion for reconsideration was denied in a Resolution dated August 8, 2003.
Hence, the instant petition for review with the following assignment of errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO
REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED
AS ITS OWN WITHOUT IN THE MEANTIME ACKNOWLEDGING IT) WHAT
THE RESPONDENTS ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS
PALPABLY UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO
REVERSAL BY THIS HONORABLE COURT, WHEN IT AGAIN ADOPTED
UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING IT) THE SUBMISSIONS
OF THE RESPONDENTS IN THEIR BRIEF WITHOUT ADDING ANYTHING
MORE THERETO DESPITE THE FACT THAT THE SAID ARGUMENT OF THE
RESPONDENTS COULD NOT HAVE BEEN SUSTAINED IN VIEW OF
UNREBUTTED EVIDENCE ON RECORD.9
Anent the first assigned error, petitioners point out that the CAs finding that petitioner
Sicam is personally liable for the loss of the pawned jewelries is "a virtual and uncritical
reproduction of the arguments set out on pp. 5-6 of the Appellants brief."10
Petitioners argue that the reproduced arguments of respondents in their Appellants Brief
suffer from infirmities, as follows:
(1) Respondents conclusively asserted in paragraph 2 of their Amended
Complaint that Agencia de R.C. Sicam, Inc. is the present owner of
Agencia de R.C. Sicam Pawnshop, and therefore, the CA cannot rule
against said conclusive assertion of respondents;
(2) The issue resolved against petitioner Sicam was not among those
raised and litigated in the trial court; and
(3) By reason of the above infirmities, it was error for the CA to have
pierced the corporate veil since a corporation has a personality distinct
and separate from its individual stockholders or members.
Anent the second error, petitioners point out that the CA finding on their negligence is
likewise an unedited reproduction of respondents brief which had the following defects:
(1) There were unrebutted evidence on record that petitioners had
observed the diligence required of them, i.e, they wanted to open a vault
with a nearby bank for purposes of safekeeping the pawned articles but

(2) Petitioners were adjudged negligent as they did not take insurance
against the loss of the pledged jelweries, but it is judicial notice that due
to high incidence of crimes, insurance companies refused to cover
pawnshops and banks because of high probability of losses due to
robberies;
(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46),
the victim of robbery was exonerated from liability for the sum of money
belonging to others and lost by him to robbers.
Respondents filed their Comment and petitioners filed their Reply thereto. The parties
subsequently submitted their respective Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were exact reproductions of the
arguments raised in respondents (appellants) brief filed with the CA, we find the same to be
not fatally infirmed. Upon examination of the Decision, we find that it expressed clearly and
distinctly the facts and the law on which it is based as required by Section 8, Article VIII of the
Constitution. The discretion to decide a case one way or another is broad enough to justify
the adoption of the arguments put forth by one of the parties, as long as these are legally
tenable and supported by law and the facts on records.11
Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of errors of law
committed by the appellate court. Generally, the findings of fact of the appellate court are
deemed conclusive and we are not duty-bound to analyze and calibrate all over again the
evidence adduced by the parties in the court a quo.12 This rule, however, is not without
exceptions, such as where the factual findings of the Court of Appeals and the trial court are
conflicting or contradictory13 as is obtaining in the instant case.
However, after a careful examination of the records, we find no justification to absolve
petitioner Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and adjudged petitioner Sicam liable
together with petitioner corporation. The rule is that the veil of corporate fiction may be
pierced when made as a shield to perpetrate fraud and/or confuse legitimate issues. 14 The
theory of corporate entity was not meant to promote unfair objectives or otherwise to shield
them.15
Notably, the evidence on record shows that at the time respondent Lulu pawned her jewelry,
the pawnshop was owned by petitioner Sicam himself. As correctly observed by the CA, in all
the pawnshop receipts issued to respondent Lulu in September 1987, all bear the words

Page | 20

"Agencia de R. C. Sicam," notwithstanding that the pawnshop was allegedly incorporated in


April 1987. The receipts issued after such alleged incorporation were still in the name of
"Agencia de R. C. Sicam," thus inevitably misleading, or at the very least, creating the wrong
impression to respondents and the public as well, that the pawnshop was owned solely by
petitioner Sicam and not by a corporation.
Even petitioners counsel, Atty. Marcial T. Balgos, in his letter 16 dated October 15, 1987
addressed to the Central Bank, expressly referred to petitioner Sicam as the proprietor of the
pawnshop notwithstanding the alleged incorporation in April 1987.
We also find no merit in petitioners' argument that since respondents had alleged in their
Amended Complaint that petitioner corporation is the present owner of the pawnshop, the
CA is bound to decide the case on that basis.
Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or written, made
by a party in the course of the proceedings in the same case, does not require proof. The
admission may be contradicted only by showing that it was made through palpable mistake
or that no such admission was made.
Thus, the general rule that a judicial admission is conclusive upon the party making it and
does not require proof, admits of two exceptions, to wit: (1) when it is shown that such
admission was made through palpable mistake, and (2) when it is shown that no such
admission was in fact made. The latter exception allows one to contradict an admission by
denying that he made such an admission.17
The Committee on the Revision of the Rules of Court explained the second exception in this
wise:
x x x if a party invokes an "admission" by an adverse party, but cites the
admission "out of context," then the one making the "admission" may
show that he made no "such" admission, or that his admission was taken
out of context.
x x x that the party can also show that he made no "such admission",
i.e., not in the sense in which the admission is made to appear.
That is the reason for the modifier "such" because if the rule simply
states that the admission may be contradicted by showing that "no
admission was made," the rule would not really be providing for a
contradiction of the admission but just a denial.18 (Emphasis supplied).
While it is true that respondents alleged in their Amended Complaint that petitioner
corporation is the present owner of the pawnshop, they did so only because petitioner Sicam
alleged in his Answer to the original complaint filed against him that he was not the real
party-in-interest as the pawnshop was incorporated in April 1987. Moreover, a reading of the
Amended Complaint in its entirety shows that respondents referred to both petitioner Sicam

and petitioner corporation where they (respondents) pawned their assorted pieces of
jewelry and ascribed to both the failure to observe due diligence commensurate with the
business which resulted in the loss of their pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to Dismiss Amended
Complaint, insofar as petitioner Sicam is concerned, averred as follows:
Roberto C. Sicam was named the defendant in the original complaint
because the pawnshop tickets involved in this case did not show that the
R.C. Sicam Pawnshop was a corporation. In paragraph 1 of his Answer, he
admitted the allegations in paragraph 1 and 2 of the Complaint. He
merely added "that defendant is not now the real party in interest in this
case."
It was defendant Sicam's omission to correct the pawnshop tickets used
in the subject transactions in this case which was the cause of the instant
action. He cannot now ask for the dismissal of the complaint against him
simply on the mere allegation that his pawnshop business is now
incorporated. It is a matter of defense, the merit of which can only be
reached after consideration of the evidence to be presented in due
course.19
Unmistakably, the alleged admission made in respondents' Amended Complaint was taken
"out of context" by petitioner Sicam to suit his own purpose. Ineluctably, the fact that
petitioner Sicam continued to issue pawnshop receipts under his name and not under the
corporation's name militates for the piercing of the corporate veil.
We likewise find no merit in petitioners' contention that the CA erred in piercing the veil of
corporate fiction of petitioner corporation, as it was not an issue raised and litigated before
the RTC.
Petitioner Sicam had alleged in his Answer filed with the trial court that he was not the real
party-in-interest because since April 20, 1987, the pawnshop business initiated by him was
incorporated and known as Agencia de R.C. Sicam. In the pre-trial brief filed by petitioner
Sicam, he submitted that as far as he was concerned, the basic issue was whether he is the
real party in interest against whom the complaint should be directed.20 In fact, he
subsequently moved for the dismissal of the complaint as to him but was not favorably acted
upon by the trial court. Moreover, the issue was squarely passed upon, although
erroneously, by the trial court in its Decision in this manner:
x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he
is concerned for the reason that he cannot be made personally liable for
a claim arising from a corporate transaction.
This Court sustains the contention of the defendant Roberto C. Sicam, Jr.
The amended complaint itself asserts that "plaintiff pawned assorted

Page | 21

jewelries in defendant's pawnshop." It has been held that " as a


consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the stockholder, nor
is the stockholder's debt or credit that of a corporation.21

fortuitous event would not exempt one from liability. When the effect is found to be partly
the result of a person's participation -- whether by active intervention, neglect or failure to
act -- the whole occurrence is humanized and removed from the rules applicable to acts of
God. 26

Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether petitioner
Sicam is personally liable is inextricably connected with the determination of the question
whether the doctrine of piercing the corporate veil should or should not apply to the case.

Petitioner Sicam had testified that there was a security guard in their pawnshop at the time
of the robbery. He likewise testified that when he started the pawnshop business in 1983, he
thought of opening a vault with the nearby bank for the purpose of safekeeping the valuables
but was discouraged by the Central Bank since pawned articles should only be stored in a
vault inside the pawnshop. The very measures which petitioners had allegedly adopted show
that to them the possibility of robbery was not only foreseeable, but actually foreseen and
anticipated. Petitioner Sicams testimony, in effect, contradicts petitioners defense of
fortuitous event.

The next question is whether petitioners are liable for the loss of the pawned articles in their
possession.
Petitioners insist that they are not liable since robbery is a fortuitous event and they are not
negligent at all.
We are not persuaded.
Article 1174 of the Civil Code provides:
Art. 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the obligation
requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen or which, though foreseen, were
inevitable.

Moreover, petitioners failed to show that they were free from any negligence by which the
loss of the pawned jewelry may have been occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the
possibility of negligence on the part of herein petitioners. In Co v. Court of Appeals,27 the
Court held:

The burden of proving that the loss was due to a fortuitous event rests on him who invokes
it.24 And, in order for a fortuitous event to exempt one from liability, it is necessary that one
has committed no negligence or misconduct that may have occasioned the loss. 25

It is not a defense for a repair shop of motor vehicles to escape liability


simply because the damage or loss of a thing lawfully placed in its
possession was due to carnapping. Carnapping per se cannot be
considered as a fortuitous event. The fact that a thing was unlawfully
and forcefully taken from another's rightful possession, as in cases of
carnapping, does not automatically give rise to a fortuitous event. To be
considered as such, carnapping entails more than the mere forceful
taking of another's property. It must be proved and established that the
event was an act of God or was done solely by third parties and that
neither the claimant nor the person alleged to be negligent has any
participation. In accordance with the Rules of Evidence, the burden of
proving that the loss was due to a fortuitous event rests on him who
invokes it which in this case is the private respondent. However,
other than the police report of the alleged carnapping incident, no other
evidence was presented by private respondent to the effect that the
incident was not due to its fault. A police report of an alleged crime, to
which only private respondent is privy, does not suffice to establish the
carnapping. Neither does it prove that there was no fault on the part of
private respondent notwithstanding the parties' agreement at the pretrial that the car was carnapped. Carnapping does not foreclose the
possibility of fault or negligence on the part of private respondent.28

It has been held that an act of God cannot be invoked to protect a person who has failed to
take steps to forestall the possible adverse consequences of such a loss. One's negligence
may have concurred with an act of God in producing damage and injury to another;
nonetheless, showing that the immediate or proximate cause of the damage or injury was a

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

Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is


therefore, not enough that the event should not have been foreseen or anticipated, as is
commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty
to foresee the happening is not impossibility to foresee the same. 22
To constitute a fortuitous event, the following elements must concur: (a) the cause of the
unforeseen and unexpected occurrence or of the failure of the debtor to comply with
obligations must be independent of human will; (b) it must be impossible to foresee the
event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to
avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill
obligations in a normal manner; and, (d) the obligor must be free from any participation in
the aggravation of the injury or loss. 23

Page | 22

On the contrary, by the very evidence of petitioners, the CA did not err in finding that
petitioners are guilty of concurrent or contributory negligence as provided in Article 1170 of
the Civil Code, to wit:

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

Art. 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay, and those who in any manner contravene the
tenor thereof, are liable for damages.29
Article 2123 of the Civil Code provides that with regard to pawnshops and other
establishments which are engaged in making loans secured by pledges, the special laws and
regulations concerning them shall be observed, and subsidiarily, the provisions on pledge,
mortgage and antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code, provides that the creditor
shall take care of the thing pledged with the diligence of a good father of a family. This
means that petitioners must take care of the pawns the way a prudent person would as to
his own property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor consists in the omission
of that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of time and of the
place. When negligence shows bad faith, the provisions of Articles 1171
and 2201, paragraph 2 shall apply.
If the law or contract does not state the diligence which is to be observed
in the performance, that which is expected of a good father of a family
shall be required.
We expounded in Cruz v. Gangan30 that negligence is the omission to do something which a
reasonable man, guided by those considerations which ordinarily regulate the conduct of
human affairs, would do; or the doing of something which a prudent and reasonable man
would not do.31 It is want of care required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise reasonable care and
caution that an ordinarily prudent person would have used in the same situation. Petitioners
were guilty of negligence in the operation of their pawnshop business. Petitioner Sicam
testified, thus:
Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.

Q. I am asking you how were the robbers able to enter despite the fact
that there was a security guard?
A. At the time of the incident which happened about 1:00 and 2:00
o'clock in the afternoon and it happened on a Saturday and everything
was quiet in the area BF Homes Paraaque they pretended to pawn an
article in the pawnshop, so one of my employees allowed him to come in
and it was only when it was announced that it was a hold up.
Q. Did you come to know how the vault was opened?
A. When the pawnshop is official (sic) open your honor the pawnshop is
partly open. The combination is off.
Q. No one open (sic) the vault for the robbers?
A. No one your honor it was open at the time of the robbery.
Q. It is clear now that at the time of the robbery the vault was open the
reason why the robbers were able to get all the items pawned to you
inside the vault.
A. Yes sir.32
revealing that there were no security measures adopted by petitioners in the operation of
the pawnshop. Evidently, no sufficient precaution and vigilance were adopted by petitioners
to protect the pawnshop from unlawful intrusion. There was no clear showing that there was
any security guard at all. Or if there was one, that he had sufficient training in securing a
pawnshop. Further, there is no showing that the alleged security guard exercised all that was
necessary to prevent any untoward incident or to ensure that no suspicious individuals were
allowed to enter the premises. In fact, it is even doubtful that there was a security guard,
since it is quite impossible that he would not have noticed that the robbers were armed with
caliber .45 pistols each, which were allegedly poked at the employees.33 Significantly, the
alleged security guard was not presented at all to corroborate petitioner Sicam's claim; not
one of petitioners' employees who were present during the robbery incident testified in
court.
Furthermore, petitioner Sicam's admission that the vault was open at the time of robbery is
clearly a proof of petitioners' failure to observe the care, precaution and vigilance that the
circumstances justly demanded. Petitioner Sicam testified that once the pawnshop was open,
the combination was already off. Considering petitioner Sicam's testimony that the robbery

Page | 23

took place on a Saturday afternoon and the area in BF Homes Paraaque at that time was
quiet, there was more reason for petitioners to have exercised reasonable foresight and
diligence in protecting the pawned jewelries. Instead of taking the precaution to protect
them, they let open the vault, providing no difficulty for the robbers to cart away the pawned
articles.
We, however, do not agree with the CA when it found petitioners negligent for not taking
steps to insure themselves against loss of the pawned jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for Pawnshops,
which took effect on July 13, 1973, and which was issued pursuant to Presidential Decree No.
114, Pawnshop Regulation Act, it is provided that pawns pledged must be insured, to wit:
Sec. 17. Insurance of Office Building and Pawns- The place of business of
a pawnshop and the pawns pledged to it must be insured against fire and
against burglary as well as for the latter(sic), by an insurance company
accredited by the Insurance Commissioner.
However, this Section was subsequently amended by CB Circular No. 764 which took effect
on October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns The office
building/premises and pawns of a pawnshop must be insured against
fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted. Obviously, the Central
Bank considered it not feasible to require insurance of pawned articles against burglary.
The robbery in the pawnshop happened in 1987, and considering the above-quoted
amendment, there is no statutory duty imposed on petitioners to insure the pawned jewelry
in which case it was error for the CA to consider it as a factor in concluding that petitioners
were negligent.
Nevertheless, the preponderance of evidence shows that petitioners failed to exercise the
diligence required of them under the Civil Code.
The diligence with which the law requires the individual at all times to govern his conduct
varies with the nature of the situation in which he is placed and the importance of the act
which he is to perform.34 Thus, the cases of Austria v. Court of Appeals,35 Hernandez v.
Chairman, Commission on Audit36 and Cruz v. Gangan37 cited by petitioners in their
pleadings, where the victims of robbery were exonerated from liability, find no application to
the present case.
In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds to be sold
on commission basis, but which Abad failed to subsequently return because of a robbery
committed upon her in 1961. The incident became the subject of a criminal case filed against

several persons. Austria filed an action against Abad and her husband (Abads) for recovery of
the pendant or its value, but the Abads set up the defense that the robbery extinguished
their obligation. The RTC ruled in favor of Austria, as the Abads failed to prove robbery; or, if
committed, that Maria Abad was guilty of negligence. The CA, however, reversed the RTC
decision holding that the fact of robbery was duly established and declared the Abads not
responsible for the loss of the jewelry on account of a fortuitous event. We held that for the
Abads to be relieved from the civil liability of returning the pendant under Art. 1174 of the
Civil Code, it would only be sufficient that the unforeseen event, the robbery, took place
without any concurrent fault on the debtors part, and this can be done by preponderance of
evidence; that to be free from liability for reason of fortuitous event, the debtor must, in
addition to the casus itself, be free of any concurrent or contributory fault or negligence.38
We found in Austria that under the circumstances prevailing at the time the Decision was
promulgated in 1971, the City of Manila and its suburbs had a high incidence of crimes
against persons and property that rendered travel after nightfall a matter to be sedulously
avoided without suitable precaution and protection; that the conduct of Maria Abad in
returning alone to her house in the evening carrying jewelry of considerable value would
have been negligence per se and would not exempt her from responsibility in the case of
robbery. However we did not hold Abad liable for negligence since, the robbery happened
ten years previously; i.e., 1961, when criminality had not reached the level of incidence
obtaining in 1971.
In contrast, the robbery in this case took place in 1987 when robbery was already prevalent
and petitioners in fact had already foreseen it as they wanted to deposit the pawn with a
nearby bank for safekeeping. Moreover, unlike in Austria, where no negligence was
committed, we found petitioners negligent in securing their pawnshop as earlier discussed.
In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of the Ternate
Beach Project of the Philippine Tourism in Cavite. In the morning of July 1, 1983, a Friday, he
went to Manila to encash two checks covering the wages of the employees and the operating
expenses of the project. However for some reason, the processing of the check was delayed
and was completed at about 3 p.m. Nevertheless, he decided to encash the check because
the project employees would be waiting for their pay the following day; otherwise, the
workers would have to wait until July 5, the earliest time, when the main office would open.
At that time, he had two choices: (1) return to Ternate, Cavite that same afternoon and
arrive early evening; or (2) take the money with him to his house in Marilao, Bulacan, spend
the night there, and leave for Ternate the following day. He chose the second option,
thinking it was the safer one. Thus, a little past 3 p.m., he took a passenger jeep bound for
Bulacan. While the jeep was on Epifanio de los Santos Avenue, the jeep was held up and the
money kept by Hernandez was taken, and the robbers jumped out of the jeep and ran.
Hernandez chased the robbers and caught up with one robber who was subsequently
charged with robbery and pleaded guilty. The other robber who held the stolen money
escaped. The Commission on Audit found Hernandez negligent because he had not brought
the cash proceeds of the checks to his office in Ternate, Cavite for safekeeping, which is the
normal procedure in the handling of funds. We held that Hernandez was not negligent in
deciding to encash the check and bringing it home to Marilao, Bulacan instead of Ternate,
Cavite due to the lateness of the hour for the following reasons: (1) he was moved by
unselfish motive for his co-employees to collect their wages and salaries the following day, a

Page | 24

Saturday, a non-working, because to encash the check on July 5, the next working day after
July 1, would have caused discomfort to laborers who were dependent on their wages for
sustenance; and (2) that choosing Marilao as a safer destination, being nearer, and in view of
the comparative hazards in the trips to the two places, said decision seemed logical at that
time. We further held that the fact that two robbers attacked him in broad daylight in the
jeep while it was on a busy highway and in the presence of other passengers could not be
said to be a result of his imprudence and negligence.
Unlike in Hernandez where the robbery happened in a public utility, the robbery in this case
took place in the pawnshop which is under the control of petitioners. Petitioners had the
means to screen the persons who were allowed entrance to the premises and to protect
itself from unlawful intrusion. Petitioners had failed to exercise precautionary measures in
ensuring that the robbers were prevented from entering the pawnshop and for keeping the
vault open for the day, which paved the way for the robbers to easily cart away the pawned
articles.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological Education and Skills
Development Authority (TESDA), boarded the Light Rail Transit (LRT) from Sen. Puyat Avenue
to Monumento when her handbag was slashed and the contents were stolen by an
unidentified person. Among those stolen were her wallet and the government-issued cellular
phone. She then reported the incident to the police authorities; however, the thief was not
located, and the cellphone was not recovered. She also reported the loss to the Regional
Director of TESDA, and she requested that she be freed from accountability for the
cellphone. The Resident Auditor denied her request on the ground that she lacked the
diligence required in the custody of government property and was ordered to pay the
purchase value in the total amount of P4,238.00. The COA found no sufficient justification to
grant the request for relief from accountability. We reversed the ruling and found that riding
the LRT cannot per se be denounced as a negligent act more so because Cruzs mode of
transit was influenced by time and money considerations; that she boarded the LRT to be
able to arrive in Caloocan in time for her 3 pm meeting; that any prudent and rational person
under similar circumstance can reasonably be expected to do the same; that possession of a
cellphone should not hinder one from boarding the LRT coach as Cruz did considering that
whether she rode a jeep or bus, the risk of theft would have also been present; that because
of her relatively low position and pay, she was not expected to have her own vehicle or to
ride a taxicab; she did not have a government assigned vehicle; that placing the cellphone in
a bag away from covetous eyes and holding on to that bag as she did is ordinarily sufficient
care of a cellphone while traveling on board the LRT; that the records did not show any
specific act of negligence on her part and negligence can never be presumed.
Unlike in the Cruz case, the robbery in this case happened in petitioners' pawnshop and they
were negligent in not exercising the precautions justly demanded of a pawnshop.
WHEREFORE, except for the insurance aspect, the Decision of the Court of Appeals dated
March 31, 2003 and its Resolution dated August 8, 2003, are AFFIRMED.
Costs against petitioners.

SO ORDERED.
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 P51,064,094.28, 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:
<<Reference: http://www.scribd.com/doc/196404620/177921>>
Date Document Amount
December 13, 1996 Promissory Note No. 96-213016
P2,000,000.00 November 7, 1995 Trust Receipt No. 96-2023657
P608,603.04 May 13, 1996 Trust Receipt No. 96-9605228
P3,753,777.40 May 24, 1996 Trust Receipt No. 96-9605249
P4,602,648.08 March 21, 1997 Trust Receipt No. 97-20472410

Page | 25

P7,289,757.79 June 7, 1996 Trust Receipt No. 96-20328011


P17,340,360.73 July 26, 1995 Trust Receipt No. 95-20194312
P670,709.24 August 31, 1995 Trust Receipt No. 95-20205313
P313,797.41 November 16, 1995 Trust Receipt No. 96-20243914
P13,015,109.87 July 3, 1996 Trust Receipt No. 96-20355215
P401,608.89 June 20, 1995 Trust Receipt No. 95-20171016
P750,089.25 December 13, 1995 Trust Receipt No. 96-37908917
P92,919.00 December 13, 1995 Trust Receipt No. 96/20258118
P224,713.58
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 Agreements19 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 P51,064,093.62, 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 P65,073,055.73 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 Concasts 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 Banks legal department, acted as the latters 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
P34,000,000.00, payable as follows:
(a) P4,000,000.00 by way of earnest money P2,000,000.00 to be paid in cash and the other
P2,000,000.00 to be paid in two (2) post-dated checks of P1,000,000.00 each;26 and
(b) the balance of P30,000,000.00 to be paid in ten (10) monthly installments of
P3,000,000.00, 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 P2,000,000.00 cash and the two (2) Bankwise post-dated checks worth
P1,000,000.00 each from Camiling. However, Atty. Saw turned over only the two (2) checks
and P1,500,000.00 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 P20,000,000.00 in favor of Metro Concast and
at least P25,000,000.00 for each individual petitioner, P25,000,000.00 as exemplary
damages, P1,000,000.00 as attorneys fees, P500,000.00 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.

Page | 26

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 latters 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 attorneys 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 Courts 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 Peakstars failure to perform its own obligations to
Metro Concast pursuant to the MoA. Petitioners classify Peakstars 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 Concasts 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 Banks 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 Peakstars 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 Peakstars 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 formers 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 paid41 or, in any way, extinguished. In this regard,
petitioners liability, as adjudged by the CA, must perforce stand. Considering, however, that
Allied Banks 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

Page | 27

the extrajudicial demand or on December 10, 1998. The rest of the appellate courts
dispositions stand.
SO ORDERED.
G.R. No. 118180. September 20, 1996]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS, Sps. NORMY D.
CARPIO and CARMEN ORQUISA; Sps. ROLANDO D. CARPIO and RAFAELA VILLANUEVA; Sps.
ELISEO D. CARPIO and ANUNCIACION del ROSARIO; LUZ C. REYES, MARIO C. REYES, JULIET
REYES-RUBIN, respondents.
DECISION

sum of SEVENTY THREE THOUSAND SEVEN HUNDRED ONLY (P73,700.00), with a down
payment of P8,900.00 and the balance of P64,800 shall be payable in six (6) years on equal
quarterly amortization plan at 18% interest per annum. The first quarterly amortization of
P4,470.36 shall be payable three months from the date of the execution of the documents
and all subsequent amortization shall be due and payable every quarter thereafter.
xxx

xxx

xxx

That, upon completion of the payment herein stipulated and agreed, the Vendor agrees to
deliver to the Vendee/s(,) his heirs, administrators and assigns(,) a good and sufficient deed
of conveyance covering the property, subject matter of this deed of conditional sale, in
accordance with the provisions of law." (Exh. "A", p. 5, Records)xxix
On 6 April 1990, upon completing the payment of the full repurchase price, private
respondents demanded from petitioner the execution of a Deed of Conveyance in their
favor.

PADILLA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court which seeks to
set aside the decisionxxviii of the Court of Appeals (CA) dated 28 February 1994 in C.A.-G.R.
CV No. 37158, as well as the resolution dated 11 August 1994 denying petitioner's motion for
reconsideration.
The facts are undisputed:
Private respondents were the original owners of a parcel of agricultural land covered by TCT
No. T-1432, situated in Barrio Capucao, Ozamis City, with an area of 113,695 square meters,
more or less.
On 30 May 1977, private respondents mortgaged said land to petitioner. When private
respondents defaulted on their obligation, petitioner foreclosed the mortgage on the land
and emerged as sole bidder in the ensuing auction sale. Consequently, Transfer Certificate of
Title No. T-10913 was eventually issued in petitioner's name.
On 6 April 1984, petitioner and private respondents entered into a Deed of Conditional Sale
wherein petitioner agreed to reconvey the foreclosed property to private respondents.

Petitioner then informed private respondents that the prestation to execute and deliver a
deed of conveyance in their favor had become legally impossible in view of Sec. 6 of Rep. Act
6657 (the Comprehensive Agrarian Reform Law or CARL) approved 10 June 1988, and Sec. 1
of E.O. 407 issued 10 June 1990.
Aggrieved, private respondents filed a complaint for specific performance with damages
against petitioner before the Regional Trial Court of Ozamis City, Branch XV. During the pretrial, the trial court narrowed down the issue to whether or not Sec. 6 of the CARL (Rep. Act
6657) had rendered legally impossible compliance by petitioner with its obligation to execute
a deed of conveyance of the subject land in favor of private respondents. The trial court
ordered both parties to file their separate memorandum and deemed the case submitted for
decision thereafter.
On 30 January 1992, the trial court rendered judgment, the dispositive part of which reads:
"WHEREFORE, judgment is rendered ordering defendant to execute and deliver unto
plaintiffs a deed of final sale of the land subject of their deed of conditional sale - Lot 5259-A,
to pay plaintiffs P10,000.00 as nominal damages, P5,000.00 as attorney's fees, P3,000.00 as
litis expenses and costs."xxx

The pertinent stipulations of the Deed provided that:


"WHEREAS, the VENDOR acquired a parcel of land in an auction sale by the City Sheriff of
Ozamiz City, pursuant to Act 3135, as amended, and subject to the redemption period
pursuant to CA 141, described as follows:
xxx

xxx

xxx

WHEREAS, the VENDEES offered to repurchase and the VENDOR agreed to sell the abovedescribed property, subject to the terms and stipulations as hereinafter stipulated, for the

The trial court held that petitioner interpreted the fourth paragraph of Sec. 6, Rep. Act 6657
literally in conjunction with Sec. 1 of E.O. 407.
The fourth paragraph of Sec. 6, Rep. Act 6657 states that:
"Upon the effectivity of this Act, any sale disposition, lease, management contract or transfer
of possession of private lands executed by the original landowner in violation of this act shall
be null and void; Provided, however, that those executed prior to this act shall be valid only
when registered with the Register of Deeds after the effectivity of this Act. Thereafter, all

Page | 28

Register of Deeds shall inform the DAR within 320 days of any transaction involving
agricultural lands in excess of five hectares."

law between the contracting parties and should be complied with in good faith (Flavio
Macasaet & Associates, Inc. vs. Commission on Audit, 173 SCRA 352).

while Sec. 1 of E.O. 407 states that:

Going now to E.O. 407, We hold that the same can neither affect appellant's obligation under
the deed of conditional sale. Under the said law, appellant is required to transfer to the
Republic of the Philippines 'all lands foreclosed' effective June 10, 1990. Under the facts
obtaining, the subject property has ceased to belong to the mass of foreclosed property
falling within the reach of said law. As earlier explained, the property has already been sold
to herein appellees even before the said E.O. has been enacted. On this same reason, We
therefore need not delve on the applicability of DBP Circular No. 11."xxxi

"Sec. 1. All government instrumentalities but not limited to x x x financial institutions such as
the DBP x x x shall immediately execute deeds of transfer in favor of the Republic of the
Philippines as represented by the Department of Agrarian Reform and surrender to the
department all landholdings suitable for agriculture."
The court a quo noted that Sec. 6 of Rep. Act 6657, taken in its entirety, is a provision dealing
primarily with retention limits in agricultural land allowed the landowner and his family and
that the fourth paragraph, which nullifies any sale x x x by the original landowner in violation
of the Act, does not cover the sale by petitioner (not the original land owner) to private
respondents.
On the other hand, according to the trial court, E.O. 407 took effect on 10 June 1990. But
private respondents completed payment of the price for the property, object of the
conditional sale, as early as 6 April 1990. Hence, with the fulfillment of the condition for the
sale, the land covered thereby, was detached from the mass of foreclosed properties held by
DBP, and, therefore, fell beyond the ambit or reach of E.O. 407.
Dissatisfied, petitioner appealed to the Court of Appeals (CA), still insisting that its obligation
to execute a Deed of Sale in favor of private respondents had become a legal impossibility
and that the non-impairment clause of the Constitution must yield to the demands of police
power.
On 28 February 1994, the CA rendered judgment dismissing petitioner's appeal on the basis
of the following disquisitions:
"It is a rule that if the obligation depends upon a suspensive condition, the demandability as
well as the acquisition or effectivity of the rights arising from the obligation is suspended
pending the happening or fulfillment of the fact or event which constitutes the condition.
Once the event which constitutes the condition is fulfilled resulting in the effectivity of the
obligation, its effects retroact to the moment when the essential elements which gave birth
to the obligation have taken place (8 Manresa, 5th Ed. Bk. 1, pa. 33). Applying this precept to
the case, the full payment by the appellee on April 6, 1990 retroacts to the time the contract
of conditional sale was executed on April 6, 1984. From that time, all elements of the
contract of sale were present. Consequently, the contract of sale was perfected. As such,
the said sale does not come under the coverage of R.A. 6657.
It is likewise interesting to note that despite the mandate of Sec. 1, R.A. 6657, appellant
continued to accept the payments made by the appellee until it was fully paid on April 6,
1990. All that the appellant has to do now is to execute the final deed of sale in favor of the
appellee. To follow the line of argument of the appellant would only result in an
unconscionable injury to the appellee. Obligations arising from contracts have the force of

In the present petition for review on certiorari, petitioner still insists on its position that Rep.
Act 6657, E.O. 407 and DBP Circular No. 11 rendered its obligation to execute a Deed of Sale
to private respondents "a legal impossibility."xxxii Petitioner also questions the award of
attorney's fees, nominal damages, and costs in favor of private respondents, as not in accord
with law and the evidence.xxxiii
We rule in favor of private respondents.
In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of
those already acquired, shall depend upon the happening of the event which constitutes the
condition.xxxiv
The deed of conditional sale between petitioner and private respondents was executed on 6
April 1984. Private respondents had religiously paid the agreed installments on the property
until they completed payment on 6 April 1990. Petitioner, in fact, allowed private
respondents to fulfill the condition of effecting full payment, and invoked Section 6 of Rep.
Act 6657 only after private respondents, having fully paid the repurchase price, demanded
the execution of a Deed of Sale in their favor.
It will be noted that Rep. Act 6657 was enacted on 10 June 1988. Following petitioner's
argument in this case, its prestation to execute the deed of sale was rendered legally
impossible by Section 6 of said law. In other words, the deed of conditional sale was
extinguished by a supervening event, giving rise to an impossibility of performance.
We reject petitioner's contention as we rule - as the trial court and CA have correctly ruled that neither Sec. 6 of Rep. Act 6657 nor Sec. 1 of E.O. 407 was intended to impair the
obligation of contract petitioner had much earlier concluded with private respondents.
More specifically, petitioner cannot invoke the last paragraph of Sec. 6 of Rep. Act 6657 to
set aside its obligations already existing prior to its enactment. In the first place, said last
paragraph clearly deals with "any sale, lease, management contract or transfer or possession
of private lands executed by the original land owner." The original owner in this case is not
the petitioner but the private respondents. Petitioner acquired the land through foreclosure
proceedings but agreed thereafter to reconvey it to private respondents, albeit conditionally.

Page | 29

As earlier stated, Sec. 6 of Rep. Act 6657 in its entirety deals with retention limits allowed by
law to small landowners. Since the property here involved is more or less ten (10) hectares,
it is then within the jurisdiction of the Department of Agrarian Reform (DAR) to determine
whether or not the property can be subjected to agrarian reform. But this necessitates an
entirely different proceeding.

WHEREFORE, premises considered, the petition is hereby DENIED, and the decision of the CA
is hereby AFFIRMED, for lack of any reversible error, with the MODIFICATION that attorney's
fees and nominal damages awarded to private respondents are hereby DELETED.

The CARL (Rep. Act 6657) was not intended to take away property without due process of
law. Nor is it intended to impair the obligation of contracts. In the same manner must E.O.
407 be regarded. It was enacted two (2) months after private respondents had legally
fulfilled the condition in the contract of conditional sale by the payment of all installments on
their due dates. These laws cannot have retroactive effect unless there is an express
provision in them to that effect.xxxv

G.R. No. 112127 July 17, 1995

As to petitioner's contention, however, that the CA erred in affirming the trial court's
decision awarding nominal damages, and attorney's fees to private respondents, we rule in
favor of petitioner.
It appears that the core issue in this case, being a pure question of law, did not reach the trial
stage as the case was submitted for decision after pre-trial.
The award of attorney's fees under Article 2208 of the Civil Code is more of an exception to
the general rule that it is not sound policy to place a penalty on the right to litigate. While
judicial discretion in the award of attorney's fees is not entirely left out, the same, as a rule,
must have a factual, legal or equitable justification. The matter cannot and should not be left
to speculation and conjecture.xxxvi
As aptly stated in the Mirasol case:
"x x x The matter of attorney's fees cannot be touched once and only in the dispositive
portion of the decision. The text itself must expressly state the reason why attorney's fees
are being awarded. The court, after reading through the text of the appealed decision, finds
the same bereft of any findings of fact and law to justify the award of attorney's fees. The
matter of such fees was touched but once and appears only in the dispositive portion of the
decision. Simply put, the text of the decision did not state the reason why attorney's fees are
being awarded, and for this reason, the Court finds it necessary to disallow the same for
being conjectural."xxxvii
While DBP committed egregious error in interpreting Sec. 6 of RA 6657, the same is not
equivalent to gross and evident bad faith when it refused to execute the deed of sale in favor
of private respondents.
For the same reasons stated above, the award of nominal damages in the amount of
P10,000.00 should also be deleted.
The amount of P3,000.00 as litigation expenses and costs against petitioner must remain.

SO ORDERED.

CENTRAL
PHILIPPINE
UNIVERSITY,
petitioner,
vs.
COURT OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ, CECILIA P. VDA. DE LOPEZ,
REDAN LOPEZ AND REMARENE LOPEZ, respondents.

BELLOSILLO, J.:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the decision of
the Court of Appeals which reversed that of the Regional Trial Court of Iloilo City directing
petitioner to reconvey to private respondents the property donated to it by their
predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of
Trustees of the Central Philippine College (now Central Philippine University [CPU]), executed
a deed of donation in favor of the latter of a parcel of land identified as Lot No. 3174-B-1 of
the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer
Certificate of Title No. T-3910-A was issued in the name of the donee CPU with the following
annotations copied from the deed of donation
1. The land described shall be utilized by the CPU exclusively for
the establishment and use of a medical college with all its
buildings as part of the curriculum;
2. The said college shall not sell, transfer or convey to any third
party nor in any way encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and
the said college shall be under obligation to erect a cornerstone
bearing that name. Any net income from the land or any of its
parks shall be put in a fund to be known as the "RAMON LOPEZ
CAMPUS FUND" to be used for improvements of said campus
and erection of a building thereon. 1
On 31 May 1989, private respondents, who are the heirs of Don Ramon Lopez, Sr., filed an
action for annulment of donation, reconveyance and damages against CPU alleging that since
1939 up to the time the action was filed the latter had not complied with the conditions of

Page | 30

the donation. Private respondents also argued that petitioner had in fact negotiated with the
National Housing Authority (NHA) to exchange the donated property with another land
owned by the latter.
In its answer petitioner alleged that the right of private respondents to file the action had
prescribed; that it did not violate any of the conditions in the deed of donation because it
never used the donated property for any other purpose than that for which it was intended;
and, that it did not sell, transfer or convey it to any third party.
On 31 May 1991, the trial court held that petitioner failed to comply with the conditions of
the donation and declared it null and void. The court a quo further directed petitioner to
execute a deed of the reconveyance of the property in favor of the heirs of the donor,
namely, private respondents herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that the
annotations at the back of petitioner's certificate of title were resolutory conditions breach
of which should terminate the rights of the donee thus making the donation revocable.
The appellate court also found that while the first condition mandated petitioner to utilize
the donated property for the establishment of a medical school, the donor did not fix a
period within which the condition must be fulfilled, hence, until a period was fixed for the
fulfillment of the condition, petitioner could not be considered as having failed to comply
with its part of the bargain. Thus, the appellate court rendered its decision reversing the
appealed decision and remanding the case to the court of origin for the determination of the
time within which petitioner should comply with the first condition annotated in the
certificate of title.
Petitioner now alleges that the Court of Appeals erred: (a) in holding that the quoted
annotations in the certificate of title of petitioner are onerous obligations and resolutory
conditions of the donation which must be fulfilled non-compliance of which would render
the donation revocable; (b) in holding that the issue of prescription does not deserve
"disquisition;" and, (c) in remanding the case to the trial court for the fixing of the period
within which petitioner would establish a medical college. 2
We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the
deed of donation executed by Don Ramon Lopez, Sr., gives us no alternative but to conclude
that his donation was onerous, one executed for a valuable consideration which is
considered the equivalent of the donation itself, e.g., when a donation imposes a burden
equivalent to the value of the donation. A gift of land to the City of Manila requiring the
latter to erect schools, construct a children's playground and open streets on the land was
considered an onerous donation. 3 Similarly, where Don Ramon Lopez donated the subject
parcel of land to petitioner but imposed an obligation upon the latter to establish a medical
college thereon, the donation must be for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well
as the extinguishment or loss of those already acquired, shall depend upon the happening of
the event which constitutes the condition. Thus, when a person donates land to another on

the condition that the latter would build upon the land a school, the condition imposed was
not a condition precedent or a suspensive condition but a resolutory one. 4 It is not correct to
say that the schoolhouse had to be constructed before the donation became effective, that
is, before the donee could become the owner of the land, otherwise, it would be invading
the property rights of the donor. The donation had to be valid before the fulfillment of the
condition. 5 If there was no fulfillment or compliance with the condition, such as what obtains
in the instant case, the donation may now be revoked and all rights which the donee may
have acquired under it shall be deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private respondents is
unavailing.
The condition imposed by the donor, i.e., the building of a medical school
upon the land donated, depended upon the exclusive will of the donee as
to when this condition shall be fulfilled. When petitioner accepted the
donation, it bound itself to comply with the condition thereof. Since the
time within which the condition should be fulfilled depended upon the
exclusive will of the petitioner, it has been held that its absolute
acceptance and the acknowledgment of its obligation provided in the
deed of donation were sufficient to prevent the statute of limitations
from barring the action of private respondents upon the original contract
which was the deed of donation. 6
Moreover, the time from which the cause of action accrued for the revocation of the
donation and recovery of the property donated cannot be specifically determined in the
instant case. A cause of action arises when that which should have been done is not done, or
that which should not have been done is done. 7 In cases where there is no special provision
for such computation, recourse must be had to the rule that the period must be counted
from the day on which the corresponding action could have been instituted. It is the legal
possibility of bringing the action which determines the starting point for the computation of
the period. In this case, the starting point begins with the expiration of a reasonable period
and opportunity for petitioner to fulfill what has been charged upon it by the donor.
The period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of
the presence of several factors and circumstances involved in the erection of an educational
institution, such as government laws and regulations pertaining to education, building
requirements and property restrictions which are beyond the control of the donee.
Thus, when the obligation does not fix a period but from its nature and circumstances it can
be inferred that a period was intended, the general rule provided in Art. 1197 of the Civil
Code applies, which provides that the courts may fix the duration thereof because the
fulfillment of the obligation itself cannot be demanded until after the court has fixed the
period for compliance therewith and such period has arrived. 8
This general rule however cannot be applied considering the different set of circumstances
existing in the instant case. More than a reasonable period of fifty (50) years has already

Page | 31

been allowed petitioner to avail of the opportunity to comply with the condition even if it be
burdensome, to make the donation in its favor forever valid. But, unfortunately, it failed to
do so. Hence, there is no more need to fix the duration of a term of the obligation when such
procedure would be a mere technicality and formality and would serve no purpose than to
delay or lead to an unnecessary and expensive multiplication of suits. 9 Moreover, under Art.
1191 of the Civil Code, when one of the obligors cannot comply with what is incumbent upon
him, the obligee may seek rescission and the court shall decree the same unless there is just
cause authorizing the fixing of a period. In the absence of any just cause for the court to
determine the period of the compliance, there is no more obstacle for the court to decree
the rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts
referring to incidental circumstances of a gratuitous contract should be resolved in favor of
the least transmission of rights and interests. 10 Records are clear and facts are undisputed
that since the execution of the deed of donation up to the time of filing of the instant action,
petitioner has failed to comply with its obligation as donee. Petitioner has slept on its
obligation for an unreasonable length of time. Hence, it is only just and equitable now to
declare the subject donation already ineffective and, for all purposes, revoked so that
petitioner as donee should now return the donated property to the heirs of the donor,
private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is
REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is
accordingly MODIFIED. Consequently, petitioner is directed to reconvey to private
respondents Lot No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer
Certificate of Title No. T-3910-A within thirty (30) days from the finality of this judgment.
Costs against petitioner.
SO ORDERED.
G.R. No. 96053 March 3, 1993
JOSEFINA TAYAG, RICARDO GALICIA, TERESITA GALICIA, EVELYN GALICIA, JUAN GALICIA, JR.
and
RODRIGO
GALICIA,
petitioners,
vs.
COURT OF APPEALS and ALBRIGIDO LEYVA, respondents.
Facundo T. Bautista for petitioners.
Jesus T. Garcia for private respondent.

MELO, J.:

The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr., prior to his demise in
1979, and Celerina Labuguin, in favor of Albrigido Leyva involving the undivided one-half
portion of a piece of land situated at Poblacion, Guimba, Nueva Ecija for the sum of
P50,000.00 under the following terms:
1. The sum of PESOS: THREE THOUSAND (P3,000.00) is HEREBY
acknowledged to have been paid upon the execution of this
agreement;
2. The sum of PESOS: TEN THOUSAND (P10,000.00) shall be
paid within ten (10) days from and after the execution of this
agreement;
3. The sum of PESOS: TEN THOUSAND (P10,000.00) represents
the VENDORS' indebtedness with the Philippine Veterans Bank
which is hereby assumed by the VENDEE; and
4. The balance of PESOS: TWENTY SEVEN THOUSAND
(P27,000.00.) shall be paid within one (1) year from and after
the execution of this instrument. (p. 53, Rollo)
is the subject matter of the present litigation between the heirs of Juan Galicia, Sr. who
assert breach of the conditions as against private respondent's claim anchored on full
payment and compliance with the stipulations thereof.
The court of origin which tried the suit for specific performance filed by private respondent
on account of the herein petitioners' reluctance to abide by the covenant, ruled in favor of
the vendee (p. 64, Rollo) while respondent court practically agreed with the trial court except
as to the amount to be paid to petitioners and the refund to private respondent are
concerned (p. 46, Rollo).
There is no dispute that the sum of P3,000.00 listed as first installment was received by Juan
Galicia, Sr. According to petitioners, of the P10,000.00 to be paid within ten days from
execution of the instrument, only P9,707.00 was tendered to, and received by, them on
numerous occasions from May 29, 1975, up to November 3, 1979. Concerning private
respondent's assumption of the vendors' obligation to the Philippine Veterans Bank, the
vendee paid only the sum of P6,926.41 while the difference the indebtedness came from
Celerina Labuguin (p. 73, Rollo). Moreover, petitioners asserted that not a single centavo of
the P27,000.00 representing the remaining balance was paid to them. Because of the
apprehension that the heirs of Juan Galicia, Sr. are disavowing the contract inked by their
predecessor, private respondent filed the complaint for specific performance.
In addressing the issue of whether the conditions of the instrument were performed by
herein private respondent as vendee, the Honorable Godofredo Rilloraza, Presiding Judge of
Branch 31 of the Regional Trial Court, Third Judicial Region stationed at Guimba, Nueva Ecija,
decided to uphold private respondent's theory on the basis of constructive fulfillment under

Page | 32

Article 1186 and estoppel through acceptance of piecemeal payments in line with Article
1235 of the Civil Code.
Anent the P10,000.00 specified as second installment, the lower court counted against the
vendors the candid statement of Josefina Tayag who sat on the witness stand and made the
admission that the check issued as payment thereof was nonetheless paid on a staggered
basis when the check was dishonored (TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p. 66,
Rollo). Regarding the third condition, the trial court noted that plaintiff below paid more than
P6,000.00 to the Philippine Veterans Bank but Celerina Labuguin, the sister and co-vendor of
Juan Galicia, Sr. paid P3,778.77 which circumstance was construed to be a ploy under Article
1186 of the Civil Code that "prematurely prevented plaintiff from paying the installment
fully" and "for the purpose of withdrawing the title to the lot". The acceptance by petitioners
of the various payments even beyond the periods agreed upon, was perceived by the lower
court as tantamount to faithful performance of the obligation pursuant to Article 1235 of the
Civil Code. Furthermore, the trial court noted that private respondent consigned P18,520.00,
an amount sufficient to offset the remaining balance, leaving the sum of P1,315.00 to be
credited to private respondent.
On September 12, 1984, judgment was rendered:
1. Ordering the defendants heirs of Juan Galicia, to execute
the Deed of Sale of their undivided ONE HALF (1/2) portion of
Lot No. 1130, Guimba Cadastre, covered by TCT No. NT-120563,
in favor of plaintiff Albrigido Leyva, with an equal frontage
facing the national road upon finality of judgment; that, in their
default, the Clerk of Court II, is hereby ordered to execute the
deed of conveyance in line with the provisions of Section 10,
Rule 39 of the Rules of Court;
2. Ordering the defendants, heirs of Juan Galicia, jointly and
severally to pay attorney's fees of P6,000.00 and the further
sum of P3,000.00 for actual and compensatory damages;
3. Ordering Celerina Labuguin and the other defendants herein
to surrender to the Court the owner's duplicate of TCT No. NT120563, province of Nueva Ecija, for the use of plaintiff in
registering the portion, subject matter of the instant suit;
4. Ordering the withdrawal of the amount of P18,520.00 now
consigned with the Court, and the amount of P17,204.75 be
delivered to the heirs of Juan Galicia as payment of the balance
of the sale of the lot in question, the defendants herein after
deducting the amount of attorney's fees and damages awarded
to the plaintiff hereof and the delivery to the plaintiff of the
further sum of P1,315.25 excess or over payment and,
defendants to pay the cost of the suit. (p. 69, Rollo)

and following the appeal interposed with respondent court, Justice Dayrit with whom
Justices Purisima and Aldecoa, Jr. concurred, modified the fourth paragraph of the decretal
portion to read:
4. Ordering the withdrawal of the amount of P18,500.00 now
consigned with the Court, and that the amount of P16,870.52
be delivered to the heirs of Juan Galicia, Sr. as payment to the
unpaid balance of the sale, including the reimbursement of the
amount paid to Philippine Veterans Bank, minus the amount of
attorney's fees and damages awarded in favor of plaintiff. The
excess of P1,649.48 will be returned to plaintiff. The costs
against defendants. (p. 51, Rollo)
As to how the foregoing directive was arrived at, the appellate court declared:
With respect to the fourth condition stipulated in the contract,
the period indicated therein is deemed modified by the parties
when the heirs of Juan Galicia, Sr. accepted payments without
objection up to November 3, 1979. On the basis of receipts
presented by appellee commencing from August 8, 1975 up to
November 3, 1979, a total amount of P13,908.25 has been
paid, thereby leaving a balance of P13,091.75. Said unpaid
balance plus the amount reimbursable to appellant in the
amount of P3,778.77 will leave an unpaid total of P16,870.52.
Since appellee consigned in court the sum of P18,500.00, he is
entitled to get the excess of P1,629.48. Thus, when the heirs of
Juan Galicia, Sr. (obligees) accepted the performance, knowing
its incompleteness or irregularity and without expressing any
protest or objection, the obligation is deemed fully complied
with (Article 1235, Civil Code). (p. 50, Rollo)
Petitioners are of the impression that the decision appealed from, which agreed with the
conclusions of the trial court, is vulnerable to attack via the recourse before Us on the
principal supposition that the full consideration of the agreement to sell was not paid by
private respondent and, therefore, the contract must be rescinded.
The suggestion of petitioners that the covenant must be cancelled in the light of private
respondent's so-called breach seems to overlook petitioners' demeanor who, instead of
immediately filing the case precisely to rescind the instrument because of non-compliance,
allowed private respondent to effect numerous payments posterior to the grace periods
provided in the contract. This apathy of petitioners who even permitted private respondent
to take the initiative in filing the suit for specific performance against them, is akin to waiver
or abandonment of the right to rescind normally conferred by Article 1191 of the Civil Code.
As aptly observed by Justice Gutierrez, Jr. in Angeles vs. Calasanz (135 SCRA 323 [1985]; 4
Paras, Civil Code of the Philippines Annotated, Twelfth Ed. [1989], p. 203:

Page | 33

. . . We agree with the plaintiffs-appellees that when the


defendants-appellants, instead of availing of their alleged right
to rescind, have accepted and received delayed payments of
installments, though the plaintiffs-appellees have been in
arrears beyond the grace period mentioned in paragraph 6 of
the contract, the defendants-appellants have waived, and are
now estopped from exercising their alleged right of rescission . .
.
In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818; cited in 4
Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a similar opinion was
expressed to the effect that:
In a perfected contract of sale of land under an agreed schedule
of payments, while the parties may mutually oblige each other
to compel the specific performance of the monthly
amortization plan, and upon failure of the buyer to make the
payment, the seller has the right to ask for a rescission of the
contract under Art. 1191 of the Civil Code, this shall be deemed
waived by acceptance of posterior payments.
Both the trial and appellate courts were, therefore, correct in sustaining the claim of private
respondent anchored on estoppel or waiver by acceptance of delayed payments under
Article 1235 of the Civil Code in that:
When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any
protest or objection, the obligation is deemed fully complied
with.
considering that the heirs of Juan Galicia, Sr. accommodated private respondent by accepting
the latter's delayed payments not only beyond the grace periods but also during the
pendency of the case for specific performance (p. 27, Memorandum for petitioners; p. 166,
Rollo). Indeed, the right to rescind is not absolute and will not be granted where there has
been substantial compliance by partial payments (4 Caguioa, Comments and Cases on Civil
Law, First Ed. [1968] p. 132). By and large, petitioners' actuation is susceptible of but one
construction that they are now estopped from reneging from their commitment on
account of acceptance of benefits arising from overdue accounts of private respondent.
Now, as to the issue of whether payments had in fact been made, there is no doubt that the
second installment was actually paid to the heirs of Juan Galicia, Sr. due to Josefina Tayag's
admission in judicio that the sum of P10,000.00 was fully liquidated. It is thus erroneous for
petitioners to suppose that "the evidence in the records do not support this conclusion" (p.
18, Memorandum for Petitioners; p. 157, Rollo). A contrario, when the court of origin, as well
as the appellate court, emphasized the frank representation along this line of Josefina Tayag
before the trial court (TSN, September l, 1983, pp. 3-4; p. 5, Decision in CA-G.R. CV No.
13339, p. 50, Rollo; p. 3, Decision in Civil Case No. 681-G, p. 66, Rollo), petitioners chose to

remain completely mute even at this stage despite the opportunity accorded to them, for
clarification. Consequently, the prejudicial aftermath of Josefina Tayag's spontaneous
reaction may no longer be obliterated on the basis of estoppel (Article 1431, Civil Code;
Section 4, Rule 129; Section 2(a), Rule 131, Revised Rules on Evidence).
Insofar as the third item of the contract is concerned, it may be recalled that respondent
court applied Article 1186 of the Civil Code on constructive fulfillment which petitioners
claim should not have been appreciated because they are the obligees while the proviso in
point speaks of the obligor. But, petitioners must concede that in a reciprocal obligation like
a contract of purchase, (Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p.
201), both parties are mutually obligors and also obligees (4 Padilla, supra, at p. 197), and
any of the contracting parties may, upon non-fulfillment by the other privy of his part of the
prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code). In short, it is
puerile for petitioners to say that they are the only obligees under the contract since they are
also bound as obligors to respect the stipulation in permitting private respondent to assume
the loan with the Philippine Veterans Bank which petitioners impeded when they paid the
balance of said loan. As vendors, they are supposed to execute the final deed of sale upon
full payment of the balance as determined hereafter.
Lastly, petitioners argue that there was no valid tender of payment nor consignation of the
sum of P18,520.00 which they acknowledge to have been deposited in court on January 22,
1981 five years after the amount of P27,000.00 had to be paid (p. 23, Memorandum for
Petitioners; p. 162, Rollo). Again this suggestion ignores the fact that consignation alone
produced the effect of payment in the case at bar because it was established below that two
or more heirs of Juan Galicia, Sr. claimed the same right to collect (Article 1256, (4), Civil
Code; pp. 4-5, Decision in Civil Case No. 681-G; pp. 67-68, Rollo). Moreover, petitioners did
not bother to refute the evidence on hand that, aside from the P18,520.00 (not P18,500.00
as computed by respondent court) which was consigned, private respondent also paid the
sum of P13,908.25 (Exhibits "F" to "CC"; p. 50, Rollo). These two figures representing private
respondent's payment of the fourth condition amount to P32,428.25, less the P3,778.77 paid
by petitioners to the bank, will lead us to the sum of P28,649.48 or a refund of P1,649.48 to
private respondent as overpayment of the P27,000.00 balance.
WHEREFORE, the petition is hereby DISMISSED and the decision appealed from is hereby
AFFIRMED with the slight modification of Paragraph 4 of the dispositive thereof which is thus
amended to read:
4. ordering the withdrawal of the sum of P18,520.00 consigned
with the Regional Trial Court, and that the amount of
P16,870.52 be delivered by private respondent with legal rate
of interest until fully paid to the heirs of Juan Galicia, Sr. as
balance of the sale including reimbursement of the sum paid to
the Philippine Veterans Bank, minus the attorney's fees and
damages awarded in favor of private respondent. The excess of
P1,649.48 shall be returned to private respondent also with
legal interest until fully paid by petitioners. With costs against
petitioners.

Page | 34

SO ORDERED.
G.R. No. 139523

May 26, 2005

SPS.
FELIPE
AND
LETICIA
CANNU,
petitioners,
vs.
SPS. GIL AND FERNANDINA GALANG AND NATIONAL HOME MORTGAGE FINANCE
CORPORATION, respondents.

March 13, 1991

15,000.007

April 6, 1991

15,000.008

November 28, 1991

5,000.009

Total

P75,000.00

Thus, leaving a balance of P45,000.00.


A Deed of Sale with Assumption of Mortgage Obligation10 dated 20 August 1990 was made
and entered into by and between spouses Fernandina and Gil Galang (vendors) and spouses
Leticia and Felipe Cannu (vendees) over the house and lot in question which contains, inter
alia, the following:

DECISION
CHICO-NAZARIO, J.:

NOW, THEREFORE, for and in consideration of the sum of TWO HUNDRED


FIFTY THOUSAND PESOS (P250,000.00), Philippine Currency, receipt of
which is hereby acknowledged by the Vendors and the assumption of the
mortgage obligation, the Vendors hereby sell, cede and transfer unto the
Vendees, their heirs, assigns and successor in interest the abovedescribed property together with the existing improvement thereon.

Before Us is a Petition for Review on Certiorari which seeks to set aside the decision1 of the
Court of Appeals dated 30 September 1998 which affirmed with modification the decision of
Branch 135 of the Regional Trial Court (RTC) of Makati City, dismissing the complaint for
Specific Performance and Damages filed by petitioners, and its Resolution 2 dated 22 July
1999 denying petitioners motion for reconsideration.
A complaint3 for Specific Performance and Damages was filed by petitioners-spouses Felipe
and Leticia Cannu against respondents-spouses Gil and Fernandina Galang and the National
Home Mortgage Finance Corporation (NHMFC) before Branch 135 of the RTC of Makati, on
24 June 1993. The case was docketed as Civil Case No. 93-2069.

It is a special condition of this contract that the Vendees shall assume and
continue with the payment of the amortization with the National Home
Mortgage Finance Corporation Inc. in the outstanding balance of
P_______________, as of __________ and shall comply with and abide
by the terms and conditions of the mortgage document dated Feb. 27,
1989 and identified as Doc. No. 82, Page 18, Book VII, S. of 1989 of
Notary Public for Quezon City Marites Sto. Tomas Alonzo, as if the
Vendees are the original signatories.

The facts that gave rise to the aforesaid complaint are as follows:
Respondents-spouses Gil and Fernandina Galang obtained a loan from Fortune Savings &
Loan Association for P173,800.00 to purchase a house and lot located at Pulang Lupa, Las
Pias, with an area of 150 square meters covered by Transfer Certificate of Title (TCT) No. T8505 in the names of respondents-spouses. To secure payment, a real estate mortgage was
constituted on the said house and lot in favor of Fortune Savings & Loan Association. In early
1990, NHMFC purchased the mortgage loan of respondents-spouses from Fortune Savings &
Loan Association for P173,800.00.

Petitioners immediately took possession and occupied the house and lot.
Petitioners made the following payments to the NHMFC:
Date

Amount

Receipt No.

July 9, 1990

P 14,312.47

D-50398611

March 12, 1991

8,000.00

D-72947812

Petitioner Leticia Cannu agreed to buy the property for P120,000.00 and to assume the
balance of the mortgage obligations with the NHMFC and with CERF Realty 5 (the Developer
of the property).

February 4, 1992

10,000.00

D-99912713

March 31, 1993

6,000.00

E-56374914

April 19, 1993

10,000.00

E-58243215

Of the P120,000.00, the following payments were made by petitioners:

April 27, 1993

7,000.00

E-61832616

Respondent Fernandina Galang authorized4 her attorney-in-fact, Adelina R. Timbang, to sell


the subject house and lot.

P 55,312.47
Date

Amount Paid

July 19, 1990

P40,000.006

Petitioners paid the "equity" or second mortgage to CERF Realty.17

Page | 35

Despite requests from Adelina R. Timbang and Fernandina Galang to pay the balance of
P45,000.00 or in the alternative to vacate the property in question, petitioners refused to do
so.
In a letter18 dated 29 March 1993, petitioner Leticia Cannu informed Mr. Fermin T. Arzaga,
Vice President, Fund Management Group of the NHMFC, that the ownership rights over the
land covered by TCT No. T-8505 in the names of respondents-spouses had been ceded and
transferred to her and her husband per Deed of Sale with Assumption of Mortgage, and that
they were obligated to assume the mortgage and pay the remaining unpaid loan balance.
Petitioners formal assumption of mortgage was not approved by the NHMFC.19
Because the Cannus failed to fully comply with their obligations, respondent Fernandina
Galang, on 21 May 1993, paid P233,957.64 as full payment of her remaining mortgage loan
with NHMFC.20
Petitioners opposed the release of TCT No. T-8505 in favor of respondents-spouses insisting
that the subject property had already been sold to them. Consequently, the NHMFC held in
abeyance the release of said TCT.
Thereupon, a Complaint for Specific Performance and Damages was filed asking, among
other things, that petitioners (plaintiffs therein) be declared the owners of the property
involved subject to reimbursements of the amount made by respondents-spouses
(defendants therein) in preterminating the mortgage loan with NHMFC.
Respondent NHMFC filed its Answer.21 It claimed that petitioners have no cause of action
against it because they have not submitted the formal requirements to be considered
assignees and successors-in-interest of the property under litigation.
In their Answer,22 respondents-spouses alleged that because of petitioners-spouses failure
to fully pay the consideration and to update the monthly amortizations with the NHMFC,
they paid in full the existing obligations with NHMFC as an initial step in the rescission and
annulment of the Deed of Sale with Assumption of Mortgage. In their counterclaim, they
maintain that the acts of petitioners in not fully complying with their obligations give rise to
rescission of the Deed of Sale with Assumption of Mortgage with the corresponding
damages.
After trial, the lower court rendered its decision ratiocinating:
On the basis of the evidence on record, testimonial and documentary,
this Court is of the view that plaintiffs have no cause of action either
against the spouses Galang or the NHMFC. Plaintiffs have admitted on
record they failed to pay the amount of P45,000.00 the balance due to
the Galangs in consideration of the Deed of Sale With Assumption of
Mortgage Obligation (Exhs. "C" and "3"). Consequently, this is a breach of
contract and evidently a failure to comply with obligation arising from
contracts. . . In this case, NHMFC has not been duly informed due to lack

of formal requirements to acknowledge plaintiffs as legal assignees, or


legitimate tranferees and, therefore, successors-in-interest to the
property, plaintiffs should have no legal personality to claim any right to
the same property.23
The decretal portion of the decision reads:
Premises considered, the foregoing complaint has not been proven even
by preponderance of evidence, and, as such, plaintiffs have no cause of
action against the defendants herein. The above-entitled case is ordered
dismissed for lack of merit.
Judgment is hereby rendered by way of counterclaim, in favor of
defendants and against plaintiffs, to wit:
1. Ordering the Deed of Sale With Assumption of Mortgage Obligation
(Exhs. "C" and "3") rescinded and hereby declared the same as nullified
without prejudice for defendants-spouses Galang to return the partial
payments made by plaintiffs; and the plaintiffs are ordered, on the other
hand, to return the physical and legal possession of the subject property
to spouses Galang by way of mutual restitution;
2. To pay defendants spouses Galang and NHMFC, each the amount of
P10,000.00 as litigation expenses, jointly and severally;
3. To pay attorneys fees to defendants in the amount of P20,000.00,
jointly and severally; and
4. The costs of suit.
5. No moral and exemplary damages awarded.24
A Motion for Reconsideration25 was filed, but same was denied. Petitioners appealed the
decision of the RTC to the Court of Appeals. On 30 September 1998, the Court of Appeals
disposed of the appeal as follows:
Obligations arising from contract have the force of law between the
contracting parties and should be complied in good faith. The terms of a
written contract are binding on the parties thereto.
Plaintiffs-appellants therefore are under obligation to pay defendantsappellees spouses Galang the sum of P250,000.00, and to assume the
mortgage.

Page | 36

Records show that upon the execution of the Contract of Sale or on July
19, 1990 plaintiffs-appellants paid defendants-appellees spouses Galang
the amount of only P40,000.00.
The next payment was made by plaintiffs-appellants on March 13, 1991
or eight (8) months after the execution of the contract. Plaintiffsappellants paid the amount of P5,000.00.
The next payment was made on April 6, 1991 for P15,000.00 and on
November 28, 1991, for another P15,000.00.

WHEREFORE, foregoing considered, the appealed decision is hereby


AFFIRMED with modification. Defendants-appellees spouses Galang are
hereby ordered to return the partial payments made by plaintiffappellants in the amount of P135,000.00.
No pronouncement as to cost.26
The motion for reconsideration27 filed by petitioners was denied by the Court of Appeals in a
Resolution28 dated 22 July 1999.
Hence, this Petition for Certiorari.

From 1991 until the present, no other payments were made by plaintiffsappellants to defendants-appellees spouses Galang.
Out of the P250,000.00 purchase price which was supposed to be paid on
the day of the execution of contract in July, 1990 plaintiffs-appellants
have paid, in the span of eight (8) years, from 1990 to present, the
amount of only P75,000.00. Plaintiffs-appellants should have paid the
P250,000.00 at the time of the execution of contract in 1990. Eight (8)
years have already lapsed and plaintiffs-appellants have not yet complied
with their obligation.
We consider this breach to be substantial.
The tender made by plaintiffs-appellants after the filing of this case, of
the Managerial Check in the amount of P278,957.00 dated January 24,
1994 cannot be considered as an effective mode of payment.
Performance or payment may be effected not by tender of payment
alone but by both tender and consignation. It is consignation which is
essential in order to extinguish plaintiffs-appellants obligation to pay the
balance of the purchase price.
In addition, plaintiffs-appellants failed to comply with their obligation to
pay the monthly amortizations due on the mortgage.
In the span of three (3) years from 1990 to 1993, plaintiffs-appellants
made only six payments. The payments made by plaintiffs-appellants are
not even sufficient to answer for the arrearages, interests and penalty
charges.
On account of these circumstances, the rescission of the Contract of Sale
is warranted and justified.
...

Petitioners raise the following assignment of errors:


1. THE HONORABLE COURT OF APPEALS ERRED WHEN IT HELD THAT
PETITIONERS BREACH OF THE OBLIGATION WAS SUBSTANTIAL.
2. THE HONORABLE COURT OF APPEALS ERRED WHEN IN EFFECT IT HELD
THAT THERE WAS NO SUBSTANTIAL COMPLIANCE WITH THE OBLIGATION
TO PAY THE MONTHLY AMORTIZATION WITH NHMFC.
3. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO
CONSIDER THE OTHER FACTS AND CIRCUMSTANCES THAT MILITATE
AGAINST RESCISSION.
4. THE HONORABLE COURT OF APPEALS ERRED WHEN IT FAILED TO
CONSIDER THAT THE ACTION FOR RESCISSION IS SUBSIDIARY.29
Before discussing the errors allegedly committed by the Court of Appeals, it must be stated a
priori that the latter made a misappreciation of evidence regarding the consideration of the
property in litigation when it relied solely on the Deed of Sale with Assumption of Mortgage
executed by the respondents-spouses Galang and petitioners-spouses Cannu.
As above-quoted, the consideration for the house and lot stated in the Deed of Sale with
Assumption of Mortgage is P250,000.00, plus the assumption of the balance of the mortgage
loan with NHMFC. However, after going over the record of the case, more particularly the
Answer of respondents-spouses, the evidence shows the consideration therefor is
P120,000.00, plus the payment of the outstanding loan mortgage with NHMFC, and of the
"equity" or second mortgage with CERF Realty (Developer of the property).30
Nowhere in the complaint and answer of the petitioners-spouses Cannu and respondentsspouses Galang shows that the consideration is "P250,000.00." In fact, what is clear is that of
the P120,000.00 to be paid to the latter, only P75,000.00 was paid to Adelina Timbang, the
spouses Galangs attorney-in-fact. This debunks the provision in the Deed of Sale with
Assumption of Mortgage that the amount of P250,000.00 has been received by petitioners.

Page | 37

Inasmuch as the Deed of Sale with Assumption of Mortgage failed to express the true intent
and agreement of the parties regarding its consideration, the same should not be fully relied
upon. The foregoing facts lead us to hold that the case on hand falls within one of the
recognized exceptions to the parole evidence rule. Under the Rules of Court, a party may
present evidence to modify, explain or add to the terms of the written agreement if he puts
in issue in his pleading, among others, its failure to express the true intent and agreement of
the parties thereto.31
In the case at bar, when respondents-spouses enumerated in their Answer the terms and
conditions for the sale of the property under litigation, which is different from that stated in
the Deed of Sale with Assumption with Mortgage, they already put in issue the matter of
consideration. Since there is a difference as to what the true consideration is, this Court has
admitted evidence aliunde to explain such inconsistency. Thus, the Court has looked into the
pleadings and testimonies of the parties to thresh out the discrepancy and to clarify the
intent of the parties.
As regards the computation32 of petitioners as to the breakdown of the P250,000.00
consideration, we find the same to be self-serving and unsupported by evidence.
On the first assigned error, petitioners argue that the Court erred when it ruled that their
breach of the obligation was substantial.
Settled is the rule that rescission or, more accurately, resolution,33 of a party to an obligation
under Article 119134 is predicated on a breach of faith by the other party that violates the
reciprocity between them.35 Article 1191 reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
Rescission will not be permitted for a slight or casual breach of the contract. Rescission may
be had only for such breaches that are substantial and fundamental as to defeat the object of
the parties in making the agreement.36 The question of whether a breach of contract is
substantial depends upon the attending circumstances37 and not merely on the percentage
of the amount not paid.
In the case at bar, we find petitioners failure to pay the remaining balance of P45,000.00 to
be substantial. Even assuming arguendo that only said amount was left out of the supposed

consideration of P250,000.00, or eighteen (18%) percent thereof, this percentage is still


substantial. Taken together with the fact that the last payment made was on 28 November
1991, eighteen months before the respondent Fernandina Galang paid the outstanding
balance of the mortgage loan with NHMFC, the intention of petitioners to renege on their
obligation is utterly clear.
Citing Massive Construction, Inc. v. Intermediate Appellate Court,38 petitioners ask that they
be granted additional time to complete their obligation. Under the facts of the case, to give
petitioners additional time to comply with their obligation will be putting premium on their
blatant non-compliance of their obligation. They had all the time to do what was required of
them (i.e., pay the P45,000.00 balance and to properly assume the mortgage loan with the
NHMFC), but still they failed to comply. Despite demands for them to pay the balance, no
payments were made.39
The fact that petitioners tendered a Managers Check to respondents-spouses Galang in the
amount of P278,957.00 seven months after the filing of this case is of no moment. Tender of
payment does not by itself produce legal payment, unless it is completed by consignation. 40
Their failure to fulfill their obligation gave the respondents-spouses Galang the right to
rescission.
Anent the second assigned error, we find that petitioners were not religious in paying the
amortization with the NHMFC. As admitted by them, in the span of three years from 1990 to
1993, their payments covered only thirty months.41 This, indeed, constitutes another breach
or violation of the Deed of Sale with Assumption of Mortgage. On top of this, there was no
formal assumption of the mortgage obligation with NHMFC because of the lack of approval
by the NHMFC42 on account of petitioners non-submission of requirements in order to be
considered as assignees/successors-in-interest over the property covered by the mortgage
obligation.43
On the third assigned error, petitioners claim there was no clear evidence to show that
respondents-spouses Galang demanded from them a strict and/or faithful compliance of the
Deed of Sale with Assumption of Mortgage.
We do not agree.
There is sufficient evidence showing that demands were made from petitioners to comply
with their obligation. Adelina R. Timbang, attorney-in-fact of respondents-spouses, per
instruction of respondent Fernandina Galang, made constant follow-ups after the last
payment made on 28 November 1991, but petitioners did not pay.44 Respondent Fernandina
Galang stated in her Answer45 that upon her arrival from America in October 1992, she
demanded from petitioners the complete compliance of their obligation by paying the full
amount of the consideration (P120,000.00) or in the alternative to vacate the property in
question, but still, petitioners refused to fulfill their obligations under the Deed of Sale with
Assumption of Mortgage. Sometime in March 1993, due to the fact that full payment has not
been paid and that the monthly amortizations with the NHMFC have not been fully updated,
she made her intentions clear with petitioner Leticia Cannu that she will rescind or annul the
Deed of Sale with Assumption of Mortgage.

Page | 38

We likewise rule that there was no waiver on the part of petitioners to demand the rescission
of the Deed of Sale with Assumption of Mortgage. The fact that respondents-spouses
accepted, through their attorney-in-fact, payments in installments does not constitute waiver
on their part to exercise their right to rescind the Deed of Sale with Assumption of Mortgage.
Adelina Timbang merely accepted the installment payments as an accommodation to
petitioners since they kept on promising they would pay. However, after the lapse of
considerable time (18 months from last payment) and the purchase price was not yet fully
paid, respondents-spouses exercised their right of rescission when they paid the outstanding
balance of the mortgage loan with NHMFC. It was only after petitioners stopped paying that
respondents-spouses moved to exercise their right of rescission.
Petitioners cite the case of Angeles v. Calasanz46 to support their claim that respondentsspouses waived their right to rescind. We cannot apply this case since it is not on all fours
with the case before us. First, in Angeles, the breach was only slight and casual which is not
true in the case before us. Second, in Angeles, the buyer had already paid more than the
principal obligation, while in the instant case, the buyers (petitioners) did not pay P45,000.00
of the P120,000.00 they were obligated to pay.
We find petitioners statement that there is no evidence of prejudice or damage to justify
rescission in favor of respondents-spouses to be unfounded. The damage suffered by
respondents-spouses is the effect of petitioners failure to fully comply with their obligation,
that is, their failure to pay the remaining P45,000.00 and to update the amortizations on the
mortgage loan with the NHMFC. Petitioners have in their possession the property under
litigation. Having parted with their house and lot, respondents-spouses should be fully
compensated for it, not only monetarily, but also as to the terms and conditions agreed upon
by the parties. This did not happen in the case before us.
Citing Seva v. Berwin & Co., Inc.,47 petitioners argue that no rescission should be decreed
because there is no evidence on record that respondent Fernandina Galang is ready, willing
and able to comply with her own obligation to restore to them the total payments they
made. They added that no allegation to that effect is contained in respondents-spouses
Answer.
We find this argument to be misleading.
First, the facts obtaining in Seva case do not fall squarely with the case on hand. In the
former, the failure of one party to perform his obligation was the fault of the other party,
while in the case on hand, failure on the part of petitioners to perform their obligation was
due to their own fault.
Second, what is stated in the book of Justice Edgardo L. Paras is "[i]t (referring to the right to
rescind or resolve) can be demanded only if the plaintiff is ready, willing and able to comply
with his own obligation, and the other is not." In other words, if one party has complied or
fulfilled his obligation, and the other has not, then the former can exercise his right to
rescind. In this case, respondents-spouses complied with their obligation when they gave the
possession of the property in question to petitioners. Thus, they have the right to ask for the
rescission of the Deed of Sale with Assumption of Mortgage.

On the fourth assigned error, petitioners, relying on Article 1383 of the Civil Code, maintain
that the Court of Appeals erred when it failed to consider that the action for rescission is
subsidiary.
Their reliance on Article 1383 is misplaced.
The subsidiary character of the action for rescission applies to contracts enumerated in
Articles 138148 of the Civil Code. The contract involved in the case before us is not one of
those mentioned therein. The provision that applies in the case at bar is Article 1191.
In the concurring opinion of Justice Jose B.L. Reyes in Universal Food Corp. v. Court of
Appeals,49 rescission under Article 1191 was distinguished from rescission under Article 1381.
Justice J.B.L. Reyes said:
. . . The rescission on account of breach of stipulations is not predicated
on injury to economic interests of the party plaintiff but on the breach of
faith by the defendant, that violates the reciprocity between the parties.
It is not a subsidiary action, and Article 1191 may be scanned without
disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his
obligations by the defendant. This rescission is a principal action
retaliatory in character, it being unjust that a party be held bound to
fulfill his promises when the other violates his. As expressed in the old
Latin aphorism: "Non servanti fidem, non est fides servanda." Hence, the
reparation of damages for the breach is purely secondary.
On the contrary, in the rescission by reason of lesion or economic
prejudice, the cause of action is subordinated to the existence of that
prejudice, because it is the raison d tre as well as the measure of the
right to rescind. Hence, where the defendant makes good the damages
caused, the action cannot be maintained or continued, as expressly
provided in Articles 1383 and 1384. But the operation of these two
articles is limited to the cases of rescission for lesion enumerated in
Article 1381 of the Civil Code of the Philippines, and does not apply to
cases under Article 1191.
From the foregoing, it is clear that rescission ("resolution" in the Old Civil Code) under Article
1191 is a principal action, while rescission under Article 1383 is a subsidiary action. The
former is based on breach by the other party that violates the reciprocity between the
parties, while the latter is not.
In the case at bar, the reciprocity between the parties was violated when petitioners failed to
fully pay the balance of P45,000.00 to respondents-spouses and their failure to update their
amortizations with the NHMFC.

Page | 39

Petitioners maintain that inasmuch as respondents-spouses Galang were not granted the
right to unilaterally rescind the sale under the Deed of Sale with Assumption of Mortgage,
they should have first asked the court for the rescission thereof before they fully paid the
outstanding balance of the mortgage loan with the NHMFC. They claim that such payment is
a unilateral act of rescission which violates existing jurisprudence.

WHEREFORE, premises considered, the decision of the Court of Appeals is hereby AFFIRMED
with MODIFICATION. Spouses Gil and Fernandina Galang are hereby ordered to return the
partial payments made by petitioners in the amount of P165,312.47. With costs.

In Tan v. Court of Appeals,50 this court said:

G.R. No. 147695

. . . [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
is clear from a reading of the Civil Code provisions. 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 partys own
judgment that the other has committed a breach of the obligation.
Where there is nothing in the contract empowering the petitioner to
rescind it without resort to the courts, the petitioners action in
unilaterally terminating the contract in this case is unjustified.
It is evident that the contract under consideration does not contain a provision authorizing
its extrajudicial rescission in case one of the parties fails to comply with what is incumbent
upon him. This being the case, respondents-spouses should have asked for judicial
intervention to obtain a judicial declaration of rescission. Be that as it may, and considering
that respondents-spouses Answer (with affirmative defenses) with Counterclaim seeks for
the rescission of the Deed of Sale with Assumption of Mortgage, it behooves the court to
settle the matter once and for all than to have the case re-litigated again on an issue already
heard on the merits and which this court has already taken cognizance of. Having found that
petitioners seriously breached the contract, we, therefore, declare the same is rescinded in
favor of respondents-spouses.
As a consequence of the rescission or, more accurately, resolution of the Deed of Sale with
Assumption of Mortgage, it is the duty of the court to require the parties to surrender
whatever they may have received from the other. The parties should be restored to their
original situation.51
The record shows petitioners paid respondents-spouses the amount of P75,000.00 out of the
P120,000.00 agreed upon. They also made payments to NHMFC amounting to P55,312.47. As
to the petitioners alleged payment to CERF Realty of P46,616.70, except for petitioner
Leticia Cannus bare allegation, we find the same not to be supported by competent
evidence. As a general rule, one who pleads payment has the burden of proving it.52
However, since it has been admitted in respondents-spouses Answer that petitioners shall
assume the second mortgage with CERF Realty in the amount of P35,000.00, and that
Adelina Timbang, respondents-spouses very own witness, testified53 that same has been
paid, it is but proper to return this amount to petitioners. The three amounts total
P165,312.47 -- the sum to be returned to petitioners.

SO ORDERED.
September 13, 2007

MANUEL
C.
PAGTALUNAN,
vs.
RUFINA DELA CRUZ VDA. DE MANZANO, respondent.

petitioner,

DECISION
AZCUNA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court of the Court of
Appeals (CA) Decision promulgated on October 30, 2000 and its Resolution dated March 23,
2001 denying petitioners motion for reconsideration. The Decision of the CA affirmed the
Decision of the Regional Trial Court (RTC) of Malolos, Bulacan, dated June 25, 1999 dismissing
the case of unlawful detainer for lack of merit.
The facts are as follows:
On July 19, 1974, Patricio Pagtalunan (Patricio), petitioners stepfather and predecessor-ininterest, entered into a Contract to Sell with respondent, wife of Patricios former mechanic,
Teodoro Manzano, whereby the former agreed to sell, and the latter to buy, a house and lot
which formed half of a parcel of land, covered by Transfer Certificate of Title (TCT) No. T10029 (now TCT No. RT59929 [T-254773]), with an area of 236 square meters. The
consideration of P17,800 was agreed to be paid in the following manner: P1,500 as
downpayment upon execution of the Contract to Sell, and the balance to be paid in equal
monthly installments of P150 on or before the last day of each month until fully paid.
It was also stipulated in the contract that respondent could immediately occupy the house
and lot; that in case of default in the payment of any of the installments for 90 days after its
due date, the contract would be automatically rescinded without need of judicial declaration,
and that all payments made and all improvements done on the premises by respondent
would be considered as rentals for the use and occupation of the property or payment for
damages suffered, and respondent was obliged to peacefully vacate the premises and deliver
the possession thereof to the vendor.
Petitioner claimed that respondent paid only P12,950. She allegedly stopped paying after
December 1979 without any justification or explanation. Moreover, in a "Kasunduan"1 dated
November 18, 1979, respondent borrowed P3,000 from Patricio payable in one year either in
one lump sum payment or by installments, failing which the balance of the loan would be
added to the principal subject of the monthly amortizations on the land.

Page | 40

Lastly, petitioner asserted that when respondent ceased paying her installments, her status
of buyer was automatically transformed to that of a lessee. Therefore, she continued to
possess the property by mere tolerance of Patricio and, subsequently, of petitioner.

9, 1980 (Exh. 71). Thereafter, respondents right of possession ipso facto ceased to be a legal
right, and became possession by mere tolerance of Patricio and his successors-in-interest.
Said tolerance ceased upon demand on respondent to vacate the property.

On the other hand, respondent alleged that she paid her monthly installments religiously,
until sometime in 1980 when Patricio changed his mind and offered to refund all her
payments provided she would surrender the house. She refused. Patricio then started
harassing her and began demolishing the house portion by portion. Respondent admitted
that she failed to pay some installments after December 1979, but that she resumed paying
in 1980 until her balance dwindled to P5,650. She claimed that despite several months of
delay in payment, Patricio never sued for ejectment and even accepted her late payments.

The dispositive portion of the MTC Decision reads:

Respondent also averred that on September 14, 1981, she and Patricio signed an agreement
(Exh. 2) whereby he consented to the suspension of respondents monthly payments until
December 1981. However, even before the lapse of said period, Patricio resumed
demolishing respondents house, prompting her to lodge a complaint with the Barangay
Captain who advised her that she could continue suspending payment even beyond
December 31, 1981 until Patricio returned all the materials he took from her house. This
Patricio failed to do until his death.
Respondent did not deny that she still owed Patricio P5,650, but claimed that she did not
resume paying her monthly installment because of the unlawful acts committed by Patricio,
as well as the filing of the ejectment case against her. She denied having any knowledge of
the Kasunduan of November 18, 1979.
Patricio and his wife died on September 17, 1992 and on October 17, 1994, respectively.
Petitioner became their sole successor-in-interest pursuant to a waiver by the other heirs. On
March 5, 1997, respondent received a letter from petitioners counsel dated February 24,
1997 demanding that she vacate the premises within five days on the ground that her
possession had become unlawful. Respondent ignored the demand. The Punong Barangay
failed to settle the dispute amicably.
On April 8, 1997, petitioner filed a Complaint for unlawful detainer against respondent with
the Municipal Trial Court (MTC) of Guiguinto, Bulacan praying that, after hearing, judgment
be rendered ordering respondent to immediately vacate the subject property and surrender
it to petitioner; forfeiting the amount of P12,950 in favor of petitioner as rentals; ordering
respondent to pay petitioner the amount of P3,000 under the Kasunduan and the amount of
P500 per month from January 1980 until she vacates the property, and to pay petitioner
attorneys fees and the costs.
On December 22, 1998, the MTC rendered a decision in favor of petitioner. It stated that
although the Contract to Sell provides for a rescission of the agreement upon failure of the
vendee to pay any installment, what the contract actually allows is properly termed a
resolution under Art. 1191 of the Civil Code.
The MTC held that respondents failure to pay not a few installments caused the resolution
or termination of the Contract to Sell. The last payment made by respondent was on January

Wherefore, all the foregoing considered, judgment is hereby rendered,


ordering the defendant:
a. to vacate the property covered by Transfer Certificate of Title
No. T-10029 of the Register of Deeds of Bulacan (now TCT No.
RT-59929 of the Register of Deeds of Bulacan), and to surrender
possession thereof to the plaintiff;
b. to pay the plaintiff the amount of P113,500 representing
rentals from January 1980 to the present;
c. to pay the plaintiff such amount of rentals, at P500/month,
that may become due after the date of judgment, until she
finally vacates the subject property;
d. to pay to the plaintiff the amount of P25,000 as attorneys
fees.
SO ORDERED.2
On appeal, the RTC of Malolos, Bulacan, in a Decision dated June 25, 1999, reversed the
decision of the MTC and dismissed the case for lack of merit. According to the RTC, the
agreement could not be automatically rescinded since there was delivery to the buyer. A
judicial determination of rescission must be secured by petitioner as a condition precedent
to convert the possession de facto of respondent from lawful to unlawful.
The dispositive portion of the RTC Decision states:
WHEREFORE, judgment is hereby rendered reversing the decision of the
Municipal Trial Court of Guiguinto, Bulacan and the ejectment case
instead be dismissed for lack of merit.3
The motion for reconsideration and motion for execution filed by petitioner were denied by
the RTC for lack of merit in an Order dated August 10, 1999.
Thereafter, petitioner filed a petition for review with the CA.
In a Decision promulgated on October 30, 2000, the CA denied the petition and affirmed the
Decision of the RTC. The dispositive portion of the Decision reads:

Page | 41

WHEREFORE, the petition for review on certiorari is Denied. The assailed


Decision of the Regional Trial Court of Malolos, Bulacan dated 25 June
1999 and its Order dated 10 August 1999 are hereby AFFIRMED.
SO ORDERED. 4
The CA found that the parties, as well as the MTC and RTC failed to advert to and to apply
Republic Act (R.A.) No. 6552, more commonly referred to as the Maceda Law, which is a
special law enacted in 1972 to protect buyers of real estate on installment payments against
onerous and oppressive conditions.
The CA held that the Contract to Sell was not validly cancelled or rescinded under Sec. 3 (b)
of R.A. No. 6552, and recognized respondents right to continue occupying unmolested the
property subject of the contract to sell.
The CA denied petitioners motion for reconsideration in a Resolution dated March 23, 2001.
Hence, this petition for review on certiorari.
Petitioner contends that:
A. Respondent Dela Cruz must bear the consequences of her deliberate
withholding of, and refusal to pay, the monthly payment. The Court of
Appeals erred in allowing Dela Cruz who acted in bad faith from
benefiting under the Maceda Law.
B. The Court of Appeals erred in resolving the issue on the applicability of
the Maceda Law, which issue was not raised in the proceedings a quo.

There is nothing in the Maceda Law, petitioner asserts, which gives the buyer a right to pay
arrearages after the grace periods have lapsed, in the event of an invalid demand for
rescission. The Maceda Law only provides that actual cancellation shall take place after 30
days from receipt of the notice of cancellation or demand for rescission and upon full
payment of the cash surrender value to the buyer.
Petitioner contends that his demand letter dated February 24, 1997 should be considered
the notice of cancellation since the demand letter informed respondent that she had "long
ceased to have any right to possess the premises in question due to [her] failure to pay
without justifiable cause." In support of his contention, he cited Layug v. Intermediate
Appellate Court8 which held that "the additional formality of a demand on [the sellers] part
for rescission by notarial act would appear, in the premises, to be merely circuitous and
consequently superfluous." He stated that in Layug, the seller already made a written
demand upon the buyer.
In addition, petitioner asserts that whatever cash surrender value respondent is entitled to
have been applied and must be applied to rentals for her use of the house and lot after
December, 1979 or after she stopped payment of her installments.
Petitioner argues that assuming Patricio accepted respondents delayed installments in 1981,
such act cannot prevent the cancellation of the Contract to Sell. Installments after 1981 were
still unpaid and the applicable grace periods under the Maceda Law on the unpaid
installments have long lapsed. Respondent cannot be allowed to hide behind the Maceda
Law. She acted with bad faith and must bear the consequences of her deliberate withholding
of and refusal to make the monthly payments.
Petitioner also contends that the applicability of the Maceda Law was never raised in the
proceedings below; hence, it should not have been applied by the CA in resolving the case.
The Court is not persuaded.

C. Assuming arguendo that the RTC was correct in ruling that the MTC
has no jurisdiction over a rescission case, the Court of Appeals erred in
not remanding the case to the RTC for trial.5
Petitioner submits that the Maceda Law supports and recognizes the right of vendors of real
estate to cancel the sale outside of court, without need for a judicial declaration of
rescission, citing Luzon Brokerage Co., Inc., v. Maritime Building Co., Inc.6
Petitioner contends that respondent also had more than the grace periods provided under
the Maceda Law within which to pay. Under Sec. 3 7 of the said law, a buyer who has paid at
least two years of installments has a grace period of one month for every year of installment
paid. Based on the amount of P12,950 which respondent had already paid, she is entitled to
a grace period of six months within which to pay her unpaid installments after December,
1979. Respondent was given more than six months from January 1980 within which to settle
her unpaid installments, but she failed to do so. Petitioners demand to vacate was sent to
respondent in February 1997.

The CA correctly ruled that R.A No. 6552, which governs sales of real estate on installment, is
applicable in the resolution of this case.
This case originated as an action for unlawful detainer. Respondent is alleged to be illegally
withholding possession of the subject property after the termination of the Contract to Sell
between Patricio and respondent. It is, therefore, incumbent upon petitioner to prove that
the Contract to Sell had been cancelled in accordance with R.A. No. 6552.
The pertinent provision of R.A. No. 6552 reads:
Sec. 3. In all transactions or contracts involving the sale or financing of
real estate on installment payments, including residential condominium
apartments but excluding industrial lots, commercial buildings and sales
to tenants under Republic Act Numbered Thirty-eight hundred forty-four
as amended by Republic Act Numbered Sixty-three hundred eighty-nine,

Page | 42

where the buyer has paid at least two years of installments, the buyer is
entitled to the following rights in case he defaults in the payment of
succeeding installments:
(a) To pay, without additional interest, the unpaid installments due within
the total grace period earned by him, which is hereby fixed at the rate of
one month grace period for every one year of installment payments
made: Provided, That this right shall be exercised by the buyer only once
in every five years of the life of the contract and its extensions, if any.
(b) If the contract is cancelled, the seller shall refund to the buyer the
cash surrender value of the payments on the property equivalent to fifty
percent of the total payments made and, after five years of installments,
an additional five percent every year but not to exceed ninety percent of
the total payments made: Provided, That the actual cancellation of the
contract shall take place after thirty days from receipt by the buyer of
the notice of cancellation or the demand for rescission of the contract
by a notarial act and upon full payment of the cash surrender value to
the buyer.9
R.A. No. 6552, otherwise known as the "Realty Installment Buyer Protection Act," recognizes
in conditional sales of all kinds of real estate (industrial, commercial, residential) the right of
the seller to cancel the contract upon non-payment of an installment by the buyer, which is
simply an event that prevents the obligation of the vendor to convey title from acquiring
binding force.10 The Court agrees with petitioner that the cancellation of the Contract to Sell
may be done outside the court particularly when the buyer agrees to such cancellation.
However, the cancellation of the contract by the seller must be in accordance with Sec. 3 (b)
of R.A. No. 6552, which requires a notarial act of rescission and the refund to the buyer of
the full payment of the cash surrender value of the payments on the property. Actual
cancellation of the contract takes place after 30 days from receipt by the buyer of the notice
of cancellation or the demand for rescission of the contract by a notarial act and upon full
payment of the cash surrender value to the buyer.
Based on the records of the case, the Contract to Sell was not validly cancelled or rescinded
under Sec. 3 (b) of R.A. No. 6552.
First, Patricio, the vendor in the Contract to Sell, died on September 17, 1992 without
canceling the Contract to Sell.

cash surrender value of the payments on the property has been applied to rentals for the use
of the house and lot after respondent stopped payment after January 1980.
The Court, however, finds that the letter 11 dated February 24, 1997, which was written by
petitioners counsel, merely made formal demand upon respondent to vacate the premises
in question within five days from receipt thereof since she had "long ceased to have any right
to possess the premises x x x due to [her] failure to pay without justifiable cause the
installment payments x x x."
Clearly, the demand letter is not the same as the notice of cancellation or demand for
rescission by a notarial act required by R.A No. 6552. Petitioner cannot rely on Layug v.
Intermediate Appellate Court12 to support his contention that the demand letter was
sufficient compliance. Layug held that "the additional formality of a demand on [the sellers]
part for rescission by notarial act would appear, in the premises, to be merely circuitous and
consequently superfluous" since the seller therein filed an action for annulment of contract,
which is a kindred concept of rescission by notarial act.13 Evidently, the case of unlawful
detainer filed by petitioner does not exempt him from complying with the said requirement.
In addition, Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of the
payments on the property to the buyer before cancellation of the contract. The provision
does not provide a different requirement for contracts to sell which allow possession of the
property by the buyer upon execution of the contract like the instant case. Hence, petitioner
cannot insist on compliance with the requirement by assuming that the cash surrender value
payable to the buyer had been applied to rentals of the property after respondent failed to
pay the installments due.
There being no valid cancellation of the Contract to Sell, the CA correctly recognized
respondents right to continue occupying the property subject of the Contract to Sell and
affirmed the dismissal of the unlawful detainer case by the RTC.
The Court notes that this case has been pending for more than ten years. Both parties prayed
for other reliefs that are just and equitable under the premises. Hence, the rights of the
parties over the subject property shall be resolved to finally dispose of that issue in this case.
Considering that the Contract to Sell was not cancelled by the vendor, Patricio, during his
lifetime or by petitioner in accordance with R.A. No. 6552 when petitioner filed this case of
unlawful detainer after 22 years of continuous possession of the property by respondent
who has paid the substantial amount of P12,300 out of the purchase price of P17,800, the
Court agrees with the CA that it is only right and just to allow respondent to pay her arrears
and settle the balance of the purchase price.

Second, petitioner also failed to cancel the Contract to Sell in accordance with law.
Petitioner contends that he has complied with the requirements of cancellation under Sec. 3
(b) of R.A. No. 6552. He asserts that his demand letter dated February 24, 1997 should be
considered as the notice of cancellation or demand for rescission by notarial act and that the

For respondents delay in the payment of the installments, the Court, in its discretion, and
applying Article 220914 of the Civil Code, may award interest at the rate of 6% per annum15
on the unpaid balance considering that there is no stipulation in the Contract to Sell for such
interest. For purposes of computing the legal interest, the reckoning period should be the
filing of the complaint for unlawful detainer on April 8, 1997.

Page | 43

Based on respondents evidence16 of payments made, the MTC found that respondent paid a
total of P12,300 out of the purchase price of P17,800. Hence, respondent still has a balance
of P5,500, plus legal interest at the rate of 6% per annum on the unpaid balance starting April
8, 1997.
The third issue is disregarded since petitioner assails an inexistent ruling of the RTC on the
lack of jurisdiction of the MTC over a rescission case when the instant case he filed is for
unlawful detainer.
WHEREFORE, the Decision of the Court of Appeals dated October 30, 2000 sustaining the
dismissal of the unlawful detainer case by the RTC is AFFIRMED with the following
MODIFICATIONS:
1. Respondent Rufina Dela Cruz Vda. de Manzano shall pay petitioner
Manuel C. Pagtalunan the balance of the purchase price in the amount of
Five Thousand Five Hundred Pesos (P5,500) plus interest at 6% per
annum from April 8, 1997 up to the finality of this judgment, and
thereafter, at the rate of 12% per annum;
2. Upon payment, petitioner Manuel C. Pagtalunan shall execute a Deed
of Absolute Sale of the subject property and deliver the certificate of title
in favor of respondent Rufina Dela Cruz Vda. de Manzano; and
3. In case of failure to pay within 60 days from finality of this Decision,
respondent Rufina Dela Cruz Vda. de Manzano shall immediately vacate
the premises without need of further demand, and the downpayment
and installment payments of P12,300 paid by her shall constitute rental
for the subject property.

In this case, it is not disputed as in tact both parties agreed that the deed of sale shall only be
executed upon payment of the remaining balance of the purchase price. Thus, pursuant to
the above stated jurisprudence, we similarly declare that the transaction entered into by the
parties is a contract to sell.
Before us is a Petition for Review on Certiorari2 questioning the June 29, 2007 Decision3 and
the October 3, 2007 Resolution4 of the Court of Appeals (CA) in CA-G.R. CV No. 86512, which
affirmed the April 19, 2005 Decision5 of the Regional Trial Court (RTC), Branch 40, of Dagupan
City in Civil Case No. 99-02971-D.
Factual Antecedents
In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother Rodolfo, respondent herein,
entered into an oral contract to sell covering Nicolass share, fixed at P500,000.00, as coowner of the familys Diego Building situated in Dagupan City. Rodolfo made a downpayment
of P250,000.00. It was agreed that the deed of sale shall be executed upon payment of the
remaining balance of P250,000.00. However, Rodolfo failed to pay the remaining balance.
Meanwhile, the building was leased out to third parties, but Nicolass share in the rents were
not remitted to him by herein respondent Eduardo, another brother of Nicolas and
designated administrator of the Diego Building. Instead, Eduardo gave Nicolass monthly
share in the rents to Rodolfo. Despite demands and protestations by Nicolas, Rodolfo and
Eduardo failed to render an accounting and remit his share in the rents and fruits of the
building, and Eduardo continued to hand them over to Rodolfo.
Thus, on May 17, 1999, Nicolas filed a Complaint6 against Rodolfo and Eduardo before the
RTC of Dagupan City and docketed as Civil Case No. 99-02971-D. Nicolas prayed that Eduardo
be ordered to render an accounting of all the transactions over the Diego Building; that
Eduardo and Rodolfo be ordered to deliver to Nicolas his share in the rents; and that Eduardo
and Rodolfo be held solidarily liable for attorneys fees and litigation expenses.

No costs.
SO ORDERED.
G.R. No. 179965

is only a contract to sell. The aforecited stipulation shows that the vendors reserved title to
the subject property until full payment of the purchase price."

February 20, 2013

NICOLAS
P.
DIEGO,
RODOLFO P. DIEGO and EDUARDO P. DIEGO, Respondents.

Petitioner,

vs.

DEL CASTILLO, J.:


It is settled jurisprudence, to the point of being elementary, that an agreement which
stipulates that the seller shall execute a deed of sale only upon or after tl1ll payment of the
purchase price is a contract to sell, not a contract of sale. In Reyes v. Tuparan, 1 this Court
declared in categorical terms that "[w]here the vendor promises to execute a deed of
absolute sale upon the completion by the vendee of the payment of the price, the contract

Rodolfo and Eduardo filed their Answer with Counterclaim7 for damages and attorneys fees.
They argued that Nicolas had no more claim in the rents in the Diego Building since he had
already sold his share to Rodolfo. Rodolfo admitted having remitted only P250,000.00 to
Nicolas. He asserted that he would pay the balance of the purchase price to Nicolas only after
the latter shall have executed a deed of absolute sale.
Ruling of the Regional Trial Court
After trial on the merits, or on April 19, 2005, the trial court rendered its Decision 8 dismissing
Civil Case No. 99-02971-D for lack of merit and ordering Nicolas to execute a deed of
absolute sale in favor of Rodolfo upon payment by the latter of the P250,000.00 balance of
the agreed purchase price. It made the following interesting pronouncement:

Page | 44

It is undisputed that plaintiff (Nicolas) is one of the co-owners of the Diego Building, x x x. As
a co-owner, he is entitled to [his] share in the rentals of the said building. However, plaintiff
[had] already sold his share to defendant Rodolfo Diego in the amount of P500,000.00 and in
fact, [had] already received a partial payment in the purchase price in the amount of
P250,000.00. Defendant Eduardo Diego testified that as per agreement, verbal, of the
plaintiff and defendant Rodolfo Diego, the remaining balance of P250,000.00 will be paid
upon the execution of the Deed of Absolute Sale. It was in the year 1997 when plaintiff was
being required by defendant Eduardo Diego to sign the Deed of Absolute Sale. Clearly,
defendant Rodolfo Diego was not yet in default as the plaintiff claims which cause [sic] him
to refuse to sign [sic] document. The contract of sale was already perfected as early as the
year 1993 when plaintiff received the partial payment, hence, he cannot unilaterally revoke
or rescind the same. From then on, plaintiff has, therefore, ceased to be a co-owner of the
building and is no longer entitled to the fruits of the Diego Building.
Equity and fairness dictate that defendant [sic] has to execute the necessary document
regarding the sale of his share to defendant Rodolfo Diego. Correspondingly, defendant
Rodolfo Diego has to perform his obligation as per their verbal agreement by paying the
remaining balance of P250,000.00.9

Nicolas moved for reconsideration but the same was denied by the CA in its Resolution dated
October 3, 2007.
Hence, this Petition.
Issues
The Petition raises the following errors that must be rectified:
I
THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THERE WAS NO
PERFECTED CONTRACT OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND RESPONDENT
RODOLFO DIEGO OVER NICOLASS SHARE OF THE BUILDING BECAUSE THE SUSPENSIVE
CONDITION HAS NOT YET BEEN FULFILLED.
II

To summarize, the trial court ruled that as early as 1993, Nicolas was no longer entitled to
the fruits of his aliquot share in the Diego Building because he had "ceased to be a co-owner"
thereof. The trial court held that when Nicolas received the P250,000.00 downpayment, a
"contract of sale" was perfected. Consequently, Nicolas is obligated to convey such share to
Rodolfo, without right of rescission. Finally, the trial court held that the P250,000.00 balance
from Rodolfo will only be due and demandable when Nicolas executes an absolute deed of
sale.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT OF SALE
BETWEEN PETITIONER AND RESPONDENT RODOLFO DIEGO REMAINS LEGALLY BINDING AND
IS NOT RESCINDED GIVING MISPLACED RELIANCE ON PETITIONER NICOLAS STATEMENT
THAT THE SALE HAS NOT YET BEEN REVOKED.

Ruling of the Court of Appeals

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONER NICOLAS
DIEGO ACTED LEGALLY AND CORRECTLY WHEN HE UNILATERALLY RESCINDED AND REVOKED
HIS AGREEMENT OF SALE WITH RESPONDENT RODOLFO DIEGO CONSIDERING RODOLFOS
MATERIAL, SUBSTANTIAL BREACH OF THE CONTRACT.

Nicolas appealed to the CA which sustained the trial courts Decision in toto. The CA held that
since there was a perfected contract of sale between Nicolas and Rodolfo, the latter may
compel the former to execute the proper sale document. Besides, Nicolass insistence that he
has since rescinded their agreement in 1997 proved the existence of a perfected sale. It
added that Nicolas could not validly rescind the contract because: "1) Rodolfo ha[d] already
made a partial payment; 2) Nicolas ha[d] already partially performed his part regarding the
contract; and 3) Rodolfo opposes the rescission."10
The CA then proceeded to rule that since no period was stipulated within which Rodolfo shall
deliver the balance of the purchase price, it was incumbent upon Nicolas to have filed a civil
case to fix the same. But because he failed to do so, Rodolfo cannot be considered to be in
delay or default.

III

IV
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAS NO MORE
RIGHTS OVER HIS SHARE IN THE BUILDING, DESPITE THE FACT THAT THERE WAS AS YET NO
PERFECTED CONTRACT OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND RODOLFO DIEGO
AND THERE WAS YET NO TRANSFER OF OWNERSHIP OF PETITIONERS SHARE TO RODOLFO
DUE TO THE NON-FULFILLMENT BY RODOLFO OF THE SUSPENSIVE CONDITION UNDER THE
CONTRACT.
V

Finally, the CA made another interesting pronouncement, that by virtue of the agreement
Nicolas entered into with Rodolfo, he had already transferred his ownership over the subject
property and as a consequence, Rodolfo is legally entitled to collect the fruits thereof in the
form of rentals. Nicolas remaining right is to demand payment of the balance of the
purchase price, provided that he first executes a deed of absolute sale in favor of Rodolfo.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT RODOLFO
HAS UNJUSTLY ENRICHED HIMSELF AT THE EXPENSE OF PETITIONER BECAUSE DESPITE NOT
HAVING PAID THE BALANCE OF THE PURCHASE PRICE OF THE SALE, THAT RODOLFO HAS NOT
YET ACQUIRED OWNERSHIP OVER THE SHARE OF PETITIONER NICOLAS, HE HAS ALREADY

Page | 45

BEEN APPROPRIATING FOR HIMSELF AND FOR HIS PERSONAL BENEFIT THE SHARE OF THE
INCOME OF THE BUILDING AND THE PORTION OF THE BUILDING ITSELF WHICH WAS DUE TO
AND OWNED BY PETITIONER NICOLAS.

The Court finds merit in the Petition.

VI

a) The stipulation to execute a deed of sale upon full payment of the purchase price is a
unique and distinguishing characteristic of a contract to sell. It also shows that the vendor
reserved title to the property until full payment.

THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ACTUAL DAMAGES,


ATTORNEYS FEES AND LITIGATION EXPENSES TO THE PETITIONER DESPITE THE FACT THAT
PETITIONERS RIGHTS HAD BEEN WANTONLY VIOLATED BY THE RESPONDENTS. 11
Petitioners Arguments
In his Petition, the Supplement12 thereon, and Reply,13 Nicolas argues that, contrary to what
the CA found, there was no perfected contract of sale even though Rodolfo had partially paid
the price; that in the absence of the third element in a sale contract the price there could
be no perfected sale; that failing to pay the required price in full, Nicolas had the right to
rescind the agreement as an unpaid seller.
Nicolas likewise takes exception to the CA finding that Rodolfo was not in default or delay in
the payment of the agreed balance for his (Nicolass) failure to file a case to fix the period
within which payment of the balance should be made. He believes that Rodolfos failure to
pay within a reasonable time was a substantial and material breach of the agreement which
gave him the right to unilaterally and extrajudicially rescind the agreement and be discharged
of his obligations as seller; and that his repeated written demands upon Rodolfo to pay the
balance granted him such rights.
Nicolas further claims that based on his agreement with Rodolfo, there was to be no transfer
of title over his share in the building until Rodolfo has effected full payment of the purchase
price, thus, giving no right to the latter to collect his share in the rentals.
Finally, Nicolas bewails the CAs failure to award damages, attorneys fees and litigation
expenses for what he believes is a case of unjust enrichment at his expense.

The contract entered into by Nicolas and Rodolfo was a contract to sell.

There is no dispute that in 1993, Rodolfo agreed to buy Nicolass share in the Diego Building
for the price of P500,000.00. There is also no dispute that of the total purchase price, Rodolfo
paid, and Nicolas received, P250,000.00. Significantly, it is also not disputed that the parties
agreed that the remaining amount of P250,000.00 would be paid after Nicolas shall have
executed a deed of sale.
This stipulation, i.e., to execute a deed of absolute sale upon full payment of the purchase
price, is a unique and distinguishing characteristic of a contract to sell. In Reyes v. Tuparan,15
this Court ruled that a stipulation in the contract, "[w]here the vendor promises to execute
a deed of absolute sale upon the completion by the vendee of the payment of the price,"
indicates that the parties entered into a contract to sell. According to this Court, this
particular provision is tantamount to a reservation of ownership on the part of the vendor.
Explicitly stated, the Court ruled that the agreement to execute a deed of sale upon full
payment of the purchase price "shows that the vendors reserved title to the subject
property until full payment of the purchase price."16
In Tan v. Benolirao,17 this Court, speaking through Justice Brion, ruled that the parties
entered into a contract to sell as revealed by the following stipulation:
d) That in case, BUYER has complied with the terms and conditions of this contract, then the
SELLERS shall execute and deliver to the BUYER the appropriate Deed of Absolute Sale;18
The Court further held that "[j]urisprudence has established that where the seller promises
to execute a deed of absolute sale upon the completion by the buyer of the payment of the
price, the contract is only a contract to sell."19

Respondents Arguments
Apart from echoing the RTC and CA pronouncements, respondents accuse the petitioner of
"cheating" them, claiming that after the latter received the P250,000.00 downpayment, he
"vanished like thin air and hibernated in the USA, he being an American citizen,"14 only to
come back claiming that the said amount was a mere loan.
They add that the Petition is a mere rehash and reiteration of the petitioners arguments
below, which are deemed to have been sufficiently passed upon and debunked by the
appellate court.

b) The acknowledgement receipt signed by Nicolas as well as the contemporaneous acts of


the parties show that they agreed on a contract to sell, not of sale. The absence of a formal
deed of conveyance is indicative of a contract to sell.
In San Lorenzo Development Corporation v. Court of Appeals,20 the facts show that spouses
Miguel and Pacita Lu (Lu) sold a certain parcel of land to Pablo Babasanta (Pablo). After
several payments, Pablo wrote Lu demanding "the execution of a final deed of sale in his
favor so that he could effect full payment of the purchase price."21 To prove his allegation
that there was a perfected contract of sale between him and Lu, Pablo presented a receipt
signed by Lu acknowledging receipt of P50,000.00 as partial payment.22

Our Ruling

Page | 46

However, when the case reached this Court, it was ruled that the transaction entered into by
Pablo and Lu was only a contract to sell, not a contract of sale. The Court held thus:
The receipt signed by Pacita Lu merely states that she accepted the sum of fifty thousand
pesos (P50,000.00) from Babasanta as partial payment of 3.6 hectares of farm lot situated in
Sta. Rosa, Laguna. While there is no stipulation that the seller reserves the ownership of the
property until full payment of the price which is a distinguishing feature of a contract to sell,
the subsequent acts of the parties convince us that the Spouses Lu never intended to
transfer ownership to Babasanta except upon full payment of the purchase price.
Babasantas letter dated 22 May 1989 was quite telling. He stated therein that despite his
repeated requests for the execution of the final deed of sale in his favor so that he could
effect full payment of the price, Pacita Lu allegedly refused to do so. In effect, Babasanta
himself recognized that ownership of the property would not be transferred to him until
such time as he shall have effected full payment of the price. Moreover, had the sellers
intended to transfer title, they could have easily executed the document of sale in its
required form simultaneously with their acceptance of the partial payment, but they did
not. Doubtlessly, the receipt signed by Pacita Lu should legally be considered as a perfected
contract to sell.23
In the instant case, records show that Nicolas signed a mere receipt24 acknowledging partial
payment of P250,000.00 from Rodolfo. It states:
July 8, 1993
Received the amount of [P250,000.00] for 1 share of Diego Building as partial payment for
Nicolas Diego.
(signed)
Nicolas Diego25
As we ruled in San Lorenzo Development Corporation v. Court of Appeals,26 the parties could
have executed a document of sale upon receipt of the partial payment but they did not. This
is thus an indication that Nicolas did not intend to immediately transfer title over his share
but only upon full payment of the purchase price. Having thus reserved title over the
property, the contract entered into by Nicolas is a contract to sell. In addition, Eduardo
admitted that he and Rodolfo repeatedly asked Nicolas to sign the deed of sale27 but the
latter refused because he was not yet paid the full amount. As we have ruled in San Lorenzo
Development Corporation v. Court of Appeals,28 the fact that Eduardo and Rodolfo asked
Nicolas to execute a deed of sale is a clear recognition on their part that the ownership over
the property still remains with Nicolas. In fine, the totality of the parties acts convinces us
that Nicolas never intended to transfer the ownership over his share in the Diego Building
until the full payment of the purchase price. Without doubt, the transaction agreed upon by
the parties was a contract to sell, not of sale.

In Chua v. Court of Appeals,29 the parties reached an impasse when the seller wanted to be
first paid the consideration before a new transfer certificate of title (TCT) is issued in the
name of the buyer. Contrarily, the buyer wanted to secure a new TCT in his name before
paying the full amount. Their agreement was embodied in a receipt containing the following
terms: "(1) the balance of P10,215,000.00 is payable on or before 15 July 1989; (2) the capital
gains tax is for the account of x x x; and (3) if [the buyer] fails to pay the balance x x x the
[seller] has the right to forfeit the earnest money x x x."30 The case eventually reached this
Court. In resolving the impasse, the Court, speaking through Justice Carpio, held that "[a]
perusal of the Receipt shows that the true agreement between the parties was a contract to
sell."31 The Court noted that "the agreement x x x was embodied in a receipt rather than in a
deed of sale, ownership not having passed between them."32 The Court thus concluded that
"[t]he absence of a formal deed of conveyance is a strong indication that the parties did
not intend immediate transfer of ownership, but only a transfer after full payment of the
purchase price."33 Thus, the "true agreement between the parties was a contract to sell."34
In the instant case, the parties were similarly embroiled in an impasse. The parties
agreement was likewise embodied only in a receipt. Also, Nicolas did not want to sign the
deed of sale unless he is fully paid. On the other hand, Rodolfo did not want to pay unless a
deed of sale is duly executed in his favor. We thus say, pursuant to our ruling in Chua v. Court
of Appeals35 that the agreement between Nicolas and Rodolfo is a contract to sell.
This Court cannot subscribe to the appellate courts view that Nicolas should first execute a
deed of absolute sale in favor of Rodolfo, before the latter can be compelled to pay the
balance of the price. This is patently ridiculous, and goes against every rule in the book. This
pronouncement virtually places the prospective seller in a contract to sell at the mercy of the
prospective buyer, and sustaining this point of view would place all contracts to sell in
jeopardy of being rendered ineffective by the act of the prospective buyers, who naturally
would demand that the deeds of absolute sale be first executed before they pay the balance
of the price. Surely, no prospective seller would accommodate.
In fine, "the need to execute a deed of absolute sale upon completion of payment of the
price generally indicates that it is a contract to sell, as it implies the reservation of title in
the vendor until the vendee has completed the payment of the price." 36 In addition, "[a]
stipulation reserving ownership in the vendor until full payment of the price is x x x typical in
a contract to sell."37 Thus, contrary to the pronouncements of the trial and appellate courts,
the parties to this case only entered into a contract to sell; as such title cannot legally pass to
Rodolfo until he makes full payment of the agreed purchase price.
c) Nicolas did not surrender or deliver title or possession to Rodolfo.
Moreover, there could not even be a surrender or delivery of title or possession to the
prospective buyer Rodolfo. This was made clear by the nature of the agreement, by Nicolass
repeated demands for the return of all rents unlawfully and unjustly remitted to Rodolfo by
Eduardo, and by Rodolfo and Eduardos repeated demands for Nicolas to execute a deed of
sale which, as we said before, is a recognition on their part that ownership over the subject
property still remains with Nicolas.

Page | 47

Significantly, when Eduardo testified, he claimed to be knowledgeable about the terms and
conditions of the transaction between Nicolas and Rodolfo. However, aside from stating that
out of the total consideration of P500,000.00, the amount of P250,000.00 had already been
paid while the remaining P250,000.00 would be paid after the execution of the Deed of Sale,
he never testified that there was a stipulation as regards delivery of title or possession. 38
It is also quite understandable why Nicolas belatedly demanded the payment of the rentals.
Records show that the structural integrity of the Diego Building was severely compromised
when an earthquake struck Dagupan City in 1990.39 In order to rehabilitate the building, the
co-owners obtained a loan from a bank.40 Starting May 1994, the property was leased to
third parties and the rentals received were used to pay off the loan.41 It was only in 1996, or
after payment of the loan that the co-owners started receiving their share in the rentals.42
During this time, Nicolas was in the USA but immediately upon his return, he demanded for
the payment of his share in the rentals which Eduardo remitted to Rodolfo. Failing which, he
filed the instant Complaint. To us, this bolsters our findings that Nicolas did not intend to
immediately transfer title over the property.
It must be stressed that it is anathema in a contract to sell that the prospective seller should
deliver title to the property to the prospective buyer pending the latters payment of the
price in full. It certainly is absurd to assume that in the absence of stipulation, a buyer under
a contract to sell is granted ownership of the property even when he has not paid the seller
in full. If this were the case, then prospective sellers in a contract to sell would in all
likelihood not be paid the balance of the price.
This ponente has had occasion to rule that "[a] contract to sell is one where the prospective
seller reserves the transfer of title to the prospective buyer until the happening of an event,
such as full payment of the purchase price. What the seller obliges himself to do is to sell the
subject property only when the entire amount of the purchase price has already been
delivered to him. In other words, the full payment of the purchase price partakes of a
suspensive condition, the nonfulfillment of which prevents the obligation to sell from arising
and thus, ownership is retained by the prospective seller without further remedies by the
prospective buyer. It does not, by itself, transfer ownership to the buyer." 43
The contract to sell is terminated or cancelled.
Having established that the transaction was a contract to sell, what happens now to the
parties agreement?
The remedy of rescission is not available in contracts to sell.44 As explained in Spouses Santos
v. Court of Appeals:45
In view of our finding in the present case that the agreement between the parties is a
contract to sell, it follows that the appellate court erred when it decreed that a judicial
rescission of said agreement was necessary. This is because there was no rescission to speak
of in the first place. As we earlier pointed out, in 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. When the petitioners in the instant case
repossessed the disputed house and lot for failure of private respondents to pay the
purchase price in full, they were merely enforcing the contract and not rescinding it. As
petitioners correctly point out, the Court of Appeals erred when it ruled that petitioners
should have judicially rescinded the contract pursuant to Articles 1592 and 1191 of the Civil
Code. 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 in
the present case.46
Similarly, we held in Chua v. Court of Appeals47 that "Article 1592 of the Civil Code permits
the buyer to pay, even after the expiration of the period, as long as no demand for rescission
of the contract has been made upon him either judicially or by notarial act. However, Article
1592 does not apply to a contract to sell where the seller reserves the ownership until full
payment of the price,"48 as in this case.1wphi1
Applying the above jurisprudence, we hold that when Rodolfo failed to fully pay the purchase
price, the contract to sell was deemed terminated or cancelled.49 As we have held in Chua v.
Court of Appeals,50 "[s]ince the agreement x x x is a mere contract to sell, the full payment of
the purchase price partakes of a suspensive condition. The non-fulfillment of the condition
prevents the obligation to sell from arising and ownership is retained by the seller without
further remedies by the buyer." Similarly, we held in Reyes v. Tuparan51 that "petitioners
obligation to sell the subject properties becomes demandable only upon the happening of
the positive suspensive condition, which is the respondents full payment of the purchase
price. Without respondents full payment, there can be no breach of contract to speak of
because petitioner has no obligation yet to turn over the title. Respondents failure to pay
in full the purchase price in full is not the breach of contract contemplated under Article 1191
of the New Civil Code but rather just an event that prevents the petitioner from being bound
to convey title to respondent." Otherwise stated, Rodolfo has no right to compel Nicolas to
transfer ownership to him because he failed to pay in full the purchase price. Correlatively,
Nicolas has no obligation to transfer his ownership over his share in the Diego Building to
Rodolfo.52
Thus, it was erroneous for the CA to rule that Nicolas should have filed a case to fix the
period for Rodolfos payment of the balance of the purchase price. It was not Nicolass
obligation to compel Rodolfo to pay the balance; it was Rodolfos duty to remit it.
It would appear that after Nicolas refused to sign the deed as there was yet no full payment,
Rodolfo and Eduardo hired the services of the Daroya Accounting Office "for the purpose of
estimating the amount to which [Nicolas] still owes [Rodolfo] as a consequence of the

Page | 48

unconsummated verbal agreement regarding the formers share in the co-ownership of


[Diego Building] in favor of the latter."53 According to the accountants report, after Nicolas
revoked his agreement with Rodolfo due to non-payment, the downpayment of P250,000.00
was considered a loan of Nicolas from Rodolfo.54 The accountant opined that the
P250,000.00 should earn interest at 18%.55 Nicolas however objected as regards the
imposition of interest as it was not previously agreed upon. Notably, the contents of the
accountants report were not disputed or rebutted by the respondents. In fact, it was stated
therein that "[a]ll the bases and assumptions made particularly in the fixing of the applicable
rate of interest have been discussed with [Eduardo]."56
We find it irrelevant and immaterial that Nicolas described the termination or cancellation of
his agreement with Rodolfo as one of rescission. Being a layman, he is understandably not
adept in legal terms and their implications. Besides, this Court should not be held captive or
bound by the conclusion reached by the parties. The proper characterization of an action
should be based on what the law says it to be, not by what a party believed it to be. "A
contract is what the law defines it to be x x x and not what the contracting parties call it."57
On the other hand, the respondents additional submission that Nicolas cheated them by
"vanishing and hibernating" in the USA after receiving Rodolfos P250,000.00 downpayment,
only to come back later and claim that the amount he received was a mere loan cannot be
believed. How the respondents could have been cheated or disadvantaged by Nicolass
leaving is beyond comprehension. If there was anybody who benefited from Nicolass
perceived "hibernation", it was the respondents, for they certainly had free rein over
Nicolass interest in the Diego Building. Rodolfo put off payment of the balance of the price,
yet, with the aid of Eduardo, collected and appropriated for himself the rents which belonged
to Nicolas.
Eduardo is solidarily liable with Rodolfo as regards the share of Nicolas in the rents.
For his complicity, bad faith and abuse of authority as the Diego Building administrator,
Eduardo must be held solidarily liable with Rodolfo for all that Nicolas should be entitled to
from 1993 up to the present, or in respect of actual damages suffered in relation to his
interest in the Diego Building. Eduardo was the primary cause of Nicolass loss, being directly
responsible for making and causing the wrongful payments to Rodolfo, who received them
under obligation to return them to Nicolas, the true recipient.1wphi1 As such, Eduardo
should be principally responsible to Nicolas as well. Suffice it to state that every person must,
in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith; and every person who, contrary to
law, wilfully or negligently causes damage to another, shall indemnify the latter for the
same.58
Attorneys fees and other costs.
"Although attorneys fees are not allowed in the absence of stipulation, the court can award
the same when the defendants act or omission has compelled the plaintiff to incur expenses
to protect his interest or where the defendant acted in gross and evident bad faith in refusing
to satisfy the plaintiffs plainly valid, just and demandable claim."59 In the instant case, it is

beyond cavil that petitioner was constrained to file the instant case to protect his interest
because of respondents unreasonable and unjustified refusal to render an accounting and to
remit to the petitioner his rightful share in rents and fruits in the Diego Building. Thus, we
deem it proper to award to petitioner attorneys fees in the amount of P50,000.00,60 as well
as litigation expenses in the amount of P20,000.00 and the sum of P1,000.00 for each court
appearance by his lawyer or lawyers, as prayed for.
WHEREFORE, premises considered, the Petition is GRANTED. The June 29, 2007 Decision and
October 3, 2007 Resolution of the Court of Appeals in CA-G.R. CV No. 86512, and the April
19, 2005 Decision of the Dagupan City Regional Trial Court, Branch 40 in Civil Case No. 9902971-D, are hereby ANNULLED and SET ASIDE.
The Court further decrees the following:
1. The oral contract to sell between petitioner Nicolas P. Diego and
respondent Rodolfo P. Diego is DECLARED terminated/cancelled;
2. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to
surrender possession and control, as the case may be, of Nicolas P.
Diegos share in the Diego Building. Respondents are further commanded
to return or surrender to the petitioner the documents of title, receipts,
papers, contracts, and all other documents in any form or manner
pertaining to the latters share in the building, which are deemed to be in
their unauthorized and illegal possession;
3. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to
immediately render an accounting of all the transactions, from the period
beginning 1993 up to the present, pertaining to Nicolas P. Diegos share
in the Diego Building, and thereafter commanded to jointly and severally
remit to the petitioner all rents, monies, payments and benefits of
whatever kind or nature pertaining thereto, which are hereby deemed
received by them during the said period, and made to them or are due,
demandable and forthcoming during the said period and from the date of
this Decision, with legal interest from the filing of the Complaint;
4. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED,
immediately and without further delay upon receipt of this Decision, to
solidarily pay the petitioner attorneys fees in the amount of P50,000.00;
litigation expenses in the amount of P20,000.00 and the sum of
P1,000.00 per counsel for each court appearance by his lawyer or
lawyers;
5. The payment of P250,000.00 made by respondent Rodolfo P. Diego,
with legal interest from the filing of the Complaint, shall be APPLIED, by
way of compensation, to his liabilities to the petitioner and to answer for
all damages and other awards and interests which are owing to the latter
under this Decision; and

Page | 49

6. Respondents counterclaim is DISMISSED.


SO ORDERED.
G.R. No. 201167

February 27, 2013

by the Bangko Sentral ng Pilipinas (BSP) without their knowledge. They thus prayed that GPI
be ordered to execute the deed, to deliver the corresponding certificate of title and the
physical possession of the subject lot within a reasonable period, and to develop Evergreen
Executive Village; or in the alternative, to cancel and/or rescind the contract and refund the
total payments made plus legal interest starting January 2000.

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of Court is the
July 22, 2011 Decision1 and February 29, 2012 Resolution2 of the Court of Appeals (CA) in CAG.R. SP No. 112981, which affirmed with modification the August 27, 2009 Decision3 of the
Office of the President (OP).

For their part, petitioners maintained that at the time of the execution of the contract, Sps.
Fajardo were actually aware that GPI's certificate of title had no technical description
inscribed on it. Nonetheless, the title to the subject lot was free from any liens or
encumbrances.11 Petitioners claimed that the failure to deliver the title to Sps. Fajardo was
beyond their control12 because while GPI's petition for inscription of technical description
(LRC Case No. 4211) was favorably granted13 by the Regional Trial Court of Caloocan City,
Branch 131 (RTC-Caloocan), the same was reversed14 by the CA; this caused the delay in the
subdivision of the property into individual lots with individual titles. Given the foregoing
incidents, petitioners thus argued that Article 1191 of the Civil Code (Code) the provision
on which Sps. Fajardo anchor their right of rescission remained inapplicable since they
were actually willing to comply with their obligation but were only prevented from doing so
due to circumstances beyond their control. Separately, petitioners pointed out that BSP's
adverse claim/levy which was annotated long after the execution of the contract had already
been settled.

The Facts

The Ruling of the HLURB-ENCRFO

On January 24, 1995, respondent-spouses Eugenio and Angelina Fajardo (Sps. Fajardo)
entered into a Contract to Sell4 (contract) with petitioner-corporation Gotesco Properties,
Inc. (GPI) for the purchase of a 100-square meter lot identified as Lot No. 13, Block No.6,
Phase No. IV of Evergreen Executive Village, a subdivision project owned and developed by
GPI located at Deparo Road, Novaliches, Caloocan City. The subject lot is a portion of a bigger
lot covered by Transfer Certificate of Title (TCT) No. 2442205 (mother title).

On February 9, 2007, the HLURB-ENCRFO issued a Decision15 in favor of Sps. Fajardo, holding
that GPIs obligation to execute the corresponding deed and to deliver the transfer certificate
of title and possession of the subject lot arose and thus became due and demandable at the
time Sps. Fajardo had fully paid the purchase price for the subject lot. Consequently, GPIs
failure to meet the said obligation constituted a substantial breach of the contract which
perforce warranted its rescission. In this regard, Sps. Fajardo were given the option to
recover the money they paid to GPI in the amount of P168,728.83, plus legal interest
reckoned from date of extra-judicial demand in September 2002 until fully paid. Petitioners
were likewise held jointly and solidarily liable for the payment of moral and exemplary
damages, attorney's fees and the costs of suit.

GOTESCO PROPERTIES, INC., JOSE C. GO, EVELYN GO, LOURDES G. ORTIGA, GEORGE GO,
and
VICENTE
GO,
Petitioners,
vs.
SPOUSES EUGENIO and ANGELINA FAJARDO, Respondents.
DECISION
PERLAS-BERNABE, J.:

Under the contract, Sps. Fajardo undertook to pay the purchase price of P126,000.00 within
a 10-year period, including interest at the rate of nine percent (9%) per annum. GPI, on the
other hand, agreed to execute a final deed of sale (deed) in favor of Sps. Fajardo upon full
payment of the stipulated consideration. However, despite its full payment of the purchase
price on January 17, 20006 and subsequent demands,7 GPI failed to execute the deed and to
deliver the title and physical possession of the subject lot. Thus, on May 3, 2006, Sps. Fajardo
filed before the Housing and Land Use Regulatory Board-Expanded National Capital Region
Field Office (HLURBENCRFO) a complaint8 for specific performance or rescission of contract
with damages against GPI and the members of its Board of Directors namely, Jose C. Go,
Evelyn Go, Lourdes G. Ortiga, George Go, and Vicente Go (individual petitioners), docketed as
HLURB Case No. REM-050306-13319.

The Ruling of the HLURB Board of Commissioners


On appeal, the HLURB Board of Commissioners affirmed the above ruling in its August 3,
2007 Decision,16 finding that the failure to execute the deed and to deliver the title to Sps.
Fajardo amounted to a violation of Section 25 of PD 957 which therefore, warranted the
refund of payments in favor of Sps. Fajardo.
The Ruling of the OP

Sps. Fajardo averred that GPI violated Section 209 of Presidential Decree No. 95710 (PD 957)
due to its failure to construct and provide water facilities, improvements, infrastructures and
other forms of development including water supply and lighting facilities for the subdivision
project. They also alleged that GPI failed to provide boundary marks for each lot and that the
mother title including the subject lot had no technical description and was even levied upon

On further appeal, the OP affirmed the HLURB rulings in its August 27, 2009 Decision.17 In so
doing, it emphasized the mandatory tenor of Section 25 of PD 957 which requires the
delivery of title to the buyer upon full payment and found that GPI unjustifiably failed to
comply with the same.

Page | 50

The Ruling of the CA


On petition for review, the CA affirmed the above rulings with modification, fixing the
amount to be refunded to Sps. Fajardo at the prevailing market value of the property 18
pursuant to the ruling in Solid Homes v. Tan (Solid Homes).19
The Petition
Petitioners insist that Sps. Fajardo have no right to rescind the contract considering that GPI's
inability to comply therewith was due to reasons beyond its control and thus, should not be
held liable to refund the payments they had received. Further, since the individual
petitioners never participated in the acts complained of nor found to have acted in bad faith,
they should not be held liable to pay damages and attorney's fees.
The Court's Ruling
The petition is partly meritorious.

A perusal of the records shows that GPI acquired the subject property on March 10, 1992
through a Deed of Partition and Exchange23 executed between it and Andres Pacheco
(Andres), the former registered owner of the property. GPI was issued TCT No. 244220 on
March 16, 1992 but the same did not bear any technical description.24 However, no plausible
explanation was advanced by the petitioners as to why the petition for inscription (docketed
as LRC Case No. 4211) dated January 6, 2000,25 was filed only after almost eight (8) years
from the acquisition of the subject property.
Neither did petitioners sufficiently explain why GPI took no positive action to cause the
immediate filing of a new petition for inscription within a reasonable time from notice of the
July 15, 2003 CA Decision which dismissed GPIs earlier petition based on technical defects,
this notwithstanding Sps. Fajardo's full payment of the purchase price and prior demand for
delivery of title. GPI filed the petition before the RTC-Caloocan, Branch 122 (docketed as LRC
Case No. C-5026) only on November 23, 2006,26 following receipt of the letter27 dated
February 10, 2006 and the filing of the complaint on May 3, 2006, alternatively seeking
refund of payments. While the court a quo decided the latter petition for inscription in its
favor,28 there is no showing that the same had attained finality or that the approved
technical description had in fact been annotated on TCT No. 244220, or even that the
subdivision plan had already been approved.

A. Sps. Fajardos right to rescind


It is settled that in a contract to sell, the seller's obligation to deliver the corresponding
certificates of title is simultaneous and reciprocal to the buyer's full payment of the purchase
price.20 In this relation, Section 25 of PD 957, which regulates the subject transaction,
imposes on the subdivision owner or developer the obligation to cause the transfer of the
corresponding certificate of title to the buyer upon full payment, to wit:
Sec. 25. Issuance of Title. The owner or developer shall deliver the title of the lot or unit to
the buyer upon full payment of the lot or unit. No fee, except those required for the
registration of the deed of sale in the Registry of Deeds, shall be collected for the issuance of
such title. In the event a mortgage over the lot or unit is outstanding at the time of the
issuance of the title to the buyer, the owner or developer shall redeem the mortgage or the
corresponding portion thereof within six months from such issuance in order that the title
over any fully paid lot or unit may be secured and delivered to the buyer in accordance
herewith. (Emphasis supplied.)
In the present case, Sps. Fajardo claim that GPI breached the contract due to its failure to
execute the deed of sale and to deliver the title and possession over the subject lot,
notwithstanding the full payment of the purchase price made by Sps. Fajardo on January 17,
200021 as well as the latters demand for GPI to comply with the aforementioned obligations
per the letter22 dated September 16, 2002. For its part, petitioners proffer that GPI could not
have committed any breach of contract considering that its purported non-compliance was
largely impelled by circumstances beyond its control i.e., the legal proceedings concerning
the subdivision of the property into individual lots. Hence, absent any substantial breach,
Sps. Fajardo had no right to rescind the contract.
The Court does not find merit in petitioners contention.

Moreover, despite petitioners allegation29 that the claim of BSP had been settled, there
appears to be no cancellation of the annotations 30 in GPIs favor. Clearly, the long delay in
the performance of GPI's obligation from date of demand on September 16, 2002 was
unreasonable and unjustified. It cannot therefore be denied that GPI substantially breached
its contract to sell with Sps. Fajardo which thereby accords the latter the right to rescind the
same pursuant to Article 1191 of the Code, viz:
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.
B. Effects of rescission
At this juncture, it is noteworthy to point out that rescission does not merely terminate the
contract and release the parties from further obligations to each other, but abrogates the
contract from its inception and restores the parties to their original positions as if no contract
has been made.31 Consequently, mutual restitution, which entails the return of the benefits

Page | 51

that each party may have received as a result of the contract, is thus required. 32 To be sure, it
has been settled that the effects of rescission as provided for in Article 1385 of the Code are
equally applicable to cases under Article 1191, to wit:
xxxx
Mutual restitution is required in cases involving rescission under Article 1191.1wphi1 This
means bringing the parties back to their original status prior to the inception of the contract.
Article 1385 of the Civil Code provides, thus:
ART. 1385. Rescission creates the obligation to return the things which were the object of
the contract, together with their fruits, and the price with its interest; consequently, it can
be carried out only when he who demands rescission can return whatever he may be
obligated to restore.
Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
This Court has consistently ruled that this provision applies to rescission under Article
1191:
Since Article 1385 of the Civil Code expressly and clearly states that "rescission creates the
obligation to return the things which were the object of the contract, together with their
fruits, and the price with its interest," the Court finds no justification to sustain petitioners
position that said Article 1385 does not apply to rescission under Article 1191. x x x33
(Emphasis supplied; citations omitted.)
In this light, it cannot be denied that only GPI benefited from the contract, having received
full payment of the contract price plus interests as early as January 17, 2000, while Sps.
Fajardo remained prejudiced by the persisting non-delivery of the subject lot despite full
payment. As a necessary consequence, considering the propriety of the rescission as earlier
discussed, Sps. Fajardo must be able to recover the price of the property pegged at its
prevailing market value consistent with the Courts pronouncement in Solid Homes,34 viz:
Indeed, there would be unjust enrichment if respondents Solid Homes, Inc. & Purita Soliven
are made to pay only the purchase price plus interest. It is definite that the value of the
subject property already escalated after almost two decades from the time the petitioner
paid for it. Equity and justice dictate that the injured party should be paid the market value
of the lot, otherwise, respondents Solid Homes, Inc. & Purita Soliven would enrich
themselves at the expense of herein lot owners when they sell the same lot at the present
market value. Surely, such a situation should not be countenanced for to do so would be
contrary to reason and therefore, unconscionable. Over time, courts have recognized with
almost pedantic adherence that what is inconvenient or contrary to reason is not allowed in
law. (Emphasis supplied.)

On this score, it is apt to mention that it is the intent of PD 957 to protect the buyer against
unscrupulous developers, operators and/or sellers who reneged on their obligations. 35 Thus,
in order to achieve this purpose, equity and justice dictate that the injured party should be
afforded full recompense and as such, be allowed to recover the prevailing market value of
the undelivered lot which had been fully paid for.1wphi1
C. Moral and exemplary damages, attorneys fees and costs of suit
Furthermore, the Court finds that there is proper legal basis to accord moral and exemplary
damages and attorney's fees, including costs of suit. Verily, GPIs unjustified failure to comply
with its obligations as above-discussed caused Sps. Fajardo serious anxiety, mental anguish
and sleepless nights, thereby justifying the award of moral damages. In the same vein, the
payment of exemplary damages remains in order so as to prevent similarly minded
subdivision developers to commit the same transgression. And finally, considering that Sps.
Fajardo were constrained to engage the services of counsel to file this suit, the award of
attorneys fees must be likewise sustained.
D. Liability of individual Petitioners
However, the Court finds no basis to hold individual petitioners solidarily liable with
petitioner GPI for the payment of damages in favor of Sps. Fajardo since it was not shown
that they acted maliciously or dealt with the latter in bad faith. Settled 1s the rule that in the
absence of malice and bad faith, as in this case, officers of the corporation cannot be made
personally liable for liabilities of the corporation which, by legal fiction, has a personality
separate and distinct from its officers, stockholders, and members.36
WHEREFORE, the assailed July 22, 2011 Decision and February 29, 2012 Resolution of the
Court of Appeals in CA-G.R. SP No. 112981 are hereby AFFIRMED WITH MODIFICATION,
absolving individual petitioners Jose C. Go, Evelyn Go, Lourdes G. Ortiga, George Go, and
Vicente Go from personal liability towards respondent-spouses Eugenio and Angelina
Fajardo.
SO ORDERED.
G.R. No. 188986

March 20, 2013

GALILEO A. MAGLASANG, doing business under the name GL Enterprises, Petitioner,


vs.
NORTHWESTERN INC., UNIVERSITY, Respondent.
DECISION
SERENO, CJ.:
Before this Court is a Rule 45 Petition, seeking a review of the 27 July 2009 Court of Appeals
(CA) Decision in CA-G.R. CV No. 88989,1 which modified the Regional Trial Court (RTC)

Page | 52

Decision of 8 January 2007 in Civil Case No. Q-04-53660.2 The CA held that petitioner
substantially breached its contracts with respondent for the installation of an integrated
bridge system (IBS).

TOTAL COST:
LESS:
OLD
EQUIPMENT TRADE-IN VALUE

Php 3,800,000.00
MARITIME
1,000,000.00

The antecedent .facts are as follows:3


On 10 June 2004, respondent Northwestern University (Northwestern), an educational
institution offering maritime-related courses, engaged the services of a Quezon City-based
firm, petitioner GL Enterprises, to install a new IBS in Laoag City. The installation of an IBS,
used as the students training laboratory, was required by the Commission on Higher
Education (CHED) before a school could offer maritime transportation programs.4

DISCOUNT

100,000.00

PROJECT COST (MATERIALS & INSTALLATION)

PhP 2,700,000.00

(Emphasis in the original)


The second contract essentially contains the same terms and conditions as follows:6

Since its IBS was already obsolete, respondent required petitioner to supply and install
specific components in order to form the most modern IBS that would be acceptable to CHED
and would be compliant with the standards of the International Maritime Organization
(IMO). For this purpose, the parties executed two contracts.

That in consideration of the payment herein mentioned to be made by the First Party
(defendant), the Second Party agrees to furnish, supply, install & integrate the most modern
INTEGRATED BRIDGE SYSTEM located at Northwestern University MOCK BOAT in accordance
with the general conditions, plans and specifications of this contract.

The first contract partly reads:5


SUPPLY & INSTALLATION OF THE FOLLOWING:
That in consideration of the payment herein mentioned to be made by the First Party
(defendant), the Second Party agrees to furnish, supply, install and integrate the most
modern INTEGRATED BRIDGE SYSTEM located at Northwestern University MOCK BOAT in
accordance with the general conditions, plans and specifications of this contract.

1. ARPA RADAR SIMULATION ROOM


xxxx

SUPPLY & INSTALLATION OF THE FOLLOWING:

2. GMDSS SIMULATION ROOM

INTEGRATED BRIDGE SYSTEM

xxxx

A. 2-RADAR SYSTEM

TOTAL
COST:
(Emphasis in the original)

PhP

270,000.00

B. OVERHEAD CONSOLE MONITORING SYSTEM


C. ENGINE TELEGRAPH SYSTEM
D. ENGINE CONTROL SYSTEM
E. WEATHER CONTROL SYSTEM
F. ECDIS SYSTEM

Common to both contracts are the following provisions: (1) the IBS and its components must
be compliant with the IMO and CHED standard and with manuals for simulators/major
equipment; (2) the contracts may be terminated if one party commits a substantial breach of
its undertaking; and (3) any dispute under the agreement shall first be settled mutually
between the parties, and if settlement is not obtained, resort shall be sought in the courts of
law.
Subsequently, Northwestern paid P1 million as down payment to GL Enterprises. The former
then assumed possession of Northwesterns old IBS as trade-in payment for its service. Thus,
the balance of the contract price remained at P1.97 million.7

G. STEERING WHEEL SYSTEM


H. BRIDGE CONSOLE

Two months after the execution of the contracts, GL Enterprises technicians delivered
various materials to the project site. However, when they started installing the components,
respondent halted the operations. GL Enterprises then asked for an explanation. 8

Page | 53

Northwestern justified the work stoppage upon its finding that the delivered equipment
were substandard.9 It explained further that GL Enterprises violated the terms and conditions
of the contracts, since the delivered components (1) were old; (2) did not have instruction
manuals and warranty certificates; (3) contained indications of being reconditioned
machines; and (4) did not meet the IMO and CHED standards. Thus, Northwestern demanded
compliance with the agreement and suggested that GL Enterprises meet with the formers
representatives to iron out the situation.
Instead of heeding this suggestion, GL Enterprises filed on 8 September 2004 a Complaint 10
for breach of contract and prayed for the following sums: P1.97 million, representing the
amount that it would have earned, had Northwestern not stopped it from performing its
tasks under the two contracts; at least P100,000 as moral damages; at least P100,000 by way
of exemplary damages; at least P100,000 as attorneys fees and litigation expenses; and cost
of suit. Petitioner alleged that Northwestern breached the contracts by ordering the work
stoppage and thus preventing the installation of the materials for the IBS.
Northwestern denied the allegation. In its defense, it asserted that since the equipment
delivered were not in accordance with the specifications provided by the contracts, all
succeeding works would be futile and would entail unnecessary expenses. Hence, it prayed
for the rescission of the contracts and made a compulsory counterclaim for actual, moral,
and exemplary damages, and attorneys fees.
The RTC held both parties at fault. It found that Northwestern unduly halted the operations,
even if the contracts called for a completed project to be evaluated by the CHED. In turn, the
breach committed by GL Enterprises consisted of the delivery of substandard equipment that
were not compliant with IMO and CHED standards as required by the agreement.
Invoking the equitable principle that "each party must bear its own loss," the trial court
treated the contracts as impossible of performance without the fault of either party or as
having been dissolved by mutual consent. Consequently, it ordered mutual restitution, which
would thereby restore the parties to their original positions as follows:11
Accordingly, plaintiff is hereby ordered to restore to the defendant all the equipment
obtained by reason of the First Contract and refund the downpayment of P1,000,000.00 to
the defendant; and for the defendant to return to the plaintiff the equipment and materials
it withheld by reason of the non-continuance of the installation and integration project. In
the event that restoration of the old equipment taken from defendant's premises is no
longer possible, plaintiff is hereby ordered to pay the appraised value of defendant's old
equipment at P1,000,000.00. Likewise, in the event that restoration of the equipment and
materials delivered by the plaintiff to the defendant is no longer possible, defendant is
hereby ordered to pay its appraised value at P1,027,480.00.
Moreover, plaintiff is likewise ordered to restore and return all the equipment obtained by
reason of the Second Contract, or if restoration or return is not possible, plaintiff is ordered
to pay the value thereof to the defendant.
SO ORDERED.

Aggrieved, both parties appealed to the CA. With each of them pointing a finger at the other
party as the violator of the contracts, the appellate court ultimately determined that GL
Enterprises was the one guilty of substantial breach and liable for attorneys fees.
The CA appreciated that since the parties essentially sought to have an IBS compliant with
the CHED and IMO standards, it was GL Enterprises delivery of defective equipment that
materially and substantially breached the contracts. Although the contracts contemplated a
completed project to be evaluated by CHED, Northwestern could not just sit idly by when it
was apparent that the components delivered were substandard.
The CA held that Northwestern only exercised ordinary prudence to prevent the inevitable
rejection of the IBS delivered by GL Enterprises. Likewise, the appellate court disregarded
petitioners excuse that the equipment delivered might not have been the components
intended to be installed, for it would be contrary to human experience to deliver equipment
from Quezon City to Laoag City with no intention to use it.
This time, applying Article 1191 of the Civil Code, the CA declared the rescission of the
contracts. It then proceeded to affirm the RTCs order of mutual restitution. Additionally, the
appellate court granted P50,000 to Northwestern by way of attorneys fees.
Before this Court, petitioner rehashes all the arguments he had raised in the courts a quo. 12
He maintains his prayer for actual damages equivalent to the amount that he would have
earned, had respondent not stopped him from performing his tasks under the two contracts;
moral and exemplary damages; attorneys fees; litigation expenses; and cost of suit.
Hence, the pertinent issue to be resolved in the instant appeal is whether the CA gravely
erred in (1) finding substantial breach on the part of GL Enterprises; (2) refusing petitioners
claims for damages, and (3) awarding attorneys fees to Northwestern.
RULING OF THE COURT
Substantial Breaches of the Contracts
Although the RTC and the CA concurred in ordering restitution, the courts a quo, however,
differed on the basis thereof. The RTC applied the equitable principle of mutual fault, while
the CA applied Article 1191 on rescission.
The power to rescind the obligations of the injured party is implied in reciprocal obligations,
such as in this case. On this score, the CA correctly applied Article 1191, which provides thus:
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.

Page | 54

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
The two contracts require no less than substantial breach before they can be rescinded. Since
the contracts do not provide for a definition of substantial breach that would terminate the
rights and obligations of the parties, we apply the definition found in our jurisprudence.
This Court defined in Cannu v. Galang13 that substantial, unlike slight or casual breaches of
contract, are fundamental breaches that defeat the object of the parties in entering into an
agreement, since the law is not concerned with trifles.14
The question of whether a breach of contract is substantial depends upon the attending
circumstances.15
In the case at bar, the parties explicitly agreed that the materials to be delivered must be
compliant with the CHED and IMO standards and must be complete with manuals. Aside
from these clear provisions in the contracts, the courts a quo similarly found that the intent
of the parties was to replace the old IBS in order to obtain CHED accreditation for
Northwesterns maritime-related courses.
According to CHED Memorandum Order (CMO) No. 10, Series of 1999, as amended by CMO
No. 13, Series of 2005, any simulator used for simulator-based training shall be capable of
simulating the operating capabilities of the shipboard equipment concerned. The simulation
must be achieved at a level of physical realism appropriate for training objectives; include the
capabilities, limitations and possible errors of such equipment; and provide an interface
through which a trainee can interact with the equipment, and the simulated environment.
Given these conditions, it was thus incumbent upon GL Enterprises to supply the components
that would create an IBS that would effectively facilitate the learning of the students.
However, GL Enterprises miserably failed in meeting its responsibility. As contained in the
findings of the CA and the RTC, petitioner supplied substandard equipment when it delivered
components that (1) were old; (2) did not have instruction manuals and warranty certificates;
(3) bore indications of being reconditioned machines; and, all told, (4) might not have met
the IMO and CHED standards. Highlighting the defects of the delivered materials, the CA
quoted respondents testimonial evidence as follows:16
Q: In particular which of these equipment of CHED requirements were not complied with?
A: The Radar Ma'am, because they delivered only 10-inch PPI, that is the monitor of the
Radar. That is 16-inch and the gyrocompass with two (2) repeaters and the history card. The
gyrocompass - there is no marker, there is no model, there is no serial number, no gimbal, no
gyroscope and a bulb to work it properly to point the true North because it is very important
to the Cadets to learn where is the true North being indicated by the Master Gyrocompass.
xxxx

Q: Mr. Witness, one of the defects you noted down in this history card is that the master
gyrocompass had no gimbals, gyroscope and balls and was replaced with an ordinary electric
motor. So what is the Implication of this?
A: Because those gimbals, balls and the gyroscope it let the gyrocompass to work so it will
point the true North but they being replaced with the ordinary motor used for toys so it will
not indicate the true North.
Q: So what happens if it will not indicate the true North?
A: It is very big problem for my cadets because they must, to learn into school where is the
true North and what is that equipment to be used on board.
Q: One of the defects is that the steering wheel was that of an ordinary automobile. And
what is the implication of this?
A: Because. on board Maam, we are using the real steering wheel and the cadets will be
implicated if they will notice that the ship have the same steering wheel as the car so it is not
advisable for them.
Q:. And another one is that the gyrocompass repeater was only refurbished and it has no
serial number. What is wrong with that?
A: It should be original Maam because this gyro repeater, it must to repeat also the true
North being indicated by the Master Gyro Compass so it will not work properly, I dont know
it will work properly. (Underscoring supplied)
Evidently, the materials delivered were less likely to pass the CHED standards, because the
navigation system to be installed might not accurately point to the true north; and the
steering wheel delivered was one that came from an automobile, instead of one used in
ships. Logically, by no stretch of the imagination could these form part of the most modern
IBS compliant with the IMO and CHED standards.
Even in the instant appeal, GL Enterprises does not refute that the equipment it delivered
was substandard. However, it reiterates its rejected excuse that Northwestern should have
made an assessment only after the completion of the IBS.17 Thus, petitioner stresses that it
was Northwestern that breached the agreement when the latter halted the installation of
the materials for the IBS, even if the parties had contemplated a completed project to be
evaluated by CHED. However, as aptly considered by the CA, respondent could not just "sit
still and wait for such day that its accreditation may not be granted by CHED due to the
apparent substandard equipment installed in the bridge system."18 The appellate court
correctly emphasized that, by that time, both parties would have incurred more costs for
nothing.
Additionally, GL Enterprises reasons that, based on the contracts, the materials that were
hauled all the way from Quezon City to Laoag City under the custody of the four designated

Page | 55

installers might not have been the components to be used.19 Without belaboring the point,
we affirm the conclusion of the CA and the RTC that the excuse is untenable for being
contrary to human experience.20

SO ORDERED.

Given that petitioner, without justification, supplied substandard components for the new
IBS, it is thus clear that its violation was not merely incidental, but directly related to the
essence of the agreement pertaining to the installation of an IBS compliant with the CHED
and IMO standards.

OPTIMUM
DEVELOPMENT
BANK,
Petitioner,
vs.
SPOUSES BENIGNO V. JOVELLANOS and LOURDES R. JOVELLANOS, Respondents.

Consequently, the CA correctly found substantial breach on the part of petitioner.


In contrast, Northwesterns breach, if any, was characterized by the appellate court as slight
or casual.21 By way of negative definition, a breach is considered casual if it does not
fundamentally defeat the object of the parties in entering into an agreement. Furthermore,
for there to be a breach to begin with, there must be a "failure, without legal excuse, to
perform any promise which forms the whole or part of the contract."22
Here, as discussed, the stoppage of the installation was justified. The action of Northwestern
constituted a legal excuse to prevent the highly possible rejection of the IBS. Hence, just as
the CA concluded, we find that Northwestern exercised ordinary prudence to avert a possible
wastage of time, effort, resources and also of the P2.9 million representing the value of the
new IBS.
Actual Damages, Moral and Exemplary Damages, and Attorney's Fees
As between the parties, substantial breach can clearly be attributed to GL
Enterprises.1wphi1 Consequently, it is not the injured party who can claim damages under
Article 1170 of the Civil Code. For this reason, we concur in the result of the CA's Decision
denying petitioner actual damages in the form of lost earnings, as well as moral and
exemplary damages.
With respect to attorney's fees, Article 2208 of the Civil Code allows the grant thereof when
the court deems it just and equitable that attorney's fees should be recovered. An award of
attorney's fees is proper if one was forced to litigate and incur expenses to protect one's
rights and interest by reason of an unjustified act or omission on the part of the party from
whom the award is sought.23
Since we affirm the CA's finding that it was not Northwestern but GL Enterprises that
breached the contracts without justification, it follows that the appellate court correctly
awarded attorneys fees to respondent. Notably, this litigation could have altogether been
avoided if petitioner heeded respondent's suggestion to amicably settle; or, better yet, if in
the first place petitioner delivered the right materials as required by the contracts.
IN VIEW THEREOF, the assailed 27 July 2009 Decision of the Court of Appeals in CA-G.R. CV
No. 88989 is hereby AFFIRMED.

G.R. No. 189145

December 4, 2013

DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari1 are the Decision2 dated May 29, 2009 and
Resolution 3 dated August 10, 2009 of the Court of Appeals (CA) in CA-G.R. SP No. 104487
which reversed the Decision4 dated December 27, 2007 of the Regional Trial Court of
Caloocan City, Branch 128 (RTC) in Civil Case No. C-21867 that, in turn, affirmed the Decision5
dated June 8, 2007 of the Metropolitan Trial Court, Branch 53 of that same city (MeTC) in
Civil Case No. 06-28830 ordering respondents-spouses Benigno and Lourdes Jovellanos (Sps.
Jovellanos) to, inter alia, vacate the premises of the property subject of this case.
The Facts
On April 26, 2005, Sps. Jovellanos entered into a Contract to Sell6 with Palmera Homes, Inc.
(Palmera Homes) for the purchase of a residential house and lot situated in Block 3, Lot 14,
Villa Alegria Subdivision, Caloocan City (subject property) for a total consideration of
P1,015,000.00. Pursuant to the contract, Sps. Jovellanos took possession of the subject
property upon a down payment of P91,500.00, undertaking to pay the remaining balance of
the contract price in equal monthly installments of P13,107.00 for a period of 10 years
starting June 12, 2005.7
On August 22, 2006, Palmera Homes assigned all its rights, title and interest in the Contract
to Sell in favor of petitioner Optimum Development Bank (Optimum) through a Deed of
Assignment of even date.8
On April 10, 2006, Optimum issued a Notice of Delinquency and Cancellation of Contract to
Sell9 for Sps. Jovellanoss failure to pay their monthly installments despite several written and
verbal notices.10
In a final Demand Letter dated May 25, 2006,11 Optimum required Sps. Jovellanos to vacate
and deliver possession of the subject property within seven (7) days which, however,
remained unheeded. Hence, Optimum filed, on November 3, 2006, a complaint for unlawful
detainer12 before the MeTC, docketed as Civil Case No. 06-28830. Despite having been
served with summons, together with a copy of the complaint, 13 Sps. Jovellanos failed to file
their answer within the prescribed reglementary period, thus prompting Optimum to move
for the rendition of judgment.14

Page | 56

Thereafter, Sps. Jovellanos filed their opposition with motion to admit answer, questioning
the jurisdiction of the court, among others. Further, they filed a Motion to Reopen and Set
the Case for Preliminary Conference, which the MeTC denied.

Contract to Sell and the determination of the rights of the parties thereunder as well as the
governing law, among others, Republic Act No. (RA) 6552.24
Accordingly, it concluded that the subject matter is one which is incapable of pecuniary
estimation and thus, within the jurisdiction of the RTC.25

The MeTC Ruling


In a Decision15 dated June 8, 2007, the MeTC ordered Sps. Jovellanos to vacate the subject
property and pay Optimum reasonable compensation in the amount of P5,000.00 for its use
and occupation until possession has been surrendered. It held that Sps. Jovellanoss
possession of the said property was by virtue of a Contract to Sell which had already been
cancelled for non-payment of the stipulated monthly installment payments. As such, their
"rights of possession over the subject property necessarily terminated or expired and hence,
their continued possession thereof constitute[d] unlawful detainer."16
Dissatisfied, Sps. Jovellanos appealed to the RTC, claiming that Optimum counsel made them
believe that a compromise agreement was being prepared, thus their decision not to engage
the services of counsel and their concomitant failure to file an answer.17
They also assailed the jurisdiction of the MeTC, claiming that the case did not merely involve
the issue of physical possession but rather, questions arising from their rights under a
contract to sell which is a matter that is incapable of pecuniary estimation and, therefore,
within the jurisdiction of the RTC.18

Undaunted, Optimum moved for reconsideration which was denied in a Resolution26 dated
August 10, 2009. Hence, the instant petition, submitting that the case is one for unlawful
detainer, which falls within the exclusive original jurisdiction of the municipal trial courts, and
not a case incapable of pecuniary estimation cognizable solely by the regional trial courts.
The Courts Ruling
The petition is meritorious. What is determinative of the nature of the action and the court
with jurisdiction over it are the allegations in the complaint and the character of the relief
sought, not the defenses set up in an answer.27
A complaint sufficiently alleges a cause of action for unlawful detainer if it recites that:
(a) initially, possession of the property by the defendant was by contract
with or by tolerance of the plaintiff;
(b) eventually, such possession became illegal upon notice by plaintiff to
defendant of the termination of the latter's right of possession;

The RTC Ruling


In a Decision19 dated December 27, 2007, the RTC affirmed the MeTCs judgment, holding
that the latter did not err in refusing to admit Sps. Jovellanos s belatedly filed answer
considering the mandatory period for its filing. It also affirmed the MeTCs finding that the
action does not involve the rights of the respective parties under the contract but merely the
recovery of possession by Optimum of the subject property after the spouses default. 20
Aggrieved, Sps. Jovellanos moved for reconsideration which was, however, denied in a
Resolution21 dated June 27, 2008. Hence, the petition before the CA reiterating that the RTC
erred in affirming the decision of the MeTC with respect to:

(c) thereafter, defendant remained in possession of the property and


deprived plaintiff of the enjoyment thereof; and
(d) within one year from the last demand on defendant to vacate the
property, plaintiff instituted the complaint for ejectment.28
Corollarily, the only issue to be resolved in an unlawful detainer case is physical or material
possession of the property involved, independent of any claim of ownership by any of the
parties involved.29

(a) the non-admission of their answer to the complaint; and


(b) the jurisdiction of the MeTC over the complaint for unlawful
detainer.22
The CA Ruling
In an Amended Decision23 dated May 29, 2009, the CA reversed and set aside the RTCs
decision, ruling to dismiss the complaint for lack of jurisdiction. It found that the controversy
does not only involve the issue of possession but also the validity of the cancellation of the

In its complaint, Optimum alleged that it was by virtue of the April 26, 2005 Contract to Sell
that Sps. Jovellanos were allowed to take possession of the subject property. However, since
the latter failed to pay the stipulated monthly installments, notwithstanding several written
and verbal notices made upon them, it cancelled the said contract as per the Notice of
Delinquency and Cancellation dated April 10, 2006. When Sps. Jovellanos refused to vacate
the subject property despite repeated demands, Optimum instituted the present action for
unlawful detainer on November 3, 2006, or within one year from the final demand made on
May 25, 2006.

Page | 57

While the RTC upheld the MeTCs ruling in favor of Optimum, the CA, on the other hand,
declared that the MeTC had no jurisdiction over the complaint for unlawful detainer,
reasoning that the case involves a matter which is incapable of pecuniary estimation i.e.,
the validity of the cancellation of the Contract to Sell and the determination of the rights of
the parties under the contract and law and hence, within the jurisdiction of the RTC. The
Court disagrees. Metropolitan Trial Courts are conditionally vested with authority to resolve
the question of ownership raised as an incident in an ejectment case where the
determination is essential to a complete adjudication of the issue of possession.30
Concomitant to the ejectment courts authority to look into the claim of ownership for
purposes of resolving the issue of possession is its authority to interpret the contract or
agreement upon which the claim is premised. Thus, in the case of Oronce v. CA, 31 wherein
the litigants opposing claims for possession was hinged on whether their written agreement
reflected the intention to enter into a sale or merely an equitable mortgage, the Court
affirmed the propriety of the ejectment courts examination of the terms of the agreement in
question by holding that, "because metropolitan trial courts are authorized to look into the
ownership of the property in controversy in ejectment cases, it behooved MTC Branch 41 to
examine the bases for petitioners claim of ownership that entailed interpretation of the
Deed of Sale with Assumption of Mortgage."32 Also, in Union Bank of the Philippines v.
Maunlad Homes, Inc.33 (Union Bank), citing Sps. Refugia v. CA, 34 the Court declared that
MeTCs have authority to interpret contracts in unlawful detainer cases, viz.:35
The authority granted to the MeTC to preliminarily resolve the issue of ownership to
determine the issue of possession ultimately allows it to interpret and enforce the contract
or agreement between the plaintiff and the defendant. To deny the MeTC jurisdiction over a
complaint merely because the issue of possession requires the interpretation of a contract
will effectively rule out unlawful detainer as a remedy. As stated, in an action for unlawful
detainer, the defendants right to possess the property may be by virtue of a contract,
express or implied;
corollarily, the termination of the defendants right to possess would be governed by the
terms of the same contract.
Interpretation of the contract between the plaintiff and the defendant is inevitable because
it is the contract that initially granted the defendant the right to possess the property; it is
this same contract that the plaintiff subsequently claims was violated or extinguished,
terminating the defendants right to possess. We ruled in Sps. Refugia v. CA that where the
resolution of the issue of possession hinges on a determination of the validity and
interpretation of the document of title or any other contract on which the claim of
possession is premised, the inferior court may likewise pass upon these issues.
The MeTCs ruling on the rights of the parties based on its interpretation of their contract is,
of course, not conclusive, but is merely provisional and is binding only with respect to the
issue of possession. (Emphases supplied; citations omitted)
In the case at bar, the unlawful detainer suit filed by Optimum against Sps. Jovellanos for
illegally withholding possession of the subject property is similarly premised upon the
cancellation or termination of the Contract to Sell between them. Indeed, it was well within

the jurisdiction of the MeTC to consider the terms of the parties agreement in order to
ultimately determine the factual bases of Optimums possessory claims over the subject
property. Proceeding accordingly, the MeTC held that Sps. Jovellanoss non-payment of the
installments due had rendered the Contract to Sell without force and effect, thus depriving
the latter of their right to possess the property subject of said contract. 36 The foregoing
disposition aptly squares with existing jurisprudence. As the Court similarly held in the Union
Bank case, the sellers cancellation of the contract to sell necessarily extinguished the buyers
right of possession over the property that was the subject of the terminated agreement.37
Verily, in a contract to sell, the prospective seller binds himself to sell the property subject of
the agreement exclusively to the prospective buyer upon fulfillment of the condition agreed
upon which is the full payment of the purchase price but reserving to himself the ownership
of the subject property despite delivery thereof to the prospective buyer.38
The full payment of the purchase price in a contract to sell is a suspensive condition, the nonfulfillment of which prevents the prospective sellers obligation to convey title from
becoming effective,39 as in this case. Further, it is significant to note that given that the
Contract to Sell in this case is one which has for its object real property to be sold on an
installment basis, the said contract is especially governed by and thus, must be examined
under the provisions of RA 6552, or the "Realty Installment Buyer Protection Act", which
provides for the rights of the buyer in case of his default in the payment of succeeding
installments. Breaking down the provisions of the law, the Court, in the case of Rillo v. CA, 40
explained the mechanics of cancellation under RA 6552 which are based mainly on the
amount of installments already paid by the buyer under the subject contract, to wit:41
Given the nature of the contract of the parties, the respondent court correctly applied
Republic Act No. 6552. Known as the Maceda Law, R.A. No. 6552 recognizes in conditional
sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to
cancel the contract upon non-payment of an installment by the buyer, which is simply an
event that prevents the obligation of the vendor to convey title from acquiring binding force.
It also provides the right of the buyer on installments in case he defaults in the payment of
succeeding installments, viz.:
(1) Where he has paid at least two years of installments,
(a) To pay, without additional interest, the unpaid installments due within the total grace
period earned by him, which is hereby fixed at the rate of one month grace period for every
one year of installment payments made:
Provided, That this right shall be exercised by the buyer only once in every five years of the
life of the contract and its extensions, if any. (b) If the contract is cancelled, the seller shall
refund to the buyer the cash surrender value of the payments on the property equivalent to
fifty per cent of the total payments made and, after five years of installments, an additional
five per cent every year but not to exceed ninety per cent of the total payments made:

Page | 58

Provided, That the actual cancellation of the contract shall take place after cancellation or
the demand for rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.

SO ORDERED.

Down payments, deposits or options on the contract shall be included in the computation of
the total number of installments made.

FIL-ESTATE PROPERTIES, INC. AND FIL-ESTATE NETWORK INC.,


vs.
SPOUSES CONRADO AND MARIA VICTORIA RONQUILLO, Respondents.

(2) Where he has paid less than two years in installments, Sec. 4. x x x the seller shall give the
buyer a grace period of not less than sixty days from the date the installment became due. If
the buyer fails to pay the installments due at the expiration of the grace period, the seller
may cancel the contract after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act. (Emphasis and
underscoring supplied)
Pertinently, since Sps. Jovellanos failed to pay their stipulated monthly installments as found
by the MeTC, the Court examines Optimums compliance with Section 4 of RA 6552, as
above-quoted and highlighted, which is the provision applicable to buyers who have paid less
than two (2) years-worth of installments. Essentially, the said provision provides for three (3)
requisites before the seller may actually cancel the subject contract: first, the seller shall give
the buyer a 60-day grace period to be reckoned from the date the installment became due;
second, the seller must give the buyer a notice of cancellation/demand for rescission by
notarial act if the buyer fails to pay the installments due at the expiration of the said grace
period; and third, the seller may actually cancel the contract only after thirty (30) days from
the buyers receipt of the said notice of cancellation/demand for rescission by notarial act. In
the present case, the 60-day grace period automatically operated42 in favor of the buyers,
Sps. Jovellanos, and took effect from the time that the maturity dates of the installment
payments lapsed. With the said grace period having expired bereft of any installment
payment on the part of Sps. Jovellanos,43 Optimum then issued a notarized Notice of
Delinquency and Cancellation of Contract on April 10, 2006. Finally, in proceeding with the
actual cancellation of the contract to sell, Optimum gave Sps. Jovellanos an additional thirty
(30) days within which to settle their arrears and reinstate the contract, or sell or assign their
rights to another.44
It was only after the expiration of the thirty day (30) period did Optimum treat the contract
to sell as effectively cancelled making as it did a final demand upon Sps. Jovellanos to
vacate the subject property only on May 25, 2006. Thus, based on the foregoing, the Court
finds that there was a valid and effective cancellation of the Contract to Sell in accordance
with Section 4 of RA 6552 and since Sps. Jovellanos had already lost their right to retain
possession of the subject property as a consequence of such cancellation, their refusal to
vacate and turn over possession to Optimum makes out a valid case for unlawful detainer as
properly adjudged by the MeTC.
WHEREFORE, the petition is GRANTED. The Decision dated May 29, 2009 and Resolution
dated August 10, 2009 of the Court of Appeals in CA-G.R. SP No. 104487 are SET ASIDE. The
Decision dated June 8, 2007 of Metropolitan Trial Court, Branch 53, Caloocan City in Civil
Case No. 06-28830 is hereby REINSTATED.

G.R. No. 185798

January 13, 2014


Petitioners,

DECISION
PEREZ, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the 1997 Rules .of Civil
Procedure assailing the Decision1 of the Court of Appeals in CA-G.R. SP No. 100450 which
affirmed the Decision of the Office of the President in O.P. Case No. 06-F-216.
As culled from the records, the facts are as follow:
Petitioner Fil-Estate Properties, Inc. is the owner and developer of the Central Park Place
Tower while co-petitioner Fil-Estate Network, Inc. is its authorized marketing agent.
Respondent Spouses Conrado and Maria Victoria Ronquillo purchased from petitioners an
82-square meter condominium unit at Central Park Place Tower in Mandaluyong City for a
pre-selling contract price of FIVE MILLION ONE HUNDRED SEVENTY-FOUR THOUSAND ONLY
(P5,174,000.00). On 29 August 1997, respondents executed and signed a Reservation
Application Agreement wherein they deposited P200,000.00 as reservation fee. As agreed
upon, respondents paid the full downpayment of P1,552,200.00 and had been paying the
P63,363.33 monthly amortizations until September 1998.
Upon learning that construction works had stopped, respondents likewise stopped paying
their monthly amortization. Claiming to have paid a total of P2,198,949.96 to petitioners,
respondents through two (2) successive letters, demanded a full refund of their payment
with interest. When their demands went unheeded, respondents were constrained to file a
Complaint for Refund and Damages before the Housing and Land Use Regulatory Board
(HLURB). Respondents prayed for reimbursement/refund of P2,198,949.96 representing the
total amortization payments, P200,000.00 as and by way of moral damages, attorneys fees
and other litigation expenses.
On 21 October 2000, the HLURB issued an Order of Default against petitioners for failing to
file their Answer within the reglementary period despite service of summons.2
Petitioners filed a motion to lift order of default and attached their position paper attributing
the delay in construction to the 1997 Asian financial crisis. Petitioners denied committing
fraud or misrepresentation which could entitle respondents to an award of moral damages.
On 13 June 2002, the HLURB, through Arbiter Atty. Joselito F. Melchor, rendered judgment
ordering petitioners to jointly and severally pay respondents the following amount:

Page | 59

a) The amount of TWO MILLION ONE HUNDRED NINETY-EIGHT


THOUSAND NINE HUNDRED FORTY NINE PESOS & 96/100
(P2,198,949.96) with interest thereon at twelve percent (12%) per annum
to be computed from the time of the complainants demand for refund
on October 08, 1998 until fully paid,

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
OFFICE BELOW ORDERING PETITIONERS-APPELLANTS TO PAY RESPONDENTS-APPELLEES THE
SUM OF P100,000.00 AS MORAL DAMAGES AND P50,000.00 AS ATTORNEYS FEES
CONSIDERING THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS THEREFOR.
III.

b) ONE HUNDRED THOUSAND PESOS (P100,000.00) as moral damages,


c) FIFTY THOUSAND PESOS (P50,000.00) as attorneys fees,
d) The costs of suit, and
e) An administrative fine of TEN THOUSAND PESOS (P10,000.00) payable
to this Office fifteen (15) days upon receipt of this decision, for violation
of Section 20 in relation to Section 38 of PD 957.3
The Arbiter considered petitioners failure to develop the condominium project as a
substantial breach of their obligation which entitles respondents to seek for rescission with
payment of damages. The Arbiter also stated that mere economic hardship is not an excuse
for contractual and legal delay.
Petitioners appealed the Arbiters Decision through a petition for review pursuant to Rule XII
of the 1996 Rules of Procedure of HLURB. On 17 February 2005, the Board of Commissioners
of the HLURB denied4 the petition and affirmed the Arbiters Decision. The HLURB reiterated
that the depreciation of the peso as a result of the Asian financial crisis is not a fortuitous
event which will exempt petitioners from the performance of their contractual obligation.
Petitioners filed a motion for reconsideration but it was denied 5 on 8 May 2006. Thereafter,
petitioners filed a Notice of Appeal with the Office of the President. On 18 April 2007,
petitioners appeal was dismissed6 by the Office of the President for lack of merit. Petitioners
moved for a reconsideration but their motion was denied7 on 26 July 2007.
Petitioners sought relief from the Court of Appeals through a petition for review under Rule
43 containing the same arguments they raised before the HLURB and the Office of the
President:
I.
THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
HONORABLE HOUSING AND LAND USE REGULATORY BOARD AND ORDERING PETITIONERSAPPELLANTS TO REFUND RESPONDENTS-APPELLEES THE SUM OF P2,198,949.96 WITH 12%
INTEREST FROM 8 OCTOBER 1998 UNTIL FULLY PAID, CONSIDERING THAT THE COMPLAINT
STATES NO CAUSE OF ACTION AGAINST PETITIONERS-APPELLANTS.
II.

THE HONORABLE OFFICE OF THE PRESIDENT ERRED IN AFFIRMING THE DECISION OF THE
HOUSING AND LAND USE REGULATORY BOARD ORDERING PETITIONERS-APPELLANTS TO PAY
P10,000.00 AS ADMINISTRATIVE FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO
SUPPORT SUCH FINDING.8
On 30 July 2008, the Court of Appeals denied the petition for review for lack of merit. The
appellate court echoed the HLURB Arbiters ruling that "a buyer for a
condominium/subdivision unit/lot unit which has not been developed in accordance with the
approved condominium/subdivision plan within the time limit for complying with said
developmental requirement may opt for reimbursement under Section 20 in relation to
Section 23 of Presidential Decree (P.D.) 957 x x x." 9 The appellate court supported the HLURB
Arbiters conclusion, which was affirmed by the HLURB Board of Commission and the Office
of the President, that petitioners failure to develop the condominium project is tantamount
to a substantial breach which warrants a refund of the total amount paid, including interest.
The appellate court pointed out that petitioners failed to prove that the Asian financial crisis
constitutes a fortuitous event which could excuse them from the performance of their
contractual and statutory obligations. The appellate court also affirmed the award of moral
damages in light of petitioners unjustified refusal to satisfy respondents claim and the
legality of the administrative fine, as provided in Section 20 of Presidential Decree No. 957.
Petitioners sought reconsideration but it was denied in a Resolution10 dated 11 December
2008 by the Court of Appeals.
Aggrieved, petitioners filed the instant petition advancing substantially the same grounds for
review:
A.
THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED IN TOTO THE DECISION OF
THE OFFICE OF THE PRESIDENT WHICH SUSTAINED RESCISSION AND REFUND IN FAVOR OF
THE RESPONDENTS DESPITE LACK OF CAUSE OF ACTION.
B.
GRANTING FOR THE SAKE OF ARGUMENT THAT THE PETITIONERS ARE LIABLE UNDER THE
PREMISES, THE HONORABLE COURT OF APPEALS ERRED WHEN IT AFFIRMED THE HUGE
AMOUNT OF INTEREST OF TWELVE PERCENT (12%).
C.

Page | 60

THE HONORABLE COURT OF APPEALS LIKEWISE ERRED WHEN IT AFFIRMED IN TOTO THE
DECISION OF THE OFFICE OF THE PRESIDENT INCLUDING THE PAYMENT OF P100,000.00 AS
MORAL DAMAGES, P50,000.00 AS ATTORNEYS FEES AND P10,000.00 AS ADMINISTRATIVE
FINE IN THE ABSENCE OF ANY FACTUAL OR LEGAL BASIS TO SUPPORT SUCH CONCLUSIONS.11
Petitioners insist that the complaint states no cause of action because they allegedly have
not committed any act of misrepresentation amounting to bad faith which could entitle
respondents to a refund. Petitioners claim that there was a mere delay in the completion of
the project and that they only resorted to "suspension and reformatting as a testament to
their commitment to their buyers." Petitioners attribute the delay to the 1997 Asian financial
crisis that befell the real estate industry. Invoking Article 1174 of the New Civil Code,
petitioners maintain that they cannot be held liable for a fortuitous event.
Petitioners contest the payment of a huge amount of interest on account of suspension of
development on a project. They liken their situation to a bank which this Court, in Overseas
Bank v. Court of Appeals,12 adjudged as not liable to pay interest on deposits during the
period that its operations are ordered suspended by the Monetary Board of the Central
Bank.
Lastly, petitioners aver that they should not be ordered to pay moral damages because they
never intended to cause delay, and again blamed the Asian economic crisis as the direct,
proximate and only cause of their failure to complete the project. Petitioners submit that
moral damages should not be awarded unless so stipulated except under the instances
enumerated in Article 2208 of the New Civil Code. Lastly, petitioners refuse to pay the
administrative fine because the delay in the project was caused not by their own deceptive
intent to defraud their buyers, but due to unforeseen circumstances beyond their control.
Three issues are presented for our resolution: 1) whether or not the Asian financial crisis
constitute a fortuitous event which would justify delay by petitioners in the performance of
their contractual obligation; 2) assuming that petitioners are liable, whether or not 12%
interest was correctly imposed on the judgment award, and 3) whether the award of moral
damages, attorneys fees and administrative fine was proper.
It is apparent that these issues were repeatedly raised by petitioners in all the legal fora. The
rulings were consistent that first, the Asian financial crisis is not a fortuitous event that would
excuse petitioners from performing their contractual obligation; second, as a result of the
breach committed by petitioners, respondents are entitled to rescind the contract and to be
refunded the amount of amortizations paid including interest and damages; and third,
petitioners are likewise obligated to pay attorneys fees and the administrative fine.
This petition did not present any justification for us to deviate from the rulings of the HLURB,
the Office of the President and the Court of Appeals.
Indeed, the non-performance of petitioners obligation entitles respondents to rescission
under Article 1191 of the New Civil Code which states:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation,
with payment of damages in either case. He may also seek rescission, even after he has
chosen fulfillment, if the latter should become impossible.
More in point is Section 23 of Presidential Decree No. 957, the rule governing the sale of
condominiums, which provides:
Section 23. Non-Forfeiture of Payments.1wphi1 No installment payment made by a buyer in
a subdivision or condominium project for the lot or unit he contracted to buy shall be
forfeited in favor of the owner or developer when the buyer, after due notice to the owner
or developer, desists from further payment due to the failure of the owner or developer to
develop the subdivision or condominium project according to the approved plans and within
the time limit for complying with the same. Such buyer may, at his option, be reimbursed the
total amount paid including amortization interests but excluding delinquency interests, with
interest thereon at the legal rate. (Emphasis supplied).
Conformably with these provisions of law, respondents are entitled to rescind the contract
and demand reimbursement for the payments they had made to petitioners.
Notably, the issues had already been settled by the Court in the case of Fil-Estate Properties,
Inc. v. Spouses Go13 promulgated on 17 August 2007, where the Court stated that the Asian
financial crisis is not an instance of caso fortuito. Bearing the same factual milieu as the
instant case, G.R. No. 165164 involves the same company, Fil-Estate, albeit about a different
condominium property. The company likewise reneged on its obligation to respondents
therein by failing to develop the condominium project despite substantial payment of the
contract price. Fil-Estate advanced the same argument that the 1997 Asian financial crisis is a
fortuitous event which justifies the delay of the construction project. First off, the Court
classified the issue as a question of fact which may not be raised in a petition for review
considering that there was no variance in the factual findings of the HLURB, the Office of the
President and the Court of Appeals. Second, the Court cited the previous rulings of Asian
Construction and Development Corporation v. Philippine Commercial International Bank14
and Mondragon Leisure and Resorts Corporation v. Court of Appeals15 holding that the 1997
Asian financial crisis did not constitute a valid justification to renege on obligations. The
Court expounded:
Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and
beyond the control of a business corporation. It is unfortunate that petitioner apparently met
with considerable difficulty e.g. increase cost of materials and labor, even before the
scheduled commencement of its real estate project as early as 1995. However, a real estate
enterprise engaged in the pre-selling of condominium units is concededly a master in
projections on commodities and currency movements and business risks. The fluctuating
movement of the Philippine peso in the foreign exchange market is an everyday occurrence,
and fluctuations in currency exchange rates happen everyday, thus, not an instance of caso
fortuito.16

Page | 61

The aforementioned decision becomes a precedent to future cases in which the facts are
substantially the same, as in this case. The principle of stare decisis, which means adherence
to judicial precedents, applies.

Angara, Concepcion, Regala & Cruz for private respondent.

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

MEDIALDEA, J.:p

The resulting modification of the award of legal interest is, also, in line with our recent ruling
in Nacar v. Gallery Frames,17 embodying the amendment introduced by the Bangko Sentral
ng Pilipinas Monetary Board in BSP-MB Circular No. 799 which pegged the interest rate at 6%
regardless of the source of obligation.
We likewise affirm the award of attorneys fees because respondents were forced to litigate
for 14 years and incur expenses to protect their rights and interest by reason of the
unjustified act on the part of petitioners.18 The imposition of P10,000.00 administrative fine
is correct pursuant to Section 38 of Presidential Decree No. 957 which reads:
Section 38. Administrative Fines. The Authority may prescribe and impose fines not
exceeding ten thousand pesos for violations of the provisions of this Decree or of any rule or
regulation thereunder. Fines shall be payable to the Authority and enforceable through writs
of execution in accordance with the provisions of the Rules of Court.
Finally, we sustain the award of moral damages. In order that moral damages may be
awarded in breach of contract cases, the defendant must have acted in bad faith, must be
found guilty of gross negligence amounting to bad faith, or must have acted in wanton
disregard of contractual obligations.19 The Arbiter found petitioners to have acted in bad
faith when they breached their contract, when they failed to address respondents
grievances and when they adamantly refused to refund respondents' payment.
In fine, we find no reversible error on the merits in the impugned Court of Appeals' Decision
and Resolution.
WHEREFORE, the petition is PARTLY GRANTED. The appealed Decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from the time of respondents' demand for refund on 8 October 1998.
SO ORDERED.

This is a petition for review on certiorari of the decision (pp 21-31, Rollo) of the Intermediate
Appellate Court (now Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the
decision of the trial court against herein private respondent Roberto Regala, Jr., one of the
defendants in the case for sum of money filed by Pacific Banking Corporation.
The facts of the case as adopted by the respondent appellant court from herein petitioner's
brief before said court are as follows:
On October 24, 1975, defendant Celia Syjuco Regala (hereinafter referred to as Celia Regala
for brevity), applied for and obtained from the plaintiff the issuance and use of Pacificard
credit card (Exhs. "A", "A-l",), under the Terms and Conditions Governing the Issuance and
Use of Pacificard (Exh. "B" and hereinafter referred to as Terms and Conditions), a copy of
which was issued to and received by the said defendant on the date of the application and
expressly agreed that the use of the Pacificard is governed by said Terms and Conditions. On
the same date, the defendant-appelant Robert Regala, Jr., spouse of defendant Celia Regala,
executed a "Guarantor's Undertaking" (Exh. "A-1-a") in favor of the appellee Bank, whereby
the latter agreed "jointly and severally of Celia Aurora Syjuco Regala, to pay the Pacific
Banking Corporation upon demand, any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Aurora Syjuco Regala with the use of the Pacificard,
or renewals thereof, issued in her favor by the Pacific Banking Corporation". It was also
agreed that "any changes of or novation in the terms and conditions in connection with the
issuance or use of the Pacificard, or any extension of time to pay such obligations, charges or
liabilities shall not in any manner release me/us from responsibility hereunder, it being
understood that I fully agree to such charges, novation or extension, and that this
understanding is a continuing one and shall subsist and bind me until the liabilities of the said
Celia Syjuco Regala have been fully satisfied or paid.
Plaintiff-appellee Pacific Banking Corporation has contracted with accredited business
establishments to honor purchases of goods and/or services by Pacificard holders and the
cost thereof to be advanced by the plaintiff-appellee for the account of the defendant
cardholder, and the latter undertook to pay any statements of account rendered by the
plaintiff-appellee for the advances thus made within thirty (30) days from the date of the
statement, provided that any overdue account shall earn interest at the rate of 14% per
annum from date of default.

G.R. No. 72275 November 13, 1991


PACIFIC
BANKING
CORPORATION,
petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents.

The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or services
on credit (Exh. "C", "C-l" to "C-112") under her Pacificard, for which the plaintiff advanced the
cost amounting to P92,803.98 at the time of the filing of the complaint.

Ocampo, Dizon & Domingo for petitioner.

Page | 62

In view of defendant Celia Regala's failure to settle her account for the purchases made thru
the use of the Pacificard, a written demand (Exh. "D") was sent to the latter and also to the
defendant Roberto Regala, Jr. (Exh. " ") under his "Guarantor's Undertaking."
A complaint was subsequently filed in Court for defendant's (sic) repeated failure to settle
their obligation. Defendant Celia Regala was declared in default for her failure to file her
answer within the reglementary period. Defendant-appellant Roberto Regala, Jr., on the
other hand, filed his Answer with Counterclaim admitting his execution of the "Guarantor's
Understanding", "but with the understanding that his liability would be limited to P2,000.00
per month."
In view of the solidary nature of the liability of the parties, the presentation of evidence exparte as against the defendant Celia Regala was jointly held with the trial of the case as
against defendant Roberto Regala.
After the presentation of plaintiff's testimonial and documentary evidence, fire struck the
City Hall of Manila, including the court where the instant case was pending, as well as all its
records.
Upon plaintiff-appellee's petition for reconstitution, the records of the instant case were duly
reconstituted. Thereafter, the case was set for pre-trial conference with respect to the
defendant-appellant Roberto Regala on plaintiff-appellee's motion, after furnishing the latter
a copy of the same. No opposition thereto having been interposed by defendant-appellant,
the trial court set the case for pre-trial conference. Neither did said defendant-appellant nor
his counsel appear on the date scheduled by the trial court for said conference despite due
notice. Consequently, plaintiff-appellee moved that the defendant-appellant Roberto Regala
he declared as in default and that it be allowed to present its evidence ex-parte, which
motion was granted. On July 21, 1983, plaintiff-appellee presented its evidence ex-parte. (pp.
23-26, Rollo)
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion
of which reads:
WHEREFORE, the Court renders judgment for the plaintiff and against the defendants
condemning the latter, jointly and severally, to pay said plaintiff the amount of P92,803.98,
with interest thereon at 14% per annum, compounded annually, from the time of demand on
November 17, 1978 until said principal amount is fully paid; plus 15% of the principal
obligation as and for attorney's fees and expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate Appellate
Court.

On August 12, 1985, respondent appellate court rendered judgment modifying the decision
of the trial court. Private respondent Roberto Regala, Jr. was made liable only to the extent
of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the
advances made during the one year period of the card's effectivity counted from October 29,
1975 up to October 29, 1976. The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated December 5, 1983 is modified only as to
appellant Roberto Regala, Jr., so as to make him liable only for the purchases made by
defendant Celia Aurora Syjuco Regala with the use of the Pacificard from October 29, 1975
up to October 29, 1976 up to the amount of P2,000.00 per month only, with interest from
the filing of the complaint up to the payment at the rate of 14% per annum without
pronouncement as to costs. (p. 32, Rollo)
A motion for reconsideration was filed by Pacific Banking Corporation which the respondent
appellate court denied for lack of merit on September 19, 1985 (p. 33, Rollo).
On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the
appellate court correctly recognized Celia Regala's obligation to Pacific Banking Corp. for the
purchases of goods and services with the use of a Pacificard credit card in the total amount
of P92,803.98 with 14% interest per annum, it erred in limiting private respondent Roberto
Regala, Jr.'s liability only for purchases made by Celia Regala with the use of the card from
October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14%
interest from the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking" which private respondent Roberto
Regala, Jr. signed in favor of Pacific Banking Corporation provides:
I/We, the undersigned, hereby agree, jointly and severally with Celia Syjuco Regala to pay the
Pacific Banking Corporation upon demand any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the use of the Pacificard or
renewals thereof issued in his favor by the Pacific Banking Corporation. Any changes of or
Novation in the terms and conditions in connection with the issuance or use of said Pacificard,
or any extension of time to pay such obligations, charges or liabilities shall not in any manner
release me/us from the responsibility hereunder, it being understood that the undertaking is a
continuing one and shall subsist and bind me/us until all the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid. (p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's
Undertaking," was in substance a contract of surety. As distinguished from a contract of
guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor only in case the latter should fail to do so, in a contract of suretyship, the
surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the
Philippines).

Page | 63

We need not look elsewhere to determine the nature and extent of private respondent
Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally with the
debtor Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred by said Celia Syjuco Regala
with the use of Pacificard or renewals thereof issued in (her) favor by Pacific Banking
Corporation." This undertaking was also provided as a condition in the issuance of the
Pacificard to Celia Regala, thus:
5. A Pacificard is issued to a Pacificard-holder against the joint and several signature of a third
party and as such, the Pacificard holder and the guarantor assume joint and several liabilities
for any and all amount arising out of the use of the Pacificard. (p. 14, Rollo)
The respondent appellate court held that "all the other rights of the guarantor are not
thereby lost by the guarantor becoming liable solidarily and therefore a surety." It further
ruled that although the surety's liability is like that of a joint and several debtor, it does not
make him the debtor but still the guarantor (or the surety), relying on the case of
Government of the Philippines v. Tizon. G.R. No. L-22108, August 30, 1967, 20 SCRA 1182.
Consequently, Article 2054 of the Civil Code providing for a limited liability on the part of the
guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less,
but not for more than the principal debtor, both as regards the amount and the onerous
nature of the conditions. 2 It is likewise not disputed by the parties that the credit limit
granted to Celia Regala was P2,000.00 per month and that Celia Regala succeeded in using
the card beyond the original period of its effectivity, October 29, 1979. We do not agree
however, that Roberto Jr.'s liability should be limited to that extent. Private respondent
Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of the
debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change
or novation of the terms and conditions in connection with the issuance of the Pacificard
credit card." Roberto, in fact, made his commitment as a surety a continuing one, binding
upon himself until all the liabilities of Celia Regala have been fully paid. All these were clear
under the "Guarantor's Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms and conditions in connection with the issuance or
use of said Pacificard, or any extension of time to pay such obligations, charges or liabilities
shall not in any manner release me/us from the responsibility hereunder, it being understood
that the undertaking is a continuing one and shall subsist and bind me/us until all the
liabilities of the said Celia Syjuco Regala have been fully satisfied or paid. (p. 12, supra;
emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms of the
undertaking of future changes in the terms and conditions governing the issuance of the
credit card to his wife and that, notwithstanding, he voluntarily agreed to be bound as a
surety. As in guaranty, a surety may secure additional and future debts of the principal
debtor the amount of which is not yet known (see Article 2053, supra).

The application by respondent court of the ruling in Government v. Tizon, supra is misplaced.
It was held in that case that:
. . . although the defendants bound themselves in solidum, the liability of the Surety under its
bond would arise only if its co-defendants, the principal obligor, should fail to comply with
the contract. To paraphrase the ruling in the case of Municipality of Orion vs. Concha, the
liability of the Surety is "consequent upon the liability" of Tizon, or "so dependent on that of
the principal debtor" that the Surety "is considered in law as being the same party as the
debtor in relation to whatever is adjudged, touching the obligation of the latter"; or the
liabilities of the two defendants herein "are so interwoven and dependent as to be
inseparable." Changing the expression, if the defendants are held liable, their liability to pay
the plaintiff would be solidary, but the nature of the Surety's undertaking is such that it does
not incur liability unless and until the principal debtor is held liable.
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in
this sense that a surety, although solidarily liable with the principal debtor, is different from
the debtor. It does not mean, however, that the surety cannot be held liable to the same
extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a
surety is determined by the clauses in the contract of suretyship(see PCIB v. CA, L-34959,
March 18, 1988, 159 SCRA 24).
ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate
court is SET ASIDE and the decision of the trial court is REINSTATED.
SO ORDERED.
[G.R. No. 101723. May 11, 2000]
INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP. (INIMACO), petitioner,
vs. NATIONAL LABOR RELATIONS COMMISSION, (Fourth Division) Cebu City, and ENRIQUE
SULIT, SOCORRO MAHINAY, ESMERALDO PEGARIDO, TITA BACUSMO, GINO NIERE,
VIRGINIA BACUS, ROBERTO NEMENZO, DARIO GO, and ROBERTO ALEGARBES, respondents.
DECISION
BUENA, J.:
This is a petition for certiorari assailing the Resolution dated September 4, 1991 issued by the
National Labor Relations Commission in RAB-VII-0711-84 on the alleged ground that it
committed a grave abuse of discretion amounting to lack of jurisdiction in upholding the Alias
Writ of Execution issued by the Labor Arbiter which deviated from the dispositive portion of
the Decision dated March 10, 1987, thereby holding that the liability of the six respondents in
the case below is solidary despite the absence of the word "solidary" in the dispositive
portion of the Decision, when their liability should merely be joint. S-jcj
The factual antecedents are undisputed: Supr-eme

Page | 64

In September 1984, private respondent Enrique Sulit, Socorro Mahinay, Esmeraldo Pegarido,
Tita Bacusmo, Gino Niere, Virginia Bacus, Roberto Nemenzo, Dariogo, and Roberto Alegarbes
filed a complaint with the Department of Labor and Employment, Regional Arbitration
Branch No. VII in Cebu City against Filipinas Carbon Mining Corporation, Gerardo Sicat,
Antonio Gonzales, Chiu Chin Gin, Lo Kuan Chin, and petitioner Industrial Management
Development Corporation (INIMACO), for payment of separation pay and unpaid wages. Sc-jj
In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held that:
"RESPONSIVE, to all the foregoing, judgment is hereby entered, ordering respondents
Filipinas Carbon and Mining Corp. Gerardo Sicat, Antonio Gonzales/Industrial Management
Development Corp. (INIMACO), Chiu Chin Gin and Lo Kuan Chin, to pay complainants Enrique
Sulit, the total award of P82,800.00; ESMERALDO PEGARIDO the full award of P19,565.00;
Roberto Nemenzo the total sum of P29,623.60 and DARIO GO the total award of P6,599.71,
or the total aggregate award of ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED
EIGHTY-EIGHT PESOS AND 31/100 (P138,588.31) to be deposited with this Commission
within ten (10) days from receipt of this Decision for appropriate disposition. All other claims
are hereby Dismiss (sic) for lack of merit. Jjs-c
"SO ORDERED.
"Cebu City, Philippines.
"10 March 1987."01
No appeal was filed within the reglementary period thus, the above Decision became final
and executory. On June 16, 1987, the Labor Arbiter issued a writ of execution but it was
returned unsatisfied. On August 26, 1987, the Labor Arbiter issued an Alias Writ of Execution
which ordered thus: Ed-pm-is
"NOW THEREFORE, by virtue of the powers vested in me by law, you are hereby commanded
to proceed to the premises of respondents Antonio Gonzales/Industrial Management
Development Corporation (INIMACO) situated at Barangay Lahug, Cebu City, in front of La
Curacha Restaurant, and/or to Filipinas Carbon and Mining corporation and Gerardo Sicat at
4th Floor Universal RE-Bldg. 106 Paseo de Roxas, Legaspi Village, Makati Metro Manila and at
Philippine National Bank, Escolta, Manila respectively, and collect the aggregate award of
ONE HUNDRED THIRTY-EIGHT THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND THIRTY
ONE CENTAVOS (P138,588.31) and thereafter turn over said amount to complainants
ENRIQUE SULIT, ESMERALDO PEGARIDO, ROBERTO NEMENZO AND DARIO GO or to this
Office for appropriate disposition. Should you fail to collect the said sum in cash, you are
hereby authorized to cause the satisfaction of the same on the movable or immovable
property(s) of respondents not exempt from execution. You are to return this writ sixty (6)
(sic) days from your receipt hereof, together with your corresponding report.

"You may collect your legal expenses from the respondents as provided for by law.
"SO ORDERED."2
On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of Execution and Set
Aside Decision,"3 alleging among others that the alias writ of execution altered and changed
the tenor of the decision by changing the liability of therein respondents from joint to
solidary, by the insertion of the words "AND/OR" between "Antonio Gonzales/Industrial
Management Development Corporation and Filipinas Carbon and Mining Corporation, et al."
However, in an order dated September 14, 1987, the Labor Arbiter denied the motion. Misoedp
On October 2, 1987, petitioner appealed4 the Labor Arbiters Order dated September 14,
1987 to the respondent NLRC. Mis-edp
The respondent NLRC dismissed the appeal in a Decision 5 dated August 31, 1988, the
pertinent portions of which read:
"In matters affecting labor rights and labor justice, we have always adopted the liberal
approach which favors the exercise of labor rights and which is beneficial to labor as a means
to give full meaning and import to the constitutional mandate to afford protection to labor.
Considering the factual circumstances in this case, there is no doubt in our mind that the
respondents herein are called upon to pay, jointly and severally, the claims of the
complainants as was the latters prayers. Inasmuch as respondents herein never
controverted the claims of the complainants below, there is no reason why complainants
prayer should not be granted. Further, in line with the powers granted to the Commission
under Article 218 (c) of the Labor code, to waive any error, defect or irregularity whether in
substance or in form in a proceeding before Us, We hold that the Writ of Execution be given
due course in all respects." Ed-p
On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept Payment Of
P23,198.05 Representing One Sixth Pro Rata Share of Respondent INIMACO As Full and Final

Page | 65

Satisfaction of Judgment As to Said Respondent." 6 The private respondents opposed the


motion. In an Order7 dated August 15, 1989, the Labor Arbiter denied the motion ruling thus:
"WHEREFORE, responsive to the foregoing respondent INIMACOs Motions are hereby
DENIED. The Sheriff of this Office is order (sic) to accept INIMACOs tender payment (sic) of
the sum of P23,198.05, as partial satisfaction of the judgment and to proceed with the
enforcement of the Alias Writ of Execution of the levied properties, now issued by this Office,
for the full and final satisfaction of the monetary award granted in the instant case.

Upon careful examination of the pleadings filed by the parties, the Court finds that petitioner
INIMACOs liability is not solidary but merely joint and that the respondent NLRC acted with
grave abuse of discretion in upholding the Labor Arbiters Alias Writ of Execution and
subsequent Orders to the effect that petitioners liability is solidary.
A solidary or joint and several obligation is one in which each debtor is liable for the entire
obligation, and each creditor is entitled to demand the whole obligation. 9 In a joint obligation
each obligor answers only for a part of the whole liability and to each obligee belongs only a
part of the correlative rights.10

"SO ORDERED." Ed-psc


Petitioner appealed the above Order of the Labor Arbiter but this was again dismissed by the
respondent NLRC in its Resolution8 dated September 4, 1991 which held that:
"The arguments of respondent on the finality of the dispositive portion of the decision in this
case is beside the point. What is important is that the Commission has ruled that the Writ of
Execution issued by the Labor Arbiter in this case is proper. It is not really correct to say that
said Writ of Execution varied the terms of the judgment. At most, considering the nature of
labor proceedings there was, an ambiguity in said dispositive portion which was
subsequently clarified by the Labor Arbiter and the Commission in the incidents which were
initiated by INIMACO itself. By sheer technicality and unfounded assertions, INIMACO would
now reopen the issue which was already resolved against it. It is not in keeping with the
established rules of practice and procedure to allow this attempt of INIMACO to delay the
final disposition of this case.
"WHEREFORE, in view of all the foregoing, this appeal is DISMISSED and the Order appealed
from is hereby AFFIRMED. Sce-dp
"With double costs against appellant."

Well-entrenched is the rule that solidary obligation cannot lightly be inferred. 11 There is a
solidary liability only when the obligation expressly so states, when the law so provides or
when the nature of the obligation so requires.12
In the dispositive portion of the Labor Arbiter, the word "solidary" does not appear. The said
fallo expressly states the following respondents therein as liable, namely: Filipinas Carbon
and Mining Corporation, Gerardo Sicat, Antonio Gonzales, Industrial Management
Development Corporation (petitioner INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor can it
be inferred therefrom that the liability of the six (6) respondents in the case below is solidary,
thus their liability should merely be joint.
Moreover, it is already a well-settled doctrine in this jurisdiction that, when it is not provided
in a judgment that the defendants are liable to pay jointly and severally a certain sum of
money, none of them may be compelled to satisfy in full said judgment. In Oriental
Commercial Co. vs. Abeto and Mabanag13 this Court held:
"It is of no consequence that, under the contract of suretyship executed by the parties, the
obligation contracted by the sureties was joint and several in character. The final judgment,
which superseded the action for the enforcement of said contract, declared the obligation to
be merely joint, and the same cannot be executed otherwise." 14

Dissatisfied with the foregoing, petitioner filed the instant case, alleging that the respondent
NLRC committed grave abuse of discretion in affirming the Order of the Labor Arbiter dated
August 15, 1989, which declared the liability of petitioner to be solidary.
The only issue in this petition is whether petitioners liability pursuant to the Decision of the
Labor Arbiter dated March 10, 1987, is solidary or not. Calrs-pped

Page | 66

Granting that the Labor Arbiter has committed a mistake in failing to indicate in the
dispositive portion that the liability of respondents therein is solidary, the correction -- which
is substantial -- can no longer be allowed in this case because the judgment has already
become final and executory. Scc-alr
It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to
settlement of rights of the parties.15 Once a decision or order becomes final and executory, it
is removed from the power or jurisdiction of the court which rendered it to further alter or
amend it.16 It thereby becomes immutable and unalterable and any amendment or alteration
which substantially affects a final and executory judgment is null and void for lack of
jurisdiction, including the entire proceedings held for that purpose.17 An order of execution
which varies the tenor of the judgment or exceeds the terms thereof is a nullity. 18
None of the parties in the case before the Labor Arbiter appealed the Decision dated March
10, 1987, hence the same became final and executory. It was, therefore, removed from the
jurisdiction of the Labor Arbiter or the NLRC to further alter or amend it. Thus, the
proceedings held for the purpose of amending or altering the dispositive portion of the said
decision are null and void for lack of jurisdiction. Also, the Alias Writ of Execution is null and
void because it varied the tenor of the judgment in that it sought to enforce the final
judgment against "Antonio Gonzales/Industrial Management Development Corp. (INIMACO)
and/or Filipinas Carbon and Mining Corp. and Gerardo Sicat," which makes the liability
solidary. Ca-lrsc
WHEREFORE, the petition is hereby GRANTED. The Resolution dated September 4, 1991 of
the respondent National Labor Relations is hereby declared NULL and VOID. The liability of
the respondents in RAB-VII-0711-84 pursuant to the Decision of the Labor Arbiter dated
March 10, 1987 should be, as it is hereby, considered joint and petitioners payment which
has been accepted considered as full satisfaction of its liability, without prejudice to the
enforcement of the award, against the other five (5) respondents in the said case. Sppedsc
SO ORDERED.
G.R. No. 144134

November 11, 2003

MARIVELES
SHIPYARD
CORP.,
Petitioner,
vs.HON. COURT OF APPEALS, LUIS REGONDOLA, MANUELIT GATALAN, ORESCA AGAPITO,

NOEL ALBADBAD, ROGELIO PINTUAN, DANILO CRISOSTOMO, ROMULO MACALINAO,


NESTOR FERER, RICKY CUESTA, ROLLY ANDRADA, LARRY ROGOLA, FRANCISCO LENOGON,
AUGUSTO QUINTO, ARFE BERAMO, BONIFACIO TRINIDAD, ALFREDO ASCARRAGA,
ERNESTO MAGNO, HONORARIO HORTECIO, NELBERT PINEDA, GLEN ESTIPULAR,
FRANCISCO COMPUESTO, ISABELITO CORTEZ, MATURAN ROSAURO, SAMSON CANAS,
FEBIEN ISIP, JESUS RIPARIP, ALFREDO SIENES, ADOLAR ALBERT, HONESTO CABANILLAS,
AMPING CASTILLO and ELWIN REVILLA, Respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Resolution,1 dated December 29, 1999, of the Court of Appeals
in CA-G.R. SP No. 55416, which dismissed outright the petition for certiorari of Mariveles
Shipyard Corp., due to a defective certificate of non-forum shopping and non-submission of
the required documents to accompany said petition. Mariveles Shipyard Corp., had filed a
special civil action for certiorari with the Court of Appeals to nullify the resolution2 of the
National Labor Relations Commission (NLRC), dated April 22, 1999, in NLRC NCR Case No. 0009-005440-96-A, which affirmed the Labor Arbiters decision,3 dated May 22, 1998, holding
petitioner jointly and severally liable with Longest Force Investigation and Security Agency,
Inc., for the underpayment of wages and overtime pay due to the private respondents.
Likewise challenged in the instant petition is the resolution4 of the Court of Appeals, dated
July 12, 2000, denying petitioners motion for reconsideration.
The facts, as culled from records, are as follows:
Sometime on October 1993, petitioner Mariveles Shipyard Corporation engaged the services
of Longest Force Investigation and Security Agency, Inc. (hereinafter, "Longest Force") to
render security services at its premises. Pursuant to their agreement, Longest Force deployed
its security guards, the private respondents herein, at the petitioners shipyard in Mariveles,
Bataan.
According to petitioner, it religiously complied with the terms of the security contract with
Longest Force, promptly paying its bills and the contract rates of the latter. However, it found
the services being rendered by the assigned guards unsatisfactory and inadequate, causing it
to terminate its contract with Longest Force on April 1995. 5 Longest Force, in turn,
terminated the employment of the security guards it had deployed at petitioners shipyard.
On September 2, 1996, private respondents filed a case for illegal dismissal, underpayment of
wages pursuant to the PNPSOSIA-PADPAO rates, non-payment of overtime pay, premium pay
for holiday and rest day, service incentive leave pay, 13th month pay and attorneys fees,
against both Longest Force and petitioner, before the Labor Arbiter. Docketed as NLRC NCR
Case No. 00-09-005440-96-A, the case sought the guards reinstatement with full backwages
and without loss of seniority rights.

Page | 67

For its part, Longest Force filed a cross-claim6 against the petitioner. Longest Force admitted
that it employed private respondents and assigned them as security guards at the premises
of petitioner from October 16, 1993 to April 30, 1995, rendering a 12 hours duty per shift for
the said period. It likewise admitted its liability as to the non-payment of the alleged wage
differential in the total amount of P2,618,025 but passed on the liability to petitioner alleging
that the service fee paid by the latter to it was way below the PNPSOSIA and PADPAO rate,
thus, "contrary to the mandatory and prohibitive laws because the right to proper
compensation and benefits provided under the existing labor laws cannot be waived nor
compromised."

TOTAL UNDERPAYMENTS - - - - - - - - - - - - - -

OVERTIME:

The petitioner denied any liability on account of the alleged illegal dismissal, stressing that no
employer-employee relationship existed between it and the security guards. It further
pointed out that it would be the height of injustice to make it liable again for monetary
claims which it had already paid. Anent the cross-claim filed by Longest Force against it,
petitioner prayed that it be dismissed for lack of merit. Petitioner averred that Longest Force
had benefited from the contract, it was now estopped from questioning said agreement on
the ground that it had made a bad deal.

Oct. 16-Dec. 15/93


(2 mos.)

Dec. 16/93-Mar.
31/94 (3.5 mos)

WHEREFORE, conformably with the foregoing, judgment is hereby rendered ordering the
respondents as follows:
Apr.
1-Dec.
31/94 (9 mos.)

Jan.
1-Apr.
29/95 (3.97 mos.)
UNDERPAYMENT WAGE
FOR
THE DIRRERENTIALS
PERIOD

Oct.
16-Dec. P5,485.00
15/93(2 mos.)

P5,000

P485.00

P970.00

Dec. 16/93-Mar.
31/94 (3.5 mos.)

6,630.00

5,000

1,630.00

5,705.00

Apr.
1-Dec.
31/94 (9 mos.)

7,090.00

5,810

1,280.00

11,520.00

Jan.
1-Apr. 7,220.00
29/95 (3.97 mos.)

5,810

1,410.00

5,597

6,630

x 3.5

= 11,602.50

7,090

x9

31,905.00

x 3.97

14,331.70

UNDERPAYMENT OF WAGES:
ACTUAL
SALARY

= P 5,485.00

1. DECLARING respondents Longest Force Investigation & Security Agency, Inc.1wphi1 and
Mariveles Shipyard Corporation jointly and severally liable to pay the money claims of
complainants representing underpayment of wages and overtime pay in the total amount of
P2,700,623.40 based on the PADPAO rates of pay covering the period from October 16, 1993
up to April 29, 1995 broken down as follows:

MONTHLY
PADPAO
RATES
(8 hrs. duty)

P5,485 x 2

On May 22, 1998, the Labor Arbiter decided NLRC NCR Case No. 00-09-005440-96-A, to wit:

PERIOD
COVERED

P23,792.70

7,220

TOTAL OVERTIME - - - - - - - - -

P63,324.20

Sub-Total of Underpayments and Overtime P87,116.90


1awp++i1

Page | 68

1. Luis Regondula (the same)

P 87,116.90

27. Alfredo Sienes (the same)

87,116.90

2. Manolito Catalan (the same)

87,116.90

28. Adolar Albert (the same)

87,116.90

3. Oresca Agapito (the same)

87,116.90

29. Cabanillas Honesto (the same)

87,116.90

4. Noel Alibadbad (the same)

87,116.90

30. Castillo Amping (the same)

87,116.90

5. Rogelio Pintuan (the same)

87,116.90

31. Revilla Elwin (the same)

87,116.90

6. Danilo Crisostomo (the same)

87,116.90

7. Romulo Macalinao (the same)

87,116.90

GRAND TOTAL

P 2,700,623.90

8. Nestor Ferrer (the same)

87,116.90

9. Ricky Cuesta (the same)

87,116.90

10. Andrada Ricky (the same)

87,116.90

11. Larry Rogola (the same)

87,116.90

12. Francisco Lenogon (the same)

87,116.90

13. Augosto Quinto (the same)

87,116.90

14. Arfe Beramo (the same)

87,116.90

15. Bonifacio Trinidad (the same)

87,116.90

Backwages:

16. Alfredo Azcarraga (the same)

87,116.90

10/16 12/15/93 = 2 mos.


P 5,485.00 x 2 mos.

= P 10,970.00

17. Ernesto Magno (the same)

87,116.90

18. Honario Hortecio (the same)

87,116.90

12/16/93 3/31/94=3.5 mos.


P 6,630.00 x 3.5 mos.

= 23,205.00

19. Nelbert Pineda (the same)

87,116.90

20. Glen Estipular (the same)

87,116.90

4/1 12/31/94 = 9 mos.


P 7,090.00 x 9 mos.

= 63,810.00

21. Francisco Compuesto (the same)

87,116.90

1/1 4/29/95 = 3.97 mos.


P 7,220.00 x 3.97 mos.

= 28,663.40

22. Isabelito Cortes (the same)

87,116.90

23. Maturan Rosauro (the same)

87,116.90

TOTAL

P 126,684.407

24. Samson Canas (the same)

87,116.90

25. Febien Isip (the same)

87,116.90

26. Jesus Riparip (the same)

87,116.90

2. DECLARING both respondents liable to pay complainants attorneys fees equivalent to ten
(10%) percent of the total award recovered or the sum of P270,062.34.
3. ORDERING respondent Longest Force Investigation & Security Agency, Inc. to reinstate all
the herein complainants to their former or equivalent positions without loss of seniority
rights and privileges with full backwages which as computed as of the date of this decision
are as follows:

1. Luis Regondula (same)

P 126,684.408

Page | 69

2. Manolito Catalan (same)

126,684.40

29. Cabanillas Honesto (same)

126,684.40

3. Oresca Agapito (same)

126,684.40

30. Castillo Amping (same)

126,684.40

4. Noel Alibadbad (same)

126,684.40

31. Revilla Elwin (same)

126,684.40

5. Rogelio Pintuan (same)

126,684.40

6. Danilo Crisostomo (same)

126,684.40

GRAND TOTAL

P3,927,216.409

7. Romulo Macalinao (same)

126,684.40

8. Nestor Ferrer (same)

126,684.40

9. Ricky Cuesta (same)

126,684.40

10. Andrada Rolly (same)

126,684.40

11. Larry Rogola (same)

126,684.40

12. Francisco Lenogon (same)

126,684.40

13. Augosto Quinto (same)

126,684.40

14. Arfe Beramo (same)

126,684.40

15. Bonifacio Trinidad (same)

126,684.40

16. Alfredo Azcarraga (same)

126,684.40

17. Ernesto Magno (same)

126,684.40

18. Honario Hortecio (same)

126,684.40

19. Nelbert Pineda (same)

126,684.40

20. Glen Estipular (same)

126,684.40

21. Francisco Compuesto (same)

126,684.40

22. Isabelito Cortes (same)

126,684.40

23. Maturan Rosauro (same)

126,684.40

24. Samson Canas (same)

126,684.40

25. Febien Isip (same)

126,684.40

26. Jesus Riparip (same)

126,684.40

27. Alfredo Sienes (same)

126,684.40

28. Adolar Albert (same)

126,684.40

4. ORDERING said Longest Force Investigation & Security Agency, Inc. to pay attorneys fees
equivalent to ten (10%) percent of the total award recovered representing backwages in the
amount of P392,721.64.10
5. DISMISSING all other claims for lack of legal basis.
SO ORDERED.11
Petitioner appealed the foregoing to the NLRC in NLRC NCR Case No. 00-09-005440-96-A. The
labor tribunal, however, affirmed in toto the decision of the Labor Arbiter. Petitioner moved
for reconsideration, but this was denied by the NLRC.
The petitioner then filed a special civil action for certiorari assailing the NLRC judgment for
having been rendered with grave abuse of discretion with the Court of Appeals, docketed as
CA-G.R. SP No. 55416. The Court of Appeals, however, denied due course to the petition and
dismissed it outright for the following reasons:
1. The verification and certification on non-forum shopping is signed not by duly authorized
officer of petitioner corporation, but by counsel (Section 1, Rule 65, 1997 Rules of Civil
Procedure).
2. The petition is unaccompanied by copies of relevant and pertinent documents, particularly
the motion for reconsideration filed before the NLRC (Section 1, Rule 65, 1997 Rules of Civil
Procedure).12
The petitioner then moved for reconsideration of the order of dismissal. The appellate court
denied the motion, pointing out that under prevailing case law subsequent compliance with
formal requirements for filing a petition as prescribed by the Rules, does not ipso facto
warrant a reconsideration. In any event, it found no grave abuse of discretion on the part of
the NLRC to grant the writ of certiorari.
Hence, this present petition before us. Petitioner submits that THE COURT OF APPEALS
GRAVELY ERRED:

Page | 70

1. .IN DISMISSING THE PETITION AND DENYING THE MOTION FOR RECONSIDERATION
DESPITE THE FACT THAT PETITIONER SUBSTANTIALLY COMPLIED WITH THE REQUIREMENTS
OF SECTION 1, RULE 65, 1997 RULES OF CIVIL PROCEDURE.
2. .IN RULING THAT PETITIONER WAS NOT DENIED DUE PROCESS OF LAW.
3. .IN AFFIRMING THE DECISION OF THE NATIONAL LABOR RELATIONS COMMISSION THAT
"LONGEST FORCE" AND PETITIONER ARE JOINTLY AND SEVERALLY LIABLE FOR PAYMENT OF
WAGES AND OVERTIME PAY DESPITE THE CLEAR SHOWING THAT PETITIONER HAVE ALREADY
PAID THE SECURITY SERVICES THAT WAS RENDERED BY PRIVATE RESPONDENTS.
4. WHEN IT FAILED TO RULE THAT ONLY "LONGEST FORCE" SHOULD BE SOLELY AND
ULTIMATELY LIABLE IN THE INSTANT CASE.13
We find the issues for our resolution to be: (1) Was it error for the Court of Appeals to
sustain its order of dismissal of petitioners special civil action for certiorari, notwithstanding
subsequent compliance with the requirements under the Rules of Court by the petitioner?
(2) Did the appellate court err in not holding that petitioner was denied due process of law
by the NLRC? and (3) Did the appellate court grievously err in finding petitioner jointly and
severally liable with Longest Force for the payment of wage differentials and overtime pay
owing to the private respondents?
On the first issue, the Court of Appeals in dismissing CA-G.R. SP No. 55416 observed that: (1)
the verification and certification of non-forum shopping was not signed by any duly
authorized officer of petitioner but merely by petitioners counsel; and (2) the petition was
not accompanied by a copy of motion for reconsideration filed before the NLRC, thus
violating Section 1,14 Rule 65 of the Rules of Court. Hence, a dismissal was proper under
Section 3,15 Rule 46 of the Rules.
In assailing the appellate courts ruling, the petitioner appeals to our sense of compassion
and kind consideration. It submits that the certification signed by its counsel and attached to
its petition filed with the Court of Appeals is substantial compliance with the requirement.
Moreover, petitioner calls our attention to the fact that when it filed its motion for
reconsideration before the Court of Appeals, a joint verification and certification of nonforum shopping duly signed by its Personnel Manager16 and a copy of the Motion for
Reconsideration17 filed before the NLRC were attached therein. Thus, petitioner prays that
we take a liberal stance to promote the ends of justice.
Petitioners plea for liberality, however, cannot be granted by the Court for reasons herein
elucidated.
It is settled that the requirement in the Rules that the certification of non-forum shopping
should be executed and signed by the plaintiff or the principal means that counsel cannot
sign said certification unless clothed with special authority to do so.18 The reason for this is
that the plaintiff or principal knows better than anyone else whether a petition has
previously been filed involving the same case or substantially the same issues. Hence, a

certification signed by counsel alone is defective and constitutes a valid cause for dismissal of
the petition.19 In the case of natural persons, the Rule requires the parties themselves to sign
the certificate of non-forum shopping. However, in the case of the corporations, the physical
act of signing may be performed, on behalf of the corporate entity, only by specifically
authorized individuals for the simple reason that corporations, as artificial persons, cannot
personally do the task themselves.20 In this case, not only was the originally appended
certification signed by counsel, but in its motion for reconsideration, still petitioner utterly
failed to show that Ms. Rosanna Ignacio, its Personnel Manager who signed the verification
and certification of non-forum shopping attached thereto, was duly authorized for this
purpose. It cannot be gainsaid that obedience to the requirements of procedural rule is
needed if we are to expect fair results therefrom. Utter disregard of the rules cannot justly
be rationalized by harking on the policy of liberal construction.21
Thus, on this point, no error could be validly attributed to respondent Court of Appeals. It did
not err in dismissing the petition for non-compliance with the requirements governing the
certification of non-forum shopping.
Anent the second issue, petitioner avers that there was denial of due process of law when
the Labor Arbiter failed to have the case tried on the merits. Petitioner adds that the Arbiter
did not observe the mandatory language of the then Sec. 5(b) Rule V (now Section 11, per
amendment in Resolution No. 01-02, Series of 2002) of the NLRC New Rules of Procedure
which provided that:
If the Labor Arbiter finds no necessity of further hearing after the parties have submitted
their position papers and supporting documents, he shall issue an Order to that effect and
shall inform the parties, stating the reasons therefor. 22
Petitioners contention, in our view, lacks sufficient basis. Well settled is the rule that the
essence of due process is simply an opportunity to be heard, or, as applied to administrative
proceedings, an opportunity to explain ones side or an opportunity to seek a reconsideration
of the action or ruling complained of.23 Not all cases require a trial-type hearing. The
requirement of due process in labor cases before a Labor Arbiter is satisfied when the parties
are given the opportunity to submit their position papers to which they are supposed to
attach all the supporting documents or documentary evidence that would prove their
respective claims, in the event the Labor Arbiter determines that no formal hearing would be
conducted or that such hearing was not necessary. 24 In any event, as found by the NLRC,
petitioner was given ample opportunity to present its side in several hearings conducted
before the Labor Arbiter and in the position papers and other supporting documents that it
had submitted. We find that such opportunity more than satisfies the requirement of due
process in labor cases.
On the third issue, petitioner argues that it should not be held jointly and severally liable with
Longest Force for underpayment of wages and overtime pay because it had been religiously
and promptly paying the bills for the security services sent by Longest Force and that these
are in accordance with the statutory minimum wage. Also, petitioner contends that it should
not be held liable for overtime pay as private respondents failed to present proof that
overtime work was actually performed. Lastly, petitioner claims that the Court of Appeals

Page | 71

failed to render a decision that finally disposed of the case because it did not specifically rule
on the immediate recourse of private respondents, that is, the matter of reimbursement
between petitioner and Longest Force in accordance with Eagle Security Agency Inc. v.
NLRC,25 and Philippine Fisheries Development Authority v. NLRC.26
Petitioners liability is joint and several with that of Longest Force, pursuant to Articles 106,
107 and 109 of the Labor Code which provide as follows:
ART. 106. CONTRACTOR OR SUBCONTRACTOR Whenever an employer enters into a
contract with another person for the performance of the formers work, the employees of
the contractor and of the latters subcontractor, if any, shall be paid in accordance with the
provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in
accordance with this Code, the employer shall be jointly and severally liable with his
contractor or subcontractor to such employees to the extent of the work performed under
the contract, in the same manner and extent that he is liable to employees directly employed
by him.
xxx
ART. 107. INDIRECT EMPLOYER. The provisions of the immediately preceding Article shall
likewise apply to any person, partnership, association or corporation which, not being an
employer, contracts with an independent contractor for the performance of any work, task,
job or project.
ART. 109. SOLIDARY LIABILITY. The provisions of existing laws to the contrary
notwithstanding, every employer or indirect employer shall be held responsible with his
contractor or subcontractor for any violation of any provision of this Code. For purposes of
determining the extent of their civil liability under this Chapter, they shall be considered as
direct employers.
In this case, when petitioner contracted for security services with Longest Force as the
security agency that hired private respondents to work as guards for the shipyard
corporation, petitioner became an indirect employer of private respondents pursuant to
Article 107 abovecited. Following Article 106, when the agency as contractor failed to pay the
guards, the corporation as principal becomes jointly and severally liable for the guards
wages. This is mandated by the Labor Code to ensure compliance with its provisions,
including payment of statutory minimum wage. The security agency is held liable by virtue of
its status as direct employer, while the corporation is deemed the indirect employer of the
guards for the purpose of paying their wages in the event of failure of the agency to pay
them. This statutory scheme gives the workers the ample protection consonant with labor
and social justice provisions of the 1987 Constitution.27
Petitioner cannot evade its liability by claiming that it had religiously paid the compensation
of guards as stipulated under the contract with the security agency. Labor standards are

enacted by the legislature to alleviate the plight of workers whose wages barely meet the
spiraling costs of their basic needs. Labor laws are considered written in every contract.
Stipulations in violation thereof are considered null. Similarly, legislated wage increases are
deemed amendments to the contract. Thus, employers cannot hide behind their contracts in
order to evade their (or their contractors or subcontractors) liability for noncompliance with
the statutory minimum wage.28
However, we must emphasize that the solidary liability of petitioner with that of Longest
Force does not preclude the application of the Civil Code provision on the right of
reimbursement from his co-debtor by the one who paid.29 As held in Del Rosario & Sons
Logging Enterprises, Inc. v. NLRC,30 the joint and several liability imposed on petitioner is
without prejudice to a claim for reimbursement by petitioner against the security agency for
such amounts as petitioner may have to pay to complainants, the private respondents
herein. The security agency may not seek exculpation by claiming that the principals
payments to it were inadequate for the guards lawful compensation. As an employer, the
security agency is charged with knowledge of labor laws; and the adequacy of the
compensation that it demands for contractual services is its principal concern and not any
others.31
On the issue of the propriety of the award of overtime pay despite the alleged lack of proof
thereof, suffice it to state that such involves a determination and evaluation of facts which
cannot be done in a petition for review. Well established is the rule that in an appeal via
certiorari, only questions of law may be reviewed.32
One final point. Upon review of the award of backwages and attorneys fees, we discovered
certain errors that happened in the addition of the amount of individual backwages that
resulted in the erroneous total amount of backwages and attorneys fees. These errors ought
to be properly rectified now. Thus, the correct sum of individual backwages should be
P126,648.40 instead of P126,684.40, while the correct sum of total backwages awarded and
attorneys fees should be P3,926,100.40 and P392,610.04, instead of P3,927,216.40 and
P392,721.64, respectively.
WHEREFORE, the Resolution of the Court of Appeals in CA-G.R. SP No. 55416 is AFFIRMED
with MODIFICATION. Petitioner and Longest Force are held liable jointly and severally for
underpayment of wages and overtime pay of the security guards, without prejudice to
petitioners right of reimbursement from Longest Force Investigation and Security Agency,
Inc. The amounts payable to complaining security guards, herein private respondents, by way
of total backwages and attorneys fees are hereby set at P3,926,100.40 and P392,610.04,
respectively. Costs against petitioner.
SO ORDERED.
G.R. No. 147791
CONSTRUCTION
vs.

September 8, 2006
DEVELOPMENT

CORPORATION

OF

THE

PHILIPPINES,

petitioner,

Page | 72

REBECCA G. ESTRELLA, RACHEL E. FLETCHER, PHILIPPINE PHOENIX SURETY & INSURANCE


INC., BATANGAS LAGUNA TAYABAS BUS CO., and WILFREDO DATINGUINOO, respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review assails the March 29, 2001 Decision1 of the Court of Appeals in CAG.R. CV No. 46896, which affirmed with modification the February 9, 1993 Decision2 of the
Regional Trial Court of Manila, Branch 13, in Civil Case No. R-82-2137, finding Batangas
Laguna Tayabas Bus Co. (BLTB) and Construction Development Corporation of the Philippines
(CDCP) liable for damages.

suffered physical discomfort, serious anxiety, fright and mental anguish, besmirched
reputation and wounded feelings, moral shock, and lifelong social humiliation; (6) that
defendants failed to act with justice, give respondents their due, observe honesty and good
faith which entitles them to claim for exemplary damage; and (7) that they are entitled to a
reasonable amount of attorney's fees and litigation expenses.
CDCP filed its Answer6 which was later amended to include a third-party complaint against
Philippine Phoenix Surety and Insurance, Inc. (Phoenix).7
On February 9, 1993, the trial court rendered a decision finding CDCP and BLTB and their
employees liable for damages, the dispositive portion of which, states:
WHEREFORE, judgment is rendered:

The antecedent facts are as follows:


In the Complaint
On December 29, 1978, respondents Rebecca G. Estrella and her granddaughter, Rachel E.
Fletcher, boarded in San Pablo City, a BLTB bus bound for Pasay City. However, they never
reached their destination because their bus was rammed from behind by a tractor-truck of
CDCP in the South Expressway. The strong impact pushed forward their seats and pinned
their knees to the seats in front of them. They regained consciousness only when rescuers
created a hole in the bus and extricated their legs from under the seats. They were brought
to the Makati Medical Center where the doctors diagnosed their injuries to be as follows:
Medical Certificate of Rebecca Estrella
Fracture,
left
Lacerated
Contusions
with
Fracture, 6th and 7th ribs, right3

tibia
wound,
abrasions,

mid
left

lower

3rd
chin
leg

1. In favor of the plaintiffs and against the defendants BLTB, Wilfredo Datinguinoo,
Construction and Development Corporation of the Philippines (now PNCC) and Espiridion
Payunan, Jr., ordering said defendants, jointly and severally to pay the plaintiffs the sum of
P79,254.43 as actual damages and to pay the sum of P10,000.00 as attorney's fees or a total
of P89,254.43;
2. In addition, defendant Construction and Development Corporation of the Philippines and
defendant Espiridion Payunan, Jr., shall pay the plaintiffs the amount of Fifty Thousand
(P50,000.00) Pesos to plaintiff Rachel Fletcher and Twenty Five Thousand (P25,000.00) Pesos
to plaintiff Rebecca Estrella;
3. On the counterclaim of BLTB Co. and Wilfredo Datinguinoo
Dismissing the counterclaim;

Medical Certificate of Rachel Fletcher


Extensive
lacerated
wounds,
right
leg
posterior
aspect
popliteal
area
and antero-lateral aspect mid lower leg with severance of muscles.
Partial amputation BK left leg with severance of gastro-soleus and
antero-lateral
compartment
of
lower
leg.
Fracture, open comminuted, both tibial4
Thereafter, respondents filed a Complaint5 for damages against CDCP, BLTB, Espiridion
Payunan, Jr. and Wilfredo Datinguinoo before the Regional Trial Court of Manila, Branch 13.
They alleged (1) that Payunan, Jr. and Datinguinoo, who were the drivers of CDCP and BLTB
buses, respectively, were negligent and did not obey traffic laws; (2) that BLTB and CDCP did
not exercise the diligence of a good father of a family in the selection and supervision of their
employees; (3) that BLTB allowed its bus to operate knowing that it lacked proper
maintenance thus exposing its passengers to grave danger; (4) that they suffered actual
damages amounting to P250,000.00 for Estrella and P300,000.00 for Fletcher; (5) that they

4. On the crossclaim against Construction and Development Corporation of the Philippines


(now PNCC) and Espiridion Payunan, Jr.
Dismissing the crossclaim;
5. On the counterclaim of Construction and Development Corporation of the Philippines
(now PNCC)
Dismissing the counterclaim;
6. On the crossclaim against BLTB
Dismissing the crossclaim;

Page | 73

7. On the Third Party Complaint by Construction and Development Corporation of the


Philippines against Philippine Phoenix Surety and Insurance, Incorporated
Dismissing the Third Party Complaint.
SO ORDERED.8
The trial court held that BLTB, as a common carrier, was bound to observe extraordinary
diligence in the vigilance over the safety of its passengers. It must carry the passengers safely
as far as human care and foresight provide, using the utmost diligence of very cautious
persons, with a due regard for all the circumstances. Thus, where a passenger dies or is
injured, the carrier is presumed to have been at fault or has acted negligently. BLTB's inability
to carry respondents to their destination gave rise to an action for breach of contract of
carriage while its failure to rebut the presumption of negligence made it liable to
respondents for the breach.9
Regarding CDCP, the trial court found that the tractor-truck it owned bumped the BLTB bus
from behind. Evidence showed that CDCP's driver was reckless and driving very fast at the
time of the incident. The gross negligence of its driver raised the presumption that CDCP was
negligent either in the selection or in the supervision of its employees which it failed to rebut
thus making it and its driver liable to respondents.10
Unsatisfied with the award of damages and attorney's fees by the trial court, respondents
moved that the decision be reconsidered but was denied. Respondents elevated the case 11 to
the Court of Appeals which affirmed the decision of the trial court but modified the amount
of damages, the dispositive portion of which provides:
WHEREFORE, the assailed decision dated October 7, 1993 of the Regional Trial Court, Branch
13, Manila is hereby AFFIRMED with the following MODIFICATION:
1. The interest of six (6) percent per annum on the actual damages of P79,354.43 should
commence to run from the time the judicial demand was made or from the filing of the
complaint on February 4, 1980;
2. Thirty (30) percent of the total amount recovered is hereby awarded as attorney's fees;
3. Defendants-appellants Construction and Development Corporation of the Philippines (now
PNCC) and Espiridion Payunan, Jr. are ordered to pay plaintiff-appellants Rebecca Estrella and
Rachel Fletcher the amount of Twenty Thousand (P20,000.00) each as exemplary damages
and P80,000.00 by way of moral damages to Rachel Fletcher.
SO ORDERED.12
The Court of Appeals held that the actual or compensatory damage sought by respondents
for the injuries they sustained in the form of hospital bills were already liquidated and were
ascertained. Accordingly, the 6% interest per annum should commence to run from the time

the judicial demand was made or from the filing of the complaint and not from the date of
judgment. The Court of Appeals also awarded attorney's fees equivalent to 30% of the total
amount recovered based on the retainer agreement of the parties. The appellate court also
held that respondents are entitled to exemplary and moral damages. Finally, it affirmed the
ruling of the trial court that the claim of CDCP against Phoenix had already prescribed.
Hence, this petition raising the following issues:
I
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING RESPONDENTS
BLTB AND/OR ITS DRIVER WILFREDO DATINGUINOO SOLELY LIABLE FOR THE DAMAGES
SUSTAINED BY HEREIN RESPONDENTS FLETCHER AND ESTRELLA.
II
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN AWARDING EXCESSIVE OR
UNFOUNDED DAMAGES, ATTORNEY'S FEES AND LEGAL INTEREST TO RESPONDENTS
FLETCHER AND ESTRELLA.
III
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING RESPONDENT
PHOENIX LIABLE UNDER ITS INSURANCE POLICY ON THE GROUND OF PRESCRIPTION.
The issues for resolution are as follows: (1) whether BLTB and its driver Wilfredo Datinguinoo
are solely liable for the damages sustained by respondents; (2) whether the damages,
attorney's fees and legal interest awarded by the CA are excessive and unfounded; (3)
whether CDCP can recover under its insurance policy from Phoenix.
Petitioner contends that since it was made solidarily liable with BLTB for actual damages and
attorney's fees in paragraph 1 of the trial court's decision, then it should no longer be held
liable to pay the amounts stated in paragraph 2 of the same decision. Petitioner claims that
the liability for actual damages and attorney's fees is based on culpa contractual, thus, only
BLTB should be held liable. As regards paragraph 2 of the trial court's decision, petitioner
claims that it is ambiguous and arbitrary because the dispositive portion did not state the
basis and nature of such award.
Respondents, on the other hand, argue that petitioner is also at fault, hence, it was properly
joined as a party. There may be an action arising out of one incident where questions of fact
are common to all. Thus, the cause of action based on culpa aquiliana in the civil suit they
filed against it was valid.
The petition lacks merit.

Page | 74

The case filed by respondents against petitioner is an action for culpa aquiliana or quasidelict under Article 2176 of the Civil Code.13 In this regard, Article 2180 provides that the
obligation imposed by Article 2176 is demandable for the acts or omissions of those persons
for whom one is responsible. Consequently, an action based on quasi-delict may be instituted
against the employer for an employee's act or omission. The liability for the negligent
conduct of the subordinate is direct and primary, but is subject to the defense of due
diligence in the selection and supervision of the employee. 14 In the instant case, the trial
court found that petitioner failed to prove that it exercised the diligence of a good father of a
family in the selection and supervision of Payunan, Jr.
The trial court and the Court of Appeals found petitioner solidarily liable with BLTB for the
actual damages suffered by respondents because of the injuries they sustained. It was
established that Payunan, Jr. was driving recklessly because of the skid marks as shown in the
sketch of the police investigator.
It is well-settled in Fabre, Jr. v. Court of Appeals,15 that the owner of the other vehicle which
collided with a common carrier is solidarily liable to the injured passenger of the same. We
held, thus:
The same rule of liability was applied in situations where the negligence of the driver of the
bus on which plaintiff was riding concurred with the negligence of a third party who was the
driver of another vehicle, thus causing an accident. In Anuran v. Buo, Batangas Laguna
Tayabas Bus Co. v. Intermediate Appellate Court, and Metro Manila Transit Corporation v.
Court of Appeals, the bus company, its driver, the operator of the other vehicle and the
driver of the vehicle were jointly and severally held liable to the injured passenger or the
latter's heirs. The basis of this allocation of liability was explained in Viluan v. Court of
Appeals, thus:
Nor should it make any difference that the liability of petitioner [bus owner] springs from
contract while that of respondents [owner and driver of other vehicle] arises from quasidelict. As early as 1913, we already ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that in case
of injury to a passenger due to the negligence of the driver of the bus on which he was riding
and of the driver of another vehicle, the drivers as well as the owners of the two vehicles are
jointly and severally liable for damages. x x x

In a "joint" obligation, each obligor answers only for a part of the whole liability; in a
"solidary" or "joint and several" obligation, the relationship between the active and the
passive subjects is so close that each of them must comply with or demand the fulfillment of
the whole obligation. In Lafarge Cement v. Continental Cement Corporation,17 we reiterated
that joint tort feasors are jointly and severally liable for the tort which they commit. Citing
Worcester v. Ocampo,18 we held that:
x x x The difficulty in the contention of the appellants is that they fail to recognize that the
basis of the present action is tort. They fail to recognize the universal doctrine that each joint
tort feasor is not only individually liable for the tort in which he participates, but is also
jointly liable with his tort feasors. x x x
It may be stated as a general rule that joint tort feasors are all the persons who command,
instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done for their benefit. They are
each liable as principals, to the same extent and in the same manner as if they had
performed the wrongful act themselves. x x x
Joint tort feasors are jointly and severally liable for the tort which they commit. The persons
injured may sue all of them or any number less than all. Each is liable for the whole damages
caused by all, and all together are jointly liable for the whole damage. It is no defense for one
sued alone, that the others who participated in the wrongful act are not joined with him as
defendants; nor is it any excuse for him that his participation in the tort was insignificant as
compared to that of the others. x x x
Joint tort feasors are not liable pro rata. The damages can not be apportioned among them,
except among themselves. They cannot insist upon an apportionment, for the purpose of
each paying an aliquot part. They are jointly and severally liable for the whole amount. x x x
A payment in full for the damage done, by one of the joint tort feasors, of course satisfies any
claim which might exist against the others. There can be but satisfaction. The release of one
of the joint tort feasors by agreement generally operates to discharge all. x x x

xxxx

Of course the court during trial may find that some of the alleged tort feasors are liable and
that others are not liable. The courts may release some for lack of evidence while
condemning others of the alleged tort feasors. And this is true even though they are charged
jointly and severally.19

As in the case of BLTB, private respondents in this case and her co-plaintiffs did not stake out
their claim against the carrier and the driver exclusively on one theory, much less on that of
breach of contract alone. After all, it was permitted for them to allege alternative causes of
action and join as many parties as may be liable on such causes of action so long as private
respondent and her co-plaintiffs do not recover twice for the same injury. What is clear
from the cases is the intent of the plaintiff there to recover from both the carrier and the
driver, thus justifying the holding that the carrier and the driver were jointly and severally
liable because their separate and distinct acts concurred to produce the same injury. 16
(Emphasis supplied)

Petitioner's claim that paragraph 2 of the dispositive portion of the trial court's decision is
ambiguous and arbitrary and also entitles respondents to recover twice is without basis. In
the body of the trial court's decision, it was clearly stated that petitioner and its driver
Payunan, Jr., are jointly and solidarily liable for moral damages in the amount of P50,000.00
to respondent Fletcher and P25,000.00 to respondent Estrella.20 Moreover, there could be no
double recovery because the award in paragraph 2 is for moral damages while the award in
paragraph 1 is for actual damages and attorney's fees.

Page | 75

Petitioner next claims that the damages, attorney's fees, and legal interest awarded by the
Court of Appeals are excessive.
Moral damages may be recovered in quasi-delicts causing physical injuries.21 The award of
moral damages in favor of Fletcher and Estrella in the amount of P80,000.00 must be
reduced since prevailing jurisprudence fixed the same at P50,000.00.22 While moral damages
are not intended to enrich the plaintiff at the expense of the defendant, the award should
nonetheless be commensurate to the suffering inflicted.23
The Court of Appeals correctly awarded respondents exemplary damages in the amount of
P20,000.00 each. Exemplary damages may be awarded in addition to moral and
compensatory damages.24 Article 2231 of the Civil Code also states that in quasi-delicts,
exemplary damages may be granted if the defendant acted with gross negligence. 25 In this
case, petitioner's driver was driving recklessly at the time its truck rammed the BLTB bus.
Petitioner, who has direct and primary liability for the negligent conduct of its subordinates,
was also found negligent in the selection and supervision of its employees. In Del Rosario v.
Court of Appeals,26 we held, thus:
ART. 2229 of the Civil Code also provides that such damages may be imposed, by way of
example or correction for the public good. While exemplary damages cannot be recovered as
a matter of right, they need not be proved, although plaintiff must show that he is entitled to
moral, temperate or compensatory damages before the court may consider the question of
whether or not exemplary damages should be awarded. Exemplary Damages are imposed
not to enrich one party or impoverish another but to serve as a deterrent against or as a
negative incentive to curb socially deleterious actions.
Regarding attorney's fees, we held in Traders Royal Bank Employees Union-Independent v.
National Labor Relations Commission,27 that:
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. 28
(Emphasis supplied)
In the instant case, the Court of Appeals correctly awarded attorney's fees and other
expenses of litigation as they may be recovered as actual or compensatory damages when
exemplary damages are awarded; when the defendant acted in gross and evident bad faith in
refusing to satisfy the plaintiff's valid, just and demandable claim; and in any other case
where the court deems it just and equitable that attorney's fees and expenses of litigation
should be recovered.29

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,30 that when an
obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasidelicts is breached, the contravenor can be held liable for payment of interest in the concept
of actual and compensatory damages,31 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.32 (Emphasis supplied)
Accordingly, the legal interest of 6% shall begin to run on February 9, 1993 when the trial
court rendered judgment and not on February 4, 1980 when the complaint was filed. This is
because at the time of the filing of the complaint, the amount of the damages to which
plaintiffs may be entitled remains unliquidated and unknown, until it is definitely
ascertained, assessed and determined by the court and only upon presentation of proof
thereon.33 From the time the judgment becomes final and executory, the interest rate shall
be 12% until its satisfaction.
Anent the last issue of whether petitioner can recover under its insurance policy from
Phoenix, we affirm the findings of both the trial court and the Court of Appeals, thus:
As regards the liability of Phoenix, the court a quo correctly ruled that defendant-appellant
CDCP's claim against Phoenix already prescribed pursuant to Section 384 of P.D. 612, as
amended, which provides:
Any person having any claim upon the policy issued pursuant to this chapter shall, without
any unnecessary delay, present to the insurance company concerned a written notice of

Page | 76

claim setting forth the nature, extent and duration of the injuries sustained as certified by a
duly licensed physician. Notice of claim must be filed within six months from date of the
accident, otherwise, the claim shall be deemed waived. Action or suit for recovery of damage
due to loss or injury must be brought in proper cases, with the Commissioner or Courts
within one year from denial of the claim, otherwise, the claimant's right of action shall
prescribe. (As amended by PD 1814, BP 874.)34

(CA) affirmed with modification the decision rendered on December 3, 1999 by the Regional
Trial Court (RTC), Branch 260, in Paraaque City that had decreed them jointly and severally
liable with Philippine National Railways (PNR), their co-defendant, to Spouses Nicolas and
Teresita Zarate (Zarates) for the death of their 15-year old son, Aaron John L. Zarate (Aaron),
then a high school student of Don Bosco Technical Institute (Don Bosco).
Antecedents

The law is clear and leaves no room for interpretation. A written notice of claim must be filed
within six months from the date of the accident. Since petitioner never made any claim
within six months from the date of the accident, its claim has already prescribed.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 46896 dated March 29, 2001, which modified the Decision of the Regional Trial Court
of Manila, Branch 13, in Civil Case No. R-82-2137, is AFFIRMED with the MODIFICATIONS
that petitioner is held jointly and severally liable to pay (1) actual damages in the amount of
P79,354.43; (2) moral damages in the amount of P50,000.00 each for Rachel Fletcher and
Rebecca Estrella; (3) exemplary damages in the amount of P20,000.00 each for Rebecca
Estrella and Rachel Fletcher; and (4) thirty percent (30%) of the total amount recovered as
attorney's fees. The total amount adjudged shall earn interest at the rate of 6% per annum
from the date of judgment of the trial court until finality of this judgment. From the time this
Decision becomes final and executory and the judgment amount remains unsatisfied, the
same shall earn interest at the rate of 12% per annum until its satisfaction.
SO ORDERED.
G.R. No. 157917

August 29, 2012

SPOUSES
TEODORO1
and
NANETTE
PERENA,
Petitioners,
vs.
SPOUSES TERESITA PHILIPPINE NICOLAS and L. ZARATE, NATIONAL RAILWAYS, and the
COURT OF APPEALS Respondents.
DECISION
BERSAMIN, J.:
The operator of a. school bus service is a common carrier in the eyes of the law. He is bound
to observe extraordinary diligence in the conduct of his business. He is presumed to be
negligent when death occurs to a passenger. His liability may include indemnity for loss of
earning capacity even if the deceased passenger may only be an unemployed high school
student at the time of the accident.
The Case
By petition for review on certiorari, Spouses Teodoro and Nanette Perefia (Perefias) appeal
the adverse decision promulgated on November 13, 2002, by which the Court of Appeals

The Pereas were engaged in the business of transporting students from their respective
residences in Paraaque City to Don Bosco in Pasong Tamo, Makati City, and back. In their
business, the Pereas used a KIA Ceres Van (van) with Plate No. PYA 896, which had the
capacity to transport 14 students at a time, two of whom would be seated in the front beside
the driver, and the others in the rear, with six students on either side. They employed
Clemente Alfaro (Alfaro) as driver of the van.
In June 1996, the Zarates contracted the Pereas to transport Aaron to and from Don Bosco.
On August 22, 1996, as on previous school days, the van picked Aaron up around 6:00 a.m.
from the Zarates residence. Aaron took his place on the left side of the van near the rear
door. The van, with its air-conditioning unit turned on and the stereo playing loudly,
ultimately carried all the 14 student riders on their way to Don Bosco. Considering that the
students were due at Don Bosco by 7:15 a.m., and that they were already running late
because of the heavy vehicular traffic on the South Superhighway, Alfaro took the van to an
alternate route at about 6:45 a.m. by traversing the narrow path underneath the Magallanes
Interchange that was then commonly used by Makati-bound vehicles as a short cut into
Makati. At the time, the narrow path was marked by piles of construction materials and
parked passenger jeepneys, and the railroad crossing in the narrow path had no railroad
warning signs, or watchmen, or other responsible persons manning the crossing. In fact, the
bamboo barandilla was up, leaving the railroad crossing open to traversing motorists.
At about the time the van was to traverse the railroad crossing, PNR Commuter No. 302
(train), operated by Jhonny Alano (Alano), was in the vicinity of the Magallanes Interchange
travelling northbound. As the train neared the railroad crossing, Alfaro drove the van
eastward across the railroad tracks, closely tailing a large passenger bus. His view of the
oncoming train was blocked because he overtook the passenger bus on its left side. The train
blew its horn to warn motorists of its approach. When the train was about 50 meters away
from the passenger bus and the van, Alano applied the ordinary brakes of the train. He
applied the emergency brakes only when he saw that a collision was imminent. The
passenger bus successfully crossed the railroad tracks, but the van driven by Alfaro did not.
The train hit the rear end of the van, and the impact threw nine of the 12 students in the
rear, including Aaron, out of the van. Aaron landed in the path of the train, which dragged his
body and severed his head, instantaneously killing him. Alano fled the scene on board the
train, and did not wait for the police investigator to arrive.
Devastated by the early and unexpected death of Aaron, the Zarates commenced this action
for damages against Alfaro, the Pereas, PNR and Alano. The Pereas and PNR filed their
respective answers, with cross-claims against each other, but Alfaro could not be served with
summons.

Page | 77

At the pre-trial, the parties stipulated on the facts and issues, viz:
A. FACTS:
That spouses Zarate were the legitimate parents of Aaron John L. Zarate;(1)
Spouses Zarate engaged the services of spouses Perea for the adequate and safe
transportation carriage of the former spouses' son from their residence in Paraaque to his
school at the Don Bosco Technical Institute in Makati City;(2)
During the effectivity of the contract of carriage and in the implementation thereof, Aaron,
the minor son of spouses Zarate died in connection with a vehicular/train collision which
occurred while Aaron was riding the contracted carrier Kia C(3)eres van of spouses Perea,
then driven and operated by the latter's employee/authorized driver Clemente Alfaro, which
van collided with the train of PNR, at around 6:45 A.M. of August 22, 1996, within the vicinity
of the Magallanes Interchange in Makati City, Metro Manila, Philippines;
At the time of the vehicular/train collision, the subject site of the vehicular/train collision
was a railroad crossing used by motorists for crossing the railroad tracks;(4)
During the said time of the vehicular/train collision, there were no appropriate and safety
warning signs and railings at the site commonly used for railroad crossing;(5)
At the material time, countless number of Makati bound public utility and private vehicles
used on a daily basis the site of the collision as an alternative route and short-cut to
Makati;(6)
The train driver or operator left the scene of the incident on board the commuter train
involved without waiting for the police investigator;(7)
The site commonly used for railroad crossing by motorists was not in fact intended by the
railroad operator for railroad crossing at the time of the vehicular collision;(8)
PNR received the demand letter of the spouses Zarate;(9)

(1) Whether or not defendant-driver of the van is, in the performance of his functions, liable
for negligence constituting the proximate cause of the vehicular collision, which resulted in
the death of plaintiff spouses' son;
(2) Whether or not the defendant spouses Perea being the employer of defendant Alfaro
are liable for any negligence which may be attributed to defendant Alfaro;
(3) Whether or not defendant Philippine National Railways being the operator of the railroad
system is liable for negligence in failing to provide adequate safety warning signs and railings
in the area commonly used by motorists for railroad crossings, constituting the proximate
cause of the vehicular collision which resulted in the death of the plaintiff spouses' son;
(4) Whether or not defendant spouses Perea are liable for breach of the contract of carriage
with plaintiff-spouses in failing to provide adequate and safe transportation for the latter's
son;
(5) Whether or not defendants spouses are liable for actual, moral damages, exemplary
damages, and attorney's fees;
(6) Whether or not defendants spouses Teodorico and Nanette Perea observed the
diligence of employers and school bus operators;
(7) Whether or not defendant-spouses are civilly liable for the accidental death of Aaron John
Zarate;
(8) Whether or not defendant PNR was grossly negligent in operating the commuter train
involved in the accident, in allowing or tolerating the motoring public to cross, and its failure
to install safety devices or equipment at the site of the accident for the protection of the
public;
(9) Whether or not defendant PNR should be made to reimburse defendant spouses for any
and whatever amount the latter may be held answerable or which they may be ordered to
pay in favor of plaintiffs by reason of the action;
(10) Whether or not defendant PNR should pay plaintiffs directly and fully on the amounts
claimed by the latter in their Complaint by reason of its gross negligence;

PNR refused to acknowledge any liability for the vehicular/train collision;(10)


The eventual closure of the railroad crossing alleged by PNR was an internal arrangement
between the former and its project contractor; and(11)
The site of the vehicular/train collision was within the vicinity or less than 100 meters from
the Magallanes station of PNR.(12)

(11) Whether or not defendant PNR is liable to defendants spouses for actual, moral and
exemplary damages and attorney's fees.2
The Zarates claim against the Pereas was upon breach of the contract of carriage for the
safe transport of Aaron; but that against PNR was based on quasi-delict under Article 2176,
Civil Code.

B. ISSUES

Page | 78

In their defense, the Pereas adduced evidence to show that they had exercised the diligence
of a good father of the family in the selection and supervision of Alfaro, by making sure that
Alfaro had been issued a drivers license and had not been involved in any vehicular accident
prior to the collision; that their own son had taken the van daily; and that Teodoro Perea
had sometimes accompanied Alfaro in the vans trips transporting the students to school.

The Court a quo erred in:


1. In finding the defendant-appellant Philippine National Railways jointly and severally liable
together with defendant-appellants spouses Teodorico and Nanette Perea and defendantappellant Clemente Alfaro to pay plaintiffs-appellees for the death of Aaron Zarate and
damages.

For its part, PNR tended to show that the proximate cause of the collision had been the
reckless crossing of the van whose driver had not first stopped, looked and listened; and that
the narrow path traversed by the van had not been intended to be a railroad crossing for
motorists.

2. In giving full faith and merit to the oral testimonies of plaintiffs-appellees witnesses
despite overwhelming documentary evidence on record, supporting the case of defendantsappellants Philippine National Railways.

Ruling of the RTC

The Pereas ascribed the following errors to the RTC, namely:

On December 3, 1999, the RTC rendered its decision,3 disposing:

The trial court erred in finding defendants-appellants jointly and severally liable for actual,
moral and exemplary damages and attorneys fees with the other defendants.

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and
against the defendants ordering them to jointly and severally pay the plaintiffs as follows:
(1) (for) the death of Aaron- Php50,000.00;

The trial court erred in dismissing the cross-claim of the appellants Pereas against the
Philippine National Railways and in not holding the latter and its train driver primarily
responsible for the incident.

(2) Actual damages in the amount of Php100,000.00;

The trial court erred in awarding excessive damages and attorneys fees.

(3) For the loss of earning capacity- Php2,109,071.00;

The trial court erred in awarding damages in the form of deceaseds loss of earning capacity
in the absence of sufficient basis for such an award.

(4) Moral damages in the amount of Php4,000,000.00;


(5) Exemplary damages in the amount of Php1,000,000.00;
(6) Attorneys fees in the amount of Php200,000.00; and
(7) Cost of suit.
SO ORDERED.
On June 29, 2000, the RTC denied the Pereas motion for reconsideration, 4 reiterating that
the cooperative gross negligence of the Pereas and PNR had caused the collision that led to
the death of Aaron; and that the damages awarded to the Zarates were not excessive, but
based on the established circumstances.

On November 13, 2002, the CA promulgated its decision, affirming the findings of the RTC,
but limited the moral damages to P 2,500,000.00; and deleted the attorneys fees because
the RTC did not state the factual and legal bases, to wit:6
WHEREFORE, premises considered, the assailed Decision of the Regional Trial Court, Branch
260 of Paraaque City is AFFIRMED with the modification that the award of Actual Damages
is reduced to P 59,502.76; Moral Damages is reduced to P 2,500,000.00; and the award for
Attorneys Fees is Deleted.
SO ORDERED.

The CAs Ruling

The CA upheld the award for the loss of Aarons earning capacity, taking cognizance of the
ruling in Cariaga v. Laguna Tayabas Bus Company and Manila Railroad Company,7 wherein
the Court gave the heirs of Cariaga a sum representing the loss of the deceaseds earning
capacity despite Cariaga being only a medical student at the time of the fatal incident.
Applying the formula adopted in the American Expectancy Table of Mortality:

Both the Pereas and PNR appealed (C.A.-G.R. CV No. 68916).

2/3 x (80 - age at the time of death) = life expectancy

PNR assigned the following errors, to wit:5

Page | 79

the CA determined the life expectancy of Aaron to be 39.3 years upon reckoning his life
expectancy from age of 21 (the age when he would have graduated from college and started
working for his own livelihood) instead of 15 years (his age when he died). Considering that
the nature of his work and his salary at the time of Aarons death were unknown, it used the
prevailing minimum wage of P 280.00/day to compute Aarons gross annual salary to be P
110,716.65, inclusive of the thirteenth month pay. Multiplying this annual salary by Aarons
life expectancy of 39.3 years, his gross income would aggregate to P 4,351,164.30, from
which his estimated expenses in the sum of P 2,189,664.30 was deducted to finally arrive at P
2,161,500.00 as net income. Due to Aarons computed net income turning out to be higher
than the amount claimed by the Zarates, only P 2,109,071.00, the amount expressly prayed
for by them, was granted.

To start with, the Pereas defense was that they exercised the diligence of a good father of
the family in the selection and supervision of Alfaro, the van driver, by seeing to it that Alfaro
had a drivers license and that he had not been involved in any vehicular accident prior to the
fatal collision with the train; that they even had their own son travel to and from school on a
daily basis; and that Teodoro Perea himself sometimes accompanied Alfaro in transporting
the passengers to and from school. The RTC gave scant consideration to such defense by
regarding such defense as inappropriate in an action for breach of contract of carriage.

On April 4, 2003, the CA denied the Pereas motion for reconsideration.8

Although in this jurisdiction the operator of a school bus service has been usually regarded as
a private carrier,9 primarily because he only caters to some specific or privileged individuals,
and his operation is neither open to the indefinite public nor for public use, the exact nature
of the operation of a school bus service has not been finally settled. This is the occasion to lay
the matter to rest.

Issues
In this appeal, the Pereas list the following as the errors committed by the CA, to wit:
I. The lower court erred when it upheld the trial courts decision holding the petitioners
jointly and severally liable to pay damages with Philippine National Railways and dismissing
their cross-claim against the latter.
II. The lower court erred in affirming the trial courts decision awarding damages for loss of
earning capacity of a minor who was only a high school student at the time of his death in
the absence of sufficient basis for such an award.
III. The lower court erred in not reducing further the amount of damages awarded, assuming
petitioners are liable at all.
Ruling
The petition has no merit.
1.
Were
the
Pereas
and severally liable for damages?

We find no adequate cause to differ from the conclusions of the lower courts that the
Pereas operated as a common carrier; and that their standard of care was extraordinary
diligence, not the ordinary diligence of a good father of a family.

A carrier is a person or corporation who undertakes to transport or convey goods or persons


from one place to another, gratuitously or for hire. The carrier is classified either as a
private/special carrier or as a common/public carrier.10 A private carrier is one who, without
making the activity a vocation, or without holding himself or itself out to the public as ready
to act for all who may desire his or its services, undertakes, by special agreement in a
particular instance only, to transport goods or persons from one place to another either
gratuitously or for hire.11 The provisions on ordinary contracts of the Civil Code govern the
contract of private carriage.The diligence required of a private carrier is only ordinary, that is,
the diligence of a good father of the family. In contrast, a common carrier is a person,
corporation, firm or association engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation, offering such services
to the public.12 Contracts of common carriage are governed by the provisions on common
carriers of the Civil Code, the Public Service Act,13 and other special laws relating to
transportation. A common carrier is required to observe extraordinary diligence, and is
presumed to be at fault or to have acted negligently in case of the loss of the effects of
passengers, or the death or injuries to passengers.14

jointly

In relation to common carriers, the Court defined public use in the following terms in United
States v. Tan Piaco,15 viz:

The Zarates brought this action for recovery of damages against both the Pereas and the
PNR, basing their claim against the Pereas on breach of contract of carriage and against the
PNR on quasi-delict.

"Public use" is the same as "use by the public". The essential feature of the public use is not
confined to privileged individuals, but is open to the indefinite public. It is this indefinite or
unrestricted quality that gives it its public character. In determining whether a use is public,
we must look not only to the character of the business to be done, but also to the proposed
mode of doing it. If the use is merely optional with the owners, or the public benefit is merely
incidental, it is not a public use, authorizing the exercise of the jurisdiction of the public
utility commission. There must be, in general, a right which the law compels the owner to
give to the general public. It is not enough that the general prosperity of the public is
promoted. Public use is not synonymous with public interest. The true criterion by which to

and

PNR

The RTC found the Pereas and the PNR negligent. The CA affirmed the findings.
We concur with the CA.

Page | 80

judge the character of the use is whether the public may enjoy it by right or only by
permission.

students of a particular school living within or near where they operated the service and for a
fee.

In De Guzman v. Court of Appeals,16 the Court noted that Article 1732 of the Civil Code
avoided any distinction between a person or an enterprise offering transportation on a
regular or an isolated basis; and has not distinguished a carrier offering his services to the
general public, that is, the general community or population, from one offering his services
only to a narrow segment of the general population.

The common carriers standard of care and vigilance as to the safety of the passengers is
defined by law. Given the nature of the business and for reasons of public policy, the
common carrier is bound "to observe extraordinary diligence in the vigilance over the goods
and for the safety of the passengers transported by them, according to all the circumstances
of each case."22 Article 1755 of the Civil Code specifies that the common carrier should "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." To
successfully fend off liability in an action upon the death or injury to a passenger, the
common carrier must prove his or its observance of that extraordinary diligence; otherwise,
the legal presumption that he or it was at fault or acted negligently would stand. 23 No device,
whether by stipulation, posting of notices, statements on tickets, or otherwise, may dispense
with or lessen the responsibility of the common carrier as defined under Article 1755 of the
Civil Code. 24

Nonetheless, the concept of a common carrier embodied in Article 1732 of the Civil Code
coincides neatly with the notion of public service under the Public Service Act, which
supplements the law on common carriers found in the Civil Code. Public service, according to
Section 13, paragraph (b) of the Public Service Act, includes:
x x x every person that now or hereafter may own, operate, manage, or control in the
Philippines, for hire or compensation, with general or limited clientle, whether permanent
or occasional, and done for the general business purposes, any common carrier, railroad,
street railway, traction railway, subway motor vehicle, either for freight or passenger, or
both, with or without fixed route and whatever may be its classification, freight or carrier
service of any class, express service, steamboat, or steamship line, pontines, ferries and
water craft, engaged in the transportation of passengers or freight or both, shipyard, marine
repair shop, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and
power, water supply and power petroleum, sewerage system, wire or wireless
communications systems, wire or wireless broadcasting stations and other similar public
services. x x x.17
Given the breadth of the aforequoted characterization of a common carrier, the Court has
considered as common carriers pipeline operators, 18 custom brokers and warehousemen,19
and barge operators20 even if they had limited clientle.
As all the foregoing indicate, the true test for a common carrier is not the quantity or extent
of the business actually transacted, or the number and character of the conveyances used in
the activity, but whether the undertaking is a part of the activity engaged in by the carrier
that he has held out to the general public as his business or occupation. If the undertaking is
a single transaction, not a part of the general business or occupation engaged in, as
advertised and held out to the general public, the individual or the entity rendering such
service is a private, not a common, carrier. The question must be determined by the
character of the business actually carried on by the carrier, not by any secret intention or
mental reservation it may entertain or assert when charged with the duties and obligations
that the law imposes.21
Applying these considerations to the case before us, there is no question that the Pereas as
the operators of a school bus service were: (a) engaged in transporting passengers generally
as a business, not just as a casual occupation; (b) undertaking to carry passengers over
established roads by the method by which the business was conducted; and (c) transporting
students for a fee. Despite catering to a limited clientle, the Pereas operated as a common
carrier because they held themselves out as a ready transportation indiscriminately to the

And, secondly, the Pereas have not presented any compelling defense or reason by which
the Court might now reverse the CAs findings on their liability. On the contrary, an
examination of the records shows that the evidence fully supported the findings of the CA.
As earlier stated, the Pereas, acting as a common carrier, were already presumed to be
negligent at the time of the accident because death had occurred to their passenger.25 The
presumption of negligence, being a presumption of law, laid the burden of evidence on their
shoulders to establish that they had not been negligent.26 It was the law no less that required
them to prove their observance of extraordinary diligence in seeing to the safe and secure
carriage of the passengers to their destination. Until they did so in a credible manner, they
stood to be held legally responsible for the death of Aaron and thus to be held liable for all
the natural consequences of such death.
There is no question that the Pereas did not overturn the presumption of their negligence
by credible evidence. Their defense of having observed the diligence of a good father of a
family in the selection and supervision of their driver was not legally sufficient. According to
Article 1759 of the Civil Code, their liability as a common carrier did not cease upon proof
that they exercised all the diligence of a good father of a family in the selection and
supervision of their employee. This was the reason why the RTC treated this defense of the
Pereas as inappropriate in this action for breach of contract of carriage.
The Pereas were liable for the death of Aaron despite the fact that their driver might have
acted beyond the scope of his authority or even in violation of the orders of the common
carrier.27 In this connection, the records showed their drivers actual negligence. There was a
showing, to begin with, that their driver traversed the railroad tracks at a point at which the
PNR did not permit motorists going into the Makati area to cross the railroad tracks.
Although that point had been used by motorists as a shortcut into the Makati area, that fact
alone did not excuse their driver into taking that route. On the other hand, with his
familiarity with that shortcut, their driver was fully aware of the risks to his passengers but he
still disregarded the risks. Compounding his lack of care was that loud music was playing

Page | 81

inside the air-conditioned van at the time of the accident. The loudness most probably
reduced his ability to hear the warning horns of the oncoming train to allow him to correctly
appreciate the lurking dangers on the railroad tracks. Also, he sought to overtake a passenger
bus on the left side as both vehicles traversed the railroad tracks. In so doing, he lost his view
of the train that was then coming from the opposite side of the passenger bus, leading him to
miscalculate his chances of beating the bus in their race, and of getting clear of the train. As a
result, the bus avoided a collision with the train but the van got slammed at its rear, causing
the fatality. Lastly, he did not slow down or go to a full stop before traversing the railroad
tracks despite knowing that his slackening of speed and going to a full stop were in
observance of the right of way at railroad tracks as defined by the traffic laws and
regulations.28 He thereby violated a specific traffic regulation on right of way, by virtue of
which he was immediately presumed to be negligent.29
The omissions of care on the part of the van driver constituted negligence, 30 which, according
to Layugan v. Intermediate Appellate Court,31 is "the omission to do something which a
reasonable man, guided by those considerations which ordinarily regulate the conduct of
human affairs, would do, or the doing of something which a prudent and reasonable man
would not do,32 or as Judge Cooley defines it, (t)he failure to observe for the protection of
the interests of another person, that degree of care, precaution, and vigilance which the
circumstances justly demand, whereby such other person suffers injury."33
The test by which to determine the existence of negligence in a particular case has been aptly
stated in the leading case of Picart v. Smith,34 thuswise:
The test by which to determine the existence of negligence in a particular case may be stated
as follows: 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. The law here in effect adopts the standard supposed to be
supplied by the imaginary conduct of the discreet paterfamilias of the Roman law. The
existence of negligence in a given case is not determined by reference to the personal
judgment of the actor in the situation before him. The law considers what would be reckless,
blameworthy, or negligent in the man of ordinary intelligence and prudence and determines
liability by that.
The question as to what would constitute the conduct of a prudent man in a given situation
must of course be always determined in the light of human experience and in view of the
facts involved in the particular case. Abstract speculation cannot here be of much value but
this much can be profitably said: Reasonable men govern their conduct by the circumstances
which are before them or known to them. They are not, and are not supposed to be,
omniscient of the future. Hence they can be expected to take care only when there is
something before them to suggest or warn of danger. Could a prudent man, in the case
under consideration, foresee harm as a result of the course actually pursued? If so, it was the
duty of the actor to take precautions to guard against that harm. Reasonable foresight of
harm, followed by the ignoring of the suggestion born of this prevision, is always necessary
before negligence can be held to exist. Stated in these terms, the proper criterion for
determining the existence of negligence in a given case is this: Conduct is said to be negligent
when a prudent man in the position of the tortfeasor would have foreseen that an effect

harmful to another was sufficiently probable to warrant his foregoing the conduct or
guarding against its consequences. (Emphasis supplied)
Pursuant to the Picart v. Smith test of negligence, the Pereas driver was entirely negligent
when he traversed the railroad tracks at a point not allowed for a motorists crossing despite
being fully aware of the grave harm to be thereby caused to his passengers; and when he
disregarded the foresight of harm to his passengers by overtaking the bus on the left side as
to leave himself blind to the approach of the oncoming train that he knew was on the
opposite side of the bus.
Unrelenting, the Pereas cite Phil. National Railways v. Intermediate Appellate Court,35
where the Court held the PNR solely liable for the damages caused to a passenger bus and its
passengers when its train hit the rear end of the bus that was then traversing the railroad
crossing. But the circumstances of that case and this one share no similarities. In Philippine
National Railways v. Intermediate Appellate Court, no evidence of contributory negligence
was adduced against the owner of the bus. Instead, it was the owner of the bus who proved
the exercise of extraordinary diligence by preponderant evidence. Also, the records are
replete with the showing of negligence on the part of both the Pereas and the PNR. Another
distinction is that the passenger bus in Philippine National Railways v. Intermediate Appellate
Court was traversing the dedicated railroad crossing when it was hit by the train, but the
Pereas school van traversed the railroad tracks at a point not intended for that purpose.
At any rate, the lower courts correctly held both the Pereas and the PNR "jointly and
severally" liable for damages arising from the death of Aaron. They had been impleaded in
the same complaint as defendants against whom the Zarates had the right to relief, whether
jointly, severally, or in the alternative, in respect to or arising out of the accident, and
questions of fact and of law were common as to the Zarates.36 Although the basis of the right
to relief of the Zarates (i.e., breach of contract of carriage) against the Pereas was distinct
from the basis of the Zarates right to relief against the PNR (i.e., quasi-delict under Article
2176, Civil Code), they nonetheless could be held jointly and severally liable by virtue of their
respective negligence combining to cause the death of Aaron. As to the PNR, the RTC rightly
found the PNR also guilty of negligence despite the school van of the Pereas traversing the
railroad tracks at a point not dedicated by the PNR as a railroad crossing for pedestrians and
motorists, because the PNR did not ensure the safety of others through the placing of
crossbars, signal lights, warning signs, and other permanent safety barriers to prevent
vehicles or pedestrians from crossing there. The RTC observed that the fact that a crossing
guard had been assigned to man that point from 7 a.m. to 5 p.m. was a good indicium that
the PNR was aware of the risks to others as well as the need to control the vehicular and
other traffic there. Verily, the Pereas and the PNR were joint tortfeasors.
2.
Was
the
indemnity
Aarons earning capacity proper?

for

loss

of

The RTC awarded indemnity for loss of Aarons earning capacity. Although agreeing with the
RTC on the liability, the CA modified the amount. Both lower courts took into consideration
that Aaron, while only a high school student, had been enrolled in one of the reputable

Page | 82

schools in the Philippines and that he had been a normal and able-bodied child prior to his
death. The basis for the computation of Aarons earning capacity was not what he would
have become or what he would have wanted to be if not for his untimely death, but the
minimum wage in effect at the time of his death. Moreover, the RTCs computation of
Aarons life expectancy rate was not reckoned from his age of 15 years at the time of his
death, but on 21 years, his age when he would have graduated from college.
We find the considerations taken into account by the lower courts to be reasonable and fully
warranted.
Yet, the Pereas submit that the indemnity for loss of earning capacity was speculative and
unfounded.1wphi1 They cited People v. Teehankee, Jr.,37 where the Court deleted the
indemnity for victim Jussi Leinos loss of earning capacity as a pilot for being speculative due
to his having graduated from high school at the International School in Manila only two years
before the shooting, and was at the time of the shooting only enrolled in the first semester at
the Manila Aero Club to pursue his ambition to become a professional pilot. That meant,
according to the Court, that he was for all intents and purposes only a high school graduate.
We reject the Pereas submission.
First of all, a careful perusal of the Teehankee, Jr. case shows that the situation there of Jussi
Leino was not akin to that of Aaron here. The CA and the RTC were not speculating that
Aaron would be some highly-paid professional, like a pilot (or, for that matter, an engineer, a
physician, or a lawyer). Instead, the computation of Aarons earning capacity was premised
on him being a lowly minimum wage earner despite his being then enrolled at a prestigious
high school like Don Bosco in Makati, a fact that would have likely ensured his success in his
later years in life and at work.
And, secondly, the fact that Aaron was then without a history of earnings should not be
taken against his parents and in favor of the defendants whose negligence not only cost
Aaron his life and his right to work and earn money, but also deprived his parents of their
right to his presence and his services as well. Our law itself states that the loss of the earning
capacity of the deceased shall be the liability of the guilty party in favor of the heirs of the
deceased, and shall in every case be assessed and awarded by the court "unless the deceased
on account of permanent physical disability not caused by the defendant, had no earning
capacity at the time of his death."38 Accordingly, we emphatically hold in favor of the
indemnification for Aarons loss of earning capacity despite him having been unemployed,
because compensation of this nature is awarded not for loss of time or earnings but for loss
of the deceaseds power or ability to earn money.39
This favorable treatment of the Zarates claim is not unprecedented. In Cariaga v. Laguna
Tayabas Bus Company and Manila Railroad Company,40 fourth-year medical student Edgardo
Carriagas earning capacity, although he survived the accident but his injuries rendered him
permanently incapacitated, was computed to be that of the physician that he dreamed to
become. The Court considered his scholastic record sufficient to justify the assumption that
he could have finished the medical course and would have passed the medical board
examinations in due time, and that he could have possibly earned a modest income as a

medical practitioner. Also, in People v. Sanchez,41 the Court opined that murder and rape
victim Eileen Sarmienta and murder victim Allan Gomez could have easily landed goodpaying jobs had they graduated in due time, and that their jobs would probably pay them
high monthly salaries from P 10,000.00 to P 15,000.00 upon their graduation. Their earning
capacities were computed at rates higher than the minimum wage at the time of their deaths
due to their being already senior agriculture students of the University of the Philippines in
Los Baos, the countrys leading educational institution in agriculture.
3.
Were the amounts of damages excessive?
The Pereas plead for the reduction of the moral and exemplary damages awarded to the
Zarates in the respective amounts of P 2,500,000.00 and P 1,000,000.00 on the ground that
such amounts were excessive.
The plea is unwarranted.
The moral damages of P 2,500,000.00 were really just and reasonable under the established
circumstances of this case because they were intended by the law to assuage the Zarates
deep mental anguish over their sons unexpected and violent death, and their moral shock
over the senseless accident. That amount would not be too much, considering that it would
help the Zarates obtain the means, diversions or amusements that would alleviate their
suffering for the loss of their child. At any rate, reducing the amount as excessive might
prove to be an injustice, given the passage of a long time from when their mental anguish
was inflicted on them on August 22, 1996.
Anent the P 1,000,000.00 allowed as exemplary damages, we should not reduce the amount
if only to render effective the desired example for the public good. As a common carrier, the
Pereas needed to be vigorously reminded to observe their duty to exercise extraordinary
diligence to prevent a similarly senseless accident from happening again. Only by an award of
exemplary damages in that amount would suffice to instill in them and others similarly
situated like them the ever-present need for greater and constant vigilance in the conduct of
a business imbued with public interest.
WHEREFORE, we DENY the petition for review on certiorari; AFFIRM the decision
promulgated on November 13, 2002; and ORDER the petitioners to pay the costs of suit.
SO ORDERED.
[G.R. No. 138677. February 12, 2002]
TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF APPEALS &
SECURITY BANK & TRUST COMPANY, respondents.
DECISION

Page | 83

VITUG, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594,
entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."
Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the
amount of P120,000.00 from respondent Security Bank and Trust Company. Petitioners
executed a promissory note binding themselves, jointly and severally, to pay the sum
borrowed with an interest of 15.189% per annum upon maturity and to pay a penalty of 5%
every month on the outstanding principal and interest in case of default. In addition,
petitioners agreed to pay 10% of the total amount due by way of attorneys fees if the matter
were indorsed to a lawyer for collection or if a suit were instituted to enforce payment. The
obligation matured on 8 September 1981; the bank, however, granted an extension but only
up until 29 December 1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20
May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand
letter to petitioners informing them that they had five days within which to make full
payment. Since petitioners still defaulted on their obligation, the bank filed on 3 November
1982, with the Regional Trial Court of Makati, Branch 143, a complaint for recovery of the
due amount.
After petitioners had filed a joint answer to the complaint, the bank presented its evidence
and, on 27 March 1985, rested its case. Petitioners, instead of introducing their own
evidence, had the hearing of the case reset on two consecutive occasions. In view of the
absence of petitioners and their counsel on 28 August 1985, the third hearing date, the bank
moved, and the trial court resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the
order of the trial court declaring them as having waived their right to present evidence and
prayed that they be allowed to prove their case. The court a quo denied the motion in an
order, dated 5 September 1988, and on 20 October 1989, it rendered its decision,xxxviii the
dispositive portion of which read:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, ordering the latter to pay, jointly and severally, to the plaintiff, as follows:
"1.
The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum,
2% service charge and 5% per month penalty charge, commencing on 20 May 1982 until fully
paid;
"2.
To pay the further sum equivalent to 10% of the total amount of indebtedness for
and as attorneys fees; and
"3.

To pay the costs of the suit.xxxix

Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the
trial court of their motion to present evidence and assailing the imposition of the 2% service
charge, the 5% per month penalty charge and 10% attorney's fees. In its decisionxl of 7
March 1996, the appellate court affirmed the judgment of the trial court except on the
matter of the 2% service charge which was deleted pursuant to Central Bank Circular No.
783. Not fully satisfied with the decision of the appellate court, both parties filed their
respective motions for reconsideration.xli Petitioners prayed for the reduction of the 5%
stipulated penalty for being unconscionable. The bank, on the other hand, asked that the
payment of interest and penalty be commenced not from the date of filing of complaint but
from the time of default as so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with
interest thereon must commence not on the date of filing of the complaint as we have
previously held in our decision but on the date when the obligation became due.
Default generally begins from the moment the creditor demands the performance of the
obligation. However, demand is not necessary to render the obligor in default when the
obligation or the law so provides.
In the case at bar, defendants-appellants executed a promissory note where they undertook
to pay the obligation on its maturity date 'without necessity of demand.' They also agreed to
pay the interest in case of non-payment from the date of default.
x x x

xxx

xxx

While we maintain that defendants-appellants must be bound by the contract which they
acknowledged and signed, we take cognizance of their plea for the application of the
provisions of Article 1229 x x x.
Considering that defendants-appellants partially complied with their obligation under the
promissory note by the reduction of the original amount of P120,000.00 to P114,416.00 and
in order that they will finally settle their obligation, it is our view and we so hold that in the
interest of justice and public policy, a penalty of 3% per month or 36% per annum would
suffice.
x x x

xxx

xxx

WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendantsappellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiffappellee Security Bank and Trust Company the following:
1.
The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum
and 3% per month penalty charge commencing May 20, 1982 until fully paid;

Page | 84

2.
The sum equivalent to 10% of the total amount of the indebtedness as and for
attorneys fees.xlii
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit
newly discovered evidence,xliii alleging that while the case was pending before the trial
court, petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate
mortgage on 18 January 1984 to secure the existing indebtedness of petitioners Ligutan and
dela Llana with the bank. Petitioners contended that the execution of the real estate
mortgage had the effect of novating the contract between them and the bank. Petitioners
further averred that the mortgage was extrajudicially foreclosed on 26 August 1986, that
they were not informed about it, and the bank did not credit them with the proceeds of the
sale. The appellate court denied the omnibus motion for reconsideration and to admit newly
discovered evidence, ratiocinating that such a second motion for reconsideration cannot be
entertained under Section 2, Rule 52, of the 1997 Rules of Civil Procedure. Furthermore, the
appellate court said, the newly-discovered evidence being invoked by petitioners had
actually been known to them when the case was brought on appeal and when the first
motion for reconsideration was filed.xliv
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their
case to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the
Rules of Court, submitting thusly I.
The respondent Court of Appeals seriously erred in not holding that the 15.189%
interest and the penalty of three (3%) percent per month or thirty-six (36%) percent per
annum imposed by private respondent bank on petitioners loan obligation are still
manifestly exorbitant, iniquitous and unconscionable.
II.
The respondent Court of Appeals gravely erred in not reducing to a reasonable
level the ten (10%) percent award of attorneys fees which is highly and grossly excessive,
unreasonable and unconscionable.
III.
The respondent Court of Appeals gravely erred in not admitting petitioners newly
discovered evidence which could not have been timely produced during the trial of this case.
IV.
The respondent Court of Appeals seriously erred in not holding that there was a
novation of the cause of action of private respondents complaint in the instant case due to
the subsequent execution of the real estate mortgage during the pendency of this case and
the subsequent foreclosure of the mortgage.xlv
Respondent bank, which did not take an appeal, would, however, have it that the penalty
sought to be deleted by petitioners was even insufficient to fully cover and compensate for
the cost of money brought about by the radical devaluation and decrease in the purchasing
power of the peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of
its occurrence. The Bank would stress that only the amount of P5,584.00 had been remitted
out of the entire loan of P120,000.00.xlvi

A penalty clause, expressly recognized by law,xlvii is an accessory undertaking to assume


greater liability on the part of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligationxlviii and to provide, in effect, for what could
be the liquidated damages resulting from such a breach. The obligor would then be bound to
pay the stipulated indemnity without the necessity of proof on the existence and on the
measure of damages caused by the breach.xlix Although a court may not at liberty ignore the
freedom of the parties to agree on such terms and conditions as they see fit that contravene
neither law nor morals, good customs, public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or
if the principal obligation has been partly or irregularly complied with.l
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not necessarily confined
to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences, the supervening realities, the standing and relationship of the
parties, and the like, the application of which, by and large, is addressed to the sound
discretion of the court. In Rizal Commercial Banking Corp. vs. Court of Appeals,li just an
example, the Court has tempered the penalty charges after taking into account the debtors
pitiful situation and its offer to settle the entire obligation with the creditor bank. The
stipulated penalty might likewise be reduced when a partial or irregular performance is made
by the debtor.lii The stipulated penalty might even be deleted such as when there has been
substantial performance in good faith by the obligor,liii when the penalty clause itself suffers
from fatal infirmity, or when exceptional circumstances so exist as to warrant it.liv
The Court of Appeals, exercising its good judgment in the instant case, has reduced the
penalty interest from 5% a month to 3% a month which petitioner still disputes. Given the
circumstances, not to mention the repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question
its reasonableness and prays that the Court reduce the amount. This contention is a fresh
issue that has not been raised and ventilated before the courts below. In any event, the
interest stipulation, on its face, does not appear as being that excessive. The essence or
rationale for the payment of interest, quite often referred to as cost of money, is not exactly
the same as that of a surcharge or a penalty. A penalty stipulation is not necessarily
preclusive of interest, if there is an agreement to that effect, the two being distinct concepts
which may separately be demanded.lv What may justify a court in not allowing the creditor
to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed, the
interest prescribed in loan financing arrangements is a fundamental part of the banking
business and the core of a bank's existence.lvi
Petitioners next assail the award of 10% of the total amount of indebtedness by way of
attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time
spent and the extent of services rendered by counsel for the bank and the nature of the case.
Bearing in mind that the rate of attorneys fees has been agreed to by the parties and
intended to answer not only for litigation expenses but also for collection efforts as well, the
Court, like the appellate court, deems the award of 10% attorneys fees to be reasonable.

Page | 85

Neither can the appellate court be held to have erred in rejecting petitioners' call for a new
trial or to admit newly discovered evidence. As the appellate court so held in its resolution of
14 May 1999 -

necessarily imply that the new agreement should be complete by itself; certain terms and
conditions may be carried, expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.

Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for
reconsideration of a judgment or final resolution by the same party shall be entertained.
Considering that the instant motion is already a second motion for reconsideration, the same
must therefore be denied.
Furthermore, it would appear from the records available to this court that the newlydiscovered evidence being invoked by defendants-appellants have actually been existent
when the case was brought on appeal to this court as well as when the first motion for
reconsideration was filed. Hence, it is quite surprising why defendants-appellants raised the
alleged newly-discovered evidence only at this stage when they could have done so in the
earlier pleadings filed before this court.

SO ORDERED.
[G.R. No. 157480. May 6, 2005]
PRYCE CORPORATION (formerly PRYCE PROPERTIES CORPORATION), petitioner, vs.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION, respondent.
DECISION
PANGANIBAN, J.:

The propriety or acceptability of such a second motion for reconsideration is not contingent
upon the averment of 'new' grounds to assail the judgment, i.e., grounds other than those
theretofore presented and rejected. Otherwise, attainment of finality of a judgment might
be stayed off indefinitely, depending on the partys ingenuousness or cleverness in
conceiving and formulating 'additional flaws' or 'newly discovered errors' therein, or thinking
up some injury or prejudice to the rights of the movant for reconsideration.lvii
At any rate, the subsequent execution of the real estate mortgage as security for the existing
loan would not have resulted in the extinguishment of the original contract of loan because
of novation. Petitioners acknowledge that the real estate mortgage contract does not
contain any express stipulation by the parties intending it to supersede the existing loan
agreement between the petitioners and the bank.lviii Respondent bank has correctly
postulated that the mortgage is but an accessory contract to secure the loan in the
promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all
the parties to the new contract; third, the extinguishment of the obligation; and fourth, the
validity of the new one.lix In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the
old and the new obligation be on every point incompatible with each other.lx An obligation
to pay a sum of money is not extinctively novated by a new instrument which merely
changes the terms of payment or adding compatible covenants or where the old contract is
merely supplemented by the new one.lxi When not expressed, incompatibility is required so
as to ensure that the parties have indeed intended such novation despite their failure to
express it in categorical terms. The incompatibility, to be sure, should take place in any of
the essential elements of the obligation, i.e., (1) the juridical relation or tie, such as from a
mere commodatum to lease of things, or from negotiorum gestio to agency, or from a
mortgage to antichresis,lxii or from a sale to one of loan;lxiii (2) the object or principal
conditions, such as a change of the nature of the prestation; or (3) the subjects, such as the
substitution of a debtorlxiv or the subrogation of the creditor. Extinctive novation does not

In legal contemplation, the termination of a contract is not equivalent to its rescission. When
an agreement is terminated, it is deemed valid at inception. Prior to termination, the
contract binds the parties, who are thus obliged to observe its provisions. However, when it
is rescinded, it is deemed inexistent, and the parties are returned to their status quo ante.
Hence, there is mutual restitution of benefits received. The consequences of termination
may be anticipated and provided for by the contract. As long as the terms of the contract are
not contrary to law, morals, good customs, public order or public policy, they shall be
respected by courts. The judiciary is not authorized to make or modify contracts; neither
may it rescue parties from disadvantageous stipulations. Courts, however, are empowered
to reduce iniquitous or unconscionable liquidated damages, indemnities and penalties
agreed upon by the parties.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, assailing the May 22,
2002 Decision[2] of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
Resolution[3] denying petitioners Motion for Reconsideration. The assailed Decision
disposed thus:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil
Case No. 93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering
[Respondent] Philippine Amusement and Gaming Corporation to pay [Petitioner] Pryce
Properties Corporation the total amount of P687,289.50 as actual damages representing the
accrued rentals for the quarter September to November 1993 with interest and penalty at
the rate of two percent (2%) per month from date of filing of the complaint until the amount
shall have been fully paid, and the sum of P50,000.00 as attorneys fees; (2) In Civil Case No.
93-68337, the appealed decision is REVERSED and SET ASIDE and a new judgment is rendered
ordering [Petitioner] Pryce Properties Corporation to reimburse [Respondent] Philippine
Amusement and Gaming Corporation the amount of P687,289.50 representing the advanced

Page | 86

rental deposits, which amount may be compensated by [Petitioner] Pryce Properties


Corporation with its award in Civil Case No. 93-68266 in the equal amount of P687,289.50.[4]
The Facts
According to the CA, the facts are as follows:
Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC
for brevity) made representations with the Philippine Amusement and Gaming Corporation
(PAGCOR) on the possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro
City. [A] series of negotiations followed. PAGCOR representatives went to Cagayan de Oro
City to determine the pulse of the people whether the presence of a casino would be
welcomed by the residents. Some local government officials showed keen interest in the
casino operation and expressed the view that possible problems were surmountable. Their
negotiations culminated with PPCs counter-letter proposal dated October 14, 1992.
On November 11, 1992, the parties executed a Contract of Lease x x x involving the
ballroom of the Hotel for a period of three (3) years starting December 1, 1992 and until
November 30, 1995. On November 13, 1992, they executed an addendum to the contract x x
x which included a lease of an additional 1000 square meters of the hotel grounds as living
quarters and playground of the casino personnel. PAGCOR advertised the start of their
casino operations on December 18, 1992.
Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution
No. 2295 x x x dated November 19, 1990 declaring as a matter of policy to prohibit and/or
not to allow the establishment of a gambling casino in Cagayan de Oro City. Resolution No.
2673 x x x dated October 19, 1992 (or a month before the contract of lease was executed)
was subsequently passed reiterating with vigor and vehemence the policy of the City under
Resolution No. 2295, series of 1990, banning casinos in Cagayan de Oro City. On December
7, 1992, the Sangguniang Panlungsod of Cagayan de Oro City enacted Ordinance No. 3353 x x
x prohibiting the issuance of business permits and canceling existing business permits to any
establishment for using, or allowing to be used, its premises or any portion thereof for the
operation of a casino.
In the afternoon of December 18, 1992 and just hours before the actual formal opening of
casino operations, a public rally in front of the hotel was staged by some local officials,
residents and religious leaders. Barricades were placed [which] prevented some casino
personnel and hotel guests from entering and exiting from the Hotel. PAGCOR was
constrained to suspend casino operations because of the rally. An agreement between PPC
and PAGCOR, on one hand, and representatives of the rallyists, on the other, eventually
ended the rally on the 20th of December, 1992.
On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang
Panlungsod of Cagayan de Oro City, prohibiting the operation of casinos and providing for
penalty for violation thereof. On January 7, 1993, PPC filed a Petition for Prohibition with
Preliminary Injunction x x x against then public respondent Cagayan de Oro City and/or
Mayor Pablo P. Magtajas x x x before the Court of Appeals, docketed as CA G.R. SP No. 29851

praying inter alia, for the declaration of unconstitutionality of Ordinance No. 3353. PAGCOR
intervened in said petition and further assailed Ordinance No. 4475-93 as being violative of
the non-impairment of contracts and equal protection clauses. On March 31, 1993, the
Court of Appeals promulgated its decision x x x, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375-93 are
hereby DECLARED UNCONSTITUTIONAL and VOID and the respondents and all other persons
acting under their authority and in their behalf are PERMANENTLY ENJOINED from enforcing
those ordinances.
SO ORDERED.
Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the
case to the Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20,
1994 x x x, the Supreme Court denied the petition and affirmed the decision of the Court of
Appeals.
In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which,
however, another public rally was held. Casino operations continued for some time, but
were later on indefinitely suspended due to the incessant demonstrations. Per verbal advice
x x x from the Office of the President of the Philippines, PAGCOR decided to stop its casino
operations in Cagayan de Oro City. PAGCOR stopped its casino operations in the hotel prior
to September, 1993. In two Statements of Account dated September 1, 1993 x x x, PPC
apprised PAGCOR of its outstanding account for the quarter September 1 to November 30,
1993. PPC sent PAGCOR another Letter dated September 3, 1993 x x x as a follow-up to the
parties earlier conference. PPC sent PAGCOR another Letter dated September 15, 1993 x x x
stating its Board of Directors decision to collect the full rentals in case of pre-termination of
the lease.
PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not amenable
to the payment of the full rentals citing as reasons unforeseen legal and other circumstances
which prevented it from complying with its obligations. PAGCOR further stated that it had no
other alternative but to pre-terminate the lease agreement due to the relentless and
vehement opposition to their casino operations. In a letter dated October 12, 1993 x x x,
PAGCOR asked PPC to refund the total of P1,437,582.25 representing the reimbursable rental
deposits and expenses for the permanent improvement of the Hotels parking lot. In a letter
dated November 5, 1993 x x x, PAGCOR formally demanded from PPC the payment of its
claim for reimbursement.
On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court of
Manila docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a
case for sum of money in the Regional Trial Court of Manila docketed as Civil Case No. 9368337.
In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the
contract of lease due to PAGCORs continuing breach of the contract and further stated that

Page | 87

it was exercising its rights under the contract of lease pursuant to Article 20 (a) and (c)
thereof.
On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266,
which the trial court admitted in an Order dated February 11, 1994. In an Order dated April
27, 1994, Civil Case No. 93-68377 was ordered consolidated with Civil Case No. 93-68266.
These cases were jointly tried by the court a quo. On August 17, 1995, the court a quo
promulgated its decision. Both parties appealed.[5]
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to
award actual and moral damages; 2) the 50 percent reduction of the amount PPC was
claiming; and 3) the courts ruling that the 2 percent penalty was to be imposed from the
date of the promulgation of the Decision, not from the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule that the
Contract of Lease had already been terminated as early as September 21, 1993, or at the
latest, on October 14, 1993, when PPC received PAGCORs letter dated October 12, 1993.
The gaming corporation added that the trial court erred in 1) failing to consider that PPC was
entitled to avail itself of the provisions of Article XX only when PPC was the party terminating
the Contract; 2) not finding that there were valid, justifiable and good reasons for
terminating the Contract; and 3) dismissing the Complaint of PAGCOR in Civil Case No. 9368337 for lack of merit, and not finding PPC liable for the reimbursement of PAGCORS cash
deposits and of the value of improvements.
Ruling of the Court of Appeals
First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination of the
Contract of Lease was unjustified. The appellate court explained that public demonstrations
and rallies could not be considered as fortuitous events that would exempt the gaming
corporation from complying with the latters contractual obligations. Therefore, the Contract
continued to be effective until PPC elected to terminate it on November 25, 1993.
Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC
had the right to ask for (1) rescission of the Contract and indemnification for damages; or (2)
only indemnification plus the continuation of the Contract. These two remedies were
alternative, not cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC
correctly exercised the option to terminate the lease agreement. Previously, the Contract
remained effective, and PPC could collect the accrued rentals. However, from the time it
terminated the Contract on November 25, 1993, PPC could no longer demand payment of
the remaining rentals as part of actual damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that
PAGCOR had acted in gross or evident bad faith in failing to pay the rentals from September
to November 1993. Such failure was shown especially by the fact that PPC still had in hand

three (3) months advance rental deposits of PAGCOR. The former could have simply applied
this deposit to the unpaid rentals, as provided in the Contract. Neither did PPC adequately
show that its reputation had been besmirched or the hotels goodwill eroded by the
establishment of the casino and the public protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that
PAGCOR had not presented official receipts to prove the latters alleged expenses. The
appellate court, however, upheld the trial courts award to PPC of P50,000 attorneys fees.
Hence this Petition.[6]
Issues
In their Memorandum, petitioner raised the following issues:
MAIN ISSUE:
Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that
Pryce was not entitled to future rentals or lease payments for the unexpired period of the
Contract of Lease between Pryce and PAGCOR?
Sub-Issues:
1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the
right of PRYCE to terminate the Contract for cause and to moreover collect rentals from
PAGCOR corresponding to the remaining term of the lease valid and binding?
2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the
Contract, PRYCE having rescinded the Contract of Lease?
3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited
by PAGCOR support its position that PRYCE was not entitled to future rentals?
4.

Would the collection by PRYCE of future rentals not give rise to unjust enrichment?

5. Could we not have harmonized Article 1659 of the Civil Code and Article 20 of the
Contract of Lease?
6. Is it not a basic rule that the law, i.e. Article 1659, is deemed written in contracts,
particularly in the PRYCE-PAGCOR Contract of Lease?[7]
The Courts Ruling
The Petition is partly meritorious.

Page | 88

Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it
argues that termination, as defined under the Contract, is different from the remedy of
rescission prescribed under Article 1659 of the Civil Code. On the other hand, PAGCOR
contends, as the CA ruled, that Article 1659 of the Civil Code governs; hence, PPC is allegedly
no longer entitled to future rentals, because it chose to rescind the Contract.
Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that obligations arising from contracts have the force
of law between the contracting parties and should be complied with in good faith.[8] In
deference to the rights of the parties, the law[9] allows them to enter into stipulations,
clauses, terms and conditions they may deem convenient; that is, as long as these are not
contrary to law, morals, good customs, public order or public policy. Likewise, it is settled
that if the terms of the contract clearly express the intention of the contracting parties, the
literal meaning of the stipulations would be controlling.[10]
In this case, Article XX of the parties Contract of Lease provides in part as follows:

The above provisions leave no doubt that the parties have covenanted 1) to give PPC the
right to terminate and cancel the Contract in the event of a default or breach by the lessee;
and 2) to make PAGCOR fully liable for rentals for the remaining term of the lease, despite
the exercise of such right to terminate. Plainly, the parties have voluntarily bound
themselves to require strict compliance with the provisions of the Contract by stipulating
that a default or breach, among others, shall give the lessee the termination option, coupled
with the lessors liability for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs,
public order or public policy. Neither is there anything objectionable about the inclusion in
the Contract of mandatory provisions concerning the rights and obligations of the parties. [11]
Being the primary law between the parties, it governs the adjudication of their rights and
obligations. A court has no alternative but to enforce the contractual stipulations in the
manner they have been agreed upon and written.[12] It is well to recall that courts, be they
trial or appellate, have no power to make or modify contracts. [13] Neither can they save
parties from disadvantageous provisions.
Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for termination plus the full
payment of future rentals under the provisions of the Contract, rather than just rescission
under Article 1659 of the Civil Code. This Court is not unmindful of the fact that termination
and rescission are terms that have been used loosely and interchangeably in the past. But
distinctions ought to be made, especially in this controversy, in which the terms mean
differently and lead to equally different consequences.

XX. BREACH OR DEFAULT


a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained
shall be deemed essential conditions of this contract, and in the event of default or breach of
any of such terms, conditions and/or covenants, or should the LESSEE become bankrupt, or
insolvent, or compounds with his creditors, the LESSOR shall have the right to terminate and
cancel this contract by giving them fifteen (15 days) prior notice delivered at the leased
premises or posted on the main door thereof. Upon such termination or cancellation, the
LESSOR may forthwith lock the premises and exclude the LESSEE therefrom, forcefully or
otherwise, without incurring any civil or criminal liability. During the fifteen (15) days notice,
the LESSEE may prevent the termination of lease by curing the events or causes of
termination or cancellation of the lease.
b)

xxx

xxx

xxx

c) Moreover, the LESSEE shall be fully liable to the LESSOR for the rentals corresponding to
the remaining term of the lease as well as for any and all damages, actual or consequential
resulting from such default and termination of this contract.
d)

xxx

xxx

The term rescission is found in 1) Article 1191[14] of the Civil Code, the general provision on
rescission of reciprocal obligations; 2) Article 1659,[15] which authorizes rescission as an
alternative remedy, insofar as the rights and obligations of the lessor and the lessee in
contracts of lease are concerned; and 3) Article 1380[16] with regard to the rescission of
contracts.
In his Concurring Opinion in Universal Food Corporation v. CA,[17] Justice J. B. L. Reyes
differentiated rescission under Article 1191 from that under Article 1381 et seq. as follows:
x x x. The rescission on account of breach of stipulations is not predicated on injury to
economic interests of the party plaintiff but on the breach of faith by the defendant, that
violates the reciprocity between the parties. It is not a subsidiary action, and Article 1191
may be scanned without disclosing anywhere that the action for rescission thereunder is
subordinated to anything other than the culpable breach of his obligations to the defendant.
This rescission is a principal action retaliatory in character, it being unjust that a party be held
bound to fulfill his promises when the other violates his. As expressed in the old Latin
aphorism: Non servanti fidem, non est fides servanda. Hence, the reparation of damages for
the breach is purely secondary.

x x x. (Italics supplied)

Page | 89

On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action
is subordinated to the existence of that prejudice, because it is the raison detre as well as
the measure of the right to rescind. x x x.[18]
Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the
old Civil Code, and that the term became the basis for rescission under Article 1191 (and,
conformably, also Article 1659).[19]

In this case, the actions and pleadings of petitioner show that it never intended to rescind the
Lease Contract from the beginning. This fact was evident when it first sought to collect the
accrued rentals from September to November 1993 because, as previously stated, it actually
demanded the enforcement of the Lease Contract prior to termination. Any intent to rescind
was not shown, even when it abrogated the Contract on November 25, 1993, because such
abrogation was not the rescission provided for under Article 1659.
Future Rentals

Now, as to the distinction between termination (or cancellation) and rescission (more
properly, resolution), Huibonhoa v. CA[20] held that, where the action prayed for the payment
of rental arrearages, the aggrieved party actually sought the partial enforcement of a lease
contract. Thus, the remedy was not rescission, but termination or cancellation, of the
contract. The Court explained:
x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate the
contract because they sought its partial enforcement in praying for rental arrearages. There
is a distinction in law between cancellation of a contract and its rescission. To rescind is to
declare a contract void in its inception and to put an end to it as though it never were. It is not
merely to terminate it and release parties from further obligations to each other but to
abrogate it from the beginning and restore the parties to relative positions which they would
have occupied had no contract ever been made.
x x x. The termination or cancellation of a contract would necessarily entail enforcement of
its terms prior to the declaration of its cancellation in the same way that before a lessee is
ejected under a lease contract, he has to fulfill his obligations thereunder that had accrued
prior to his ejectment. However, termination of a contract need not undergo judicial
intervention. x x x.[21] (Italics supplied)
Rescission has likewise been defined as the unmaking of a contract, or its undoing from the
beginning, and not merely its termination. Rescission may be effected by both parties by
mutual agreement; or unilaterally by one of them declaring a rescission of contract without
the consent of the other, if a legally sufficient ground exists or if a decree of rescission is
applied for before the courts.[22] On the other hand, termination refers to an end in time or
existence; a close, cessation or conclusion. With respect to a lease or contract, it means an
ending, usually before the end of the anticipated term of such lease or contract, that may be
effected by mutual agreement or by one party exercising one of its remedies as a
consequence of the default of the other.[23]
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the
parties to their original situation prior to the inception of the contract. [24] Applying this
principle to this case, it means that PPC would re-acquire possession of the leased premises,
and PAGCOR would get back the rentals it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation;
neither is the contract treated as if it never existed. Prior to its termination, the parties are
obliged to comply with their contractual obligations. Only after the contract has been
cancelled will they be released from their obligations.

As to the remaining sub-issue of future rentals, Rios v. Jacinto[25] is inapplicable, because the
remedy resorted to by the lessors in that case was rescission, not termination. The rights
and obligations of the parties in Rios were governed by Article 1659 of the Civil Code; hence,
the Court held that the damages to which the lessor was entitled could not have extended to
the lessees liability for future rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or
enjoyment of anothers property after the termination of a contract. We stress that by
abrogating the Contract in the present case, PPC released PAGCOR from the latters future
obligations, which included the payment of rentals. To grant that right to the former is to
unjustly enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is
manifest from a reading of the mandatory provision under subparagraph (a) in conjunction
with subparagraph (c) of the Contract. A penal clause is an accessory obligation which the
parties attach to a principal obligation for the purpose of insuring the performance thereof
by imposing on the debtor a special prestation (generally consisting in the payment of a sum
of money) in case the obligation is not fulfilled or is irregularly or inadequately fulfilled. [26]
Quite common in lease contracts, this clause functions to strengthen the coercive force of
the obligation and to provide, in effect, for what could be the liquidated damages resulting
from a breach.[27] There is nothing immoral or illegal in such indemnity/penalty clause,
absent any showing that it was forced upon or fraudulently foisted on the obligor.[28]
In obligations with a penal clause, the general rule is that the penalty serves as a substitute
for the indemnity for damages and the payment of interests in case of noncompliance; that
is, if there is no stipulation to the contrary,[29] in which case proof of actual damages is not
necessary for the penalty to be demanded.[30] There are exceptions to the aforementioned
rule, however, as enumerated in paragraph 1 of Article 1226 of the Civil Code: 1) when there
is a stipulation to the contrary, 2) when the obligor is sued for refusal to pay the agreed
penalty, and 3) when the obligor is guilty of fraud. In these cases, the purpose of the penalty
is obviously to punish the obligor for the breach. Hence, the obligee can recover from the
former not only the penalty, but also other damages resulting from the nonfulfillment of the
principal obligation. [31]
In the present case, the first exception applies because Article XX (c) provides that, aside
from the payment of the rentals corresponding to the remaining term of the lease, the lessee
shall also be liable for any and all damages, actual or consequential, resulting from such

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default and termination of this contract. Having entered into the Contract voluntarily and
with full knowledge of its provisions, PAGCOR must be held bound to its obligations. It
cannot evade further liability for liquidated damages.
Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts. [32]
This power is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we
quote:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be
equitably reduced if they are iniquitous or unconscionable.

WHEREFORE, the Petition is GRANTED in part. The assailed Decision and Resolution are
hereby MODIFIED to include the payment of penalty. Accordingly, respondent is ordered to
pay petitioner the additional amount of P687,289.50 as penalty, which may be set off or
applied against the formers advanced rental deposits. Meanwhile, the CAs award to
petitioner of actual damages representing the accrued rentals for September to November
1993 -- with interest and penalty at the rate of two percent (2%) per month, from the date of
filing of the Complaint until the amount shall have been fully paid -- as well as the P50,000
award for attorneys fees, is AFFIRMED. No costs.
SO ORDERED.
ERMINDA
F.
vs.
SUPERVALUE, INC., Respondent.

FLORENTINO,

Petitioner,

DECISION
CHICO-NAZARIO, J.:

The question of whether a penalty is reasonable or iniquitous is addressed to the sound


discretion of the courts. To be considered in fixing the amount of penalty are factors such as
-- but not limited to -- the type, extent and purpose of the penalty; the nature of the
obligation; the mode of the breach and its consequences; the supervening realities; the
standing and relationship of the parties; and the like.[33]
In this case, PAGCORs breach was occasioned by events that, although not fortuitous in law,
were in fact real and pressing. From the CAs factual findings, which are not contested by
either party, we find that PAGCOR conducted a series of negotiations and consultations
before entering into the Contract. It did so not only with the PPC, but also with local
government officials, who assured it that the problems were surmountable. Likewise,
PAGCOR took pains to contest the ordinances[34] before the courts, which consequently
declared them unconstitutional. On top of these developments, the gaming corporation was
advised by the Office of the President to stop the games in Cagayan de Oro City, prompting
the former to cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino operations had to be
suspended for days on end since their start in December 1992; and indefinitely from July 15,
1993, upon the advice of the Office of President, until the formal cessation of operations in
September 1993. Needless to say, these interruptions and stoppages meant that PAGCOR
suffered a tremendous loss of expected revenues, not to mention the fact that it had fully
operated under the Contract only for a limited time.

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules
of Court, filed by petitioner Erminda F. Florentino, seeking to reverse and set aside the
Decision,1 dated 10 October 2003 and the Resolution,2 dated 19 April 2006 of the Court of
Appeals in CA-G.R. CV No. 73853. The appellate court, in its assailed Decision and
Resolution, modified the Decision dated 30 April 2001 of the Regional Trial Court (RTC) of
Makati, Branch 57, in Civil Case No. 00-1015, finding the respondent Supervalue, Inc., liable
for the sum of P192,000.00, representing the security deposits made by the petitioner
upon the commencement of their Contract of Lease. The dispositive portion of the assailed
appellate courts Decision thus reads:
WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The April 30, 2001
Decision of the Regional Trial Court of Makati, Branch 57 is therefore MODIFIED to wit: (a)
the portion ordering the [herein respondent] to pay the amount of P192,000.00
representing the security deposits and P50,000.00 as attorneys fees in favor of the [herein
petitioner] as well as giving [respondent] the option to reimburse [petitioner] of the
value of the improvements introduced by the [petitioner] on the leased [premises] should
[respondent] choose to appropriate itself or require the [petitioner] to remove the
improvements, is hereby REVERSED and SET ASIDE; and (b) the portion ordering the return
to [petitioner] the properties seized by [respondent] after the former settled her obligation
with the latter is however MAINTAINED.3
The factual and procedural antecedents of the instant petition are as follows:

While petitioners right to a stipulated penalty is affirmed, we consider the claim for future
rentals to the tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably
reduced. Under the circumstances, the advanced rental deposits in the sum of P687,289.50
should be sufficient penalty for respondents breach.

Petitioner is doing business under the business name "Empanada Royale," a sole
proprietorship engaged in the retail of empanada with outlets in different malls and
business establishments within Metro Manila.4

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Respondent, on the other hand, is a domestic corporation engaged in the business of


leasing stalls and commercial store spaces located inside SM Malls found all throughout
the country.5
On 8 March 1999, petitioner and respondent executed three Contracts of Lease containing
similar terms and conditions over the cart-type stalls at SM North Edsa and SM Southmall
and a store space at SM Megamall. The term of each contract is for a period of four months
and may be renewed upon agreement of the parties.6
Upon the expiration of the original Contracts of Lease, the parties agreed to renew the
same by extending their terms until 31 March 2000.7
Before the expiration of said Contracts of Lease, or on 4 February 2000, petitioner received
two letters from the respondent, both dated 14 January 2000, transmitted through
facsimile transmissions.8
In the first letter, petitioner was charged with violating Section 8 of the Contracts of Lease
by not opening on 16 December 1999 and 26 December 1999.9
Respondent also charged petitioner with selling a new variety of empanada called "miniembutido" and of increasing the price of her merchandise from P20.00 to P22.00, without
the prior approval of the respondent.10
Respondent observed that petitioner was frequently closing earlier than the usual mall
hours, either because of non-delivery or delay in the delivery of stocks to her outlets, again
in violation of the terms of the contract. A stern warning was thus given to petitioner to
refrain from committing similar infractions in the future in order to avoid the termination
of the lease contract.11
In the second letter, respondent informed the petitioner that it will no longer renew the
Contracts of Lease for the three outlets, upon their expiration on 31 March 2000.12
In a letter-reply dated 11 February 2000, petitioner explained that the "mini-embutido" is
not a new variety of empanada but had similar fillings, taste and ingredients as those of
pork empanada; only, its size was reduced in order to make it more affordable to the
buyers.13
Such explanation notwithstanding, respondent still refused to renew its Contracts of Lease
with the petitioner. To the contrary, respondent took possession of the store space in SM
Megamall and confiscated the equipment and personal belongings of the petitioner found
therein after the expiration of the lease contract.14
In a letter dated 8 May 2000, petitioner demanded that the respondent release the
equipment and personal belongings it seized from the SM Megamall store space and return
the security deposits, in the sum of P192,000.00, turned over by the petitioner upon
signing of the Contracts of Lease. On 15 June 2000, petitioner sent respondent another

letter reiterating her previous demands, but the latter failed or refused to comply
therewith. 15
On 17 August 2000, an action for Specific Performance, Sum of Money and Damages was
filed by the petitioner against the respondent before the RTC of Makati, Branch 57.16
In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged that the respondent
made verbal representations that the Contracts of Lease will be renewed from time to time
and, through the said representations, the petitioner was induced to introduce
improvements upon the store space at SM Megamall in the sum of P200,000.00, only to
find out a year later that the respondent will no longer renew her lease contracts for all
three outlets.17
In addition, petitioner alleged that the respondent, without justifiable cause and without
previous demand, refused to return the security deposits in the amount of P192,000.00.18
Further, petitioner claimed that the respondent seized her equipment and personal
belongings found inside the store space in SM Megamall after the lease contract for the
said outlet expired and despite repeated written demands from the petitioner, respondent
continuously refused to return the seized items.19
Petitioner thus prayed for the award of actual damages in the sum of P472,000.00,
representing the sum of security deposits, cost of improvements and the value of the
personal properties seized. Petitioner also asked for the award of P300,000.00 as moral
damages; P50,000.00 as exemplary damages; and P80,000.00 as attorneys fees and
expenses of litigation.20
For its part, respondent countered that petitioner committed several violations of the
terms of their Contracts of Lease by not opening from 16 December 1999 to 26 December
1999, and by introducing a new variety of empanada without the prior consent of the
respondent, as mandated by the provision of Section 2 of the Contract of Lease.
Respondent also alleged that petitioner infringed the lease contract by frequently closing
earlier than the agreed closing hours. Respondent finally averred that petitioner is liable
for the amount P106,474.09, representing the penalty for selling a new variety of
empanada, electricity and water bills, and rental adjustment, among other charges
incidental to the lease agreements. Respondent claimed that the seizure of petitioners
personal belongings and equipment was in the exercise of its retaining lien, considering
that the petitioner failed to settle the said obligations up to the time the complaint was
filed.21
Considering that petitioner already committed several breaches of contract, the
respondent thus opted not to renew its Contracts of Lease with her anymore. The security
deposits were made in order to ensure faithful compliance with the terms of their lease
agreements; and since petitioner committed several infractions thereof, respondent was
justified in forfeiting the security deposits in the latters favor.

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On 30 April 2001, the RTC rendered a Judgment22 in favor of the petitioner and found that
the physical takeover by the respondent of the leased premises and the seizure of
petitioners equipment and personal belongings without prior notice were illegal. The
decretal part of the RTC Judgment reads:
WHEREFORE, premises duly considered, judgment is hereby rendered ordering the [herein
respondent] to pay [herein petitioner] the amount of P192,000.00 representing the
security deposits made by the [petitioner] and P50,000.00 as and for attorneys fees.
The [respondent] is likewise ordered to return to the [petitioner] the various properties
seized by the former after settling her account with the [respondent].
Lastly, the [respondent] may choose either to reimburse the [petitioner] one half (1/2) of
the value of the improvements introduced by the plaintiff at SM Megamall should
[respondent] choose to appropriate the improvements to itself or require the [petitioner]
to remove the improvements, even though the principal thing may suffer damage thereby.
[Petitioner] shall not, however, cause anymore impairment upon the said leased premises
than is necessary.
The other damages claimed by the plaintiff are denied for lack of merit.
Aggrieved, the respondent appealed the adverse RTC Judgment to the Court of Appeals.
In a Decision23 dated 10 October 2003, the Court of Appeals modified the RTC Judgment
and found that the respondent was justified in forfeiting the security deposits and was not
liable to reimburse the petitioner for the value of the improvements introduced in the
leased premises and to pay for attorneys fees. In modifying the findings of the lower court,
the appellate court declared that in view of the breaches of contract committed by the
petitioner, the respondent is justified in forfeiting the security deposits. Moreover, since
the petitioner did not obtain the consent of the respondent before she introduced
improvements on the SM Megamall store space, the respondent has therefore no
obligation to reimburse the petitioner for the amount expended in connection with the
said improvements.24 The Court of Appeals, however, maintained the order of the trial
court for respondent to return to petitioner her properties after she has settled her
obligations to the respondent. The appellate court denied petitioners Motion for
Reconsideration in a Resolution25 dated 19 April 2006.
Hence, this instant Petition for Review on Certiorari26 filed by the petitioner assailing the
Court of Appeals Decision. For the resolution of this Court are the following issues:
I. Whether or not the respondent is liable to return the security deposits to the petitions.
II. Whether or not the respondent is liable to reimburse the petitioner for the sum of the
improvements she introduced in the leased premises.

The appellate court, in finding that the respondent is authorized to forfeit the security
deposits, relied on the provisions of Sections 5 and 18 of the Contract of Lease, to wit:
Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of SIXTY THOUSAND
PESOS (P60,000.00) equivalent to three (3) months rent as security for the full and faithful
performance to each and every term, provision, covenant and condition of this lease and
not as a pre-payment of rent. If at any time during the term of this lease the rent is
increased[,] the LESSEE on demand shall make an additional deposit equal to the increase
in rent. The LESSOR shall not be required to keep the deposit separate from its general
funds and the deposit shall not be entitled to interest. The deposit shall remain intact
during the entire term and shall not be applied as payment for any monetary obligations of
the LESSEE under this contract. If the LESSEE shall faithfully perform every provision of this
lease[,] the deposit shall be refunded to the LESSEE upon the expiration of this Lease and
upon satisfaction of all monetary obligation to the LESSOR.
xxxx
Section 18. TERMINATION. Any breach, non-performance or non-observance of the terms
and conditions herein provided shall constitute default which shall be sufficient ground to
terminate this lease, its extension or renewal. In which event, the LESSOR shall demand
that LESSEE immediately vacate the premises, and LESSOR shall forfeit in its favor the
deposit tendered without prejudice to any such other appropriate action as may be legally
authorized.28
Since it was already established by the trial court that the petitioner was guilty of
committing several breaches of contract, the Court of Appeals decreed that she cannot
therefore rightfully demand the return of the security deposits for the same are deemed
forfeited by reason of evident contractual violations.
It is undisputed that the above-quoted provision found in all Contracts of Lease is in the
nature of a penal clause to ensure petitioners faithful compliance with the terms and
conditions of the said contracts.
A penal clause is an accessory undertaking to assume greater liability in case of breach. It is
attached to an obligation in order to insure performance and has a double function: (1) to
provide for liquidated damages, and (2) to strengthen the coercive force of the obligation
by the threat of greater responsibility in the event of breach. 29 The obligor would then be
bound to pay the stipulated indemnity without the necessity of proof of the existence and
the measure of damages caused by the breach.30 Article 1226 of the Civil Code states:
Art. 1226. In obligations with a penal clause, the penalty shall substitute the indemnity for
damages and the payment of interests in case of noncompliance, if there is no stipulation
to the contrary. Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.

III. Whether or not the respondent is liable for attorneys fees.27

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The penalty may be enforced only when it is demandable in accordance with the provisions
of this Code.
As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on
such terms and conditions as they see fit as long as they are not contrary to law, morals,
good customs, public order or public policy. Nevertheless, courts may equitably reduce a
stipulated penalty in the contracts in two instances: (1) if the principal obligation has been
partly or irregularly complied with; and (2) even if there has been no compliance if the
penalty is iniquitous or unconscionable in accordance with Article 1229 of the Civil Code
which clearly provides:
Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has
been partly or irregularly complied with by the debtor. Even if there has been no
performance, the penalty may also be reduced by the courts if it is iniquitous or
unconscionable.31
In ascertaining whether the penalty is unconscionable or not, this court set out the
following standard in Ligutan v. Court of Appeals,32 to wit:
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factor as, but not necessarily
confined to, the type, extent and purpose of the penalty, the nature of the obligation, the
mode of breach and its consequences, the supervening realities, the standing and
relationship of the parties, and the like, the application of which, by and large, is addressed
to the sound discretion of the court. xxx.
In the instant case, the forfeiture of the entire amount of the security deposits in the sum
of P192,000.00 was excessive and unconscionable considering that the gravity of the
breaches committed by the petitioner is not of such degree that the respondent was
unduly prejudiced thereby. It is but equitable therefore to reduce the penalty of the
petitioner to 50% of the total amount of security deposits.
It is in the exercise of its sound discretion that this court tempered the penalty for the
breaches committed by the petitioner to 50% of the amount of the security deposits. The
forfeiture of the entire sum of P192,000.00 is clearly a usurious and iniquitous penalty for
the transgressions committed by the petitioner. The respondent is therefore under the
obligation to return the 50% of P192,000.00 to the petitioner.
Turning now to the liability of the respondent to reimburse the petitioner for one-half of
the expenses incurred for the improvements on the leased store space at SM Megamall,
the following provision in the Contracts of Lease will enlighten us in resolving this issue:
Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The LESSEE shall not make
any alterations, additions, or improvements without the prior written consent of LESSOR;
and all alterations, additions or improvements made on the leased premises, except
movable or fixtures put in at LESSEEs expense and which are removable, without defacing

the buildings or damaging its floorings, shall become LESSORs property without
compensation/reimbursement but the LESSOR reserves the right to require the removal of
the said alterations, additions or improvements upon expiration of the lease.
The foregoing provision in the Contract of Lease mandates that before the petitioner can
introduce any improvement on the leased premises, she should first obtain respondents
consent. In the case at bar, it was not shown that petitioner previously secured the consent
of the respondent before she made the improvements on the leased space in SM
Megamall. It was not even alleged by the petitioner that she obtained such consent or she
at least attempted to secure the same. On the other hand, the petitioner asserted that
respondent allegedly misrepresented to her that it would renew the terms of the contracts
from time to time after their expirations, and that the petitioner was so induced thereby
that she expended the sum of P200,000.00 for the improvement of the store space leased.
This argument was squarely addressed by this court in Fernandez v. Court of Appeals,33
thus:
The Court ruled that the stipulation of the parties in their lease contract "to be renewable"
at the option of both parties stresses that the faculty to renew was given not to the lessee
alone nor to the lessor by himself but to the two simultaneously; hence, both must agree
to renew if a new contract is to come about.
Petitioners contention that respondents had verbally agreed to extend the lease
indefinitely is inadmissible to qualify the terms of the written contract under the parole
evidence rule, and unenforceable under the statute of frauds.34
Moreover, it is consonant with human experience that lessees, before occupying the leased
premises, especially store spaces located inside malls and big commercial establishments,
would renovate the place and introduce improvements thereon according to the needs and
nature of their business and in harmony with their trademark designs as part of their
marketing ploy to attract customers. Certainly, no inducement or misrepresentation from
the lessor is necessary for this purpose, for it is not only a matter of necessity that a lessee
should re-design its place of business but a business strategy as well.
In ruling that the respondent is liable to reimburse petitioner one half of the amount of
improvements made on the leased store space should it choose to appropriate the same,
the RTC relied on the provision of Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the
use for which the lease is intended, without altering the form or substance of the property
leased, the lessor upon the termination of the lease shall pay the lessee one-half of the
value of the improvements at that time. Should the lessor refuse to reimburse said
amount, the lessee may remove the improvements, even though the principal thing may
suffer damage thereby. He shall not, however, cause any more impairment upon the
property leased than is necessary.

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While it is true that under the above-quoted provision of the Civil Code, the lessor is under
the obligation to pay the lessee one-half of the value of the improvements made should
the lessor choose to appropriate the improvements, Article 1678 however should be read
together with Article 448 and Article 546 of the same statute, which provide:
Art. 448. The owner of the land on which anything has been built, sown or planted in good
faith, shall have the right to appropriate as his own the works, sowing or planting, after
payment of the indemnity provided for in articles 546 and 548, or to oblige the one who
built or planted to pay the price of the land, and the one who sowed, the proper rent.
However, the builder or planter cannot be obliged to buy the land if its value is
considerably more than that of the building or trees. In such case, he shall pay reasonable
rent, if the owner of the land does not choose to appropriate the building or trees after
proper indemnity. The parties shall agree upon the terms of the lease and in case of
disagreement, the court shall fix the terms thereof.
xxxx
Art. 546. Necessary expenses shall be refunded to every possessor; but only possessor in
good faith may retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right
of retention, the person who has defeated him in the possession having the option of
refunding the amount of the expenses or of paying the increase in value which the thing
may have acquired by reason thereof.

apply where one's only interest is that of a lessee under a rental contract; otherwise, it
would always be in the power of the tenant to "improve" his landlord out of his property.
Since petitioners interest in the store space is merely that of the lessee under the lease
contract, she cannot therefore be considered a builder in good faith. Consequently,
respondent may appropriate the improvements introduced on the leased premises without
any obligation to reimburse the petitioner for the sum expended.
Anent the claim for attorneys fees, we resolve to likewise deny the award of the same.
Attorneys fees may be awarded when a party is compelled to litigate or to incur expenses
to protect its interest by reason of unjustified act of the other.37
In the instant petition, it was not shown that the respondent unjustifiably refused to grant
the demands of the petitioner so as to compel the latter to initiate legal action to enforce
her right. As we have found herein, there is basis for respondents refusal to return to
petitioner the security deposits and to reimburse the costs of the improvements in the
leased premises. The award of attorneys fees is therefore not proper in the instant case.
WHEREFORE, premises considered, the instant Petition is PARTLY GRANTED. The Court of
Appeals Decision dated 10 October 2003 in CA-G.R. CV No. 73853 is hereby AFFIRMED with
the MODIFICATION that the respondent may forfeit only 50% of the total amount of the
security deposits in the sum of P192,000.00, and must return the remaining 50% to the
petitioner. No costs.
SO ORDERED.

Thus, to be entitled to reimbursement for improvements introduced on the property, the


petitioner must be considered a builder in good faith. Further, Articles 448 and 546 of the
Civil Code, which allow full reimbursement of useful improvements and retention of the
premises until reimbursement is made, apply only to a possessor in good faith, i.e., one
who builds on land with the belief that he is the owner thereof. A builder in good faith is
one who is unaware of any flaw in his title to the land at the time he builds on it. 35 In this
case, the petitioner cannot claim that she was not aware of any flaw in her title or was
under the belief that she is the owner of the subject premises for it is a settled fact that she
is merely a lessee thereof.1wphi1
In Geminiano v. Court of Appeals,36 this Court was emphatic in declaring that lessees are
not possessors or builders in good faith, thus:
Being mere lessees, the private respondents knew that their occupation of the premises
would continue only for the life of the lease. Plainly, they cannot be considered as
possessors nor builders in good faith.
In a plethora of cases, this Court has held that Article 448 of the Civil Code, in relation to
Article 546 of the same Code, which allows full reimbursement of useful improvements and
retention of the premises until reimbursement is made, applies only to a possessor in good
faith, i.e., one who builds on land with the belief that he is the owner thereof. It does not

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