G.R. No.

153201 January 26, 2005

JOSE MENCHAVEZ, JUAN MENCHAVEZ JR., SIMEON MENCHAVEZ, RODOLFO MENCHAVEZ, CESAR
MENCHAVEZ, REYNALDO, MENCHAVEZ, ALMA MENCHAVEZ, ELMA MENCHAVEZ, CHARITO M. MAGA, FE
M. POTOT, THELMA M. REROMA, MYRNA M. YBAEZ, and SARAH M. VILLABER, petitioners,
vs.
FLORENTINO TEVES JR., respondent.

DECISION

PANGANIBAN, J.:

Avoid contract is deemed legally nonexistent. It produces no legal effect. As a general rule, courts leave parties to
such a contract as they are, because they are in pari delicto or equally at fault. Neither party is entitled to legal
protection.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, assailing the February 28, 2001
Decision2and the April 16, 2002 Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 51144. The challenged
Decision disposed as follows:

"WHEREFORE, the assailed decision is hereby MODIFIED, as follows:

"1. Ordering [petitioners] to jointly and severally pay the [respondent] the amount of P128,074.40 as actual
damages, and P50,000.00 as liquidated damages;

"2. Dismissing the third party complaint against the third party defendants;

"3. Upholding the counterclaims of the third party defendants against the [petitioners. Petitioners] are hereby
required to pay [the] third party defendants the sum of P30,000.00 as moral damages for the clearly
unfounded suit;

"4. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 in the concept
of attorneys fees and appearance fees of P300.00 per appearance;

"5. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 as exemplary
damages pro bono publico and litigation expenses including costs, in the sum of P5,000.00."4

The assailed Resolution denied petitioners Motion for Reconsideration.

The Facts

On February 28, 1986, a "Contract of Lease" was executed by Jose S. Menchavez, Juan S. Menchavez Sr., Juan S.
Menchavez Jr., Rodolfo Menchavez, Simeon Menchavez, Reynaldo Menchavez, Cesar Menchavez, Charito M.
Maga, Fe M. Potot, Thelma R. Reroma, Myrna Ybaez, Sonia S. Menchavez, Sarah Villaver, Alma S. Menchavez,
and Elma S. Menchavez, as lessors; and Florentino Teves Jr. as lessee. The pertinent portions of the Contract are
l^vvphi1.net

herein reproduced as follows:

"WHEREAS, the LESSORS are the absolute and lawful co-owners of that area covered by FISHPOND
APPLICATION No. VI-1076 of Juan Menchavez, Sr., filed on September 20, 1972, at Fisheries Regional Office No.
VII, Cebu City covering an area of 10.0 hectares more or less located at Tabuelan, Cebu;

xxxxxxxxx
"NOW, THEREFORE, for and in consideration of the mutual covenant and stipulations hereinafter set forth, the
LESSORS and the LESSEE have agreed and hereby agree as follows:

"1. The TERM of this LEASE is FIVE (5) YEARS, from and after the execution of this Contract of Lease,
renewable at the OPTION of the LESSORS;

"2. The LESSEE agrees to pay the LESSORS at the residence of JUAN MENCHAVEZ SR., one of the
LESSORS herein, the sum of FORTY THOUSAND PESOS (P40,000.00) Philippine Currency, annually x x
x;

"3. The LESSORS hereby warrant that the above-described parcel of land is fit and good for the intended
use as FISHPOND;

"4. The LESSORS hereby warrant and assure to maintain the LESSEE in the peaceful and adequate
enjoyment of the lease for the entire duration of the contract;

"5. The LESSORS hereby further warrant that the LESSEE can and shall enjoy the intended use of the
leased premises as FISHPOND FOR THE ENTIRE DURATION OF THE CONTRACT;

"6. The LESSORS hereby warrant that the above-premises is free from all liens and encumbrances, and
shall protect the LESSEE of his right of lease over the said premises from any and all claims whatsoever;

"7. Any violation of the terms and conditions herein provided, more particularly the warranties above-
mentioned, the parties of this Contract responsible thereof shall pay liquidated damages in the amount of not
less than P50,000.00 to the offended party of this Contract; in case the LESSORS violated therefor, they
bound themselves jointly and severally liable to the LESSEE;"

x x x x x x x x x.5

On June 2, 1988, Cebu RTC Sheriffs Gumersindo Gimenez and Arturo Cabigon demolished the fishpond dikes
constructed by respondent and delivered possession of the subject property to other parties. 6 As a result, he filed a
Complaint for damages with application for preliminary attachment against petitioners. In his Complaint, he alleged
that the lessors had violated their Contract of Lease, specifically the peaceful and adequate enjoyment of the
property for the entire duration of the Contract. He claimed P157,184.40 as consequential damages for the
demolition of the fishpond dikes, P395,390.00 as unearned income, and an amount not less than P100,000.00 for
rentals paid.7

Respondent further asserted that the lessors had withheld from him the findings of the trial court in Civil Case No.
510-T, entitled "Eufracia Colongan and Paulino Pamplona v. Juan Menchavez Sr. and Sevillana S. Menchavez." In
that case involving the same property, subject of the lease, the Menchavez spouses were ordered to remove the
dikes illegally constructed and to pay damages and attorneys fees.8

Petitioners filed a Third Party Complaint against Benny and Elizabeth Allego, Albino Laput, Adrinico Che and
Charlemagne Arendain Jr., as agents of Eufracia Colongan and Paulino Pamplona. The third-party defendants
maintained that the Complaint filed against them was unfounded. As agents of their elderly parents, they could not
be sued in their personal capacity. Thus, they asserted their own counterclaims. 9

After trial on the merits, the RTC ruled thus:

"[The court must resolve the issues one by one.] As to the question of whether the contract of lease between Teves
and the [petitioners] is valid, we must look into the present law on the matter of fishponds. And this is Pres. Decree
No. 704 which provides in Sec. 24:

Lease of fishponds-Public lands available for fishpond development including those earmarked for family-size
fishponds and not yet leased prior to November 9, 1972 shall be leased only to qualified persons, associations,
cooperatives or corporations, subject to the following conditions.
 1. The lease shall be for a period of twenty five years (25), renewable for another twenty five years;

2. Fifty percent of the area leased shall be developed and be producing in commercial scale within three
years and the remaining portion shall be developed and be producing in commercial scale within five years;
both periods begin from the execution of the lease contract;

3. All areas not fully developed within five years from the date of the execution of the lease contract shall
automatically revert to the public domain for disposition of the bureau; provided that a lessee who failed to
develop the area or any portion thereof shall not be permitted to reapply for said area or any portion thereof
or any public land under this decree; and/or any portion thereof or any public land under this decree;

4. No portion of the leased area shall be subleased.

The Constitution, (Sec. 2 & 3, Art. XII of the 1987 Constitution) states:

Sec. 2 - All lands of the public domain, waters, minerals, coal, petroleum and other mineral oils, all forces of
potential energy, fisheries, forests, or timber, wild life, flora and fauna and other natural resources are owned by the
state.

Sec. 3 - Lands of the public domain are classified into agricultural, forest or timber, mineral lands and national
parks. Agricultural lands of the public domain may be further classified by law according to the uses to which they
may be devoted. Alienable lands of the public domain shall be limited to agricultural lands x x x.

"As a consequence of these provisions, and the declared public policy of the State under the Regalian Doctrine, the
lease contract between Florentino Teves, Jr. and Juan Menchavez Sr. and his family is a patent nullity. Being a
patent nullity, [petitioners] could not give any rights to Florentino Teves, Jr. under the principle: NEMO DAT QUOD
NON HABET - meaning ONE CANNOT GIVE WHAT HE DOES NOT HAVE, considering that this property in
litigation belongs to the State and not to [petitioners]. Therefore, the first issue is resolved in the negative, as the
court declares the contract of lease as invalid and void ab-initio.

"On the issue of whether [respondent] and [petitioners] are guilty of mutual fraud, the court rules that the
[respondent] and [petitioners] are in pari-delicto. As a consequence of this, the court must leave them where they
are found. x x x.

xxxxxxxxx

"x x x. Why? Because the defendants ought to have known that they cannot lease what does not belong to them for
as a matter of fact, they themselves are still applying for a lease of the same property under litigation from the
government.

"On the other hand, Florentino Teves, being fully aware that [petitioners were] not yet the owner[s], had assumed
the risks and under the principle of VOLENTI NON FIT INJURIA NEQUES DOLUS - He who voluntarily assumes a
risk, does not suffer damage[s] thereby. As a consequence, when Teves leased the fishpond area from [petitioners]-
who were mere holders or possessors thereof, he took the risk that it may turn out later that his application for lease
may not be approved.

"Unfortunately however, even granting that the lease of [petitioners] and [their] application in 1972 were to be
approved, still [they] could not sublease the same. In view therefore of these, the parties must be left in the same
situation in which the court finds them, under the principle IN PARI DELICTO NON ORITOR ACTIO, meaning[:]
Where both are at fault, no one can found a claim.

"On the third issue of whether the third party defendants are liable for demolishing the dikes pursuant to a writ of
execution issued by the lower court[, t]his must be resolved in the negative, that the third party defendants are not
liable. First, because the third party defendants are mere agents of Eufracia Colongan and Eufenio Pamplona, who
l^vvphi1.net

are the ones who should be made liable if at all, and considering that the demolition was pursuant to an order of the
court to restore the prevailing party in that Civil Case 510-T, entitled: Eufracia Colongan v. Menchavez.
"After the court has ruled that the contract of lease is null and void ab-initio, there is no right of the [respondent] to
protect and therefore[,] there is no basis for questioning the Sheriffs authority to demolish the dikes in order to
restore the prevailing party, under the principle VIDETUR NEMO QUISQUAM ID CAPERE QUOD EI NECESSE
EST ALII RESTITUERE - He will not be considered as using force who exercise his rights and proceeds by the force
of law.

"WHEREFORE, in view of all foregoing [evidence] and considerations, this court hereby renders judgment as
follows:

"1. Dismissing the x x x complaint by the [respondent] against the [petitioners];

"2. Dismissing the third party complaint against the third party defendants;

"3. Upholding the counterclaims of the third party defendants against the [petitioners. The petitioners] are
hereby required to pay third party defendants the sum of P30,000.00 as moral damages for this clearly
unfounded suit;

"4. Requiring the [petitioners] to reimburse the third party defendants the sum of P10,000.00 in the concept
of attorneys fees and appearance fees of P300.00 per appearance;

"5. Requiring the [petitioners] to pay to the third party defendants the sum of P10,000.00 as exemplary
damages probono publico and litigation expenses including costs, in the sum of P5,000.00."10 (Underscoring
in the original)

Respondent elevated the case to the Court of Appeals, where it was docketed as CA-GR CV No. 51144.

Ruling of the Court of Appeals

The CA disagreed with the RTCs finding that petitioners and respondent were in pari delicto. It contended that while
there was negligence on the part of respondent for failing to verify the ownership of the subject property, there was
no evidence that he had knowledge of petitioners lack of ownership.11 It held as follows:

"x x x. Contrary to the findings of the lower court, it was not duly proven and established that Teves had actual
knowledge of the fact that [petitioners] merely usurped the property they leased to him. What Teves admitted was
that he did not ask for any additional document other than those shown to him, one of which was the fishpond
application. In fact, [Teves] consistently claimed that he did not bother to ask the latter for their title to the property
because he relied on their representation that they are the lawful owners of the fishpond they are holding for lease.
(TSN, July 11, 1991, pp. 8-11)"121awphi1.nt

The CA ruled that respondent could recover actual damages in the amount of P128,074.40. Citing Article 1356 13 of
the Civil Code, it further awarded liquidated damages in the amount of P50,000, notwithstanding the nullity of the
Contract.14

Hence, this Petition.15

The Issues

Petitioners raise the following issues for our consideration:

"1. The Court of Appeals disregarded the evidence, the law and jurisprudence when it modified the trial
courts decision when it ruled in effect that the trial court erred in holding that the respondent and petitioners
are in pari delicto, and the courts must leave them where they are found;

"2. The Court of Appeals disregarded the evidence, the law and jurisprudence in modifying the decision of
the trial court and ruled in effect that the Regional Trial Court erred in dismissing the respondents
Complaint."16
The Courts Ruling

The Petition has merit.

Main Issue:

Were the Parties in Pari Delicto?

The Court shall discuss the two issues simultaneously.

In Pari Delicto Rule on Void Contracts

The parties do not dispute the finding of the trial and the appellate courts that the Contract of Lease was
void.17Indeed, the RTC correctly held that it was the State, not petitioners, that owned the fishpond. The 1987
Constitution specifically declares that all lands of the public domain, waters, fisheries and other natural resources
belong to the State.18 Included here are fishponds, which may not be alienated but only leased. 19 Possession thereof,
no matter how long, cannot ripen into ownership. 20

Being merely applicants for the lease of the fishponds, petitioners had no transferable right over them. And even if
the State were to grant their application, the law expressly disallowed sublease of the fishponds to respondent. 21Void
are all contracts in which the cause, object or purpose is contrary to law, public order or public policy.22

A void contract is equivalent to nothing; it produces no civil effect. 23 It does not create, modify or extinguish a juridical
relation.24 Parties to a void agreement cannot expect the aid of the law; the courts leave them as they are, because
they are deemed in pari delicto or "in equal fault."25 To this rule, however, there are exceptions that permit the return
of that which may have been given under a void contract. 26 One of the exceptions is found in Article 1412 of the Civil
Code, which states:

"Art. 1412. If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the
following rules shall be observed:

"(1) When the fault is on the part of both contracting parties, neither may recover what he has given by virtue
of the contract, or demand the performance of the others undertaking;

"(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of
the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault, may
demand the return of what he has given without any obligation to comply with his promise."

On this premise, respondent contends that he can recover from petitioners, because he is an innocent party to the
Contract of Lease.27 Petitioners allegedly induced him to enter into it through serious misrepresentation. 28

Finding of In Pari Delicto:

A Question of Fact

The issue of whether respondent was at fault or whether the parties were in pari delicto is a question of fact not
normally taken up in a petition for review on certiorari under Rule 45 of the Rules of Court. 29 The present case,
however, falls under two recognized exceptions to this rule. 30 This Court is compelled to review the facts, since the
CAs factual findings are (1) contrary to those of the trial court; 31 and (2) premised on an absence of evidence, a
presumption that is contradicted by the evidence on record.32

Unquestionably, petitioners leased out a property that did not belong to them, one that they had no authority to
sublease. The trial court correctly observed that petitioners still had a pending lease application with the State at the
time they entered into the Contract with respondent. 33
Respondent, on the other hand, claims that petitioners misled him into executing the Contract. 34 He insists that he
relied on their assertions regarding their ownership of the property. His own evidence, however, rebuts his
contention that he did not know that they lacked ownership. At the very least, he had notice of their doubtful
ownership of the fishpond.

Respondent himself admitted that he was aware that the petitioners lease application for the fishpond had not yet
been approved.35 Thus, he knowingly entered into the Contract with the risk that the application might be
disapproved. Noteworthy is the fact that the existence of a fishpond lease application necessarily contradicts a claim
of ownership. That respondent did not know of petitioners lack of ownership is therefore incredible.

The evidence of respondent himself shows that he negotiated the lease of the fishpond with both Juan Menchavez
Sr. and Juan Menchavez Jr. in the office of his lawyer, Atty. Jorge Esparagoza. 36 His counsels presence during the
negotiations, prior to the parties meeting of minds, further debunks his claim of lack of knowledge. Lawyers are
expected to know that fishponds belong to the State and are inalienable. It was reasonably expected of the counsel
herein to advise his client regarding the matter of ownership.

Indeed, the evidence presented by respondent demonstrates the contradictory claims of petitioners regarding their
alleged ownership of the fishpond. On the one hand, they claimed ownership and, on the other, they assured him
that their fishpond lease application would be approved. 37 This circumstance should have been sufficient to place
him on notice. It should have compelled him to determine their right over the fishpond, including their right to lease
it.

The Contract itself stated that the area was still covered by a fishpond application. 38 Nonetheless, although
petitioners declared in the Contract that they co-owned the property, their erroneous declaration should not be used
against them. A cursory examination of the Contract suggests that it was drafted to favor the lessee. It can readily be
presumed that it was he or his counsel who prepared it -- a matter supported by petitioners evidence. 39 The
ambiguity should therefore be resolved against him, being the one who primarily caused it. 40

The CA erred in finding that petitioners had failed to prove actual knowledge of respondent of the ownership status
of the property that had been leased to him. On the contrary, as the party alleging the fact, it was he who had the
burden of proving through a preponderance of evidence 41 -- that they misled him regarding the ownership of the
fishpond. His evidence fails to support this contention. Instead, it reveals his fault in entering into a void Contract. As
both parties are equally at fault, neither may recover against the other.42

Liquidated Damages Not Proper

The CA erred in awarding liquidated damages, notwithstanding its finding that the Contract of Lease was void. Even
if it was assumed that respondent was entitled to reimbursement as provided under paragraph 1 of Article 1412 of
the Civil Code, the award of liquidated damages was contrary to established legal principles. 1a\^/phi1.net

Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of a breach
thereof.43Liquidated damages are identical to penalty insofar as legal results are concerned. 44 Intended to ensure the
performance of the principal obligation, such damages are accessory and subsidiary obligations. 45 In the present
case, it was stipulated that the party responsible for the violation of the terms, conditions and warranties of the
Contract would pay not less than P50,000 as liquidated damages. Since the principal obligation was void, there was
no contract that could have been breached by petitioners; thus, the stipulation on liquidated damages was
inexistent. The nullity of the principal obligation carried with it the nullity of the accessory obligation of liquidated
damages.46

As explained earlier, the applicable law in the present factual milieu is Article 1412 of the Civil Code. This law merely
allows innocent parties to recover what they have given without any obligation to comply with their prestation. No
damages may be recovered on the basis of a void contract; being nonexistent, the agreement produces no juridical
tie between the parties involved. Since there is no contract, the injured party may only recover through other
sources of obligations such as a law or a quasi-contract. 47 A party recovering through these other sources of
obligations may not claim liquidated damages, which is an obligation arising from a contract.
WHEREFORE, the Petition is GRANTED and the assailed Decision and Resolution SET ASIDE. The Decision of
the trial court is hereby REINSTATED.

No pronouncement as to costs.

SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

Footnotes

1
Rollo, pp. 6-14.

2
Id., pp. 45-52. Tenth Division. Penned by Justice Eloy R. Bello Jr., with the concurrence of Justices
Eugenio S. Labitoria (Division chairman) and Perlita J. Tria Tirona (member).

3
Id., p. 53.

4
Assailed Decision, p. 8; rollo, p. 51.

5
Contract of Lease (rollo, pp. 15-17); Assailed Decision, p. 2 (rollo, p. 45-A).

6
Assailed Decision, p. 2; rollo, p. 45-A.

7
Ibid.

8
Ibid.

9
Id., pp. 3 & 46.

10
RTC Decision, pp. 6-9; rollo, pp. 23-26.

11
Assailed Decision, p. 7; rollo, p. 50.

12
Ibid.

13
"Art. 1356. Contracts shall be obligatory, in whatever form they may have been entered into, provided all
the essential requisites for their validity are present. However, when the law requires that a contract be in
some form in order that it may be valid or enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the right of the parties stated in the following
article cannot be exercised."

14
Assailed Decision, p. 8; rollo, p. 51.

The case was deemed submitted for decision on March 1, 2004, upon this Courts receipt of respondents
15

Memorandum, signed by Atty. Jorge L. Esparagoza. Petitioners Memorandum, signed by Atty. Recto A. de
Dios, was received by this Court on March 2, 2004.

16
Petitioners Memorandum, p. 5; rollo, p. 144.

17
See Petitioners Memorandum, p. 7 (rollo, p. 146); respondents Brief filed with the CA, p. 7 (rollo, p. 33).
18
2, Article XII of the 1987 Constitution.

The law in force at the time the Contract was executed was PD 704, "The Fisheries Decree of 1975,"
19

approved on May 16, 1975. Under Sec. 23 of this decree, public lands suitable for fishpond purposes were
not to be disposed of by sale.

On this matter, the applicable law now is RA 8550, "The Philippine Fisheries Code of 1998,"
approved on February 25, 1998. Its pertinent provision reads:

"Section 45. Disposition of Public Lands for Fishery Purposes. Public lands such as tidal swamps,
mangroves, marshes, foreshore lands and ponds suitable for fishery operations shall not be
disposed or alienated. Upon effectivity of this Code, [Fishpond Lease Agreements or] FLA may be
issued for public lands that may be declared available for fishpond development primarily to qualified
fisherfolk cooperatives/associations: Provided, however, That upon the expiration of existing FLAs
the current lessees shall be given priority and be entitled to an extension of twenty-five (25) years in
the utilization of their respective leased areas. Thereafter, such FLAs shall be granted to any Filipino
citizen with preference, primarily to qualified fisherfolk cooperatives/associations as well as small
and medium enterprises as defined under Republic Act No. 8289: Provided, further, That the
Department shall declare as reservation, portions of available public lands certified as suitable for
fishpond purposes for fish sanctuary, conservation, and ecological purposes: Provided, finally, That
two (2) years after the approval of this Act, no fish pens or fish cages or fish traps shall be allowed in
lakes."

20
See Republic of the Philippines v. Court of Appeals, 374 Phil. 209, 219, September 30, 1999.

21
In PD 704, the prohibition on subleasing a fishpond was retained in RA 8550, from which we quote:

"Section 46. Lease of Fishponds. Fishpond leased to qualified persons and fisherfolk
organizations/cooperatives shall be subject to the following conditions:

"a. Areas leased for fishpond purposes shall be no more than 50 hectares for individuals and
250 hectares for corporations or fisherfolk organizations;

"b. The lease shall be for a period of twenty-five (25) years and renewable for another
twenty-five (25) years: Provided, That in case of the death of the lessee, his spouse and/or
children, as his heirs, shall have preemptive rights to the unexpired term of his Fishpond
Lease Agreement subject to the same terms and conditions provided herein provided that
the said heirs are qualified;

"c. Lease rates for fishpond areas shall be determined by the Department: Provided, That all
fees collected shall be remitted to the National Fisheries Research and Development
Institute and other qualified research institutions to be used for aquaculture research
development;

"d. The area leased shall be developed and producing on a commercial scale within three (3)
years from the approval of the lease contract: Provided, however, That all areas not fully
producing within five (5) years from the date of approval of the lease contract shall
automatically revert to the public domain for reforestation;

"e. The fishpond shall not be subleased, in whole or in part, and failure to comply with
this provision shall mean cancellation of FLA;

"f. The transfer or assignment of rights to FLA shall be allowed only upon prior written
approval of the Department;
 "g. The lessee shall undertake reforestation for river banks, bays, streams, and seashore
fronting the dike of his fishpond subject to the rules and regulations to be promulgated
thereon; and

"h. The lessee shall provide facilities that will minimize environmental pollution, i.e., settling
ponds, reservoirs, etc: Provided, That failure to comply with this provision shall mean
cancellation of FLA." (emphasis supplied)

22
Art. 1409, Civil Code.

23
Tolentino, Civil Code of the Philippines (1991), Vol. IV, p. 629; Tongoy v. Court of Appeals, 208 Phil. 95,
113, June 28, 1983.

24
Id., p. 632; Tongoy v. Court of Appeals, supra.

25
Sodhi, Latin Words and Phrases for Lawyers (1980), p. 115.

In pari delicto is "a universal doctrine which holds that no action arises, in equity or at law, from an
illegal contract; no suit can be maintained for its specific performance, or to recover the property
agreed to be sold or delivered, or the money agreed to be paid, or damages for its violation; and
where the parties are in pari delicto, no affirmative relief of any kind will be given to one against the
other." Moreno, Philippine Law Dictionary (1988), p. 451 (citing Rellosa v. Gaw, 93 Phil. 827, 831,
September 29, 1953).

26
Justice Vitug cites some of these exceptions, under which recovery may be made by any of the following

"(a) The innocent party (Arts. 1411-1412, Civil Code);

"(b) The debtor who pays usurious interest (Art. 1413, Civil Code);

"(c) The party repudiating the void contract before the illegal purpose is accomplished or before
damage is caused to a third person and if public interest is subserved by allowing recovery (Art.
1414, Civil Code);

"(d) The incapacitated party if the interest of justice so demands (Art. 1515, Civil Code);

"(e) The party for whose protection the prohibition by law is intended if the agreement is not
illegal per se but merely prohibited and if public policy would be enhanced by permitting
recovery (Art. 1416, Civil Code); and

"(f) The party for whose benefit the law has been intended such as in price ceiling laws (Art. 1417,
Civil Code) and labor laws (Arts. 1418-1419, Civil Code)." Vitug, Civil Law Annotated, Vol. III (2003),
pp. 159-160.

27
Appellants Brief filed by herein respondent with the CA, p. 7; rollo, p. 33.

28
Ibid.

29
1, Rule 45, Rules of Court.

30
Mighty Corporation v. E&J Gallo Winery, GR No. 154342 , July 14, 2004; CIR v. Embroidery and Garments
Industries (Phil.), Inc., 364 Phil. 541, 546, March 22, 1999; Asia Brewery, Inc. v. Court of Appeals, 224 SCRA
437, 443, July 5, 1993.

Yobido v. Court of Appeals, 346 Phil. 1, 9, October 17, 1997; Co v. Court of Appeals, 317 Phil. 230, 238,
31

August 11, 1995.

 32
Salazar v. Gutierrez, 144 Phil. 233, 239, May 29, 1970.

33
RTC Decision, p. 7; rollo, p. 24.

34
Respondents Memorandum, p. 11; rollo, p. 132.

35
RTC Decision, p. 3; rollo, p. 20.

36
Id., pp. 2 & 19.

37
Id., pp. 3 & 20.

38
Whereas clause, Contract of Lease, p. 1; rollo, p. 15.

39
Juan Menchavez Jr. gave his testimony -- as part of petitioners defense -- that it was Florentino Teves
who had brought the Contract to him and his father, Juan Menchavez Sr., for signature. RTC Decision, p. 4;
rollo, p. 21.

40
Art. 1377 of the Civil Code states that "[t]he interpretation of obscure words or stipulations in a contract
shall not favor the party who caused the obscurity."

See Padilla v. Sps. Paredes, 385 Phil. 128, 139, March 17, 2000; Garcia v. Court of Appeals, 327
Phil. 1097, 1111, July 5, 1996; Villamil v. Court of Appeals, 208 SCRA 643, 650, May 8, 1992; De
Borja v. Court of Agrarian Relations, 79 SCRA 557, 565, October 25, 1977.

41
The burden of proof in civil cases is the preponderance of evidence or the superior weight of evidence for
the issues involved. 1, Rule 133, Rules of Court.

42
Art. 1412 of the Civil Code.

43
Art. 2226 of the Civil Code.

44
Tolentino, Civil Code of the Philippines, Vol. V (1992), p. 662.

45
Tolentino, Civil Code of the Philippines, Vol. IV (1991), p. 264.

Ibid. Under Article 1230 of the Civil Code, the nullity of the principal obligation carries with it that of the
46

penal clause. See also SSS v. Moonwalk Development and Housing Corporation, 221 SCRA 119, April 7,
1993.

Art. 1157 of the Civil Code states that obligations arise from law, contracts, quasi-contracts, delicts and
47

quasi-delicts.

G.R. No. L-12376 August 22, 1958

JOE'S RADIO and ELECTRICAL SUPPLY, plaintiff-appellee,

vs.
ALTO ELECTRONICS CORPORATION and ALTO SURETY and INSURANCE CO.,
INC., defendants-appellants.

Jose W. Diokno for appellee.

Manuel P. Calanog for appellant Alto Electronics Corporation.
Aristorenas and Relova for appellant Alto Surety and Insurance Co., Inc.
REYES, J.B.L., J.:

Appeal from a judgment of the Court of First Instance of Manila, in its Civil Case No. 21805,
ordering the defendants to pay jointly and severally to the plaintiff, the sum of P49,378.77, plus
6 per cent interest per annum from July 2, 1954, plus the further sum of P39,780 as liquidated
damages, with legal interest from the filing of the complaint, provided, however, that the liability
of the defendant surety company shall not exceed P66,150, in accordance with the surety bond.

The facts of this case are practically undisputed, and may be substantially stated as follows:

On May 23, 1953, the plaintiff and appellee and the Bolinao Electronics Corporation entered into
a "dealership agreement", (Exhibit "A"), whereby the latter bound itself to sell and deliver to the
former 500 television sets (RCA TV Model 21T-303, 21" KERBY) at the price of P1,134.00 each, in
two shipments of 250 sets, the first shipment to be made within 90 days from May 23, 1953, and
the next shipment within 60 days after the completion of the first shipment. On its part, the
appellee, Joe's Radio & Electrical Supply, agreed to deposit 1/3 of the total price of the first
shipment, minus a discount of 30 per cent, upon signing the contract; 1/3 of the total price of the
second shipment, minus a discount of 30 per cent, immediately after its receipt of the first
shipment; and the balance of the total price of each shipment (minus the discounts) immediately
after making the performance test of each set in each shipment. To secure the true and faithful
compliance of the agreement by the Bolinao Electronics Corporation, it agreed to put up a surety
bond, in an amount sufficient to cover the advance payment to be made by appellee, and also
that, should the Bolinao Electronics Corporation fail to comply with the terms of the agreement
within the period specified, it would return to appellee upon demand whatever amount or
amounts had been deposited by the latter, with interest at the rate of 6% per annum, plus
damages equivalent to 20 per cent of the total cost of 250 television sets.

The defendant and appellant Alto Electronics Corporation was subrogated to the rights and
obligations of the Bolinao Electronics Corporation in the "dealership agreement" on August 31,
1953; and on the same date, the other defendant-appellant Alto Surety & Insurance Co., Inc.,
issued in favor of appellee a surety bond in the amount of P66,150 to guarantee the full and
faithful performance by the appellant Alto Electronics Corporation under the agreement.

The first shipment of 250 television sets was totally delivered, and totally paid for. Thereafter,
appellee deposited with appellant Alto Electronics Corporation the sum of P66,150, the sum
required under the "dealership agreement" as advance partial payment for the 250 sets of the
second delivery. No delivery having been made on this second batch, suit was commenced
against the defendants and appellants on January 30, 1954.

During the pendency of the case, but before trial was held, the appellee and the Alto Electronics
Corporation entered into another agreement, dated July 2, 1954, wherein the latter admitted
having received from the former the sum of P66,150, as advance partial payment, as
aforementioned, for the remaining 250 television sets slated for delivery by the Alto Electronics
Corporation to the appellee under the dealership agreement; and that, as of the date of the
additional agreement, said sum, together with interest thereon, amounted to P70,008.75. Under
the terms of the second instrument, the said appellant agreed to liquidate this indebtedness by
delivering to appellee 66 television sets of various models, delivery to commence within five
days after the signing of the agreement and to be completed within 90 days thereafter. With this
agreement, the Alto Surety & Insurance Co., Inc. signed in conformity.
However, of the 66 television sets required to be delivered under the agreement, appellant Alto
Electronics Corporation was only able to deliver 13 sets, with a total value of P20,629.98, leaving
an unpaid balance of P49,378.77. Besides these 13 television sets, said appellant also delivered
to appellee two other sets with a total value of P2,928.24, which were accepted by the latter as
"deposit pending receipt of letter of approval from the appellant surety company" presumably
(fearing a release of the surety bond should said delivery be accepted without the surety
company's consent), because delivery was made after the lapse of the period provided in the
second agreement.

In view of such failure of the appellant Alto Electronics Corporation to comply fully with the said
additional agreement, appellee reactivated the present suit and on April 2, 1955, filed an
amended and supplemental complaint alleging the above facts.

As already indicated, the trial court rendered judgment in favor of the plaintiff and appellee.
Against this decision, the defendants-appellants, Alto Electronics Corporation and Alto Surety &
Insurance Co., Inc., appealed to the Court of Appeals, which certified the case to this Court, in
view of section 17, paragraph 2, of the Judiciary Act of 1948, since the amount involved is far in
excess of P50,000.

Appellants, Alto Electronics Corporation and Alto Surety & Insurance Co., Inc., now urge that:

1. The lower court erred in not crediting the appellants with the sum of P2,928.24, representing
the cost (current price less 40 per cent and 2 per cent discount) of three (3) TV sets delivered to
and accepted by the appellee.

2. The lower court erred in holding that the subsequent agreement Exhibit "G" is a supplement to
the original dealership agreement and not a novation thereof.

3. The lower court erred in holding that the stipulation for liquidated damages and interest
contained in the original dealership agreement was tacitly carried over to the subsequent
agreement, Exhibit "G."

4. The lower court erred in holding that the appellants are jointly and severally liable for the
principal sum of P49,378.77, with interest at 6% per annum from July 2, 1954, plus 20 per cent of
the total cost of undelivered sets or the sum of P39,780 as liquidated damages, with interest at 6
per cent per annum from the filing of the complaint on January 30, 1954.

On the first assignment of error, it is urged by appellants that the value of two television sets
which were accepted by appellee as "deposit pending receipt of letter of approval from the Alto
Surety & Insurance Co., Inc.," should be credited to the principal amount owned by appellant Alto
Electronics Corporation. They cite in this regard a statement from the Corpus Juris (Vol. 12, p.
320) to the effect that:

Where a tender is made on condition that it shall be received in settlement of a disputed claim, it
is the duty of the party to whom it is made either to refuse it or accept it on the terms as made.
He has no right to accept the tender and prescribe the terms of the acceptance. Where a tender
thus made is accepted, it is binding, although the acceptance is under protest or with the
express declaration that it is received in part satisfaction only.

G.R. No. L-12376 August 22, 1958

JOE'S RADIO and ELECTRICAL SUPPLY, plaintiff-appellee,
vs.
ALTO ELECTRONICS CORPORATION and ALTO SURETY and INSURANCE CO., INC., defendants-appellants.

Jose W. Diokno for appellee.

Manuel P. Calanog for appellant Alto Electronics Corporation.
Aristorenas and Relova for appellant Alto Surety and Insurance Co., Inc.

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

Appeal from a judgment of the Court of First Instance of Manila, in its Civil Case No. 21805, ordering the defendants
to pay jointly and severally to the plaintiff, the sum of P49,378.77, plus 6 per cent interest per annum from July 2,
1954, plus the further sum of P39,780 as liquidated damages, with legal interest from the filing of the complaint,
provided, however, that the liability of the defendant surety company shall not exceed P66,150, in accordance with
the surety bond.

The facts of this case are practically undisputed, and may be substantially stated as follows:

On May 23, 1953, the plaintiff and appellee and the Bolinao Electronics Corporation entered into a "dealership
agreement", (Exhibit "A"), whereby the latter bound itself to sell and deliver to the former 500 television sets (RCA
TV Model 21T-303, 21" KERBY) at the price of P1,134.00 each, in two shipments of 250 sets, the first shipment to
be made within 90 days from May 23, 1953, and the next shipment within 60 days after the completion of the first
shipment. On its part, the appellee, Joe's Radio & Electrical Supply, agreed to deposit 1/3 of the total price of the
first shipment, minus a discount of 30 per cent, upon signing the contract; 1/3 of the total price of the second
shipment, minus a discount of 30 per cent, immediately after its receipt of the first shipment; and the balance of the
total price of each shipment (minus the discounts) immediately after making the performance test of each set in
each shipment. To secure the true and faithful compliance of the agreement by the Bolinao Electronics Corporation,
it agreed to put up a surety bond, in an amount sufficient to cover the advance payment to be made by appellee,
and also that, should the Bolinao Electronics Corporation fail to comply with the terms of the agreement within the
period specified, it would return to appellee upon demand whatever amount or amounts had been deposited by the
latter, with interest at the rate of 6% per annum, plus damages equivalent to 20 per cent of the total cost of 250
television sets.

The defendant and appellant Alto Electronics Corporation was subrogated to the rights and obligations of the
Bolinao Electronics Corporation in the "dealership agreement" on August 31, 1953; and on the same date, the other
defendant-appellant Alto Surety & Insurance Co., Inc., issued in favor of appellee a surety bond in the amount of
P66,150 to guarantee the full and faithful performance by the appellant Alto Electronics Corporation under the
agreement.

The first shipment of 250 television sets was totally delivered, and totally paid for. Thereafter, appellee deposited
with appellant Alto Electronics Corporation the sum of P66,150, the sum required under the "dealership agreement"
as advance partial payment for the 250 sets of the second delivery. No delivery having been made on this second
batch, suit was commenced against the defendants and appellants on January 30, 1954.

During the pendency of the case, but before trial was held, the appellee and the Alto Electronics Corporation
entered into another agreement, dated July 2, 1954, wherein the latter admitted having received from the former the
sum of P66,150, as advance partial payment, as aforementioned, for the remaining 250 television sets slated for
delivery by the Alto Electronics Corporation to the appellee under the dealership agreement; and that, as of the date
of the additional agreement, said sum, together with interest thereon, amounted to P70,008.75. Under the terms of
the second instrument, the said appellant agreed to liquidate this indebtedness by delivering to appellee 66
television sets of various models, delivery to commence within five days after the signing of the agreement and to
be completed within 90 days thereafter. With this agreement, the Alto Surety & Insurance Co., Inc. signed in
conformity.

However, of the 66 television sets required to be delivered under the agreement, appellant Alto Electronics
Corporation was only able to deliver 13 sets, with a total value of P20,629.98, leaving an unpaid balance of
P49,378.77. Besides these 13 television sets, said appellant also delivered to appellee two other sets with a total
value of P2,928.24, which were accepted by the latter as "deposit pending receipt of letter of approval from the
appellant surety company" presumably (fearing a release of the surety bond should said delivery be accepted
without the surety company's consent), because delivery was made after the lapse of the period provided in the
second agreement.

In view of such failure of the appellant Alto Electronics Corporation to comply fully with the said additional
agreement, appellee reactivated the present suit and on April 2, 1955, filed an amended and supplemental
complaint alleging the above facts.

As already indicated, the trial court rendered judgment in favor of the plaintiff and appellee. Against this decision, the
defendants-appellants, Alto Electronics Corporation and Alto Surety & Insurance Co., Inc., appealed to the Court of
Appeals, which certified the case to this Court, in view of section 17, paragraph 2, of the Judiciary Act of 1948, since
the amount involved is far in excess of P50,000.

Appellants, Alto Electronics Corporation and Alto Surety & Insurance Co., Inc., now urge that:

1. The lower court erred in not crediting the appellants with the sum of P2,928.24, representing the cost
(current price less 40 per cent and 2 per cent discount) of three (3) TV sets delivered to and accepted by the
appellee.

2. The lower court erred in holding that the subsequent agreement Exhibit "G" is a supplement to the original
dealership agreement and not a novation thereof.

3. The lower court erred in holding that the stipulation for liquidated damages and interest contained in the
original dealership agreement was tacitly carried over to the subsequent agreement, Exhibit "G."

4. The lower court erred in holding that the appellants are jointly and severally liable for the principal sum of
P49,378.77, with interest at 6% per annum from July 2, 1954, plus 20 per cent of the total cost of
undelivered sets or the sum of P39,780 as liquidated damages, with interest at 6 per cent per annum from
the filing of the complaint on January 30, 1954.

On the first assignment of error, it is urged by appellants that the value of two television sets which were accepted
by appellee as "deposit pending receipt of letter of approval from the Alto Surety & Insurance Co., Inc.," should be
credited to the principal amount owned by appellant Alto Electronics Corporation. They cite in this regard a
statement from the Corpus Juris (Vol. 12, p. 320) to the effect that:

Where a tender is made on condition that it shall be received in settlement of a disputed claim, it is the duty
of the party to whom it is made either to refuse it or accept it on the terms as made. He has no right to
accept the tender and prescribe the terms of the acceptance. Where a tender thus made is accepted, it is
binding, although the acceptance is under protest or with the express declaration that it is received in part
satisfaction only.

G.R. No. L-33205 August 31, 1987

LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners,
vs.
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE CASTRO, respondents.

FERNAN, J.:

This is an appeal by certiorari involving purely questions of law from the decision rendered by respondent judge in
Civil Case No. Q-12275 entitled "Social Security System versus Lirag Textile Mills, Inc. and Basilio L. Lirag."

The antecedent facts, as stipulated by the parties during the trial, are as follows:

1. That on September 4, 1961, the plaintiff [herein respondent Social Security System] and the
defendants [herein petitioners] Lirag Textile Mills, Inc. and Basilio Lirag entered into a Purchase
Agreement under which the plaintiff agreed to purchase from the said defendant preferred shares of
stock worth ONE MILLION PESOS [P1,000,000.00] subject to the conditions set forth in such
agreement;...

2. That pursuant to the Purchase Agreement of September 4, 1961, the plaintiff, on January 31,
1962, paid the defendant Lirag Textile Mills, Inc. the sum of FIVE HUNDRED THOUSAND PESOS
[P500,000.00] for which the said defendant issued to plaintiff 5,000 preferred shares with a par value
of one hundred pesos [P10000] per share as evidenced by stock Certificate No. 128, ...

3. That further in pursuance of the Purchase Agreement of September 4, 1961, the plaintiff paid to
the Lirag Textile Mills, Inc. the sum of FIVE UNDRED THOUSAND PESOS [P500,000.00] for which
the said defendant issued to plaintiff 5,000 preferred shares with a par value of one hundred pesos
[P100.00] per share as evidenced by Stock Certificate No. 139, ...

4. That in accordance with paragraph 3 of the Purchase Agreement of September 4, 1961 which
provides for the repurchase by the Lirag Textile Mills, Inc. of the shares of stock at regular intervals
of one year beginning with the 4th year following the date of issue, Stock Certificates Nos. 128 and
139 were to be repurchased by the Lirag Textile Mills, Inc. thus:

CERT. No. AMOUNT DATE OF REDEMPTION

128 P100,000.00 February 14, 1965

100,000.00 February 14, 1966

100,000.00 February 14, 1967

100,000.00 February 14, 1968

100,000.00 February 14, 1969

139 P100,000.00 July 3, 1966

100,000.00 July 3,1967

100,000.00 July 3,1968

 100,000.00 July 3, 1969

100,000.00 July 3,1970

5. That to guarantee the redemption of the stocks purchased by the plaintiff, the payment of
dividends, as well as the other obligations of the Lirag Textile Mills, Inc., defendants Basilio L. Lirag
signed the Purchase Agreement of September 4, 1961 not only as president of the defendant
corporation, but also as surety so that should the Lirag Textile Mills, Inc. fail to perform any of its
obligations in the said Purchase Agreement, the surety shall immediately pay to the vendee the
amounts then outstanding pursuant to Condition No. 4, to wit:

To guarantee the redemption of the stocks herein purchased, the payment of the
dividends, as well as other obligations of the VENDOR herein, the SURETY hereby
binds himself jointly and severally liable with the VENDOR so that should the
VENDOR fail to perform any of its obligations hereunder, the SURETY shall
immediately pay to the VENDEE the amounts then outstanding. '

6. That defendant corporation failed to redeem certificates of Stock Nos. 128 and 139 by payment of
the amounts mentioned in paragraph 4 above;

7. That the Lirag Textile Mills, lnc. has not paid dividends in the amounts and within the period set
forth in paragraph 10 of the complaint;*

8. That letters of demands have been sent by the plaintiff to the defendant to redeem the foregoing
stock certificates and pay the dividends set forth in paragraph 10 of the complaint, but the Lirag
Textile Mills, Inc. has not made such redemption nor made such dividend payments;

9. That defendant Basilio L. Lirag likewise received letters of demand from the plaintiff requiring him
to make good his obligation as surety;

10. That notwithstanding such letters of demand to the defendant Basilio L. Lirag, Stock Certificates
Nos. 128 and 139 issued to plaintiff are still unredeemed and no dividends have been paid on said
stock certificates;

11. That paragraph 5 of the Purchase Agreement provides that should the Lirag Textile Mills, Inc. fail
to effect any of the redemptions stipulated therein, the entire obligation shall immediately become
due and demandable and the Lirag Textile Mills, Inc., shall, furthermore, be liable to the plaintiff in an
amount equivalent to twelve per cent [12%] of the amount then outstanding as liquidated damages;

12. That the failure of the Lirag Textile Mills, Inc. to redeem the foregoing certificates of stock and
pay dividends thereon were due to financial reverses, to wit:

[a] Unrestrained smuggling into the country of textiles from the United States and
other countries;

[b] Unrestricted entry of supposed remmants which competed with textiles of

domestic produce to the disadvantage and economic prejudice of the latter;

[c] Scarcity of money and the unavailability of financing facilities;

[d] Payment of interest on matured loans extended to defendant corporation;

 [e] Construction of the Montalban plant of the defendant corporation financed largely
through reparation benefits;

[f] Labor problems occasioned by the fact that the defendant company is financial
(sic) unable to improve, in a substantial way, the economic plight of its workers as a
result of which two costly strikes had occurred, one in 1965 and another in 1968; and

[g] The occurrence of a fire which destroyed more than 1 million worth of raw cotton,
paralyzed operations partially, increased overhead costs and wiped out any expected
profits that year;

13. That it has been the policy of the plaintiff to be represented in the board of directors of the
corporation or entity which has obtained financial assistance from the System be it in terms of loans,
mortgages or equity investments. Thus, pursuant to paragraph 6 of the Purchase Agreement of
September 4, 1961 which provides as follows:

The VENDEE shall be allowed to have a representative in the Board of Directors of

the VENDOR with the right to participate in the discussions and to vote therein;

14. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan were each issued one common
share of stock as a qualifying share to their election to the Board of Directors of the Lirag Textiles
Mills, Inc.;

15. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan, during their respective tenure
as member of the Board of Directors of the Lirag Textile Mills, Inc. attended the meetings of the said
Board, received per diems for their attendance therein in the same manner and in the same amount
as any other member of the Board of Directors, participated in the deliberations therein and freely
exercised their right to vote in such meetings. However, the per diems received by the SSS
representative do not go to the coffers of the System but personally to the representative in the said
board of directors. 1

For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with the terms of the Purchase Agreement, the
SSS filed an action for specific performance and damages before the then Court of First Instance of Rizal, Quezon
City, praying that therein defendants Lirag Textile Mills, Inc. and Basilio L. Lirag be adjudged liable for [1] the entire
obligation of P1M which became due and demandable upon defendants' failure to repurchase the stocks as
scheduled; [21 dividends in the amount of P220,000.00; [31 liquidated damages in an amount equivalent to twelve
percent (12%) of the amount then outstanding; [4] exemplary damages in the amount of P100,000.00 and [5]
attorney's fees of P20,000.00.

Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the complaint, but were denied the relief
sought. Thus, they filed their answer with counterclaim, denying the existence of any obligation on their part to
redeem the preferred stocks, on the ground that the SSS became and still is a preferred stockholder of the
corporation so that redemption of the shares purchased depended upon the financial ability of said corporation.
Insofar as defendant Basilio Lirag is concerned, it was alleged that his liability arises only if the corporation is liable
and does not perform its obligations under the Purchase Agreement. They further contended that no liability on their
part has arisen because of the financial condition of the corporation upon which such liability was made to depend,
particularly the non-realization of any profit or earned surplus. Thus, the other claims for dividends, liquidated
damages and exemplary damages are allegedly without basis.

After entering into the Stipulation of Facts above-quoted, the parties filed their respective memoranda and submitted
the case for decision.
The lower court, ruling that the purchase agreement was a debt instrument, decided in favor of SSS and sentenced
Lirag Textile Mills, Inc. and Basilio L. Lirag to pay SSS jointly and severally P1,000,000.00 plus legal interest until
the said amount is fully paid; P220,000.00 representing the 8% per annum dividends on the preferred shares plus
legal interest up to the time of actual payment; P146,400.00 as liquidated damages; and P10,000.00 as attorney's
fees. The counterclaim of Lirag Textile Mills, Inc. and Basilio L. Lirag was dismissed.

Hence, this petition.

Petitioners assign the following errors:

1. The trial court erred in deciding that the Purchase Agreement is a debt instrument;

2. Respondent judge erred in holding petitioner corporation liable for the payment of the 8%
preferred and cumulative dividends on the preferred shares since the purchase agreement provides
that said dividends shall be paid from the net profits and earned surplus of petitioner corporation and
respondent SSS has admitted that due to losses sustained since -1964, no dividends had been and
can be declared by petitioner corporation;

3. Respondent judge erred in sentencing petitioners to pay P146,400.00 in liquidated damages;

4. Respondent judge erred in sentencing petitioners to pay P10,000.00 by way of attorney's fees;

5. Respondent judge erred in sentencing petitioners to pay interest from the time of firing the
complaint u to the time of full payment both on the P1,000,000.00 invested by respondent SSS in
petitioner's corporation and on the P220,000.00 which the SSS claims as dividends due on its
investments;

6. Respondent judge erred in holding that petitioner Lirag is liable to redeem the P1,000,000.00
worth of preferred shares purchased by respondent SSS from petitioner corporation and the 8%
cumulative dividend, it appearing that Lirag was merely a surety and not an insurer of the obligation;

7. Respondent judge erred in dismissing the counterclaim of petitioners.

The fundamental issue in this case is whether or not the Purchase Agreement entered into by petitioners and
respondent SSS is a debt instrument.

Petitioners claim that respondent SSS merely became and still is a preferred stockholder of the petitioner
corporation, the redemption of the shares purchased by said respondent being dependent upon the financial ability
of petitioner corporation. Petitioner corporation, thus, has no obligation to redeem the preferred stocks.

On the other hand, respondent SSS claims that the Purchase Agreement is a debt instrument, imposing upon the
petitioners the obligation to pay the amount owed, and creating as between them the relation of creditor and debtor,
not that of a stockholder and a corporation.

We uphold the lower court's finding that the Purchase Agreement is, indeed, a debt instrument. Its terms and
conditions unmistakably show that the parties intended the repurchase of the preferred shares on the respective
scheduled dates to be an absolute obligation which does not depend upon the financial ability of petitioner
corporation. This absolute obligation on the part of petitioner corporation is made manifest by the fact that a surety
was required to see to it that the obligation is fulfilled in the event of the principal debtor's inability to do so. The
unconditional undertaking of petitioner corporation to redeem the preferred shares at the specified dates constitutes
a debt which is defined "as an obligation to pay money at some fixed future time, or at a time which becomes
definite and fixed by acts of either party and which they expressly or impliedly, agree to perform in the contract. 2

A stockholder sinks or swims with the corporation and there is no obligation to return the value of his shares by
means of repurchase if the corporation incurs losses and financial reverses, much less guarantee such repurchase
through a surety.

As private respondent rightly contends, if the parties intended it [SSS] to be merely a stockholder of petitioner
corporation, it would have been sufficient that Preferred Certificates Nos. 128 and 139 were issued in its name as
the preferred certificates contained all the rights of a stockholder as well as certain obligations on the part of
petitioner corporation. However, the parties did in fact execute the Purchase Agreement, at the same time that the
petitioner corporation issued its preferred stock to the respondent SSS. The Purchase Agreement serves to define
the rights and obligations of the parties and to establish firmly the liability of petitioners in case of breach of contract.
The Certificates of Preferred Stock serve as additional evidence of the agreement between the parties, though the
precise terms and conditions thereof must be read together with, and regarded as qualified by the terms and
conditions of the Purchase Agreement.

The rights given by the Purchase Agreement to respondent SSS are rights not enjoyed by ordinary stockholders.
This fact could only lead to the conclusion made by the trial court that:

The aforementioned rights specially stipulated for the benefit of the plaintiff [respondent SSS]
suggest eloquently an intention on the part of the plaintiff [respondent SSS] to facilitate a loan to the
defendant corporation upon the latter's request. In order to afford protection to the plaintiff which
otherwise is provided by means of collaterals, as the plaintiff exacts in its grants of loans in its
ordinary transactions of this kind, as it is looked upon more as a lending institution rather than as an
investing agency, the purchase agreement supplied these protective rights which would otherwise be
furnished by collaterals to the loan. Thus, the membership in the board is to have a watchdog in the
operation of the business of the corporation, so as to insure against mismanagement which may
result in losses not entirely unavoidable since payment for purposes of redemption as well as the
dividends is expressly stipulated to come from profits and/or surplus. Such a right is never exacted
by an ordinary stockholder merely investing in the corporation. 3

Moreover, the Purchase Agreement provided that failure on the part of petitioner to repurchase the preferred shares
on the scheduled due dates renders the entire obligation due and demandable, with petitioner in such eventuality
liable to pay 12% of the then outstanding obligation as liquidated damages. These features of the Purchase
Agreement, taken collectively, clearly show the intent of the parties to be bound therein as debtor and creditor, and
not as corporation and stockholder.

Petitioners' contention that it is beyond the power and competence of petitioner corporation to redeem the preferred
shares or pay the accrued dividends due to financial reverses can not serve as legal justification for their failure to
perform under the Purchase Agreement. The Purchase Agreement constitutes the law between the parties and
obligations arising ex contractu must be fulfilled in accordance with the stipulations. 4 Besides, it was precisely this
eventuality that was sought to be avoided when respondent SSS required a surety for the obligation.

Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for petitioner corporation's default. As surety,
Basilio L. Lirag is bound immediately to pay respondent SSS the amount then outstanding.

The obligation of a surety differs from that of a guarantor in that the surety insures the debt, whereas
the guarantor merely insures solvency of the debtor; and the surety undertakes to pay if the principal
does not pay, whereas a guarantor merely binds itself to pay if the principal is unable to pay. 5
On the liability of petitioners to pay 8% cumulative dividend, We agree with the observation of the lower court that
the dividends stipulated by the parties served evidently as interests. 6 The amount thereof was fixed at 8% per annum
and was not made to depend upon or to fluctuate with the amount of profits or surplus realized, a clear indication that the
parties intended to give a sure and fixed earnings on the principal loan. The fact that the dividends were supposed to be
paid out of net profits and earned surplus, of which there were none, does not excuse petitioners from the payment
thereof, again for the reason that the undertaking of petitioner Basilio L. Lirag as surety, included the payment of dividends
and other obligations then outstanding.

The award of the sum of P146,400.00 in liquidated damages representing 12% of the amount then outstanding is
correct, considering that petitioners in the stipulation of facts admitted having failed to fulfill their obligations under
the Purchase Agreement. The grant of liquidated damages in the amount stated is expressly provided for in the
Purchase Agreement in case of contractual breach.

The pronouncement of the lower court for the payment of interests on both the unredeemed shares and unpaid
dividends is also in order. Per stipulation of facts, petitioners did not deny the fact of non-payment of dividends nor
their failure to purchase the preferred shares. Since these involve sums of money which are overdue, they are
bound to earn legal interest from the time of demand, in this case, judicial, i.e., the time of filing the action.

Petitioner Basilio L. Lirag is precluded from denying his liability under the- Purchase Agreement. After his firm
representation to "pay immediately to the VENDEE the amounts then outstanding" evidencing his commitment as
SURETY, he is estopped from denying the same. His signature in the agreement carries with it the official
imprimatur as petitioner corporation's president, in his personal capacity as majority stockholder, as surety and as
solidary obligor. The essence of his obligation as surety is to pay immediately without qualification whatsoever if
petitioner corporation does not pay. To have another interpretation of petitioner Lirag's liability as surety would
violate the integrity of the Purchase Agreement as well as the clear and unmistakable intent of the parties to the
same.

WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social Security System vs. Lirag Textile Mills, Inc.
and Basilio L. Lirag" is hereby affirmed in toto. Costs against petitioners.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortes, JJ., concur.

Footnotes

* Defendants Lirag Textile Mills Inc. and Basilio Lirag under Condition 2 of the Purchase Agreement
obligated themselves to pay on the ONE MILLION PESOS [P1,000,000.00] Preferred Shares
cumulative dividends of Eight Percent [8%] thereon per annum out of the net profits and earned
surplus of the defendant corporation, to wit:

2. The shares of stock shall earn preferred cumulative dividend of EIGHT PERCENT
[8%] per annum out of the net profits and earned surplus of the VENDOR before any
dividend is declared upon the common shares of stock of the VENDOR. XXX

Thus, under paragraph 10 of the complaint, it was alleged

that "defendants as of July 3, 1966 had an overdue account

with the plaintiff in the amount of TWO HUNDRED TWENTY

 THOUSAND PESOS [P220,000.001 representing dividends on

the preferred shares ..." [p. 28, Rollo].

1 Annex "D," Petition, pp. 53-57, Rollo.

2 Eliot v. Fiscal Court of Pike County, 36 S.W. (2d) 619, 621, 237 Ky 797, underscoring supplied.

3 Pp. 66-67, Rollo.

4 Art. 11 59, Civil Code.

5 Manila Surety and Fidelity Co. v. Batu Construction Co., 53 O.G. 8836.

6 P. 62, Rollo.