1207 JOINT/SOLIDARY OBLIGATIONS

G.R. No. 72275 November 13, 1991

PACIFIC BANKING CORPORATION, petitioner,
vs.
HON INTERMEDIATE APPELLATE COURT AND ROBERTO REGALA, JR., respondents.
Ocampo, Dizon & Domingo for petitioner.
Angara, Concepcion, Regala & Cruz for private respondent.

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

The defendant Celia Regala, as such Pacificard holder, had purchased goods and/or
services on credit (Exh. "C", "C-l" to "C-112") under her Pacificard, for which the plaintiff
advanced the cost amounting to P92,803.98 at the time of the filing of the complaint.
In view of defendant Celia Regala's failure to settle her account for the purchases made
thru the use of the Pacificard, a written demand (Exh. "D") was sent to the latter and also
to the defendant Roberto Regala, Jr. (Exh. " ") under his "Guarantor's Undertaking."
A complaint was subsequently filed in Court for defendant's (sic) repeated failure to settle
their obligation. Defendant Celia Regala was declared in default for her failure to file her
answer within the reglementary period. Defendant-appellant Roberto Regala, Jr., on the
other hand, filed his Answer with Counterclaim admitting his execution of the
"Guarantor's Understanding", "but with the understanding that his liability would be limited
to P2,000.00 per month."
In view of the solidary nature of the liability of the parties, the presentation of
evidence ex-parte as against the defendant Celia Regala was jointly held with the trial of
the case as against defendant Roberto Regala.
After the presentation of plaintiff's testimonial and documentary evidence, fire struck the
City Hall of Manila, including the court where the instant case was pending, as well as all
its records.
Upon plaintiff-appellee's petition for reconstitution, the records of the instant case were
duly reconstituted. Thereafter, the case was set for pre-trial conference with respect to
the defendant-appellant Roberto Regala on plaintiff-appellee's motion, after furnishing the
latter a copy of the same. No opposition thereto having been interposed by defendantappellant, the trial court set the case for pre-trial conference. Neither did said defendantappellant nor his counsel appear on the date scheduled by the trial court for said
conference despite due notice. Consequently, plaintiff-appellee moved that the
defendant-appellant Roberto Regala he declared as in default and that it be allowed to
present its evidence ex-parte, which motion was granted. On July 21, 1983, plaintiffappellee presented its evidence ex-parte. (pp. 23-26, Rollo)
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of which
reads:
WHEREFORE, the Court renders judgment for the plaintiff and against the defendants
condemning the latter, jointly and severally, to pay said plaintiff the amount of
P92,803.98, with interest thereon at 14% per annum, compounded annually, from the
time of demand on November 17, 1978 until said principal amount is fully paid; plus 15%
of the principal obligation as and for attorney's fees and expense of suit; and the costs.
The counterclaim of defendant Roberto Regala, Jr. is dismissed for lack of merit.
SO ORDERED. (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate Appellate Court.
On August 12, 1985, respondent appellate court rendered judgment modifying the decision of the trial
court. Private respondent Roberto Regala, Jr. was made liable only to the extent of the monthly credit
limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the advances made during the one

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

The respondent appellate court held that "all the other rights of the guarantor are not thereby lost by the
guarantor becoming liable solidarily and therefore a surety." It further ruled that although the surety's
liability is like that of a joint and several debtor, it does not make him the debtor but still the guarantor (or
the surety), relying on the case of Government of the Philippines v. Tizon. G.R. No. L-22108, August 30,
1967, 20 SCRA 1182. Consequently, Article 2054 of the Civil Code providing for a limited liability on the
part of the guarantor or debtor still applies.
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less, but not for
more than the principal debtor, both as regards the amount and the onerous nature of the conditions. 2 It
is likewise not disputed by the parties that the credit limit granted to Celia Regala was P2,000.00 per
month and that Celia Regala succeeded in using the card beyond the original period of its effectivity,
October 29, 1979. We do not agree however, that Roberto Jr.'s liability should be limited to that extent.
Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent of
the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any change or
novation of the terms and conditions in connection with the issuance of the Pacificard credit
card." Roberto, in fact, made his commitment as a surety a continuing one, binding upon himself until all
the liabilities of Celia Regala have been fully paid. All these were clear under the "Guarantor's
Undertaking" Roberto signed, thus:
. . . Any changes of or novation in the terms and conditions in connection with the
issuance or use of said Pacificard, or any extension of time to pay such obligations,
charges or liabilities shall not in any manner release me/us from the responsibility
hereunder, it being understood that the undertaking is a continuing one and shall subsist
and bind me/us until all the liabilities of the said Celia Syjuco Regala have been fully
satisfied or paid. (p. 12, supra; emphasis supplied)
Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of future
changes in the terms and conditions governing the issuance of the credit card to his wife and that,
notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure
additional and future debts of the principal debtor the amount of which is not yet known (see Article
2053, supra).
The application by respondent court of the ruling in Government v. Tizon, supra is misplaced. It was held
in that case that:
. . . although the defendants bound themselves in solidum, the liability of the Surety under
its bond would arise only if its co-defendants, the principal obligor, should fail to comply
with the contract. To paraphrase the ruling in the case of Municipality of Orion vs.
Concha, the liability of the Surety is "consequent upon the liability" of Tizon, or "so
dependent on that of the principal debtor" that the Surety "is considered in law as being
the same party as the debtor in relation to whatever is adjudged, touching the obligation
of the latter"; or the liabilities of the two defendants herein "are so interwoven and
dependent as to be inseparable." Changing the expression, if the defendants are held
liable, their liability to pay the plaintiff would be solidary, but the nature of the Surety's
undertaking is such that it does not incur liability unless and until the principal debtor is
held liable.
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in this sense
that a surety, although solidarily liable with the principal debtor, is different from the debtor. It does not
mean, however, that the surety cannot be held liable to the same extent as the principal debtor. The
nature and extent of the liabilities of a guarantor or a surety is determined by the clauses in the contract of
suretyship(see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24).

ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate court is
SET ASIDE and the decision of the trial court is REINSTATED.
SO ORDERED.

[G.R. No. 101723. May 11, 2000]

INDUSTRIAL MANAGEMENT INTERNATIONAL DEVELOPMENT CORP. (INIMACO), petitioner,
vs. NATIONAL LABOR RELATIONS COMMISSION, (Fourth Division) Cebu City, and ENRIQUE
SULIT, SOCORRO MAHINAY, ESMERALDO PEGARIDO, TITA BACUSMO, GINO NIERE, VIRGINIA
BACUS, ROBERTO NEMENZO, DARIO GO, and ROBERTO ALEGARBES, respondents.
DECISION
BUENA, J.:
This is a petition for certiorari assailing the Resolution dated September 4, 1991 issued by the National
Labor Relations Commission in RAB-VII-0711-84 on the alleged ground that it committed a grave abuse
of discretion amounting to lack of jurisdiction in upholding the Alias Writ of Execution issued by the Labor
Arbiter which deviated from the dispositive portion of the Decision dated March 10, 1987, thereby holding
that the liability of the six respondents in the case below is solidary despite the absence of the word
"solidary" in the dispositive portion of the Decision, when their liability should merely be joint. S-jcj
The factual antecedents are undisputed: Supr-eme
In September 1984, private respondent Enrique Sulit, Socorro Mahinay, Esmeraldo Pegarido, Tita
Bacusmo, Gino Niere, Virginia Bacus, Roberto Nemenzo, Dariogo, and Roberto Alegarbes filed a
complaint with the Department of Labor and Employment, Regional Arbitration Branch No. VII in Cebu
City against Filipinas Carbon Mining Corporation, Gerardo Sicat, Antonio Gonzales, Chiu Chin Gin, Lo
Kuan Chin, and petitioner Industrial Management Development Corporation (INIMACO), for payment of
separation pay and unpaid wages. Sc-jj
In a Decision dated March 10, 1987, Labor Arbiter Bonifacio B. Tumamak held that:
"RESPONSIVE, to all the foregoing, judgment is hereby entered, ordering respondents
Filipinas Carbon and Mining Corp. Gerardo Sicat, Antonio Gonzales/Industrial
Management Development Corp. (INIMACO), Chiu Chin Gin and Lo Kuan Chin, to pay
complainants Enrique Sulit, the total award of P82,800.00; ESMERALDO PEGARIDO the
full award of P19,565.00; Roberto Nemenzo the total sum of P29,623.60 and DARIO GO
the total award of P6,599.71, or the total aggregate award of ONE HUNDRED THIRTYEIGHT THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND 31/100
(P138,588.31) to be deposited with this Commission within ten (10) days from receipt of
this Decision for appropriate disposition. All other claims are hereby Dismiss (sic) for lack
of merit. Jjs-c
"SO ORDERED.
"Cebu City, Philippines.
"10 March 1987."0

[1]

No appeal was filed within the reglementary period thus, the above Decision became final and executory.
On June 16, 1987, the Labor Arbiter issued a writ of execution but it was returned unsatisfied. On August
26, 1987, the Labor Arbiter issued an Alias Writ of Execution which ordered thus: Ed-pm-is
"NOW THEREFORE, by virtue of the powers vested in me by law, you are hereby
commanded to proceed to the premises of respondents Antonio Gonzales/Industrial
Management Development Corporation (INIMACO) situated at Barangay Lahug, Cebu
City, in front of La Curacha Restaurant, and/or to Filipinas Carbon and Mining
corporation and Gerardo Sicat at 4th Floor Universal RE-Bldg. 106 Paseo de Roxas,
Legaspi Village, Makati Metro Manila and at Philippine National Bank, Escolta, Manila
respectively, and collect the aggregate award of ONE HUNDRED THIRTY-EIGHT
THOUSAND FIVE HUNDRED EIGHTY-EIGHT PESOS AND THIRTY ONE CENTAVOS
(P138,588.31) and thereafter turn over said amount to complainants ENRIQUE SULIT,
ESMERALDO PEGARIDO, ROBERTO NEMENZO AND DARIO GO or to this Office for
appropriate disposition. Should you fail to collect the said sum in cash, you are hereby
authorized to cause the satisfaction of the same on the movable or immovable
property(s) of respondents not exempt from execution. You are to return this writ sixty (6)
(sic) days from your receipt hereof, together with your corresponding report.
"You may collect your legal expenses from the respondents as provided for by law.
"SO ORDERED."

[2]

On September 3, 1987, petitioner filed a "Motion to Quash Alias Writ of Execution and Set Aside
[3]
Decision," alleging among others that the alias writ of execution altered and changed the tenor of the
decision by changing the liability of therein respondents from joint to solidary, by the insertion of the
words "AND/OR" between "Antonio Gonzales/Industrial Management Development Corporation and
Filipinas Carbon and Mining Corporation, et al." However, in an order dated September 14, 1987, the
Labor Arbiter denied the motion. Mis-oedp
On October 2, 1987, petitioner appealed
respondent NLRC. Mis-edp

[4]

the Labor Arbiters Order dated September 14, 1987 to the

The respondent NLRC dismissed the appeal in a Decision

of which read:

[5]

dated August 31, 1988, the pertinent portions

"In matters affecting labor rights and labor justice, we have always adopted the liberal
approach which favors the exercise of labor rights and which is beneficial to labor as a
means to give full meaning and import to the constitutional mandate to afford protection
to labor. Considering the factual circumstances in this case, there is no doubt in our mind
that the respondents herein are called upon to pay, jointly and severally, the claims of the
complainants as was the latters prayers. Inasmuch as respondents herein never
controverted the claims of the complainants below, there is no reason why complainants
prayer should not be granted. Further, in line with the powers granted to the Commission
under Article 218 (c) of the Labor code, to waive any error, defect or irregularity whether
in substance or in form in a proceeding before Us, We hold that the Writ of Execution be
given due course in all respects." Ed-p
On July 31, 1989, petitioner filed a "Motion To Compel Sheriff To Accept Payment Of P23,198.05
Representing One Sixth Pro Rata Share of Respondent INIMACO As Full and Final Satisfaction of
[6]
[7]
Judgment As to Said Respondent." The private respondents opposed the motion. In an Order dated
August 15, 1989, the Labor Arbiter denied the motion ruling thus:

"WHEREFORE, responsive to the foregoing respondent INIMACOs Motions are hereby

DENIED. The Sheriff of this Office is order (sic) to accept INIMACOs tender payment
(sic) of the sum of P23,198.05, as partial satisfaction of the judgment and to proceed with
the enforcement of the Alias Writ of Execution of the levied properties, now issued by this
Office, for the full and final satisfaction of the monetary award granted in the instant case.
"SO ORDERED." Ed-psc
Petitioner appealed the above Order of the Labor Arbiter but this was again dismissed by the respondent
[8]
NLRC in its Resolution dated September 4, 1991 which held that:
"The arguments of respondent on the finality of the dispositive portion of the decision in
this case is beside the point. What is important is that the Commission has ruled that the
Writ of Execution issued by the Labor Arbiter in this case is proper. It is not really correct
to say that said Writ of Execution varied the terms of the judgment. At most, considering
the nature of labor proceedings there was, an ambiguity in said dispositive portion which
was subsequently clarified by the Labor Arbiter and the Commission in the incidents
which were initiated by INIMACO itself. By sheer technicality and unfounded assertions,
INIMACO would now reopen the issue which was already resolved against it. It is not in
keeping with the established rules of practice and procedure to allow this attempt of
INIMACO to delay the final disposition of this case.
"WHEREFORE, in view of all the foregoing, this appeal is DISMISSED and the Order
appealed from is hereby AFFIRMED. Sce-dp
"With double costs against appellant."
Dissatisfied with the foregoing, petitioner filed the instant case, alleging that the respondent NLRC
committed grave abuse of discretion in affirming the Order of the Labor Arbiter dated August 15, 1989,
which declared the liability of petitioner to be solidary.
The only issue in this petition is whether petitioners liability pursuant to the Decision of the Labor Arbiter
dated March 10, 1987, is solidary or not. Calrs-pped
Upon careful examination of the pleadings filed by the parties, the Court finds that petitioner INIMACOs
liability is not solidary but merely joint and that the respondent NLRC acted with grave abuse of discretion
in upholding the Labor Arbiters Alias Writ of Execution and subsequent Orders to the effect that
petitioners liability is solidary.
A solidary or joint and several obligation is one in which each debtor is liable for the entire obligation, and
[9]
each creditor is entitled to demand the whole obligation. In a joint obligation each obligor answers only
[10]
for a part of the whole liability and to each obligee belongs only a part of the correlative rights.
[11]

Well-entrenched is the rule that solidary obligation cannot lightly be inferred. There is a solidary liability
only when the obligation expressly so states, when the law so provides or when the nature of the
[12]
obligation so requires.
In the dispositive portion of the Labor Arbiter, the word "solidary" does not appear. The
said fallo expressly states the following respondents therein as liable, namely: Filipinas Carbon and
Mining Corporation, Gerardo Sicat, Antonio Gonzales, Industrial Management Development Corporation
(petitioner INIMACO), Chiu Chin Gin, and Lo Kuan Chin. Nor can it be inferred therefrom that the liability
of the six (6) respondents in the case below is solidary, thus their liability should merely be joint.

Moreover, it is already a well-settled doctrine in this jurisdiction that, when it is not provided in a judgment
that the defendants are liable to pay jointly and severally a certain sum of money, none of them may be
[13]
compelled to satisfy in full said judgment. In Oriental Commercial Co. vs. Abeto and Mabanag this
Court held:
"It is of no consequence that, under the contract of suretyship executed by the parties,
the obligation contracted by the sureties was joint and several in character. The final
judgment, which superseded the action for the enforcement of said contract, declared the
[14]
obligation to be merely joint, and the same cannot be executed otherwise."
Granting that the Labor Arbiter has committed a mistake in failing to indicate in the dispositive portion that
the liability of respondents therein is solidary, the correction -- which is substantial -- can no longer be
allowed in this case because the judgment has already become final and executory. Scc-alr
It is an elementary principle of procedure that the resolution of the court in a given issue as embodied in
the dispositive part of a decision or order is the controlling factor as to settlement of rights of the
[15]
parties. Once a decision or order becomes final and executory, it is removed from the power or
[16]
jurisdiction of the court which rendered it to further alter or amend it. It thereby becomes immutable and
unalterable and any amendment or alteration which substantially affects a final and executory judgment is
[17]
null and void for lack of jurisdiction, including the entire proceedings held for that purpose. An order of
[18]
execution which varies the tenor of the judgment or exceeds the terms thereof is a nullity.
None of the parties in the case before the Labor Arbiter appealed the Decision dated March 10, 1987,
hence the same became final and executory. It was, therefore, removed from the jurisdiction of the Labor
Arbiter or the NLRC to further alter or amend it. Thus, the proceedings held for the purpose of amending
or altering the dispositive portion of the said decision are null and void for lack of jurisdiction. Also, the
Alias Writ of Execution is null and void because it varied the tenor of the judgment in that it sought to
enforce the final judgment against "Antonio Gonzales/Industrial Management Development Corp.
(INIMACO) and/or Filipinas Carbon and Mining Corp. and Gerardo Sicat," which makes the liability
solidary. Ca-lrsc
WHEREFORE, the petition is hereby GRANTED. The Resolution dated September 4, 1991 of the
respondent National Labor Relations is hereby declared NULL and VOID. The liability of the respondents
in RAB-VII-0711-84 pursuant to the Decision of the Labor Arbiter dated March 10, 1987 should be, as it is
hereby, considered joint and petitioners payment which has been accepted considered as full satisfaction
of its liability, without prejudice to the enforcement of the award, against the other five (5) respondents in
the said case. Sppedsc
SO ORDERED.

[G.R. No. 144134. November 11, 2003]

MARIVELES SHIPYARD CORP., petitioner, vs. HON. COURT OF APPEALS, LUIS REGONDOLA,
MANUELIT GATALAN, ORESCA AGAPITO, NOEL ALBADBAD, ROGELIO PINTUAN, DANILO
CRISOSTOMO, ROMULO MACALINAO, NESTOR FERER, RICKY CUESTA, ROLLY ANDRADA,
LARRY ROGOLA, FRANCISCO LENOGON, AUGUSTO QUINTO, ARFE BERAMO, BONIFACIO
TRINIDAD, ALFREDO ASCARRAGA, ERNESTO MAGNO, HONORARIO HORTECIO,
NELBERT PINEDA, GLEN ESTIPULAR, FRANCISCO COMPUESTO, ISABELITO CORTEZ,
MATURAN ROSAURO, SAMSON CANAS, FEBIEN ISIP, JESUS RIPARIP, ALFREDO

SIENES, ADOLAR ALBERT, HONESTO CABANILLAS, AMPING CASTILLO and ELWIN

REVILLA, respondents.
DECISION
QUISUMBING, J.:
[1]

For review on certiorari is the Resolution, dated December 29, 1999, of the Court of Appeals in CAG.R. SP No. 55416, which dismissed outright the petition for certiorari of Mariveles Shipyard Corp., due to
a defective certificate of non-forum shopping and non-submission of the required documents to
accompany said petition. Mariveles Shipyard Corp., had filed a special civil action for certiorari with the
[2]
Court of Appeals to nullify the resolution of the National Labor Relations Commission (NLRC), dated
April 22, 1999, in NLRC NCR Case No. 00-09-005440-96-A, which affirmed the Labor Arbiters
[3]
decision, dated May 22, 1998, holding petitioner jointly and severally liable with Longest Force
Investigation and Security Agency, Inc., for the underpayment of wages and overtime pay due to the
[4]
private respondents. Likewise challenged in the instant petition is the resolution of the Court of Appeals,
dated July 12, 2000, denying petitioners motion for reconsideration.
The facts, as culled from records, are as follows:
Sometime on October 1993, petitioner Mariveles Shipyard Corporation engaged the services of
Longest Force Investigation and Security Agency, Inc. (hereinafter, Longest Force) to render security
services at its premises. Pursuant to their agreement, Longest Force deployed its security guards, the
private respondents herein, at the petitioners shipyard in Mariveles,Bataan.
According to petitioner, it religiously complied with the terms of the security contract with Longest
Force, promptly paying its bills and the contract rates of the latter. However, it found the services being
rendered by the assigned guards unsatisfactory and inadequate, causing it to terminate its contract with
[5]
Longest Force on April 1995. Longest Force, in turn, terminated the employment of the security guards
it had deployed at petitioners shipyard.
On September 2, 1996, private respondents filed a case for illegal dismissal, underpayment of
wages pursuant to the PNPSOSIA-PADPAO rates, non-payment of overtime pay, premium pay for
th
holiday and rest day, service incentive leave pay, 13 month pay and attorneys fees, against both
Longest Force and petitioner, before the Labor Arbiter. Docketed as NLRC NCR Case No. 00-09005440-96-A, the case sought the guards reinstatement with full backwages and without loss of seniority
rights.
[6]

For its part, Longest Force filed a cross-claim against the petitioner. Longest Force admitted that it
employed private respondents and assigned them as security guards at the premises of petitioner
from October 16, 1993 to April 30, 1995, rendering a 12 hours duty per shift for the said period. It
likewise admitted its liability as to the non-payment of the alleged wage differential in the total amount
of P2,618,025 but passed on the liability to petitioner alleging that the service fee paid by the latter to it
was way below the PNPSOSIA and PADPAO rate, thus, contrary to the mandatory and prohibitive laws
because the right to proper compensation and benefits provided under the existing labor laws cannot be
waived nor compromised.
The petitioner denied any liability on account of the alleged illegal dismissal, stressing that no
employer-employee relationship existed between it and the security guards. It further pointed out that it
would be the height of injustice to make it liable again for monetary claims which it had already paid.
Anent the cross-claim filed by Longest Force against it, petitioner prayed that it be dismissed for lack of
merit. Petitioner averred that Longest Force had benefited from the contract, it was now estopped from
questioning said agreement on the ground that it had made a bad deal.
On May 22, 1998, the Labor Arbiter decided NLRC NCR Case No. 00-09-005440-96-A, to wit:
WHEREFORE, conformably with the foregoing, judgment is hereby rendered ordering the respondents as
follows:

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

MONTHLY
PADPAO
RATES
(8 hrs. duty)

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

ACTUAL
UNDERPAYMENT
SALARY FOR THE
Wage
RECEIVED
PERIOD
DIFFERENTIALS

P5,485.00

Dec. 16/93Mar.
5,705.00
31/94 (3.5 mos.)
Apr. 1Dec.
520.00
31/94 (9 mos.)

P5,000

6,630.00

7,090.00

Jan. 1Apr.
7,220.00
7.70
29/95 (3.97 mos.)

P 485.00

5,000

1,630.00

5,810

1,280.00

11,

5,810

1,410.00

5,59

TOTAL UNDERPAYMENTS - - - - - - - - - - - - - - - OVERTIME:

Oct. 16-Dec. 15/93 P5,485 x 2
(2 mos.)
2

= P 5,485.00

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

6,630 x 3.5
2

= 11,602.50

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

7,090 x 9
2

= 31,905.00

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

7,220 x 3.97
2

= 14,331.70

TOTAL OVERTIME- - - - - - - - - P63,324.20

Sub-Total of Underpayments and Overtime P87,116.90
1. Luis Regondula
(the same)
P
2. Manolito Catalan
(the same)
3. Oresca Agapito
(the same)
4. Noel Alibadbad
(the same)
5. Rogelio Pintuan
(the same)
6. Danilo Crisostomo
(the same)

P970.00

87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90

P23,792.70

7. Romulo Macalinao
8. Nestor Ferrer
9. Ricky Cuesta
10. Andrada Ricky
11. Larry Rogola
12. Francisco Lenogon
13. Augosto Quinto
14. Arfe Beramo
15. Bonifacio Trinidad
16. Alfredo Azcarraga
17. Ernesto Magno
18. Honario Hortecio
19. Nelbert Pineda
20. Glen Estipular
21. Francisco Compuesto
22. Isabelito Cortes
23. Maturan Rosauro
24. Samson Canas
25. Febien Isip
26. Jesus Riparip
27. Alfredo Sienes
28. Adolar Albert
29. Cabanillas Honesto
30. Castillo Amping
31. Revilla Elwin

(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)
(the same)

GRAND TOTAL

87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
87,116.90
P 2,700,623.90

2. DECLARING both respondents liable to pay complainants attorneys fees equivalent to ten (10%)
percent of the total award recovered or the sum of P270,062.34.
3. ORDERING respondent Longest Force Investigation & Security Agency, Inc. to reinstate all the herein
complainants to their former or equivalent positions without loss of seniority rights and privileges with full
backwages which as computed as of the date of this decision are as follows:
Backwages:
10/16 12/15/93 =2 mos.
P 5,485.00 x 2 mos.

P 10,970.00

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

P 6,630.00 x 3.5 mos.
=

23,205.00

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

P 7,090.00 x 9 mos.

63,810.00

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

P 7,220.00 x 3.97 mos.

28,663.40

TOTAL
1. Luis Regondula
2. Manolito Catalan
3. Oresca Agapito

P 126,684.40
(same)
(same)
(same)

[7]

[8]

126,684.40
126,684.40
126,684.40

4. Noel Alibadbad
5. Rogelio Pintuan
6. Danilo Crisostomo
7. Romulo Macalinao
8. Nestor Ferrer
9. Ricky Cuesta
10. Andrada Rolly
11. Larry Rogola
12. Francisco Lenogon
13. Augosto Quinto
14. Arfe Beramo
15. Bonifacio Trinidad
16. Alfredo Azcarraga
17. Ernesto Magno
18. Honario Hortecio
19. Nelbert Pineda
20. Glen Estipular
21. Francisco Compuesto
22. Isabelito Cortes
23. Maturan Rosauro
24. Samson Canas
25. Febien Isip
26. Jesus Riparip
27. Alfredo Sienes
28. Adolar Albert
29. Cabanillas Honesto
30. Castillo Amping
31. Revilla Elwin
GRAND TOTAL

(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)
(same)

126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
126,684.40
P3,927,216.40

[9]

4. ORDERING said Longest Force Investigation & Security Agency, Inc. to pay attorneys fees equivalent
to ten (10%) percent of the total award recovered representing backwages in the amount
[10]
ofP392,721.64.
5. DISMISSING all other claims for lack of legal basis.
SO ORDERED.

[11]

Petitioner appealed the foregoing to the NLRC in NLRC NCR Case No. 00-09-005440-96-A. The
labor tribunal, however, affirmed in toto the decision of the Labor Arbiter. Petitioner moved for
reconsideration, but this was denied by the NLRC.
The petitioner then filed a special civil action for certiorari assailing the NLRC judgment for having
been rendered with grave abuse of discretion with the Court of Appeals, docketed as CA-G.R. SP No.
55416. The Court of Appeals, however, denied due course to the petition and dismissed it outright for the
following reasons:
1. The verification and certification on non-forum shopping is signed not by duly authorized
officer of petitioner corporation, but by counsel (Section 1, Rule 65, 1997 Rules of Civil
Procedure).
2. The petition is unaccompanied by copies of relevant and pertinent documents, particularly
the motion for reconsideration filed before the NLRC (Section 1, Rule 65, 1997 Rules of Civil
[12]
Procedure).

The petitioner then moved for reconsideration of the order of dismissal. The appellate court denied
the motion, pointing out that under prevailing case law subsequent compliance with formal requirements
for filing a petition as prescribed by the Rules, does not ipso facto warrant a reconsideration. In any
event, it found no grave abuse of discretion on the part of the NLRC to grant the writ of certiorari.
Hence, this present petition before us. Petitioner submits that THE COURT OF APPEALS
GRAVELY ERRED:
1. .IN DISMISSING THE PETITION AND DENYING THE MOTION FOR
RECONSIDERATION DESPITE THE FACT THAT PETITIONER SUBSTANTIALLY
COMPLIED WITH THE REQUIREMENTS OF SECTION 1, RULE 65, 1997 RULES OF
CIVIL PROCEDURE.
2. .IN RULING THAT PETITIONER WAS NOT DENIED DUE PROCESS OF LAW.
3. .IN AFFIRMING THE DECISION OF THE NATIONAL LABOR RELATIONS
COMMISSION THAT LONGEST FORCE AND PETITIONER ARE JOINTLY AND
SEVERALLY LIABLE FOR PAYMENT OF WAGES AND OVERTIME PAY DESPITE THE
CLEAR SHOWING THAT PETITIONER HAVE ALREADY PAID THE SECURITY
SERVICES THAT WAS RENDERED BY PRIVATE RESPONDENTS.
4. WHEN IT FAILED TO RULE THAT ONLY LONGEST FORCE SHOULD BE SOLELY
[13]
AND ULTIMATELY LIABLE IN THE INSTANT CASE.
We find the issues for our resolution to be: (1) Was it error for the Court of Appeals to sustain its
order of dismissal of petitioners special civil action for certiorari, notwithstanding subsequent compliance
with the requirements under the Rules of Court by the petitioner? (2) Did the appellate court err in not
holding that petitioner was denied due process of law by the NLRC? and (3) Did the appellate court
grievously err in finding petitioner jointly and severally liable with Longest Force for the payment of wage
differentials and overtime pay owing to the private respondents?
On the first issue, the Court of Appeals in dismissing CA-G.R. SP No. 55416 observed that: (1) the
verification and certification of non-forum shopping was not signed by any duly authorized officer of
petitioner but merely by petitioners counsel; and (2) the petition was not accompanied by a copy of
[14]
motion for reconsideration filed before the NLRC, thus violating Section 1, Rule 65 of the Rules of
[15]
Court. Hence, a dismissal was proper under Section 3, Rule 46 of the Rules.
In assailing the appellate courts ruling, the petitioner appeals to our sense of compassion and kind
consideration. It submits that the certification signed by its counsel and attached to its petition filed with
the Court of Appeals is substantial compliance with the requirement. Moreover, petitioner calls our
attention to the fact that when it filed its motion for reconsideration before the Court of Appeals, a joint
[16]
verification and certification of non-forum shopping duly signed by its Personnel Manager and a copy of
[17]
the Motion for Reconsideration filed before the NLRC were attached therein. Thus, petitioner prays
that we take a liberal stance to promote the ends of justice.
Petitioners plea for liberality, however, cannot be granted by the Court for reasons herein elucidated.
It is settled that the requirement in the Rules that the certification of non-forum shopping should be
executed and signed by the plaintiff or the principal means that counsel cannot sign said certification
[18]
unless clothed with special authority to do so. The reason for this is that the plaintiff or principal knows
better than anyone else whether a petition has previously been filed involving the same case or
substantially the same issues. Hence, a certification signed by counsel alone is defective and constitutes
[19]
a valid cause for dismissal of the petition. In the case of natural persons, the Rule requires the parties
themselves to sign the certificate of non-forum shopping. However, in the case of the corporations, the
physical act of signing may be performed, on behalf of the corporate entity, only by specifically authorized
individuals for the simple reason that corporations, as artificial persons, cannot personally do the task
[20]
themselves.
In this case, not only was the originally appended certification signed by counsel, but in its
motion for reconsideration, still petitioner utterly failed to show that Ms. Rosanna Ignacio, its Personnel
Manager who signed the verification and certification of non-forum shopping attached thereto, was duly
authorized for this purpose. It cannot be gainsaid that obedience to the requirements of procedural rule is

needed if we are to expect fair results therefrom. Utter disregard of the rules cannot justly be rationalized
[21]
by harking on the policy of liberal construction.
Thus, on this point, no error could be validly attributed to respondent Court of Appeals. It did not err
in dismissing the petition for non-compliance with the requirements governing the certification of nonforum shopping.
Anent the second issue, petitioner avers that there was denial of due process of law when the Labor
Arbiter failed to have the case tried on the merits. Petitioner adds that the Arbiter did not observe the
mandatory language of the then Sec. 5(b) Rule V (now Section 11, per amendment in Resolution No. 0102, Series of 2002) of the NLRC New Rules of Procedure which provided that:
If the Labor Arbiter finds no necessity of further hearing after the parties have submitted their position
papers and supporting documents, he shall issue an Order to that effect and shall inform the parties,
[22]
stating the reasons therefor.
Petitioners contention, in our view, lacks sufficient basis. Well settled is the rule that the essence of
due process is simply an opportunity to be heard, or, as applied to administrative proceedings, an
opportunity to explain ones side or an opportunity to seek a reconsideration of the action or ruling
[23]
complained of.
Not all cases require a trial-type hearing. The requirement of due process in labor
cases before a Labor Arbiter is satisfied when the parties are given the opportunity to submit their position
papers to which they are supposed to attach all the supporting documents or documentary evidence that
would prove their respective claims, in the event the Labor Arbiter determines that no formal hearing
[24]
would be conducted or that such hearing was not necessary.
In any event, as found by the NLRC,
petitioner was given ample opportunity to present its side in several hearings conducted before the Labor
Arbiter and in the position papers and other supporting documents that it had submitted. We find that
such opportunity more than satisfies the requirement of due process in labor cases.
On the third issue, petitioner argues that it should not be held jointly and severally liable with Longest
Force for underpayment of wages and overtime pay because it had been religiously and promptly paying
the bills for the security services sent by Longest Force and that these are in accordance with the
statutory minimum wage. Also, petitioner contends that it should not be held liable for overtime pay as
private respondents failed to present proof that overtime work was actually performed. Lastly, petitioner
claims that the Court of Appeals failed to render a decision that finally disposed of the case because it did
not specifically rule on the immediate recourse of private respondents, that is, the matter of
reimbursement between petitioner and Longest Force in accordance with Eagle Security Agency Inc. v.
[25]
[26]
NLRC, and Philippine Fisheries Development Authority v. NLRC.
Petitioners liability is joint and several with that of Longest Force, pursuant to Articles 106, 107 and
109 of the Labor Code which provide as follows:
ART. 106. CONTRACTOR OR SUBCONTRACTOR Whenever an employer enters into a contract with
another person for the performance of the formers work, the employees of the contractor and of the
latters subcontractor, if any, shall be paid in accordance with the provisions of this Code.
In the event that the contractor or subcontractor fails to pay the wages of his employees in accordance
with this Code, the employer shall be jointly and severally liable with his contractor or subcontractor to
such employees to the extent of the work performed under the contract, in the same manner and extent
that he is liable to employees directly employed by him.
xxx
ART. 107. INDIRECT EMPLOYER. The provisions of the immediately preceding Article shall likewise
apply to any person, partnership, association or corporation which, not being an employer, contracts with
an independent contractor for the performance of any work, task, job or project.

ART. 109. SOLIDARY LIABILITY. The provisions of existing laws to the contrary notwithstanding,
every employer or indirect employer shall be held responsible with his contractor or subcontractor for any
violation of any provision of this Code. For purposes of determining the extent of their civil liability under
this Chapter, they shall be considered as direct employers.
In this case, when petitioner contracted for security services with Longest Force as the security
agency that hired private respondents to work as guards for the shipyard corporation, petitioner became
an indirect employer of private respondents pursuant to Article 107 abovecited. Following Article 106,
when the agency as contractor failed to pay the guards, the corporation as principal becomes jointly and
severally liable for the guards wages. This is mandated by the Labor Code to ensure compliance with its
provisions, including payment of statutory minimum wage. The security agency is held liable by virtue of
its status as direct employer, while the corporation is deemed the indirect employer of the guards for the
purpose of paying their wages in the event of failure of the agency to pay them. This statutory scheme
gives the workers the ample protection consonant with labor and social justice provisions of the 1987
[27]
Constitution.
Petitioner cannot evade its liability by claiming that it had religiously paid the compensation of guards
as stipulated under the contract with the security agency. Labor standards are enacted by the legislature
to alleviate the plight of workers whose wages barely meet the spiraling costs of their basic needs. Labor
laws are considered written in every contract. Stipulations in violation thereof are considered
null. Similarly, legislated wage increases are deemed amendments to the contract. Thus, employers
cannot hide behind their contracts in order to evade their (or their contractors or subcontractors) liability
[28]
for noncompliance with the statutory minimum wage.
However, we must emphasize that the solidary liability of petitioner with that of Longest Force does
not preclude the application of the Civil Code provision on the right of reimbursement from his co-debtor
[29]
[30]
by the one who paid.
As held in Del Rosario & Sons Logging Enterprises, Inc. v. NLRC, the joint and
several liability imposed on petitioner is without prejudice to a claim for reimbursement by petitioner
against the security agency for such amounts as petitioner may have to pay to complainants, the private
respondents herein. The security agency may not seek exculpation by claiming that the principals
payments to it were inadequate for the guards lawful compensation. As an employer, the security
agency is charged with knowledge of labor laws; and the adequacy of the compensation that it demands
[31]
for contractual services is its principal concern and not any others.
On the issue of the propriety of the award of overtime pay despite the alleged lack of proof thereof,
suffice it to state that such involves a determination and evaluation of facts which cannot be done in a
petition for review. Well established is the rule that in an appeal via certiorari, only questions of law may
[32]
be reviewed.
One final point. Upon review of the award of backwages and attorneys fees, we discovered certain
errors that happened in the addition of the amount of individual backwages that resulted in the erroneous
total amount of backwages and attorneys fees. These errors ought to be properly rectified now. Thus,
the correct sum of individual backwages should beP126,648.40 instead of P126,684.40, while the correct
sum of total backwages awarded and attorneys fees should be P3,926,100.40 and P392,610.04, instead
of P3,927,216.40 andP392,721.64, respectively.
WHEREFORE, the Resolution of the Court of Appeals in CA-G.R. SP No. 55416 is
AFFIRMED with MODIFICATION. Petitioner and Longest Force are held liable jointly and severally for
underpayment of wages and overtime pay of the security guards, without prejudice to petitioners right of
reimbursement from Longest Force Investigation and Security Agency, Inc. The amounts payable to
complaining security guards, herein private respondents, by way of total backwages and attorneys fees
are hereby set at P3,926,100.40 and P392,610.04, respectively. Costs against petitioner.
SO ORDERED.

CONSTRUCTION DEVELOPMENT
CORPORATION OF THE
PHILIPPINES,
Petitioner,

G.R. No. 147791

- versus -

Present:
Panganiban, C.J. (Chairperson),
Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ.

REBECCA G. ESTRELLA, RACHEL E.

FLETCHER, PHILIPPINE PHOENIX
SURETY & INSURANCE INC.,
BATANGAS LAGUNA TAYABAS
BUS CO., and WILFREDO
Promulgated:
DATINGUINOO,
Respondents.
September 8, 2006
x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
[1]

This petition for review assails the March 29, 2001 Decision of the Court of Appeals in CA-G.R.
[2]
CV No. 46896, which affirmed with modification the February 9, 1993 Decision of the Regional Trial
Court of Manila, Branch 13, in Civil Case No. R-82-2137, finding Batangas Laguna Tayabas Bus Co.
(BLTB) and Construction Development Corporation of the Philippines (CDCP) liable for damages.
The antecedent facts are as follows:
On December 29, 1978, respondents Rebecca G. Estrella and her granddaughter, Rachel E.
Fletcher, boarded in San Pablo City, a BLTB bus bound for Pasay City. However, they never reached
their destination because their bus was rammed from behind by a tractor-truck of CDCP in the South
Expressway. The strong impact pushed forward their seats and pinned their knees to the seats in front of
them. They regained consciousness only when rescuers created a hole in the bus and extricated their
legs from under the seats. They were brought to the Makati Medical Center where the doctors diagnosed
their injuries to be as follows:
Medical Certificate of Rebecca Estrella
Fracture, left tibia mid 3rd
Lacerated wound, chin
Contusions with abrasions, left lower leg
[3]
Fracture, 6th and 7th ribs, right
Medical Certificate of Rachel Fletcher
Extensive lacerated wounds, right leg posterior aspect popliteal area
and antero-lateral aspect mid lower leg with severance of muscles.
Partial amputation BK left leg with severance of gastro-soleus and
antero-lateral compartment of lower leg.
[4]
Fracture, open comminuted, both tibial

[5]

Thereafter, respondents filed a Complaint for damages against CDCP, BLTB, Espiridion
Payunan, Jr. and Wilfredo Datinguinoo before the Regional Trial Court of Manila, Branch 13. They
alleged (1) that Payunan, Jr. and Datinguinoo, who were the drivers of CDCP and BLTB buses,
respectively, were negligent and did not obey traffic laws; (2) that BLTB and CDCP did not exercise the
diligence of a good father of a family in the selection and supervision of their employees; (3) that BLTB
allowed its bus to operate knowing that it lacked proper maintenance thus exposing its passengers to
grave danger; (4) that they suffered actual damages amounting to P250,000.00 for Estrella and
P300,000.00 for Fletcher; (5) that they suffered physical discomfort, serious anxiety, fright and mental
anguish, besmirched reputation and wounded feelings, moral shock, and lifelong social humiliation; (6)
that defendants failed to act with justice, give respondents their due, observe honesty and good faith
which entitles them to claim for exemplary damage; and (7) that they are entitled to a reasonable amount
of attorneys fees and litigation expenses.
[6]

CDCP filed its Answer which was later amended to include a third-party complaint against
[7]
Philippine Phoenix Surety and Insurance, Inc. (Phoenix).
On February 9, 1993, the trial court rendered a decision finding CDCP and BLTB and their
employees liable for damages, the dispositive portion of which, states:
WHEREFORE, judgment is rendered:
In the Complaint
1.
In favor of the plaintiffs and against the defendants BLTB, Wilfredo
Datinguinoo, Construction and Development Corporation of the Philippines (now PNCC)
and Espiridion Payunan, Jr., ordering said defendants, jointly and severally to pay the
plaintiffs the sum of P79,254.43 as actual damages and to pay the sum of P10,000.00 as
attorneys fees or a total of P89,254.43;
2.
In addition, defendant Construction and Development Corporation of the
Philippines and defendant Espiridion Payunan, Jr., shall pay the plaintiffs the amount of
Fifty Thousand (P50,000.00) Pesos to plaintiff Rachel Fletcher and Twenty Five
Thousand (P25,000.00) Pesos to plaintiff Rebecca Estrella;
3.
On the counterclaim of BLTB Co. and Wilfredo Datinguinoo
Dismissing the counterclaim;
4.
On the crossclaim against Construction and Development Corporation of
the Philippines (now PNCC) and Espiridion Payunan, Jr.
Dismissing the crossclaim;
5.
On the counterclaim of Construction and Development Corporation of
the Philippines (now PNCC)
Dismissing the counterclaim;

6.
On the crossclaim against BLTB
Dismissing the crossclaim;
7.
On the Third Party Complaint by Construction and Development
Corporation of the Philippines against Philippine Phoenix Surety and Insurance,
Incorporated
Dismissing the Third Party Complaint.
SO ORDERED.

[8]

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

[12]

The Court of Appeals held that the actual or compensatory damage sought by respondents for the
injuries they sustained in the form of hospital bills were already liquidated and were
ascertained. Accordingly, the 6% interest per annum should commence to run from the time the judicial
demand was made or from the filing of the complaint and not from the date of judgment. The Court of
Appeals also awarded attorneys fees equivalent to 30% of the total amount recovered based on the
retainer agreement of the parties. The appellate court also held that respondents are entitled to
exemplary and moral damages. Finally, it affirmed the ruling of the trial court that the claim of CDCP
againstPhoenix had already prescribed.

Hence, this petition raising the following issues:

I
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING
RESPONDENTS BLTB AND/OR ITS DRIVER WILFREDO DATINGUINOO SOLELY
LIABLE FOR THE DAMAGES SUSTAINED BY HEREIN RESPONDENTS FLETCHER
AND ESTRELLA.
II
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN AWARDING
EXCESSIVE OR UNFOUNDED DAMAGES, ATTORNEYS FEES AND LEGAL
INTEREST TO RESPONDENTS FLETCHER AND ESTRELLA.
III
WHETHER OR NOT THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING
RESPONDENT PHOENIX LIABLE UNDER ITS INSURANCE POLICY ON THE
GROUND OF PRESCRIPTION.
The issues for resolution are as follows: (1) whether BLTB and its driver Wilfredo Datinguinoo are
solely liable for the damages sustained by respondents; (2) whether the damages, attorneys fees and
legal interest awarded by the CA are excessive and unfounded; (3) whether CDCP can recover under its
insurance policy from Phoenix.
Petitioner contends that since it was made solidarily liable with BLTB for actual damages and
attorneys fees in paragraph 1 of the trial courts decision, then it should no longer be held liable to pay
the amounts stated in paragraph 2 of the same decision. Petitioner claims that the liability for actual
damages and attorneys fees is based on culpa contractual, thus, only BLTB should be held liable. As
regards paragraph 2 of the trial courts decision, petitioner claims that it is ambiguous and arbitrary
because the dispositive portion did not state the basis and nature of such award.
Respondents, on the other hand, argue that petitioner is also at fault, hence, it was properly joined
as a party. There may be an action arising out of one incident where questions of fact are common to
all. Thus, the cause of action based on culpa aquiliana in the civil suit they filed against it was valid.
The petition lacks merit.
The case filed by respondents against petitioner is an action for culpa aquiliana or quasi-delict
[13]
under Article 2176 of the Civil Code.
In this regard, Article 2180 provides that the obligation imposed
by Article 2176 is demandable for the acts or omissions of those persons for whom one is
responsible. Consequently, an action based on quasi-delict may be instituted against the employer for an
employees act or omission. The liability for the negligent conduct of the subordinate
is direct and primary, but is subject to the defense of due diligence in the selection and supervision of the
[14]
employee.
In the instant case, the trial court found that petitioner failed to prove that it exercised the
diligence of a good father of a family in the selection and supervision of Payunan, Jr.
The trial court and the Court of Appeals found petitioner solidarily liable with BLTB for the actual
damages suffered by respondents because of the injuries they sustained. It was established that
Payunan, Jr. was driving recklessly because of the skid marks as shown in the sketch of the police
investigator.
[15]

It is well-settled in Fabre, Jr. v. Court of Appeals, that the owner of the other vehicle which
collided with a common carrier is solidarily liable to the injured passenger of the same. We held, thus:
The same rule of liability was applied in situations where the negligence of the
driver of the bus on which plaintiff was riding concurred with the negligence of a third

party who was the driver of another vehicle, thus causing an accident. In Anuran v.
Buo, Batangas Laguna Tayabas Bus Co. v. Intermediate Appellate Court, and Metro
Manila Transit Corporation v. Court of Appeals, the bus company, its driver, the
operator of the other vehicle and the driver of the vehicle were jointly and severally
held liable to the injured passenger or the latters heirs. The basis of this allocation of
liability was explained in Viluan v. Court of Appeals, thus:
Nor should it make any difference that the liability of petitioner [bus owner]
springs from contract while that of respondents [owner and driver of other vehicle]
arises fromquasi-delict. As early as 1913, we already ruled in Gutierrez vs. Gutierrez,
56 Phil. 177, that in case of injury to a passenger due to the negligence of the driver of
the bus on which he was riding and of the driver of another vehicle, the drivers as well as
the owners of the two vehicles are jointly and severally liable for damages. x x x
xxxx

As in the case of BLTB, private respondents in this case and her co-plaintiffs did
not stake out their claim against the carrier and the driver exclusively on one theory,
much less on that of breach of contract alone. After all, it was permitted for them to
allege alternative causes of action and join as many parties as may be liable on
such causes of action so long as private respondent and her co-plaintiffs do not
recover twice for the same injury. What is clear from the cases is the intent of the
plaintiff there to recover from both the carrier and the driver, thus justifying the holding
that the carrier and the driver were jointly and severally liable because their separate and
[16]
distinct acts concurred to produce the same injury. (Emphasis supplied)
In a joint obligation, each obligor answers only for a part of the whole liability; in a solidary or
joint and several obligation, the relationship between the active and the passive subjects is so close that
each of them must comply with or demand the fulfillment of the whole obligation. In Lafarge Cement v.
[17]
Continental Cement Corporation, we reiterated that joint tort feasors are jointly and severally liable for
[18]
the tort which they commit. Citing Worcester v. Ocampo, we held that:
x x x The difficulty in the contention of the appellants is that they fail to recognize that the
basis of the present action is tort. They fail to recognize the universal doctrine that each
joint tort feasor is not only individually liable for the tort in which he participates, but is
also jointly liable with his tort feasors. x x x
It may be stated as a general rule that joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet
the commission of a tort, or who approve of it after it is done, if done for their
benefit. They are each liable as principals, to the same extent and in the same manner
as if they had performed the wrongful act themselves. x x x
Joint tort feasors are jointly and severally liable for the tort which they commit.
The persons injured may sue all of them or any number less than all. Each is liable for
the whole damages caused by all, and all together are jointly liable for the whole
damage. It is no defense for one sued alone, that the others who participated in the
wrongful act are not joined with him as defendants; nor is it any excuse for him that his
participation in the tort was insignificant as compared to that of the others. x x x
Joint tort feasors are not liable pro rata. The damages can not be apportioned
among them, except among themselves. They cannot insist upon an apportionment, for
the purpose of each paying an aliquot part. They are jointly and severally liable for the
whole amount. x x x
A payment in full for the damage done, by one of the joint tort feasors, of course
satisfies any claim which might exist against the others. There can be but satisfaction.
The release of one of the joint tort feasors by agreement generally operates to discharge
all. x x x
Of course the court during trial may find that some of the alleged tort feasors are
liable and that others are not liable. The courts may release some for lack of evidence
while condemning others of the alleged tort feasors. And this is true even though they
[19]
are charged jointly and severally.
Petitioners claim that paragraph 2 of the dispositive portion of the trial courts decision is
ambiguous and arbitrary and also entitles respondents to recover twice is without basis. In the body of
the trial courts decision, it was clearly stated that petitioner and its driver Payunan, Jr., are jointly and
solidarily liable for moral damages in the amount of P50,000.00 to respondent Fletcher and P25,000.00 to
[20]
respondent Estrella.
Moreover, there could be no double recovery because the award in paragraph 2
is for moral damages while the award in paragraph 1 is for actual damages and attorneys fees.

Petitioner next claims that the damages, attorneys fees, and legal interest awarded by the Court of
Appeals are excessive.
[21]

Moral damages may be recovered in quasi-delicts causing physical injuries.

The award of
moral damages in favor of Fletcher and Estrella in the amount of P80,000.00 must be reduced since
[22]
prevailing jurisprudence fixed the same at P50,000.00.
While moral damages are not intended to
enrich the plaintiff at the expense of the defendant, the award should nonetheless be commensurate to
[23]
the suffering inflicted.
The Court of Appeals correctly awarded respondents exemplary damages in the amount of
P20,000.00 each. Exemplary damages may be awarded in addition to moral and compensatory
[24]
damages.
Article 2231 of the Civil Code also states that in quasi-delicts, exemplary damages may be
[25]
granted if the defendant acted with gross negligence. In this case, petitioners driver was driving
recklessly at the time its truck rammed the BLTB bus. Petitioner, who has direct and primary liability for
the negligent conduct of its subordinates, was also found negligent in the selection and supervision of its
[26]
employees. In Del Rosario v. Court of Appeals, we held, thus:
ART. 2229 of the Civil Code also provides that such damages may be imposed, by way
of example or correction for the public good. While exemplary damages cannot be
recovered as a matter of right, they need not be proved, although plaintiff must show that
he is entitled to moral, temperate or compensatory damages before the court may
consider the question of whether or not exemplary damages should be
awarded. Exemplary Damages are imposed not to enrich one party or impoverish
another but to serve as a deterrent against or as a negative incentive to curb socially
deleterious actions.
Regarding attorneys fees, we held in Traders Royal Bank Employees Union-Independent v.
[27]
National Labor Relations Commission, that:
There are two commonly accepted concepts of attorneys fees, the so-called
ordinary and extraordinary. In its ordinary concept, an attorneys fee is the reasonable
compensation paid to a lawyer by his client for the legal services he has rendered to the
latter. The basis of this compensation is the fact of his employment by and his
agreement with the client.
In its extraordinary concept, an attorneys fee is an indemnity for damages
ordered by the court to be paid by the losing party in a litigation. The basis of this is
any of the cases provided by law where such award can be made, such as those
authorized in Article 2208, Civil Code, and is payable not to the lawyer but to the
client, unless they have agreed that the award shall pertain to the lawyer as
[28]
additional compensation or as part thereof. (Emphasis supplied)
In the instant case, the Court of Appeals correctly awarded attorneys fees and other expenses of
litigation as they may be recovered as actual or compensatory damages when exemplary damages are
awarded; when the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiffs
valid, just and demandable claim; and in any other case where the court deems it just and equitable that
[29]
attorneys fees and expenses of litigation should be recovered.
Regarding the imposition of legal interest at the rate of 6% from the time of the filing of the
[30]
complaint, we held in Eastern Shipping Lines, Inc. v. Court of Appeals, that when an obligation,
regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts is breached, the
contravenor can be held liable for payment of interest in the concept of actual and compensatory
[31]
damages, subject to the following rules, to wit

1.
When the obligation is breached, and it consists in the payment of a sum
of money, i.e., a loan or forbearance of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the rate of
interest shall be 12% per annum to be computed from default, i.e., from judicial or
extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.
2.
When an obligation, not constituting a loan or forbearance of money, is
breached, an interest on the amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall begin to run
only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in any case, be
on the amount finally adjudged.
3.
When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such finality until
its satisfaction, this interim period being deemed to be by then an equivalent to a
[32]
forbearance of credit. (Emphasis supplied)
Accordingly, the legal interest of 6% shall begin to run on February 9, 1993 when the trial court
rendered judgment and not on February 4, 1980 when the complaint was filed. This is because at the
time of the filing of the complaint, the amount of the damages to which plaintiffs may be entitled remains
unliquidated and unknown, until it is definitely ascertained, assessed and determined by the court and
[33]
only upon presentation of proof thereon. From the time the judgment becomes final and executory, the
interest rate shall be 12% until its satisfaction.
Anent the last issue of whether petitioner can recover under its insurance policy from Phoenix, we
affirm the findings of both the trial court and the Court of Appeals, thus:
As regards the liability of Phoenix, the court a quo correctly ruled that defendantappellant CDCPs claim against Phoenix already prescribed pursuant to Section 384 of
P.D. 612, as amended, which provides:
Any person having any claim upon the policy issued pursuant to
this chapter shall, without any unnecessary delay, present to the
insurance company concerned a written notice of claim setting forth the
nature, extent and duration of the injuries sustained as certified by a duly
licensed physician. Notice of claim must be filed within six months from
date of the accident, otherwise, the claim shall be deemed
waived. Action or suit for recovery of damage due to loss or injury must
be brought in proper cases, with the Commissioner or Courts within one
year from denial of the claim, otherwise, the claimants right of action
[34]
shall prescribe. (As amended by PD 1814, BP 874.)
The law is clear and leaves no room for interpretation. A written notice of claim must be filed
within six months from the date of the accident. Since petitioner never made any claim within six months
from the date of the accident, its claim has already prescribed.

WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 46896 dated March 29, 2001, which modified the Decision of the Regional Trial Court of Manila,
Branch 13, in Civil Case No. R-82-2137, is AFFIRMED with the MODIFICATIONS that petitioner is held
jointly and severally liable to pay (1) actual damages in the amount of P79,354.43; (2) moral damages in
the amount of P50,000.00 each for Rachel Fletcher and Rebecca Estrella; (3) exemplary damages in the
amount of P20,000.00 each for Rebecca Estrella and Rachel Fletcher; and (4) thirty percent (30%) of the
total amount recovered as attorneys fees. The total amount adjudged shall earn interest at the rate of
6% per annum from the date of judgment of the trial court until finality of this judgment. From the time this
Decision becomes final and executory and the judgment amount remains unsatisfied, the same shall earn
interest at the rate of 12% per annum until its satisfaction.
SO ORDERED.
G.R. No. 157917

August 29, 2012

1

SPOUSES TEODORO and NANETTE PERENA, Petitioners,

vs.
SPOUSES TERESITA PHILIPPINE NICOLAS and L. ZARATE, NATIONAL RAILWAYS, and the
COURT OF APPEALS Respondents.
DECISION
BERSAMIN, J.:
The operator of a. school bus service is a common carrier in the eyes of the law. He is bound to observe
extraordinary diligence in the conduct of his business. He is presumed to be negligent when death occurs
to a passenger. His liability may include indemnity for loss of earning capacity even if the deceased
passenger may only be an unemployed high school student at the time of the accident.
The Case
By petition for review on certiorari, Spouses Teodoro and Nanette Perefia (Perefias) appeal the adverse
decision promulgated on November 13, 2002, by which the Court of Appeals (CA) affirmed with
modification the decision rendered on December 3, 1999 by the Regional Trial Court (RTC), Branch 260,
in Paraaque City that had decreed them jointly and severally liable with Philippine National Railways
(PNR), their co-defendant, to Spouses Nicolas and Teresita Zarate (Zarates) for the death of their 15-year
old son, Aaron John L. Zarate (Aaron), then a high school student of Don Bosco Technical Institute (Don
Bosco).
Antecedents
The Pereas were engaged in the business of transporting students from their respective residences in
Paraaque City to Don Bosco in Pasong Tamo, Makati City, and back. In their business, the Pereas
used a KIA Ceres Van (van) with Plate No. PYA 896, which had the capacity to transport 14 students at a
time, two of whom would be seated in the front beside the driver, and the others in the rear, with six
students on either side. They employed Clemente Alfaro (Alfaro) as driver of the van.
In June 1996, the Zarates contracted the Pereas to transport Aaron to and from Don Bosco. On August
22, 1996, as on previous school days, the van picked Aaron up around 6:00 a.m. from the Zarates
residence. Aaron took his place on the left side of the van near the rear door. The van, with its airconditioning unit turned on and the stereo playing loudly, ultimately carried all the 14 student riders on
their way to Don Bosco. Considering that the students were due at Don Bosco by 7:15 a.m., and that they
were already running late because of the heavy vehicular traffic on the South Superhighway, Alfaro took
the van to an alternate route at about 6:45 a.m. by traversing the narrow path underneath the Magallanes

Interchange that was then commonly used by Makati-bound vehicles as a short cut into Makati. At the
time, the narrow path was marked by piles of construction materials and parked passenger jeepneys, and
the railroad crossing in the narrow path had no railroad warning signs, or watchmen, or other responsible
persons manning the crossing. In fact, the bamboo barandilla was up, leaving the railroad crossing open
to traversing motorists.
At about the time the van was to traverse the railroad crossing, PNR Commuter No. 302 (train), operated
by Jhonny Alano (Alano), was in the vicinity of the Magallanes Interchange travelling northbound. As the
train neared the railroad crossing, Alfaro drove the van eastward across the railroad tracks, closely tailing
a large passenger bus. His view of the oncoming train was blocked because he overtook the passenger
bus on its left side. The train blew its horn to warn motorists of its approach. When the train was about 50
meters away from the passenger bus and the van, Alano applied the ordinary brakes of the train. He
applied the emergency brakes only when he saw that a collision was imminent. The passenger bus
successfully crossed the railroad tracks, but the van driven by Alfaro did not. The train hit the rear end of
the van, and the impact threw nine of the 12 students in the rear, including Aaron, out of the van. Aaron
landed in the path of the train, which dragged his body and severed his head, instantaneously killing him.
Alano fled the scene on board the train, and did not wait for the police investigator to arrive.
Devastated by the early and unexpected death of Aaron, the Zarates commenced this action for damages
against Alfaro, the Pereas, PNR and Alano. The Pereas and PNR filed their respective answers, with
cross-claims against each other, but Alfaro could not be served with summons.
At the pre-trial, the parties stipulated on the facts and issues, viz:
A. FACTS:
(1) That spouses Zarate were the legitimate parents of Aaron John L. Zarate;
(2) Spouses Zarate engaged the services of spouses Perea for the adequate and safe
transportation carriage of the former spouses' son from their residence in Paraaque to his
school at the Don Bosco Technical Institute in Makati City;
(3) During the effectivity of the contract of carriage and in the implementation thereof, Aaron, the
minor son of spouses Zarate died in connection with a vehicular/train collision which occurred
while Aaron was riding the contracted carrier Kia Ceres van of spouses Perea, then driven and
operated by the latter's employee/authorized driver Clemente Alfaro, which van collided with the
train of PNR, at around 6:45 A.M. of August 22, 1996, within the vicinity of the Magallanes
Interchange in Makati City, Metro Manila, Philippines;
(4) At the time of the vehicular/train collision, the subject site of the vehicular/train collision was a
railroad crossing used by motorists for crossing the railroad tracks;
(5) During the said time of the vehicular/train collision, there were no appropriate and safety
warning signs and railings at the site commonly used for railroad crossing;
(6) At the material time, countless number of Makati bound public utility and private vehicles
used on a daily basis the site of the collision as an alternative route and short-cut to Makati;
(7) The train driver or operator left the scene of the incident on board the commuter train
involved without waiting for the police investigator;
(8) The site commonly used for railroad crossing by motorists was not in fact intended by the
railroad operator for railroad crossing at the time of the vehicular collision;

(9) PNR received the demand letter of the spouses Zarate;

(10) PNR refused to acknowledge any liability for the vehicular/train collision;
(11) The eventual closure of the railroad crossing alleged by PNR was an internal arrangement
between the former and its project contractor; and
(12) The site of the vehicular/train collision was within the vicinity or less than 100 meters from
the Magallanes station of PNR.
B. ISSUES
(1) Whether or not defendant-driver of the van is, in the performance of his functions, liable for
negligence constituting the proximate cause of the vehicular collision, which resulted in the death
of plaintiff spouses' son;
(2) Whether or not the defendant spouses Perea being the employer of defendant Alfaro are
liable for any negligence which may be attributed to defendant Alfaro;
(3) Whether or not defendant Philippine National Railways being the operator of the railroad
system is liable for negligence in failing to provide adequate safety warning signs and railings in
the area commonly used by motorists for railroad crossings, constituting the proximate cause of
the vehicular collision which resulted in the death of the plaintiff spouses' son;
(4) Whether or not defendant spouses Perea are liable for breach of the contract of carriage with
plaintiff-spouses in failing to provide adequate and safe transportation for the latter's son;
(5) Whether or not defendants spouses are liable for actual, moral damages, exemplary
damages, and attorney's fees;
(6) Whether or not defendants spouses Teodorico and Nanette Perea observed the diligence of
employers and school bus operators;
(7) Whether or not defendant-spouses are civilly liable for the accidental death of Aaron John
Zarate;
(8) Whether or not defendant PNR was grossly negligent in operating the commuter train involved
in the accident, in allowing or tolerating the motoring public to cross, and its failure to install safety
devices or equipment at the site of the accident for the protection of the public;
(9) Whether or not defendant PNR should be made to reimburse defendant spouses for any and
whatever amount the latter may be held answerable or which they may be ordered to pay in favor
of plaintiffs by reason of the action;
(10) Whether or not defendant PNR should pay plaintiffs directly and fully on the amounts claimed
by the latter in their Complaint by reason of its gross negligence;
(11) Whether or not defendant PNR is liable to defendants spouses for actual, moral and
2
exemplary damages and attorney's fees.
The Zarates claim against the Pereas was upon breach of the contract of carriage for the safe transport
of Aaron; but that against PNR was based on quasi-delict under Article 2176, Civil Code.

In their defense, the Pereas adduced evidence to show that they had exercised the diligence of a good
father of the family in the selection and supervision of Alfaro, by making sure that Alfaro had been issued
a drivers license and had not been involved in any vehicular accident prior to the collision; that their own
son had taken the van daily; and that Teodoro Perea had sometimes accompanied Alfaro in the vans
trips transporting the students to school.
For its part, PNR tended to show that the proximate cause of the collision had been the reckless crossing
of the van whose driver had not first stopped, looked and listened; and that the narrow path traversed by
the van had not been intended to be a railroad crossing for motorists.
Ruling of the RTC
3

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

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendants ordering them to jointly and severally pay the plaintiffs as follows:
(1) (for) the death of Aaron- Php50,000.00;
(2) Actual damages in the amount of Php100,000.00;
(3) For the loss of earning capacity- Php2,109,071.00;
(4) Moral damages in the amount of Php4,000,000.00;
(5) Exemplary damages in the amount of Php1,000,000.00;
(6) Attorneys fees in the amount of Php200,000.00; and
(7) Cost of suit.
SO ORDERED.
4

On June 29, 2000, the RTC denied the Pereas motion for reconsideration, reiterating that the
cooperative gross negligence of the Pereas and PNR had caused the collision that led to the death of
Aaron; and that the damages awarded to the Zarates were not excessive, but based on the established
circumstances.
The CAs Ruling
Both the Pereas and PNR appealed (C.A.-G.R. CV No. 68916).
PNR assigned the following errors, to wit:

The Court a quo erred in:

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

2. In giving full faith and merit to the oral testimonies of plaintiffs-appellees witnesses despite
overwhelming documentary evidence on record, supporting the case of defendants-appellants
Philippine National Railways.
The Pereas ascribed the following errors to the RTC, namely:
The trial court erred in finding defendants-appellants jointly and severally liable for actual, moral and
exemplary damages and attorneys fees with the other defendants.
The trial court erred in dismissing the cross-claim of the appellants Pereas against the Philippine
National Railways and in not holding the latter and its train driver primarily responsible for the incident.
The trial court erred in awarding excessive damages and attorneys fees.
The trial court erred in awarding damages in the form of deceaseds loss of earning capacity in the
absence of sufficient basis for such an award.
On November 13, 2002, the CA promulgated its decision, affirming the findings of the RTC, but limited the
moral damages to P 2,500,000.00; and deleted the attorneys fees because the RTC did not state the
6
factual and legal bases, to wit:
WHEREFORE, premises considered, the assailed Decision of the Regional Trial Court, Branch 260 of
Paraaque City is AFFIRMED with the modification that the award of Actual Damages is reduced
to P59,502.76; Moral Damages is reduced to P 2,500,000.00; and the award for Attorneys Fees is
Deleted.
SO ORDERED.
The CA upheld the award for the loss of Aarons earning capacity, taking cognizance of the ruling in
7
Cariaga v. Laguna Tayabas Bus Company and Manila Railroad Company, wherein the Court gave the
heirs of Cariaga a sum representing the loss of the deceaseds earning capacity despite Cariaga being
only a medical student at the time of the fatal incident. Applying the formula adopted in the American
Expectancy Table of Mortality:
2/3 x (80 - age at the time of death) = life expectancy
the CA determined the life expectancy of Aaron to be 39.3 years upon reckoning his life expectancy from
age of 21 (the age when he would have graduated from college and started working for his own
livelihood) instead of 15 years (his age when he died). Considering that the nature of his work and his
salary at the time of Aarons death were unknown, it used the prevailing minimum wage of P 280.00/day
to compute Aarons gross annual salary to be P 110,716.65, inclusive of the thirteenth month pay.
Multiplying this annual salary by Aarons life expectancy of 39.3 years, his gross income would aggregate
to P 4,351,164.30, from which his estimated expenses in the sum of P 2,189,664.30 was deducted to
finally arrive at P 2,161,500.00 as net income. Due to Aarons computed net income turning out to be
higher than the amount claimed by the Zarates, only P 2,109,071.00, the amount expressly prayed for by
them, was granted.
On April 4, 2003, the CA denied the Pereas motion for reconsideration.

Issues
In this appeal, the Pereas list the following as the errors committed by the CA, to wit:

I. The lower court erred when it upheld the trial courts decision holding the petitioners jointly and
severally liable to pay damages with Philippine National Railways and dismissing their cross-claim against
the latter.
II. The lower court erred in affirming the trial courts decision awarding damages for loss of earning
capacity of a minor who was only a high school student at the time of his death in the absence of
sufficient basis for such an award.
III. The lower court erred in not reducing further the amount of damages awarded, assuming petitioners
are liable at all.
Ruling
The petition has no merit.
1.
Were the Pereas and PNR jointly
and severally liable for damages?
The Zarates brought this action for recovery of damages against both the Pereas and the PNR, basing
their claim against the Pereas on breach of contract of carriage and against the PNR on quasi-delict.
The RTC found the Pereas and the PNR negligent. The CA affirmed the findings.
We concur with the CA.
To start with, the Pereas defense was that they exercised the diligence of a good father of the family in
the selection and supervision of Alfaro, the van driver, by seeing to it that Alfaro had a drivers license and
that he had not been involved in any vehicular accident prior to the fatal collision with the train; that they
even had their own son travel to and from school on a daily basis; and that Teodoro Perea himself
sometimes accompanied Alfaro in transporting the passengers to and from school. The RTC gave scant
consideration to such defense by regarding such defense as inappropriate in an action for breach of
contract of carriage.
We find no adequate cause to differ from the conclusions of the lower courts that the Pereas operated
as a common carrier; and that their standard of care was extraordinary diligence, not the ordinary
diligence of a good father of a family.
Although in this jurisdiction the operator of a school bus service has been usually regarded as a private
9
carrier, primarily because he only caters to some specific or privileged individuals, and his operation is
neither open to the indefinite public nor for public use, the exact nature of the operation of a school bus
service has not been finally settled. This is the occasion to lay the matter to rest.
A carrier is a person or corporation who undertakes to transport or convey goods or persons from one
place to another, gratuitously or for hire. The carrier is classified either as a private/special carrier or as a
10
common/public carrier. A private carrier is one who, without making the activity a vocation, or without
holding himself or itself out to the public as ready to act for all who may desire his or its services,
undertakes, by special agreement in a particular instance only, to transport goods or persons from one
11
place to another either gratuitously or for hire. The provisions on ordinary contracts of the Civil Code
govern the contract of private carriage.The diligence required of a private carrier is only ordinary, that is,
the diligence of a good father of the family. In contrast, a common carrier is a person, corporation, firm or
association engaged in the business of carrying or transporting passengers or goods or both, by land,
12
water, or air, for compensation, offering such services to the public. Contracts of common carriage are

13

governed by the provisions on common carriers of the Civil Code, the Public Service Act, and other
special laws relating to transportation. A common carrier is required to observe extraordinary diligence,
and is presumed to be at fault or to have acted negligently in case of the loss of the effects of
14
passengers, or the death or injuries to passengers.
In relation to common carriers, the Court defined public use in the following terms in United States v. Tan
15
Piaco, viz:
"Public use" is the same as "use by the public". The essential feature of the public use is not confined to
privileged individuals, but is open to the indefinite public. It is this indefinite or unrestricted quality that
gives it its public character. In determining whether a use is public, we must look not only to the character
of the business to be done, but also to the proposed mode of doing it. If the use is merely optional with
the owners, or the public benefit is merely incidental, it is not a public use, authorizing the exercise of the
jurisdiction of the public utility commission. There must be, in general, a right which the law compels the
owner to give to the general public. It is not enough that the general prosperity of the public is promoted.
Public use is not synonymous with public interest. The true criterion by which to judge the character of the
use is whether the public may enjoy it by right or only by permission.
16

In De Guzman v. Court of Appeals, the Court noted that Article 1732 of the Civil Code avoided any
distinction between a person or an enterprise offering transportation on a regular or an isolated basis; and
has not distinguished a carrier offering his services to the general public, that is, the general community
or population, from one offering his services only to a narrow segment of the general population.
Nonetheless, the concept of a common carrier embodied in Article 1732 of the Civil Code coincides neatly
with the notion of public service under the Public Service Act, which supplements the law on common
carriers found in the Civil Code. Public service, according to Section 13, paragraph (b) of the Public
Service Act, includes:
x x x every person that now or hereafter may own, operate, manage, or control in the Philippines, for hire
or compensation, with general or limited clientle, whether permanent or occasional, and done for the
general business purposes, any common carrier, railroad, street railway, traction railway, subway motor
vehicle, either for freight or passenger, or both, with or without fixed route and whatever may be its
classification, freight or carrier service of any class, express service, steamboat, or steamship line,
pontines, ferries and water craft, engaged in the transportation of passengers or freight or both, shipyard,
marine repair shop, ice-refrigeration plant, canal, irrigation system, gas, electric light, heat and power,
water supply and power petroleum, sewerage system, wire or wireless communications systems, wire or
17
wireless broadcasting stations and other similar public services. x x x.
Given the breadth of the aforequoted characterization of a common carrier, the Court has considered as
18
19
20
common carriers pipeline operators, custom brokers and warehousemen, and barge operators even
if they had limited clientle.
As all the foregoing indicate, the true test for a common carrier is not the quantity or extent of the
business actually transacted, or the number and character of the conveyances used in the activity, but
whether the undertaking is a part of the activity engaged in by the carrier that he has held out to the
general public as his business or occupation. If the undertaking is a single transaction, not a part of the
general business or occupation engaged in, as advertised and held out to the general public, the
individual or the entity rendering such service is a private, not a common, carrier. The question must be
determined by the character of the business actually carried on by the carrier, not by any secret intention
or mental reservation it may entertain or assert when charged with the duties and obligations that the law
21
imposes.
Applying these considerations to the case before us, there is no question that the Pereas as the
operators of a school bus service were: (a) engaged in transporting passengers generally as a business,

not just as a casual occupation; (b) undertaking to carry passengers over established roads by the
method by which the business was conducted; and (c) transporting students for a fee. Despite catering to
a limited clientle, the Pereas operated as a common carrier because they held themselves out as a
ready transportation indiscriminately to the students of a particular school living within or near where they
operated the service and for a fee.
The common carriers standard of care and vigilance as to the safety of the passengers is defined by law.
Given the nature of the business and for reasons of public policy, the common carrier is bound "to
observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers
22
transported by them, according to all the circumstances of each case." Article 1755 of the Civil Code
specifies that the common carrier should "carry the passengers safely as far as human care and foresight
can provide, using the utmost diligence of very cautious persons, with a due regard for all the
circumstances." To successfully fend off liability in an action upon the death or injury to a passenger, the
common carrier must prove his or its observance of that extraordinary diligence; otherwise, the legal
23
presumption that he or it was at fault or acted negligently would stand. No device, whether by
stipulation, posting of notices, statements on tickets, or otherwise, may dispense with or lessen the
24
responsibility of the common carrier as defined under Article 1755 of the Civil Code.
And, secondly, the Pereas have not presented any compelling defense or reason by which the Court
might now reverse the CAs findings on their liability. On the contrary, an examination of the records
shows that the evidence fully supported the findings of the CA.
As earlier stated, the Pereas, acting as a common carrier, were already presumed to be negligent at the
25
time of the accident because death had occurred to their passenger. The presumption of negligence,
being a presumption of law, laid the burden of evidence on their shoulders to establish that they had not
26
been negligent. It was the law no less that required them to prove their observance of extraordinary
diligence in seeing to the safe and secure carriage of the passengers to their destination. Until they did so
in a credible manner, they stood to be held legally responsible for the death of Aaron and thus to be held
liable for all the natural consequences of such death.
There is no question that the Pereas did not overturn the presumption of their negligence by credible
evidence. Their defense of having observed the diligence of a good father of a family in the selection and
supervision of their driver was not legally sufficient. According to Article 1759 of the Civil Code, their
liability as a common carrier did not cease upon proof that they exercised all the diligence of a good
father of a family in the selection and supervision of their employee. This was the reason why the RTC
treated this defense of the Pereas as inappropriate in this action for breach of contract of carriage.
The Pereas were liable for the death of Aaron despite the fact that their driver might have acted beyond
27
the scope of his authority or even in violation of the orders of the common carrier. In this connection, the
records showed their drivers actual negligence. There was a showing, to begin with, that their driver
traversed the railroad tracks at a point at which the PNR did not permit motorists going into the Makati
area to cross the railroad tracks. Although that point had been used by motorists as a shortcut into the
Makati area, that fact alone did not excuse their driver into taking that route. On the other hand, with his
familiarity with that shortcut, their driver was fully aware of the risks to his passengers but he still
disregarded the risks. Compounding his lack of care was that loud music was playing inside the airconditioned van at the time of the accident. The loudness most probably reduced his ability to hear the
warning horns of the oncoming train to allow him to correctly appreciate the lurking dangers on the
railroad tracks. Also, he sought to overtake a passenger bus on the left side as both vehicles traversed
the railroad tracks. In so doing, he lost his view of the train that was then coming from the opposite side of
the passenger bus, leading him to miscalculate his chances of beating the bus in their race, and of getting
clear of the train. As a result, the bus avoided a collision with the train but the van got slammed at its rear,
causing the fatality. Lastly, he did not slow down or go to a full stop before traversing the railroad tracks
despite knowing that his slackening of speed and going to a full stop were in observance of the right of
28
way at railroad tracks as defined by the traffic laws and regulations. He thereby violated a specific traffic
29
regulation on right of way, by virtue of which he was immediately presumed to be negligent.

30

The omissions of care on the part of the van driver constituted negligence, which, according to Layugan
31
v. Intermediate Appellate Court, is "the omission to do something which a reasonable man, guided by
those considerations which ordinarily regulate the conduct of human affairs, would do, or the doing of
32
something which a prudent and reasonable man would not do, or as Judge Cooley defines it, (t)he
failure to observe for the protection of the interests of another person, that degree of care, precaution,
33
and vigilance which the circumstances justly demand, whereby such other person suffers injury."
The test by which to determine the existence of negligence in a particular case has been aptly stated in
34
the leading case of Picart v. Smith, thuswise:
The test by which to determine the existence of negligence in a particular case may be stated as follows:
Did the defendant in doing the alleged negligent act use that reasonable care and caution which an
ordinarily prudent person would have used in the same situation? If not, then he is guilty of negligence.
The law here in effect adopts the standard supposed to be supplied by the imaginary conduct of the
discreet paterfamilias of the Roman law. The existence of negligence in a given case is not determined by
reference to the personal judgment of the actor in the situation before him. The law considers what would
be reckless, blameworthy, or negligent in the man of ordinary intelligence and prudence and determines
liability by that.
The question as to what would constitute the conduct of a prudent man in a given situation must of course
be always determined in the light of human experience and in view of the facts involved in the particular
case. Abstract speculation cannot here be of much value but this much can be profitably said:
Reasonable men govern their conduct by the circumstances which are before them or known to them.
They are not, and are not supposed to be, omniscient of the future. Hence they can be expected to take
care only when there is something before them to suggest or warn of danger. Could a prudent man, in the
case under consideration, foresee harm as a result of the course actually pursued? If so, it was the duty
of the actor to take precautions to guard against that harm. Reasonable foresight of harm, followed by the
ignoring of the suggestion born of this prevision, is always necessary before negligence can be held to
exist. Stated in these terms, the proper criterion for determining the existence of negligence in a given
case is this: Conduct is said to be negligent when a prudent man in the position of the tortfeasor would
have foreseen that an effect harmful to another was sufficiently probable to warrant his foregoing the
conduct or guarding against its consequences. (Emphasis supplied)
Pursuant to the Picart v. Smith test of negligence, the Pereas driver was entirely negligent when he
traversed the railroad tracks at a point not allowed for a motorists crossing despite being fully aware of
the grave harm to be thereby caused to his passengers; and when he disregarded the foresight of harm
to his passengers by overtaking the bus on the left side as to leave himself blind to the approach of the
oncoming train that he knew was on the opposite side of the bus.
35

Unrelenting, the Pereas cite Phil. National Railways v. Intermediate Appellate Court, where the Court
held the PNR solely liable for the damages caused to a passenger bus and its passengers when its train
hit the rear end of the bus that was then traversing the railroad crossing. But the circumstances of that
case and this one share no similarities. In Philippine National Railways v. Intermediate Appellate Court,
no evidence of contributory negligence was adduced against the owner of the bus. Instead, it was the
owner of the bus who proved the exercise of extraordinary diligence by preponderant evidence. Also, the
records are replete with the showing of negligence on the part of both the Pereas and the PNR. Another
distinction is that the passenger bus in Philippine National Railways v. Intermediate Appellate Court was
traversing the dedicated railroad crossing when it was hit by the train, but the Pereas school van
traversed the railroad tracks at a point not intended for that purpose.
At any rate, the lower courts correctly held both the Pereas and the PNR "jointly and severally" liable for
damages arising from the death of Aaron. They had been impleaded in the same complaint as
defendants against whom the Zarates had the right to relief, whether jointly, severally, or in the
alternative, in respect to or arising out of the accident, and questions of fact and of law were common as
36
to the Zarates. Although the basis of the right to relief of the Zarates (i.e., breach of contract of carriage)

against the Pereas was distinct from the basis of the Zarates right to relief against the PNR (i.e., quasidelict under Article 2176, Civil Code), they nonetheless could be held jointly and severally liable by virtue
of their respective negligence combining to cause the death of Aaron. As to the PNR, the RTC rightly
found the PNR also guilty of negligence despite the school van of the Pereas traversing the railroad
tracks at a point not dedicated by the PNR as a railroad crossing for pedestrians and motorists, because
the PNR did not ensure the safety of others through the placing of crossbars, signal lights, warning signs,
and other permanent safety barriers to prevent vehicles or pedestrians from crossing there. The RTC
observed that the fact that a crossing guard had been assigned to man that point from 7 a.m. to 5 p.m.
was a good indicium that the PNR was aware of the risks to others as well as the need to control the
vehicular and other traffic there. Verily, the Pereas and the PNR were joint tortfeasors.
2.
Was the indemnity for loss of
Aarons earning capacity proper?
The RTC awarded indemnity for loss of Aarons earning capacity. Although agreeing with the RTC on the
liability, the CA modified the amount. Both lower courts took into consideration that Aaron, while only a
high school student, had been enrolled in one of the reputable schools in the Philippines and that he had
been a normal and able-bodied child prior to his death. The basis for the computation of Aarons earning
capacity was not what he would have become or what he would have wanted to be if not for his untimely
death, but the minimum wage in effect at the time of his death. Moreover, the RTCs computation of
Aarons life expectancy rate was not reckoned from his age of 15 years at the time of his death, but on 21
years, his age when he would have graduated from college.
We find the considerations taken into account by the lower courts to be reasonable and fully warranted.
Yet, the Pereas submit that the indemnity for loss of earning capacity was speculative and
37
unfounded. They cited People v. Teehankee, Jr., where the Court deleted the indemnity for victim Jussi
Leinos loss of earning capacity as a pilot for being speculative due to his having graduated from high
school at the International School in Manila only two years before the shooting, and was at the time of the
shooting only enrolled in the first semester at the Manila Aero Club to pursue his ambition to become a
professional pilot. That meant, according to the Court, that he was for all intents and purposes only a high
school graduate.
We reject the Pereas submission.
First of all, a careful perusal of the Teehankee, Jr. case shows that the situation there of Jussi Leino was
not akin to that of Aaron here. The CA and the RTC were not speculating that Aaron would be some
highly-paid professional, like a pilot (or, for that matter, an engineer, a physician, or a lawyer). Instead, the
computation of Aarons earning capacity was premised on him being a lowly minimum wage earner
despite his being then enrolled at a prestigious high school like Don Bosco in Makati, a fact that would
have likely ensured his success in his later years in life and at work.
And, secondly, the fact that Aaron was then without a history of earnings should not be taken against his
parents and in favor of the defendants whose negligence not only cost Aaron his life and his right to work
and earn money, but also deprived his parents of their right to his presence and his services as well. Our
law itself states that the loss of the earning capacity of the deceased shall be the liability of the guilty party
in favor of the heirs of the deceased, and shall in every case be assessed and awarded by the court
"unless the deceased on account of permanent physical disability not caused by the defendant, had no
38
earning capacity at the time of his death." Accordingly, we emphatically hold in favor of the
indemnification for Aarons loss of earning capacity despite him having been unemployed, because
compensation of this nature is awarded not for loss of time or earnings but for loss of the deceaseds
39
power or ability to earn money.

This favorable treatment of the Zarates claim is not unprecedented. In Cariaga v. Laguna Tayabas Bus
40
Company and Manila Railroad Company, fourth-year medical student Edgardo Carriagas earning
capacity, although he survived the accident but his injuries rendered him permanently incapacitated, was
computed to be that of the physician that he dreamed to become. The Court considered his scholastic
record sufficient to justify the assumption that he could have finished the medical course and would have
passed the medical board examinations in due time, and that he could have possibly earned a modest
41
income as a medical practitioner. Also, in People v. Sanchez, the Court opined that murder and rape
victim Eileen Sarmienta and murder victim Allan Gomez could have easily landed good-paying jobs had
they graduated in due time, and that their jobs would probably pay them high monthly salaries
from P 10,000.00 to P 15,000.00 upon their graduation. Their earning capacities were computed at rates
higher than the minimum wage at the time of their deaths due to their being already senior agriculture
students of the University of the Philippines in Los Baos, the countrys leading educational institution in
agriculture.
3.
Were the amounts of damages excessive?
The Pereas plead for the reduction of the moral and exemplary damages awarded to the Zarates in the
respective amounts of P 2,500,000.00 and P 1,000,000.00 on the ground that such amounts were
excessive.
The plea is unwarranted.
The moral damages of P 2,500,000.00 were really just and reasonable under the established
circumstances of this case because they were intended by the law to assuage the Zarates deep mental
anguish over their sons unexpected and violent death, and their moral shock over the senseless
accident. That amount would not be too much, considering that it would help the Zarates obtain the
means, diversions or amusements that would alleviate their suffering for the loss of their child. At any
rate, reducing the amount as excessive might prove to be an injustice, given the passage of a long time
from when their mental anguish was inflicted on them on August 22, 1996.
Anent the P 1,000,000.00 allowed as exemplary damages, we should not reduce the amount if only to
render effective the desired example for the public good. As a common carrier, the Pereas needed to be
vigorously reminded to observe their duty to exercise extraordinary diligence to prevent a similarly
senseless accident from happening again. Only by an award of exemplary damages in that amount would
suffice to instill in them and others similarly situated like them the ever-present need for greater and
constant vigilance in the conduct of a business imbued with public interest.
WHEREFORE, we DENY the petition for review on certiorari; AFFIRM the decision promulgated on
November 13, 2002; and ORDER the petitioners to pay the costs of suit.
SO ORDERED.
1226 OBLIGATIONS WITH A PENAL CLAUSE

[G.R. No. 138677. February 12, 2002]

TOLOMEO LIGUTAN and LEONIDAS DE LA LLANA, petitioners, vs. HON. COURT OF APPEALS &
SECURITY BANK & TRUST COMPANY,respondents.

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

[2]

Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the trial court
of their motion to present evidence and assailing the imposition of the 2% service charge, the 5% per
[3]
month penalty charge and 10% attorney's fees. In its decision of 7 March 1996, the appellate court
affirmed the judgment of the trial court except on the matter of the 2% service charge which was deleted
pursuant to Central Bank Circular No. 783. Not fully satisfied with the decision of the appellate court, both
[4]
parties filed their respective motions for reconsideration. Petitioners prayed for the reduction of the 5%
stipulated penalty for being unconscionable. The bank, on the other hand, asked that the payment of
interest and penalty be commenced not from the date of filing of complaint but from the time of default as
so stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:

We find merit in plaintiff-appellees claim that the principal sum of P114,416.00 with interest thereon must
commence not on the date of filing of the complaint as we have previously held in our decision but on the
date when the obligation became due.
Default generally begins from the moment the creditor demands the performance of the
obligation. However, demand is not necessary to render the obligor in default when the obligation or the
law so provides.
In the case at bar, defendants-appellants executed a promissory note where they undertook to pay the
obligation on its maturity date 'without necessity of demand.' They also agreed to pay the interest in case
of non-payment from the date of default.
x x x
xxx

xxx

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

xxx

WHEREFORE, the decision sought to be reconsidered is hereby MODIFIED. The defendantsappellants Tolomeo Ligutan and Leonidas dela Llana are hereby ordered to pay the plaintiffappellee Security Bank and Trust Company the following:
1. The sum of P114,416.00 with interest thereon at the rate of 15.189% per annum and 3%
per month penalty charge commencing May 20, 1982 until fully paid;
2. The sum equivalent to 10% of the total amount of the indebtedness as and for attorneys
[5]
fees.
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit newly
[6]
discovered evidence, alleging that while the case was pending before the trial court,
petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage on 18
January 1984 to secure the existing indebtedness of petitioners Ligutan and dela Llanawith the
bank. Petitioners contended that the execution of the real estate mortgage had the effect of novating the
contract between them and the bank. Petitioners further averred that the mortgage
was extrajudicially foreclosed on 26 August 1986, that they were not informed about it, and the bank did
not credit them with the proceeds of the sale. The appellate court denied the omnibus motion for
reconsideration and to admit newly discovered evidence, ratiocinating that such a second motion for
reconsideration cannot be entertained under Section 2, Rule 52, of the 1997 Rules of Civil
Procedure. Furthermore, the appellate court said, the newly-discovered evidence being invoked by
petitioners had actually been known to them when the case was brought on appeal and when the first
[7]
motion for reconsideration was filed.
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their case to
this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the Rules of Court,
submitting thusly I.

The respondent Court of Appeals seriously erred in not holding that the 15.189%
interest and the penalty of three (3%) percent per month or thirty-six (36%) percent

per annum imposed by private respondent bank on petitioners loan obligation are
still manifestly exorbitant, iniquitous and unconscionable.
II.

The respondent Court of Appeals gravely erred in not reducing to a reasonable level
the ten (10%) percent award of attorneys fees which is highly and grossly
excessive, unreasonable and unconscionable.

III.

The respondent Court of Appeals gravely erred in not admitting petitioners newly
discovered evidence which could not have been timely produced during the trial of
this case.

IV.

The respondent Court of Appeals seriously erred in not holding that there was
a novation of the cause of action of private respondents complaint in the instant
case due to the subsequent execution of the real estate mortgage during
[8]
the pendency of this case and the subsequent foreclosure of the mortgage.

Respondent bank, which did not take an appeal, would, however, have it that the penalty sought to
be deleted by petitioners was even insufficient to fully cover and compensate for the cost of money
brought about by the radical devaluation and decrease in the purchasing power of the peso,
particularly vis-a-vis the U.S. dollar, taking into account the time frame of its occurrence. The Bank would
[9]
stress that only the amount of P5,584.00 had been remitted out of the entire loan of P120,000.00.
[10]

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

liability on the part of an obligor in case of breach of an obligation. It functions to strengthen the coercive
[11]
force of the obligation and to provide, in effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the stipulated indemnity without the necessity of
[12]
proof on the existence and on the measure of damages caused by the breach. Although a court may
not at liberty ignore the freedom of the parties to agree on such terms and conditions as they see fit that
contravene neither law nor morals, good customs, public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced by the courts if it is iniquitous or unconscionable or if the principal
[13]
obligation has been partly or irregularly complied with.
The question of whether a penalty is reasonable or iniquitous can be partly subjective and partly
objective. Its resolution would depend on such factors as, but not necessarily confined to, the type,
extent and purpose of the penalty, the nature of the obligation, the mode of breach and its consequences,
the supervening realities, the standing and relationship of the parties, and the like, the application of
which, by and large, is addressed to the sound discretion of the court. In Rizal Commercial Banking
[14]
Corp. vs. Court of Appeals, just an example, the Court has tempered the penalty charges after taking
into account the debtors pitiful situation and its offer to settle the entire obligation with the creditor
bank. The stipulated penalty might likewise be reduced when a partial or irregular performance is made
[15]
by the debtor. The stipulated penalty might even be deleted such as when there has been substantial
[16]
performance in good faith by the obligor, when the penalty clause itself suffers from fatal infirmity, or
[17]
when exceptional circumstances so exist as to warrant it.
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty
interest from 5% a month to 3% a month which petitioner still disputes. Given the circumstances, not to
mention the repeated acts of breach by petitioners of their contractual obligation, the Court sees no
cogent ground to modify the ruling of the appellate court..
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that has not
been raised and ventilated before the courts below. In any event, the interest stipulation, on its face,
does not appear as being that excessive. The essence or rationale for the payment of interest, quite
often referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A penalty
stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being
[18]
distinct concepts which may separately be demanded. What may justify a court in not allowing the
creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid
agreement, may not equally justify the non-payment or reduction of interest. Indeed, the interest

prescribed in loan financing arrangements is a fundamental part of the banking business and the core of
[19]
a bank's existence.
Petitioners next assail the award of 10% of the total amount of indebtedness by way of attorney's
fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time spent and the extent of
services rendered by counsel for the bank and the nature of the case. Bearing in mind that the rate of
attorneys fees has been agreed to by the parties and intended to answer not only for litigation expenses
but also for collection efforts as well, the Court, like the appellate court, deems the award of 10%
attorneys fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial or to
admit newly discovered evidence. As the appellate court so held in its resolution of14 May 1999 Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a
judgment or final resolution by the same party shall be entertained. Considering that the instant motion is
already a second motion for reconsideration, the same must therefore be denied.
Furthermore, it would appear from the records available to this court that the newly-discovered evidence
being invoked by defendants-appellants have actually been existent when the case was brought on
appeal to this court as well as when the first motion for reconsideration was filed. Hence, it is quite
surprising why defendants-appellants raised the alleged newly-discovered evidence only at this stage
when they could have done so in the earlier pleadings filed before this court.
The propriety or acceptability of such a second motion for reconsideration is not contingent upon the
averment of 'new' grounds to assail the judgment, i.e., grounds other than those theretofore presented
and rejected. Otherwise, attainment of finality of a judgment might be stayed off indefinitely, depending
on the partys ingenuousness or cleverness in conceiving and formulating 'additional flaws' or 'newly
discovered errors' therein, or thinking up some injury or prejudice to the rights of the movant for
[20]
reconsideration.
At any rate, the subsequent execution of the real estate mortgage as security for the existing loan would
not have resulted in the extinguishment of the original contract of loan because ofnovation. Petitioners
acknowledge that the real estate mortgage contract does not contain any express stipulation by the
parties intending it to supersede the existing loan agreement between the petitioners and the
[21]
bank. Respondent bank has correctly postulated that the mortgage is but an accessory contract to
secure the loan in the promissory note.
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the parties
to the new contract; third, the extinguishment of the obligation; and fourth, the validity of the new
[22]
one. In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms, or that the old and the new obligation be on every
[23]
point incompatible with each other. An obligation to pay a sum of money is not extinctively novated by a
new instrument which merely changes the terms of payment or adding compatible covenants or where
[24]
the old contract is merely supplemented by the new one. When not expressed, incompatibility is
required so as to ensure that the parties have indeed intended such novation despite their failure to
express it in categorical terms. The incompatibility, to be sure, should take place in any of the essential
elements of the obligation, i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease
[25]
of things, or from negotiorum gestio to agency, or from a mortgage to antichresis, or from a sale to one
[26]
of loan; (2) the object or principal conditions, such as a change of the nature of the prestation; or (3) the
[27]
subjects,
such
as
the
substitution
of
a
debtor or
the
subrogation
of
the
creditor. Extinctive novation does not necessarily imply that the new agreement should be complete by
itself; certain terms and conditions may be carried, expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.

[G.R. No. 157480. May 6, 2005]

PRYCE

CORPORATION
(formerly
PRYCE
PROPERTIES
CORPORATION), petitioner,
vs. PHILIPPINE AMUSEMENT AND GAMING CORPORATION,respondent.
DECISION

PANGANIBAN, J.:
In legal contemplation, the termination of a contract is not equivalent to its rescission. When an
agreement is terminated, it is deemed valid at inception. Prior to termination, the contract binds the
parties, who are thus obliged to observe its provisions. However, when it is rescinded, it is deemed
inexistent, and the parties are returned to their status quo ante. Hence, there is mutual restitution of
benefits received. The consequences of termination may be anticipated and provided for by the
contract. As long as the terms of the contract are not contrary to law, morals, good customs, public order
or public policy, they shall be respected by courts. The judiciary is not authorized to make or modify
contracts; neither may it rescue parties from disadvantageous stipulations. Courts, however, are
empowered to reduce iniquitous or unconscionable liquidated damages, indemnities and penalties agreed
upon by the parties.

The Case
[1]

Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the May 22, 2002
[2]
Decision of the Court of Appeals (CA) in CA-GR CV No. 51629 and its March 4, 2003
[3]
Resolution denying petitioners Motion for Reconsideration. The assailed Decision disposed thus:
WHEREFORE, in view of the foregoing, judgment is hereby rendered as follows: (1) In Civil Case No.
93-68266, the appealed decision[,] is AFFIRMED with MODIFICATION[,] ordering [Respondent]
Philippine Amusement and Gaming Corporation to pay [Petitioner] Pryce Properties Corporation the total
amount of P687,289.50 as actual damages representing the accrued rentals for the quarter September to
November 1993 with interest and penalty at the rate of two percent (2%) per month from date of filing of
the complaint until the amount shall have been fully paid, and the sum of P50,000.00 as attorneys fees;
(2) In Civil Case No. 93-68337, the appealed decision is REVERSED and SET ASIDE and a new
judgment is rendered ordering [Petitioner] Pryce Properties Corporation to reimburse
[Respondent] Philippine Amusement and Gaming Corporation the amount of P687,289.50 representing
the advanced rental deposits, which amount may be compensated by [Petitioner] Pryce Properties
[4]
Corporation with its award in Civil Case No. 93-68266 in the equal amount of P687,289.50.

The Facts

According to the CA, the facts are as follows:

Sometime in the first half of 1992, representatives from Pryce Properties Corporation (PPC for brevity)
made representations with the Philippine Amusement and Gaming Corporation (PAGCOR) on the
possibility of setting up a casino in Pryce Plaza Hotel in Cagayan de Oro City. [A] series of negotiations
followed. PAGCOR representatives went to Cagayan de Oro City to determine the pulse of the people
whether the presence of a casino would be welcomed by the residents. Some local government officials
showed keen interest in the casino operation and expressed the view that possible problems were
surmountable. Their negotiations culminated with PPCs counter-letter proposal dated October 14, 1992.
On November 11, 1992, the parties executed a Contract of Lease x x x involving the ballroom of the
Hotel for a period of three (3) years starting December 1, 1992 and until November 30, 1995. On
November 13, 1992, they executed an addendum to the contract x x x which included a lease of an
additional 1000 square meters of the hotel grounds as living quarters and playground of the casino
personnel. PAGCOR advertised the start of their casino operations on December 18, 1992.
Way back in 1990, the Sangguniang Panlungsod of Cagayan de Oro City passed Resolution No. 2295 x
x x dated November 19, 1990 declaring as a matter of policy to prohibit and/or not to allow the
establishment of a gambling casino in Cagayan de Oro City. Resolution No. 2673 x x x dated October
19, 1992 (or a month before the contract of lease was executed) was subsequently passed reiterating
with vigor and vehemence the policy of the City under Resolution No. 2295, series of 1990, banning
casinos in Cagayan de Oro City. On December 7, 1992, the Sangguniang Panlungsod of Cagayan de
Oro City enacted Ordinance No. 3353 x x x prohibiting the issuance of business permits and canceling
existing business permits to any establishment for using, or allowing to be used, its premises or any
portion thereof for the operation of a casino.
In the afternoon of December 18, 1992 and just hours before the actual formal opening of casino
operations, a public rally in front of the hotel was staged by some local officials, residents and religious
leaders. Barricades were placed [which] prevented some casino personnel and hotel guests from
entering and exiting from the Hotel. PAGCOR was constrained to suspend casino operations because of
the rally. An agreement between PPC and PAGCOR, on one hand, and representatives of the rallyists,
th
on the other, eventually ended the rally on the 20 of December, 1992.
On January 4, 1993, Ordinance No. 3375-93 x x x was passed by the Sangguniang Panlungsod of
Cagayan de Oro City, prohibiting the operation of casinos and providing for penalty for violation
thereof. On January 7, 1993, PPC filed a Petition for Prohibition with Preliminary Injunction x x x against
then public respondent Cagayan de Oro City and/or Mayor Pablo P. Magtajas x x x before the Court of
Appeals, docketed as CA G.R. SP No. 29851 praying inter alia, for the declaration of unconstitutionality of
Ordinance No. 3353. PAGCOR intervened in said petition and further assailed Ordinance No. 4475-93
as being violative of the non-impairment of contracts and equal protection clauses. On March 31, 1993,
the Court of Appeals promulgated its decision x x x, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, Ordinance No. 3353 and Ordinance No. 3375-93 are hereby
DECLARED UNCONSTITUTIONAL and VOID and the respondents and all other persons acting under
their authority and in their behalf are PERMANENTLY ENJOINED from enforcing those ordinances.
SO ORDERED.
Aggrieved by the decision, then public respondents Cagayan de Oro City, et al. elevated the case to the
Supreme Court in G.R. No. 111097, where, in an En Banc Decision dated July 20, 1994 x x x, the
Supreme Court denied the petition and affirmed the decision of the Court of Appeals.
In the meantime, PAGCOR resumed casino operations on July 15, 1993, against which, however,
another public rally was held. Casino operations continued for some time, but were later on indefinitely

suspended due to the incessant demonstrations. Per verbal advice x x x from the Office of the President
of the Philippines, PAGCOR decided to stop its casino operations in Cagayan de Oro City. PAGCOR
stopped its casino operations in the hotel prior to September, 1993. In two Statements of Account dated
September 1, 1993 x x x, PPC apprised PAGCOR of its outstanding account for the quarter September 1
to November 30, 1993. PPC sent PAGCOR another Letter dated September 3, 1993 x x x as a follow-up
to the parties earlier conference. PPC sent PAGCOR another Letter dated September 15, 1993 x x x
stating its Board of Directors decision to collect the full rentals in case of pre-termination of the lease.
PAGCOR sent PPC a letter dated September 20, 1993 x x x [stating] that it was not amenable to the
payment of the full rentals citing as reasons unforeseen legal and other circumstances which prevented it
from complying with its obligations. PAGCOR further stated that it had no other alternative but to preterminate the lease agreement due to the relentless and vehement opposition to their casino
operations. In a letter dated October 12, 1993 x x x, PAGCOR asked PPC to refund the total
of P1,437,582.25 representing the reimbursable rental deposits and expenses for the permanent
improvement of the Hotels parking lot. In a letter dated November 5, 1993 x x x, PAGCOR formally
demanded from PPC the payment of its claim for reimbursement.
On November 15, 1993 x x x, PPC filed a case for sum of money in the Regional Trial Court of Manila
docketed as Civil Case No. 93-68266. On November 19, 1993, PAGCOR also filed a case for sum of
money in the Regional Trial Court of Manila docketed as Civil Case No. 93-68337.
In a letter dated November 25, 1993, PPC informed PAGCOR that it was terminating the contract of
lease due to PAGCORs continuing breach of the contract and further stated that it was exercising its
rights under the contract of lease pursuant to Article 20 (a) and (c) thereof.
On February 2, 1994, PPC filed a supplemental complaint x x x in Civil Case No. 93-68266, which the
trial court admitted in an Order dated February 11, 1994. In an Order dated April 27, 1994, Civil Case No.
93-68377 was ordered consolidated with Civil Case No. 93-68266. These cases were jointly tried by the
[5]
court a quo. On August 17, 1995, the court a quo promulgated its decision. Both parties appealed.
In its appeal, PPC faulted the trial court for the following reasons: 1) failure of the court to award
actual and moral damages; 2) the 50 percent reduction of the amount PPC was claiming; and 3) the
courts ruling that the 2 percent penalty was to be imposed from the date of the promulgation of the
Decision, not from the date stipulated in the Contract.
On the other hand, PAGCOR criticized the trial court for the latters failure to rule that the Contract of
Lease had already been terminated as early as September 21, 1993, or at the latest, on October 14,
1993, when PPC received PAGCORs letter dated October 12, 1993. The gaming corporation added that
the trial court erred in 1) failing to consider that PPC was entitled to avail itself of the provisions of Article
XX only when PPC was the party terminating the Contract; 2) not finding that there were valid, justifiable
and good reasons for terminating the Contract; and 3) dismissing the Complaint of PAGCOR in Civil Case
No. 93-68337 for lack of merit, and not finding PPC liable for the reimbursement of PAGCORS cash
deposits and of the value of improvements.

Ruling of the Court of Appeals

First, on the appeal of PAGCOR, the CA ruled that the PAGCORS pretermination of the Contract of
Lease was unjustified. The appellate court explained that public demonstrations and rallies could not be
considered as fortuitous events that would exempt the gaming corporation from complying with the latters
contractual obligations. Therefore, the Contract continued to be effective until PPC elected to terminate it
on November 25, 1993.

Regarding the contentions of PPC, the CA held that under Article 1659 of the Civil Code, PPC had
the right to ask for (1) rescission of the Contract and indemnification for damages; or(2) only
indemnification plus the continuation of the Contract. These two remedies were alternative, not
cumulative, ruled the CA.
As PAGCOR had admitted its failure to pay the rentals for September to November 1993, PPC
correctly exercised the option to terminate the lease agreement. Previously, the Contract remained
effective, and PPC could collect the accrued rentals. However, from the time it terminated the Contract
on November 25, 1993, PPC could no longer demand payment of the remaining rentals as part of actual
damages, the CA added.
Denying the claim for moral damages, the CA pointed out the failure of PPC to show that PAGCOR
had acted in gross or evident bad faith in failing to pay the rentals from September to November
1993. Such failure was shown especially by the fact that PPC still had in hand three (3) months advance
rental deposits of PAGCOR. The former could have simply applied this deposit to the unpaid rentals, as
provided in the Contract. Neither did PPC adequately show that its reputation had been besmirched or
the hotels goodwill eroded by the establishment of the casino and the public protests.
Finally, as to the claimed reimbursement for parking lot improvement, the CA held that PAGCOR had
not presented official receipts to prove the latters alleged expenses. The appellate court, however,
upheld the trial courts award to PPC of P50,000 attorneys fees.
Hence this Petition.

[6]

Issues
In their Memorandum, petitioner raised the following issues:
MAIN ISSUE:
Did the Honorable Court of Appeals commit x x x grave and reversible error by holding that Pryce was
not entitled to future rentals or lease payments for the unexpired period of the Contract of Lease between
Pryce and PAGCOR?
Sub-Issues:
1. Were the provisions of Sections 20(a) and 20(c) of the Contract of Lease relative to the right of
PRYCE to terminate the Contract for cause and to moreover collect rentals from PAGCOR corresponding
to the remaining term of the lease valid and binding?
2. Did not Article 1659 of the Civil Code supersede Sections 20(a) and 20(c) of the Contract, PRYCE
having rescinded the Contract of Lease?
3. Do the case of Rios, et al. vs. Jacinto Palma Enterprises, et al. and the other cases cited by
PAGCOR support its position that PRYCE was not entitled to future rentals?
4.

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

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

The Courts Ruling

The Petition is partly meritorious.

Main Issue:
Collection of Remaining Rentals
PPC anchors its right to collect future rentals upon the provisions of the Contract. Likewise, it argues
that termination, as defined under the Contract, is different from the remedy ofrescission prescribed under
Article 1659 of the Civil Code. On the other hand, PAGCOR contends, as the CA ruled, that Article 1659
of the Civil Code governs; hence, PPC is allegedly no longer entitled to future rentals, because it chose
to rescind the Contract.

Contract Provisions
Clear and Binding
Article 1159 of the Civil Code provides that obligations arising from contracts have the force of law
[8]
between the contracting parties and should be complied with in good faith. In deference to the rights of
[9]
the parties, the law allows them to enter into stipulations, clauses, terms and conditions they may deem
convenient; that is, as long as these are not contrary to law, morals, good customs, public order or public
policy. Likewise, it is settled that if the terms of the contract clearly express the intention of the
[10]
contracting parties, the literal meaning of the stipulations would be controlling.
In this case, Article XX of the parties Contract of Lease provides in part as follows:
XX. BREACH OR DEFAULT
a) The LESSEE agrees that all the terms, conditions and/or covenants herein contained shall be
deemed essential conditions of this contract, and in the event of default or breach of any of such terms,
conditions and/or covenants, or should the LESSEE become bankrupt, or insolvent, or compounds with
his creditors, the LESSOR shall have the right to terminate and cancel this contract by giving them fifteen
(15 days) prior notice delivered at the leased premises or posted on the main door thereof. Upon such
termination or cancellation, the LESSOR may forthwith lock the premises and exclude the LESSEE
therefrom, forcefully or otherwise, without incurring any civil or criminal liability. During the fifteen (15)
days notice, the LESSEE may prevent the termination of lease by curing the events or causes of
termination or cancellation of the lease.
b)

xxx

xxx

xxx

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

xxx

xxx

x x x. (Italics supplied)

The above provisions leave no doubt that the parties have covenanted 1) to give PPC the right to
terminate and cancel the Contract in the event of a default or breach by the lessee; and 2) to make
PAGCOR fully liable for rentals for the remaining term of the lease, despite the exercise of such right to
terminate. Plainly, the parties have voluntarily bound themselves to require strict compliance with the

provisions of the Contract by stipulating that a default or breach, among others, shall give the lessee the
termination option, coupled with the lessors liability for rentals for the remaining term of the lease.
For sure, these stipulations are valid and are not contrary to law, morals, good customs, public order
or public policy. Neither is there anything objectionable about the inclusion in the Contract of mandatory
[11]
provisions concerning the rights and obligations of the parties. Being the primary law between the
parties, it governs the adjudication of their rights and obligations. A court has no alternative but to
[12]
enforce the contractual stipulations in the manner they have been agreed upon and written. It is well to
[13]
recall that courts, be they trial or appellate, have no power to make or modify contracts. Neither can
they save parties from disadvantageous provisions.

Termination or Rescission?
Well-taken is petitioners insistence that it had the right to ask for termination plus the full payment of
future rentals under the provisions of the Contract, rather than just rescissionunder Article 1659 of the
Civil Code. This Court is not unmindful of the fact that termination and rescission are terms that have
been used loosely and interchangeably in the past. But distinctions ought to be made, especially in this
controversy, in which the terms mean differently and lead to equally different consequences.
[14]

The term rescission is found in 1) Article 1191 of the Civil Code, the general provision on
[15]
rescission of reciprocal obligations; 2) Article 1659, which authorizes rescission as an alternative
remedy, insofar as the rights and obligations of the lessor and the lessee in contracts of lease are
[16]
concerned; and 3) Article 1380 with regard to the rescission of contracts.
[17]

In his Concurring Opinion in Universal Food Corporation v. CA, Justice J. B. L. Reyes

differentiated rescission under Article 1191 from that under Article 1381 et seq. as follows:
x x x. The rescission on account of breach of stipulations is not predicated on injury to economic
interests of the party plaintiff but on the breach of faith by the defendant, that violates the reciprocity
between the parties. It is not a subsidiary action, and Article 1191 may be scanned without disclosing
anywhere that the action for rescission thereunder is subordinated to anything other than the culpable
breach of his obligations to the defendant. This rescission is a principal action retaliatory in character, it
being unjust that a party be held bound to fulfill his promises when the other violates his. As expressed in
the old Latin aphorism: Non servanti fidem, non est fides servanda. Hence, the reparation of damages
for the breach is purely secondary.
On the contrary, in rescission by reason of lesion or economic prejudice, the cause of action is
subordinated to the existence of that prejudice, because it is the raison detre as well as the measure of
[18]
the right to rescind. x x x.
Relevantly, it has been pointed out that resolution was originally used in Article 1124 of the old Civil
Code, and that the term became the basis for rescission under Article 1191 (and, conformably, also
[19]
Article 1659).
Now,
as to
the distinction between termination (or cancellation)
and rescission (more
[20]
properly, resolution), Huibonhoa v. CA held that, where the action prayed for the payment of rental
arrearages, the aggrieved party actually sought the partial enforcement of a lease contract. Thus, the
remedy was not rescission, but termination or cancellation, of the contract. The Court explained:
x x x. By the allegations of the complaint, the Gojoccos aim was to cancel or terminate the contract
because they sought its partial enforcement in praying for rental arrearages. There is a distinction in law
between cancellation of a contract and its rescission. To rescind is to declare a contract void in its
inception and to put an end to it as though it never were. It is not merely to terminate it and release

parties from further obligations to each other but to abrogate it from the beginning and restore the parties
to relative positions which they would have occupied had no contract ever been made.
x x x. The termination or cancellation of a contract would necessarily entail enforcement of its terms prior
to the declaration of its cancellation in the same way that before a lessee is ejected under a lease
contract, he has to fulfill his obligations thereunder that had accrued prior to his ejectment. However,
[21]
termination of a contract need not undergo judicial intervention. x x x. (Italics supplied)
Rescission has likewise been defined as the unmaking of a contract, or its undoing from the
beginning, and not merely its termination. Rescission may be effected by both parties by mutual
agreement; or unilaterally by one of them declaring a rescission of contract without the consent of the
[22]
other, if a legally sufficient ground exists or if a decree of rescission is applied for before the courts. On
the other hand, termination refers to an end in time or existence; a close, cessation or conclusion. With
respect to a lease or contract, it means an ending, usually before the end of the anticipated term of such
lease or contract, that may be effected by mutual agreement or by one party exercising one of its
[23]
remedies as a consequence of the default of the other.
Thus, mutual restitution is required in a rescission (or resolution), in order to bring back the parties to
[24]
their original situation prior to the inception of the contract. Applying this principle to this case, it means
that PPC would re-acquire possession of the leased premises, and PAGCOR would get back the rentals
it paid the former for the use of the hotel space.
In contrast, the parties in a case of termination are not restored to their original situation; neither is
the contract treated as if it never existed. Prior to its termination, the parties are obliged to comply with
their contractual obligations. Only after the contract has been cancelled will they be released from their
obligations.
In this case, the actions and pleadings of petitioner show that it never intended to rescind the Lease
Contract from the beginning. This fact was evident when it first sought to collect the accrued rentals from
September to November 1993 because, as previously stated, it actually demanded the enforcement of
the Lease Contract prior to termination. Any intent to rescind was not shown, even when it abrogated the
Contract on November 25, 1993, because such abrogation was not the rescission provided for under
Article 1659.

Future Rentals
[25]

As to the remaining sub-issue of future rentals, Rios v. Jacinto is inapplicable, because the
remedy resorted to by the lessors in that case was rescission, not termination. The rights and obligations
of the parties in Rios were governed by Article 1659 of the Civil Code; hence, the Court held that the
damages to which the lessor was entitled could not have extended to the lessees liability for future
rentals.
Upon the other hand, future rentals cannot be claimed as compensation for the use or enjoyment of
anothers property after the termination of a contract. We stress that by abrogating the Contract in the
present case, PPC released PAGCOR from the latters future obligations, which included the payment of
rentals. To grant that right to the former is to unjustly enrich it at the latters expense.
However, it appears that Section XX (c) was intended to be a penalty clause. That fact is manifest
from a reading of the mandatory provision under subparagraph (a) in conjunction with subparagraph (c) of
the Contract. A penal clause is an accessory obligation which the parties attach to a principal obligation
for the purpose of insuring the performance thereof by imposing on the debtor a special prestation
(generally consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
[26]
irregularly or inadequately fulfilled.

Quite common in lease contracts, this clause functions to strengthen the coercive force of the
obligation and to provide, in effect, for what could be the liquidated damages resulting from a
[27]
breach. There is nothing immoral or illegal in such indemnity/penalty clause, absent any showing that it
[28]
was forced upon or fraudulently foisted on the obligor.
In obligations with a penal clause, the general rule is that the penalty serves as a substitute for the
indemnity for damages and the payment of interests in case of noncompliance; that is, if there is no
[29]
stipulation to the contrary, in which case proof of actual damages is not necessary for the penalty to be
[30]
demanded. There are exceptions to the aforementioned rule, however, as enumerated in paragraph 1
of Article 1226 of the Civil Code: 1) when there is a stipulation to the contrary, 2) when the obligor is sued
for refusal to pay the agreed penalty, and 3) when the obligor is guilty of fraud. In these cases, the
purpose of the penalty is obviously to punish the obligor for the breach. Hence, the obligee can recover
from the former not only the penalty, but also other damages resulting from the nonfulfillment of the
[31]
principal obligation.
In the present case, the first exception applies because Article XX (c) provides that, aside from the
payment of the rentals corresponding to the remaining term of the lease, the lessee shall also be liable
for any and all damages, actual or consequential, resulting from such default and termination of this
contract. Having entered into the Contract voluntarily and with full knowledge of its provisions, PAGCOR
must be held bound to its obligations. It cannot evade further liability for liquidated damages.

Reduction of Penalty
In certain cases, a stipulated penalty may nevertheless be equitably reduced by the courts.
power is explicitly sanctioned by Articles 1229 and 2227 of the Civil Code, which we quote:

[32]

This

Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also
be reduced by the courts if it is iniquitous or unconscionable.
Art. 2227. Liquidated damages, whether intended as an indemnity or a penalty, shall be equitably
reduced if they are iniquitous or unconscionable.
The question of whether a penalty is reasonable or iniquitous is addressed to the sound discretion of
the courts. To be considered in fixing the amount of penalty are factors such as -- but not limited to -- the
type, extent and purpose of the penalty; the nature of the obligation; the mode of the breach and its
[33]
consequences; the supervening realities; the standing and relationship of the parties; and the like.
In this case, PAGCORs breach was occasioned by events that, although not fortuitous in law, were
in fact real and pressing. From the CAs factual findings, which are not contested by either party, we find
that PAGCOR conducted a series of negotiations and consultations before entering into the Contract. It
did so not only with the PPC, but also with local government officials, who assured it that the problems
[34]
were surmountable. Likewise, PAGCOR took pains to contest the ordinances before the courts, which
consequently declared them unconstitutional. On top of these developments, the gaming corporation was
advised by the Office of the President to stop the games in Cagayan de Oro City, prompting the former to
cease operations prior to September 1993.
Also worth mentioning is the CAs finding that PAGCORs casino operations had to be suspended for
days on end since their start in December 1992; and indefinitely from July 15, 1993, upon the advice of
the Office of President, until the formal cessation of operations in September 1993. Needless to say,
these interruptions and stoppages meant that PAGCOR suffered a tremendous loss of expected
revenues, not to mention the fact that it had fully operated under the Contract only for a limited time.
While petitioners right to a stipulated penalty is affirmed, we consider the claim for future rentals to
the tune of P7,037,835.40 to be highly iniquitous. The amount should be equitably reduced. Under the

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

ERMINDA F. FLORENTINO,
Petitioner,
- versus SUPERVALUE, INC.,
Respondent.

DECISION

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court,
[1]
filed by petitioner Erminda F. Florentino, seeking to reverse and set aside the Decision, dated 10
[2]
October 2003 and the Resolution, dated 19 April 2006 of the Court of Appeals in CA-G.R. CV No.
73853. The appellate court, in its assailed Decision and Resolution, modified the Decision dated 30 April
2001 of the Regional Trial Court (RTC) of Makati, Branch 57, in Civil Case No. 00-1015, finding the
respondentSupervalue, Inc., liable for the sum of P192,000.00, representing the security deposits made
by the petitioner upon the commencement of their Contract of Lease. The dispositiveportion of the
assailed appellate courts Decision thus reads:

WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The

April 30, 2001 Decision of the Regional Trial Court of Makati, Branch 57 is therefore
MODIFIED to wit: (a) the portion ordering the [herein respondent] to pay the amount
of P192,000.00 representing the security deposits and P50,000.00 as attorneys fees in
favor of the
[herein petitioner] as well as giving [respondent] the option to reimburse
[petitioner] of the value of the improvements introduced by the [petitioner] on the
leased [premises] should [respondent] choose to appropriate itself or require the
[petitioner] to remove the improvements, is hereby REVERSED and SET ASIDE; and (b)
the portion ordering the return to [petitioner] the properties seized by [respondent] after
[3]
the former settled her obligation with the latter is however MAINTAINED.

The factual and procedural antecedents of the instant petition are as follows:

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

Respondent, on the other hand, is a domestic corporation engaged in the business of leasing
[5]
stalls and commercial store spaces located inside SM Malls found all throughout the country.

On 8 March 1999, petitioner and respondent executed three Contracts of Lease containing similar
terms and conditions over the cart-type stalls at SM North Edsa and SMSouthmall and a store space at
SM Megamall. The term of each contract is for a period of four months and may be renewed upon
[6]
agreement of the parties.

Upon the expiration of the original Contracts of Lease, the parties agreed to renew the same by
[7]
extending their terms until 31 March 2000.

Before the expiration of said Contracts of Lease, or on 4 February 2000, petitioner received two
[8]
letters from the respondent, both dated 14 January 2000, transmitted through facsimile transmissions.

In the first letter, petitioner was charged with violating Section 8 of the Contracts of Lease by not
[9]
opening on 16 December 1999 and 26 December 1999.

Respondent also charged petitioner with selling a new variety of empanada called miniembutido and of increasing the price of her merchandise from P20.00 to P22.00, without the prior
[10]
approval of the respondent.

Respondent observed that petitioner was frequently closing earlier than the usual mall hours,
either because of non-delivery or delay in the delivery of stocks to her outlets, again in violation of the
terms of the contract. A stern warning was thus given to petitioner to refrain from committing similar
[11]
infractions in the future in order to avoid the termination of the lease contract.

In the second letter, respondent informed the petitioner that it will no longer renew the Contracts of
[12]
Lease for the three outlets, upon their expiration on 31 March 2000.

In a letter-reply dated 11 February 2000, petitioner explained that the mini-embutido is not a new
variety of empanada but had similar fillings, taste and ingredients as those of pork empanada; only, its
[13]
size was reduced in order to make it more affordable to the buyers.

Such explanation notwithstanding, respondent still refused to renew its Contracts of Lease with the
petitioner. To the contrary, respondent took possession of the store space in SM Megamall and

confiscated the equipment and personal belongings of the petitioner found therein after the expiration of
[14]
the lease contract.

In a letter dated 8 May 2000, petitioner demanded that the respondent release the equipment and
personal belongings it seized from the SM Megamall store space and return the security deposits, in the
sum of P192,000.00, turned over by the petitioner upon signing of the Contracts of Lease. On 15 June
2000, petitioner sent respondent another letter reiterating her previous demands, but the latter failed or
[15]
refused to comply therewith.

On 17 August 2000, an action for Specific Performance, Sum of Money and Damages was filed by
[16]
the petitioner against the respondent before the RTC of Makati, Branch 57.

In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged that the respondent
made verbal representations that the Contracts of Lease will be renewed from time to time and, through
the said representations, the petitioner was induced to introduce improvements upon the store space at
SM Megamall in the sum of P200,000.00, only to find out a year later that the respondent will no longer
[17]
renew her lease contracts for all three outlets.

In addition, petitioner alleged that the respondent, without justifiable cause and without previous
[18]
demand, refused to return the security deposits in the amount ofP192,000.00.

Further, petitioner claimed that the respondent seized her equipment and personal belongings
found inside the store space in SM Megamall after the lease contract for the said outlet expired and
despite repeated written demands from the petitioner, respondent continuously refused to return the
[19]
seized items.

Petitioner thus prayed for the award of actual damages in the sum of P472,000.00, representing
the sum of security deposits, cost of improvements and the value of the personal properties
seized. Petitioner also asked for the award of P300,000.00 as moral damages; P50,000.00 as exemplary
[20]
damages; and P80,000.00 as attorneys fees and expenses of litigation.

For its part, respondent countered that petitioner committed several violations of the terms of their
Contracts of Lease by not opening from 16 December 1999 to 26 December 1999, and by introducing a
new variety of empanada without the prior consent of the respondent, as mandated by the provision of
Section 2 of the Contract of Lease. Respondent also alleged that petitioner infringed the lease contract by
frequently closing earlier than the agreed closing hours. Respondent finally averred that petitioner is
liable for the amount P106,474.09, representing the penalty for selling a new variety of empanada,
electricity and water bills, and rental adjustment, among other charges incidental to the lease
agreements. Respondent claimed that the seizure of petitioners personal belongings and equipment was
in the exercise of its retaining lien, considering that the petitioner failed to settle the said obligations up to
[21]
the time the complaint was filed.

Considering that petitioner already committed several breaches of contract, the respondent thus
opted not to renew its Contracts of Lease with her anymore. The security deposits were made in order to

ensure faithful compliance with the terms of their lease agreements; and since petitioner committed
several infractions thereof, respondent was justified in forfeiting the security deposits in the latters favor.

[22]

On 30 April 2001, the RTC rendered a Judgment in favor of the petitioner and found that the
physical takeover by the respondent of the leased premises and the seizure of petitioners equipment and
personal belongings without prior notice were illegal. The decretal part of the RTC Judgment reads:

WHEREFORE, premises duly considered, judgment is hereby rendered ordering

the [herein respondent] to pay [herein petitioner] the amount of P192,000.00 representing
the security deposits made by the [petitioner] and P50,000.00 as and for attorneys fees.

The [respondent] is likewise ordered to return to the [petitioner] the various

properties seized by the former after settling her account with the [respondent].

Lastly, the [respondent] may choose either to reimburse the [petitioner] one half
(1/2) of the value of the improvements introduced by the plaintiff at SM Megamall should
[respondent] choose to appropriate the improvements to itself or require the [petitioner] to
remove the improvements, even though the principal thing may suffer damage
thereby. [Petitioner] shall not, however, cause anymore impairment upon the said leased
premises than is necessary.

The other damages claimed by the plaintiff are denied for lack of merit.

Aggrieved, the respondent appealed the adverse RTC Judgment to the Court of Appeals.

[23]

In a Decision dated 10 October 2003, the Court of Appeals modified the RTC Judgment and
found that the respondent was justified in forfeiting the security deposits and was not liable to reimburse
the petitioner for the value of the improvements introduced in the leased premises and to pay for
attorneys fees. In modifying the findings of the lower court, the appellate court declared that in view of
the breaches of contract committed by the petitioner, the respondent is justified in forfeiting the security
deposits. Moreover, since the petitioner did not obtain the consent of the respondent before she
introduced improvements on the SM Megamall store space, the respondent has therefore no obligation to
[24]
reimburse the petitioner for the amount expended in connection with the said improvements.
The
Court of Appeals, however, maintained the order of the trial court for respondent to return to petitioner her
properties after she has settled her obligations to the respondent. The appellate court denied petitioners
[25]
Motion for Reconsideration in a Resolution dated 19 April 2006.

[26]

Hence, this instant Petition for Review on Certiorari filed by the petitioner assailing the Court of
Appeals Decision. For the resolution of this Court are the following issues:

I.

Whether or not the respondent is liable to return the security deposits to the petitions.

II.
Whether or not the respondent is liable to reimburse the petitioner for the sum of the improvements
she introduced in the leased premises.

III.

Whether or not the respondent is liable for attorneys fees.

[27]

The appellate court, in finding that the respondent is authorized to forfeit the security deposits,
relied on the provisions of Sections 5 and 18 of the Contract of Lease, to wit:

Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of
SIXTY THOUSAND PESOS (P60,000.00) equivalent to three (3) months rent as
security for the full and faithful performance to each and every term, provision,
covenant and condition of this lease and not as a pre-payment of rent. If at any
time during the term of this lease the rent is increased[,] the LESSEE on demand shall
make an additional deposit equal to the increase in rent. The LESSOR shall not be
required to keep the deposit separate from its general funds and the deposit shall not be
entitled to interest. The deposit shall remain intact during the entire term and shall not be
applied as payment for any monetary obligations of the LESSEE under this contract. If
the LESSEE shall faithfully perform every provision of this lease[,] the deposit shall be
refunded to the LESSEE upon the expiration of this Lease and upon satisfaction of all
monetary obligation to the LESSOR.

xxxx

Section 18. TERMINATION. Any breach, non-performance or nonobservance of the terms and conditions herein provided shall constitute default
which shall be sufficient ground to terminate this lease, its extension or
renewal. In which event, the LESSOR shall demand that LESSEE immediately vacate
the premises, and LESSOR shall forfeit in its favor the deposit tendered without
[28]
prejudice to any such other appropriate action as may be legally authorized.

Since it was already established by the trial court that the petitioner was guilty of committing
several breaches of contract, the Court of Appeals decreed that she cannot therefore rightfully demand
the return of the security deposits for the same are deemed forfeited by reason of evident contractual
violations.

It is undisputed that the above-quoted provision found in all Contracts of Lease is in the nature of a
penal clause to ensure petitioners faithful compliance with the terms and conditions of the said contracts.

A penal clause is an accessory undertaking to assume greater liability in case of breach. It is

attached to an obligation in order to insure performance and has a double function: (1) to provide for
liquidated damages, and (2) to strengthen the coercive force of the obligation by the threat of greater

[29]

responsibility in the event of breach.

The obligor would then be bound to pay the stipulated indemnity
without the necessity of proof of the existence and the measure of damages caused by the
[30]
breach.
Article 1226 of the Civil Code states:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if there is
no stipulation to the contrary. Nevertheless, damages shall be paid if the obligor refuses
to pay the penalty or is guilty of fraud in the fulfillment of the obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.

As a general rule, courts are not at liberty to ignore the freedoms of the parties to agree on such
terms and conditions as they see fit as long as they are not contrary to law, morals, good customs, public
order or public policy. Nevertheless, courts may equitably reduce a stipulated penalty in the contracts in
two instances: (1) if the principal obligation has been partly or irregularly complied with; and (2) even if
there has been no compliance if the penalty is iniquitous or unconscionable in accordance with Article
1229 of the Civil Code which clearly provides:

Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there has
been no performance, the penalty may also be reduced by the courts if it is iniquitous or
[31]
unconscionable.

In ascertaining whether the penalty is unconscionable or not, this court set out the following
[32]
standard in Ligutan v. Court of Appeals, to wit:

The question of whether a penalty is reasonable or iniquitous can be partly

subjective and partly objective. Its resolution would depend on such factor as, but not
necessarily confined to, the type, extent and purpose of the penalty, the nature of the
obligation, the mode of breach and its consequences, the supervening realities, the
standing and relationship of the parties, and the like, the application of which, by and
large, is addressed to the sound discretion of the court. xxx.

In the instant case, the forfeiture of the entire amount of the security deposits in the sum
of P192,000.00 was excessive and unconscionable considering that the gravity of the breaches
committed by the petitioner is not of such degree that the respondent was unduly prejudiced thereby. It is
but equitable therefore to reduce the penalty of the petitioner to 50% of the total amount of security
deposits.

It is in the exercise of its sound discretion that this court tempered the penalty for the breaches
committed by the petitioner to 50% of the amount of the security deposits. The forfeiture of the entire sum
of P192,000.00 is clearly a usurious and iniquitous penalty for the transgressions committed by the
petitioner. The respondent is therefore under the obligation to return the 50% of P192,000.00 to the
petitioner.

Turning now to the liability of the respondent to reimburse the petitioner for one-half of the
expenses incurred for the improvements on the leased store space at SMMegamall, the following
provision in the Contracts of Lease will enlighten us in resolving this issue:

Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The

LESSEE shall not make any alterations, additions, or improvements without the prior
written consent of LESSOR; and all alterations, additions or improvements made on the
leased premises, except movable or fixtures put in at LESSEEs expense and which are
removable, without defacing the buildings or damaging its floorings, shall
become LESSORs property without compensation/reimbursement but the LESSOR
reserves the right to require the removal of the said alterations, additions or
improvements upon expiration of the lease.

The foregoing provision in the Contract of Lease mandates that before the petitioner can introduce
any improvement on the leased premises, she should first obtain respondents consent. In the case at
bar, it was not shown that petitioner previously secured the consent of the respondent before she made
the improvements on the leased space in SM Megamall. It was not even alleged by the petitioner that
she obtained such consent or she at least attempted to secure the same. On the other hand, the
petitioner asserted that respondent allegedly misrepresented to her that it would renew the terms of the
contracts from time to time after their expirations, and that the petitioner was so induced thereby that she
expended the sum of P200,000.00 for the improvement of the store space leased.

This argument was squarely addressed by this court in Fernandez v. Court of Appeals,

[33]

thus:

The Court ruled that the stipulation of the parties in their lease contract to be renewable
at the option of both parties stresses that the faculty to renew was given not to the lessee
alone nor to the lessor by himself but to the two simultaneously; hence, both must agree
to renew if a new contract is to come about.

Petitioners contention that respondents had verbally agreed to extend the lease
indefinitely is inadmissible to qualify the terms of the written contract under the parole
[34]
evidence rule, and unenforceable under the statute of frauds.

Moreover, it is consonant with human experience that lessees, before occupying the leased
premises, especially store spaces located inside malls and big commercial establishments, would
renovate the place and introduce improvements thereon according to the needs and nature of their
business and in harmony with their trademark designs as part of their marketing ploy to attract

customers. Certainly, no inducement or misrepresentation from the lessor is necessary for this purpose,
for it is not only a matter of necessity that a lessee should re-design its place of business but a business
strategy as well.

In ruling that the respondent is liable to reimburse petitioner one half of the amount of
improvements made on the leased store space should it choose to appropriate the same, the RTC relied
on the provision of Article 1678 of the Civil Code which provides:
Art. 1678. If the lessee makes, in good faith, useful improvements which are
suitable to the use for which the lease is intended, without altering the form or substance
of the property leased, the lessor upon the termination of the lease shall pay the lessee
one-half of the value of the improvements at that time. Should the lessor refuse to
reimburse said amount, the lessee may remove the improvements, even though the
principal thing may suffer damage thereby. He shall not, however, cause any more
impairment upon the property leased than is necessary.

While it is true that under the above-quoted provision of the Civil Code, the lessor is under the
obligation to pay the lessee one-half of the value of the improvements made should the lessor choose to
appropriate the improvements, Article 1678 however should be read together with Article 448 and Article
546 of the same statute, which provide:

Art. 448. The owner of the land on which anything has been built, sown or
planted in good faith, shall have the right to appropriate as his own the works, sowing or
planting, after payment of the indemnity provided for in articles 546 and 548, or to oblige
the one who built or planted to pay the price of the land, and the one who sowed, the
proper rent. However, the builder or planter cannot be obliged to buy the land if its value
is considerably more than that of the building or trees. In such case, he shall pay
reasonable rent, if the owner of the land does not choose to appropriate the building or
trees after proper indemnity. The parties shall agree upon the terms of the lease and in
case of disagreement, the court shall fix the terms thereof.

xxxx

Art. 546. Necessary expenses shall be refunded to every possessor; but only
possessor in good faith may retain the thing until he has been reimbursed therefor.

Useful expenses shall be refunded only to the possessor in good faith with the
same right of retention, the person who has defeated him in the possession having the
option of refunding the amount of the expenses or of paying the increase in value which
the thing may have acquired by reason thereof.

Thus, to be entitled to reimbursement for improvements introduced on the property, the petitioner
must be considered a builder in good faith. Further, Articles 448 and 546 of the Civil Code, which allow
full reimbursement of useful improvements and retention of the premises until reimbursement is made,
apply only to a possessor in good faith, i.e.,one who builds on land with the belief that he is the owner
thereof. A builder in good faith is one who is unaware of any flaw in his title to the land at the time he

[35]

builds on it. In this case, the petitioner cannot claim that she was not aware of any flaw in her title or
was under the belief that she is the owner of the subject premises for it is a settled fact that she is merely
a lessee thereof.

In Geminiano v. Court of Appeals,

possessors or builders in good faith, thus:

[36]

this Court was emphatic in declaring that lessees are not

Being mere lessees, the private respondents knew that their occupation of
the premises would continue only for the life of the lease. Plainly, they cannot be
considered as possessors nor builders in good faith.

In a plethora of cases, this Court has held that Article 448 of the Civil Code, in
relation to Article 546 of the same Code, which allows full reimbursement of useful
improvements and retention of the premises until reimbursement is made, applies only to
a possessor in good faith, i.e., one who builds on land with the belief that he is the owner
thereof. It does not apply where one's only interest is that of a lessee under a
rental contract; otherwise, it would always be in the power of the tenant to
"improve" his landlord out of his property.

Since petitioners interest in the store space is merely that of the lessee under the lease contract,
she cannot therefore be considered a builder in good faith. Consequently, respondent may appropriate
the improvements introduced on the leased premises without any obligation to reimburse the petitioner for
the sum expended.

Anent the claim for attorneys fees, we resolve to likewise deny the award of the same. Attorneys
fees may be awarded when a party is compelled to litigate or to incur expenses to protect its interest by
[37]
reason of unjustified act of the other.

In the instant petition, it was not shown that the respondent unjustifiably refused to grant the
demands of the petitioner so as to compel the latter to initiate legal action to enforce her right. As we
have found herein, there is basis for respondents refusal to return to petitioner the security deposits and
to reimburse the costs of the improvements in the leased premises. The award of attorneys fees is
therefore not proper in the instant case.

WHEREFORE, premises considered, the instant Petition is PARTLY GRANTED. The Court of
Appeals Decision dated 10 October 2003 in CA-G.R. CV No. 73853 is hereby AFFIRMED with
the MODIFICATION that the respondent may forfeit only 50% of the total amount of the security deposits
in the sum of P192,000.00, and must return the remaining 50% to the petitioner. No costs.

SO ORDERED.

G.R. No. 171514

July 18, 2012

REPUBLIC OF THE PHILIPPINES, Petitioner,

vs.
DOMINGO ESPINOSA, Respondent.
DECISION
REYES, J.:
1

This is a petition for review on certiorari from the Decision dated November 11, 2004 and
2
Resolution dated February 13, 2006 of the Court of Appeals in CA-G.R. CV No. 72456.
On March 3, 1999, respondent Domingo Espinosa (Espinosa) tiled with the Municipal Trial Court (MTC) of
3
Consolacion, Cebu an application for land registration covering a parcel of land with an area of 5,525
square meters and situated in Barangay Cabangahan, Consolacion, Cebu. In support of his application,
which was docketed as LRC Case No. N-81, Espinosa alleged that: (a) the property, which is more
particularly known as Lot No. 8499 of Cad. 545-D (New), is alienable and disposable; (b) he purchased
the property from his mother, Isabel Espinosa (Isabel), on July 4, 1970 and the latters other heirs had
waived their rights thereto; and (c) he and his predecessor-in-interest had been in possession of the
property in the concept of an owner for more than thirty (30) years.
4

Espinosa submitted the blueprint of Advanced Survey Plan 07-000893 to prove the identity of the land.
As proof that the property is alienable and disposable, he marked as evidence the annotation on the
advance survey plan made by Cynthia L. Ibaez, Chief of the Map Projection Section, stating that
"CONFORMED PER L.C. MAP NOTATION L.C. Map No. 2545 Project No. 28 certified on June 25, 1963,
5
verified to be within Alienable & Disposable Area". Espinosa also presented two (2) tax declarations for
the years 1965 and 1974 in Isabels name Tax Declaration Nos. 013516 and 06137 to prove that she
had been in possession of the property since 1965. To support his claim that he had been religiously
6
paying the taxes due on the property, Espinosa presented a Certification dated December 1, 1998
issued by the Office of the Treasurer of Consolacion, Cebu and three (3) tax declarations for the years
7 8
1978, 1980 and 1985 Tax Declaration Nos. 14010, 17681 and 01071 .
Petitioner opposed Espinosas application, claiming that: (a) Section 48(b) of Commonwealth Act No. 141
otherwise known as the "Public Land Act" (PLA) had not been complied with as Espinosas predecessorin-interest possessed the property only after June 12, 1945; and (b) the tax declarations do not prove that
his possession and that of his predecessor-in-interest are in the character and for the length of time
required by law.
9

On August 18, 2000, the MTC rendered a Judgment granting Espinosas petition for registration, the
dispositive portion of which states:
WHEREFORE, and in view of all the foregoing, judgment is hereby rendered ordering for the
registration and the confirmation of title of Espinosa over Lot No. 8499, Cad 545-D (New),
situated at Barangay Cabangahan, Consolacion, Cebu, Philippines, containing an area of 5,525
square meters and that upon the finality of this decision, let a corresponding decree of registration
be issued in favor of the herein applicant in accordance with Section 39, P.D. 1529.
SO ORDERED.

10

According to the MTC, Espinosa was able to prove that the property is alienable and disposable and that
he complied with the requirements of Section 14(1) of Presidential Decree (P.D.) No. 1529. Specifically:

After a careful consideration of the evidence presented in the above-entitled case, the Court is convinced,
and so holds, that Espinosa was able to establish his ownership and possession over the subject lot
which is within the area considered by the Department of Environment and Natural Resources (DENR) as
alienable and disposable land of the public domain.
The Court is likewise convinced that the applicant and that of predecessor-in-interest have been in open,
actual, public, continuous, adverse and under claim of title thereto within the time prescribed by law (Sec.
11
14, sub-par. 1, P.D. 1529) and/or in accordance with the Land Registration Act.
Petitioner appealed to the CA and pointed Espinosas failure to prove that his possession and that of his
predecessor-in-interest were for the period required by law. As shown by Tax Declaration No. 013516,
Isabels possession commenced only in 1965 and not on June 12, 1945 or earlier as required by Section
48(b) of the PLA. On the other hand, Espinosa came into possession of the property only in 1970
following the sale that transpired between him and his mother and the earliest tax declaration in his name
was for the year 1978. According to petitioner, that Espinosa and his predecessor-in-interest were
supposedly in possession for more than thirty (30) years is inconsequential absent proof that such
12
possession began on June 12, 1945 or earlier.
Petitioner also claimed that Espinosas failure to present the original tracing cloth of the survey plan or a
13
sepia copy thereof is fatal to his application. Citing Del Rosario v. Republic of the Philippines and
14
Director of Lands v. Judge Reyes, petitioner argued that the submission of the original tracing cloth is
15
mandatory in establishing the identity of the land subject of the application.
Further, petitioner claimed that the annotation on the advance survey plan is not the evidence admissible
16
to prove that the subject land is alienable and disposable.
By way of the assailed decision, the CA dismissed petitioners appeal and affirmed the MTC Decision
dated August 18, 2000. The CA ruled that possession for at least thirty (30) years, despite the fact that it
commenced after June 12, 1945, sufficed to convert the property to private. Thus:
The contention of petitioner is not meritorious on the following grounds:
a) The record of the case will show that Espinosa has successfully established valid title over the subject
land and that he and his predecessor-in-interest have been in continuous, adverse, public and
undisturbed possession of said land in the concept of an owner for more than 30 years before the filing of
the application. Established jurisprudence has consistently pronounced that "open, continuous and
exclusive possession for at least 30 years of alienable public land ipso jure converts the same into private
property (Director of Lands vs. Intermediate Appellate Court, 214 SCRA 604). This means that
occupation and cultivation for more than 30 years by applicant and his predecessor-in-interest vests title
on such applicant so as to segregate the land from the mass of public land (National Power Corporation
vs. Court of Appeals, 218 SCRA 41); and
b) It is true that the requirement of possession since June 12, 1945 is the latest amendment of Section
48(b) of the Public Land Act (C.A. No. 141), but a strict implementation of the law would in certain cases
result in inequity and unfairness to Espinosa. As wisely stated by the Supreme Court in the case of
Republic vs. Court of Appeals, 235 SCRA 567:
"Following the logic of the petitioner, any transferee is thus foreclosed to apply for registration of title over
a parcel of land notwithstanding the fact that the transferor, or his predecessor-in-interest has been in
17
open, notorious and exclusive possession thereof for thirty (30) years or more."
The CA also ruled that registration can be based on other documentary evidence, not necessarily the
original tracing cloth plan, as the identity and location of the property can be established by other
competent evidence.

Again, the aforesaid contention of [the petitioner] is without merit. While the best evidence to identify a
piece of land for registration purposes may be the original tracing cloth plan from the Land Registration
Commission, the court may sufficiently order the issuance of a decree of registration on the basis of the
blue print copies and other evidence (Republic of the Philippines vs. Intermediate Appellate Court, G.R.
No. L-70594, October 10, 1986). The said case provides further:
"The fact that the lower court finds the evidence of the applicant sufficient to justify the
registration and confirmation of her titles and did not find it necessary to avail of the original
tracing cloth plan from the Land Registration Commission for purposes of comparison, should not
militate against the rights of the applicant. Such is especially true in this case where no clear,
strong, convincing and more preponderant proof has been shown by the oppositor to overcome
the correctness of said plans which were found both by the lower court and the Court of Appeals
as conclusive proofs of the description and identities of the parcels of land contained therein."
There is no dispute that, in case of Del Rosario vs. Republic, supra the Supreme Court pronounced that
the submission in evidence of the original tracing cloth plan, duly approved by the Bureau of Lands, in
cases for application of original registration of land is a mandatory requirement, and that failure to comply
with such requirement is fatal to ones application for registration. However, such pronouncement need
not be taken as an iron clad rule nor to be applied strictly in all cases without due regard to the rationale
behind the submission of the tracing cloth plan.
x x x:
xxxx
As long as the identity of and location of the lot can be established by other competent evidence like a
duly approved blueprint copy of the advance survey plan of Lot 8499 and technical description of Lot
8499, containing and identifying the boundaries, actual area and location of the lot, the presentation of the
18
original tracing cloth plan may be excused.
Moreover, the CA ruled that Espinosa had duly proven that the property is alienable and disposable:
Espinosa has established that Lot 8499 is alienable and disposable. In the duly approved
Advance Survey Plan As-07-0000893 (sic) duly approved by the Land Management Services,
DENR, Region 7, Cebu City, it is certified/verified that the subject lot is inside the alienable and
19
disposable area of the disposable and alienable land of the public domain.
Petitioner moved for reconsideration but this was denied by the CA in its Resolution
2006.

20

dated February 13,

Petitioners Case
Petitioner entreats this Court to reverse and set aside the CAs assailed decision and attributes the
following errors: (a) Espinosa failed to prove by competent evidence that the subject property is alienable
and disposable; (b) jurisprudence dictates that a survey plan identifies the property in preparation for a
judicial proceeding but does not convert the property into alienable, much less, private; (c) under Section
17 of P.D. No. 1529, the submission of the original tracing cloth plan is mandatory to determine the exact
metes and bounds of the property; and (d) a blueprint copy of the survey plan may be admitted as
evidence of the identity and location of the property only if it bears the approval of the Director of Lands.
Issues

The resolution of the primordial question of whether Espinosa has acquired an imperfect title over the
subject property that is worthy of confirmation and registration is hinged on the determination of the
following issues:
a. whether the blueprint of the advanced survey plan substantially complies with Section 17 of
P.D. No. 1529; and
b. whether the notation on the blueprint copy of the plan made by the geodetic engineer who
conducted the survey sufficed to prove that the land applied for is alienable and disposable.
Our Ruling
The lower courts were unanimous in holding that Espinosas application is anchored on Section 14(1) of
P.D. No. 1529 in relation to Section 48(b) of the PLA and the grant thereof is warranted in view of
evidence supposedly showing his compliance with the requirements thereof.
This Court is of a different view.
Based on Espinosas allegations and his supporting documents, it is patent that his claim of an imperfect
title over the property in question is based on Section 14(2) and not Section 14(1) of P.D. No. 1529 in
relation to Section 48(b) of the PLA. Espinosa did not allege that his possession and that of his
predecessor-in-interest commenced on June 12, 1945 or earlier as prescribed under the two (2) latter
provisions. On the contrary, Espinosa repeatedly alleged that he acquired title thru his possession and
that of his predecessor-in-interest, Isabel, of the subject property for thirty (30) years, or through
prescription. Therefore, the rule that should have been applied is Section 14(2) of P.D. No. 1529, which
states:
Sec. 14. Who may apply. The following persons may file in the proper Court of First Instance an
application for registration of title to land, whether personally or through their duly authorized
representatives:
xxxx
(2) Those who have acquired ownership of private lands by prescription under the
provision of existing laws.
Obviously, the confusion that attended the lower courts disposition of this case stemmed from their
failure to apprise themselves of the changes that Section 48(b) of the PLA underwent over the years.
Section 48(b) of the PLA originally states:
Sec. 48. The following described citizens of the Philippines, occupying lands of the public domain
or claiming to own any such lands or an interest therein, but whose titles have not been perfected
or completed, may apply to the Court of First Instance of the province where the land is located
for confirmation of their claims and the issuance of a certificate of title therefor, under the Land
Registration Act, to wit:
xxxx
(b) Those who by themselves or through their predecessors-in-interest have been in the
open, continuous, exclusive and notorious possession and occupation of agricultural
lands of the public domain, under a bona fide claim of acquisition or ownership, except as
against the Government, since July twenty-sixth, eighteen hundred and ninety-four,
except when prevented by war or force majeure. These shall be conclusively presumed

to have performed all the conditions essential to a Government grant and shall be entitled
to a certificate of title under the provisions of this chapter.
Thus, the required possession and occupation for judicial confirmation of imperfect title was since July 26,
1894 or earlier.
On June 22, 1957, Republic Act (R.A.) No. 1942 amended Section 48(b) of the PLA by providing a thirty
(30)-year prescriptive period for judicial confirmation of imperfect title. Thus:
(b) Those who by themselves or through their predecessors-in-interest have been in the open,
continuous, exclusive and notorious possession and occupation of agricultural lands of the public
domain, under a bona fide claim of acquisition or ownership, for at least thirty years immediately
preceding the filing of the application for confirmation of title except when prevented by war or
force majeure. These shall be conclusively presumed to have performed all the conditions
essential to a Government grant and shall be entitled to a certificate of title under the provisions
of this chapter.
On January 25, 1977, P.D. No. 1073 was issued, changing the requirement for possession and
occupation for a period of thirty (30) years to possession and occupation since June 12, 1945 or earlier.
Section 4 of P.D. No. 1073 states:
Sec. 4. The provisions of Section 48(b) and Section 48(c), Chapter VIII of the Public Land Act are
hereby amended in the sense that these provisions shall apply only to alienable and disposable
lands of the public domain which have been in open, continuous, exclusive and notorious
possession and occupation by the applicant himself or thru his predecessor-in-interest, under a
bona fide claim of acquisition of ownership, since June 12, 1945.
On June 11, 1978, P.D. No. 1529 was enacted. Notably, the requirement for possession and occupation
since June 12, 1945 or earlier was adopted under Section 14(1) thereof.
P.D. No. 1073, in effect, repealed R.A. No. 1942 such that applications under Section 48(b) of the PLA
filed after the promulgation of P.D. No. 1073 should allege and prove possession and occupation that
dated back to June 12, 1945 or earlier. However, vested rights may have been acquired under Section
48(b) prior to its amendment by P.D. No. 1073. That is, should petitions for registration filed by those who
had already been in possession of alienable and disposable lands of the public domain for thirty (30)
years at the time P.D. No. 1073 was promulgated be denied because their possession commenced after
21
June 12, 1945? In Abejaron v. Nabasa, this Court resolved this legal predicament as follows:
However, as petitioner Abejarons 30-year period of possession and occupation required by the
Public Land Act, as amended by R.A. 1942 ran from 1945 to 1975, prior to the effectivity of P.D.
No. 1073 in 1977, the requirement of said P.D. that occupation and possession should have
started on June 12, 1945 or earlier, does not apply to him. As the Susi doctrine holds that the
grant of title by virtue of Sec. 48(b) takes place by operation of law, then upon Abejarons
satisfaction of the requirements of this law, he would have already gained title over the disputed
land in 1975. This follows the doctrine laid down in Director of Lands v. Intermediate Appellate
Court, et al., that the law cannot impair vested rights such as a land grant. More clearly stated,
"Filipino citizens who by themselves or their predecessors-in-interest have been, prior to the
effectivity of P.D. 1073 on January 25, 1977, in open, continuous, exclusive and notorious
possession and occupation of agricultural lands of the public domain, under a bona fide claim of
acquisition of ownership, for at least 30 years, or at least since January 24, 1947" may apply for
judicial confirmation of their imperfect or incomplete title under Sec. 48(b) of the Public Land
22
Act. (Citations omitted)

Consequently, for one to invoke Section 48(b) and claim an imperfect title over an alienable and
disposable land of the public domain on the basis of a thirty (30)-year possession and occupation, it must
be demonstrated that such possession and occupation commenced on January 24, 1947 and the thirty
(30)-year period was completed prior to the effectivity of P.D. No. 1073.
There is nothing in Section 48(b) that would suggest that it provides for two (2) modes of acquisition. It is
not the case that there is an option between possession and occupation for thirty (30) years and
possession and occupation since June 12, 1945 or earlier. It is neither contemplated under Section 48(b)
that if possession and occupation of an alienable and disposable public land started after June 12, 1945,
it is still possible to acquire an imperfect title if such possession and occupation spanned for thirty (30)
years at the time of the filing of the application.
In this case, the lower courts concluded that Espinosa complied with the requirements of Section 48(b) of
the PLA in relation to Section 14(1) of P.D. No. 1529 based on supposed evidence that he and his
predecessor-in-interest had been in possession of the property for at least thirty (30) years prior to the
time he filed his application. However, there is nothing on record showing that as of January 25, 1977 or
prior to the effectivity of P.D. No. 1073, he or Isabel had already acquired title by means of possession
and occupation of the property for thirty (30) years. On the contrary, the earliest tax declaration in Isabels
name was for the year 1965 indicating that as of January 25, 1977, only twelve (12) years had lapsed
from the time she first came supposedly into possession.
23

The CAs reliance on Director of Lands v. Intermediate Appellate Court is misplaced considering that the
application therein was filed on October 20, 1975 or before the effectivity of P.D. No. 1073. The same can
24
be said with respect to National Power Corporation v. Court of Appeals. The petition for registration
therein was filed on August 21, 1968 and at that time, the prevailing rule was that provided under Section
48(b) as amended by R.A. No. 1942.
25

In Republic v. Court of Appeals, the applicants therein entered into possession of the property on June
17, 1978 and filed their application on February 5, 1987. Nonetheless, there is evidence that the
individuals from whom the applicant purchased the property, or their predecessors-in-interest, had been
in possession since 1937. Thus, during the effectivity of Section 48(b) as amended by R.A. No. 1942, or
while the prevailing rule was possession and occupation for thirty (30) years, or prior to the issuance of
P.D. No. 1073, the thirty (30)-year prescriptive period was already completed.
Thus, assuming that it is Section 48(b) of the PLA in relation to Section 14(1) of P.D. No. 1529 that should
apply in this case, as the lower courts held, it was incumbent upon Espinosa to prove, among other
things, that Isabels possession of the property dated back at least to June 12, 1945. That in view of the
established fact that Isabels alleged possession and occupation started much later, the lower courts
should have dismissed Espinosas application outright.
In sum, the CA, as well as the MTC, erred in not applying the present text of Section 48(b) of the PLA.
That there were instances wherein applications were granted on the basis of possession and occupation
for thirty (30) years was for the sole reason discussed above. Regrettably, such reason does not obtain in
this case.
Being clear that it is Section 14(2) of P.D. No. 1529 that should apply, it follows that the subject property
being supposedly alienable and disposable will not suffice. As Section 14(2) categorically provides, only
private properties may be acquired thru prescription and under Articles 420 and 421 of the Civil Code,
only those properties, which are not for public use, public service or intended for the development of
26
national wealth, are considered private. In Heirs of Mario Malabanan v. Republic, this Court held that
there must be an official declaration to that effect before the property may be rendered susceptible to
prescription:

Nonetheless, Article 422 of the Civil Code states that "property of public dominion, when no longer
intended for public use or for public service, shall form part of the patrimonial property of the State." It is
this provision that controls how public dominion property may be converted into patrimonial property
susceptible to acquisition by prescription. After all, Article 420(2) makes clear that those property "which
belong to the State, without being for public use, and are intended for some public service or for the
development of the national wealth" are public dominion property. For as long as the property belongs to
the State, although already classified as alienable or disposable, it remains property of the public
dominion if when it is "intended for some public service or for the development of the national wealth."
(Emphasis supplied)
Accordingly, there must be an express declaration by the State that the public dominion property is no
longer intended for public service or the development of the national wealth or that the property has been
converted into patrimonial. Without such express declaration, the property, even if classified as alienable
or disposable, remains property of the public dominion, pursuant to Article 420(2), and thus incapable of
acquisition by prescription. It is only when such alienable and disposable lands are expressly declared by
the State to be no longer intended for public service or for the development of the national wealth that the
period of acquisitive prescription can begin to run. Such declaration shall be in the form of a law duly
enacted by Congress or a Presidential Proclamation in cases where the President is duly authorized by
27
law.
Thus, granting that Isabel and, later, Espinosa possessed and occupied the property for an aggregate
period of thirty (30) years, this does not operate to divest the State of its ownership. The property, albeit
allegedly alienable and disposable, is not patrimonial. As the property is not held by the State in its private
capacity, acquisition of title thereto necessitates observance of the provisions of Section 48(b) of the PLA
in relation to Section 14(1) of P.D. No. 1529 or possession and occupation since June 12, 1945. For
prescription to run against the State, there must be proof that there was an official declaration that the
subject property is no longer earmarked for public service or the development of national wealth.
Moreover, such official declaration should have been issued at least ten (10) or thirty (30) years, as the
case may be, prior to the filing of the application for registration. The period of possession and occupation
prior to the conversion of the property to private or patrimonial shall not be considered in determining
completion of the prescriptive period. Indeed, while a piece of land is still reserved for public service or
the development of national wealth, even if the same is alienable and disposable, possession and
occupation no matter how lengthy will not ripen to ownership or give rise to any title that would defeat that
of the States if such did not commence on June 12, 1945 or earlier.
At any rate, as petitioner correctly pointed out, the notation on the survey plan does not constitute
incontrovertible evidence that would overcome the presumption that the property belongs to the
inalienable public domain.
All lands of the public domain belong to the State, which is the source of any asserted right to any
ownership of land. All lands not appearing to be clearly within private ownership are presumed to belong
to the State. Accordingly, public lands not shown to have been reclassified or released as alienable
agricultural land, or alienated to a private person by the State, remain part of the inalienable public
domain. The burden of proof in overcoming the presumption of State ownership of the lands of the public
domain is on the person applying for registration (or claiming ownership), who must prove that the land
subject of the application is alienable or disposable. To overcome this presumption, incontrovertible
evidence must be established that the land subject of the application (or claim) is alienable or
28
disposable.
29

30

In Republic v. Sarmiento, this Court reiterated the earlier ruling in Menguito v. Republic that the
notation made by a surveyor-geodetic engineer that the property surveyed is alienable and disposable is
not the positive government act that would remove the property from the inalienable domain. Neither it is
the evidence accepted as sufficient to controvert the presumption that the property is inalienable:

To discharge the onus, respondent relies on the blue print copy of the conversion and subdivision plan
approved by the DENR Center which bears the notation of the surveyor-geodetic engineer that "this
survey is inside the alienable and disposable area, Project No. 27-B. L.C. Map No. 2623, certified on
January 3, 1968 by the Bureau of Forestry."
Menguito v. Republic teaches, however, that reliance on such a notation to prove that the lot is alienable
is insufficient and does not constitute incontrovertible evidence to overcome the presumption that it
remains part of the inalienable public domain.
"To prove that the land in question formed part of the alienable and disposable lands of the public
domain, petitioners relied on the printed words which read: "This survey plan is inside Alienable and
Disposable Land Area, Project No. 27-B as per L.C. Map No. 2623, certified by the Bureau of Forestry on
January 3, 1968," appearing on Exhibit "E" (Survey Plan No. Swo-13-000227).
This proof is not sufficient. Section 2, Article XII of the 1987 Constitution, provides: "All lands of the public
domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries,
forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. . . ."
For the original registration of title, the applicant (petitioners in this case) must overcome the presumption
that the land sought to be registered forms part of the public domain. Unless public land is shown to have
been reclassified or alienated to a private person by the State, it remains part of the inalienable public
domain. Indeed, "occupation thereof in the concept of owner, no matter how long, cannot ripen into
ownership and be registered as a title." To overcome such presumption, incontrovertible evidence must
be shown by the applicant. Absent such evidence, the land sought to be registered remains inalienable.
In the present case, petitioners cite a surveyor geodetic engineers notation in Exhibit "E" indicating that
the survey was inside alienable and disposable land. Such notation does not constitute a positive
government act validly changing the classification of the land in question.
Verily, a mere surveyor has no authority to reclassify lands of the public domain. By relying solely on the
said surveyors assertion, petitioners have not sufficiently proven that the land in question has been
31
declared alienable." (Citations omitted and underscoring supplied)
Therefore, even if Espinosas application may not be dismissed due to his failure to present the original
tracing cloth of the survey plan, there are numerous grounds for its denial. The blueprint copy of the
advanced survey plan may be admitted as evidence of the identity and location of the subject property if:
(a) it was duly executed by a licensed geodetic engineer; (b) it proceeded officially from the Land
Management Services (LMS) of the DENR; and (c) it is accompanied by a technical description of the
property which is certified as correct by the geodetic surveyor who conducted the survey and the LMS of
32
the DENR. As ruled in Republic v. Guinto-Aldana, the identity of the land, its boundaries and location
can be established by other competent evidence apart from the original tracing cloth such as a duly
executed blueprint of the survey plan and technical description:
Yet if the reason for requiring an applicant to adduce in evidence the original tracing cloth plan is
merely to provide a convenient and necessary means to afford certainty as to the exact identity of
the property applied for registration and to ensure that the same does not overlap with the
boundaries of the adjoining lots, there stands to be no reason why a registration application must
be denied for failure to present the original tracing cloth plan, especially where it is accompanied
by pieces of evidencesuch as a duly executed blueprint of the survey plan and a duly executed
technical description of the propertywhich may likewise substantially and with as much certainty
33
prove the limits and extent of the property sought to be registered.
However, while such blueprint copy of the survey plan may be offered as evidence of the identity, location
and the boundaries of the property applied for, the notation therein may not be admitted as evidence of

34

alienability and disposability. In Republic v. Heirs of Juan Fabio, this Court enumerated the documents
that are deemed relevant and sufficient to prove that the property is already outside the inalienable public
domain as follows:
In Republic v. T.A.N. Properties, Inc., we ruled that it is not enough for the Provincial Environment
and Natural Resources Office (PENRO) or CENRO to certify that a land is alienable and
disposable. The applicant for land registration must prove that the DENR Secretary had approved
the land classification and released the land of the public domain as alienable and disposable,
and that the land subject of the application for registration falls within the approved area per
verification through survey by the PENRO or CENRO. In addition, the applicant must present a
copy of the original classification of the land into alienable and disposable, as declared by the
DENR Secretary, or as proclaimed by the President. Such copy of the DENR Secretarys
declaration or the Presidents proclamation must be certified as a true copy by the legal custodian
of such official record. These facts must be established to prove that the land is alienable and
35
disposable. (Citation omitted)
Based on the foregoing, it appears that Espinosa cannot avail the benefits of either Section 14(1) of P.O.
No. 1529 in relation to Section 48(b) of the PLA or Section 14(2) of P.O. No. 1529. Applying Section 14(1)
of P.O. No. 1529 and Section 48(b) of the PLA, albeit improper, Espinosa failed to prove that: (a) Isabel's
possession of the property dated back to June 12, 1945 or earlier; and (b) the property is alienable and
disposable. On the other hand, applying Section 14(2) of P.O. No. 1529, Espinosa failed to prove that the
property is patrimonial. As to whether Espinosa was able to prove that his possession and occupation
and that of Isabel were of the character prescribed by law, the resolution of this issue has been rendered
unnecessary by the foregoing considerations.
WHEREFORE, premises considered, the petition is GIVEN DUE COURSE and GRANTED. The Decision
dated November 11, 2004 and Resolution dated February 13, 2006 of the Court of Appeals in CA-G.R.
CV No. 72456 are REVERSED and SET ASIDE and Domingo Espinosa's application for registration of
title over Lot No. 8499 of Cad. 545-D (New) located at Barangay Cabangahan, Consolacion, Cebu is
hereby DENIED for lack of merit. No pronouncement as to costs.
SO ORDERED.