EN BANC

[G.R. No. L-27454. April 30, 1970.]

ROSENDO O. CHAVES, plaintiff-appellant, vs. FRUCTUOSO GONZALES, defendant-appellee.

Chaves, Elio, Chaves & Associates for plaintiff-appellant.

Sulpicio E. Platon for defendant-appellee.

SYLLABUS
1.CIVIL LAW; CONTRACTS; BREACH OF CONTRACT FOR NON-PERFORMANCE; FIXING OF PERIOD BEFORE
FILING OF COMPLAINT FOR NON-PERFORMANCE, ACADEMIC. Where the time for compliance had expired and
there was breach of contract by non-performance, it was academic for the plaintiff to have first petitioned the court to fix a
period for the performance of the contract before filing his complaint.
2.ID.; ID.; ID.; DEFENDANT CANNOT INVOKE ARTICLE 1197 OF THE CIVIL CODE OF THE PHILIPPINES. Where
the defendant virtually admitted non-performance of the contract by returning the typewriter that he was obliged to repair
in a non-working condition, with essential parts missing, Article 1197 of the Civil Code of the Philippines cannot be
invoked. The fixing of a period would thus be a mere formality and would serve no purpose than to delay.
3.ID.; ID.; ID.; DAMAGES RECOVERABLE; CASE AT BAR. Where the defendant-appellee contravened the tenor of his
obligation because he not only did not repair the typewriter but returned it "in shambles,'' he is liable for the cost of the
labor or service expended in the repair of the typewriter, which is in the amount of P58.75, because the obligation or
contract was to repair it. In addition, he is likewise liable under Art. 1170 of the Code, for the cost of the missing parts, in
the amount of P31.10, for in his obligation to repair the typewriter he was bound, but failed or neglected, to return it in the
same condition it was when he received it.
4.ID.; ID.; ID.; CLAIMS FOR DAMAGES OR ATTORNEY'S FEES NOT RECOVERABLE; NOT ALLEGED OR PROVED
IN INSTANT CASE. Claims for damages and attorney's fees must be pleaded, and the existence of the actual basis
thereof must be proved. As no findings of fact were made on the claims for damages and attorney's fees, there is no
factual basis upon which to make an award therefor.
5.REMEDIAL LAW; APPEALS; APPEAL FROM COURT OF FIRST INSTANCE TO SUPREME COURT; ONLY
QUESTIONS OF LAW REVIEWABLE. Where the appellant directly appeals from the decision of the trial court to the
Supreme Court on questions of law, he is bound by the judgment of the court a quo on its findings of fact.

DECISION

REYES, J.B.L., J p:
This is a direct appeal by the party who prevailed in a suit for breach of oral contract and recovery of damages but was
unsatisfied with the decision rendered by the Court of First Instance of Manila, in its Civil Case No. 65138, because it
awarded him only P31.10 out of his total claim of P690 00 for actual, temperate and moral damages and attorney's fees.
The appealed judgment, which is brief, is hereunder quoted in full:
"In the early part of July, 1963, the plaintiff delivered to the defendant, who is a typewriter repairer, a
portable typewriter for routine cleaning and servicing. The defendant was not able to finish the job
after some time despite repeated reminders made by the plaintiff. The defendant merely gave
assurances, but failed to comply with the same. In October, 1963, the defendant asked from the

plaintiff the sum of P6.00 for the purchase of spare parts, which amount the plaintiff gave to the
defendant. On October 26, 1963, after getting exasperated with the delay of the repair of the
typewriter, the plaintiff went to the house of the defendant and asked for the return of the typewriter.
The defendant delivered the typewriter in a wrapped package. On reaching home, the plaintiff
examined the typewriter returned to him by the defendant and found out that the same was in
shambles, with the interior cover and some parts and screws missing. On October 29, 1963. the
plaintiff sent a letter to the defendant formally demanding the return of the missing parts, the interior
cover and the sum of P6.00 (Exhibit D). The following day, the defendant returned to the plaintiff
some of the missing parts, the interior cover and the P6.00.
"On August 29, 1964, the plaintiff had his typewriter repaired by Freixas Business Machines, and the
repair job cost him a total of P89.85, including labor and materials (Exhibit C).
"On August 23, 1965, the plaintiff commenced this action before the City Court of Manila, demanding
from the defendant the payment of P90.00 as actual and compensatory damages, P100.00 for
temperate damages, P500.00 for moral damages, and P500.00 as attorney's fees.
"In his answer as well as in his testimony given before this court, the defendant made no denials of
the facts narrated above, except the claim of the plaintiff that the typewriter was delivered to the
defendant through a certain Julio Bocalin, which the defendant denied allegedly because the
typewriter was delivered to him personally by the plaintiff.
"The repair done on the typewriter by Freixas Business Machines with the total cost of P89.85 should
not, however, be fully chargeable against the defendant. The repair invoice, Exhibit C, shows that the
missing parts had a total value of only P31.10.
"WHEREFORE, judgment is hereby rendered ordering the defendant to pay the plaintiff the sum of
P31.10, and the costs of suit.
"SO ORDERED."
The error of the court a quo, according to the plaintiff-appellant, Rosendo O. Chaves, is that it awarded only the value of
the missing parts of the typewriter, instead of the whole cost of labor and materials that went into the repair of the
machine, as provided for in Article 1167 of the Civil Code, reading as follows:
"ART. 1167.If a person obliged to do something fails to do it, the same shall be executed at his cost.
This same rule shall be observed if he does it in contravention of the tenor of the obligation.
Furthermore it may be decreed that what has been poorly done he undone."
On the other hand, the position of the defendant-appellee, Fructuoso Gonzales, is that he is not liable at all, not even for
the sum of P31.10, because his contract with plaintiff-appellant did not contain a period, so that plaintiff-appellant should
have first filed a petition for the court to fix the period, under Article 1197 of the Civil Code, within which the defendant
appellee was to comply with the contract before said defendant-appellee could be held liable for breach of contract.
Because the plaintiff appealed directly to the Supreme Court and the appellee did not interpose any appeal, the facts, as
found by the trial court, are now conclusive and non-reviewable. 1
The appealed judgment states that the "plaintiff delivered to the defendant . . . a portable typewriter for routine cleaning
and servicing"; that the defendant was not able to finish the job after some time despite repeated reminders made by the
plaintiff"; that the "defendant merely gave assurances, but failed to comply with the same"; and that "after getting
exasperated with the delay of the repair of the typewriter", the plaintiff went to the house of the defendant and asked for its
return, which was done. The inferences derivable from these findings of fact are that the appellant and the appellee had a
perfected contract for cleaning and servicing a typewriter; that they intended that the defendant was to finish it at some
future time although such time was not specified; and that such time had passed without the work having been
accomplished, far the defendant returned the typewriter cannibalized and unrepaired, which in itself is a breach of his
obligation, without demanding that he should be given more time to finish the job, or compensation for the work he had
already done. The time for compliance having evidently expired, and there being a breach of contract by nonperformance, it was academic for the plaintiff to have first petitioned the court to fix a period for the performance of the
contract before filing his complaint in this case. Defendant cannot invoke Article 1197 of the Civil Code for he virtually
admitted non-performance by returning the typewriter that he was obliged to repair in a non-working condition, with

essential parts missing. The fixing of a period would thus be a mere formality and would serve no purpose than to delay
(cf. Tiglao. et al. V. Manila Railroad Co. 98 Phil. 181).
It is clear that the defendant-appellee contravened the tenor of his obligation because he not only did not repair the
typewriter but returned it "in shambles", according to the appealed decision. For such contravention, as appellant
contends, he is liable under Article 1167 of the Civil Code. jam quot, for the cost of executing the obligation in a proper
manner. The cost of the execution of the obligation in this case should be the cost of the labor or service expended in the
repair of the typewriter, which is in the amount of P58.75. because the obligation or contract was to repair it.
In addition, the defendant-appellee is likewise liable, under Article 1170 of the Code, for the cost of the missing parts, in
the amount of P31.10, for in his obligation to repair the typewriter he was bound, but failed or neglected, to return it in the
same condition it was when he received it.
Appellant's claims for moral and temperate damages and attorney's fees were, however, correctly rejected by the trial
court, for these were not alleged in his complaint (Record on Appeal, pages 1-5). Claims for damages and attorney's fees
must be pleaded, and the existence of the actual basis thereof must be proved. 2The appealed judgment thus made no
findings on these claims, nor on the fraud or malice charged to the appellee. As no findings of fact were made on the
claims for damages and attorney's fees, there is no factual basis upon which to make an award therefor. Appellant is
bound by such judgment of the court, a quo, by reason of his having resorted directly to the Supreme Court on questions
of law.
IN VIEW OF THE FOREGOING REASONS, the appealed judgment is hereby modified, by ordering the defendantappellee to pay, as he is hereby ordered to pay, the plaintiff-appellant the sum of P89.85, with interest at the legal rate
from the filing of the complaint. Costs in all instances against appellee Fructuoso Gonzales.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee and Villamor, JJ., concur.
Barredo, J., did not take part.
Footnotes
1.Perez v. Araneta, L-18414, 15 July 1968, 24 SCRA 43; Cebu Portland Cement Co. v. Mun. of Naga L-24116-17, 22
August 1968, 24 SCRA 708.
2.Malonzo v. Galang, L-13851, 27 July 1960; Darang v. Belizear, L-22399, 31 March 1967, 19 SCRA 214.

SECOND DIVISION
[G.R. No. L-29139. November 15, 1974.]
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P. ALCANTARA, plaintiffsappellants, vs. ESTEBAN PICZON and SOSING-LOBOS & CO., INC., defendants-appellees.

Vicente C. Santos for plaintiff-appellants.

Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.
Vicente M. Macabidang for defendant-appellee Esteban Piczon.

DECISION

BARREDO, J p:
Appeal from the decision of the Court of First Instance of Samar in its Civil Case No. 5156, entitled Consuelo P. Piczon,
et. al. vs. Esteban Piczon, et al., sentencing defendants-appellees, Sosing Lobos and Co., Inc., as principal, and Esteban
Piczon, as guarantor, to pay plaintiffs-appellants "the sum of P12,500.00 with 12% interest from August 6, 1964 until said
principal amount of P12,500.00 shall have been duly paid, and the costs."
After issues were joined and at the end of the pre-trial held on August 22, 1967, the trial court issued the following order:
"When this case was called for pre-trial, plaintiffs and defendants through their lawyers, appeared and
entered into the following agreement:
1.That defendants admit the due execution of Annexes 'A' and 'B' of the complaint;
2.That consequently defendant Sosing-Lobos and Co., Inc. binds itself to the plaintiffs for P12,600.00,
the same to be paid on or before October 31, 1967 together with the interest that this court may
determine.
That the issues in this case are legal ones namely:
(a)Will the payment of twelve per cent interest of P12,500.00 commence to run from August 6, 1964
when plaintiffs made the first demand or from August 29, 1956 when the obligation becomes due and
demandable?
(b)Is defendant Esteban Piczon liable as a guarantor or a surety?
That the parties are hereby required to file their respective memorandum if they so desire on or
before September 15, 1967 to discuss the legal issues and therewith the case will be considered
submitted for decision.
WHEREFORE, the instant case is hereby considered submitted based on the aforesaid facts agreed
upon and upon submission of the parties of their respective memorandum on or before September
15, 1967.
SO ORDERED." 1 (Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads thus:
"AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and resident of and with postal address in
the municipality of Catbalogan, Province of Samar, Philippines, in my capacity as the President of the
corporation known as the 'SOSING-LOBOS and CO., INC.,' as controlling stockholder, and at the
same time as guarantor for the same, do by these presents contract a loan of Twelve Thousand Five
Hundred Pesos (P12,500.00), Philippine Currency, the receipt of which is hereby acknowledged, from
the 'Piczon and Co., Inc.' another corporation, the main offices of the two corporations being in
Catbalogan, Samar, for which I undertake, bind and agree to use the loan as surety cash deposit for
registration with the Securities and Exchange Commission of the incorporation papers relative to the
'Sosing-Lobos and Co., Inc.,' and to return or pay the same amount with Twelve Per Cent (12%)
interest per annum, commencing from the date of execution hereof, to the 'Piczon and Co., Inc., as
soon as the said incorporation papers are duly registered and the Certificate of Incorporation issued
by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in Catbalogan, Samar, Philippines, this 28th
day of September, 1956.
(Sgd.) ESTEBAN PICZON"

(Record on Appeal, pp. 6-7.)

The trial court having rendered judgment in the tenor aforequoted, appellants assign the following alleged errors:
"I
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF 12% INTEREST ON THE
PRINCIPAL OF P12,500.00 FROM AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28,
1956, WHEN ANNEX 'A' WAS DULY EXECUTED.
"II
THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT ESTEBAN PICZON AS GUARANTOR
ONLY AND NOT AS SURETY.
"III
THE TRIAL COURT ERRED IN NOT ADJUDICATING DAMAGES IN FAVOR OF THE PLAINTIFFSAPPELLANTS." (Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of requiring appellees to pay interest at 12% only from August 6,
1964, the trial court should have adhered to the terms of the agreement which plainly provides that Esteban Piczon had
obligated Sosing-Lobos and Co., Inc. and himself to "return or pay (to Piczon and Co., Inc.) the same amount
(P12,500.00) with Twelve Per Cent (12%) interest per annum commencing from the date of the execution hereof", Annex
A, which was on September 28, 1956. Under Article 2209 of the Civil Code "(i)f the obligation consists in the payment of a
sum of money, and the debtor incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per
annum." In the case at bar, the "interest agreed upon" by the parties in Annex A was to commence from the execution of
said document.
Appellees' contention that the reference in Article 2209 to delay incurred by the debtor which can serve as the basis for
liability for interest is to that defined in Article 1169 of the Civil Code reading thus:
"Those obliged to deliver or to do something incur in delay from the time the obligee judicially or
extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may exist:
(1)When the obligation or the law expressly so declares; or
(2)When from the nature and the circumstances of the obligation it appears that the designation of the
time when the thing is to be delivered or the service is to be rendered was a controlling motive for the
establishment of the contract; or
(3)When demand would be useless, as when the obligor has rendered it beyond his power to
perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to
comply in a proper manner with what is incumbent upon him. From the moment one of the parties
fulfills his obligation, delay by the other begins."
is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the article cited by appellees (which was Article
1100 of the Old Civil Code read in relation to Art. 1101) is applicable only when the obligation is to do something other
than the payment of money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado, 104 Phil. 920, the Court squarely
ruled that if the contract stipulates from what time interest will be counted, said stipulated time controls, and, therefore
interest is payable from such time, and not from the date of the filing of the complaint (at p. 925). Were that not the
law, there would be no basis for the provision of Article 2212 of the Civil Code providing that "(I)nterest due shall earn
legal interest from the time it is judicially demanded, although the obligation may be silent upon this point."
Incidentally, appellants would have been entitled to the benefit of this article, had they not failed to plead the same in

their complaint. Their prayer for it in their brief is much too late. Appellees had no opportunity to meet the issue
squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose cannot be sustained. Under the terms of the contract,
Annex A, Esteban Piczon expressly bound himself only as guarantor, and there are no circumstances in the record from
which it can be deduced that his liability could be that of a surety. A guaranty must be express, (Article 2055, Civil Code)
and it would be violative of the law to consider a party to be bound as a surety when the very word used in the agreement
is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order, appellants accepted the express
assumption of liability by Sosing-Lobos & Co., Inc. for the payment of the obligation in question, thereby modifying their
original posture that inasmuch as that corporation did not exist yet at the time of the agreement, Piczon necessarily must
have bound himself as insurer.
As already explained earlier, appellants' prayer for payment of legal interest upon interest due from the filing of the
complaint can no longer be entertained, the same not having been made an issue in the pleadings in the court below. We
do not believe that such a substantial matter can be deemed included in a general prayer for "any other relief just and
equitable in the premises", especially when, as in this case, the pre-trial order does not mention it in the enumeration of
the issues to be resolved by the court.
PREMISES CONSIDERED, the judgment of the trial court is modified so as to make appellees liable for the stipulated
interest of 12% per annum from September 28, 1956, instead of August 6, 1964. In all other respects, said judgment is
affirmed. Costs against appellees.
Fernando (Chairman), Antonio, Fernandez and Aquino, JJ., concur.
Footnotes
1.Annex "B" is a document entitled "Mutual Quit Claims. Cessions and Amicable Settlement" under which the right of
action of Piczon and Co., Inc. under Annex "A" was transferred to the heirs of Alejandro Piczon who are the
appellants.

SECOND DIVISION
[G.R. No. 124242. January 21, 2005.]
SAN LORENZO DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS, PABLO
S. BABASANTA, SPS. MIGUEL LU and PACITA ZAVALLA LU, respondents.

DECISION

TINGA, J p:
From a coaptation of the records of this case, it appears that respondents Miguel Lu and Pacita Zavalla, (hereinafter, the
Spouses Lu) owned two (2) parcels of land situated in Sta. Rosa, Laguna covered by TCT No. T-39022 and TCT No. T39023 both measuring 15,808 square meters or a total of 3.1616 hectares.
On 20 August 1986, the Spouses Lu purportedly sold the two parcels of land to respondent Pablo Babasanta, (hereinafter,
Babasanta) for the price of fifteen pesos (P15.00) per square meter. Babasanta made a downpayment of fifty thousand
pesos (P50,000.00) as evidenced by a memorandum receipt issued by Pacita Lu of the same date. Several other
payments totaling two hundred thousand pesos (P200,000.00) were made by Babasanta.

Sometime in May 1989, Babasanta wrote a letter to Pacita Lu to demand the execution of a final deed of sale in his favor
so that he could effect full payment of the purchase price. In the same letter, Babasanta notified the spouses about having
received information that the spouses sold the same property to another without his knowledge and consent. He
demanded that the second sale be cancelled and that a final deed of sale be issued in his favor. cEAIHa
In response, Pacita Lu wrote a letter to Babasanta wherein she acknowledged having agreed to sell the property to him at
fifteen pesos (P15.00) per square meter. She, however, reminded Babasanta that when the balance of the purchase price
became due, he requested for a reduction of the price and when she refused, Babasanta backed out of the sale. Pacita
added that she returned the sum of fifty thousand pesos (P50,000.00) to Babasanta through Eugenio Oya.
On 2 June 1989, respondent Babasanta, as plaintiff, filed before the Regional Trial Court (RTC), Branch 31, of San Pedro,
Laguna, a Complaint for Specific Performance and Damages 1 against his co-respondents herein, the Spouses Lu.
Babasanta alleged that the lands covered by TCT No. T-39022 and T-39023 had been sold to him by the spouses at
fifteen pesos (P15.00) per square meter. Despite his repeated demands for the execution of a final deed of sale in his
favor, respondents allegedly refused.
In their Answer, 2 the Spouses Lu alleged that Pacita Lu obtained loans from Babasanta and when the total advances of
Pacita reached fifty thousand pesos (P50,000.00), the latter and Babasanta, without the knowledge and consent of Miguel
Lu, had verbally agreed to transform the transaction into a contract to sell the two parcels of land to Babasanta with the
fifty thousand pesos (P50,000.00) to be considered as the downpayment for the property and the balance to be paid on or
before 31 December 1987. Respondents Lu added that as of November 1987, total payments made by Babasanta
amounted to only two hundred thousand pesos (P200,000.00) and the latter allegedly failed to pay the balance of two
hundred sixty thousand pesos (P260,000.00) despite repeated demands. Babasanta had purportedly asked Pacita for a
reduction of the price from fifteen pesos (P15.00) to twelve pesos (P12.00) per square meter and when the Spouses Lu
refused to grant Babasanta's request, the latter rescinded the contract to sell and declared that the original loan
transaction just be carried out in that the spouses would be indebted to him in the amount of two hundred thousand pesos
(P200,000.00). Accordingly, on 6 July 1989, they purchased Interbank Manager's Check No. 05020269 in the amount of
two hundred thousand pesos (P200,000.00) in the name of Babasanta to show that she was able and willing to pay the
balance of her loan obligation.
Babasanta later filed an Amended Complaint dated 17 January 1990 3 wherein he prayed for the issuance of a writ of
preliminary injunction with temporary restraining order and the inclusion of the Register of Deeds of Calamba, Laguna as
party defendant. He contended that the issuance of a preliminary injunction was necessary to restrain the transfer or
conveyance by the Spouses Lu of the subject property to other persons.
The Spouses Lu filed their Opposition 4 to the amended complaint contending that it raised new matters which seriously
affect their substantive rights under the original complaint. However, the trial court in its Order dated 17 January
1990 5 admitted the amended complaint.
On 19 January 1990, herein petitioner San Lorenzo Development Corporation (SLDC) filed a Motion for
Intervention 6 before the trial court. SLDC alleged that it had legal interest in the subject matter under litigation because
on 3 May 1989, the two parcels of land involved, namely Lot 1764-A and 1764-B, had been sold to it in aDeed of Absolute
Sale with Mortgage. 7 It alleged that it was a buyer in good faith and for value and therefore it had a better right over the
property in litigation.
In his Opposition to SLDC's motion for intervention, 8 respondent Babasanta demurred and argued that the latter had no
legal interest in the case because the two parcels of land involved herein had already been conveyed to him by the
Spouses Lu and hence, the vendors were without legal capacity to transfer or dispose of the two parcels of land to the
intervenor.
Meanwhile, the trial court in its Order dated 21 March 1990 allowed SLDC to intervene. SLDC filed its Complaint-inIntervention on 19 April 1990. 9 Respondent Babasanta's motion for the issuance of a preliminary injunction was likewise
granted by the trial court in its Order dated 11 January 1991 10 conditioned upon his filing of a bond in the amount of fifty
thousand pesos (P50,000.00). cAECST
SLDC in its Complaint-in-Intervention alleged that on 11 February 1989, the Spouses Lu executed in its favor an Option to
Buy the lots subject of the complaint. Accordingly, it paid an option money in the amount of three hundred sixteen
thousand one hundred sixty pesos (P316,160.00) out of the total consideration for the purchase of the two lots of one
million two hundred sixty-four thousand six hundred forty pesos (P1,264,640.00). After the Spouses Lu received a total
amount of six hundred thirty-two thousand three hundred twenty pesos (P632,320.00) they executed on 3 May 1989
a Deed of Absolute Sale with Mortgage in its favor. SLDC added that the certificates of title over the property were
delivered to it by the spouses clean and free from any adverse claims and/or notice of lis pendens. SLDC further alleged

that it only learned of the filing of the complaint sometime in the early part of January 1990 which prompted it to file the
motion to intervene without delay. Claiming that it was a buyer in good faith, SLDC argued that it had no obligation to look
beyond the titles submitted to it by the Spouses Lu particularly because Babasanta's claims were not annotated on the
certificates of title at the time the lands were sold to it.
After a protracted trial, the RTC rendered its Decision on 30 July 1993 upholding the sale of the property to SLDC. It
ordered the Spouses Lu to pay Babasanta the sum of two hundred thousand pesos (P200,000.00) with legal interest plus
the further sum of fifty thousand pesos (P50,000.00) as and for attorney's fees. On the complaint-in-intervention, the trial
court ordered the Register of Deeds of Laguna, Calamba Branch to cancel the notice of lis pendens annotated on the
original of the TCT No. T-39022 (T-7218) and No. T-39023 (T-7219).
Applying Article 1544 of the Civil Code, the trial court ruled that since both Babasanta and SLDC did not register the
respective sales in their favor, ownership of the property should pertain to the buyer who first acquired possession of the
property. The trial court equated the execution of a public instrument in favor of SLDC as sufficient delivery of the property
to the latter. It concluded that symbolic possession could be considered to have been first transferred to SLDC and
consequently ownership of the property pertained to SLDC who purchased the property in good faith.
Respondent Babasanta appealed the trial court's decision to the Court of Appeals alleging in the main that the trial court
erred in concluding that SLDC is a purchaser in good faith and in upholding the validity of the sale made by the Spouses
Lu in favor of SLDC.
Respondent spouses likewise filed an appeal to the Court of Appeals. They contended that the trial court erred in failing to
consider that the contract to sell between them and Babasanta had been novated when the latter abandoned the verbal
contract of sale and declared that the original loan transaction just be carried out. The Spouses Lu argued that since the
properties involved were conjugal, the trial court should have declared the verbal contract to sell between Pacita Lu and
Pablo Babasanta null and void ab initio for lack of knowledge and consent of Miguel Lu. They further averred that the trial
court erred in not dismissing the complaint filed by Babasanta; in awarding damages in his favor and in refusing to grant
the reliefs prayed for in their answer.
On 4 October 1995, the Court of Appeals rendered its Decision 11 which set aside the judgment of the trial court. It
declared that the sale between Babasanta and the Spouses Lu was valid and subsisting and ordered the spouses to
execute the necessary deed of conveyance in favor of Babasanta, and the latter to pay the balance of the purchase price
in the amount of two hundred sixty thousand pesos (P260,000.00). The appellate court ruled that the Absolute Deed of
Sale with Mortgage in favor of SLDC was null and void on the ground that SLDC was a purchaser in bad faith. The
Spouses Lu were further ordered to return all payments made by SLDC with legal interest and to pay attorney's fees to
Babasanta.
SLDC and the Spouses Lu filed separate motions for reconsideration with the appellate court. 12 However, in
a Manifestation dated 20 December 1995, 13 the Spouses Lu informed the appellate court that they are no longer
contesting the decision dated 4 October 1995.

In its Resolution dated 11 March 1996, 14 the appellate court considered as withdrawn the motion for reconsideration filed
by the Spouses Lu in view of their manifestation of 20 December 1995. The appellate court denied SLDC's motion for
reconsideration on the ground that no new or substantial arguments were raised therein which would warrant modification
or reversal of the court's decision dated 4 October 1995. DIcSHE
Hence, this petition.
SLDC assigns the following errors allegedly committed by the appellate court:
THE COURT OF APPEALS ERRED IN HOLDING THAT SAN LORENZO WAS NOT A BUYER IN
GOOD FAITH BECAUSE WHEN THE SELLER PACITA ZAVALLA LU OBTAINED FROM IT THE
CASH ADVANCE OF P200,000.00, SAN LORENZO WAS PUT ON INQUIRY OF A PRIOR
TRANSACTION ON THE PROPERTY.
THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE ESTABLISHED FACT THAT
THE ALLEGED FIRST BUYER, RESPONDENT BABASANTA, WAS NOT IN POSSESSION OF THE
DISPUTED PROPERTY WHEN SAN LORENZO BOUGHT AND TOOK POSSESSION OF THE

PROPERTY AND NO ADVERSE CLAIM, LIEN, ENCUMBRANCE OR LIS PENDENS WAS

ANNOTATED ON THE TITLES.
THE COURT OF APPEALS ERRED IN FAILING TO APPRECIATE THE FACT THAT RESPONDENT
BABASANTA HAS SUBMITTED NO EVIDENCE SHOWING THAT SAN LORENZO WAS AWARE OF
HIS RIGHTS OR INTERESTS IN THE DISPUTED PROPERTY.
THE COURT OF APPEALS ERRED IN HOLDING THAT NOTWITHSTANDING ITS FULL
CONCURRENCE ON THE FINDINGS OF FACT OF THE TRIAL COURT, IT REVERSED AND SET
ASIDE THE DECISION OF THE TRIAL COURT UPHOLDING THE TITLE OF SAN LORENZO AS A
BUYER AND FIRST POSSESSOR IN GOOD FAITH. 15
SLDC contended that the appellate court erred in concluding that it had prior notice of Babasanta's claim over the
property merely on the basis of its having advanced the amount of two hundred thousand pesos (P200,000.00) to Pacita
Lu upon the latter's representation that she needed the money to pay her obligation to Babasanta. It argued that it had no
reason to suspect that Pacita was not telling the truth that the money would be used to pay her indebtedness to
Babasanta. At any rate, SLDC averred that the amount of two hundred thousand pesos (P200,000.00) which it advanced
to Pacita Lu would be deducted from the balance of the purchase price still due from it and should not be construed as
notice of the prior sale of the land to Babasanta. It added that at no instance did Pacita Lu inform it that the lands had
been previously sold to Babasanta.
Moreover, SLDC stressed that after the execution of the sale in its favor it immediately took possession of the property
and asserted its rights as new owner as opposed to Babasanta who has never exercised acts of ownership. Since the
titles bore no adverse claim, encumbrance, or lien at the time it was sold to it, SLDC argued that it had every reason to
rely on the correctness of the certificate of title and it was not obliged to go beyond the certificate to determine the
condition of the property. Invoking the presumption of good faith, it added that the burden rests on Babasanta to prove
that it was aware of the prior sale to him but the latter failed to do so. SLDC pointed out that the notice of lis pendens was
annotated only on 2 June 1989 long after the sale of the property to it was consummated on 3 May 1989.
Meanwhile, in an Urgent Ex-Parte Manifestation dated 27 August 1999, the Spouses Lu informed the Court that due to
financial constraints they have no more interest to pursue their rights in the instant case and submit themselves to the
decision of the Court of Appeals. 16
On the other hand, respondent Babasanta argued that SLDC could not have acquired ownership of the property because
it failed to comply with the requirement of registration of the sale in good faith. He emphasized that at the time SLDC
registered the sale in its favor on 30 June 1990, there was already a notice of lis pendensannotated on the titles of the
property made as early as 2 June 1989. Hence, petitioner's registration of the sale did not confer upon it any right.
Babasanta further asserted that petitioner's bad faith in the acquisition of the property is evident from the fact that it failed
to make necessary inquiry regarding the purpose of the issuance of the two hundred thousand pesos (P200,000.00)
manager's check in his favor. HTCISE
The core issue presented for resolution in the instant petition is who between SLDC and Babasanta has a better right over
the two parcels of land subject of the instant case in view of the successive transactions executed by the Spouses Lu.
To prove the perfection of the contract of sale in his favor, Babasanta presented a document signed by Pacita Lu
acknowledging receipt of the sum of fifty thousand pesos (P50,000.00) as partial payment for 3.6 hectares of farm lot
situated at Barangay Pulong, Sta. Cruz, Sta. Rosa, Laguna. 17 While the receipt signed by Pacita did not mention the
price for which the property was being sold, this deficiency was supplied by Pacita Lu's letter dated 29 May
1989 18 wherein she admitted that she agreed to sell the 3.6 hectares of land to Babasanta for fifteen pesos (P15.00) per
square meter.
An analysis of the facts obtaining in this case, as well as the evidence presented by the parties, irresistibly leads to the
conclusion that the agreement between Babasanta and the Spouses Lu is a contract to sell and not a contract of sale.
Contracts, in general, are perfected by mere consent, 19 which is manifested by the meeting of the offer and the
acceptance upon the thing which are to constitute the contract. The offer must be certain and the acceptance
absolute. 20 Moreover, contracts shall be obligatory in whatever form they may have been entered into, provided all the
essential requisites for their validity are present. 21
The receipt signed by Pacita Lu merely states that she accepted the sum of fifty thousand pesos (P50,000.00) from
Babasanta as partial payment of 3.6 hectares of farm lot situated in Sta. Rosa, Laguna. While there is no stipulation that
the seller reserves the ownership of the property until full payment of the price which is a distinguishing feature of a

contract to sell, the subsequent acts of the parties convince us that the Spouses Lu never intended to transfer ownership
to Babasanta except upon full payment of the purchase price.
Babasanta's letter dated 22 May 1989 was quite telling. He stated therein that despite his repeated requests for the
execution of the final deed of sale in his favor so that he could effect full payment of the price, Pacita Lu allegedly refused
to do so. In effect, Babasanta himself recognized that ownership of the property would not be transferred to him until such
time as he shall have effected full payment of the price. Moreover, had the sellers intended to transfer title, they could
have easily executed the document of sale in its required form simultaneously with their acceptance of the partial
payment, but they did not. Doubtlessly, the receipt signed by Pacita Lu should legally be considered as a perfected
contract to sell.
The distinction between a contract to sell and a contract of sale is quite germane. In a contract of sale, title passes to the
vendee upon the delivery of the thing sold; whereas in a contract to sell, by agreement the ownership is reserved in the
vendor and is not to pass until the full payment of the price. 22 In a contract of sale, the vendor has lost and cannot
recover ownership until and unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by
the vendor until the full payment of the price, such payment being a positive suspensive condition and failure of which is
not a breach but an event that prevents the obligation of the vendor to convey title from becoming effective. 23
The perfected contract to sell imposed upon Babasanta the obligation to pay the balance of the purchase price. There
being an obligation to pay the price, Babasanta should have made the proper tender of payment and consignation of the
price in court as required by law. Mere sending of a letter by the vendee expressing the intention to pay without the
accompanying payment is not considered a valid tender of payment. 24 Consignation of the amounts due in court is
essential in order to extinguish Babasanta's obligation to pay the balance of the purchase price. Glaringly absent from the
records is any indication that Babasanta even attempted to make the proper consignation of the amounts due, thus, the
obligation on the part of the sellers to convey title never acquired obligatory force.
On the assumption that the transaction between the parties is a contract of sale and not a contract to sell, Babasanta's
claim of ownership should nevertheless fail.
Sale, being a consensual contract, is perfected by mere consent 25 and from that moment, the parties may reciprocally
demand performance. 26 The essential elements of a contract of sale, to wit: (1) consent or meeting of the minds, that is,
to transfer ownership in exchange for the price; (2) object certain which is the subject matter of the contract; (3) cause of
the obligation which is established. 27
The perfection of a contract of sale should not, however, be confused with its consummation. In relation to the acquisition
and transfer of ownership, it should be noted that sale is not a mode, but merely a title. A mode is the legal means by
which dominion or ownership is created, transferred or destroyed, but title is only the legal basis by which to affect
dominion or ownership. 28 Under Article 712 of the Civil Code, "ownership and other real rights over property are
acquired and transmitted by law, by donation, by testate and intestate succession, and in consequence of certain
contracts, by tradition." Contracts only constitute titles or rights to the transfer or acquisition of ownership, while delivery or
tradition is the mode of accomplishing the same. 29 Therefore, sale by itself does not transfer or affect ownership; the
most that sale does is to create the obligation to transfer ownership. It is tradition or delivery, as a consequence of sale,
that actually transfers ownership. aHSCcE

Explicitly, the law provides that the ownership of the thing sold is acquired by the vendee from the moment it is delivered
to him in any of the ways specified in Article 1497 to 1501. 30 The word "delivered" should not be taken restrictively to
mean transfer of actual physical possession of the property. The law recognizes two principal modes of delivery, to wit: (1)
actual delivery; and (2) legal or constructive delivery.
Actual delivery consists in placing the thing sold in the control and possession of the vendee. 31 Legal or constructive
delivery, on the other hand, may be had through any of the following ways: the execution of a public instrument evidencing
the sale; 32 symbolical tradition such as the delivery of the keys of the place where the movable sold is being
kept; 33 traditio longa manu or by mere consent or agreement if the movable sold cannot yet be transferred to the
possession of the buyer at the time of the sale; 34 traditio brevi manu if the buyer already had possession of the object
even before the sale; 35 and traditio constitutum possessorium, where the seller remains in possession of the property in
a different capacity. 36
Following the above disquisition, respondent Babasanta did not acquire ownership by the mere execution of the receipt by
Pacita Lu acknowledging receipt of partial payment for the property. For one, the agreement between Babasanta and the
Spouses Lu, though valid, was not embodied in a public instrument. Hence, no constructive delivery of the lands could

have been effected. For another, Babasanta had not taken possession of the property at any time after the perfection of
the sale in his favor or exercised acts of dominion over it despite his assertions that he was the rightful owner of the lands.
Simply stated, there was no delivery to Babasanta, whether actual or constructive, which is essential to transfer ownership
of the property. Thus, even on the assumption that the perfected contract between the parties was a sale, ownership
could not have passed to Babasanta in the absence of delivery, since in a contract of sale ownership is transferred to the
vendee only upon the delivery of the thing sold. 37
However, it must be stressed that the juridical relationship between the parties in a double sale is primarily governed by
Article 1544 which lays down the rules of preference between the two purchasers of the same property. It provides:
Art. 1544.If the same thing should have been sold to different vendees, the ownership shall be
transferred to the person who may have first taken possession thereof in good faith, if it should be
movable property.
Should it be immovable property, the ownership shall belong to the person acquiring it who in good
faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was first in
the possession; and, in the absence thereof, to the person who presents the oldest title, provided
there is good faith.
The principle of primus tempore, potior jure (first in time, stronger in right) gains greater significance in case of double sale
of immovable property. When the thing sold twice is an immovable, the one who acquires it and first records it in the
Registry of Property, both made in good faith, shall be deemed the owner. 38 Verily, the act of registration must be
coupled with good faith that is, the registrant must have no knowledge of the defect or lack of title of his vendor or must
not have been aware of facts which should have put him upon such inquiry and investigation as might be necessary to
acquaint him with the defects in the title of his vendor. 39
Admittedly, SLDC registered the sale with the Registry of Deeds after it had acquired knowledge of Babasanta's claim.
Babasanta, however, strongly argues that the registration of the sale by SLDC was not sufficient to confer upon the latter
any title to the property since the registration was attended by bad faith. Specifically, he points out that at the time SLDC
registered the sale on 30 June 1990, there was already a notice of lis pendens on the file with the Register of Deeds, the
same having been filed one year before on 2 June 1989. ACTIcS
Did the registration of the sale after the annotation of the notice of lis pendens obliterate the effects of delivery and
possession in good faith which admittedly had occurred prior to SLDC's knowledge of the transaction in favor of
Babasanta?
We do not hold so.
It must be stressed that as early as 11 February 1989, the Spouses Lu executed the Option to Buy in favor of SLDC upon
receiving P316,160.00 as option money from SLDC. After SLDC had paid more than one half of the agreed purchase
price of P1,264,640.00, the Spouses Lu subsequently executed on 3 May 1989 a Deed of Absolute Sale in favor or SLDC.
At the time both deeds were executed, SLDC had no knowledge of the prior transaction of the Spouses Lu with
Babasanta. Simply stated, from the time of execution of the first deed up to the moment of transfer and delivery of
possession of the lands to SLDC, it had acted in good faith and the subsequent annotation of lis pendens has no effect at
all on the consummated sale between SLDC and the Spouses Lu.
A purchaser in good faith is one who buys property of another without notice that some other person has a right to, or
interest in, such property and pays a full and fair price for the same at the time of such purchase, or before he has
notice of the claim or interest of some other person in the property. 40 Following the foregoing definition, we rule that
SLDC qualifies as a buyer in good faith since there is no evidence extant in the records that it had knowledge of the prior
transaction in favor of Babasanta. At the time of the sale of the property to SLDC, the vendors were still the registered
owners of the property and were in fact in possession of the lands. Time and again, this Court has ruled that a person
dealing with the owner of registered land is not bound to go beyond the certificate of title as he is charged with notice of
burdens on the property which are noted on the face of the register or on the certificate of title. 41 In assailing knowledge
of the transaction between him and the Spouses Lu, Babasanta apparently relies on the principle of constructive notice
incorporated in Section 52 of the Property Registration Decree (P.D. No. 1529) which reads, thus:
Sec. 52.Constructive notice upon registration. Every conveyance, mortgage, lease, lien,
attachment, order, judgment, instrument or entry affecting registered land shall, if registered, filed, or

entered in the office of the Register of Deeds for the province or city where the land to which it relates
lies, be constructive notice to all persons from the time of such registering, filing, or entering.
However, the constructive notice operates as such by the express wording of Section 52 from the time of the
registration of the notice of lis pendens which in this case was effected only on 2 June 1989, at which time the sale in
favor of SLDC had long been consummated insofar as the obligation of the Spouses Lu to transfer ownership over
the property to SLDC is concerned.
More fundamentally, given the superiority of the right of SLDC to the claim of Babasanta the annotation of the notice of lis
pendens cannot help Babasanta's position a bit and it is irrelevant to the good or bad faith characterization of SLDC as a
purchaser. A notice of lis pendens, as the Court held in Natao v. Esteban, 42 serves as a warning to a prospective
purchaser or incumbrancer that the particular property is in litigation; and that he should keep his hands off the same,
unless he intends to gamble on the results of the litigation." Precisely, in this case SLDC has intervened in the pending
litigation to protect its rights. Obviously, SLDC's faith in the merit of its cause has been vindicated with the Court's present
decision which is the ultimate denouement on the controversy.
The Court of Appeals has made capital 43 of SLDC's averment in its Complaint-in-Intervention 44 that at the instance of
Pacita Lu it issued a check for P200,000.00 payable to Babasanta and the confirmatory testimony of Pacita Lu herself on
cross-examination. 45 However, there is nothing in the said pleading and the testimony which explicitly relates the amount
to the transaction between the Spouses Lu and Babasanta for what they attest to is that the amount was supposed to pay
off the advances made by Babasanta to Pacita Lu. In any event, the incident took place after the Spouses Lu had already
executed the Deed of Absolute Sale with Mortgagein favor of SLDC and therefore, as previously explained, it has no
effect on the legal position of SLDC. EHSITc
Assuming ex gratia argumenti that SLDC's registration of the sale had been tainted by the prior notice of lis pendens and
assuming further for the same nonce that this is a case of double sale, still Babasanta's claim could not prevail over that
of SLDC's. In Abarquez v. Court of Appeals, 46 this Court had the occasion to rule that if a vendee in a double sale
registers the sale after he has acquired knowledge of a previous sale, the registration constitutes a registration in bad faith
and does not confer upon him any right. If the registration is done in bad faith, it is as if there is no registration at all, and
the buyer who has taken possession first of the property in good faith shall be preferred.
In Abarquez, the first sale to the spouses Israel was notarized and registered only after the second vendee, Abarquez,
registered their deed of sale with the Registry of Deeds, but the Israels were first in possession. This Court awarded the
property to the Israels because registration of the property by Abarquez lacked the element of good faith. While the facts
in the instant case substantially differ from that in Abarquez, we would not hesitate to rule in favor of SLDC on the basis of
its prior possession of the property in good faith. Be it noted that delivery of the property to SLDC was immediately
effected after the execution of the deed in its favor, at which time SLDC had no knowledge at all of the prior transaction by
the Spouses Lu in favor of Babasanta.

The law speaks not only of one criterion. The first criterion is priority of entry in the registry of property; there being no
priority of such entry, the second is priority of possession; and, in the absence of the two priorities, the third priority is of
the date of title, with good faith as the common critical element. Since SLDC acquired possession of the property in good
faith in contrast to Babasanta, who neither registered nor possessed the property at any time, SLDC's right is definitely
superior to that of Babasanta's.
At any rate, the above discussion on the rules on double sale would be purely academic for as earlier stated in this
decision, the contract between Babasanta and the Spouses Lu is not a contract of sale but merely a contract to sell.
In Dichoso v. Roxas, 47 we had the occasion to rule that Article 1544 does not apply to a case where there was a sale to
one party of the land itself while the other contract was a mere promise to sell the land or at most an actual assignment of
the right to repurchase the same land. Accordingly, there was no double sale of the same land in that case.
WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals appealed from is
REVERSED and SET ASIDE and the decision of the Regional Trial Court, Branch 31, of San Pedro, Laguna is
REINSTATED. No costs.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.

THIRD DIVISION
[G.R. No. 77365. April 7, 1992.]
RITA CALEON, petitioner, vs. AGUS DEVELOPMENT CORPORATION and COURT OF
APPEALS, respondents.

Luis A. Cuevas for petitioner.

Pablito M. Rojas for private respondent.

SYLLABUS
1.CIVIL LAW; LEASE; LEASE OF BUILDING INCLUDES LEASE OF LOT AND RENTALS OF BUILDING INCLUDES
THOSE OF LOT. The issue has already been laid to rest in the case of Duellome v. Gotico (7 SCRA 841 [1963]) where
this Court ruled that the lease of a building naturally includes the lease of the lot, and the rentals of the building includes
those of the lot. Thus: ". . . the lease of a building would naturally include the lease of the lot and that the rentals of the
building include the rentals of the lot. . . . "Furthermore, under our Civil Code, the occupancy of a building or house not
only suggests but implies the tenancy or possession in fact of the land on which they are constructed. This is not a new
pronouncement. An extensive elaboration of this rule was discussed by this Court in the case of Baquiran, et al. v.
Baquiran et al., 53 O.G. p. 1130. '. . . the Court of Appeals should have found the herein appellees lessees of the house,
and for all legal purposes, of the lot on which it was built as well'."
2.ID.; ID.; BATAS PAMBANSA BLG. 25; GROUNDS FOR JUDICIAL EJECTMENT. Section 5 of Batas Pambansa Blg.
25 enumerates the grounds for judicial ejectment, among which is the subleasing of residential units without the written
consent of the owner/lessor, to wit: "SEC. 5. Grounds for judicial ejectment. Ejectment shall be allowed on the following
grounds: "a) Subleasing or assignment of lease of residential units in whole or in part, without the written consent of the
owner/lessor: Provided that in the case of subleases or assignments executed prior to the approval of this Act, the
sublessor/assignor shall have sixty days from the effectivity of this Act within which to obtain the written approval of the
owner/lessor or terminate the sublease or assignment."
3.ID.; ID.; ID.; RESIDENTIAL UNIT, DEFINED. Section 2(b) of Batas Pambansa Blg. 25 defines the term residential
unit as follows: "SEC. 2. Definition of Terms Unless otherwise indicated wherever in this Act, the following shall have
the following meaning: "b. A residential unit refers to an apartment, house and/or land on which another's dwelling is
located used for residential purposes and shall include not only buildings, parts or units thereof used solely as dwelling
places, except motels, motel rooms, hotels, hotel rooms, boarding houses, dormitories, rooms and bedspaces for rent, but
also those used for home industries, retail stores, or other business purposes if the owner thereof and his family actually
live therein and use it principally for dwelling purposes: . . .."
4.CONSTITUTIONAL LAW; CONSTITUTIONALITY OF STATUTES PRESUMED; REQUISITES FOR SUPREME COURT
DECISION ON QUESTION OF CONSTITUTIONALITY. It is well settled that all presumptions are indulged in favor of
constitutionality; one who attacks a statute, alleging unconstitutionality must prove its invalidity beyond a reasonable doubt
(Victoriano v. Elizalde Rope Worker's Union, 59 SCRA 54 [1974]). In fact, this Court does not decide questions of a
constitutional nature unless that question is properly raised and presented in appropriate cases and is necessary to a
determination of the case, i.e., the issue of constitutionality must be the very lis mota presented (Tropical Homes, Inc. v.
National Housing Authority, 152 SCRA 540 [1987]).
5.ID.; POLICE POWER; GUARANTY OF NON-IMPAIRMENT OF OBLIGATIONS OF CONTRACT LIMITED BY POLICE
POWER. It is now beyond question that the constitutional guaranty of non-impairment of obligations of contract is
limited by and subject to the exercise of police power of the State in the interest of public health, safety, morals and
general welfare (Kabiling, et al. v. National Housing Authority, 156 SCRA 623 [1987]). In spite of the constitutional
prohibition, the State continues to possess authority to safeguard the vital interests of its people. Legislation appropriate to
safeguarding said interest may modify or abrogate contracts already in effect (Victoriano v. Elizalde Rope Worker's Union,
et al., supra). In fact, every contract affecting public interest suffers a congenital infirmity in that it contains an implied
reservation of the police power as a postulate of the existing legal order. This power can be activated at anytime to
change the provisions of the contract, or even abrogate it entirely, for the promotion or protection of the general welfare.
Such an act will not militate against the impairment clause, which is subject to and limited by the paramount police power
(Villanueva v. Castaeda, 154 SCRA 142 [1987]).

6.ID.; ID.; ID.; BATAS PAMBANSA BLG. 25 APPLICABLE TO LEASES ENTERED INTO PRIOR TO ITS EFFECTIVITY.
Batas Pambansa Blg. 25, "An Act Regulating Rentals of Dwelling Units or of Land On Which Another's Dwelling is
Located and For Other Purposes" shows that the subject matter of the law is the regulation of rentals and is intended only
for dwelling units with specified monthly rentals constructed before the law became effective (Baens v. Court of Appeals,
125 SCRA 634 [1983]). Batas Pambansa Blg. 25 is derived from P.D. No. 20 which has been declared by this Court as a
police power legislation, applicable to leases entered into prior to July 14, 1971 (effectivity date of RA 6539), so that the
applicability thereof to existing contracts cannot be denied (Gutierrez v. Cantada, 90 SCRA 1 [1979]).
7.ID.; SOCIAL JUSTICE; OBJECTIVE OF BATAS PAMBANSA BLG. 25 NOT SUBJECT TO EXPLOITATION BY
LESSEES. The objective of Batas Pambansa Blg. 25 is to remedy the plight of lessees, but such objective is not
subject to exploitation by the lessees for whose benefit the law was enacted. Thus, the prohibition provided for in the law
against the sublease of the premises without the consent of the owner. As enunciated by this Court, it must be
remembered that social justice cannot be invoked to trample on the rights of property owners, who under our Constitution
and laws are also entitled to protection. The social justice consecrated in our Constitution was not intended to take away
rights from a person and give them to another who is not entitled thereto (Salonga v. Farrales, 105 SCRA 360 [1981]).

DECISION

BIDIN, J p:
This is a petition for review on certiorari seeking the reversal of the January 28, 1987 decision of the Court of Appeals in
CA-G.R. SP No. 10990 entitled "Rita Caleon v. Hon. Samilo Barlongay, et al." dismissing the petition for review of the
decision of the Regional Trial Court of Manila, Branch 34, which affirmed the decision of the Metropolitan Trial Court of
Manila, Branch XII, ejecting the petitioner. prLL
The undisputed facts of the case are as follows:
Private respondent Agus Development Corporation is the owner of a parcel of land denominated as Lot 39, Block 28,
situated at 1611-1619 Lealtad, Sampaloc, Manila, which it leased to petitioner Rita Caleon for a monthly rental of
P180.00. Petitioner constructed on the lot leased a 4-door apartment building.
Without the consent of the private respondent, the petitioner sub-leased two of the four doors of the apartment to Rolando
Guevarra and Felicisima Estrada for a monthly rental of P350.00 each. Upon learning of the sub-lease, private
respondent through counsel demanded in writing that the petitioner vacate the leased premises (Rollo, Annex "A", p.
20). prcd
For failure of petitioner to comply with the demand, private respondent filed a complaint for ejectment (Civil Case No.
048908) with the Metropolitan Trial Court of Manila, Branch XII against the petitioner citing as ground therefor the
provisions of Batas Pambansa Blg. 25, Section 5, which is the unauthorized sub-leasing of part of the leased premises to
third persons without securing the consent of the lessor within the required sixty (60)-day period from the promulgation of
the new law (B.P. 25). (Rollo, Petition, p. 8).
After trial, the court a quo rendered its decision ordering petitioner and all persons claiming possession under her (a) to
vacate the premises alluded to in the complaint; (b) to remove whatever improvement she introduced on the property; (c)
to pay private respondent the amount of P2,000.00 as attorney's fees; and (d) to pay the costs (Rollo, Annex "A", p. 19).
Petitioner appealed the decision to the Regional Trial Court and on November 24, 1980, presiding judge of the RTC, the
Hon. Samilo Barlongay, affirmed in toto the decision of the Metropolitan Trial Court (Rollo, Annex "A", p. 19).
The decision of the Regional Trial Court was appealed to the Court of Appeals for review. The respondent Court of
Appeals rendered its decision dated January 28, 1987, the dispositive portion of which reads as follows:
"PREMISES CONSIDERED, the petition not being prima facie meritorious, the same is outright
dismissed."
"SO ORDERED." (Rollo, Annex "A", p. 21)

Hence, the petition for review on certiorari.

The principal issue in this case is whether or not the lease of an apartment includes a sublease of the lot on which it is
constructed, as would constitute a ground for ejectment under Batas Pambansa Blg. 25.
Petitioner is of the view that Batas Pambansa Blg. 25 is not applicable because what she leased was her own apartment
house which does not include a sublease of the lot she leased from private respondent on which the apartment is
constructed.
Petitioner's contention is untenable.
The issue has already been laid to rest in the case of Duellome v. Gotico (7 SCRA 841 [1963]) where this Court ruled that
the lease of a building naturally includes the lease of the lot, and the rentals of the building includes those of the lot. Thus:
". . . the lease of a building would naturally include the lease of the lot and that the rentals of the
building include the rentals of the lot.
xxx xxx xxx

"Furthermore, under our Civil Code, the occupancy of a building or house not only suggests but
implies the tenancy or possession in fact of the land on which they are constructed. This is not a new
pronouncement. An extensive elaboration of this rule was discussed by this Court in the case of
Baquiran, et al. v. Baquiran et al., 53 O.G. p. 1130.
'. . . the Court of Appeals should have found the herein appellees lessees of the
house, and for all legal purposes, of the lot on which it was built as well'."
But petitioner insists that the ruling in the aforecited case is not applicable to the case at bar because the former is a
damage suit while the latter is an ejectment case.
Be that as it may, this Court has categorically answered in the affirmative, the principal question, common to both cases
and on which rests the resolution of the issues involved therein. Under the above ruling it is beyond dispute that petitioner
in leasing her apartment has also subleased the lot on which it is constructed which lot belongs to private respondent.
Consequently, she has violated the provisions of Section 5, Batas Pambansa Blg. 25 which is a ground for ejectment.
Section 5 of Batas Pambansa Blg. 25 enumerates the grounds for judicial ejectment, among which is the subleasing of
residential units without the written consent of the owner/lessor, to wit:
"SEC. 5.Grounds for judicial ejectment. Ejectment shall be allowed on the following grounds:
"a)Subleasing or assignment of lease of residential units in whole or in part, without the written
consent of the owner/lessor: Provided that in the case of subleases or assignments executed prior to
the approval of this Act, the sublessor/assignor shall have sixty days from the effectivity of this Act
within which to obtain the written approval of the owner/lessor or terminate the sublease or
assignment."
Section 2(b) of Batas Pambansa Blg. 25 defines the term residential unit as follows:
"SEC. 2.Definition of Terms Unless otherwise indicated wherever in this Act, the following shall
have the following meaning:
xxx xxx xxx
"b.A residential unit refers to an apartment, house and/or land on which another's dwelling is
located used for residential purposes and shall include not only buildings, parts or units thereof used
solely as dwelling places, except motels, motel rooms, hotels, hotel rooms, boarding houses,
dormitories, rooms and bedspaces for rent, but also those used for home industries, retail stores, or

other business purposes if the owner thereof and his family actually live therein and use it principally
for dwelling purposes: . . .."
Petitioner argued further that Batas Pambansa Blg. 25 cannot be applied in this case because there is a perfected
contract of lease without any express prohibition on subleasing which had been in effect between petitioner and private
respondent long before the enactment of Batas Pambansa Blg. 25. Therefore, the application of said law to the case at
bar is unconstitutional as an impairment of the obligation of contracts. LLphil
It is well settled that all presumptions are indulged in favor of constitutionality; one who attacks a statute, alleging
unconstitutionality must prove its invalidity beyond a reasonable doubt (Victoriano v. Elizalde Rope Worker's Union, 59
SCRA 54 [1974]). In fact, this Court does not decide questions of a constitutional nature unless that question is properly
raised and presented in appropriate cases and is necessary to a determination of the case, i.e., the issue of
constitutionality must be the very lis mota presented (Tropical Homes, Inc. v. National Housing Authority, 152 SCRA 540
[1987]).
In any event, it is now beyond question that the constitutional guaranty of non-impairment of obligations of contract is
limited by and subject to the exercise of police power of the State in the interest of public health, safety, morals and
general welfare (Kabiling, et al. v. National Housing Authority, 156 SCRA 623 [1987]). In spite of the constitutional
prohibition, the State continues to possess authority to safeguard the vital interests of its people. Legislation appropriate to
safeguarding said interest may modify or abrogate contracts already in effect (Victoriano v. Elizalde Rope Worker's Union,
et al., supra). In fact, every contract affecting public interest suffers a congenital infirmity in that it contains an implied
reservation of the police power as a postulate of the existing legal order. This power can be activated at anytime to
change the provisions of the contract, or even abrogate it entirely, for the promotion or protection of the general welfare.
Such an act will not militate against the impairment clause, which is subject to and limited by the paramount police power
(Villanueva v. Castaneda, 154 SCRA 142 [1987]).
Batas Pambansa Blg. 25, "An Act Regulating Rentals of Dwelling Units or of Land On Which Another's Dwelling is
Located and For Other Purposes" shows that the subject matter of the law is the regulation of rentals and is intended only
for dwelling units with specified monthly rentals constructed before the law became effective (Baens v. Court of Appeals,
125 SCRA 634 [1983]).
Batas Pambansa Blg. 25 is derived from P.D. No. 20 which has been declared by this Court as a police power legislation,
applicable to leases entered into prior to July 14, 1971 (effectivity date of RA 6539), so that the applicability thereof to
existing contracts cannot be denied (Gutierrez v. Cantada, 90 SCRA 1 [1979]).
Finally, petitioner invokes, among others, the promotion of social justice policy of the New Constitution. Like P.D. No. 20,
the objective of Batas Pambansa Blg. 25 is to remedy the plight of lessees, but such objective is not subject to exploitation
by the lessees for whose benefit the law was enacted. Thus, the prohibition provided for in the law against the sublease of
the premises without the consent of the owner. As enunciated by this Court, it must be remembered that social justice
cannot be invoked to trample on the rights of property owners, who under our Constitution and laws are also entitled to
protection. The social justice consecrated in our Constitution was not intended to take away rights from a person and give
them to another who is not entitled thereto (Salonga v. Farrales, 105 SCRA 360 [1981]).
WHEREFORE, the Petition is Denied for lack of merit and the assailed decision of the Court of Appeals is Affirmed.
SO ORDERED.
Gutierrez, Jr., Davide, Jr. and Romero, JJ., concur.
Feliciano, J., is on leave.

FIRST DIVISION
[G.R. No. 117190. January 2, 1997.]
JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND
GENERAL MERCHANDISING, petitioner, vs. COURT OF APPEALS and VICENTE HERCE
JR., respondents.

Ricardo C. Valmonte for petitioner.

Restituto M. Mendoza for private respondent.

SYLLABUS
1.CIVIL LAW; CONTRACT; INTERPRETATION; INTENTION OF THE PARTIES SHALL BE ACCORDED PRIMORDIAL
CONSIDERATION. It is a cardinal rule in the interpretation of contracts that the intention of the parties shall be
accorded primordial consideration and, in case of doubt, their contemporaneous and subsequent acts shall be principally
considered. prLL
2.OBLIGATION; NATURE AND EFFECTS; EXEMPTION FROM LIABILITY BY REASON OF FORTUITOUS EVENTS;
REQUISITES. This Court has consistently held that in order for a party to claim exemption from liability by reason of
fortuitous event under Art. 1174 of the Civil Code the event should be the sole and proximate cause of the loss or
destruction of the object of the contract. In Nakpil vs. Court of Appeals, Nos. L-47851 and L- 47896, 3 October 1986, 144
SCRA 596, four (4) requisites must concur: (a) the cause of the breach of the obligation must be independent of the will of
the debtor; (b) the event must be either unforseeable or unavoidable; (c) the event must be such as to render it impossible
for the debtor to fulfill his obligation in a normal manner; and, (d) the debtor must be free from any participation in or
aggravation of the injury to the creditor.
3.ID.; ID.; ID.; APPLICATION OF ART. 1167 OF THE CIVIL CODE; WHEN A PERSON OBLIGED TO DO SOMETHING
FAILS TO DO IT, THE SAME SHALL BE EXECUTED AT HIS COST. In reciprocal obligations, neither party incurs in
delay if the other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. (Art.
1169, last par., New Civil Code) When the windmill failed to function properly it became incumbent upon petitioner to
institute the proper repairs in accordance with the guaranty stated in the contract. Thus, respondent cannot be said to
have incurred in delay; instead, it is petitioner who should bear the expenses for the reconstruction of the windmill. Article
1167 of the Civil Code is explicit on this point that if a person obliged to do something fails to do it, the same shall be
executed at his cost. llcd

DECISION

BELLOSILLO, J p:
This case involves the proper interpretation of the contract entered into between the parties.
Sometime in April 1987 petitioner Jacinto M. Tanguilig doing business under the name and style J.M.T. Engineering and
General Merchandising proposed to respondent Vicente Herce Jr. to construct a windmill system for him. After some
negotiations they agreed on the construction of the windmill for a consideration of P60,000.00 with a one-year guaranty
from the date of completion and acceptance by respondent Herce Jr. of the project. Pursuant to the agreement
respondent paid petitioner a down payment of P30,000.00 and an installment payment of P15,000.00, leaving a balance
of P15,000.00.
On 14 March 1988, due to the refusal and failure of respondent to pay the balance, petitioner filed a complaint to collect
the amount. In his Answer before the trial court respondent denied the claim saying that he had already paid this amount
to the San Pedro General Merchandising Inc. (SPGMI) which constructed the deep well to which the windmill system was
to be connected. According to respondent, since the deep well formed part of the system the payment he tendered to
SPGMI should be credited to his account by petitioner. Moreover, assuming that he owed petitioner a balance of
P15,000.00, this should be offset by the defects in the windmill system which caused the structure to collapse after a
strong wind hit their place. 1
Petitioner denied that the construction of a deep well was included in the agreement to build the windmill system, for the
contract price of P60,000.00 was solely for the windmill assembly and its installation, exclusive of other incidental
materials needed for the project. He also disowned any obligation to repair or reconstruct the system and insisted that he
delivered it in good and working condition to respondent who accepted the same without protest. Besides, its collapse
was attributable to a typhoon, a force majeure, which relieved him of any liability.

In finding for plaintiff, the trial court held that the construction of the deep well was not part of the windmill project as
evidenced clearly by the letter proposals submitted by petitioner to respondent. 2 It noted that "[i]f the intention of the
parties is to include the construction of the deep well in the project, the same should be stated in the proposals. In the
absence of such an agreement, it could be safely concluded that the construction of the deep well is not a part of the
project undertaken by the plaintiff." 3 With respect to the repair of the windmill, the trial court found that "there is no clear
and convincing proof that the windmill system fell down due to the defect of the construction. " 4
The Court of Appeals reversed the trial court. It ruled that the construction of the deep well was included in the agreement
of the parties because the term "deep well" was mentioned in both proposals. It also gave credence to the testimony of
respondent's witness Guillermo Pili, the proprietor of SPGMI which installed the deep well, that petitioner Tanguilig told
him that the cost of constructing the deep well would be deducted from the contract price of P60,000.00. Upon these
premises the appellate court concluded that respondent's payment of P15,000.00 to SPGMI should be applied to his
remaining balance with petitioner thus effectively extinguishing his contractual obligation. However, it rejected petitioner's
claim of force majeure and ordered the latter to reconstruct the windmill in accordance with the stipulated one-year
guaranty.
His motion for reconsideration having been denied by the Court of Appeals, petitioner now seeks relief from this Court. He
raises two issues: firstly, whether the agreement to construct the windmill system included the installation of a deep well
and, secondly, whether petitioner is under obligation to reconstruct the windmill after it collapsed.
We reverse the appellate court on the first issue but sustain it on the second.
The preponderance of evidence supports the finding of the trial court that the installation of a deep well was not included
in the proposals of petitioner to construct a windmill system for respondent. There were in fact two (2) proposals: one
dated 19 May 1987 which pegged the contract price at P87,000.00 (Exh. "1"). This was rejected by respondent. The other
was submitted three days later, i.e., on 22 May 1987 which contained more specifications but proposed a lower contract
price of P60,000.00 (Exh. "A"). The latter proposal was accepted by respondent and the construction immediately
followed. The pertinent portions of the first letter-proposal (Exh. "1") are reproduced hereunder
In connection with your Windmill System and Installation, we would like to quote to you as follows:
One (1) Set Windmill suitable for 2 inches diameter deepwell, 2 HP, capacity, 14 feet in diameter,
with 20 pieces blade, Tower 40 feet high, including mechanism which is not advisable to operate
during extra-intensity wind. Excluding cylinder pump.
UNIT CONTRACT PRICE P87,000.00
The second letter-proposal (Exh. "A") provides as follows:
In connection with your Windmill system, Supply of Labor Materials and Installation, operated water
pump, we would like to quote to you as follows
One (1) set Windmill assembly for 2 inches or 3 inches deep-well pump, 6 Stroke, 14 feet
diameter, 1-lot blade materials, 40 feet Tower complete with standard appurtenances up to Cylinder
pump, shafting U.S. adjustable International Metal.
One (1) lot Angle bar, G. I. pipe, Reducer Coupling, Elbow Gate valve, cross Tee coupling.
One (1) lot Float valve.
One (1) lot Concreting materials foundation.
F. O. B. Laguna
Contract Price P60,000.00
Notably, nowhere in either proposal is the installation of a deep well mentioned, even remotely. Neither is there an
itemization or description of the materials to be used in constructing the deep well. There is absolutely no mention in the
two (2) documents that a deep well pump is a component of the proposed windmill system. The contract prices fixed in
both proposals cover only the features specifically described therein and no other. While the words "deep well" and "deep

well pump" are mentioned in both, these do not indicate that a deep well is part of the windmill system. They merely
describe the type of deep well pump for which the proposed windmill would be suitable. As correctly pointed out by
petitioner, the words "deep well" preceded by the prepositions "for" and "suitable for" were meant only to convey the idea
that the proposed windmill would be appropriate for a deep well pump with a diameter of 2 to 3 inches. For if the real
intent of petitioner was to include a deep well in the agreement to construct a windmill, he would have used instead the
conjunctions "and" or "with." Since the terms of the instruments are clear and leave no doubt as to their meaning they
should not be disturbed. aisadc
Moreover, it is a cardinal rule in the interpretation of contracts that the intention of the parties shall be accorded primordial
consideration 5 and, in case of doubt, their contemporaneous and subsequent acts shall be principally considered. 6 An
examination of such contemporaneous and subsequent acts of respondent as well as the attendant circumstances does
not persuade us to uphold him.
Respondent insists that petitioner verbally agreed that the contract price of P60,000.00 covered the installation of a deep
well pump. He contends that since petitioner did not have the capacity to install the pump the latter agreed to have a third
party do the work the cost of which was to be deducted from the contract price. To prove his point, he presented Guillermo
Pili of SPGMI who declared that petitioner Tanguilig approached him with a letter from respondent Herce Jr. asking him to
build a deep well pump as "part of the price/contract which Engineer (Herce) had with Mr. Tanguilig." 7

We are disinclined to accept the version of respondent. The claim of Pili that Herce Jr. wrote him a letter is
unsubstantiated. The alleged letter was never presented in court by private respondent for reasons known only to him. But
granting that this written communication existed, it could not have simply contained a request for Pili to install a deep well;
it would have also mentioned the party who would pay for the undertaking. It strains credulity that respondent would keep
silent on this matter and leave it all to petitioner Tanguilig to verbally convey to Pili that the deep well was part of the
windmill construction and that its payment would come from the contract price of P60,000.00.
We find it also unusual that Pili would readily consent to build a deep well the payment for which would come supposedly
from the windmill contract price on the mere representation of petitioner, whom he had never met before, without a written
commitment at least from the former. For if indeed the deep well were part of the windmill project, the contract for its
installation would have been strictly a matter between petitioner and Pili himself with the former assuming the obligation to
pay the price. That it was respondent Herce Jr. himself who paid for the deep well by handing over to Pili the amount of
P15,000.00 clearly indicates that the contract for the deep well was not part of the windmill project but a separate
agreement between respondent and Pili. Besides, if the price of P60,000.00 included the deep well, the obligation of
respondent was to pay the entire amount to petitioner without prejudice to any action that Guillermo Pili or SPGMI may
take, if any, against the latter. Significantly, when asked why he tendered payment directly to Pili and not to petitioner,
respondent explained, rather lamely, that he did it "because he has (sic) the money, so (he) just paid the money in his
possession. 8
Can respondent claim that Pili accepted his payment on behalf of petitioner? No. While the law is clear that "payment
shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person
authorized to receive it, " 9 it does not appear from the record that Pili and/or SPGMI was so authorized.
Respondent cannot claim the benefit of the law "concerning payments made by a third person." 10 The Civil Code
provisions do not apply in the instant case because no creditor-debtor relationship between petitioner and Guillermo Pili
and/or SPGMI has been established regarding the construction of the deep well. Specifically, witness Pili did not testify
that he entered into a contract with petitioner for the construction of respondent's deep well. If SPGMI was really
commissioned by petitioner to construct the deep well, an agreement particularly to this effect should have been entered
into.
The contemporaneous and subsequent acts of the parties concerned effectively belie respondent's assertions. These
circumstances only show that the construction of the well by SPGMI was for the sole account of respondent and that
petitioner merely supervised the installation of the well because the windmill was to be connected to it. There is no legal
nor factual basis by which this Court can impose upon petitioner an obligation he did not expressly assume nor ratify.
The second issue is not a novel one. In a long line of cases 11 this Court has consistently held that in order for a party to
claim exemption from liability by reason of fortuitous event under Art. 1174 of the Civil Code the event should be the sole
and proximate cause of the loss or destruction of the object of the contract. In Nakpil vs. Court of Appeals, 12 four (4)
requisites must concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the
event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to

fulfill his obligation in a normal manner; and, (d) the debtor must be free from any participation in or aggravation of the
injury to the creditor.
Petitioner failed to show that the collapse of the windmill was due solely to a fortuitous event. Interestingly, the evidence
does not disclose that there was actually a typhoon on the day the windmill collapsed. Petitioner merely stated that there
was a "strong wind." But a strong wind in this case cannot be fortuitous unforeseeable nor unavoidable. On the
contrary, a strong wind should be present in places where windmills are constructed, otherwise the windmills will not turn.
The appellate court correctly observed that "given the newly-constructed windmill system, the same would not have
collapsed had there been no inherent defect in it which could only be attributable to the appellee." 13 It emphasized that
respondent had in his favor the presumption that "things have happened according to the ordinary course of nature and
the ordinary habits of life." 14 This presumption has not been rebutted by petitioner.
Finally, petitioner's argument that private respondent was already in default in the payment of his outstanding balance of
P15,000.00 and hence should bear his own loss, is untenable. In reciprocal obligations, neither party incurs in delay if the
other does not comply or is not ready to comply in a proper manner with what is incumbent upon him. 15 When the
windmill failed to function properly it became incumbent upon petitioner to institute the proper repairs in accordance with
the guaranty stated in the contract. Thus, respondent cannot be said to have incurred in delay; instead, it is petitioner who
should bear the expenses for the reconstruction of the windmill. Article 1167 of the Civil Code is explicit on this point that if
a person obliged to do something fails to do it, the same shall be executed at his cost
WHEREFORE, the appealed decision is MODIFIED. Respondent VICENTE HERCE JR. is directed to pay petitioner
JACINTO M. TANGUILIG the balance of P15,000.00 with interest at the legal rate from the date of the filing of the
complaint. In return, petitioner is ordered to "reconstruct subject defective windmill system, in accordance with the oneyear guaranty" 16 and to complete the same within three (3) months from the finality of this decision.
SO ORDERED.
Padilla, Vitug, Kapunan and Hermosisima, Jr., JJ., concur.
Footnotes
1.TSN, 20 December 1988, pp. 10-12.
2.Exh. "A" and Exh. "1.
3.Rollo, p. 36.
4.Id., p. 37.
5.Kasilag v. Rodriguez, 69 Phil. 217 (1939).
6.Art. 1371, New Civil Code; GSIS v. Court of Appeals, G.R. No. 52478, 30 October 1986, 145 SCRA 311; Serrano
v. Court of Appeals, No. L-46357, 9 October 1985, 139 SCRA 179.
7.TSN, 13 April 1989, pp. 18-19.
8.TSN, 13 April 1989, p. 22.
9.Art. 1240, New Civil Code.
10.Arts. 1236 and 1237, New Civil Code .
11.Nakpil v. Court of Appeals, Nos. L-47851, L-47863, L-47896, 3 October 1986, 144 SCRA 596; National Power
Corporation v. Court of Appeals, G.R. Nos. L-47379 and 47481, 16 May 1988, 161 SCRA 334; National Power
Corporation v. Court of Appeals, G.R. Nos. 103442-45, 21 May 1993, 222 SCRA 415.
12.See Note 11.

13.Rollo, p. 44.
14.Sec. 3, par. (y), Rule 131, Revised Rules on Evidence.
15.Art. 1169, last par., New Civil Code.
16.See CA Decision, p. 7; Rollo, p. 27.

THIRD DIVISION
[G.R. Nos. 180631-33. February 22, 2012.]
PHILIPPINE CHARTER INSURANCE CORPORATION, petitioner, vs. CENTRAL COLLEGES OF
THE PHILIPPINES and DYNAMIC PLANNERS AND CONSTRUCTION
CORPORATION, respondents.

DECISION

MENDOZA, J p:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure challenging the June 29, 2007
Decision 1 and November 19, 2007 Resolution 2 of the Court of Appeals (CA) in the consolidated cases CA-G.R. SP Nos.
90361, 90383 and 90384.
THE FACTS
On May 16, 2000, Central Colleges of the Philippines (CCP), an educational institution, contracted the services of
Dynamic Planners and Construction Corporation(DPCC) to be its general contractor for the construction of its five (5)storey school building at No. 39 Aurora Boulevard, Quezon City, with a total contract price of P248,000,000.00. As
embodied in a Contract Agreement, 3 the construction of the entire building would be done in two phases with each phase
valued at P124,000,000.00.
To guarantee the fulfillment of the obligation, DPCC posted three (3) bonds, all issued by the Philippine Charter Insurance
Corporation (PCIC), namely: (1) Surety Bond No. PCIC-45542, dated June 25, 2003, amounting to P7,031,460.74; 4 (2)
Performance Bond No. PCIC-45541 5 in the amount of P2,929,775.31 which was subsequently increased to
P6,199,999.99 through Bond Endorsement No. E-2003/12527; 6 and (3) Performance Bond No. PCIC-46172 for
P692,890.74. 7 All the bonds were callable on demand and set to expire on October 30, 2003.
The Phase 1 of the project was completed without issue. Thereafter, CCP paid DPCC P14,880,000.00 or 12% of the
agreed price of P124,000,000.00 with a check dated March 14, 2002 as downpayment for the Phase 2 of the project.
The Phase 2 of the project, however, encountered numerous delays. When CCP audited DPCC on July 25, 2003, only
47% of the work to be done was actually finished.
Thus, in a letter dated October 29, 2003 addressed to DPCC and PCIC, CCP informed them of the breach in the contract
and its plan to claim on the construction bonds. Pertinent portions of the letter are herein quoted:
You are both hereby NOTIFIED that the Bonds referred to above for the faithful performance of a
Contract, dated 16 May 2000 for the construction of CCP EXTENSION BLDG. (Phase 2) at 39 Aurora
Blvd., Quezon City, Metro Manila and the Variation Order No. 2 has been breached by the
CONTRACTOR for which reason, the CENTRAL COLLEGES OF THE PHILIPPINES, as owner,
hereby gives NOTICE that it will file an action on the said performance and surety bonds. 8

On November 6, 2003, CCP notified DPCC and PCIC that only 51% of the project was completed, which was way behind
the construction schedule, prompting it to declare the occurrence of default against DPCC. It formally requested PCIC to
remit the proceeds of the bonds. 9 DACTSa
On November 14, 2003, DPCC wrote PCIC confirming the finding that Phase 2 was only 51% finished and, at the same
time, requesting for the extension of its performance and surety bonds because the supposed revision of the plans would
require more days. 10
In a letter dated November 21, 2003, CCP notified PCIC that because of DPCC's inability to complete the project on time,
it decided to terminate its contract with the latter and to continue the construction on its own. The full text of the letter is
herein reproduced:
We acknowledge the receipt of your letter dated November 14, 2003 and we are in the process of
compiling the documents you requested. The said documents will be submitted as soon as possible.
Furthermore, we would like to reiterate that your principal, the Dynamic Planners & Construction
Corporation has breached the Contract of Agreement dated May 16, 2000 by having completed only
an estimated 51% of the construction of the 5-storey CCP Extension Building, Phase 2 and has
therefore failed to perform the work within the agreed schedule.
In view thereof, as stated in our earlier letter of 6 November 2003, we were compelled to declare the
occurrence of a default on the part of your principal, and have terminated their contract. Please remit
to us the proceeds of the captioned Bonds within the earliest possible time.
The Central Colleges of the Philippines will complete the construction of the 5-storey CCP Extension
Building, Phase 2 on its own. 11
Meanwhile, on December 5, 2003, PCIC informed DPCC that it had approved its request for extension of the bonds. 12
Eventually, negotiations to continue on with the construction between CCP and DPCC reached a dead end. CCP hired
another contractor to work on the school site.
On August 13, 2004, CCP sent a letter to PCIC of its final demand for the payment of P13,924,351.47 as indicated in the
bonds. 13
On August 20, 2004, PCIC denied CCP's claims against the three bonds. 14
Thus, on October 28, 2004, CCP filed a complaint with request for arbitration before the Construction Industry Arbitration
Commission (CIAC) against DPCC and PCIC.15 In its complaint, CCP prayed that CIAC hold DPCC and PCIC, jointly and
severally liable, against the following bonds:
1.Under Surety Bond No. 45542, the amount of Php7,031,460.74 plus legal interest from the date of
demand until full payment thereof;
2.Under Performance Bond Nos. PCIC-45541 [Bond Endorsement Nos. E-2003/12527] and PCIC46172, the amount of Php6,892,890.73 plus legal interest from the date of demand until full payment
thereof; and
3.Php100,000.00 as and for attorney's fees. 16
In their Answer, 17 DPCC and PCIC denied any liability and proffered that CCP unlawfully withheld the materials,
equipment, formworks and scaffoldings left at the premises amounting to P4,232,264.12.
On June 3, 2005, the CIAC rendered a decision in favor of CCP. It gave the following reasons:
1.Claimant was legally justified in terminating the Contract;
2.On the issue of whether claimant faithfully complied with its contractual obligation in respect of (a)
the release of the downpayment, (b) the delivery of the drawings for construction, and (c) the

payment of progress billings, there is no record that Dynamic protested the delay in the delivery of the
site, the delay in the submission of technical plans and demanded as a result thereof the
corresponding adjustment of the Contract Period or the Contract Price. The issue of delay in the
reduction of the down payment is moot since Dynamic acquiesced in the reduction of the down
payment from 15% to 12% and the issue of payment of the 12th progress billing arose as a
consequence of a legitimate issue as to the percentage of completion of the work by Dynamic as of
August 2003. CTAIHc
3.Dynamic's percentage of accomplishment as of the date of the termination of the Contract was
57.33% at P71,089,200.
4.The original Contract Price was P124,000,000. To this amount shall be added the price of Variation
Order No. 2 of P13,857,814.87 or an adjusted Contract Price of P137,857,814.87. Deducting
P110,000,792.87, the overpayment to Dynamic is P27,779,022.00. However, Claimant is entitled to
an award not exceeding the amount of its claims in its Complaint and in the Terms of Reference.
5.Dynamic failed to produce evidence to show that it was not paid the balance of the Contract Price
for Phase 1 of the Project.
6.Surety is liable to Claimant under the Performance and Surety Bonds it issued in favor of Claimant.
The liability of Surety is to indemnify Claimant for the un-recouped down payment [which] shall not
exceed P7,031,460.74 under the Surety Bond and for not more than P6,892,890.73 under the
Performance Bonds.
7.If Surety is obliged to pay these amounts to Claimant, it is entitled, on its cross-claim, to indemnity
from Dynamic.
8.Claimant's claims under the Surety and Performance Bonds are not time-barred.
9.Surety is not barred by estoppel from denying liability under the Surety and Performance Bonds.
10.Claimant's request to Dynamic to extend the term of these bonds, Dynamic's request to Surety to
extend their terms and Surety's grant of the extension requested have no adverse legal effect upon
the rights and obligations of the parties.
11.The contractual time-bar embodied in the bonds is valid and binding.
12.Dynamic is entitled to its claims for the payment of P1,732,264.14 for materials and of
P2,500,000.00 for the equipment, formworks and scaffolding left at the site.
13.The claims for payment of moral, exemplary and temperate damages and for attorney's fees are
denied.
14.The parties shall bear their own cost of arbitration. 18
Thus, CIAC disposed of the case finding DPCC liable to pay CCP P7,031,460.74 from the Surety Bond representing the
unrecouped downpayment and P6,892,890.73 from its Performance Bond for a total of P13,924,351.47. The CIAC
likewise ordered CCP to pay DPCC P1,732,264.12 corresponding to the construction materials left at the site and
P2,500,000.00 for the cost of equipment, formworks and scaffoldings appropriated by CCP or a total of P4,232,264.12.
The fallo reads:
WHEREFORE, award is hereby made against Respondent Dynamic Planners and Construction
Corporation and Respondent Philippine Charter Insurance Corporation, ordering them, jointly and
severally, to pay Claimant, Central Colleges of the Philippines the amount of P7,031,460.74 under the
Surety Bond as un-recouped down payment, and the amount of P6,892,890.73 under the
Performance Bond or the total amount of P13,924,351.47.
Award is likewise made against Claimant, Central Colleges of the Philippines, ordering the latter to
pay Respondent Dynamic Planners and Construction Corporation, the amount of P1,732,264.12 for
the latter's materials left at the Project Site and the amount of P2,500,000.00 as the cost of its

equipment, formworks and scaffoldings which were appropriated by the former or the total amount of
P4,232,264.12.
Offsetting the amount due claimant Central Colleges of the Philippines from Respondent Dynamic
Planners and Construction Corporation and that due the latter from the former, there is a net amount
of P9,692,087.37 which Respondent Dynamic Planners and Construction Corporation is hereby
ordered to pay Claimant Central Colleges of the Philippines with interest at the rate of 6% per annum
from the date of this Final Award and 12% per annum from the time this Final Award becomes final
and executory and until it is fully paid in accordance with Eastern Shipping Lines, Inc. vs. Court of
Appeals (1994) 234 SCRA 78. aSTAIH
The joint and several liability of Respondent Philippine Charter Insurance Corporation with
Respondent Dynamic Planners and Construction Corporation is accordingly reduced to
P9,692,087.37. In the event of payment by Respondent Philippine Charter Insurance Corporation, the
latter is entitled to indemnity from its co-Respondent Dynamic Planners and Construction Corporation
up to the full amount of such payment. In the event of delay in making payment to indemnify
Respondent Philippine Charter Insurance Corporation, Respondent Dynamic Planners Charter
Insurance Corporation shall pay interest at the rate of 21% per annum in accordance with the
Indemnity Agreement between them.
All other claims, counterclaims and cross-claims not otherwise determined in this Final Award are
deemed denied for lack of merit.
SO ORDERED. 19
All the parties appealed the CIAC decision to the CA. PCIC's appeal was docketed as CA-G.R. SP No. 90361; 20 CCP's
appeal was docketed as CA-G.R. SP No. 90383;21 and DPCC's appeal was docketed as CA-G.R. SP No.
90384. 22 Eventually, the cases were consolidated. 23
On June 29, 2007, the CA modified CIAC's earlier decision. 24 The CA found that DPCC was already in delay for
managing to complete only 51% of the construction work necessary to finish the Phase 2 of the project. It held that due to
DPCC's inexcusable delay, CCP was legally within its rights to terminate the contract with it. It likewise did not give weight
to PCIC's defense that Bond No. 46172 was already released because the said issue was never raised before the CIAC
and was raised for the first time on appeal. 25 The CA, however, deleted the award of cost of the materials, equipment,
formworks and scaffoldings allegedly left by DPCC at the work site for its failure to prove the actual costs of said
materials. 26 It added, "In any event, the cost of such materials, equipment, formworks and scaffoldings cannot be
deducted from Philippine Charter's liability on the bond, as the credit does not belong to the latter but to
Dynamic." 27 Accordingly, the decretal portion of the CA decision reads:
WHEREFORE, the Final Award, dated 03 June 2005, of the Construction Industry Arbitration
Commission (CIAC) in CIAC Case No. 36-2004 is AFFIRMED with MODIFICATION, in that the award
to Dynamic Planners and Construction Corporation of its counterclaim for materials, equipment,
formworks and scaffoldings left at the work site in the total amount of P4,232,264.12 is DELETED.
Philippine Charter Insurance Corporation and Dynamic Planners and Construction Corporation are
ORDERED jointly and severally to pay Central Colleges of the Philippines the total amount of
P13,924,351.47 under Surety Bond No. PCIC-45542, Performance Bond No. PCIC-45541 (as
modified by Bond Endorsement No. E-2003/12527), and Performance Bond No. PCIC-46172. Said
amount shall bear interest at the rate of 6% per annum from the date of demand made on 29 October
2003. However, for any amount not yet paid after the date of the finality of this decision, the rate of
interest on the payable amount shall be increased to 12% per annum from the date when this
decision becomes final and executory until it is fully paid.
SO ORDERED. 28
PCIC moved for the reconsideration of the said decision, but the CA disposed of it with a denial in its November 19, 2007
Resolution.
Hence, this petition. 29
In its Memorandum, 30 PCIC submits the following issues for resolution:

1st Issue: Whether or not the CA grossly erred in sustaining the CIAC award finding petitioner
liable to respondent CCP under the performance bonds and the surety bond?
2nd Issue: Whether or not the CA grossly erred in upholding the CIAC award pronouncing
respondent CCP as rightfully and justifiably entitled to terminate the contract
agreement? DcaCSE
3rd Issue: Whether or not the CA grossly erred in deleting the counterclaim of respondent
DPCC covering the costs of materials, equipment, formworks and scaffoldings left at site and
in denying petitioner to benefit from the counterclaim? 31
PCIC argues that the CA erred in sustaining the award of P692,890.74 representing Performance Bond PCIC-46172
because the obligation guaranteed by said performance bond was already completed, therefore, no liability should attach
against the said bond. 32
In this regard, the petitioner has a point.
Although this particular issue was not expressly raised in the parties' Terms of Reference, 33 nevertheless, the issue on
Performance Bond PCIC-46172 was extensively discussed during the arbitral tribunal's hearing of February 21, 2005. To
accurately reflect what transpired on said hearing, relevant portions of the transcript of stenographic notes are herein
quoted:
ATTY. G. Q. ENRIQUEZ: 34
I am calling your attention to Bond PCIC-45542.
MR. CRISPINO P. REYES: 35
You are calling my attention where?
ATTY. G. Q. ENRIQUEZ:
In the terms of Reference, can we please get the copy of that so that we can be reminded?
ATTY. B.G. FAJARDO:
There are only two, Counsel-the Performance and the Surety Bond.
ATTY. G. Q. ENRIQUEZ:
Performance Bond in the amount of
MR. CRISPINO P. REYES:
We're interested in 45542 and we're interested in 45541. What we're no longer interested in, we
have to be candid to this Honorable Tribunal, we are no longer interested, [we] no
longer want to collect on Performance Bond 46172.
ATTY. A.V. CAMARA: 36
At this point in time, we would like to be of record that although that Bond 46172 covering the amount
of P692,890.74 per their declaration had already been satisfied that is why only two bonds
now are being . . .
ATTY. J.N. RABOCA:
May I make a qualification with that, your Honor? It's not that it was satisfied. It's that the Claimant is
not claiming anymore because all the works under this bond were already accomplished.

ATTY. G. Q. ENRIQUEZ:
Yes, because you have already a Certificate of Acceptance.
ATTY. J.N. RABOCA:
Correct.
ATTY. G. Q. ENRIQUEZ:
So, we're just narrowing down into two bonds.
ATTY. A.V. CAMARA:
The two bonds.
ATTY. G. Q. ENRIQUEZ:
Okay. IETCAS
ATTY. A.V. CAMARA:
Then therefore the liability on 46172 should be released. They are only covered by the
pleadings especially the Complaint.
MR. CRISPINO P. REYES:
We do not dispute this. 37 [Emphases supplied]
It is clear from the testimony of Crispino P. Reyes, CCP's President, that the school no longer wants to collect on
Performance Bond PCIC 46172 (with a value of P692,890.74). This statement before the arbitral tribunal is a judicial
admission effectively settling the issue with respect to PCIC 46172. Section 4, Rule 129 of the Rules of Court provides:
Sec. 4.Judicial admissions. An admission, verbal or written, made by a party in the course of the
proceedings in the same case, does not require proof. The admission may be contradicted only by
showing that it was made through palpable mistake or that no such admission was made.
A party may make judicial admissions in (a) the pleadings; (b) during the trial, either by verbal or written manifestations or
stipulations; or (c) in other stages of the judicial proceeding. 38 It is an established principle that judicial admissions
cannot be contradicted by the admitter who is the party himself 39 and binds the person who makes the same, and absent
any showing that this was made thru palpable mistake, no amount of rationalization can offset it. 40
Since CCP, through its President, judicially admitted that it is no longer interested in pursuing PCIC-46172, the scope of
its claim will just be confined to Surety Bond No. PCIC-45542 and Performance Bond No. PCIC-45541.
PCIC claims that DPCC was already in default as early as September 4, 2003, 41 hence, the ten-day reglementary period
to file a claim on the bonds should have been reckoned from such date and filed on September 14, 2003. PCIC claims
that CCP notified them only on October 29, 2003 which is already beyond the limitation that any claim on the bonds
should be presented in writing within ten (10) days from the expiration of the bond or from the occurrence of the default or
failure of the principal, whichever is earliest. 42
The Court finds itself unable to agree. Article 1169 of the New Civil Code provides: CITaSA
Art. 1169.Those obliged to deliver or to do something incur in delay from the time the obligee judicially
or extrajudicially demands from them the fulfillment of their obligation.
The civil law concept of delay or default commences from the time the obligor demands, judicially or extrajudicially, the
fulfillment of the obligation from the obligee. In legal parlance, demand is the assertion of a legal or procedural

right. 43 Hence, DPCC incurred delay from the time CCP called its attention that it had breached the contract and
extrajudicially demanded the fulfillment of its commitment against the bonds.
It is the obligor's culpable delay, not merely the time element, which gives the obligee the right to seek the performance of
the obligation. As such, CCP's cause of action accrued from the time that DPCC became in culpable delay as
contemplated in the surety and performance bonds. In fact, Surety Bond PCIC-45542, 44Performance Bond PCIC45541 45 and PCIC-46172 each specified how claims should be made against it:
Surety Bond PCIC-45542 46
The liability of PHILIPPINE CHARTER INSURANCE CORPORATION, under this bond will expire on
October 30, 2003; Furthermore, it is hereby agreed and understood that PHILIPPINE CHARTER
INSURANCE CORPORATION will not be liable for any claim not presented to it in writing within
FIFTEEN (15) DAYS from the expiration of this bond, and that the Obligee hereby waives its right to
claim or file any court action against the surety after the termination of FIFTEEN (15) DAYS from the
time its cause of action accrues.
Performance Bond PCIC-45541 47 and PCIC-46172: 48
The liability of PHILIPPINE CHARTER INSURANCE CORPORATION, under this bond will expire on
October 30, 2003; Furthermore, it is hereby agreed and understood that PHILIPPINE CHARTER
INSURANCE CORPORATION will not be liable for any claim not presented to it in writing within TEN
(10) DAYS from the expiration of this bond or from the occurrence of the default or failure of the
Principal, whichever is the earliest, and the Obligee hereby waives its right to file any claims against
the Surety after termination of the period of ten (10) DAYS above mentioned after which time this
bond shall definitely terminate and be deemed absolutely cancelled. cACHSE
Thus, DPCC became in default on October 29, 2003 when CCP informed it in writing of the breach of the contract
agreement and demanded the fulfillment of its obligation against the bonds. Consequently, the November 6, 2003 letter
that CCP sent to PCIC properly complied with the notice of claim requirement set forth in the said bonds.
Upon notice of default of obligor DPCC, PCIC's liability, as surety, was already attached. A surety under Article 2047 of
the New Civil Code solidarily binds itself with the principal debtor to assure the fulfillment of the obligation:
Art. 2047.By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship. [Emphasis
supplied]
The case of Asset Builders Corporation v. Stronghold Insurance Company, Inc. 49 explains how a surety agreement
works:
As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor.
That undertaking makes a surety agreement an ancillary contract as it presupposes the existence of
a principal contract. Although the contract of a surety is in essence secondary only to a valid principal
obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or
personal interest over the obligations nor does it receive any benefit therefrom. 50 Let it be stressed
that notwithstanding the fact that the surety contract is secondary to the principal obligation, the
surety assumes liability as a regular party to the undertaking. 51
Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation, 52 reiterating the
ruling in Garcia v. Court of Appeals, 53 expounds on the nature of the surety's liability:
. . . . The surety's obligation is not an original and direct one for the performance of his own
act, but merely accessory or collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence secondary only to a valid
principal obligation, his liability to the creditor or promisee of the principal is said to
be direct, primary and absolute; in other words, he is directly and equally bound with the
principal.

Suretyship, in essence, contains two types of relationship the principal relationship between the
obligee and the obligor, and the accessory surety relationship between the principal and the surety. In
this arrangement, the obligee accepts the surety's solidary undertaking to pay if the obligor does not
pay.Such acceptance, however, does not change in any material way the obligee's relationship
with the principal obligor. Neither does it make the surety an active party to the principal
obligee-obligor relationship. Thus, the acceptance does not give the surety the right to
intervene in the principal contract. The surety's role arises only upon the obligor's default, at
which time, it can be directly held liable by the obligee for payment as a solidary
obligor. 54 [Emphases supplied]
Having acted as a surety, PCIC is duty bound to perform what it has guaranteed on its surety and performance bonds, all
of which are callable on demand, occasioned by its principal's default.
PCIC also proffers that CCP did not file any claim against the bonds after its extension. 55
The Court is not persuaded. CCP need not file another claim as to the supposed extended bonds because the October
29, 2003 letter was sufficient notice to PCIC and DPCC of the latter's default and its intention to proceed against the
surety and performance bonds. Moreover, the extension of the bonds was only approved and relayed by PCIC to DPCC
on December 5, 2003 or after the October 29, 2003 Notice of Default.
As to whether CCP was legally warranted in terminating the contract with DPCC for its failure to comply with its obligation,
the Court affirms the CA's disquisition. The option to terminate the contract is clearly apparent in the parties' agreement.
Specifically, Article 16 of the Contract Agreement provides: TIcAaH
ARTICLE 16
Termination
16.1The OWNER shall have the right to terminate this CONTRACT after giving fifteen (15) days
notice in writing for any of the following causes:
16.1.1.Substantial failure on the part of the CONTRACTOR in fulfilling its obligation;
16.1.2.Assignment or sub-contracting of any of the works herein by the CONTRACTOR
without approval by the OWNER;
16.1.3The CONTRACTOR is willfully violating any of the material conditions, stipulations
and covenants of this CONTRACT and/or the attachments hereto. In the event of
termination of this CONTRACT pursuant to the above, any amount owing to the
CONTRACTOR at the time of such termination for services already rendered and/or
materials delivered and taken over by the OWNER shall be withheld by the OWNER
pending the determination of value of damages sustained by the OWNER by reason of such
termination and payment of such damages by the CONTRACTOR.
The Court also finds nothing improper in the deletion by the CA of the award of actual damages in favor of DPCC. Actual
or compensatory damages means the adequate compensation for pecuniary loss suffered and for profits the obligee failed
to obtain. To be entitled to actual or compensatory damages, it is basic that there must be pleading and proof of actual
damages suffered. 56 Equally vital to the fact that the amount of loss must be capable of proof, such loss must also be
actually proven with a reasonable degree of certainty, premised upon competent proof or the best evidence
obtainable. 57 The burden of proof of the damage suffered is, consequently, imposed on the party claiming it 58 who, in
turn, should present the best evidence available in support of his claim. It could include sales and delivery receipts, cash
and check vouchers and other pieces of documentary evidence of the same nature pertaining to the items he is seeking
to recover. In the absence of corroborative evidence, it has been held that self-serving statements of account are not
sufficient basis for an award of actual damages. 59 Moreover, a claim for actual damages cannot be predicated on flimsy,
remote, speculative, and insubstantial proof. 60 Thus, courts are required to state the factual bases of the
award. 61DHITSc
In this case, DPCC was not able to establish that it is entitled to the actual damages that it prayed for in its counterclaim.
As the CA put it, "while Dynamic (DPCC) presented receipts issued by its suppliers of materials, equipment, formworks
and scaffoldings, it failed to prove that the items in the receipts correspond to the items allegedly left at the work
site." 62 Besides, the Court cannot grant a relief in its favor because DPCC did not appeal the decision of the CA.

WHEREFORE, the petition is PARTLY GRANTED. The June 29, 2007 Decision of the Court of Appeals in CA-G.R. SP
Nos. 90361, 90383 and 90384 is MODIFIED to read as follows:
Philippine Charter Insurance Corporation and Dynamic Planners and Construction Corporation are
ordered to, jointly and severally, pay Central Colleges of the Philippines the total amount of
P13,231,460.73 under Surety Bond No. PCIC-45542 and Performance Bond No. PCIC-45541 (as
modified by Bond Endorsement No. E-2003/12527). Said amount shall bear interest at the rate of 6%
per annum from the date of demand made on October 29, 2003. For any amount not yet paid after
the date of the finality of this decision, however, the rate of interest on the payable amount shall be
increased to 12% per annum from the date when this decision becomes final and executory until it is
fully paid.
SO ORDERED. THCSEA
Velasco, Jr., Peralta, Abad and Perlas-Bernabe, JJ., concur.

SECOND DIVISION
[G.R. No. 126490. March 31, 1998.]
ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.

Roco, Bunag, Kapunan & Magallos for petitioner.

Angelo E. Grasparail for private respondent.

SYNOPSIS
Petitioner signed as co-maker in a loan. A promissory note was executed whereby she acknowledged her joint and
several (solidary) liability with the principal, that the creditor may demand payment in case of default, and that she fully
understood the contents thereof. Petitioner, when informed that the debtors defaulted, requested that creditor try to collect
from her principal first and offered to settle the obligation in case the creditor fails to collect. She also offered a parcel of
land to settle the obligation which the creditor refused. Thereafter, a complaint was filed against petitioner to the exclusion
of the principal debtors. Again petitioner offered to pay but the amount offered was way below the amount computed. The
trial court dismissed the complaint and ruled that the complaint against the petitioner amounted to a discharge of a prior
party, that the offer to pay made by petitioner who is secondarily liable to the instrument discharged petitioner. The Court
of Appeals, reversing the trial court, ruled that petitioner is solidarily liable with the principal debtors and may be sued for
the entire obligation. Hence, this recourse. aTEScI
The Supreme Court held that it is a cardinal rule in interpretations of contracts that if the terms of a contract are clear and
leave no doubt upon the intention of the parties, the literal meaning of its stipulation shall control. Hence, where petitioner
expressly binds herself to be jointly and severally or solidarily liable with the principal maker of the note, her liability is that
of a surety and is bound equally and absolutely with the principal.
Having entered into a contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she did
so in ignorance of their legal effect.
The obligee is entitled to demand fulfillment of the obligation or performance stipulated, hence, an offer to pay obligation
in an amount less or different from that due does not discharge liability. SECIcT

SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACTS OF ADHESION; NOT PER SE INVALID. Contracts of
adhesion are not invalid per se and that on numerous occasions the binding effects thereof have been upheld. The

peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to which the provisions are intended to
apply. Hence, just as consistently and unhesitatingly, but without categorically invalidating such contracts, the Court has
construed obscurities and ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably
against the drafter thereof when justified in light of the operative facts and surrounding circumstances. The factual
scenario obtaining in the case before us warrants a liberal application of the rule in favor of respondent corporation.
2.ID.; ID.; INTERPRETATION OF CONTRACTS; LITERAL MEANING OF ITS PROVISION SHALL CONTROL IF THE
TERMS THEREOF ARE CLEAR AND LEAVE NO DOUBT UPON THE INTENTION OF THE PARTIES. It is a cardinal
rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the intention of the
contracting parties, the literal meaning of its stipulation shall control. aEAcHI
3.ID.; ID.; ID.; ID.; CASE AT BAR. In the case at bar, petitioner expressly bound herself to be jointly and severally or
solidarily liable with the principal maker of the note. The terms of the contract are clear, explicit and unequivocal that
petitioner's liability is that of a surety. Her pretension that the terms "jointly and severally or solidarily liable" contained in
the second paragraph of her contract are technical and legal terms which could not be easily understood by an ordinary
layman like her is diametrically opposed to her manifestation in the contract that she "fully understood the contents" of the
promissory note and that she is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she
voluntary affixed her signature thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence
of fraud is unavailing. Fraud must be established by clear and convincing evidence, mere preponderance of evidence not
even being adequate. Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her own
uncorroborated and, expectedly, self-serving allegations.
4.ID.; ID.; PARTY IS ESTOPPED TO ASSERT MISAPPREHENSION OF LEGAL EFFECT OF UNDERTAKING WHERE
SHE ENTERED INTO IT WITH FULL KNOWLEDGE OF ITS TERMS AND CONDITIONS. Having entered into the
contracts with full knowledge of its terms and conditions, petitioner is estopped to assert that she did so under a
misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. The rule that ignorance of
the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to contracts of
suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for relieving her of
liability. CScaDH
5.ID.; ID.; SURETY DIFFERENTIATED FROM GUARANTY. A surety is an insurer of the debt, whereas a guarantor is
an insurer of the solvency of the debtor. A suretyship is an undertaking that the debt shall be paid; a guaranty, an
undertaking that the debtor shall pay. Stated differently, a surety promises to pay the principal's debt if the principal will not
pay, while a guarantor agrees that the creditor, after proceeding against the principal, may proceed against the guarantor
if the principal is unable to pay. A surety binds himself to perform if the principal does not, without regard to his ability to do
so. A guarantor, on the other hand, does not contract that the principal will pay, but simply that he is able to do so. In other
words, a surety undertakes directly for the payment and is so responsible at once if the principal debtor makes default,
while a guarantor contracts to pay if, by the use of due diligence, the debt cannot be made out of the principal debtor.
6.ID.; ID.; INTENTION OF CONTRACTING PARTIES; JUDGED BY THEIR CONTEMPORANEOUS AND SUBSEQUENT
ACTS. It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous
and subsequent acts shall also be principally considered.
7.ID.; ID.; SURETYSHIP; SURETY IS BOUND EQUALLY AND ABSOLUTELY WITH THE PRINCIPAL. A surety is
bound equally and absolutely with the principal, and as such is deemed an original promisor and debtor from the
beginning. This is because in suretyship there is but one contract, and the surety is bound by the same agreement which
binds the principal. In essence, the contract of a surety starts with the agreement, which is precisely the situation
obtaining in this case before the Court.
8.ID.; ID.; ID.; ID.; SURETY IS AN ORIGINAL DEBTOR AND HIS LIABILITY IS IMMEDIATE AND DIRECT. A surety is
usually bound with his principal by the same instrument, executed at the same time and upon the same consideration; he
is an original debtor, and his liability is immediate and direct. Thus, it has been held that where a written agreement on the
same sheet of paper with and immediately following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the terms of the principal contract, the
signers were "sureties" jointly liable with the buyer. A surety usually enters into the same obligation as that of his principal,
and the signatures of both usually appear upon the same instrument, and the same consideration usually supports the
obligation for both the principal and the surety. ASDCaI
9.ID.; ID.; ID.; SURETY BOUND BY WAIVER EXECUTED BY PRINCIPAL. There is no merit in petitioner's contention
that the complaint was prematurely filed because the principal debtors cannot as yet be considered in default, there
having been no judicial or extrajudicial demand made by respondent corporation. Petitioner has agreed that respondent
corporation may demand payment of the loan from her in case the principal maker defaults, subject to the same
conditions expressed in the promissory note. Significantly, paragraph (G) of the note states that "should I fail to pay in

accordance with the above schedule of payment, I hereby waive my right to notice and demand." Hence, demand by the
creditor is no longer necessary in order that delay may exist since the contract itself already expressly so declares. As a
surety, petitioner is equally bound by such waiver.
10.ID.; ID.; ID.; DEMAND ON SURETIES, NOT NECESSARY BEFORE BRINGING SUIT AGAINST THEM; NOR
ENTITLED TO BE GIVEN NOTICE OF PRINCIPAL'S DEFAULT. Even if it were otherwise, demand on the sureties is
not necessary before bringing suit against them, since the commencement of the suit is a sufficient demand. On this point,
it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's
default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure
to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety.
The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the
creditor has not notified him in the absence of a special agreement to that effect in the contract of surety. In the absence
of a statutory or contractual requirement, it is not necessary that payment or performance of his obligation be first
demanded of the principal, especially where demand would have been useless; nor is it a requisite, before proceeding
against the sureties, that the principal be called on to account.

11.ID.; ID.; ID.; ID.; RATIONALE BEHIND. The underlying principle therefor is that suretyship is a direct contract to pay
the debt of another. A surety is liable as much as his principal is liable, and absolutely liable as soon as default is made,
without any demand upon the principal whatsoever or any notice of default. As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his principal. TIDcEH
12.ID.; ID.; ID.; CREDITOR, NOT REQUIRED TO EXHAUST REMEDIES AGAINST THE PRINCIPAL BEFORE HE CAN
PROCEED AGAINST THE SURETY. A creditor's right to proceed against the surety exists independently of his right to
proceed against the principal. Under Article 1216 of the Civil Code, the creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the
creditor has the right to proceed even against the surety alone. Since, generally, it is not necessary for a creditor to
proceed against the principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the
surety is the same as that of the principal, then as soon as the principal in order to hold the surety liable, where, by the
terms of the contract, the obligation of the surety is the same as that of the principal, then as soon as the principal is in
default, the surety is likewise in default, and may be sued immediately and before any proceedings are had against the
principal. Perforce, in accordance with the rule that, in the absence of statute or agreement otherwise, a surety is primarily
liable, and with the rule that his proper remedy is to pay the debt and pursue the principal for reimbursement, the surety
cannot at law, unless permitted by statute and in the absence of any agreement limiting the application of the security,
require the creditor or obligee, before proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound.
13.ID.; ID.; ID.; ID.; REASON. Where a creditor refrains from proceeding against the principal, the surety is not
exonerated. In other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety,
unless the surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal
does not discharge the surety whether given at the principal's request or without it, and whether it is yielded by the
creditor through sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of
the creditor to sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues
until the principal becomes insolvent. And, in the absence of proof of resultant injury, a surety is not discharged by the
creditor's mere statement that the creditor will not look to the surety, or that he need not trouble himself. The
consequences of the delay, such as the subsequent insolvency of the principal, or the fact that the remedies against the
principal may be lost by lapse of time, are immaterial. The raison d' etre for the rule is that there is nothing to prevent the
creditor from proceeding against the principal at any time. At any rate, if the surety is dissatisfied with the degree of
activity displayed by the creditor in the pursuit of his principal, he may pay the debt himself and become subrogated to all
the right and remedies of the creditor.
14.ID.; ID.; ID.; EXTENSION DISCHARGING SURETY, CONSTRUED. It may not be amiss to add that leniency shown
to a debtor in default, by delay permitted by the creditor without change in the time when the debt might be demanded,
does not constitute an extension of the time of payment, which would release the surety. In order to constitute an
extension discharging the surety, it should appear that the extension was for a definite period, pursuant to an enforceable
agreement between the principal and the creditor, and that it was made without the consent of the surety or with a
reservation of rights with respect to him. The contract must be one which precludes the creditor from, or at least hinders
him in, enforcing the principal contract within the period during which he could otherwise have enforced it, and which
precludes the surety from paying the debt.
15.ID.; ID.; ID.; ID.; CASE AT BAR. None of these elements are present in the instant case. Verily, the mere fact that
respondent corporation gave the principal debtors an extended period of time within which to comply with their obligation

did not effectively absolve herein petitioner from the consequences of her undertaking. Besides, the burden is on the
surety, herein petitioner, to show that she has been discharged by some act of the creditor, herein respondent corporation,
failing in which we cannot grant the relief prayed for. EHSITc
16.ID.; ID.; ID.; DELAY IN DISCHARGING SURETY; THERE MUST BE ACTUAL OFFER OF PAYMENT. Respondent
corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who initially
requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails to
collect. The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of
petitioner. At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal
does not pay.
17.ID.; ID.; DEBTOR OF A THING CANNOT COMPEL THE CREDITOR TO RECEIVE A DIFFERENT ONE; CASE AT
BAR. Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned.
Respondent corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot
compel the creditor to receive a different one, although the latter may be of the same value, or more valuable than that
which is due. The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the
object of the obligation would constitute novation requiring the express consent of the parties.
18.ID.; ID.; A PERSON ENTERING INTO A CONTRACT HAS A RIGHT TO INSIST ON ITS PERFORMANCE IN ALL
PARTICULARS. After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance
of the obligation in the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot
be blamed for refusing the amount being offered because it fell way below the amount it had computed, based on the
stipulated interests and penalty charges, as owing and due from herein petitioner. A debt shall be understood to have
been paid unless the thing or service in which the obligation consists has been completely delivered or rendered, as the
case may be. In other words, the prestation must be fulfilled completely. A person entering into a contract has a right to
insist on its performance in all particulars. Petitioner cannot compel respondent corporation to accept the amount she is
willing to pay because the moment the latter accept the performance, knowing its incompleteness or irregularity, and
without expressing any protest or objection, then the obligation shall be deemed fully complied with. Precisely, this is what
respondent corporation wanted to avoid when it continually refused to settle with petitioner at less than what was actually
due under their contract. ATHCac
19.ID.; ID.; LOAN; PAYMENT OF INTEREST AS PENALTY; AMOUNT MAY BE EQUITABLY REDUCED. It must be
remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even before the
filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by the debtor. And, even if there has been no performance,
the penalty may also be reduced if it is iniquitous or leonine. In a case previously decided by this Court which likewise
involved private respondent M.B. Lending Corporation, and which is substantially on all fours with the one at bar, we
decided to eliminate altogether the penalty interest for being excessive and unwarranted. Accordingly, the penalty interest
of 3% per month being imposed on petitioner should similarly be eliminated.
20.ID.; ID.; PAYMENT OF ATTORNEY'S FEES; MAY BE REDUCED IF THE AMOUNT APPEARS UNCONSCIONABLE
OR UNREASONABLE; 25% OF THE TOTAL AMOUNT DUE, UNCONSCIONABLE. Finally, with respect to the award
of attorney's fees, this Court has previously ruled that even with an agreement thereon between the parties, the court may
nevertheless reduce such attorney's fees fixed in the contract when the amount thereof appears to be unconscionable or
unreasonable. To that end, it is not necessary to show, as in other contracts, that it is contrary to morals or public policy.
The grant of attorney's fees equivalent to 25% of the total amount due is, in our opinion, unreasonable and immoderate,
considering the minimal unpaid amount involved and the extent of the work involved in this simple action for collection of a
sum of money. We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be sufficient in this
case. CAHTIS

DECISION

REGALADO, J p:
Where a party signs a promissory note as a co-maker and binds herself to be jointly and severally liable with the principal
debtor in case the latter defaults in the payment of the loan, is such undertaking of the former deemed to be that of a
surety as an insurer of the debt, or of a guarantor who warrants the solvency of the debtor? cdasia

Pursuant to a promissory note dated March 13, 1990, private respondent M.B. Lending Corporation extended a loan to
the spouses Osmea and Merlyn Azarraga, together with petitioner Estrella Palmares, in the amount of P30,000.00
payable on or before May 12, 1990, with compounded interest at the rate of 6% per annum to be computed every 30 days
from the date thereof. 1 On four occasions after the execution of the promissory note and even after the loan matured,
petitioner and the Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance of P13,700.00. No
payments were made after the last payment on September 26, 1991. 2

Consequently, on the basis of petitioner's solidary liability under the promissory note, respondent corporation filed a
complaint 3 against petitioner Palmares as the lone party-defendant, to the exclusion of the principal debtors, allegedly by
reason of the insolvency of the latter.
In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in August 1990, immediately after the loan
matured, she offered to settle the obligation with respondent corporation but the latter informed her that they would try to
collect from the spouses Azarraga and that she need not worry about it; that there has already been a partial payment in
the amount of P17,010.00; that the interest of 6% per month compounded at the same rate per month, as well as the
penalty charges of 3% per month, are usurious and unconscionable; and that while she agrees to be liable on the note but
only upon default of the principal debtor, respondent corporation acted in bad faith in suing her alone without including the
Azarragas when they were the only ones who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the resolution of the trial court: (1) what the
rate of interest, penalty and damages should be; (2) whether the liability of the defendant (herein petitioner) is primary or
subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a subsidiary liability and not a comaker with primary liability. 5
Thereafter, the parties agreed to submit the case for decision based on the pleadings filed and the memoranda to be
submitted by them. On November 26, 1992, the Regional Trial Court of Iloilo City, Branch 23, rendered judgment
dismissing the complaint without prejudice to the filing of a separate action for a sum of money against the spouses
Osmea and Merlyn Azarraga who are primarily liable on the instrument. 6 This was based on the findings of the court a
quo that the filing of the complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga spouses,
amounted to a discharge of a prior party; that the offer made by petitioner to pay the obligation is considered a valid
tender of payment sufficient to discharge a person's secondary liability on the instrument; that petitioner, as co-maker, is
only secondary liable on the instrument; and that the promissory note is a contract of adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and rendered judgment declaring herein
petitioner Palmares liable to pay respondent corporation:
1.The sum of P13,700.00 representing the outstanding balance still due and owing with interest at six
percent (6%) per month computed from the date the loan was contracted until fully paid;
2.The sum equivalent to the stipulated penalty of three percent (3%) per month, of the outstanding
balance;
3.Attorney's fees at 25% of the total amount due per stipulations;
4.Plus costs of suit. 7
Contrary to the findings of the trial court, respondent appellate court declared that petitioner Palmares is a surety since
she bound herself to be jointly and severally or solidarity liable with the principal debtors, the Azarraga spouses, when she
signed as a co-maker. As such, petitioner is primarily liable on the note and hence may be sued by the creditor
corporation for the entire obligation. It also adverted to the fact that petitioner admitted her liability in her Answer although
she claims that the Azarraga spouses should have been impleaded. Respondent court ordered the imposition of the
stipulated 6% interest and 3% penalty charges on the ground that the Usury Law is no longer enforceable pursuant to
Central Bank Circular No. 905. Finally, it rationalized that even if the promissory note were to be considered as a contract
of adhesion, the same is not entirely prohibited because the one who adheres to the contract is free to reject it entirely; if
he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:

A.The Court of Appeals erred in ruling that Palmares acted as surety and is therefore solidarily liable
to pay the promissory note.
1.The terms of the promissory note are vague. Its conflicting provisions do not establish Palmares'
solidary liability.
2.The promissory note contains provisions which establish the co-maker's liability as that of a
guarantor.
3.There is no sufficient basis for concluding that Palmares' liability is solidary.
4.The promissory note is a contract of adhesion and should be construed against M.B. Lending
Corporation.
5.Palmares cannot be compelled to pay the loan at this point.
B.Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly imposing the
interests and penalty charges on the outstanding balance of the promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material points by respondent corporation.
They are further refuted by accepted doctrines in the American jurisdiction after which we patterned our statutory law on
suretyship and guaranty. This case then affords us the opportunity to make an extended exposition on the ramifications of
these two specialized contracts, for such guidance as may be taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully understood the
contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily liable with the
above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand payment of the above
loan from me in case the principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note
subject to the same conditions above-contained. 8
Petitioner contends that the provisions of the second and third paragraph are conflicting in that while the second
paragraph seems to define her liability as that of a surety which is joint and solidary with the principal maker, on the other
hand, under the third paragraph her liability is actually that of a mere guarantor because she bound herself to fulfill the
obligation only in case the principal debtor should fail to do so, which is the essence of a contract of guaranty. More simply
stated, although the second paragraph says that she is liable as a surety, the third paragraph defines the nature of her
liability as that of a guarantor. According to petitioner, these are two conflicting provisions in the promissory note and the
rule is that clauses in the contract should be interpreted in relation to one another and not by parts. In other words, the
second paragraph should not be taken in isolation, but should be read in relation to the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner avers that she could be held liable
only as a guarantor for several reasons.First, the words "jointly and severally or solidarily liable" used in the second
paragraph are technical and legal terms which are not fully appreciated by an ordinary layman like herein petitioner, a 65year old housewife who is likely to enter into such transactions without fully realizing the nature and extent of her liability.
On the contrary, the wordings used in the third paragraph are easier to comprehend. Second, the law looks upon the
contract of suretyship with a jealous eye and the rule is that the obligation of the surety cannot be extended by implication
beyond specified limits, taking into consideration the peculiar nature of a surety agreement which holds the surety liable
despite the absence of any direct consideration received from either the principal obligor or the creditor. Third, the
promissory note is a contract of adhesion since it was prepared by respondent M.B. Lending Corporation. The note was
brought to petitioner partially filled up, the contents thereof were never explained to her, and her only participation was to
sign thereon. Thus, any apparent ambiguity in the contract should be strictly construed against private respondent
pursuant to Art. 1377 of the Civil Code. 9

Petitioner accordingly concludes that her liability should be deemed restricted by the clause in the third paragraph of the
promissory note to be that of a guarantor. cdasia
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan because the principal debtors cannot be
considered in default in the absence of a judicial or extrajudicial demand. It is true that the complaint alleges the fact of
demand, but the purported demand letters were never attached to the pleadings filed by private respondent before the
trial court. And, while petitioner may have admitted in her Amended Answer that she received a demand letter from
respondent corporation sometime in 1990, the same did not effectively put her or the principal debtors in default for the
simple reason that the latter subsequently made a partial payment on the loan in September, 1991, a fact which was
never controverted by herein private respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of P2,745,483.39 in favor of private
respondent when, in truth and in fact, the outstanding balance of the loan is only P13,700.00. Where the interest charged
on the loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially complied with, the court may
equitable reduce the penalty 10 on grounds of substantial justice. More importantly, respondent corporation never refuted
petitioner's allegation that immediately after the loan matured, she informed said respondent of her desire to settle the
obligation. The court should, therefore, mitigate the damages to be paid since petitioner has shown a sincere desire for a
compromise. 11

After a judicious evaluation of the arguments of the parties, we are constrained to dismiss the petition for lack of merit, but
to except therefrom the issue anent the propriety of the monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory note executed between the parties
is a contract of adhesion, it has been the consistent holding of the Court that contracts of adhesion are not invalid per
se and that on numerous occasions the binding effects thereof have been upheld. The peculiar nature of such contracts
necessitate a close scrutiny of the factual milieu to which the provisions are intended to apply. Hence, just as consistently
and unhesitatingly, but without categorically invalidating such contracts, the Court has construed obscurities and
ambiguities in the restrictive provisions of contracts of adhesion strictly albeit not unreasonably against the drafter thereof
when justified in light of the operative facts and surrounding circumstances. 12 The factual scenario obtaining in the case
before us warrants a liberal application of the rule in favor of respondent corporation.
The Civil Code pertinently provides:
Art. 2047.By guaranty, a person called the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3,
Title I of this Book shall be observed. In such case the contract is called a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt upon the
intention of the contracting parties, the literal meaning of its stipulation shall control. 13 In the case at bar, petitioner
expressly bound herself to be jointly and severally or solidarily liable with the principal maker of the note. The terms of the
contract are clear, explicit and unequivocal that petitioner's liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarity liable" contained in the second paragraph of her contract
are technical and legal terms which could not be easily understood by an ordinary layman like her is diametrically
opposed to her manifestation in the contract that she "fully understood the contents" of the promissory note and that she
is "fully aware" of her solidary liability with the principal maker. Petitioner admits that she voluntarily affixed her signature
thereto; ergo, she cannot now be heard to claim otherwise. Any reference to the existence of fraud is unavailing. Fraud
must be established by clear and convincing evidence, mere preponderance of evidence not even being adequate.
Petitioner's attempt to prove fraud must, therefore, fail as it was evidenced only by her own uncorroborated and,
expectedly, self-serving allegations. 14
Having entered into the contract with full knowledge of its terms and conditions, petitioner is estopped to assert that she
did so under a misapprehension or in ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The
rule that ignorance of the contents of an instrument does not ordinarily affect the liability of one who signs it also applies to
contracts of suretyship. And the mistake of a surety as to the legal effect of her obligation is ordinarily no reason for
relieving her of liability. 16

Petitioner would like to make capital of the fact that although she obligated herself to be jointly and severally liable with the
principal maker, her liability is deemed restricted by the provisions of the third paragraph of her contract wherein she
agreed "that M.B. Lending Corporation may demand payment of the above loan from me in case the principal maker, Mrs.
Merlyn Azarraga defaults in the payment of the note," which makes her contract one of guaranty and not suretyship. The
purported discordance is more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of the debtor. 17 A suretyship is an
undertaking that the debt shall be paid; a guaranty, an undertaking that the debtor shall pay. 18 Stated differently, a surety
promises to pay the principal's debt if the principal will not pay, while a guarantor agrees that the creditor, after proceeding
against the principal, may proceed against the guarantor if the principal is unable to pay. 19 A surety binds himself to
perform if the principal does not, without regard to his ability to do so. A guarantor, on the other hand, does not contract
that the principal will pay, but simply that he is able to do so. 20 In other words, a surety undertakes directly for the
payment and is so responsible at once if the principal debtor makes default, while a guarantor contracts to pay if, by the
use of due diligence, the debt cannot be made out of the principal debtor. 21
Quintessentially, the undertaking to pay upon default of the principal debtor does not automatically remove it from the
ambit of a contract of suretyship. The second and third paragraphs of the aforequoted portion of the promissory note do
not contain any other condition for the enforcement of respondent corporation's right against petitioner. It has not been
shown, either in the contract or the pleadings, that respondent corporation agreed to proceed against herein
petitioner only if and when the defaulting principal has become insolvent. A contract of suretyship, to repeat, is that
wherein one lends his credit by joining in the principal debtor's obligation, so as to render himself directly and primarily
responsible with him, and without reference to the solvency of the principal. 22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes the rule on strictissimi juris, which
holds that when the meaning of a contract of indemnity or guaranty has once been judicially determined under the rule of
reasonable construction applicable to all written contracts, then the liability of the surety, under his contract, as thus
interpreted and construed, is not to be extended beyond its strict meaning. 23 The rule, however, will apply only after it
has been definitely ascertained that the contract is one of suretyship and not a contract of guaranty. It cannot be used as
an aid in determining whether a party's undertaking is that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the stipulation contained in the third
paragraph of the controverted suretyship contract merely elucidated on and made more specific the obligation of
petitioner as generally defined in the second paragraph thereof. Resultantly, the theory advanced by petitioner, that she is
merely a guarantor because her liability attaches only upon default of the principal debtor, must necessarily fail for being
incongruent with the judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting parties, their contemporaneous and
subsequent acts shall also be principally considered. 24 Several attendant factors in that genre lend support to our finding
that petitioner is a surety. For one, when petitioner was informed about the failure of the principal debtor to pay the loan,
she immediately offered to settle the account with respondent corporation. Obviously, in her mind, she knew that she was
directly and primarily liable upon default of her principal. For another, and this is most revealing, petitioner presented the
receipts of the payments already made, from the time of initial payment up to the last, which were all issued in her name
and of the Azarraga spouses. 25 This can only be construed to mean that the payments made by the principal debtors
were considered by respondent corporation as creditable directly upon the account and inuring to the benefit of petitioner.
The concomitant and simultaneous compliance of petitioner's obligation with that of her principals only goes to show that,
from the very start, petitioner considered herself equally bound by the contract of the principal makers. cdasia
In this regard, we need only to reiterate the rule that a surety is bound equally and absolutely with the principal, 26 and as
such is deemed an original promisor and debtor from the beginning. 27 This is because in suretyship there is but one
contract, and the surety is bound by the same agreement which binds the principal. 28 In essence, the contract of a surety
starts with the agreement, 29 which is precisely the situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately follows the terms and conditions
stipulated between respondent corporation, as creditor, and the principal obligors. A surety is usually bound with his
principal by the same instrument, executed at the same time and upon the same consideration; he is an original debtor,
and his liability is immediate and direct. 30 Thus, it has been held that where a written agreement on the same sheet of
paper with and immediately following the principal contract between the buyer and seller is executed simultaneously
therewith, providing that the signers of the agreement agreed to the terms of the principal contract, the signers were
"sureties" jointly liable with the buyer. 31 A surety usually enters into the same obligation as that of his principal, and the
signatures of both usually appear upon the same instrument, and the same consideration usually supports the obligation
for both the principal and the surety.32

There is no merit in petitioner's contention that the complaint was prematurely filed because the principal debtors cannot
as yet be considered in default, there having been no judicial or extrajudicial demand made by respondent corporation.
Petitioner has agreed that respondent corporation may demand payment of the loan from her in case the principal maker
defaults, subject to the same conditions expressed in the promissory note. Significantly, paragraph (G) of the note states
that "should I fail to pay in accordance with the above schedule of payment, I hereby waive my right to notice and
demand." Hence, demand by the creditor is no longer necessary in order that delay may exist since the contract itself
already expressly so declares. 33 As a surety, petitioner is equally bound by such waiver.

Even if it were otherwise, demand on the sureties is not necessary before bringing suit against them, since the
commencement of the suit is a sufficient demand. 34On this point, it may be worth mentioning that a surety is not even
entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active
diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default
of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's
default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special
agreement to that effect in the contract of suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the principal debtors, by not attaching copies
thereof to its pleadings, is likewise immaterial. In the absence of a statutory or contractual requirement, it is not necessary
that payment or performance of his obligation be first demanded of the principal, especially where demand would have
been useless; nor is it a requisite, before proceeding against the sureties, that the principal be called on to account.36 The
underlying principle therefor is that a suretyship is a direct contract to pay the debt of another. A surety is liable as much
as his principal is liable, and absolutely liable as soon as default is made, without any demand upon the principal
whatsoever or any notice of default. 37 As an original promisor and debtor from the beginning, he is held ordinarily to
know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely against her to the exclusion of the principal debtors
who allegedly were the only ones who benefited from the proceeds of the loan. What petitioner is trying to imply is that the
creditor, herein respondent corporation, should have proceeded first against the principal before suing on her obligation
as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to proceed against the
principal. 39 Under Article 1216 of the Civil Code, the creditor may proceed against any one of the solidary debtors or
some or all of them simultaneously. The rule, therefore, is that if the obligation is joint and several, the creditor has the
right to proceed even against the surety alone. 40 Since, generally, it is not necessary for a creditor to proceed against a
principal in order to hold the surety liable, where, by the terms of the contract, the obligation of the surety is the same as
that of the principal, then as soon as the principal is in default, the surety is likewise in default, and may be sued
immediately and before any proceedings are had against the principal. 41 Perforce, in accordance with the rule that, in
the absence of statute or agreement otherwise, a surety is primarily liable, and with the rule that his proper remedy is to
pay the debt and pursue the principal for reimbursement, the surety cannot at law, unless permitted by statute and in the
absence of any agreement limiting the application of the security, require the creditor or obligee, before proceeding
against the surety, to resort to and exhaust his remedies against the principal, particularly where both principal and surety
are equally bound. 42
We agree with respondent corporation that its mere failure to immediately sue petitioner on her obligation does not
release her from liability. Where a creditor refrains from proceeding against the principal, the surety is not exonerated. In
other words, mere want of diligence or forbearance does not affect the creditor's rights vis-a-vis the surety, unless the
surety requires him by appropriate notice to sue on the obligation. Such gratuitous indulgence of the principal does not
discharge the surety whether given at the principal's request or without it, and whether it is yielded by the creditor through
sympathy or from an inclination to favor the principal, or is only the result of passiveness. The neglect of the creditor to
sue the principal at the time the debt falls due does not discharge the surety, even if such delay continues until the
principal becomes insolvent. 43 And, in the absence of proof of resultant injury, a surety is not discharged by the creditor's
mere statement that the creditor will not look to the surety, 44 or that he need not trouble himself. 45 The consequences of
the delay, such as the subsequent insolvency of the principal, 46 or the fact that the remedies against the principal may be
lost by lapse of time, are immaterial. 47
The raison d'trefor the rule is that there is nothing to prevent the creditor from proceeding against the principal at any
time. 48 At any rate, if the surety is dissatisfied with the degree of activity displayed by the creditor in the pursuit of his
principal, he may pay the debt himself and become subrogated to all the rights and remedies of the creditor. 49
It may not be amiss to add that leniency shown to a debtor in default, by delay permitted by the creditor without change in
the time when the debt might be demanded, does not constitute an extension of the time of payment, which would release

the surety. 50 In order to constitute an extension discharging the surety, it should appear that the extension was for a
definite period , pursuant to an enforceable agreement between the principal and the creditor, and that it was made
without the consent of the surety or with a reservation of rights with respect to him. The contract must be one which
precludes the creditor from, or at least hinders him in, enforcing the principal contract within the period during which he
could otherwise have enforced it, and which precludes the surety from paying the debt. 51
None of these elements are present in the instant case. Verily, the mere fact that respondent corporation gave the
principal debtors an extended period of time within which to comply with their obligation did not effectively absolve herein
petitioner from the consequences of her undertaking. Besides, the burden is on the surety, herein petitioner, to show that
she has been discharged by some act of the creditor, 52 herein respondent corporation, failing in which we cannot grant
the relief prayed for. LLjur
As a final issue, petitioner claims that assuming that her liability is solidary, the interests and penalty chargers on the
outstanding balance of the loan cannot be imposed for being illegal and unconscionable. Petitioner additionally theorizes
that respondent corporation intentionally delayed the collection of the loan in order that the interests and penalty charges
would accumulate. The statement, likewise traversed by said respondent, is misleading.
In an affidavit 53 executed by petitioner, which was attached to her petition, she stated, among others, that:
8.During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan has been
released and that she has not paid the same upon its maturity. I received a telephone call from Mr.
Augusto Banusing of MB Lending informing me of this fact and of my liability arising from the
promissory note which I signed.
9.I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga. At the same time,
I offered to pay MB Lending the outstanding balance of the principal obligation should he fail to collect
from Merlyn and Osmea Azarraga. Mr. Banusing advised me not to worry because he will try to
collect first from Merlyn and Osmea Azarraga.
10.A year thereafter, I received a telephone call from the secretary of Mr. Banusing who reminded that
the loan of Merlyn and Osmea Azarraga, together with interest and penalties thereon, has not been
paid. Since I had no available funds at that time, I offered to pay MB Lending by delivering to them a
parcel of land which I own. Mr. Banusing's secretary, however, refused my offer for the reason that
they are not interested in real estate.
11.In March 1992, I received a copy of the summons and of the complaint filed against me by MB
Lending before the RTC-Iloilo. After learning that a complaint was filed against me, I instructed Sheila
Gatia to go to MB Lending and reiterate my first offer to pay the outstanding balance of the principal
obligation of Merlyn Azarraga in the amount of P30,000.00.
12.Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus, counsel of MB
Lending.
13.Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay the outstanding
balance of the principal obligation loan (sic) of Merlyn and Osmea Azarraga is acceptable. Later,
Atty. Venus informed Ms. Gatia that my offer is not acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and substantial in order to effectively
discharge her from liability. There are a number of circumstances which conjointly inveigh against her aforesaid theory.
1.Respondent corporation cannot be faulted for not immediately demanding payment from petitioner. It was petitioner who
initially requested that the creditor try to collect from her principal first, and she offered to pay only in case the creditor fails
to collect. The delay, if any, was occasioned by the fact that respondent corporation merely acquiesced to the request of
petitioner. At any rate, there was here no actual offer of payment to speak of but only a commitment to pay if the principal
does not pay.
2.Petitioner made a second attempt to settle the obligation by offering a parcel of land which she owned. Respondent
corporation was acting well within its rights when it refused to accept the offer. The debtor of a thing cannot compel the
creditor to receive a different one, although the latter may be of the same value, or more valuable than that which is
due. 54 The obligee is entitled to demand fulfillment of the obligation or performance as stipulated. A change of the object
of the obligation would constitute novation requiring the express consent of the parties. 55

3.After the complaint was filed against her, petitioner reiterated her offer to pay the outstanding balance of the obligation in
the amount of P30,000.00 but the same was likewise rejected. Again, respondent corporation cannot be blamed for
refusing the amount being offered because it fell way below the amount it had computed, based on the stipulated interests
and penalty charges, as owing and due from herein petitioner. A debt shall not be understood to have been paid unless
the thing or service in which the obligation consists has been completely delivered or rendered, as the case may be. 56 In
other words, the prestation must be fulfilled completely. A person entering into a contract has a right to insist on its
performance in all particulars. 57
Petitioner cannot compel respondent corporation to accept the amount she is willing to pay because the moment the latter
accepts the performance, knowing its incompleteness or irregularity, and without expressing any protest or objection, then
the obligation shall be deemed fully complied with. 58 Precisely, this is what respondent corporation wanted to avoid when
it continually refused to settle with petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per month and attorney's fees
equivalent to 25% of the total amount due are highly inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of P16,300.00 had already been paid even
before the filing of the present case. Article 1229 of the Civil Code provides that the court shall equitably reduce the
penalty when the principal obligation has been partly or irregularly complied with by the debtor. And, even if there has
been no performance, the penalty may also be reduced if it is iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent M.B. Lending Corporation, and
which is substantially on all fours with the one at bar, we decided to eliminate altogether the penalty interest for being
excessive and unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the economic impact of
the penalty interest of three percent (3%) per month on total amount due but unpaid should be
equitably reduced. The purpose for which the penalty interest is intended that is, to punish the
obligor will have been sufficiently served by the effects of compounded interest. Under the
exceptional circumstances in the case at bar, e.g., the original amount loaned was only P15,000.00;
partial payment of P8,600.00 was made on due date; and the heavy (albeit still lawful) regular
compensatory interest, the penalty interest stipulated in the parties' promissory note is iniquitous and
unconscionable and may be equitably reduced further by eliminating such penalty interest
altogether. 59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled that even with an agreement thereon
between the parties, the court may nevertheless reduce such attorney's fees fixed in the contract when the amount
thereof appears to be unconscionable or unreasonable. 60 To that end, it is not even necessary to show, as in other
contracts, that it is contrary to morals or public policy. 61 The grant of attorney's fees equivalent to 25% of the total
amount due is, in our opinion, unreasonable and immoderate, considering the minimal unpaid amount involved and the
extent of the work involved in this simple action for collection of a sum of money. We, therefore, hold that the amount of
P10,000.00 as and for attorney's fee would be sufficient in this case. 62
WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the MODIFICATION that the penalty interest
of 3% per month is hereby deleted and the award of attorney's fees is reduced to P10,000.00.
SO ORDERED. LLjur
Melo, Puno, Mendoza and Martinez, JJ .,concur.

THIRD DIVISION
[G.R. No. 100594. March 10, 1993.]

BINALBAGAN TECH. INC., and HERMILO J. NAVA, petitioners, vs. THE COURT OF APPEALS,
MAGDALENA L. PUENTEVELLA, ANGELINA P. ECHAUS, ROMULO L. PUENTEVELLA, RENATO
L. PUENTEVELLA, NOLI L. PUENTEVELLA and NELIA LOURDES P. JACINTO,respondents.

Mateo Valenzuela for petitioners.

Hilado, Hagad & Hilado for private respondents.

SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; PARTY CANNOT DEMAND PERFORMANCE OF AN OBLIGATION
UNLESS HE IS IN A POSITION TO COMPLY WITH HIS OWN OBLIGATIONS. A party to a contract cannot demand
performance of the other party's obligations unless he is in a position to comply with his own obligations. Similarly, the
right to rescind a contract can be demanded only if a party thereto is ready, willing and able to comply with his own
obligations thereunder (Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil. 581 [1926]; Paras, Civil Code of the Philippines,
12th ed. Vol. IV, p. 200). In a contract of sale, the vendor is bound to transfer the ownership of and deliver, as well as
warrant, the thing which is the object of the sale (Art. 1495, Civil Code); he warrants that the buyer shall, from the time
ownership is passed, have and enjoy the legal and peaceful possession of the thing.
2.ID.; PRESCRIPTIVE PERIOD WITHIN WHICH TO INSTITUTE ACTION UPON A WRITTEN CONTRACT; CASE AT
BAR. The prescriptive period within which to institute an action upon a written contract is ten years (Art. 1144, Civil
Code). The cause of action of private respondent Echaus is based on the deed of sale executed on May 11, 1967,
whereby ownership of the subdivision lots was transferred to petitioner. She filed Civil Case No. 1354 for recovery of title
and damages only on October 8, 1982. From May 11, 1967 to October 8, 1982, more than fifteen (15) years elapsed.
Seemingly, the 10-year prescriptive period had expired before she brought her action to recover title. However, the period
1974 to 1982 should be deducted in computing the prescriptive period for the reason that from 1974 to 1982, private
respondent Echaus was not in a legal position to initiate action against petitioner since as aforestated, through no fault of
hers, her warranty against eviction was breached. Deducting eight years (1974 to 1982) from the period 1967 to 1982,
only seven years elapsed. Consequently, Civil Case No. 1354 was filed within the 10-year prescriptive period.

DECISION

MELO, J p:
The petition for review on certiorari now before us seeks to reverse the decision of the Court of Appeals
promulgated on March 27, 1991 in CA-G.R. CV No. 24635 (de Pano, Cacdac (P), and Vailoces, JJ .).
The facts of the case, as borne out by the record, are as follows:
On May 11, 1967, private respondents, through Angelina P. Echaus, in her capacity as Judicial Administrator
of the intestate estate of Luis B. Puentevella, executed a Contract to Sell and a Deed of Sale of forty-two subdivision
lots within the Phib-Khik Subdivision of the Puentebella family, conveying and transferring said lots to petitioner
Binalbagan Tech., Inc. (hereinafter referred to as Binalbagan). In turn Binalbagan, through its president, petitioner
Hermilio J. Nava (hereinafter referred to as Nava), executed an Acknowledgment of Debt with Mortgage Agreement,
mortgaging said lots in favor of the estate of Puentebella.
Upon the transfer to Binalbagan of titles to the 42 subdivision lots, said petitioner took possession of the lots
and the building and improvements thereon. Binalbagan started operating a school on the property from 1967 when
the titles and possession of the lots were transferred to it.
It appears that there was a pending case, Civil Case No. 7435 of Regional Trial Court stationed at
Himamaylan, Negros Occidental. Relative to said case we shall quote the findings of fact of the Court of Appeals in its
decision dated October 30, 1978 in CA-G.R. No. 4211-R:

To have a better perspective of the background facts leading to the filing of this instant case
on appeal, there is a need to make reference to the circumstances surrounding the filing of Civil Case
No. 7435, to wit:
The intestate estate of the late Luis B. Puentebella as registered owner of several
subdivision lots, specifically mentioned in paragraph 2 of plaintiffs' complaint, thru Judicial
Administratrix, Angelina L. Puentevella sold said aforementioned lots to Raul Javellana with the
condition that the vendee-promisee would not transfer his rights to said lots without the express
consent of Puentevella and that in case of the cancellation of the contract by reason of the violation of
any of the terms thereof, all payments therefor made and all improvements introduced on the property
shall pertain to the promissor and shall be considered as rentals for the use and occupation
thereof. LLphil
Javellana having failed to pay the installments for a period of five years, Civil Case No. 7435
was filed by defendant Puentevella against Raul Javellana and the Southern Negros Colleges which
was impleaded as a party defendant it being in actual possession thereof, for the rescission of their
contract to sell and the recovery of possession of the lots and buildings with damages.
Accordingly, after trial, judgment was rendered in favor of Puentevella and thereafter,
defendants Deputy Sheriffs served a copy of the writ of execution on the Acting Director of the
Southern Negros College and delivered possession of the lots and buildings to defendant
Puentevella's representative, Mrs. Manuel Gentapanan, and further levied execution on the books
and school equipment, supplies, library, apparatus, etc. to satisfy the monetary portion of the
judgment under execution on October 27, 1967. Said books, equipment, etc. as reflected in the
Depositary Receipt, (Exh. "B") dated October 28, 1965, were delivered by the Sheriffs to the Acting
Director of the Southern Negros College as depositary of the same.
Came December 29, 1965 when the plaintiffs in the instant case on appeal filed their ThirdParty Claim based on an alleged Deed of Sale executed in their favor by spouses Jose and Lolita
Lopez, thus Puentevella was constrained to assert physical possession of the premises to counteract
the fictitious and unenforceable claim of herein plaintiffs.
Upon the filing of the instant case for injunction and damages on January 3, 1966, an exparte writ of preliminary injunction was issued by the Honorable Presiding Judge Carlos Abiera, which
order, however, was elevated to the Honorable Court of Appeals which issued a writ of preliminary
injunction ordering Judge Carlos Abiera or any other persons or persons in his behalf to refrain from
further enforcing the injunction issued by him in this case and from further issuing any other writs or
prohibitions which would in any manner affect the enforcement of the judgment rendered in Civil Case
7435, pending the finality of the decision of the Honorable Court of Appeals in the latter case. Thus,
defendant Puentevella was restored to the possession of the lots and buildings subject of this case.
However, plaintiffs filed a petition for review with the Supreme Court which issued a restraining order
against the sale of the properties claimed by the spouses-plaintiffs [in Abierra vs. Court of Appeals, 45
SCRA 314].
When the Supreme Court dissolved the aforesaid injunction issued by the Court of Appeals, possession of
the building and other property was taken from petitioner Binalbagan and given to the third-party claimants, the de la
Cruz spouses. Petitioner Binalbagan transferred its school to another location. In the meantime, an appeal was
interposed by the defendants in Civil Case No. 293 with the Court of Appeals where the appeal was docketed as CAG.R. No. 42211-R. On October 30, 1978, the Court of Appeals rendered judgment, reversing the appealed decision in
Civil Case No. 293. On April 29, 1981, judgment was entered in CA-G.R. No. 42211, and the record of the case was
remanded to the court of origin on December 22, 1981. Consequently, in 1982 the judgment in Civil Case No. 7435
was finally executed and enforced, and petitioner was restored to the possession of the subdivision lots on May 31,
1982. It will be noted that petitioner was not in possession of the lots from 1974 to May 31, 1982.
After petitioner Binalbagan was again placed in possession of the subdivision lots, private respondent
Angelina Echaus demanded payment from petitioner Binalbagan for the subdivision lots, enclosing in the letter of
demand a statement of account as of September 1982 showing a total amount due of P367,509.93, representing the
price of the land and accrued interest as of that date.
As petitioner Binalbagan failed to effect payment, private respondent Angelina P. Echaus filed on October 8,
1982 Civil Case No. 1354 of the Regional Trial Court of the Sixth Judicial Region stationed in Himamaylan, Negros
Occidental against petitioners for recovery of title and damages. An amended complaint was filed by private

respondent Angelina P. Echaus by including her mother, brothers, and sisters as co-plaintiffs, which was admitted by
the trial court on March 18, 1983. cdphil
After trial, the trial court rendered a decision on August 30, 1989, the dispositive portion of which reads as
follows:
IN VIEW OF THE FOREGOING, and inasmuch as there is no fraud and since the action on the
written contract, Exh. "C", has long prescribed, judgment is hereby rendered in favor of the
defendants and against the plaintiffs dismissing the amended complaint.
The counterclaim is likewise dismissed for lack of sufficient proof. Each shall bear their
respective expenses of litigation (pp. 71-72, Rollo).
Private respondents appealed to the Court of Appeals which rendered a decision on March 27, 1991,
disposing:
WHEREFORE, premises considered, the appealed decision is REVERSED and SET ASIDE
and a new one is rendered ordering the appellee Binalbagan Tech. Inc., through any of its officers, to
execute a deed of conveyance or any other instrument, transferring and returning unto the appellants
the ownership and titles of the subject 42 subdivision lots. Costs against appellees. (pp. 51-52, Rollo)

Thus, this petition for review on certiorari wherein petitioners assign the following alleged errors of the Court
of Appeals:
First Error
The Court of Appeals erred in holding that the cause of action of the respondents has not prescribed.
Second Error
The Court of Appeals erred in holding that Civil Case No. 293 interrupts the running of the
period of the prescription.
Third Error
The Court of Appeals erred in citing the cases of David-Garlitos and Rivero vs. Rivero to
support its contention that the period of prescription was interrupted in the case at bar.
Fourth Error
The finding of facts of the Honorable Court of Appeals in reversing the lower court decision
has no basis and is contradicted by the evidence on record of the case at bar as well as the
admission of parties." (p. 16, Rollo)
The main issue of this case is: Whether private respondents' cause of action in Civil Case No. 1354 is
barred by prescription.
On this point the Court of Appeals held:
As it is evident that there was an interruption during the period from 1974 up to 1982, the
period of prescription, as correctly maintained by the appellants, was tolled during such period, due to
the injunctive writ in Civil Case No. 293 as discussed earlier when the vendors could not maintain the
vendee in possession, and consequently was in no position to legally demand payment of the price.
Accordingly, while it may be conceded that appellants' cause of action to demand performance had
accrued on June 10, 1967 due to the appellee institution's default in the payment of the first
installment which became due on that date, the running of prescription was interrupted in 1974 when,
from the words of the lower court itself, "the Supreme Court reversed the Court of Appeal's decision

and dissolved the injunction which the latter court had earlier issued in Civil Case No. 293,
possession of the building and other properties was taken from defendant Binalbagan Tech. Inc. and
given to the de la Cruz spouses, through Southern Negros College". And the period of prescription
commenced to run anew only on May 31, 1982 when the appellants were finally able to fully
implement the already executory judgment in Case No. 7435, and thus restore appellees in
possession of the 42 subdivision lots. Cdpr
In other words, the period of prescription was interrupted, because from 1974 up to 1982,
the appellants themselves could not have restored unto the appellees the possession of the 42
subdivision lots precisely because of the preliminary injunction mentioned elsewhere. Consequently,
the appellants could not have prospered in any suit to compel performance or payment from the
appellees-buyers, because the appellants themselves were in no position to perform their own
corresponding obligation to deliver to and maintain said buyers in possession of the lots subject
matter of the sale. (Article 1458, 1495, 1537, Civil Code). (pp 49-50, Rollo)
We agree with the Court of Appeals.
A party to a contract cannot demand performance of the other party's obligations unless he is in a position to
comply with his own obligations. Similarly, the right to rescind a contract can be demanded only if a party thereto is
ready, willing and able to comply with his own obligations thereunder (Art. 1191, Civil Code; Seva vs. Berwin, 48 Phil.
581 [1926]; Paras, Civil Code of the Philippines, 12th ed. Vol. IV, p. 200). In a contract of sale, the vendor is bound to
transfer the ownership of and deliver, as well as warrant, the thing which is the object of the sale (Art. 1495, Civil
Code); he warrants that the buyer shall, from the time ownership is passed, have and enjoy the legal and peaceful
possession of the thing
ARTICLE 1547.In a contract of sale, unless a contrary intention appears, there is:
(1)An implied warranty on the part of the seller that he has a right to sell the thing at the time
when the ownership is to pass, and that the buyer shall from that time have and enjoy the legal and
peaceful possession of the thing.
xxx xxx xxx
As afore-stated, petitioner was evicted from the subject subdivision lots in 1974 by virtue of a court order in
Civil Case No. 293 and reinstated to the possession thereof only in 1982. During the period, therefore, from 1974 to
1982, seller private respondent Angelina Echaus' warranty against eviction given to buyer petitioner was breached
though, admittedly, through no fault of her own. It follows that during that period, 1974 to 1982, private respondent
Echaus was not in a legal position to demand compliance of the prestation of petitioner to pay the price of said
subdivision lots. In short, her right to demand payment was suspended during that period, 1974-1982.
The prescriptive period within which to institute an action upon a written contract is ten years (Art. 1144, Civil
Code). The cause of action of private respondent Echaus is based on the deed of sale aforementioned. The deed of
sale whereby private respondent Echaus transferred ownership of the subdivision lots was executed on May 11,
1967. She filed Civil Case No. 1354 for recovery of title and damages only on October 8, 1982. From May 11, 1967 to
October 8, 1982, more than fifteen (15) years elapsed. Seemingly, the 10-year prescriptive period had expired before
she brought her action to recover title. However, the period 1974 to 1982 should be deducted in computing the
prescriptive period for the reason that, as above discussed, from 1974 to 1982, private respondent Echaus was not in
a legal position to initiate action against petitioner since as aforestated, through no fault of hers, her warranty against
eviction was breached. In the case of Daniel vs. Garlitos, (95 Phil. 387 [1954]), it was held that a court order deferring
action on the execution of judgment suspended the running of the 5-year period for execution of a judgment. Here the
execution of the judgment in Civil Case No. 7435 was stopped by the writ of preliminary injunction issued in Civil
Case No. 293. It was only when Civil Case No. 293 was dismissed that the writ of execution in Civil Case Na. 7435
could be implemented and petitioner Binalbagan restored to the possession of the subject lots. LLjur
Deducting eight years (1974 to 1982) from the period 1967 to 1982, only seven years elapsed.
Consequently, Civil Case No. 1354 was filed within the 10-year prescriptive period. Working against petitioner's
position too is the principle against unjust enrichment which would certainly be the result if petitioner is allowed to
own the 42 lots without full payment thereof.
WHEREFORE, the petition is DENIED and the decision of the Court of Appeals in CA-G.R. CV No. 24635 is
AFFIRMED.

SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ ., concur.
Gutierrez, Jr., J ., on terminal leave.

FIRST DIVISION
[G.R. No. 115129. February 12, 1997.]
IGNACIO BARZAGA, petitioner, vs. COURT OF APPEALS and ANGELITO ALVIAR, respondents.

Franco L. Loyola for petitioners.

Monsod Valencia and Associates for private respondent.

SYLLABUS
1.CIVIL LAW; OBLIGATION AND CONTRACTS; EFFECT OF OBLIGATIONS; A PARTY GUILTY OF NEGLIGENCE AND
DELAY IN THE PERFORMANCE OF HIS CONTRACTUAL OBLIGATION IS LIABLE FOR DAMAGES. An assiduous
scrutiny of the record convinces us that respondent Angelito Alviar was negligent and incurred in delay in the performance
of his contractual obligation. This sufficiently entitles petitioner Ignacio Barzaga to be indemnified for the damage he
suffered as a consequence of delay or a contractual breach. The law expressly provides that those who in the
performance of their obligation are guilty of fraud, negligence, or delay and those who in any manner contravene the tenor
thereof, are liable for damages.
2.ID.; ID.; ID.; ID.; THE ARGUMENT THAT THE INVOICES NEVER INDICATED A SPECIFIC DELIVERY TIME MUST
FALL IN THE FACE OF THE POSITIVE VERBAL COMMITMENT OF RESPONDENT'S STOREKEEPER; CASE AT BAR.
Contrary to the appellate court's factual determination, there was a specific time agreed upon for the delivery materials
to the cemetery. Petitioner went to private respondent's store on 21 December precisely to inquire if the materials he
intended to purchase could be delivered immediately. But he was told by the storekeeper that if there were still deliveries
to be made that afternoon his order would be delivered the following day. With this in mind Barzaga decided to buy the
construction materials the following morning after he was assured of immediate delivery according to his time frame. The
argument that the invoices never indicated a specific delivery time must fall in the face of the positive verbal commitment
of respondent's storekeeper. Consequently it was no longer necessary to indicate in the invoices the exact time the
purchased items were to be brought to the cemetery. In fact, storekeeper Boncales admitted that it was her custom not to
indicate the time of delivery whenever she prepared invoices.
3.ID.; ID.; ID.; ID.; THE DELIBERATE SUPPRESSION OF MATERIAL INFORMATION BY ITSELF MANIFESTS A
CERTAIN DEGREE OF BAD FAITH. One piece of testimony by respondent's witness Marina Boncales has caught our
attention that the delivery truck arrived a little late than usual because it came from a delivery of materials in Langcaan,
Dasmarias, Cavite. Significantly, this information was withheld by Boncales from petitioner when the latter was
negotiating with her for the purchase of construction materials. Consequently, it is not unreasonable to suppose that had
she told petitioner of this fact and that the delivery of the materials would consequently be delayed, petitioner would not
have bought the materials from respondent's hardware store but elsewhere which would meet his time requirement. The
deliberate suppression of this information by itself manifests a certain degree of bad faith on the part of respondent's
storekeeper.
4.ID.; ID.; ID.; ID.; CASE AT BAR; A CASE OF NON-PERFORMANCE OF A RECIPROCAL OBLIGATION. This case is
clearly one of non-performance of a reciprocal obligation. In their contract of purchase and sale, petitioner had already
complied fully with what was required of him as purchaser, i.e., the payment of the purchase price of P2,110.00. It was
incumbent upon respondent to immediately fulfill his obligation to deliver the goods otherwise delay would attach.
5.ID.; DAMAGES; AWARD OF MORAL DAMAGES; SUSTAINED. We sustain the award of moral damages. It cannot
be denied that petitioner and his family suffered wounded feelings, mental anguish and serious anxiety while keeping
watch on Christmas day over the remains of their loved one who could not be laid to rest on the date she herself had
chosen. There is no gainsaying the inexpressible pain and sorrow Ignacio Barzaga and his family bore at that moment

caused no less by the ineptitude, cavalier behavior and bad faith of respondent and his employees in the performance of
an obligation voluntarily entered into.
6.ID.; ID.; GROSS NEGLIGENCE IN THE FULFILLMENT OF ONE'S BUSINESS OBLIGATIONS ENTITLES THE
AGGRIEVED PARTY TO EXEMPLARY DAMAGES. We also affirm the grant of exemplary damages. The lackadaisical
and feckless attitude of the employees of respondent over which he exercised supervisory authority indicates gross
negligence in the fulfillment of his business obligations. Respondent Alviar and his employees should have exercised
fairness and good judgment in dealing with petitioner who was then grieving over the loss of his wife. Instead of
commiserating with him, respondent and his employees contributed to petitioner's anguish by causing him to bear the
agony resulting from his inability to fulfill his wife's dying wish.
7.ID.; ID.; TEMPERATE DAMAGES; MAY NOT BE AWARDED IN CASES WHERE THE AMOUNT OF PECUNIARY
LOSSES, BY THEIR VERY NATURE, COULD BE ESTABLISHED WITH CERTAINTY. We delete the award of
temperate damages. Under Art. 2224 of the Civil Code, temperate damages are more than nominal but less than
compensatory, and may be recovered when the court finds that some pecuniary loss has been suffered but the amount
cannot, from the nature of the case, be proved with certainty. In this case, the trial court found that plaintiff suffered
damages in the form of wages for the hired workers for 22 December 1990 and expenses incurred during the extra two (2)
days of the wake. The record however does not show that petitioner presented proof of the actual amount of expenses he
incurred which seems to be the reason the trial court awarded to him temperate damages instead. This is an erroneous
application of the concept of temperate damages. While petitioner may have indeed suffered pecuniary losses, these by
their very nature could be established with certainty by means of payment receipts.
8.ID.; ID.; ACTUAL OR COMPENSATORY DAMAGES; PARTY'S FAILURE TO PROVE ACTUAL EXPENDITURE
CONDUCES TO A FAILURE OF HIS CLAIM. Petitioner's claim falls unequivocally within the realm of actual or
compensatory damages. However, his failure to prove actual expenditure consequently conduces to a failure of his claim.
For in determining actual damages, the court cannot rely on mere assertions, speculations, conjectures or guesswork but
must depend on competent proof and on the best evidence obtainable regarding the actual amount of loss.

DECISION

BELLOSILLO, J p:
The Fates ordained that Christmas 1990 be bleak for Ignacio Barzaga and his family. On the nineteenth of December
Ignacio's wife succumbed to a debilitating ailment after prolonged pain and suffering. Forewarned by her attending
physicians of her impending death, she expressed her wish to be laid to rest before Christmas day to spare her family
from keeping lonely vigil over her remains while the whole of Christendom celebrate the Nativity of their Redeemer.
Drained to the bone from the tragedy that befell his family yet preoccupied with overseeing the wake for his departed wife,
Ignacio Barzaga set out to arrange for her interment on the twenty-fourth of December in obedience semper fidelis to her
dying wish. But her final entreaty, unfortunately, could not be carried out. Dire events conspired to block his plans that
forthwith gave him and his family their gloomiest Christmas ever.
This is Barzaga's story. On 21 December 1990, at about three o'clock in the afternoon, he went to the hardware store of
respondent Angelito Alviar to inquire about the availability of certain materials to be used in the construction of a niche for
his wife. He also asked if the materials could be delivered at once. Marina Boncales, Alviar's storekeeper, replied that she
had yet to verify if the store had pending deliveries that afternoon because if there were then all subsequent purchases
would have to be delivered the following day. With that reply petitioner left.
At seven o' clock the following morning, 22 December, Barzaga returned to Alviar's hardware store to follow up his
purchase of construction materials. He told the store employees that the materials he was buying would have to be
delivered at the Memorial Cemetery in Dasmarias, Cavite, by eight o'clock that morning since his hired workers were
already at the burial site and time was of the essence. Marina Boncales agreed to deliver the items at the designated
time, date and place. With this assurance, Barzaga purchased the materials and paid in full the amount of P2,110.00.
Thereafter he joined his workers at the cemetery, which was only a kilometer away, to await the delivery.
The construction materials did not arrive at eight o'clock as promised. At nine o' clock, the delivery was still nowhere in
sight. Barzaga returned to the hardware store to inquire about the delay. Boncales assured him that although the delivery
truck was not yet around it had already left the garage and that as soon as it arrived the materials would be brought over

to the cemetery in no time at all. That left petitioner no choice but to rejoin his workers at the memorial park and wait for
the materials.
By ten o'clock, there was still no delivery. This prompted petitioner to return to the store to inquire about the materials. But
he received the same answer from respondent's employees who even cajoled him to go back to the burial place as they
would just follow with his construction materials.
After hours of waiting which seemed interminable to him Barzaga became extremely upset. He decided to dismiss
his laborers for the day. He proceeded to the police station, which was just nearby, and lodged a complaint against Alviar.
He had his complaint entered in the police blotter. When he returned again to the store he saw the delivery truck already
there but the materials he purchased were not yet ready for loading. Distressed that Alviar's employees were not the least
concerned, despite his impassioned pleas, Barzaga decided to cancel his transaction with the store and look for
construction materials elsewhere.

In the afternoon of that day, petitioner was able to buy from another store. But since darkness was already setting in and
his workers had left, he made up his mind to start his project the following morning, 23 December. But he knew that the
niche would not be finished in time for the scheduled burial the following day. His laborers had to take a break on
Christmas Day and they could only resume in the morning of the twenty-sixth. The niche was completed in the afternoon
and Barzaga's wife was finally laid to rest. However, it was two-and-a-half (2-1/2) days behind schedule.
On 21 January 1991, tormented perhaps by his inability to fulfill his wife's dying wish, Barzaga wrote private respondent
Alviar demanding recompense for the damage he suffered. Alviar did not respond. Consequently, petitioner sued him
before the Regional Trial Court. 1
Resisting petitioner's claim, private respondent contended that legal delay could not be validly ascribed to him because no
specific time of delivery was agreed upon between them. He pointed out that the invoices evidencing the sale did not
contain any stipulation as to the exact time of delivery and that assuming that the materials were not delivered within the
period desired by petitioner, the delivery truck suffered a flat tire on the way to the store to pick up the materials. Besides,
his men were ready to make the delivery by ten-thirty in the morning of 22 December but petitioner refused to accept
them. According to Alviar, it was this obstinate refusal of petitioner to accept delivery that caused the delay in the
construction of the niche and the consequent failure of the family to inter their loved one on the twenty-fourth of
December, and that, if at all, it was petitioner and no other who brought about all his personal woes. cda
Upholding the proposition that respondent incurred in delay in the delivery of the construction materials resulting in undue
prejudice to petitioner, the trial court ordered respondent Alviar to pay petitioner (a) P2,110.00 as refund for the purchase
price of the materials with interest per annum computed at the legal rate from the date of the filing of the complaint, (b)
P5,000.00 as temperate damages, (c) P20,000.00 as moral damages, (d) P5,000.00 as litigation expenses, and (e)
P5,000.00 as attorney's fees.
On appeal, respondent Court of Appeals reversed the lower court and ruled that there was no contractual commitment as
to the exact time of delivery since this was not indicated in the invoice receipts covering the sale. 2
The arrangement to deliver the materials merely implied that delivery should be made within a reasonable time but that
the conclusion that since petitioner's workers were already at the graveyard the delivery had to be made at that precise
moment, is non-sequitur. The Court of Appeals also held that assuming that there was delay, petitioner still had sufficient
time to construct the tomb and hold his wife's burial as she wished.
We sustain the trial court. An assiduous scrutiny of the record convinces us that respondent Angelito Alviar was negligent
and incurred in delay in the performance of his contractual obligation. This sufficiently entitles petitioner Ignacio Barzaga
to be indemnified for the damage he suffered as a consequence of delay or a contractual breach. The law expressly
provides that those who in the performance of their obligation are guilty of fraud, negligence, or delay and those who in
any manner contravene the tenor thereof, are liable for damages. 3
Contrary to the appellate court's factual determination, there was a specific time agreed upon for the delivery of the
materials to the cemetery. Petitioner went to private respondent's store on 21 December precisely to inquire if the
materials he intended to purchase could be delivered immediately. But he was told by the storekeeper that if there were
still deliveries to be made that afternoon his order would be delivered the following day. With this in mind Barzaga decided
to buy the construction materials the following morning after he was assured of immediate delivery according to his time
frame. The argument that the invoices never indicated a specific delivery time must fall in the face of the positive verbal
commitment of respondent's storekeeper. Consequently it was no longer necessary to indicate in the invoices the exact

time the purchased items were to be brought to the cemetery. In fact, storekeeper Boncales admitted that it was her
custom not to indicate the time of delivery whenever she prepared invoices. 4
Private respondent invokes fortuitous event as his handy excuse for that "bit of delay" in the delivery of petitioner's
purchases. He maintains that Barzaga should have allowed his delivery men a little more time to bring the construction
materials over to the cemetery since a few hours more would not really matter and considering that his truck had a flat
tire. Besides, according to him, Barzaga still had sufficient time to build the tomb for his wife.
This is a gratuitous assertion that borders on callousness. Private respondent had no right to manipulate petitioner's
timetable and substitute it with his own. Petitioner had a deadline to meet. A few hours of delay was no piddling matter to
him who in his bereavement had yet to attend to other pressing family concerns. Despite this, respondent's employees
still made light of his earnest importunings for an immediate delivery. As petitioner bitterly declared in court " . . . they
(respondent's employees) were making a fool out of me." 5
We also find unacceptable respondent's justification that his truck had a flat tire, for this event, if indeed it happened, was
foreseeable according to the trial court, and as such should have been reasonably guarded against. The nature of private
respondent's business requires that he should be ready at all times to meet contingencies of this kind. One piece of
testimony by respondent's witness Marina Boncales has caught our attention that the delivery truck arrived a little late
than usual because it came from a delivery of materials in Langcaan, Dasmarias, Cavite. 6 Significantly, this information
was withheld by Boncales from petitioner when the latter was negotiating with her for the purchase of construction
materials. Consequently, it is not unreasonable to suppose that had she told petitioner of this fact and that the delivery of
the materials would consequently be delayed, petitioner would not have bought the materials from respondent's hardware
store but elsewhere which could meet his time requirement. The deliberate suppression of this information by itself
manifests a certain degree of bad faith on the part of respondent's storekeeper.
The appellate court appears to have belittled petitioner's submission that under the prevailing circumstances time was of
the essence in the delivery of the materials to the grave site. However, we find petitioner's assertion to be anchored on
solid ground. The niche had to be constructed at the very least on the twenty-second of December considering that it
would take about two (2) days to finish the job if the interment was to take place on the twenty-fourth of the month.
Respondent's delay in the delivery of the construction materials wasted so much time that construction of the tomb could
start only on the twenty-third. It could not be ready for the scheduled burial of petitioner's wife. This undoubtedly prolonged
the wake, in addition to the fact that work at the cemetery had to be put off on Christmas day.
This case is clearly one of non-performance of a reciprocal obligation. 7 In their contract of purchase and sale, petitioner
had already complied fully with what was required of him as purchaser, i.e., the payment of the purchase price of
P2,110.00. It was incumbent upon respondent to immediately fulfill his obligation to deliver the goods otherwise delay
would attach.
We therefore sustain the award of moral damages. It cannot be denied that petitioner and his family suffered wounded
feelings, mental anguish and serious anxiety while keeping watch on Christmas day over the remains of their loved one
who could not be laid to rest on the date she herself had chosen. There is no gainsaying the inexpressible pain and
sorrow Ignacio Barzaga and his family bore at that moment caused no less by the ineptitude, cavalier behavior and bad
faith of respondent and his employees in the performance of an obligation voluntarily entered into.
We also affirm the grant of exemplary damages. The lackadaisical and feckless attitude of the employees of respondent
over which he exercised supervisory authority indicates gross negligence in the fulfillment of his business obligations.
Respondent Alviar and his employees should have exercised fairness and good judgment in dealing with petitioner who
was then grieving over the loss of his wife. Instead of commiserating with him, respondent and his employees contributed
to petitioner's anguish by causing him to bear the agony resulting from his inability to fulfill his wife's dying wish.
We delete however the award of temperate damages. Under Art. 2224 of the Civil Code, temperate damages are more
than nominal but less than compensatory, and may be recovered when the court finds that some pecuniary loss has been
suffered but the amount cannot, from the nature of the case, be proved with certainty. In this case, the trial court found
that plaintiff suffered damages in the form of wages for the hired workers for 22 December 1990 and expenses incurred
during the extra two (2) days of the wake. The record however does not show that petitioner presented proof of the actual
amount of expenses he incurred which seems to be the reason the trial court awarded to him temperate damages
instead. This is an erroneous application of the concept of temperate damages. While petitioner may have indeed suffered
pecuniary losses, these by their very nature could be established with certainty by means of payment receipts. As such,
the claim falls unequivocally within the realm of actual or compensatory damages. Petitioner's failure to prove actual
expenditure consequently conduces to a failure of his claim. For in determining actual damages, the court cannot rely on
mere assertions, speculations, conjectures or guesswork but must depend on competent proof and on the best evidence
obtainable regarding the actual amount of loss. 8

We affirm the award of attorney's fees and litigation expenses. Award of damages, attorney's fees and litigation costs is
left to the sound discretion of the court, and if such discretion be well exercised, as in this case, it will not be disturbed on
appeal. 9
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE except insofar as it GRANTED on a
motion for reconsideration the refund by private respondent of the amount of P2,110.00 paid by petitioner for the
construction materials. Consequently, except for the award of P5,000.00 as temperate damages which we delete, the
decision of the Regional Trial Court granting petitioner (a) P2,110.00 as refund for the value of materials with interest
computed at the legal rate per annum from the date of the filing of the case; (b) P20,000.00 as moral damages; (c)
P10,000.00 as exemplary damages; (d) P5,000.00 as litigation expenses; and (4) P5,000.00 as attorney's fees, is
AFFIRMED. No costs.
SO ORDERED.
Padilla, Vitug, Kapunan, and Hermosisima, Jr., JJ., concur.
Footnotes
1.Assigned to RTC-Br. 21, Imus, Cavite, presided over by Judge Roy S. del Rosario, Rollo, p. 68.
2.Decision penned by Justice Manuel C. Herrera, concurred in by Justices Cezar D. Francisco and Buenaventura J.
Guerrero, Rollo, p. 38.
3.Art. 1170, Civil Code.
4.TSN, 6 December 1991, pp. 22-23.
5.TSN, 19 September 1991, p. 47.
6.TSN, 6 December 1991, p. 35.
7.Art. 1169, last par., Civil Code.
8.Dichoso v. Court of Appeals, G.R. No. 55613, 10 December 1990, 192 SCRA 169; People v. Rosario, G.R. No.
108789, 18 July 1995, 246 SCRA 658.
9.Philippine Airlines, Inc. v. Court of Appeals, G.R. Nos. 50504-05, 13 August 1990, 188 SCRA 461.

THIRD DIVISION
[G.R. No. 164186. October 4, 2010.]
FINANCIAL BUILDING CORPORATION, petitioner, vs. RUDLIN INTERNATIONAL
CORPORATION, BLOOMFIELD EDUCATIONAL FOUNDATION, INC., RODOLFO J. LAGERA,
MA. ERLINDA J. LAGERA AND JOSAPHAT R. BRAVANTE, respondents.

[G.R. No. 164347. October 4, 2010.]

RUDLIN INTERNATIONAL CORPORATION, BLOOMFIELD EDUCATIONAL FOUNDATION, INC.,
RODOLFO J. LAGERA, MA. ERLINDA J. LAGERA AND JOSAPHAT R.
BRAVANTE, petitioners, vs. FINANCIAL BUILDING CORPORATION, respondent.

DECISION

VILLARAMA, JR., J p:
The present consolidated petitions for review under Rule 45 assail the Decision 1 dated December 12, 2003 of the Court
of Appeals (CA) in CA-G.R. CV No. 41224 which affirmed with modification the Decision 2 dated January 12, 1993 of the
Regional Trial Court (RTC) of Makati City, Branch 65 in Civil Case No. 16266.
The Facts
Sometime in October 1985, Rudlin International Corporation (Rudlin) invited proposals from several contractors to
undertake the construction of a three-storey school building and other appurtenances thereto at Vista Grande, BF Resort
Village, Las Pias, Metro Manila. The contract was eventually awarded to Financial Building Corporation (FBC), with a bid
of P6,933,268.00 as total project cost. On November 22, 1985, Rudlin represented by its Chairman of the Board and
President Rodolfo J. Lagera, and FBC represented by its Vice-President and Treasurer Jaime B. Lo, executed a
Construction Agreement 3 which, among others, provided for the total consideration and liability for delay as follows:
SECTION FOUR
CONTRACT PRICE
The OWNER agrees to pay the CONTRACTOR, for the work stated in Section Two hereof, the total
price of SIX MILLION NINE HUNDRED THIRTY THREE THOUSAND TWO HUNDRED SIXTY
EIGHT PESOS (P6,933,268.00) in accordance with Section five et seq. Payment of this amount is
subject to additions or deductions in accordance with the provisions of this Agreement and of the
other documents to which this Agreement is made subject to. 4 ACDIcS
xxx xxx xxx
SECTION TWELVE
TIME OF ESSENCE; EXTENSION OF TIME
Time is of the essence in this Agreement and any delay not due to force majeure will result in injury
and damage to the OWNER in view of which it is hereby stipulated that, in the completion of the work,
the CONTRACTOR shall be liable to the OWNER in the sum equivalent to 1/10 of 1% of the total
contract price for every calendar day of delay (Sundays and Legal Holidays included). Any sums
accruing in favor of the OWNER under this provision shall be deductible from the stipulated Contract
Price or any balance thereof due to the CONTRACTOR. 5
The contract also provided for completion date not later than April 30, 1986 unless an extension of time has been
"authorized and approved by the OWNER and the ARCHITECT in writing." 6 It appears that the construction was not
finished on said date as Rudlin wrote FBC to complete the project not later than May 31, 1986, except for the
administration wing which Rudlin expected to be turned over to it "100% complete by June 10, 1986." 7
On June 5, 1986, Rudlin and FBC made amendments to their Construction Agreement dated November 22, 1985 through
a Letter-Agreement 8 signed by Rodolfo J. Lagera and Jaime B. Lo, as follows:
1.Financial Building Corporation ("FBC") shall complete and deliver the Project to Rudlin
International, Inc. ("RII") on or before 10 June 1986.
2.Payment of the balance due on the contract price shall be made after the parties have reconciled
their accounts with regard to the upgrading and downgrading of the work done on the Project,
which reconciliation shall be settled not later than 30 June 1986.
3.RII shall pay FBC the unpaid balance as determined under paragraph 2 hereof, under the following
terms and conditions:
(a)RII shall pay FBC an additional payment of Two Hundred Fifty Thousand Pesos
(P250,000.00) upon signing hereof, receipt of which is hereby acknowledged. This is in
addition to the Two Hundred Fifty Thousand Pesos (P250,000.00) paid on 29 May 1986.

(b)The rest of the unpaid balance shall be payable within a period of ninety (90) days from
the date the said balance is determined in accordance with paragraph 2 hereof, adequately
secured by post dated checks and the same to earn interest at the prevailing bank rates.
There shall be a moratorium of thirty (30) days, the payments to be made in accordance with
the following schedule: AaSHED
On or before 15 July 1986
On or before 31 July 1986
On or before 15 August 1986
On or before 31 August 1986

TOTAL PAYMENTS DUE

25%
25%
25%
25%

100%

This Letter-Agreement amends the corresponding provisions of the Construction Agreement dated 22
November 1985, except that Section 12 thereof is hereby waived. 9 (Emphasis supplied.)
On June 15, 1986, the subject school building, "Bloomfield Academy," was inaugurated and utilized by Rudlin upon the
start of the school year. From the exchange of correspondence between FBC and Rudlin, it can be gleaned that no
reconciliation of accounts took place pursuant to the Letter-Agreement dated June 5, 1986. FBC demanded payment of
the balance of the adjusted contract price per its computation, but it was not heeded by Rudlin.
On March 10, 1987, FBC filed in the RTC a suit for a sum of money with prayer for preliminary attachment against Rudlin,
Bloomfield Educational Foundation, Inc. (Bloomfield) and their officers, directors or stockholders, namely: Rodolfo J.
Lagera, Ma. Erlinda J. Lagera and Josaphat R. Bravante. FBC alleged that the total and final contract price, inclusive of
additives and deductives which are covered by valid documents, is P7,324,128.44; that Rudlin paid FBC only
P4,874,920.14, thus leaving a balance of P2,449,208.30; and that despite repeated demands by FBC, Rudlin refused to
pay its obligations. FBC further prayed for legal interest on the amount of P2,449,208.30 from the time it became due and
demandable, attorney's fees equivalent to 25% of the total amount due, moral and exemplary damages and the cost of
suit. 10
The trial court granted the prayer for preliminary attachment but before the sheriff could implement the writ issued by the
court, Rudlin filed the proper counter bond.
In their Answer with Counterclaim, 11 defendants denied the allegations of the complaint. Rudlin averred that the
Construction Agreement did not reflect the true contract price agreed upon, which is P6,006,965.00. The amount of
P6,933,268.00, which is FBC's bid price, was indicated in the Construction Agreement solely for the purpose of obtaining
a higher amount of loan from the Bank of Philippine Islands (BPI). The execution of said document was made with the
understanding between FBC and Rudlin that the contract price stated therein would be decreased to a mutually
acceptable contract price. However, due to inadvertence, the parties forgot to sign an agreement fixing the true contract
price.
Rudlin also denied that the construction of the project was completed by FBC. The original completion date, April 30,
1986, was later moved to June 10, 1986. But despite the extension given by Rudlin, FBC still has not completed the
project. Neither did FBC deliver to Rudlin a complete release of all liens arising out of the Construction Agreement or
receipts in full in lieu thereof, as well as an affidavit that the releases and receipts include all the labor, interests and
equipment for which a claim or action can be filed, as required under Section Eight of the Construction Agreement. In fact,
for non-payment by FBC of one of its sub-contractors, Rudlin was sued as a co-defendant with FBC in Civil Case No.
15734 pending before the RTC of Makati, Branch 138. ICHcaD
Rudlin likewise claimed that many portions of the work performed by FBC are incomplete and/or faulty, defective and
deficient (valued at P1,180,127.35), for which reason Architect Eduardo R. Quezon has not certified on the full
performance and completion of the project. The work done by FBC was thus not accepted by Rudlin for valid reasons.
Rudlin had already paid FBC the total amount of P5,564,219.58. After considering the 10% retention money and the value
of additives and deductives, Rudlin had actually overpaid FBC by P415,701.34. Clearly, Rudlin does not owe FBC the
amount stated in its Complaint; FBC likewise had sent a final demand letter dated March 2, 1987 to Rudlin which
mentioned only the amount of P115,000.00 as Rudlin's outstanding accountability.
As to Bloomfield and the individual defendants, they contended that not being parties to the Construction Agreement, FBC
has no cause of action against them. Moreover, in their dealings with FBC, they acted with justice, honesty and good faith.
Under its counterclaim, Rudlin invoked the provision in the Construction Agreement granting the Owner the right to
terminate the contract and take over the construction works upon default of the Contractor who abandons or fails to

complete the project, or fails to carry out the work in accordance with the provisions of the Contract Documents, and to
deduct the costs from whatever payment is due or to become due to the Contractor. Rudlin asserted that despite
demands it made upon FBC, the latter still failed and refused to complete and make good its obligations under the
Construction Agreement and to correct faulty and defective works.
In its Reply, 12 FBC asserted that the demand letter dated March 2, 1987 pertains to another account of Rudlin. FBC
asserted that its failure to deliver releases of some liens was due to Rudlin's failure to pay the amount claimed in the
complaint. At any rate, by the very fact that Rudlin is actually making use of the school building constructed by FBC, it is
deemed to have accepted the work.
By agreement of the parties, the trial court appointed three Commissioners to resolve factual issues pertaining to the
construction of the subject building, specifically the following:
1)Adherence or non-adherence to the plan and specifications;
2)Additives, deductives, defects and faults in the construction; [and]
3)Completion or non-completion of the project. 13
The Commissioners conducted ocular inspection of the subject school building on February 23, 1988, March 6, 1988,
March 12, 1988, April 25, 1988, April 26, 1988 and May 12, 1988. 14 On September 28, 1989, they submitted a detailed
report on their findings and conclusions, including the additives (modifications and additional works, the value of which are
to be reimbursed by the Owner) and deductives (deficiencies and cost of repairs done by the Owner and other expenses
which shall be deducted from the contract price due to the Contractor). 15 FBC submitted its comments on the said report
denying any responsibility for the alleged defects and deficiencies found by the commissioners and insisting that it had
fully performed all the works in accordance with the plans, specifications and modifications as approved by
Rudlin. DECSIT
During the trial, the following witnesses testified: Jaime Beltran Lo, Alexander E. Reyes, Gregorio P. Pineda, Rodolfo J.
Lagera, Teresita L. Ngan Tian, Carolina F. Bodoy, and the court-appointed commissioners Engr. Alberto R. Payumo,
Architect Agaton R. Sabino and Edmundo B. Flores.
Ruling of the RTC
In its decision, 16 the trial court concluded that as shown by the Commissioners' Report, the subject school building had
several defects. It found untenable FBC's denial of any responsibility for the defects caused by the inferior quality of
waterproofing material used by its subcontractor, INDESCO, citing Section Eleven of the Construction Agreement
whereby the Contractor assumes full responsibility for the acts, negligence or omissions of all its employees, as well as for
those of its subcontractor and the latter's employees. Moreover, the modifications to the original plans and specifications,
which gave rise to the deductives and additives, were not shown to have been approved by Rudlin nor concurred in by the
project Architect, contrary to FBC's allegation.
The trial court thus decreed:
In view of the foregoing, the complaint against defendant Rudlin is dismissed. Considering that
defendant Bloomfield Educational Foundation was not a party to the Construction Agreement, the
complaint against the latter is dismissed. Plaintiff having failed to prove that defendants Rodolfo
Lagera, Ma. Erlinda Lagera and Josaphat Bravante acted in their personal capacities, the complaint
against them is likewise dismissed.
There being bad faith on the part of defendant Rudlin in that it deliberately failed to disclose the true
contract price, defendants' counterclaim is dismissed.
No pronouncement as to costs.
SO ORDERED. 17
Both FBC and Rudlin filed notices of appeal.
Ruling of the CA

While the CA upheld the dismissal of the complaint as against the individual defendants and Bloomfield, it found that FBC
was able to substantiate its claim against Rudlin for the unpaid balance of the contract price of P6,933,268.00 (not
P6,006,965.00), which after considering the additives and deductives, the direct payment made by Rudlin, cost of
chargeable materials and rebates, would still leave the amount of P1,508,464.84 due to FBC based on the Summary of
Contract Revisions and Unpaid Balances on which Gregorio P. Pineda testified. 18 EHTSCD
According to the CA, if not for the alleged construction defects and supposed additives and deductives, Rudlin could have
considered the building "complete", as in fact the school building is already being used as such by Rudlin. In resolving the
issues pertinent to said construction defects, the CA declared that it cannot rely solely on the Commissioners' Report
considering that the commissioners who tried to explain their "conclusions" contained in the said report testified that these
were made "not exactly what they actually intended to report." The CA then grouped the defects noted by the
commissioners during the ocular inspection as follows: (1) the defect in the waterproofing of the gutter and the water
stains and delamination of plywood and tiles reasonably presumed as caused by the water seepage; (2) the hairline
cracks on walls, beams and floors; (3) the cracks which extend to the outer portion of the walls; (4) cracks on the floors;
(5) the gap between the inner wall and the beams at the conference room; (6) missing components such as tiles, door
locksets and cold water knob. Based on the testimonies of Commissioners Sabino and Payumo, the CA observed that the
causes of the foregoing defects were not fully established; that these may be considered as either ordinary defects due to
wear and tear or construction defects, depending on the interpretation that a party would like to adopt; and the
commissioners who testified had admitted that they themselves were not certain of the "causes" and were merely stating
their respective opinions on the possible causes of the noted defects.
Analyzing the evidence on record, the CA concluded that FBC was not liable for the defect in waterproofing and delay in
the completion of the works for the following reasons: (1) the changing of the brand of the waterproofing used in the gutter
was fully discussed during the regular meeting between the representatives of FBC and Architect Quezon; it was in fact
Josaphat Bravante who selected the subcontractor and the brand of the waterproofing to be used; (2) there was no
convincing proof that FBC failed to supervise the performance of said subcontractor chosen by Rudlin; (3) Gregorio P.
Pineda who was present during the aforesaid meetings was competent to testify on the preparation of the minutes of the
meetings (Exhibits "EE" and "GG" to "WW"), pursuant to which the additives and deductives were made, and that Rudlin's
silence on this matter only supports such a conclusion; (4) Rudlin's claim that it undertook repairs on the defects in the
construction for which the amount of P350,000.00 was supposedly spent, was not supported by any receipt or concrete
evidence other than the self-serving testimony of Rodolfo J. Lagera; (5) there was no formal walk-through made and
certification by the architect because Architect Quezon ignored FBC's letter requesting the said final walk-through, the
relationship between the parties at that time having turned sour; and (6) Rudlin's reliance on Section Twelve of the
Construction Agreement is misplaced, the Letter-Agreement dated June 5, 1986 shows that the parties agreed for a new
date of completion of the school building and the schedule of payment of the remaining construction price.
The CA thus ordered Rudlin to pay FBC the remaining balance of P1,508,464.84. 19 ETIDaH
Rudlin filed a motion for reconsideration while FBC moved for partial reconsideration of the CA decision. The CA denied
both motions under its Resolution dated June 23, 2004. 20
The Cases
Petitioner FBC in G.R. No. 164186 seeks modification of the CA Decision insofar as it failed to include legal interest on the
amount which Rudlin was adjudged still liable to pay FBC (P1,508,464.84) and attorney's fees and litigation expenses
equivalent to 25% of the total award. FBC likewise prays that the individual defendants and Bloomfield be declared
solidarily liable with Rudlin. 21
In G.R. No. 164347, petitioner Rudlin contends that the CA resolved the issues of the case in a way that is not in accord
with the law and applicable jurisprudence and contradicted by the evidence on record. In particular, Rudlin assails the CA
in perfunctorily denying its Motion for Reconsideration dated January 7, 2004; in not finding that petitioners fully
substantiated their assertion that the Construction Agreement is not reflective of the true intent of the parties; in not finding
that Bloomfield Academy Building was not actually completed as scheduled in violation of the Construction Agreement
and causing Rudlin to spend P350,000.00 for the same; in not declaring as correctly found by the trial court that
FBC is liable for the defects in the waterproofing since the change in waterproofing specifications was not approved by
Rudlin nor concurred in by the Project Engineer, and that some modifications to the original plans and specifications which
gave rise to the additives and deductive were not approved by Rudlin nor concurred in by the Project Engineer; and in not
holding that Rudlin's claim for damages by reason of delay is with legal and factual basis. 22
From the foregoing, the issues to be resolved are: (1) whether FBC is liable for the defects in the construction of the
subject school building and delay in the completion of the works; (2) after considering the payments, deductives and
additives and other charges admitted, whether Rudlin is still liable for the balance of the contract price and the amount
thereof; and (3) whether Rudlin is entitled to its counterclaim.

Our Ruling
The resolution of these cases calls for a reexamination of facts. While generally, the Court is not a trier of facts, a
recognized exception thereto is a situation where the findings of fact of the CA and the trial court are conflicting. 23
Contrary to the findings of the appellate court, we hold that the facts on record clearly established FBC's liability for the
defects and deficiencies so numerous that it took several days for the court-appointed commissioners to complete the
ocular inspection. The CA tried to minimize the impact of such findings by declaring that the Commissioners' Report
cannot be the sole basis for determining whether FBC faithfully complied with all its undertakings and obligations under
the Construction Agreement. However, the glaring fact remains that there were construction defects which have been
described in detail under each inspection date. While it is true that the commissioners who testified gave different opinions
as to whether the noted defects and deficiencies were due to substandard materials and poor workmanship or the same
was just the result of ordinary wear and tear and even lack of maintenance, the court can properly evaluate the common
findings and conclusions reflected in the Commissioners' Report based on the totality of evidence. TcCDIS
Perusing the records, we are unable to agree with the appellate court's view that the testimonies given in court by the
commissioners had left uncertain the determination of the nature of the defects and deficiencies, i.e., whether these are
construction defects or merely due to improper maintenance.
First, it stands undisputed that the damage wrought by water seepage causing water stains, leaking roofs, peeling off of
paint, cracks on walls and delamination of plywood, among others, was so pervasive on many portions of the building that
even after the same was inaugurated in time for the school opening on June 15, 1986, most of the classrooms and
administrative offices, as well as other common areas such as the lobby and comfort rooms, could not be properly utilized
as their defective condition posed danger to the teachers and students. It must be noted that at the time of ocular
inspection in 1988, it was barely two years from the time the building was actually used and yet the overall structure of the
building was severely impaired by the defective waterproofing and other deficiencies. Prior to the court-authorized
inspection, those visible defects had been photographed under the supervision of Rodolfo J. Lagera, which further
confirmed the findings of the commissioners. 24 The CA thus erred in giving weight to FBC's claim that the seepage of
water into the beams, walls and floor can be attributed to lack of proper maintenance, citing the declarations of FBC's
Alexander E. Reyes and Commissioner Payumo who allegedly found "piles of dirt collected on the gutter and when the
dirt was removed, the water flowed down to the spout." Given the extent of the defects and deficiencies found in the
school building, this simplistic explanation from FBC is unacceptable.
Although Commissioner Sabino testified that it was possible that the water seepage was caused by the clogging of the
downspout due to lack of maintenance in clearing the gutter of dirt, Commissioner Payumo, an engineer, testified that
whether the building is properly maintained on that aspect does not really matter because good waterproofing should
always hold and prevent seepage whenever there is accumulation of rainwater in the gutter of the roof. Engr. Payumo
stated that waterproofing should hold for a period of at least five years:
ATTY. FERNANDEZ (continuing)
QIn other words, Mr. Witness, from what you saw, the water proofing there was for poor maintenance,
the owner did not remove the dirt.
ANo sir, because if the water proofing is good, it should not fade [sic, should read as fail].
xxx xxx xxx
ATTY. AUTEA: (TO WITNESS)
QBased on the standard of practice on the construction industry, how long should a water
proofing pool [sic, should read as hold ]? AScTaD
xxx xxx xxx
WITNESS
AThe practice is about five (5) years.
COURT:

Before the water proofing fail?

AYes, your Honor. 25 (Emphasis supplied.)
We thus cannot agree with the CA's stance that in view of the disagreement expressed by the commissioners in their
testimonies, it would be unjust to hold FBC responsible for the substandard waterproofing. The following conclusions set
forth in the Commissioners' Report are categorical in declaring the omissions, deviations and negligence of the Contractor
(FBC) in the execution of the construction project, to wit:
1.The subject construction project, i.e., Bloomfield Academy located at Wilfredo Tecson Avenue, Vista
Grande, BF Resort Village, Las Pias, Metro Manila, has been completed with a lot of
deficiencies and defects in the work.
2.There were additives and deductives done without proper and formal approval from any of the
parties.
3.There was no formal approved cost adjustments nor contract time for the additive and
deductive works.
4.There were portions of the subject construction project that [were] not in accordance [with] the
agreed plans and specifications.
5.There were no formal request nor approval for some deviations from the plans and
specifications from the owners nor from the Architect.
6.There were several portions of the subject construction project that we found defective and
below standards which were found during the ocular inspection done by the
Commissioners and [were] reflected in the stenographic report.
7.Some deficiencies and defects in the works and the punchlist of Architect [were] not acted
upon nor any repairs made to date as required under the contract prior to acceptance.
8.Some items in the Architect's punchlist although repaired and acted on [were] never
formally turned over nor accepted.
9.There was no contract time adjustment on the lapsed contract time for the original contract and for
the additional works done. ITaCEc
10.There was no formal turn-over made by the contractor nor acceptance on the part of the
owner of the project.
11.There are provisions in the contract that were violated or have not been followed by the contractor
in his performance of the project like the non-submittal of the various bonds (Section 16, M
and N) and other contract documents needed in the execution of the contract as some of the
findings of the commissioner in the investigation. 26 (Emphasis supplied.)
The CA, however, declared that notwithstanding the damage caused by water seepage, Rudlin cannot claim that the
building was not completed and that the only reason which could have justified Rudlin's refusal to pay the balance is the
liability of FBC for changing the specified waterproofing brand from John Mans Ville to Neo-pren Elastomeric. The CA thus
ruled:
. . . it appears beyond cavil that the changing of the brand of the waterproofing used in the gutter was
fully discussed during the regular meeting between the representatives of plaintiff-appellant FBC and
Architect Quezon. In fact, it was the defendant-appellant Rudlin through defendant-appellant
Josaphat Bravante who selected the sub-contractor and the brand of waterproofing to be used in the
gutter. As the general contractor, plaintiff-appellant FBC was only duty bound to supervise the
performance of the sub-contractor and see to it that the proper procedure was properly followed. In
the absence of any convincing proof that plaintiff-appellant FBC failed to supervise the performance
of the sub-contractor, it is highly unjust on the part of plaintiff-appellant FBC to be held liable and even
be required to re-do the whole work using the original specified brand at its own expense. A contrary

ruling would lead to a scenario where the owner of the subject building would start imposing the use
of cheaper materials to save money because after all when the substituted materials fail, the
contractor can nevertheless be held liable. 27 (Italics supplied.)
We do not agree. The purported minutes of meetings, wherein the modifications to the original plans and specifications,
particularly the change of waterproofing were allegedly discussed and approved by Rudlin's representative in the person
of Josaphat Bravante (Exhibits "EE" and "GG" to "WW"), 28 were not given credence by the trial court as these actually
showed that not all such modifications have been approved. Moreover, the trial court held that FBC failed to prove their
due execution and authenticity. But the CA reversed the trial court and held that witness Gregorio P. Pineda who was
present in the said meetings was competent to testify on the contents and due execution of the aforesaid Exhibits "EE"
and "GG" to "WW".
Even assuming arguendo that the change in waterproofing brand was indeed taken up during a meeting in the presence
of Rudlin's representative, we cannot agree with the CA's position that the alleged verbal assent by Josaphat Bravante in
the purported minutes of meetings 29 was sufficient evidence of the Owner's approval of the modifications in the original
plans and specifications. Likewise, the letter dated July 7, 1986 30 of FBC's project engineer Alexander E. Reyes
informing Architect Quezon that the change in waterproofing brand was approved by Bravante is at best, self-serving, and
the same does not bind Rudlin. ITSacC
Under Section Nine of the Construction Agreement, Architect Quezon, as representative of the Owner, is the one vested
with the general supervision and direction of the work and who is authorized to "reject work which does not conform to the
Contract Documents" and to formally stop such work or a portion thereof when necessary. 31 More explicitly, Section Ten
of the same agreement provides that the Owner shall give all instructions to the Contractor through the Architect.
FBC therefore cannot escape liability for the poor quality of waterproofing on the ground that Rudlin's representative was
present during the meeting when the change in brand to be used was allegedly discussed with his concurrence. The
requirements for a valid change or modification in the original plans and specifications were clearly set out in Section
Fifteen of the Construction Agreement, which provides:
SECTION FIFTEEN
WORK CHANGES
The OWNER reserves the right to order work changes in the nature of additions, deletions, or
modifications, without invalidating this Agreement. All changes shall be authorized by a written
change order signed by the OWNER and by the ARCHITECT.
Work shall be changed, and the completion time shall be modified only as set out in the written
change order. Any adjustment in the Contract Price resulting in a credit or a charge to the
OWNER shall be determined by written agreement of the parties, before starting the work
involved in the change. 32
As it is, the modification effected by FBC on waterproofing work was never approved in writing by Architect Quezon and
Rudlin. Contrary to the appellate court's declaration that Rudlin by its silence impliedly approved the change in
waterproofing brand, the letter dated September 1, 1986 of Architect Quezon to Jimmy Lo deplored the unauthorized
change in the specified brand exacerbated by defective application, and required FBC to re-do such work. Said letter
reads:
DEAR JIMMY,
SOMETIME IN JUNE 1986, OUR GROUP DISCUSSED IN ADVANCE WITH MS. LINDA LAGERA,
THE POSSIBILITY OF LEAKS IN THE PROJECT, DUE TO CHANGE IN OUR SPECIFICATIONS.
WE ALSO ASKED ENGR. ALEX REYES TO WRITE US OFFICIALLY REGARDING CHANGE ON
WATERPROOFING SPECIFICATIONS AND SUBSTITUTION OF ANOTHER BRAND WITHOUT
OUR APPROVAL. THE SPECIFIED BRAND IS BIRD & SONS OR JOHNS MANVILLE AGAINST
NEOPRENE AS SUBSTITUTE, A PRODUCT WHICH WE ARE NOT USE TO.
YOUR ENGINEER CLAIMS THAT THEY WERE ASKED TO MADE CHANGES BY MR. PAT
BRAVANTE AS PART OF THE DOWNGRADING OF THE PROJECT, BUT SOMEHOW ERRORS
WERE MADE IN THE EXECUTION OF THE WORK. THE SITUATION IS NOW HOPELESSLY
SNARLED. DUE TO MANY LEAKS IN THE PROJECT, ESPECIALLY AT THE ADMINISTRATION
AREA AND LEAVING US WITHOUT ASSURANCE ON YOUR PART ON THE CORRECTIVE
MEASURE OF THIS PROBLEM.

THIS REQUIRE URGENT ACTION ON YOUR SIDE TO RE-DO ALL WATERPROOFING WORKS,
USING OUR SPECIFICATIONS WITHOUT ANY EXPENSE TO THE OWNER AS PART OF THE
GENERAL CONDITIONS OF THE CONTRACT DOCUMENT. ANYTHING YOU CAN DO TO
EXPIDITE(sic) CORRECTION OF THE ERROR ON THE PROJECT WILL BE GREATLY
APPRECIATED. 33 (Emphasis supplied.) AIDTSE
At this point, it bears to stress that the June 5, 1986 Letter-Agreement signed by both FBC and Rudlin, which extended
the completion time to June 10, 1986 expressly amended only the corresponding provisions of the Construction
Agreement pertaining to completion date and schedule of payment of the balance due to FBC, which was conditioned on
the reconciliation of the upgrading and downgrading of the work done by the contractor. Said Letter-Agreement did not
relieve FBC as contractor of responsibility for defects under its warranties under the Construction Agreement, which
include those works performed by its subcontractor. The pertinent provisions of the Construction Agreement showed that
FBC was obligated to correct and/or re-execute defective work before and after final payment, pursuant to its general
warranties as contractor, thus:
SECTION FOURTEEN
CORRECTING WORK
1.BEFORE FINAL PAYMENT
The CONTRACTOR shall promptly remove from the premises all works and materials condemned by
the ARCHITECT as failing to conform with the Contract Documents, whether incorporated in the work
or not, and the CONTRACTOR shall promptly replace and reexecute the work in accordance
with the Contract Documents and without expense to the OWNER.
If the CONTRACTOR does not remove such condemned work and materials within a reasonable time
fixed by the written notice, the OWNER may remove them and may store the materials at the
expense of the CONTRACTOR. If the CONTRACTOR does not pay the expenses for such removal
within ten (10) days, the OWNER may, after written notice to the CONTRACTOR, sell such materials
at auction or at a private sale and shall account for the net proceeds thereof, after deducting all the
costs and expenses that should have been borne by the CONTRACTOR. This does not preclude
other actions or remedies which the OWNER may have against the CONTRACTOR.
2.AFTER FINAL PAYMENT
Neither the final certificate for payment nor any provision in the Contract Documents shall relieve the
CONTRACTOR of responsibility for faulty materials or workmanship. It shall remedy any defects
due thereto and pay for any damage to other work resulting therefrom, which shall appear
within the specified guaranty period. All questions arising under this provision shall be subject to
arbitration in case of failure of the parties to arrive at an agreement. HDcaAI
xxx xxx xxx
SECTION SIXTEEN
GUARANTY-WARRANTY
The CONTRACTOR shall, in case of work performed by its subcontractors, secure warranties from
said subcontractors and deliver copies of the same to the ARCHITECT or OWNER upon completion
of the work.
The CONTRACTOR shall and does hereby warrant and guarantee the following:
(a)All works, for a period of one (1) year from the date of completion as evidenced by the date
of final acceptance in writing of the entire work by the OWNER.
(b)All work performed by it directly or performed by its sub-contractors, shall be free from any
defects of materials and workmanship.
(c)The CONTRACTOR further agrees that it will, at its own expense, repair and/or replace all
such defective materials or work, and all other work damaged thereby which becomes
defective during the term of this Guaranty-Warranty. (Emphasis supplied.)

The above-stipulated period of warranty has not even commenced considering that even if Bloomfield proceeded with the
inauguration in time for the opening of classes, there was no formal turn over of the building to Rudlin and no final
acceptance in writing was made by Rudlin. FBC faulted Architect Quezon whose alleged absence and refusal to meet with
their officers and to conduct the final walk-through, prevented it from having the building formally turned over to the
Owner. Such contention is unfounded because the evidence on record reveals that it was FBC which defaulted on its
obligations under the Construction Agreement. FBC is bound by its undertaking under Section Fourteen (14) to replace
and re-execute defective waterproofing and correct the damage such had caused to the structure and finishing of the
building.
In a letter dated September 17, 1986 addressed to FBC's lawyer, Rudlin's lawyer responded to FBC's demands for
payment, as follows:
We write in behalf of our client, RUDLIN INTERNATIONAL, INC., in reply to your letter dated 20
August 1986 and the letter of your client, Financial Building Corporation (FBC) dated 12 August 1986,
regarding your client's alleged remaining balance with our client under the above-captioned
Agreement. TaISDA
We would like to remind your client that our client has not yet accepted the Project nor has
Architect Eduardo R. Quezon certified that FBC has fully performed and completed the
Project. Neither has your client delivered to our client a complete release of all liens arising out of the
Agreement or receipts in full in lieu thereof, and an affidavit that the releases and receipts include all
the labor, interests and equipment for which a claim or action can be filed, as required under Section
Eight of said Agreement. We would also like to call your attention to the letter of Architect Quezon to
our client dated 10 September 1986, a copy of which is attached as Annex "A", enumerating therein
what your client has to submit/furnish, and pay our client before any final payment is made by our
client to your client.
Further, we would like to inform you that the uncompleted and/on faulty work, defects and
deficiencies in the Project which were enumerated in the Punch List dated 27 June 1986 and
received by FBC on 30 June 1986, have not been completed and/or corrected by FBC. Our
client requested said Architect Quezon to update the same. We are forwarding to you a copy of the
updated Punch List dated 10 September 1986 which is attached hereto as Annex "B". Moreover, your
client should visit the Project to see, among other things, how the administrative offices, library,
chapel and classrooms get flooded when it rains. This situation poses a hazard to the health and life
of the students, teachers and staff of Bloomfield Academy.
Moreover, based on the Updated Tabulation Report of Architect Eduardo R. Quezon in relation to his
Additive and Deductive Evaluation Report, a copy of which is attached as Annex "C", it appears
that whatever minimum balance which FBC may have against our client will not even be
sufficient to complete the Project, to undertake correction of its faulty and defective work, and
to cover the 10% cash retention. It appears further that our client has overpaid your client by Four
Hundred Fifteen Thousand Seven Hundred One and 34/100 Pesos (P415,701.34).
We are, therefore, giving your client fifteen (15) days from your receipt of this letter to complete and
make good its undertakings/obligations under the Agreement. Failure on the part of your client to do
so will leave our client no other alternative but to invoke the provisions of said Agreement declaring
your client in default, and cause the Project to be completed and the deficiencies corrected, deducting
the costs from whatever payment which may be due to your client, and collecting from your client the
difference.
Further, please advise your client that there will be legal constraints for our Atty. Avelino J. Cruz, Jr. to
mediate between your client and our client under the circumstances. Please be assured, however,
that like you, we are advising our client to opt for a reasonable resolution of the problem. 34 DSacAE
In its letter-reply dated September 24, 1986 of FBC's counsel, FBC insisted that Rudlin still owed it the sum of P2.4
million, more or less; that it cannot turn over the project because Architect Quezon refused to meet with FBC's engineers
to discuss the additives and deductives work summary; that Architect Quezon's letter cannot be made the basis of FBC's
obligations under the Construction Agreement; and that the punch list dated June 27, 1986 is only a dilatory document as
certain items being purely additional works should be excluded. FBC protested the leaks and flooding mentioned by
Rudlin's counsel, which FBC said are minor items which can be easily corrected as in fact it was corrected by the
waterproofing subcontractor INDESCO which was referred by Rudlin. To solve the problem, FBC proposed that the
corrective works be done by Rudlin provided the price thereof be approved by FBC and Rudlin will not spend more than

P50,000.00 therefor. As to the 10% retention fund, FBC advised that per understanding with Rudlin, this was waived in
view of the commitment of FBC to finish the project to the best of its funding ability. 35
FBC then suggested that Rudlin release the sum of P500,000.00 so that FBC can pay its suppliers and to enable it to
submit the required affidavit of complete payment of labor and material men; that Rudlin's retained architect complete the
reconciliation of the additive and deductive works with FBC; and thereafter, to arrange payment backed up by sufficient
collaterals. 36
In its subsequent letter dated October 3, 1986, FBC again pressed for payment and further distanced itself from
INDESCO, claiming that negotiations for the waterproofing works with INDESCO was handled by Rudlin's Mr. Bravante.
FBC informed Rudlin that it was advised by INDESCO that the waterproofing complaints have been attended to. 37 But
since the roof leaks and flooding of the corridor and classrooms persisted despite the repairs supposedly done by the
subcontractor, Rudlin formally notified its lawyer that it was invoking the contractor's warranty under the Construction
Agreement and sought assistance to have the said defects and deficiencies corrected by the
Contractor. 38 Consequently, Rudlin through a letter dated October 14, 1986 signed by its Vice-President and Chief
Operating Officer, Teresita L. Ngan Tian, advised FBC that the latter's request for payment "has been held in abeyance
until the waterproofing job is completed to the satisfaction of the Owners." 39
We find that in withholding payment of the balance of the contract price, Rudlin properly exercised its rights under the
Construction Agreement. The CA thus erred in ordering Rudlin to pay FBC the balance of the contract price which was
computed as follows: SaHTCE
1.
2.

Contract Price
Additives
Total Additive Cost

3.
4.
5.
6.

Deductives
Direct Payment
Chargeable Materials
Rebates
Total Payments
TOTAL UNPAID BALANCE

P6,933,268.00
P1,074,385.53

P8,007,653.53

P886,706.45
P4,874,920.14
P727,688.90
P9,793.22

P6,499,188.71

P1,508,464.84 40
============

The above computation was based solely on the Summary of Contract Revisions and Unpaid Balances submitted by
FBC's witness Gregorio P. Pineda. Rudlin submitted its own computation based on what it claims as the true contract
price of P6,006,965.00 and asserting that the following should be deducted: P4,878,920.14 as payments to FBC which
the latter admitted; P727,688.90 direct payments to suppliers also admitted by FBC; deductives of P1,180,127.35
representing the cost of modifications in the original plans and specifications which were not approved by Rudlin and its
architect; and P350,000.00 for the repairs undertaken by Rudlin.
Considering that FBC had not completed the corrective/repair works in accordance with the Contract Documents and as
approved or certified in writing by the Architect as to its completion, its demand for the payment of the final balance was
premature. Under the Letter-Agreement dated June 5, 1986, final payment was subject to reconciliation of their accounts
regarding the upgrading and downgrading done on the project. Obviously, this cannot be complied with unless FBC as the
defaulting party completes the repair/corrective works for only then can the actual cost of additives and deductives be
determined. In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready to comply in
a proper manner with what is incumbent upon him. 41 When the substandard waterproofing caused extensive damage to
the school building, it was incumbent upon FBC to institute at its own expense the proper repairs in accordance with the
guaranty-warranty stated in the Construction Agreement. Thus, Rudlin cannot be said to have incurred delay in the
reconciliation of accounts, as a precondition for final payment; instead, it is FBC who was guilty of delay by its stubborn
refusal to replace or re-execute the defective waterproofing of the subject school building.
On the issue of the correct total contract price, we hold that Rudlin failed to substantiate its claim that the contract price
stated in the Construction Agreement (P6,933,268.00) was not the true contract price because it had an understanding
with FBC's Jaime B. Lo that they would decrease said amount to a mutually acceptable amount. TEAaDC
Under the general rule in Section 9 of Rule 130 of the Rules of Court, when the terms of an agreement were reduced in
writing, as in this case, it is deemed to contain all the terms agreed upon and no evidence of such terms can be admitted
other than the contents thereof. Rudlin argues that under Section 9, Rule 130, a party may present evidence to modify,

explain or add to the terms of the written agreement if it is put in issue in the pleading, "[t]he failure of the written
agreement to express the true intent and the agreement of the parties thereto." Assuming as true Rudlin's claim that
Exhibit "7" failed to accurately reflect an intent of the parties to fix the total contract price at P6,006,965.00, Rudlin failed to
avail of its right to seek the reformation of the instrument to the end that such true intention may be expressed.
Evidence of a prior or contemporaneous verbal agreement is generally not admissible to vary, contradict or defeat the
operation of a valid contract. 42 Section 9 of Rule 130 of the Rules of Court states:
SEC. 9.Evidence of written agreements. When the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be, between the parties
and their successors-in-interest, no evidence of such terms other than the contents of the written
agreement.
However, a party may present evidence to modify, explain or add to the terms of the written
agreement if he puts in issue in his pleading:
(a)An intrinsic ambiguity, mistake or imperfection in the written agreement;
(b)The failure of the written agreement to express the true intent and agreement of the parties
thereto;
(c)The validity of the written agreement; or
(d)The existence of other terms agreed to by the parties or their successors-in-interest after the
execution of the written agreement.
The term "agreement" includes wills.
Rudlin cannot invoke the exception under (a) or (b) of the above provision. Such exception obtains only where "the written
contract is so ambiguous or obscure in terms that the contractual intention of the parties cannot be understood from a
mere reading of the instrument. In such a case, extrinsic evidence of the subject matter of the contract, of the relations of
the parties to each other, and of the facts and circumstances surrounding them when they entered into the contract may
be received to enable the court to make a proper interpretation of the instrument." 43 HIaSDc
Under the fourth exception, however, Rudlin's evidence is admissible to show the existence of such other terms agreed to
by the parties after the execution of the contract. But apart from the Bar Chart and Cash Flow Chart prepared by FBC,
and the testimony of Rodolfo J. Lagera, no competent evidence was adduced by Rudlin to prove that the amount of
P6,006,965.00 stated therein as contract price was the actual decreased amount that FBC and Rudlin found mutually
acceptable. As to the affidavits executed by Architect Quezon and his associate Roberto R. Antonio, 44 the same do not
serve as competent proof of the purported actual contract price as they did not testify thereon. Significantly, the June 5,
1986 Letter-Agreement did not at all mention the total contract price. Likewise, there is nothing in the various letters sent
by Rudlin to FBC while construction was in progress and even subsequent to the execution of the said Letter-Agreement
indicating that Rudlin corrected the contract price of P6,933,268.00 which FBC had repeatedly mentioned in its letters and
documents. 45
As to Rudlin's counterclaim for reimbursement of its expenses in repairing the defective waterproofing, not a single receipt
was presented by Rudlin to prove that such expense was actually incurred by it. Under the Civil Code, one is entitled to an
adequate compensation only for such pecuniary loss suffered by him as he has duly proved. The award of actual
damages must be based on the evidence presented, not on the personal knowledge of the court; and certainly not on
flimsy, remote, speculative and nonsubstantial proof. 46
The testimony of Rodolfo J. Lagera on the total cost allegedly spent by Rudlin in repairing the waterproofing works does
not suffice. A court cannot rely on speculations, conjectures or guesswork as to the fact of damage but must depend upon
competent proof that they have indeed been suffered by the injured party and on the basis of the best evidence obtainable
as to the actual amount thereof. It must point out specific facts that could provide the gauge for measuring whatever
compensatory or actual damages were borne. 47
The counterclaim for attorney's fees must likewise be denied. We have stressed that the award of attorney's fees is the
exception rather than the rule, as they are not always awarded every time a party prevails in a suit because of the policy
that no premium should be placed on the right to litigate. Attorney's fees as part of damages is awarded only in the
instances specified in Article 2208 of the Civil Code. 48

ART. 2208.In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:
(1)When exemplary damages are awarded;
(2)When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest;
(3)In criminal cases of malicious prosecution against the plaintiff;
(4)In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5)Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly
valid, just and demandable claim;
(6)In actions for legal support;
(7)In actions for the recovery of wages of household helpers, laborers and skilled workers;
(8)In actions for indemnity under workmen's compensation and employer's liability laws;
(9)In a separate civil action to recover civil liability arising from a crime;
(10)When at least double judicial costs are awarded;
(11)In any other case where the court deems it just and equitable that attorney's fees and expenses
of litigation should be recovered. HCETDS
In all cases, the attorney's fees and expenses of litigation must be reasonable.
None of the foregoing situations obtains in the case at bar.
WHEREFORE, the petition in G.R. No. 164186 is DENIED while the petition in G.R. No. 164347 is PARTLY GRANTED.
The Decision dated December 12, 2003 of the Court of Appeals in CA-G.R. CV No. 41224 is REVERSED and SET
ASIDE, and the Decision dated January 12, 1993 of the Regional Trial Court of Makati City, Branch 65 in Civil Case No.
16266 is REINSTATED.
No costs.
SO ORDERED.
Carpio Morales, Brion, Bersamin and Sereno, JJ., concur.
[G.R. No. 117190. January 2, 1997.]
JACINTO TANGUILIG doing business under the name and style J.M.T. ENGINEERING AND
GENERAL MERCHANDISING, petitioner, vs. COURT OF APPEALS and VICENTE HERCE
JR., respondents.

(See page 16.)

SECOND DIVISION

[G.R. No. 108129. September 23, 1999.]

AEROSPACE CHEMICAL INDUSTRIES, INC., petitioner, vs. COURT OF APPEALS, PHILIPPINE
PHOSPHATE FERTILIZER, CORP.,respondents.

Gancayco Law Offices for petitioner.

Quiroz Dumas and Capistrano Law Offices for private respondent.

SYNOPSIS
On June 27, 1986, petitioner Aerospace Industries, Inc. purchased five hundred metric tons of sulfuric acid from private
respondent Philippine Phosphate Fertilizer Corporation. Petitioner agreed to secure the means of transport to pick-up the
sulfuric acid from private respondents' loadports in Basay, Negros Oriental and Sangi, Cebu. On October 3, 1986,
petitioner paid the purchased price of 500 MT of sulfuric acid. Then, it chartered M/T Sultan Kayumanggi to carry the
agreed volumes of freight from designated loading areas. But the vessel was able to withdraw a partial amount of sulfuric
acid from Basay and Sangi because it tilted. And later, it sank with a total amount of 227.51 MT of sulfuric acid on board.
Petitioner sent a demand letter to private respondent for delivery of the 272.49 MT of sulfuric acid. Petitioner then filed a
complaint against private respondent for specific performance and/or damages before the Regional Trial Court of Pasig.
The private respondent filed an answer with counterclaim and alleged that it was the petitioner which was remiss in the
performance of its obligation in arranging the shipping requirements of its purchases and, hence, should pay damages.
Petitioner prevailed in the trial court. However, on appeal, the Court of Appeals reversed the decision of the trial court and
instead found petitioner guilty of delay and therefore, liable for damages.
Hence, this petition.
The Court agreed with the Court of Appeals that the private respondent had no obligation to agree to the additional order
and may not be faulted for its inability to meet the said additional requirements of the petitioner. And the respondent's
incapacity to agree to the delivery of another 227.51 MT. was not a legal justification for the petitioner's refusal to lift the
remaining 272.481. On the other hand, petitioner was found guilty of delay, after private respondent made the necessary
extrajudicial demand by requiring petitioner to lift the cargo at its designated loadports. When petitioner failed to comply
with its obligations under the contract, it became liable for its shortcomings. Petitioner was indubitably liable for proven
damages.

SYLLABUS
1.REMEDIAL LAW; EVIDENCE; TESTIMONY OF WITNESSES; PROFESSIONAL REPORT SHOULD CARRY MORE
WEIGHT THAN TESTIMONY OF EMPLOYEE OF PARTY. Since the third party surveyor was neither petitioner's nor
private respondent's employee, his professional report should carry more weight than that of Melecio Hernandez, an
employee of petitioner. TcSHaD
2.CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACT OF SALE; BUYER MUST COMPLY WITH OBLIGATION
TO UNDERTAKE SHIPPING REQUIREMENTS OF CARGO; CASE AT BAR. Petitioner, as the buyer, was obligated
under the contract to undertake the shipping requirements of the cargo from the private respondent's loadports to the
petitioner's designated warehouse. It was petitioner which chartered M/T Sultan Kayumanggi. The vessel was petitioner's
agent. When it failed to comply with the necessary loading conditions of sulfuric acid, it was incumbent upon petitioner to
immediately replace M/T Sultan Kayumanggi with another sea worthy vessel.
3.REMEDIAL LAW; EVIDENCE; TESTIMONY OF WITNESSES; PARTY WHO ASSERTS THAT CONTRACT OF SALE
WAS CHANGED OR MODIFIED HAS BURDEN OF PROVING THE SAME. Additionally, petitioner claims that private
respondent's employee, Gil Belen, had recommended to petitioner to fully utilize the vessel, hence petitioner's request for
an additional order to complete the vessel's 500 MT capacity. This claim has no probative pertinence nor solid basis. A
party who asserts that a contract of sale has been changed or modified has the burden of proving the change or
modification by clear and convincing evidence. Repeated requests and additional orders were contained in petitioner's
letters to private respondent. In contrast, Belen's alleged action was only verbal; it was not substantiated at all during the
trial. Note that, using the vessel to full capacity could redound to petitioner's advantage, not the other party's. If additional
orders were at the instance of private respondent, the same must be properly proved together with its relevance to the
question of delay. Settled is the principle in law that proof of verbal agreements offered to vary the terms of written

agreements is inadmissible, under the parol evidence rule. Belen's purported recommendation could not be taken at face
value and, obviously, cannot excuse petitioner's default.
4.CIVIL LAW; OBLIGATIONS AND CONTRACTS OF SALE; WHEN BREACH THEREOF WAS COMMITTED BY BUYER,
SELLER HAS RIGHT OF ACTION FOR DAMAGES. Where there has been breach of contract by the buyer, the seller
has a right of action for damages. Following this rule, a cause of action of the seller for damages may arise where the
buyer refuses to remove the goods, such that buyer has to remove them. Article 1170 of Civil Code provides: "Those who
in the performance of their obligations are guilty of fraud, negligence, or delay and those who in any manner contravene
the tenor thereof, are liable for damages."
5.ID.; ID.; ID.; NATURE AND EFFECTS OF OBLIGATIONS; WHEN DELAY OF PERFORMANCE OF OBLIGATION
BEGINS. Delay begins from the time the obligee judicially or extrajudicially demands from the obligor the performance
of the obligation. Art. 1169 states: "Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation." In order that the debtor may be in
default, it is necessary that the following requisites be present: (1) that the obligation be demandable and already
liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the performance judicially or
extrajudicially.
6.ID.; ID.; ID.; ID.; ID.; CASE AT BAR. Records reveal that a tanker ship had to pick up sulfuric acid in Basay, then
proceed to get the remaining stocks in Sangi, Cebu. A period of three days appears to us reasonable for a vessel to travel
between Basay and Sangi. Logically, the computation of damages arising from the shipping delay would then have to be
from December 15, 1986, given said reasonable period after the December 12th letter. More important, private
respondent was forced to vacate Basay wharf only on December 15th. Its Basay expenses incurred before December 15,
1986, were necessary and regular business expenses for which the petitioner should not be obliged to pay. AaIDHS
7.ID.; ID.; ID.; ID.; BUYER WHO INCURRED DELAY IN PERFORMANCE OF OBLIGATION SHALL ASSUME RISK
BEFORE DELIVERY OF GOODS; CASE AT BAR. The general rule that before delivery, the risk of loss is borne by the
seller who is still the owner, is not applicable in this case because petitioner had incurred delay in the performance of its
obligation. Article 1504 of the Civil Code clearly states: "Unless otherwise agreed, the goods remain at the seller's risk
until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the
goods are at the buyer's risk whether actual delivery has made or not except that: . . . (2) Where actual delivery had been
delayed through the fault of either the buyer or seller the goods are at the risk of the party at fault.
8.ID.; ID.; ID.; ID.; PARTY GUILTY OF DELAY IS LIABLE FOR PROVEN DAMAGES. As pointed out earlier, petitioner
is guilty of delay, after private respondent made the necessary extrajudicial demand by requiring petitioner to lift the cargo
at its designated loadports. When petitioner failed to comply with its obligations under the contract it became liable for its
shortcomings. Petitioner is indubitably liable for proven damages.
9.REMEDIAL LAW; CIVIL PROCEDURE; COUNTERCLAIM; ENCOURAGED BY LAW. It is worth noting that the
adjustment and allowance of private respondent's counterclaim or set-off in the present action, rather than by another
independent action, is encouraged by the law. Such practice serves to avoid circuitry of action, multiplicity of suits,
inconvenience, expense, and unwarranted consumption of the court's time. The trend of judicial decisions is toward a
liberal extension of the right to avail of counterclaims or set-offs. The rules on counterclaims are designed to achieve the
disposition of a whole controversy involving the conflicting claims of interested parties at one time and in one action,
provided all parties can be brought before the court and the matter decided without prejudicing the right of any party. Setoff in this case is proper and reasonable.

DECISION

QUISUMBING, J p:
This petition for review assails the Decision 1 dated August 19, 1992, of the Court of Appeals, which set aside the
judgment of the Regional Trial Court of Pasig, Branch 151. The case stemmed from a complaint filed by the buyer (herein
petitioner) against the seller (private respondent) for alleged breach of contract. Although petitioner prevailed in the trial
court, the appellate court reversed and instead found petitioner guilty of delay and therefore liable for damages, as
follows: cdrep
"WHEREFORE, the Decision of the court a quo is SET ASIDE and a new one rendered, dismissing
the complaint with costs against the plaintiff (herein petitioner) and, on the counterclaim, ordering the

plaintiff Aerospace Chemical Industries, Inc. to pay the defendant, Philippine Phosphate Fertilizer
Corporation the sum of P324,516.63 representing the balance of the maintenance cost and tank
rental charges incurred by the defendant for the failure of the plaintiff to haul the rest of the sulfuric
acid on the designated date.
Costs against plaintiff-appellee." 2

As gleaned from the records, the following are the antecedents:

On June 27, 1986, petitioner Aerospace Industries, Inc. (Aerospace) purchased five hundred (500) metric tons of sulfuric
acid from private respondent Philippine Phosphate Fertilizer Corporation (Philphos). The contract 3 was in letter-form as
follows:
27 June 1986
AEROSPACE INDUSTRIES INC.
203 E. Fernandez St.
San Juan, Metro Manila
Attention:Mr. Melecio Hernandez
Manager
Subject:Sulfuric Acid Shipment
Gentlemen:
This is to confirm our agreement to supply your Sulfuric Acid requirement under the following terms
and conditions: prcd
A.Commodity:Sulfuric Acid in Bulk
B.Concentration:98-99% H2SO4
C.Quantity:500MT - 100 MT Ex-Basay
400 MT Ex-Sangi
D.Price:US$ 50.00/MT - FOB Cotcot, Basay,
Negros Or.
US$ 54.00/MT - FOB Sangi, Cebu
E.Payment:Cash in Philippine currency payable
to Philippine Phosphate Fertilizer Corp.
(MAKATI) at PCIB selling rate at the
time of payment at least five (5) days
prior to shipment date.
F.Shipping Conditions
1.Laycan:July

2.Loadport:Cotcot, Basay, Negros Or. and

Atlas Pier, Sangi, Cebu
xxx xxx xxx
11.Other terms and Conditions: To be mutually agreed upon.
Very truly yours,
Philippine Phosphate Fertilizer Corp.
Signed: Herman J. Rustia
Sr. Manager, Materials & Logistics
CONFORME:
AEROSPACE INDUSTRIES, INC.
Signed: Mr. Melecio Hernandez
Manager
Initially set beginning July 1986, the agreement provided that the buyer shall pay its purchases in equivalent Philippine
currency value, five days prior to the shipment date. Petitioner as buyer committed to secure the means of transport to
pick-up the purchases from private respondent's loadports. Per agreement, one hundred metric tons (100 MT) of sulfuric
acid should be taken from Basay, Negros Oriental storage tank, while the remaining four hundred metric tons (400 MT)
should be retrieved from Sangi, Cebu.
On August 6, 1986, private respondent sent an advisory letter 4 to petitioner to withdraw the sulfuric acid purchased at
Basay because private respondent had been incurring incremental expense of two thousand (P2,000.00) pesos for each
day of delay in shipment. cdll
On October 3, 1986, petitioner paid five hundred fifty-three thousand, two hundred eighty (P553,280.00) pesos for 500 MT
of sulfuric acid.
On November 19, 1986, petitioner chartered M/T Sultan Kayumanggi, owned by Ace Bulk Head Services. The vessel was
assigned to carry the agreed volumes of freight from designated loading areas. M/T Kayumanggi withdrew only 70.009
MT of sulfuric acid from Basay because said vessel heavily tilted on its port side. Consequently, the master of the ship
stopped further loading. Thereafter, the vessel underwent repairs.
In a demand letter 5 dated December 12, 1986, private respondent asked petitioner to retrieve the remaining sulfuric acid
in Basay tanks so that said tanks could be emptied on or before December 15, 1986. Private respondent said that it would
charge petitioner the storage and consequential costs for the Basay tanks, including all other incremental expenses due to
loading delay, if petitioner failed to comply.
On December 18, 1986, M/T Sultan Kayumanggi docked at Sangi, Cebu, but withdrew only 157.51 MT of sulfuric acid.
Again, the vessel tilted. Further loading was aborted. Two survey reports conducted by the Societe Generale de
Surveillance (SGS) Far East Limited, dated December 17, 1986 and January 2, 1987, attested to these occurrences.
Later, on a date not specified in the record, M/T Sultan Kayumanggi sank with a total of 227.51 MT of sulfuric acid on
board. cdrep
Petitioner chartered another vessel, M/T Don Victor, with a capacity of approximately 500 MT. 6 On January 26 and March
20, 1987, Melecio Hernandez, acting for the petitioner, addressed letters to private respondent, concerning additional
orders of sulfuric acid to replace its sunken purchases, which letters are hereunder excerpted:
January 26, 1987

xxx xxx xxx

"We recently charter another vessel M/T DON VICTOR who will be authorized by us to lift the balance
approximately 272.49 MT.
We request your goodselves to grant us for another Purchase Order with quantity of 227.51 MT and
we are willing to pay the additional order at the prevailing market price, provided the lifting of the total
500 MT be centered/confined to only one safe berth which is Atlas Pier, Sangi, Cebu." 7
March 20, 1987
"This refers to the remaining balance of the above product quantity which were not loaded to the
authorized cargo vessel, M/T Sultan Kayumanggi at your loadport Sangi, Toledo City.
Please be advised that we will be getting the above product quantity within the month of April 1987
and we are arranging for a 500 MT Sulfuric Acid inclusive of which the remaining balance: 272.49
MT an additional product quantity thereof of 227.51 MT." 8 cdasia
Petitioner's letter 9 dated May 15, 1987, reiterated the same request to private respondent.
On January 25, 1988, petitioner's counsel, Atty. Pedro T. Santos, Jr., sent a demand letter 10 to private respondent for the
delivery of the 272.49 MT of sulfuric acid paid by his client, or the return of the purchase price of three hundred seven
thousand five hundred thirty (P307,530.00) pesos. Private respondent in reply, 11 on March 8, 1988, instructed petitioner
to lift the remaining 30 MT of sulfuric acid from Basay, or pay maintenance and storage expenses commencing August 1,
1986.
On July 6, 1988, petitioner wrote another letter, insisting on picking up its purchases consisting of 272.49 MT and an
additional of 227.51 MT of sulfuric acid. According to petitioner it had paid the chartered vessel for the full capacity of 500
MT, stating that:
"With regard to our balance of sulfuric acid - product at your shore tank/plant for 272.49 metric ton
that was left by M/T Sultana Kayumanggi due to her sinking, we request for an additional quantity of
227.51 metric ton of sulfuric acid, 98% concentration.
The additional quantity is requested in order to complete the shipment, as the chartered vessel
schedule to lift the high grade sulfuric acid product is contracted for her full capacity/load which is 500
metric tons more or less.
We are willing to pay the additional quantity - 227.51 metric tons high grade sulfuric acid in the
prevailing price of the said product." 12 prLL
xxx xxx xxx
By telephone, petitioner requested private respondent's Shipping Manager, Gil Belen, to get its additional order of 227.51
MT of sulfuric acid at Isabel, Leyte. 13 Belen relayed the information to his associate, Herman Rustia, the Senior Manager
for Imports and International Sales of private respondent. In a letter dated July 22, 1988, Rustia replied:
"Subject:Sulfuric Acid Ex-Isabel
Gentlemen:
Confirming earlier telcon with our Mr. G.B. Belen, we regret to inform you that we cannot
accommodate your request to lift Sulfuric Acid ex-Isabel due to Pyrite limitation and delayed arrival of
imported Sulfuric Acid from Japan." 14
On July 25, 1988, petitioner's counsel wrote to private respondent another demand letter for the delivery of the purchases
remaining, or suffer tedious legal action his client would commence.

On May 4, 1989, petitioner filed a complaint for specific performance and/or damages before the Regional Trial Court of
Pasig, Branch 151. Private respondent filed its answer with counterclaim, stating that it was the petitioner who was remiss
in the performance of its obligation in arranging the shipping requirements of its purchases and, as a consequence,
should pay damages as computed below: LibLex
Advanced Payment by Aerospace (Oct. 3, 1986)P553,280.00
Less Shipments
70.009 MT sulfuric acidP72,830.36
151.51 MT sulfuric acid176,966.27(249,796.63)

BalanceP303,483.37
Less Charges
Basay Maintenance Expense
from Aug. 15 to Dec. 15, 1986
(P2,000.00/day x 122 days)P244,000.00
Sangi - Tank Rental
from Aug. 15, 1986 to Aug. 15, 1987
(P32,000.00/mo. x 12 mos.)384,000.00(628,000.00)

Receivable/Counterclaim(P324,516.63)
==========
Trial ensued and after due proceedings, judgment was rendered by the trial court in petitioner's favor, disposing as
follows:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant, directing the latter to pay the
former the following sums: dctai
1.P306,060.77 - representing the value of the undelivered 272.49 metric tons of sulfuric acid plaintiff
paid to defendant;
2.P91,818.23 - representing unrealized profits, both items with 12% interest per annum from May 4,
1989, when the complaint was filed until fully paid;
3.P30,000.00 - as exemplary damages; and
4.P30,000.00 - as attorney's fees and litigation expenses, both last items also with 12% interest per
annum from date hereof until fully paid.
Defendant's counterclaims are hereby dismissed for lack of merit.
Costs against defendant." 15

In finding for the petitioner, the trial court held that the petitioner was absolved in its obligation to pick-up the remaining
sulfuric acid because its failure was due toforce majeure. According to the trial court, it was private respondent who
committed a breach of contract when it failed to accommodate the additional order of the petitioner, to replace those that
sank in the sea, thus:
"To begin with, even if we assume that it is incumbent upon the plaintiff to 'lift' the sulfuric acid it
ordered from defendant, the fact that force majeureintervened when the vessel which was previouly
(sic) listing, but which the parties, including a representative of the defendant, did not mind, sunk, has
the effect of absolving plaintiff from 'lifting' the sulfuric acid at the designated load port. But even
assuming the plaintiff cannot be held entirely blameless, the allegation that plaintiff agreed to a
payment of a 2,000-peso incremental expenses per day to defendant for delayed 'lifting' has not been
proven. . . .

Also, if it were true that plaintiff is indebted to defendant, why did defendant accept a second
additional order after the transaction in litigation? Why also, did defendant not send plaintiff
statements of account until after 3 years? prcd
All these convince the Court that indeed, defendant must return what plaintiff has paid it for the goods
which the latter did not actually receive." 16
On appeal by private respondent, the Court of Appeals reversed the decision of the trial court, as follows:
"Based on the facts of this case as hereinabove set forth, it is clear that the plaintiff had the obligation
to withdraw the full amount of 500 MT of sulfuric acid from the defendant's loadport at Basay and
Sangi on or before August 15, 1986. As early as August 6, 1986 it had been accordingly warned by
the defendant that any delay in the hauling of the commodity would mean expenses on the part of the
defendant amounting to P2,000.00 a day. The plaintiff sent its vessel, the 'M/T Sultan Kayumanggi',
only on November 19, 1987. The vessel, however, was not capable of loading the entire 500 MT and
in fact, with its load of only 227.519 MT, it sank.
Contrary to the position of the trial court, the sinking of the 'M/T Sultan Kayumanggi' did not absolve
the plaintiff from its obligation to lift the rest of the 272.481 MT of sulfuric acid at the agreed time. It
was the plaintiff's duty to charter another vessel for the purpose. It did contract for the services of a
new vessel, the 'M/T Don Victor', but did not want to lift the balance of 272.481 MT only but insisted
that its additional order of 227.51 MT be also given by the defendant to complete 500 MT, apparently
so that the vessel may be availed of in its full capacity. cdtai
xxx xxx xxx
We find no basis for the decision of the trial court to make the defendant liable to the plaintiff not only
for the cost of the sulfuric acid, which the plaintiff itself failed to haul, but also for unrealized profits as
well as exemplary damages and attorney's fees." 17
Respondent Court of Appeals found the petitioner guilty of delay and negligence in the performance of its obligation. It
dismissed the complaint of petitioner and ordered it to pay damages representing the counterclaim of private respondent.
The motion for reconsideration filed by petitioner was denied by respondent court in its Resolution dated December 21,
1992, for lack of merit.
Petitioner now comes before us, assigning the following errors:
I.
RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT TO
HAVE COMMITTED A BREACH OF CONTRACT WHEN IT IS NOT DISPUTED THAT PETITIONER
PAID IN FULL THE VALUE OF 500 MT OF SULFURIC ACID TO PRIVATE RESPONDENT BUT THE
LATTER WAS ABLE TO DELIVER TO PETITIONER ONLY 227.51 M.T. LLpr

II.
RESPONDENT COURT OF APPEALS GRAVELY ERRED IN HOLDING PETITIONER LIABLE FOR
DAMAGES TO PRIVATE RESPONDENT ON THE BASIS OF A XEROX COPY OF AN ALLEGED
AGREEMENT TO HOLD PETITIONER LIABLE FOR DAMAGES FOR THE DELAY WHEN PRIVATE
RESPONDENT FAILED TO PRODUCE THE ORIGINAL IN CONTRAVENTION OF THE RULES ON
EVIDENCE.
III.
RESPONDENT COURT OF APPEALS ERRED IN FAILING TO CONSIDER THE UNDISPUTED
FACTS THAT PETITIONER'S PAYMENT FOR THE GOODS WAS RECEIVED BY PRIVATE
RESPONDENT WITHOUT ANY QUALIFICATION AND THAT PRIVATE RESPONDENT ENTERED
INTO ANOTHER CONTRACT TO SUPPLY PETITIONER 227.519 MT OF SULFURIC ACID IN
ADDITION TO THE UNDELIVERED BALANCE AS PROOF THAT ANY DELAY OF PETITIONER
WAS DEEMED WAIVED BY SAID ACTS OF RESPONDENT.
IV.
RESPONDENT COURT OF APPEALS ERRED IN NOT CONSIDERING THE LAW THAT WHEN THE
SALE INVOLVES FUNGIBLE GOODS AS IN THIS CASE THE EXPENSES FOR STORAGE AND
MAINTENANCE ARE FOR THE ACCOUNT OF THE SELLER (ARTICLE 1504 CIVIL CODE).
V.
RESPONDENT COURT OF APPEALS ERRED IN FAILING TO RENDER JUDGMENT FOR
PETITIONER AFFIRMING THE DECISION OF THE TRIAL COURT. prLL
From the assigned errors, we synthesize the pertinent issues raised by the petitioner as follows:
1.Did the respondent court err in holding that the petitioner committed breach of contract, considering
that:
a)the petitioner allegedly paid the full value of its purchases, yet received only a portion of
said purchases?
b)petitioner and private respondent allegedly had also agreed for the purchase and supply of
an additional 227.519 MT of sulfuric acid, hence prior delay, if any, had been
waived?
2.Did the respondent court err in awarding damages to private respondent?
3.Should expenses for the storage and preservation of the purchased fungible goods, namely sulfuric
acid, be on seller's account pursuant to Article 1504 of the Civil Code?
To resolve these issues, petitioner urges us to review factual findings of respondent court and its conclusion that the
petitioner was guilty of delay in the performance of its obligation. According to petitioner, that conclusion is contrary to the
factual evidence. It adds that respondent court disregarded the rule that findings of the trial court are given weight, with
the highest degree of respect. Claiming that respondent court's findings conflict with those of the trial court, petitioner
prays that the trial court's findings be upheld over those of the appellate court. cdphil
Petitioner argues that it paid the purchase price of sulfuric acid, five (5) days prior to the withdrawal thereof, or on October
3, 1986, hence, it had complied with the primary condition set in the sales contract. Petitioner claims its failure to pick-up
the remaining purchases on time was due to a storm, a force majeure, which sank the vessel. It thus claims exemption
from liability to pay damages. Petitioner also contends that it was actually the private respondent's shipping officer, who
advised petitioner to buy the additional 227.51 MT of sulfuric acid, so as to fully utilize the capacity of the vessel it
chartered. Petitioner insists that when its ship was ready to pick-up the remaining balance of 272.49 MT of sulfuric acid,
private respondent could not comply with the contract commitment due to "pyrite limitation."

While we agree with petitioner that when the findings of the Court of Appeals are contrary to those of the trial court, 18 this
Court may review those findings, we find the appellate court's conclusion that petitioner violated the subject contract
amply supported by preponderant evidence. Petitioner's claim was predicated merely on the allegations of its employee,
Melecio Hernandez, that the storm or force majeure caused the petitioner's delay and failure to lift the cargo of sulfuric
acid at the designated loadports. In contrast, the appellate court discounted Hernandez' assertions. For on record, the
storm was not the proximate cause of petitioner's failure to transport its purchases on time. The survey report submitted
by a third party surveyor, SGS Far East Limited, revealed that the vessel, which was unstable, was incapable of carrying
the full load of sulfuric acid. Note that there was a premature termination of loading in Basay, Negros Oriental. The vessel
had to undergo several repairs before continuing its voyage to pick-up the balance of cargo at Sangi, Cebu. Despite
repairs, the vessel still failed to carry the whole lot of 500 MT of sulfuric acid due to ship defects like listing to one side. Its
unfortunate sinking was not due to force majeure. It sunk because it was, based on SGS survey report, unstable and
unseaworthy.
Witness surveyor Eugenio Rabe's incident report, dated December 13, 1986 in Basay, Negros Oriental, elucidated this
point: LLphil
"Loading was started at 1500hrs. November 19. At 1600Hrs. November 20, loading operation was
temporarily stopped by the vessel's master due to ships stability was heavily tilted to port side, ship's
had tried to transfer the loaded acid to stbdside but failed to do so, due to their auxiliary pump on
board does not work out for acid.
xxx xxx xxx
Note. Attending surveyor arrived BMC Basay on November 22, due to delayed advice of said vessel
Declared quantity loaded onboard based on data's provided by PHILPHOS representative.
On November 26, two representative of shipping company arrived Basay to assist the situation, at
1300Hrs repairing and/or welding of tank number 5 started at 1000Hrs November 27, repairing and/or
welding was suspended due to the explosion of tank no. 5. Explosion ripped about two feet of the
double bottom tank.
November 27 up to date no progress of said vessel" 19
While at Sangi, Cebu, the vessel's condition (listing) did not improve as the survey report therein noted:
"Declared quantity loaded on board was based on shore tank withdrawal due to ship's incomplete
tank calibration table. Barge displacement cannot be applied due to ship was listing to Stboard side
which has been loaded with rocks to control her stability." 20 prcd
These two vital pieces of information were totally ignored by trial court. The appellate court correctly took these into
account, significantly. As to the weather condition in Basay, the appellate court accepted surveyor Rabe's testimony, thus:
"Q.Now, Mr. Witness, what was the weather condition then at Basay, Negros Oriental during the
loading operation of sulfuric acid on board the Sultana Kayumanggi?
A.Fair, sir." 21
Since the third party surveyor was neither petitioner's nor private respondent's employee, his professional report should
carry more weight than that of Melecio Hernandez, an employee of petitioner. Petitioner, as the buyer, was obligated
under the contract to undertake the shipping requirements of the cargo from the private respondent's loadports to the
petitioner's designated warehouse. It was petitioner which chartered M/T Sultan Kayumanggi. The vessel was petitioner's
agent. When it failed to comply with the necessary loading conditions of sulfuric acid, it was incumbent upon petitioner to
immediately replace M/T Sultan Kayumanggi with another seaworthy vessel. However, despite repeated demands,
petitioner did not comply seasonably.

Additionally, petitioner claims that private respondent's employee, Gil Belen, had recommended to petitioner to fully utilize
the vessel, hence petitioner's request for an additional order to complete the vessel's 500 MT capacity. This claim has no
probative pertinence nor solid basis. A party who asserts that a contract of sale has been changed or modified has the
burden of proving the change or modification by clear and convincing evidence. 22 Repeated requests and additional

orders were contained in petitioner's letters to private respondent. In contrast, Belen's alleged action was only verbal; it
was not substantiated at all during the trial. Note that, using the vessel to full capacity could redound to petitioner's
advantage, not the other party's. If additional orders were at the instance of private respondent, the same must be
properly proved together with its relevance to the question of delay. Settled is the principle in law that proof of verbal
agreements offered to vary the terms of written agreements is inadmissible, under the parol evidence rule. 23 Belen's
purported recommendation could not be taken at face value and, obviously, cannot excuse petitioner's default. llcd
Respondent court found petitioner's default unjustified, and on this conclusion we agree:
"It is not true that the defendant was not in a position to deliver the 272.481 MT which was the
balance of the original 500 MT purchased by the plaintiff. The whole lot of 500 MT was ready for lifting
as early as August 15, 1986. What the defendant could not sell to the plaintiff was
the additional 227.51 MT which said plaintiff was ordering, for the reason that the defendant was
short of the supply needed. The defendant, however, had no obligation to agree to this additional
order and may not be faulted for its inability to meet the said additional requirements of the plaintiff.
And the defendant's incapacity to agree to the delivery of another 227.51 MT is not a legal justification
for the plaintiff's refusal to lift the remaining 272.481.
It is clear from the plaintiff's letters to the defendant that it wanted to send the 'M/T Don Victor' only if
the defendant would confirm that it was ready to deliver 500 MT. Because the defendant could not sell
another 227.51 MT to the plaintiff, the latter did not send a new vessel to pick up the balance of the
500 MT originally contracted for by the parties. This, inspite the representations made by the
defendant for the hauling thereof as scheduled and its reminders that any expenses for the delay
would be for the account of the plaintiff." 24
We are therefore constrained to declare that the respondent court did not err when it absolved private respondent from
any breach of contract. prLL
Our next inquiry is whether damages have been properly awarded against petitioner for its unjustified delay in the
performance of its obligation under the contract. Where there has been breach of contract by the buyer, the seller has a
right of action for damages. Following this rule, a cause of action of the seller for damages may arise where the buyer
refuses to remove the goods, such that buyer has to remove them. 25 Article 1170 of the Civil Code provides:
"Those who in the performance of their obligations are guilty of fraud, negligence, or delay and those
who in any manner contravene the tenor thereof, are liable for damages."
Delay begins from the time the obligee judicially or extrajudicially demands from the obligor the performance of the
obligation. 26 Art. 1169 states:
"ARTICLE 1169.Those obliged to deliver or to do something incur in delay from the time the obligee
judicially or extrajudicially demands from them the fulfillment of their obligation."
In order that the debtor may be in default, it is necessary that the following requisites be present: (1) that the obligation be
demandable and already liquidated; (2) that the debtor delays performance; and (3) that the creditor requires the
performance judicially or extrajudicially. 27
In the present case, private respondent required petitioner to ship out or lift the sulfuric acid as agreed, otherwise
petitioner would be charged for the consequential damages owing to any delay. As stated in private respondent's letter to
petitioner, dated December 12, 1986: prcd
Subject:M/T "KAYUMANGGI"
Gentlemen:
This is to reiterate our telephone advice and our letter HJR-8612-031 dated 2 December 1986
regarding your sulfuric acid vessel, M/T "KAYUMANGGI".
As we have, in various instances, advised you, our Basay wharf will have to be vacated 15th
December 1986 as we are expecting the arrival of our chartered vessel purportedly to haul our
equipments and all other remaining assets in Basay. This includes our sulfuric acid tanks. We regret,
therefore, that if these tanks are not emptied on or before the 15th of December, we either have to

charge you for the tanks waiting time at Basay and its consequential costs (i.e.chartering of another
vessel for its second pick-up at Basay, handling, etc.) as well as all other incremental costs on
account of the protracted loading delay."28 (Emphasis supplied)
Indeed the above demand, which was unheeded, justifies the finding of delay. But when did such delay begin? The above
letter constitutes private respondent's extrajudicial demand for the petitioner to fulfill its obligation, and its dateline is
significant. Given its date, however, we cannot sustain the finding of the respondent court that petitioner's delay started on
August 6, 1986. The Court of Appeals had relied on private respondent's earlier letter to petitioner of that date for
computing the commencement of delay. But as averred by petitioner, said letter of August 6th is not a categorical demand.
What it showed was a mere statement of fact, that "[F]for your information any delay in Sulfuric Acid withdrawal shall cost
us incremental expenses of P2,000.00 per day." Noteworthy, private respondent accepted the full payment by petitioner
for purchases on October 3, 1986, without qualification, long after the August 6th letter. In contrast to the August 6th letter,
that of December 12th was a categorical demand. LibLex
Records reveal that a tanker ship had to pick-up sulfuric acid in Basay, then proceed to get the remaining stocks in Sangi,
Cebu. A period of three days appears to us reasonable for a vessel to travel between Basay and Sangi. Logically, the
computation of damages arising from the shipping delay would then have to be from December 15, 1986, given said
reasonable period after the December 12th letter. More important, private respondent was forced to vacate Basay wharf
only on December 15th. Its Basay expenses incurred before December 15, 1986, were necessary and regular business
expenses for which the petitioner should not be obliged to pay.
Note that private respondent extended its lease agreement for Sangi, Cebu storage tank until August 31, 1987, solely for
petitioner's sulfuric acid. It stands to reason that petitioner should reimburse private respondent's rental expenses of
P32,000 monthly, commencing December 15, 1986, up to August 31, 1987, the period of the extended lease. Note further
that there is nothing on record refuting the amount of expenses abovecited. Private respondent presented in court two
supporting documents: first, the lease agreement pertaining to the equipment, and second a letter dated June 15, 1987,
sent by Atlas Fertilizer Corporation to private respondent representing the rental charges incurred. Private respondent is
entitled to recover the payment for these charges. It should be reimbursed the amount of two hundred seventy two
thousand (P272,000.00) 29 pesos, corresponding to the total amount of rentals from December 15, 1986 to August 31,
1987 of the Sangi, Cebu storage tank.
Finally, we note also that petitioner tries to exempt itself from paying rental expenses and other damages by arguing that
expenses for the preservation of fungible goods must be assumed by the seller. Rental expenses of storing sulfuric acid
should be at private respondent's account until ownership is transferred, according to petitioner. However, the general rule
that before delivery, the risk of loss is borne by the seller who is still the owner, is not applicable in this case because
petitioner had incurred delay in the performance of its obligation. Article 1504 of the Civil Code clearly states:
"Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at
the buyer's risk whether actual delivery has been made or not, except that: cdphil
xxx xxx xxx
(2)Where actual delivery has been delayed through the fault of either the buyer or seller the goods
are at the risk of the party at fault." (emphasis supplied)
On this score, we quote with approval the findings of the appellate court, thus:
". . . The defendant [herein private respondent] was not remiss in reminding the plaintiff that it would
have to bear the said expenses for failure to lift the commodity for an unreasonable length of time.
But even assuming that the plaintiff did not consent to be so bound, the provisions of Civil Code come
in to make it liable for the damages sought by the defendant.
Article 1170 of the Civil Code provides:
'Those who in the performance of their obligations are guilty of fraud, negligence, or delay
and those who in any manner contravene the tenor thereof, are liable for damages..'

Certainly, the plaintiff [herein petitioner] was guilty of negligence and delay in the performance of its
obligation to lift the sulfuric acid on August 15, 1986 and had contravened the tenor of its lettercontract with the defendant." 30 LLpr
As pointed out earlier, petitioner is guilty of delay, after private respondent made the necessary extrajudicial demand by
requiring petitioner to lift the cargo at its designated loadports. When petitioner failed to comply with its obligations under
the contract it became liable for its shortcomings. Petitioner is indubitably liable for proven damages.

Considering, however, that petitioner made an advance payment for the unlifted sulfuric acid in the amount of three
hundred three thousand, four hundred eighty three pesos and thirty seven centavos (P303,483.37), it is proper to set-off
this amount against the rental expenses initially paid by private respondent. It is worth noting that the adjustment and
allowance of private respondent's counterclaim or set-off in the present action, rather than by another independent action,
is encouraged by the law. Such practice serves to avoid circuitry of action, multiplicity of suits, inconvenience, expense,
and unwarranted consumption of the court's time. 31 The trend of judicial decisions is toward a liberal extension of the
right to avail of counterclaims or set-offs. 32 The rules on counterclaims are designed to achieve the disposition of a
whole controversy involving the conflicting claims of interested parties at one time and in one action, provided all parties
can be brought before the court and the matter decided without prejudicing the right of any party. 33 Set-off in this case is
proper and reasonable. It involves deducting P272,000.00 (rentals) from P303,483.37 (advance payment), which will
leave the amount of P31,483.37 refundable to petitioner.
WHEREFORE, the petition is hereby DENIED. The assailed decision of the Court of Appeals in CA G.R. CV No. 33802 is
AFFIRMED, with MODIFICATION that the amount of damages awarded in favor of private respondent is REDUCED to
Two hundred seventy two thousand pesos (P272,000.00). It is also ORDERED that said amount of damages be OFFSET
against petitioner's advance payment of Three hundred three thousand four hundred eighty three pesos and thirty-seven
centavos (P303,483.37) representing the price of the 272.481 MT of sulfuric acid not lifted. Lastly, it is ORDERED that the
excess amount of thirty one thousand, four hundred eighty three pesos and thirty seven centavos (P31,483.37) be
RETURNED soonest by private respondent to herein petitioner. LibLex
Costs against the petitioner.
SO ORDERED.
Bellosillo, Mendoza and Buena, JJ., concur.