Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 159617

August 8, 2007

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners,

vs.
LULU V. JORGE and CESAR JORGE, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr. (petitioner Sicam) and
Agencia de R.C. Sicam, Inc. (petitioner corporation) seeking to annul the Decision 1 of the Court of
Appeals dated March 31, 2003, and its Resolution2 dated August 8, 2003, in CA G.R. CV No. 56633.
It appears that on different dates from September to October 1987, Lulu V. Jorge (respondent Lulu)
pawned several pieces of jewelry with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF
Homes 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.
Respondents subsequently filed an Amended Complaint to include petitioner corporation.
Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned considering that he is
not the real party-in-interest. Respondents opposed the same. The RTC denied the motion in an Order
dated November 8, 1989.5
After trial on the merits, the RTC rendered its Decision 6 dated January 12, 1993, dismissing
respondents complaint as well as petitioners counterclaim. The RTC held that petitioner Sicam could
not be made personally liable for a claim arising out of a corporate transaction; that in the Amended
Complaint of respondents, they asserted that "plaintiff pawned assorted jewelries in defendants'
pawnshop"; and that as a consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of a stockholder.
The RTC further ruled that petitioner corporation could not be held liable for the loss of the pawned
jewelry since it had not been rebutted by respondents that the loss of the pledged pieces of jewelry in
the possession of the corporation was occasioned by armed robbery; that robbery is a fortuitous event
which exempts the victim from liability for the loss, citing the case of Austria v. Court of Appeals;7 and
that the parties transaction was that of a pledgor and pledgee and under Art. 1174 of the Civil Code,
the pawnshop as a pledgee is not responsible for those events which could not be foreseen.
Respondents appealed the RTC Decision to the CA. In a Decision dated March 31, 2003, the CA
reversed the RTC, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the instant Appeal is GRANTED, and the Decision dated
January 12, 1993,of the Regional Trial Court of Makati, Branch 62, is hereby REVERSED and
SET ASIDE, ordering the appellees to pay appellants the actual value of the lost jewelry
amounting to P272,000.00, and attorney' fees of P27,200.00.8
In finding petitioner Sicam liable together with petitioner corporation, the CA applied the doctrine of
piercing the veil of corporate entity reasoning that respondents were misled into thinking that they were
dealing with the pawnshop owned by petitioner Sicam as all the pawnshop tickets issued to them bear
the words "Agencia de R.C. Sicam"; and that there was no indication on the pawnshop tickets that it

was the petitioner corporation that owned the pawnshop which explained why respondents had to
amend their complaint impleading petitioner corporation.
The CA further held that the corresponding diligence required of a pawnshop is that it should take steps
to secure and protect the pledged items and should take steps to insure itself against the loss of articles
which are entrusted to its custody as it derives earnings from the pawnshop trade which petitioners
failed to do; that Austria is not applicable to this case since the robbery incident happened in 1961
when the criminality had not as yet reached the levels attained in the present day; that they are at least
guilty of contributory negligence and should be held liable for the loss of jewelries; and that robberies
and hold-ups are foreseeable risks in that those engaged in the pawnshop business are expected to
foresee.
The CA concluded that both petitioners should be jointly and severally held liable to respondents for
the loss of the pawned jewelry.
Petitioners motion for reconsideration was denied in a Resolution dated August 8, 2003.
Hence, the instant petition for review with the following assignment of errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO
REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED AS ITS
OWN WITHOUT IN THE MEANTIME ACKNOWLEDGING IT) WHAT THE
RESPONDENTS ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS PALPABLY
UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO
REVERSAL

BY

THIS

HONORABLE

COURT,

WHEN

IT AGAIN

ADOPTED

UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING IT) THE SUBMISSIONS OF THE

RESPONDENTS IN THEIR BRIEF WITHOUT ADDING ANYTHING MORE THERETO
DESPITE THE FACT THAT THE SAID ARGUMENT OF THE RESPONDENTS COULD
NOT HAVE BEEN SUSTAINED IN VIEW OF UNREBUTTED EVIDENCE ON RECORD. 9
Anent the first assigned error, petitioners point out that the 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 was discouraged by the Central Bank (CB) since CB rules
provide that they can only store the pawned articles in a vault inside the pawnshop premises and
no other place;
(2) Petitioners were adjudged negligent as they did not take insurance against the loss of the
pledged jelweries, but it is judicial notice that due to high incidence of crimes, insurance
companies refused to cover pawnshops and banks because of high probability of losses due to
robberies;
(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), the victim of
robbery was exonerated from liability for the sum of money belonging to others and lost by him
to robbers.
Respondents filed their Comment and petitioners filed their Reply thereto. The parties subsequently
submitted their respective Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were exact reproductions of the
arguments raised in respondents (appellants) brief filed with the CA, we find the same to be not
fatally infirmed. Upon examination of the Decision, we find that it expressed clearly and distinctly the
facts and the law on which it is based as required by Section 8, Article VIII of the Constitution. The
discretion to decide a case one way or another is broad enough to justify the adoption of the arguments
put forth by one of the parties, as long as these are legally tenable and supported by law and the facts
on records.11
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 "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 letter16 dated October 15, 1987 addressed to
the Central Bank, expressly referred to petitioner Sicam as the proprietor of the pawnshop
notwithstanding the alleged incorporation in April 1987.
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-ininterest because since April 20, 1987, the pawnshop business initiated by him was incorporated and
known as Agencia de R.C. Sicam. In the pre-trial brief filed by petitioner Sicam, he submitted that as
far as he was concerned, the basic issue was whether he is the real party in interest against whom the
complaint should be directed.20 In fact, he subsequently moved for the dismissal of the complaint as to
him but was not favorably acted upon by the trial court. Moreover, the issue was squarely passed upon,
although erroneously, by the trial court in its Decision in this manner:
x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is concerned for the
reason that he cannot be made personally liable for a claim arising from a corporate transaction.
This Court sustains the contention of the defendant Roberto C. Sicam, Jr. The amended
complaint itself asserts that "plaintiff pawned assorted jewelries in defendant's pawnshop." It

has been held that " as a consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of the stockholder, nor is the stockholder's debt
or credit that of a corporation.21
Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether petitioner Sicam is
personally liable is inextricably connected with the determination of the question whether the doctrine
of piercing the corporate veil should or should not apply to the case.
The next question is whether petitioners are liable for the loss of the pawned articles in their
possession.
Petitioners insist that they are not liable since robbery is a fortuitous event and they are not negligent at
all.
We are not persuaded.
Article 1174 of the Civil Code provides:
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by
stipulation, or when the nature of the obligation requires the assumption of risk, no person shall
be responsible for those events which could not be foreseen or which, though foreseen, were
inevitable.
Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not
enough that the event should not have been foreseen or anticipated, as is commonly believed but it
must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not
impossibility to foresee the same. 22
To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen
and unexpected occurrence or of the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the event that constitutes the caso
fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal manner; and, (d) the obligor must
be free from any participation in the aggravation of the injury or loss. 23
The burden of proving that the loss was due to a fortuitous event rests on him who invokes it. 24 And, in
order for a fortuitous event to exempt one from liability, it is necessary that one has committed no
negligence or misconduct that may have occasioned the loss. 25
It has been held that an act of God cannot be invoked to protect a person who has failed to take steps to
forestall the possible adverse consequences of such a loss. One's negligence may have concurred with
an act of God in producing damage and injury to another; nonetheless, showing that the immediate or
proximate cause of the damage or injury was a fortuitous event would not exempt one from liability.

When the effect is found to be partly the result of a person's participation -- whether by active
intervention, neglect or failure to act -- the whole occurrence is humanized and removed from the rules
applicable to acts of God. 26
Petitioner Sicam had testified that there was a security guard in their pawnshop at the time of the
robbery. He likewise testified that when he started the pawnshop business in 1983, he thought of
opening a vault with the nearby bank for the purpose of safekeeping the valuables but was discouraged
by the Central Bank since pawned articles should only be stored in a vault inside the pawnshop. The
very measures which petitioners had allegedly adopted show that to them the possibility of robbery was
not only foreseeable, but actually foreseen and anticipated. Petitioner Sicams testimony, in effect,
contradicts petitioners defense of fortuitous event.
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:
It is not a defense for a repair shop of motor vehicles to escape liability simply because the
damage or loss of a thing lawfully placed in its possession was due to carnapping. Carnapping
per se cannot be considered as a fortuitous event. The fact that a thing was unlawfully and
forcefully taken from another's rightful possession, as in cases of carnapping, does not
automatically give rise to a fortuitous event. To be considered as such, carnapping entails
more than the mere forceful taking of another's property. It must be proved and
established that the event was an act of God or was done solely by third parties and that
neither the claimant nor the person alleged to be negligent has any participation. In
accordance with the Rules of Evidence, the burden of proving that the loss was due to a
fortuitous event rests on him who invokes it which in this case is the private respondent.
However, other than the police report of the alleged carnapping incident, no other evidence was
presented by private respondent to the effect that the incident was not due to its fault. A police
report of an alleged crime, to which only private respondent is privy, does not suffice to
establish the carnapping. Neither does it prove that there was no fault on the part of private
respondent notwithstanding the parties' agreement at the pre-trial that the car was carnapped.
Carnapping does not foreclose the possibility of fault or negligence on the part of private
respondent.28
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.
On the contrary, by the very evidence of petitioners, the CA did not err in finding that petitioners are
guilty of concurrent or contributory negligence as provided in Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or

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

Manila

THIRD DIVISION
MANILA ELECTRIC COMPANY,

G.R. No. 158911

Petitioner,
Present:
- versus -

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,

MATILDE MACABAGDAL RAMOY,

CHICO-NAZARIO,

BIENVENIDO RAMOY, ROMANA

NACHURA, and

RAMOY-RAMOS, ROSEMARIE

REYES, JJ.

RAMOY, OFELIA DURIAN and

CYRENE PANADO,

Promulgated:

Respondents.

March 4, 2008

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

DECISION
AUSTRIA-MARTINEZ, J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court,
praying that the Decision[1] of the Court of Appeals (CA) dated December 16, 2002,
ordering petitioner Manila Electric Company (MERALCO) to pay Leoncio Ramoy[2]
moral and exemplary damages and attorney's fees, and the CA Resolution[3] dated July
1, 2003, denying petitioner's motion for reconsideration, be reversed and set aside.
The Regional Trial Court (RTC) of Quezon City, Branch 81, accurately summarized the
facts as culled from the records, thus:
The evidence on record has established that in the year 1987 the National Power Corporation (NPC)
filed with the MTC Quezon City a case for ejectment against several persons allegedly illegally
occupying its properties in Baesa, Quezon City. Among the defendants in the ejectment case was
Leoncio Ramoy, one of the plaintiffs in the case at bar. On April 28, 1989 after the defendants failed to
file an answer in spite of summons duly served, the MTC Branch 36, Quezon City rendered judgment
for the plaintiff [MERALCO] and ordering the defendants to demolish or remove the building and
structures they built on the land of the plaintiff and to vacate the premises. In the case of Leoncio
Ramoy, the Court found that he was occupying a portion of Lot No. 72-B-2-B with the exact location
of his apartments indicated and encircled in the location map as No. 7. A copy of the decision was
furnished Leoncio Ramoy (Exhibits 2, 2-A, 2-B, 2-C, pp. 128-131, Record; TSN, July 2, 1993, p. 5).
On June 20, 1990 NPC wrote Meralco requesting for the immediate disconnection of electric power
supply to all residential and commercial establishments beneath the NPC transmission lines along
Baesa, Quezon City (Exh. 7, p. 143, Record). Attached to the letter was a list of establishments affected
which included plaintiffs Leoncio and Matilde Ramoy (Exh. 9), as well as a copy of the court decision
(Exh. 2). After deliberating on NPC's letter, Meralco decided to comply with NPC's request (Exhibits 6,
6-A, 6-A-1, 6-B) and thereupon issued notices of disconnection to all establishments affected including
plaintiffs Leoncio Ramoy (Exhs. 3, 3-A to 3-C), Matilde Ramoy/Matilde Macabagdal (Exhibits 3-D to
3-E), Rosemarie Ramoy (Exh. 3-F), Ofelia Durian (Exh. 3-G), Jose Valiza (Exh. 3-H) and Cyrene S.
Panado (Exh. 3-I).
In a letter dated August 17, 1990 Meralco requested NPC for a joint survey to determine all the

establishments which are considered under NPC property in view of the fact that the houses in the area
are very close to each other (Exh. 12). Shortly thereafter, a joint survey was conducted and the NPC
personnel pointed out the electric meters to be disconnected (Exh. 13; TSN, October 8, 1993, p. 7;
TSN, July 1994, p. 8).
In due time, the electric service connection of the plaintiffs [herein respondents] was disconnected
(Exhibits D to G, with submarkings, pp. 86-87, Record).
Plaintiff Leoncio Ramoy testified that he and his wife are the registered owners of a parcel of land
covered by TCT No. 326346, a portion of which was occupied by plaintiffs Rosemarie Ramoy, Ofelia
Durian, Jose Valiza and Cyrene S. Panado as lessees. When the Meralco employees were disconnecting
plaintiffs' power connection, plaintiff Leoncio Ramoy objected by informing the Meralco foreman that
his property was outside the NPC property and pointing out the monuments showing the boundaries of
his property. However, he was threatened and told not to interfere by the armed men who accompanied
the Meralco employees. After the electric power in Ramoy's apartment was cut off, the plaintiffslessees left the premises.
During the ocular inspection ordered by the Court and attended by the parties, it was found out that the
residence of plaintiffs-spouses Leoncio and Matilde Ramoy was indeed outside the NPC property. This
was confirmed by defendant's witness R.P. Monsale III on cross-examination (TSN, October 13, 1993,
pp. 10 and 11). Monsale also admitted that he did not inform his supervisor about this fact nor did he
recommend re-connection of plaintiffs' power supply (Ibid., p. 14).
The record also shows that at the request of NPC, defendant Meralco re-connected the electric service
of four customers previously disconnected none of whom was any of the plaintiffs (Exh. 14).[4]

The RTC decided in favor of MERALCO by dismissing herein respondents' claim for
moral damages, exemplary damages and attorney's fees. However, the RTC ordered
MERALCO to restore the electric power supply of respondents.
Respondents then appealed to the CA. In its Decision dated December 16, 2002, the CA
faulted MERALCO for not requiring from National Power Corporation (NPC) a writ of
execution or demolition and in not coordinating with the court sheriff or other proper
officer before complying with the NPC's request. Thus, the CA held MERALCO liable
for moral and exemplary damages and attorney's fees. MERALCO's motion for
reconsideration of the Decision was denied per Resolution dated July 1, 2003.
Hence, herein petition for review on certiorari on the following grounds:
I

THE COURT OF APPEALS GRAVELY ERRED WHEN IT FOUND MERALCO NEGLIGENT

WHEN IT DISCONNECTED THE SUBJECT ELECTRIC SERVICE OF RESPONDENTS.
II
THE COURT OF APPEALS GRAVELY ERRED WHEN IT AWARDED MORAL AND
EXEMPLARY DAMAGES AND ATTORNEY'S FEES AGAINST MERALCO UNDER THE
CIRCUMSTANCES THAT THE LATTER ACTED IN GOOD FAITH IN THE DISCONNECTION
OF THE ELECTRIC SERVICES OF THE RESPONDENTS. [5]

The petition is partly meritorious.

MERALCO admits[6] that respondents are its customers under a Service Contract
whereby it is obliged to supply respondents with electricity. Nevertheless, upon request
of the NPC, MERALCO disconnected its power supply to respondents on the ground
that they were illegally occupying the NPC's right of way. Under the Service Contract,
[a] customer of electric service must show his right or proper interest over the property
in order that he will be provided with and assured a continuous electric service.[7]
MERALCO argues that since there is a Decision of the Metropolitan Trial Court (MTC)
of Quezon City ruling that herein respondents were among the illegal occupants of the
NPC's right of way, MERALCO was justified in cutting off service to respondents.
Clearly, respondents' cause of action against MERALCO is anchored on culpa
contractual or breach of contract for the latter's discontinuance of its service to
respondents under Article 1170 of the Civil Code which provides:
Article 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for
damages.

In Radio Communications of the Philippines, Inc. v. Verchez,[8] the Court

expounded on the nature of culpa contractual, thus:
In culpa contractual x x x the mere proof of the existence of the contract and the failure of its
compliance justify, prima facie, a corresponding right of relief. The law, recognizing the obligatory
force of contracts, will not permit a party to be set free from liability for any kind of misperformance of
the contractual undertaking or a contravention of the tenor thereof. A breach upon the contract confers
upon the injured party a valid cause for recovering that which may have been lost or suffered. The

remedy serves to preserve the interests of the promissee that may include his expectation interest,
which is his interest in having the benefit of his bargain by being put in as good a position as he would
have been in had the contract been performed, or his reliance interest, which is his interest in being
reimbursed for loss caused by reliance on the contract by being put in as good a position as he would
have been in had the contract not been made; or his restitution interest, which is his interest in having
restored to him any benefit that he has conferred on the other party. Indeed, agreements can accomplish
little, either for their makers or for society, unless they are made the basis for action. The effect of every
infraction is to create a new duty, that is, to make recompense to the one who has been injured by the
failure of another to observe his contractual obligation unless he can show extenuating circumstances,
like proof of his exercise of due diligence x x x or of the attendance of fortuitous event, to excuse him
from his ensuing liability.[9] (Emphasis supplied)

Article 1173 also provides that the fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature of the obligation and
corresponds with the circumstances of the persons, of the time and of the place. The
Court emphasized in Ridjo Tape & Chemical Corporation v. Court of Appeals[10] that as
a public utility, MERALCO has the obligation to discharge its functions with utmost
care and diligence.[11]
The Court agrees with the CA that under the factual milieu of the present case,
MERALCO failed to exercise the utmost degree of care and diligence required of it. To
repeat, it was not enough for MERALCO to merely rely on the Decision of the MTC
without ascertaining whether it had become final and executory. Verily, only upon
finality of said Decision can it be said with conclusiveness that respondents have no
right or proper interest over the subject property, thus, are not entitled to the services of
MERALCO.
Although MERALCO insists that the MTC Decision is final and executory, it never
showed any documentary evidence to support this allegation. Moreover, if it were true
that the decision was final and executory, the most prudent thing for MERALCO to have
done was to coordinate with the proper court officials in determining which structures
are covered by said court order. Likewise, there is no evidence on record to show that
this was done by MERALCO.

The utmost care and diligence required of MERALCO necessitates such great degree of
prudence on its part, and failure to exercise the diligence required means that
MERALCO was at fault and negligent in the performance of its obligation. In Ridjo
Tape,[12] the Court explained:
[B]eing a public utility vested with vital public interest, MERALCO is impressed with certain
obligations towards its customers and any omission on its part to perform such duties would be
prejudicial to its interest. For in the final analysis, the bottom line is that those who do not exercise
such prudence in the discharge of their duties shall be made to bear the consequences of such oversight.
[13]

This being so, MERALCO is liable for damages under Article 1170 of the Civil Code.
The next question is: Are respondents entitled to moral and exemplary damages and
attorney's fees?
Article 2220 of the Civil Code provides:
Article 2220. Willful injury to property may be a legal ground for awarding moral damages if the court
should find that, under the circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad faith.

In the present case, MERALCO wilfully caused injury to Leoncio Ramoy by

withholding from him and his tenants the supply of electricity to which they were
entitled under the Service Contract. This is contrary to public policy because, as
discussed above, MERALCO, being a vital public utility, is expected to exercise utmost
care and diligence in the performance of its obligation. It was incumbent upon
MERALCO to do everything within its power to ensure that the improvements built by
respondents are within the NPCs right of way before disconnecting their power supply.
The Court emphasized in Samar II Electric Cooperative, Inc. v. Quijano[14] that:
Electricity is a basic necessity the generation and distribution of which is imbued with public interest,
and its provider is a public utility subject to strict regulation by the State in the exercise of police
power. Failure to comply with these regulations will give rise to the presumption of bad faith or
abuse of right.[15] (Emphasis supplied)

Thus, by analogy, MERALCO's failure to exercise utmost care and diligence in the

performance of its obligation to Leoncio Ramoy, its customer, is tantamount to bad faith.
Leoncio Ramoy testified that he suffered wounded feelings because of MERALCO's
actions.[16] Furthermore, due to the lack of power supply, the lessees of his four
apartments on subject lot left the premises.[17] Clearly, therefore, Leoncio Ramoy is
entitled to moral damages in the amount awarded by the CA.
Leoncio Ramoy, the lone witness for respondents, was the only one who testified
regarding the effects on him of MERALCO's electric service disconnection. His corespondents Matilde Ramoy, Rosemarie Ramoy, Ofelia Durian and Cyrene Panado did
not present any evidence of damages they suffered.
It is a hornbook principle that damages may be awarded only if proven. In
Mahinay v. Velasquez, Jr.,[18] the Court held thus:
In order that moral damages may be awarded, there must be pleading and proof of moral suffering,
mental anguish, fright and the like. While respondent alleged in his complaint that he suffered mental
anguish, serious anxiety, wounded feelings and moral shock, he failed to prove them during the trial.
Indeed, respondent should have taken the witness stand and should have testified on the mental
anguish, serious anxiety, wounded feelings and other emotional and mental suffering he purportedly
suffered to sustain his claim for moral damages. Mere allegations do not suffice; they must be
substantiated by clear and convincing proof. No other person could have proven such damages
except the respondent himself as they were extremely personal to him.
In Keirulf vs. Court of Appeals, we held:
While no proof of pecuniary loss is necessary in order that moral damages may
be awarded, the amount of indemnity being left to the discretion of the court, it
is nevertheless essential that the claimant should satisfactorily show the
existence of the factual basis of damages and its causal connection to defendants
acts. This is so because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to compensate the claimant
for actual injury suffered and not to impose a penalty on the wrongdoer. In
Francisco vs. GSIS, the Court held that there must be clear testimony on the
anguish and other forms of mental suffering. Thus, if the plaintiff fails to
take the witness stand and testify as to his/her social humiliation, wounded
feelings and anxiety, moral damages cannot be awarded. In Cocoland
Development Corporation vs. National Labor Relations Commission, the Court
held that additional facts must be pleaded and proven to warrant the grant of
moral damages under the Civil Code, these being, x x x social humiliation,
wounded feelings, grave anxiety, etc. that resulted therefrom.

x x x The award of moral damages must be anchored to a clear showing

that respondent actually experienced mental anguish, besmirched
reputation, sleepless nights, wounded feelings or similar injury. There
was no better witness to this experience than respondent himself. Since
respondent failed to testify on the witness stand, the trial court did
not have any factual basis to award moral damages to him.[19]
(Emphasis supplied)

Thus, only respondent Leoncio Ramoy, who testified as to his wounded feelings,
may be awarded moral damages.[20]
With regard to exemplary damages, Article 2232 of the Civil Code provides that in
contracts and quasi-contracts, the court may award exemplary damages if the defendant,
in this case MERALCO, acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner, while Article 2233 of the same Code provides that such damages
cannot be recovered as a matter of right and the adjudication of the same is within the
discretion of the court.
The Court finds that MERALCO fell short of exercising the due diligence
required, but its actions cannot be considered wanton, fraudulent, reckless, oppressive or
malevolent. Records show that MERALCO did take some measures, i.e., coordinating
with NPC officials and conducting a joint survey of the subject area, to verify which
electric meters should be disconnected although these measures are not sufficient,
considering the degree of diligence required of it. Thus, in this case, exemplary damages
should not be awarded.
Since the Court does not deem it proper to award exemplary damages in this case, then
the CA's award for attorney's fees should likewise be deleted, as Article 2208 of the
Civil Code states that in the absence of stipulation, attorney's fees cannot be recovered
except in cases provided for in said Article, to wit:
Article 2208. In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1)

When exemplary damages are awarded;

(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs plainly
valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
(8) In actions for indemnity under workmens compensation and employers liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorneys fees and expenses of
litigation should be recovered.
In all cases, the attorneys fees and expenses of litigation must be reasonable.

None of the grounds for recovery of attorney's fees are present.

WHEREFORE, the petition is PARTLY GRANTED. The Decision of
SOLAR HARVEST, INC.,
Petitioner,
- versus DAVAO CORRUGATED CARTON
CORPORATION,
Respondent.

G.R. No. 176868

Present:
CARPIO, J.,
Chairperson,
NACHURA,
PERALTA,
ABAD, and
MENDOZA, JJ.
Promulgated:

July 26, 2010

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Petitioner seeks a review of the Court of Appeals (CA) Decision[1] dated September 21,
2006 and Resolution[2] dated February 23, 2007, which denied petitioners motion for
reconsideration. The assailed Decision denied petitioners claim for reimbursement for
the amount it paid to respondent for the manufacture of corrugated carton boxes.
The case arose from the following antecedents:
In the first quarter of 1998, petitioner, Solar Harvest, Inc., entered into an agreement
with respondent, Davao Corrugated Carton Corporation, for the purchase of corrugated
carton boxes, specifically designed for petitioners business of exporting fresh bananas,
at US$1.10 each. The agreement was not reduced into writing. To get the production
underway, petitioner deposited, on March 31, 1998, US$40,150.00 in respondents US
Dollar Savings Account with Westmont Bank, as full payment for the ordered boxes.
Despite such payment, petitioner did not receive any boxes from respondent. On January
3, 2001, petitioner wrote a demand letter for reimbursement of the amount paid.[3] On
February 19, 2001, respondent replied that the boxes had been completed as early as
April 3, 1998 and that petitioner failed to pick them up from the formers warehouse 30
days from completion, as agreed upon. Respondent mentioned that petitioner even
placed an additional order of 24,000 boxes, out of which, 14,000 had been manufactured
without any advanced payment from petitioner. Respondent then demanded petitioner to
remove the boxes from the factory and to pay the balance of US$15,400.00 for the
additional boxes and P132,000.00 as storage fee.
On August 17, 2001, petitioner filed a Complaint for sum of money and damages against
respondent. The Complaint averred that the parties agreed that the boxes will be

delivered within 30 days from payment but respondent failed to manufacture and deliver
the boxes within such time. It further alleged
6. That repeated follow-up was made by the plaintiff for the immediate production of the ordered
boxes, but every time, defendant [would] only show samples of boxes and ma[k]e repeated promises to
deliver the said ordered boxes.
7. That because of the failure of the defendant to deliver the ordered boxes, plaintiff ha[d] to cancel the
same and demand payment and/or refund from the defendant but the latter refused to pay and/or refund
the US$40,150.00 payment made by the former for the ordered boxes.[4]

In its Answer with Counterclaim,[5] respondent insisted that, as early as April 3, 1998, it
had already completed production of the 36,500 boxes, contrary to petitioners allegation.
According to respondent, petitioner, in fact, made an additional order of 24,000 boxes,
out of which, 14,000 had been completed without waiting for petitioners payment.
Respondent stated that petitioner was to pick up the boxes at the factory as agreed upon,
but petitioner failed to do so. Respondent averred that, on October 8, 1998, petitioners
representative, Bobby Que (Que), went to the factory and saw that the boxes were ready
for pick up. On February 20, 1999, Que visited the factory again and supposedly advised
respondent to sell the boxes as rejects to recoup the cost of the unpaid 14,000 boxes,
because petitioners transaction to ship bananas to did not materialize. Respondent
claimed that the boxes were occupying warehouse space and that petitioner should be
made to pay storage fee at P60.00 per square meter for every month from April 1998. As
counterclaim, respondent prayed that judgment be rendered ordering petitioner to pay
$15,400.00, plus interest, moral and exemplary damages, attorneys fees, and costs of the
suit.
In reply, petitioner denied that it made a second order of 24,000 boxes and that
respondent already completed the initial order of 36,500 boxes and 14,000 boxes out of
the second order. It maintained that

respondent only manufactured a sample of the ordered boxes and that respondent could
not have produced 14,000 boxes without the required pre-payments.[6]
During trial, petitioner presented Que as its sole witness. Que testified that he ordered
the boxes from respondent and deposited the money in respondents account.[7] He
specifically stated that, when he visited respondents factory, he saw that the boxes had
no print of petitioners logo.[8] A few months later, he followed-up the order and was
told that the company had full production, and thus, was promised that production of the
order would be rushed. He told respondent that it should indeed rush production because
the need for the boxes was urgent. Thereafter, he asked his partner, Alfred Ong, to cancel
the order because it was already late for them to meet their commitment to ship the
bananas to .[9] On cross-examination, Que further testified that China Zero Food, the
Chinese company that ordered the bananas, was sending a ship to to get the bananas, but
since there were no cartons, the ship could not proceed. He said that, at that time,
bananas from Tagum Agricultural Development Corporation (TADECO) were already
there. He denied that petitioner made an additional order of 24,000 boxes. He explained
that it took three years to refer the matter to counsel because respondent promised to
pay.[10]
For respondent, Bienvenido Estanislao (Estanislao) testified that he met Que in in
October 1998 to inspect the boxes and that the latter got samples of them. In February
2000, they inspected the boxes again and Que got more samples. Estanislao said that
petitioner did not pick up the boxes because the ship did not arrive.[11] Jaime Tan (Tan),
president of respondent, also testified that his company finished production of the
36,500 boxes on April 3, 1998 and that petitioner made a second order of 24,000 boxes.
He said that the agreement was for respondent to produce the boxes and for petitioner to
pick them up from the warehouse.[12] He also said that the reason why petitioner did
not pick up the boxes was that the ship that was to carry the bananas did not arrive.[13]
According to him, during the last visit of Que and Estanislao, he asked them to withdraw

the boxes immediately because they were occupying a big space in his plant, but they,
instead, told him to sell the cartons as rejects. He was able to sell 5,000 boxes at P20.00
each for a total of P100,000.00. They then told him to apply the said amount to the
unpaid balance.
In its March 2, 2004 Decision, the Regional Trial Court (RTC) ruled that respondent did
not commit any breach of faith that would justify rescission of the contract and the
consequent reimbursement of the amount paid by petitioner. The RTC said that
respondent was able to produce the ordered boxes but petitioner failed to obtain
possession thereof because its ship did not arrive. It thus dismissed the complaint and
respondents counterclaims, disposing as follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of defendant and against
the plaintiff and, accordingly, plaintiffs complaint is hereby ordered DISMISSED without
pronouncement as to cost. Defendants counterclaims are similarly dismissed for lack of merit.
SO ORDERED.[14]

Petitioner filed a notice of appeal with the CA.

On September 21, 2006, the CA denied the appeal for lack of merit.[15] The appellate
court held that petitioner failed to discharge its burden of proving what it claimed to be
the parties agreement with respect to the delivery of the boxes. According to the CA, it
was unthinkable that, over a period of more than two years, petitioner did not even
demand for the delivery of the boxes. The CA added that even assuming that the
agreement was for respondent to deliver the boxes, respondent would not be liable for
breach of contract as petitioner had not yet demanded from it the delivery of the boxes.
[16]
Petitioner moved for reconsideration,[17] but the motion was denied by the CA in its
Resolution of February 23, 2007.[18]
In this petition, petitioner insists that respondent did not completely manufacture the
boxes and that it was respondent which was obliged to deliver the boxes to TADECO.

We find no reversible error in the assailed Decision that would justify the grant of this
petition.
Petitioners claim for reimbursement is actually one for rescission (or resolution) of
contract under Article 1191 of the Civil Code, which reads:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors
should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.

The right to rescind a contract arises once the other party defaults in the performance of
his obligation. In determining when default occurs, Art. 1191 should be taken in
conjunction with Art. 1169 of the same law, which provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1)

When the obligation or the law expressly so declares; or

(2)
When from the nature and the circumstances of the obligation it appears that the
designation of the time when the thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or
(3)
perform.

When demand would be useless, as when the obligor has rendered it beyond his power to

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins.

In reciprocal obligations, as in a contract of sale, the general rule is that the fulfillment
of the parties respective obligations should be simultaneous. Hence, no demand is
generally necessary because, once a party fulfills his obligation and the other party does

not fulfill his, the latter automatically incurs in delay. But when different dates for
performance of the obligations are fixed, the default for each obligation must be
determined by the rules given in the first paragraph of the present article,[19] that is, the
other party would incur in delay only from the moment the other party demands
fulfillment of the formers obligation. Thus, even in reciprocal obligations, if the period
for the fulfillment of the obligation is fixed, demand upon the obligee is still necessary
before the obligor can be considered in default and before a cause of action for
rescission will accrue.
Evident from the records and even from the allegations in the complaint was the lack of
demand by petitioner upon respondent to fulfill its obligation to manufacture and deliver
the boxes. The Complaint only alleged that petitioner made a follow-up upon
respondent, which, however, would not qualify as a demand for the fulfillment of the
obligation. Petitioners witness also testified that they made a follow-up of the boxes, but
not a demand. Note is taken of the fact that, with respect to their claim for
reimbursement, the Complaint alleged and the witness testified that a demand letter was
sent to respondent. Without a previous demand for the fulfillment of the obligation,
petitioner would not have a cause of action for rescission against respondent as the latter
would not yet be considered in breach of its contractual obligation.
Even assuming that a demand had been previously made before filing the present case,
petitioners claim for reimbursement would still fail, as the circumstances would show
that respondent was not guilty of breach of contract.
The existence of a breach of contract is a factual matter not usually reviewed in a
petition for review under Rule 45.[20] The Court, in petitions for review, limits its
inquiry only to questions of law. After all, it is not a trier of facts, and findings of fact
made by the trial court, especially when reiterated by the CA, must be given great
respect if not considered as final.[21] In dealing with this petition, we will not veer away
from this doctrine and will thus sustain the factual findings of the CA, which we find to

be adequately supported by the evidence on record.

As correctly observed by the CA, aside from the pictures of the finished boxes and the
production report thereof, there is ample showing that the boxes had already been
manufactured by respondent. There is the testimony of Estanislao who accompanied
Que to the factory, attesting that, during their first visit to the company, they saw the pile
of petitioners boxes and Que took samples thereof. Que, petitioners witness, himself
confirmed this incident. He testified that Tan pointed the boxes to him and that he got a
sample and saw that it was blank. Ques absolute assertion that the boxes were not
manufactured is, therefore, implausible and suspicious.
In fact, we note that respondents counsel manifested in court, during trial, that his client
was willing to shoulder expenses for a representative of the court to visit the plant and
see the boxes.[22] Had it been true that the boxes were not yet completed, respondent
would not have been so bold as to challenge the court to conduct an ocular inspection of
their warehouse. Even in its Comment to this petition, respondent prays that petitioner
be ordered to remove the boxes from its factory site,[23] which could only mean that the
boxes are, up to the present, still in respondents premises.
We also believe that the agreement between the parties was for petitioner to pick up the
boxes from respondents warehouse, contrary to petitioners allegation. Thus, it was due
to petitioners fault that the boxes were not delivered to TADECO.
Petitioner had the burden to prove that the agreement was, in fact, for respondent to
deliver the boxes within 30 days from payment, as alleged in the Complaint. Its sole
witness, Que, was not even competent to testify on the terms of the agreement and,
therefore, we cannot give much credence to his testimony. It appeared from the
testimony of Que that he did not personally place the order with Tan, thus:
Q. No, my question is, you went to and placed your order there?
A. I made a phone call.
Q. You made a phone call to Mr. Tan?

A. The first time, the first call to Mr. Alf[re]d Ong. Alfred Ong has a contact with Mr. Tan.
Q. So, your first statement that you were the one who placed the order is not true?
A. Thats true. The Solar Harvest made a contact with Mr. Tan and I deposited the money in the bank.
Q. You said a while ago [t]hat you were the one who called Mr. Tan and placed the order for 36,500
boxes, isnt it?
A. First time it was Mr. Alfred Ong.
Q. It was Mr. Ong who placed the order[,] not you?
A. Yes, sir.[24]
Q. Is it not a fact that the cartons were ordered through Mr. Bienvenido Estanislao?
A. Yes, sir.[25]

Moreover, assuming that respondent was obliged to deliver the boxes, it could not have
complied with such obligation. Que, insisting that the boxes had not been manufactured,
admitted that he did not give respondent the authority to deliver the boxes to TADECO:
Q. Did you give authority to Mr. Tan to deliver these boxes to TADECO?
A. No, sir. As I have said, before the delivery, we must have to check the carton, the quantity and
quality. But I have not seen a single carton.
Q. Are you trying to impress upon the [c]ourt that it is only after the boxes are completed, will you give
authority to Mr. Tan to deliver the boxes to TADECO[?]
A. Sir, because when I checked the plant, I have not seen any carton. I asked Mr. Tan to rush the carton
but not[26]
Q. Did you give any authority for Mr. Tan to deliver these boxes to TADECO?
A. Because I have not seen any of my carton.
Q. You dont have any authority yet given to Mr. Tan?
A. None, your Honor.[27]

Surely, without such authority, TADECO would not have allowed respondent to deposit
the boxes within its premises.
In sum, the Court finds that petitioner failed to establish a cause of action for rescission,
the evidence having shown that respondent did not commit any breach of its contractual
obligation. As previously stated, the subject boxes are still within respondents premises.

To put a rest to this dispute, we therefore relieve respondent from the burden of having
to keep the boxes within its premises and, consequently, give it the right to dispose of
them, after petitioner is given a period of time within which to remove them from the
premises.
WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals
Decision dated September 21, 2006 and Resolution dated February 23, 2007 are
AFFIRMED. In addition, petitioner is given a period of 30 days from notice within
which to cause the removal of the 36,500
boxes from respondents warehouse. After the lapse of said period and petitioner fails to
effect such removal, respondent shall have the right to dispose of the boxes in any
manner it may deem fit.
SO ORDERED.

SECOND DIVISION
MINDANAO TERMINAL AND G.R. No. 162467
BROKERAGE SERVICE, INC.
Petitioner, Present:
- versus - CARPIO MORALES ,* JJ.,
Acting Chairperson,
TINGA,
PHOENIX ASSURANCE VELASCO, JR.,
COMPANY OF NEW YORK/ LEONARDO DE CASTRO,** and
MCGEE & CO., INC., BRION, JJ.
Respondent.
Promulgated:
May 8, 2009

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

DECISION
TINGA, J.:
Before us is a petition for review on certiorari[1] under Rule 45 of the 1997 Rules of
Civil Procedure of the [2] Decision of the Court of Appeals and the Resolution[3] of the
same court denying petitioners motion for reconsideration.
The facts of the case are not disputed.
Del Monte Philippines, Inc. (Del Monte) contracted petitioner Mindanao Terminal and
Brokerage Service, Inc. (Mindanao Terminal), a stevedoring company, to load and stow
a shipment of 146,288 cartons of fresh green Philippine bananas and 15,202 cartons of
fresh pineapples belonging to Del Monte Fresh Produce International, Inc. (Del Monte
Produce) into the cargo hold of the vessel M/V Mistrau. The vessel was docked at the
port of Davao City and the goods were to be transported by it to the port of Inchon,
Korea in favor of consignee Taegu Industries, Inc. Del Monte Produce insured the
shipment under an open cargo policy with private respondent Phoenix Assurance
Company of New York (Phoenix), a non-life insurance company, and private respondent
McGee & Co. Inc. (McGee), the underwriting manager/agent of .[4]
Mindanao Terminal loaded and stowed the cargoes aboard the M/V Mistrau. The vessel
set sail from the of City and arrived at the of , . It was then discovered upon discharge
that some of the cargo was in bad condition. The Marine Cargo Damage Surveyor of
Incok Loss and Average Adjuster of Korea, through its representative Byeong Yong Ahn
(Byeong), surveyed the extent of the damage of the shipment. In a survey report, it was
stated that 16,069 cartons of the banana shipment and 2,185 cartons of the pineapple
shipment were so damaged that they no longer had commercial value.[5]
Del Monte Produce filed a claim under the open cargo policy for the damages to its
shipment. McGees Marine Claims Insurance Adjuster evaluated the claim and

recommended that payment in the amount of $210,266.43 be made. A check for the
recommended amount was sent to Del Monte Produce; the latter then issued a
subrogation receipt[6] to and McGee.
and McGee instituted an action for damages[7] against Mindanao Terminal in the
Regional Trial Court (RTC) of , Branch 12. After trial, the RTC,[8] in a decision dated
20 October 1999, held that the only participation of Mindanao Terminal was to load the
cargoes on board the M/V Mistrau under the direction and supervision of the ships
officers, who would not have accepted the cargoes on board the vessel and signed the
foremans report unless they were properly arranged and tightly secured to withstand
voyage across the open seas. Accordingly, Mindanao Terminal cannot be held liable for
whatever happened to the cargoes after it had loaded and stowed them. Moreover, citing
the survey report, it was found by the RTC that the cargoes were damaged on account of
a typhoon which M/V Mistrau had encountered during the voyage. It was further held
that and McGee had no cause of action against Mindanao Terminal because the latter,
whose services were contracted by Del Monte, a distinct corporation from Del Monte
Produce, had no contract with the assured Del Monte Produce. The RTC dismissed the
complaint and awarded the counterclaim of Mindanao Terminal in the amount of
P83,945.80 as actual damages and P100,000.00 as attorneys fees.[9] The actual damages
were awarded as reimbursement for the expenses incurred by Mindanao Terminals
lawyer in attending the hearings in the case wherein he had to travel all the way from
Metro Manila to .
Phoenix and McGee appealed to the Court of Appeals. The appellate court reversed and
set aside[10] the decision of the RTC in its decision. The same court ordered Mindanao
Terminal to pay and McGee the total amount of $210,265.45 plus legal interest from the
filing of the complaint until fully paid and attorneys fees of 20% of the claim.[11] It
sustained s and McGees argument that the damage in the cargoes was the result of
improper stowage by Mindanao Terminal. It imposed on Mindanao Terminal, as the

stevedore of the cargo, the duty to exercise extraordinary diligence in loading and
stowing the cargoes. It further held that even with the absence of a contractual
relationship between Mindanao Terminal and Del Monte Produce, the cause of action of
and McGee could be based on quasi-delict under Article 2176 of the Civil Code.[12]
Mindanao Terminal filed a motion for reconsideration,[13] which the Court of Appeals
denied in its [14] resolution. Hence, the present petition for review.
Mindanao Terminal raises two issues in the case at bar, namely: whether it was careless
and negligent in the loading and stowage of the cargoes onboard M/V Mistrau making it
liable for damages; and, whether and McGee has a cause of action against Mindanao
Terminal under Article 2176 of the Civil Code on quasi-delict. To resolve the petition,
three questions have to be answered: first, whether Phoenix and McGee have a cause of
action against Mindanao Terminal; second, whether Mindanao Terminal, as a
stevedoring company, is under obligation to observe the same extraordinary degree of
diligence in the conduct of its business as required by law for common carriers[15] and
warehousemen;[16] and third, whether Mindanao Terminal observed the degree of
diligence required by law of a stevedoring company.
We agree with the Court of Appeals that the complaint filed by and McGee against
Mindanao Terminal, from which the present case has arisen, states a cause of action. The
present action is based on quasi-delict, arising from the negligent and careless loading
and stowing of the cargoes belonging to Del Monte Produce. Even assuming that both
Phoenix and McGee have only been subrogated in the rights of Del Monte Produce, who
is not a party to the contract of service between Mindanao Terminal and Del Monte, still
the insurance carriers may have a cause of action in light of the Courts consistent ruling
that the act that breaks the contract may be also a tort.[17] In fine, a liability for tort may
arise even under a contract, where tort is that which breaches the contract[18]. In the
present case, and McGee are not suing for damages for injuries arising from the breach
of the contract of service but from the alleged negligent manner by which Mindanao

Terminal handled the cargoes belonging to Del Monte Produce. Despite the absence of
contractual relationship between Del Monte Produce and Mindanao Terminal, the
allegation of negligence on the part of the defendant should be sufficient to establish a
cause of action arising from quasi-delict.[19]
The resolution of the two remaining issues is determinative of the ultimate result of this
case.
Article 1173 of the Civil Code is very clear that if the law or contract does not state the
degree of diligence which is to be observed in the performance of an obligation then that
which is expected of a good father of a family or ordinary diligence shall be required.
Mindanao Terminal, a stevedoring company which was charged with the loading and
stowing the cargoes of Del Monte Produce aboard M/V Mistrau, had acted merely as a
labor provider in the case at bar. There is no specific provision of law that imposes a
higher degree of diligence than ordinary diligence for a stevedoring company or one
who is charged only with the loading and stowing of cargoes. It was neither alleged nor
proven by and McGee that Mindanao Terminal was bound by contractual stipulation to
observe a higher degree of diligence than that required of a good father of a family. We
therefore conclude that following Article 1173, Mindanao Terminal was required to
observe ordinary diligence only in loading and stowing the cargoes of Del Monte
Produce aboard M/V Mistrau.
The Court of Appeals erred when it cited the case of Summa Insurance Corporation v.
CA and Port Service Inc.[20] in imposing a higher degree of diligence,[21] on Mindanao
Terminal in loading and stowing the cargoes. The case of Summa Insurance
Corporation v. CA, which involved the issue of whether an arrastre operator is legally
liable for the loss of a shipment in its custody and the extent of its liability, is
inapplicable to the factual circumstances of the case at bar. Therein, a vessel owned by
the National Galleon Shipping Corporation (NGSC) arrived at Pier 3, , , carrying a
shipment consigned to the order of Caterpillar Far East Ltd. with Semirara Coal

Corporation (Semirara) as "notify party." The shipment, including a bundle of PC 8 U

blades, was discharged from the vessel to the custody of the private respondent, the
exclusive arrastre operator at the . Accordingly, three good-order cargo receipts were
issued by NGSC, duly signed by the ship's checker and a representative of private
respondent. When Semirara inspected the shipment at house, it discovered that the
bundle of PC8U blades was missing. From those facts, the Court observed:
x x x The relationship therefore between the consignee and the arrastre operator must be examined.
This relationship is much akin to that existing between the consignee or owner of shipped goods and
the common carrier, or that between a depositor and a warehouseman[[22]]. In the performance of its
obligations, an arrastre operator should observe the same degree of diligence as that required of a
common carrier and a warehouseman as enunciated under Article 1733 of the Civil Code and
Section 3(b) of the Warehouse Receipts Law, respectively. Being the custodian of the goods
discharged from a vessel, an arrastre operator's duty is to take good care of the goods and to turn
them over to the party entitled to their possession. (Emphasis supplied)[23]

There is a distinction between an arrastre and a stevedore.[24] Arrastre, a Spanish word

which refers to hauling of cargo, comprehends the handling of cargo on the wharf or
between the establishment of the consignee or shipper and the ship's tackle. The
responsibility of the arrastre operator lasts until the delivery of the cargo to the
consignee. The service is usually performed by longshoremen. On the other hand,
stevedoring refers to the handling of the cargo in the holds of the vessel or between the
ship's tackle and the holds of the vessel. The responsibility of the stevedore ends upon
the loading and stowing of the cargo in the vessel.
It is not disputed that Mindanao Terminal was performing purely stevedoring function
while the private respondent in the Summa case was performing arrastre function. In the
present case, Mindanao Terminal, as a stevedore, was only charged with the loading and
stowing of the cargoes from the pier to the ships cargo hold; it was never the custodian
of the shipment of Del Monte Produce. A stevedore is not a common carrier for it does
not transport goods or passengers; it is not akin to a warehouseman for it does not store
goods for profit. The loading and stowing of cargoes would not have a far reaching

public ramification as that of a common carrier and a warehouseman; the public is

adequately protected by our laws on contract and on quasi-delict. The public policy
considerations in legally imposing upon a common carrier or a warehouseman a higher
degree of diligence is not present in a stevedoring outfit which mainly provides labor in
loading and stowing of cargoes for its clients.
In the third issue, and McGee failed to prove by preponderance of evidence[25] that
Mindanao Terminal had acted negligently. Where the evidence on an issue of fact is in
equipoise or there is any doubt on which side the evidence preponderates the party
having the burden of proof fails upon that issue. That is to say, if the evidence touching a
disputed fact is equally balanced, or if it does not produce a just, rational belief of its
existence, or if it leaves the mind in a state of perplexity, the party holding the
affirmative as to such fact must fail.[26]
We adopt the findings[27] of the RTC,[28] which are not disputed by and McGee. The
Court of Appeals did not make any new findings of fact when it reversed the decision of
the trial court. The only participation of Mindanao Terminal was to load the cargoes on
board M/V Mistrau.[29] It was not disputed by and McGee that the materials, such as
ropes, pallets, and cardboards, used in lashing and rigging the cargoes were all provided
by M/V Mistrau and these materials meets industry standard.[30]
It was further established that Mindanao Terminal loaded and stowed the cargoes of Del
Monte Produce aboard the M/V Mistrau in accordance with the stowage plan, a guide for
the area assignments of the goods in the vessels hold, prepared by Del Monte Produce
and the officers of M/V Mistrau.[31] The loading and stowing was done under the
direction and supervision of the ship officers. The vessels officer would order the closing
of the hatches only if the loading was done correctly after a final inspection.[32] The
said ship officers would not have accepted the cargoes on board the vessel if they were
not properly arranged and tightly secured to withstand the voyage in open seas. They
would order the stevedore to rectify any error in its loading and stowing. A foremans

report, as proof of work done on board the vessel, was prepared by the checkers of
Mindanao Terminal and concurred in by the Chief Officer of M/V Mistrau after they
were satisfied that the cargoes were properly loaded.[33]
and McGee relied heavily on the deposition of Byeong Yong Ahn[34] and on the survey
report[35] of the damage to the cargoes. Byeong, whose testimony was refreshed by the
survey report,[36] found that the cause of the damage was improper stowage[37] due to
the manner the cargoes were arranged such that there were no spaces between cartons,
the use of cardboards as support system, and the use of small rope to tie the cartons
together but not by the negligent conduct of Mindanao Terminal in loading and stowing
the cargoes. As admitted by and McGee in their Comment[38] before us, the latter is
merely a stevedoring company which was tasked by Del Monte to load and stow the
shipments of fresh banana and pineapple of Del Monte Produce aboard the M/V Mistrau.
How and where it should load and stow a shipment in a vessel is wholly dependent on
the shipper and the officers of the vessel. In other words, the work of the stevedore was
under the supervision of the shipper and officers of the vessel. Even the materials used
for stowage, such as ropes, pallets, and cardboards, are provided for by the vessel. Even
the survey report found that it was because of the boisterous stormy weather due to the
typhoon Seth, as encountered by M/V Mistrau during its voyage, which caused the
shipments in the cargo hold to collapse, shift and bruise in extensive extent.[39] Even
the deposition of Byeong was not supported by the conclusion in the survey report that:
CAUSE OF DAMAGE
xxx
From the above facts and our survey results, we are of the opinion that damage occurred aboard the
carrying vessel during sea transit, being caused by ships heavy rolling and pitching under boisterous
weather while proceeding from 1600 hrs on 7th October to 0700 hrs on th October, 1994 as described in
the sea protest.[40]

As it is clear that Mindanao Terminal had duly exercised the required degree of
diligence in loading and stowing the cargoes, which is the ordinary diligence of a good

father of a family, the grant of the petition is in order.

However, the Court finds no basis for the award of attorneys fees in favor of petitioner.
None of the circumstances enumerated in Article 2208 of the Civil Code exists. The
present case is clearly not an unfounded civil action against the plaintiff as there is no
showing that it was instituted for the mere purpose of vexation or injury. It is not sound
public policy to set a premium to the right to litigate where such right is exercised in
good faith, even if erroneously.[41] Likewise, the RTC erred in awarding P83,945.80
actual damages to Mindanao Terminal. Although actual expenses were incurred by
Mindanao Terminal in relation to the trial of this case in , the lawyer of Mindanao
Terminal incurred expenses for plane fare, hotel accommodations and food, as well as
other miscellaneous expenses, as he attended the trials coming all the way from . But
there is no showing that and McGee made a false claim against Mindanao Terminal
resulting in the protracted trial of the case necessitating the incurrence of expenditures.
[42]
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 66121 is SET ASIDE and the decision of the , Branch 12 in Civil Case
No. 25,311.97 is hereby REINSTATED MINUS the awards of P100,000.00 as
attorneys fees and P83,945.80 as actual damages.

SO ORDERED.
DANTE O. TINGA
Associate Justice
WE CONCUR:
CONCHITA CARPIO MORALES
Associate Justice
Acting Chairperson
FIRST DIVISION

G.R. No. L-30056 August 30, 1988

MARCELO AGCAOILI, plaintiff-appellee
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
Artemio L. Agcaoili for plaintiff-appellee.
Office of the Government Corporate Counsel for defendant-appellant.

NARVASA, J.:
The appellant Government Service Insurance System, (GSIS, for short) having approved the
application of the appellee Agcaoili for the purchase of a house and lot in the GSIS Housing Project at
Nangka Marikina, Rizal, subject to the condition that the latter should forthwith occupy the house, a
condition that Agacoili tried to fulfill but could not for the reason that the house was absolutely
uninhabitable; Agcaoili, after paying the first installment and other fees, having thereafter refused to
make further payment of other stipulated installments until GSIS had made the house habitable; and
appellant having refused to do so, opting instead to cancel the award and demand the vacation by
Agcaoili of the premises; and Agcaoili having sued the GSIS in the Court of First Instance of Manila
for specific performance with damages and having obtained a favorable judgment, the case was
appealled to this Court by the GSIS. Its appeal must fail.
The essential facts are not in dispute. Approval of Agcaoili's aforementioned application for purchase 1
was contained in a letter 2 addressed to Agcaoili and signed by GSIS Manager Archimedes Villanueva in behalf
of the Chairman-General Manager, reading as follows:

Please be informed that your application to purchase a house and lot in our GSIS
Housing Project at Nangka, Marikina, Rizal, has been approved by this Office. Lot No.
26, Block No. (48) 2, together with the housing unit constructed thereon, has been
allocated to you.
You are, therefore, advised to occupy the said house immediately.
If you fail to occupy the same within three (3) days from receipt of this notice, your
application shall be considered automatically disapproved and the said house and lot will
be awarded to another applicant.
Agcaoili lost no time in occupying the house. He could not stay in it, however, and had to leave the
very next day, because the house was nothing more than a shell, in such a state of incompleteness that
civilized occupation was not possible: ceiling, stairs, double walling, lighting facilities, water
connection, bathroom, toilet kitchen, drainage, were inexistent. Agcaoili did however ask a homeless
friend, a certain Villanueva, to stay in the premises as some sort of watchman, pending completion of
the construction of the house. Agcaoili thereafter complained to the GSIS, to no avail.
The GSIS asked Agcaoili to pay the monthly amortizations and other fees. Agcaoili paid the first

monthly installment and the incidental fees, 3 but refused to make further payments until and unless the
GSIS completed the housing unit. What the GSIS did was to cancel the award and require Agcaoili to vacate the
premises. 4 Agcaoili reacted by instituting suit in the Court of First Instance of Manila for specific performance
and damages. 5 Pending the action, a written protest was lodged by other awardees of housing units in the
same subdivision, regarding the failure of the System to complete construction of their own houses. 6 Judgment
was in due course rendered , 7 on the basis of the evidence adduced by Agcaoili only, the GSIS having opted to
dispense with presentation of its own proofs. The judgment was in Agcaoili's favor and contained the following
dispositions, 8 to wit:

1) Declaring the cancellation of the award (of a house and lot) in favor of plaintiff
(Mariano Agcaoili) illegal and void;
2) Ordering the defendant (GSIS) to respect and enforce the aforesaid award to the
plaintiff relative to Lot No. 26, Block No. (48) 2 of the Government Service Insurance
System (GSIS) low cost housing project at Nangka Marikina, Rizal;
3) Ordering the defendant to complete the house in question so as to make the same
habitable and authorizing it (defendant) to collect the monthly amortization thereon only
after said house shall have been completed under the terms and conditions mentioned in
Exhibit A ;and
4) Ordering the defendant to pay P100.00 as damages and P300.00 as and for attorney's
fees, and costs.
Appellant GSIS would have this Court reverse this judgment on the argument that
1) Agcaoili had no right to suspend payment of amortizations on account of the incompleteness of his
housing unit, since said unit had been sold "in the condition and state of completion then existing ...
(and) he is deemed to have accepted the same in the condition he found it when he accepted the
award;" and assuming indefiniteness of the contract in this regard, such circumstance precludes a
judgment for specific performance. 9
2) Perfection of the contract of sale between it and Agcaoili being conditioned upon the latter's
immediate occupancy of the house subject thereof, and the latter having failed to comply with the
condition, no contract ever came into existence between them ; 10
3) Agcaoili's act of placing his homeless friend, Villanueva, in possession, "without the prior or
subsequent knowledge or consent of the defendant (GSIS)" operated as a repudiation by Agcaoili of the
award and a deprivation of the GSIS at the same time of the reasonable rental value of the property. 11
Agcaoili's offer to buy from GSIS was contained in a printed form drawn up by the latter, entitled
"Application to Purchase a House and/or Lot." Agcaoili filled up the form, signed it, and submitted it.
12 The acceptance of the application was also set out in a form (mimeographed) also prepared by the GSIS. As
already mentioned, this form sent to Agcaoili, duly filled up, advised him of the approval of his "application to
purchase a house and lot in our GSIS Housing Project at NANGKA, MARIKINA, RIZAL," and that "Lot No. 26,

Block No. (48) 2, together with the housing unit constructed thereon, has been allocated to you." Neither the
application form nor the acceptance or approval form of the GSIS nor the notice to commence payment of a
monthly amortizations, which again refers to "the house and lot awarded" contained any hint that the house
was incomplete, and was being sold "as is," i.e., in whatever state of completion it might be at the time. On the
other hand, the condition explicitly imposed on Agcaoili "to occupy the said house immediately," or in any
case within three (3) days from notice, otherwise his "application shall be considered automatically disapproved
and the said house and lot will be awarded to another applicant" would imply that construction of the house
was more or less complete, and it was by reasonable standards, habitable, and that indeed, the awardee should
stay and live in it; it could not be interpreted as meaning that the awardee would occupy it in the sense of a
pioneer or settler in a rude wilderness, making do with whatever he found available in the envirornment.

There was then a perfected contract of sale between the parties; there had been a meeting of the minds
upon the purchase by Agcaoili of a determinate house and lot in the GSIS Housing Project at Nangka
Marikina, Rizal at a definite price payable in amortizations at P31.56 per month, and from that moment
the parties acquired the right to reciprocally demand performance. 13 It was, to be sure, the duty of the
GSIS, as seller, to deliver the thing sold in a condition suitable for its enjoyment by the buyer for the purpose
contemplated , 14 in other words, to deliver the house subject of the contract in a reasonably livable state. This it
failed to do.

It sold a house to Agcaoili, and required him to immediately occupy it under pain of cancellation of the
sale. Under the circumstances there can hardly be any doubt that the house contemplated was one that
could be occupied for purposes of residence in reasonable comfort and convenience. There would be no
sense to require the awardee to immediately occupy and live in a shell of a house, a structure consisting
only of four walls with openings, and a roof, and to theorize, as the GSIS does, that this was what was
intended by the parties, since the contract did not clearly impose upon it the obligation to deliver a
habitable house, is to advocate an absurdity, the creation of an unfair situation. By any objective
interpretation of its terms, the contract can only be understood as imposing on the GSIS an obligation
to deliver to Agcaoili a reasonably habitable dwelling in return for his undertaking to pay the stipulated
price. Since GSIS did not fulfill that obligation, and was not willing to put the house in habitable state,
it cannot invoke Agcaoili's suspension of payment of amortizations as cause to cancel the contract
between them. It is axiomatic that "(i)n reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner with what is incumbent upon him." 15
Nor may the GSIS succeed in justifying its cancellation of the award to Agcaoili by the claim that the
latter had not complied with the condition of occupying the house within three (3) days. The record
shows that Agcaoili did try to fulfill the condition; he did try to occupy the house but found it to be so
uninhabitable that he had to leave it the following day. He did however leave a friend in the structure,
who being homeless and hence willing to accept shelter even of the most rudimentary sort, agreed to
stay therein and look after it. Thus the argument that Agcaoili breached the agreement by failing to
occupy the house, and by allowing another person to stay in it without the consent of the GSIS, must be
rejected as devoid of merit.
Finally, the GSIS should not be heard to say that the agreement between it and Agcaoili is silent, or
imprecise as to its exact prestation Blame for the imprecision cannot be imputed to Agcaoili; it was
after all the GSIS which caused the contract to come into being by its written acceptance of Agcaoili's

offer to purchase, that offer being contained in a printed form supplied by the GSIS. Said appellant
having caused the ambiguity of which it would now make capital, the question of interpretation arising
therefrom, should be resolved against it.
It will not do, however, to dispose of the controversy by simply declaring that the contract between the
parties had not been validly cancelled and was therefore still in force, and that Agcaoili could not be
compelled by the GSIS to pay the stipulated price of the house and lot subject of the contract until and
unless it had first completed construction of the house. This would leave the contract hanging or in
suspended animation, as it were, Agcaoili unwilling to pay unless the house were first completed, and
the GSIS averse to completing construction, which is precisely what has been the state of affairs
between the parties for more than twenty (20) years now. On the other hand, assuming it to be feasible
to still finish the construction of the house at this time, to compel the GSIS to do so so that Agcaoili's
prestation to pay the price might in turn be demanded, without modifying the price therefor, would not
be quite fair. The cost to the GSIS of completion of construction at present prices would make the
stipulated price disproportionate, unrealistic.
The situation calls for the exercise by this Court of its equity jurisdiction, to the end that it may render
complete justice to both parties.
As we . . reaffirmed in Air Manila, Inc. vs. Court of Industrial Relations (83 SCRA 579,
589 [1978]). "(E)quity as the complement of legal jurisdiction seeks to reach and do
complete justice where courts of law, through the inflexibility of their rules and want of
power to adapt their judgments to the special circumstances of cases, are incompetent so
to do. Equity regards the spirit of and not the letter, the intent and not the form, the
substance rather than the circumstance, as it is variously expressed by different courts...
" 16
In this case, the Court can not require specific performance of the contract in question according to its
literal terms, as this would result in inequity. The prevailing rule is that in decreeing specific
performance equity requires 17
... not only that the contract be just and equitable in its provisions, but that the
consequences of specific performance likewise be equitable and just. The general rule is
that this equitable relief will not be granted if, under the circumstances of the case, the
result of the specific enforcement of the contract would be harsh, inequitable,
oppressive, or result in an unconscionable advantage to the plaintiff . .
In the exercise of its equity jurisdiction, the Court may adjust the rights of parties in accordance with
the circumstances obtaining at the time of rendition of judgment, when these are significantly different
from those existing at the time of generation of those rights.
The Court is not restricted to an adjustment of the rights of the parties as they existed
when suit was brought, but will give relief appropriate to events occuring ending the
suit. 18

While equitable jurisdiction is generally to be determined with reference to the situation existing
at the time the suit is filed, the relief to be accorded by the decree is governed by the conditions
which are shown to exist at the time of making thereof, and not by the circumstances attending
the inception of the litigation. In making up the final decree in an equity suit the judge may rightly
consider matters arising after suit was brought. Therefore, as a general rule, equity will
administer such relief as the nature, rights, facts and exigencies of the case demand at the close
of the trial or at the time of the making of the decree. 19

That adjustment is entirely consistent with the Civil Law principle that in the exercise of rights a person
must act with justice, give everyone his due, and observe honesty and good faith. 20 Adjustment of rights
has been held to be particularly applicable when there has been a depreciation of currency.

Depreciation of the currency or other medium of payment contracted for has frequently
been held to justify the court in withholding specific performance or at least
conditioning it upon payment of the actual value of the property contracted for. Thus, in
an action for the specific performance of a real estate contract, it has been held that
where the currency in which the plaintiff had contracted to pay had greatly depreciated
before enforcement was sought, the relief would be denied unless the complaint would
undertake to pay the equitable value of the land. (Willard & Tayloe [U.S.] 8 Wall 557,19
L. Ed 501; Doughdrill v. Edwards, 59 Ala 424) 21
In determining the precise relief to give, the Court will "balance the equities" or the respective interests
of the parties, and take account of the relative hardship that one relief or another may occasion to them .
22

The completion of the unfinished house so that it may be put into habitable condition, as one form of
relief to the plaintiff Agcaoili, no longer appears to be a feasible option in view of the not
inconsiderable time that has already elapsed. That would require an adjustment of the price of the
subject of the sale to conform to present prices of construction materials and labor. It is more in
keeping with the realities of the situation, and with equitable norms, to simply require payment for the
land on which the house stands, and for the house itself, in its unfinished state, as of the time of the
contract. In fact, this is an alternative relief proposed by Agcaoili himself, i.e., "that judgment issue . .
(o)rdering the defendant (GSIS) to execute a deed of sale that would embody and provide for a
reasonable amortization of payment on the basis of the present actual unfinished and uncompleted
condition, worth and value of the said house. 23
WHEREFORE, the judgment of the Court a quo insofar as it invalidates and sets aside the cancellation
by respondent GSIS of the award in favor of petitioner Agcaoili of Lot No. 26, Block No. (48) 2 of the
GSIS low cost housing project at Nangka, Marikina, Rizal, and orders the former to respect the
aforesaid award and to pay damages in the amounts specified, is AFFIRMED as being in accord with
the facts and the law. Said judgments is however modified by deleting the requirement for respondent
GSIS "to complete the house in question so as to make the same habitable," and instead it is hereby
ORDERED that the contract between the parties relative to the property above described be modified
by adding to the cost of the land, as of the time of perfection of the contract, the cost of the house in its
unfinished state also as of the time of perfection of the contract, and correspondingly adjusting the

amortizations to be paid by petitioner Agcaoili, the modification to be effected after determination by

the Court a quo of the value of said house on the basis of the agreement of the parties, or if this is not
possible by such commissioner or commissioners as the Court may appoint. No pronouncement as to
costs.
SO ORDERED.
Cruz, Gancayco, Aquino and Medialdea, JJ., concur.

Footnotes
1 Dated June 24, 1964.
2 Dated October 5, 1965 (Exh. A ); Folder of Exhibits,p.1.
3 O.R. No. 186558, Oct. 10, 1966.
4 Exh. D, Folder of Exhibits, p. 4.
5 Docketed as Civil Case No. 69417.
6 The letter was sent thru the awardees' "Samahang Lakas ng Mahihirap," copy having
been marked at the trial as Exh. F; to the letter was attached a resolution of said
Samahan adopted at its meeting of July 23, 1967 and to which, in turn, was appended a 3
page list of uncompleted houses with a specification of items not completed.
7 By Hon. Manuel P. Barcelona, presiding over Br. VIII of the CFI of Manila; Record on
Appeal, pp. 22-25, Rollo, p. 13.
8 Parenthetical insertions Identifying the parties, supplied.
9 Appellant's brief, pp. 11-14.
10 Id., pp. 7-8.
EN BANC
G.R. No. L-15645

January 31, 1964

PAZ P. ARRIETA and VITALIADO ARRIETA, plaintiffs-appellees,

vs.
NATIONAL RICE AND CORN CORPORATION, defendant-appellant,
MANILA UNDERWRITERS INSURANCE CO., INC., defendant-appellee.
Teehankee and Carreon for plaintiffs-appellees.
The Government Corporate Counsel for defendant-appellant.
Isidro A. Vera for defendant-appellee.
REGALA, J.:

This is an appeal of the defendant-appellant NARIC from the decision of the trial court dated February
20, 1958, awarding to the plaintiffs-appellees the amount of $286,000.00 as damages for breach of
contract and dismissing the counterclaim and third party complaint of the defendant-appellant NARIC.
In accordance with Section 13 of Republic Act No. 3452, "the National Rice and Corn Administration
(NARIC) is hereby abolished and all its assets, liabilities, functions, powers which are not inconsistent
with the provisions of this Act, and all personnel are transferred "to the Rice and Corn Administration
(RCA).
All references, therefore, to the NARIC in this decision must accordingly be adjusted and read as RCA
pursuant to the aforementioned law.
On May 19, 1952, plaintiff-appellee participated in the public bidding called by the NARIC for the
supply of 20,000 metric tons of Burmese rice. As her bid of $203.00 per metric ton was the lowest, she
was awarded the contract for the same. Accordingly, on July 1, 1952, plaintiff-appellee Paz P. Arrieta
and the appellant corporation entered into a Contract of Sale of Rice, under the terms of which the
former obligated herself to deliver to the latter 20,000 metric tons of Burmess Rice at $203.00 per
metric ton, CIF Manila. In turn, the defendant corporation committed itself to pay for the imported rice
"by means of an irrevocable, confirmed and assignable letter of credit in U.S. currency in favor of the
plaintiff-appellee and/or supplier in Burma, immediately." Despite the commitment to pay immediately
"by means of an irrevocable, confirmed and assignable Letter of Credit," however, it was only on July
30, 1952, or a full month from the execution of the contract, that the defendant corporation, thru its
general manager, took the first to open a letter of credit by forwarding to the Philippine National Bank
its Application for Commercial Letter Credit. The application was accompanied by a transmittal letter,
the relevant paragraphs of which read:
In view of the fact that we do not have sufficient deposit with your institution with which to
cover the amount required to be deposited as a condition for the opening of letters of credit, we
will appreciate it if this application could be considered special case.
We understand that our supplier, Mrs. Paz P. Arrieta, has a deadline to meet which is August 4,
1952, and in order to comply therewith, it is imperative that the L/C be opened prior to that
date. We would therefore request your full cooperation on this matter.
On the same day, July 30, 1952, Mrs. Paz P. Arrieta thru counsel, advised the appellant corporation of
the extreme necessity for the immediate opening of the letter credit since she had by then made a tender
to her supplier in Rangoon, Burma, "equivalent to 5% of the F.O.B. price of 20,000 tons at $180.70 and
in compliance with the regulations in Rangoon this 5% will be confiscated if the required letter of
credit is not received by them before August 4, 1952."
On August 4, 1952, the Philippine National Bank informed the appellant corporation that its
application, "for a letter of credit for $3,614,000.00 in favor of Thiri Setkya has been approved by the
Board of Directors with the condition that marginal cash deposit be paid and that drafts are to be paid
upon presentment." (Exh. J-pl.; Exh. 10-def., p. 19, Folder of Exhibits). Furthermore, the Bank
represented that it "will hold your application in abeyance pending compliance with the above stated

requirement."
As it turned out, however, the appellant corporation not in any financial position to meet the condition.
As matter of fact, in a letter dated August 2, 1952, the NARIC bluntly confessed to the appellee its
dilemma: "In this connection, please be advised that our application for opening of the letter of credit
has been presented to the bank since July 30th but the latter requires that we first deposit 50% of the
value of the letter amounting to aproximately $3,614,000.00 which we are not in a position to meet."
(Emphasis supplied. Exh. 9-Def.; Exh. 1-Pe., p. 18, Folder of Exhibits)
Consequently, the credit instrument applied for was opened only on September 8, 1952 "in favor of
Thiri Setkya, Rangoon, Burma, and/or assignee for $3,614,000.00," (which is more than two months
from the execution of the contract) the party named by the appellee as beneficiary of the letter of
credit.1wph1.t
As a result of the delay, the allocation of appellee's supplier in Rangoon was cancelled and the 5%
deposit, amounting to 524,000 kyats or approximately P200,000.00 was forfeited. In this connection, it
must be made of record that although the Burmese authorities had set August 4, 1952, as the deadline
for the remittance of the required letter of credit, the cancellation of the allocation and the confiscation
of the 5% deposit were not effected until August 20, 1952, or, a full half month after the expiration of
the deadline. And yet, even with the 15-day grace, appellant corporation was unable to make good its
commitment to open the disputed letter of credit.
The appellee endeavored, but failed, to restore the cancelled Burmese rice allocation. When the futility
of reinstating the same became apparent, she offered to substitute Thailand rice instead to the defendant
NARIC, communicating at the same time that the offer was "a solution which should be beneficial to
the NARIC and to us at the same time." (Exh. X-Pe., Exh. 25Def., p. 38, Folder of Exhibits). This
offer for substitution, however, was rejected by the appellant in a resolution dated November 15, 1952.
On the foregoing, the appellee sent a letter to the appellant, demanding compensation for the damages
caused her in the sum of $286,000.00, U.S. currency, representing unrealized profit. The demand
having been rejected she instituted this case now on appeal.
At the instance of the NARIC, a counterclaim was filed and the Manila Underwriters Insurance
Company was brought to the suit as a third party defendant to hold it liable on the performance bond it
executed in favor of the plaintiff-appellee.
We find for the appellee.
It is clear upon the records that the sole and principal reason for the cancellation of the allocation
contracted by the appellee herein in Rangoon, Burma, was the failure of the letter of credit to be opened
with the contemplated period. This failure must, therefore, be taken as the immediate cause for the
consequent damage which resulted. As it is then, the disposition of this case depends on a
determination of who was responsible for such failure. Stated differently, the issue is whether
appellant's failure to open immediately the letter of credit in dispute amounted to a breach of the
contract of July 1, 1952 for which it may be held liable in damages.

Appellant corporation disclaims responsibility for the delay in the opening of the letter of credit. On the
contrary, it insists that the fault lies with the appellee. Appellant contends that the disputed negotiable
instrument was not promptly secured because the appellee , failed to seasonably furnish data necessary
and required for opening the same, namely, "(1) the amount of the letter of credit, (2) the person,
company or corporation in whose favor it is to be opened, and (3) the place and bank where it may be
negotiated." Appellant would have this Court believe, therefore, that had these informations been
forthwith furnished it, there would have been no delay in securing the instrument.
Appellant's explanation has neither force nor merit. In the first place, the explanation reaches into an
area of the proceedings into which We are not at liberty to encroach. The explanation refers to a
question of fact. Nothing in the record suggests any arbitrary or abusive conduct on the part of the trial
judge in the formulation of the ruling. His conclusion on the matter is sufficiently borne out by the
evidence presented. We are denied, therefore, the prerogative to disturb that finding, consonant to the
time-honored tradition of this Tribunal to hold trial judges better situated to make conclusions on
questions of fact. For the record, We quote hereunder the lower court's ruling on the point:
The defense that the delay, if any in opening the letter of credit was due to the failure of plaintiff
to name the supplier, the amount and the bank is not tenable. Plaintiff stated in Court that these
facts were known to defendant even before the contract was executed because these facts were
necessarily revealed to the defendant before she could qualify as a bidder. She stated too that
she had given the necessary data immediately after the execution of Exh. "A" (the contract of
July 1, 1952) to Mr. GABRIEL BELMONTE, General Manager of the NARIC, both orally and
in writing and that she also pressed for the opening of the letter of credit on these occasions.
These statements have not been controverted and defendant NARIC, notwithstanding its
previous intention to do so, failed to present Mr. Belmonte to testify or refute this. ...
Secondly, from the correspondence and communications which form part of the record of this case, it is
clear that what singularly delayed the opening of the stipulated letter of credit and which, in turn,
caused the cancellation of the allocation in Burma, was the inability of the appellant corporation to
meet the condition importation by the Bank for granting the same. We do not think the appellant
corporation can refute the fact that had it been able to put up the 50% marginal cash deposit demanded
by the bank, then the letter of credit would have been approved, opened and released as early as August
4, 1952. The letter of the Philippine National Bank to the NARIC was plain and explicit that as of the
said date, appellant's "application for a letter of credit ... has been approved by the Board of Directors
with the condition that 50% marginal cash deposit be paid and that drafts are to be paid upon
presentment." (Emphasis supplied)
The liability of the appellant, however, stems not alone from this failure or inability to satisfy the
requirements of the bank. Its culpability arises from its willful and deliberate assumption of contractual
obligations even as it was well aware of its financial incapacity to undertake the prestation. We base
this judgment upon the letter which accompanied the application filed by the appellant with the bank, a
part of which letter was quoted earlier in this decision. In the said accompanying correspondence,
appellant admitted and owned that it did "not have sufficient deposit with your institution (the PNB)

with which to cover the amount required to be deposited as a condition for the opening of letters of
credit. ... .
A number of logical inferences may be drawn from the aforementioned admission. First, that the
appellant knew the bank requirements for opening letters of credit; second, that appellant also knew it
could not meet those requirement. When, therefore, despite this awareness that was financially
incompetent to open a letter of credit immediately, appellant agreed in paragraph 8 of the contract to
pay immediately "by means of an irrevocable, confirm and assignable letter of credit," it must be
similarly held to have bound itself to answer for all and every consequences that would result from the
representation. aptly observed by the trial court:
... Having called for bids for the importation of rice involving millions, $4,260,000.00 to be
exact, it should have a certained its ability and capacity to comply with the inevitably
requirements in cash to pay for such importation. Having announced the bid, it must be deemed
to have impliedly assured suppliers of its capacity and facility to finance the importation within
the required period, especially since it had imposed the supplier the 90-day period within which
the shipment of the rice must be brought into the Philippines. Having entered in the contract, it
should have taken steps immediately to arrange for the letter of credit for the large amount
involved and inquired into the possibility of its issuance.
In relation to the aforequoted observation of the trial court, We would like to make reference also to
Article 11 of the Civil Code which provides:
Those who in the performance of their obligation are guilty of fraud, negligence, or delay, and
those who in any manner contravene the tenor thereof, are liable in damages.
Under this provision, not only debtors guilty of fraud, negligence or default in the performance of
obligations a decreed liable; in general, every debtor who fails in performance of his obligations is
bound to indemnify for the losses and damages caused thereby (De la Cruz Seminary of Manila, 18
Phil. 330; Municipality of Moncada v. Cajuigan, 21 Phil. 184; De la Cavada v. Diaz, 37 Phil. 982;
Maluenda & Co. v. Enriquez, 46 Phil. 916; Pasumil v. Chong, 49 Phil. 1003; Pando v. Gimenez, 54
Phil. 459; Acme Films v. Theaters Supply, 63 Phil. 657). The phrase "any manner contravene the tenor"
of the obligation includes any illicit act which impairs the strict and faithful fulfillment of the
obligation or every kind or defective performance. (IV Tolentino, Civil Code of the Philippines, citing
authorities, p. 103.)
The NARIC would also have this Court hold that the subsequent offer to substitute Thailand rice for the
originally contracted Burmese rice amounted to a waiver by the appellee of whatever rights she might
have derived from the breach of the contract. We disagree. Waivers are not presumed, but must be
clearly and convincingly shown, either by express stipulation or acts admitting no other reasonable
explanation. (Ramirez v. Court of Appeals, 52 O.G. 779.) In the case at bar, no such intent to waive has
been established.
We have carefully examined and studied the oral and documentary evidence presented in this case and
upon which the lower court based its award. Under the contract, the NARIC bound itself to buy 20,000

metric tons of Burmese rice at "$203.00 U.S. Dollars per metric ton, all net shipped weight, and all in
U.S. currency, C.I.F. Manila ..." On the other hand, documentary and other evidence establish with
equal certainty that the plaintiff-appellee was able to secure the contracted commodity at the cost price
of $180.70 per metric ton from her supplier in Burma. Considering freights, insurance and charges
incident to its shipment here and the forfeiture of the 5% deposit, the award granted by the lower court
is fair and equitable. For a clearer view of the equity of the damages awarded, We reproduce below the
testimony of the appellee, adequately supported by the evidence and record:
Q. Will you please tell the court, how much is the damage you suffered?
A. Because the selling price of my rice is $203.00 per metric ton, and the cost price of my rice
is $180.00 We had to pay also $6.25 for shipping and about $164 for insurance. So adding the
cost of the rice, the freight, the insurance, the total would be about $187.99 that would be
$15.01 gross profit per metric ton, multiply by 20,000 equals $300,200, that is my supposed
profit if I went through the contract.
The above testimony of the plaintiff was a general approximation of the actual figures involved in the
transaction. A precise and more exact demonstration of the equity of the award herein is provided by
Exhibit HH of the plaintiff and Exhibit 34 of the defendant, hereunder quoted so far as germane.
It is equally of record now that as shown in her request dated July 29, 1959, and other
communications subsequent thereto for the opening by your corporation of the required letter of
credit, Mrs. Arrieta was supposed to pay her supplier in Burma at the rate of One Hundred
Eighty Dollars and Seventy Cents ($180.70) in U.S. Currency, per ton plus Eight Dollars
($8.00) in the same currency per ton for shipping and other handling expenses, so that she is
already assured of a net profit of Fourteen Dollars and Thirty Cents ($14.30), U.S., Currency,
per ton or a total of Two Hundred and Eighty Six Thousand Dollars ($286,000.00), U.S.
Currency, in the aforesaid transaction. ...
Lastly, herein appellant filed a counterclaim asserting that it has suffered, likewise by way of unrealized
profit damages in the total sum of $406,000.00 from the failure of the projected contract to materialize.
This counterclaim was supported by a cost study made and submitted by the appellant itself and
wherein it was illustrated how indeed had the importation pushed thru, NARIC would have realized in
profit the amount asserted in the counterclaim. And yet, the said amount of P406,000.00 was realizable
by appellant despite a number of expenses which the appellee under the contract, did not have to incur.
Thus, under the cost study submitted by the appellant, banking and unloading charges were to be
shouldered by it, including an Import License Fee of 2% and superintendence fee of $0.25 per metric
ton. If the NARIC stood to profit over P400 000.00 from the disputed transaction inspite of the extra
expenditures from which the herein appellee was exempt, we are convicted of the fairness of the
judgment presently under appeal.
In the premises, however, a minor modification must be effected in the dispositive portion of the
decision appeal from insofar as it expresses the amount of damages in U.S. currency and not in
Philippine Peso. Republic Act 529 specifically requires the discharge of obligations only "in any coin

or currency which at the time of payment is legal tender for public and private debts." In view of that
law, therefore, the award should be converted into and expressed in Philippine Peso.
This brings us to a consideration of what rate of exchange should apply in the conversion here decreed.
Should it be at the time of the breach, at the time the obligation was incurred or at the rate of exchange
prevailing on the promulgation of this decision.
In the case of Engel v. Velasco & Co., 47 Phil. 115, We ruled that in an action for recovery of damages
for breach of contract, even if the obligation assumed by the defendant was to pay the plaintiff a sum of
money expressed in American currency, the indemnity to be allowed should be expressed in Philippine
currency at the rate of exchange at the time of the judgment rather than at the rate of exchange
prevailing on the date of defendant's breach. This ruling, however, can neither be applied nor extended
to the case at bar for the same was laid down when there was no law against stipulating foreign
currencies in Philippine contracts. But now we have Republic Act No. 529 which expressly declares
such stipulations as contrary to public policy, void and of no effect. And, as We already pronounced in
the case of Eastboard Navigation, Ltd. v. Juan Ysmael & Co., Inc., G.R. No. L-9090, September 10,
1957, if there is any agreement to pay an obligation in a currency other than Philippine legal tender, the
same is null and void as contrary to public policy (Republic Act 529), and the most that could be
demanded is to pay said obligation in Philippine currency "to be measured in the prevailing rate of
exchange at the time the obligation was incurred (Sec. 1, idem)."
UPON ALL THE FOREGOING, the decision appealed from is hereby affirmed, with the sole
modification that the award should be converted into the Philippine peso at the rate of exchange
prevailing at the time the obligation was incurred or on July 1, 1952 when the contract was executed.
The appellee insurance company, in the light of this judgment, is relieved of any liability under this
suit. No pronouncement as to costs.
SECOND DIVISION
G.R. No. 73867 February 29, 1988
TELEFAST COMMUNICATIONS/PHILIPPINE WIRELESS, INC., petitioner,
vs.
IGNACIO CASTRO, SR., SOFIA C. CROUCH, IGNACIO CASTRO JR., AURORA CASTRO,
SALVADOR CASTRO, MARIO CASTRO, CONRADO CASTRO, ESMERALDA C. FLORO,
AGERICO CASTRO, ROLANDO CASTRO, VIRGILIO CASTRO AND GLORIA CASTRO,
and HONORABLE INTERMEDIATE APPELLATE COURT, respondents.

PADILLA, J.:
Petition for review on certiorari of the decision

* of the Intermediate Appellate Court, dated 11 February 1986, in AC-G.R. No. CV-

70245, entitled "Ignacio Castro, Sr., et al., Plaintiffs-Appellees, versus Telefast Communication/Philippine Wireless, Inc., Defendant-Appellant."

The facts of the case are as follows:

On 2 November 1956, Consolacion Bravo-Castro wife of plaintiff Ignacio Castro, Sr. and mother of the

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

The Court of First Instance of Pangasinan, after trial, ordered the defendant (now petitioner) to pay the
plaintiffs (now private respondents) damages, as follows, with interest at 6% per annum:
1. Sofia C. Crouch, P31.92 and P16,000.00 as compensatory damages and P20,000.00 as
moral damages.
2. Ignacio Castro Sr., P20,000.00 as moral damages.
3. Ignacio Castro Jr., P20,000.00 as moral damages.
4. Aurora Castro, P10,000.00 moral damages.
5. Salvador Castro, P10,000.00 moral damages.
6. Mario Castro, P10,000.00 moral damages.
7. Conrado Castro, P10,000 moral damages.
8. Esmeralda C. Floro, P20,000.00 moral damages.
9. Agerico Castro, P10,000.00 moral damages.
10. Rolando Castro, P10,000.00 moral damages.
11. Virgilio Castro, P10,000.00 moral damages.
12. Gloria Castro, P10,000.00 moral damages.
Defendant is also ordered to pay P5,000.00 attorney's fees, exemplary damages in the amount of
P1,000.00 to each of the plaintiffs and costs. 2
On appeal by petitioner, the Intermediate Appellate Court affirmed the trial court's decision but

eliminated the award of P16,000.00 as compensatory damages to Sofia C. Crouch and the award of
P1,000.00 to each of the private respondents as exemplary damages. The award of P20,000.00 as moral
damages to each of Sofia C. Crouch, Ignacio Castro, Jr. and Esmeralda C. Floro was also reduced to
P120,000. 00 for each. 3
Petitioner appeals from the judgment of the appellate court, contending that the award of moral
damages should be eliminated as defendant's negligent act was not motivated by "fraud, malice or
recklessness."
In other words, under petitioner's theory, it can only be held liable for P 31.92, the fee or charges paid
by Sofia C. Crouch for the telegram that was never sent to the addressee thereof.
Petitioner's contention is without merit.
Art. 1170 of the Civil Code provides that "those who in the performance of their obligations are guilty
of fraud, negligence or delay, and those who in any manner contravene the tenor thereof, are liable for
damages." Art. 2176 also provides that "whoever by act or omission causes damage to another, there
being fault or negligence, is obliged to pay for the damage done."
In the case at bar, petitioner and private respondent Sofia C. Crouch entered into a contract whereby,
for a fee, petitioner undertook to send said private respondent's message overseas by telegram. This,
petitioner did not do, despite performance by said private respondent of her obligation by paying the
required charges. Petitioner was therefore guilty of contravening its obligation to said private
respondent and is thus liable for damages.
This liability is not limited to actual or quantified damages. To sustain petitioner's contrary position in
this regard would result in an inequitous situation where petitioner will only be held liable for the
actual cost of a telegram fixed thirty (30) years ago.
We find Art. 2217 of the Civil Code applicable to the case at bar. It states: "Moral damages include
physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation, and similar injury. Though incapable of pecuniary computation, moral
damages may be recovered if they are the proximate results of the defendant's wrongful act or
omission." (Emphasis supplied).
Here, petitioner's act or omission, which amounted to gross negligence, was precisely the cause of the
suffering private respondents had to undergo.
As the appellate court properly observed:
[Who] can seriously dispute the shock, the mental anguish and the sorrow that the
overseas children must have suffered upon learning of the death of their mother after she
had already been interred, without being given the opportunity to even make a choice on
whether they wanted to pay her their last respects? There is no doubt that these
emotional sufferings were proximately caused by appellant's omission and substantive

law provides for the justification for the award of moral damages. 4
We also sustain the trial court's award of P16,000.00 as compensatory damages to Sofia C. Crouch
representing the expenses she incurred when she came to the Philippines from the United States to
testify before the trial court. Had petitioner not been remiss in performing its obligation, there would
have been no need for this suit or for Mrs. Crouch's testimony.
The award of exemplary damages by the trial court is likewise justified and, therefore, sustained in the
amount of P1,000.00 for each of the private respondents, as a warning to all telegram companies to
observe due diligence in transmitting the messages of their customers.
WHEREFORE, the petition is DENIED. The decision appealed from is modified so that petitioner is
held liable to private respondents in the following amounts:
(1) P10,000.00 as moral damages, to each of private respondents;
(2) P1,000.00 as exemplary damages, to each of private respondents;
(3) P16,000.00 as compensatory damages, to private respondent Sofia C. Crouch;
(4) P5,000.00 as attorney's fees; and
(5) Costs of suit.
SO ORDERED.
Yap (Chairman), Paras and Sarmiento, JJ., concur.

Separate Opinions

MELENCIO-HERRERA, J., concurring.

[I] concur.In addition to compensatory and exemplary damages, moral damages are recoverable in
actions for breach of contract, as in this case, where the breach has been wanton and reckless,
tantamount to bad faith.

G.R. Nos. 103442-45 May 21, 1993

NATIONAL POWER CORPORATION, ET AL., petitioners,
vs.
THE COURT OF APPEALS, GAUDENCIO C. RAYO, ET AL., respondents.

The Solicitor General for plaintiff-appellee.

Ponciano G. Hernandez for private respondents.

DAVIDE, JR., J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court urging this
Court to set aside the 19 August 1991 consolidated Decision of the Court of Appeals in CA.-G.R. CV
Nos. 27290-93 1 which reversed the Decision of Branch 5 of the then Court of First Instance (now Regional
Trial Court) of Bulacan, and held petitioners National Power Corporation (NPC) and Benjamin Chavez jointly and
severally liable to the private respondents for actual and moral damages, litigation expenses and attorney's fees.

This present controversy traces its beginnings to four (4) separate complaints 2 for damages filed against
the NPC and Benjamin Chavez before the trial court. The plaintiffs therein, now private respondents, sought to
recover actual and other damages for the loss of lives and the destruction to property caused by the inundation
of the town of Norzagaray, Bulacan on 26-27 October 1978. The flooding was purportedly caused by the
negligent release by the defendants of water through the spillways of the Angat Dam (Hydroelectric Plant). In
said complaints, the plaintiffs alleged, inter alia, that: 1) defendant NPC operated and maintained a multipurpose hydroelectric plant in the Angat River at Hilltop, Norzagaray, Bulacan; 2) defendant Benjamin Chavez
was the plant supervisor at the time of the incident in question; 3) despite the defendants' knowledge, as early as
24 October 1978, of the impending entry of typhoon "Kading," they failed to exercise due diligence in monitoring
the water level at the dam; 4) when the said water level went beyond the maximum allowable limit at the height
of the typhoon, the defendants suddenly, negligently and recklessly opened three (3) of the dam's spillways,
thereby releasing a large amount of water which inundated the banks of the Angat River; and 5) as a
consequence, members of the household of the plaintiffs, together with their animals, drowned, and their
properties were washed away in the evening of 26 October and the early hours of 27 October 1978. 3

In their Answers, the defendants, now petitioners, alleged that: 1) the NPC exercised due care,
diligence and prudence in the operation and maintenance of the hydroelectric plant; 2) the NPC
exercised the diligence of a good father in the selection of its employees; 3) written notices were sent to
the different municipalities of Bulacan warning the residents therein about the impending release of a
large volume of water with the onset of typhoon "Kading" and advise them to take the necessary
precautions; 4) the water released during the typhoon was needed to prevent the collapse of the dam
and avoid greater damage to people and property; 5) in spite of the precautions undertaken and the
diligence exercised, they could still not contain or control the flood that resulted and; 6) the damages
incurred by the private respondents were caused by a fortuitous event or force majeure and are in the
nature and character of damnum absque injuria. By way of special affirmative defense, the defendants
averred that the NPC cannot be sued because it performs a purely governmental function. 4
Upon motion of the defendants, a preliminary hearing on the special defense was conducted. As a result
thereof, the trial court dismissed the complaints as against the NPC on the ground that the provision of

its charter allowing it to sue and be sued does not contemplate actions based on tort. The parties do not,
however, dispute the fact that this Court overruled the trial court and ordered the reinstatement of the
complaints as against the NPC. 5
Being closely interrelated, the cases were consolidated and trial thereafter ensued.
The lower court rendered its decision on 30 April 1990 dismissing the complaints "for lack of sufficient
and credible evidence." 6 Consequently, the private respondents seasonably appealed therefrom to the
respondent Court which then docketed the cases as CA-G.R. CV Nos. 27290-93.

In its joint decision promulgated on 19 August 1991, the Court of Appeals reversed the appealed
decision and awarded damages in favor of the private respondents. The dispositive portion of the
decision reads:
CONFORMABLY TO THE FOREGOING, the joint decision appealed from is hereby
REVERSED and SET ASIDE, and a new one is hereby rendered:
1. In Civil Case No. SM-950, ordering defendants-appellees to pay, jointly and severally,
plaintiffs-appellants, with legal interest from the date when this decision shall become
final and executory, the following:
A. Actual damages, to wit:
1) Gaudencio C. Rayo, Two Hundred Thirty One Thousand Two Hundred
Sixty Pesos (P231,260.00);
2) Bienvenido P. Pascual, Two Hundred Four Thousand Five Hundred
Pesos (P204.500.00);
3) Tomas Manuel, One Hundred Fifty Five Thousand Pesos
(P155,000.00);
4) Pedro C. Bartolome, One Hundred Forty Seven Thousand Pesos
(P147,000.00);.
5) Bernardino Cruz, One Hundred Forty Three Thousand Five Hundred
Fifty Two Pesos and Fifty Centavos (P143,552.50);
6) Jose Palad, Fifty Seven Thousand Five Hundred Pesos (P57,500.00);
7) Mariano S. Cruz, Forty Thousand Pesos (P40,000.00);
8) Lucio Fajardo, Twenty nine Thousand Eighty Pesos (P29,080.00); and
B. Litigation expenses of Ten Thousand Pesos (P10,000.00);
2. In Civil case No. SM-951, ordering defendants-appellees to pay jointly and severally,
plaintiff-appellant, with legal interest from the date when this decision shall have
become final and executory, the following :

A. Actual damages of Five Hundred Twenty Thousand Pesos

(P520,000.00);.
B. Moral damages of five hundred Thousand Pesos (P500,000.00); and.
C. Litigation expenses of Ten Thousand Pesos (P10,000.00);.
3. In Civil Case No. SM-953, ordering defendants-appellees to pay, jointly and severally,
with legal interest from the date when this decision shall have become final and
executory;
A. Plaintiff-appellant Angel C. Torres:
1) Actual damages of One Hundred Ninety Nine Thousand One Hundred Twenty Pesos
(P199,120.00);
2) Moral Damages of One Hundred Fifty Thousand Pesos (P150,000.00);
B. Plaintiff-appellant Norberto Torres:
1) Actual damages of Fifty Thousand Pesos (P50,000.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
C. Plaintiff-appellant Rodelio Joaquin:
1) Actual damages of One Hundred Thousand Pesos (P100,000.00);
2) Moral damages of One Hundred Thousand Pesos (P100,000.00); and
D. Plaintifsf-appellants litigation expenses of Ten Thousand Pesos (P10,000.00);
4. In Civil case No. SM-1247, ordering defendants-appellees to pay, jointly and
severally, with legal interest from the date when this decision shall have become final
and executory :
A. Plaintiffs-appellants Presentacion Lorenzo and Clodualdo Lorenzo:
1) Actual damages of Two Hundred Fifty Six Thousand Six Hundred
Pesos (P256,600.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
B. Plaintiff-appellant Consolacion Guzman :
1) Actual damages of One Hundred forty Thousand Pesos (P140,000.00);
2) Moral damages of Fifty Thousand Pesos (P50,000.00);
C. Plaintiff-appellant Virginia Guzman :
1) Actual damages of Two Hundred Five Hundred Twenty Pesos
(205,520.00); and

D. Plaintiffs-appellants litigation expenses of Ten Thousand Pesos (10,000.00).

In addition, in all the four (4) instant cases, ordering defendants-appellees to pay, jointly
and severally, plaintiffs-appellants attorney fees in an amount equivalent to 15% of the
total amount awarded.
No pronouncement as to costs. 7
The foregoing judgment is based on the public respondent's conclusion that the petitioners were guilty
of:
. . . a patent gross and evident lack of foresight, imprudence and negligence . . . in the
management and operation of Angat Dam. The unholiness of the hour, the extent of the
opening of the spillways, And the magnitude of the water released, are all but products
of defendants-appellees' headlessness, slovenliness, and carelessness. The resulting flash
flood and inundation of even areas (sic) one (1) kilometer away from the Angat River
bank would have been avoided had defendants-appellees prepared the Angat Dam by
maintaining in the first place, a water elevation which would allow room for the
expected torrential rains. 8
This conclusion, in turn, is anchored on its findings of fact, to wit:
As early as October 21, 1978, defendants-appellees knew of the impending onslaught of
and imminent danger posed by typhoon "Kading". For as alleged by defendantsappellees themselves, the coming of said super typhoon was bannered by Bulletin Today,
a newspaper of national circulation, on October 25, 1978, as "Super Howler to hit R.P."
The next day, October 26, 1978, said typhoon once again merited a headline in said
newspaper as "Kading's Big Blow expected this afternoon" (Appellee's Brief, p. 6).
Apart from the newspapers, defendants-appellees learned of typhoon "Kading' through
radio announcements (Civil Case No. SM-950, TSN, Benjamin Chavez, December 4,
1984, pp. 7-9).
Defendants-appellees doubly knew that the Angat Dam can safely hold a normal
maximum headwater elevation of 217 meters (Appellee's brief, p. 12; Civil Case No.
SM-951, Exhibit "I-6"; Civil Case No. SM-953, Exhibit "J-6"; Civil Case No. SM-1247,
Exhibit "G-6").
Yet, despite such knowledge, defendants-appellees maintained a reservoir water
elevation even beyond its maximum and safe level, thereby giving no sufficient
allowance for the reservoir to contain the rain water that will inevitably be brought by
the coming typhoon.
On October 24, 1978, before typhoon "Kading" entered the Philippine area of
responsibility, water elevation ranged from 217.61 to 217.53, with very little opening of

the spillways, ranging from 1/2 to 1 meter. On October 25, 1978, when typhoon
"Kading" entered the Philippine area of responsibility, and public storm signal number
one was hoisted over Bulacan at 10:45 a.m., later raised to number two at 4:45 p.m., and
then to number three at 10:45 p.m., water elevation ranged from 217.47 to 217.57, with
very little opening of the spillways, ranging from 1/2 to 1 meter. On October 26, 1978,
when public storm signal number three remained hoisted over Bulacan, the water
elevation still remained at its maximum level of 217.00 to 218.00 with very little
opening of the spillways ranging from 1/2 to 2 meters, until at or about midnight, the
spillways were suddenly opened at 5 meters, then increasing swiftly to 8, 10, 12, 12.5,
13, 13.5, 14, 14.5 in the early morning hours of October 27, 1978, releasing water at the
rate of 4,500 cubic meters per second, more or less. On October 27, 1978, water
elevation remained at a range of 218.30 to 217.05 (Civil Case No. SM-950, Exhibits "D"
and series, "L", "M", "N", and "O" and Exhibits "3" and "4"; Civil Case No. SM-951,
Exhibits "H" and "H-1"; Civil Case No. SM-953, Exhibits "I" and "I-1"; Civil Case No.
SM 1247, Exhibits "F" and "F-1").
xxx xxx xxx
From the mass of evidence extant in the record, We are convinced, and so hold that the
flash flood on October 27, 1978, was caused not by rain waters ( sic), but by stored
waters (sic) suddenly and simultaneously released from the Angat Dam by defendantsappellees, particularly from midnight of October 26, 1978 up to the morning hours of
October
27,
1978. 9
The appellate court rejected the petitioners' defense that they had sent "early warning written notices"
to the towns of Norzagaray, Angat, Bustos, Plaridel, Baliwag and Calumpit dated 24 October 1978
which read:
TO ALL CONCERN (sic):
Please be informed that at present our reservoir (dam) is full and that we have been
releasing water intermittently for the past several days.
With the coming of typhoon "Rita" (Kading) we expect to release greater (sic) volume of
water, if it pass (sic) over our place.
In view of this kindly advise people residing along Angat River to keep alert and stay in
safe places.
BENJAMIN L. CHAVEZ
Power Plant Superintendent
10

because:
Said notice was delivered to the "towns of Bulacan" on October 26, 1978 by defendantsappellees driver, Leonardo Nepomuceno (Civil Case No. SM-950, TSN, Benjamin
Chavez, December 4, 1984, pp. 7-11 and TSN, Leonardo Nepomuceno, March 7, 1985,
pp. 10-12).
Said notice is ineffectual, insufficient and inadequate for purposes of the opening of the
spillway gates at midnight of October 26, 1978 and on October 27, 1978. It did not
prepare or warn the persons so served, for the volume of water to be released, which
turned out to be of such magnitude, that residents near or along the Angat River, even
those one (1) kilometer away, should have been advised to evacuate. Said notice,
addressed "TO ALL CONCERN (sic)," was delivered to a policeman (Civil Case No.
SM-950, pp. 10-12 and Exhibit "2-A") for the municipality of Norzagaray. Said notice
was not thus addressed and delivered to the proper and responsible officials who could
have disseminated the warning to the residents directly affected. As for the municipality
of Sta. Maria, where plaintiffs-appellants in Civil Case No. SM-1246 reside, said notice
does not appear to have been served. 11
Relying on Juan F. Nakpil & Sons vs. Court of Appeals, 12 public respondent rejected the petitioners' plea
that the incident in question was caused by force majeure and that they are, therefore, not liable to the private
respondents for any kind of damage such damage being in the nature of damnum absque injuria.

The motion for reconsideration filed by the petitioners, as well as the motion to modify judgment filed
by the public respondents, 13 were denied by the public respondent in its Resolution of 27 December 1991. 14
Petitioners thus filed the instant petition on 21 February 1992.
After the Comment to the petition was filed by the private respondents and the Reply thereto was filed
by the petitioners, We gave due course to the petition on 17 June 1992 and directed the parties to
submit their respective Memoranda, 15 which they subsequently complied with.
The petitioners raised the following errors allegedly committed by the respondent Court :
I. THE COURT OF APPEALS ERRED IN APPLYING THE RULING OF NAKPIL &
SONS V. COURT OF APPEALS AND HOLDING THAT PETITIONERS WERE
GUILTY OF NEGLIGENCE.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WRITTEN
NOTICES OF WARNING ISSUED BY PETITIONERS WERE INSUFFICIENT.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE DAMAGE
SUFFERED BY PRIVATE RESPONDENTS WAS NOT DAMNUM ABSQUE INJURIA.

IV.

THE

COURT

OF

APPEALS

ERRED

IN

NOT

AWARDING

THE

COUNTERCLAIM OF PETITIONERS FOR ATTORNEY'S FEES AND EXPENSES

OF LITIGATION. 16
These same errors were raised by herein petitioners in G.R. No. 96410, entitled National Power
Corporation, et al., vs. Court of Appeals, et al., 17 which this Court decided on 3 July 1992. The said case
involved the very same incident subject of the instant petition. In no uncertain terms, We declared therein that
the proximate cause of the loss and damage sustained by the plaintiffs therein who were similarly situated as
the private respondents herein was the negligence of the petitioners, and that the 24 October 1978 "early
warning notice" supposedly sent to the affected municipalities, the same notice involved in the case at bar, was
insufficient. We thus cannot now rule otherwise not only because such a decision binds this Court with respect to
the cause of the inundation of the town of Norzagaray, Bulacan on 26-27 October 1978 which resulted in the loss
of lives and the destruction to property in both cases, but also because of the fact that on the basis of its
meticulous analysis and evaluation of the evidence adduced by the parties in the cases subject of CA-G.R. CV
Nos. 27290-93, public respondent found as conclusively established that indeed, the petitioners were guilty of
"patent gross and evident lack of foresight, imprudence and negligence in the management and operation of
Angat Dam," and that "the extent of the opening of the spillways, and the magnitude of the water released, are
all but products of defendants-appellees' headlessness, slovenliness, and carelessness." 18 Its findings and
conclusions are biding upon Us, there being no showing of the existence of any of the exceptions to the general
rule that findings of fact of the Court of Appeals are conclusive upon this Court. 19 Elsewise stated, the
challenged decision can stand on its own merits independently of Our decision in G.R. No. 96410. In any event,
We reiterate here in Our pronouncement in the latter case that Juan F. Nakpil & Sons vs. Court of Appeals 20 is
still good law as far as the concurrent liability of an obligor in the case of force majeure is concerned. In the
Nakpil case, We held:

To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of
an obligation due to an "act of God," the following must concur: (a) the cause of the
breach of the obligation must be independent of the will of the debtor; (b) the event must
be either unforseeable or unavoidable; (c) the event must be such as to render it
impossible for the debtor to fulfill his obligation in a moral manner; and (d) the debtor
must be free from any participation in, or aggravation of the injury to the creditor.
(Vasquez v. Court of Appeals, 138 SCRA 553; Estrada v. Consolacion, 71 SCRA 423;
Austria v. Court of Appeals, 39 SCRA 527; Republic of the Phil. v. Luzon Stevedoring
Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a
corresponding fraud, negligence, delay or violation or contravention in any manner of
the tenor of the obligation as provided for in Article 1170 of the Civil Code, which
results in loss or damage, the obligor cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be
one occasioned exclusively by the violence of nature and all human agencies are to be
excluded from creating or entering into the cause of the mischief. When the effect, the
cause of which is to be considered, is found to be in part the result of the participation of

man, whether it be from active intervention or neglect, or failure to act, the whole
occurrence is thereby humanized, as it were, and removed from the rules applicable to
the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate
cause of the damage was the act of God. To be exempt from liability for loss because of
an act of God, he must be free from any previous negligence or misconduct by which
that loss or damage may have been occasioned. (Fish & Elective Co. v. Phil. Motors, 55
Phil. 129; Tucker v. Milan, 49 O.G. 4379; Limpangco & Sons v. Yangco Steamship Co.,
34 Phil. 594, 604; Lasam v. Smith, 45 Phil. 657). 21
Accordingly, petitioners cannot be heard to invoke the act of God or force majeure to escape liability
for the loss or damage sustained by private respondents since they, the petitioners, were guilty of
negligence. The event then was not occasioned exclusively by an act of God or force majeure; a human
factor negligence or imprudence had intervened. The effect then of the force majeure in question
may be deemed to have, even if only partly, resulted from the participation of man. Thus, the whole
occurrence was thereby humanized, as it were, and removed from the laws applicable to acts of God.
WHEREFORE, for want of merit, the instant petition is hereby DISMISSED and the Consolidated
Decision of the Court of Appeals in CA-G.R. CV Nos. 27290-93 is AFFIRMED, with costs against the
petitioners.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ., concur.
# Footnotes
Manila
SECOND DIVISION
G.R. No. 71049 May 29, 1987
BERNARDINO JIMENEZ, petitioner,
vs.
CITY OF MANILA and INTERMEDIATE APPELLATE COURT, respondents.

PARAS, J.:
This is a petition for review on certiorari of: (1) the decision

* of the Intermediate Appellate Court in AC-G.R. No. 013887-CV

Bernardino Jimenez v. Asiatic Integrated Corporation and City of Manila, reversing the decision ** of the Court of First Instance of Manila, Branch XXII in Civil
Case No. 96390 between the same parties, but only insofar as holding Asiatic Integrated Corporation solely liable for damages and attorney's fees instead of
making the City of Manila jointly and solidarily liable with it as prayed for by the petitioner and (2) the resolution of the same Appellate Court denying his Partial

Motion for Reconsideration (Rollo, p. 2).

The dispositive portion of the Intermediate Appellate Court's decision is as follows:

WHEREFORE, the decision appealed from is hereby REVERSED. A new one is hereby
entered ordering the defendant Asiatic Integrated Corporation to pay the plaintiff
P221.90 actual medical expenses, P900.00 for the amount paid for the operation and
management of a school bus, P20,000.00 as moral damages due to pains, sufferings and
sleepless nights and P l0,000.00 as attorney's fees.
SO ORDERED. (p. 20, Rollo)
The findings of respondent Appellate Court are as follows:
The evidence of the plaintiff (petitioner herein) shows that in the morning of August 15, 1974 he,
together with his neighbors, went to Sta. Ana public market to buy "bagoong" at the time when the
public market was flooded with ankle deep rainwater. After purchasing the "bagoong" he turned around
to return home but he stepped on an uncovered opening which could not be seen because of the dirty
rainwater, causing a dirty and rusty four- inch nail, stuck inside the uncovered opening, to pierce the
left leg of plaintiff-petitioner penetrating to a depth of about one and a half inches. After administering
first aid treatment at a nearby drugstore, his companions helped him hobble home. He felt ill and
developed fever and he had to be carried to Dr. Juanita Mascardo. Despite the medicine administered to
him by the latter, his left leg swelled with great pain. He was then rushed to the Veterans Memorial
Hospital where he had to be confined for twenty (20) days due to high fever and severe pain.
Upon his discharge from the hospital, he had to walk around with crutches for fifteen (15) days. His
injury prevented him from attending to the school buses he is operating. As a result, he had to engage
the services of one Bienvenido Valdez to supervise his business for an aggregate compensation of nine
hundred pesos (P900.00). (Decision, AC-G.R. CV No. 01387, Rollo, pp. 13-20).
Petitioner sued for damages the City of Manila and the Asiatic Integrated Corporation under whose
administration the Sta. Ana Public Market had been placed by virtue of a Management and Operating
Contract (Rollo, p. 47).
The lower court decided in favor of respondents, the dispositive portion of the decision reading:
WHEREFORE, judgment is hereby rendered in favor of the defendants and against the
plaintiff dismissing the complaint with costs against the plaintiff. For lack of sufficient
evidence, the counterclaims of the defendants are likewise dismissed. (Decision, Civil
Case No. 96390, Rollo, p. 42).
As above stated, on appeal, the Intermediate Appellate Court held the Asiatic Integrated Corporation
liable for damages but absolved respondent City of Manila.
Hence this petition.
The lone assignment of error raised in this petition is on whether or not the Intermediate Appellate
Court erred in not ruling that respondent City of Manila should be jointly and severally liable with

Asiatic Integrated Corporation for the injuries petitioner suffered.

In compliance with the resolution of July 1, 1985 of the First Division of this Court (Rollo, p. 29)
respondent City of Manila filed its comment on August 13, 1985 (Rollo, p. 34) while petitioner filed its
reply on August 21, 1985 (Reno, p. 51).
Thereafter, the Court in the resolution of September 11, 1985 (Rollo, p. 62) gave due course to the
petition and required both parties to submit simultaneous memoranda
Petitioner filed his memorandum on October 1, 1985 (Rollo, p. 65) while respondent filed its
memorandum on October 24, 1985 (Rollo, p. 82).
In the resolution of October 13, 1986, this case was transferred to the Second Division of this Court,
the same having been assigned to a member of said Division (Rollo, p. 92).
The petition is impressed with merit.
As correctly found by the Intermediate Appellate Court, there is no doubt that the plaintiff suffered
injuries when he fell into a drainage opening without any cover in the Sta. Ana Public Market.
Defendants do not deny that plaintiff was in fact injured although the Asiatic Integrated Corporation
tries to minimize the extent of the injuries, claiming that it was only a small puncture and that as a war
veteran, plaintiff's hospitalization at the War Veteran's Hospital was free. (Decision, AC-G.R. CV No.
01387, Rollo, p. 6).
Respondent City of Manila maintains that it cannot be held liable for the injuries sustained by the
petitioner because under the Management and Operating Contract, Asiatic Integrated Corporation
assumed all responsibility for damages which may be suffered by third persons for any cause
attributable to it.
It has also been argued that the City of Manila cannot be held liable under Article 1, Section 4 of
Republic Act No. 409 as amended (Revised Charter of Manila) which provides:
The City shall not be liable or held for damages or injuries to persons or property arising
from the failure of the Mayor, the Municipal Board, or any other City Officer, to enforce
the provisions of this chapter, or any other law or ordinance, or from negligence of said
Mayor, Municipal Board, or any other officers while enforcing or attempting to enforce
said provisions.
This issue has been laid to rest in the case of City of Manila v. Teotico (22 SCRA 269-272 [1968])
where the Supreme Court squarely ruled that Republic Act No. 409 establishes a general rule regulating
the liability of the City of Manila for "damages or injury to persons or property arising from the failure
of city officers" to enforce the provisions of said Act, "or any other law or ordinance or from
negligence" of the City "Mayor, Municipal Board, or other officers while enforcing or attempting to
enforce said provisions."
Upon the other hand, Article 2189 of the Civil Code of the Philippines which provides that:
Provinces, cities and municipalities shall be liable for damages for the death of, or

injuries suffered by any person by reason of defective conditions of roads, streets,

bridges, public buildings and other public works under their control or supervision.
constitutes a particular prescription making "provinces, cities and municipalities ... liable for damages
for the death of, or injury suffered by any person by reason" specifically "of the defective
condition of roads, streets, bridges, public buildings, and other public works under their control or
supervision." In other words, Art. 1, sec. 4, R.A. No. 409 refers to liability arising from negligence, in
general, regardless of the object, thereof, while Article 2189 of the Civil Code governs liability due to
"defective streets, public buildings and other public works" in particular and is therefore decisive on
this specific case.
In the same suit, the Supreme Court clarified further that under Article 2189 of the Civil Code, it is not
necessary for the liability therein established to attach, that the defective public works belong to the
province, city or municipality from which responsibility is exacted. What said article requires is that the
province, city or municipality has either "control or supervision" over the public building in question.
In the case at bar, there is no question that the Sta. Ana Public Market, despite the Management and
Operating Contract between respondent City and Asiatic Integrated Corporation remained under the
control of the former.
For one thing, said contract is explicit in this regard, when it provides:
II
That immediately after the execution of this contract, the SECOND PARTY shall start
the painting, cleaning, sanitizing and repair of the public markets and talipapas and
within ninety (90) days thereof, the SECOND PARTY shall submit a program of
improvement, development, rehabilitation and reconstruction of the city public markets
and talipapas subject to prior approval of the FIRST PARTY. (Rollo, p. 44)
xxx xxx xxx
VI
That all present personnel of the City public markets and talipapas shall be retained by
the SECOND PARTY as long as their services remain satisfactory and they shall be
extended the same rights and privileges as heretofore enjoyed by them. Provided,
however, that the SECOND PARTY shall have the right, subject to prior approval of the
FIRST PARTY to discharge any of the present employees for cause. (Rollo, p. 45).
VII
That the SECOND PARTY may from time to time be required by the FIRST PARTY, or
his duly authorized representative or representatives, to report, on the activities and
operation of the City public markets and talipapas and the facilities and conveniences
installed therein, particularly as to their cost of construction, operation and maintenance
in connection with the stipulations contained in this Contract. (lbid)

The fact of supervision and control of the City over subject public market was admitted by Mayor
Ramon Bagatsing in his letter to Secretary of Finance Cesar Virata which reads:
These cases arose from the controversy over the Management and Operating Contract
entered into on December 28, 1972 by and between the City of Manila and the Asiatic
Integrated Corporation, whereby in consideration of a fixed service fee, the City hired
the services of the said corporation to undertake the physical management, maintenance,
rehabilitation and development of the City's public markets and' Talipapas' subject to the
control and supervision of the City.
xxx xxx xxx
It is believed that there is nothing incongruous in the exercise of these powers vis-a-vis
the existence of the contract, inasmuch as the City retains the power of supervision and
control over its public markets and talipapas under the terms of the contract. (Exhibit
"7-A") (Emphasis supplied.) (Rollo, p. 75).
In fact, the City of Manila employed a market master for the Sta. Ana Public Market whose primary
duty is to take direct supervision and control of that particular market, more specifically, to check the
safety of the place for the public.
Thus the Asst. Chief of the Market Division and Deputy Market Administrator of the City of Manila
testified as follows:
Court This market master is an employee of the City of Manila?
Mr. Ymson Yes, Your Honor.
Q What are his functions?
A Direct supervision and control over the market area assigned to
him."(T.s.n.,pp. 41-42, Hearing of May 20, 1977.)
xxx xxx xxx
Court As far as you know there is or is there any specific employee
assigned with the task of seeing to it that the Sta. Ana Market is safe for
the public?
Mr. Ymson Actually, as I stated, Your Honor, that the Sta. Ana has its own
market master. The primary duty of that market master is to make the
direct supervision and control of that particular market, the check or
verifying whether the place is safe for public safety is vested in the
market master. (T.s.n., pp. 2425, Hearing of July 27, 1977.) (Emphasis
supplied.) (Rollo, p. 76).
Finally, Section 30 (g) of the Local Tax Code as amended, provides:
The treasurer shall exercise direct and immediate supervision administration and

control over public markets and the personnel thereof, including those whose duties
concern the maintenance and upkeep of the market and ordinances and other pertinent
rules and regulations. (Emphasis supplied.) (Rollo, p. 76)
The contention of respondent City of Manila that petitioner should not have ventured to go to Sta. Ana
Public Market during a stormy weather is indeed untenable. As observed by respondent Court of
Appeals, it is an error for the trial court to attribute the negligence to herein petitioner. More
specifically stated, the findings of appellate court are as follows:
... The trial court even chastised the plaintiff for going to market on a rainy day just to
buy bagoong. A customer in a store has the right to assume that the owner will comply
with his duty to keep the premises safe for customers. If he ventures to the store on the
basis of such assumption and is injured because the owner did not comply with his duty,
no negligence can be imputed to the customer. (Decision, AC-G. R. CV No. 01387,
Rollo, p. 19).
As a defense against liability on the basis of a quasi-delict, one must have exercised the diligence of a
good father of a family. (Art. 1173 of the Civil Code).
There is no argument that it is the duty of the City of Manila to exercise reasonable care to keep the
public market reasonably safe for people frequenting the place for their marketing needs.
While it may be conceded that the fulfillment of such duties is extremely difficult during storms and
floods, it must however, be admitted that ordinary precautions could have been taken during good
weather to minimize the dangers to life and limb under those difficult circumstances.
For instance, the drainage hole could have been placed under the stalls instead of on the passage ways.
Even more important is the fact, that the City should have seen to it that the openings were covered.
Sadly, the evidence indicates that long before petitioner fell into the opening, it was already uncovered,
and five (5) months after the incident happened, the opening was still uncovered. (Rollo, pp. 57; 59).
Moreover, while there are findings that during floods the vendors remove the iron grills to hasten the
flow of water (Decision, AC-G.R. CV No. 0 1387; Rollo, p. 17), there is no showing that such practice
has ever been prohibited, much less penalized by the City of Manila. Neither was it shown that any sign
had been placed thereabouts to warn passersby of the impending danger.
To recapitulate, it appears evident that the City of Manila is likewise liable for damages under Article
2189 of the Civil Code, respondent City having retained control and supervision over the Sta. Ana
Public Market and as tort-feasor under Article 2176 of the Civil Code on quasi-delicts
Petitioner had the right to assume that there were no openings in the middle of the passageways and if
any, that they were adequately covered. Had the opening been covered, petitioner could not have fallen
into it. Thus the negligence of the City of Manila is the proximate cause of the injury suffered, the City
is therefore liable for the injury suffered by the peti- 4 petitioner.
Respondent City of Manila and Asiatic Integrated Corporation being joint tort-feasors are solidarily
liable under Article 2194 of the Civil Code.

PREMISES CONSIDERED, the decision of the Court of Appeals is hereby MODIFIED, making the
City of Manila and the Asiatic Integrated Corporation solidarily liable to pay the plaintiff P221.90
actual medical expenses, P900.00 for the amount paid for the operation and management of the school
bus, P20,000.00 as moral damages due to pain, sufferings and sleepless nights and P10,000.00 as
attorney's fees.
SO ORDERED.
SECOND DIVISION
G.R. No. L-47851 October 3, 1986
JUAN F. NAKPIL & SONS, and JUAN F. NAKPIL, petitioners,
vs.
THE COURT OF APPEALS, UNITED CONSTRUCTION COMPANY, INC., JUAN J.
CARLOS, and the PHILIPPINE BAR ASSOCIATION, respondents.
G.R. No. L-47863 October 3, 1986
THE UNITED CONSTRUCTION CO., INC., petitioner,
vs.
COURT OF APPEALS, ET AL., respondents.
G.R. No. L-47896 October 3, 1986
PHILIPPINE BAR ASSOCIATION, ET AL., petitioners,
vs.
COURT OF APPEALS, ET AL., respondents.

PARAS, J.:
These are petitions for review on certiorari of the November 28, 1977 decision of the Court of
Appeals in CA-G.R. No. 51771-R modifying the decision of the Court of First Instance of Manila,
Branch V, in Civil Case No. 74958 dated September 21, 1971 as modified by the Order of the
lower court dated December 8, 1971. The Court of Appeals in modifying the decision of the lower
court included an award of an additional amount of P200,000.00 to the Philippine Bar
Association to be paid jointly and severally by the defendant United Construction Co. and by the
third-party defendants Juan F. Nakpil and Sons and Juan F. Nakpil.
The dispositive portion of the modified decision of the lower court reads:
WHEREFORE, judgment is hereby rendered:
(a) Ordering defendant United Construction Co., Inc. and third-party defendants
(except Roman Ozaeta) to pay the plaintiff, jointly and severally, the sum of
P989,335.68 with interest at the legal rate from November 29, 1968, the date of the
filing of the complaint until full payment;

(b) Dismissing the complaint with respect to defendant Juan J. Carlos;

(c) Dismissing the third-party complaint;
(d) Dismissing the defendant's and third-party defendants' counterclaims for lack
of merit;
(e) Ordering defendant United Construction Co., Inc. and third-party defendants
(except Roman Ozaeta) to pay the costs in equal shares.
SO ORDERED. (Record on Appeal p. 521; Rollo, L- 47851, p. 169).
The dispositive portion of the decision of the Court of Appeals reads:
WHEREFORE, the judgment appealed from is modified to include an award of
P200,000.00 in favor of plaintiff-appellant Philippine Bar Association, with interest
at the legal rate from November 29, 1968 until full payment to be paid jointly and
severally by defendant United Construction Co., Inc. and third party defendants
(except Roman Ozaeta). In all other respects, the judgment dated September 21,
1971 as modified in the December 8, 1971 Order of the lower court is hereby
affirmed with COSTS to be paid by the defendant and third party defendant
(except Roman Ozaeta) in equal shares.
SO ORDERED.
Petitioners Juan F. Nakpil & Sons in L-47851 and United Construction Co., Inc. and Juan J.
Carlos in L-47863 seek the reversal of the decision of the Court of Appeals, among other things,
for exoneration from liability while petitioner Philippine Bar Association in L-47896 seeks the
modification of aforesaid decision to obtain an award of P1,830,000.00 for the loss of the PBA
building plus four (4) times such amount as damages resulting in increased cost of the building,
P100,000.00 as exemplary damages; and P100,000.00 as attorney's fees.
These petitions arising from the same case filed in the Court of First Instance of Manila were
consolidated by this Court in the resolution of May 10, 1978 requiring the respective respondents
to comment. (Rollo, L-47851, p. 172).
The facts as found by the lower court (Decision, C.C. No. 74958; Record on Appeal, pp. 269-348;
pp. 520-521; Rollo, L-47851, p. 169) and affirmed by the Court of Appeals are as follows:
The plaintiff, Philippine Bar Association, a civic-non-profit association, incorporated under the
Corporation Law, decided to construct an office building on its 840 square meters lot located at
the comer of Aduana and Arzobispo Streets, Intramuros, Manila. The construction was
undertaken by the United Construction, Inc. on an "administration" basis, on the suggestion of
Juan J. Carlos, the president and general manager of said corporation. The proposal was
approved by plaintiff's board of directors and signed by its president Roman Ozaeta, a thirdparty defendant in this case. The plans and specifications for the building were prepared by the
other third-party defendants Juan F. Nakpil & Sons. The building was completed in June, 1966.

In the early morning of August 2, 1968 an unusually strong earthquake hit Manila and its
environs and the building in question sustained major damage. The front columns of the building
buckled, causing the building to tilt forward dangerously. The tenants vacated the building in
view of its precarious condition. As a temporary remedial measure, the building was shored up
by United Construction, Inc. at the cost of P13,661.28.
On November 29, 1968, the plaintiff commenced this action for the recovery of damages arising
from the partial collapse of the building against United Construction, Inc. and its President and
General Manager Juan J. Carlos as defendants. Plaintiff alleges that the collapse of the building
was accused by defects in the construction, the failure of the contractors to follow plans and
specifications and violations by the defendants of the terms of the contract.
Defendants in turn filed a third-party complaint against the architects who prepared the plans
and specifications, alleging in essence that the collapse of the building was due to the defects in
the said plans and specifications. Roman Ozaeta, the then president of the plaintiff Bar
Association was included as a third-party defendant for damages for having included Juan J.
Carlos, President of the United Construction Co., Inc. as party defendant.
On March 3, 1969, the plaintiff and third-party defendants Juan F. Nakpil & Sons and Juan F.
Nakpil presented a written stipulation which reads:
1. That in relation to defendants' answer with counterclaims and third- party
complaints and the third-party defendants Nakpil & Sons' answer thereto, the
plaintiff need not amend its complaint by including the said Juan F. Nakpil & Sons
and Juan F. Nakpil personally as parties defendant.
2. That in the event (unexpected by the undersigned) that the Court should find
after the trial that the above-named defendants Juan J. Carlos and United
Construction Co., Inc. are free from any blame and liability for the collapse of the
PBA Building, and should further find that the collapse of said building was due to
defects and/or inadequacy of the plans, designs, and specifications p by the thirdparty defendants, or in the event that the Court may find Juan F. Nakpil and Sons
and/or Juan F. Nakpil contributorily negligent or in any way jointly and solidarily
liable with the defendants, judgment may be rendered in whole or in part. as the
case may be, against Juan F. Nakpil & Sons and/or Juan F. Nakpil in favor of the
plaintiff to all intents and purposes as if plaintiff's complaint has been duly
amended by including the said Juan F. Nakpil & Sons and Juan F. Nakpil as parties
defendant and by alleging causes of action against them including, among others,
the defects or inadequacy of the plans, designs, and specifications prepared by them
and/or failure in the performance of their contract with plaintiff.
3. Both parties hereby jointly petition this Honorable Court to approve this
stipulation. (Record on Appeal, pp. 274-275; Rollo, L-47851,p.169).
Upon the issues being joined, a pre-trial was conducted on March 7, 1969, during which among

others, the parties agreed to refer the technical issues involved in the case to a Commissioner. Mr.
Andres O. Hizon, who was ultimately appointed by the trial court, assumed his office as
Commissioner, charged with the duty to try the following issues:
1. Whether the damage sustained by the PBA building during the August 2, 1968
earthquake had been caused, directly or indirectly, by:
(a) The inadequacies or defects in the plans and specifications prepared by thirdparty defendants;
(b) The deviations, if any, made by the defendants from said plans and
specifications and how said deviations contributed to the damage sustained;
(c) The alleged failure of defendants to observe the requisite quality of materials
and workmanship in the construction of the building;
(d) The alleged failure to exercise the requisite degree of supervision expected of the
architect, the contractor and/or the owner of the building;
(e) An act of God or a fortuitous event; and
(f) Any other cause not herein above specified.
2. If the cause of the damage suffered by the building arose from a combination of
the above-enumerated factors, the degree or proportion in which each individual
factor contributed to the damage sustained;
3. Whether the building is now a total loss and should be completely demolished or
whether it may still be repaired and restored to a tenantable condition. In the latter
case, the determination of the cost of such restoration or repair, and the value of
any remaining construction, such as the foundation, which may still be utilized or
availed of (Record on Appeal, pp. 275-276; Rollo, L-47851, p. 169).
Thus, the issues of this case were divided into technical issues and non-technical issues. As
aforestated the technical issues were referred to the Commissioner. The non-technical issues were
tried by the Court.
Meanwhile, plaintiff moved twice for the demolition of the building on the ground that it may
topple down in case of a strong earthquake. The motions were opposed by the defendants and the
matter was referred to the Commissioner. Finally, on April 30, 1979 the building was authorized
to be demolished at the expense of the plaintiff, but not another earthquake of high intensity on
April 7, 1970 followed by other strong earthquakes on April 9, and 12, 1970, caused further
damage to the property. The actual demolition was undertaken by the buyer of the damaged
building. (Record on Appeal, pp. 278-280; Ibid.)
After the protracted hearings, the Commissioner eventually submitted his report on September
25, 1970 with the findings that while the damage sustained by the PBA building was caused
directly by the August 2, 1968 earthquake whose magnitude was estimated at 7.3 they were also

caused by the defects in the plans and specifications prepared by the third-party defendants'
architects, deviations from said plans and specifications by the defendant contractors and failure
of the latter to observe the requisite workmanship in the construction of the building and of the
contractors, architects and even the owners to exercise the requisite degree of supervision in the
construction of subject building.
All the parties registered their objections to aforesaid findings which in turn were answered by
the Commissioner.
The trial court agreed with the findings of the Commissioner except as to the holding that the
owner is charged with full nine supervision of the construction. The Court sees no legal or
contractual basis for such conclusion. (Record on Appeal, pp. 309-328; Ibid).
Thus, on September 21, 1971, the lower court rendered the assailed decision which was modified
by the Intermediate Appellate Court on November 28, 1977.
All the parties herein appealed from the decision of the Intermediate Appellate Court. Hence,
these petitions.
On May 11, 1978, the United Architects of the Philippines, the Association of Civil Engineers, and
the Philippine Institute of Architects filed with the Court a motion to intervene as amicus curiae.
They proposed to present a position paper on the liability of architects when a building collapses
and to submit likewise a critical analysis with computations on the divergent views on the design
and plans as submitted by the experts procured by the parties. The motion having been granted,
the amicus curiae were granted a period of 60 days within which to submit their position.
After the parties had all filed their comments, We gave due course to the petitions in Our
Resolution of July 21, 1978.
The position papers of the amicus curiae (submitted on November 24, 1978) were duly noted.
The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not
defective. But the Commissioner, when asked by Us to comment, reiterated his conclusion that
the defects in the plans and specifications indeed existed.
Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. No.
4131) and the 1966 Asep Code, the Commissioner added that even if it can be proved that the
defects in the construction alone (and not in the plans and design) caused the damage to the
building, still the deficiency in the original design and jack of specific provisions against torsion
in the original plans and the overload on the ground floor columns (found by an the experts
including the original designer) certainly contributed to the damage which occurred. (Ibid, p.
174).
In their respective briefs petitioners, among others, raised the following assignments of errors:
Philippine Bar Association claimed that the measure of damages should not be limited to
P1,100,000.00 as estimated cost of repairs or to the period of six (6) months for loss of rentals

while United Construction Co., Inc. and the Nakpils claimed that it was an act of God that caused
the failure of the building which should exempt them from responsibility and not the defective
construction, poor workmanship, deviations from plans and specifications and other
imperfections in the case of United Construction Co., Inc. or the deficiencies in the design, plans
and specifications prepared by petitioners in the case of the Nakpils. Both UCCI and the Nakpils
object to the payment of the additional amount of P200,000.00 imposed by the Court of Appeals.
UCCI also claimed that it should be reimbursed the expenses of shoring the building in the
amount of P13,661.28 while the Nakpils opposed the payment of damages jointly and solidarity
with UCCI.
The pivotal issue in this case is whether or not an act of God-an unusually strong earthquakewhich caused the failure of the building, exempts from liability, parties who are otherwise liable
because of their negligence.
The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the
New Civil Code, which provides:
Art. 1723. The engineer or architect who drew up the plans and specifications for a
building is liable for damages if within fifteen years from the completion of the
structure the same should collapse by reason of a defect in those plans and
specifications, or due to the defects in the ground. The contractor is likewise
responsible for the damage if the edifice fags within the same period on account of
defects in the construction or the use of materials of inferior quality furnished by
him, or due to any violation of the terms of the contract. If the engineer or architect
supervises the construction, he shall be solidarily liable with the contractor.
Acceptance of the building, after completion, does not imply waiver of any of the
causes of action by reason of any defect mentioned in the preceding paragraph.
The action must be brought within ten years following the collapse of the building.
On the other hand, the general rule is that no person shall be responsible for events which could
not be foreseen or which though foreseen, were inevitable (Article 1174, New Civil Code).
An act of God has been defined as an accident, due directly and exclusively to natural causes
without human intervention, which by no amount of foresight, pains or care, reasonably to have
been expected, could have been prevented. (1 Corpus Juris 1174).
There is no dispute that the earthquake of August 2, 1968 is a fortuitous event or an act of God.
To exempt the obligor from liability under Article 1174 of the Civil Code, for a breach of an
obligation due to an "act of God," the following must concur: (a) the cause of the breach of the
obligation must be independent of the will of the debtor; (b) the event must be either
unforseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor
to fulfill his obligation in a normal manner; and (d) the debtor must be free from any
participation in, or aggravation of the injury to the creditor. (Vasquez v. Court of Appeals, 138

SCRA 553; Estrada v. Consolacion, 71 SCRA 423; Austria v. Court of Appeals, 39 SCRA 527;
Republic of the Phil. v. Luzon Stevedoring Corp., 21 SCRA 279; Lasam v. Smith, 45 Phil. 657).
Thus, if upon the happening of a fortuitous event or an act of God, there concurs a corresponding
fraud, negligence, delay or violation or contravention in any manner of the tenor of the obligation
as provided for in Article 1170 of the Civil Code, which results in loss or damage, the obligor
cannot escape liability.
The principle embodied in the act of God doctrine strictly requires that the act must be one
occasioned exclusively by the violence of nature and all human agencies are to be excluded from
creating or entering into the cause of the mischief. When the effect, the cause of which is to be
considered, is found to be in part the result of the participation of man, whether it be from active
intervention or neglect, or failure to act, the whole occurrence is thereby humanized, as it were,
and removed from the rules applicable to the acts of God. (1 Corpus Juris, pp. 1174-1175).
Thus it has been held that when the negligence of a person concurs with an act of God in
producing a loss, such person is not exempt from liability by showing that the immediate cause of
the damage was the act of God. To be exempt from liability for loss because of an act of God, he
must be free from any previous negligence or misconduct by which that loss or damage may have
been occasioned. (Fish & Elective Co. v. Phil. Motors, 55 Phil. 129; Tucker v. Milan, 49 O.G.
4379; Limpangco & Sons v. Yangco Steamship Co., 34 Phil. 594, 604; Lasam v. Smith, 45 Phil.
657).
The negligence of the defendant and the third-party defendants petitioners was established
beyond dispute both in the lower court and in the Intermediate Appellate Court. Defendant
United Construction Co., Inc. was found to have made substantial deviations from the plans and
specifications. and to have failed to observe the requisite workmanship in the construction as well
as to exercise the requisite degree of supervision; while the third-party defendants were found to
have inadequacies or defects in the plans and specifications prepared by them. As correctly
assessed by both courts, the defects in the construction and in the plans and specifications were
the proximate causes that rendered the PBA building unable to withstand the earthquake of
August 2, 1968. For this reason the defendant and third-party defendants cannot claim
exemption from liability. (Decision, Court of Appeals, pp. 30-31).
It is well settled that the findings of facts of the Court of Appeals are conclusive on the parties
and on this court (cases cited in Tolentino vs. de Jesus, 56 SCRA 67; Cesar vs. Sandiganbayan,
January 17, 1985, 134 SCRA 105, 121), unless (1) the conclusion is a finding grounded entirely on
speculation, surmise and conjectures; (2) the inference made is manifestly mistaken; (3) there is
grave abuse of discretion; (4) the judgment is based on misapprehension of facts; (5) the findings
of fact are conflicting , (6) the Court of Appeals went beyond the issues of the case and its findings
are contrary to the admissions of both appellant and appellees (Ramos vs. Pepsi-Cola Bottling
Co., February 8, 1967, 19 SCRA 289, 291-292; Roque vs. Buan, Oct. 31, 1967, 21 SCRA 648, 651);
(7) the findings of facts of the Court of Appeals are contrary to those of the trial court; (8) said
findings of facts are conclusions without citation of specific evidence on which they are based; (9)

the facts set forth in the petition as well as in the petitioner's main and reply briefs are not
disputed by the respondents (Garcia vs. CA, June 30, 1970, 33 SCRA 622; Alsua-Bett vs. Court of
Appeals, July 30, 1979, 92 SCRA 322, 366); (10) the finding of fact of the Court of Appeals is
premised on the supposed absence of evidence and is contradicted by evidence on record (Salazar
vs. Gutierrez, May 29, 1970, 33 SCRA 243, 247; Cited in G.R. No. 66497-98, Sacay v.
Sandiganbayan, July 10, 1986).
It is evident that the case at bar does not fall under any of the exceptions above-mentioned. On
the contrary, the records show that the lower court spared no effort in arriving at the correct
appreciation of facts by the referral of technical issues to a Commissioner chosen by the parties
whose findings and conclusions remained convincingly unrebutted by the intervenors/amicus
curiae who were allowed to intervene in the Supreme Court.
In any event, the relevant and logical observations of the trial court as affirmed by the Court of
Appeals that "while it is not possible to state with certainty that the building would not have
collapsed were those defects not present, the fact remains that several buildings in the same area
withstood the earthquake to which the building of the plaintiff was similarly subjected," cannot
be ignored.
The next issue to be resolved is the amount of damages to be awarded to the PBA for the partial
collapse (and eventual complete collapse) of its building.
The Court of Appeals affirmed the finding of the trial court based on the report of the
Commissioner that the total amount required to repair the PBA building and to restore it to
tenantable condition was P900,000.00 inasmuch as it was not initially a total loss. However, while
the trial court awarded the PBA said amount as damages, plus unrealized rental income for onehalf year, the Court of Appeals modified the amount by awarding in favor of PBA an additional
sum of P200,000.00 representing the damage suffered by the PBA building as a result of another
earthquake that occurred on April 7, 1970 (L-47896, Vol. I, p. 92).
The PBA in its brief insists that the proper award should be P1,830,000.00 representing the total
value of the building (L-47896, PBA's No. 1 Assignment of Error, p. 19), while both the NAKPILS
and UNITED question the additional award of P200,000.00 in favor of the PBA (L- 47851,
NAKPIL's Brief as Petitioner, p. 6, UNITED's Brief as Petitioner, p. 25). The PBA further urges
that the unrealized rental income awarded to it should not be limited to a period of one-half year
but should be computed on a continuing basis at the rate of P178,671.76 a year until the
judgment for the principal amount shall have been satisfied L- 47896, PBA's No. 11 Assignment
of Errors, p. 19).
The collapse of the PBA building as a result of the August 2, 1968 earthquake was only partial
and it is undisputed that the building could then still be repaired and restored to its tenantable
condition. The PBA, however, in view of its lack of needed funding, was unable, thru no fault of
its own, to have the building repaired. UNITED, on the other hand, spent P13,661.28 to shore up
the building after the August 2, 1968 earthquake (L-47896, CA Decision, p. 46). Because of the

earthquake on April 7, 1970, the trial court after the needed consultations, authorized the total
demolition of the building (L-47896, Vol. 1, pp. 53-54).
There should be no question that the NAKPILS and UNITED are liable for the damage resulting
from the partial and eventual collapse of the PBA building as a result of the earthquakes.
We quote with approval the following from the erudite decision penned by Justice Hugo E.
Gutierrez (now an Associate Justice of the Supreme Court) while still an Associate Justice of the
Court of Appeals:
There is no question that an earthquake and other forces of nature such as
cyclones, drought, floods, lightning, and perils of the sea are acts of God. It does not
necessarily follow, however, that specific losses and suffering resulting from the
occurrence of these natural force are also acts of God. We are not convinced on the
basis of the evidence on record that from the thousands of structures in Manila,
God singled out the blameless PBA building in Intramuros and around six or seven
other buildings in various parts of the city for collapse or severe damage and that
God alone was responsible for the damages and losses thus suffered.
The record is replete with evidence of defects and deficiencies in the designs and
plans, defective construction, poor workmanship, deviation from plans and
specifications and other imperfections. These deficiencies are attributable to
negligent men and not to a perfect God.
The act-of-God arguments of the defendants- appellants and third party
defendants-appellants presented in their briefs are premised on legal
generalizations or speculations and on theological fatalism both of which ignore the
plain facts. The lengthy discussion of United on ordinary earthquakes and
unusually strong earthquakes and on ordinary fortuitous events and extraordinary
fortuitous events leads to its argument that the August 2, 1968 earthquake was of
such an overwhelming and destructive character that by its own force and
independent of the particular negligence alleged, the injury would have been
produced. If we follow this line of speculative reasoning, we will be forced to
conclude that under such a situation scores of buildings in the vicinity and in other
parts of Manila would have toppled down. Following the same line of reasoning,
Nakpil and Sons alleges that the designs were adequate in accordance with preAugust 2, 1968 knowledge and appear inadequate only in the light of engineering
information acquired after the earthquake. If this were so, hundreds of ancient
buildings which survived the earthquake better than the two-year old PBA building
must have been designed and constructed by architects and contractors whose
knowledge and foresight were unexplainably auspicious and prophetic.
Fortunately, the facts on record allow a more down to earth explanation of the
collapse. The failure of the PBA building, as a unique and distinct construction with
no reference or comparison to other buildings, to weather the severe earthquake

forces was traced to design deficiencies and defective construction, factors which
are neither mysterious nor esoteric. The theological allusion of appellant United
that God acts in mysterious ways His wonders to perform impresses us to be
inappropriate. The evidence reveals defects and deficiencies in design and
construction. There is no mystery about these acts of negligence. The collapse of the
PBA building was no wonder performed by God. It was a result of the
imperfections in the work of the architects and the people in the construction
company. More relevant to our mind is the lesson from the parable of the wise man
in the Sermon on the Mount "which built his house upon a rock; and the rain
descended and the floods came and the winds blew and beat upon that house; and it
fen not; for it was founded upon a rock" and of the "foolish upon the sand. And the
rain descended and man which built his house the floods came, and the winds blew,
and beat upon that house; and it fell and great was the fall of it. (St. Matthew 7: 2427)." The requirement that a building should withstand rains, floods, winds,
earthquakes, and natural forces is precisely the reason why we have professional
experts like architects, and engineers. Designs and constructions vary under
varying circumstances and conditions but the requirement to design and build well
does not change.
The findings of the lower Court on the cause of the collapse are more rational and
accurate. Instead of laying the blame solely on the motions and forces generated by
the earthquake, it also examined the ability of the PBA building, as designed and
constructed, to withstand and successfully weather those forces.
The evidence sufficiently supports a conclusion that the negligence and fault of
both United and Nakpil and Sons, not a mysterious act of an inscrutable God, were
responsible for the damages. The Report of the Commissioner, Plaintiff's
Objections to the Report, Third Party Defendants' Objections to the Report,
Defendants' Objections to the Report, Commissioner's Answer to the various
Objections, Plaintiffs' Reply to the Commissioner's Answer, Defendants' Reply to
the Commissioner's Answer, Counter-Reply to Defendants' Reply, and Third-Party
Defendants' Reply to the Commissioner's Report not to mention the exhibits and
the testimonies show that the main arguments raised on appeal were already raised
during the trial and fully considered by the lower Court. A reiteration of these same
arguments on appeal fails to convince us that we should reverse or disturb the
lower Court's factual findings and its conclusions drawn from the facts, among
them:
The Commissioner also found merit in the allegations of the defendants as to the
physical evidence before and after the earthquake showing the inadequacy of
design, to wit:
Physical evidence before the earthquake providing (sic) inadequacy of design;

1. inadequate design was the cause of the failure of the building.

2. Sun-baffles on the two sides and in front of the building;
a. Increase the inertia forces that move the building laterally toward the Manila
Fire Department.
b. Create another stiffness imbalance.
3. The embedded 4" diameter cast iron down spout on all exterior columns reduces
the cross-sectional area of each of the columns and the strength thereof.
4. Two front corners, A7 and D7 columns were very much less reinforced.
Physical Evidence After the Earthquake, Proving Inadequacy of design;
1. Column A7 suffered the severest fracture and maximum sagging. Also D7.
2. There are more damages in the front part of the building than towards the rear,
not only in columns but also in slabs.
3. Building leaned and sagged more on the front part of the building.
4. Floors showed maximum sagging on the sides and toward the front corner parts
of the building.
5. There was a lateral displacement of the building of about 8", Maximum sagging
occurs at the column A7 where the floor is lower by 80 cm. than the highest slab
level.
6. Slab at the corner column D7 sagged by 38 cm.
The Commissioner concluded that there were deficiencies or defects in the design,
plans and specifications of the PBA building which involved appreciable risks with
respect to the accidental forces which may result from earthquake shocks. He
conceded, however, that the fact that those deficiencies or defects may have arisen
from an obsolete or not too conservative code or even a code that does not require a
design for earthquake forces mitigates in a large measure the responsibility or
liability of the architect and engineer designer.
The Third-party defendants, who are the most concerned with this portion of the
Commissioner's report, voiced opposition to the same on the grounds that (a) the
finding is based on a basic erroneous conception as to the design concept of the
building, to wit, that the design is essentially that of a heavy rectangular box on
stilts with shear wan at one end; (b) the finding that there were defects and a
deficiency in the design of the building would at best be based on an approximation
and, therefore, rightly belonged to the realm of speculation, rather than of certainty
and could very possibly be outright error; (c) the Commissioner has failed to back
up or support his finding with extensive, complex and highly specialized

computations and analyzes which he himself emphasizes are necessary in the

determination of such a highly technical question; and (d) the Commissioner has
analyzed the design of the PBA building not in the light of existing and available
earthquake engineering knowledge at the time of the preparation of the design, but
in the light of recent and current standards.
The Commissioner answered the said objections alleging that third-party
defendants' objections were based on estimates or exhibits not presented during the
hearing that the resort to engineering references posterior to the date of the
preparation of the plans was induced by the third-party defendants themselves who
submitted computations of the third-party defendants are erroneous.
The issue presently considered is admittedly a technical one of the highest degree. It
involves questions not within the ordinary competence of the bench and the bar to
resolve by themselves. Counsel for the third-party defendants has aptly remarked
that "engineering, although dealing in mathematics, is not an exact science and that
the present knowledge as to the nature of earthquakes and the behaviour of forces
generated by them still leaves much to be desired; so much so "that the experts of
the different parties, who are all engineers, cannot agree on what equation to use,
as to what earthquake co-efficients are, on the codes to be used and even as to the
type of structure that the PBA building (is) was (p. 29, Memo, of third- party
defendants before the Commissioner).
The difficulty expected by the Court if tills technical matter were to be tried and
inquired into by the Court itself, coupled with the intrinsic nature of the questions
involved therein, constituted the reason for the reference of the said issues to a
Commissioner whose qualifications and experience have eminently qualified him
for the task, and whose competence had not been questioned by the parties until he
submitted his report. Within the pardonable limit of the Court's ability to
comprehend the meaning of the Commissioner's report on this issue, and the
objections voiced to the same, the Court sees no compelling reasons to disturb the
findings of the Commissioner that there were defects and deficiencies in the design,
plans and specifications prepared by third-party defendants, and that said defects
and deficiencies involved appreciable risks with respect to the accidental forces
which may result from earthquake shocks.
(2) (a) The deviations, if any, made by the defendants from the plans and
specifications, and how said deviations contributed to the damage sustained by the
building.
(b) The alleged failure of defendants to observe the requisite quality of materials
and workmanship in the construction of the building.
These two issues, being interrelated with each other, will be discussed together.

The findings of the Commissioner on these issues were as follows:

We now turn to the construction of the PBA Building and the alleged deficiencies or
defects in the construction and violations or deviations from the plans and
specifications. All these may be summarized as follows:
a. Summary of alleged defects as reported by Engineer Mario M. Bundalian.
(1) Wrongful and defective placing of reinforcing bars.
(2) Absence of effective and desirable integration of the 3 bars in the cluster.
(3) Oversize coarse aggregates: 1-1/4 to 2" were used. Specification requires no
larger than 1 inch.
(4) Reinforcement assembly is not concentric with the column, eccentricity being 3"
off when on one face the main bars are only 1 1/2' from the surface.
(5) Prevalence of honeycombs,
(6) Contraband construction joints,
(7) Absence, or omission, or over spacing of spiral hoops,
(8) Deliberate severance of spirals into semi-circles in noted on Col. A-5, ground
floor,
(9) Defective construction joints in Columns A-3, C-7, D-7 and D-4, ground floor,
(10) Undergraduate concrete is evident,
(11) Big cavity in core of Column 2A-4, second floor,
(12) Columns buckled at different planes. Columns buckled worst where there are
no spirals or where spirals are cut. Columns suffered worst displacement where the
eccentricity of the columnar reinforcement assembly is more acute.
b. Summary of alleged defects as reported by Engr. Antonio Avecilla.
Columns are first (or ground) floor, unless otherwise stated.
(1) Column D4 Spacing of spiral is changed from 2" to 5" on centers,
(2) Column D5 No spiral up to a height of 22" from the ground floor,
(3) Column D6 Spacing of spiral over 4 l/2,
(4) Column D7 Lack of lateral ties,
(5) Column C7 Absence of spiral to a height of 20" from the ground level,
Spirals are at 2" from the exterior column face and 6" from the inner column face,
(6) Column B6 Lack of spiral on 2 feet below the floor beams,

(7) Column B5 Lack of spirals at a distance of 26' below the beam,

(8) Column B7 Spirals not tied to vertical reinforcing bars, Spirals are uneven
2" to 4",
(9) Column A3 Lack of lateral ties,
(10) Column A4 Spirals cut off and welded to two separate clustered vertical
bars,
(11) Column A4 (second floor Column is completely hollow to a height of 30"
(12) Column A5 Spirals were cut from the floor level to the bottom of the
spandrel beam to a height of 6 feet,
(13) Column A6 No spirals up to a height of 30' above the ground floor level,
(14) Column A7 Lack of lateralties or spirals,
c. Summary of alleged defects as reported by the experts of the Third-Party
defendants.
Ground floor columns.
(1) Column A4 Spirals are cut,
(2) Column A5 Spirals are cut,
(3) Column A6 At lower 18" spirals are absent,
(4) Column A7 Ties are too far apart,
(5) Column B5 At upper fourth of column spirals are either absent or
improperly spliced,
(6) Column B6 At upper 2 feet spirals are absent,
(7) Column B7 At upper fourth of column spirals missing or improperly spliced.
(8) Column C7 Spirals are absent at lowest 18"
(9) Column D5 At lowest 2 feet spirals are absent,
(10) Column D6 Spirals are too far apart and apparently improperly spliced,
(11) Column D7 Lateral ties are too far apart, spaced 16" on centers.
There is merit in many of these allegations. The explanations given by the
engineering experts for the defendants are either contrary to general principles of
engineering design for reinforced concrete or not applicable to the requirements for
ductility and strength of reinforced concrete in earthquake-resistant design and
construction.

We shall first classify and consider defects which may have appreciable bearing or
relation to' the earthquake-resistant property of the building.
As heretofore mentioned, details which insure ductility at or near the connections
between columns and girders are desirable in earthquake resistant design and
construction. The omission of spirals and ties or hoops at the bottom and/or tops of
columns contributed greatly to the loss of earthquake-resistant strength. The plans
and specifications required that these spirals and ties be carried from the floor level
to the bottom reinforcement of the deeper beam (p. 1, Specifications, p. 970,
Reference 11). There were several clear evidences where this was not done
especially in some of the ground floor columns which failed.
There were also unmistakable evidences that the spacings of the spirals and ties in
the columns were in many cases greater than those called for in the plans and
specifications resulting again in loss of earthquake-resistant strength. The assertion
of the engineering experts for the defendants that the improper spacings and the
cutting of the spirals did not result in loss of strength in the column cannot be
maintained and is certainly contrary to the general principles of column design and
construction. And even granting that there be no loss in strength at the yield point
(an assumption which is very doubtful) the cutting or improper spacings of spirals
will certainly result in the loss of the plastic range or ductility in the column and it
is precisely this plastic range or ductility which is desirable and needed for
earthquake-resistant strength.
There is no excuse for the cavity or hollow portion in the column A4, second floor,
and although this column did not fail, this is certainly an evidence on the part of the
contractor of poor construction.
The effect of eccentricities in the columns which were measured at about 2 1/2
inches maximum may be approximated in relation to column loads and column and
beam moments. The main effect of eccentricity is to change the beam or girder
span. The effect on the measured eccentricity of 2 inches, therefore, is to increase or
diminish the column load by a maximum of about 1% and to increase or diminish
the column or beam movements by about a maximum of 2%. While these can
certainly be absorbed within the factor of safety, they nevertheless diminish said
factor of safety.
The cutting of the spirals in column A5, ground floor is the subject of great
contention between the parties and deserves special consideration.
The proper placing of the main reinforcements and spirals in column A5, ground
floor, is the responsibility of the general contractor which is the UCCI. The burden
of proof, therefore, that this cutting was done by others is upon the defendants.
Other than a strong allegation and assertion that it is the plumber or his men who

may have done the cutting (and this was flatly denied by the plumber) no
conclusive proof was presented. The engineering experts for the defendants
asserted that they could have no motivation for cutting the bar because they can
simply replace the spirals by wrapping around a new set of spirals. This is not quite
correct. There is evidence to show that the pouring of concrete for columns was
sometimes done through the beam and girder reinforcements which were already in
place as in the case of column A4 second floor. If the reinforcement for the girder
and column is to subsequently wrap around the spirals, this would not do for the
elasticity of steel would prevent the making of tight column spirals and loose or
improper spirals would result. The proper way is to produce correct spirals down
from the top of the main column bars, a procedure which can not be done if either
the beam or girder reinforcement is already in place. The engineering experts for
the defendants strongly assert and apparently believe that the cutting of the spirals
did not materially diminish the strength of the column. This belief together with the
difficulty of slipping the spirals on the top of the column once the beam
reinforcement is in place may be a sufficient motivation for the cutting of the
spirals themselves. The defendants, therefore, should be held responsible for the
consequences arising from the loss of strength or ductility in column A5 which may
have contributed to the damages sustained by the building.
The lack of proper length of splicing of spirals was also proven in the visible spirals
of the columns where spalling of the concrete cover had taken place. This lack of
proper splicing contributed in a small measure to the loss of strength.
The effects of all the other proven and visible defects although nor can certainly be
accumulated so that they can contribute to an appreciable loss in earthquakeresistant strength. The engineering experts for the defendants submitted an
estimate on some of these defects in the amount of a few percent. If accumulated,
therefore, including the effect of eccentricity in the column the loss in strength due
to these minor defects may run to as much as ten percent.
To recapitulate: the omission or lack of spirals and ties at the bottom and/or at the
top of some of the ground floor columns contributed greatly to the collapse of the
PBA building since it is at these points where the greater part of the failure
occurred. The liability for the cutting of the spirals in column A5, ground floor, in
the considered opinion of the Commissioner rests on the shoulders of the
defendants and the loss of strength in this column contributed to the damage which
occurred.
It is reasonable to conclude, therefore, that the proven defects, deficiencies and
violations of the plans and specifications of the PBA building contributed to the
damages which resulted during the earthquake of August 2, 1968 and the vice of
these defects and deficiencies is that they not only increase but also aggravate the

weakness mentioned in the design of the structure. In other words, these defects
and deficiencies not only tend to add but also to multiply the effects of the
shortcomings in the design of the building. We may say, therefore, that the defects
and deficiencies in the construction contributed greatly to the damage which
occurred.
Since the execution and supervision of the construction work in the hands of the
contractor is direct and positive, the presence of existence of all the major defects
and deficiencies noted and proven manifests an element of negligence which may
amount to imprudence in the construction work. (pp. 42-49, Commissioners
Report).
As the parties most directly concerned with this portion of the Commissioner's report, the
defendants voiced their objections to the same on the grounds that the Commissioner should have
specified the defects found by him to be "meritorious"; that the Commissioner failed to indicate
the number of cases where the spirals and ties were not carried from the floor level to the bottom
reinforcement of the deeper beam, or where the spacing of the spirals and ties in the columns
were greater than that called for in the specifications; that the hollow in column A4, second floor,
the eccentricities in the columns, the lack of proper length of splicing of spirals, and the cut in the
spirals in column A5, ground floor, did not aggravate or contribute to the damage suffered by the
building; that the defects in the construction were within the tolerable margin of safety; and that
the cutting of the spirals in column A5, ground floor, was done by the plumber or his men, and
not by the defendants.
Answering the said objections, the Commissioner stated that, since many of the defects were
minor only the totality of the defects was considered. As regards the objection as to failure to
state the number of cases where the spirals and ties were not carried from the floor level to the
bottom reinforcement, the Commissioner specified groundfloor columns B-6 and C-5 the first one
without spirals for 03 inches at the top, and in the latter, there were no spirals for 10 inches at the
bottom. The Commissioner likewise specified the first storey columns where the spacings were
greater than that called for in the specifications to be columns B-5, B-6, C-7, C-6, C-5, D-5 and B7. The objection to the failure of the Commissioner to specify the number of columns where there
was lack of proper length of splicing of spirals, the Commissioner mentioned groundfloor
columns B-6 and B-5 where all the splices were less than 1-1/2 turns and were not welded,
resulting in some loss of strength which could be critical near the ends of the columns. He
answered the supposition of the defendants that the spirals and the ties must have been looted, by
calling attention to the fact that the missing spirals and ties were only in two out of the 25
columns, which rendered said supposition to be improbable.
The Commissioner conceded that the hollow in column A-4, second floor, did not aggravate or
contribute to the damage, but averred that it is "evidence of poor construction." On the claim
that the eccentricity could be absorbed within the factor of safety, the Commissioner answered
that, while the same may be true, it also contributed to or aggravated the damage suffered by the

building.
The objection regarding the cutting of the spirals in Column A-5, groundfloor, was answered by
the Commissioner by reiterating the observation in his report that irrespective of who did the
cutting of the spirals, the defendants should be held liable for the same as the general contractor
of the building. The Commissioner further stated that the loss of strength of the cut spirals and
inelastic deflections of the supposed lattice work defeated the purpose of the spiral containment
in the column and resulted in the loss of strength, as evidenced by the actual failure of this
column.
Again, the Court concurs in the findings of the Commissioner on these issues and fails to find any
sufficient cause to disregard or modify the same. As found by the Commissioner, the "deviations
made by the defendants from the plans and specifications caused indirectly the damage sustained
and that those deviations not only added but also aggravated the damage caused by the defects in
the plans and specifications prepared by third-party defendants. (Rollo, Vol. I, pp. 128-142)
The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the
third-party defendants in effecting the plans, designs, specifications, and construction of the PBA
building and We hold such negligence as equivalent to bad faith in the performance of their
respective tasks.
Relative thereto, the ruling of the Supreme Court in Tucker v. Milan (49 O.G. 4379, 4380) which
may be in point in this case reads:
One who negligently creates a dangerous condition cannot escape liability for the natural and
probable consequences thereof, although the act of a third person, or an act of God for which he
is not responsible, intervenes to precipitate the loss.
As already discussed, the destruction was not purely an act of God. Truth to tell hundreds of
ancient buildings in the vicinity were hardly affected by the earthquake. Only one thing spells out
the fatal difference; gross negligence and evident bad faith, without which the damage would not
have occurred.
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, We deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the
exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra, p. 10) indemnity in favor of
the Philippine Bar Association of FIVE MILLION (P5,000,000.00) Pesos to cover all damages
(with the exception of attorney's fees) occasioned by the loss of the building (including interest
charges and lost rentals) and an additional ONE HUNDRED THOUSAND (P100,000.00) Pesos as
and for attorney's fees, the total sum being payable upon the finality of this decision. Upon failure
to pay on such finality, twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary costs against the defendant and third-party
defendants (except Roman Ozaeta).

SO ORDERED.

UNLAD RESOURCES DEVELOPMENT

CORPORATION, UNLAD RURAL BANK
OF NOVELETA, INC., UNLAD
Present:
COMMODITIES, INC., HELENA Z.
BENITEZ, and CONRADO L. BENITEZ
YNARES-SANTIAGO, J.,
II,

G.R. No. 149338

Petitioners,

Chairperson,
AUSTRIA-MARTINEZ,

- versus -

CHICO-NAZARIO,
RENATO P. DRAGON, TARCISIUS R.
RODRIGUEZ, VICENTE D. CASAS,
NACHURA, and
ROMULO M. VIRATA, FLAVIANO
PERDITO, TEOTIMO BENITEZ, ELENA
REYES, JJ.
BENITEZ, and ROLANDO SUAREZ,
Respondents.

Promulgated:
July 28, 2008

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of
Civil Procedure seeking the reversal of the November 29, 2000 Decision[1] and August
2, 2001 Resolution[2] of the Court of Appeals (CA) in CA-G.R. CV No. 54226.

The facts, as found by the CA, are as follows:

On December 29, 1981, the Plaintiffs (herein respondents) and defendant (herein petitioner) Unlad
Resources, through its Chairman[,] Helena Z. Benitez[,] entered into a Memorandum of Agreement
wherein it is provided that [respondents], as controlling stockholders of the Rural Bank [of Noveleta]
shall allow Unlad Resources to invest four million eight hundred thousand pesos (P4,800,000.00) in the
Rural Bank in the form of additional equity. On the other hand, [petitioner] Unlad Resources bound
itself to invest the said amount of 4.8 million pesos in the Rural Bank; upon signing, it was, likewise,
agreed that [petitioner] Unlad Resources shall subscribe to a minimum of four hundred eighty thousand
pesos (P480,000.00) (sic) common or preferred non-voting shares of stock with a total par value of four
million eight hundred thousand pesos (P4,800,000.00) and pay up immediately one million two
hundred thousand pesos (P1,200,000.00) for said subscription; that the [respondents], upon the signing
of the said agreement shall transfer control and management over the Rural Bank to Unlad Resources.
According to the [respondents], immediately after the signing of the agreement, they complied with
their obligation and transferred control of the Rural Bank to Unlad Resources and its nominees and the
Bank was renamed the Unlad Rural Bank of Noveleta, Inc. However, [respondents] claim that despite
repeated demands, Unlad Resources has failed and refused to comply with their obligation under the
said Memorandum of Agreement when it did not invest four million eight hundred thousand pesos
(P4,800,000.00) in the Rural Bank in the form of additional equity and, likewise, it failed to
immediately infuse one million two hundred thousand pesos (P1,200,000.00) as paid in capital upon
signing of the Memorandum of Agreement.
On , the Board of Directors of [petitioner] Unlad Resources passed Resolution No. 84-041 authorizing
the President and the General Manager to lease a mango plantation situated in Naic, . Pursuant to this
Resolution, the Bank as [lessee] entered into a Contract of Lease with the [petitioner] Helena Z.
Benitez as [lessor]. The management of the mango plantation was undertaken by Unlad Commodities,
Inc., a subsidiary of Unlad Resources[,] under a Management Contract Agreement. The Management
Contract provides that Unlad Commodities, Inc. would receive eighty percent (80%) of the net profits
generated by the operation of the mango plantation while the Banks share is twenty percent (20%). It
was further agreed that at the end of the lease period, the Rural Bank shall turn over to the lessor all
permanent improvements introduced by it on the plantation.
xxxx
On May 20, 1987, [petitioner] Unlad Rural Bank wrote [respondents] regarding [the] Central Banks
approval to retire its [Development Bank of the Philippines] preferred shares in the amount of
P219,000.00 and giving notice for subscription to proportionate shares. The [respondents] objected on
the grounds that there is already a sinking fund for the retirement of the said DBP-held preferred shares
provided for annually and that it could deprive the Rural Bank of a cheap source of fund. (sic)
[Respondents] alleged compliance with all of their obligations under the Memorandum of Agreement
in that they have transferred control and management over the Rural bank to the [petitioners] and are
ready, willing and able to allow [petitioners] to subscribe to a minimum of four hundred eighty

thousand (P480,000.00) (sic) common or preferred non-voting shares of stocks with a total par value of
four million eight hundred thousand pesos (P4,800,000.00) in the Rural Bank. However, [petitioners]
have failed and refused to subscribe to the said shares of stock and to pay the initial amount of one
million two hundred thousand pesos (P1,200,000.00) for said subscription.[3]

On July 3, 1987, herein respondents filed before the Regional Trial Court (RTC) of
Makati City, Branch 61 a Complaint[4] for rescission of the agreement and the return of
control and management of the Rural Bank from petitioners to respondents, plus
damages. After trial, the RTC rendered a Decision,[5] the dispositive portion of which
provides:
WHEREFORE, Premises Considered, judgment is hereby rendered, as follows:
1.

The Memorandum of Agreement dated (sic) is hereby declared rescinded and:

(a)
Defendant Unlad Resources Development Corporation is
hereby ordered to immediately return control and management over the
Rural Bank of Noveleta, Inc. to Plaintiffs; and
(b)
Unlad Rural Bank of Noveleta, Inc. is hereby ordered to
return to Defendants the sum of One Million Three Thousand Seventy
Pesos (P1,003,070.00)
2.
The Director for Rural Banks of the Bangko Sentral ng Pilipinas is hereby appointed as
Receiver of the Rural Bank;
3.
Unlad Rural Bank of Noveleta, Inc. is hereby enjoined from placing the retired DBP-held
preferred shares available for subscription and the same is hereby ordered to be placed under a sinking
fund;
4.
Defendant Unlad Resources Development Corporation is hereby ordered to pay plaintiffs
the following:
(a)
actual compensatory damages amounting to Four Million
Six Hundred One Thousand Seven Hundred Sixty- Five and 38/100
Pesos (P4,601,765.38);
(b)
moral damages in the amount of Five Hundred Thousand
Pesos (P500,000.00);
(c)
exemplary and corrective damages in the amount of One
Hundred Thousand Pesos (P100,000.00); and
(d)
attorneys fees in the sum of (P100,000.00), plus cost of
suit.
SO ORDERED.[6]

Herein petitioners appealed the ruling to the CA. Respondents filed a Motion to Dismiss

and, subsequently, a Supplemental Motion to Dismiss, which were both denied. Later,
however, the CA, in a Decision dated November 29, 2000, dismissed the appeal for lack
of merit and affirmed the RTC Decision in all respects. Petitioners motion for
reconsideration was denied in CA Resolution dated August 2, 2001.
Petitioners are now before this Court alleging that the CA committed a grave and serious
reversible error in issuing the assailed Decision. Petitioners question the jurisdiction of
the trial court, something they have done from the beginning of the controversy,
contending that the issues that respondents raised before the trial court are intracorporate in nature and are, therefore, beyond the jurisdiction of the trial court. They
point out that respondents complaint charged them with mismanagement and alleged
dissipation of the assets of the Rural Bank. Since the complaint challenges corporate
actions and decisions of the Board of Directors and prays for the recovery of the control
and management of the Rural Bank, these matters fall outside the jurisdiction of the trial
court. Thus, they posit that the judgment of the trial court, as affirmed by the CA, is null
and void and may be impugned at any time.
Petitioners further argue that the action instituted by respondents had already prescribed,
because Article 1389 of the Civil Code provides that an action for rescission must be
commenced within four years. They claim that the trial court and the CA mistakenly
applied Article 1144 of the Civil Code which treats of prescription of actions in general.
They submit that Article 1389, which deals specifically with actions for rescission, is the
applicable law.
Moreover, petitioners assert that they have fully complied with their undertaking under
the subject Memorandum of Agreement, but that the undertaking has become a legal and
factual impossibility because the authorized capital stock of the Rural Bank was
increased from P1.7 million to only P5 million, and could not accommodate the
subscription by petitioners of P4.8 million worth of shares. Such deficiency, petitioners
contend, is with the knowledge and approval of respondent Renato P. Dragon and his

nominees to the Board of Directors.

Petitioners, without conceding the propriety of the judgment of rescission, also argue
that the subject Memorandum of Agreement could not just be ordered rescinded without
the corresponding order for the restitution of the parties total contributions and/or
investments in the Rural Bank. Finally, they assail the award for moral and exemplary
damages, as well as the award for attorneys fees, as bereft of factual and legal bases
given that, in the body of the Decision, it was merely stated that respondents suffered
moral damages without any discussion or explanation of, nor any justification for such
award. Likewise, the matter of attorneys fees was not at all discussed in the body of the
Decision. Petitioners claim that pursuant to the prevailing rule, attorneys fees cannot be
recovered in the absence of stipulation.
On the other hand, respondents declare that immediately after the signing of the
Memorandum of Agreement, they complied with their obligation and transferred control
of the Rural Bank to petitioner Unlad Resources and its nominees, but that, despite
repeated demands, petitioners have failed and refused to comply with their concomitant
obligations under the Agreement.
Respondents narrate that shortly after taking over the Rural Bank, petitioners Conrado L.
Benitez II and Jorge C. Cerbo, as President and General Manager, respectively, entered
into a Contract of Lease over the Naic, Cavite mango plantation, and that, as a
consequence of this venture, the bank incurred expenses amounting to P475,371.57,
equivalent to 25.76% of its capital and surplus. The respondents further assert that the
Central Bank found this undertaking not inherently connected with bona fide rural
banking operations, nor does it fall within the allied undertakings permitted under
Section 26 of Central Bank Circular No. 741 and Section 3379 of the Manual of
Regulations of the Central Bank. Thus, respondents contend that this circumstance,
coupled with the fact that petitioners Helena Z. Benitez and Conrado L. Benitez II were
also stockholders and members of the Board of Directors of Unlad Resources, Unlad

Rural Bank, and Unlad Commodities at that time, is adequate proof that the Rural Banks
management had every intention of diverting, dissipating, and/or wasting the banks
assets for petitioners own gain.
They likewise allege that because of the failure of petitioners to comply with their
obligations under the Memorandum of Agreement, respondents, with the exception of
Tarcisius Rodriguez, lodged a complaint with the Securities and Exchange Commission
(SEC), seeking rescission of the Agreement, damages, and the appointment of a
management committee, but the SEC dismissed the complaint for lack of jurisdiction.
Furthermore, when the Rural Bank informed respondents of the Central Banks approval
of its plan to retire its DBP-held preferred shares, giving notices for subscription to
proportionate shares, respondents objected on the ground that there was already a
sinking fund for the retirement of said shares provided for annually, and that the
retirement would deprive the petitioner Rural Bank of a cheap source of fund. It was at
that point, respondents claim, that they instituted the aforementioned Complaint against
petitioners before the RTC of Makati.
The respondents also seek the outright dismissal of this Petition for lack of verification
as to petitioners Helena Z. Benitez and Conrado L. Benitez II; lack of proper verification
as to petitioners Unlad Resources Development Corporation, Unlad Rural Bank of
Noveleta, Inc., and Unlad Commodities, Inc.; lack of proper verified statement of
material dates; and lack of proper sworn certification of non-forum shopping.
They support the proposition that Tijam v. Sibonghanoy[7] applies, and that petitioners
are indeed estopped from questioning the jurisdiction of the trial court. They also share
the lower courts view that it is Article 1144 of the Civil Code, and not Article 1389, that
is applicable to this case. Finally, respondents allege that the failure of petitioner Unlad
Resources to comply with its undertaking under the Agreement, as uniformly found by
the trial court and the CA, may no longer be assailed in the instant Petition, and that the
award of moral and exemplary damages and attorneys fees is justified.

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

It is well to remember that the respondents had actually filed with the SEC a case against
the petitioners which, however, was dismissed for lack of jurisdiction due to the

pendency of the case before the RTC.[10] The SECs Order dismissing the respondents
complaint is instructive:
From the foregoing allegations, it is apparent that the present action involves two separate causes of
action which are interrelated, and the resolution of which hinges on the very document sought to be
rescinded. The assertion that the defendants failed to comply with their contractual undertaking and the
claim for rescission of the contract by the plaintiffs has, in effect, put in issue the very status of the
herein defendants as stockholders of the Rural Bank. The issue as to whether or not the defendants are
stockholders of the Rural Bank is a pivotal issue to be determined on the basis of the Memorandum of
Agreement. It is a prejudicial question and a logical antecedent to confer jurisdiction to this
Commission.
It is to be noted, however, that determination of the contractual undertaking of the parties under a
contract lies with the Regional Trial Courts and not with this Commission. x x x[11]

Be that as it may, this point has been rendered moot by Republic Act (R.A.) No. 8799,
also known as the Securities Regulation Code. This law, which took effect in 2000, has
transferred jurisdiction over such disputes to the RTC. Specifically, R.A. 8799 provides:
Sec. 5. Powers and Functions of the Commission
xxxx
5.2. The Commissions jurisdiction over all cases enumerated under Section 5 of Presidential Decree
No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial
Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional
Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain
jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which
should be resolved within one (1) year from the enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation cases filed as of until finally disposed.

Section 5 of P.D. No. 902-A reads, thus:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
a)
Devices and schemes employed by or any acts of the board of directors, business
associates, its officers or partnership, amounting to fraud and misrepresentation which may be
detrimental to the interest of the public and/or of the stockholder, partners, members of associations or
organizations registered with the Commission;
b)

Controversies arising out of intra-corporate or partnership relations, between and among

stockholders, members, or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity;
Controversies in the election or appointment of directors, trustees, officers or managers of
such corporations, partnerships or associations.
c)

Consequently, whether the cause of action stems from a contractual dispute or one that
involves intra-corporate matters, the RTC already has jurisdiction over this case. In this
light, the question of whether the doctrine of estoppel by laches applies, as enunciated
by this Court in Tijam v. Sibonghanoy, no longer finds relevance.
Second, the issue of prescription. Petitioners further contend that the action for
rescission has prescribed under Article 1398 of the Civil Code, which provides:
Article 1389. The action to claim rescission must be commenced within four years x x x.

This is an erroneous proposition. Article 1389 specifically refers to rescissible contracts

as, clearly, this provision is under the chapter entitled Rescissible Contracts.
In a previous case,[12] this Court has held that Article 1389:
applies to rescissible contracts, as enumerated and defined in Articles 1380 and 1381. We must stress
however, that the rescission in Article 1381 is not akin to the term rescission in Article 1191 and Article
1592. In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or
cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of
rescission for lesion as enumerated in said article.
The prescriptive period applicable to rescission under Articles 1191 and 1592, is found in Article 1144,
which provides that the action upon a written contract should be brought within ten years from the time
the right of action accrues.

Article 1381 sets out what are rescissible contracts, to wit:

Article 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer lesion
by more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the claims
due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant without
the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission.

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

Based on the records of this case, the action was commenced on July 3, 1987, while the
Memorandum of Agreement was entered into on December 29, 1981. Article 1144
specifically provides that the 10-year period is counted from the time the right of action
accrues. The right of action accrues from the moment the breach of right or duty occurs.
[13] Thus, the original Complaint was filed well within the prescriptive period.
We now proceed to determine if the trial court, as affirmed by the CA, correctly ruled for
the rescission of the subject Agreement.
Petitioners contend that they have fully complied with their obligation under the
Memorandum of Agreement. They allege that due to respondents failure to increase the
capital stock of the corporation to an amount that will accommodate their undertaking, it
had become impossible for them to perform their end of the Agreement.

Again, petitioners contention is untenable. There is no question that petitioners herein

failed to fulfill their obligation under the Memorandum of Agreement. Even they admit
the same, albeit laying the blame on respondents.
It is true that respondents increased the Rural Banks authorized capital stock to only P5
million, which was not enough to accommodate the P4.8 million worth of stocks that
petitioners were to subscribe to and pay for. However, respondents failure to fulfill their
undertaking in the agreement would have given rise to the scenario contemplated by
Article 1191 of the Civil Code, which reads:
Article 1191. The power to rescind reciprocal obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with the
payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if
the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a
period.
This is understood to be without prejudice to the rights of third persons who have acquired the thing, in
accordance with Articles 1385 and 1388 and the Mortgage Law.

Thus, petitioners should have exacted fulfillment from the respondents or asked for the
rescission of the contract instead of simply not performing their part of the Agreement.
But in the course of things, it was the respondents who availed of the remedy under
Article 1191, opting for the rescission of the Agreement in order to regain control of the
Rural Bank.
Having determined that the rescission of the subject Memorandum of Agreement was in
order, the trial court ordered petitioner Unlad Resources to return to respondents the
management and control of the Rural Bank and for the latter to return the sum of
P1,003,070.00 to petitioners.
Mutual restitution is required in cases involving rescission under Article 1191. This
means bringing the parties back to their original status prior to the inception of the

contract.[14] Article 1385 of the Civil Code provides, thus:

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out only when
he who demands rescission can return whatever he may be obligated to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in the
possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.

This Court has consistently ruled that this provision applies to rescission under Article
1191:
[S]ince Article 1385 of the Civil Code expressly and clearly states that rescission creates the obligation
to return the things which were the object of the contract, together with their fruits, and the price with
its interest, the Court finds no justification to sustain petitioners position that said Article 1385 does not
apply to rescission under Article 1191.[15]

Rescission has the effect of unmaking a contract, or its undoing from the beginning, and
not merely its termination.[16] Hence, rescission creates the obligation to return the
object of the contract. It can be carried out only when the one who demands rescission
can return whatever he may be obliged to restore. To rescind is to declare a contract void
at its inception and to put an end to it as though it never was. It is not merely to
terminate it and release the parties from further obligations to each other, but to abrogate
it from the beginning and restore the parties to their relative positions as if no contract
has been made.[17]
Accordingly, when a decree for rescission is handed down, it is the duty of the court to
require both parties to surrender that which they have respectively received and to place
each other as far as practicable in his original situation. The rescission has the effect of
abrogating the contract in all parts.[18]
Clearly, the petitioners failed to fulfill their end of the agreement, and thus, there was
just cause for rescission. With the contract thus rescinded, the parties must be restored to
the status quo ante, that is, before they entered into the Memorandum of Agreement.

Finally, we must resolve the question of the propriety of the award for damages and
attorneys fees.
The trial courts Decision mentioned that the evidence is clear and convincing that
Plaintiffs (herein respondents) suffered actual compensatory damages amounting to Four
Million Six Hundred One Thousand Seven Hundred Sixty-Five and 38/100 Pesos
(P4,601,765.38) moral damages and attorneys fees.
Though not discussed in the body of the Decision, the records show that the amount of
P4,601,765.38 pertains to actual losses incurred by respondents as a result of petitioners
non-compliance with their undertaking under the Memorandum of Agreement. On this
point, respondent Dragon presented testimonial and documentary evidence to prove the
actual amount of damages, thus:
Atty. Cruz
Q: Was there any consequence to you Mr. Dragon due to any breach of the agreement marked as
Exhibit A?
A: Yes sir I could have earned thru the shares of stock that I have, or we have or we had by this time
amounting to several millions pesos (sic). They have only put in the whole amount that we have agreed
upon (sic).
Q: In this connection did you cause computation of these losses that you incured (sic)?
A: Yes sir.
xxxx
Q: Will you please kindly go through this computation and explain the same to the Honorable Court?
A: Number 1 is an Organ (sic) income from the sale of 60% (sic) at only Three Hundred Ninety Nine
Thousand Two hundred for Nineteen Thousand Nine Hundred Sixty shares which should have been
sold if it were sold to others for P50.00 each for a total of Nine Hundred Ninety Eight Thousand but
sold to them for Three Hundred Ninety nine (sic) Thousand two (sic) Hundred only and of which only
Three Hundred Twenty Four Thousand Six Hundred was paid to me. Therefore, there was a difference
of Six Hundred Seven Three (sic) Thousand Four Hundred (P673,400.00). On the basis of the
commulative (sic) lost income every year from March 1982 from the amount of Seven Six Hundred
(sic) Seventy Three Thousand four (sic) Hundred (P673,400.) (sic) there would be a discommulative
(sic) lost (sic) of One Million Ninety Three Thousand Nine Hundred Fifty Two Pesos and forty two
(sic) centavos (P1,093,952.42). Please note that the interest imputed is only at 12% per annum but it

should had (sic) been much higher. In 1984 to 1986 (sic) alone rates went as higher (sic) as 40% per
annum from the so called (sic) Jobo Bills and yet we only computed the imputed income or lost income
at 12% per annum and then there is a 40% participation on the unrealized earnings due to their failure
to put in an stabilized (sic) earnings. You will note that if they put in 4.8 million Pesos and it would be
earning money, 40% of that will go to us because 40% of the bank would be ours and 60% would be
there (sic). But because they did put in the 4.8 million our 40% did not earn up to that extent and
computed again on the basis of 12% the amount (sic) on the commulative (sic) basis up to September
1990 is 2 million three hundred fifty two thousand sixty five pesos and four centavos (sic).
(P2,352,065.04). You will note again that the average return of investment of any based (sic) Rural
Bank has been no less than 20% or about 30% per annum. And we computed only the earnings at 12%.
xxxx
There were loans granted fraudulently to members of the board and some borrowers which were not all
charged interest for several years and on this basis we computed a 40% shares (sic) on the foregone
income interest income (sic) on all these fraudulently granted loans, without interest being collected
and none a project (sic) among a plantation project (sic), which was funded by the bank but nothing
was given back to the bank for several hundred thousand of pesos (sic). And we arrived an (sic)
estimate of the foregone interest income a total of One Million Two Hundred Five Thousand Eight
Hundred Sixty None Pesos and eighty one (sic) centavos and 40 percent share of this (sic) would be
Four Hundred Eighty Two Thousand Three Hundred Forty Seven Pesos and Ninety Two Centavos. All
in all our estimate of the damages we have suffered is Four Million Six Hundred one (sic) Thousand
Seven Hundred Sixty Five Pesos and thirty eight (sic) centavos (P4,601,765.38).[19]

More importantly, petitioners never raised in issue before the CA this award of actual
compensatory damages. They did not raise the matter of damages in their Appellants
Brief, while in their Motion for Reconsideration, they questioned only the award of
moral and exemplary damages, not the award of actual damages. Even in the present
Petition for Review, what petitioners raised was the propriety of the award of moral and
exemplary damages and attorneys fees.
On the grant of moral and exemplary damages and attorneys fees, we note that the trial
courts Decision did not discuss the basis for the award. No mention of these damages
awarded or their factual basis is made in the body of the Decision, only in the dispositive
portion. Be that as it may, we have examined the records of the case and found that the
award must be sustained.
It should be remembered that there are two separate causes of action in this case: one for

rescission of the Memorandum of Agreement and the other for receivership based on
alleged mismanagement of the company by the plaintiffs. While the award of actual
compensatory damages was based on the breach of duty under the Memorandum of
Agreement, the award of moral damages appears to be based on petitioners
mismanagement of the company when they became members of the Board of Directors
of the Rural Bank.

Thus, the trial court said:

Under the Rural Banks management, a systematic diversion of the banks assets was conceived
whereby: (a) The Rural Banks funds would be funneled in the development and improvements of the
Benitez Mango Plantation in the guise of an investment in said plantation; (b) Of the net profits earned
from the plantations operations, the Rural Banks share therein, although it shoulders all of the financial
risks, would be a measly twenty percent (20%) thereof while UCI, without investing a single centavo,
would earn eighty percent (80%) of the said profits. Thus, the bulk of the profits of the mango
plantation was also sought to be diverted to an entity wherein Helena Z. Benitez and Conrado L.
Benitez II are not only principal stockholders but also the Chairman of the Board of Directors and
President, respectively. Moreover, Defendant Helena Z. Benitez would be entitled to receive, under the
lease contract, rentals in the total amount of Three Hundred Thousand Pesos (P300,000.00) or ten
percent (10%) of gross profits, whichever is higher. (c) Finally, at the end of the lease period, the Rural
Bank was obliged to turn over to the lessor (Helena Z. Benitez) all permanent improvements introduced
by it on the plantation at no cost to Ms. Benitez.
Further, in its report dated March 13, 1985, the [Central Bank] after conducting its general examination
upon the Rural Bank ordered the latter to explain satisfactorily why the bank engage (sic) in an
undertaking not inherently connected with [bona fide] rural banking operations nor within the allowed
allied undertakings, contrary to the provisions of Section 3379 of the CB Manual of Regulations and
Section 26 of CB Circular No. 741, otherwise known as the Circular on Rural Banks[.]
The aforestated CB report states that total exposure to this project now amounts to P475,371.57 or
25.76% of its capital and surplus[.] Notwithstanding a finding by the CB of the undertakings illegality,
the defendants nevertheless persisted in pursuing the Mango Plantation Project and never acceded to
the call of [the] CB for it to desist from further implementing the said project. It was only after another
letter from the CB was received when defendant finally shelved the mango plantation project.
The result of the aforestated report, as well as the actuations of the Defendants in not yielding to the
order of the CB, adequately establishes not only a violation of CB Rules (specifically Section 26,
Circular 741 and Section 3379 of the CB Manual of Regulations, but also, that it has caused undue
damage both to the Rural bank as well as its stockholders.
The initial CB report should have sufficiently apprised Defendants of the illegality of the undertaking.
Defendants, therefore have the duty to terminate the Mango Plantation Project. They, however, [chose]
to continue it, apparently to further their [own] interest in the scheme for their own personal benefit and
gain, an act which is clearly contrary to the fiduciary nature of their relationship with the corporation in
which they are officers. Such persistence proves evident bad faith, or a breach of a known duty through
some motive or ill-will, which resulted in the further dissipation and wastage of the Rural Banks assets,
unjustly depriving Plaintiffs of their fair share in the assets of the bank.
All the foregoing satisfactorily affirms the allegations of Plaintiffs to the effect that these contracts
were but part of a device employed by Defendants to siphon [off] the Rural bank for their personal
gain.[20]

Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury. Though incapable of precise pecuniary computation, moral damages may be
recovered if they are the proximate result of the defendants wrongful act or omission.
[21] Article 2220 of the Civil Code further provides that moral damages may be
recovered in case of a breach of contract where the defendant acted in bad faith.[22]
To award moral damages, a court must be satisfied with proof of the following
requisites: (1) an injury whether physical, mental, or psychological clearly sustained by
the claimant; (2) a culpable act or omission factually established; (3) a wrongful act or
omission of the defendant as the proximate cause of the injury sustained by the claimant;
and (4) the award of damages predicated on any of the cases stated in Article 2219.[23]
Accordingly, based upon the findings of the trial court, it is clear that respondents are
entitled to moral damages. The acts attributed to the petitioners as directors of the Rural
Bank manifestly prejudiced the respondents causing detriment to their standing as
directors and stockholders of the Rural Bank.
Exemplary damages cannot be recovered as a matter of right.[24] While these need not
be proved, respondents must show that they are entitled to moral, temperate or
compensatory damages before the court may consider the question of awarding
exemplary damages.[25] We find that respondents are indeed entitled to moral damages;
thus, the award for exemplary damages is in order.
Anent the award for attorneys fees, Article 2208 of the Civil Code states:
In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs, cannot
be recovered, except:
(1)

When exemplary damages are awarded.

Hence, the award of exemplary damages is in itself sufficient justification for the award
of attorneys fees.[26]
WHEREFORE, the foregoing premises considered, the petition is hereby DENIED.

The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No.
54226 are AFFIRMED.

SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice

WE CONCUR:
G.R. No. L-29155 May 13, 1970
UNIVERSAL
FOOD
CORPORATION,
petitioner,
vs.
THE COURT OF APPEALS, MAGDALO V. FRANCISCO, SR., and VICTORIANO N.
FRANCISCO, respondents.
Wigberto E. Taada for petitioner.
Teofilo Mendoza for respondents.

CASTRO, J.:
Petition for certiorari by the Universal Food Corporation against the decision of the Court of Appeals
of February 13, 1968 in CA-G.R. 31430-R (Magdalo V. Francisco, Sr. and Victoriano V. Francisco,
plaintiffs-appellants vs. Universal Food Corporation, defendant-appellee), the dispositive portion of
which reads as follows: "WHEREFORE the appealed decision is hereby reversed; the BILL OF
ASSIGNMENT marked Exhibit A is hereby rescinded, and defendant is hereby ordered to return to
plaintiff Magdalo V. Francisco, Sr., his Mafran sauce trademark and formula subject-matter of Exhibit
A, and to pay him his monthly salary of P300.00 from December 1, 1960, until the return to him of said
trademark and formula, plus attorney's fees in the amount of P500.00, with costs against defendant." 1
On February 14, 1961 Magdalo V. Francisco, Sr. and Victoriano V. Francisco filed with the Court of
First Instance of Manila, against, the Universal Food Corporation, an action for rescission of a contract
entitled "Bill of Assignment." The plaintiffs prayed the court to adjudge the defendant as without any
right to the use of the Mafran trademark and formula, and order the latter to restore to them the said
right of user; to order the defendant to pay Magdalo V. Francisco, Sr. his unpaid salary from December
1, 1960, as well as damages in the sum of P40,000, and to pay the costs of suit. 1
On February 28, the defendant filed its answer containing admissions and denials. Paragraph 3 thereof
"admits the allegations contained in paragraph 3 of plaintiffs' complaint." The answer further alleged
that the defendant had complied with all the terms and conditions of the Bill of Assignment and,
consequently, the plaintiffs are not entitled to rescission thereof; that the plaintiff Magdalo V. Francisco,
Sr. was not dismissed from the service as permanent chief chemist of the corporation as he is still its
chief chemist; and, by way of special defenses, that the aforesaid plaintiff is estopped from questioning
1) the contents and due execution of the Bill of Assignment, 2) the corporate acts of the petitioner,
particularly the resolution adopted by its board of directors at the special meeting held on October 14,

1960, to suspend operations to avoid further losses due to increase in the prices of raw materials, since
the same plaintiff was present when that resolution was adopted and even took part in the consideration
thereof, 3) the actuations of its president and general manager in enforcing and implementing the said
resolution, 4) the fact that the same plaintiff was negligent in the performance of his duties as chief
chemist of the corporation, and 5) the further fact that the said plaintiff was delinquent in the payment
of his subscribed shares of stock with the corporation. The defendant corporation prayed for the
dismissal of the complaint, and asked for P750 as attorney's fees and P5,000 in exemplary or corrective
damages.
On June 25, 1962 the lower court dismissed the plaintiffs' complaint as well as the defendant's claim
for damages and attorney's fees, with costs against the former, who promptly appealed to the Court of
Appeals. On February 13, 1969 the appellate court rendered the judgment now the subject of the
present recourse.
The Court of Appeals arrived at the following "uncontroverted" findings of fact:
That as far back as 1938, plaintiff Magdalo V. Francisco, Sr. discovered or invented a
formula for the manufacture of a food seasoning (sauce) derived from banana fruits
popularly known as MAFRAN sauce; that the manufacture of this product was used in
commercial scale in 1942, and in the same year plaintiff registered his trademark in his
name as owner and inventor with the Bureau of Patents; that due to lack of sufficient
capital to finance the expansion of the business, in 1960, said plaintiff secured the
financial assistance of Tirso T. Reyes who, after a series of negotiations, formed with
others defendant Universal Food Corporation eventually leading to the execution on
May 11, 1960 of the aforequoted "Bill of Assignment" (Exhibit A or 1).
Conformably with the terms and conditions of Exh. A, plaintiff Magdalo V. Francisco,
Sr. was appointed Chief Chemist with a salary of P300.00 a month, and plaintiff
Victoriano V. Francisco was appointed auditor and superintendent with a salary of
P250.00 a month. Since the start of the operation of defendant corporation, plaintiff
Magdalo V. Francisco, Sr., when preparing the secret materials inside the laboratory,
never allowed anyone, not even his own son, or the President and General Manager
Tirso T. Reyes, of defendant, to enter the laboratory in order to keep the formula secret
to himself. However, said plaintiff expressed a willingness to give the formula to
defendant provided that the same should be placed or kept inside a safe to be opened
only when he is already incapacitated to perform his duties as Chief Chemist, but
defendant never acquired a safe for that purpose. On July 26, 1960, President and
General Manager Tirso T. Reyes wrote plaintiff requesting him to permit one or two
members of his family to observe the preparation of the 'Mafran Sauce' (Exhibit C), but
said request was denied by plaintiff. In spite of such denial, Tirso T. Reyes did not
compel or force plaintiff to accede to said request. Thereafter, however, due to the
alleged scarcity and high prices of raw materials, on November 28, 1960, SecretaryTreasurer Ciriaco L. de Guzman of defendant issued a Memorandum (Exhibit B), duly

approved by the President and General Manager Tirso T. Reyes that only Supervisor
Ricardo Francisco should be retained in the factory and that the salary of plaintiff
Magdalo V. Francisco, Sr., should be stopped for the time being until the corporation
should resume its operation. Some five (5) days later, that is, on December 3, 1960,
President and General Manager Tirso T. Reyes, issued a memorandom to Victoriano
Francisco ordering him to report to the factory and produce "Mafran Sauce" at the rate
of not less than 100 cases a day so as to cope with the orders of the corporation's various
distributors and dealers, and with instructions to take only the necessary daily employees
without employing permanent employees (Exhibit B). Again, on December 6, 1961,
another memorandum was issued by the same President and General Manager
instructing the Assistant Chief Chemist Ricardo Francisco, to recall all daily employees
who are connected in the production of Mafran Sauce and also some additional daily
employees for the production of Porky Pops (Exhibit B-1). On December 29, 1960,
another memorandum was issued by the President and General Manager instructing
Ricardo Francisco, as Chief Chemist, and Porfirio Zarraga, as Acting Superintendent, to
produce Mafran Sauce and Porky Pops in full swing starting January 2, 1961 with
further instructions to hire daily laborers in order to cope with the full blast protection
(Exhibit S-2). Plaintiff Magdalo V. Francisco, Sr. received his salary as Chief Chemist in
the amount of P300.00 a month only until his services were terminated on November 30,
1960. On January 9 and 16, 1961, defendant, acting thru its President and General
Manager, authorized Porfirio Zarraga and Paula de Bacula to look for a buyer of the
corporation including its trademarks, formula and assets at a price of not less than
P300,000.00 (Exhibits D and D-1). Due to these successive memoranda, without
plaintiff Magdalo V. Francisco, Sr. being recalled back to work, the latter filed the
present action on February 14, 1961. About a month afterwards, in a letter dated March
20, 1961, defendant, thru its President and General Manager, requested said plaintiff to
report for duty (Exhibit 3), but the latter declined the request because the present action
was already filed in court (Exhibit J).
1. The petitioner's first contention is that the respondents are not entitled to rescission. It is argued that
under article 1191 of the new Civil Code, the right to rescind a reciprocal obligation is not absolute and
can be demanded only if one is ready, willing and able to comply with his own obligation and the other
is not; that under article 1169 of the same Code, in reciprocal obligations, neither party incurs in delay
if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him; that in this case the trial court found that the respondents not only have failed to show that the
petitioner has been guilty of default in performing its contractual obligations, "but the record
sufficiently reveals the fact that it was the plaintiff Magdalo V. Francisco who had been remiss in the
compliance of his contractual obligation to cede and transfer to the defendant the formula for Mafran
sauce;" that even the respondent Court of Appeals found that as "observed by the lower court, 'the
record is replete with the various attempt made by the defendant (herein petitioner) to secure the said
formula from Magdalo V. Francisco to no avail; and that upon the foregoing findings, the respondent

Court of Appeals unjustly concluded that the private respondents are entitled to rescind the Bill of
Assignment.
The threshold question is whether by virtue of the terms of the Bill of Assignment the respondent
Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the formula for Mafran
sauce. 2
The Bill of Assignment sets forth the following terms and conditions:
THAT the Party of the First Part [Magdalo V. Francisco, Sr.] is the sole and exclusive
owner of the MAFRAN trade-mark and the formula for MAFRAN SAUCE;
THAT for and in consideration of the royalty of TWO (2%) PER CENTUM of the net
annual profit which the PARTY OF THE Second Part [Universal Food Corporation] may
realize by and/or out of its production of MAFRAN SAUCE and other food products
and from other business which the Party of the Second Part may engage in as defined in
its Articles of Incorporation, and which its Board of Directors shall determine and
declare, said Party of the First Part hereby assign, transfer, and convey all its property
rights and interest over said Mafran trademark and formula for MAFRAN SAUCE unto
the Party of the Second Part;
THAT the payment for the royalty of TWO (2%) PER CENTUM of the annual net profit
which the Party of the Second Part obligates itself to pay unto the Party of the First Part
as founder and as owner of the MAFRAN trademark and formula for MAFRAN
SAUCE, shall be paid at every end of the Fiscal Year after the proper accounting and
inventories has been undertaken by the Party of the Second Part and after a competent
auditor designated by the Board of Directors shall have duly examined and audited its
books of accounts and shall have certified as to the correctness of its Financial
Statement;
THAT it is hereby understood that the Party of the First Part, to improve the quality of
the products of the Party of the First Part and to increase its production, shall endeavor
or undertake such research, study, experiments and testing, to invent or cause to invent
additional formula or formulas, the property rights and interest thereon shall likewise be
assigned, transferred, and conveyed unto the Party of the Second Part in consideration of
the foregoing premises, covenants and stipulations:
THAT in the operation and management of the Party of the First Part, the Party of the
First Part shall be entitled to the following Participation:
(a) THAT Dr. MAGDALO V. FRANCISCO shall be appointed Second Vice-President
and Chief Chemist of the Party of the Second Part, which appointments are permanent in
character and Mr. VICTORIANO V. FRANCISCO shall be appointed Auditor thereof
and in the event that the Treasurer or any officer who may have the custody of the funds,
assets and other properties of the Party of the Second Part comes from the Party of the

First Part, then the Auditor shall not be appointed from the latter; furthermore should the
Auditor be appointed from the Party representing the majority shares of the Party of the
Second Part, then the Treasurer shall be appointed from the Party of the First Part;
(b) THAT in case of death or other disabilities they should become incapacitated to
discharge the duties of their respective position, then, their shares or assigns and who
may have necessary qualifications shall be preferred to succeed them;
(c) That the Party of the First Part shall always be entitled to at least two (2) membership
in the Board of Directors of the Party of the Second Part;
(d) THAT in the manufacture of MAFRAN SAUCE and other food products by the
Party of the Second Part, the Chief Chemist shall have and shall exercise absolute
control and supervision over the laboratory assistants and personnel and in the purchase
and safekeeping of the Chemicals and other mixtures used in the preparation of said
products;
THAT this assignment, transfer and conveyance is absolute and irrevocable in no case
shall the PARTY OF THE First Part ask, demand or sue for the surrender of its rights
and interest over said MAFRAN trademark and mafran formula, except when a
dissolution of the Party of the Second Part, voluntary or otherwise, eventually arises, in
which case then the property rights and interests over said trademark and formula shall
automatically revert the Party of the First Part.
Certain provisions of the Bill of Assignment would seem to support the petitioner's position that the
respondent patentee, Magdalo V. Francisco, Sr. ceded and transferred to the petitioner corporation the
formula for Mafran sauce. Thus, the last part of the second paragraph recites that the respondent
patentee "assign, transfer and convey all its property rights and interest over said Mafran trademark
and formula for MAFRAN SAUCE unto the Party of the Second Part," and the last paragraph states
that such "assignment, transfer and conveyance is absolute and irrevocable (and) in no case shall the
PARTY OF THE First Part ask, demand or sue for the surrender of its rights and interest over said
MAFRAN trademark and mafran formula."
However, a perceptive analysis of the entire instrument and the language employed therein 3 would lead
one to the conclusion that what was actually ceded and transferred was only the use of the Mafran sauce
formula. This was the precise intention of the parties, 4 as we shall presently show.

Firstly, one of the principal considerations of the Bill of Assignment is the payment of "royalty of
TWO (2%) PER CENTUM of the net annual profit" which the petitioner corporation may realize by
and/or out of its production of Mafran sauce and other food products, etc. The word "royalty," when
employed in connection with a license under a patent, means the compensation paid for the use of a
patented invention.
'Royalty,' when used in connection with a license under a patent, means the
compensation paid by the licensee to the licensor for the use of the licensor's patented

invention." (Hazeltine Corporation vs. Zenith Radio Corporation, 100 F. 2d 10, 16.) 5
Secondly, in order to preserve the secrecy of the Mafran formula and to prevent its unauthorized
proliferation, it is provided in paragraph 5-(a) of the Bill that the respondent patentee was to be
appointed "chief chemist ... permanent in character," and that in case of his "death or other disabilities,"
then his "heirs or assigns who may have necessary qualifications shall be preferred to succeed" him as
such chief chemist. It is further provided in paragraph 5-(d) that the same respondent shall have and
shall exercise absolute control and supervision over the laboratory assistants and personnel and over the
purchase and safekeeping of the chemicals and other mixtures used in the preparation of the said
product. All these provisions of the Bill of Assignment clearly show that the intention of the respondent
patentee at the time of its execution was to part, not with the formula for Mafran sauce, but only its use,
to preserve the monopoly and to effectively prohibit anyone from availing of the invention. 6
Thirdly, pursuant to the last paragraph of the Bill, should dissolution of the Petitioner corporation
eventually take place, "the property rights and interests over said trademark and formula shall
automatically revert to the respondent patentee. This must be so, because there could be no reversion of
the trademark and formula in this case, if, as contended by the petitioner, the respondent patentee
assigned, ceded and transferred the trademark and formula and not merely the right to use it for
then such assignment passes the property in such patent right to the petitioner corporation to which it is
ceded, which, on the corporation becoming insolvent, will become part of the property in the hands of
the receiver thereof. 7
Fourthly, it is alleged in paragraph 3 of the respondents' complaint that what was ceded and transferred
by virtue of the Bill of Assignment is the "use of the formula" (and not the formula itself). This
incontrovertible fact is admitted without equivocation in paragraph 3 of the petitioner's answer. Hence,
it does "not require proof and cannot be contradicted." 8 The last part of paragraph 3 of the complaint and
paragraph 3 of the answer are reproduced below for ready reference:

3. ... and due to these privileges, the plaintiff in return assigned to said corporation his
interest and rights over the said trademark and formula so that the defendant corporation
could use the formula in the preparation and manufacture of the mafran sauce, and the
trade name for the marketing of said project, as appearing in said contract ....
3. Defendant admits the allegations contained in paragraph 3 of plaintiff's complaint.
Fifthly, the facts of the case compellingly demonstrate continued possession of the Mafran sauce
formula by the respondent patentee.
Finally, our conclusion is fortified by the admonition of the Civil Code that a conveyance should be
interpreted to effect "the least transmission of right," 9 and is there a better example of least transmission of
rights than allowing or permitting only the use, without transfer of ownership, of the formula for Mafran sauce.

The foregoing reasons support the conclusion of the Court of Appeals 10 that what was actually ceded
and transferred by the respondent patentee Magdalo V. Francisco, Sr. in favor of the petitioner corporation was
only the use of the formula. Properly speaking, the Bill of Assignment vested in the petitioner corporation no title

to the formula. Without basis, therefore, is the observation of the lower court that the respondent patentee "had
been remiss in the compliance of his contractual obligation to cede and transfer to the defendant the formula for
Mafran sauce."

2. The next fundamental question for resolution is whether the respondent Magdalo V. Francisco, Sr.
was dismissed from his position as chief chemist of the corporation without justifiable cause, and in
violation of paragraph 5-(a) of the Bill of Assignment which in part provides that his appointment is
"permanent in character."
The petitioner submits that there is nothing in the successive memoranda issued by the corporate
officers of the petitioner, marked exhibits B, B-1 and B-2, from which can be implied that the
respondent patentee was being dismissed from his position as chief chemist of the corporation. The
fact, continues the petitioner, is that at a special meeting of the board of directors of the corporation
held on October 14, 1960, when the board decided to suspend operations of the factory for two to four
months and to retain only a skeletal force to avoid further losses, the two private respondents were
present, and the respondent patentee was even designated as the acting superintendent, and assigned the
mission of explaining to the personnel of the factory why the corporation was stopping operations
temporarily and laying off personnel. The petitioner further submits that exhibit B indicates that the
salary of the respondent patentee would not be paid only during the time that the petitioner corporation
was idle, and that he could draw his salary as soon as the corporation resumed operations. The clear
import of this exhibit was allegedly entirely disregarded by the respondent Court of Appeals, which
concluded that since the petitioner resumed partial production of Mafran sauce without notifying the
said respondent formally, the latter had been dismissed as chief chemist, without considering that the
petitioner had to resume partial operations only to fill its pending orders, and that the respondents were
duly notified of that decision, that is, that exhibit B-1 was addressed to Ricardo Francisco, and this was
made known to the respondent Victoriano V. Francisco. Besides, the records will show that the
respondent patentee had knowledge of the resumption of production by the corporation, but in spite of
such knowledge he did not report for work.
The petitioner further submits that if the respondent patentee really had unqualified interest in
propagating the product he claimed he so dearly loved, certainly he would not have waited for a formal
notification but would have immediately reported for work, considering that he was then and still is a
member of the corporation's board of directors, and insofar as the petitioner is concerned, he is still its
chief chemist; and because Ricardo Francisco is a son of the respondent patentee to whom had been
entrusted the performance of the duties of chief chemist, while the respondent Victoriano V. Francisco
is his brother, the respondent patentee could not feign ignorance of the resumption of operations.
The petitioner finally submits that although exhibit B-2 is addressed to Ricardo Francisco, and is dated
December 29, 1960, the records will show that the petitioner was set to resume full capacity production
only sometime in March or April, 1961, and the respondent patentee cannot deny that in the very same
month when the petitioner was set to resume full production, he received a copy of the resolution of its
board of directors, directing him to report immediately for duty; that exhibit H, of a later vintage as it is
dated February 1, 1961, clearly shows that Ricardo Francisco was merely the acting chemist, and this

was the situation on February 1, 1961, thirteen days before the filing of the present action for
rescission. The designation of Ricardo Francisco as the chief chemist carried no weight because the
president and general manager of the corporation had no power to make the designation without the
consent of the corporation's board of directors. The fact of the matter is that although the respondent
Magdalo V. Francisco, Sr. was not mentioned in exhibit H as chief chemist, this same exhibit clearly
indicates that Ricardo Francisco was merely the acting chemist as he was the one assisting his father.
In our view, the foregoing submissions cannot outweigh the uncontroverted facts. On November 28,
1960 the secretary-treasurer of the corporation issued a memorandum (exh. B), duly approved by its
president and general manager, directing that only Ricardo Francisco be retained in the factory and that
the salary of respondent patentee, as chief chemist, be stopped for the time being until the corporation
resumed operations. This measure was taken allegedly because of the scarcity and high prices of raw
materials. Five days later, however, or on December 3, the president and general manager issued a
memorandum (exh. B-1) ordering the respondent Victoria V. Francisco to report to the factory and to
produce Mafran sauce at the rate of no less than 100 cases a day to cope with the orders of the various
distributors and dealers of the corporation, and instructing him to take only the necessary daily
employees without employing permanent ones. Then on December 6, the same president and general
manager issued yet another memorandum (exh. B-2), instructing Ricardo Francisco, as assistant chief
chemist, to recall all daily employees connected with the production of Mafran sauce and to hire
additional daily employees for the production of Porky Pops. Twenty-three days afterwards, or on
December 29, the same president and general manager issued still another memorandum (exh. S-2),
directing "Ricardo Francisco, as Chief Chemist" and Porfirio Zarraga, as acting superintendent, to
produce Mafran sauce and, Porky Pops in full swing, starting January 2, 1961, with the further
instruction to hire daily laborers in order to cope with the full blast production. And finally, at the
hearing held on October 24, 1961, the same president and general manager admitted that "I consider
that the two months we paid him (referring to respondent Magdalo V. Francisco, Sr.) is the separation
pay."
The facts narrated in the preceding paragraph were the prevailing milieu on February 14, 1961 when
the complaint for rescission of the Bill of Assignment was filed. They clearly prove that the petitioner,
acting through its corporate officers, 11 schemed and maneuvered to ease out, separate and dismiss the
said respondent from the service as permanent chief chemist, in flagrant violation of paragraph 5-(a)
and (b) of the Bill of Assignment. The fact that a month after the institution of the action for rescission,
the petitioner corporation, thru its president and general manager, requested the respondent patentee to
report for duty (exh. 3), is of no consequence. As the Court of Appeals correctly observed, such request
was a "recall to placate said plaintiff."
3. We now come to the question of rescission of the Bill of Assignment. In this connection, we quote
for ready reference the following articles of the new Civil Code governing rescission of contracts:
ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the

obligation, with the payment of damages in either case. He may also seek rescission
even after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 of the Mortgage Law.
ART. 1383. The action for rescission is subsidiary; it cannot be instituted except when
the party suffering damage has no other legal means to obtain reparation for the same.
ART. 1384. Rescission shall be only to the extent necessary to cover the damages
caused.
At the moment, we shall concern ourselves with the first two paragraphs of article 1191. The power to
rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him. The injured party may choose between fulfillment and rescission of the
obligation, with payment of damages in either case.
In this case before us, there is no controversy that the provisions of the Bill of Assignment are
reciprocal in nature. The petitioner corporation violated the Bill of Assignment, specifically paragraph
5-(a) and (b), by terminating the services of the respondent patentee Magdalo V. Francisco, Sr., without
lawful and justifiable cause.
Upon the factual milieu, is rescission of the Bill of Assignment proper?
The general rule is that rescission of a contract will not be permitted for a slight or casual breach, but
only for such substantial and fundamental breach as would defeat the very object of the parties in
making the agreement. 12 The question of whether a breach of a contract is substantial depends upon the
attendant circumstances. 13 The petitioner contends that rescission of the Bill of Assignment should be denied,
because under article 1383, rescission is a subsidiary remedy which cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. However, in this case the
dismissal of the respondent patentee Magdalo V. Francisco, Sr. as the permanent chief chemist of the
corporation is a fundamental and substantial breach of the Bill of Assignment. He was dismissed without any
fault or negligence on his part. Thus, apart from the legal principle that the option to demand performance or
ask for rescission of a contract belongs to the injured party, 14 the fact remains that the respondentsappellees had no alternative but to file the present action for rescission and damages. It is to be emphasized that
the respondent patentee would not have agreed to the other terms of the Bill of Assignment were it not for the
basic commitment of the petitioner corporation to appoint him as its Second Vice-President and Chief Chemist
on a permanent basis; that in the manufacture of Mafran sauce and other food products he would have "absolute
control and supervision over the laboratory assistants and personnel and in the purchase and safeguarding of
said products;" and that only by all these measures could the respondent patentee preserve effectively the
secrecy of the formula, prevent its proliferation, enjoy its monopoly, and, in the process afford and secure for
himself a lifetime job and steady income. The salient provisions of the Bill of Assignment, namely, the transfer to
the corporation of only the use of the formula; the appointment of the respondent patentee as Second VicePresident and chief chemist on a permanent status; the obligation of the said respondent patentee to continue
research on the patent to improve the quality of the products of the corporation; the need of absolute control and

supervision over the laboratory assistants and personnel and in the purchase and safekeeping of the chemicals
and other mixtures used in the preparation of said product all these provisions of the Bill of Assignment are so
interdependent that violation of one would result in virtual nullification of the rest.

4. The petitioner further contends that it was error for the Court of Appeals to hold that the respondent
patentee is entitled to payment of his monthly salary of P300 from December 1, 1960, until the return
to him of the Mafran trademark and formula, arguing that under articles 1191, the right to specific
performance is not conjunctive with the right to rescind a reciprocal contract; that a plaintiff cannot ask
for both remedies; that the appellate court awarded the respondents both remedies as it held that the
respondents are entitled to rescind the Bill of Assignment and also that the respondent patentee is
entitled to his salary aforesaid; that this is a gross error of law, when it is considered that such holding
would make the petitioner liable to pay respondent patentee's salary from December 1, 1960 to
"kingdom come," as the said holding requires the petitioner to make payment until it returns the
formula which, the appellate court itself found, the corporation never had; that, moreover, the fact is
that the said respondent patentee refused to go back to work, notwithstanding the call for him to return
which negates his right to be paid his back salaries for services which he had not rendered; and that
if the said respondent is entitled to be paid any back salary, the same should be computed only from
December 1, 1960 to March 31, 1961, for on March 20, 1961 the petitioner had already formally called
him back to work.
The above contention is without merit. Reading once more the Bill of Assignment in its entirety and the
particular provisions in their proper setting, we hold that the contract placed the use of the formula for
Mafran sauce with the petitioner, subject to defined limitations. One of the considerations for the
transfer of the use thereof was the undertaking on the part of the petitioner corporation to employ the
respondent patentee as the Second Vice-President and Chief Chemist on a permanent status, at a
monthly salary of P300, unless "death or other disabilities supervened. Under these circumstances, the
petitioner corporation could not escape liability to pay the private respondent patentee his agreed
monthly salary, as long as the use, as well as the right to use, the formula for Mafran sauce remained
with the corporation.
5. The petitioner finally contends that the Court of Appeals erred in ordering the corporation to return
to the respondents the trademark and formula for Mafran sauce, when both the decision of the appellate
court and that of the lower court state that the corporation is not aware nor is in possession of the
formula for Mafran sauce, and the respondent patentee admittedly never gave the same to the
corporation. According to the petitioner these findings would render it impossible to carry out the order
to return the formula to the respondent patentee. The petitioner's predicament is understandable. Article
1385 of the new Civil Code provides that rescission creates the obligation to return the things which
were the object of the contract. But that as it may, it is a logical inference from the appellate court's
decision that what was meant to be returned to the respondent patentee is not the formula itself, but
only its use and the right to such use. Thus, the respondents in their complaint for rescission
specifically and particularly pray, among others, that the petitioner corporation be adjudged as "without
any right to use said trademark and formula."

ACCORDINGLY, conformably with the observations we have above made, the judgment of the Court
of Appeals is modified to read as follows: "Wherefore the appealed decision is reversed. The Bill of
Assignment (Exhibit A) is hereby rescinded, and the defendant corporation is ordered to return and
restore to the plaintiff Magdalo V. Francisco, Sr. the right to the use of his Mafran sauce trademark and
formula, subject-matter of the Bill of Assignment, and to this end the defendant corporation and all its
assigns and successors are hereby permanently enjoined, effective immediately, from using in any
manner the said Mafran sauce trademark and formula. The defendant corporation shall also pay to
Magdalo V. Francisco, Sr. his monthly salary of P300 from December 1, 1960, until the date of finality
of this judgment, inclusive, the total amount due to him to earn legal interest from the date of the
finality of this judgment until it shall have been fully paid, plus attorney's fees in the amount of P500,
with costs against the defendant corporation." As thus modified, the said judgment is affirmed, with
costs against the petitioner corporation.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Barredo and Villamor, JJ., concur.
Teehankee J., took no part.

Separate Opinions

REYES, J.B.L., J., concurring:

I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the
argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco,
should be denied because under Article 1383 of the Civil Code of the Philippines rescission can not be
demanded except when the party suffering damage has no other legal means to obtain reparation, is
predicated on a failure to distinguish between a rescission for breach of contract under Article 1191 of
the Civil Code and a rescission by reason of lesion or economic prejudice, under Article 1381, et seq.
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 in 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'etre 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.
It is probable that the petitioner's confusion arose from the defective technique of the new Code that
terms both instances as rescission without distinctions between them; unlike the previous Spanish Civil
Code of 1889, that differentiated "resolution" for breach of stipulations from "rescission" by reason of
lesion or damage. 1 But the terminological vagueness does not justify confusing one case with the other,
considering the patent difference in causes and results of either action.

Separate Opinions
REYES, J.B.L., J., concurring:
I concur with the opinion penned by Mr. Justice Fred Ruiz Castro, but I would like to add that the
argument of petitioner, that the rescission demanded by the respondent-appellee, Magdalo Francisco,
should be denied because under Article 1383 of the Civil Code of the Philippines rescission can not be
demanded except when the party suffering damage has no other legal means to obtain reparation, is
predicated on a failure to distinguish between a rescission for breach of contract under Article 1191 of
the Civil Code and a rescission by reason of lesion or economic prejudice, under Article 1381, et seq.
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 in 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'etre 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.
It is probable that the petitioner's confusion arose from the defective technique of the new Code that
terms both instances as rescission without distinctions between them; unlike the previous Spanish Civil
Code of 1889, that differentiated "resolution" for breach of stipulations from "rescission" by reason of
lesion or damage. 1 But the terminological vagueness does not justify confusing one case with the other,

considering the patent difference in causes and results of either action.

Footnotes
1 The complaint alleges:
"3. That on the 31st day of May, 1960 plaintiffs and defendant corporation entered into
contract, in which it was stipulated among other things, that inasmuch as plaintiff Magdalo V.
Francisco, Sr. is the owner and author of the formula of mafran sauce as above stated, he will be
appointed as Second Vice-President and Chief Chemist of the defendant corporation, which
appointments are permanent in character; and as such Chief shall have and shall exercise
absolute control and supervision over the laboratory assistants and personnel, and in the
purchase and safe-keeping of the chemicals and other mixtures used in the preparation of said
product in order to preserve the secrecy of the said formula in the preparation of the mafran
sauce, in the manufacture of which the defendant corporation will be engaged as its principal
business, and other products which from time to time the plaintiff may discover and prepare as
Chemist; and due to these privileges, the plaintiff in return assigned to said corporation his
interests and rights over the said trademark and formula, so that the defendant corporation could
use the formula in the preparation and manufacture of the mafran sauce and the trade name for
the marketing of said product, as appearing in said Contract;
"4. That the defendant corporation, thru the machination of its President and Manager, Mr.
Tirso T. Reyes, and in violation of the terms and conditions of the said Contract, as above
stated, and for the purpose of defrauding the herein plaintiff, said defendant without any
justifiable cause dismissed all the assistants and laborers of the plaintiff in said laboratory,
wherein mafran sauce is prepared, with the evident intention to discover the secret of the said
formula; and when they were not able to do so, due to the precaution made by the plaintiff in the
preparation of said mafran sauce, the aforementioned defendant without justifiable cause and in
violation of the said Contract with regard to the permanent character of his appointment as
Chief Chemist, dismissed him as such (Chief Chemist) from the service of the defendant
corporation, and appointed other employees in his place in the preparation of the said mafran
sauce, and proceeded with the manufacture and marketing of the said product in the absence of
the herein plaintiff;"
"5. That in furtherance of the intention of the defendant to deprive the herein plaintiffs of
their right on the royalty equivalent to 2% of the net profit of the corporation that may be
realized in the manufacture of mafran sauce and other like products and to complete its
fraudulent scheme to get at all cost the ownership of the said trade mark and formula which is
the main objective of the said corporation, said defendant thru machination of its President and
Manager, Mr. Tirso T. Reyes and in connivance with his associates representing the majority of
the stockholders of the said corporation, the latter is now selling in favor of a third party, the
assets of the said corporation together with the ownership of the aforementioned trade mark and
formula, in violation of the conditions of the said Contract.

"6. That due to this malicious attitude of the defendant, plaintiff Magdalo V. Francisco, Sr.
was deprived of his salary from December 1, 1960 up to the present time at the rate of THREE
HUNDRED (P300.00) PESOS a month, in violation of the conditions of the said Contract of
Assignment;
"7. That the defendant in order to add insult to injury, prepared or caused the preparation and
manufacture of mafran sauce of inferior quality and sold it in the market; and as a result of these
unlawful acts of the defendant, the good name and reputation of the mafran sauce went down
causing thereby irreparable damages to the plaintiff as owner and author of the said formula and
trade name, which could be reasonably estimated in an amount not less than FORTY
THOUSAND (P40,000.00) PESOS as of today, plus an additional sum equivalent to TEN
THOUSAND (P10,000.00) PESOS a month from this date until the return of the said trade
mark and formula to the plaintiffs; .
"8. That due to this malicious attitude of the defendant and unlawful machination of its
president and manager, Mr. Tirso T. Reyes, the plaintiffs were constrained to engage the
services of the undersigned counsel in the agreed amount of FIVE THOUSAND (P5,000.00)
PESOS, Philippine Currency."
2 A patent is a property (Blum vs. C.I.R., 183 F. 2d 881; Marshall vs. Colgate-Palmolive-Peet
Co., 175 F. 2d 215; Lamar vs. Granger, 99 F. Supp. 17)' It has the attributes of personality
(Hartley Pen Co. vs. Lindy Pen Co., 16 F.R.D. 141, cited in 25-6th- D-1328). A patent right or
any interest therein may be sold or assigned. The patentee may assign his patent right in toto or
he may grant limited rights of manufacture and sale to others (40 Am. Jur., sec. 133, p. 621,
notes 1 & 2). The patentee has the right to sell it or to keep it; to manufacture the article himself
or to authorize others to sell it (40 Am. Jur., sec. 4, p. 534, notes 9 & 10). The right of a patentee
has the characteristics and incidents of other sorts of property, and that it is as much entitled to
the protection of the courts as in any other character of property (E Bennet & Sons vs. National
Harrow Co., 186 U.S. 70, 46 L ed. 1058, 22 S. Ct. 747).
3 The interpretation of public instruments involves a question of law, since the contract is in the
nature of law between the parties. The whole instrument should be read in toto (Pio Sian
Melliza vs. City of IIoilo et al., L-24732, April 30, 1968); see also Wilson v. Olsen 30 P. (2d),
710, 711.
4 "Under this section [referring to par. 1, sec. 47, Title 35, USCA, which is substantially similar
to sec. 50 of R.A. 165], a patent may be assigned only by a written instrument and although no
particular form of words is essential, such instrument must be substantially a 'transfer', actual or
constructive, with the clear intent of the assignor, at the time, to part with his legal interest, in
whole or in part and with full knowledge of the rights so transferred." (Owen vs. Paramount
Productions, D. C. Cal. 1941, 41 F. Supp. 551). See also note 3, and Bacordo vs. Alcantara, et
al., L-20080, July 30, 1965.) 5 See also Commissioner of Internal Revenue vs. Clarion Oil Co.,
148 F. 2d 671, 673; 77 C.J.S. 542-543.

6 "Two constituent property elements, of distinct source, nature, and divisible content in herein
every patented invention. One is the property in the invention itself the right to make, use
and sell the patented object personally or through others the second is property in the
monopoly - the right effectively to prohibit others from practicing the invention or profiting
therefrom without owner's consent. ... Rights in the invention itself may be transferred either
separately or together, upon one person or many, and each may independently of the others use
the rights received. The monopoly is indivisible, except as to locality, although several
assignees may jointly hold the undivided interest in the patent." (Zenith Radio Corp. vs. Radio
Corp. of America, 121 F. Supp. 803, 805 (May 20, 1954).
7 Douglas vs. Campbell, 24 Ohio Cir. Ct. R. 241, cited in P. 43, USCA, Title 35, on Patents.
8 Admissions made by the parties in the pleadings, or in the course of the trial or other
proceedings do not require proof and can not be contradicted unless previously shown to have
been made through palpable mistake (sec. 2, Rule 129, new Rules of Court).
9 Cf. Angela Estate, Inc., et al. vs. CFI of Negros Occidental, et al., L-27084, July 31, 1968,
citing Art. 1378, 1st sent., N.C.C., and Olino vs. Medina, 13 Phil. 379.
10 The findings and conclusions of fact of the Court of Appeals will not be disturbed by the
Supreme Court so long as there is evidence to support the same (Atanacio vs. People, L-7537,
Oct. 24, 1955); see also Arroyo, et al. vs. El Peaterio del Smo Rosario de Afolo, et al., L-22005,
May 3, 1968; Alquiza, et al. vs. Alquiza, et al., L-23342, Feb. 10, 1968; MD Transit & Taxi Co.,
Inc. vs. Court of Appeals, et al., L-23882, Feb. 17, 1968; City of Manila vs. Teotico, et al.,
L-23052, Jan. 29, 1968.
11 "Not of de minimis importance in a proper approach to the problem at hand is the nature of a
general manager's position in the corporate structure. A rule that has gained acceptance through
the years is that a corporate officer 'intrusted with the general management and control of its
business, has implied authority to make any contract or do any other act which is necessary or
appropriate to the conduct of the ordinary business of the corporation.' As such officer, 'he may,
without any special authority from the Board of Directors, perform all acts of an ordinary
nature, which by usage or necessity are incident to his office, and may bind the corporation by
contracts in matters arising in the usual course of business'." (The Board of Liquidators, etc. vs.
Heirs of Maximo M. Kalaw, et al., L-18805, August 14, 1967.)
12 Song Fo & Go. vs. Hawaiian-Philippine Co., 47 Phil. 821, 827.
13 Corpus vs. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968.
14 Jacinto vs. Carpenter, 46 Phil. 893.
Reyes, J.B.L., concurring:
1 See Articles 1124 and 1291, Civil Code of 1889.

The Lawphil Project - Arellano Law Foundation

EN BANC
G.R. No. L-47774

March 14, 1941

MAGDALENA ESTATE, INC., petitioner-appellant,

vs.
LOUIS J. MYRICK, respondent-appellee.
Felipe Ysmael and Eusebio C. Encarnacion for petitioner.
Andres C. Aguilar for respondent.
LAUREL, J.:
On January 2, 1928, the Magdalena Estate, Inc., sold to Louis J. Myrick lots Nos. 28 and 29 of Block 1,
Parcel 9 of the San Juan Subdivision, San Juan Rizal, their contract of sale No. SJ-639 (Exhibits B and
1) providing that the price of P7,953 shall be payable in 120 equal monthly installments of P96.39 each
on the second day of every month beginning the date of execution of the agreement. Simultaneously,
the vendee executed and delivered to the vendor a promissory note (Exhibits C and 2) for the whole
purchase price, wherein it was stipulated that "si cualquier pago o pagos de este pagare quedasen en
mora por mas de dos meses, entonces todos el saldo no pagado del mismo con cualesquiera intereses
que hubiese devengado, vercera y sera exigible inmediatamente y devengara intereses al mismo tipo de
9 por ciento al ao hasta su completo pago, y en tal caso me comprometo, ademas, a pagar al tenedor
de este pagare el 10 por ciento de la cantidad en concepto de honorarios de abogado."
In pursuance of said agreement, the vendee made several monthly payments amounting to P2,596.08,
the last being on October 4, 1930, although the first installment due and unpaid was that of May 2,
1930. By reason of this default, the vendor, through its president, K.H. Hemady, on December 14,
1932, notified the vendee that, in view of his inability to comply with the terms of their contract, said
agreement had been cancelled as of that date, thereby relieving him of any further obligation
thereunder, and that all amounts paid by him had been forfeited in favor of the vendor, who assumes
the absolute right over the lots in question. To this communication, the vendee did not reply, and it
appears likewise that the vendor thereafter did not require him to make any further disbursements on
account of the purchase price.
On July 22, 1936, Louis J. Myrick, respondent herein, commenced the present action in the Court of
First Instance of Albay, praying for an entry of judgment against the Magdalena Estate, Inc. for the sum
of P2,596.08 with legal interest thereon from the filing of the complaint until its payment, and for costs
of the suit. Said defendant, the herein petitioner, on September 7, 1936, filed his answer consisting in a
general denial and a cross-complaint and counterclaim, alleging that contract SJ-639 was still in full
force and effect and that, therefore, the plaintiff should be condemned to pay the balance plus interest
and attorneys' fees. After due trial, the Court of First Instance of Albay, on January 31, 1939, rendered
its decision ordering the defendant to pay the plaintiff the sum of P2,596.08 with legal interest from

December 14, 1932 until paid and costs, and dismissing defendant's counterclaim. From this judgment,
the Magdalena Estate, Inc. appealed to the Court of Appeals, where the cause was docketed as CA-G.R.
No. 5037, and which, on August 23, 1940, confirmed the decision of the lower court, with the only
modification that the payment of interest was to be computed from the date of the filing of the
complaint instead of from the date of the cancellation of the contract. A motion for reconsideration was
presented, which was denied on September 6, 1940. Hence, the present petition for a writ of certiorari.
Petitioner-appellant assigns several errors which we proceed to discuss in the course of this opinion.
Petitioner holds that contract SJ-639 has not been rendered inefficacious by its letter to the respondent,
dated December 14, 1932, and submits the following propositions: (1) That the intention of the author
of a written instrument shall always prevail over the literal sense of its wording; (2) that a bilateral
contract may be resolved or cancelled only by the prior mutual agreement of the parties, which is
approved by the judgment of the proper court; and (3) that the letter of December 14, 1932 was not
assented to by the respondent, and therefore, cannot be deemed to have produced a cancellation, even if
it ever was intended. Petitioner contends that the letter in dispute is a mere notification and, to this end,
introduced in evidence the disposition of Mr. K.H. Hemady, president of the Magdalena Estate, Inc.
wherein he stated that the word "cancelled" in the letter of December 14, 1932, "es un error de mi
interpretacion sin ninguna intencion de cancelar," and the testimony of Sebastian San Andres, one of its
employees, that the lots were never offered for sale after the mailing of the letter aforementioned. Upon
the other hand, the Court of Appeals, in its decision of August 23, 1940, makes the finding that
"notwithstanding the deposition of K.H. Hemady, president of the defendant corporation, to the effect
that the contract was not cancelled nor was his intention to do so when he wrote the letter of December
14, 1932, marked Exhibit 6 and D (pp. 6-7, deposition Exhibit 1-a), faith and credit cannot be given to
such testimony in view of the clear terms of the letter which evince his unequivocal intent to resolve
the contract. His testimony is an afterthought. The intent to resolve the contract is expressed
unmistakably not only in the letter of December 14, 1932, already referred to (Exhibit 6 and D), but is
reiterated in the letters which the president of the defendant corporation states that plaintiff lost his
rights for the land for being behind more than two years, and of April 10, 1035 (Exhibit G), where
defendant's president makes the following statements: "Confirming the verbal arrangement had
between you and our Mr. K.H. Hemady regarding the account of Mr. Louis J. Myrick under contract
No. SJ-639, already cancelled."
This conclusion of fact of the Court of Appeals is final and should not be disturbed. (Guico vs. Mayuga
and Heirs of Mayuga, 63 Phil., 328; Mamuyac vs. Abena, XXXVIII Off. Gaz. 84.) Where the terms of
a writing are clear, positive and unambiguous, the intention of the parties should be gleaned from the
language therein employed, which is conclusive in the absence of mistake (13 C.J. 524; City of Manila
vs. Rizal Park Co., 52 Phil. 515). The proposition that the intention of the writer, once ascertained, shall
prevail over the literal sense of the words employed is not absolute and should be deemed secondary to
and limited by the primary rule that, when the text of the instrument is explicit and leaves no doubt as
to its intention, the court may not read into it any other which would contradict its plain import.
Besides, we have met with some circumstances of record which demonstrate the unequivocal

determination of the petitioner to cancel their contract. They are: (1) the act of the petitioner in
immediately taking possession of the lots in question and offering to resell them to Judge M.V. del
Rosario, as demonstrated by his letter marked Exhibit G, shortly after December 14, 1932; (2) his
failure to demand from the respondent the balance of the account after the mailing of the disputed
letter; and (3) the letters of January 10, 1933 (Exhibit F-2) and April 10, 1935 (Exhibit G) reiterate, in
clear terms, the intention to cancel first announced by petitioner since December 14, 1932.
It is next argued that contract SJ-639, being a bilateral agreement, in the absence of a stipulation
permitting its cancellation, may not be resolved by the mere act of the petitioner. The fact that the
contracting parties herein did not provide for resolution is now of no moment, for the reason that the
obligations arising from the contract of sale being reciprocal, such obligations are governed by article
1124 of the Civil Code which declares that the power to resolve, in the event that one of the obligors
should not perform his part, is implied. (Mateos vs. Lopez, 6 Phil., 206; Cortez vs. Bibao & Beramo,
41 Phil. 298; Cui. vs. Sun Chan, 41 Phil., 523; Po Pauco vs. Siguenza, 49 Phil., 404.) Upon the other
hand, where, as in this case, the petitioner cancelled the contract, advised the respondent that he has
been relieved of his obligations thereunder, and led said respondent to believe it so and act upon such
belief, the petitioner may not be allowed, in the language of section 333 of the Code of Civil Procedure
(now section 68 (a) of Rule 123 of the New Rules of Court), in any litigation the course of litigation or
in dealings in nais, be permitted to repudiate his representations, or occupy inconsistent positions, or, in
the letter of the Scotch law, to "approbate and reprobate." (Bigelow on Estoppel, page 673; Toppan v.
Cleveland, Co. & C.R. Co., Fed. Cas. 14,099.)
The contract of sale, contract SJ-639, contains no provision authorizing the vendor, in the event of
failure of the vendee to continue in the payment of the stipulated monthly installments, to retain the
amounts paid to him on account of the purchase price. The claim, therefore, of the petitioner that it has
the right to forfeit said sums in its favor is untenable. Under article 1124 of the Civil Code, however, he
may choose between demanding the fulfillment of the contract or its resolution. These remedies are
alternative and not cumulative, and the petitioner in this case, having to cancel the contract, cannot
avail himself of the other remedy of exacting performance. (Osorio & Tirona vs. Bennet & Provincial
Board of Cavite, 41 Phil., 301; Yap Unki vs. Chua Jamco, 14 Phil., 602.) As a consequence of the
resolution, the parties should be restored, as far as practicable, to their original situation (Po Pauco vs.
Siguenza, supra) which can be approximated only by ordering, as we do now, the return of the things
which were the object of the contract, with their fruits and of the price, with its interest (article 1295,
Civil Code), computed from the date of the institution of the action. (Verceluz vs. Edao, 46 Phil. 801.)
The writ prayed for is hereby denied, with costs against the petitioner. So ordered.
Imperial, Diaz, Moran, and Horrilleno, JJ., concur.

G.R. No. L-28602 September 29, 1970

UNIVERSITY OF THE PHILIPPINES, petitioner,
vs.

WALFRIDO DE LOS ANGELES, in his capacity as JUDGE of the COURT OF FIRST

INSTANCE IN QUEZON CITY, et al., respondents.
Office of the Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel
Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.

REYES, J.B.L., J.:

Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case No.
9435, are sought to be annulled in this petition for certiorari and prohibition, filed by herein petitioner
University of the Philippines (or UP) against the above-named respondent judge and the Associated
Lumber Manufacturing Company, Inc. (or ALUMCO). The first order, dated 25 February 1966,
enjoined UP from awarding logging rights over its timber concession (or Land Grant), situated at the
Lubayat areas in the provinces of Laguna and Quezon; the second order, dated 14 January 1967,
adjudged UP in contempt of court, and directed Sta. Clara Lumber Company, Inc. to refrain from
exercising logging rights or conducting logging operations on the concession; and the third order, dated
12 December 1967, denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or
implementation of the three (3) questioned orders was issued by this Court, per its resolution on 9
February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the purpose of
raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under which
the latter was granted exclusive authority, for a period starting from the date of the agreement to 31
December 1965, extendible for a further period of five (5) years by mutual agreement, to cut, collect
and remove timber from the Land Grant, in consideration of payment to UP of royalties, forest fees,
etc.; that ALUMCO cut and removed timber therefrom but, as of 8 December 1964, it had incurred an
unpaid account of P219,362.94, which, despite repeated demands, it had failed to pay; that after it had
received notice that UP would rescind or terminate the logging agreement, ALUMCO executed an
instrument, entitled "Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December
1964, which was approved by the president of UP, and which stipulated the following:
3. In the event that the payments called for in Nos. 1 and 2 of this paragraph are not
sufficient to liquidate the foregoing indebtedness of the DEBTOR in favor of the
CREDITOR, the balance outstanding after the said payments have been applied shall be
paid by the DEBTOR in full no later than June 30, 1965;

xxx xxx xxx

5. In the event that the DEBTOR fails to comply with any of its promises or
undertakings in this document, the DEBTOR agrees without reservation that the
CREDITOR shall have the right and the power to consider the Logging Agreement dated
December 2, 1960 as rescinded without the necessity of any judicial suit, and the
CREDITOR shall be entitled as a matter of right to Fifty Thousand Pesos (P50,000.00)
by way of and for liquidated damages;
ALUMCO continued its logging operations, but again incurred an unpaid account, for the period from
9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the indebtedness that it
had previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the logging agreement that they had entered in
1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was docketed as Civil
Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the collection or payment of
the herein before stated sums of money and alleging the facts hereinbefore specified, together with
other allegations; it prayed for and obtained an order, dated 30 September 1965, for preliminary
attachment and preliminary injunction restraining ALUMCO from continuing its logging operations in
the Land Grant.
That before the issuance of the aforesaid preliminary injunction UP had taken steps to have another
concessionaire take over the logging operation, by advertising an invitation to bid; that bidding was
conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.; the logging contract
was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and
preliminary injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from conducting
the bidding; on 27 November 1965, it filed a second petition for preliminary injunction; and, on 25
February 1966, respondent judge issued the first of the questioned orders, enjoining UP from awarding
logging rights over the concession to any other party.
That UP received the order of 25 February 1966 after it had concluded its contract with Sta. Clara
Lumber Company, Inc., and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order dated 14
January 1967, declared petitioner UP in contempt of court and, in the same order, directed Sta. Clara
Lumber Company, Inc., to refrain from exercising logging rights or conducting logging operations in
the concession.
The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12 December
1967.

Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is embodied
in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny the foregoing
allegations in the petition. In its answer, respondent corrected itself by stating that the period of the
logging agreement is five (5) years - not seven (7) years, as it had alleged in its second amended answer
to the complaint in Civil Case No. 9435. It reiterated, however, its defenses in the court below, which
maybe boiled down to: blaming its former general manager, Cesar Guy, in not turning over
management of ALUMCO, thereby rendering it unable to pay the sum of P219,382.94; that it failed to
pursue the manner of payments, as stipulated in the "Acknowledgment of Debt and Proposed Manner
of Payments" because the logs that it had cut turned out to be rotten and could not be sold to Sta. Clara
Lumber Company, Inc., under its contract "to buy and sell" with said firm, and which contract was
referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments"; that UP's
unilateral rescission of the logging contract, without a court order, was invalid; that petitioner's
supervisor refused to allow respondent to cut new logs unless the logs previously cut during the
management of Cesar Guy be first sold; that respondent was permitted to cut logs in the middle of June
1965 but petitioner's supervisor stopped all logging operations on 15 July 1965; that it had made
several offers to petitioner for respondent to resume logging operations but respondent received no
reply.
The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO rescinded,
and may disregard the same before any judicial pronouncement to that effect. Respondent ALUMCO
contended, and the lower court, in issuing the injunction order of 25 February 1966, apparently
sustained it (although the order expresses no specific findings in this regard), that it is only after a final
court decree declaring the contract rescinded for violation of its terms that U.P. could disregard
ALUMCO's rights under the contract and treat the agreement as breached and of no force or effect.
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt and
Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor (UP) has "the
right and the power to consider, the Logging Agreement dated 2 December 1960 as rescinded without
the necessity of any judicial suit." As to such special stipulation, and in connection with Article 1191 of
the Civil Code, this Court stated in Froilan vs. Pan Oriental Shipping Co., et al., L-11897, 31 October
1964, 12 SCRA 276:
there is nothing in the law that prohibits the parties from entering into agreement that
violation of the terms of the contract would cause cancellation thereof, even without
court intervention. In other words, it is not always necessary for the injured party to
resort to court for rescission of the contract.
Of course, it must be understood that the act of party in treating a contract as cancelled or resolved on
account of infractions by the other contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper court. If the other party denies that
rescission is justified, it is free to resort to judicial action in its own behalf, and bring the matter to
court. Then, should the court, after due hearing, decide that the resolution of the contract was not

warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or rescinded, and
act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final
judgment of the corresponding court that will conclusively and finally settle whether the action taken
was or was not correct in law. But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to
protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation, 1
since in every case where the extrajudicial resolution is contested only the final award of the court of competent
jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action
will be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial
invalidation, unless attack thereon should become barred by acquiescence, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of
contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla, Civil Law,
Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the
rescinder the other party is not barred from questioning in court such abuse or error, the practical effect
of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the
rescinder.
In fact, even without express provision conferring the power of cancellation upon one contracting party,
the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil Code (of
which Article 1191 of our own Civil; Code is practically a reproduction), has repeatedly held that, a
resolution of reciprocal or synallagmatic contracts may be made extrajudicially unless successfully
impugned in court.
El articulo 1124 del Codigo Civil establece la facultad de resolver las obligaciones
reciprocas para el caso de que uno de los obligados no cumpliese lo que le incumbe,
facultad que, segun jurisprudencia de este Tribunal, surge immediatamente despuesque
la otra parte incumplio su deber, sin necesidad de una declaracion previa de los
Tribunales. (Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur. Civ. 897).
Segun reiterada doctrina de esta Sala, el Art. 1124 regula la resolucioncomo una
"facultad" atribuida a la parte perjudicada por el incumplimiento del contrato, la cual
tiene derecho do opcion entre exigir el cumplimientoo la resolucion de lo convenido,
que puede ejercitarse, ya en la via judicial, ya fuera de ella, por declaracion del
acreedor, a reserva, claro es, que si la declaracion de resolucion hecha por una de las
partes se impugna por la otra, queda aquella sometida el examen y sancion de los

Tribunale, que habran de declarar, en definitiva, bien hecha la resolucion o por el

contrario, no ajustada a Derecho. (Sent. TS of Spain, 16 November 1956; Jurisp.
Aranzadi, 3, 447).
La resolucion de los contratos sinalagmaticos, fundada en el incumplimiento por una de
las partes de su respectiva prestacion, puedetener lugar con eficacia" 1. o Por la declaracion de
voluntad de la otra hecha extraprocesalmente, si no es impugnada en juicio luego con exito. y 2. 0 Por la demanda de la perjudicada,
cuando no opta por el cumplimientocon la indemnizacion de danos y perjuicios realmente causados, siempre quese acredite, ademas,
una actitud o conducta persistente y rebelde de laadversa o la satisfaccion de lo pactado, a un hecho obstativo que de un modoabsoluto,
definitivo o irreformable lo impida, segun el art. 1.124, interpretado por la jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo
1955 y 16 Nov. 1956, entre otras, inspiradas por el principio del Derecho intermedio, recogido del Canonico, por el cual fragenti fidem,
fides non est servanda. (Ss. de 4 Nov. 1958 y 22 Jun. 1959.) (Emphasis supplied).

In the light of the foregoing principles, and considering that the complaint of petitioner University
made out a prima facie case of breach of contract and defaults in payment by respondent ALUMCO, to
the extent that the court below issued a writ of preliminary injunction stopping ALUMCO's logging
operations, and repeatedly denied its motions to lift the injunction; that it is not denied that the
respondent company had profited from its operations previous to the agreement of 5 December 1964
("Acknowledgment of Debt and Proposed Manner of Payment"); that the excuses offered in the second
amended answer, such as the misconduct of its former manager Cesar Guy, and the rotten condition of
the logs in private respondent's pond, which said respondent was in a better position to know when it
executed the acknowledgment of indebtedness, do not constitute on their face sufficient excuse for nonpayment; and considering that whatever prejudice may be suffered by respondent ALUMCO is
susceptibility of compensation in damages, it becomes plain that the acts of the court a quo in enjoining
petitioner's measures to protect its interest without first receiving evidence on the issues tendered by the
parties, and in subsequently refusing to dissolve the injunction, were in grave abuse of discretion,
correctible by certiorari, since appeal was not available or adequate. Such injunction, therefore, must be
set aside.
For the reason that the order finding the petitioner UP in contempt of court has open appealed to the
Court of Appeals, and the case is pending therein, this Court abstains from making any pronouncement
thereon.
WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent court of 25
February 1966, granting the Associated Lumber Company's petition for injunction, is hereby set aside.
Let the records be remanded for further proceedings conformably to this opinion.
Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ.,
concur.
Reyes, J.B.L., Actg. C.J., is on leave.

# Footnotes
1 Ocejo Perez & Co. vs. International Banking Corp., 37 Phil. 631; Republic vs.
Hospital de San Juan de Dios, et al., 84 Phil. 820.

FIRST DIVISION
G.R. No. L-29360 January 30, 1982
JOSE C. ZULUETA, petitioner,
vs.
HON. HERMINIO MARIANO, in his capacity as Presiding Judge of Branch X of the Court of
First Instance of Rizal; and LAMBERTO AVELLANA, respondents.

MELENCIO-HERRERA, J.:
In this action for mandamus and Prohibition, petitioner seeks to compel respondent Judge to assume
appellate, not original jurisdiction over an Ejectment case appealed from the Municipal Court of Pasig
(CC No. 1190 entitled Jose C. Zulueta vs. Lamberto Avellana), and to issue a Writ of Execution in said
case.
The antecedental facts follow:
Petitioner Jose C. Zulueta is the registered owner of a residential house and lot situated within the
Antonio Subdivision, Pasig, Rizal.
On November 6, 1964, petitioner Zulueta and private respondent Lamberto Avellana, a movie director,
entered into a "Contract to Sell" the aforementioned property for P75,000.00 payable in twenty years
with respondent buyer assuming to pay a down payment of P5,000.00 and a monthly installment of
P630.00 payable in advance before the 5th day of the corresponding month, starting with December,
1964.
It was further stipulated:
12) That upon failure of the BUYER to fulfill any of the conditions herein stipulated,
BUYER automatically and irrevocably authorizes OWNER to recover extra-judicially,
physical possession of the land, building and other improvements which are the subject
of this contract, and to take possession also extra-judicially whatever personal properties
may be found within the aforesaid premises from the date of said failure to answer for
whatever unfulfilled monetary obligations BUYER may have with OWNER; and this
contract shall be considered as without force and effect also from said date; all payments
made by the BUYER to OWNER shall be deemed as rental payments without prejudice
to OWNER's right to collect from BUYER whatever other monthly installments and
other money obligations which may have been paid until BUYER vacates the aforesaid
premises; upon his failure to comply with any of the herein conditions BUYER forfeits
all money claims against OWNER and shall pay a monthly rental equivalent to his
monthly installment under Condition 1 of this Contract from the date of the said failure
to the date of recovery of physical possession by OWNER of the land, building and
other improvements which are the subject of this Contract; BUYER shall not remove his

personal properties without the previous written consent of OWNER, who, should he
take possession of such properties following the aforesaid failure of BUYER, shall
return the same to BUYER only after the latter shall have fulfilled all money claims
against him by OWNER; in all cases herein, demand is waived;
Respondent Avellana occupied the property from December, 1964, but title remained with petitioner
Zulueta.
Upon the allegation that respondent Avellana had failed to comply with the monthly amortizations
stipulated in the contract, despite demands to pay and to vacate the premises, and that thereby the
contract was converted into one of lease, petitioner, on June 22, 1966, commenced an Ejectment suit
against respondent before the Municipal Court of Pasig (CC No. 1190), praying that judgment be
rendered ordering respondent 1) to vacate the premises; 2) to pay petitioner the sum of P11,751.30
representing respondent's balance owing as of May, 1966; 3) to pay petitioner the sum of P 630.00
every month after May, 1966, and costs.
Respondent controverted by contending that the Municipal Court had no jurisdiction over the nature of
the action as it involved the interpretation and/or rescission of the contract; that prior to the execution
of the contract to sell, petitioner was already indebted to him in the sum of P31,269.00 representing the
cost of two movies respondent made for petitioner and used by the latter in his political campaign in
1964 when petitioner ran for Congressman, as well as the cost of one 16 millimeter projector petitioner
borrowed from respondent and which had never been returned, which amounts, according to their
understanding, would be applied as down payment for the property and to whatever obligations
respondent had with petitioner. The latter strongly denied such an understanding. Respondent's total
counterclaim against petitioner was in the amount of P42,629.99 representing petitioner's pleaded
indebtedness to private respondent, claim for moral damages, and attorney's fees.
The counterclaim was dismissed by the Municipal Court for being in an amount beyond its jurisdiction.
However, as a special defense, private respondent sought to offset the sum of P31,269.00 against his
obligations to petitioner.
Deciding the case on May 10, 1967, the Municipal Court found that respondent Avellana had failed to
comply with his financial obligations under the contract and ordered him to vacate the premises and
deliver possession thereof to petitioner; to pay petitioner the sum of P21,093.88 representing arrearages
as of April, 1967, and P630.00 as monthly rental from and after May, 1967 until delivery of possession
of that premises to petitioner. That conclusion was premised on title finding that breach of any of the
conditions by private respondent converted the agreement into a lease contractual and upon the
following considerations:
The question involved herein is that of possession, that who of the contending parties
has the better right to possession of the properly in question. The issue in this case being
that of possession, the claim of defendant against plaintiff or P 31,269.00 indebtedness,
has no place as a defense here. It should be the subject- matter of a separate action
against, plaintiff Jose C. Zulueta. As it is, said indebtedness is only a claim still

debatable and controversial and not a final judgment. 'It is our considered opinion that to
admit and to allow such a defense would be tantamount to prejuding the claim on its
merits prematurely in favor of defendant. This court can not do without violating some
rules of law. This is not the proper court and this is not the proper case in which to
ventilate the claim.
Respondent Avellana appealed to the Court of First Instance of Rizal presided by respondent Judge.
Thereat, petitioner summoned for execution alleging private respondent's failure to deposit in
accordance the monthly rentals, which the latter denied. Respondent Judge held resolution thereof in
abeyance.
On February 19, 1968, respondent Avellana filed a Motion to Dismiss Appeal alleging that, inasmuch
as the defense set up in his Answer was that he had not breached his contract with petitioner, the case
necessarily involved the interpretation and/or rescission of the contract and, therefore, beyond the
jurisdiction of the Municipal Court. Petitioner opposed claiming that the Complaint had set out a clear
case of unlawful detainer considering that judicial action for the rescission of the contract was
unnecessary due to the automatic rescission clause therein and the fact that petitioner had cancelled
said contract so that respondent's right to remain in the premises had ceased.
On March 21, 1968, respondent Judge dismissed the case on the ground of lack of jurisdiction of the
Municipal Court, explaining:
The decision of the lower court declared said Contract to Sell to have been converted
into a contract of lease. It is the contention of the defendant that the lower court had no
jurisdiction to entertain the case as the same involves the interpretation of contract as to
whether or not the same has been converted to lease contract. Although the contract to
sell object of this case states that the same may be converted into a lease contract upon
the failure of the defendant to pay the amortization of the property in question, there is
no showing that before filing this case in the lower court, the plaintiff has exercised or
has pursued his right pursuant to the contract which should be the basis of the action in
the lower court.
Petitioner's Motion for Reconsideration was denied by respondent Judge as follows:
The plaintiff having filed a motion for reconsideration of this Court's Order dismissing
the appeal, the Court, while standing pat on its Order dismissing this case for lack of
jurisdiction of the lower court over the subject matter, hereby takes cognizance of the
case and will try the case as if it has been filed originally in this Court.
WHEREFORE, let this case be set for pre-trial on July 12, 1968 at 8:30 a.m. with notice
to an parties.
Petitioner then availed of the instant recourse.
Was the action before the Municipal Court of Pasig essentially for detainer and, therefore, within its
exclusive original jurisdiction, or one for rescission or annulment of a contract, which should be

litigated before a Court of First Instance?

Upon a review of the attendant circumstances, we uphold the ruling of respondent Judge that the
Municipal Court of Pasig was bereft of jurisdiction to take cognizance of the case filed before it. In his
Complaint, petitioner had alleged violation by respondent Avellana of the stipulations of their
agreement to sell and thus unilaterally considered the contract rescinded. Respondent Avellana denied
any breach on his part and argued that the principal issue was one of interpretation and/or rescission of
the contract as well as of set-off. Under those circumstances, proof of violation is a condition precedent
to resolution or rescission. It is only when the violation has been established that the contract can be
declared resolved or rescinded. Upon such rescission, in turn, hinges a pronouncement that possession
of the realty has become unlawful. Thus, the basic issue is not possession but one of rescission or
annulment of a contract. which is beyond the jurisdiction of the Municipal Court to hear and determine.
A violation by a party of any of the stipulations of a contract on agreement to sell real
property would entitle the other party to resolved or rescind it. An allegation of such
violation in a detainer suit may be proved by competent evidence. And if proved a
justice of the peace court might make a finding to that effect, but it certainly cannot
declare and hold that the contract is resolved or rescinded. It is beyond its power so to
do. And as the illegality of the possession of realty by a party to a contract to sell is
premised upon the resolution of the contract, it follows that an allegation and proof of
such violation, a condition precedent to such resolution or rescission, to render unlawful
the possession of the land or building erected thereon by the party who has violated the
contract, cannot be taken cognizance of by a justice of the peace court. ... 1
True, the contract between the parties provided for extrajudicial rescission. This has legal effect,
however, where the other party does not oppose it. 2 Where it is objected to, a judicial determination of the
issue is still necessary.

A stipulation entitling one party to take possession of the land and building if the other
party violates the contract does not ex proprio vigore confer upon the former the right to
take possession thereof if objected to without judicial intervention and' determination. 3
But while respondent Judge correctly ruled that the Municipal Court had no jurisdiction over the case
and correctly dismissed the appeal, he erred in assuming original jurisdiction, in the face of the
objection interposed by petitioner. Section 11, Rule 40, leaves no room for doubt on this point:
Section 11. Lack of jurisdiction A case tried by an inferior court without jurisdiction
over the subject matter shall be dismiss on appeal by the Court of First Instance. But
instead of dismissing the case, the Court of First Instance may try the case on the merits,
if the parties therein file their pleadings and go to trial without any objection to such

jurisdiction.
There was no other recourse left for respondent Judge, therefore, except to dismiss the appeal.
If an inferior court tries a case without jurisdiction over the subject-matter on appeal, the
only authority of the CFI is to declare the inferior court to have acted without
jurisdiction and dismiss the case, unless the parties agree to the exercise by the CFI of its
original jurisdiction to try the case on the merits. 4
The foregoing premises considered, petitioner's prayer for a Writ of Execution of the judgment of the
Municipal Court of Pasig must perforce be denied.
WHEREFORE, the Writ of mandamus is denied, but the Writ of Prohibition is granted and respondent
Court hereby permanently enjoined from taking cognizance of Civil Case No. 10595 in the exercise of
its original jurisdiction. No costs.
SO ORDERED.
Makasiar, Fernandez, Guerrero and Plana, JJ., concur.
Teehankee, J., concur in the result.

Footnotes
1 Nera vs. Vacante, 3 SCRA 505, 511 (1961).
2 Tolentino, Civil Code of the Phil., Vol. IV, 1962 ed, p. 168,
3 Nera vs. Vacante, supra.
4 Ganancial vs. Atillo, 14 SCRA 460 (1965).
FIRST DIVISION
G.R. No. L-56076 September 21, 1983
PALAY, INC. and ALBERT ONSTOTT, petitioner,
vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY
and NAZARIO DUMPIT respondents.
Santos, Calcetas-Santos & Geronimo Law Office for petitioner.
Wilfredo E. Dizon for private respondent.

MELENCIO-HERRERA, J.:
The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P.
Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to

private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as
resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as
well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said
Resolution of May 2, 1980, are being assailed in this petition.
On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of
private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the
Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by
TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per
annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully
paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the expiration of the grace period
of one month, without need of notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last
payment was made on December 5, 1967 for installments up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update
all his overdue accounts with interest, and seeking its written consent to the assignment of his rights to
a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the
same request. Replying petitioners informed respondent that his Contract to Sell had long been
rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.
Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the
National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No.
2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of
either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President
of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of
P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners'
Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated October 23,
1979. 1
On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to
law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the
Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the
present petition wherein the following issues are raised:
I
Whether notice or demand is not mandatory under the circumstances and, therefore, may
be dispensed with by stipulation in a contract to sell.
II

Whether petitioners may be held liable for the refund of the installment payments made
by respondent Nazario M. Dumpit.
III
Whether the doctrine of piercing the veil of corporate fiction has application to the case
at bar.
IV
Whether respondent Presidential Executive Assistant committed grave abuse of
discretion in upholding the decision of respondent NHA holding petitioners solidarily
liable for the refund of the installment payments made by respondent Nazario M.
Dumpit thereby denying substantial justice to the petitioners, particularly petitioner
Onstott
We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned
Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On October 28,
1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due
course to the petition on March 15, 1982.
On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without
prior notice or demand upon respondent in view of paragraph 6 thereof which provides6. That in case the BUYER falls to satisfy any monthly installment or any other
payments herein agreed upon, the BUYER shall be granted a month of grace within
which to make the payment of the t in arrears together with the one corresponding to the
said month of grace. -It shall be understood, however, that should the month of grace
herein granted to the BUYER expire, without the payment & corresponding to both
months having been satisfied, an interest of ten (10%) per cent per annum shall be
charged on the amounts the BUYER should have paid; it is understood further, that
should a period of NINETY (90) DAYS elapse to begin from the expiration of the month
of grace hereinbefore mentioned, and the BUYER shall not have paid all the amounts
that the BUYER should have paid with the corresponding interest up to the date, the
SELLER shall have the right to declare this contract cancelled and of no effect without
notice, and as a consequence thereof, the SELLER may dispose of the lot/lots covered
by this Contract in favor of other persons, as if this contract had never been entered into.
In case of such cancellation of this Contract, all the amounts which may have been paid
by the BUYER in accordance with the agreement, together with all the improvements
made on the premises, shall be considered as rents paid for the use and occupation of the
above mentioned premises and for liquidated damages suffered by virtue of the failure of
the BUYER to fulfill his part of this agreement : and the BUYER hereby renounces his
right to demand or reclaim the return of the same and further obligates peacefully to
vacate the premises and deliver the same to the SELLER.

Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a
contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of
its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the
defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles
3 the act of a party in treating a contract as cancelled should be made known to the other. We quote the
pertinent excerpt:

Of course, it must be understood that the act of a party in treating a contract as cancelled
or resolved in account of infractions by the other contracting party must be made known
to the other and is always provisional being ever subject to scrutiny and review by the
proper court. If the other party denies that rescission is justified it is free to resort to
judicial action in its own behalf, and bring the matter to court. Then, should the court,
after due hearing, decide that the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own
risk. For it is only the final judgment of the corresponding court that will conclusively
and finally settle whether the action taken was or was not correct in law. But the law
definitely does not require that the contracting party who believes itself injured must
first file suit and wait for a judgment before taking extrajudicial steps to protect its
interest. Otherwise, the party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until the final judgment of
rescission is rendered when the law itself requires that he should exercise due diligence
to minimize its own damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution of a
reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631;
Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in every case where
the extrajudicial resolution is contested only the final award of the court of competent
jurisdiction can conclusively settle whether the resolution was proper or not. It is in this
sense that judicial action win be necessary, as without it, the extrajudicial resolution will
remain contestable and subject to judicial invalidation unless attack thereon should
become barred by acquiescense, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case
of breach of contract may render nugatory the general rule requiring judicial action (v.
Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as
already observed, in case of abuse or error by the rescinder the other party is not barred
from questioning in court such abuse or error, the practical effect of the stipulation
being merely to transfer to the defaulter the initiative of instituting suit, instead of the

rescinder (Emphasis supplied).

Of similar import is the ruling in Nera vs. Vacante 4, reading:
A stipulation entitling one party to take possession of the land and building if the other
party violates the contract does not ex propio vigore confer upon the former the right to
take possession thereof if objected to without judicial intervention and determination.
This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect
where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue is still
necessary.

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination. 7
In this case, private respondent has denied that rescission is justified and has resorted to judicial action.
It is now for the Court to determine whether resolution of the contract by petitioners was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against private
respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in
court because from the moment the petitioner defaulted in the timely payment of the installments, the contract
between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case notice
in writing was made to the vendee of the cancellation and annulment of the contract although the contract
entitled the seller to immediate repossessing of the land upon default by the buyer.

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act
No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments."
which took effect on September 14, 1972, when it specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from
receipt by the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the cash surrender value to the buyer.
(Emphasis supplied).
The contention that private respondent had waived his right to be notified under paragraph 6 of the
contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom to stipulate. A waiver must be certain and
unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully
accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment payments
against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to
buyers of real estate on installment payments.

Regarding the second issue on refund of the installment payments made by private
respondent. Article 1385 of the Civil Code provides:

ART. 1385. Rescission creates the obligation to return the things which were the object
of the contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can return whatever he may be
obliged to restore.
Neither sham rescission take place when the things which are the object of the contract
are legally in the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no evidence on record that other lots are
still available, private respondent is entitled to the refund of installments paid plus interest at the legal
rate of 12% computed from the date of the institution of the action. 10 It would be most inequitable if
petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the
proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who
was made jointly and severally liable with petitioner corporation for refund to private respondent of the
total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law
with a personality separate and distinct from those of the persons composing it as wen as from that of
any other legal entity to which it may be related. 11 As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and
vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end
subversive of justice 12 ; or for purposes that could not have been intended by the law that created it 13 ; or to
defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud or confuse
legitimate issues 15 ; or to circumvent the law or perpetuate deception 16 ; or as an alter ego, adjunct or
business conduit for the sole benefit of the stockholders. 17

We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on
paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the President of the corporation
and he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used
the corporation to defraud private respondent. He cannot, therefore, be made personally liable just
because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by
another corporation is not of itself sufficient ground for disregarding the separate corporate personality.
18 In this respect then, a modification of the Resolution under review is called for.

WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby
modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of

P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the
filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.
No costs.
G.R. No. L-42283 March 18, 1985
BUENAVENTURA ANGELES, ET AL., plaintiffs-appellees,
vs.
URSULA TORRES CALASANZ, ET AL., defendants-appellants.

GUTIERREZ, JR., J.:

This is an appeal from the decision of the Court of First Instance of Rizal, Seventh Judicial District,
Branch X, declaring the contract to sell as not having been validly cancelled and ordering the
defendants-appellants to execute a final deed of sale in favor of the plaintiffs-appellees, to pay P500.00
attorney's fees and costs.
The facts being undisputed, the Court of Appeals certified the case to us since only pure questions of
law have been raised for appellate review.
On December 19, 1957, defendants-appellants Ursula Torres Calasanz and Tomas Calasanz and
plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of
land located in Cainta, Rizal for the amount of P3,920.00 plus 7% interest per annum.
The plaintiffs-appellees made a downpayment of P392.00 upon the execution of the contract. They
promised to pay the balance in monthly installments of P 41.20 until fully paid, the installments being
due and payable on the 19th day of each month. The plaintiffs-appellees paid the monthly installments
until July 1966, when their aggregate payment already amounted to P4,533.38. On numerous
occasions, the defendants-appellants accepted and received delayed installment payments from the
plaintiffs-appellees.
On December 7, 1966, the defendants-appellants wrote the plaintiffs-appellees a letter requesting the
remittance of past due accounts.
On January 28, 1967, the defendants-appellants cancelled the said contract because the plaintiffsappellees failed to meet subsequent payments. The plaintiffs' letter with their plea for reconsideration of
the said cancellation was denied by the defendants-appellants.
The plaintiffs-appellees filed Civil Case No. 8943 with the Court of First Instance of Rizal, Seventh
Judicial District, Branch X to compel the defendants-appellants to execute in their favor the final deed
of sale alleging inter alia that after computing all subsequent payments for the land in question, they
found out that they have already paid the total amount of P4,533.38 including interests, realty taxes and
incidental expenses for the registration and transfer of the land.
The defendants-appellants alleged in their answer that the complaint states no cause of action and that

the plaintiffs-appellees violated paragraph six (6) of the contract to sell when they failed and refused to
pay and/or offer to pay the monthly installments corresponding to the month of August, 1966 for more
than five (5) months, thereby constraining the defendants-appellants to cancel the said contract.
The lower court rendered judgment in favor of the plaintiffs-appellees. The dispositive portion of the
decision reads:
WHEREFORE, based on the foregoing considerations, the Court hereby renders
judgment in favor of the plaintiffs and against the defendants declaring that the contract
subject matter of the instant case was NOT VALIDLY cancelled by the defendants.
Consequently, the defendants are ordered to execute a final Deed of Sale in favor of the
plaintiffs and to pay the sum of P500.00 by way of attorney's fees. Costs against the
defendants.
A motion for reconsideration filed by the defendants-appellants was denied.
As earlier stated, the then Court of Appeals certified the case to us considering that the appeal involves
pure questions of law.
The defendants-appellants assigned the following alleged errors of the lower court:
First Assignment of Error
THE LOWER COURT ERRED IN NOT HOLDING THE CONTRACT TO SELL
(ANNEX "A" OF COMPLIANCE) AS HAVING BEEN LEGALLY AND VALIDLY
CANCELLED.
Second Assignment of Error
EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS
NOT BEEN LEGALLY AND VALIDLY CANCELLED, THE LOWER COURT
ERRED IN ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE
IN FAVOR OF THE PLAINTIFF.
Third Assignment of Error
THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY
PLAINTIFFS THE SUM OF P500.00 AS ATTORNEY'S FEES.
The main issue to be resolved is whether or not the contract to sell has been automatically and validly
cancelled by the defendants-appellants.
The defendants-appellants submit that the contract was validly cancelled pursuant to paragraph six of
the contract which provides:
xxx xxx xxx
SIXTH.In case the party of the SECOND PART fails to satisfy any monthly
installments, or any other payments herein agreed upon, he is granted a month of grace

within which to make the retarded payment, together with the one corresponding to the
said month of grace; it is understood, however, that should the month of grace herein
granted to the party of the SECOND PART expired; without the payments corresponding
to both months having been satisfied, an interest of 10% per annum will be charged on
the amounts he should have paid; it is understood further, that should a period of 90
days elapse, to begin from the expiration of the month of grace herein mentioned, and
the party of SECOND PART has not paid all the amounts he should have paid with the
corresponding interest up to that date, the party of the FIRST PART has the right to
declare this contract cancelled and of no effect, and as consequence thereof, the party of
the FIRST PART may dispose of the parcel of land covered by this contract in favor of
other persons, as if this contract had never been entered into. In case of such
cancellation of the contract, all the amounts paid in accordance with this agreement
together with all the improvements made on the premises, shall be considered as rents
paid for the use and occupation of the above mentioned premises, and as payment for the
damages suffered by failure of the party of the SECOND PART to fulfill his part of the
agreement; and the party of the SECOND PART hereby renounces all his right to
demand or reclaim the return of the same and obliges himself to peacefully vacate the
premises and deliver the same to the party of the FIRST PART. (Emphasis supplied by
appellant)
xxx xxx xxx
The defendants-appellants argue that the plaintiffs-appellees failed to pay the August, 1966 installment
despite demands for more than four (4) months. The defendants-appellants point to Jocson v. Capitol
Subdivision (G.R. No. L-6573, February 28, 1955) where this Court upheld the right of the subdivision
owner to automatically cancel a contract to sell on the strength of a provision or stipulation similar to
paragraph 6 of the contract in this case. The defendants-appellants also argue that even in the absence
of the aforequoted provision, they had the right to cancel the contract to sell under Article 1191 of the
Civil Code of the Philippines.
The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. They state that
paragraph 6 of the contract to sell is contrary to law insofar as it provides that in case of specified
breaches of its terms, the sellers have the right to declare the contract cancelled and of no effect,
because it granted the sellers an absolute and automatic right of rescission.
Article 1191 of the Civil Code on the rescission of reciprocal obligations provides:
The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulfillment, if the latter should become impossible.
xxx xxx xxx

Article 1191 is explicit. In reciprocal obligations, either party the right to rescind the contract upon the
failure of the other to perform the obligation assumed thereunder. Moreover, there is nothing in the law
that prohibits the parties from entering into an agreement that violation of the terms of the contract
would cause its cancellation even without court intervention (Froilan v. Pan Oriental Shipping, Co., et
al., 12 SCRA 276)
Well settled is, however, the rule that a judicial action for the rescission of a contract is
not necessary where the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions' (Lopez v. Commissioner of Customs, 37
SCRA 327, and cases cited therein)
Resort to judicial action for rescission is obviously not contemplated . . . The validity of
the stipulation can not be seriously disputed. It is in the nature of a facultative resolutory
condition which in many cases has been upheld by this Court. (Ponce Enrile v. Court of
Appeals, 29 SCRA 504).
The rule that it is not always necessary for the injured party to resort to court for rescission of the
contract when the contract itself provides that it may be rescinded for violation of its terms and
conditions, was qualified by this Court in University of the Philippines v. De los Angeles, (35 SCRA
102) where we explained that:
Of course, it must be understood that the act of a party in treating a contract as cancelled
or resolved on account of infractions by the other contracting party must be made known
to the other and is always provisional, being ever subject to scrutiny and review by the
proper court. If the other party denies that rescission is justified, it is free to resort to
judicial action in its own behalf, and bring the matter to court. Then, should the court,
after due hearing, decide that the resolution of the contract was not warranted, the
responsible party will be sentenced to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded to the party prejudiced.
In other words, the party who deems the contract violated many consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own
risk. For it is only the final judgment of the corresponding court that will conclusively
and finally settle whether the action taken was or was not correct in law. ... .
We see no conflict between this ruling and the previous jurisprudence of this Court
invoked by respondent declaring that judicial action is necessary for the resolution of a
reciprocal obligation; (Ocejo, Perez & Co. v. International Banking Corp., 37 Phil. 631;
Republic v. Hospital de San Juan de Dios, et al., 84 Phil. 820) since in every case where
the extrajudicial resolution is contested only the final award of the court of competent
jurisdiction can conclusively settle whether the resolution was proper or not. It is in this
sense that judicial action will be necessary, as without it, the extrajudicial resolution will
remain contestable and subject to judicial invalidation, unless attack thereon should
become barred by acquiescence, estoppel or prescription.

The right to rescind the contract for non-performance of one of its stipulations, therefore, is not
absolute. In Universal Food Corp. v. Court of Appeals (33 SCRA 1) the Court stated that
The general rule is that rescission of a contract will not be permitted for a slight or
casual breach, but only for such substantial and fundamental breach as would defeat the
very object of the parties in making the agreement. (Song Fo & Co. v. HawaiianPhilippine Co., 47 Phil. 821, 827) The question of whether a breach of a contract is
substantial depends upon the attendant circumstances. (Corpus v. Hon. Alikpala, et al.,
L-23707 & L-23720, Jan. 17, 1968). ... .
The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell
which provides:
SECOND.That in consideration of the agreement of sale of the above described
property, the party of the SECOND PART obligates himself to pay to the party of the
FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY
(P3,920.00), Philippine Currency, plus interest at the rate of 7% per annum, as follows:
(a) The amount of THREE HUNDRED NINETY TWO only (P392.00) when this
contract is signed; and
(b) The sum of FORTY ONE AND 20/100 ONLY (P4l.20) on or before the 19th day of
each month, from this date until the total payment of the price above stipulated,
including interest.
because they failed to pay the August installment, despite demand, for more than four (4) months.
The breach of the contract adverted to by the defendants-appellants is so slight and casual when we
consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid
the monthly installments for a period of almost nine (9) years. In other words, in only a short time, the
entire obligation would have been paid. Furthermore, although the principal obligation was only P
3,920.00 excluding the 7 percent interests, the plaintiffs- appellees had already paid an aggregate
amount of P 4,533.38. To sanction the rescission made by the defendants-appellants will work injustice
to the plaintiffs- appellees. (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA 829) It would unjustly
enrich the defendants-appellants.
Article 1234 of the Civil Code which provides that:
If the obligation has been substantially performed in good faith, the obligor may recover
as though there had been a strict and complete fulfillment, less damages suffered by the
obligee.
also militates against the unilateral act of the defendants-appellants in cancelling the contract.
We agree with the observation of the lower court to the effect that:
Although the primary object of selling subdivided lots is business, yet, it cannot be
denied that this subdivision is likewise purposely done to afford those landless, low

income group people of realizing their dream of a little parcel of land which they can
really call their own.
The defendants-appellants cannot rely on paragraph 9 of the contract which provides:
NINTH.-That whatever consideration of the party of the FIRST PART may concede to
the party of the SECOND PART, as not exacting a strict compliance with the conditions
of paragraph 6 of this contract, as well as any other condonation that the party of the
FIRST PART may give to the party of the SECOND PART with regards to the
obligations of the latter, should not be interpreted as a renunciation on the part of the
party of the FIRST PART of any right granted it by this contract, in case of default or
non-compliance by the party of the SECOND PART.
The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance
of paragraph 6 not merely once, but for as many times as he wishes.
The defendants-appellants' contention is without merit. We agree with the plaintiffs-appellees that when
the 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 De Guzman v. Guieb (48 SCRA
68), we held that:
xxx xxx xxx
But defendants do not deny that in spite of the long arrearages, neither they nor their
predecessor, Teodoro de Guzman, even took steps to cancel the option or to eject the
appellees from the home-lot in question. On the contrary, it is admitted that the delayed
payments were received without protest or qualification. ... Under these circumstances,
We cannot but agree with the lower court that at the time appellees exercised their
option, appellants had already forfeited their right to invoke the above-quoted provision
regarding the nullifying effect of the non-payment of six months rentals by appellees by
their having accepted without qualification on July 21, 1964 the full payment by
appellees of all their arrearages.
The defendants-appellants contend in the second assignment of error that the ledger of payments show
a balance of P671,67 due from the plaintiffs-appellees. They submit that while it is true that the total
monthly installments paid by the plaintiffs-appellees may have exceeded P3,920.00, a substantial
portion of the said payments were applied to the interests since the contract specifically provides for a
7% interest per annum on the remaining balance. The defendants-appellants rely on paragraph 2 of the
contract which provides:
SECOND.That in consideration of the agreement of sale of the above described
property, the party of the SECOND PART obligates himself to pay to the party of the
FIRST PART the Sum of THREE THOUSAND NINE HUNDRED TWENTY ONLY (P

3,920.00), Philippine Currency, plus interest at the rate of 7% per annum ... . (Emphasis
supplied)
The plaintiffs-appellees on the other hand are firm in their submission that since they have already paid
the defendants-appellants a total sum of P4,533.38, the defendants-appellants must now be compelled
to execute the final deed of sale pursuant to paragraph 12 of the contract which provides:
TWELFTH.That once the payment of the sum of P3,920.00, the total price of the sale
is completed, the party to the FIRST PART will execute in favor of the party of the
SECOND PART, the necessary deed or deeds to transfer to the latter the title of the
parcel of land sold, free from all hens and encumbrances other than those expressly
provided in this contract; it is understood, however, that au the expenses which may be
incurred in the said transfer of title shall be paid by the party of the SECOND PART, as
above stated.
Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the
contract herein is a contract of adhesion.
We agree with the plaintiffs-appellees. The contract to sell entered into by the parties has some
characteristics of a contract of adhesion. The defendants-appellants drafted and prepared the contract.
The plaintiffs-appellees, eager to acquire a lot upon which they could build a home, affixed their
signatures and assented to the terms and conditions of the contract. They had no opportunity to
question nor change any of the terms of the agreement. It was offered to them on a "take it or leave it"
basis. In Sweet Lines, Inc. v. Teves (83 SCRA 36 1), we held that:
xxx xxx xxx
... (W)hile generally, stipulations in a contract come about after deliberate drafting by the
parties thereto. . . . there are certain contracts almost all the provisions of which have
been drafted only by one party, usually a corporation. Such contracts are called contracts
of adhesion, because the only participation of the party is the signing of his signature or
his "adhesion" thereto. Insurance contracts, bills of lading, contracts of sale of lots on
the installment plan fall into this category. (Paras, Civil Code of the Philippines,
Seventh ed., Vol. 1, p. 80.) (Emphasis supplied)
While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendantsappellants the sum of P3,920.00 plus 7% interest per annum, it is likewise true that under paragraph 12
the seller is obligated to transfer the title to the buyer upon payment of the P3,920.00 price sale.
The contract to sell, being a contract of adhesion, must be construed against the party causing it. We
agree with the observation of the plaintiffs-appellees to the effect that "the terms of a contract must be
interpreted against the party who drafted the same, especially where such interpretation will help effect
justice to buyers who, after having invested a big amount of money, are now sought to be deprived of
the same thru the prayed application of a contract clever in its phraseology, condemnable in its
lopsidedness and injurious in its effect which, in essence, and in its entirety is most unfair to the

buyers."
Thus, since the principal obligation under the contract is only P3,920.00 and the plaintiffs-appellees
have already paid an aggregate amount of P4,533.38, the courts should only order the payment of the
few remaining installments but not uphold the cancellation of the contract. Upon payment of the
balance of P671.67 without any interest thereon, the defendants-appellants must immediately execute
the final deed of sale in favor of the plaintiffs-appellees and execute the necessary transfer documents
as provided in paragraph 12 of the contract. The attorney's fees are justified.
WHEREFORE, the instant petition is DENIED for lack of merit. The decision appealed from is
AFFIRMED with the modification that the plaintiffs-appellees should pay the balance of SIX
HUNDRED SEVENTY ONE PESOS AND SIXTY-SEVEN CENTAVOS (P671.67) without any
interes
G.R. No. L-22590 March 20, 1987
SOLOMON BOYSAW and ALFREDO M. YULO, JR., plaintiffs-appellants,
vs.
INTERPHIL PROMOTIONS, INC., LOPE SARREAL, SR., and MANUEL NIETO, JR.,
defendants-appellees.
Felipe Torres and Associates for plaintiffs-appellants.
V.E. Del Rosario & Associates for defendant-appellee M. Nieto, Jr.
A.R. Naravasa & Pol Tiglao, Jr. for defendant-appellee Interphil Promotions, Inc.
RESOLUTION

FERNAN, J.:
This is an appeal interposed by Solomon Boysaw and Alfredo Yulo, Jr., from the decision dated July
25, 1963 and other rulings and orders of the then Court of First Instance [CFI] of Rizal, Quezon City,
Branch V in Civil Case No. Q-5063, entitled "Solomon Boysaw and Alfredo M. Yulo, Jr., Plaintiffs
versus Interphil Promotions, Inc., Lope Sarreal, Sr. and Manuel Nieto, Jr., Defendants," which, among
others, ordered them to jointly and severally pay defendant-appellee Manuel Nieto, Jr., the total sum of
P25,000.00, broken down into P20,000.00 as moral damages and P5,000.00 as attorney's fees; the
defendants-appellees Interphil Promotions, Inc. and Lope Sarreal, Sr., P250,000.00 as unrealized
profits, P33,369.72 as actual damages and P5,000.00 as attorney's fees; and defendant-appellee Lope
Sarreal, Sr., the additional amount of P20,000.00 as moral damages aside from costs.
The antecedent facts of the case are as follows:
On May 1, 1961, Solomon Boysaw and his then Manager, Willie Ketchum, signed with Interphil
Promotions, Inc. represented by Lope Sarreal, Sr., a contract to engage Gabriel "Flash" Elorde in a
boxing contest for the junior lightweight championship of the world.

It was stipulated that the bout would be held at the Rizal Memorial Stadium in Manila on September
30, 1961 or not later than thirty [30] days thereafter should a postponement be mutually agreed upon,
and that Boysaw would not, prior to the date of the boxing contest, engage in any other such contest
without the written consent of Interphil Promotions, Inc.
On May 3, 1961, a supplemental agreement on certain details not covered by the principal contract was
entered into by Ketchum and Interphil. Thereafter, Interphil signed Gabriel "Flash" Elorde to a similar
agreement, that is, to engage Boysaw in a title fight at the Rizal Memorial Stadium on September 30,
1961.
On June 19, 1961, Boysaw fought and defeated Louis Avila in a ten-round non-title bout held in Las
Vegas, Nevada, U.S.A. [pp. 26-27, t.s.n., session of March 14, 1963].
On July 2, 1961, Ketchum on his own behalf and on behalf of his associate Frank Ruskay, assigned to
J. Amado Araneta the managerial rights over Solomon Boysaw.
Presumably in preparation for his engagement with Interphil, Solomon Boysaw arrived in the
Philippines on July 31, 1961.
On September 1, 1961, J. Amado Araneta assigned to Alfredo J. Yulo, Jr. the managerial rights over
Boysaw that he earlier acquired from Ketchum and Ruskay. The next day, September 2, 1961, Boysaw
wrote Lope Sarreal, Sr. informing him of his arrival and presence in the Philippines.
On September 5, 1961, Alfredo Yulo, Jr. wrote to Sarreal informing him of his acquisition of the
managerial rights over Boysaw and indicating his and Boysaw's readiness to comply with the boxing
contract of May 1, 1961. On the same date, on behalf of Interphil Sarreal wrote a letter to the Games
and Amusement Board [GAB] expressing concern over reports that there had been a switch of
managers in the case of Boysaw, of which he had not been formally notified, and requesting that
Boysaw be called to an inquiry to clarify the situation.
The GAB called a series of conferences of the parties concerned culminating in the issuance of its
decision to schedule the Elorde-Boysaw fight for November 4, 1961. The USA National Boxing
Association which has supervisory control of all world title fights approved the date set by the GAB
Yulo, Jr. refused to accept the change in the fight date, maintaining his refusal even after Sarreal on
September 26, 1961, offered to advance the fight date to October 28, 1961 which was within the 30-day
period of allowable postponements provided in the principal boxing contract of May 1, 1961.
Early in October 1961, Yulo, Jr. exchanged communications with one Mamerto Besa, a local boxing
promoter, for a possible promotion of the projected Elorde-Boysaw title bout. In one of such
communications dated October 6, 1961, Yulo informed Besa that he was willing to approve the fight
date of November 4,1961 provided the same was promoted by Besa.
While an Elorde-Boysaw fight was eventually staged, the fight contemplated in the May 1, 1961
boxing contract never materialized.
As a result of the foregoing occurrences, on October 12, 1961, Boysaw and Yulo, Jr. sued Interphil,

Sarreal, Sr. and Manuel Nieto, Jr. in the CFI of Rizal [Quezon City Branch] for damages allegedly
occasioned by the refusal of Interphil and Sarreal, aided and abetted by Nieto, Jr., then GAB Chairman,
to honor their commitments under the boxing contract of May 1,1961.
On the first scheduled date of trial, plaintiff moved to disqualify Solicitor Jorge Coquia of the Solicitor
General's Office and Atty. Romeo Edu of the GAB Legal Department from appearing for defendant
Nieto, Jr. on the ground that the latter had been sued in his personal capacity and, therefore, was not
entitled to be represented by government counsel. The motion was denied insofar as Solicitor General
Coquia was concerned, but was granted as regards the disqualification of Atty. Edu.
The case dragged into 1963 when sometime in the early part of said year, plaintiff Boysaw left the
country without informing the court and, as alleged, his counsel. He was still abroad when, on May 13,
1963, he was scheduled to take the witness stand. Thus, the lower court reset the trial for June 20, 1963.
Since Boysaw was still abroad on the later date, another postponement was granted by the lower court
for July 23, 1963 upon assurance of Boysaw's counsel that should Boysaw fail to appear on said date,
plaintiff's case would be deemed submitted on the evidence thus far presented.
On or about July 16, 1963, plaintiffs represented by a new counsel, filed an urgent motion for
postponement of the July 23, 1963 trial, pleading anew Boysaw's inability to return to the country on
time. The motion was denied; so was the motion for reconsideration filed by plaintiffs on July 22,
1963.
The trial proceeded as scheduled on July 23, 1963 with plaintiff's case being deemed submitted after
the plaintiffs declined to submit documentary evidence when they had no other witnesses to present.
When defendant's counsel was about to present their case, plaintiff's counsel after asking the court's
permission, took no further part in the proceedings.
After the lower court rendered its judgment dismissing the plaintiffs' complaint, the plaintiffs moved
for a new trial. The motion was denied, hence, this appeal taken directly to this Court by reason of the
amount involved.
From the errors assigned by the plaintiffs, as having been committed by the lower court, the following
principal issues can be deduced:
1. Whether or not there was a violation of the fight contract of May 1, 1961; and if there
was, who was guilty of such violation.
2. Whether or not there was legal ground for the postponement of the fight date from
September 1, 1961, as stipulated in the May 1, 1961 boxing contract, to November
4,1961,
3. Whether or not the lower court erred in the refusing a postponement of the July 23,
1963 trial.
4. Whether or not the lower court erred in denying the appellant's motion for a new trial.
5. Whether or not the lower court, on the basis of the evidence adduced, erred in

awarding the appellees damages of the character and amount stated in the decision.
On the issue pertaining to the violation of the May 1, 1961 fight contract, the evidence established that
the contract was violated by appellant Boysaw himself when, without the approval or consent of
Interphil, he fought Louis Avila on June 19, 1961 in Las Vegas Nevada. Appellant Yulo admitted this
fact during the trial. [pp. 26-27, t.s.n., March 14, 1963].
While the contract imposed no penalty for such violation, this does not grant any of the parties the
unbridled liberty to breach it with impunity. Our law on contracts recognizes the principle that
actionable injury inheres in every contractual breach. Thus:
Those who in the performance of their obligations are guilty of fraud, negligence or
delay, and those who in any manner contravene the terms thereof, are liable for damages.
[Art. 1170, Civil Code].
Also:
The power to rescind obligations is implied, in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him. [Part 1, Art. 1191, Civil
Code].
There is no doubt that the contract in question gave rise to reciprocal obligations. "Reciprocal
obligations are those which arise from the same cause, and in which each party is a debtor and a
creditor of the other, such that the obligation of one is dependent upon the obligation of the other. They
are to be performed simultaneously, so that the performance of one is conditioned upon the
simultaneous fulfillment of the other" [Tolentino, Civil Code of the Philippines, Vol. IV, p. 175.1
The power to rescind is given to the injured party. "Where the plaintiff is the party who did not perform
the undertaking which he was bound by the terms of the agreement to perform 4 he is not entitled to
insist upon the performance of the contract by the defendant, or recover damages by reason of his own
breach " [Seva vs. Alfredo Berwin 48 Phil. 581, Emphasis supplied].
Another violation of the contract in question was the assignment and transfer, first to J. Amado Araneta,
and subsequently, to appellant Yulo, Jr., of the managerial rights over Boysaw without the knowledge
or consent of Interphil.
The assignments, from Ketchum to Araneta, and from Araneta to Yulo, were in fact novations of the
original contract which, to be valid, should have been consented to by Interphil.
Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. [Art. 1293, Civil Code, emphasis supplied].
That appellant Yulo, Jr., through a letter, advised Interphil on September 5, 1961 of his acquisition of
the managerial rights over Boysaw cannot change the fact that such acquisition, and the prior
acquisition of such rights by Araneta were done without the consent of Interphil. There is no showing
that Interphil, upon receipt of Yulo's letter, acceded to the "substitution" by Yulo of the original

principal obligor, who is Ketchum. The logical presumption can only be that, with Interphil's letter to
the GAB expressing concern over reported managerial changes and requesting for clarification on the
matter, the appellees were not reliably informed of the changes of managers. Not being reliably
informed, appellees cannot be deemed to have consented to such changes.
Under the law when a contract is unlawfully novated by an applicable and unilateral substitution of the
obligor by another, the aggrieved creditor is not bound to deal with the substitute.
The consent of the creditor to the change of debtors, whether in expromision or
delegacion is an, indispensable requirement . . . Substitution of one debtor for another
may delay or prevent the fulfillment of the obligation by reason of the inability or
insolvency of the new debtor, hence, the creditor should agree to accept the substitution
in order that it may be binding on him.
Thus, in a contract where x is the creditor and y is the debtor, if y enters into a contract
with z, under which he transfers to z all his rights under the first contract, together with
the obligations thereunder, but such transfer is not consented to or approved by x, there
is no novation. X can still bring his action against y for performance of their contract or
damages in case of breach. [Tolentino, Civil Code of the Philippines, Vol. IV, p. 3611.
From the evidence, it is clear that the appellees, instead of availing themselves of the options given to
them by law of rescission or refusal to recognize the substitute obligor Yulo, really wanted to postpone
the fight date owing to an injury that Elorde sustained in a recent bout. That the appellees had the
justification to renegotiate the original contract, particularly the fight date is undeniable from the facts
aforestated. Under the circumstances, the appellees' desire to postpone the fight date could neither be
unlawful nor unreasonable.
We uphold the appellees' contention that since all the rights on the matter rested with the appellees, and
appellants' claims, if any, to the enforcement of the contract hung entirely upon the former's pleasure
and sufferance, the GAB did not act arbitrarily in acceding to the appellee's request to reset the fight
date to November 4, 1961. It must be noted that appellant Yulo had earlier agreed to abide by the GAB
ruling.
In a show of accommodation, the appellees offered to advance the November 4, 1961 fight to October
28, 1961 just to place it within the 30- day limit of allowable postponements stipulated in the original
boxing contract.
The refusal of appellants to accept a postponement without any other reason but the implementation of
the terms of the original boxing contract entirely overlooks the fact that by virtue of the violations they
have committed of the terms thereof, they have forfeited any right to its enforcement.
On the validity of the fight postponement, the violations of the terms of the original contract by
appellants vested the appellees with the right to rescind and repudiate such contract altogether. That
they sought to seek an adjustment of one particular covenant of the contract, is under the
circumstances, within the appellee's rights.

While the appellants concede to the GAB's authority to regulate boxing contests, including the setting
of dates thereof, [pp. 44-49, t.s.n., Jan. 17, 1963], it is their contention that only Manuel Nieto, Jr. made
the decision for postponement, thereby arrogating to himself the prerogatives of the whole GAB Board.
The records do not support appellants' contention. Appellant Yulo himself admitted that it was the GAB
Board that set the questioned fight date. [pp. 32-42, t.s.n., Jan. 17, 1963]. Also, it must be stated that
one of the strongest presumptions of law is that official duty has been regularly performed. In this case,
the absence of evidence to the contrary, warrants the full application of said presumption that the
decision to set the Elorde-Boysaw fight on November 4, 1961 was a GAB Board decision and not of
Manuel Nieto, Jr. alone.
Anent the lower court's refusal to postpone the July 23, 1963 trial, suffice it to say that the same issue
had been raised before Us by appellants in a petition for certiorari and prohibition docketed as G.R. No.
L-21506. The dismissal by the Court of said petition had laid this issue to rest, and appellants cannot
now hope to resurrect the said issue in this appeal.
On the denial of appellant's motion for a new trial, we find that the lower court did not commit any
reversible error.
The alleged newly discovered evidence, upon which the motion for new trial was made to rest, consists
merely of clearances which Boysaw secured from the clerk of court prior to his departure for abroad.
Such evidence cannot alter the result of the case even if admitted for they can only prove that Boysaw
did not leave the country without notice to the court or his counsel.
The argument of appellants is that if the clearances were admitted to support the motion for a new trial,
the lower court would have allowed the postponement of the trial, it being convinced that Boysaw did
not leave without notice to the court or to his counsel. Boysaw's testimony upon his return would, then,
have altered the results of the case.
We find the argument without merit because it confuses the evidence of the clearances and the
testimony of Boysaw. We uphold the lower court's ruling that:
The said documents [clearances] are not evidence to offset the evidence adduced during
the hearing of the defendants. In fact, the clearances are not even material to the issues
raised. It is the opinion of the Court that the 'newly discovered evidence' contemplated in
Rule 37 of the Rules of Court, is such kind of evidence which has reference to the merits
of the case, of such a nature and kind, that if it were presented, it would alter the result of
the judgment. As admitted by the counsel in their pleadings, such clearances might have
impelled the Court to grant the postponement prayed for by them had they been
presented on time. The question of the denial of the postponement sought for by counsel
for plaintiffs is a moot issue . . . The denial of the petition for certiorari and prohibition
filed by them, had he effect of sustaining such ruling of the court . . . [pp. 296-297,
Record on Appeal].
The testimony of Boysaw cannot be considered newly discovered evidence for as appellees rightly

contend, such evidence has been in existence waiting only to be elicited from him by questioning.
We cite with approval appellee's contention that "the two qualities that ought to concur or dwell on
each and every of evidence that is invoked as a ground for new trial in order to warrant the reopening . .
. inhered separately on two unrelated species of proof" which "creates a legal monstrosity that deserves
no recognition."
On the issue pertaining to the award of excessive damages, it must be noted that because the appellants
wilfully refused to participate in the final hearing and refused to present documentary evidence after
they no longer had witnesses to present, they, by their own acts prevented themselves from objecting to
or presenting proof contrary to those adduced for the appellees.
On the actual damages awarded to appellees, the appellants contend that a conclusion or finding based
upon the uncorroborated testimony of a lone witness cannot be sufficient. We hold that in civil cases,
there is no rule requiring more than one witness or declaring that the testimony of a single witness will
not suffice to establish facts, especially where such testimony has not been contradicted or rebutted.
Thus, we find no reason to disturb the award of P250,000.00 as and for unrealized profits to the
appellees.
On the award of actual damages to Interphil and Sarreal, the records bear sufficient evidence presented
by appellees of actual damages which were neither objected to nor rebutted by appellants, again
because they adamantly refused to participate in the court proceedings.
The award of attorney's fees in the amount of P5,000.00 in favor of defendant-appellee Manuel Nieto,
Jr. and another P5,000.00 in favor of defendants-appellees Interphil Promotions, Inc. and Lope Sarreal,
Sr., jointly, cannot also be regarded as excessive considering the extent and nature of defensecounsels'
services which involved legal work for sixteen [16] months.
However, in the matter of moral damages, we are inclined to uphold the appellant's contention that the
award is not sanctioned by law and well- settled authorities. Art. 2219 of the Civil Code provides:
Art. 2219. Moral damages may be recovered in the following analogous cases:
1) A criminal offense resulting in physical injuries;
2) Quasi-delict causing physical injuries;
3) Seduction, abduction, rape or other lascivious acts;
4) Adultery or concubinage;
5) Illegal or arbitrary detention or arrest;
6) Illegal search;
7) Libel, slander or any other form of defamation;
8) Malicious prosecution;
9) Acts mentioned in Art. 309.

10) Acts and actions referred to in Arts., 21, 26, 27, 28, 29, 30, 32, 34 and 35.
The award of moral damages in the instant case is not based on any of the cases enumerated in Art.
2219 of the Civil Code. The action herein brought by plaintiffs-appellants is based on a perceived
breach committed by the defendants-appellees of the contract of May 1, 1961, and cannot, as such, be
arbitrarily considered as a case of malicious prosecution.
Moral damages cannot be imposed on a party litigant although such litigant exercises it erroneously
because if the action has been erroneously filed, such litigant may be penalized for costs.
The grant of moral damages is not subject to the whims and caprices of judges or courts.
The court's discretion in granting or refusing it is governed by reason and justice. In
order that a person may be made liable to the payment of moral damages, the law
requires that his act be wrongful. The adverse result of an action does not per se make
the act wrongful and subject the actor to the payment of moral damages. The law could
not have meant to impose a penalty on the right to litigate; such right is so precious that
moral damages may not be charged on those who may exercise it erroneously. For these
the law taxes costs. [Barreto vs. Arevalo, et. al. No. L-7748, Aug. 27, 1956, 52 O.G., No.
13, p. 5818.]
WHEREFORE, except for the award of moral damages which is herein deleted, the decision of the
lower court is hereby affirmed.
SO ORDERED.
Manila
SECOND DIVISION
G.R. No. L-67881 June 30, 1987
PILIPINAS BANK as Successor-In-Interest Of And/Or In substitution to, The
MANUFACTURERS BANK AND TRUST COMPANY, petitioner-appellant
vs.
INTERMEDIATE APPELLATE COURT (Fourth Civil Cases Division), and JOSE W. DIOKNO
and CARMEN I. DIOKNO, respondents-appellees.

PARAS, J.:
This is an appeal by certiorari from the Decision

1 of the respondent court dated May 31, 1984 in CA-G.R. CV No. 67205 entitled

"Jose W. Diokno and Carmen I. Diokno, plaintiffs-appellees, vs. The Manufacturers Bank and Trust Company, defendant-appellant" which affirmed the decision

2 of the Court of First Instance of Rizal (Pasig Branch XXI) in Civil Case No. 19660, the dispositive portion of
which reads:

WHEREFORE, judgment is rendered in favor of the plaintiffs and against the defendant,
ordering the defendant Manufacturers Bank & Trust Company:

1. To deliver to the plaintiffs the parcel of land described in Contract to Sell No. VV-18(a) in the total area of 5,936 square meters and to execute in their favor the necessary
deed of absolute sale therefor;
2. To pay the sum of P556,160.00 less the amount due on the contract (i.e., the unpaid
installments from December, 1966 until the contract would have been fully paid together
with interest thereon up to March 25, 1974) with legal interest on said balance from
April 22, 1974 until the same is fully paid;
3. P50,000.00 by way of moral damages;
4. P50,000.00 by way of exemplary damages;
5. Ten per cent (10%) of the judgment by way of attorney's fees; and
6. Costs of suit.
SO ORDERED. (Rollo, pp. 14-15)
The following are the undisputed facts of the case:
1. On April 18, 1961, Hacienda Benito, Inc. (petitioner's predecessor-in-interest) as vendor, and private
respondents, as vendees executed Contract to Sell No. VV-18 (a) (Exh. A) over a parcel of land with an
area of 5,936 square meters of the Victoria Valley Subdivision in Antipolo, Rizal, subject to the
following terms and conditions, among others, relevant to this petition:
(a) The total contract price for the entire 5,936 square-meter-lot was P47,488.00;
(b) Of the total sum, an amount of Pl2,182.00 was applied thereto so as to reduce the
balance on the principal to P35,306.00;
(c) The aforesaid balance, together with the stipulated interest of 6% per annum, was to
be paid over a period of 8-1/2 years starting on May 1, 1961 at a monthly installment of
P446.10 until fully paid-although this monthly installment was later adjusted to the
higher amount of P797.86, starting on April 1, 1965;
(d) Upon complete payment by the vendee of the total price of the lot the vendor shall
execute a deed of sale in favor of the vendee;
(e) The contract shall be considered automatically rescinded and cancelled and of no
further force and effect upon failure of the vendee to pay when due, three or more
consecutive installments as stipulated therein or to comply with any of the terms and
conditions thereof, in which case the vendor shall have right to resell the said parcel of
land to any person interested, forfeiting payments made by the vendee as liquidated
damages.
2. On July 27, 1965, petitioner sent to private respondents a Statement of Account (Exh. F-1)
requesting remittance of installment arrears showing partial payments for the month of April 1965 and
May 1965 and complete default for June, July and August, 1965;

3. Likewise, on August 31, 1965, petitioner sent to private respondents another Statement of Account
with the additional entries of interests and the incoming installment for September, 1965;
4. In partial compliance with the aforesaid Statements of Account, private respondents paid on
September 3, 1965 the sum of Pl,397.00 which answers for the installments for the months of June
1965 to August 1965;
5. On March 17, 1967, petitioner sent private respondents a simple demand letter showing a
delinquency in their monthly amortizations for 19 months (Exh. 9);
6. On April 17, 1967, petitioner again sent private respondents a demand letter showing total arrearages
of 20 months as of April 1965, but this time advising that unless they up-date their installment
payments, petitioner shall be constrained to avail of the automatic rescission clause (Exh. 10);
7. On May 17, 1967, private respondents made a partial payment of P2,000.00 with the request for an
extension of 60 days from May 17, 1967 within which to up-date their account (Exh. 10-a);
8. On July 17, 1967, private respondents wrote a letter to petitioner asking another extension of sixty
(60) days to pay all their arrearages and update their payments under Contract No. VV-18 (a);
9. On September 18, 1967, private respondents paid P5,000.00 as partial payment and requested an
extension of another 30 days from September 18, 1967 within which to update their account (Exh. 10c);
10. On October 19, 1967, however, private respondents failed to update their arrearages and did not
request for any further extension of time within which to update their account;
11. After almost three (3) years, or on July 16, 1970, private respondents wrote a letter to petitioner
requesting for a Statement of Account as of date in arrears and interests(Exh. 10-d), to which petitioner
made a reply on July 22, 1970 (Exh. 11);
12. On May 19, 1971, petitioner wrote a letter to private respondents, reminding them of their balance
which will be due on the 31st instant (Exh. J);
13. More than two (2) years from May 19, 1971 or on July 5, 1973, private respondents wrote a letter to
petitioner expressing their desire to fully settle their obligation, requesting for a complete statement of
all the balance due including interests;
14. On March 14, 1974, private respondents wrote a letter reiterating their request in their letter dated
July 5, 1973, which has not been complied with despite several follow-ups (Exh. O);
15. On March 25, 1974, private respondent Carmen I. Diokno went to see the Chairman of petitioner's
Board of Directors on the matter informing him that she had a buyer who was ready to purchase the
property,
16. On March 27, 1974, petitioner wrote a letter to private respondents, informing them that the
contract to sell had been rescinded/cancelled by a notarial act, to which letter was annexed a "Demand
for Rescission of Contract", notarized on March 25, 1974 (Exh. 12);

17. In view of the foregoing, private respondents filed Complaint for Specific Performance with
Damages to compel petitioner to execute a deed of sale in their favor, and to deliver to them the title of
the lot in question.
18. Petitioner filed an Answer with counterclaim for damages in the form of attorney's fees, claiming
that Contract to Sell No. VV-18(a) has been automatically rescinded or cancelled by virtue of private
respondents' failure to pay the installments due in the contract under the automatic rescission clause.
19. After trial, the lower court rendered a decision in private respondents' favor, holding that petitioner
could not rescind the contract to sell, because: (a) petitioner waived the automatic rescission clause by
accepting payment on September 1967, and by sending letters advising private respondents of the
balances due, thus, looking forward to receiving payments thereon; (b) in any event, until May 18,
1977 (when petitioner made arrangements for the acquisition of additional 870 square meters)
petitioner could not have delivered the entire area contracted for, so, neither could private respondents
be liable in default, citing Art. 1 189 of the New Civil Code. (Decision, pp. 141-148, Amended Record
on Appeal).
Said decision was affirmed on appeal.
Hence, this Petition For Review on Certiorari, raising the main issue of whether or not the Contract to
Sell No. VV-18(a) was rescinded or cancelled, under the automatic rescission clause contained therein.
We find the petition meritless. While it is true that in the leading case of Luzon Brokerage Co., Inc. vs.
Maritime Building Co., Inc. and Myers Building Co., 43 SCRA 93 the Supreme Court reiterated among
other things that a contractual provision allowing "automatic rescission" (without prior need of judicial
rescission, resolution or cancellation) is VALID, the remedy of one who feels aggrieved being to go to
Court for the cancellation of the rescission itself, in case the rescission is found unjustified under the
circumstances, still in the instant case there is a clear WAIVER of the stipulated right of "automatic
rescission," as evidenced by the many extensions granted private respondents by the petitioner. In all
these extensions, the petitioner never called attention to the proviso on "automatic rescission."
WHEREFORE the assailed decision is hereby AFFIRMED but the actual damages are hereby reduced
to P250,000.00 (the profit private respondents could have earned had the land been delivered to them at
the time they were ready to pay all their arrearages) minus whatever private respondents still owe the
petitioner (with the stipulated 6% annual interest up to March 25, 1974) as a result of the contract.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., Padilla and Cortes, JJ., concur.
Bidin, J., took no part.

Footnotes
1 Penned by Justice Porfirio V. Sison concurred in by Justices Abdulwahid A. Bidin,
Marcelino R. Veloso, and Desiderio P. Jurado.

2 Penned by Judge Gregorio G. Pineda.

The Lawphil Project - Arellano Law Foundation
G.R. No. L-45710 October 3, 1985
CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO,
JR. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as
statutory receiver of Island Savings Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of
Appeals, in C.A.-G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February
15, 1972 of the Court of First Instance of Agusan, which dismissed the petition of respondent Sulpicio
M. Tolentino for injunction, specific performance or rescission, and damages with preliminary
injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department,
approved the loan application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan,
executed on the same day a real estate mortgage over his 100-hectare land located in Cubo, Las Nieves,
Agusan, and covered by TCT No. T-305, and which mortgage was annotated on the said title the next
day. The approved loan application called for a lump sum P80,000.00 loan, repayable in semi-annual
installments for a period of 3 years, with 12% annual interest. It was required that Sulpicio M.
Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a
subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and
Sulpicio M. Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12%
annual interest, payable within 3 years from the date of execution of the contract at semi-annual
installments of P3,459.00 (p. 64, rec.). An advance interest for the P80,000.00 loan covering a 6-month
period amounting to P4,800.00 was deducted from the partial release of P17,000.00. But this prededucted interest was refunded to Sulpicio M. Tolentino on July 23, 1965, after being informed by the
Bank that there was no fund yet available for the release of the P63,000.00 balance (p. 47, rec.). The
Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance
(p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was
suffering liquidity problems, issued Resolution No. 1049, which provides:

In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit
liabilities, the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans,
provided that such extensions or renewals shall be subject to review by the
Superintendent of Banks, who may impose such limitations as may be necessary to
insure correction of the bank's deficiency as soon as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the
required capital to restore its solvency, issued Resolution No. 967 which prohibited Island Savings
Bank from doing business in the Philippines and instructed the Acting Superintendent of Banks to take
charge of the assets of Island Savings Bank (pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the
promissory note, filed an application for the extra-judicial foreclosure of the real estate mortgage
covering the 100-hectare land of Sulpicio M. Tolentino; and the sheriff scheduled the auction for
January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan
for injunction, specific performance or rescission and damages with preliminary injunction, alleging
that since Island Savings Bank failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is
entitled to specific performance by ordering Island Savings Bank to deliver the P63,000.00 with
interest of 12% per annum from April 28, 1965, and if said balance cannot be delivered, to rescind the
real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary
restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the
mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the
petition of Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central
Bank and by the Acting Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding
unmeritorious the petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the
amount of PI 7 000.00 plus legal interest and legal charges due thereon, and lifting the restraining order
so that the sheriff may proceed with the foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of
First Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific
performance, but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor

collect the P17,000.00 loan pp. 30-:31. rec.).

Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory
note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate
mortgage be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on
April 28, 1965, they undertook reciprocal obligations. In reciprocal obligations, the obligation or
promise of each party is the consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46
[1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1 [1969]); and when one party has performed or is ready
and willing to perform his part of the contract, the other party who has not performed or is not ready
and willing to perform incurs in delay (Art. 1169 of the Civil Code). The promise of Sulpicio M.
Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the
P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he
signified his willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings
Bank to furnish the P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan
started on April 28, 1965, and lasted for a period of 3 years or when the Monetary Board of the Central
Bank issued Resolution No. 967 on June 14, 1968, which prohibited Island Savings Bank from doing
further business. Such prohibition made it legally impossible for Island Savings Bank to furnish the
P63,000.00 balance of the P80,000.00 loan. The power of the Monetary Board to take over insolvent
banks for the protection of the public is recognized by Section 29 of R.A. No. 265, which took effect
on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island
Savings Bank in complying with its obligation of releasing the P63,000.00 balance because said
resolution merely prohibited the Bank from making new loans and investments, and nowhere did it
prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.
Besides, the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the
contract, nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs.
Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a debtor is never an
excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract by him
(vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest
amounting to P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken
as a waiver of his right to collect the P63,000.00 balance. The act of Island Savings Bank, in asking the
advance interest for 6 months on the supposed P80,000.00 loan, was improper considering that only

P17,000.00 out of the P80,000.00 loan was released. A person cannot be legally charged interest for a
non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the pre-deducted interest was an
exercise of his right to it, which right exist independently of his right to demand the completion of the
P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of the
other.
The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot
exempt it from complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This
Court previously ruled that bank officials and employees are expected to exercise caution and prudence
in the discharge of their functions (Rural Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is
the obligation of the bank's officials and employees that before they approve the loan application of
their customers, they must investigate the existence and evaluation of the properties being offered as a
loan security. The recent rush of events where collaterals for bank loans turn out to be non-existent or
grossly over-valued underscore the importance of this responsibility. The mere reliance by bank
officials and employees on their customer's representation regarding the loan collateral being offered as
loan security is a patent non-performance of this responsibility. If ever bank officials and employees
totally reIy on the representation of their customers as to the valuation of the loan collateral, the bank
shall bear the risk in case the collateral turn out to be over-valued. The representation made by the
customer is immaterial to the bank's responsibility to conduct its own investigation. Furthermore, the
lower court, on objections of' Sulpicio M. Tolentino, had enjoined petitioners from presenting proof on
the alleged over-valuation because of their failure to raise the same in their pleadings (pp. 198-199,
t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the Rules of Court, Section 2, Rule 9,
which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are
deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan
agreement, Sulpicio M. Tolentino, under Article 1191 of the Civil Code, may choose between specific
performance or rescission with damages in either case. But since Island Savings Bank is now
prohibited from doing further business by Monetary Board Resolution No. 967, WE cannot grant
specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the
P63,000.00 balance of the P80,000.00 loan, because the bank is in default only insofar as such amount
is concerned, as there is no doubt that the bank failed to give the P63,000.00. As far as the partial
release of P17,000.00, which Sulpicio M. Tolentino accepted and executed a promissory note to cover
it, the bank was deemed to have complied with its reciprocal obligation to furnish a P17,000.00 loan.
The promissory note gave rise to Sulpicio M. Tolentino's reciprocal obligation to pay the P17,000.00
loan when it falls due. His failure to pay the overdue amortizations under the promissory note made
him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If there is a
right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank.
If Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3
years, he would be entitled to ask for rescission of the entire loan because he cannot possibly be in

default as there was no date for him to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that is,
Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M.
Tolentino failed to comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated,
they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their
reciprocal obligations, the liability of the first infractor shall be equitably tempered by the courts. WE
rule that the liability of Island Savings Bank for damages in not furnishing the entire loan is offset by
the liability of Sulpicio M. Tolentino for damages, in the form of penalties and surcharges, for not
paying his overdue P17,000.00 debt. The liability of Sulpicio M. Tolentino for interest on his PI
7,000.00 debt shall not be included in offsetting the liabilities of both parties. Since Sulpicio M.
Tolentino derived some benefit for his use of the P17,000.00, it is just that he should account for the
interest thereon.
WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed
to satisfy his P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the principal
contract (Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his
obligation to pay is the existence of a debt. Thus, in the accessory contract of real estate mortgage, the
consideration of the debtor in furnishing the mortgage is the existence of a valid, voidable, or
unenforceable debt (Art. 2086, in relation to Art, 2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then
in existence, as there was no debt yet because Island Savings Bank had not made any release on the
loan, does not make the real estate mortgage void for lack of consideration. It is not necessary that any
consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs.
C.A., 125 SCRA 122 [1983]). lt may either be a prior or subsequent matter. But when the consideration
is subsequent to the mortgage, the mortgage can take effect only when the debt secured by it is created
as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in the 8th ed., Jones on
Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage becomes
unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59,
1974 ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than
the sum named in the mortgage, the mortgage cannot be enforced for more than the actual sum due
(Metropolitan Life Ins. Co. vs. Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol.
1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real
estate mortgage of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75%
of P80,000.00, hence the real estate mortgage covering 100 hectares is unenforceable to the extent of
78.75 hectares. The mortgage covering the remainder of 21.25 hectares subsists as a security for the
P17,000.00 debt. 21.25 hectares is more than sufficient to secure a P17,000.00 debt.

The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is
inapplicable to the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the
successors in interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is not
completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge
or cancel the mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several
heirs of the debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a
mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS
HEREBY MODIFIED, AND
1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN
PETITIONERS THE SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST
PER ANNUM COVERING THE PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12%
INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE
COVERING 21.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL
INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED
UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M.
TOLENTINO.
NO COSTS. SO ORDERED.
Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.
Aquino (Chairman) and Abad Santos, JJ., took no part.
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