POLIAND INDUSTRIAL LIMITED, petitioner, vs.

NATIONAL DEVELOPMENT COMPANY, DEVELOPMENT BANK OF THE PHILIPPINES, and THE HONORABLE COURT OF APPEALS (Fourteenth Division) respondents.

ANTECEDENTS The following factual antecedents are matters of record. Between October 1979 and March 1981, Asian Hardwood Limited (Asian Hardwood), a Hong Kong corporation, extended credit accommodations in favor of GALLEON totaling US$3,317,747.32. [2] At that time, GALLEON, a domestic corporation organized in 1977 and headed by its president, Roberto Cuenca, was engaged in the maritime transport of goods. The advances were utilized to augment GALLEON’s working capital depleted as a result of the purchase of five new vessels and two second-hand vessels in 1979 and competitiveness of the shipping industry. GALLEON had incurred an obligation in the total amount of US$3,391,084.91 in favor of Asian Hardwood. To finance the acquisition of the vessels, GALLEON obtained loans from Japanese lenders, namely, Taiyo Kobe Bank, Ltd., Mitsui Bank Ltd. and Marubeni Benelux. On October 10, 1979, GALLEON, through Cuenca, and DBP executed a Deed of Undertaking[3] whereby DBP guaranteed the prompt and punctual payment of GALLEON’s borrowings from the Japanese lenders. To secure DBP’s guarantee under the Deed of Undertaking, GALLEON promised, among others, to secure a first mortgage on the five new vessels and on the second-hand vessels. Thus, GALLEON executed on January 25, 1982 a mortgage contract over five of its vessels namely, M/V “Galleon Honor,” M/V “Galleon Integrity,” M/V “Galleon Dignity,” M/V “Galleon Pride,” and M/V “Galleon Trust” in favor of DBP.[4] Meanwhile, on January 21, 1981, President Ferdinand Marcos issued Letter of Instruction (LOI) No. 1155, directing NDC to acquire the entire shareholdings of GALLEON for the amount originally contributed by its shareholders payable in five (5) years without interest cost to the government. In the same LOI, DBP was to advance to GALLEON within three years from its effectivity the principal amount and the interest thereon of GALLEON’s maturing obligations. On August 10, 1981, GALLEON, represented by its president, Cuenca, and NDC, represented by Minister of Trade Roberto

[G.R. No. 143877. August 22, 2005]

NATIONAL DEVELOPMENT COMPANY, petitioner, vs. POLIAND INDUSTRIAL LIMITED, respondent. DECISION TINGA, J.: Before this Court are two Rule 45 consolidated petitions for review seeking the review of the Decision[1] of the Court of Appeals (Fourth Division) in CA-G.R. CV No. 53257, which modified the Decision of the Regional Trial Court, Branch 61, Makati City in Civil Case No. 91-2798. Upon motion of the Development Bank of the Philippines (DBP), the two petitions were consolidated since both assail the same Decision of the Court of Appeals. In G.R. No. 143866, petitioner Poliand Industrial Limited (POLIAND) seeks judgment declaring the National Development Company (NDC) and the DBP solidarily liable in the amount of US$2,315,747.32, representing the maritime lien in favor of POLIAND and the net amount of loans incurred by Galleon Shipping Corporation (GALLEON). It also prays that NDC and DBP be ordered to pay the attorney’s fees and costs of the proceedings as solidary debtors. In G.R. No. 143877, petitioner NDC seeks the reversal of the Court of Appeals’ Decision ordering it to pay POLIAND the amount of One Million Nine Hundred Twenty Thousand Two Hundred Ninety-Eight and 56/100 United States Dollars (US$1,920,298.56), corresponding to the maritime lien in favor of POLIAND, plus interest.

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Ongpin, forged a Memorandum of Agreement,[5] whereby NDC and GALLEON agreed to execute a share purchase agreement within sixty days for the transfer of GALLEON’s shareholdings. Thereafter, NDC assumed the management and operations of GALLEON although Cuenca remained president until May 9, 1982.[6] Using its own funds, NDC paid Asian Hardwood on January 15, 1982 the amount of US$1,000,000.00 as partial settlement of GALLEON’s obligations.[7] On February 10, 1982, LOI No. 1195 was issued directing the foreclosure of the mortgage on the five vessels. For failure of GALLEON to pay its debt despite repeated demands from DBP, the vessels were extrajudicially foreclosed on various dates and acquired by DBP for the total amount of P539,000,000.00. DBP subsequently sold the vessels to NDC for the same amount.[8] On April 22, 1982, the Board of Directors of GALLEON amended the Articles of Incorporation changing the corporate name from Galleon Shipping Corporation to National Galleon Shipping Corporation and increasing the number of directors from seven to nine.[9] Asian Hardwood assigned its rights over the outstanding obligation of GALLEON of US$2,315,747.32 to World Universal Trading and Investment Company, S.A. (World Universal), embodied in a Deed of Assignment executed on April 29, 1989.[10] World Universal, in turn, assigned the credit to petitioner POLIAND sometime in July 1989.[11] On March 24, 1988, then President Aquino issued Administrative Order No. 64, directing NDC and Philippine Export and Foreign Loan Guarantee Corporation (now Trade and Investment Development Corporation of the Philippines) to transfer some of their assets to the National Government, through the Asset Privatization Trust (APT) for disposition. Among those transferred to the APT were the five GALLEON vessels sold at the foreclosure proceedings. On September 24, 1991, POLIAND made written demands on GALLEON, NDC, and DBP for the satisfaction of the outstanding balance in the amount of US$2,315,747.32.[12] For failure to heed the demand, POLIAND instituted a collection suit against NDC, DBP and

GALLEON filed on October 10, 1991 with the Regional Trial Court, Branch 61, Makati City. POLIAND claimed that under LOI No. 1155 and the Memorandum of Agreement between GALLEON and NDC, defendants GALLEON, NDC, and DBP were solidarily liable to POLIAND as assignee of the rights of the credit advances/loan accommodations to GALLEON. POLIAND also claimed that it had a preferred maritime lien over the proceeds of the extrajudicial foreclosure sale of GALLEON’s vessels mortgaged by NDC to DBP. The complaint prayed for judgment ordering NDC, DBP, and GALLEON to pay POLIAND jointly and severally the balance of the credit advances/loan accommodations in the amount of US$2,315,747.32 and attorney’s fees of P100,000.00 plus 20% of the amount recovered. By way of an alternative cause of action, POLIAND sought reimbursement from NDC and DBP for the preferred maritime lien of US$1,193,298.56.[13] In its Answer with Compulsory Counterclaim and Cross-claim, DBP denied being a party to any of the alleged loan transactions. Accordingly, DBP argued that POLIAND’s complaint stated no cause of action against DBP or was barred by the Statute of Frauds because DBP did not sign any memorandum to act as guarantor for the alleged credit advances/loan accommodations in favor of POLIAND. DBP also denied any liability under LOI No. 1155, which it described as immoral and unconstitutional, since it was rescinded by LOI No. 1195. By way of its Affirmative Allegations and Defenses, DBP countered that it was unaware of the maritime lien on the five vessels mortgaged in its favor and that as far as GALLEON’s foreign borrowings are concerned, DBP agreed to act as guarantor thereof only under the conditions laid down under the Deed of Undertaking. DBP prayed for the award of actual, moral and exemplary damages and attorney’s fees against POLIAND as compulsory counterclaim. In the event that it be adjudged liable for the payment of the loan accommodations and the maritime liens, DBP prayed that its codefendant GALLEON be ordered to indemnify DBP for the full amount.[14] For its part, NDC denied any participation in the execution of the loan accommodations/credit advances and acquisition of ownership of GALLEON, asserting that it acted only as manager of GALLEON. NDC specifically denied having agreed to the assumption of GALLEON’s liabilities because no purchase and sale agreement was

2

executed and the delivery of the required shares of stock of GALLEON did not take place.[15] Upon motion by POLIAND, the trial court dropped GALLEON as a defendant, despite vigorous oppositions from NDC and DBP. At the pre-trial conference on April 29, 1993, the trial court issued an Order limiting the issues to the following: (1) whether or not GALLEON has an outstanding obligation in the amount of US$2,315,747.32; (2) whether or not NDC and DBP may be held solidarily liable therefor; and (3) whether or not there exists a preferred maritime lien of P1,000,000.00 in favor of POLIAND.[16] After trial on the merits, the court a quo rendered a decision on August 9, 1996 in favor of POLIAND. Finding that GALLEON’s loan advances/credit accommodations were duly established by the evidence on record, the trial court concluded that under LOI No. 1155, DBP and NDC are liable for those obligations. The trial court also found NDC liable for GALLEON’s obligations based on the Memorandum of Agreement dated August 1981 executed between GALLEON and NDC, where it was provided that NDC shall prioritize repayments of GALLEON’s valid and subsisting liabilities subject of a meritorious lawsuit or which have been arranged and guaranteed by Cuenca. The trial court was of the opinion that despite the subsequent issuance of LOI No. 1195, NDC and DBP’s obligation under LOI No. 1155 subsisted because “vested rights of the parties have arisen therefrom.” Accordingly, the trial court interpreted LOI No. 1195’s directive to “limit and protect” to mean that “DBP and NDC should not assume or incur additional exposure with respect to GALLEON.”[17] The trial court dismissed NDC’s argument that the Memorandum of Agreement was merely a preliminary agreement, noting that under paragraph nine thereof, the only condition for the payment of GALLEON’s subsisting loans by NDC was the determination by the latter that those obligations were incurred in the ordinary course of GALLEON’s business. The trial court did not regard the non-execution of the stock purchase agreement as fatal to POLIAND’s cause since its non-happening was solely attributable to NDC. The trial court also ruled that POLIAND had preference to the maritime lien over the proceeds of the extrajudicial foreclosure sale of GALLEON’s vessels since the

loan advances/credit accommodations utilized for the payment of expenses on the vessels were obtained prior to the constitution of the mortgage in favor of DBP. In sum, NDC and DBP were ordered to pay POLIAND as follows: WHEREFORE, premises above considered, judgment is hereby rendered for plaintiff as against defendants DBP and NDC, who are hereby ORDERED as follows: 1. To jointly and severally PAY plaintiff POLIAND the amount of TWO MILLION THREE HUNDRED FIFTEEN THOUSAND SEVEN HUNDRED FORTY SEVEN AND 21/100 [sic] United States Dollars (US$2,315,747.32) computed at the official exchange rate at the time of payment, plus interest at the rate of 12% per annum from 25 September 1991 until fully paid; 2. To PAY the amount of ONE MILLION (P1,000,000.) Pesos, Philippine Currency, for and as attorney’s fees; and 3. To PAY the costs of the proceedings.

SO ORDERED.[18] Both NDC and DBP appealed the trial court’s decision. The Court of Appeals rendered a modified judgment, absolving DBP of any liability in view of POLIAND’s failure to clearly prove its action against DBP. The appellate court also discharged NDC of any liability arising from the credit advances/loan obligations obtained by GALLEON on the ground that NDC did not acquire ownership of GALLEON but merely assumed control over its management and operations. However, NDC was held liable to POLIAND for the payment of the preferred maritime lien based on LOI No. 1195 which directed NDC to “discharge such maritime liens as may be necessary to allow the foreclosed vessels to engage on the international shipping business,” as well as attorney’s fees and costs of suit. The dispositive portion of the Decisionreads:

3

TO SATISFY THE Not satisfied with the modified judgment. TOGETHER WITH RESPONDENT NDC. in accordance with the foregoing findings. Costs against defendant-appellant NDC. SO ORDERED. C. the assailed decision is MODIFIED. NDC filed its petition. RESPONDENT NDC NOT ONLY TOOK OVER TOTALLY THE MANAGEMENT AND CONTROL OF GALLEON BUT ALSO ASSUMED OWNERSHIP OF GALLEON PURSUANT TO LOI NO. CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS. DISMISSED THE CASE AGAINST RESPONDENT DBP WITHOUT STATING CLEARLY AND DISTINCTLY THE REASONS FOR SUCH A DISMISSAL.WHEREFORE.[20] On August 25. 1984. PETITIONER POLIAND’S PREDECESSOR-ININTEREST. THUS.920. No. 1155 AND THE MEMORANDUM OF AGREEMENT DATED 10 AUGUST 1981. Defendant-appellant NDC is hereby ordered to pay plaintiff-appellee POLIAND the amount of US$1.298. RESPONDENT COURT OF APPEALS GRAVELY ERRED ALSO IN NOT FINDING THAT RESPONDENT DBP IS JOINTLY AND SOLIDARILY LIABLE WITH RESPONDENT NDC FOR THE PAYMENT OF MARITIME LIENS PLUS INTEREST PURSUANT TO SECTION 17 OF PRESIDENTIAL DECREEE 1521. [19] GALLEON CARRIED WITH IT THE ASSUMPTION OF THE LATTER’S LIABILITIES TO THIRD PARTIES SUCH AS ASIAN HARDWOOD. 2000. 2000. WITH RESPECT TO THE NET TOTAL AMOUNT OWING TO PETITIONER POLIAND. CONTRARY TO THE FINDINGS OF RESPONDENT COURT OF APPEALS. as follows: The case against defendant-appellant DBP is hereby DISMISSED.298. RESPONDENT COURT OF APPEALS. In G. petitioner POLIAND raises the following arguments: RESPONDENT COURT OF APPEALS COMMITTED GRAVE AND REVERSIBLE ERRORS IN ITS QUESTIONED DECISION DATED 29 JUNE 2000 AND DECIDED QUESTIONS CONTRARY TO LAW AND THE APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT MODIFIED THE DECISION DATED 09 AUGUST 1996 RENDERED BY THE REGIONAL TRIAL COURT (BRANCH 61) CONSIDERING THAT: A. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER NDC IS LIABLE TO PAY GALLEON’S OUTSTANDING OBLIGATION TO RESPONDENT POLIAND IN THE AMOUNT OF US$ 1.56. 143866 filed on August 21. RESPONDENT NDC’S ACQUISITION OF FULL OWNERSHIP AND CONTROL OF 4 . IN VIOLATION OF THE CONSTITUTION AND THE RULES OF COURT.56 plus legal interest effective September 12. The award of attorney’s fees and cost of suit is addressed only against NDC. imputing the following errors to the Court of Appeals: I.R. B. both POLIAND and NDC elevated it to this Court via two separate petitions for review on certiorari. No. docketed as G. 143877. PETITIONER POLIAND WAS ABLE TO ESTABLISH THAT RESPONDENT DBP IS SOLIDARILY LIABLE. D.R.920.

[23] POLIAND’s cause of action against NDC is premised on the theory that when NDC acquired all the shareholdings of GALLEON. whether or not it is liable to pay GALLEON’s outstanding obligation. II.R. With respect to defendant-appellant DBP.R.R. No. 1521 OTHERWISE KNOWN AS THE ‘SHIP MORTGAGE DECREE OF 1978 IS NOT APPLICABLE IN THE CASE AT BAR. 143866. (C) THE FORECLOSURE SALE OF THE FIVE (5) GALLEON VESSELS EXTINGUISHES ALL CLAIMS AGAINST THE VESSELS. including the loan advances/credit accommodations obtained by GALLEON from POLIAND’s predecessors-in-interest. In G.[21] The two petitions were consolidated considering that both petitions assail the same Court of Appeals’ Decision. (A) PRESIDENTIAL DECREE NO. 1155 and the Memorandum of Agreement. THE COURT OF APPEALS ERRED IN AWARDING ATTORNEY’S FEES TO RESPONDENT POLIAND. including that bearing on its claim for damages and attorney’s fees which does not persuade. POLIAND questions the appellate court’s finding that neither NDC nor DBP can be held liable for the loan accommodations to GALLEON. RULING of the COURT I. The Court answers the issue in the negative. (B) PETITIONER NDC DOES NOT HOLD THE PROCEEDS OF THE FORECLOSURE SALE OF THE FIVE (5) GALLEON VESSELS.000.[22] . resolution of the matters raised in its assignment of errors hinges on whether or not it acquired the shareholdings of GALLEON as directed by LOI 1155. POLIAND 5 .” Since no such execution and consequent transfer of shareholdings took place.PREFERRED MARITIME LIENS OVER THE PROCEEDS OF THE FORECLOSURE SALE OF THE FIVE GALLEON VESSELS. 143866...000. No. NDC did not acquire ownership of GALLEON. and if in the negative. It ratiocinated thus: With respect to appellant NDC. 1982. In G. The MOA executed by GALLEON and NDC following the issuance of LOI 1155 called for the execution of a “formal share purchase agreement and the transfer of all the shareholdings of seller to Buyer. This leaves it unnecessary to dwell on DBP’s other assigned errors. namely: (1) Whether NDC or DBP or both are liable to POLIAND on the loan accommodations and credit advances incurred by GALLEON. In G. POLIAND failed to clearly prove its cause of action against it. Liability on loan accommodations and credit advances incurred by GALLEON The Court of Appeals reversed the trial court’s conclusion that NDC and DBP are both liable to POLIAND for GALLEON’s debts on the basis of LOI No. after being satisfied of the existence of GALLEON’s obligation to ASIAN HARDWOOD. and (2) Whether POLIAND has a maritime lien enforceable against NDC or DBP or both. ISSUES The bone of contention revolves around two main issues..00) US dollars. It merely assumed “actual control over the management and operations” of GALLEON in the exercise of which it. the former also assumed the latter’s liabilities. although on different fronts. partially paid the latter One Million ($1. on January 15. 143877. NDC asserts that it is not liable to POLIAND for the preferred maritime lien. No.

Minister Enrile. 1155 had been rescinded by LOI No. there exists a grave emergency or threat or imminence thereof. NDC asserts that it could not have acquired GALLEON’s equity and. Torres[25] and Parong. President Marcos made it clear that there was no military take-over of the government.[30] Being administrative in nature. to the end that hopefully insurgency may not rear its head in this country again. thus. 1155. Moreover.argues that NDC acquired ownership of GALLEON pursuant to paragraphs 1 and 2 of LOI No. and not excluding the stopping effectively of a brewing.[31] paramount considerations compelled the grant of extraordinary legislative power to the President at that time when the nation was beset with threats to public order and the purpose for which the authority was granted was specific to meet the exigencies of that period. the decree. Minister Enrile[33] differentiated between LOIs in the nature of mere administrative issuances and those forming part of the law of the land. 1195. Inc. et al. during the period when then President Marcos exercised extraordinary legislative powers. Minister of Finance. relying on the pronouncements in Philippine Association of Service Exporters. became inoperative and non-existent. prescribing the manner. whenever in his judgment. issued in the exercise of his administrative power of control. Even assuming that conditions were set. v. and that much less was there being established a revolutionary government. its liabilities because LOI No. not liable under LOI No. without loss of time. Ruben D.[27] NDC denies POLIAND’s contention that it deliberately prevented the execution of the share purchase agreement considering that Cuenca remained GALLEON’s president seven months after the signing of the Memorandum of Agreement. et al. It believes that no conditions were required prior to the assumption by NDC of GALLEON’s ownership and subsisting loans. a determination of whether or not it was issued in response to the objectives stated in Legaspi is necessary. or whenever the interim Batasan Pambansa or the regular National Assembly fails or is unable to act adequately on any matter for any reason that in his judgment requires immediate action.[26] is of the opinion that LOI No. et al. The following conditions must be established before a letter of instruction may be considered a law: To form part of the law of the land. if not a strong separatist movement in Mindanao. POLIAND opines that the conditions were deemed fulfilled pursuant to Article 1186 of the Civil Code because of NDC’s apparent intent to prevent the execution of the share purchase agreement. letters of instructions are simply directives of the President of the Philippines.[28] NDC contends that the Memorandum of Agreement was a mere preliminary agreement between Cuenca and Ongpin for the intended purchase of GALLEON’s equity. to heads of departments and/or officers under the executive branch of the government for observance by the officials and/or employees thereof. and therefore. consequently. and most of all the social amelioration of the poor and underprivileged in the farms and in the barrios. v. Parong. education and culture of our people.[34] 6 . he issued certain decrees. 1155 As a general rule. However. even as he declared that said martial law was of a double-barrelled type. As pointed out by the Court in Legaspi v. thus: True. orders and letters of instruction which the Court has declared as having the force and effect of a statute. unfamiliar to traditional constitutionalists and political scientists—for two basic and transcendental objectives were intended by it: (1) the quelling of nation-wide subversive activities characteristic not only of a rebellion but of a state of war fanned by a foreign power of a different ideology from ours. they do not have the force and effect of a law and.[24] On the other hand.[29] NDC. which was implemented through the execution of the Memorandum of Agreement. and (2) the establishment of a New Society by the institution of disciplinary measures designed to eradicate the deeprooted causes of the rebellion and elevate the standards of living. cannot be a valid source of obligation. 1155 does not have the force and effect of law and cannot be a valid source of obligation. terms and conditions of said purchase. before a letter of instruction is declared as having the force and effect of a statute. v. NDC.[32] Thus. order or LOI must be issued by the President in the exercise of his extraordinary power of legislation as contemplated in Section 6 of the 1976 amendments to the Constitution.

the language and purpose of LOI No. 1155 suggests that it was issued to address the security of the nation.[35] The merger... one of the combining corporations survives and continues the combined business.7 million which is the amount originally contributed by the present shareholders. 1155 was issued on July 21. 1155 was specifically directed to DBP. NDC is to provide additional equity to Galleon as may be required. DBP to advance for a period of three years from date hereof both the principal and the interest on Galleon's obligations falling due and to convert such advances into 12% preferred shares in Galleon Shipping Corporation. NDC to immediately infuse P30 million into Galleon Shipping Corporation in lieu of is previously approved subscription to Philippine National Lines. 3.Only when issued under any of the two circumstances will a decree. directly or remotely. NDC ipso facto acquired the interests in GALLEON without disregarding applicable statutory requirements governing the acquisition of a corporation. 1155. NDC and the Maritime Industry Authority to undertake the following tasks: LETTER OF INSTRUCTIONS NO. 1. The subject matter of LOI No... Ordinarily. 1981 when then President Marcos was vested with extraordinary legislative powers. 1155 was in the nature of a mere administrative issuance directed to NDC. NDC shall acquire 100% of the shareholdings of Galleon Shipping Corporation from its present owners for the amount of P46. LOI No. 4. The decree or instruction should have been issued either when there existed a grave emergency or threat or imminence or when the Legislature failed or was unable to act adequately on the matter. DBP and NDC to negotiate a restructuring of loans extended by foreign creditors of Galleon. does 7 . payable after five years with no interest cost. DBP and MARINA to undertake a policy measure. order. LOI No. There is no doubt that LOI No. The qualification that there exists a grave emergency or threat or imminence thereof must be interpreted to refer to the prevailing peace and order conditions because the particular purpose the President was authorized to assume legislative powers was to address the deteriorating peace and order situation during the martial law period. 1155 is not connected. Obviously. properties and liabilities are acquired by the surviving corporation. to a grave emergency or threat to the peace and order situation of the nation in particular or to the public interest in general. that is. 6 of the 1973 Constitution. . 1155 DEVELOPMENT BANK OF THE PHILIPPINES NATIONAL DEVELOPMENT COMPANY MARITIME INDUSTRY AUTHORITY DIRECTING A REHABILITATION PLAN FOR GALLEON SHIPPING CORPORATION . MARINA to provide assistance to Galleon by mandating a rational liner shipping schedule considering existing freight volumes and to immediately negotiate a bilateral agreement with the United States in accordance with UNCTAD resolutions. to rehabilitate a private corporation. 2. 5.. Nothing in the language of LOI No. however. in the merger of two or more existing corporations. NDC. 1155 precludes this Court from declaring that said LOI had the force and effect of law in the absence of any of the conditions set out in Parong. while the rest are dissolved and all their rights. not liable under the Corporation Code The Court cannot accept POLIAND’s theory that with the effectivity of LOI No. or letter be qualified as having the force and effect of law. In addition. 1155 was undoubtedly issued at the time when the President exercised legislative powers granted under Amendment No.. Although LOI No.

[38] The records do not show SEC approval of the merger. In the absence of SEC approval.56 representing the proceeds of the loan from Asian Hardwood which were spent by GALLEON for ship modification and salaries of crew. 1155.[41] POLIAND contends that NDC can no longer raise the issue on the latter’s liability for the payment of the maritime lien considering that upon appeal to the Court of Appeals. the directive in LOI No. There is. Liability on maritime lien On the second issue of whether or not NDC is liable to POLIAND for the payment of maritime lien. this rule is not without exceptions. or had otherwise accommodated GALLEON’s obligations to POLIAND or its predecessors-in-interest. 1155 POLIAND argues that paragraph 3 of LOI No. NDC did not acquire the rights or interests of GALLEON. to satisfy the preferred maritime liens over the proceeds of the foreclosure sale of the 5 vessels. however. subject to its prior determination that the merger is not inconsistent with the Code or existing laws.298. Matters not assigned as errors on appeal but are evidently plain or clerical errors within contemplation of law. the Court ruled that an appellate court is accorded a broad discretionary power to waive the lack of assignment of errors and consider errors not assigned: (a) (b) Grounds not assigned as errors but affecting the jurisdiction of the court over the subject matter.[42] Generally. 1155 which is void and unconstitutional. The issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval but also marks the moment whereupon the consequences of a merger take place. NDC is liable to pay ASIAN HARDWOOD’s successor-in-interest POLIAND the equivalent of US$1. not liable under LOI No. LOI No. there was no effective transfer of the shareholdings in GALLEON to NDC. Where a party to the merger is a special corporation governed by its own charter. including its liabilities. In the following instances. and properties as well as liabilities shall be taken and deemed transferred to and vested in the surviving corporation. DBP. the merger shall only be effective upon the issuance of a certificate of merger by the Securities and Exchange Commission (SEC).[36] As specifically provided under Section 79[37] of said Code. NDC did not assign it as an error. However. [39] DBP argues that POLIAND has no cause of action against it under LOI No. Hence.not become effective upon the mere agreement of the constituent corporations. POLIAND cannot assert that no conditions were required prior to the assumption by NDC of ownership of GALLEON and its subsisting loans. the absorbed corporation ceases to exist but its rights. Matters not assigned as errors on appeal but consideration of which is necessary in arriving at a just decision and complete resolution of the case or to (c) 8 . the appellate court ruled in the affirmative. II. 1155 unequivocally obliged DBP to advance the obligations of GALLEON. In directing NDC to acquire the shareholdings in GALLEON. By operation of law. to wit: Non-acquisition of ownership of GALLEON notwithstanding. nothing from the records of the case to indicate that DBP had acted as surety or guarantor.930. an appellate court may only pass upon errors assigned. the President could not have intended that the parties disregard the requirements of law. 1155 cannot be a valid source of obligation because it did not create any privity of contract between DBP and POLIAND or its predecessors-in-interest. upon the effectivity of the merger. Being a mere administrative issuance. 1155 was in the nature of a grant of authority by the President on DBP to enter into certain transactions for the satisfaction of GALLEON’s obligations. the Code particularly mandates that a favorable recommendation of the appropriate government agency should first be obtained. At best.[40] The Court affirms the appellate court’s ruling that POLIAND does not have any cause of action against DBP under LOI No. Compliance with the statutory requirements is a condition precedent to the effective transfer of the shareholdings in GALLEON to NDC.

Said provision outlines the formal and registration requirements in order that a sale of a vessel on voyage or in a foreign port becomes effective as against third persons.serve the interests of a justice or to avoid dispensing piecemeal justice. while providing for the order of payment of creditors in the event of sale of a vessel. DBP’s appellant’s brief[44] pointed out POLIAND’s failure to present convincing evidence to prove its alternative cause of action. however. Section 17 of P. Thus. Clearly. not applicable NDC cites Articles 578[47] and 580[48] of the Code of Commerce to bolster its argument that the foreclosure of the vessels extinguished all claims against the vessels including POLIAND’s claim. NDC is not precluded from again raising the issue before this Court even if it did not specifically assign the matter as an error before the Court of Appeals. save for those claims enumerated under Section 17. Article 580. 1521. which POLIAND disputed in its appellee’s brief. No. the debts shall be satisfied in the order specified therein. the resolution of the instant case depends on the determination as to which creditor is entitled to the proceeds of the foreclosure sale of the vessels. Besides. it follows that the Code of Commerce provision is deemed repealed by the provision of P. 1521[50] also provides that in the judicial or extrajudicial sale of a vessel for the enforcement of a preferred mortgage lien constituted in accordance with Section 2 of P. No. Matters not assigned as errors on appeal but closely related to an error assigned. however. On the other hand.D. reveal that the issue on the liability on the preferred maritime lien had been properly raised and argued upon before the Court of Appeals not by NDC but by DBP who was also adjudged liable thereon by the trial court. 1521. The records. 1521. as the posterior law. by way of exception.D. is dependent. No. otherwise known as the Ship Mortgage Decree of 1978. Matters not assigned as errors on appeal but upon which the determination of a question properly assigned.[43] Articles 578 and 580 of the Code of Commerce. The Court of Appeals.) No.[46] P.D. which have preference over the preferred mortgage lien in the order stated therein. (d) Matters not specifically assigned as errors on appeal but raised in the trial court and are matters of record having some bearing on the issue submitted which the parties failed to raise or which the lower court ignored. On the other hand.D. No. In particular. Article 578 of the Code of Commerce is inapplicable. had been repealed by the pertinent provisions of Presidential Decree (P.D. even if they are not assigned as errors in the appeal if it finds that their consideration is necessary in arriving at a just decision of the case. such preferred mortgage lien shall have priority over all pre-existing claims against the vessel.[51] (e) (f) It is noteworthy that the question of NDC and DBP’s liability on the maritime lien had been raised by POLIAND as an alternative cause of action against NDC and DBP and was passed upon by the trial court. 1521 is a subsequent legislation and since said law in Section 17 thereof confers on the preferred mortgage lien on the vessel superiority over all other claims. reversed the trial court’s finding that NDC and DBP are liable to POLIAND for the payment of the credit advances and loan accommodations and instead found NDC to be solely liable on the preferred maritime lien although NDC did not assign it as an error. thereby engendering an irreconcilable conflict with the order of preference provided under Article 580 of the Code of Commerce.D. 1521 is applicable. this Court is clothed with ample authority to review matters.[49] Article 578 of the Code of Commerce is not relevant to the facts of the instant case because it governs the sale of vessels in a foreign port. No. Article 580 provides that in case of the judicial sale of a vessel for the payment of creditors. Since P.[45] The issue on the maritime lien is a matter of record having been adequately ventilated before and passed upon by the trial court and the appellate court. not the 9 .

Other Liens. All credits not paid. — Any citizen of the Philippines. (3) general average. No. as enumerated under Section 17. No.Civil Code provisions on concurrence/preference of credits Whether or not the order of preference under Section 17. purchase or initial operation of the vessels. the Japanese lenders would not have provided the funds utilized in the 10 . domestic or foreign. if it falls within the ambit of Section 2. (4) salvage including contract salvage. including any possessory common-law lien of which a lienor is deprived under the provisions of Section 16 of this Decree. all pre-existing claims in the vessel.D. 1979 Deed of Undertaking signed by GALLEON and DBP was an ordinary ship mortgage and not a preferred one. defining how a preferred mortgage is constituted. 1521. for the purpose of financing the construction. P. that is. No. whether fully or partially shall subsist as ordinary credits enforceable by personal action against the debtor. 1521 because GALLEON constituted the same for the purpose of financing the construction. 1521 recognizes the constitution of a mortgage on a vessel. the residue shall be divided among them pro rata. or any association or corporation organized under the laws of the Philippines. (Emphasis supplied. P. 1521. purchase of vessels or initial operation of vessels. except the following claims in the order stated: (1) expenses and fees allowed and costs taxed by the court and taxes due to the Government. shall be held terminated and shall thereafter attach in like amount and in accordance with the priorities established herein to the proceeds of the sale. Upon enforcement of the preferred mortgage and eventual foreclosure of the vessel. Preferred Maritime Lien. the proceeds of the sale shall be first applied to the claim of the mortgage creditor unless there are superior or preferential liens. the mortgage obtains a preferred status provided the formal requisites enumerated under Section 4[53] are complied with. While it is correct that GALLEON executed the mortgage in consideration of DBP’s guarantee of the prompt payment of GALLEON’s obligations to the Japanese lenders. 1521 may be properly applied in the instant case depends on the classification of the mortgage on the GALLEON vessels. DBP’s undertaking to pay the Japanese banks was a condition sine qua non to the acquisition of funds for the purchase of the GALLEON vessels. it was not given in connection with the construction. acquisition. (6) damages arising out of tort.D. and (7) preferred mortgage registered prior in time. No.D. but for the purpose of guaranteeing GALLEON’s foreign borrowings. acquisition. — (a) Upon the sale of any mortgaged vessel in any extra-judicial sale or by order of a district court of the Philippines in any suit in rem in admiralty for the enforcement of a preferred mortgage lien thereon.) There is no question that the mortgage executed in favor of DBP is covered by P. at least sixty per cent of the capital of which is owned by citizens of the Philippines may. P. Priorities. (2) crew's wages. If the mortgage on the vessel is constituted for the purpose stated under Section 2. The record of judicial sale or sale by public auction shall be recorded in the Record of Transfers and Encumbrances of Vessels in the port of documentation. NDC and DBP both argue that POLIAND’s claim cannot prevail over DBP’s mortgage credit over the foreclosed vessels because the mortgage executed in favor of DBP pursuant to the October 10.[52] Section 2 of P. No. Who may Constitute a Ship Mortgage. freely constitute a mortgage or any other lien or encumbrance on his or its vessels and its equipment with any bank or other financial institutions. (5) maritime liens arising prior in time to the recording of the preferred mortgage. acquisition. Without DBP’s guarantee. to wit: SECTION 2. the mortgage constituted on GALLEON’s vessels in favor of DBP may appropriately be characterized as a preferred mortgage under Section 2. Contrary to NDC’s assertion. purchase of vessels or initial operation of vessels.D.D. (b) If the proceeds of the sale should not be sufficient to pay all creditors included in one number or grade. namely: SECTION 17. The preferred mortgage lien shall have priority over all claims against the vessel. that is.

The mortgage in favor of DBP was therefore constituted to facilitate the acquisition of funds necessary for the purchase of the vessels. 1195 on NDC to discharge maritime liens to allow the vessels to engage in international business. Such maritime lien is described under Section 21. DBP contends that a ship modification cost is omitted under Section 17. No. [57] The trial court found that GALLEON’s advances obtained from Asian Hardwood were used to cover for the payment of bunker oil/fuel. The trial court also found that the advances from Asian Hardwood were spent for ship modification cost and the crew’s salary and wages.[56] considered to be superior to the preferred mortgage lien is a maritime lien arising prior in time to the recording of the preferred mortgage. unused stores and oil. use of dry dock or marine railway. As stated in Section 21. P. 1521 should govern. 1521. POLIAND also contends that by virtue of the directive in LOI No. 1521. 1521. — Any person furnishing repairs. 1521.[54] Following NDC’s theory. it must be established that the credit was extended to the vessel itself. P. is superior to POLIAND’s claim.” The ship modification cost may properly be classified under this broad category because it was a necessary expenses for the vessel’s navigation. No. to the exclusion of all others to the extent of the value of the personal property to which the preference exists. and generally be so interpreted as to embrace only cases in which the special provisions are not applicable. it must be shown to be one of the enumerated claims which Section 17. P.D.[55] POLIAND’s alternative cause of action for the payment of maritime liens is based on Sections 17 and 21 of P. hence. No.D. shall have a maritime lien on the vessel. POLIAND’s maritime lien is superior to DBP’s mortgage lien Before POLIAND’s claim may be classified as superior to the mortgage constituted on the vessel. the credits guaranteed by a chattel mortgage upon the thing mortgaged shall enjoy preference (with respect to the thing mortgaged).D. No. Under the aforequoted provision. towage. which is fourth in the order of preference under Article 2241. P. it does not have a status superior to DBP’s preferred mortgage lien. No. No. Under the law. it may properly be treated as a maritime lien for necessaries under Section 21.[58] These expenses clearly fall under Section 21.purchase of the GALLEON vessels. 1521 declares as having preferential status in the event of the sale of the vessel. which reads: SECTION 21.D. and it shall be necessary to allege or prove that credit was given to the vessel. P. which may be enforced by suit in rem.D. the expense must be incurred upon the order of the owner of the vessel or its authorized person and prior to the recording of the ship mortgage. 1521. P. NDC’s argument does not persuade the Court. the Civil Code provisions on concurrence and preference of credits and not P. NDC is liable therefor.D. NDC adds that being an ordinary ship mortgage.D. No. bonded stores. supplies. or other necessaries to any vessel. No. or of a person authorized by the owner. a maritime lien may consist in “other necessaries spent for the vessel. in relation to Article 2241 of the Civil Code. which enjoys no preference. provisions. 1521 on the order of preference in the satisfaction of the claims against the vessel is the more applicable statute to the instant case compared to the Civil Code provisions on the concurrence and preference of credit. Maritime Lien for Necessaries. General legislation must give way to special legislation on the same subject.D. One of such claims enumerated under Section 17. 1521 which is 11 . 1521. The provision of P. As long as an expense on the vessel is indispensable to the maintenance and navigation of the vessel. DBP’s mortgage credit.D. and repair and docking of the GALLEON vessels.D. No. P. upon the order of the owner of such vessel. No. NDC contends that under Article 2246. persons entitled to such lien. whether foreign or domestic.

As explained in Philippine National Bank v. No. Although POLIAND or its predecessors-in-interest are not sailors entitled to wages. Findings of fact of lower courts are deemed conclusive and binding upon the Supreme Court except when the findings are grounded on speculation. All told.D. there is no privity of contract between POLIAND or its predecessors-in-interest. will justify a different conclusion. [61] (2) Even if conceded. if properly considered.[60] 12 . is inapplicable. it became the transferee of all the rights of Hong Kong Dockyards. The Court explained as follows: From the foregoing. Considering that Citibank paid off the debt of PISC to Hong Kong United Dockyards. in making its findings. by virtue of Article 1302. 1982.With respect to the claim for salary and wages of the crew. 1521..”[64] DBP’s reliance on the Statute of Frauds is misplaced. To begin with. By definition. there is no doubt that it is also one of the enumerated claims under Section 17. thus. POLIAND hinges its claim on the maritime lien based on LOI No.[63] a third person who satisfies the obligation to an original maritime lienor may claim from the debtor because the third person is subrogated to the rights of the maritime lienor over the vessel. P. DBP reiterates the following arguments: (1) The salary and crew’s wages cannot be claimed by POLIAND or its predecessors-in-interest because none of them is a sailor or mariner. and when findings of fact of the Court of Appeals are premised on the absence of evidence but are contradicted by the evidence on record. 1521. including the maritime lien over the vessel M/V “Asian Liberty. on the other. 1195 and P. second only to judicial costs and taxes due the government in preference and.D. subrogation is the transfer of all the rights of the creditor to a third person. As a person not interested in the fulfillment of the obligation between PISC and Hong Kong United Dockyards. No. Ltd. when the findings of fact are conclusions without citation of specific evidence upon which they are based. and DBP. Ltd. Hong Kong United Dockyards. In its defense. Article 1403 (2) of the Civil Code. P. Neither can DBP invoke prescription or laches against POLIAND. surmises or conjectures. as a maritime lienor over the vessel. Ltd. as against PISC. P. an action upon an Only NDC is liable on the maritime lien POLIAND maintains that DBP is also solidarily liable for the payment of the preferred maritime lien over the proceeds of the foreclosure sale by virtue of Section 17. Under Article 1144 of the Civil Code. par. Court of Appeals. It claims that since the lien was incurred prior to the constitution of the mortgage on January 25.[62] The first argument is absurd. Ltd. absurd or impossible. which enumerates the contracts covered by the Statue of Frauds.D. the preferred maritime lien attaches to the proceeds of the sale of the vessels and has priority over all claims against the vessels in accordance with Section 17. when the Court of Appeals. the determination of the existence and the amount of POLIAND’s claim for maritime lien is a finding of fact which is within the province of the courts below. when the factual findings of the trial and appellate courts are conflicting.D. they can still make a claim for the advances spent for the salary and wages of the crew under the principle of legal subrogation. when the inference made is manifestly mistaken. Citibank was subrogated to the rights of Hong Kong United Dockyards. and not on any contract or agreement. No. Ltd. 1521. and (3) POLIAND’s claim is barred by prescription and laches. on one hand. who substitutes him in all his rights. 2 of the New Civil Code. 1521. when the judgment of the appellate court is premised on a misapprehension of facts or when it has failed to notice certain relevant facts which. when there is grave abuse of discretion in the appreciation of facts.[59] The Court finds no sufficient justification to reverse the findings of the trial court and the appellate court in respect to the existence and amount of maritime lien. having a status superior to DBP’s mortgage lien. No. POLIAND’s preferred maritime lien is unenforceable pursuant to Article 1403 of the Civil Code. it is clear that the amount used for the repair of the vessel M/V “Asean Liberty” was advanced by Citibank and was utilized for the purpose of paying off the original maritime lienor. has gone beyond the issues of the case and such findings are contrary to the admissions of both appellant and appellee.

On this note.[68] which directed the transfer of the vessels to the APT. LOI 1195 directed NDC to “discharge such maritime liens as may be necessary to allow the foreclosed vessels to engage on the international shipping business. Laches also do not lie because there was no unreasonable delay on the part of POLIAND in asserting its rights. Indeed. Asian Hardwood.[66] Considering that DBP subsequently transferred ownership of the vessels to NDC. to evince good faith. the enforcement of a maritime lien is in the nature and character of a proceeding quasi in rem. given the fact that in its “actual control over the management and operations” of GALLEON. could not have participated as they were unaware and were not made parties to the case. The right of action arose after January 15. NDC could have inquired as to the existence of other claims against the vessels apart from DBP’s mortgage lien.00 in partial settlement of GALLEON’s obligations. At that time. Hence. used only with reference to certain proceedings in courts of admiralty wherein the property alone is treated as responsible for the claim or obligation upon which the proceedings are based. in its narrow application. Considering that NDC was also in a position to know or discover the financial condition of GALLEON when it took over its management.298. it follows the vessel. 1991. including POLIAND’s predecessors-in-interest who apparently had earlier or superior rights over the foreclosed vessels. NDC could not have pleaded ignorance over the existence of a prior or preferential lien on the vessels subject of foreclosure. the prescriptive period for the enforcement by action of the balance of GALLEON’s outstanding obligations had commenced.56 representing part of the proceeds of GALLEON’s loan which was spent by GALLEON “for ship modification and salaries of crew” that NDC is liable. on its hypothesis that 13 .obligation created by law must be brought within ten years from the time the right of action accrues. the lack of notice to GALLEON’s creditors suggests that the extrajudicial foreclosure was effected to prejudice the rights of GALLEON’s other creditors. All things considered. It took place when NDC had already assumed the management and operations of GALLEON. The other creditors. it instituted the instant suit seasonably.000.” In fine. or before the lapse of the ten-year prescriptive period.[67] Thus. A maritime lien is akin to a mortgage lien in that in spite of the transfer of ownership. Parenthetically. before it (NDC) mortgaged the 5 vessels to DBP on January 25. NDC cannot claim that it was a subsequent purchaser in good faith because it had knowledge that the vessels were subject to various liens. the Court finds that only NDC is liable for the payment of the maritime lien. when NDC partially paid off GALLEON’s obligations to POLIAND’s predecessor-in-interest. the maritime lien subsists. 1982. As aptly held by the Court of Appeals: NDC’s claim that even if maritime liens existed over the proceeds of the foreclosure sale of the vessels which it subsequently purchased from DBP.000.930. the lien is not extinguished. The maritime lien is inseparable from the vessel and until discharged. Prescription could not have set in because the prescriptive period was tolled when POLIAND made a written demand for the satisfaction of the obligation on September 24. the latter foreclosed on its mortgage over the GALLEON ships. At that time. NDC also cannot rely on Administrative Order No.[65] The expression “action in rem” is. GALLEON was already a failing corporation having borrowed large sums of money from banks and financial institutions. At the very least. the Court holds the latter liable on the maritime lien. Notwithstanding the subsequent transfer of the vessels to NDC. This is a unique situation where the extrajudicial foreclosure of the GALLEON vessels took place without the intervention of GALLEON’s other creditors including POLIAND’s predecessors-ininterest who were apparently left in the dark about the foreclosure proceedings. When GALLEON defaulted in the payment of its obligations to DBP. however. 1982. 64. it was put on notice of the various obligations of GALLEON including those secured from ASIAN HARDWOOD as in fact it even paid ASIAN HARDWOOD US$1. the Court believes and so holds that the institution of the extrajudicial foreclosure proceedings was tainted with bad faith. it is with respect to POLIAND’s claim for payment of US$1. it is not liable as it was a purchaser in good faith fails.

In other respects. •The advances were utilized to augment GALLEON’Sworking capital depleted as a result of thepurchase of five new vessels and two second-handvessels in 1979 and competitiveness of shippingcompany. where the inevitable conclusion from the body of the decision is so clear as to show that there was a mistake in the dispositive portion.R.000. No pronouncement as to costs. No. No. •To obtain the acquisition of vessels. it is clear from the trial court records and the Court of Appeals’ Rollo that the bigger amount awarded in the dispositive portion of the Court of Appeals’ Decision was a typographical mistake. GALLEONobtained loans from Japanese lenders. APT is a mere conduit through which the assets acquired by the National Government are provisionally held and managed until their eventual disposal or privatization. There is a discrepancy between the dispositive portion of the Court of Appeals’ Decision and the body thereof with respect to the amount of the maritime lien in favor of POLIAND. [75] In the instant case.000. The Decision of the Court of Appeals in CAG. 143877 are DENIED. Considering that the appellate court’s Decision merely affirmed the trial court’s finding with respect to the amount of maritime lien.56” plus interest[72] despite a finding that NDC’s liability to POLIAND represents the maritime lien[73] which according to the complaint[74] is the alternative cause of action of POLIAND in the smaller amount of US$1. 64 did not divest NDC of its ownership over the GALLEON vessels because APT merely holds the vessels in trust for NDC until the same are disposed. that would not be sufficient to discharge the maritime lien and deprive POLIAND of its recourse based on the lien.R.R. The dispositive portion ordered NDC to pay POLIAND “the amount of US$1.298. the body of the decision will prevail.NDCFACTS: •Between 1979 and 1981.920. final order while the opinion in the body is merely a statement ordering nothing. Such denouement would smack of denial of due process and taking of property without just compensation. 53257 is MODIFIED to the extent that National Development Company is liable to Poliand Industrial Limited for the amount of One Million One Hundred Ninety Three Thousand Two Hundred Ninety Eight US Dollars and Fifty-Six US Cents (US$ 1. CV No. However. Under Article 2208[71] of the Civil Code.193. This rule rests on the theory that the fallo is the POLIAND INDUSTRIAL LTD. Administrative Order No.such transfer extinguished the lien.[69] The award was affirmed by the Court of Appeals as against NDC only. The general rule is that where there is conflict between the dispositive portion or the fallo and the body of the decision. WHEREFORE. as prayed for by POLIAND in its complaint.00 on account of the amount involved in the case and the protracted character of the litigation. SO ORDERED.298. NDC’s liability for attorney’s fees The lower court awarded attorney’s fees to POLIAND in the amount of P1.56. 143866 and G. both Petitions in G. 14 . the bigger amount stated in the dispositive portion of the Court of Appeals’ Decision must have been awarded through indavertence. the fallo controls. One final note.298.56). VS.[70] This Court finds no reversible error with the award as upheld by the appellate court. said Decision is AFFIRMED.193. Asian Hardwoodextended credit accommodations in favor of GALLEON. Even if ownership was transferred to APT. plus interest of 12% per annum computed from 25 September 1991 until fully paid. attorney’s fees may be awarded inter alia when the defendant’s act or omission has compelled the plaintiff to incur expenses to protect his interest or in any other case where the court deems it just and equitable that attorney’s fees and expenses of litigation be recovered.

1155. •But the CA absolved DBP of any liability. GALLEON promised tosecure first mortgage on the five new vessels andon the second-hand vessels. •POLIAND claimed that under LOI No. NDC AND DBP were solidarily liable to POLIAND as assignee of the rightsof the credit advances/loan accommodationsto GALLEON. •In Feb. •In January 1981. 1991. •Then. 1155and the Memorandum Of Agreement between GALLEON and NDC. DBP’s contention: •POLIAND has no cause of action against DBPbecause DBP did not sign any memorandum to actas guarantor for the alleged credit advances/loanaccommodations in favor of POLIAND. POLIAND made written demandson GALLEON. 64. NDC’s contention: •NDC denied having agreed to the assumption of GALLEON’s liabilities because no purchase andsale agreement was executed and the delivery of the required shares to stock of GALLEON did nottake place. 1155. DBP and NDCare liable for those obligations. Pres. directing NDC and Phil. through theASSET PRIVATIZATION TRUST (APT) fordisposition. •In August 1981. defendant GALLEON. NDC and DBP for thesatisfaction of the outstanding balance.•In October 1979. Among those transferred to theAPT were the five GALLEON vessels sold at the foreclosure proceedings. directing NDC to acquirethe entire shareholdings of GALLEON to thegovernment and DBP was to advance toGALLEON the principal amount and interestof GALLEON’s maturing obligation. NDC assumed the management andoperations of GALLEON. •The CA also discharged NDC of any liability arisingfrom the credit advances/ loan obligationsobtained by GALLEON on the ground that NDC didnot acquire ownership of GALLEON but merelyassumed control over its management andoperations. Pres. 1155. • The court a quo decided in favor of POLIANDconcluding that under LOI No. •In Sept. •DBP subsequently sold the vessels to NDC. Export and Foreign Loan Guarantee Corporation to transfer some of their assetsto the National Government. •In March 1988. DBP alsodenied any liability under LOI No. it paid Asian Hardwood apartial settlement of GALLEON’s obligations. Marcos issued Letter of Instruction No. GALLEON and DBP forged aMemorandum Of Agreement. 1195 was issueddirecting the foreclosure of the mortgage onthe five vessels for failure of GALLEON to pay itsdebt despite repeated demands from DBP. GALLEON and DBP executed aDeed of Undertaking whereby DBP guaranteed thepayment of GALLEON’S borrowings from the Japanese lenders. whereby NDCand GALLEON agreed to execute a sharepurchase agreement for the transfer of GALLEON’s shareholdings. 15 . •Asian Hardwood assigned its rights over theoutstanding obligation of GALLEON to WorldUniversal which in turn assigned the credit topetitioner POLIAND. 1982. •To secure DBP’s guarantee. •Using NDC’s funds. LOI No. Aquino issuedAdministrative Order No.

the absorbedcorporation ceases to exist but its rights andproperties and liabilities shall transferred to andvested in the surviving corporation. • The merger shall only be effective upon theissuance of a certificate of merger by theSecurities and Exchange Commission. •LOI No.NDC not liable under the corporation code • The court cannot accept POLIAND’s theory thatwith the effectivity of LOI No. 1155 •As a general rule. 1155. 16 . directly orremotely. issued in the exercise of his administrative power of control. however. •Being administrative issuance. 1155 was in the nature of a mereadministrative issuance directed to NDC.ISSUE: WON NDC or DBP or both are liable to POLIAND on theloan accommodations and credit advances incurred byGALLEON RULING: NDC not liable under LOI No. there was noeffective transfer of the shareholdings inGALLEON to NDC. 1155. Hence. LOIs are simply directives of thePres. • The records do not show SEC approval of themerger. The merger. POLIAND cannot assert that noconditions were required prior to the assumptionby NDC of ownership of GALLEON and itssubsisting loans •Compliance with the statutory requirements is acondition precedent to the effective transfer of the shareholdings in GALLEON to NDC. •LOI should be qualified as having the force andeffect of law only when issued either when thereexisted a grave emergency or threat or imminenceor when the legislative failed or was unable to actadequately on the matter. •LOI No. DBP andMARINA to undertake a policy measure torehabilitate a private corporation. including itsliabilities. does notbecome effective upon the mere agreement of the constituent corporations. properties andliabilities are acquired by the survivingcorporation. Of the Phils. LOI No. while the restare dissolved and all their rights. NDC did not acquirethe rights or interests of GALLEON. 1155 •POLIAND does not have any cause of actionagainst DBP under LOI No. NDC acquiredthe interest in GALLEON without disregardingapplicable statutory requirements governing theacquisition of a corporation. 1155 was not connected. to a grave emergency or threat to thepeace and order situation of the nation inparticular or to the public interest in general. not liable under LOI No. subject toits prior determination that the merger is notinconsistent with the code or existing laws. 1155cannot be a valid source of obligation because itdid not create any privity of contract between DBPand POLIAND or its predecessor-in-interest. •In the merger of two or more existing corporations. •LOIs do not have the force and effect of a law andcannot be valid source of obligation. Uponthe effectivity of the merger. to heads anddepartments and/or officers under the executivebranch of the government for observance by theofficials and/or employees thereof.DBP.one of the combining corporations survives andcontinues the combined business. •In the absence of SEC approval..

BATERINA. AGAN. respondents. DNATA-WINGS AVIATION SYSTEMS CORPORATION. ZIALCITA. MIASCOR GROUNDHANDLING CORPORATION. MACROASIA-MENZIES AIRPORT SERVICES CORPORATION. May 5. RAMON M. HILARIO. MACARANBON. HARLIN CAST ABAYON. 2003] [G. ADOLFO. MIASCOR CATERING SERVICES CORPORATION. GAERLAN. 155661.: 17 . 2003] CEFERINO C.. 1155 was in the nature of a grant of authority by the President on DBP toenter into certain transactions for the satisfactionof GALLEON’s obligations. BIENVENIDO C. MORY V. PALCON and SAMAHANG MANGGAGAWA SA PALIPARAN NG PILIPINAS (SMPP). DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS. NOGRALES. LUISA M. JOSEPH B. PROSPERO C. ANGELITO SANTOS. and MIASCOR LOGISTICS CORPORATION. MACROASIAEUREST SERVICES. LOLITA R. TERESA V. in his capacity as Head of the Department of Transportation and Communications. MIASCOR AIRCRAFT MAINTENANCE CORPORATION. MANUEL ANTONIO B. VIRGIE CATAMIN RONALD SCHLOBOM. RAFAEL P. MENDOZA. petitioners. or hadotherwise accommodated GALLEON’s obligation toPOLIAND or its predecessors-in-interest. MENDOZA. ALFREDO B. MAMERTO S. LEONARDO DE LA ROSA. JOSE MARI B.R. respondents. petitioners. JARAULA. VALENCIA. SECRETARY LEANDRO M. INC.PHILIPPINE INTERNATIONAL AIR TERMINALS CO. DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and SECRETARY LEANDRO M.. • There is nothing in the records that indicate thatDBP has acted as surety or guarantor. INC. DIMAANO. EDUARDO C. LOPEZ.• The directives in LOI No. and PHILIPPINE AIRLINES EMPLOYEES ASSOCIATION (PALEA). BOÑE. JACINTO V. DEMOSTHENES P. SALES. and BENASING O. CLARA. petitioners-inintervention. MENDOZA. DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS. MARTINEZ and CONSTANTINO G. WILLY BUYSON VILLARAMA. May 5. DINA C. DE LEON.. petitioners. JR.. PHILIPPINE INTERNATIONAL AIR TERMINALS CO. DECISION SALACNIB F. PROSPERO A. 155547. DIMALANTA. vs. in his capacity as Head of the Department of Transportation and Communications. J. PUNO.R. INC. CATAHAN. MA. PHILIPPINE INTERNATIONAL AIR TERMINALS CO. REUEL E.. PICHAY. INC. DOMALAON. CONRADO G. HIZON. [G. in his capacity as Head of the Department of Transportation and Communications. MIASCOR WORKERS UNION .. and SECRETARY SIMEON A. JR.respondents. REUNILLA. MANILA INTERNATIONAL AIRPORT AUTHORITY. vs. DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS.NATIONAL LABOR UNION (MWU-NLU). NANTES. vs. MANILA INTERNATIONAL AIRPORT AUTHORITY. No.. MA. REMEDIOS P. respondents-intervenors.. in his capacity as Head of the Department of Public Works and Highways. PARAS.. DATUMANONG. SECRETARY LEANDRO M. No. CLAVEL A. MANILA INTERNATIONAL AIRPORT AUTHORITY.

(2) the Amended and Restated Concession Agreement dated November 26. The proponent would be evaluated based on its ability to provide a minimum amount of equity to the project. the NEDA passed Board Resolution No. and (5) the Third Supplement to the Amended and Restated Concession Agreement dated June 22. on January 19. (4) the Second Supplement to the Amended and Restated Concession Agreement dated September 4. (PIATCO): (1) the Concession Agreement signed on July 12. 1997. Andrew Gotianun. 1996. the second envelope the Technical Proposal. 1996. On June 20. the PBAC issued PBAC Bulletin No. 2000. (AEDC) which was registered with the Securities and Exchange Commission (SEC) on September 15. 2 inviting all bidders to a pre-bid conference on July 29.[1] On December 2. On July 23. The ADP submitted a Draft Final Report to the DOTC in December 1989. however.. NAIA future requirements. On January 5. subject to certain conditions. and the third envelope the Financial Proposal of the proponent. 1996. proposed master plans and development plans. the PIATCO Contracts). and maintenance phases of the project. The study consisted of two parts: first. and 21. Sr. operation.00 (US$2. AEDC submitted an unsolicited proposal to the Government through the DOTC/MIAA for the development of NAIA International Passenger Terminal III (NAIA IPT III) under a build-operate-and-transfer arrangement pursuant to RA 6957 as amended by RA 7718 (BOT Law). 94832 constituting the Prequalification Bids and Awards Committee (PBAC) for the implementation of the NAIA IPT III project. Lucio Tan. 1996. Some time in 1993. postponing the availment of the Bid Documents and the submission of the comparative bid proposals. 1999. 1996. the DOTC engaged the services of Aeroport de Paris (ADP) to conduct a comprehensive study of the Ninoy Aquino International Airport (NAIA) and determine whether the present airport can cope with the traffic development up to the year 2010. upon submission of a written application and payment of a non-refundable fee of P50. The Bid Documents issued by the PBAC provided among others that the proponent must have adequate capability to sustain the financing requirement for the detailed engineering. 1996. 2 which approved the NAIA IPT III project.m. DOTC/MIAA caused the publication in two daily newspapers of an invitation for competitive or comparative proposals on AEDC’s unsolicited proposal. On March 27. 1995. George Ty and Alfonso Yuchengco met with then President Fidel V.000). 14. On October 5. 1994. and second. Inc. the NEDA Investment Coordinating Council (NEDA ICC) – Technical Board favorably endorsed the project to the ICC – Cabinet Committee which approved the same. capacity of existing facilities. six business leaders consisting of John Gokongwei. construction. On February 13. 1994. 1995. 1996. the DOTC issued Dept. then DOTC Secretary Jose Garcia endorsed the proposal of AEDC to the National Economic and Development Authority (NEDA). 1 was issued. Ramos to explore the possibility of investing in the construction and operation of a new international airport terminal. A revised proposal. To signify their commitment to pursue the project. (3) the First Supplement to the Amended and Restated Concession Agreement dated August 27. 1996. Interested firms were permitted to obtain the Request for Proposal Documents beginning June 28. On June 7. they formed the Asia’s Emerging Dragon Corp. design. The first envelope should contain the Prequalification Documents. 18 . presentation of the preliminary design of the passenger terminal building. 1993. The alternative bidders were required to submit three (3) sealed envelopes on or before 5:00 p. 1996. traffic forecasts. 4-A of RA 6957. in accordance with Sec. Henry Sy. The facts are as follows: In August 1989. and its capacity to secure external financing for the project.Petitioners and petitioners-in-intervention filed the instant petitions for prohibition under Rule 65 of the Revised Rules of Court seeking to prohibit the Manila International Airport Authority (MIAA) and the Department of Transportation and Communications (DOTC) and its Secretary from implementing the following agreements executed by the Philippine Government through the DOTC and the MIAA and the Philippine International Air Terminals Co. Order No. 2001 (collectively. as amended. PBAC Bulletin No. of September 20. was forwarded by the DOTC to NEDA on December 13. 1999.000..

” Paircargo’s queries and the PBAC’s responses were as follows: 1. but payment of which shall start upon site possession. b. In order to comply with this equity requirement. For purposes of pre-qualification. Aside from the fixed Annual Guaranteed Payment. the PBAC issued Bid Bulletin No.0% 7. and that the challengers’ technical and financial proposals would remain confidential. 19 . The minimum amount of equity shall be 30% of the Project Cost. c.3. a letter testimonial from reputable banks attesting that the project proponent and/or the members of the consortium are banking with them. 1996. On August 29. iii. that the project proponent and/or the members are of good financial standing. the PBAC issued PBAC Bulletin No. 3 amending the Bid Documents. Paircargo is requesting PBAC to just allow each member of (sic) corporation of the Joint Venture to just execute an agreement that embodies a commitment to infuse the required capital in case the project is awarded to the Joint Venture instead of increasing each corporation’s current authorized capital stock just for prequalification purposes. Proponent may offer an Annual Guaranteed Payment which need not be of equal amount. 1996. and have adequate resources. depending on the outcome of PBAC’s query on the matter with the Department of Justice. In September 1996. The basis for the prequalification shall be the proponent’s compliance with the minimum technical and financial requirements provided in the Bid Documents and the IRR of the BOT Law. construction. The PBAC also clarified that the list of revenue sources contained in Annex 4. Rule 11 of the Implementing Rules and Regulations of the BOT Law.2a of the Bid Documents was merely indicative and that other revenue sources may be included by the proponent. The following amendments were made on the Bid Documents: a. Proof of the availability of the project proponent and/or the consortium to provide the minimum amount of equity for the project. Upon the request of prospective bidder People’s Air Cargo & Warehousing Co.On August 16.4 of the Bid Documents considering that the capitalization of each member company is so structured to meet the requirements and needs of their current respective business undertaking/activities. entitled “Answers to the Queries of PAIRCARGO as Per Letter Dated September 3 and 10. Amendments to the draft Concession Agreement shall be issued from time to time. only the proposed Annual Guaranteed Payment submitted by the challengers would be revealed to AEDC. d. 1996. and ii. The project proponent must have adequate capability to sustain the financing requirement for the detailed engineering. the Second Pre-Bid Conference was held where certain clarifications were made. subject to approval by DOTC/MIAA. 5. this capability shall be measured in terms of: i. Said amendments shall only cover items that would not materially affect the preparation of the proponent’s proposal.5% 10. It is difficult for Paircargo and Associates to meet the required minimum equity requirement as prescribed in Section 8. and those charges which would be actually deemed Public Utility Fees could still be revised. Inc (Paircargo).0% e. The amount of the fixed Annual Guaranteed Payment shall be subject of the price challenge. and/or operation and maintenance phases of the project as the case may be. design. ii.6. the PBAC clarified that only those fees and charges denominated as Public Utility Fees would be subject to regulation.. Furthermore. First 5 years Next 10 years Next 10 years 5. the PBAC warranted that based on Sec. the proponent shall include in its financial proposal an additional percentage of gross revenue share of the Government. as follows: i. 11.

On October 3. the consortium composed of People’s Air Cargo and Warehousing Co. 1996. for prequalification purposes. particularly with respect to Paircargo’s financial capability. to be established by submitting the respective companies’ audited financial statements. 1996. a final version will be issued before the award of contract. (Security Bank) (collectively. the PBAC had found that the challenger. Paircargo is negotiating with banks and other institutions for the extension of a Performance Security to the joint venture in the event that the Concessions Agreement (sic) is awarded to them. b. The PBAC then proceeded with the opening of the second envelope of the Paircargo Consortium which contained its Technical Proposal. informing AEDC that it had considered the issues raised by the latter. On September 20. c. The Secretary of the DOTC approved the finding of the PBAC. Air and Grounds Services. 1996. which include: a. The PBAC gave its reply on October 2. However. The appointment of Lufthansa as the facility operator. d. had prequalified to undertake the project. The lack of corporate approvals and financial capability of PAGS. Paircargo.In prequalification. The PBAC also stated that it would require AEDC to sign Supplement C of the Bid Documents (Acceptance of Criteria and Waiver of Rights to Enjoin Project) and to submit the same with the required Bid Security. 20 . (Paircargo). not future or potential capability. Paircargo Consortium) submitted their competitive proposal to the PBAC. Phil. as amended (the General Banking Act) on the amount that Security Bank could legally invest in the project. The prohibition imposed by RA 337. AEDC informed the PBAC in writing of its reservations as regards the Paircargo Consortium. the PBAC prequalified the Paircargo Consortium. Paircargo is being required to submit a copy of the draft concession as one of the documentary requirements. 1996. Paircargo is requesting that they’d (sic) be furnished copy of the approved negotiated agreement between the PBAC and the AEDC at the soonest possible time. Any material changes would be made known to prospective challengers through bid bulletins. AEDC reiterated its objections. in view of the restrictions imposed by Section 21-B of the General Banking Act and Sections 1380 and 1381 of the Manual Regulations for Banks and Other Financial Intermediaries. On October 7. On September 23. September 24. At present. A copy of the draft Concession Agreement is included in the Bid Documents. On the following day. However. in view of the Philippine requirement in the operation of a public utility. Inc. the PBAC opened the first envelope containing the prequalification documents of the Paircargo Consortium. total financial capability of all member companies of the Consortium. However. A commitment to put up equity once awarded the project is not enough to establish that “present” financial capability. shall be acceptable. The lack of corporate approvals and financial capability of PAIRCARGO. (PAGS) and Security Bank Corp. the agency is interested in one’s financial capability at the time of prequalification.. 2. AEDC again manifested its objections and requested that it be furnished with excerpts of the PBAC meeting and the accompanying technical evaluation report where each of the issues they raised were addressed. The inclusion of Siemens as a contractor of the PAIRCARGO Joint Venture. 1996. and e. Therefore. and that based on the documents submitted by Paircargo and the established prequalification criteria. Inc. On September 26. 1996. 1996.

the voting members of the PBAC and Pantaleon D. On November 26. Alvarez. the project would be awarded to Paircargo. Sec.On October 16.. Thus. in his capacity as Chairman of the PBAC Technical Committee. the PBAC opened the third envelope submitted by AEDC and the Paircargo Consortium containing their respective financial proposals. Mandamus and Injunction against the Secretary of the DOTC. rentals and other charges in accordance with the rates or schedules stipulated in the 1997 Concession Agreement. 6.5% share in gross revenues for the next ten years of operation. On April 17. As the ad referendum gathered only four (4) of the required six (6) signatures. on a no-objection basis. 1997.10 with respect to the temporary take-over of operations by GRP. and may be renewed at the option of the Government for a period not exceeding twenty-five (25) years. Enrile. the Government and PIATCO signed three Supplements to the ARCA. the NEDA merely noted the agreement. However. On April 11.04 concerning the assignment by Concessionaire of its interest in the Development Facility. The Government granted PIATCO the franchise to operate and maintain the said terminal during the concession period and to collect the fees. Henry T. Paircargo Consortium incorporated into Philippine International Airport Terminals Co. On July 9. the entire Article VIII concerning the provisions on the termination of the contract. The Agreement provided that the concession period shall be for twentyfive (25) years commencing from the in-service date. 1997. 10. AEDC subsequently protested the alleged undue preference given to PIATCO and reiterated its objections as regards the prequalification of PIATCO. through its President.11 pertaining to the definition of “certificate of completion”. the DOTC issued the notice of award for the project to PIATCO. on December 11. Sec. 1997. 1997. Sec. 3. At the end of the concession period. PIATCO shall transfer the development facility to MIAA. 1996. (PIATCO). signed the “Concession Agreement for the Build-Operate-andTransfer Arrangement of the Ninoy Aquino International Airport Passenger Terminal III” (1997 Concession Agreement). On February 27. Go. Both proponents offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the government and to pay the government: 5% share in gross revenues for the first five years of operation. AEDC filed with the Regional Trial Court of Pasig a Petition for Declaration of Nullity of the Proceedings. the Government and PIATCO signed an Amended and Restated Concession Agreement (ARCA). through then DOTC Secretary Arturo T.05 pertaining to the Special Obligations of GRP. 5.03 as regards the periodic adjustment of public utility fees and charges. issued a notice to Paircargo Consortium regarding AEDC’s failure to match the proposal. otherwise. 1996. 1998. The First Supplement was signed on 21 .02 providing for the venue of the arbitration proceedings in case a dispute or controversy arises between the parties to the agreement. in accordance with the Bid Documents. Inc. and gave AEDC 30 working days or until November 28. the Chairman of the PBAC. and Sec. of the BOT agreement between the DOTC and PIATCO. the PBAC formally informed AEDC that it had accepted the price proposal submitted by the Paircargo Consortium. As AEDC failed to match the proposal within the 30-day period. On April 16. Sec. 4. then DOTC Secretary Amado Lagdameo.02 (a) dealing with the exclusivity of the franchise given to the Concessionaire. the Government. 1996 within which to match the said bid.75 billion for the same period. 5. 1.08 (c) dealing with the proceeds of Concessionaire’s insurance. 1997. 5. and PIATCO. the DOTC submitted the concession agreement for the second-pass approval of the NEDA-ICC. Sec. 7. On July 12. duties and other imposts that may be levied on the Concessionaire. AEDC offered to pay the government a total of P135 million as guaranteed payment for 27 years while Paircargo Consortium offered to pay the government a total of P17. Subsequently. Among the provisions of the 1997 Concession Agreement that were amended by the ARCA were: Sec. 1997. in addition to the foregoing.16 pertaining to the taxes. Sec. the NEDA-ICC conducted an ad referendum to facilitate the approval. Sec. and 10% share in gross revenues for the last ten years of operation. 2.

6. are the dominant players in the industry with an aggregate market share of 70%. 6. Zialcita. passenger handling. Jr. 2002.01 (c) of the ARCA pertaining to the Disposition of Terminal Fees. 22 . During the pendency of the case before this Court.[4] On December 11. 6.. had existing concession contracts with various service providers to offer international airline airport services. Harlin Cast Abayon and Benasing O. it provided for time extensions. Some of these service providers are the Miascor Group. DNATA and MacroAsia. Eduardo C. repair and/or replacement of all airport facilities and equipment which are owned or operated by MIAA. Nantes.[3] On November 6. 2002. Finally. 2002. and further providing additional special obligations on the part of GRP aside from those already enumerated in Sec. moved to intervene in the case as Respondents-Intervenors. Congressmen Salacnib Baterina. Willie B. On October 24. such as in-flight catering. and the changes in the timetable. It also amended Sec. 1. another group of Congressmen.36 of the ARCA defining “Revenues” or “Gross Revenues”. Meanwhile. Sec. It defined the scope of works. 2002. incremental and consequential costs and losses consequent to the existence of such structures. They filed their Comment-InIntervention defending the validity of the assailed agreements and praying for the dismissal of the petitions. Pichay. The First Supplement to the ARCA amended Sec. 1999. Jacinto V. the workers of the international airline service providers. and other services. the swapping of obligations between GRP and PIATCO regarding the improvement of Sales Road. The Second Supplement to the ARCA contained provisions concerning the clearing. Nograles. The Office of the Solicitor General and the Office of the Government Corporate Counsel filed their respective Comments in behalf of the public respondents. Villarama. 2000. several employees of the MIAA likewise filed a petition assailing the legality of the various agreements. on November 29. maintenance.. Prospero A.[2] On October 15. On September 17. it provided for the procedure for the demolition of the said structures and the consideration for the same which the GRP shall pay PIATCO.August 27. aircraft maintenance and provisions. Clavel Martinez and Constantino Jaraula filed a similar petition with this Court. Prospero C. Rafael P. DNATA-Wings Aviation Systems Corp. claiming that they stand to lose their employment upon the implementation of the questioned agreements. Miascor.05 (d) of the ARCA referring to the obligation of MIAA to provide sufficient funds for the upkeep. and it provided for some additional obligations on the part of PIATCO as regards the said structures. 2002. the service providers. joining the cause of the petitioning workers. ramp and ground support.02 (a) (iii) of the ARCA referring to the Payments of Percentage Share in Gross Revenues. filed a motion for intervention and a petitionin-intervention. 2. The First Supplement also provided a stipulation as regards the construction of a surface road to connect NAIA Terminal II and Terminal III in lieu of the proposed access tunnel crossing Runway 13/31. Hon. Supplements). 2. the MIAA which is charged with the maintenance and operation of the NAIA Terminals I and II. Sec. to several international airlines at the NAIA.05 of the ARCA. and Sec. together with Philippine Airlines (PAL). demolition or disposal of subterranean structures uncovered or discovered at the site of the construction of the terminal by the Concessionaire. the Third Supplement provided for the obligations of the Concessionaire as regards the construction of the surface road connecting Terminals II and III. in her speech at the 2002 Golden Shell Export Awards at Malacañang Palace.”[5] Respondent PIATCO filed its Comments to the present petitions on November 7 and 27. President Gloria Macapagal Arroyo. cargo handling and warehousing. 2001 (collectively. removal. stated that she will not “honor (PIATCO) contracts which the Executive Branch’s legal offices have concluded (as) null and void.02 of the ARCA by inserting an introductory paragraph. Macaranbon. the Second Supplement on September 4. 2002. and the MacroAsia Group. filed before this Court a petition for prohibition to enjoin the enforcement of said agreements. 2002. and the Third Supplement on June 22. Paras.

155001 and 155661 In G.On December 10. passenger handling. aircraft maintenance and provisions. ramp and ground support. the Court then resolved in open court to require the parties to file simultaneously their respective Memoranda in amplification of the issues heard in the oral arguments within 30 days and to explore the possibility of arbitration or mediation as provided in the challenged contracts.R. Petitioners-Intervenors in the same case are all corporations organized and existing under Philippine laws engaged in the business of providing in-flight catering. the ARCA and the Supplements thereto void for being contrary to the Constitution. 2002. Also included as petitioners are labor unions MIASCOR Workers UnionNational Labor Union and Philippine Airlines Employees Association. and public policy. The Court is aware of the far reaching fall out effects of the ruling which it makes today. Petitioners contend that the DOTC and the MIAA. 2003. the Court is again faced with the task of resolving complicated issues made difficult by their intersecting legal and economic implications. 155661. No. In the present cases.R. G. We shall first dispose of the procedural issues raised by respondent PIATCO which they allege will bar the resolution of the instant controversy. this Court will not begin to do otherwise today. the Office of the Solicitor General and the Office of the Government Corporate Counsel prayed that the present petitions be given due course and that judgment be rendered declaring the 1997 Concession Agreement. specific provisions of the BOT Law and its Implementing Rules and Regulations. the Court heard the case on oral argument. Each of the petitioners-intervenors have separate and subsisting concession agreements with MIAA and with various international airlines which they allege are being interfered with and violated by respondent PIATCO. On March 6. 2003 PIATCO commenced arbitration proceedings before the International Chamber of Commerce. petitioners constitute employees of MIAA and Samahang Manggagawa sa Paliparan ng Pilipinas . Nos. cargo handling and warehousing and other services. ramp and ground support. In their consolidated Memorandum. For more than a century and whenever the exigencies of the times demand it.R. this Court has never shirked from its solemn duty to dispense justice and resolve “actual controversies involving rights which are legally demandable and enforceable. They filed the petition as taxpayers and persons who have a legitimate interest to protect in the implementation of the PIATCO Contracts. the BOT Law and its Implementing Rules and Regulations.a legitimate labor union and accredited as the sole and exclusive bargaining agent of all the employees in MIAA. and to determine whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction. After the oral argument. aircraft maintenance and provisions. No. Petitioners anchor their petition for prohibition on the nullity of the contracts entered into by the Government and PIATCO regarding the build-operate-and-transfer of the NAIA IPT III. PetitionersIntervenors allege that as tax-paying international airline and airportrelated service operators.”[6] To be sure. International Court of Arbitration (ICC) by filing a Request for Arbitration with the Secretariat of the ICC against the Government of the Republic of the Philippines acting through the DOTC and MIAA. each one of them stands to be irreparably injured by the implementation of the PIATCO Contracts. Petitioners’ Legal Standing to File the present Petitions a. 155001 individual petitioners are employees of various service providers[7] having separate concession contracts with MIAA and continuing service agreements with various international airlines to provide in-flight catering. by entering into 23 . respondent PIATCO informed the Court that on March 4. Petitioners in both cases raise the argument that the PIATCO Contracts contain stipulations which directly contravene numerous provisions of the Constitution. In G. These petitioners filed the instant action for prohibition as taxpayers and as parties whose rights and interests stand to be violated by the implementation of the PIATCO Contracts. passenger handling. cargo handling and warehousing and other services to several international airlines at the Ninoy Aquino International Airport.

155547 In G. The petitioning service providers will thus be compelled to contract with PIATCO alone for such services. They stand to lose their source of livelihood. it has been held that the interest of a person assailing the constitutionality of a statute must be direct and personal. they allege that they will be effectively barred from providing international airline airport services at the NAIA Terminals I and II as all international airlines and passengers will be diverted to the NAIA IPT III.”[9] Accordingly. Moreover. citizens and taxpayers. With respect to existing concession agreements between MIAA and international airport service providers regarding certain services or operations. because the contracts compel the Government and/or the House of Representatives to appropriate funds necessary to comply with the provisions therein.said contracts. and not merely that he suffers thereby in some indefinite way. 155547. the Government shall cause the closure of Ninoy Aquino International Airport Passenger Terminals I and II as international passenger terminals. but also that he sustained or is in imminent danger of sustaining some direct injury as a result of its enforcement. they stand to lose employment. Petitioning employees of various service providers at the NAIA Terminals I and II and of MIAA on the other hand allege that with the closure of the NAIA Terminals I and II as international passenger terminals under the PIATCO Contracts. not only that the law or any government act is invalid. there being no plain. have committed grave abuse of discretion amounting to lack or excess of jurisdiction which can be remedied only by a writ of prohibition. they entered into their respective contracts with the MIAA with the understanding that the said contracts will be in force for the stipulated period.R. The contracts further provide that upon the commencement of operations at the NAIA IPT III. It must appear that the person complaining has been or is about to be denied some right or privilege to which he is lawfully entitled or that he is about to be subjected to some burdens or penalties by reason of the statute or act complained of. and thereafter. they are especially interested in the PIATCO Contracts. upon the commencement of operations of the NAIA IPT III. a property right which is zealously protected by the Constitution. petitioners filed the petition for prohibition as members of the House of Representatives.[11] They cite provisions of the PIATCO 24 . subsisting concession agreements between MIAA and petitionersintervenors and service contracts between international airlines and petitioners-intervenors stand to be nullified or terminated by the operation of the NAIA IPT III under the PIATCO Contracts. In the above-mentioned cases. G. Petitioning service providers stress that despite the very competitive market. The question on legal standing is whether such parties have “alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions. petitioners assail the provisions in the 1997 Concession Agreement and the ARCA which grant PIATCO the exclusive right to operate a commercial international passenger terminal within the Island of Luzon. petitioners have a direct and substantial interest to protect by reason of the implementation of the PIATCO Contracts. except those international airports already existing at the time of the execution of the agreement. the substantial capital investments required and the high rate of fees. The financial prejudice brought about by the PIATCO Contracts on petitioners and petitioners-intervenors in these cases are legitimate interests sufficient to confer on them the requisite standing to file the instant petitions. No. renewed so as to allow each of the petitioning service providers to recoup their investments and obtain a reasonable return thereon.[10] We hold that petitioners have the requisite standing. b. speedy or adequate remedy in the ordinary course of law. In particular. They allege that as members of the House of Representatives. the 1997 Concession Agreement and the ARCA uniformly provide that such services or operations will not be carried over to the NAIA IPT III and PIATCO is under no obligation to permit such carry over except through a separate agreement duly entered into with PIATCO. No. with no assurance that subsisting contracts with MIAA and other international airlines will be respected.R.[8] With respect to the petitioning service providers and their employees. He must be able to show.

acts. even if. They contend that trial courts have concurrent jurisdiction with this Court with respect to a special civil action for prohibition and hence. The facts necessary to resolve these legal questions are well established and.02 of the ARCA have been filed at the instance of respondent PIATCO.[19] It is easy to discern that exceptional circumstances exist in the cases at bar that call for the relaxation of the rule. Guingona. . hence. They allege that the Government obligations in the PIATCO Contracts which compel government expenditure without appropriation is a curtailment of their prerogatives as legislators. In Kilosbayan. the BOT Law and its Implementing Rules and Regulations. Legal Effect of the Commencement of Arbitration Proceedings by PIATCO There is one more procedural obstacle which must be overcome.”[12] Standing is a peculiar concept in constitutional law because in some cases. and even association of planters.[15] this Court held “[i]n line with the liberal policy of this Court on locus standi. strictly speaking. members of Congress. we resolve to grant standing to the petitioners. The rule on hierarchy of courts will not also prevent this Court from assuming jurisdiction over the cases at bar. After a thorough study and careful evaluation of the issues involved. Municipality of Imus[13]and Gonzales v. Raquiza[14] wherein this Court held that appropriation must be made only on amounts immediately demandable. PIATCO alleges that submission of this controversy to this Court at the first instance is a violation of the rule on hierarchy of courts. rulings. the crucial issues submitted for resolution are of first impression and they entail the proper legal interpretation of key provisions of the Constitution.”[16] Further. . Again. taxpayers or voters who actually sue in the public interest. public interest demands that we take a more liberal view in determining whether the petitioners suing as legislators. . we hold that the arbitration step taken by PIATCO will not oust this Court of its jurisdiction over the cases at bar. contrary to the mandate of the Constitution that “[n]o money shall be paid out of the treasury except in pursuance of an appropriation made by law. “insofar as taxpayers' suits are concerned . it is still within the wide discretion of the Court to waive the requirement and so remove the impediment to its addressing and resolving the serious constitutional questions raised.”[18] In view of the serious legal questions involved and their impact on public interest. Inc. need not be determined by a trial court. ordinary taxpayers. 25 . Both petitioners and respondents agree that these cases are oftranscendental importance as they involve the construction and operation of the country’s premier international airport. procedural bars may be lowered to give way for the speedy disposition of the instant cases. . taxpayers and citizens have locus standi to file the instant petition. they [the petitioners] are not covered by the definition.Contracts which require disbursement of unappropriated amounts in compliance with the contractual obligations of the Government. Moreover. (this Court) is not devoid of discretion as to whether or not it should be entertained.”[17] As such “. this Court is of the view that the crux of the instant controversy involves significant legal questions. Thus. Other Procedural Matters Respondent PIATCO further alleges that this Court is without jurisdiction to review the instant cases as factual issues are involved which this Court is ill-equipped to resolve. considering the nature of the controversy before the Court. following the rule on hierarchy of courts. or orders of various government agencies or instrumentalities. suits are not brought by parties who have been personally injured by the operation of a law or any other government act but by concerned citizens. and non-profit civic organizations were allowed to initiate and prosecute actions before this Court to question the constitutionality or validity of laws. The said rule may be relaxed when the redress desired cannot be obtained in the appropriate courts or where exceptional and compelling circumstances justify availment of a remedy within and calling for the exercise of this Court’s primary jurisdiction. Moreover. decisions. Although we are not unmindful of the cases of Imus Electric Co. v. resort must first be had before the trial courts. The Court is aware that arbitration proceedings pursuant to Section 10. v.

In the said Memorandum. 26 . on the other hand. a member of the consortium. Court of Appeals. Considering that there are parties to the case who are neither parties to the Distributorship Agreement nor heirs or assigns of the parties thereto. 3. Undersecretary Cal opined: The Bid Documents. This objective would not be met if this Court were to allow the parties to settle the cases by arbitration as there are certain issues involving non-parties to the PIATCO Contracts which the arbitral tribunal will not be equipped to resolve.926. as amended or the General Banking Act that a commercial bank cannot invest in any single enterprise in an amount more than 15% of its net worth.[22] Thus. PIATCO’s predecessor. It is established that petitioners in the present cases who have presented legitimate interests in the resolution of the controversy are not parties to the PIATCO Contracts. No.421. sufficient to meet the equity requirements of the project. Laperal Realty Corporation. As stated in Bid Bulletin No.700. cannot be compelled to submit to arbitration proceedings. Jr.000. The Challenger has complied with this requirement. This contention is based on the restriction under R. their assigns and heirs. they cannot be bound by the arbitration clause provided for in the ARCA and hence. result in multiplicity of suits.000. I Is PIATCO a qualified bidder? Public respondents argue that the Paircargo Consortium. They allege that in computing the ability of the Paircargo Consortium to meet the minimum equity requirements for the project. the entire net worth of Security Bank. 337. to the merits of the instant controversy. we ruled that the interest of justice would best be served if the trial court hears and adjudicates the case in a single and complete proceeding.000. require that financial capability will be evaluated based on total financial capability of all the member companies of the [Paircargo] Consortium. The said Memorandum was in response to a letter from Mr. the Challenger was found to have a combined net worth of P3. only the parties to the Distributorship Agreement are bound by its terms.” To impose that as a requirement now will be nothing less than unfair. v. In so ruling. including those raised by petitioners. this Court affirmed the trial court’s decision denying petitioner’s Motion to Suspend Proceedings pursuant to the arbitration clause under the contract. Cal stating that the Paircargo Consortium is found to have a combined net worth of P3. on the strength of the Memorandum dated October 14. A speedy and decisive resolution of all the critical issues in the present controversy. this Court. was not a duly pre-qualified bidder on the unsolicited proposal submitted by AEDC as the Paircargo Consortium failed to meet the financial capability required under the BOT Law and the Bid Documents. 1996 issued by the DOTC Undersecretary Primitivo C. financial capability may also be established by testimonial letters issued by reputable banks.242.900. should not be considered. as clarified through Bid Bulletin Nos. The financial statement or the net worth is not the sole basis in establishing financial capability. this Court held that as contracts produce legal effect between the parties. PIATCO relies.[20] even after finding that the arbitration clause in the Distributorship Agreement in question is valid and the dispute between the parties is arbitrable.[21] held that to tolerate the splitting of proceedings by allowing arbitration as to some of the parties on the one hand and trial for the others on the other hand would. cannot be made before an arbitral tribunal. In this connection. duplicitous procedure and unnecessary delay.00. The object of arbitration is precisely to allow an expeditious determination of a dispute. including the arbitration clause stipulated therein.A. This Court ruled that arbitration proceedings could be called for but only with respect to the parties to the contract in question.00 that could support a project costing approximately P13 Billion. Accordingly. 3 and 5. Ramos questioning the financial capability of the Paircargo Consortium on the ground that it does not have the financial resources to put up the required minimum equity of P2. Now. in effect. Antonio Henson of AEDC to President Fidel V. citing its previous ruling in Salas.000. It is not a requirement that the net worth must be “unrestricted.00.In Del Monte Corporation-USA v.

Basis of Pre-qualification The basis for the pre-qualification shall be on the compliance of the proponent to the minimum technical and financial requirements provided in the Bid Documents and in the IRR of the BOT Law.00 respectively.000. the Paircargo Consortium or any challenger to the unsolicited proposal of AEDC has to show that it possesses the requisite financial capability to undertake the project in the minimum amount of 30% of the project cost through (i) proof of the ability to provide a minimum amount of equity to the project.01a of the draft concession agreement. and (ii) a letter testimonial from reputable banks attesting that the project proponent and/or members of the consortium are banking with them.[26] PAGS’ Audited Financial Statements as of 1995 indicate that it has approximately P26.4 of the Bid Documents. and that they have adequate resources. 7718.183.00. organizational and legal standards” required by the law. construction and/or operation and maintenance phases of the project. No. having satisfied the minimum financial. In fact.[28] We agree with public respondents that with respect to Security Bank. c. as the case may be. that they are in good financial standing. The debt portion of the project financing should not exceed 70% of the actual project cost.095. R.A.6.4 Pre-qualification Requirements. technical. the minimum amount of equity needed.000. that they are in good financial standing. (emphasis supplied) Pursuant to this provision. this capability shall be measured in terms of (i) proof of the ability of the project proponent and/or the consortium to provide a minimum amount of equity to the project.123.[27] Security Bank’s Audited Financial Statements as of 1995 show that it has a net worth equivalent to its capital funds in the amount of P3.00 to invest as its equity for the project. Financial Capability: The project proponent must have adequate capability to sustain the financing requirements for the detailed engineering design. 6957.523.00.755. For purposes of pre-qualification.To recap.735. The minimum amount of equity to which the proponent’s financial capability will be based shall be thirty percent (30%) of the project cost instead of the twenty percent (20%) specified in Section 3. has submitted the lowest bid and most favorable terms of the project.377.000.650.700. the PBAC issued PBAC Bulletin No. Paircargo’s Audited Financial Statements as of 1993 and 1994 indicated that it had a net worth of P2. 3 dated August 16. Accordingly.00. 1996 amending the financial capability requirements for pre-qualification of the project proponent as follows: 6. As the minimum project cost was estimated to be US$350.515. The government agency/LGU concerned shall determine on a project-toproject basis and before pre-qualification. This is to correlate with the required debt-to-equity ratio of 70:30 in Section 2. in case of a build-operate-and-transfer arrangement.000. and (ii) a letter testimonial from reputable banks attesting that the project proponent or members of the consortium are banking with them. …. and that they have adequate resources.592. the 1994 Implementing Rules and Regulations of the BOT Law provide: Section 5.A. as amended by R.1 IRR of the BOT Law) but not for prequalification (Section 5.00 and P3. net worth reflected in the Financial Statement should not be taken as the amount of the money to be used to answer the required thirty percent (30%) equity of the challenger but rather to be used in establishing if there is enough basis to believe that the challenger can comply with the required 30% equity.504.[25] the Paircargo Consortium had to show to the satisfaction of the PBAC that it had the ability to provide the minimum equity for the project in the amount of at least P2. the contract shall be awarded to the bidder “who. proof of sufficient equity is required as one of the conditions for award of contract (Section 12.[23] Under the BOT Law.[24] Further. based on the above provisions of law.00 or roughly P9.783.4 of the same document). the entire amount of its net worth could not be invested in a 27 .

X121. (b) the equity investment in any one enterprise whether allied or non-allied shall not exceed fifteen percent (15%) of the net worth of the bank. operation and maintenance of the NAIA IPT III project at the time of pre-qualification. 28 . invest in the equity of a non-allied undertaking. the ability of the bidder to undertake the project.single undertaking or enterprise. Thus. — The equity investments of banks in any single enterprise shall not exceed at any time fifteen percent (15%) of the net worth of the investing bank as defined in Sec. whether allied or non-allied in accordance with the provisions of R. the law requires the government agency to examine and determine the ability of the bidder to fund the entire cost of the project by considering the maximum amounts that each bidder may invest in the project at the time of pre-qualification. 129.871.55. a bank authorized to provide commercial banking services. at the earliest opportunity. and (d) the equity investment in other banks shall be deducted from the investing bank's net worth for purposes of computing the prescribed ratio of net worth to risk assets. in the case of Paircargo Consortium.5.55 or only 6.A. That (a) the total investment in equities shall not exceed fifty percent (50%) of the net worth of the bank.08% of the project cost.[29] an amount substantially less than the prescribed minimum equity investment required for the project in the amount of P2. the Monetary Board. (c) the equity investment of the bank. the PBAC should determine the maximum amounts that each member of the consortium may commit for the construction. to operate under an expanded commercial banking authority and by virtue thereof exercise. Further. Other Limitations and Restrictions.755. The purpose of pre-qualification in any public bidding is to determine.00 or 30% of the project cost. …. the maximum amount which may be invested by it would only be 15% of its net worth in view of the restrictions imposed by the General Banking Act.095. the powers of an Investment House as provided in Presidential Decree No. may authorize a commercial bank. or own a majority or all of the equity in a financial intermediary other than a commercial bank or a bank authorized to provide commercial banking services: Provided. whenever it shall deem appropriate and necessary to further national development objectives or support national priority projects. Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes. such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the project. The provisions in this or in any other Act to the contrary notwithstanding.525.384. In any single enterprise. in accordance with the 70:30 debt-to-equity ratio prescribed in the Bid Documents. a. The PBAC has determined that any prospective bidder for the construction. The total net worth therefore of the Paircargo Consortium. 337. With respect to Security Bank. the 1993 Manual of Regulations for Banks provides: SECTION X383. Thus. in a single non-allied undertaking shall not exceed thirty-five percent (35%) of the total equity in the enterprise nor shall it exceed thirty-five percent (35%) of the voting stock in that enterprise. or of its wholly or majority-owned subsidiary. after considering the maximum amounts that may be validly invested by each of its members is P558. — The following limitations and restrictions shall also apply regarding equity investments of banks.656. as well as a government-owned and controlled bank. operation and maintenance of the NAIA IPT III project should prove that it has the ability to provide equity in the minimum amount of 30% of the project cost. the maximum amount that Security Bank could validly invest in the Paircargo Consortium is only P528. Thus. in addition to powers authorized for commercial banks. No. X106 and Subsec. as amended or the General Banking Act: Sec.000. with respect to the bidder’s financial capacity at the pre-qualification stage. representing 15% of its entire net worth. 21-B.

A restrictive and conservative application of the rules and procedures of public bidding is necessary not only to protect the impartiality and regularity of the proceedings but also to ensure the financial and technical reliability of the project. the determination of whether or not a bidder is prequalified to undertake the project requires an evaluation of the financial capacity of the said bidder at the time the bid is submitted based on the required documents presented by the bidder. Thus: Competition must be legitimate. i. and DOTC/MIAA. including AEDC. alteration or modification. the same undertaking.. the maximum amounts which the Paircargo Consortium may invest in the project fell short of the minimum amounts prescribed by the PBAC. The relevant government authority is dutybound to ensure that the awardee of the contract possesses the minimum required financial capability to complete the project. PIATCO maintains. public bidding aims to protect the public interest by giving the public the best possible advantages through open competition. however. Amendments to the Draft Concessions Agreement Amendments to the Draft Concessions Agreement shall be issued from time to time. competition requires. and not designed to injure or defraud the government. This is especially true in the case at bar which involves the investment of billions of pesos by the project proponent. This would open doors to abuse and defeat the very purpose of a public bidding.Further. regulations. is null and void. a common basis. To allow the PBAC to estimate the bidder’s future financial capability would not secure the viability and integrity of the project. fair and honest. In the field of government contract law. the Court feels that it is necessary to discuss in full the pressing issues of the present controversy for a complete resolution thereof. Considering that at the prequalification stage.' but also that it be legitimate. Strict observance of the rules. said bidder should be properly disqualified. the same subject matter. we hold that Paircargo Consortium was not a qualified bidder. fair and honest.[30] Thus. By its very nature. upon the same thing. Said amendments shall only cover items that would not materially affect the preparation of the proponent’s proposal.[31] 29 . a disqualified bidder. if the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder. honest and competitive public bidding. that the Concession Agreement attached to the Bid Documents is intended to be a draft. It argued further that said intention is expressed in Part C (6) of Bid Bulletin No. While it would be proper at this juncture to end the resolution of the instant controversy. They maintain that a substantial departure from the draft Concession Agreement is a violation of public policy and renders the 1997 Concession Agreement null and void. not only `bidding upon a common standard. subject to change. II Is the 1997 Concession Agreement valid? Petitioners and public respondents contend that the 1997 Concession Agreement is invalid as it contains provisions that substantially depart from the draft Concession Agreement included in the Bid Documents. 3 issued by the PBAC which states: 6.e. It has been held that: The basic rule in public bidding is that bids should be evaluated based on the required documents submitted before and not after the opening of bids. as the legal effects of the disqualification of respondent PIATCO’s predecessor would come into play and necessarily result in the nullity of all the subsequent contracts entered by it in pursuance of the project. The PBAC should not be allowed to speculate on the future financial ability of the bidder to undertake the project on the basis of documents submitted. Otherwise. and that this intention was clear to all participants. and guidelines of the bidding process is the only safeguard to a fair. Thus the award of the contract by the PBAC to the Paircargo Consortium. the foundation of a fair and competitive public bidding would be defeated.

would contain substantially different terms and conditions that would have the effect of altering the technical and/or financial proposals previously submitted by other bidders. is null and void: The Court agrees with the contention of counsel for the plaintiffs that the due execution of a contract after public bidding is a limitation upon the right of the contracting parties to alter or amend it without another public bidding. Nor can they enter into a contract with the best bidder containing substantial provisions beneficial to him. Each bidder must be able to bid on the same thing.. Hence. Not simply in terms of application of the procedural rules and regulations imposed by the relevant government agency. operate equally or indiscriminately upon all bidders.[34] this Court quoted with approval the ruling of the trial court that an amendment to a contract awarded through public bidding.” While we concede that a winning bidder is not precluded from modifying or amending certain provisions of the contract bidded 30 . the PBAC also clarified that “[s]aid amendments shall only cover items that would not materially affect the preparation of the proponent’s proposal. 3 cited by PIATCO to support its argument that the draft concession agreement is subject to amendment. municipal authorities can only let a contract for public work to the lowest responsible bidder. as in this case. Thus: It is inherent in public biddings that there shall be a fair competition among the bidders. The specifications in such biddings provide the common ground or basis for the bidders. for otherwise what would a public bidding be good for if after the execution of a contract after public bidding. when taken as a whole. Delgado Brothers. The specifications should. accordingly.[32] The same rule was restated by Chief Justice Stuart of the Supreme Court of Minnesota: The law is well settled that where. Inc.An essential element of a publicly bidded contract is that all bidders must be on equal footing. but more importantly. then the essence of fair competition in the public bidding is destroyed. He who bids or offers the best terms is awarded the contract subject of the bid. the question that comes to fore is this: is the 1997 Concession Agreement the same agreement that was offered for public bidding. at their will? Public biddings are held for the protection of the public. the proposals and specifications therefore must be so framed as to permit free and full competition. v. and it is obvious that such protection and best possible advantages to the public will disappear if the parties to a contract executed after public bidding may alter or amend it without another previous public bidding. when such subsequent amendment was made without a new public bidding. the pertinent portion of which was quoted above.. If the winning bidder is allowed to later include or modify certain provisions in the contract awarded such that the contract is altered in any material respect.e. A public bidding would indeed be a farce if after the contract is awarded. i. the determination of whether or not a modification or amendment of a contract bidded out constitutes a substantial amendment rests on whether the contract. such changes must not constitute substantial or material amendments that would alter the basic parameters of the contract and would constitute a denial to the other bidders of the opportunity to bid on the same terms. the winning bidder may modify the contract and include provisions which are favorable to it that were not previously made available to the other bidders. in the PBAC Bid Bulletin No. not included or contemplated in the terms and specifications upon which the bids were invited. In the case of Caltex (Philippines). The alterations and modifications in the contract executed between the government and the winning bidder must be such as to render such executed contract to be an entirely different contract from the one that was bidded upon. [33] upon. and to give the public the best possible advantages by means of open competition between the bidders. the contracting parties may alter or amend the contract. the draft Concession Agreement attached to the Bid Documents? A close comparison of the draft Concession In fact. or even cancel it. Inc. The rationale is obvious.[35] Hence. on the contract bidded upon.

and (3) new fees and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I.. For fees under the first category. those which are subject to periodic adjustment in accordance with a prescribed parametric formula and effective only upon written approval by MIAA. MIAA reserves the right to regulate (1) lobby and vehicular parking fees and (2) other new fees and charges that may be imposed by PIATCO. and (4) Terminal Fees. Under the 1997 Concession Agreement. (2) aircraft tacking fees. Provided that adjustments shall be made effective only after the written express approval of the MIAA. pursuant to Administrative Order No. Adjustments in the aircraft parking fees. The full text of said provision is quoted below: Section 6. aircraft tacking fees. groundhandling fees.03 of the draft Concession Agreement. as amended. (2) aircraft tacking fees. 31 .Agreement attached to the Bid Documents and the 1997 Concession Agreement reveals that the documents differ in at least two material respects: a.the draft Concession Agreement includes the following:[36] (1) aircraft parking fees.03. fees which PIATCO may adjust whenever it deems necessary without need for consent of DOTC/MIAA are “Non-Public Utility Revenues” and is defined as “all other income not classified as Public Utility Revenues derived from operations of the Terminal and the Terminal Complex.”[38] Thus. rentals from airline offices and porterage fees are no longer subject to MIAA regulation. fees which are subject to adjustment and effective upon MIAA approval are classified as “Public Utility Revenues” and include:[37] (1) aircraft parking fees. The glaring distinctions between the draft Concession Agreement and the 1997 Concession Agreement lie in the types of fees included in each category and the extent of the supervision and regulation which MIAA is allowed to exercise in relation thereto. i. Such regulation may be made by periodic adjustment and is effective only upon written approval of MIAA. (3) check-in counter fees. (3) groundhandling fees. Periodic Adjustment in Fees and Charges. under the 1997 Concession Agreement. The implication of the reduced number of fees that are subject to MIAA approval is best appreciated in relation to fees included in the second category identified above. rentals and airline offices. check-in-counter rentals and porterage fees shall be allowed only once every two years and in accordance with the Parametric Formula attached hereto as Annex F. (4) rentals and airline offices.e. groundhandling fees. Further. Series of 1993. under Section 6. and (6) porterage fees. Modification on the Public Utility Revenues and Non-Public Utility Revenues that may be collected by PIATCO The fees that may be imposed and collected by PIATCO under the draft Concession Agreement and the 1997 Concession Agreement may be classified into three distinct categories: (1) fees which are subject to periodic adjustment of once every two years in accordance with a prescribed parametric formula and adjustments are made effective only upon written approval by MIAA. 1. (2) fees other than those included in the first category which maybe adjusted by PIATCO whenever it deems necessary without need for consent of DOTC/MIAA. Under the 1997 Concession Agreement. (5) check-in counter rentals.

. under Section 6. While the vehicular parking fee. under the 1997 Concession Agreement. new fees and charges that may be imposed by PIATCO which have not been previously imposed or collected at the Ninoy Aquino International Airport Passenger Terminal I.03 of the draft Concession Agreement MIAA has reserved the right to regulate the same under the same conditions that MIAA may regulate fees under the first category. if in the reasonable opinion of GRP the said fees have become exorbitant resulting in the unreasonable deprivation of End Users of such services. The 1997 Concession Agreement. under the draft Concession Agreement. under the 1997 Concession Agreement. in this respect. “Public Utility Revenues” are subject to an “Interim Adjustment” of fees upon the occurrence of certain extraordinary events specified in the agreement. this was included within the category of “Public Utility Revenues” under the 1997 Concession Agreement.Provided. porterage fee and greeter/well wisher fee constitute Non-Public Utility Revenues of Concessionaire. There is an obvious relaxation of the extent of control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO. In the draft Concession Agreement. …. shall be contingent only on the conformity of the adjustments with the above said parametric formula. under the 1997 Concession Agreement. PIATCO is able to enjoy the benefits of depreciations of the Philippine Peso.e. This classification is significant because under the 1997 Concession Agreement.e. The MIAA reserves the right to regulate under the foregoing terms and conditions the lobby and vehicular parking fees and other new fees and charges as contemplated in paragraph 2 of Section 6. i. with respect to (1) vehicular parking fee. (2) porterage fee and (3) greeter/well wisher fee. further. In the draft Concession Agreement. With respect to terminal fees that may be charged by PIATCO.01 if in its judgment the users of the airport shall be deprived of a free option for the services they cover. as shown earlier. When taken as a whole. are denominated in US Dollars[44] while payments to the Government are in Philippine Pesos. By stipulating that “Public Utility Revenues” will be paid to PIATCO in US Dollars while payments by PIATCO to the Government are in Philippine currency under the 1997 Concession Agreement. the equivalent provision under the 1997 Concession Agreement reads: Section 6. that such approval of the MIAA.[39] On the other hand. Moreover.”[43] [41] Finally. while being effectively insulated from the detrimental effects of exchange rate fluctuations. GRP may intervene and require Concessionaire to explain and justify the fee it may set from time to time. all that MIAA can do is to require PIATCO toexplain and justify the fees set by PIATCO. terminal fees are not included in the types of fees that may be subject to “Interim Adjustment. (c) Concessionaire shall at all times be judicious in fixing fees and charges constituting Non-Public Utility Revenues in order to ensure that End Users are not unreasonably deprived of services.[42] However. no such stipulation was included. i. periodic adjustment of once every two years in accordance with a prescribed parametric formula and effective only upon written approval by MIAA.” except terminal fees. vehicular parking fee is subject to MIAA regulation and approval under the second paragraph of Section 6.03 Periodic Adjustment in Fees and Charges. the changes under the 1997 Concession Agreement with respect to reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to other fees are significant amendments that substantially distinguish the draft Concession Agreement from the 1997 Concession Agreement. adjustment of fees under the third category is not subject to MIAA regulation.[40] Thus. with respect to the third category of fees that may be imposed and collected by PIATCO. The first adjustment shall be made prior to the In-Service Date of the Terminal. However. “Public Utility Revenues. clearly gives PIATCO more favorable terms than 32 ..03 thereof while porterage fee is covered by the first paragraph of the same provision.

04 …. including all interests. to be substituted as concessionaire and operator of the Development Facility in accordance with the terms and conditions hereof. GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities. likewise under the terms and conditions of this Agreement. contractors and sub-contractors. acting in good faith and with due diligence. either (i) take over the Assignment. reimbursements and other related expenses. by written notice. is unable to designate a qualified operator within the aforesaid period. b. (c) If GRP should. and further including amounts owed by Concessionaire to its suppliers. the latter shall form and organize a concession company qualified to take over the operation of the Development Facility. the same is further subject to “Interim Adjustments” not previously stipulated in the draft Concession Agreement. Adjustments of all other fees imposed and collected by PIATCO are entirely within its control. (b) In the event Concessionaire should default in the payment of an Attendant Liability. However. within one hundred eighty (180) Days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire. the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. In fact. If the concession company should elect to designate an operator for the Development Facility. surcharges. except terminal fees. associated fees. the concession company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRP’s written notice. It is not very difficult to see that the changes in the 1997 Concession Agreement translate to direct and concrete financial advantages for PIATCO which were not available at the time the contract was offered for bidding. charges.04 in relation to the definition of “Attendant Liabilities. default by PIATCO of any of its obligations to creditors who have provided. or designate a qualified operator acceptable to GRP to operate the Development Facility. gives PIATCO an added benefit which was not available at the time of bidding. GRP shall. indemnities. the 1997 Concession Agreement provides: Section 4. Assumption by the Government of the liabilities of PIATCO in the event of the latter’s default thereof Under the draft Concession Agreement. Provided that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice. the change in the currency stipulated for “Public Utility Revenues” under the 1997 Concession Agreement. Moreover. Such default does not directly result in any concomitant right or obligation in favor of the Government. under the 1997 Concession Agreement. loaned or advanced funds for the NAIA IPT III project does not result in the assumption by the Government of these liabilities. The term “Attendant Liabilities” under the 1997 Concession Agreement is defined as: Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the Concessionaire as owing to Unpaid Creditors who have provided. loaned or advanced funds actually used for the Project. If the concession company. Finally. nowhere in the said contract does default of PIATCO’s loans figure in the agreement. if qualified.” default by PIATCO of its loans used to finance the NAIA IPT III project triggers the 33 . then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant Liabilities. with respect to terminal fees. Under the above quoted portions of Section 4. allow the Unpaid Creditors to be substituted as concessionaire. and the default has resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity. Development Facility and assume the Attendant Liabilities. penalties.what was available to other bidders at the time the contract was bidded out. It cannot be denied that under the 1997 Concession Agreement only “Public Utility Revenues” are subject to MIAA regulation. or (ii) allow the Unpaid Creditors.

Without going into the validity of this provision at this juncture. requirements of financing and borrowing notwithstanding. the contract signed by the government and the contract-awardee is an entirely different contract from the contract bidded.[47] Any government action which permits any substantial variance between the conditions under which the bids are invited and the contract executed after the award thereof is a grave abuse of discretion amounting to lack or excess of jurisdiction which warrants proper judicial action. operation and maintenance of the NAIA IPT III. suffice it to state that Section 4. In view of the above discussion.. A strict adherence on the principles. when the Government so elects and allows a qualified operator to take over as Concessionaire. PIATCO. Section 4. It is therefore inevitable for the awardee of the contract to seek alternate sources of funds to support the project.04 is an important amendment to the 1997 Concession Agreement because it grants PIATCO a financial advantage or benefit which was not previously made available during the bidding process. under certain conditions. Thus. a circumstance that is not entirely within the control of the Government. upon a concrete showing that. However.[46] These are the basic parameters which every awardee of a contract bidded out must conform to. especially in this case which involves the construction. Expectedly. Only in one instance may the Government escape the assumption of PIATCO’s liabilities. the fact that the foregoing substantial amendments were made on the 1997 Concession Agreement renders the same null and void for being contrary to public policy. Public bidding is a standard practice for procuring government contracts for public service and for furnishing supplies and other materials. It aims to secure for the government the lowest possible price under the most favorable terms and conditions. They claim that it was the lenders who proposed the amendments to the draft Concession Agreement which resulted in the 1997 Concession Agreement. (2) opportunity for competition. this circumstance is dependent on the existence and availability of a qualified operator who is willing to take over the rights and obligations of PIATCO under the contract. this Court maintains that amendments to the contract bidded upon should always conform to the general policy on public bidding if such procedure is to be faithful to its real nature and purpose.occurrence of certain events that leads to the assumption by the Government of the liability for the loans. and (3) a basis for the exact comparison of bids. of the liabilities of PIATCO directly translates concrete financial advantages to PIATCO that were previously not available during the bidding process. an option that was not made available in the draft Concession Agreement.04 of the 1997 Concession Agreement may be considered a form of security for the loans PIATCO has obtained to finance the project. competitive public bidding aims to protect the public interest by giving the public the best possible advantages through open competition. however. courts should not hesitate to strike down said contract in its entirety for violation of public policy on public bidding. to curtail favoritism in the award of government contracts and avoid suspicion of anomalies and it places all bidders in equal footing. A regulation of the matter which excludes any of these factors destroys the distinctive character of the system and thwarts the purpose of its adoption.e. By its very nature and characteristic. argues that the parties to the bidding procedure acknowledge that the draft Concession Agreement is subject to amendment because the Bid Documents permit financing or borrowing. Be that as it may. This financial advantage is a significant modification that translates to better terms and conditions for PIATCO. i. rules and regulations on public bidding must be sustained if only to preserve the integrity and the faith of the general public on the procedure. These amendments cannot be taken as merely supplements to or implementing provisions of those already 34 . We agree that it is not inconsistent with the rationale and purpose of the BOT Law to allow the project proponent or the winning bidder to obtain financing for the project. as in this case. It is not difficult to see that the amendments on (1) the types of fees or charges that are subject to MIAA regulation or control and the extent thereof and (2) the assumption by the Government.[45] It has been held that the three principles in public bidding are (1) the offer to the public. These amendments convert the 1997 Concession Agreement to an entirely different agreement from the contract bidded out or the draft Concession Agreement. compliance by the project proponent of its undertakings therein would involve a substantial amount of investment.

Section 4. is obligated to pay “all amounts recorded and from time to time outstanding from the books” of PIATCO which the latter owes to its creditors. and the default resulted in the acceleration of the payment due date of the Attendant Liability prior to its stated date of maturity. the concession company shall in good faith identify and designate a qualified operator acceptable to GRP within one hundred eighty (180) days from receipt of GRP’s written notice.06. GRP shall within one hundred eighty (180) days from receipt of the joint written notice of the Unpaid Creditors and Concessionaire. likewise under the terms and conditions of this Agreement. the Unpaid Creditors and Concessionaire shall immediately inform GRP in writing of such default. or designate a qualified operator acceptable to GRP to operate the Development Facility.existing in the draft Concession Agreement. This is due to the fact that the Government would only be free from assuming PIATCO’s 35 . penalties. Attendant Liabilities Attendant Liabilities refer to all amounts recorded and from time to time outstanding in the books of the Concessionaire as owing to Unpaid Creditors who have provided.[51] In effect. (c) If GRP. that if at the end of the 180-day period GRP shall not have served the Unpaid Creditors and Concessionaire written notice of its choice. whatever option the Government chooses to take in the event of PIATCO’s failure to fulfill its loan obligations. penalties. GRP shall be deemed to have elected to take over the Development Facility with the concomitant assumption of Attendant Liabilities. allow the Unpaid Creditors to be substituted as concessionaire. If the concession company should elect to designate an operator for the Development Facility. by written notice. the Government is still at a risk of being liable to PIATCO’s creditors should the latter be unable to designate a qualified operator within the prescribed period. indemnities. (b) In the event Concessionaire should default in the payment of an Attendant Liability. …. contractors and sub-contractors. charges. and further including amounts owed by Concessionaire to its suppliers. the Government is still at a risk of assuming PIATCO’s outstanding loans. If the concession company. reimbursements and other related expenses. charges. then GRP shall at the end of the 180-day period take over the Development Facility and assume Attendant Liabilities. reimbursements and other related expenses.[48] It is clear from the above-quoted provisions that Government. indemnities. in relation to Article 1. associated fees.06. III Direct Government Guarantee Article IV. surcharges. associated fees. either (i) take over the Development Facility and assume the Attendant Liabilities. if qualified to be substituted as concessionaire and operator of the Development facility in accordance with the terms and conditions hereof.04 Assignment ….”[50] This obligation of the Government to pay PIATCO’s creditors upon PIATCO’s default would arise if the Government opts to take over NAIA IPT III. is unable to designate a qualified operator within the aforesaid period. It should be noted. of the 1997 Concession Agreement provides: Section 4. surcharges. Section 1. however. or (ii) allow the Unpaid Creditors.04(b) and (c). loaned or advanced funds actually used for the Project. including all interests. the latter shall form and organize a concession company qualified to takeover the operation of the Development Facility.[49] These amounts include “all interests. The amendments discussed above present new terms and conditions which provide financial benefit to PIATCO which may have altered the technical and financial parameters of other bidders had they known that such terms were available. that even if the Government chooses the second option. which is to allow PIATCO’s unpaid creditors operate NAIA IPT III. acting in good faith and with due diligence. in the event that PIATCO defaults in its loan obligations. Provided.

in such form as may be reasonably acceptable to both GRP and Senior Lenders. or with an agent of such Senior Lenders (which agreement shall be subject to the approval of the Bangko Sentral ng Pilipinas). such as minimizing the unstable flow of returns. Clearly by providing that the Government “assumes” the attendant liabilities.04 Security …. The provisions providing for direct government guarantee which is prohibited by law is clear from the terms thereof. and without prejudice to any other rights of the Senior Lenders or any Senior Lenders’ agent may have (including without limitation under security interests granted in favor of the Senior Lenders). ….[53] This is but logical for if the government would in the end still be at a risk of paying the debts incurred by the private entity in the BOT projects. (c) GRP agrees with Concessionaire (PIATCO) that it shall negotiate in good faith and enter into direct agreement with the Senior Lenders. The fact that the ARCA superseded the 1997 Concession Agreement did not cure this fatal defect. are unable to designate a nominee or effect a transfer in terms and conditions satisfactory to the Senior Lenders within one hundred eighty (180) days after giving GRP notice as referred to respectively in (iv) or (v) above. Section 1. Article IV. availability and willingness of a qualified operator. This is why private sector resources are being tapped in order to finance these projects. and as a result thereof the Senior Lenders have become entitled to accelerate the Senior Loans. The Government under the circumstances provided for in the 1997 Concession Agreement is at the mercy of the existence. which consists of PIATCO’s unpaid debts. with regard.debts if the unpaid creditors would be able to designate a qualified operator within the period provided for in the contract. and is in fact encouraged to do so by way of incentives. to the following parameters: …. It is of no moment that the relevant sections are subsumed under the title of “assignment”. to either in good faith identify and designate a nominee which is qualified under sub-clause (viii)(y) below to operate the Development Facility [NAIA Terminal 3] or transfer the Concessionaire’s [PIATCO] rights and obligations under this Agreement to a transferee which is qualified under sub-clause (viii) below. then the purpose of the law is subverted.06.04(c). [52] provided that the government would not have to unnecessarily expend scarcely available funds for the project itself. As such. (iv) If the Concessionaire [PIATCO] is in default under a payment obligation owed to the Senior Lenders. the Senior Lenders shall have the right to notify GRP of the same. then GRP and the Senior Lenders shall endeavor in good faith to enter into any other 36 . Thus. (vi) if the Senior Lenders. Section 2(n) of the BOT Law defines direct guarantee as follows: (n) Direct government guarantee — An agreement whereby the government or any of its agencies or local government units assume responsibility for the repayment of debt directly incurred by the project proponentin implementing the project in case of a loan default. acting in good faith and using reasonable efforts. The BOT law allows the private sector to participate. One of the main impetus for the enactment of the BOT Law is the lack of government funds to construct the infrastructure and development projects necessary for economic growth and development. the 1997 Concession Agreement provided for a direct government guarantee for the debts incurred by PIATCO in the implementation of the NAIA IPT III project. The above contractual provisions constitute a direct government guarantee which is prohibited by law. subsidy and equity by the government in these projects are strictly prohibited. in relation to Article I. the Government’s assumption of liability is virtually out of its control. of the ARCA provides: Section 4. inter alia. Section 4. direct guarantee.

advanced funds or provided any other type of financial facilities to PIATCO for NAIA IPT III. Worse. The Government. …. “all principal. if greater.arrangement relating to the Development Facility [NAIA Terminal 3] (other than a turnover of the Development Facility [NAIA Terminal 3] to GRP) within the following one hundred eighty (180) days. . and other related expenses . this Agreement shall be deemed terminated upon the transfer of the Development Facility [NAIA Terminal 3] to GRP pursuant hereto. Attendant liabilities as defined in the ARCA includes all amounts owed or thereafter may be owed by PIATCO not only to the Senior Lenders with whom PIATCO has defaulted in its loan obligations but to all other persons who may have loaned. Should the Senior Lenders fail to make such an appointment. by acceleration or otherwise. interest. Notwithstanding Section 8. The fact that the Government’s obligation to pay PIATCO’s lenders for the latter’s obligation would only arise after the Senior Lenders fail to appoint a qualified nominee or transferee does not detract from the fact that. associated fees. upon transfer of NAIA IPT III to the Government. then at the end thereof the Development Facility [NAIA Terminal 3] shall be transferred by the Concessionaire [PIATCO] to GRP or its designee and GRP shall make a termination payment to Concessionaire [PIATCO] equal to the Appraised Value (as hereinafter defined) of the Development Facility [NAIA Terminal 3] or the sum of the Attendant Liabilities. but is not limited to. charges. including. all principal. . the ARCA still obligates the Government to pay any and all amounts owed by PIATCO to its lenders in connection with NAIA IPT III. reimbursements. by acceleration or otherwise.”[55] It is clear from the foregoing that the ARCA provides for a direct guarantee by the government to pay PIATCO’s loans not only to its Senior Lenders but all other entities who provided PIATCO funds or services upon PIATCO’s default in its loan obligation with its Senior Lenders. Section 1. should the conditions as stated in the contract occur. would be merely notified by the Senior Lenders of the same and it is the Senior Lenders who are authorized to appoint a qualified nominee or transferee. whether payable at maturity. termination payment equal to the appraised value of the project or the value of the attendant liabilities whichever is greater. the Government is obligated to directly negotiate and enter into an agreement relating to NAIA IPT III with the Senior Lenders. or advanced funds or provided financial facilities to Concessionaire [PIATCO] for the Project [NAIA Terminal 3]. the Government is then automatically obligated to “directly deal and negotiate” with the Attendant Liabilities refer to all amounts in each case supported by verifiable evidence from time to time owed or which may become owing by Concessionaire [PIATCO] to Senior Lenders or any other persons or entities who have provided. associated fees. charges. contractors and sub-contractors. If the Senior Lenders and the 37 . without limitation. suppliers. whether payable at maturity.06.[54] It is clear from the foregoing contractual provisions that in the event that PIATCO fails to fulfill its loan obligations to its Senior Lenders.includes. The amount of PIATCO’s debt that the Government would have to pay as a result of PIATCO’s default in its loan obligations -. the Government must then pay PIATCO. reimbursements. If no agreement relating to the Development Facility [NAIA Terminal 3] is arrived at by GRP and the Senior Lenders within the said 180-day period. and other related expenses (including the fees. Attendant Liabilities Government are unable to enter into an agreement after the prescribed period. upon PIATCO’s default. should the latter fail to appoint a qualified nominee or transferee who will take the place of PIATCO. interest. the conditions that would make the Government liable for PIATCO’s debts is triggered by PIATCO’s own default of its loan obligations to its Senior Lenders to which loan contracts the Government was never a party to. charges and expenses of any agents or trustees of such persons or entities).01(c) hereof. The Government was not even given an option as to what course of action it should take in case PIATCO defaulted in the payment of its senior loans. and further including amounts owed by Concessionaire [PIATCO] to its professional consultants and advisers. loaned.in case no qualified nominee or transferee is appointed by the Senior Lenders and no other agreement relating to NAIA IPT III has been reached between the Government and the Senior Lenders -.

the following conditions must first be met: (1) the project involves a new concept in technology and/or is not part of the list of priority projects. will not take the contract out of the ambit of a direct guarantee by the government as the existence. subsidy or equity is required. during the emergency and under reasonable terms prescribed by it. IV Temporary takeover of business affected with public interest Article XII. availability and willingness of a qualified nominee or transferee is totally out of the government’s control. then its inclusion in the contract executed after the said proposal has been accepted is likewise sufficient to invalidate the contract itself.”[57] The BOT Law clearly and strictly prohibits direct government guarantee.which is to expose the government to the risk of incurring a monetary obligation resulting from a contract of loan between the project proponent and its lenders and to which the Government is not a party to -.but would also render the BOT Law useless for what it seeks to achieve –.[58] To declare the PIATCO contracts valid despite the clear statutory prohibition against a direct government guarantee would not only make a mockery of what the BOT Law seeks to prevent -. be allowed to later on be inserted in the contract resulting from the said proposal. could illafford to finance at this point in time. in the present case. the Senior Lenders (that they would appoint a qualified nominee or transferee or agree to some other arrangement with the Government) and the existence of a qualified nominee or transferee who is able and willing to take the place of PIATCO in NAIA IPT III. temporarily take over or direct the operation of any privately owned public utility or business affected with public interest. be countenanced particularly in this instance where the government is exposed to the risk of shouldering hundreds of million of dollars in debt.to make use of the resources of the private sector in the “financing. A prohibited provision. The proscription against government guarantee in any form is one of the policy considerations behind the BOT Law. and should not. The BOT Law and its implementing rules provide that in order for an unsolicited proposal for a BOT project may be accepted. It stands to reason therefore that if a proposal can be denied by reason of the existence of direct government guarantee. subsidy and equity in unsolicited proposals that the mere inclusion of a provision to that effect is fatal and is sufficient to deny the proposal.Senior Lenders regarding NAIA IPT III. the State may. 38 . This in effect would make the Government liable for PIATCO’s loans should the conditions as set forth in the ARCA arise. when the public interest so requires. the inclusion of which would result in the denial of a proposal cannot. (2) no direct government guarantee. The basic rules of justice and fair play alone militate against such an occurrence and must not. the ARCA obligates the Government to pay for all loans. This is a form of direct government guarantee. It is further provided that the presence of direct government guarantee. operation and maintenance of infrastructure and development projects”[59] which are necessary for national growth and development but which the government.[56] The failure to meet any of the above conditions will result in the denial of the proposal. operation and maintenance of NAIA IPT III. advances and obligations arising out of financial facilities extended to PIATCO for the implementation of the NAIA IPT III project should PIATCO default in its loan obligations to its Senior Lenders and the latter fails to appoint a qualified nominee or transferee. This Court has long and consistently adhered to the legal maxim that those that cannot be done directly cannot be done indirectly. Clearly. unfortunately. subsidy or equity will “necessarily disqualify a proposal from being treated and accepted as an unsolicited proposal. In times of national emergency. The only way the Government would not be liable for PIATCO’s debt is for a qualified nominee or transferee to be appointed in place of PIATCO to continue the construction. and (3) the government agency or local government unit has invited by publication other interested parties to a public bidding and conducted the same. however. Section 17 of the 1987 Constitution provides: Section 17. As such the Government is virtually at the mercy of PIATCO (that it would not default on its loan obligations to its Senior Lenders). therefore. This “pre-condition”.

and other consequential damages. the operations shall be returned to Concessionaire. calamities or national disasters. the matter shall be resolved in accordance with Section 10. that upon termination of war. at which time.”[60] The duration of the emergency itself is the determining factor as to how long the temporary takeover by the government would last. Any amount determined to be payable by GRP to Concessionaire shall be offset from the amount next payable by Concessionaire to GRP. The private entity-owner affected by the temporary takeover cannot. requiring the government to pay reasonable compensation for the reasonable use of the property pursuant to the operation of the business contravenes the Constitution. or on the liability of GRP as aforesaid. or declaration concerning or relating to acquisition. (c) In the event the development Facility or any part thereof and/or the operations of Concessionaire or any part thereof. Police power is the “most essential. claim just compensation for the use of the said business and its properties as the temporary takeover by the government is in exercise of its police power and not of its power of eminent domain. or control the sale of a particular commodity. provided. the Concession Period shall be suspended. GRP shall. seizure or appropriation by GRP in times of war or national emergency. immediately take over the operations of the Terminal and/or the Terminal Complex. V Regulation of Monopolies A monopoly is “a privilege or peculiar advantage vested in one or more persons or companies. manufacture a particular article. but not strikes “unless it is of such proportion that would paralyze government service.The above provision pertains to the right of the State in times of national emergency. to temporarily take over the operation of any business affected with public interest. [62] PIATCO cannot. become the subject matter of or be included in any notice. the Concession period shall commence to run again. Article V.”[64] Its exercise therefore must not be unreasonably hampered nor its exercise be a source of obligation by the government in the absence of damage due to arbitrariness of its exercise. Section 5.01 [Arbitration]. by mere contractual stipulation. hostilities or national emergency. and in the exercise of its police power. the State in effecting the temporary takeover is exercising its police power. if the temporary take over should occur at the time when Concessionaire is still servicing debts owed to project lenders). by written notice to Concessionaire. In the 1986 Constitutional Commission.10 Temporary Take-over of operations by GRP. [65] Thus. If the parties cannot agree on the reasonable compensation of Concessionaire. As such the government is not required to compensate the private entityowner of the said business as there is no transfer of ownership. Concessionaire shall be entitled to reasonable compensation for the duration of the temporary take over by GRP. and illimitable of powers. insistent. whether permanent or temporary. which compensation shall take into account the reasonable cost for the use of the Terminal and/or Terminal Complex. any loss or damage to the Development Facility. the term “national emergency” was defined to include threat from external aggression. During such take over by GRP. Clearly.”[63] Article XII.” It is the welfare and interest of the public which is the paramount consideration in determining whether or not to temporarily take over a particular business. whether private 39 . notification. section 17 of the 1987 Constitution envisions a situation wherein the exigencies of the times necessitate the government to “temporarily take over or direct the operation of any privately owned public utility or business affected with public interest. likewise. consisting in the exclusive right (or power) to carry on a particular business or trade.10 (c) of the 1997 Concession Agreement provides: Section 5. contravene the Constitutional provision on temporary government takeover and obligate the government to pay “reasonable cost for the use of the Terminal and/or Terminal Complex. (which is in the amount at least equal to the debt service requirements of Concessionaire. …. [61] The temporary takeover by the government extends only to the operation of the business and not to the ownership thereof.”[66] The 1987 Constitution strictly regulates monopolies.

Thus. has the right and the duty to ensure that it is done in accord with public interest. operation and maintenance of NAIA IPT III.[72] Both the 1997 Concession Agreement and the ARCA further provide that. PIATCO’s right to operate NAIA IPT III cannot also violate the rights of third parties. in view of the exclusive right granted to PIATCO. a determination must first be made as to whether public interest requires a monopoly. (e) GRP confirms that certain concession agreements relative to certain services and operations currently being undertaken at the Ninoy Aquino International Airport passenger Terminal I have a validity period extending beyond the In-Service Date.[75] While it is the declared policy of the BOT Law to encourage private sector participation by “providing a climate of minimum government regulations. and even provides for their prohibition if public interest so requires. upon commencement of PIATCO’s operation of NAIA IPT III. through the MIAA. monopolies are not per se prohibited by the Constitution but may be permitted to exist to aid the government in carrying on an enterprise or to aid in the performance of various services and functions in the interest of the public. The state shall regulate or prohibit monopolies when the public interest so requires.or public. the concession contracts of the service providers currently servicing Terminals 1 and 2 would no longer be renewed and those concession contracts whose expiration are subsequent to the In-Service Date would cease to be effective on the said date. 19.”[76] the same does not mean that Government must completely surrender its sovereign power to protect public interest in the operation of a public utility as a monopoly.[69] As such. Clark Special Economic Zone (“CSEZ”) and in Laoag City. Nonetheless. The right granted to the public utility may be exclusive but the exercise of the right cannot run riot. This. the privilege given to PIATCO is subject to reasonable regulation and supervision by the Government through the MIAA. Clearly. under the 1997 Concession Agreement and the ARCA. while PIATCO may be authorized to exclusively operate NAIA IPT III as an international passenger terminal.[70] The right granted to PIATCO to exclusively operate NAIA IPT III would be for a period of twentyfive (25) years from the In-Service Date[71] and renewable for another twenty-five (25) years at the option of the government. the government has determined that public interest would be served better if private sector resources were used in its construction and an exclusive right to operate be granted to the private entity undertaking the said project.[68] This is with the exception of already existing international airports in Luzon such as those located in the Subic Bay Freeport Special Economic Zone (“SBFSEZ”). Terminals 1 and 2 of NAIA would cease to function as international passenger terminals. As monopolies are subject to abuses that can inflict severe prejudice to the public. [73] The operation of an international passenger airport terminal is no doubt an undertaking imbued with public interest. Section 19 of the 1987 Constitution states: Sec. in this case PIATCO. In entering into a Build–Operate-and-Transfer contract for the construction. which is the government agency authorized to operate the NAIA complex. however. The operation of said public utility can not be done in an arbitrary manner to the detriment of the public which it seeks to serve. PIATCO. as well as DOTC. the Government. Section 3.01 Concession Period …. No combinations in restraint of trade or unfair competition shall be allowed. In the cases at bar. does not prevent MIAA to use Terminals 1 and 2 as domestic passenger terminals or in any other manner as it may deem appropriate except those activities that would compete with NAIA IPT III in the latter’s operation as an international passenger terminal. the department to which MIAA is attached.01(e) of the 1997 Concession Agreement and the ARCA provide: 3. is granted the “exclusive right to operate a commercial international passenger terminal within the Island of Luzon” at the NAIA IPT III. GRP 40 . they are subject to a higher level of State regulation than an ordinary business undertaking.[74] This is in accord with the Constitutional mandate that a monopoly which is not prohibited must be regulated. Article XII.[67] Nonetheless.

06 of the 1997 Concession Agreement and Section 4. PIATCO cannot.04(c) in relation to Section 1. the counsel for the petitioners-in-intervention for G. agan jr v piatco Facts: In August 1989 the DOTC had a study conducted to determine whether or not the present Ninoy Aquino International Airport (NAIA) can cope with traffic development up to the year 2010.through DOTC/MIAA. are likewise null and void. The provisions of the 1997 Concession Agreement and the ARCA did not strip government. as well as the other terms and conditions thereof. Further. No. During the oral arguments on December 10. Four years later. all such amounts shall be fully deductible by way of an offset from any amount which the Concessionaire is bound to pay GRP under this Agreement. whose period of effectivity. These contracts must be respected not just by the parties thereto but also by third parties. One contract remains valid until 2008 and the other until 2010. operation and maintenance of the NAIA IPT III is null and void.[77] We hold that while the service providers presently operating at NAIA Terminal 1 do not have an absolute right for the renewal or the extension of their respective contracts. which amendments had the effect of converting the 1997 Concession Agreement into an entirely different agreement from the contract bidded upon. As the primary government agency tasked with the job. six Filipino-Chinese business leaders met 41 . have a valid and binding contract with the Government. PIATCO. the Amended and Restated Concession Agreement and the Supplements thereto are set aside for being null and void. considering that the 1997 Concession Agreement contains material and substantial amendments. SO ORDERED. the 1997 Concession Agreement is similarly null and void for being contrary to public policy. confirms that these services and operations shall not be carried over to the Terminal and the Concessionaire is under no legal obligation to permit such carryover except through a separate agreement duly entered into with Concessionaire. in 1993. Lazaro[78] whose contracts consist of temporary hold-over permits. cannot be violated. the efficient functioning of NAIA IPT III is imbued with public interest. WHEREFORE. including the cost of litigation and the reasonable fees paid or payable to Concessionaire’s counsel of choice. 155001 stated that there are two service providers whose contracts are still existing and whose validity extends beyond the In-Service Date. the award by the PBAC of the contract for the construction. including NAIA IPT III. through MIAA. render a valid and binding contract nugatory.06 of the ARCA. the interest of the public. A draft final report was submitted to the DOTC in December 1989. In the event Concessionaire becomes involved in any litigation initiated by any such concessionaire or operator. The provisions under Sections 4. GRP undertakes and hereby holds Concessionaire free and harmless on full indemnity basis from and against any loss and/or any liability resulting from any such litigation. the BOT Law and its Implementing Rules and Regulations are also null and void. In contrast to the arrastre and stevedoring service providers in the case of Anglo-Fil Trading Corporation v. by the mere expedient of claiming an exclusive right to operate. cannot require the Government to break its contractual obligations to the service providers. those contracts whose duration extends beyond NAIA IPT III’s In-Service-Date should not be unduly prejudiced. The Supplements. among others. which constitute a direct government guarantee expressly prohibited by.R. predecessor of respondent PIATCO. the affected service providers in the cases at bar. thru the MIAA. by law and certainly not by contract. this Court rules that in view of the absence of the requisite financial capacity of the Paircargo Consortium. of its right to supervise the operation of the whole NAIA complex.04(b) and (c) in relation to Section 1. being accessory contracts to the ARCA. VI CONCLUSION In sum. In fine. 2002.[79] it is MIAA’s responsibility to ensure that whoever by contract is given the right to operate NAIA IPT III will do so within the bounds of the law and with due regard to the rights of third parties and above all. the 1997 Concession Agreement.

the third envelope containing the financial proposals were opened. and be able to secure external financing for the project. operation. In March 1995. The bid documents allowed amendments to the draft concession agreement. noting the “lack of corporate approvals and financial capability of PAIRCARGO. The bidding was scheduled on September 20. 2 which approved the NAIA IPT III project. The first envelope. because the PBAC has a pending query with the justice department. the DOTC endorsed the AEDC proposal to the National Economic and Development Authority (NEDA). and these could still be revised. Paircargo Consortium offered a total of P17. however. The bid documents issued by the Prequalification Bids and Awards Committee said the proponent must have adequate capability to sustain the financing requirement for the engineering. 1996 that based on the documents submitted and the prequalification criteria. was opened on September 23. The AEDC reiterated its objections two more times. In June 1996. In September 1996. The PBAC. design. Inc (PAIRCARGO). upon the request of People’s Air Cargo & Warehousing Co. the PBAC made several clarifications. Both PAIRCARGO and AEDC offered to build the NAIA Passenger Terminal III for at least $350 million at no cost to the government and to pay the government a 5% share in gross revenues for the first five years of operation. and maintenance phases of the project. and a 10% share in gross revenues for the last 10 years of operation. PBAC issued a bid bulletin in which it said that since PAIRCARGO could not meet the required minimum equity prescribed in the bid documents. In August 1996.” For one. On September 26.” The project proponent may add other revenue sources. 7. a 7. and 10% in the next 10 years. as required by law (sec 4-A of RA6957). The alternative bidders had to submit three envelopes. PAIRCARGO submitted their competitive proposal to the PBAC.5% share in gross revenues for the next 10 years of operation. only fees and charges denominated as “public utility fees” would be subject to regulation. and given AEDC 30 working days to match the bid. it would accept instead an audited financial statement of the financial capability of all member companies of the consortium. The DOTC secretary approved PBAC’s findings. because Philippine laws limit to Filipinos the operation of a public utility.75 billion for the same period. the second the technical proposal.5% in the next 10 years. PAIRCARGO was prequalified. This would be in addition to a fixed annual guaranteed payment to the government. which wanted to challenge the AEDC bid. When AEDC 42 . The proponent must have an equity that is at least 30% of the project cost. but said that these should cover only items that would not materially affect the preparation of the proponent’s proposal. 1996. in October 1994. The first contains the prequalification documents. In January 1996. PBAC informed AEDC it had accepted Paircago’s price proposal.with then President Fidel Ramos to explore the possibility of investing in the construction and operation of a new international airport terminal. during the second pre-bid conference. the DOTC published an invitation for competitive bidding in two daily newspapers. The PBAC said the list of revenue sources mentioned in the bid documents were “merely indicative. In addition to this. AEDC offered to pay the government P135 million as guaranteed payment for 27 years. In September 1996. subject to approval by the DOTC/MIAA. NEDA passed Board Resolution No. PAIRCARGO included in the computation of its financial capability the total net worth of Security Bank. The six later formed the Asia’s Emerging Dragon Corp (AEDC) which submitted an unsolicited proposal for the development of NAIA International Passenger Terminal III more than a year after the first meeting with Ramos. construction. said on October 2. and PAIRCARGO had offered to pay the government higher. Also. containing the prequalification documents. It also questioned the appointment of Lufthansa as facility operator. Government was also guaranteed a five percent share in the gross revenue of the project for the first five years. when the Banking Law limits to 15% the total investment that a bank may make on one project. On October 16. The basis for the prequalification shall be the proponent’s compliance with the minimum technical and financial requirements provided in the bid documents and the IRR of the BOT (build operate and transfer) Law. and the third the financial proposal of the proponent. and PBAC prequalified the PAIRCARGO consortium the following day. 1996. AEDC filed with PBAC its reservations regarding PAIRCARGo.

In March 2003. In November 2002. Three more supplements to the ARCA were signed afterwards: in August 1999. Paircargo Consortium incorporated into Philippine International Airport Terminals Co Inc (PIATCO). the BOT Law and its implementing rules and regulations. 1997. it filed before the Pasig RTC a petition for declaration of nullity of the proceedings. the DOTC issued the notice of award for the project to PIATCO. the service providers filed a motion for intervention and a petition in intervention. In November 1998. Clavel Martinez and Constantino Jaraula – filed a similar petition shortly after. the DOTC issued a notice on December 11 1996 regarding AEDC’s failure to match the proposal. In April 1997. Prospero Pichay Jr. Eduardo Zialcita. in September 2000. granting PIATCO the franchise to operate and maintain the NAIA Passenger Terminal III for 25 years. The Concession Agreement was signed on July 12. They said the transfer to NAIA III could cost them their jobs. The ARCA amended provisions on the special obligations of the government.failed to do so. required government to construct an access road connecting NAIA II and III. another group of congressmen – Jacinto Paras. In December 2002. and added to the special obligations of government. and the three supplemental agreements – violate the Constitution and the BOT Law? Held/Decision: 43 . The first redefined revenues. Because there were only four instead of the required six signatures. joining the cause of the petitioning workers. several MIAA employees also filed a petition questioning the legality of the agreements. 1997. the Office of the Solicitor General and the Office of the Government Corporate Counsel prayed that the petitions be given due course and that the 1997 Concession Agreement. PIATCO was allowed to collect fees. Issue: Did the PIATCO agreements – the 1997 Concession Agreement. and to explore the possibility of arbitration as provided in the challenged contracts. PIATCO will transfer the airport to MIAA. duties and other charges that may be levied PIATCO. Willie Villarama. In September 2002. and the chair of the PBAC technical committee. and in June 2001. AEDC protested the alleged undue preference given to PIATCO and reiterated its objections regarding the prequalification of PIATCO.. the required the parties to file their respective memoranda. the government and PIATCO signed an Amended and Restated Concession Agreement (ARCA). the exclusivity of the franchise given to PIATCO. the PBAC chair and its voting members. workers of the international airline service providers filed before the Supreme Court a petition for prohibition enjoining the enforcement of the agreements. since under the agreements. Prospero Nograles. the NEDA merely noted the agreement. Harlin Cast Abayon and Benasing Macarambon – filed their comment in intervention defending the validity of the agreements and praying for the dismissal of the petitions. the NEDA ICC conducted an ad referendum to facilitate the approval of the BOT agreement between the DOTC and PIATCO. the proceeds of the insurance. Three congressmen – Salacnib Baterina. Rafael Nantes. On April 17. The second supplement required government to clear structures at the construction site and to pay PIATCO for these. In February 1997. the court heard the case on oral argument. At the end of the concession period. PIATCO is not required to honor MIAA’s existing concession contracts with various service providers for international airline airport services. the ARCA. In October 2002. and the provisions on the termination of the contract. PIATCO commenced arbitration proceedings before the International Chamber of Commerce. On July 9. International Court of Arbitration. 2002. The third provided for PIATCO’s obligations regarding the construction of the surface road connecting Terminals II and III. On December 10. mandamus and injunction against the DOTC secretary. rentals and other charges in accordance with the rates or schedules in the 1997 Concession Agreement. the taxes. with an option to renew for a period not exceeding 25 years. the ARCA and the supplements be declared void for being contrary to the Constitution. In their consolidated memorandum.

default by PIATCO of its obligations does not result in the assumption by government of these liabilities.” The signed agreement also allowed PIATCO to charge in US dollars. The signed agreement was different from the draft that was bidded on.YES. It cannot be denied that under the 1997 Concession Agreement only “Public Utility Revenues” are subject to MIAA regulation. PIATCO was not a qualified bidder. while paying the government in pesos. with respect to terminal fees. These concerned the fees that may be imposed and collected by PIATCO. the change in the currency stipulated for “Public Utility Revenues” under the 1997 Concession Agreement. gives PIATCO an added benefit which was not available at the time of bidding. the changes under the 1997 Concession Agreement with respect to reduction in the types of fees that are subject to MIAA regulation and the relaxation of such regulation with respect to other fees are significant amendments that substantially distinguish the draft Concession Agreement from the 1997 Concession Agreement. and basis for the exact comparison of bids. The three principles in public bidding are: an offer to the public. the same is further subject to “Interim Adjustments” not previously stipulated in the draft Concession Agreement. The signed agreement said fees subject to MIAA approval are “public utility fees” and took out groundhandling and rentals and airlines offices from the list. which might have changed the technical and financial parameters of other bidders had they known that such terms were available. except terminal fees. Under the draft Concession Agreement. While it was a draft and was expected to amended from time to time.523 billion. Finally. or only 6% of the project cost. Under the law. such ceiling or legal restriction determines the true maximum amount which a bidder may invest in the project…If the maximum amount of equity that a bidder may invest in the project at the time the bids are submitted falls short of the minimum amounts required to be put up by the bidder. Ratio: In the first place. under the 1997 Concession Agreement.183 billion. “Disregarding the investment ceilings provided by applicable law would not result in a proper evaluation of whether or not a bidder is pre-qualified to undertake the project as for all intents and purposes. The minimum project cost was estimated to be P9. default by PIATCO of its loans used to finance the project eventually leads to government 44 . Security Bank could only invest P528 million. Moreover. Since banks are allowed to invest only 15% of it entire net worth. which meant that Paircargo Consortium had to prove it could provide at least P2. Thus the award of the contract by the PBAC to the Paircargo consortium is null and void. There was also “an obvious relaxation of the extent of control and regulation by MIAA with respect to the particular fees that may be charged by PIATCO. groundhandling fees. substantial changes require another bidding. which as of 1995 was at P3. clearly gives PIATCO more favorable terms than what was available to other bidders at the time the contract was bidded out. in this respect. The changes should not be substantial or material enough to alter the basic parameters of the contract. the PBAC bid bulletin also said that the amendments should only cover items that would not materially affect the preparation of the proposal. check-in counter rentals and porterage fees under those that are regulated – subject to periodic adjustment of once every two years and in accordance to a certain formula. There were two main differences between the draft agreement and the one that was signed. opportunity for competition. Paircargo’s audited financial statement for 1994 showed it had a net worth of P3. The draft agreement classified aircraft parking and tacking fees. Adjustments of all other fees imposed and collected by PIATCO are entirely within its control. and the extent of control and regulation that MIAA has over the fees that PIATCO will charge. which brings down Paircargo’s equity to P558. The 1997 Concession Agreement signed between PIATCO and the government was substantially different from the draft concession agreement that was bidded on. rentals and airlines offices. said bidder should be properly disqualified…we hold that Paircargo Consortium was not a qualified bidder.” Other issues: 1. 2. Changing the parameters would change the agreement. “When taken as a whole. Under the signed agreement.123 billion. The 1997 Concession Agreement. but that was because it included in the computation the total net worth of Security Bank.755 billion. It is not very difficult to see that the changes in the 1997 Concession Agreement translate to direct and concrete financial advantages for PIATCO which were not available at the time the contract was offered for bidding.384 million. and constitute a denial to the other bidders of the opportunity to bid on the same terms.

and in Laoag City.04 (C) IN RELATION TO SECTION 1. 4. The 1997 Concession Agreement gave PIATCO the exclusive right to operate a commercial international passenger terminal within the island of Luzon. 12 of the 1987 Constitution. THE PROVISIONS UNDER SECTIONS 4.assumption of the liability for the loans. THIS COURT RULES THAT IN VIEW OF THE ABSENCE OF THE REQUISITE FINANCIAL CAPACITY OF THE PAIRCARGO CONSORTIUM. by the mere expedient claiming an exclusive right to operate. Art XII. by law and certainly not by contract. The 1987 Constitution strictly regulates monopolies. 1985 45 . The 1997 Concession Agreement.06 OF THE ARCA. and illimitable of powers. cannot require the Government to break its contractual obligations to the service providers. G. insistent. THE SUPPLEMENTS. contravene the Constitutional provision on temporary government and obligate the government pay reasonable cost for the use of Terminal and/or Terminal Complex. THE BOT LAW AND ITS IMPLEMENTING RULES AND REGULATIONS ARE ALSO NULL AND VOID. CONSIDERING THAT THE 1997 CONCESSION AGREEMENT CONTAINS MATERIAL AND SUBSTANTIAL AMENDMENTS. WHICH CONSTITUTE A DIRECT GOVERNMENT GUARANTEE EXPRESSLY PROHIBITED BY.06 OF THE 1997 CONCESSION AGREEMENT AND SECTION 4. then its inclusion in the contract executed after the said proposal has been accepted is likewise sufficient to invalidate the contract itself…To declare the PIATCO contracts valid despite the clear statutory prohibition against a direct government guarantee would not only make a mockery of what the BOT Law seeks to prevent – which is to expose the government to the risk of incurring a monetary obligation resulting from a contract of loan between the project proponent and its lenders and to which the Government is not a party to – but would also render the BOT Law useless for what it seeks to achieve – to make use of the resources of the private sector in the financing. Sec. however. THE AWARD BY THE PBAC OF THE CONTRACT FOR THE CONSTRUCTION. Since the takeover is temporary and extends only to the operation of the business and not the ownership. is subject to reasonable regulation and supervision and should not violate the rights of third parties. Its exercise must not be unreasonably hampered nor its exercise be a source of obligation by the government in the absence of damage due to arbitrariness of its exercise. Sec. which prohibits direct government guarantees. This privilege. government is not required to compensate the owner. BEING ACCESSORY CONTRACTS TO THE ARCA. ARE LIKEWISE NULL AND VOID. PIATCO. THE 1997 CONCESSION AGREEMENT IS SIMILARLY NULL AND VOID FOR BEING CONTRARY TO PUBLIC POLICY. 5. No. says that in the event of a takeover. unfortunately. operation and maintenance of infrastructure and development projects which are necessary for national growth and development but which the government. Clark Special Economic Zone. could ill-afford to finance at this point in time. PREDECESSOR OF RESPONDENT PIATCO. OPERATION AND MAINTENANCE OF THE NAIA IPT III IS NULL AND VOID.04(B) AND (C) IN RELATION TO SECTION 1. 19 says: The State shall regulate or prohibit monopolies when the public interest so requires. on the other hand. render a valid and binding contract nugatory. Neither can the owner claim just compensation for the use of the business and its properties because the takeover is in exercise of the State’s police power and not of its power of eminent domain. This is in violation of the BOT Law.” 3.R.10 of the 1997 Concession Agreement violates Article XII. There are service providers at the NAIA I with existing contracts with the MIAA valid until 2010. Police power is the most essential. “PIATCO cannot. WHICH AMENDMENTS HAD THE EFFECT OF CONVERTING THE 1997 CONCESSION AGREEMENT INTO AN ENTIRELY DIFFERENT AGREEMENT FROM THE CONTRACT BIDDED UPON. The Constitutional provision allows for temporary takeover of public facilities in times of national emergency. Sec. with the exception of already existing terminals such as those in the Subic Bay Freeport. L-42283 March 18. “If a proposal can be denied by reason of the existence of direct government guarantee. by mere contractual stipulation. since the 1997 Concession Agreement says PIATCO is not bound to honor existing contracts with MIAA. AMONG OTHERS. transferring operations from NAIA I to NAIA III would unduly prejudice them. “Concessionaire shall be entitled to reasonable compensation for the duration of the temporary takeover…” “PIATCO cannot. FURTHER.” IN SUM.

Consequently. based on the foregoing considerations. ET AL. when their aggregate payment already amounted to P4.20 until fully paid. Seventh Judicial District.00 upon the execution of the contract. 1966 for more than five (5) months. they found out that they have already paid the total amount of P4. Costs against the defendants.BUENAVENTURA ANGELES. The dispositive portion of the decision reads: WHEREFORE. the installments being due and payable on the 19th day of each month. payments. defendants-appellants. Rizal for the amount of P3. 1967. Branch X. 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. A motion for reconsideration filed by the defendants-appellants was denied. They promised to pay the balance in monthly installments of P 41.00 plus 7% interest per annum..533. 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. On January 28. JR.: This is an appeal from the decision of the Court of First Instance of Rizal. As earlier stated. ET AL.00 attorney's fees and costs. The facts being undisputed. the defendants-appellants cancelled the said contract because the plaintiffs-appellees failed to meet subsequent 46 . The plaintiffs' letter with their plea for reconsideration of the said cancellation was denied by the defendants-appellants. to pay P500. URSULA TORRES CALASANZ. On December 7.533. The plaintiffsappellees paid the monthly installments until July 1966.920. 1957.00 by way of attorney's fees. plaintiffs-appellees. the then Court of Appeals certified the case to us considering that the appeal involves pure questions of law.38. J. 1966. The plaintiffs-appellees made a downpayment of P392.38 including interests. Seventh Judicial District. The lower court rendered judgment in favor of the plaintiffsappellees. The plaintiffs-appellees filed Civil Case No. On numerous occasions.. thereby constraining the defendants-appellants to cancel the said contract. the Court of Appeals certified the case to us since only pure questions of law have been raised for appellate review. 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. the defendants-appellants wrote the plaintiffsappellees a letter requesting the remittance of past due accounts. The defendants-appellants assigned the following alleged errors of the lower court: GUTIERREZ. vs. 8943 with the Court of First Instance of Rizal. On December 19. realty taxes and incidental expenses for the registration and transfer of the land. the defendants-appellants accepted and received delayed installment payments from the plaintiffs-appellees. 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.. 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. the defendants are ordered to execute a final Deed of Sale in favor of the plaintiffs and to pay the sum of P500.

he is granted a month of grace within which to make the retarded payment. The defendants-appellants point to Jocson v. that should a period of 90 days elapse. the party of the FIRST PART has the right to declare this contract cancelled and of no effect. without the payments corresponding to both months having been satisfied. and the party of SECOND PART has not paid all the amounts he should have paid with the corresponding interest up to that date.R. all the amounts paid in accordance with this agreement together with all the improvements made on the premises. an interest of 10% per annum will be charged on the amounts he should have paid.00 AS ATTORNEY'S FEES. and as payment for the damages suffered by failure of the party of the SECOND PART to fulfill his part of the agreement. together with the one corresponding to the said month of grace. to begin from the expiration of the month of grace herein mentioned. 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. and as consequence thereof. L-6573. 1966 installment despite demands for more than four (4) months. The main issue to be resolved is whether or not the contract to sell has been automatically and validly cancelled by the defendantsappellants. the party of the FIRST PART may dispose of the parcel of land covered by this contract in favor of other persons. 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 of such cancellation of the contract. No. as if this contract had never been entered into. Third Assignment of Error THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO PAY PLAINTIFFS THE SUM OF P500. February 28. (Emphasis supplied by appellant) xxx xxx xxx The defendants-appellants argue that the plaintiffs-appellees failed to pay the August. it is understood further. 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.—In case the party of the SECOND PART fails to satisfy any monthly installments. The defendantsappellants also argue that even in the absence of the aforequoted 47 . Second Assignment of Error EVEN ASSUMING ARGUENDO THAT THE SAID CONTRACT TO SELL HAS NOT BEEN LEGALLY AND VALIDLY CANCELLED. or any other payments herein agreed upon.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. shall be considered as rents paid for the use and occupation of the above mentioned premises. THE LOWER COURT ERRED IN ORDERING DEFENDANTS TO EXECUTE A FINAL DEED OF SALE IN FAVOR OF THE PLAINTIFF. that should the month of grace herein granted to the party of the SECOND PART expired. however. Capitol Subdivision (G. it is understood.

the party who deems the contract violated many consider it resolved or rescinded. either party the right to rescind the contract upon the failure of the other to perform the obligation assumed thereunder. 12 SCRA 276)— Well settled is. We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary 48 . He may also seek rescission. the sellers have the right to declare the contract cancelled and of no effect. . and the consequent indemnity awarded to the party prejudiced. De los Angeles. The injured party may choose between the fulfillment and the rescission of the obligation.. Court of Appeals. . The plaintiffs-appellees on the other hand contend that the Jocson ruling does not apply. 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. the responsible party will be sentenced to damages. Article 1191 of the Civil Code on the rescission of reciprocal obligations provides: The power to rescind obligations is implied in reciprocal ones. Co. It is in the nature of a facultative resolutory condition which in many cases has been upheld by this Court. 37 SCRA 327. 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. and bring the matter to court. 29 SCRA 504). 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. 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.provision. should the court. xxx xxx xxx Article 1191 is explicit. in case one of the obligors should not comply with what is incumbent upon him.. If the other party denies that rescission is justified. without previous court action. it is free to resort to judicial action in its own behalf. (Ponce Enrile v.. Moreover. In other words. In reciprocal obligations. The validity of the stipulation can not be seriously disputed. 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. in the contrary case. (35 SCRA 102) where we explained that: Of course. with the payment of damages in either case. was qualified by this Court in University of the Philippines v.. Then. even after he has chosen fulfillment. after due hearing. being ever subject to scrutiny and review by the proper court. et al. if the latter should become impossible. they had the right to cancel the contract to sell under Article 1191 of the Civil Code of the Philippines. 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. but it proceeds at its own risk. decide that the resolution of the contract was not warranted. and cases cited therein) Resort to judicial action for rescission is obviously not contemplated . because it granted the sellers an absolute and automatic right of rescission. . the resolution will be affirmed. Commissioner of Customs. and act accordingly. Pan Oriental Shipping. . however.

1968). The right to rescind the contract for non-performance of one of its stipulations. It is in this sense that judicial action will be necessary. L-23707 & L-23720. International Banking Corp. in only a short time.20) on or before the 19th day of each month. but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement. Philippine Currency. estoppel or prescription.920. 47 Phil.. 84 Phil. plus interest at the rate of 7% per annum. Republic v. 31 SCRA 829) It would unjustly enrich the defendants-appellants. including interest.. Article 1234 of the Civil Code which provides that: If the obligation has been substantially performed in good faith. 631. although the principal obligation was only P 3. therefore. yet. unless attack thereon should become barred by acquiescence. (See J. the plaintiffs. v. We agree with the observation of the lower court to the effect that: Although the primary object of selling subdivided lots is business.00) when this contract is signed. In other words. v. Jan.. it cannot be denied that this 49 . HawaiianPhilippine Co.appellees had already paid an aggregate amount of P 4. 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. for more than four (4) months. because they failed to pay the August installment.appellees.533. 827) The question of whether a breach of a contract is substantial depends upon the attendant circumstances.00). less damages suffered by the obligee. from this date until the total payment of the price above stipulated. also militates against the unilateral act of the defendants-appellants in cancelling the contract. Javier.. 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. (Song Fo & Co. (Corpus v.38. Hospital de San Juan de Dios. InUniversal Food Corp. (Ocejo. Furthermore.920.. is not absolute. the extrajudicial resolution will remain contestable and subject to judicial invalidation.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. the obligor may recover as though there had been a strict and complete fulfillment. .—That in consideration of the agreement of sale of the above described property. 37 Phil. et al.. Tuazon and Co. . Hon. 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. and (b) The sum of FORTY ONE AND 20/100 ONLY (P4l.. The defendants-appellants state that the plaintiffs-appellees violated Section two of the contract to sell which provides: SECOND. v. v. 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. Perez & Co.for the resolution of a reciprocal obligation. Inc. To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs. Alikpala. the entire obligation would have been paid. despite demand. as follows: (a) The amount of THREE HUNDRED NINETY TWO only (P392. 17. 821. et al.M.00 excluding the 7 percent interests. as without it.

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.—That once the payment of the sum of P3.. neither they nor their predecessor. the total price of the sale is completed. the defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. The defendants-appellants' contention is without merit.00. the party to the FIRST PART will execute in favor of 50 . as not exacting a strict compliance with the conditions of paragraph 6 of this contract.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.920. 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. but for as many times as he wishes. have accepted and received delayed payments of installments.00. we held that: xxx xxx xxx But defendants do not deny that in spite of the long arrearages. 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.subdivision is likewise purposely done to afford those landless. The defendants-appellants contend in the second assignment of error that the ledger of payments show a balance of P671. On the contrary.. They submit that while it is true that the total monthly installments paid by the plaintiffs-appellees may have exceeded P3. The defendants-appellants argue that paragraph nine clearly allows the seller to waive the observance of paragraph 6 not merely once. . We agree with the plaintiffs-appellees that when the defendants-appellants. Teodoro de Guzman. though the plaintiffsappellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract.533.—That in consideration of the agreement of sale of the above described property. We cannot but agree with the lower court that at the time appellees exercised their option. Under these circumstances. In De Guzman v.920. appellants had already forfeited their right to invoke the abovequoted provision regarding the nullifying effect of the non-payment of six months rentals by appellees by their having accepted without qualification on July 21. it is admitted that the delayed payments were received without protest or qualification..67 due from the plaintiffs-appellees. 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. . in case of default or noncompliance by the party of the SECOND PART. even took steps to cancel the option or to eject the appellees from the home-lot in question.-That whatever consideration of the party of the FIRST PART may concede to the party of the SECOND PART. Philippine Currency. (Emphasis supplied) The plaintiffs-appellees on the other hand are firm in their submission that since they have already paid the defendantsappellants a total sum of P4. plus interest at the rate of 7% per annum .. The defendants-appellants rely on paragraph 2 of the contract which provides: SECOND.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. instead of availing of their alleged right to rescind. 1964 the full payment by appellees of all their arrearages.920. Guieb (48 SCRA 68).

920. Insurance contracts.00 price sale.. since the principal obligation under the contract is only P3. SO ORDERED. 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. (W)hile generally. The contract to sell. 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. . it is likewise true that under paragraph 12 the seller is obligated to transfer the title to the buyer upon payment of the P3. in essence. Upon payment of the balance of P671.920.533." Thus. Vol. Civil Code of the Philippines. Inc. stipulations in a contract come about after deliberate drafting by the parties thereto.67) without any interests. ANGELES VS. being a contract of adhesion.. it is understood. especially where such interpretation will help effect justice to buyers who. as above stated. It was offered to them on a "take it or leave it" basis. Teves (83 SCRA 36 1). however. after having invested a big amount of money. and in its entirety is most unfair to the buyers. v. They had no opportunity to question nor change any of the terms of the agreement. The attorney's fees are justified. Costs against the defendants-appellants.the party of the SECOND PART. In Sweet Lines. WHEREFORE. condemnable in its lopsidedness and injurious in its effect which. eager to acquire a lot upon which they could build a home. bills of lading. 1. there are certain contracts almost all the provisions of which have been drafted only by one party. 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. must be construed against the party causing it. affixed their signatures and assented to the terms and conditions of the contract. .920. p. . usually a corporation. The plaintiffs-appellees. The contract to sell entered into by the parties has some characteristics of a contract of adhesion. the courts should only order the payment of the few remaining installments but not uphold the cancellation of the contract. free from all hens and encumbrances other than those expressly provided in this contract. 80. We agree with the plaintiffs-appellees.00 and the plaintiffs-appellees have already paid an aggregate amount of P4. Seventh ed. The defendants-appellants drafted and prepared the contract.00 plus 7% interest per annum. Closely related to the second assignment of error is the submission of the plaintiffs-appellees that the contract herein is a contract of adhesion.) (Emphasis supplied) While it is true that paragraph 2 of the contract obligated the plaintiffs-appellees to pay the defendants-appellants the sum of P3. CALASANZ 135 SCRA 323 51 .38. because the only participation of the party is the signing of his signature or his "adhesion" thereto.67 without any interest thereon. we held that: xxx xxx xxx . are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology. contracts of sale of lots on the installment plan fall into this category. the instant petition is DENIED for lack of merit. the necessary deed or deeds to transfer to the latter the title of the parcel of land sold. (Paras. Such contracts are called contracts of adhesion. that au the expenses which may be incurred in the said transfer of title shall be paid by the party of the SECOND PART..

when their aggregate payment already amounted to P4. after having invested a big amount of money.00 and the plaintiffs-appellees have already paid an aggregate amount of P4. and its entirety is most unfair to the buyers. The plaintiffs-appellees paid the monthly installments until July 1966. they found out that they have already paid the total amount including interests. 1966. The contract to sell.FACTS: On December 19. the installment being due and payable on the 19th day of each month. 1957. the defendant must immediately execute the final deed of sale in favor of the plaintiffs and 52 . condemnable in its lopsidedness and injurious in its effect which. On December 7. being a contract of adhesion. hence this appeal. The plaintiffs’ letter with their plea for reconsideration of the said cancellation was denied by the defendants. the defendants-appellants wrote the plantiffs-appellees a letter requesting the remittance of past due accounts. defendants-appellants Ursula Torres Calasanz and plaintiffs-appellees Buenaventura Angeles and Teofila Juani entered into a contract to sell a piece of land located in Cainta. 1967.20 until fully paid.920. it is likewise true that under par 12 the seller is obligated to transfer the title to the buyer upon payment of the said price.920. The plaintiffs-appellees made a downpayment of P392. the courts should only order the payment of the few remaining installments but not uphold the cancellation of the contract.00 plus 7% interest per annum. are now sought to be deprived of the same thru the prayed application of a contract clever in its phraseology. Thus.2 of the contract obligated the plaintiffs-appellees to pay the defendants the sum of P3. thereby constraining the defendants to cancel the said contract. On January 28.533. since the principal obligation under the contract is only P3. The Court of First Instance rendered judgment in favor of the plaintiffs. the defendants-appellants cancelled the said contract because the plaintiffs failed to meet subsequent payments.38.920 plus 7% interest per annum. must be construed against the party causing it. 1966 for more than 5 months.533. in essence.00 upon the execution of the contract. especially where such interpretation will help effect justice to buyers who.67 without any interest thereon.38. While it is true that par. Upon payment of the balance of P671. 6 of the contract to sell when they failed and refused to pay and/or offer to pay monthly installments corresponding to the month of August. ISSUE: Has the Contract to Sell been automatically and validly cancelled by the defendants-appellants? RULING: No. The Supreme Court agree with the observation of the plaintiffsappellees to the effect that the terms of a contract must be interpreted against the party who drafted the same. realty taxes and incidental expenses. They promised to pay the balance in monthly installments of P41. The plaintiffs-appellees filed a case before the Court of First Instance to compel the defendant to execute in their favor the final deed of sale alleging inter alia that after computing all subsequent payments for the land in question. Rizal for the amount of P3. The defendants alleged in their answer that the plaintiffs violated par.

It was not born yesterday.: Procedural rules are designed to insure the orderly and expeditious administration of justice by providing for a practical system by which the parties to a litigation may be accorded a full and fair opportunity to present their respective positions and refute each other's submissions under the prescribed requirements. On the same day. Defensor. Alarico T. On August 10. Vicente Pascual Jr. as provided in par. G. This was opposed by the private respondent. By complying faithfully with the Rules of Court. 3 both concluded in February 1983. On July 13. 80491 August 12. 1984. Mundin. 1982. No. who said that the copy sought had already been sent directly to the petitioner by registered CRUZ. filed its entry of appearance and motion for extension of time to file responsive pleading on behalf of the petitioner. Rubinos and Fornier. together with the corresponding summons. Adjective law is not the counterfoil of substantive law. Copies of the complaint. it easily recognizes and rejects it.R. adopted on December 28. & Jose Teoderico V. The motion was subsequently granted but only for ten days. 939B-82. petitioner. Yulo. the bench and the bar are better able to discuss. the Philippine Veterans Bank conveyed a parcel of land under a conditional sale to Averdi Marketing and Development Corporation. however. then transferred his rights to Eduardo Lopingco. ARTIE VERGEL DE DIOS. vs. ingenious gambits to this end are not unknown to the Court. J. In fact. Lopingco filed with the Regional Trial Court of Manila a complaint against the petitioner and the Philippine Veterans Bank for revocation of the said board resolution and the rescission of his contract with the petitioner. respondents. Aliling & Macamay Law Offices for petitioner. On July 6. Molina for respondents. This usually happens where the party does not expect to win on the merits of his cause and so seeks to out-maneuver and delay his opponent by resorting to clever if futile technicalities. 1992 J. as general manager of Averdi. 1984. The other alternative is judicial anarchy. subject to the terms and conditions specified in their Memorandum of Agreement 2 and the Addendum thereto. herein private respondent. were served on the defendants. conditions and limitations. Veterans Bank. 1 Petitioner Artie Vergel de Dios. Pascual. It is unfortunate. the law firm of Fornier. at 9:15 o'clock in the morning. COURT OF APPEALS AND EDUARDO LOPINGCO. When it comes across any such subterfuge. 1984. Leo Romero for private respondents. Lopingco filed an amended complaint and at the same time served a copy thereof on the petitioner by registered mail. that on occasion procedural rules are invoked not to uphold but to frustrate the prescriptions of substantive law. 1984. the petitioner filed through counsel an omnibus motion asking that he be furnished a copy of the amended complaint. through Atty. but after the filing of the amended complaint. the Philippine Veterans Bank filed a motion to dismiss the complaint on the grounds of lack of a cause action and improper party. By its Board Resolution No.12 of the contract. that the rules of procedure may not be perverted into engines of injustice. analyze and understand substantive rights and duties and consequently to more effectively protect and enforce them. Saligumba & Martin for Phil. On June 21. there is a symbiotic relationship between them.execute the necessary transfer of documents. The many 53 .

" On September 12. PLDT vs. there was as yet no appearance of counsel for said defendant. Estaris. The trial court deferred resolution of the motion pending receipt of proof that the petitioner had indeed received the copy of the amended complaint sent to him by registered mail. ordering defendant J. ordering defendant J. Rules of Court to serve the judgment upon the party affected thereby.00 with legal interest thereon from February 18.mail "because at the time said copy was mailed. for reasons to be cited below. pleadings. Artie Vergel de Dios to pay the plaintiff P20. Assuming that such service was not necessary. 128 SCRA 402-403) for "Without any record before it of any attorney appearing for said party. Artie de Dios to indemnify plaintiff in the amount of P 140. 10% of the total amount due as and for attorney's fees and to pay the costs. it certainly was in accordance with Section 2 of Rule 13 of the Rev. It would be an absurdity to hold otherwise. On June 5. 1983 until plaintiff shall have received a complete refund of his investment.00 yearly from February 18. vs. 2.000. the service of amended complaint directly on defendant De Dios is in accordance with Sec. it is not correct then for movant De Dios to claim that this Court did not resolve his Omnibus Motion before declaring him in default and that the default order has no legal basis. The trial court also found that the petitioner was negligent in not filing his answer on time. On December 6. 1985. he contented that he was nonetheless not negligent for failing to file his answer within the extended reglementary period. 5 SCRA 503. ordering the rescission of the MemorandumAgreement and the Addendum thereto entered into between plaintiff Eduardo Lopingco and defendant J. . at the hearing on the motion to dismiss. P1. 1984. R-13. Gonong rendered a decision disposing as follows: WHEREFORE. 1983. 1984. JUDGMENT is hereby rendered. and the like. upon presentation of a certification from the Makati Central Post Office that the petitioner had received a copy of the amended complaint on July 17. counsel for the private respondent moved for a declaration of default against the petitioner for failure to file his answer within the reglementary period. Revised Rules of Court. Judge Arsenio M. Because of all this. 1984. he was declared in default and evidence for the other parties was subsequently received ex parte. 52 SCRA 392). On April 30. 1985. should be made on the party. The case is hereby DISMISSED in so far as defendant Philippine Veterans Bank is concerned. To repeat. Artie Vergel de Dios to refund the plaintiff his downpayment of P725. the instant plaintiff could only serve his amended complaint directly on defendant De Dios. 1985.000. orders. if not represented by counsel (Elli vs. Artie Vergel de Dios." (Luzon Rubber & Manufacturing Co. 54 . to the effect that service of notice. the petitioner filed a motion for new trial alleging error on the part of the trial court for declaring him in default although he had not yet been served with a copy of the amended complaint and his omnibus motion had not yet been resolved. By analogy. This motion was denied in an order dated August 7. NLRC.000.00 as actual damages. Ditan.00 as litigation expenses. 4 On the validity of the service of the amended complaint. the trial court declared: .000. ordering the defendant J. . based on the allegations and prayer on the complaint and the evidences adduced in support thereof.

000. conformably to Rule 14. Plainly. The appellate tribunal affirmed the questioned order. The petitioner submits that inasmuch as the amended complaint completely replaced the original complaint. 8 A reading of the amended complaint in the case at bar shows that it merely supplemented an incomplete allegation regarding the subject property. 3rd Floor. the court must ascertain if the defendant shall be required to answer for a liability or legal obligation wholly different from that which was stated in the original complaint. the latter was stricken from the record and considered non-existent." 9 This certification has not been denied by the petitioner. the right to fair trial and the right to due process of law." It is clear from a comparison of the allegations appearing in the original complaint and in the amended complaint that the cause of action of the private respondent had not been changed. Sec. the trial court denied him the right to be heard in violation of due process. 1984. 1984 at GSIS Post Office addressed to Artie Vergel de Dios. alleging that the trial court erred in declaring him in default without first ruling on his Omnibus Motion and in denying his motion for new trial.On August 30. Puyat Avenue. or if what are alleged refer to the same matter but are more fully and differently stated. 1933 (the amended complaint) posted on "July 13. 100 Gil J. 7 An amendment will not be considered as stating a new cause of action if the facts alleged in the amended complaint show substantially the same wrong with respect to the same transaction. administrator Dado on July 17. The purpose of the amendment was merely to include the additional information that the subject property "was and is still under litigation and the contract was entered into without the knowledge and approval of the litigants or of competent judicial authority. a new summons should have been issued requiring the defendants to answer the same. The amended complaint also asked for the rescission of the Memorandum of Agreement and the Addendum and the return of the sum of P 725. the petitioner filed an appeal with the respondent court. Metro Manila.00 which had been given by Lopingco to the petitioner as down payment on the subject property. he received a copy of the amended complaint on July 17. 1984. 5 The petitioner then came to this Court. 1985. and (d) in not declaring that the decision appealed from as tainted with an award of excessive damages. For failing to do this and thereafter declaring him in default. and violation of the law. as certified to by the Makati Central Post Office. Studio 20. and the subject of the controversy or the liability sought to be enforced remains the same. what was sought to be enforced against the petitioner both in the original complaint and in the amended complaint was his obligation to refund the said sum to the private respondent. The rule is that it is only when new causes of action are alleged in an amended complaint filed before the defendant has appeared in court that another summons must be served on the defendant with the amended complaint. contending that the Court of Appeals committed grave abuse of discretion: (a) in holding that he was properly declared in default. The amended complaint did not change the cause of action but simply advanced the abovequoted additional information. Makati Townhouse. We hold therefore that no new summons on the amended complaint was necessary. of the Rules of Court. the record shows that. through his authorized agent. As the amended complaint was a completely new pleading. Apart from this. So was the summons that accompanied it. (c) in not declaring that the proper remedy or action of respondent Lopingco is reformation and not rescission of the Memorandum of Agreement and the Addendum thereto. Makati. 6 In determining whether a different cause of action is introduced by amendments to the complaint. (b) in not setting aside the judgment by default as improper for unjustly depriving him of his constitutional right to be heard. The certification stated that Registered Letter No. insufficiency of evidence. This argument is not acceptable. 55 . 1. or where averments which were implied are made in express terms. was delivered to and received by the authorized representative of the addressee. contrary to the petitioner's allegation.

judgment by default may be taken against him. page 38. But there are limits to our forbearance. It is noteworthy that the trial court cautiously suspended resolution of the motion to declare the petitioner in default until the private respondent shall have furnished proof of service of the amended complaint upon the petitioner. it was only when he filed. Luna: 10 It is within the sound discretion of the court to set aside an order of default and to permit a defendant to file his answer and to be heard on the merits even after the reglementary period for the filing of the answer has expired. these guidelines for an orderly and expeditious procedure would be rendered meaningless. Unless it is shown clearly that a party has justifiable reason for the delay. As the trial court granted the motion for extension before declaring the petitioner in default. preferring to give the parties full opportunity to argue their respective positions at a regular trial. 1984. Entry of Appearance and Motion for Extension of Time to File Responsive Pleading. In not exercising that discretion in the petitioner's favor. 56 . Neither has the petitioner been denied due process. on the part of the court to refuse to accept the answer where it finds no justifiable reason for the delay in the filing of the answer. As it turned out. 2 of Rule 13 of the Rules of Court. Mundin. within the same period. Undersigned counsel was informed by defendant that the LAST DAY FOR FILING HIS ANSWER AND/OR RESPONSIVE PLEADING IS TOMORROW. and received by him four days after. reading thus: 2. defendant De Dios was aware of his task to file his answer to the instant complaint within the time constraint provided by the Rules as can be gleaned from his motion through his counsel. Atty. 1984. . 1985.The trial court was correct in holding that when the private respondent sent by registered mail a copy of the amended complaint directly to the petitioner. It was only on December 6. record. allowing direct service on a party if not represented by counsel. or an abuse of discretion. after the private respondent had submitted the above-quoted certification. still he (De Dios) did not upon receipt of the Amended Complaint sent on 13 July. but it is not error. that the trial court declared the petitioner in default. the court will not ordinarily exercise its discretion in his favor. his Motion For New trial on June 5. In motions for reconsideration of an order of default. to file his answer to the amended complaint. Judge Gonong correctly observed: . . in spite of this consciousness upon receipt of the summons directing him within fifteen days after service to answer complaint. At the time the amended complaint was filed. the defendant was not yet represented by counsel. he was acting in accordance with Sec. Defensor. 2. otherwise. It is true that this Court looks with disfavor upon default judgments. 1984). As a matter of fact. which entered its appearance only after the private respondent had filed his amended complaint. for he was given adequate opportunity. capitalization supplied). rush to his counsel and handed to the latter the said amended complaint so that he would not run the risk of being declared in default. even extended by ten days more beyond the reglementary period. he cannot say that it had unduly favored the private respondent. As we held in Pahilanga vs. 13 July 1984. and also to serve a copy of said answer. And yet. the summons and copy of the complaint having been received by herein defendant on 28 June. thru Atty. on 17 July. 1984. and failure to do so. 1984' (par. that he disclosed the fact that he did not consult his counsel as regards his receipt of the amended complaint (or 11 months and 18 days from July 17. the moving party has the burden of showing such diligence as would justify his being excused from not filing the answer within the reglementary period as provided by the Rules of Court.

In the Memorandum of Agreement.000. 939B-82. De Dios.000. The petitioner argues that the private respondent has no cause of action for rescission and contends that the proper action is for reformation of the Memorandum of Agreement and the Addendum.00 to the petitioner only upon execution by the latter of the deed of assignment in favor of the private respondent as required by the above-quoted last paragraph. He did not. We find that the above-quoted conditions.00 to the petitioner without one single document to prove that the property rights acquired by the petitioner under Board Resolution No. it being convinced that said defendant's actuations of delay as pictured above can only be subsumed as one "not excusable negligence.00 to the Philippine Veterans Bank and P500.00 to the PARTY OF THE FIRST PART in the following manner: a. a deed of assignment over the property subject of the agreement. And so he has only himself to blame for the consequences of his act in treating the summons and complaint served upon him for granted.000. Otherwise. What we read from the agreement is that the private respondent shall pay the P500. P500. subject to the following terms and conditions: 1. on or before ___________. He submits. so that the latter could obtain a conditional sale of the property from the bank.00) from the Philippine Veterans Bank shall be paid by the PARTY OF THE SECOND PART through the PARTY OF THE FIRST PART. The down payment of 20% for the purchase of the land (P700. that it was the private respondent who violated the express terms of the contracts for failing and refusing to pay the amount of P500. 57 .000. The petitioner does not deny that he has not executed that deed. specifically the stipulation in the last paragraph.000. the petitioner assigned to the private respondent the property rights he had acquired under Board Resolution No.000.00 upon payment of the 20% downpayment over the land.000. The PARTY OF THE SECOND PART shall pay the sum of P1. the petition must also fail. as the second party.This circumstance or inattention on his part simply demonstrates that defendant De Dios did not exercise due diligence and concern on the matter as an ordinary prudent person would do in order to have his answer filed within the reglementary period. Practical wisdom in taking care of one's affairs dictates that he should pay attention to the summons and at once see his lawyer without any delay.00 to the petitioner upon his payment of the 20% downpayment to Philippine Veterans Bank.000. b. though. 939B-82 no longer belong to him but have already been transferred to Lopingco. This court can do no less than to withhold exercising its discretion in his favor. We are not persuaded.000." On the merits. are susceptible of only one interpretation. upon fulfillment thereof.00 in five (5) equal installments for a period of five (5) months beginning on the date of this agreement. The plain meaning is that upon the down payment of the amount of P700. as the first party. mistake or accident. FINAL ASSIGNMENT: The sale by the bank of the property to the PARTY OF THE FIRST PART being conditioned upon the payment of the 20% down payment shall. obligate the PARTY OF THE FIRST PART thereupon to automatically execute in favor of the PARTY OF THE SECOND PART a deed of assignment over the said property. shall execute in favor of Lopingco. 2. P500.000. the private respondent would be paying P700.00 to the Philippine Veterans Bank by Lopingco.

with the payment of damages in either case. it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.00 knowing fully well that he could not transfer or convey his rights is a wrong. In demanding that the trial court serve new summons upon him because of the amendment of the complaint.00 and an additional amount of P25. and the price with its interest. We think not. Artie Vergel de Dios. rescission is the proper remedy and as provided for under Art. The court shall decree the rescission claimed. enforceable against him. in fact the plaintiff was never in possession of the object of said contract as title and possession thereto cannot be transferred by the defendant de Dios. even after he has chosen fulfillment. 1191 of the Civil Code. 1385 of the New Civil Code: Rescission creates the obligation to return the things which were the object of the contract. which has not been denied.Under the circumstances of this case. and his subsequent receipt of the partial consideration of P700. Under the facts presented.000. thus: Art. it has 58 . together with their fruits. Even if it was. we find that the non-performance by the petitioner of his obligation to execute the deed of assignment. The injured party may choose between the fulfillment and the rescission of the obligation. and pursuant to the same provision the plaintiff is likewise entitled to an indemnity for damages. We again quote the trial court with approval: If there be any actionable wrong under the facts obtaining hereunder it would be the act of defendant J." In the case at bar. 9391-82 and having succeeded in having the plaintiff agree thereto on the assurance that defendant de Dios will be able to procure the approval and conformity of the Bank. Interpreting this article in the case of Universal Food Corporation vs. the private respondent thereby limited his recourse to reformation of the contract. He may also seek rescission.000. The petitioner submits that by claiming that the agreements did not reflect the true intention of the parties. of which he was not able to do so. the plaintiff is very well entitled to the rescission of the Memorandum-Agreement and its Addendum. unless there be just cause authorizing the fixing of a period. By entering into the contract (Memorandum-Agreement and its Addendum) conveying his rights arising from Veterans Bank Board Resolution No. The power to rescind obligations is implied in reciprocal ones." In the case at bar. 1191. there is no question that the private respondent could avail himself of the remedy of rescission as authorized under Art. Given a choice of remedies. Court of Appeals. 11 we stated that "rescission will be ordered only where the breach complained of is so substantial as to defeat the object of the parties in entering into the agreement. the petitioner manifested his bad faith all too clearly. was a substantial breach that warranted rescission. in case one of the obligors should not comply with what is incumbent upon him. if the latter should become impossible. the private respondent had a right to reject reformation of the contract as an available option and to choose rescission instead as the more effective relief for the protection of his interests. in accordance with articles 1385 and 1388 and the Mortgage Law. consequently. The amendment made was not substantial and did not change the original complaint so as to require the service of new summons upon him. This is understood to be without prejudice to the rights of third persons who have acquired the thing.

and we sustain them completely. Esteban C. the petition is DENIED. 4 Nevertheless Tolosa accepted her subsequent late payments amounting to P3.260-square meter lot in the Poblacion of Tigbauan.R. Ocampo caused her adverse claim to be annotated on Tolosa’s certificate of title as Entry No.700. 5Meanwhile. agrees to execute and deliver unto the VENDEE whatever pertinent document or documents necessary to implement this sale and to transfer title to the VENDEE. He cannot now claim that he was unaware of the amended complaint and was thus unable to answer it.been established that a copy of the amended complaint had been legally delivered to and received by him and that he in fact referred it to his counsel. 2 On 21 April 1975. N-38846. ." covering the same parcel of land were executed 59 . petitioner. Courts do not lend themselves to empty gestures or useless rituals that can only impede the speedy a administration of justice. N675.00. Indeed they are not. The challenged decision is AFFIRMED. through his own negligence. WHEREFORE. Ocampo paid but only the total of P16. Both buyers now assert against each other a better title to the property. Iloilo. 238353. On 17 March 1975. the petitioner cannot complain that the damages awarded against him are excessive. P12. BELLOSILLO." Before the six-month period to complete the payment of the purchase price expired. the VENDOR .C. with costs against the petitioner. Tolosa mortgaged the land to the Philippine Veterans Bank and had the encumbrance annotated on his certificate of title under Entry No. OCAMPO. the subject property was involved in a boundary dispute.R. Manuel for petitioner. Borres. the parties entered into an "Agreement to Sell Real Property" 3 whereby Tolosa "sells. .00 of which was paid upon signing of the deed and the balance to be due within six (6) months thereafter. On 20 August 1974. 1 entered into a contract whereby Tolosa undertook to sell the same parcel of land to Ocampo not later than 15 May 1975 for P22. COURT OF APPEALS and MAGDALENA S. The petitioner's pious invocation of due process is nothing short of heretical and deserves to be dismissed. 6 On 6 June 1976. Ocampo. No. 279936.00. In these circumstances. 1994 PILAR T.000.: Two (2) documents. L. That is a rank pretense. L.R. 0-7743 in the name of seller Severino Tolosa. P1. J. by a seller in favor of two (2) different buyers. Nery D. Paragraph 4 of the contract provides that "immediately upon complete payment of the purchase price . Record No.900. . vs. In dispute is an 18. upon learning of the mortgage lien. cedes and transfers" the land to Ocampo in consideration of P25. 97442 June 30. . an "Agreement to Sell Real Property" and a "Contract to Sell.00 of which was paid upon execution thereof.00. VILLARUZ.000.00. respondents.500. albeit. described in Plan Psu-223696. Tolosa and Pilar T.000. The trial court was not obliged to perform a charade. not soon enough. In his letter to Ocampo dated 15 March 1977. and registered under Original Certificate of Title No. Tolosa sought the cancellation of Ocampo’s adverse claim and presented her with two G. Case No. the latter being then represented by Teresa T.C. Duremdes for private respondent. by the VENDEE.

Villaruz appealed to the Court of Appeals. 10 Failing to convince Ocampo. Tolosa and Magdalena S. although no deed of definite sale would be delivered to her unless the price was fully paid. which was P5. Villaruz executed a "Contract to Sell" 9 whereby Tolosa "sells. reversed and set aside the trial court’s decision — 60 .000. rendered a decision in Civil Case No. transfers. The contract noted the supposed judicial termination of the boundary dispute over the land. 13 Borres claimed in her answer that she was merely the agent of Ocampo who was the real party in interest.000. intervened in the case. 302257. Damages and Quieting of Title" against Teresa Borres. No. should Tolosa be ready to deliver to her the deed of absolute sale and the owner’s duplicate of OCT No. Tolosa succeeded in securing from another branch of the court the cancellation of the adverse claims of Ocampo without notice to her. Borres however died so that the trial court. On 13 October 1981. Ordering plaintiff to pay Pilar T. On 19 July 1977. Ocampo over the lot in litigation upon the latter’s payment of the balance of P4. the 16th Division of the Court of Appeals. namely. Ocampo filed a third-party complaint against Villaruz. Ordering plaintiff Tolosa to execute the corresponding deed of sale in favor of third-party plaintiff Pilar T. if any. 11 On 4 August 1977. Declaring the contract to sell executed between plaintiff Severino Tolosa and third-party defendant Magdalena Villaruz as null and void as well as the Transfer of Certificate of Title issued in connection therewith. On 11 October 1990.R. 7 On even date.00. Ocampo P10. Tolosa filed a petition in the Court of First Instance of Iloilo to cancel the adverse claim of Ocampo.00 as moral damages.000. 0-7743 for purposes of registration. during the pendency of Civil Case No. 15 On 7 January 1988. cedes. Ilarde denied the petition. 12163 dismissing the complaint of Tolosa as well as the complaint in intervention of Villaruz — 1. P30. Ordering plaintiff Tolosa to vacate and deliver possession of the lot in question to Pilar T. Judge Ricardo M. 12163. 18428.00. Ereño of the Regional Trial Court of Iloilo. and costs. Her motion for reconsideration having been denied on 26 March 1988. 4. Magdalena S. another adverse claim was caused to be annotated by Ocampo on OCT No. Ocampo through counsel wrote Tolosa expressing her readiness to pay the balance of the purchase price.400. on 2 July 1979. then claiming to have already bought the land. Villaruz. Judge Julian Y.options. 3. 8 On 3 June 1977.000. 12 On 7 October 1977. 2. Tolosa wrote Ocampo offering to reimburse her what she paid provided she would sign a document canceling her adverse claim. a refund of payments made.300. The contract stipulated the immediate conveyance of the physical possession of the land to Villaruz. ordered her substitution by defendant Ocampo. 16 in CA-G. Tolosa filed an action for "Breach of Contract. 0-7743 under Entry No. 14 This paved the way for the registration on 23 November 1979 of the contract of sale of Villaruz dated 8 August 1979 and the subsequent issuance of Transfer Certificate of Title No.00 as litigation expenses.00 as attorney’s fees.400. 0-7743 of Tolosa. On 9 October 1979. Ocampo. or a share from the net proceeds if sold to a third party. and conveys" to Villaruz the same land in consideration of P94. T-100021 in her name which canceled the Original Certificate of Title No. On 30 July 1977.00. The amount of P15.00 was to be paid upon execution and the balance upon cancellation of all liens and encumbrances from the certificate of title. Branch 27. P2.

par. Contrary to the interpretation of the appellate court. Vda. . by itself. the above-described parcel of land. Inc. no right to retain ownership and possession of the land pending full payment of the price can be inferred from the fact that no delivery was made to Ocampo.. the latter hereby SELLS. The appellate court upheld the sale in favor of Villaruz on the theory that the 21 April 1975 agreement of Tolosa and Ocampo was merely a contract to sell.. If the intent was for the seller to retain ownership and possession of the land through non-delivery of certain documents unless the price be fully paid. 2.. It claimed that in the absence of a deed of absolute sale in favor of Ocampo. v. In this regard. T-100021 the adverse claims filed by Pilar Ocampo under Entry No. the VENDOR hereby agrees to execute and deliver unto the VENDEE whatever pertinent document or documents necessary to implement this sale and to transfer title to the VENDEE. immediately upon complete payment of the purchase price herein by the VENDEE." In Dignos v. 17 we laid down the criteria that: . Declaring Magdalena S. Paragraph 4 pertains to the undertaking of the seller to execute and deliver to the buyer any document deemed necessary by law to implement the sale and transfer title since the parties were unsure of what documents were pertinent. The agreement between Tolosa and Ocampo dated 21 April 1975 although titled "Agreement to Sell Real Property" was a perfected contract of absolute sale wherein Tolosa forthwith sold. Inc. to be paid by the VENDEE unto the VENDOR. de Leon. Tolosa retained ownership over the land and validly conveyed the same to Villaruz. . and 3. We held in De la Cruz v. It provided "[T]hat for and in consideration of the sum of TWENTY-FIVE THOUSAND PESOS (P25. Maritime Building Co. 0-7743. 4 alone should be inutile. 86 SCRA 305). Inc. Legaspi: 20 61 ..1. CEDES and TRANSFERS in favor of the former — her heirs and assigns. ceded and transferred the land to Ocampo. 18 The failure of the buyer to pay the price in full within a fixed period does not. 279936 and 302257 found in OCT No. CA. 4 of the contract. a deed of sale is absolute in nature although denominated as a "Deed of Conditional Sale" where nowhere in the contract in question is a proviso or stipulation to the effect that title to the property sold is reserved in the vendor until full payment of the purchase price. bar the transfer of the ownership or possession. Villaruz the absolute owner of the parcel of land covered by TCT No. T100021 of the Register of Deeds of Iloilo.000. reiterating Taguba and Luzon Brokerage Co. 132 SCRA 722. . Philippine Currency. Ordering the Register of Deeds of Iloilo to annotate at the back of TCT No. were not found in the subject contract to indicate that it was indeed a mere contract to sell or a deed of conditional sale. it should have been complemented with a proviso that the sale would not be implemented nor the title considered transferred unless another document specifically for said purpose be first executed and delivered to the buyer. free from all liens and encumbrances. . The conditions mentioned in Dignos. 19 much less dissolve the contract of sale. Ordering the parties to pay proportionate costs.00). 4 of the contract which provides that — . in relation to par. Luzon Brokerage Co. we find nothing significant about par.. nor is there a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within a fixed period (Taguba v.

Neither was there any agreement nor allegation that payment on time was essential (Cf. 12163 on 7 October 1977. In any case.41. The document specifically said so. 251). Cortes vs. plaintiff failed to hand the money to defendants. 55 Phil.00 but also discharged Tolosa’s mortgage debt in the amount of P4. 43 Phil. hence.. 298. Tan King. Before Civil Case No. Bibaño. Under Art. In other words. as he previously promised. 41 Phil. the contract became null and void for lack of consideration.600. 28 the purchase price would have been deemed fully paid. 2759. or to demand rescission in court. Puato vs. Although the complaint sought the cancellation of Ocampo’s adverse claim on Tolosa’s OCT and for the refund of the payments made. and defendants’ right was to demand interest — legal interest — for the delay. the letter of 2 August 1977 claimed to have been sent by Tolosa to Ocampo rescinding the contract of sale 23 was defective because it was not notarized 24 and. Subsequent non-payment of the price at the time agreed upon did not convert the contract into one without cause or consideration: a nudum pactum (Levy vs. Johnson. 1592 of the Civil Code. it was not proven to have been received by Ocampo. 477." 26 It is "[n]ot merely to terminate it and release parties from further obligations to each other but to abrogate it from the beginning and restore parties to relative positions which they would have occupied had no contract ever been made. 1592 of the Civil Code. 110). In other words. . (Escueta vs. Warner Barnes & Co. did not ipso facto resolve the contract. If only to accentuate her intention to make good her contractual obligations. on the other hand. Ocampo offered to pay the balance of the purchase price in her letter of 15 March 1977 or more than four months before Tolosa allegedly wrote his letter of rescission on 2 August 1977. Abella vs. Magdalena Estate. . 12163 was filed on 7 October 1977. Pardo. 650. 64 Phil. Civil Case No. 25 Likewise. with its resultant consequences. of the ground to rescind under Art. 457)." 27 Even assuming arguendo that Civil Case No. the breach on the part of Ocampo was only slight if not outweighed by the bad faith of Tolosa in reneging in his 62 . and such was undoubtedly the agreement.453. To rescind is "[t]o declare a contract void in its inception and to put an end to it as though it never were. Tolosa. and more than six months before the filing of Civil Case No. 4 Phil. seeking discharge from contractual obligations and an offer for restitution is not the same as abrogation of the contract. His unqualified acceptance of payments after the sixmonth period expired constitutes waiver of the period and. It cannot be denied that when the document was signed the cause or consideration existed: P450. 12163 could not be considered a judicial demand under Art. 43 Phil. Berg vs.) Such failure. these could not be equivalent to a rescission. Francisco. there was default on his part at most. This offer to pay prior to the demand for rescission is sufficient to defeat Tolosa’s prerogative under Art. 22 However. however. more importantly. Had not Tolosa ordered the Philippine Veterans Bank to return the mortgage debt payment by Ocampo. 12163 was a valid judicial demand. 505). The situation was rather one in which there is failure to pay the consideration. no stipulation to that effect having been alleged (Cf. Inza. the failure of Ocampo to complete her payment of the purchase price within the stipulated period merely accorded Tolosa the option to rescind the contract of sale upon judicial or notarial demand. Mendoza. Gaz. Ocampo not only paid Tolosa a total of P20. 42 Off. pursuant to article 1501 (3) of the Civil Code 21 (Villaruel vs. when after the notarization of the contract. 1592 of the Civil Code because it did not pray for the rescission of the contract. 1592. however. rescission is not granted as a matter of course. vs. they err in the assertion that as plaintiff failed to pay the price after the execution of the document of sale as agreed previously. 92 Phil. is now precluded from raising the issue of late payments.

" also militates against the unilateral act of the defendantsappellants in canceling the contract. judicial rescission of the contract cannot be justified. v. Villaruz was never in good faith. In other words. 1968) . While the contract dated 3 June 1977 in favor of Villaruz is also a contract of sale. Hawaiian-Philippine Co.533. On the contrary. the defendants-appellants have waived and are now estopped from exercising their alleged right of rescission. although the principal obligation was only P3920. 1544 of the Civil code on double sales.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years. . 63 . that of Ocampo dated 21 April 1975 should prevail pursuant to Art. The defendants-appellants state that the plaintiffsappellees violated Section two of the contract to sell . . we held . 31 SCRA 829).00 excluding the 7 percent interest. even took steps to cancel the option or to eject the appellees from the home-lot in question.38. neither they nor their predecessor . But defendants do not deny that in spite of the long arrearages. Angeles v. despite demand. 1964 the full payment by appellees of all their arrearages. though the plaintiffsappellees have been in arrears beyond the grace period mentioned in paragraph 6 of the contract. v. . because they failed to pay the August installment.. .. is not absolute. 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. . Jan. v. . et al. InUniversal Food Corp. 827). L23707 & L-23720. Javier. Under these circumstances. have accepted and received delayed payments of installments. We cannot but agree with the lower court that at the time appellees exercised their option. 821. . . 17.. Inc. it is admitted that the delayed payments were received without protest or qualification. in only a short time. Calasanz 29 is apropos — The right to rescind the contract for non-performance of one of its stipulations . Hon. . . In De Guzman v. but only for such substantial and fundamental breach as would defeat the very object of the parties in making the agreement (Song Fo & Co.. Alikpala. 30 While Villaruz may have registered his contract or came into possession ahead of Ocampo. the plaintiffsappellees had already paid an aggregate amount of P4. less damages suffered by the obligee. 47 Phil. hence. We agree with the plaintiffs-appellees that when the defendants-appellants. . . Court of Appeals (33 SCRA 1) the Court stated: The general rule is that rescission of a contract will not be permitted for a slight or casual breach. It would unjustly enrich the defendants-appellants. Article 1234 of the Civil Code which provides that "[I]f the obligation has been substantially performed in good faith.own prestations. . Tuazon and Co. The question of whether a breach of a contract is substantial depends upon the attendant circumstances (Corpus v. . Guieb (48 SCRA 68). Furthermore. . for more than four (4) months. the obligator may recover as though there had been a strict and complete fulfillment. appellants had already forfeited their right to invoke the abovequoted provision regarding the nullifying effect of the non-payment of six-months rentals by appellees by their having accepted without qualification on July 21. . To sanction the rescission made by the defendants-appellants will work injustice to the plaintiffs-appellees (See J. the entire obligation would have been paid.M. instead of availing of their right to rescind.

among others. without prejudice to Severino Tolosa collecting from petitioner Pilar T. There are two issues for resolution in this case: 64 . These. 1985. 31 Knowledge of the foregoing should have impelled Villaruz to investigate the circumstances of the annotation since this is equivalent to registration of Ocampo’s contract of sale as against Villaruz.00 which nevertheless may be deducted from the monetary awards made by the trial court in favor of petitioner Ocampo. Moreover.Since Ocampo had her adverse claim annotated on Tolosa’s OCT on 6 June 1976.R. Villaruz could not profess innocence thereof when she signed her contract on 3 June 1977. there is no more need for it. vs. COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE. Incidentally. with the modification that respondent Magdalena S. in fact. T-100021 in her name to petitioner Pilar T.. Bengzon. Cortes & Gonzales for petitioners. On August 3. Ocampo. respondent insurance company's branch manager. Branch 27. on the cancelation of this claim. Villaruz is directed to reconvey the subject land now covered by TCT No. PA-20015.400. in Civil Case No. J. although the decision of the trial court ordering Tolosa to execute another deed of sale in favor of Ocampo already became final as against him for failing to appeal therefrom. 12163 is REINSTATED. respondent insurance company offered to reinstate same policy it had previously cancelled and even proposed to extend its lifetime to December 17. Baraan & Fernandez Law Offices for private respondent. Ocampo should be considered the preferred buyer. respondents-appellees. 32 From the foregoing. 95641 September 22.: On June 29. her full payment of the purchase price was made dependent. Dagupan City against respondent insurance company. in brief. Ocampo having the older title in good faith and considering that personal knowledge thereof by Villaruz constitutes registration as against the latter. 1985. Villaruz admitted having been informed by Tolosa of the first sale to Ocampo while still negotiating to buy the land. it is enough that we order Villaruz to reconvey the property to Ocampo. ROMERO. WHEREFORE. No. G. AREOLA and LYDIA D. respondent insurance company unilaterally cancelled the same since company records revealed that petitioner-insured failed to pay his premiums. Bengzon. Gutierrez. 1994 SANTOS B. Malapit. the decision of the Court of Appeals is REVERSED and SET ASIDE and the decision dated 7 January 1988 of the Regional Trial Court of Iloilo. AREOLA. SO ORDERED. are the material facts that gave rise to the action for damages due to breach of contract instituted by petitioner-insured before Branch 40 RTC. seven months after the issuance of petitioner Santos Areola's Personal Accident Insurance Policy No. Ocampo the balance of the purchase price of P4. In sum. the stipulation in the contract of Villaruz conveying the land in her favor bows to Tolosa’s admission at the witness stand on 15 May 1980 that he never actually delivered the possession of the property to anyone. upon a finding that the cancellation was erroneous and that the premiums were paid in full by petitioner-insured but were not remitted by Teofilo M. INC. 1985. For practical purposes. petitionersappellants.

through the Baguio City branch of Prudential Guarantee and Assurance. 6 Areola also warned that should his demands be unsatisfied.609. 9300 to petitioner-insured for the amount of P1. 1985 stating that the 65 . agent of respondent insurance company. 1 Under the terms of the statement of account issued by respondent insurance company. 4 On June 29. or that the current commercial rate of increase on the payment he had made under provisional receipt No. sent petitioner-insured Endorsement No. 1985. respondent insurance company. he would sue for damages.609. demand for an OFFICIAL RECEIPT. in an effort to rectify such error. BG-002/85 which "cancelled flat" Policy No. (hereinafter referred to as Prudential). PA BG-20015 "for non-payment of premium effective as of inception dated. 1984. a personal accident insurance policy covering the one-year period between noon of November 28. On July 17. petitioner-insured confronted Carlito Ang.65 plus documentary stamps and premium tax" to the account of the insured. 7 In reply to the petitioner-insured's letter of July 15. Malapit. demand for a Provisional Receipt and if our Official Receipts is (sic) not received by you within 7 days please notify us. the company's liability would cease to operate. If payment is made to our representative. Teofilo M. and demanded the issuance of an official receipt. please notify us.000. a lawyer from Dagupan City. 1985. bought. on July 15. petitioner-insured failed to receive any official receipt from Prudential. However.65 which included the premium of P1. the following is legibly printed: This Statement of Account must not be considered a receipt. Shocked by the cancellation of the policy. Ampil III. wrote Areola a letter dated July 25. Malapit warned Areola that should be fail to pay the balance.609. Official Receipt will be issued to you upon payment of this account.(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to payment of damages? (2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent insurance company. he received a letter from production manager Malapit informing him that the "partial payment" of P1.25 and 2% premium tax of P29.65 3 On the lower portion of the receipt the following is written in capital letters: Note: This collector's provisional receipt will be confirmed by our official receipt. If payment is made to our office. respondent insurance company issued collector's provisional receipt No.00. Santos Areola. 1985. petitioner-insured sent respondent insurance company a letter demanding that he be insured under the same terms and conditions as those contained in Policy No. 1984 and noon of November 28. PA-BG20015 commencing upon its receipt of his letter. through its Assistant Vice-President Mariano M. documentary stamp of P110. 1985. through its Baguio City manager. Ang told petitionerinsured that the cancellation of the policy was a mistake but he would personally see to its rectification.470. 9300 be returned within five days.00 he had made on the policy had been "exhausted pursuant to the provisions of the Short Period Rate Scale" printed at the back of the policy. petitioner-insured was supposed to pay the total amount of P1. it appears that petitionerinsured. respondent insurance company. Hence.40. 2 At the lower lefthand corner of the statement of account. thus absolving it therefrom? From the factual findings of the trial court. Inc." 5 The same endorsement also credited "a return premium of P1. 1985. If our official receipt is not received by you within 7 days. obliterate whatever liability for damages it may have to bear. On December 17.

company was verifying whether the payment had in fact been issued therefor. on June 30. as and for attorney's fees the amount of P10. for which reason no official receipt was issued to him. Ampil emphasized that the official receipt should have been issued seven days from the issuance of the provisional receipt but because no official receipt had been issued in Areola's name. it argued that. To pay the costs. Hence. the appellate court issued a reversal of the decision of the trial court. In its Answer. denying bad faith on its part in unilaterally cancelling subject insurance policy. the trial court held that there was breach of contract on the part of respondent insurance company. 1985 10 but unfortunately. Lydia. Consequently. Areola and his wife.00 as exemplary damages. The trial court. 9 The letter was personally delivered by Carlito Ang to Areola on August 13. the court below declared that respondent insurance company acted in bad faith in unilaterally cancelling subject insurance policy. having done so only after seven months from the time that it had taken force and effect and despite the fact of full payment of premiums and other charges on the issued insurance policy. In its decision. This ruling was challenged on appeal by respondent insurance company. Ampil informed Areola that Prudential was "amenable to extending PGA-PA-BG20015 up to December 17. ordering respondent insurance company to pay the former the following: a) P1. However. It insists that it cannot be held liable for damages arising from breach of contract. 2.000. rendered a judgment in favor of petitioner-insured. Had the insured met an accident at the time.000. having demonstrated fully well its fulfillment of its obligation. the petitioner could not have been considered insured." Apologizing again for the inconvenience caused Areola. 1985 or one year from the date when payment was received. Ampil wrote Areola another letter confirming that the amount of P1. According to the Court of 66 . the insurance company would certainly have disclaimed any liability because technically. there was reason to believe that no payment had been made. Hence. and c) P50. by acknowledging the inconvenience caused on petitioner-insured and after taking steps to rectify its omission by reinstating the cancelled policy prior to the filing of the complaint. it concluded that petitioner-insured no longer has a cause of action against it.65 as actual damages. After consideration of the appeal. 1985. Ampil expressed the company's concern by agreeing "to hold you cover (sic) under the terms of the referenced policy until such time that this matter is cleared.703.00 as moral damages. convinced that the latter had erred in finding respondent insurance company in bad faith for the cancellation of petitioner-insured's policy. Apologizing for the inconvenience." 8 On August 3. 1987. respondent insurance company admitted that the cancellation of petitioner-insured's policy was due to the failure of Malapit to turn over the premiums collected.609. and 3. meant that the protection sought by petitionerinsured from the risks insured against was never extended by respondent insurance company. explained the lower court. Ampil exhorted him to indicate his conformity to the proposal by signing on the space provided for in the letter.00.000. b) P200. as early as August 6. 1984. 1985 had filed a complaint for breach of contract with damages before the lower court. respondent insurance company had complied with its obligation under the contract. To pay to the plaintiff. 9300 was in fact received by Prudential on December 17. Cancellation from the date of the policy's inception. entitling petitioner-insured to an award of the damages prayed for.65 covered by provisional receipt No.

i. III Respondent Court of Appeals committed a reversible error in not finding that even without considering the fraudulent acts of its own officer in misappropriating the premium payment. is therefore not separate and distinct from that of respondent-insurance company. it further observed. of his job by forcing him to resign. in misappropriating his premium payments is the proximate cause of the cancellation of the insurance policy. 1985. proof of which must be established convincingly. argued petitioner-insured. respondent insurance company was not motivated by negligence. (c) the reinstatement of the policy with a proposal to extend its effective period to December 17. this petition for review on certiorari anchored on these arguments: I Respondent Court of Appeals is guilty of grave abuse of discretion and committed a serious and reversible error in not holding Respondent Prudential liable for the cancellation of the insurance contract which was admittedly caused by the fraudulent acts and bad faith of its own officers. is some motive of self-interest or ill-will. concludes petitionerinsured. manager of respondent insurance company's branch office in Baguio. 1985 confirming that the premium had been paid on December 17. further reinforces the allegation of bad faith. is attributable to respondent insurance company. the cancellation of the insurance policy was based on what the existing records showed. The appellate court added that respondent insurance company even relieved Malapit. Petitioner-insured theorized that Malapit's act of signing and even sending the notice of cancellation himself. Such fraudulent act committed by Malapit. the following acts indicate that respondent insurance company did not act precipitately or willfully to inflict a wrong on petitioner-insured: (a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid the premium. Bad faith. It is petitioner-insured's submission that the fraudulent act of Malapit. an artificial corporate being which can act only through its officers or employees. bear the consequences of the erroneous cancellation of subject insurance policy caused by the 67 . (b) the letter of August 3. 1984. contrary to the view held by the Court of Appeals. a furtive design of ulterior purpose.e. therefore. malice or bad faith in cancelling subject policy. it was Mr. Malapit's actuation. notwithstanding his personal knowledge of petitioner-insured's full payment of premiums. Malapit — the person who committed the fraud — who sent and signed the notice of cancellation. Hence. because among others. the act itself in cancelling the insurance policy was done with bad faith and/or gross negligence and wanton attitude amounting to bad faith. and (d) respondent insurance company's apologies for the "inconvenience" caused upon petitioner-insured. absence of an official receipt issued to petitioner-insured confirming payment of premiums. Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals denied. It must. its Baguio City manager..Appeals. IV Respondent Court of Appeals has decided a question of substance contrary to law and applicable decision of the Supreme Court when it refused to award damages in favor of herein PetitionerAppellants. said the Court of Appeals. II Respondent Court of Appeals committed serious and reversible error and abused its discretion in ruling that the defenses of good faith and honest mistake can co-exist with the admitted fraudulent acts and evident bad faith. On the contrary. Rather.

could not possibly absolve respondent insurance company from liability. The fact that private respondent insurance company was itself defrauded due to the anomalies that took place in its Baguio branch office. After all. even though no benefit may accrue to the bank therefrom. reasoned out petitioner-insured. Consequently. it further explained. on the other hand. A corporation. effectively restored petitioner-insured to all his rights under the policy. His act of receiving the premiums collected is well within the province of his authority. no exoneration from liability could result therefrom.e. Respondent company should be reminded that a contract of insurance creates reciprocal obligations for both insurer and insured. The latters' acts are considered as its own for which it can be held to account. damage had already been inflicted on him and no amount of rectification could remedy the same. The principal must comply with all the obligations which the agent may have contracted within the scope of his authority. in the particular case. does not free the same from its obligation to petitioner Areola. by provision of law. whatever cause of action there might have been against it. Malapit's failure to remit the premiums he received cannot constitute a defense for private respondent insurance company. Hence. nor will it be permitted to shirk its responsibility for such frauds.non-remittance by its own employee of the premiums paid. Respondent insurance company. We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the premiums paid by petitioner-insured is beyond doubt directly imputable to respondent insurance company. Accordingly. It is beyond doubt that he represented its interest and acted in its behalf. As admitted by private respondent insurance company in its answer. 11 The facts are clear as to the relationship between private respondent insurance company and Malapit. argues that where reinstatement. there being an obvious breach of contract. no longer exists and the consequent award of damages ordered by the lower court in unsustainable. i. acts solely thru its employees. the principal is not bound except when he ratifies it expressly or tacitly. is bound by the acts of its agent. prior to the filing of the complaint. a banking corporation is liable to innocent third persons where the representation is made in the course of its business by an agent acting within the general scope of his authority even though. A bank holding out its officers and agent as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of their employment. Its earlier act of reinstating the insurance policy can not obliterate the injury inflicted on petitioner-insured. such as respondent insurance company. for his own ultimate benefit. 12 Malapit was the manager of its Baguio branch. particularly under Article 1910 of the Civil Code. As held in Prudential Bank v. the equitable relief sought by petitioner-insured was granted at an opportune moment. the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person.: 14 A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. petitioner-insured is left without a cause of action on which to predicate his claim for damages. Article 1910 thus reads: Art. Court of Appeals 13 citing the ruling in McIntosh v. according to petitioner-insured. Reinstatement. respondent insurance company is liable by way of damages for the fraudulent acts committed by Malapit that gave occasion to the erroneous cancellation of subject insurance policy. 1910. Subsequent reinstatement. Reciprocal obligations are those which 68 . Thus. Dakota Trust Co. such as the non-accrual of said premiums to its account. As for any obligation wherein the agent has exceeded his power. his receipt of said premiums is receipt by private respondent insurance company who.

that reinstatement being equivalent to fulfillment of its obligation.. 95811.1 dated January 30. 16 the injured party. G. 1996. INC. said article entitles the injured party to payment of damages. such that the obligation of one is dependent upon the obligation of the other.. 1990. 2002. the petition for review on certiorari is hereby GRANTED and the decision of the Court of Appeals in CA-G. namely. and (b) that in the satisfaction of the damages awarded therein. private respondent insurance company. 153004 November 5. Such a claim finds no support in our laws on obligations and contracts. respectively. respondents. The nature of damages to be awarded. or where there has been a breach of contract and no substantial injury or actual damages whatsoever have been or can be shown. as well as the April 12. CV No. However. J. vs. The facts of this case are undisputed. respondent insurance company promised to extend protection to petitioner-insured against the risk insured for a consideration in the form of premiums to be paid by the latter. such as respondent insurance company. respondent insurance company is ORDERED to pay the legal rate of interest computed from date of filing of complaint until final payment thereof.e. 2002. petitioner. Resolution2 of the Court of Appeals in CA-G. Moreover. the relationship as creditor and debtor between the parties arose from a common cause: i. would be in the form of nominal damages 17 contrary to that granted by the court below. SO ORDERED. and likewise denied petitioner's Motion for Reconsideration.: Subject of the present petition for review on certiorari is the Decision. is given a choice between fulfillment or rescission of the obligation in case one of the obligors. INC.arise from the same cause and in which each party is both a debtor and a creditor of the other. in Civil Case No. No. 16902 on May 31. fails to comply with what is incumbent upon him.R. RTC Dagupan City. 69 . by reason of their agreement to enter into a contract of insurance under whose terms. no actual or substantial damage or injury was inflicted on petitioner Areola at the time the insurance policy was cancelled. within a reasonable time took steps to rectify the wrong committed by reinstating the insurance policy of petitioner. ERNESTO V. petitioner-insured in this case. 2004 SANTOS VENTURA HOCORMA FOUNDATION.000. On October 26. Ernesto V. REVERSED. No. Although the erroneous cancellation of the insurance policy constituted a breach of contract.R. Inc. divests petitioner-insured of a rightful claim for payment of damages. Untenable then is reinstatement insurance company's argument. The decision of Branch 40. D-7972 rendered on June 30. (SVHFI) were the plaintiff and defendant. regardless of whether he demands fulfillment or rescission of the obligation.00 be awarded petitioner in lieu of the damages adjudicated by court a quo. Branch 148.. 15 Under the circumstances of instant case. 55122. 1987 is hereby REINSTATED subject to the following modifications: (a) that nominal damages amounting to P30. however. particularly the second paragraph of Article 1191. Nominal damages are "recoverable where a legal right is technically violated and must be vindicated against an invasion that has produced no actual present loss of any kind.3 dated October 4. The appellate court reversed the Decision. Under the law governing reciprocal obligations. 18 WHEREFORE. in Civil Case No. of the Regional Trial Court of Makati City. SANTOS and RIVERLAND. in several civil cases filed in different courts in the Philippines. DECISION QUISUMBING. Santos and Santos Ventura Hocorma Foundation.R.

petitioner SVHFI sold to Development Exchange Livelihood Corporation two real properties. The pertinent portions of the Agreement read as follows: 1. the Sheriff levied on the real properties of petitioner. provided. Consequently. however. Discovering the disposition made by the petitioner.A. 1993. shall be partially devoted to the payment of the Foundation's obligations under this agreement as may still be subsisting and payable at the time of any such sale or sales. Petitioner. respondent Santos applied with the Regional Trial Court of Makati City. issued a Decision6approving the compromise agreement.. 2. The balance of P13 Million shall be paid. within a period of not more than two (2) years from the execution of this agreement. which was ignored by the latter. the proceeds of any such sale. respondent Santos sent a letter to the petitioner demanding the payment of the remaining P13 million. that in the event that the Foundation does not pay the whole or any part of such balance. plaintiff Santos shall cause the dismissal with prejudice of Civil Cases Nos. filed numerous motions to block the enforcement of the said writ.A. at the discretion of the Foundation. however. P1. provided. There was no response from petitioner.. respondent Santos sent another letter to petitioner inquiring when it would pay the balance of P13 million.5 Million). which were previously subjects of lis pendens.5 million to respondent Santos. TC-1024. for such lifting). For its part. 24304) respectively and for the immediate lifting of the aforesaid various notices of lis pendens on the real properties aforementioned (by signing herein attached corresponding documents. and location mutually acceptable to both parties. 1991. The RTC granted the writ. leaving a balance of P13 million. petitioner SVHFI. Defendant Foundation shall pay Plaintiff Santos P14. On October 28. b. which were formerly subjects of the lis pendens. 4968 (C. or any part thereof as may be required. whether in one lump sum or in installments. Failure of compliance of any of the foregoing terms and conditions by either or both parties to this agreement shall ipso facto and ipso jure automatically entitle the aggrieved party to a writ of execution for the enforcement of this agreement. Branch 62. Thus. 5. payment of any unpaid portion shall only be in the form of land aforesaid. the parties executed a Compromise Agreement4 which amicably ended all their pending litigations. Subsequently. 1991.-G. 1992. that in the event that defendant Foundation shall sell or dispose of any of the lands previously subject of lis pendens. paid P1. on September 30.1990. however. valuation. .5 Million in the following manner: a. No. The challenge of the execution of the 70 . Meanwhile. otherwise. Immediately upon the execution of this agreement (and [the] receipt of the P1.5 Million immediately upon the execution of this agreement.R. respondent Santos moved for the dismissal of the aforesaid civil cases. 45366 and 18166 and voluntarily withdraw the appeals in Civil Cases Nos. Branch 62. for the issuance of a writ of execution of its compromise judgment dated September 30. 26598) and 88-45366 (C. the Regional Trial Court of Makati City. but in no case shall the payment of such balance be later than two (2) years from the date of this agreement.R.-G. 1413OR. [Emphasis supplied]5 In compliance with the Compromise Agreement. He also caused the lifting of the notices of lis pendens on the real properties involved. the same shall be paid with the corresponding portion of the land or real properties subject of the aforesaid cases and previously covered by the notices of lis pendens. under such terms and conditions as to area. No. on March 10. 88-743.

they prayed that the aforesaid sales be declared final and not subject to legal redemption. the trial court rendered a Decision9 dismissing herein respondents' complaint and ordering them to pay attorney's fees and exemplary damages to petitioner. In the said auction. NOTWITHSTANDING THE FACT THAT THE OBLIGATION OF THE PETITIONER TO RESPONDENT SANTOS TO PAY A SUM OF MONEY HAD BEEN CONVERTED TO AN OBLIGATION TO PAY IN KIND – DELIVERY OF REAL PROPERTIES OWNED BY THE PETITIONER – WHICH HAD BEEN FULLY PERFORMED III 71 . On June 2. 1996. was the highest bidder.. however. 1992. INC. Riverland. On October 4. Petitioner counterclaimed for attorney's fees and exemplary damages. MR. It further claimed that the alleged delay in the payment of the balance was due to its valid exercise of its rights to protect its interests as provided under the Rules.aforesaid compromise judgment even reached the Supreme Court. the obligation became due on October 26. The Certificates of Sale issued for both properties provided for the right of redemption within one year from the date of registration of the said properties. JUDGE DIOKNO PROVIDES FOR PAYMENT OF INTEREST TO THE RESPONDENT II WHETHER OF NOT THE COURT OF APPEALS ERRED IN AWARDING LEGAL IN[T]EREST IN FAVOR OF THE RESPONDENTS. SANTOS AND RIVERLAND. finding merit in the appeal.8 petitioner countered that respondents have no cause of action against it since it had fully paid its obligation to the latter. Respondents then appealed to the Court of Appeals. SANTOS AND RIVERLAND. and (2) P20.: (1) legal interest on the principal amount of P13 million at the rate of 12% per annum from the date of demand on October 28. for the sale of real properties of petitioner in Bacolod City.. In its Answer. Furthermore. Inc. 1994. Thus. Pampanga were auctioned. Inc. another auction sale was held on February 8. were futile. SO ORDERED. 1992 up to the date of actual payment of the whole obligation. All these efforts. 1995. attorney's fees and costs of litigation. was the highest bidder for P12 million and it was issued a Certificate of Sale covering the real properties subject of the auction sale. but payment of the remaining P12 million was effected only on November 22. The appellate court reversed the ruling of the trial court: WHEREFORE. 1994. Again. On November 22. Hence this petition for review on certiorari where petitioner assigns the following issues: I WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT AWARDED LEGAL INTEREST IN FAVOR OF THE RESPONDENTS. NOTWITHSTANDING THE FACT THAT NEITHER IN THE COMPROMISE AGREEMENT NOR IN THE COMPROMISE JUDGEMENT OF HON. INC.000 as attorney's fees and costs of suit. 1995. penalty. Santos and Riverland Inc. Subsequently. Riverland. respondents prayed that petitioner be ordered to pay legal interest on the obligation. They further alleged that under the Compromise Agreement. the appealed Decision is hereby REVERSED and judgment is hereby rendered ordering appellee SVHFI to pay appellants Santos and Riverland. MR. Inc. filed a Complaint for Declaratory Relief and Damages7 alleging that there was delay on the part of petitioner in paying the balance of P13 million. petitioner's real properties located in Mabalacat.

the respondents asked for the dismissal of the pending civil cases. Respondents posit that petitioner's failure to comply entitles them to damages. also waives and renounces any and all claims that it may have against plaintiff Santos in connection with such cases. This act of the petitioner showed that it acknowledges that the agreement was immediately executory and enforceable upon its execution.13 [Emphasis supplied. the Compromise Agreement was entered into by the parties on October 26. who. As to the remaining P13 million. on the other hand. and defendant Foundation. has been superseded by the compromise agreement. 1990. The petitioner. balanced by the danger of losing. it is incumbent upon respondent Santos to ask for judicial intervention for purposes of fixing the period. and which everyone of them prefers in the hope of gaining. Respondents profer that their right to damages is based on delay in the payment of the obligation provided in the Compromise Agreement. A compromise is a contract whereby the parties. paid the initial P1.15 It is an agreement between two or more persons.5 million upon the execution of the agreement. it becomes the source of the rights and obligations of the parties thereto. 1991. on the other hand.11 Furthermore. The Compromise Agreement provides that payment must be made within the two-year period from its execution.12 Article 4 of the compromise agreement provides: Plaintiff Santos waives and renounces any and all other claims that he and his family may have on the defendant Foundation arising from and in connection with the aforesaid civil cases. for preventing or putting an end to a lawsuit. the terms and conditions of the compromise agreement are clear and unambiguous.16 The general rule is that a compromise has upon the parties the effect and authority of res judicata.] Lastly. the legal interest by way of penalty on account of fault or delay shall not be due and payable.14 The petition lacks merit. It provides: 72 . with respect to the matter definitely stated therein. adjust their difficulties by mutual consent in the manner which they agree on. or which by implication from its terms should be deemed to have been included therein. It is only when a fixed period exists that the legal interests can be computed.21 In accordance with the compromise agreement. This was approved by the trial court and became the law governing their contract. From the time a compromise is validly entered into.18 In the case at bar. by way of interest. The purpose of the compromise is precisely to replace and terminate controverted claims.20 Applying existing jurisprudence. by making reciprocal concessions.WHETHER OR NOT RESPONDENTS ARE BARRED FROM DEMANDING PAYMENT OF INTEREST BY REASON OF THE WAIVER PROVISION IN THE COMPROMISE AGREEMENT. Petitioner SVHFI alleges that where a compromise agreement or compromise judgment does not provide for the payment of interest. the petitioner argues that the respondents are barred by res judicata from seeking legal interest on account of the waiver clause in the duly approved compromise agreement.17 This holds true even if the agreement has not been judicially approved. considering that the obligation or loan. on which the payment of legal interest could be based. WHICH BECAME THE LAW AMONG THE PARTIES10 The only issue to be resolved is whether the respondents are entitled to legal interest. avoid a litigation or put an end to one already commenced. the compromise agreement as a consensual contract became binding between the parties upon its execution and not upon its court approval.19 It was judicially approved on September 30. petitioner alleges that since the compromise agreement did not provide for a period within which the obligation will become due and demandable.

1990.e.. the obligation was already due and demandable. The second requisite is also present. it incurred delay..26 The complaining party has been deprived of funds to which he is entitled by virtue of their compromise agreement. interest as damages is generally allowed as a matter of right.28 The legal interest for loan as forbearance of money is 12% per annum29 to be computed from default. The two-year period must be counted from October 26.. the petitioner is liable for damages for the delay in the performance of its obligation. Verily.. within a period of not more than two (2) years from the execution of this agreement…22[Emphasis supplied. When the respondents gave a demand letter on October 28. b. it is necessary that the following requisites be present: (1) that the obligation be demandable and already liquidated. and not on the judicial approval of the compromise agreement on September 30. the obligation is liquidated because the debtor knows precisely how much he is to pay and when he is to pay it. 2002 of the Court of Appeals and its April 12. and (3) that the creditor requires the performance judicially or extrajudicially. the petition is DENIED for lack of merit. Furthermore. (2) that the debtor delays performance. 73 . 55122 are AFFIRMED. The two-year period ended on October 26.R.. The balance of P13 Million shall be paid. The Decision dated January 30. the demand letter sent to the petitioner on October 28. the obligation was already due and demandable after the lapse of the two-year period from the execution of the contract. 1992. Costs against petitioner. It is the non-fulfillment of the obligation with respect to time. the obligation was already due and demandable. [Emphasis supplied] Delay as used in this article is synonymous to default or mora which means delay in the fulfillment of obligations.30 WHEREFORE. to the petitioner. This compensation is in the form of interest. 1991. When the debtor knows the amount and period when he is to pay. whether in one lump sum or in installments.23 In order for the debtor to be in default. Third. Moreover. i. It was able to fully settle its outstanding balance only on February 8. it filed several motions and elevated adverse resolutions to the appellate court to hinder the execution of a final and executory judgment. the legal rate of interest shall prevail.27 In the absence of agreement. the date of execution of the compromise agreement.. When the petitioner failed to pay its due obligation after the demand was made. from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. 1992. and further delay the fulfillment of its obligation. 1992. CV No. SO ORDERED. Article 1169 of the New Civil Code provides: Those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands from them the fulfillment of their obligation. Petitioner delayed in the performance.24 In the case at bar. 2002 Resolution in CA-G. at the discretion of the Foundation. 1995. This is provided for in Article 117025 of the New Civil Code. When respondents wrote a demand letter to petitioner on October 28. The goal of compensation requires that the complainant be compensated for the loss of use of those funds. 1992. was in accordance with an extra-judicial demand contemplated by law. which is more than two years after the extrajudicial demand.] .

(p.G. J. The said telegram was detached from the machine and placed inside a sealed envelope and delivered to plaintiff. the effect on the plaintiff is the same. is a Petition for Review by certiorari of the decision of the Court of Appeals. There is no indication from the face of the telegram that the additional words in Tagalog were sent as a private joke between the operators of the defendant.R. It will open the door to frauds and allow the defendant to act with impunity if it can escape liability by the simple expedient of showing that its employees acted beyond the scope of their assigned tasks. Annex "A") Plaintiff-respondent Loreto Dionela alleges that the defamatory words on the telegram sent to him not only wounded his feelings but also caused him undue embarrassment and affected adversely his business as well because other people have come to know of said defamatory words. Nobody other than the operator manned the teletype machine which automatically receives telegrams being transmitted. (RCPI). COURT OF APPEALS and LORETO DIONELA. PARAS.000. L-44748 August 29.. INC. modifying the decision of the trial court in a civil case for recovery of damages against petitioner corporation by reducing the award to private respondent Loreto Dionela of moral damages from P40. Defendant corporation as a defense.: Before Us. They clearly impute a vice or defect of the plaintiff. The business of the defendant is to transmit telegrams. Whether or not they were intended for the plaintiff. The additional words in Tagalog were never noticed and were included in the telegram when delivered.000 to Pl5. reading as follows: 176 AS JR 1215PM 9 PAID MANDALUYONG JUL 22-66 LORETO DIONELA CABANGAN LEGASPI CITY WIRE ARRIVAL OF CHECK FER LORETO DIONELA-CABANGAN-WIRE ARRIVAL OF CHECK-PER 115 PM SA IYO WALANG PAKINABANG DUMATING KA DIYAN-WALA-KANG PADALA DITO KAHIT BULBUL MO 74 . The trial court in finding for the plaintiff ruled as follows: There is no question that the additional words in Tagalog are libelous. Loreto Dionela. The defendant is sued directly not as an employer. Any person reading the additional words in Tagalog will naturally think that they refer to the addressee. The telegram sent through its facilities was received in its station at Legaspi City. The basis of the complaint against the defendant corporation is a telegram sent through its Manila Office to the offended party. alleges that the additional words in Tagalog was a private joke between the sending and receiving operators and that they were not addressed to or intended for plaintiff and therefore did not form part of the telegram and that the Tagalog words are not defamatory. O. respondents.000. and attorney's fees from P3. the plaintiff. 1986 RADIO COMMUNICATIONS OF THE PHILS. 19. No. vs. obviously as is. Pythogoras Oliver for respondents.000 to P2. petitioner.

1968. It follows that the plaintiff is entitled to damages and attorney's fees. L-22794. 20.Every person must.00 as the reasonable amount of moral damages and the amount of P3. II 75 . and observe honesty and good faith.00 as moral damages is hereby reduced to P15.00 and for attorney's fees the amount of P2. 22 SCRA 44). resulting in injury to appellee. The fact that a carbon copy of the telegram was filed among other telegrams and left to hang for the public to see.000. was the failure of the appellant to take the necessary or precautionary steps to avoid the occurrence of the humiliating incident now complained of.000. open for inspection by a third party is sufficient publication. There is sufficient publication of the libelous Tagalog words. 19. ART.00 as attorney's fee which the defendant should pay the plaintiff. libelous per se. Record on Appeal) The respondent appellate court in its assailed decision confirming the aforegoing findings of the lower court stated: The proximate cause. It would have been otherwise perhaps had the telegram been placed and kept in a secured place where no one may have had a chance to read it without appellee's permission. (pp. The company had not imposed any safeguard against such eventualities and this void in its operating procedure does not speak well of its concern for their clientele's interests. 22-23. therefore.000. The office file of the defendant containing copies of telegrams received are open and held together only by a metal fastener.00 is awarded. The libelous Tagalog words must have affected his business and social standing in the community. wilfully or negligently causes damage to another.. act with justice. The law implies damages in this instance (Quemel vs. and from which malice may be presumed in the absence of any showing of good intention and justifiable motive on the part of the appellant. The plaintiff is a businessman. This negligence is imputable to appellant and not to its employees. record) After a motion for reconsideration was denied by the appellate court. January 16. Moreover. they are open to view and inspection by third parties. contrary to law.000. shall indemnify the latter for the same. Negligence here is very patent. as correctly found by the lower court.The liability of the defendant is predicated not only on Article 33 of the Civil Code of the Philippines but on the following articles of said Code: ART. The award of P40. Court of Appeals. 15-16. The claim that there was no publication of the libelous words in Tagalog is also without merit. give everyone his due. petitioner came to Us with the following: ASSIGNMENT OF ERRORS I The Honorable Court of Appeals erred in holding that Petitioner-employer should answer directly and primarily for the civil liability arising from the criminal act of its employee.000.-Every person who. (pp. in the exercise of his rights and in the performance of his duties. The Court fixes the amount of P40. The additional Tagalog words at the bottom of the telegram are.

Carlos C. CORAZON C. However. we may apply the doctrine of RES IPSA LOQUITUR (the thing speaks for itself).The Honorable Court of Appeals erred in holding that there was sufficient publication of the alleged libelous telegram in question.. In most cases. III The Honorable Court of Appeals erred in holding that the liability of petitioner-company-employer is predicated on Articles 19 and 20 of the Civil Code. of the deceased Vicente Juan Syquia. SYQUIA and ANTHONY C. WHEREFORE. and Anthony Syquia. Everytime a person transmits a message through the facilities of the petitioner. 1 Petitioner is a domestic corporation engaged in the business of receiving and transmitting messages. 103 of the Revised Penal Code. CARLOS C. Record) Petitioner's contentions do not merit our consideration. 4. for recovery of damages arising from breach of contract and/or quasi-delict. as contemplated by law on libel. premises considered. SYQUIA. 19 and 20 of the New Civil Code (supra). petitioners. the petitioner can act only through its employees. libelous matters were included in the message transmitted. Inc. The cause of action of the private respondent is based on Arts. The trial court dismissed the complaint. since negligence may be hard to substantiate in some cases. respondents. and THE MANILA MEMORIAL PARK CEMETERY. The action for damages was filed in the lower court directly against respondent corporation not as an employer subsidiarily liable under the provisions of Article 1161 of the New Civil Code in relation to Art. Hence the acts of its employees in receiving and transmitting messages are the acts of the petitioner. Pacis & Reyes Law Offices for petitioners. J. Carlota C. 1979. negligence must be proved in order that plaintiff may recover. Augusto S. 1993 The Honorable Court of Appeals erred in awarding Atty's. SYQUIA. To hold that the petitioner is not liable directly for the acts of its employees in the JUAN J. Articles on Human Relations. IV pursuit of petitioner's business is to deprive the general public availing of the services of the petitioner of an effective and adequate remedy. San Pedro & Ari-Ben C. Sebastian for private respondents. by considering the presence of facts or circumstances surrounding the injury. SO ORDERED. were the parents and siblings. Manila Memorial Park Cemetery. Upon receipt of the rate or fee fixed. CARLOTA C. SYQUIA. On March 5. No. As a corporation. the petitioner undertakes to transmit the message accurately. 98695 January 27. fees. vs. There is no question that in the case at bar. they filed a complaint 1 in the then Court of First Instance against herein private respondent. (p. Syquia.. JR. THE HONORABLE COURT OF APPEALS. G. without the consent or knowledge of the sender. Syquia. the judgment of the appellate court is hereby AFFIRMED. INC.R.: Herein petitioners. Juan J. 76 . As well as on respondent's breach of contract thru the negligence of its own employees. There is a clear case of breach of contract by the petitioner in adding extraneous and libelous matters in the message sent to the private respondent. Syquia and Corazon C. CAMPOS. Syquia. SYQUIA. respectively. a contract is entered into.

Carlota and Anthony all surnamed Syquia. Manila Memorial Park Cemetery. that as the concrete vault was being raised to the surface. and the exposed parts of the deceased's remains were damaged and soiled by the action of the water and silt and were also coated with filth. plaintiffs-appellants with the assistance of licensed morticians and certain personnel of defendantappellant (sic) caused the opening of the concrete vault on September 15. that pursuant to a Deed of Sale (Contract No. 1978. Syquia and defendant-appellee. Corazon. exemplary damages in the amount determined by the court. 1978 executed between plaintiff-appellant Juan J. The complaint alleged among others. water drained out of the hole. 1969 and Interment Order No. 1978 conformably and in accordance with defendant-appellant's (sic) interment procedures.The antecedent facts.000. (b) the coffin was entirely damaged by water. filth and silt causing the wooden parts to warp and separate and to crack the viewing glass panel located directly above the head and torso of the deceased.. the clothing of the deceased. that pursuant to an authority granted by the Municipal Court of Parañaque. the complaint prayed that judgment be rendered ordering defendant-appellee to pay plaintiffs-appellants P30. Metro Manila on September 14. and because there was a pre-existing contractual relation between the Syquias and defendant Manila Memorial Park Cemetery. because of defendant-appellee's gross negligence conformably to Article 2176 of the New Civil Code in failing to seal the concrete vault. more or less). 7106 dated July 21. 6885) dated August 27. plaintiffs-appellants discovered that the concrete vault had a hole approximately three (3) inches in diameter near the bottom of one of the walls closing out the width of the vault on one end and that for a certain length of time (one hour. plaintiffs-appellants became agitated and upset with concern that the water which had collected inside the vault might have risen as it in fact did rise. the former. Due to the alleged unlawful and malicious breach by the defendant-appellee of its obligation to deliver a defect-free concrete vault designed to protect the remains of the deceased and the coffin against the elements which resulted in the desecration of deceased's grave and in the alternative. 1978. (c) the entire lining of the coffin. that because of the aforesaid discovery. Inc. 2 In dismissing the complaint. Juan. plaintiff-appellants herein. the following became apparent to the plaintiffsappellants: (a) the interior walls of the concrete vault showed evidence of total flooding. and expenses of litigation and costs of suit.000. The trial court 77 . 1978. P500. as gathered by the respondent Court. father of deceased Vicente Juan J.00 for moral damages. the concrete vault encasing the coffin of the deceased was removed from its niche underground with the assistance of certain employees of defendant-appellant (sic). that on September 4. to the level of the coffin and flooded the same as well as the remains of the deceased with ill effects thereto. Inc. filed a complaint for damages against defendant-appellee. preparatory to transferring the said remains to a newly purchased family plot also at the Manila Memorial Park Cemetery.00 for actual damages. that upon opening the vault. 20% of defendant-appellee's total liability as attorney's fees. the trial court held that the contract between the parties did not guarantee that the cement vault would be waterproof. that there could be no quasi-delict because the defendant was not guilty of any fault or negligence. 1979. Syquia authorized and instructed defendant-appellee to inter the remains of deceased in the Manila Memorial Park Cemetery in the morning of July 25. are as follows: On March 5.

000. however. a negligent act which constituted a quasi-delict. Juan Syquia. when it held that no act of desecration was committed. the Court of Appeals found no negligent act on the part of private respondent to justify an award of damages against it. held that there was no tort because of a preexisting contract and the absence of fault/negligence. is obliged to pay for the damage done." 3 From this judgment. At the bottom of the entire proceedings is the act of boring a hole by private respondent on the vault of the deceased kin of the bereaved petitioners. With respect to herein petitioners' averment that private respondent has committed culpa aquiliana. We find no reason to disregard the respondent's Court finding that there was no negligence. 3. Petitioner's motion for reconsideration was denied in a Resolution dated April 25. did not award the P25.. There is not enough ground. 1990 however. undisputed facts. such as those which have been stipulated upon by the parties. and 5. the Syquias appealed. alternatively. Art. The trial court also accepted the explanation given by defendant for boring a hole at the bottom side of the vault: "The hole had to be bored through the concrete vault because if it has no hole the vault will (sic) float and the grave would be filled with water and the digging would caved (sic) in the earth. Inc. chose the gravesite despite knowing that said area had to be constantly sprinkled with water to keep the grass green and that water would eventually seep through the vault. breached its contract with petitioners. Whoever by act or omission causes damage to another. Although a pre-existing contractual relation between the parties does not preclude the existence of a culpa aquiliana. in the alternative. 1991. and admitted in the answer. Nonetheless. the latter is liable for desecrating the grave of petitioners' dead. 2. 2176. The latter allege that such act was either a breach of private respondent's contractual obligation to provide a sealed vault. there being fault or negligence. the Syquias filed the instant petition. whether private respondent was guilty of a tort.00 actual damages which was agreed upon by the parties. In the instant case. 4. Such fault or 78 . that there was no desecration. overlooked and refused to consider relevant. and in not awarding damages. to justify a reversal of the decision of the respondent Court and to uphold the pleas of the petitioners. held that the contract and the Rules and Resolutions of private respondent allowed the flooding of the vault and the entrance thereto of filth and silt. held that the act of boring a hole was justifiable and corollarily. affirmed the judgment of dismissal. 5 Unsatisfied with the respondent Court's decision. or.also noted that the father himself. The Court of Appeals in the Decision 4 dated December 7. Unfortunately. or. We understand the feelings of petitioners and empathize with them. which could have justified a different conclusion. We are more inclined to answer the foregoing questions in the negative. that the boring of the hole was justifiable. and attorney's fees. moral and exemplary damages. petitioners claim that whatever kind of negligence private respondent has committed. They alleged that the trial court erred in holding that the contract allowed the flooding of the vault. We are called upon to determine whether the Manila Memorial Park Cemetery. both in fact and in law. the earth would caved (sic) in the (sic) fill up the grave. They allege herein that the Court of Appeals committed the following errors when it: 1. testified to by private respondent's witnesses.

are liable for damages. the actual installment of which shall be made by the employees of the Association. that is. . and was. We do not agree." 9 On the other hand. morals. or delay. Petitioners however claim that private respondent breached its contract with them as the latter held out in the brochure it distributed that the . 1969. not waterproof. Every earth interment shall be made enclosed in a concrete box. that the vault would be waterproof. . 178 SCRA 739). Hence. Inc. After the burial. or in an outer wall of stone. lot may hold single or double internment (sic) underground in sealed concrete vault. or public policy. water seeped through the cement enclosure and damaged everything inside it. if there is no pre-existing contractual relation between the parties." 10 The meaning that has been given by private respondent to the word conforms with the cited dictionary definition. Private respondent's witness. good customs. It is basic that the parties are bound by the terms of their contract. had there been actual negligence on the part of the Manila Memorial Park Cemetery. the validity of the contract must be sustained (Phil. bound itself to provide the concrete box to be send in the interment. on the same day. 11 Contracts should be interpreted according to their literal meaning and should not be interpreted beyond their obvious intendment. Well settled is the rule that when the terms of the contract are clear and leave no doubt as to the intention of the contracting parties. explained that the term "sealed" meant "closed. et al. vs. but for culpa contractual as provided by Article 1170 of the Civil Code. Dexter Heuschkel." 8 Petitioners claim that the vault provided by private respondent was not sealed. Moreover. . . Mr. He can not now claim that said concrete vault must in addition. a contracting party cannot incur a liability more than what is 79 . The Manila Memorial Park Cemetery. Inc. entered into a contract entitled "Deed of Sale and Certificate of Perpetual Care" 6 on August 27. Consequently. In this case. 175 SCRA 416). (Emphasis supplied). public order. 12 As ruled by the respondent Court: When plaintiff-appellant Juan J.. the day before the interment. the word "seal" is defined as . Court of Appeals. . it is also quite clear that "sealed" cannot be equated with "waterproof".. . American Insurance Co. and those who in any manner contravene the tenor thereof. is called a quasi-delict . it would be held liable not for a quasi-delict or culpa aquiliana. Inc. to wit: Those who in the performance of their obligations are guilty of fraud. Where there is nothing in the contract which is contrary to law. . Consonant with this ruling. negligence. it can be assumed that he has accepted defendantappellee's undertaking to merely provide a concrete vault. which is the law between them (Rizal Commercial Banking Corporation vs. brick or concrete. 1978. the vault was covered by a cement lid. There was no stipulation in the Deed of Sale and Certificate of Perpetual Care and in the Rules and Regulations of the Manila Memorial Park Cemetery. Syquia affixed his signature to the Deed of Sale (Exhibit "A") and the attached Rules and Regulations (Exhibit "1"). that cannot be opened without rupture and that serve as a check against tampering or unauthorized opening. . any of various closures or fastenings . 7 Pursuant to this above-mentioned Rule. . Rule 17 of the Rules and Regulations of private respondent provides that: Rule 17. a concrete vault was provided on July 27. also be waterproofed (sic).negligence. Inc. then the literal meaning of the stipulation shall control. it has been established that the Syquias and the Manila Memorial Park Cemetery. Judge Pineda. installed by private respondent's employees in the grave which was dug earlier. That agreement governed the relations of the parties and defined their respective rights and obligations.

expressly specified in his undertaking. It cannot be extended by implication, beyond the terms of the contract (Rizal Commercial Banking Corporation vs. Court of Appeals, supra). And as a rule of evidence, where the terms of an agreement are reduced to writing, the document itself, being constituted by the parties as the expositor of their intentions, is the only instrument of evidence in respect of that agreement which the law will recognize, so long as its (sic) exists for the purpose of evidence (Starkie, Ev., pp. 648, 655, Kasheenath vs. Chundy, 5 W.R. 68 cited in Francisco, Revised Rules of Court in the Phil. p. 153, 1973 Ed.). And if the terms of the contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control (Santos vs. CA, et al., G. R. No. 83664, Nov. 13, 1989; Prudential Bank & Trust Co. vs. Community Builders Co., Inc., 165 SCRA 285; Balatero vs. IAC, 154 SCRA 530). 13 We hold, therefore, that private respondent did not breach the tenor of its obligation to the Syquias. While this may be so, can private respondent be liable for culpa aquiliana for boring the hole on the vault? It cannot be denied that the hole made possible the entry of more water and soil than was natural had there been no hole. The law defines negligence as 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." 14 In the absence of stipulation or legal provision providing the contrary, the diligence to be observed in the performance of the obligation is that which is expected of a good father of a family. The circumstances surrounding the commission of the assailed act — boring of the hole — negate the allegation of negligence. The reason for the act was explained by Henry Flores, Interment Foreman, who said that:

Q It has been established in this particular case that a certain Vicente Juan Syquia was interred on July 25, 1978 at the Parañaque Cemetery of the Manila Memorial Park Cemetery, Inc., will you please tell the Hon. Court what or whether you have participation in connection with said internment (sic)? A A day before Juan (sic) Syquia was buried our personnel dug a grave. After digging the next morning a vault was taken and placed in the grave and when the vault was placed on the grave a hole was placed on the vault so that water could come into the vault because it was raining heavily then because the vault has no hole the vault will float and the grave would be filled with water and the digging would caved (sic) in and the earth, the earth would (sic) caved in and fill up the grave. 15 (Emphasis ours) Except for the foreman's opinion that the concrete vault may float should there be a heavy rainfall, from the above-mentioned explanation, private respondent has exercised the diligence of a good father of a family in preventing the accumulation of water inside the vault which would have resulted in the caving in of earth around the grave filling the same with earth. Thus, finding no evidence of negligence on the part of private respondent, We find no reason to award damages in favor of petitioners. In the light of the foregoing facts, and construed in the language of the applicable laws and jurisprudence, We are constrained to

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AFFIRM in toto the decision of the respondent Court of Appeals dated December 7, 1990. No costs. SO ORDERED. G.R. No. 108164 February 23, 1995 FAR EAST BANK AND TRUST COMPANY, petitioner, vs. THE HONORABLE COURT OF APPEALS, LUIS A. LUNA and CLARITA S. LUNA, respondents.

In a letter, dated 11 October 1988, private respondent Luis Luna, through counsel, demanded from FEBTC the payment of damages. Adrian V. Festejo, a vice-president of the bank, expressed the bank's apologies to Luis. In his letter, dated 03 November 1988, Festejo, in part, said: In cases when a card is reported to our office as lost, FAREASTCARD undertakes the necessary action to avert its unauthorized use (such as tagging the card as hotlisted), as it is always our intention to protect our cardholders. An investigation of your case however, revealed that FAREASTCARD failed to inform you about its security policy. Furthermore, an overzealous employee of the Bank's Credit Card Department did not consider the possibility that it may have been you who was presenting the card at that time (for which reason, the unfortunate incident occurred). 1 Festejo also sent a letter to the Manager of the Bahia Rooftop Restaurant to assure the latter that private respondents were "very valued clients" of FEBTC. William Anthony King, Food and Beverage Manager of the Intercontinental Hotel, wrote back to say that the credibility of private respondent had never been "in question." A copy of this reply was sent to Luis by Festejo. Still evidently feeling aggrieved, private respondents, on 05 December 1988, filed a complaint for damages with the Regional Trial Court ("RTC") of Pasig against FEBTC. On 30 March 1990, the RTC of Pasig, given the foregoing factual settings, rendered a decision ordering FEBTC to pay private respondents (a) P300,000.00 moral damages; (b) P50,000.00 exemplary damages; and (c) P20,000.00 attorney's fees. On appeal to the Court of Appeals, the appellate court affirmed the decision of the trial court. Its motion for reconsideration having been denied by the appellate court, FEBTC has come to this Court with this petition for review.

VITUG, J.: Some time in October 1986, private respondent Luis A. Luna applied for, and was accorded, a FAREASTCARD issued by petitioner Far East Bank and Trust Company ("FEBTC") at its Pasig Branch. Upon his request, the bank also issued a supplemental card to private respondent Clarita S. Luna. In August 1988, Clarita lost her credit card. FEBTC was forthwith informed. In order to replace the lost card, Clarita submitted an affidavit of loss. In cases of this nature, the bank's internal security procedures and policy would appear to be to meanwhile so record the lost card, along with the principal card, as a "Hot Card" or "Cancelled Card" in its master file. On 06 October 1988, Luis tendered a despedida lunch for a close friend, a Filipino-American, and another guest at the Bahia Rooftop Restaurant of the Hotel Intercontinental Manila. To pay for the lunch, Luis presented his FAREASTCARD to the attending waiter who promptly had it verified through a telephone call to the bank's Credit Card Department. Since the card was not honored, Luis was forced to pay in cash the bill amounting to P588.13. Naturally, Luis felt embarrassed by this incident.

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There is merit in this appeal. In culpa contractual, moral damages may be recovered where the defendant is shown to have acted in bad faith or with malice in the breach of the contract. 2 The Civil Code provides: Art. 2220. Willful injury to property may be a legal ground for awarding moral damages if the court should find that, under the circumstances, such damages are justly due. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. (Emphasis supplied) Bad faith, in this context, includes gross, but not simple, negligence. 3 Exceptionally, in a contract of carriage, moral damages are also allowed in case of death of a passenger attributable to the fault (which is presumed 4) of the common carrier. 5 Concededly, the bank was remiss in indeed neglecting to personally inform Luis of his own card's cancellation. Nothing in the findings of the trial court and the appellate court, however, can sufficiently indicate any deliberate intent on the part of FEBTC to cause harm to private respondents. Neither could FEBTC's negligence in failing to give personal notice to Luis be considered so gross as to amount to malice or bad faith. Malice or bad faith implies a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is different from the negative idea of negligence in that malice or bad faith contemplates a state of mind affirmatively operating with furtive design or ill will. 6 We are not unaware of the previous rulings of this Court, such as in American Express International, Inc., vs.Intermediate Appellate Court (167 SCRA 209) and Bank of Philippine Islands vs. Intermediate Appellate Court(206 SCRA 408), sanctioning the application of Article 21, in relation to Article 2217 and Article 2219 7 of the Civil Code to a contractual breach similar to the case at bench. Article 21 states:

Art. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage. Article 21 of the Code, it should be observed, contemplates a conscious act to cause harm. Thus, even if we are to assume that the provision could properly relate to a breach of contract, its application can be warranted only when the defendant's disregard of his contractual obligation is so deliberate as to approximate a degree of misconduct certainly no less worse than fraud or bad faith. Most importantly, Article 21 is a mere declaration of a general principle in human relations that clearly must, in any case, give way to the specific provision of Article 2220 of the Civil Code authorizing the grant of moral damages in culpa contractual solely when the breach is due to fraud or bad faith. Mr. Justice Jose B.L. Reyes, in his ponencia in Fores vs. Miranda 8 explained with great clarity the predominance that we should give to Article 2220 in contractual relations; we quote: Anent the moral damages ordered to be paid to the respondent, the same must be discarded. We have repeatedly ruled (Cachero vs. Manila Yellow Taxicab Co. Inc., 101 Phil. 523; 54 Off. Gaz., [26], 6599; Necesito, et al. vs. Paras, 104 Phil., 75; 56 Off. Gaz., [23] 4023), that moral damages are not recoverable in damage actions predicated on a breach of the contract of transportation, in view of Articles 2219 and 2220 of the new Civil Code, which provide as follows: Art. 2219. Moral damages may be recovered in the following and analogous cases: (1) A criminal offense resulting in physical injuries; (2) Quasi-delicts causing physical injuries; xxx xxx xxx

82

e. under the circumstances. therefore. bad faith. and in the case at bar there is no other evidence of such malice to support the award of moral damages by the Court of Appeals. 1170-1172). Resolution on motion to reconsider. 2220. The same rule applies to breaches of contract where the defendant acted fraudulently or in bad faith. if there is no pre-existing contractual relation between the parties. i. wanton or deliberately injurious conduct. but because the definition of quasi-delict in Art. 2201. Paras. 84. 104 Phil. not only because Art. moral damages are not recoverable unless it is proved that the carrier was guilty of malice or bad faith. September 11. without proof of bad faith or malice on the part of the defendant. is obliged to pay for the damage done. 2220. 2206. as required by Art. We think it is clear that the mere carelessness of the carrier's driver does not per se constitute or justify an inference of malice or bad faith on the part of the carrier. and constitute unwarranted judicial legislation." Art. descendants and ascendants of the deceased passenger to "demand moral damages for mental anguish by reason of the death of the deceased" (Necesito vs. 2220 specifically provides for the damages that are caused contractual breach. and which the parties have foreseen or could have reasonably foreseen at the time the obligation was constituted. 1958). In case of fraud. Wilful injury to property may be a legal ground for awarding moral damages if the court should find that. The exception to the basic rule of damages now under consideration is a mishap resulting in the death of a passenger. that entitles the spouse. By contrasting the provisions of these two articles it immediately becomes apparent that: (a) In case of breach of contract (including one of transportation) proof of bad faith or fraud (dolus).. such damages are justly due. 1764 makes it all the more evident that where the injured passenger does not die. the damages for which the obligor who acted in good faith is liable shall be those that are the natural and probable consequences of the breach of the obligation. the obligor shall be responsible for all damages which may be reasonably attributed to the non-performance of the obligation.Art. 83 . Whoever by act or omission causes damage to another. and (b) That a breach of contract can not be considered included in the descriptive term "analogous cases" used in Art. Such fault or negligence. in which case Article 1764 makes the common carrier expressly subject to the rule of Art. is called a quasi-delict and is governed by the provisions of this Chapter. But the exceptional rule of Art. 2176 of the Code expressly excludes the cases where there is a "preexisitng contractual relations between the parties. In contracts and quasi-contracts. malice or wanton attitude. bad faith or malice in the sense of deliberate or wanton wrong doing and negligence (as mere carelessness) is too fundamental in our law to be ignored (Arts. To award moral damages for breach of contract. 2219. would be to violate the clear provisions of the law. Art. there being fault or negligence. xxx xxx xxx The distinction between fraud. is essential to justify an award of moral damages. their consequences being clearly differentiated by the Code. 2176.

148 SCRA 440. The appealed decision is MODIFIED by deleting the award of moral and exemplary damages to private respondents. CLLC E. in the absence of statutory provision to the contrary. Gochangco Workers Union vs. to be inordinate and substantially devoid of legal basis. or malevolent manner (Art. Here. We see no issue of sound discretion on the part of the appellate court in allowing the award thereof by the trial court. private respondents' damage claim is predicated solely on their contractual relationship. 18 SCRA 155). PNB vs. In contracts and quasi-contracts. Civil Code. vs. 2220 they limited recovery of moral damages to breaches of contract in bad faith. Civil Code. the act or omission complained of cannot by itself be held to stand as a separate cause of action or as an independent actionable tort. and Air France vs. in turn. Bank of Phil. 106 SCRA 143. Acceptance and Finance Corp. 2208.G. 161 SCRA 655. may be vindicated or recognized.00 by way of nominal damages. Luna an amount of P5. fraudulent. CA. even perhaps inadvertent. temperate. and not for the purpose of indemnifying the plaintiff for any loss suffered by him. In quasi-delicts.It is to be presumed. NLRC. Pan American World Airways. 23 SCRA 1117. but the fact must be shown in evidence. cannot improve private respondents' case for it can aptly govern only where the act or omission complained of would constitute an actionable tort independently of the contract. therefore. unfortunately. 2231. Nevertheless. The test (whether a quasi-delict can be deemed to underlie the breach of a contract) can be stated thusly: Where. liquidated or compensatory damages (Art. the award of moral damages made by the court a quo. Civil Code). 2232.. 2229. Civil Code). affirmed by the appellate court. and a carrier's bad faith is not to be lightly inferred from a mere finding that the contract was breached through negligence of the carrier's employees. Exemplary or corrective damages. This doctrine. Singson vs. the petition for review is given due course. 2230. Court of Appeals. Globe Mackay Cable and Radio Corp. 176 SCRA 778). Carrascoso. petitioner is ordered to pay private respondent Luis A. 16 SCRA 431). Court of Appeals. without a pre-existing contract between two parties. which has been violated or invaded by the defendant. seePrudenciado vs. the court may award exemplary damages if the defendant is found to have acted in a wanton. are intended to serve as an example or as correction for the public good in addition to moral. an act or omission can nonetheless amount to an actionable tort by itself. that this difference was in the mind of the lawmakers when in Art. oppressive. the bank's failure. Airlines vs. WHEREFORE. Islands. 161 SCRA 449). 165 SCRA 166). such damages are granted if the defendant is shown to have been so guilty of gross negligence as to approximate malice (See Art. The Court finds. without such agreement. reckless. No costs. in its stead. Given the above premises and the factual circumstances here obtaining. In all other respects. It is true that negligence may be occasionally so gross as to amount to malice. to honor its credit card issued to private respondent Luis should entitle him to recover a measure of damages sanctioned under Article 2221 of the Civil Code providing thusly: Art. 2221. Lopez vs. The Court has not in the process overlooked another rule that a quasi-delict can be the cause for breaching a contract that might thereby permit the application of applicable principles on tort 9 even where there is a pre-existing contract between the plaintiff and the defendant (Phil. the appealed decision is AFFIRMED. the fact that the parties are contractually bound is no bar to the application of quasi-delict provisions to the case. Reasonable attorney's fees may be recovered where the court deems such recovery to be just and equitable (Art. Civil Code. it would also be just as arduous to sustain the exemplary damages granted by the courts below (see De Leon vs. In criminal offenses. 84 .000. Gen. Nominal damages are adjudicated in order that a right of the plaintiff. Alliance Transport System. exemplary damages are imposed when the crime is committed with one or more aggravating circumstances (Art.

however. "D") on account of the latter's continued failure to pay the installment due 30 June 1981 and the interest on the unpaid balance of the stipulated initial payment. providing that private respondent would additionally pay to petitioner corporation the amounts of P55. Robles. clauses. Tabaquero. (its new corporate name MULTINATIONAL REALTY DEVELOPMENT CORPORATION) and MARIANO Z. respondents. J. Finally. once perfected. Bricktown Development Corporation (herein petitioner corporation). We shall. has the force of law between the parties with which they are bound to comply in good faith and from which neither one may renege without the consent of the other. although nothing conclusive would appear to have ultimately been arrived at.888 square meters. the parties continued to negotiate for a possible modification of their agreement. Private respondent was only able to pay petitioner corporation the sum of P1. take the lead in the instant controversy.000.00 was stipulated to be paid by private respondent in such amounts and maturity dates. The total price of P21. represented by its President and co-petitioner Mariano Z. Velarde. Simando & Associates for petitioners. petitioners. represented in these acts by its Vice-President. morals. is expressed in the cardinal principle that the parties in that juridical relation must act with justice. on 12 October 1981.00 to be paid by means of an assumption by private respondent of petitioner corporation's mortgage liability to the Philippine Savings Bank or. Petilla. 1994 BRICKTOWN DEVELOPMENT CORP. public order or public policy. The standard norm in the performance of their respective covenants in the contract. COURT OF APPEALS. the parties executed a Supplemental Agreement (Exh.369. These basic tenets. covering a total of 96 residential lots. Moises G. On even date. P4.000. vs. should be considered 85 .75 on 30 June 1981.364. honesty and good faith.21 (Exhs. 31 March 1981. Parañaque. Petitioner corporation G. 112182 December 12.25 on 31 December 1981. No. VITUG. Private respondent reminds us that the factual findings of the trial court. indeed. momentarily paraphrase these findings.209.334. situated at the Multinational Village Subdivision. therefore.00 on 31 March 1981. The autonomy of contracts allows the parties to establish such stipulations. there appears to be no valid justification in the case at bench for us to take an exception from the rule. alternatively. AMOR TIERRA DEVELOPMENT CORPORATION and the HON. good customs.68. On 31 March 1981. In the meanwhile.: A contract.200. once again. sent private respondent a "Notice of Cancellation of Contract" (Exh. terms and conditions as they may deem appropriate provided only that they are not contrary to law. and of P390. to be made payable in cash. through its legal counsel. as follows: P2. with an aggregate area of 82. "A" and "B") in favor of Amor Tierra Development Corporation (herein private respondent). Metro Manila.37 representing interest paid by petitioner corporation to the Philippine Savings Bank in updating the bank loan for the period from 01 February to 31 March 1981. We concede to this reminder since.500.443. binding on this Court in this petition. P3. La Huerta. Dela Torre.875.729.SO ORDERED. or 21% interest on the balance of downpayment for the period from 31 March to 30 June 1981. "A" to "K").906.R. and the balance of P11.968. petitioner corporation. executed two Contracts to Sell (Exhs. sustained by the Court of Appeals. "C").639. as well as in the exercise of their rights thereunder. VERALDE. Ricafrente & Aguirre Law Firm for private respondent.

the trial court rendered its decision. the dispositive portion of which read: In view of all the foregoing. Ordering the [petitioner] corporation to pay the [private respondent] the amount of Twenty-five Thousand (P25. and (4) In not holding that the forfeiture of the P1.334.378. 2 On appeal.48 was warranted under the liquidated damages provisions of the contracts to sell and the supplemental agreement and was not iniquitous nor unconscionable. or on 26 September 1983. "E") the refund of private respondent's various payments to petitioner corporation.advised private respondent. on 18 November 1983." Several months later. its action with the courta quo.00) Pesos. starting November 18. demanded (Exh. the appellate court affirmed in toto the trial court's findings and judgment. conduct and representation. through counsel. private respondent. judgment is hereby rendered as follows: 1. that it (private respondent) still had the right to pay its arrearages within 30 days from receipt of the notice "otherwise the actual cancellation of the contract (would) take place.197. Bricktown Development Corporation.455. The core issues would really come down to (a) whether or not the contracts to sell were validly rescinded or cancelled by petitioner 86 .21) with interest at the rate of Twelve (12%) percent per annum. 3. or. to return to the [private respondent] the amount of One Million Three Hundred Thirty Four Thousand Four Hundred Forty-Three Pesos and Twenty-One Centavos (P1.000. allegedly "amounting to P2. the date when the complaint was filed. to assign to private respondent an equivalent number of unencumbered lots at the same price fixed in the contracts.71. also known as Multinational Realty Development Corporation. not having been heeded.443. representing attorney's fees. and 5. 1983. Ordering the [petitioner] corporation. petitioners contend that the Court of Appeals has erred in ruling that — (1) By petitioners' acts. "B" and "C") rescinded. 4. With costs against the [petitioner] corporation. until the amount is fully paid. however. in lieu of a cash payment. In their instant petition. (3) The cancellation of the contract required a positive act on the part of petitioners giving private respondent the sixty (60) day grace period provided in the contracts to sell. The demand. private respondent commenced." with interest within fifteen days from receipt of said letter. Dismissing [petitioner's] counterclaim for lack of merit. 2. SO ORDERED. Declaring the Contracts to Sell and the Supplemental Agreement (Exhibits "A".497. 1 Following the reception of evidence. (2) Petitioners were no justified in resolving the contracts to sell and the supplemental agreement. they themselves delayed or prevented the performance of the contracts to sell and the supplemental agreement and were thus estopped from cancelling the same.

1 above.334. this Court is unable to completely disregard the following findings of both the trial court and the appellate court. however. were made. the OWNER shall grant the purchaser a sixty (60)-day grace period within which to pay the amount/s due.21 which was even short of the stipulated initial payment of P2. must be viewed differently. Said the trial court: It has been duly established through the testimony of plaintiff's witnesses Marcosa Sanchez and Vicente Casas that there were negotiations to enter into 87 . provided. the OWNER shall have the right to resell the lot/s subject hereof to another buyer and all payments made. the provisions of Article 1169 of the Civil Code would find no relevance whatsoever. together with all improvements introduced on the aforementioned lot/s shall be forfeited in favor of the OWNER as liquidated damages. While clearly insufficient to justify a foreclosure of the right of petitioner corporation to rescind or cancel its contracts with private respondent. warrant some favorable consideration by this Court. not an obligation.00.corporation and. the PURCHASER obligates itself to peacefully vacate the aforesaid lot/s without necessity of notice or demand by the OWNER. Concededly. Court of Appeals.639.200. 4 Verily.00. The cancellation of the contracts to sell by petitioner corporation accords with the contractual covenants of the parties. either extinctive or modificatory.443. Of a total selling price of P21. given the factual findings of both the trial court and the appellate court. and such cancellation must be respected. nevertheless. Paragraph 15 of the Contracts to Sell provided thusly: 15. and should the PURCHASER still fail to pay the due amount/s within the 60-day grace period. the grace period is effective without further need of demand either calling for the payment of the obligation or for honoring the right. the negotiations that they have pursued strictly did not result in the novation. such as in this case. 96 SCRA 741. that the actual cancellation or rescission shall take effect only after the lapse of thirty (30) days from the date of receipt by the PURCHASER of the notice of cancellation of this contract or the demand for its rescission by a notarial act. No additional payments. the terms of payment agreed upon by the parties were not met by private respondent. and thereafter. of the contracts to sell. of the debtor. Should the PURCHASER fail to pay when due any of the installments mentioned in stipulation No. would generally still require judicial or extrajudicial demand before "default" can be said to arise.875. in the case at bench. A notice of cancellation was ultimately made months after the lapse of the contracted grace period. (b) whether or not the amounts already remitted by private respondent under said contracts were rightly forfeited by petitioner corporation. When unconditionally conferred. 3 A grace period is a right. Agustin vs. it would seem. the series of events and circumstances described by said courts to have prevailed in the interim between the parties. On this score. Admittedly. under Article 1169 of the Civil Code. It may be noteworthy to add that in a contract to sell. Petitioners do not deny the fact that there has indeed been a constant dialogue between the parties during the period of their juridical relation. 186 SCRA 375). Lapuz. the PURCHASER shall have the right to exparte cancel or rescind this contract. the sixty-day grace period under the terms of the contracts to sell became ipso factooperative from the moment the due payments were not met at their stated maturities. private respondent was only able to remit the sum of P1. in the affirmative. the non-payment of the purchase price (which is normally the condition for the final sale) can prevent the obligation to convey title from acquiring any obligatory force (Roque vs. and in this connection. however. The grace period must not be likened to an obligation. the non-payment of which.000. The forfeiture of the payments thus far remitted under the cancelled contracts in question.

however. computed from judicial demand. private respondent should not be allowed to totally free itself from its own breach. made two counterproposals. Labog for petitioners. The first negotiation took place before June 30. or that the defendant corporation may sell the corporation itself. in the opening statement of this ponencia. we have intimated that the relationship between parties in any contract must always be characterized and punctuated by good faith and fair dealing. Velarde replied that subdivision owners would not consent to the building of small houses.21 with 12% interest per annum to commence only." There was. indeed. They told the defendant Velarde of the plaintiff's request for the division of the lots to be purchased into smaller lots and the building of town houses or smaller houses therein as these kinds of houses can be sold easily than big ones. No. thru its president.petitioners. SPOUSES PEDRO ASUNCION AND MARING ASUNCION. to likewise sanction the forfeiture by petitioner corporation of payments made to it by private respondent. 88 . reasonable ground to believe that because of the negotiations between the parties. Vice-President and president.another agreement between the parties. considering. no malice or bad faith on the part of the plaintiff in suspending payments.334. Judging from what the courts below have said. He. the peculiar circumstances found to be extant by the trial court.443. the plaintiff was led to believe that the parties may ultimately enter into another agreement in place of the "contracts to sell. coupled with the fact that the plaintiff never took actual possession of the properties and the defendants did not also dispose of the same during the pendency of said negotiations. to adjudge any interest payment by petitioners on the amount to be thus refunded. after March 31. We do not find it equitable. therefore. of the plaintiff corporation. petitioners did fall well behind that standard. from the date of finality of this decision until such refund is effected. in our view. for. SO ORDERED. however. Indeed.R. but had consented to the delay or suspension of payments. and its other properties. No costs. respondents. the Court of Appeals observed: We agree with the court a quo that there is. 6 In fine. the appealed decision is AFFIRMED insofar as it declares valid the cancellation of the contracts in question but MODIFIED by ordering the refund by petitioner corporation of P1. The negotiations between the parties went on for sometime but nothing definite was accomplished. WHEREFORE. while we must conclude that petitioner corporation still acted within its legal right to declare the contracts to sell rescinded or cancelled. They did not give the plaintiff a categorical answer that their counter-proposals will not materialize. the defendant Mariano Velarde. Eligio A. went to the office of the defendant corporation and made some proposals to the latter. 1984 BERLIN TAGUBA AND SEBASTIANA DOMINGO. 5 For its part. when Moises Petilla and Renato Dragon. On the contrary. MARIA PERALTA VDA. 1981. respectively. 1981. DE DE LEON AND THE HONORABLE COURT OF APPEALS. nevertheless. confirmed by the Court of Appeals. together with the Multinational Village Subdivision. to the plaintiff and the latter's sister companies engaged in the real estate business. vs. G. it would be unconscionable. evidently. however. to wit: that the defendant corporation would assign to the plaintiff a number of lots corresponding to the amounts the latter had already paid. the defendants not only contributed. L-59980 October 23. together with Marcosa Sanchez.

m. for and in consideration of the sum of Eighteen Thousand (P18. the VENDEE shall be given an extension of Six (6) months with interest (legal rate) after which VENDOR may INCREASE the purchase price to P50. executors. Isabela. II-1215. entitled "Maria Peralta Vda. a) P3. Philippine Currency. 1972. private respondent instituted on April 29.Romeo B. by reason of which petitioner was compelled but with the express knowledge and consent and even upon the proposal of private respondent. who mediated to settle the dispute between them and that in the said conference. de De Leon.129 square meters located at Cauayan.) In their Answer. m.00 per sq. c) That failure to pay the VENDOR the whole balance on December 31. Petitioner further alleged that the parties had appeared before Governor Dy. de De Leon. to the Spouses Asuncion who were actually in possession thereof. 1 the only salient terms and conditions of which reads — têñ. 1972. Berlin Taguba married to Sebastiana Domingo (now petitioner) is the owner of a residential lot with an area of 3. The aforesaid sum of P18. The deed evidencing said sale was denominated as "Deed of Conditional Sale". the decision of the defunct Court of Appeals in its CA-G. and CONVEY unto and in favor of the VENDEE.00) Pesos.00 shall be paid at the residence of the VENDOR as follows: 89 . until the whole amount would have been paid on or before December 3.500. 1976 a complaint for Specific Performance with Preliminary Mandatory Injunction with Damages against Spouses Berlin Taguba and Sebastiana Domingo. in the then Court of First Instance of Isabela (Civil Case No. b) To pay the amount of at least One Thousand (P1. were separately occupying portions of the aforementioned lot as lessees. (also petitioners) and herein private respondent Maria Peralta Vda.00 to complete the stipulated purchase price of P18. versus Berlin Taguba and Sebastiana Domingo" for "Specific Performance with Preliminary Mandatory Injunction with Damages".R. J.00 to petitioner Berlin Taguba in May 1973 within the grace period but the latter refused to receive payment.500. they had agreed that CUEVAS.000. but claimed that private respondent failed to comply with her obligation under the Deed of Conditional Sale despite the several extensions granted her. to negotiate the sale of a portion of the property sold. TRANSFER. On August 27. Alleging that she (private respondent) had already paid the sum of P12. Calixto for respondents. II-1215. (P45.:ñé+. CEDE. Spouses Taguba admitted the sale of the property.00 per sq. Br.00 Philippine Currency upon the signing and executed petition of this contract. Spouses Pedro Asuncion and Marita Lungab.) to be paid in the manner herein below specified.500.£ªwph!1 This is a Petition to Review on Certiorari. Berlin Taguba sold a portion of the said lot consisting of 400 square meters to private respondent Maria Peralta Vda de De Leon. No. which the VENDEE agrees should she fail to pay within said period of time. administrators or assigns the abovedescribed portion. 65357-R which reversed on appeal the decision of the then Court of First Instance of Isabela in Civil Case No.00 and had tendered payment of the balance of P5. the VENDOR hereby SELL.000.000. Philippine Currency MONTHLY to commence September 1972. and that since negotiations for settlement with the intervention of Governor Dy failed. her heirs. The portion sold comprises the area occupied by the Asuncions and private respondent Vda de De Leon.00) Pesos. £îhqw⣠NOW THEREFORE. 1972.000.

1974.R. Dy.00 within thirty (30) days from receipt of notice from the Clerk of Court of the lower court of receipt of the records of the case from the Court of Appeals as provided for in the last paragraph of Section 1. SO ORDERED. Exhibit '3' and void or of no force and effect in view of the prior sale of the property covered under said deed to plaintiff on August 27. 1974. 3) Ordering Berlin Taguba to reimburse the plaintiff of whatever amount he received from the plaintiff in excess of the costs of the area actually occupied by plaintiff at P45. 5) The order granting preliminary injunction against plaintiff dated July 13. and 4) Ordering defendants jointly and severally to deliver to plaintiff possession of the property described in Exhibit "A" with an area of 400 square meters.£îhqw⣠1) Ordering a cadastral survey by a competent Geodetic Engineer of the actual area occupied by the plaintiff and the intervenors.ñët 90 . 1981. 1978 is hereby declared permanent.00 per square meter. the portion sold by defendant Taguba to plaintiff. The Asuncion spouses intervened and filed their Answer in Intervention alleging that they bought in good faith that portion of the land they actually occupy after private respondent defaulted in her undertaking in their contract with petitioner Berlin Taguba and after a confrontation in the house of Governor Faustino N.£îhqw⣠WHEREFORE. 2) Ordering the defendant Berlin Taguba to execute a deed of absolute sale in favor of the plaintiff of the actual area actually occupied by her. the decision of the lower court is hereby SET ASIDE and a new judgment rendered as follows: 1) Ordering defendant Berlin Taguba to execute a deed of absolute sale in favor of plaintiff over the 400 square meter portion of his property described in Exhibit "A" upon the payment by plaintiff of the sum of P7. the then Court of Appeals reversed the decision of the lower court in a decision promulgated on October 22. the dispositive portion of which reads as follows — têñ.ñët On appeal under CA-G. Rule 39 in relation to Section 11. No. Rule 51 of the Rules of Court. 3) Ordering defendant Berlin Taguba to reimburse defendant Pedro Asuncion the purchase price received by him under the deed of sale of April 19. 1972 Exhibit "A". 65357-R. SO ORDERED. Exhibit "3". After trial.1äwphï1.1äwphï1.private respondent and the Asuncion spouses will buy only the portions which they respectively and actually as lessees. the dispositive portion of which reads as follows — têñ. the lower court rendered judgment.500. 2) Declaring the deed of sale executed by defendant Taguba in favor of defendant Asuncion in April 19. With costs against defendants-appellees. 4) The cost of survey shag be borne by the plaintiff and intervenor share and share alike. Without special pronouncement as to costs.

The motion for reconsideration of the aforesaid decision filed by petitioner Spouses Taguba and Spouses Asuncion having been denied.têñ. 1972 and to increase the price from P45. Finally. Considering. There is also no stipulation giving the vendor (petitioner Taguba) the right to unilaterally rescind the contract the moment the vendee (private respondent de Leon) fails to pay within a fixed period.000. which We affirm and sustain to be a contract of sale. the vendee may pay. 1972. private respondent had already actually paid the sum of P12. equity and justice mandate that she be given additional period within which to complete payment of the purchase price.500. de De Leon 2 was absolute in nature. Nowhere in the said contract in question could we find a proviso or stipulation to the effect that title to the property sold is reserved in the vendor 3 until full payment of the purchase price.00 of the total stipulated purchase price of P18. as long as no demand for rescission of the contract has been made upon him either judicially or by notarial act.00 and had tendered payment of the balance of P5.000. (Emphasis supplied) In the case at bar.00 within the grace period of six months from December 31. which states — têñ. Thus Par. and neither had he filed a suit in court to rescind the sale. 8 91 . 6Considering that in the instant case. a reading of the contract in its entirety would show that the only right of petitioner Taguba as vendor was to collect interest at the legal rate if private respondent-vendee fails to pay the full purchase price of P18. The petition is without merit. it is undisputed that petitioner Taguba never notified private respondent by notarial act that he was rescinding the contract. it has been ruled that "where time is not of the essence of the agreement. 1592. 1972.00 up to December 31. We find that said sale cannot prevail over the previous sale in favor of private respondent.eventhough may have been stipulated that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place.00 per square meter if vendee still fails to pay within the six months grace period from December 31. the Asuncion spouses.00 per sq. even after the expiration of the period. a slight delay on the part of one party in the performance of his obligation is not a sufficient ground for the rescission of the agreement. 4 Indeed. Despite the denomination of the deed as a "Deed of Conditional Sale" a reading of the conditions (earlier quoted in this decision) therein set forth reveals the contrary.00 to P50. they now come before this Court through the instant petition praying that the decision of the then Court of Appeals be set aside and the decision of the lower court be affirmed in toto. After the demand the court may not grant him a new term. which the VENDEE agrees should she fail to pay within said period of time. 1972. the VENDEE shall be given an extension of six (6) months with interest (legal rate) after which VENDOR may INCREASE the purchase price to P50. 7 With the respect to the sale executed by petitioner Taguba in favor of the other petitioners. C of the deed provides. £îhqw⣠Art. absolute in nature 5 the applicable provision is Article 1592 of the New Civil Code.500. the nature of the transaction between petitioner Taguba and private respondent. We agree with respondent Court of Appeals (now Intermediate Appellate Court) that the contract of sale between petitioner Berlin Taguba and private respondent Maria Peralta Vda. therefore. £îhqw⣠c) That failure to pay the VENDOR the whole balance on December 31. The Asuncion spouses cannot be considered buyers in good faith because they were aware of the earlier sale to private respondent. 1974 of 233 square meters portion of his property which is a part of the 400 square meters previously sold to private respondent de Leon. on April 19. m. In the sale of immovable property.

MARIN. Marbel. Branch 11. ARMADA. all surnamed ARMADA. JUDGE MIDPANTAO L. vs. The exchange did not mean that the parties were definitely entitled to the properties being exchanged but it was executed "in anticipation of a declaration of said right". of legal age. respondents. hereinafter designated as the ARMADAS. now substituted by his heirs. Iloilo in exchange for the land of the Armadas 92 . likewise Filipino.R. ADIL. 7252 and other properties in that province. Iloilo. single. AQUINO. U. MARIN and ANTONIO S. The exchange would be rescindible when it is definitely ascertained that the parties have respectively no right to the properties sought to be exchanged. The deed of exchange reads as follows: DEED OF EXCHANGE WITH QUITCLAIM KNOW ALL MEN BY THESE PRESENTS: This DEED OF EXCHANGE WITH QUITCLAIM. the judgment of respondent Appellate Court is hereby AFFIRMED with costs against petitioners. In a 1963 document. REGISTER OF DEEDS. and Heirs of MARGARITA M.WHEREFORE. Province of Iloilo. to Antonio S. ARMADA and ARISTON P. JR. located in Cotabato covered by TCT No. with residence and postal address at Bo. Province of Cotabato. South Cotabato. — and — M. P. Flores and D. Renato D. ARMADA. of legal age. petitioner. ADIL. MARIN. General Santos City. No. vs. 1984 AQUILINA P. made and entered into by and between: AQUILINA P. MARIN. ARISTON. L-49018 July 16. EVA SALAZAR VDA. 1984 AQUILINA P. Monica Pacificar Vda. Marin assigned to the brothers Manuel P..A. JUDGE MIDPANTAO L.ñët G. situated in January.R. with residence and postal address at Stockton. No. de Provido. DONALD and CRISTINA. MANUEL P. SO ORDERED. Marin-Flores for petitioners. CFI of Iloilo. Aquiline P. CFI. L-47986 July 16. MANUEL P. J. ARISTON P. CFI. married. petitioners..: This case is about the rescission of a deed of exchange. 8. ARMADA. ARMADA-HONORIO.. California. Armada and Ariston P. hereinafter designated as MARIN.S. for him and in behalf of his brother. with residence and postal address at the Municipality of January. MANUEL.1äwphï1. single. Filipino. SR. DE ARMADA. ARMADA and ARISTON P. of legal age. G.R. Armada her hereditary share in the testate estate of her deceased mother. Munez for private respondents. PROVINCIAL SHERIFF. Koronadal. Filipino. ARMADA. now substituted by his heirs. Marin. respondents. Philippines.

who died testate in the Municipality of January. cede conveys and quitclaims unto the said ARMADAS. their heirs. being residents of January. NOW. MARIN have long been and 93 . V-2354 and now covered by TCT No. Iloilo. interests. 1. Philippines. titles and participations the latter may have or could have in any real or personal properties situated at Cetabato. assign. 252 of the Cotabato Registry: 3. before Sr. the parties hereto hereby covenant and stipulate as follows. No. Notary Public for and in the Province of Iloilo. 95. MARIN. the late MONICA PACIFICAR VDA DE PROVIDO. to wit: 1. transfer. 1959. That the ARMADAS by virtue of these presents hereby likewise cede. WHEREAS. as per Doc. in favor of the ARMADAS. MANUEL B. Page No. and for such other good and valuable considerations. interests and participations in any and all real and personal properties representing her legitimate share in the estate of her deceased mother. on October 20. while AQUILINA P. all her rights. the ARMADAS know for a fact that the properties being assigned and quit-claimed in their favor by AQUILINA P. and duly acknowledged on the same date. situated at the Municipality of January. Book No. MARIN hereby transfers. MARIN may have over the real and personal properties of MONICA PACIFICAR VDA DE PROVIDO aforementioned because of the proximity of the said properties to them. 2. MARIN was named as an heir in that certain LAST WILL AND TESTAMENT executed by the said MONICA PACIFICAR VDA DE PROVIDO. that they may have or could have in any and all real and personal properties situated at the Province of Cotabato. convey and quitclaim in favor of the said AQUILINA P. MARIN by way of exchange. Province of Iloilo Philippines: WHEREAS. Philippines. MARIN is presently residing in Cotabato.WITNESSETH: WHEREAS. of his Notarial Register. interests. all their rights. successors and assigns. a photostatic copy of which is hereto attached and made an integral part of this AGREEMENT as Annex A. titles and participations. WHEREAS. Series of 1959. AQUILINA P. in exchange for whatever rights. AQUILINA P. titles. LAURO. assigns. Philippines. MONICA PACIFICAR VDA DE PROVIDO. for and ii consideration of the foregoing premises. titles and participations that AQUILINA P. interests. That AQUILINA P. is one of the legitimate children and compulsory heirs of the deceased MONICA PACIFICAR VDA DE PROVIDO. Province of Iloilo Philippines. 1960. Iloilo. AQUILINA P. THEREFORE. 262. WHEREAS. more particularly in that parcel of land formerly covered by TCT No. it is specifically provided in the attached LAST WILL AND TESTAMENT OF MONICA PACIFICAR VDA DE PROVIDO that AQUILINA P. That. interests.. on June 3. MARIN will share equally with her co-heirs the estate of the decedent consisting of personal properties and registered and unregistered lands situated in the Municipality of January. the ARMADAS desire to acquire all the rights. MARIN does by these presents hereby WAGE and QUITCLAIM all her rights. titles and participations in all the real and personal properties of her deceased mother.

Ariston P. Armada) (SGD. the parties hereto have affixed their hand this 13 th day of June.continue to be productive and are more valuable than the properties which they are exchange in under this document.) MANUEL P. except only when it is eventually ascertained and finally determined that they have respectively no right. 94 . (SGD. Francisco Provido and Monica Pacificar. That the parties hereto hereby agree that the lawful ownership and possession of each shall be protected by the other against any and all claims of any person or persons. That it is specifically understood and agreed that the execution of this document by parties parties hereto shall in no way be construed as an acknowledgment on his or part that the other is or are entitled in the properties heretofore quit-claimed but only in anticipation of a declaration of said right. the deceased spouses. of Janiuay Iloilo. real or personal. 4. MARIN (Witness and Notarial Acknowledgement are omitted) As background. and the ARMADAS likewise grant a similar authority to MARIN IN WITNESS WHEREOF. mistake. which they have assigned or quitclaimed in favor of each other. conveyed and unclaimed by one party to the other is situated in the place where either is a resident resulting in better administration of the aforementioned properties. and not attended by fraud. had hereditary rights in the estates of her parents. ARMADA (For himself and in behalf of his brother. That the parties hereto shall take possession of and make use of the properties subject of this DEED OF EXCHANGE AND QUITCLAIM upon the signing of the same. 6. who resided in Koronadal. That both parties hereto hereby acknowledge that the e exchange contained herein operates to their individual and mutual benefit and advantage. 5. The Armadas in 1963 expected to inherit some lots in General Santos City from their uncle. Cotabato. both parties hereby authorize each other the registration of this document with the register of Deeds of Iloilo. it should be stated that the Armadas and Mrs. That to make this AGREEMENT valid. 9. the parties hereto are not . MARIN (SGD. Marin are first cousins. misrepresentation or the like and that they have no further claim for additional price or consideration against each other. title or participation in any property. and in the event of mutual restitution by reason of the above eventuality. 10. That the parties hereto intend this AGREEMENT to be absolute and irrevocable. for the reason that the property being ceded. both declaring that the properties received by way of exchange under this document is adequate consideration for the properties quit-claimed. interest. liable for any fruits or benefits which they may have received from the aforementioned properties during the existence and efficacy of this AGREEMENT and that no damage could be claimed by one against the other 7.) AQUILINA P. 8. transferred. Marin. That both parties furthermore acknowledge that the exchange contemplated herein is made in perfect good faith.) ANTONIO S. 1963. Mrs. who died in 1954. Proceso Pacificar. binding and effective Live.

Adil rescinded the deed of exchange. her share with a total area of 9. who signed the deed for aim. Marin appealed to this Court on legal issues (L-49018). Marin and a first cousin also of the Armadas. Armada resided in Janiuay. She chose to forget the deed. cannot be definitely ascertained. In 1963. General Santos City with a total area of 8.700. Aurora Provido-Collado. As already stated. 1976. in which the Armadas expected to inherit a part. renounced and quit-claimed her share" in favor of Aurora. when the deed of exchange was executed. that share was supposed to be exchanged for the two lots in General Santos City which the Armadas received in 1976 after a pestiferous litigation. Then. Marin.Elevencionado a sister of Mrs. was formally adjudicated to Aurora. Did Mrs. It was stated therein that Mrs. 2nd par. the Armadas and the other heirs had to sue Soledad. released the Armadas from their obligation under said deed and ordered Mrs. she agreed to convey to her sister. They overlooked the fact that Ariston P. Marin to pay the Armadas P10. or on November 14.124 square meters. It is evident from the deed of exchange that the intention of the parties relative to the lots. the estate of Proceso Pacificar. Judge Adil issued an order of execution pending appeal which Mrs.where died in 1938 and 1960. 1409 [6]. Marin that they are entitled to the properties involved therein and that it was executed "in anticipation of a declaration of" their rights to the properties. Marin inherit actually anything from her parents? The answer is nothing. The Armadas filed the instant rescissory action against Mrs. had no authority to do so Manuel was not the attorney-in-fact of Ariston (See Art. Marin assailed by certiorari in this Court. Marin never possessed these two lots. located in Barrio lagao. So. Her conduct showed that she considered herself not bound by it. had been adjudicated to Soledad Pronido. respectively. Thus.010 square meters. in the extra-judicial partition of her parents' estate on June 25. 1378. They were supposed to be exchange for her proindiviso share in her parents' estate in Janiuay. 95 . Armada was not bound at all by the deed since Manuel. Mrs. The enforcement of the execution was restrained by this Court (L-47986). Civil Code). Manuel P. Marin "has waived. and Art. The sole issue resolved by the trial court was prescription. Marin could not perform her obligation under the deed since she had assigned her hereditary rights to her sister. The protracted litigation ended in a compromise in 1976 when the Armadas were awarded Lots 906-A-2 and 906-A-3. it is stipulated in paragraph 8 that the parties should take possession and make use of the properties involved in the deed. which are the objects of the exchange. Marin on December 7. There was no trial. 1968. Civil Code). Mrs. ordered restitution of whatever might have been received by Mrs. It held that the Armadas' action had not prescribed because their right to rescind accrued only in 1976 when they discovered that Mrs.000 as attorney's fees. Soledad claimed to be the sole heir of Proceso.000 as moral and exemplary damages and P3. Judge Midpantao L. 1977 (where the instant case for rescission was already pending). Five years after that deed. The two related cases have been consolidated. as already noted. The case was submitted on the pleadings. The two provisions are irreconcilable because paragraph contemplates that the properties are still to be awarded or adjudicated to the parties whereas paragraph 8 envisages a situation where the parties have already control and possession thereof. her interest in two lots in January in payment of her obligation amounting to P1. We hold that this circumstance renders the exchange void or inexistent (Art. it is provided in paragraph 7 that the deed should not be construed as an acknowledgment by the Armadas and Mrs. Then. 1403 [1].

The properties covered by the deed should have been specified and described. 1980 in the amount of P76. 47. This is an appeal by certiorari from the decision of the Court of Appeals. 1986 LUISA F. As no evidence was presented in this case. & Associates for private respondent.000. No.000 square meters representing theproindiviso share of Mrs.550. THE COURT OF APPEALS AND RAMON FLORES. the dispositive part of which reads as follows: IN VIEW OF THE FOREGOING PREMISES.71 in full settlement of petitioner's obligation. and to the 9.It should be noted that in paragraph 7 of Mrs. civil Code. we cannot sustain the award of P10. Marin rendered impossible the performance of her obligation under the deed. pp.000 as moral and exemplary damages and P3.J.C. C.000 as attorney's fees. 1977. MCLAUGHLIN. G. Because of that impossibility. Civil Code). The annotation thereof on TCT Nos. As we have seen. On February 28. petitioner.. R.450. 10833 and 10834 should be cancelled. The parties also agreed that the balance shall bear interest at the rate of 1% per 96 . petitioner Luisa F. her action would be barred under the rule of exceptio non adimpleti contractus (plaintiff is not entitled to sue because he has not performed his part of the agreement). The instant rescissory action may be treated as an action to declare void the deed of exchange. The action to declare the inexistence of a contract does not prescribe (Art. 1410. A perusal of the deed gives the impression that it involves many properties.00 payable as follows: a) P26. McLaughlin and private respondent Ramon Flores entered into a contract of conditional sale of real property. the Armadas could rescind extrajudicially the deed of exchange (Art. 1191 Civil Code.124 square meters of land. and b) the balance of P113. or another check of equivalent kind and value. Marin in her parents' estate. the earlier check having become stale. Such a qualifications is not found in her agreement with her sister. the trial court's judgment and the order of execution pending appeal are set aside. Aquilina Provido-Mrin's counterclaim is dismissed. Marin should sue the Armadas. vs. WHEREFORE. 1977. Paragraph one of the deed of conditional sale fixed the total purchase price of P140. SO ORDERED. No costs. 4 Tolentino. Mrs. the petition for certiorari and mandamus is hereby GRANTED and the Orders of respondent court dated November 21 and 27 both 1980 are hereby nullified and set aside and respondent Judge is ordered to order private respondent to accept petitioner's Pacific Banking Corporation certified manager's Check No. The Armadas' claim for damages and attorney's fees is denied. L-57552 October 10. which the Armadas would inherit from their uncle in General Santos City. MC-A-000311 dated November 17. FERIA. The deed of exchange is hereby declared void and inexistent. 1973 Ed. In reality. it refers only to 8.R. If Mrs.00 upon the execution of the deed. 171-172).059. respondents. Actg. Rollo of L-49018). Marin's answer with affirmative defense she avers therein that her 1968 agreement with her sister means that she would convey her properties to the latter (Aurora) when the Armadas should be "adjudged to be without rights or interests to any properties in General Santos City" (p.00 to be paid not later than May 31. Domingo Jr.

1980. Petitioner prayed that a) the deed of conditional sale of real property be declared rescinded with forfeiture of all payments as liquidated damages. On June 19.00.000. petitioner filed a complaint in the then Court of First Instance of Rizal (Civil Case No. 1980. 97 . As agreed upon. the parties submitted a Compromise Agreement on the basis of which the court rendered a decision on January 22. private respondent filed a motion for reconsideration tendering at the same time a Pacific Banking Corporation certified manager's check in the amount of P76.00. and the parties agreed that said amount would be payable as follows: a) P50. On December 27.000. private respondent agreed to pay one thousand (P l.059. the plaintiff (petitioner) will be entitled to the issuance of a writ of execution rescinding the Deed of Conditional Sale of Real Property. 1980. Private respondent states on page 14 of his brief that on November 3. 1976. 1979. 1979. the trial court granted the motion for writ of execution.00) pesos monthly rental beginning December 5. 1979 until the obligation is duly paid. On November 17. On November 14. Paragraphs 6 and 7 of the Compromise Agreement further state: That the parties are agreed that in the event the defendant (private respondent) fails to comply with his obligations herein provided.71 in two equal installments on June 30. this does not appear in the decision of the Court of Appeals. This demand included not only the installment due on June 30. 1980. That in the event of execution all payments made by defendant (private respondent) will be forfeited in favor of the plaintiff (petitioner) as liquidated damages. However. petitioner wrote to private respondent demanding that the latter pay the balance of P69. In said compromise agreement. On November 7. and b) the balance of P69.000. petitioner filed a Motion for Writ of Execution alleging that private respondent failed to pay the installment due on June 1980 and that since June 1980 he had failed to pay the monthly rental of P l. defendant (private respondent) hereby waives his right to appeal to (from) the Order of Rescission and the Writ of Execution which the Court shall render in accordance with the stipulations herein provided for. 1980.71. 1980.000.71 on or before October 31. private respondent sent a letter to petitioner signifying his willingness and intention to pay the full balance of P69. Under paragraph 3 of the Compromise Agreement. In such eventuality. 1980.00 upon the signing of the agreement and in addition he also paid an "escalation cost" of P25.059.00 back rentals since June 1980 and the eviction of private respondent.71. and b) the court order the payment of Pl. private respondent acknowledged his indebtedness to petitioner under the deed of conditional sale in the amount of P119. private respondent paid P50. he tendered payment to petitioner but this was refused acceptance by petitioner. 1980.000. 1980. On October 15. until the full purchase price was paid. for the use of the property subject matter of the deed of conditional sale.050. On October 30.059. 1980 but also the installment due on December 31. 33573) for the rescission of the deed of conditional sale due to the failure of private respondent to pay the balance due on May 31.month to commence from December 1.000. 1980 and December 31. and at the same time demanding to see the certificate of title of the property and the tax payment receipts.00 upon signing of the agreement. the first working day of said month.059. 1977. 1980.71.

payable to the order of petitioner and covering the entire obligation including the installment due on December 31, 1980. However, the trial court denied the motion for reconsideration in an order dated November 21, 1980 and issued the writ of execution on November 25, 1980. In an order dated November 27, 1980, the trial court granted petitioner's ex-parte motion for clarification of the order of execution rescinding the deed of conditional sale of real property. On November 28, 1980, private respondent filed with the Court of Appeals a petition for certiorari and prohibition assailing the orders dated November 21 and 27, 1980. As initially stated above, the appellate court nullified and set aside the disputed orders of the lower court. In its decision, the appellate court ruled in part as follows: The issue here is whether respondent court committed a grave abuse of discretion in issuing the orders dated November 21, 1980 and November 27,1980. The general rule is that rescission will not be permitted for a slight or casual breach of the contract, but only for such breaches as are substantial and fundamental as to defeat the object of the parties in making the agreement. (Song Fo & Co. vs. Hawaiian-Philippine Co., 47 Phil. 821) In aforesaid case, it was held that a delay in payment for a small quantity of molasses, for some twenty days is not such a violation of an essential condition of the contract as warrants rescission for non-performance. In Universal Food Corp. vs. Court of Appeals, 33 SCRA 1, the Song Fo ruling was reaffirmed.

In the case at bar, McLaughlin wrote Flores on October 15, 1980 demanding that Flores pay the balance of P69,059.71 on or before October 31, 1980. Thus it is undeniable that despite Flores' failure to make the payment which was due on June 1980, McLaughlin waived whatever right she had under the compromise agreement as incorporated in the decision of respondent court, to demand rescission. xxx xxx xxx It is significant to note that on November 17, 1980, or just seventeen (17) days after October 31, 1980, the deadline set by McLaughlin, Flores tendered the certified manager's check. We hold that the Song Fo ruling is applicable herein considering that in the latter case, there was a 20-day delay in the payment of the obligation as compared to a 17-day delay in the instant case. Furthermore, as held in the recent case of New Pacific Timber & Supply Co., Inc. vs. Hon. Alberto Seneris, L-41764, December 19, 1980, it is the accepted practice in business to consider a cashier's or manager's check as cash and that upon certification of a check, it is equivalent to its acceptance (Section 187, Negotiable Instrument Law) and the funds are thereby transferred to the credit of the creditor (Araneta v. Tuason, 49 O.G. p. 59). In the New Pacific Timber & Supply Co., Inc. case, the Supreme Court further held that the object of certifying a check is to enable the holder thereof to use it as money, citing the ruling in PNB vs. National City Bank of New York, 63 Phil. 711.

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In the New Pacific Timber case, it was also ruled that the exception in Section 63 of the Central Bank Act that the clearing of a check and the subsequent crediting of the amount thereof to the account of the creditor is equivalent to delivery of cash, is applicable to a payment through a certified check. Considering that Flores had already paid P101,550.00 under the contract to sell, excluding the monthly rentals paid, certainly it would be the height of inequity to have this amount forfeited in favor McLaughlin. Under the questioned orders, McLaughlin would get back the property and still keep P101,550.00. Petitioner contends that the appellate court erred in not observing the provisions of Article No. 1306 of the Civil Code of the Philippines and in having arbitrarily abused its judicial discretion by disregarding the penal clause stipulated by the parties in the compromise agreement which was the basis of the decision of the lower court. We agree with the appellate court that it would be inequitable to cancel the contract of conditional sale and to have the amount of P101,550.00 (P l48,126.97 according to private respondent in his brief) already paid by him under said contract, excluding the monthly rentals paid, forfeited in favor of petitioner, particularly after private respondent had tendered the amount of P76,059.71 in full payment of his obligation. In the analogous case of De Guzman vs. Court of Appeals, this Court sustained the order of the respondent judge denying the petitioners' motion for execution on the ground that the private respondent had substantially complied with the terms and conditions of the compromise agreement, and directing the petitioners to immediately execute the necessary documents transferring to the private respondent the title to the properties (July 23, 1985, 137 SCRA 730). In the case at bar, there was also substantial compliance with the compromise agreement.

Petitioner invokes the ruling of the Court in its Resolution of November 16, 1978 in the case of Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., to the effect that Republic Act 6552 (the Maceda Law) "recognizes and reaffirms the vendor's right to cancel the contract to sell upon breach and non-payment of the stipulated installments but requires a grace period after at least two years of regular installment payments ... . " (86 SCRA 305, 329) On the other hand, private respondent also invokes said law as an expression of public policy to protect buyers of real estate on installments against onerous and oppressive conditions (Section 2 of Republic Act No. 6552). Section 4 of Republic Act No. 6552 which took effect on September 14, 1972 provides as follows: In case where less than two years of installments were paid, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of the cancellation or the demand for rescission of the contract by a notarial act. Section 7 of said law provides as follows: Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3, 4, 5 and 6, shall be null and void. The spirit of these provisions further supports the decision of the appellate court. The record does not contain the complete text of the compromise agreement dated December 20, 1979 and the decision approving it. However, assuming that under the terms of said agreement the December 31, 1980 installment was due and payable when on October 15, 1980, petitioner demanded payment of the balance of P69,059.71 on or before October 31, 1980, petitioner

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could cancel the contract after thirty days from receipt by private respondent of the notice of cancellation. Considering petitioner's motion for execution filed on November 7, 1980 as a notice of cancellation, petitioner could cancel the contract of conditional sale after thirty days from receipt by private respondent of said motion. Private respondent's tender of payment of the amount of P76,059.71 together with his motion for reconsideration on November 17, 1980 was, therefore, well within the thirty-day period grants by law.. The tender made by private respondent of a certified bank manager's check payable to petitioner was a valid tender of payment. The certified check covered not only the balance of the purchase price in the amount of P69,059.71, but also the arrears in the rental payments from June to December, 1980 in the amount of P7,000.00, or a total of P76,059.71. On this point the appellate court correctly applied the ruling in the case of New Pacific Timber & Supply Co., Inc. vs. Seneris (101 SCRA 686, 692-694) to the case at bar. Moreover, Section 49, Rule 130 of the Revised Rules of Court provides that: An offer in writing to pay a particular sum of money or to deliver a written instrument or specific property is, if rejected, equivalent to the actual production and tender of the money, instrument, or property. However, although private respondent had made a valid tender of payment which preserved his rights as a vendee in the contract of conditional sale of real property, he did not follow it with a consignation or deposit of the sum due with the court. As this Court has held: The rule regarding payment of redemption prices is invoked. True that consignation of the redemption price is not necessary in order that the vendor may compel the vendee to allow the repurchase within the time provided by law or by contract. (Rosales vs. Reyes and Ordoveza, 25 Phil. 495.) We have held that in such cases a mere tender of payment is

enough, if made on time, as a basis for action against the vendee to compel him to resell. But that tender does not in itself relieve the vendor from his obligation to pay the price when redemption is allowed by the court. In other words, tender of payment is sufficient to compel redemption but is not in itself a payment that relieves the vendor from his liability to pay the redemption price. " (Paez vs. Magno, 83 Phil. 403, 405) On September 1, 1986, the Court issued the following resolution Considering the allegation in petitioner's reply brief that the Manager's Check tendered by private respondent on November 17, 1980 was subsequently cancelled and converted into cash, the Court RESOLVED to REQUIRE the parties within ten (10) days from notice to inform the Court whether or not the amount thereof was deposited in court and whether or not private respondent continued paying the monthly rental of P1,000.00 stipulated in the Compromise Agreement. In compliance with this resolution, both parties submitted their respective manifestations which confirm that the Manager's Check in question was subsequently withdrawn and replaced by cash, but the cash was not deposited with the court. According to Article 1256 of the Civil Code of the Philippines, if the creditor to whom tender of payment has been made refuses without just cause to accept it, the debtor shall be released from responsibility by the consignation of the thing or sum due, and that consignation alone shall produce the same effect in the five cases enumerated therein; Article 1257 provides that in order that the consignation of the thing (or sum) due may release the obligor, it must first be announced to the persons interested in the fulfillment of the obligation; and Article 1258 provides that consignation shall be made by depositing the thing (or sum) due at the disposal of the

100

McLaughlin in the amount of P76. in the above-cited case of New Pacific Timber & Supply Co. vs.059. pursuant to the decision of the appellate court. the rentals in arrears of P l.000.00 from January 1. in accordance with paragraph 3 of the Compromise Agreement. his obligation was not paid and he is liable in addition for the payment of the monthly rental of Pl. However. petitioner herein was ordered to accept the aforesaid amount in full payment of herein respondent's obligation under the contract subject matter thereof. he purchased a Metrobank Cashier's Check No. Seneris (101 SCRA 686). WHEREFORE. Inc.R. Tender is the antecedent of consignation. L-45710 October 3. SO ORDERED. 1981 until said obligation is duly paid." but that he did not continue paying the monthly rental of Pl. an act preparatory to the consignation. that is. and from which are derived the immediate consequences which the debtor desires or seeks to obtain.059. 1986.059. G. within sixty (60) days from the finality of this decision. it was incumbent on private respondent to deposit the same with the court in order to be released from responsibility. a photocopy of which was enclosed and marked as Annex "A. CC 004233 in favor of petitioner Luisa F. Similarly. (b) Private respondent is ordered to pay petitioner. 1985 101 . (8 Manresa 325). As the Court held in the case of Soco vs. and (c) Petitioner is ordered to execute a deed of absolute sale in favor of private respondent over the real property in question upon full payment of the amounts as provided in paragraphs (a) and (b) above. Militante. promulgated on June 28. No costs.71. No. 1980. the decision of the Court of Appeals is AFFIRMED with the following modifications: (a) Petitioner is ordered to accept from private respondent the Metrobank Cashier's Check No. while consignation is necessarily judicial. 1981 until full payment thereof.00 a month from January 1.. the vendee was released from responsibility because he had deposited with the court the balance of the purchase price. In the case at bar. 1983.00 because.173) In the above-cited case of De Guzman vs.71 or another certified check of a reputable bank drawn in her favor in the same amount. the judgment debtor was released from responsibility by depositing with the court the amount of the judgment obligation. private respondent states that on September 16. Tender of payment may be extrajudicial. although as above stated private respondent had preserved his rights as a vendee in the contract of conditional sale of real property by a timely valid tender of payment of the balance of his obligation which was not accepted by petitioner. after examining the above-cited provisions of the law and the jurisprudence on the matter: Tender of payment must be distinguished from consignation. Court of Appeals (137 SCRA 730). Since private respondent did not deposit said amount with the court. he remains liable for the payment of his obligation because of his failure to deposit the amount due with the court.000.71 and the rentals in arrears. (123 SCRA 160. which is the principal. private respondent shall be entitled to a deed of absolute sale in his favor of the real property in question. and the priority of the first is the attempt to make a private settlement before proceeding to the solemnities of consignation.judicial authority and that the interested parties shall also be notified thereof. In his manifestation dated September 19. inasmuch as petitioner did not accept the aforesaid amount. CC 004233 in her favor in the amount of P76. Upon full payment of the amount of P76.000.1.

provided that such extensions or renewals shall be subject to review by the Superintendent of Banks. the Monetary Board. repayable in semi-annual installments for a period of 3 years. issued Resolution No. Jr. 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.). T-305. respondents. petitioners.R. after finding Island Savings Bank was suffering liquidity problems.00 loan covering a 6-month period amounting to P4. 1977. executed on the same day a real estate mortgage over his 100-hectare land located in Cubo.CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. who may impose such limitations as may be necessary to insure correction of the bank's deficiency as soon as possible. No. approved the loan application for P80. 1049. after being informed by the Bank that there was no fund yet available for the release of the P63. and which mortgage was annotated on the said title the next day. payable within 3 years from the date of execution of the contract at semi-annual installments of P3. CJ.000.: This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals. in C. specific performance or rescission. 1965. after finding thatIsland Savings Bank failed to put up the required capital to restore its solvency. On April 28. It was required that Sulpicio M. 102 . Lombos and Marino E.A. The approved loan application called for a lump sum P80. Tolentino. 1965.00 at 12% annual interest. a mere P17. Tolentino on July 23. OF THE DEPARTMENT OF COMMERCIAL AND SAVINGS BANK. On August 13. TOLENTINO. which dismissed the petition of respondent Sulpicio M. Tolentino for injunction. modifying the decision dated February 15. which provides: In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit liabilities. with 12% annual interest.). the Monetary Board of the Central Bank. rec. Fabian S. JR. The Bank. and Sulpicio M.00 balance (p. I. 1968.000. in his capacity as statutory receiver of Island Savings Bank.. 64.). 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. 113. who. CASTRO.000. THE HONORABLE COURT OF APPEALS and SULPICIO M. rec. as a security for the loan.000. vs. Antonio R.459.00 of Sulpicio M.000. 1972 of the Court of First Instance of Agusan. xxx xxx xxx (p. by unanimous vote.00 partial release of the P80.000. On June 14. 46. Las Nieves. promised repeatedly the release of the P63. thru its vice-president and treasurer.000. Eslao for petitioners.00 balance (p. Tupaz for private respondent.000. rec. upon favorable recommendation of its legal department. Agusan.B. Tolentino and his wife Edita Tolentino signed a promissory note for P17. rec.000. But this pre-deducted interest was refunded to Sulpicio M. rec).00 loan was made by the Bank. 48-49. Regalado.00 (p.-G.800. issued Resolution No. On May 22.00 loan. An advance interest for the P80. and damages with preliminary injunction. the Board.). MAKASIAR. 1965. Island Savings Bank.00 was deducted from the partial release of P17. 1965.00. and covered by TCT No. Tolentino shall use the loan proceeds solely as an additional capital to develop his other property into a subdivision. 52253-R dated February 11. 47.

No.A.000. the obligation of Island Savings Bank to furnish the P80. 265. finding unmeritorious the petition of Sulpicio M.00 covered by the promissory note. 1968. this instant petition by the central Bank. Ruaya. 1965.000. Such prohibition made it legally impossible for Island Savings Bank to furnish the P63. in view of non-payment of the P17. 1969. 30-:31. to rescind the real estate mortgage (pp. de Quirino vs. 1969.). they undertook reciprocal obligations.00 subsists. specific performance or rescission and damages with preliminary injunction. 1977. filed by the Central Bank and by the Acting Superintendent of Banks (pp. on appeal by Sulpicio M. On January 29. Tolentino liable to pay the P17. 1948.00 loan agreement on April 28. The issues are: 1.00 surety bond. 1972. and lifting the restraining order so that the sheriff may proceed with the foreclosure (pp. upon the filing of a P5. 65-76.). 1169 of the Civil Code). rec.000.000. Tolentino.00 loan. modified the Court of First Instance decision by affirming the dismissal of Sulpicio M. Tolentino. Island Savings Bank. the Court of Appeals. rec.00 loan. the validity of which is not in question. the Bank's delay in furnishing the entire loan started on April 28. Pelarca 29 SCRA 1 [1969]). The promise of Sulpicio M. When Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish the P80. 1965. he signified his willingness to pay the P80.00 balance of the P80. 1965. On January 21. the trial court admitted the answer in intervention praying for the dismissal of the petition of Sulpicio M. If Sulpicio M. the other party who has not performed or is not ready and willing to perform incurs in delay (Art.000. Tolentino entered into an P80. Tolentino filed a petition with the Court of First Instance of Agusan for injunction. the trial court. filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land of Sulpicio M. can his real estate mortgage be foreclosed to satisfy said amount? When Island Savings Bank and Sulpicio M. On February 11. Tolentino executed a real estate mortgage on April 28.000.). Tolentino for specific performance prosper? 2. The power of the Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R. 110 SCRA 46 [1981]. Tolentino and the setting aside of the restraining order. Hence.00 with interest of 12% per annum from April 28.000. rec.000. 1969. ordering him to pay Island Savings Bank the amount of PI 7 000. issued a temporary restraining order enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87. From such date. 103 . alleging that since Island Savings Bank failed to deliver the P63. but it ruled that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17. On February 15. the trial court.000.00 balance of the P80.00 debt covered by the promissory note? 3. rec. which prohibited Island Savings Bank from doing further business.00 loan. 32-43.).000.000. Sulpicio M.00 plus legal interest and legal charges due thereon. Can the action of Sulpicio M. 967 on June 14.00 loan accrued. On January 20. and lasted for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No.00 loan. which took effect on June 15.00 loan pp. 1968. and when one party has performed or is ready and willing to perform his part of the contract. Tolentino.On August 1.000. he is entitled to specific performance by ordering Island Savings Bank to deliver the P63. 135-136. and the sheriff scheduled the auction for January 22. Is Sulpicio M. Thus. Tolentino's petition for specific performance.000. 1965. and if said balance cannot be delivered. rec. Tolentino's liability to pay the P17. the obligation or promise of each party is the consideration for that of the other (Penaco vs. Vda.000. In reciprocal obligations. after trial on the merits rendered its decision. 1969.

000. Afzelius and Afzelius. in asking the advance interest for 6 months on the supposed P80. If Tolentino had not signed a promissory note setting the date for payment of P17.000.n. It is the obligation of the bank's officials and employees that before they approve the loan application of their customers. The promissory note gave rise to Sulpicio M. the bank shall bear the risk in case the collateral turn out to be over-valued.00 balance because said resolution merely prohibited the Bank from making new loans and investments.00 loan. The recent rush of events where collaterals for bank loans turn out to be non-existent or grossly overvalued underscore the importance of this responsibility.The Board Resolution No. The lower court's action is sanctioned by the Rules of Court.000. 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. 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 P80.00 loan when it falls due. But since Island Savings Bank is now prohibited from doing further business by Monetary Board Resolution No. because the bank is in default only insofar as such amount is concerned. cannot raise the same issue before the Supreme Court. CJS p. 104 SCRA 151 [1981]). however. 190 [1918]). If ever bank officials and employees totally reIy on the representation of their customers as to the valuation of the loan collateral. Rule 9. that is. 650) The fact that Sulpicio M. Island Savings Bank.00. the receipt by Sulpicio M.000. Inc. 967. 1049 issued on August 13. Tolentino's reciprocal obligation to pay the P17. 39 Phil. it shall belong to the aggrieved party.00 balance of the P80.000.000.. Thus. which states that "defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived.800.00.000. C.s.1965 cannot interrupt the default of Island Savings Bank in complying with its obligation of releasing the P63.. Rescission is the only alternative remedy left. And. the mere pecuniary inability to fulfill an engagement does not discharge the obligation of the contract.000. Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement. may choose between specific performance or rescission with damages in either case.00 out of the P80.000. t.00 loan. Sept.A. If there is a right to rescind the promissory note.00 loan. Section 2.000. on objections of' Sulpicio M.00 loan. The representation made by the customer is immaterial to the bank's responsibility to conduct its own investigation. was improper considering that only P17. that rescission is only for the P63. Tolentino. 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. hence not entitled to rescission (Article 1191 of the Civil Code). A person cannot be legally charged interest for a non-existing debt. '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. As far as the partial release of P17. 198199. which right exist independently of his right to demand the completion of the P80.00 loan was released. Tolentino accepted and executed a promissory note to cover it.000. The exercise of one right does not affect." Petitioners.000. 'Tolentino of the pre-deducted interest was an exercise of his right to it. as there is no doubt that the bank failed to give the P63. Tolentino. WE cannot grant specific performance in favor of Sulpicio M. Tolentino. which Sulpicio M. Sulpicio M. had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to raise the same in their pleadings (pp. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to P4. the bank was deemed to have complied with its reciprocal obligation to furnish a P17. much less neutralize. 15.00 balance. 1971).00 104 . nor does it constitute any defense to a decree of specific performance (Gutierrez Repide vs. His failure to pay the overdue amortizations under the promissory note made him a party in default. under Article 1191 of the Civil Code. thus. they must investigate the existence and evaluation of the properties being offered as a loan security. Furthermore.000. 17A. 1974 ed. Besides. and nowhere did it prohibit island Savings Bank from releasing the balance of loan agreements previously contracted.00 for the supposed P80.000.00 loan. WE rule. the exercise of the other. vs. The act of Island Savings Bank. the lower court.00 loan covering a 6-month period cannot be taken as a waiver of his right to collect the P63.000.

172 N. Co. 82.000. The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract (Banco de Oro vs. voidable.00. cited in 5th ed. Tolentino became unenforceable to such extent. the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Island Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. that the real estate mortgage of Sulpicio M.000. p. 1974 ed.75 hectares.000. CJS. Vol. for not paying his overdue P17. Tolentino for damages.00 debt.000. no consideration was then in existence. pp. hence the real estate mortgage covering 100 hectares is unenforceable to the extent of 78. Bayuga.000. the real estate mortgage of Sulpicio M..00 debt.00 debt within 3 years as stipulated. 1. Sherman. 93 SCRA 443 [1979]).00 balance of the P8O. 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. when there is partial failure of consideration. does not make the real estate mortgage void for lack of consideration. 180). 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.00 debt. the consideration of the debtor in furnishing the mortgage is the existence of a valid. 88. they are both liable for damages. Vol. 19. p. it is just that he should account for the interest thereon.00 debt. 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. F(2d) p. Tolentino failed to comply with his obligation to pay his P17. The liability of Sulpicio M. the mortgage can take effect only when the debt secured by it is created as a binding contract to pay (Parks vs.75% of P80. Since both parties were in default in the performance of their respective reciprocal obligations. Since Island Savings Bank failed to furnish the P63. Thus.000. Tolentino cannot be entirely foreclosed to satisfy his P 17.. P63. Jones on Mortgage. For the debtor.W. or unenforceable debt (Art. The mortgage covering the remainder of 21. et al. in the accessory contract of real estate mortgage.000.25 hectares is more than sufficient to secure a P17. The fact that when Sulpicio M. the consideration of his obligation to pay is the existence of a debt. And.00 debt shall not be included in offsetting the liabilities of both parties. the liability of the first infractor shall be equitably tempered by the courts. Since Sulpicio M. Tolentino derived some benefit for his use of the P17. p. 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. Poore.E.000. Vol.within 3 years. WE hold. vs. cited in Vol. Peterson.00 is 78.. in relation to Art. 583. as there was no debt yet because Island Savings Bank had not made any release on the loan. in the form of penalties and surcharges. Therefore. Vol. C.00 loan. Vol.25 hectares subsists as a security for the P17. P.A. 'Tolentino executed his real estate mortgage. 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. 176 N. lt may either be a prior or subsequent matter. that is. 125 SCRA 122 [1983]). Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal obligations. the mortgage becomes unenforceable to the extent of such failure (Dow. 59. Wiltsie on Mortgage. 2. cited in the 8th ed. however. 138). 105 . 2086. But when the consideration is subsequent to the mortgage. 21. 2052.000.00. 5-6). vs.000. It is not necessary that any consideration should pass at the time of the execution of the contract of real mortgage (Bonnevie vs.000. Tolentino for interest on his PI 7. Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in the mortgage. of the Civil Code).

Neither can the creditor's heir who have received his share of the debt return the pledge or cancel the mortgage. and also requested his fatherin-law to proceed immediately to the place of the accident and look for the watch. Zozobrado for petitioner. No. vs.000. GUTIERREZ.75 HECTARES IS HEREBY DECLARED UNEN FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. 2. G. 1977 IS HEREBY MODIFIED. In spite of the efforts 106 . he immediately entered the Danao City Hospital to attend to his injuries. he suffered injuries on his left arm.. the plaintiff who was sitting at the front seat was thrown out of the vehicle. respondents. Aside from this. CLEMENTE FONTANAR. IN CASE SULPICIO M. Ruperto N. PUJ-71-7 on the course of the trip from Danao City to Cebu City. he went back to Danao City but on the way. petitioner. Valentin A. AND 3. L-45637 May 31. of the decision of the Court of First Instance of Cebu which reversed the decision of the City Court of Cebu and exonerated the respondents from any liability arising from a vehicular accident. PLUS P41. FERNANDO BANZON and BERFOL CAMORO. Because of his shock and injuries. THE REAL ESTATE MORTGAGE COVERING 78. to the prejudice of other heirs who have not been paid. the right rear tire exploded causing the vehicle to turn turtle. SO ORDERED. "D"). J. 1965 TO AUGUST 22. (Exh.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE PERIOD FROM MAY 22. 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. TOLENTINO. Upon landing on the ground. Alfarara for respondents. 1985 ROBERTO JUNTILLA. he discovered that his "Omega" wrist watch was lost. The jeepney was driven by defendant Berfol Camoro. THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11. 1985 UNTIL PAID. Hence. It was registered under the franchise of defendant Clemente Fontanar but was actually owned by defendant Fernando Banzon. the rule of indivisibility of a mortgage cannot apply WHEREFORE. HIS REAL ESTATE MORTGAGE COVERING 21. When he came to his senses.25 HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS. AND 12% INTEREST ON THE TOTAL AMOUNT COUNTED FROM AUGUST 22. The background facts which led to the filing of a complaint for breach of contract and damages against the respondents are summarized by the Court of First Instance of Cebu as follows: The facts established after trial show that the plaintiff was a passenger of the public utility jeepney bearing plate No. NO COSTS.: This is a petition for review. right thigh and on his back. the plaintiff momentarily lost consciousness. TOLENTINO FAILS TO PAY. on questions of law. he found that he had a lacerated wound on his right palm. When the jeepney reached Mandaue City. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE SUM OF P17. AND 1. In the process. JR.00. 1985. Upon his arrival in Danao City.R.210. SULPICIO M.

The respondents filed their answer. Branch XIV. Paras. The petitioner questions the conclusion of the respondent court drawn from this finding of fact. We find the petition impressed with merit. judgment is hereby rendered in favor of the plaintiff and against the defendants and the latter are hereby ordered. The City Court and the Court of First Instance of Cebu found that the right rear tire of the passenger jeepney in which the petitioner was riding blew up causing the vehicle to fall on its side. After trial. The Honorable Court below committed grave abuse of discretion in failing to take cognizance of the fact that defendants and/or their employee failed to exercise "utmost and/or extraordinary diligence" required of common carriers contemplated under Art. Senining of the Civil Court of Cebu rendered judgment in favor of the petitioner and against the respondents.70 (Exh. Fernando Banzon and Berfol Camoro.of his father-in-law.00 for the doctor's fees and medicine. R-17378 for breach of contract with damages before the City Court of Cebu City. The dispositive portion of the decision reads: WHEREFORE. jointly and severally. A tire blow-out. xxx xxx xxx Petitioner Roberto Juntilla filed Civil Case No.00 as reimbursement for the lost Omega wrist watch. The Court of First Instance of Cebu ruled that: After reviewing the records of the case. The petitioner raises the following alleged errors committed by the Court of First Instance of Cebu on appeal— a. A motion for reconsideration was denied by the Court of First Instance. an additional sum of P300. et al. such as what happened in the case at bar. to pay the plaintiff the sum of P750. v. judgment is hereby rendered exonerating the defendants from any liability to the plaintiff without pronouncement as to costs. the further sum of P100. there being absence of a showing that there was misconduct or negligence on the part of the operator in the operation and maintenance of the vehicle involved. 1755 of the Civil Code of the Philippines. The fact that the right rear tire exploded. the sum of P246. The respondents appealed to the Court of First Instance of Cebu. is an inevitable accident that exempts the carrier from liability. Canares reversed the judgment of the City Court of Cebu upon a finding that the accident in question was due to a fortuitous event. this Court finds that the accident in question was due to a fortuitous event. Branch I against Clemente Fontanar. alleging inter alia that the accident that caused losses to the petitioner was beyond the control of the respondents taking into account that the tire that exploded was newly bought and was only slightly used at the time it blew up. Judge Leonardo B. 107 . which he bought for P 852. b. The Court of First Instance of Cebu erred when it absolved the carrier from any liability upon a finding that the tire blow out is a fortuitous event. "B") could no longer be found. the wrist watch. Judge Romulo R.64 as unrealized salary of the plaintiff from his employer. The Honorable Court below committed grave abuse of discretion by deciding the case contrary to the doctrine laid down by the Honorable Supreme Court in the case of Necesito et al.00 for attorney's fees and the costs. The dispositive portion of the decision reads: WHEREFORE.

8136.despite being brand new. not only are not binding on this Court but were based on considerations quite different from those that obtain in the case at bar. also in relation to contracts.. The records show that the passenger jeepney turned turtle and jumped into a ditch immediately after its right rear tire exploded. must be independent of the human will. (2) It must be impossible to foresee the event which constitutes the caso fortuito. No..R.. And (4) the obligor (debtor) must be free from any participation in the aggravation of the injury resulting to the creditor. we laid down the following essential characteristics of caso fortuito: xxx xxx xxx .. .R. this would be a clear case of fortuitous event. No. 8136. CA-G... The petitioner stated that there were three (3) passengers in the front seat and fourteen (14) passengers in the rear. In a legal sense and. (17 SCRA 23). The appellate court there made no findings of any specific acts of negligence on the part of the defendants and confined itself to the question of whether or not a tire blow-out. There is also evidence to show that the passenger jeepney was overloaded at the time of the accident. it must be impossible to avoid. De Jesus. v. could have been caused by too much air pressure injected into the tire coupled by the fact that the jeepney was overloaded and speeding at the time of the accident. (3) The occurrence must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. June 27. In Lasam v. there are specific acts of negligence on the part of the respondents. and People v. While it may be true that the tire that blew-up was still good because the grooves of the tire were still visible. therefore.. 1954. No evidence was presented to show that the accident was due to adverse road conditions or that precautions were taken by the jeepney driver to compensate for any conditions liable to cause accidents. The Court of First Instance relied on the ruling of the Court of Appeals in Rodriguez v. These rulings. Palapad. Red Line Transportation Co. where the Court of Appeals ruled that: A tire blow-out does not constitute negligence unless the tire was already old and should not have been used at all. The evidence shows that the passenger jeepney was running at a very fast speed before the accident. . constitutes a clear case of caso fortuito which can be a proper basis for exonerating the defendants from liability. by itself alone and without a showing as to the causative factors. The sudden blowing-up.) 108 . Red Line Transportation Co. 657). citing the rulings of the Court of Appeals in Rodriguez v. No. 309. consequently. December 29. CA G. a caso fortuito presents the following essential characteristics: (1) The cause of the unforeseen and unexpected occurrence. or of the failure of the debtor to comply with his obligation. we held that: Petitioner maintains that a tire blow-out is a fortuitous event and gives rise to no liability for negligence. or if it can be foreseen. December 29. 18480. this fact alone does not make the explosion of the tire a fortuitous event. 1958. 1954.R. (5 Encyclopedia Juridica Espanola.. et al. The reliance of the Court of First Instance on the Rodriguez case is not in order. Indeed. Smith (45 Phil. however. In La Mallorca and Pampanga Bus Co. The foregoing conclusions of the Court of First Instance of Cebu are based on a misapprehension of overall facts from which a conclusion should be drawn. CA G. We agree with the observation of the petitioner that a public utility jeep running at a regular and safe speed will not jump into a ditch when its right rear tire blows up. In the case at bar. would generate liability.

that the carrier. The respondents argue that the doctor who issued the medical certificate was not presented during the trial. (104 Phil. v. The respondents also claim that the petitioner was not wearing any wrist watch during the accident. as far as regards the work of constructing the appliance...00). Roy. For the purposes of this doctrine. the good repute of the manufacturer will not relieve the carrier from liability' (10 Am. Hussey. SO ORDERED.. The rationale of the carrier's liability is the fact that the passenger has neither choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. et al.S. The records show that this obligation was not met by the respondents. It should be noted that the City Court of Cebu found that the petitioner had a lacerated wound on his right palm aside from injuries on his left arm. the cause of the unforeseen and unexpected occurrence was not independent of the human will. 29 ALR 788. 102 U. and that on his way back to Danao City. see also Pennsylvania R. Paras. with a due regard for all the circumstances. therefore. Ed. Branch I is REINSTATED. and Ed Note. whenever it appears that the defect would have been discovered by the carrier if it had exercised the degree of care which under the circumstances was incumbent upon it. it binds itself to carry the passengers safely as far as human care and foresight can provide. 205. and by entering into the said contract. 1324. 1975.: Ann. et al. Co. Southern R. Common carriers should teach their drivers not to overload their vehicles. 1916E 929).In the case at bar. Having no privity whatever with the manufacturer or vendor of the defective equipment. while not an insurer of the safety of his passengers. 141. not to exceed safe and legal speed limits. 451. and hence not cross-examined. 2d 70. 74 ALR 1172. while the carrier usually has. and the decision of the City Court of Cebu. using the utmost diligence of a very cautious person. The accident was caused either through the negligence of the driver or because of mechanical defects in the tire. with regard to inspection and application of the necessary tests. It is but logical. Damages shall earn interests from January 27. Branch IV appealed from is hereby REVERSED and SET ASIDE. Cas. 20 L. It is sufficient to reiterate that the source of a common carrier's legal liability is the contract of carriage. we held in Necesito. that: . why was he treated in Danao City and not in Mandaue City where the accident took place. .. According to this theory. should nevertheless be held to answer for the flaws of his equipment if such flaws were at all discoverable. 109 . 42 Fed. s. WHEREFORE. The respondents submit that if the petitioner was really injured. The respondents likewise argue that the petitioner cannot recover any amount for failure to prove such damages during the trial. Jur. and to know the correct measures to take when a tire blows up thus insuring the safety of passengers at all times. The preponderance of authority is in favor of the doctrine that a passenger is entitled to recover damages from a carrier for an injury resulting from a defect in an appliance purchased from a manufacturer. the manufacturer is considered as being in law the agent or servant of the carrier. Relative to the contingency of mechanical defects. the passenger has no remedy against him. More so when we consider the fact that the Court of First Instance of Cebu impliedly concurred in these matters when it confined itself to the question of whether or not the tire blow out was a fortuitous event. 75). he discovered that his "Omega" wrist watch was lost. right thigh and on his back. with the modification that the damages shall earn interest at 12% per annum and the attorney's fees are increased to SIX HUNDRED PESOS (P600. v. These are findings of facts of the City Court of Cebu which we find no reason to disturb. v. the decision of the Court of First Instance of Cebu. Co.

R. 169). 1986 PHILIPPINE BAR ASSOCIATION. L-47896 October 3. L-47863 October 3. NAKPIL.47851.. Nakpil. ET AL. (e) Ordering defendant United Construction Co.000... vs.. ET AL.G. 1968 until full payment to be paid jointly and severally by defendant United Construction Co. petitioners. No. in Civil Case No. L-47851 October 3. Inc. Nakpil and Sons and Juan F. THE COURT OF APPEALS. 74958 dated September 21.R. (Record on Appeal p. No. G. No. COURT OF APPEALS. The Court of Appeals in modifying the decision of the lower court included an award of an additional amount of P200. (b) Dismissing the complaint with respect to defendant Juan J. INC.00 in favor of plaintiff-appellant Philippine Bar Association. and the PHILIPPINE BAR ASSOCIATION. jointly and severally. SO ORDERED. Rollo.R.. vs.. JUAN J. respondents. 1971 Order of the lower court is hereby affirmed with COSTS to be paid by the PARAS.000. (d) Dismissing the defendant's and third-party defendants' counterclaims for lack of merit. CARLOS. p. vs. INC. and third-party defendants (except Roman Ozaeta) to pay the costs in equal shares.. The dispositive portion of the decision of the Court of Appeals reads: WHEREFORE. The dispositive portion of the modified decision of the lower court reads: 110 . with interest at the legal rate from November 29. and third-party defendants (except Roman Ozaeta) to pay the plaintiff. Carlos.68 with interest at the legal rate from November 29.. J. COURT OF APPEALS. and JUAN F. judgment is hereby rendered: (a) Ordering defendant United Construction Co. the sum of P989. L.: These are petitions for review on certiorari of the November 28. respondents. NAKPIL & SONS.. 521. 1971 as modified by the Order of the lower court dated December 8. and third party defendants (except Roman Ozaeta). 1977 decision of the Court of Appeals in CA-G. G. No. Inc. 1986 JUAN F. 1971. 1968. ET AL. 1986 THE UNITED CONSTRUCTION CO. WHEREFORE. petitioner. petitioners. In all other respects. 1971 as modified in the December 8.R. the date of the filing of the complaint until full payment. Inc. 51771-R modifying the decision of the Court of First Instance of Manila.335.00 to the Philippine Bar Association to be paid jointly and severally by the defendant United Construction Co. UNITED CONSTRUCTION COMPANY. (c) Dismissing the third-party complaint. the judgment dated September 21. respondents. Branch V. the judgment appealed from is modified to include an award of P200. and by the third-party defendants Juan F.

Defendants in turn filed a third-party complaint against the architects who prepared the plans and specifications. Rollo.000.. 74958. 111 . The building was completed in June. on an "administration" basis. the plaintiff and third-party defendants Juan F. 1966. Inc. the plaintiff need not amend its complaint by including the said Juan F. a third-party defendant in this case.00 for the loss of the PBA building plus four (4) times such amount as damages resulting in increased cost of the building. 269-348. Inc. Nakpil & Sons.830.00 as attorney's fees. 172). p. on the suggestion of Juan J. pp. among other things. The tenants vacated the building in view of its precarious condition. In the early morning of August 2. decided to construct an office building on its 840 square meters lot located at the comer of Aduana and Arzobispo Streets. the failure of the contractors to follow plans and specifications and violations by the defendants of the terms of the contract. at the cost of P13. for exoneration from liability while petitioner Philippine Bar Association in L-47896 seeks the modification of aforesaid decision to obtain an award of P1. As a temporary remedial measure. alleging in essence that the collapse of the building was due to the defects in the said plans and specifications. Philippine Bar Association. The proposal was approved by plaintiff's board of directors and signed by its president Roman Ozaeta. Carlos. Roman Ozaeta. Manila. The front columns of the building buckled.661.000. Nakpil personally as parties defendant. p. 1978 requiring the respective respondents to comment. Intramuros. The facts as found by the lower court (Decision. the building was shored up by United Construction. incorporated under the Corporation Law. Nakpil & Sons in L-47851 and United Construction Co. The construction was undertaken by the United Construction. That in relation to defendants' answer with counterclaims and third. pp.000. Plaintiff alleges that the collapse of the building was accused by defects in the construction. Nakpil presented a written stipulation which reads: 1. Carlos. Carlos in L-47863 seek the reversal of the decision of the Court of Appeals.00 as exemplary damages. a civic-non-profit association. and Juan J. 169) and affirmed by the Court of Appeals are as follows: The plaintiff. causing the building to tilt forward dangerously.. as party defendant. C. 1969. The plans and specifications for the building were prepared by the other thirdparty defendants Juan F. Inc. 1968 an unusually strong earthquake hit Manila and its environs and the building in question sustained major damage. Inc. 520-521.C. and its President and General Manager Juan J. Carlos as defendants. the then president of the plaintiff Bar Association was included as a third-party defendant for damages for having included Juan J.defendant and third party defendant (except Roman Ozaeta) in equal shares. L-47851. the president and general manager of said corporation.28. On March 3. SO ORDERED. On November 29. L-47851. (Rollo. Nakpil & Sons and Juan F. and P100.party complaints and the third-party defendants Nakpil & Sons' answer thereto. the plaintiff commenced this action for the recovery of damages arising from the partial collapse of the building against United Construction. No. Petitioners Juan F. P100. 1968. 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. Record on Appeal. President of the United Construction Co. Nakpil & Sons and Juan F. Inc.

or in the event that the Court may find Juan F. That in the event (unexpected by the undersigned) that the Court should find after the trial that the above-named defendants Juan J. (c) The alleged failure of defendants to observe the requisite quality of materials and workmanship in the construction of the building. designs. against Juan F. the contractor and/or the owner of the building. 274-275. (e) An act of God or a fortuitous event. pp. 1968 earthquake had been caused. Nakpil & Sons and Juan F. are free from any blame and liability for the collapse of the PBA Building. designs. Both parties hereby jointly petition this Honorable Court to approve this stipulation. 1969. 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. and should further find that the collapse of said building was due to defects and/or inadequacy of the plans. made by the defendants from said plans and specifications and how said deviations contributed to the damage sustained. if any. (Record on Appeal. and specifications prepared by them and/or failure in the performance of their contract with plaintiff. 2. such as the foundation.2. assumed his office as Commissioner.p. In the latter case. Whether the damage sustained by the PBA building during the August 2. by: (a) The inadequacies or defects in the plans and specifications prepared by third-party defendants. during which among others. (b) The deviations. Nakpil contributorily negligent or in any way jointly and solidarily liable with the defendants. L47851. Nakpil & Sons and/or Juan F. as the case may be. and the value of any remaining construction. charged with the duty to try the following issues: 1. 3. a pre-trial was conducted on March 7. which may still be utilized or availed 112 . directly or indirectly. If the cause of the damage suffered by the building arose from a combination of the aboveenumerated factors. 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. (d) The alleged failure to exercise the requisite degree of supervision expected of the architect. Carlos and United Construction Co. the parties agreed to refer the technical issues involved in the case to a Commissioner. and specifications p by the third-party defendants. Andres O. Hizon. Nakpil as parties defendant and by alleging causes of action against them including.169). the determination of the cost of such restoration or repair. 3. Mr. Inc. Nakpil and Sons and/or Juan F.. Upon the issues being joined. the defects or inadequacy of the plans. and (f) Any other cause not herein above specified. the degree or proportion in which each individual factor contributed to the damage sustained. among others. judgment may be rendered in whole or in part. who was ultimately appointed by the trial court. Rollo.

309-328.3 they were also caused by the defects in the plans and specifications prepared by the thirdparty defendants' architects. Using the same authorities availed of by the amicus curiae such as the Manila Code (Ord. 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. pp. on September 21. 4131) and the 1966 Asep Code. 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. the Association of Civil Engineers. when asked by Us to comment. caused further damage to the property. and 12.) After the protracted hearings. 1970 with the findings that while the damage sustained by the PBA building was caused directly by the August 2. The actual demolition was undertaken by the buyer of the damaged building. Hence. (Record on Appeal. the United Architects of the Philippines. Finally. p. reiterated his conclusion that the defects in the plans and specifications indeed existed. the lower court rendered the assailed decision which was modified by the Intermediate Appellate Court on November 28. these petitions. pp. 169). 1970 followed by other strong earthquakes on April 9. The amicus curiae gave the opinion that the plans and specifications of the Nakpils were not defective. Thus. the Commissioner added that even if it can be proved that the defects in theconstruction alone (and not in the plans and design) caused the damage to the building. On May 11. No. 1968 earthquake whose magnitude was estimated at 7. architects and even the owners to exercise the requisite degree of supervision in the construction of subject building. (Record on Appeal. Meanwhile. 1978. Ibid). on April 30. 278-280. The non-technical issues were tried by the Court. 1970. 1978) were duly noted. Rollo. the amicus curiae were granted a period of 60 days within which to submit their position. The motions were opposed by the defendants and the matter was referred to the Commissioner. All the parties herein appealed from the decision of the Intermediate Appellate Court. 275-276. Ibid. and the Philippine Institute of Architects filed with the Court a motion to intervene as amicus curiae. The Court sees no legal or contractual basis for such conclusion. After the parties had all filed their comments. still the deficiency in the original design and jack of specific provisions against 113 . pp. 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. 1978. 1979 the building was authorized to be demolished at the expense of the plaintiff. The position papers of the amicus curiae (submitted on November 24. Thus. As aforestated the technical issues were referred to the Commissioner. 1971. the Commissioner eventually submitted his report on September 25. but not another earthquake of high intensity on April 7.of (Record on Appeal. the issues of this case were divided into technical issues and non-technical issues. We gave due course to the petitions in Our Resolution of July 21. L47851. plaintiff moved twice for the demolition of the building on the ground that it may topple down in case of a strong earthquake. All the parties registered their objections to aforesaid findings which in turn were answered by the Commissioner. 1977. But the Commissioner.

661. he shall be solidarily liable with the contractor. raised the following assignments of errors: Philippine Bar Association claimed that the measure of damages should not be limited to P1.. pains or care. were inevitable (Article 1174. 1968 is a fortuitous event or an act of God.000. for a breach of an obligation due to an "act of God. deviations from plans and specifications and other imperfections in the case of United Construction Co. 1723.100. 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.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. does not imply waiver of any of the causes of action by reason of any defect mentioned in the preceding paragraph. (b) the event must be either unforseeable or unavoidable. among others. Both UCCI and the Nakpils object to the payment of the additional amount of P200. (Ibid. 174).. after completion. the general rule is that no person shall be responsible for events which could not be foreseen or which though foreseen. If the engineer or architect supervises the construction. Inc. 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. The applicable law governing the rights and liabilities of the parties herein is Article 1723 of the New Civil Code. which provides: Art. 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. On the other hand. Inc. which by no amount of foresight." the following must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor. Acceptance of the building. poor workmanship. or the deficiencies in the design. 138 SCRA 553. UCCI also claimed that it should be reimbursed the expenses of shoring the building in the amount of P13. Court of Appeals.000. An act of God has been defined as an accident. or due to any violation of the terms of the contract. exempts from liability. (1 Corpus Juris 1174). To exempt the obligor from liability under Article 1174 of the Civil Code.00 imposed by the Court of Appeals. reasonably to have been expected.28 while the Nakpils opposed the payment of damages jointly and solidarity with UCCI. (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner. due directly and exclusively to natural causes without human intervention. (Vasquez v. could have been prevented. In their respective briefs petitioners. Estrada 114 . New Civil Code). parties who are otherwise liable because of their negligence. The action must be brought within ten years following the collapse of the building. or due to the defects in the ground. The pivotal issue in this case is whether or not an act of God-an unusually strong earthquake-which caused the failure of the building. and (d) the debtor must be free from any participation in. There is no dispute that the earthquake of August 2. plans and specifications prepared by petitioners in the case of the Nakpils. p.00 as estimated cost of repairs or to the period of six (6) months for loss of rentals while United Construction Co. or aggravation of the injury to the creditor.

the whole occurrence is thereby humanized. 1970. Roque vs. Sandiganbayan. July 10. Limpangco & Sons v. Court of Appeals. Phil. (Decision. pp. Court of Appeals. negligence. Oct. Consolacion. (5) the findings of fact are conflicting . 1970. July 30. (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. whether it be from active intervention or neglect. if upon the happening of a fortuitous event or an act of God. 45 Phil. pp. January 17. and removed from the rules applicable to the acts of God. May 29. 1174-1175). To be exempt from liability for loss because of an act of God. 121). 604. 657).. No. 39 SCRA 527. It is evident that the case at bar does not fall under any of the exceptions above-mentioned. 1985. 651).. there concurs a corresponding fraud. 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. 21 SCRA 648. is found to be in part the result of the participation of man. 1979. Lasam v. 30-31). 19 SCRA 289. 55 Phil. Luzon Stevedoring Corp. de Jesus. June 30. PepsiCola Bottling Co. (1 Corpus Juris. (8) said findings of facts are conclusions without citation of specific evidence on which they are based. Smith. such person is not exempt from liability by showing that the immediate cause of the damage was the act of God. 4379. 1967. As correctly assessed by both courts. Gutierrez. (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. the cause of which is to be considered. Alsua-Bett vs. (4) the judgment is based on misapprehension of facts. 247. 92 SCRA 322. On the contrary. 291-292. 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. 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. was found to have made substantial deviations from the plans and specifications. 129. (3) there is grave abuse of discretion. Court of Appeals. Smith. 1967. 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 115 . (Fish & Elective Co. which results in loss or damage. 71 SCRA 423. Sandiganbayan. Milan. (2) the inference made is manifestly mistaken. Yangco Steamship Co. 45 Phil. v.. Thus. 56 SCRA 67. 33 SCRA 622. When the effect. surmise and conjectures. (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. February 8.. while the third-party defendants were found to have inadequacies or defects in the plans and specifications prepared by them. 366). Cited in G. 657). and to have failed to observe the requisite workmanship in the construction as well as to exercise the requisite degree of supervision. Lasam v. Austria v. 66497-98. (7) the findings of facts of the Court of Appeals are contrary to those of the trial court. Tucker v. Cesar vs. Thus it has been held that when the negligence of a person concurs with an act of God in producing a loss. the obligor cannot escape liability. Motors. 49 O. unless (1) the conclusion is a finding grounded entirely on speculation. delay or violation or contravention in any manner of the tenor of the obligation as provided for in Article 1170 of the Civil Code. Buan. 34 Phil. Sacay v. Republic of the Phil.v. 33 SCRA 243. Defendant United Construction Co. Inc. 134 SCRA 105. For this reason the defendant and third-party defendants cannot claim exemption from liability. 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. he must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. v. as it were.R. 21 SCRA 279.G. 31. CA. 1986). 594. or failure to act.

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 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. 11 Assignment of Errors. 1. 25). Because of the earthquake on April 7. 6. to have the building repaired. NAKPIL's Brief as Petitioner.00 in favor of the PBA (L. the Court of Appeals modified the amount by awarding in favor of PBA an additional sum of P200. 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. plus unrealized rental income for one-half year. However. drought. The record is replete with evidence of defects and deficiencies in the designs and plans. 116 . It does not necessarily follow. on the other hand. p. however. spent P13. and perils of the sea are acts of God. authorized the total demolition of the building (L-47896. 19). 1970 (L47896.00 inasmuch as it was not initially a total loss. was unable. 53-54). 19). while both the NAKPILS and UNITED question the additional award of P200. PBA's No.830.00 representing the total value of the building (L47896. The collapse of the PBA building as a result of the August 2." cannot be ignored. p. the fact remains that several buildings in the same area withstood the earthquake to which the building of the plaintiff was similarly subjected. We quote with approval the following from the erudite decision penned by Justice Hugo E. however.28 to shore up the building after the August 2. while the trial court awarded the PBA said amount as damages.000.671. 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 P900.47896. 1968 earthquake was only partial and it is undisputed that the building could then still be repaired and restored to its tenantable condition.661. in view of its lack of needed funding.00 representing the damage suffered by the PBA building as a result of another earthquake that occurred on April 7.000. 46). PBA's No. 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. In any event. UNITED. Vol. p. that specific losses and suffering resulting from the occurrence of these natural force are also acts of God. 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.76 a year until the judgment for the principal amount shall have been satisfied L. p. The PBA in its brief insists that the proper award should be P1.47851. pp. UNITED's Brief as Petitioner. 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. lightning. 1970. p. floods. thru no fault of its own. 92). The PBA. p. 1968 earthquake (L47896. Vol. We are not convinced on the basis of the evidence on record that from the thousands of structures in Manila.conclusions remained convincingly unrebutted by the intervenors/amicus curiae who were allowed to intervene in the Supreme Court. the trial court after the needed consultations. 1 Assignment of Error. CA Decision.000. I.000.

and the rain descended and the floods came and the winds blew and beat upon that house. it also examined the ability of the PBA building. (St. 117 . The failure of the PBA building. The theological allusion of appellant United that God acts in mysterious ways His wonders to perform impresses us to be inappropriate. 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. Matthew 7: 24-27). and beat upon that house. There is no mystery about these acts of negligence. If we follow this line of speculative reasoning. 1968 knowledge and appear inadequate only in the light of engineering information acquired after the earthquake. The collapse of the PBA building was no wonder performed by God. and it fen not. The findings of the lower Court on the cause of the collapse are more rational and accurate. as designed and constructed. floods. Instead of laying the blame solely on the motions and forces generated by the earthquake. deviation from plans and specifications and other imperfections. Designs and constructions vary under varying circumstances and conditions but the requirement to design and build well does not change. Fortunately. to weather the severe earthquake forces was traced to design deficiencies and defective construction. and natural forces is precisely the reason why we have professional experts like architects. It was a result of the imperfections in the work of the architects and the people in the construction company. And the rain descended and man which built his house the floods came. and engineers. Nakpil and Sons alleges that the designs were adequate in accordance with pre-August 2. Following the same line of reasoning. 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. poor workmanship. The evidence reveals defects and deficiencies in design and construction. These deficiencies are attributable to negligent men and not to a perfect God. for it was founded upon a rock" and of the "foolish upon the sand. winds. the facts on record allow a more down to earth explanation of the collapse. and the winds blew. 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. The act-of-God arguments of the defendantsappellants 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 requirement that a building should withstand rains. If this were so. the injury would have been produced. as a unique and distinct construction with no reference or comparison to other buildings. to withstand and successfully weather those forces. 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. and it fell and great was the fall of it. 1968 earthquake was of such an overwhelming and destructive character that by its own force and independent of the particular negligence alleged. factors which are neither mysterious nor esoteric.defective construction. earthquakes.

Also D7. Physical Evidence After the Earthquake. A7 and D7 columns were very much less reinforced. Commissioner's Answer to the various Objections. Create another stiffness imbalance. Floors showed maximum sagging on the sides and toward the front corner parts of the building. The embedded 4" diameter cast iron down spout on all exterior columns reduces the crosssectional area of each of the columns and the strength thereof. Sun-baffles on the two sides and in front of the building. Defendants' Reply to the Commissioner's Answer. 4. Increase the inertia forces that move the building laterally toward the Manila Fire Department. Maximum sagging occurs at the column A7 where the floor is lower by 80 cm. 2. There are more damages in the front part of the building than towards the rear. to wit: Physical evidence before the earthquake providing (sic) inadequacy of design. 3. 1. 4. 118 . Plaintiff's Objections to the Report. Third Party Defendants' Objections to the Report. Slab at the corner column D7 sagged by 38 cm. than the highest slab level. 6. 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. were responsible for the damages. 5. 2. a. The Report of the Commissioner. There was a lateral displacement of the building of about 8". Counter-Reply to Defendants' Reply. inadequate design was the cause of the failure of the building. Defendants' Objections to the Report. b. not a mysterious act of an inscrutable God. Two front corners. Building leaned and sagged more on the front part of the building. 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. 1. Plaintiffs' Reply to the Commissioner's Answer. 3. not only in columns but also in slabs. Column A7 suffered the severest fracture and maximum sagging. Proving Inadequacy of design.The evidence sufficiently supports a conclusion that the negligence and fault of both United and Nakpil and Sons. 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.

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 thirdparty 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

119

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 semicircles 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.

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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,

(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,

(4) Column D7 — Lack of lateral ties, (2) Column A5 — Spirals are cut, (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, (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.

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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. The main effect of eccentricity is to change the beam or girder span. p. 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. Specifications. The cutting of the spirals in column A5. 1. and although this column did not fail. We shall first classify and consider defects which may have appreciable bearing or relation to' the earthquake-resistant property of the building. There is no excuse for the cavity or hollow portion in the column A4.There is merit in many of these allegations. While these can certainly be absorbed within the factor of safety. There were several clear evidences where this was not done especially in some of the ground floor columns which failed. Reference 11). 970. that this cutting was done by others is upon the defendants. As heretofore mentioned. 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 burden of proof. therefore. 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. The proper placing of the main reinforcements and spirals in column A5. second floor. is the responsibility of the general contractor which is the UCCI. therefore. details which insure ductility at or near the connections between columns and girders are desirable in earthquake resistant design and construction. Other than a strong allegation and assertion that it is the plumber or his men who 122 . ground floor. 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. 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 effect on the measured eccentricity of 2 inches. 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%. 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. ground floor is the subject of great contention between the parties and deserves special consideration. this is certainly an evidence on the part of the contractor of poor construction. they nevertheless diminish said factor of safety.

The engineering experts for the defendants submitted an estimate on some of these defects in the amount of a few percent. In other words. The liability for the cutting of the spirals in column A5. a procedure which can not be done if either the beam or girder reinforcement is already in place. therefore. therefore. 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. We may say. The effects of all the other proven and visible defects although nor can certainly be accumulated so that they can contribute to an appreciable loss in earthquake-resistant strength. The 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. 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 lack of proper splicing contributed in a small measure to the loss of strength. that the proven defects. 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. 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. If accumulated. The defendants. 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. 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. ground floor. that the defects and deficiencies in the construction contributed greatly to the damage which occurred. If the reinforcement for the girder and column is to subsequently wrap around the spirals. 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. This is not quite correct. these defects and deficiencies not only tend to add but also to multiply the effects of the shortcomings in the design of the building. therefore. It is reasonable to conclude. 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.may have done the cutting (and this was flatly denied by the plumber) no conclusive proof was presented. deficiencies and violations of the plans and specifications of the PBA building contributed to the damages which resulted during the earthquake of August 2. 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. The proper way is to produce correct spirals down from the top of the main column bars. 123 . this would not do for the elasticity of steel would prevent the making of tight column spirals and loose or improper spirals would result.

and in the latter. did not aggravate or contribute to the damage suffered by the building. the defendants should be held liable for the same as the general contractor of the building. by calling attention to the fact that the missing spirals and ties were only in two out of the 25 columns. while the same may be true. D-5 and B7. (pp. there were no spirals for 10 inches at the bottom. specifications. since many of the defects were minor only the totality of the defects was considered. pp. 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. it also contributed to or aggravated the damage suffered by 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. second floor. (Rollo. resulting in some loss of strength which could be critical near the ends of the columns.Since the execution and supervision of the construction work in the hands of the contractor is direct and positive. designs. and not by the defendants. that the defects in the construction were within the tolerable margin of safety. B-6. the Commissioner stated that. 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. second floor. was done by the plumber or his men. 42-49. He answered the supposition of the defendants that the spirals and the ties must have been looted. Vol. Answering the said objections. The Commissioner conceded that the hollow in column A-4. The objection regarding the cutting of the spirals in Column A5. 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. but averred that it is "evidence of poor construction. 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. Again. was answered by the Commissioner by reiterating the observation in his report that irrespective of who did the cutting of the spirals. 128-142) The afore-mentioned facts clearly indicate the wanton negligence of both the defendant and the third-party defendants in effecting the plans. As the parties most directly concerned with this portion of the Commissioner's report. the lack of proper length of splicing of spirals. groundfloor. 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. 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. or where the spacing of the spirals and ties in the columns were greater than that called for in the specifications. 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. and construction 124 . as evidenced by the actual failure of this column. ground floor. which rendered said supposition to be improbable. and the cut in the spirals in column A5. C-7. did not aggravate or contribute to the damage. the Commissioner answered that. the eccentricities in the columns. C-6. C-5. ground floor. I. As found by the Commissioner." On the claim that the eccentricity could be absorbed within the factor of safety. Commissioners Report). 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. that the hollow in column A4. 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". the Commissioner specified groundfloor columns B-6 and C-5 the first one without spirals for 03 inches at the top. and that the cutting of the spirals in column A5.

Upon failure to pay on such finality. Inc.000.000. Jesus L. Only one thing spells out the fatal difference. vs. CONSOLACION DIMAANO and MILAGROS DIMAANO. the decision appealed from is hereby MODIFIED and considering the special and environmental circumstances of this case. Southeastern College. Buffeted by very strong winds. twelve (12%) per cent interest per annum shall be imposed upon aforementioned amounts from finality until paid.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. intervenes to precipitate the loss. As already discussed. vs. Milan (49 O. Reyna. petitioner. p. and Resolution 2 dated September 12.00. or an act of God for which he is not responsible. et al.00) Pesos as and for attorney's fees. Pertinent aspects of the latter's Report 5 dated October 18. upon the defendant and the third-party defendants (with the exception of Roman Ozaeta) a solidary (Art. 1996 of the Court of Appeals 3 in CA-G. 1998 SOUTHEASTERN COLLEGE INC.000.R. SO ORDERED. Civil Code. the roof of petitioner's building was partly ripped off and blown away. No. PURISIMA. respondents. 1996.". as We do hereby impose. landing on and destroying portions of the roofing of private respondents' house. Solidary costs against the defendant and third-party defendants (except Roman Ozaeta). 1989. On October 11. Supra. DE DIMAANO.000. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5. Relative thereto. as follows: 5. 126389 July 10.. After the typhoon had passed. the general 125 . Pasay City. at about 6:30 in the morning. gross negligence and evident bad faith.G. 1989 stated. REMEDIOS DIMAANO. the destruction was not purely an act of God. Thus.000. 1723. 4 The Resolution under attack denied petitioner's motion for reconsideration. Private respondents are owners of a house at 326 College Road. entitled "Juanita de Jesus vda. Engr. which reduced the moral damages awarded below from P1. G.R.00 to P200. while petitioner owns a four-storey school building along the same College Road. We deem it reasonable to render a decision imposing. the total sum being payable upon the finality of this decision. Situated in the peripheral lot is an almost U-shaped formation of 4-storey building. 4379. One of the factors that may have led to this calamitous event is the formation of the building in the area and the general direction of the wind. Truth to tell hundreds of ancient buildings in the vicinity were hardly affected by the earthquake. No. WHEREFORE. with the strong winds having a westerly direction. a powerful typhoon "Saling" hit Metro Manila. an ocular inspection of the destroyed building was conducted by a team of engineers headed by the city building official. without which the damage would not have occurred. EMERITA DIMAANO. although the act of a third person.: Petition for review under Rule 45 of the Rules of Court seeking to set aside the Decision 1 promulgated on July 31.000. 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. COURT OF APPEALS. de Dimaano. the ruling of the Supreme Court in Tucker v. JUANITA DE JESUS VDA. J.of the PBA building and We hold such negligence as equivalent to bad faith in the performance of their respective tasks. 41422.

those located on both ends of the building. plus litigation expenses. private respondents alleged that the damage to their house rendered the same uninhabitable. giving credence to the ocular inspection report to the effect that subject school building had a "defective roofing structure. is "in tip-top condition". plus costs. thus: WHEREFORE. limbs and property of persons living in the vicinity. b) P1. The claim for exemplary damages is denied for the reason that the defendants (sic) did in a wanton fraudulent.116. that it has not been remiss in its responsibility to see to it that said school building. those trusses are not anchored at all to the roof beams." In their Complaint 6 before the Regional Trial Court of Pasay City. forcing them to stay temporarily in others' houses. 6. (sic) ordering the latter to pay jointly and severally the former as follows: a) P117. without its roofing or any portion thereof giving way." The dispositive portion of the lower court's decision 7 reads. 8 that: 126 . And so they sought to recover from petitioner P117. which houses school children. as actual damages. Another factor and perhaps the most likely reason for the dislodging of the roofing structural trusses is the improper anchorage of the said trusses to the roof beams. as actual damages.00.000. in view of the foregoing. absent any negligence on its part.00." the fourth floor of subject school building be declared as a "structural hazard. Branch 117. receiving the heaviest impact of the strong winds.000. as exemplary damages and P100. P300. there are other steel bars which were not even bent to the trusses.00. faculty members. thus. the damage to private respondents' houses "could have been avoided if the construction of the roof of [petitioner's] building was not faulty. The 1/2' diameter steel bars embedded on the concrete roof beams which serve as truss anchorage are not bolted nor nailed to the trusses.00.formation of the building becomes a big funnel-like structure. as moral damages. the one situated along College Road. typhoon "Saling" was "an act of God and therefore beyond human control" such that petitioner cannot be answerable for the damages wrought thereby. oppressive or malevolent manner.000.000. which remained intact after the storm. Still. In its Answer.116. c) P100. In its appeal to the Court of Appeals. reckless.000. It then recommended that "to avoid any further loss and damage to lives. petitioner averred that subject school building had withstood several devastating typhoons and other calamities in the past. The trial court. there are portions of the roofing." found that. d) Costs of the instant suit. Hence. and employees.000. P1.00 as attorney's fees.00.000. while typhoon "Saling" was accompanied by strong winds. for and as attorney's fees. and furthermore. petitioner assigned as errors.00 as moral damages. the Court renders judgment (sic) in favor of the plaintiff (sic) and against the defendants. for damages based on culpa aquiliana.

00. subject matter of the case. AN INTERVENING EVENT THAT RENDERS THIS CASE MOOT AND ACADEMIC.000. 3. The pivot of inquiry here. III THE TRIAL COURT ERRED IN AWARDING ACTUAL AND MORAL DAMAGES AS WELL AS ATTORNEY'S FEES AND LITIGATION EXPENSES AND COSTS OF SUIT TO DIMAANOS WHEN THEY HAVE NOT INCURRED ACTUAL DAMAGES AT ALL AS DIMAANOS HAVE ALREADY SOLD THEIR PROPERTY. has the right to pursue their complaint against petitioner when the case was already moot and academic by the sale of the property to third party. with the latter having suffered. actual damage has legal basis. Whether or not petitioner is liable for damage caused to others by typhoon "Saling" being an act of God. Whether or not the issuance of a writ of execution pending appeal. ex-parte or without hearing. IS NOT "THE SOLE AND ABSOLUTE REASON" FOR THE RIPPING-OFF OF THE SMALL PORTION OF THE ROOF OF SOUTHEASTERN'S FOUR (4) STOREY SCHOOL BUILDING. 4. without proof or receipts of actual damage. Whether or not the award of attorney's fees when the case was already moot academic [sic] legally justified. is whether the damage on the roof of the building of private 127 . AS AN ACT OF GOD. 5.000. during its pendency.00 to P200.I THE TRIAL COURT ERRED IN HOLDING THAT TYPHOON "SALING". As mentioned earlier. Whether or not the award of actual damages [sic] to respondent Dimaanos on the basis of speculation or conjecture. determinative of the other issues. IV THE TRIAL COURT ERRED IN ORDERING THE ISSUANCE OF THE WRIT OF EXECUTION INSPITE OF THE PERFECTION OF SOUTHEASTERN'S APPEAL WHEN THERE IS NO COMPELLING REASON FOR THE ISSUANCE THERETO. Whether or not the award of moral damages to respondent Dimaanos. 6.000. petitioner's resort to this Court. Hence. II THE TRIAL COURT ERRED IN HOLDING THAT "THE CONSTRUCTION OF THE ROOF OF DEFENDANT'S SCHOOL BUILDING WAS FAULTY" NOTWITHSTANDING THE ADMISSION THAT THERE WERE TYPHOONS BEFORE BUT NOT AS GRAVE AS TYPHOON "SALING" WHICH IS THE DIRECT AND PROXIMATE CAUSE OF THE INCIDENT. raising for resolution the issues of: 1. respondent Court of Appeals affirmed with modification the trial court's disposition by reducing the award of moral damages from P1. [sic] legally feasible or justified. 2. Whether or not respondent Dimaanos who are no longer the owner of the property. has support in law.

petitioner cannot be held liable for the damages suffered by the private respondents. notwithstanding the general rule that factual findings by the trail court. fires. When a person's negligence concurs with an act of God in producing damage or injury to another. This conclusion finds support in Article 1174 of Civil Code." 11 In order that a fortuitous event may exempt a person from liability. After a thorough study and evaluation of the evidence on record. the trial court imputed negligence to petitioner and adjudged it liable for damages to private respondents. this Court believes otherwise." 10 Civilist Arturo M. When the effect is found to be partly the result of the participation of man — whether it be from active intervention. There is no question that a typhoon or storm is a fortuitous event. storms. Private respondents. though foreseen. floods. or neglect. a natural occurrence which may be foreseen but is unavoidable despite any amount of foresight. Negligence. 14 After a careful scrutiny of the records and the pleadings submitted by the parties. governmental prohibitions. robbery. such as an armed invasion. or which. or when the nature of the obligation requires the assumption of risk. guided by considerations which ordinarily regulate the conduct of human affairs. Except in cases expressly specified by the law.respondents resulting from the impact of the falling portions of the school building's roof ripped off by the strong winds of typhoon "Saling". epidemics. it bears emphasizing that a person claiming damages for the negligence of another has the burden of proving the existence of fault or negligence causative of his injury or loss. are binding and conclusive upon this Court. in establishing the culpability of petitioner. such that if it were not. etc." Based on such finding. The antecedent of fortuitous event or caso fortuito is found in the Partidas which defines it as "an event which takes place by accident and could not have been foreseen. as commonly understood. or when it is otherwise declared by stipulation. we proceed to determine whether petitioner was negligent. precaution. were inevitable. due to fortuitous event? If so. 16 In other words. would do. 18 From these premises." 9 Escriche elaborates it as "an unexpected event or act of God which could neither be foreseen nor resisted. was. within legal contemplation. It may be the failure to observe that degree of care. etc. 19 not merely by presumptions and conclusions without basis in fact. which provides: Art 1174. there should have been no human participation amounting to a negligent act. The facts constitutive of negligence must be affirmatively established by competent evidence. is conduct which naturally or reasonably creates undue risk or harm to others. and removed from the rules applicable to acts of God. attack by bandits. no person shall be responsible for those events which could not be foreseen. it is necessary that he be free from any previous negligence or misconduct by reason of which the loss may have been occasioned. or failure to act — the whole occurrence is hereby humanized. 15 In order to be exempt from liability arising from any adverse consequence engendered thereby. Tolentino adds that "[f]ortuitous events may be produced by two general causes: (1) by nature. the person seeking exoneration from liability must not be guilty of negligence. 17 or the omission to do something which a prudent and reasonable man. especially when affirmed by the appellate court. the lower court accorded full credence to the finding of the investigating team that subject school building's roofing had "no sufficient anchorage to hold it in position especially when battered by strong winds. 12 An act of God cannot be invoked for the protection of a person who has been guilty of gross negligence in not trying to forestall its possible adverse consequences. diligence or care. merely relied on the aforementioned report submitted by a team which made an ocular inspection of petitioner's 128 . 13 In the case under consideration. the damage caused to private respondents' house could have been avoided? At the outset. such as earthquakes. and vigilance which the circumstances justify demand. we find exception to this rule and hold that the lower courts misappreciated the evidence proffered. and (2) by the act of man. such person is not exempt from liability by showing that the immediate or proximate cause of the damages or injury was a fortuitous event.

these are. 25 More so because no bad faith or willful act to cause damage was alleged and proven to warrant moral damages. obviously. 24 Petitioner cannot be made to answer for a purely fortuitous event. If subject school building's roofing was not firmly anchored to its trusses. Reyna admitted that it was a legal requirement before the construction of any building to obtain a permit from the city building official (city engineer. pointing out specific facts that afford a basis for measuring whatever compensatory damages are borne. after construction of the building. the city building official. Private respondents failed to adduce adequate and competent proof of the pecuniary loss they actually incurred. when part of its roof needed repairs of the damage inflicted by typhoon "Saling". contrary to the report that its "U-shaped" form was "structurally defective. Neither did they prove any substantial deviation from the approved plans and specifications. In the present case. For instance. at the very least. 20 What is visual to the eye through. we find no clear and convincing evidence to sustain the judgment of the appellate court." In light of the foregoing. cannot always definitely conclude that a third person shot the victim. In addition. the city building official is presumed to have properly performed his duties 23 in connection therewith. Nor did they conclusively establish that the construction of such building was basically flawed. who has been in the city government service since 1974. It could have been self-inflicted or caused accidentally by a stray bullet. prior to the passage of the Building Act of 1977). Engr. Having obtained both building permit and certificate of occupancy. that the original plans and design of petitioner's school building were approved prior to its construction. Private respondents did not even show that the plans. petitioner elicited from one of the witnesses of private respondents.27 Private respondents merely submitted an estimated amount needed for the repair of the roof their subject building. the same city official gave the go-signal for such repairs — without any deviation from the original design — and subsequently. whether the "necessary repairs" were caused ONLY by petitioner's 129 . Moreover. 22 Furthermore. it could not have withstood long years and several typhoons even stronger than "Saling. no investigation was conducted to determine the real cause of the partial unroofing of petitioner's school building. private respondents' claim for actual and moral damages as well as attorney's fees must fail.school building after the typhoon.26 It is not enough that the damage be capable of proof but must be actually proved with a reasonable degree of certainty. The relationship of cause and effect must be clearly shown. is not always reflective of the real cause behind. What is more. city building official Jesus Reyna. authorized the use of the entire fourth floor of the same building. an ocular inspection is one by means of actual sight or viewing. prima facie evidence of the regular and proper construction of subject school building." Having given his unqualified imprimatur. specifications and design of said school building were deficient and defective. With this disposition on the pivotal issue. We thus hold that petitioner has not been shown negligent or at fault regarding the construction and maintenance of its school building in question and that typhoon "Saling" was the proximate cause of the damage suffered by private respondents' house. petitioner presented its vice president for finance and administration who testified that an annual maintenance inspection and repair of subject school building were regularly undertaken. As the term imparts. admitted in open court that no complaint regarding any defect on the same structure has ever been lodged before his office prior to the institution of the case at bench. It is a matter of judicial notice that typhoons are common occurrences in this country. one who hears a gunshot and then sees a wounded person. Petitioner was even willing to present its maintenance supervisor to attest to the extent of such regular inspection but private respondents agreed to dispense with his testimony and simply stipulated that it would be corroborative of the vice president's narration. a certification must be secured from the same official attesting to the readiness for occupancy of the edifice. other than the said ocular inspection. In like manner. 21 On the other hand. These only prove that subject building suffers from no structural defect.

000.00 principal obligation.000. No. the Trial Court issued. 1961. plaintiff loaned P10. Costs against the private respondents. The loan became ultimately due on January 31. but claimed that the additional P6. which endorsed it to this instance stating that the issue involved was one of law. Upon application of plaintiff. on the same date of September 23. the Court hereby allows both parties to simultaneously submit a Motion for Summary Judgment. 1960. 1960. 1960. the writ of execution issued on April 1.alleged negligence in the maintenance of its school building. an Order was issued by the Trial Court stating that "after considering the manifestation of both counsel in Chambers. OLYMPIC SAWMILL CO. proceedings before the Trial Court versed principally in regards to the attachment. de Joya for defendants-appellants. and ELINO LEE CHI.00 as follows: That the sum of SIX THOUSAND PESOS (P6. Accordingly. 7314 before the trial court a quo is ordered DISMISSED and the writ of execution issued on April 1. G. to defendant partnership and defendant Elino Lee Chi. Defendants admitted the P10. Nueva Ecija. plaintiff-appellee. Defendants again failed to pay their obligation by April 30. defendantsappellants. 1993 by the trial court is hereby nullified and set aside.000. de Guzman for plaintiff-appellee. as the managing partner. 1960. This is an appeal by defendants from a Decision rendered by the then Court of First Instance of Bulacan. a writ of Attachment on real and personal properties of defendants located at Karanglan. On January 18. Felizardo S. the parties executed another loan document. The Court deems unnecessary to resolve the other issues posed by petitioner. After the Writ of Attachment was implemented.00 was extended to April 30.00.000. plaintiff instituted this collection case. private respondents are ORDERED to return to petitioner any amount or property received by them by virtue of said writ. WHEREFORE.000. Payment of the P10.00). vs. 1984 LIAM LAW. the petition is GRANTED and the challenged Decision is REVERSED. L-30771 May 28. 1957. 1993 in said case is SET ASIDE. 1 The plaintiff filed his MELENCIO-HERRERA. but was not paid on that date. J. 1960. Mariano M.00 constituted usurious interest. It appears that on or about September 7. 1960 and. As regards the sixth issue. or up to April 30.: 130 . is an essential question that remains indeterminable. legal interest. SO ORDERED. The appeal was originally taken to the then Court of Appeals. but the obligation was increased by P6. On March 17.M.R. Private respondents are ordered to reimburse any amount or return to petitioner any property which they may have received by virtue of the enforcement of said writ. without interest.000. on September 23. Philippine currency shall form part of the principal obligation to answer for attorney's fees. 1960. with the debtors asking for an extension of three months. The complaint of private respondents in Civil Case No. or included the ordinary wear and tear of the house itself. and other cost incident thereto to be paid unto the creditor and his successors in interest upon the termination of this agreement. however.

000. . No evidentiary hearing having been held.Motion for Summary Judgment on January 31. unless the debtor proves the contrary". 196l. Section 24(d). which took effect on 19 December 1953. Under Article 1354 of the Civil Code. 3 Section 9 of the Usury Law (Act 2655) provided: SEC. and may be retroactively applied to the case at bar because it is procedural in nature.00 obligation was illegal. 6 WHEREFORE. Republic Act No.. "it is presumed that it exists and is lawful. The foregoing provision envisages a complaint filed against an entity which has committed usury. should be considered repealed with retroactive effect. while defendants filed theirs on February 2. SO ORDERED. where it is the defendant. Confirming the Trial Court's finding. 1961. usury has been legally non-existent. the Trial Court rendered decision ordering defendants to pay plaintiff "the amount of P10. They insist the claim of usury should have been deemed admitted by plaintiff as it was "not denied specifically and under oath". with legal rate of interest on both amounts from April 30.000.00 by way of liquidated damages .000. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought or filed against said person or corporation before a competent court to recover the money or other personal or real property." It is from this judgment that defendants have appealed. we view the P6. charged or received in violation of the provisions of this Act. 5 . Statutes regulating the procedure of the courts will be construed as applicable to actions pending and undetermined at the time of their passage.00 plus the further sum of P6. the defendant shall be deemed to have admitted the usury.. for the recovery of the usurious interest paid. 876. as in the present.000. the appealed judgment is hereby affirmed. The main thrust of defendants' appeal is the allegation in their Answer that the P6. for sometime now. 1960. known as the Arbitration Law. not the plaintiff. it has to be concluded that defendants had not proven that the P6. 131 . .000. representing loss of interest income. . as of March 17. 2 On June 26. 1961.000.00 obligation as liquidated damages suffered by plaintiff. procedural in nature. attorney's fees and incidentals. seeds or agricultural products. who is alleging usury. Interest can now be charged as lender and borrower may agree upon. if the entity sued shall not file its answer under oath denying the allegation of usury. in regards to the agreement of the parties relative to the P6.00 obligation. 1960. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained in the latter. The provision does not apply to a case.. Procedural laws are retrospective in that sense and to that extent. 4 The Rules of Court in regards to allegations of usury.. We have decided to affirm.00 constituted usurious interest. without pronouncement as to costs. Moreover. In that case.

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