1

A.

GENERAL PROVISION
3. REQUISITES OR ELEMENTS OF AN OBLIGATION

EN BANC
[G.R. No. 109125. December 2, 1994.]
ANG YU ASUNCION,
ARTHUR
GO
AND
KEH
TIONG, petitioners, vs. THE HON. COURT OF APPEALS and
BUEN
REALTY
DEVELOPMENT
CORPORATION, respondents.

DECISION

VITUG, J p:
Assailed, in this petition for review, is the decision of the Court of Appeals,
dated 04 December 1991, in CA-G.R. SP No. 26345 setting aside and declaring without
force and effect the orders of execution of the trial court, dated 30 August 1991 and 27
September 1991, in Civil Case No. 87-41058.
The antecedents are recited in good detail by the appellate court thusly:
"On July 29, 1987 a Second Amended Complaint for Specific
Performance was filed by Ann Yu Asuncion and Keh Tiong, et al.,
against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before the
Regional Trial Court, Branch 31, Manila in Civil Case No. 87-41058,
alleging, among others, that plaintiffs are tenants or lessees of
residential and commercial spaces owned by defendants described as
Nos. 630-638 Ongpin Street, Binondo, Manila; that they have
occupied said spaces since 1935 and have been religiously paying the
rental and complying with all the conditions of the lease contract; that
on several occasions before October 9, 1986, defendants informed
plaintiffs that they are offering to sell the premises and are giving
them priority to acquire the same; that during the negotiations, Bobby
Cu Unjieng offered a price of P6-million while plaintiffs made a
counter offer of P5-million; that plaintiffs thereafter asked the
defendants to put their offer in writing to which request defendants
acceded; that in reply to defendant's letter, plaintiffs wrote them on

October 24, 1986 asking that they specify the terms and conditions of
the offer to sell; that when plaintiffs did not receive any reply, they
sent another letter dated January 28, 1987 with the same request; that
since defendants failed to specify the terms and conditions of the offer
to sell and because of information received that defendants were
about to sell the property, plaintiffs were compelled to file the
complaint to compel defendants to sell the property to them.
"Defendants filed their answer denying the material allegations of the
complaint and interposing a special defense of lack of cause of action.
"After the issues were joined, defendants filed a motion for summary
judgment which was granted by the lower court. The trial court found
that defendants' offer to sell was never accepted by the plaintiffs for
the reason that the parties did not agree upon the terms and conditions
of the proposed sale, hence, there was no contract of sale at all.
Nonetheless, the lower court ruled that should the defendants
subsequently offer their property for sale at a price of P11-million or
below, plaintiffs will have the right of first refusal. Thus the
dispositive portion of the decision states:
"'WHEREFORE, judgment is hereby rendered in favor of
the defendants and against the plaintiffs summarily
dismissing the complaint subject to the aforementioned
condition that if the defendants subsequently decide to
offer their property for sale for a purchase price of Eleven
Million Pesos or lower, then the plaintiffs has the option to
purchase the property or of first refusal, otherwise,
defendants need not offer the property to the plaintiffs if
the purchase price is higher than Eleven Million Pesos.
"'SO ORDERED.'
"Aggrieved by the decision, plaintiffs appealed to this Court in CAG.R. CV No. 21123. In a decision promulgated on September 21,
1990 (penned by Justice Segundino G. Chua and concurred in by
Justices Vicente V. Mendoza and Fernando A. Santiago), this Court
affirmed with modification the lower court's judgment, holding:
"'In resume, there was no meeting of the minds between
the parties concerning the sale of the property. Absent such
requirement, the claim for specific performance will not
lie. Appellants' demand for actual, moral and exemplary
damages will likewise fail as there exists no justifiable
ground for its award. Summary judgment for defendants
was properly granted. Courts may render summary
judgment when there is no genuine issue as to any material
fact and the moving party is entitled to a judgment as a
matter of law (Garcia vs. Court of Appeals, 176 SCRA

2
815). All requisites obtaining, the decision of the court a
quo is legally justifiable.
'WHEREFORE, finding the appeal unmeritorious, the
judgment appealed from is hereby AFFIRMED, but
subject to the following modification: The court a quo in
the aforestated decision gave the plaintiffs-appellants the
right of first refusal only if the property is sold for a
purchase price of Eleven Million pesos or lower; however,
considering the mercurial and uncertain forces in our
market economy today. We find no reason not to grant the
same right of first refusal to herein appellants in the event
that the subject property is sold for a price in excess of
Eleven Million pesos. No pronouncement as to costs.
'SO ORDERED.'
"The decision of this Court was brought to the Supreme Court by
petition for review on certiorari. The Supreme Court denied the
appeal on May 6, 1991 'for insufficiency in form and substances'
(Annex H, Petition).
"On November 15, 1990, while CA-G.R. CV No. 21123 was pending
consideration by this Court, the Cu Unjieng spouses executed a Deed
of Sale (Annex D, Petition) transferring the property in question to
herein petitioner Buen Realty and Development Corporation, subject
to the following terms and conditions:
"'1. That for and in consideration of the sum of FIFTEEN
MILLION PESOS (P15,000,000.00), receipt of which in
full is hereby acknowledged, the VENDORS hereby sells,
transfers and conveys for and in favor of the VENDEE, his
heirs, executors, administrators or assigns, the abovedescribed property with all the improvements found
therein including all the rights and interest in the said
property free from all liens and encumbrances of whatever
nature, except the pending ejectment proceeding;
'2. That the VENDEE shall pay the Documentary Stamp
Tax, registration fees for the transfer of title in his favor
and other expenses incidental to the sale of abovedescribed property including capital gains tax and accrued
real estate taxes.'
"As a consequence of the sale, TCT No. 105254/T-881 in the name of
the Cu Unjieng spouses was cancelled and, in lieu thereof, TCT No.
195816 was issued in the name of petitioner on December 3, 1990.
"On July 1, 1991, petitioner as the new owner of the subject property
wrote a letter to the lessees demanding that the latter vacate the
premises.

"On July 16, 1991, the lessees wrote a reply to petitioner stating that
petitioner brought the property subject to the notice of lis pendens
regarding Civil Case No. 87-41058 annotated on TCT No. 105254/T881 in the name of the Cu Unjiengs.
"The lessees filed a Motion for Execution dated August 27, 1991 of
the Decision in Civil Case No. 87-41058 as modified by
the Court ofAppeals in CA-G.R. CV No. 21123.
"On August 30, 1991, respondent Judge issued an order (Annex A,
Petition) quoted as follows:
"'Presented before the Court is a Motion for Execution
filed by plaintiff represented by Atty. Antonio Albano.
Both defendants Bobby Cu Unjieng and Rose Cu Unjieng
represented by Atty. Vicente Sison and Atty. Anacleto
Magno respectively were duly notified in today's
consideration of the motion as evidenced by the rubber
stamp and signatures upon the copy of the Motion for
Execution.
'The gist of the motion is that the Decision of the Court
dated September 21, 1990 as modified by
the Court of Appeals in its decision in CA G.R. CV-21123,
and elevated to the Supreme Court upon the petition for
review and that the same was denied by the highest
tribunal in its resolution dated May 6, 1991 in G.R. No. L97276, had now become final and executory. As a
consequence, there was an Entry of Judgment by the
Supreme Court as of June 6, 1991, stating that the
aforesaid modified decision had already become final and
executory.
'It is the observation of the Court that this property in
dispute was the subject of the Notice of Lis Pendens and
that the modified decision of this Court promulgated by
the Court of Appeals which had become final to the effect
that should the defendants decide to offer the property for
sale for a price of P11 Million or lower, and considering
the mercurial and uncertain forces in our market economy
today, the same right of first refusal to herein
plaintiffs/appellants in the event that the subject property
is sold for a price in excess of Eleven Million pesos or
more.
'WHEREFORE, defendants are hereby ordered to execute
the necessary Deed of Sale of the property in litigation in
favor of plaintiffs Ang Yu Asuncion, Keh Tiong and
Arthur Go for the consideration of P15 Million pesos in
recognition of plaintiffs' right of first refusal and that a

3
new Transfer Certificate of Title be issued in favor of the
buyer.
'All previous transactions involving the same property
notwithstanding the issuance of another title to Buen
Realty Corporation, is hereby set aside as having been
executed in bad faith.
'SO ORDERED.'
"On September 22, 1991 respondent Judge issue another order, the
dispositive portion of which reads:
"'WHEREFORE, let there be Writ of Execution issue in
the above-entitled case directing the Deputy Sheriff
Ramon Enriquez of this Court to implement said Writ of
Execution ordering the defendants among others to
comply with the aforesaid Order of this Court within a
period of one (1) week from receipt of this Order and for
defendants to execute the necessary Deed of Sale of the
property
in
litigation
in
favor
of
the
plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for
the consideration of P15,000,000.00 and ordering the
Register of Deeds of the City of Manila, to cancel and set
aside the title already issued in favor of Buen Realty
Corporation which was previously executed between the
latter and defendants and to register the new title in favor
of the aforesaid plaintiffs Ang Yu Asuncion, Keh Tiong
and Arthur Go.

'SO ORDERED.'
"On the same day, September 27, 1991 the corresponding writ of
execution (Annex C, Petition) was issued". 1
On 04 December 1991, the appellate court, on appeal to it by private
respondent, set aside and declared without force and effect the above questioned orders of
the court a quo.
In this petition for review on certiorari, petitioners contend that Buen Realty
can be held bound by the writ of execution by virtue of the notice of lis pendens, carried
over on TCT No. 195816 issued in the name of Buen Realty, at the time of the latter's
purchase of the property on 15 November 1991 from the Cu Unjiengs. prcd
We affirm the decision of the appellate court.
A not too recent development in real estate transactions is the adoption of such
arrangements as the right of first refusal, a purchase option and a contract to sell. For
ready reference, we might point out some fundamental precepts that may find some
relevance to this discussion.

An obligation is a juridical necessity to give, to do or not to do (Art. 1156,

Civil Code). The obligation is constituted upon the concurrence of the essential elements
thereof, viz: (a) The vinculum juris or juridical tie which is the efficient cause established
by the various sources of obligations (law, contracts, quasi-contracts, delicts and quasidelicts); (b) the object which is the prestation or conduct; required to be observed (to
give, to do or not to do); and (c) the subject-persons who, viewed from the demandability
of the obligation, are the active (obligee) and the passive (obligor) subjects.
Among the sources of an obligation is a contract (Art. 1157, Civil Code),
which is a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service (Art. 1305, Civil Code).
A contract undergoes various stages that include its negotiation or preparation, its
perfection and, finally, its consummation. Negotiation covers the period from the time the
prospective contracting parties indicate interest in the contract to the time the contract is
concluded (perfected). The perfection of the contract takes place upon the concurrence of
the essential elements thereof. A contract which is consensual as to perfection is so
established upon a mere meeting of minds, i.e., the concurrence of offer and acceptance,
on the object and on the cause thereof. A contract which requires, in addition to the
above, the delivery of the object of the agreement, as in a pledge or commodatum, is
commonly referred to as a real contract. In a solemn contract, compliance with certain
formalities prescribed by law, such as in a donation of real property, is essential in order
to make the act valid, the prescribed form being thereby an essential element thereof. The
stage of consummation begins when the parties perform their respective undertakings
under the contract culminating in the extinguishment thereof. cdrep
Until the contract is perfected, it cannot, as an independent source of
obligation, serve as a binding juridical relation. In sales, particularly, to which the topic
for discussion about the case at bench belongs, the contract is perfected when a person,
called the seller, obligates himself, for a price certain, to deliver and to transfer ownership
of a thing or right to another, called the buyer, over which the latter agrees. Article 1458
of the Civil Code provides:
"Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
"A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell"
where invariably the ownership of the thing sold is retained until the fulfillment of a
positive suspensive condition (normally, the full payment of the purchase price), the
breach of the condition will prevent the obligation to convey title from acquiring an
obligatory force. 2 In Dignos vs. Court of Appeals (158 SCRA 375), we have said that,
although denominated a "Deed of Conditional Sale," a sale is still absolute where the
contract is devoid of any proviso that title is reserved or the right to unilaterally rescind is
stipulated, e.g., until or unless the price is paid. Ownership will then be transferred to the
buyer upon actual or constructive delivery (e.g., by the execution of a public document)
of the property sold. Where the condition is imposed upon the perfection of the contract
itself, the failure of the condition would prevent such perfection. 3 If the condition is
imposed on the obligation of a party which is not fulfilled, the other party may either
waive the condition or refuse to proceed with the sale (Art. 1545, Civil Code). 4

4
An unconditional mutual promise to buy and sell, as long as the object is made
determinate and the price is fixed, can be obligatory on the parties, and compliance
therewith may accordingly be exacted. 5
An accepted unilateral promise which specifies the thing to be sold and the
price to be paid, when coupled with a valuable consideration distinct and separate from
the price, is what may properly be termed a perfected contract of option. This contract is
legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the
Civil Code, viz:
"ART. 1479. . . . .
"An accepted unilateral promise to buy or to sell a
determinate thing for a price certain is binding upon the promissor if
the promise is supported by a consideration distinct from the price.
(1451a) 6
Observe, however, that the option is not the contract of sale itself.7 The optionee has the
right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is
accepted before a breach of the option, a bilateral promise to sell and to buy ensues and
both parties are then reciprocally bound to comply with their respective undertakings. 8
Let us elucidate a little. A negotiation is formally initiated by an offer. An
imperfect promise (policitacion) is merely an offer. Public advertisements or solicitations
and the like are ordinarily construed as mere invitations to make offers or only as
proposals. These relations, until a contract is perfected, are not considered binding
commitments. Thus, at any time prior to the perfection of the contract, either negotiating
party may stop the negotiation. The offer, at this stage, may be withdrawn; the
withdrawal is effective immediately after its manifestation, such as by its mailing and not
necessarily when the offeree learns of the withdrawal (Laudico vs. Arias, 43 Phil. 270).
Where a period is given to the offeree within which to accept the offer, the following
rules generally govern:
(1) If the period is not itself founded upon or supported by a consideration, the
offeror is still free and has the right to withdrawal the offer before its acceptance, or, if an
acceptance has been made, before the offeror's coming to know of such fact, by
communicating that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins,
Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is applicable to a unilateral
promise to sell under Art. 1479, modifying the previous decision in South Western
Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of
Paraaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45 SCRA 368). The
right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it
could give rise to a damage claim under Article 19 of the Civil Code which ordains that
"every person must, in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good faith." LLjur
(2) If the period has a separate consideration, a contract of "option" is
deemed perfected, and it would be a breach of that contract to withdraw the offer during
the agreed period. The option, however, is an independent contract by itself, and it is to
be distinguished from the projected main agreement (subject matter of the option) which
is obviously yet to be concluded. If, in fact, the optioner-offeror withdraws the offer
before its acceptance (exercise of the option) by the optionee-offeree, the latter may not
sue for specific performance on the proposed contract ("object" of the option) since it has
failed to reach its own stage of perfection. The optioner-offeror, however, renders himself

liable for damages for breach of the option. In these cases, care should be taken of the
real nature of the consideration given, for if, in fact, it has been intended to be part of the
consideration for the main contract with a right of withdrawal on the part of the optionee,
the main contract could be deemed perfected; a similar instance would be an "earnest
money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code).
In the law on sales, the so-called "right of first refusal" is an innovative
juridical relation. Needless to point out, it cannot be deemed a perfected contract of sale
under Article 1458 of the Civil Code. Neither can the right of first refusal, understood in
its normal concept, per se be brought within the purview of an option under the second
paragraph of Article 1479, aforequoted, or possibly of an offer under Article 1319 9 of the
same Code. An option or an offer would require, among other things, 10 a clear certainty
on both the object and the cause or consideration of the envisioned contract. In a right of
first refusal, while the object might be made determinate, the exercise of the right,
however, would be dependent not only on the grantor's eventual intention to enter into a
binding juridical relation with another but also on terms, including the price, that
obviously are yet to be later firmed up. Prior thereto, it can at best be so described as
merely belonging to a class of preparatory juridical relations governed not by contracts
(since the essential elements to establish the vinculum juris would still be indefinite and
inconclusive) but by, among other laws of general application, the pertinent scattered
provisions of the Civil Code on human conduct. LexLib
Even on the premise that such right of first refusal has been decreed under a
final judgment, like here, its breach cannot justify correspondingly an issuance of a writ
of execution under a judgment that merely recognizes its existence, nor would it sanction
an action for specific performance without thereby negating the indispensable element of
consensuality in the perfection of contracts. 11 It is not to say, however, that the right of
first refusal would be inconsequential for, such as already intimated above, an unjustified
disregard thereof, given, for instance, the circumstances expressed in Article 19 12 of the
Civil Code, can warrant a recovery for damages.
The final judgment in Civil Case No. 87-41058, it must be stressed, has
merely accorded a "right of first refusal" in favor of petitioners. The consequence of such
a declaration entails no more than what has heretofore been said. In fine, if, as it is here
so conveyed to us, petitioners are aggrieved by the failure of private respondents to honor
the right of first refusal, the remedy is not a writ of execution on the judgment, since
there is none to execute, but an action for damages in a proper forum for the purpose.
Furthermore, whether private respondent Buen Realty Development
Corporation, the alleged purchaser of the property, has acted in good faith or bad faith
and whether or not it should, in any case, be considered bound to respect the registration
of the lis pendens in Civil Case No. 87-41058 are matters that must be independently
addressed in appropriate proceedings. Buen Realty, not having been impleaded in Civil
Case No. 87-41058, cannot be held subject to the writ of execution issued by respondent
Judge, let alone ousted from the ownership and possession of the property, without first
being duly afforded its day in court.
We are also unable to agree with petitioners that the Court of Appeals has
erred in holding that the writ of execution varies the terms of the judgment in Civil Case
No. 87-41058, later affirmed in CA-G.R. CV-21123. The Court of Appeals, in this regard,
has observed: Cdpr

5
"Finally, the questioned writ of execution is in variance with the
decision of the trial court as modified by this Court. As already stated,
there was nothing in said decision 13 that decreed the execution of a
deed of sale between the Cu Unjiengs and respondent lessees, or the
fixing of the price of the sale, or the cancellation of title in the name
of petitioner (Limpin vs. IAC, 147 SCRA 516; Pamantasan ng
Lungsod ng Maynila vs. IAC, 143 SCRA 311; De Guzman vs. CA,
137 SCRA 730; Pastor vs. CA, 122 SCRA 885)."
It is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not
have decreed at the time the execution of any deed of sale between the Cu Unjiengs and
petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside
the questioned Orders, dated 30 August 1991 and 27 September 1991, of the court a quo.
Costs against petitioners.
SO ORDERED.
Narvasa, C.J., Padilla, Bidin, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason,
Puno and Mendoza, JJ., concur.
Kapunan, J., took no part.
Feliciano, J., is on leave.
||| (Asuncion v. Court of Appeals, G.R. No. 109125, [December 2, 1994])

A.

5. ONLIGATION DISTINGUISHED FROM CAUSE OF ACTION; SUBJECT

MATTER DISTINGUISHED FROM CAUSE OF ACTION
I.
FIRST DIVISION
[G.R. No. 135394. April 29, 2003.]
JOSE V. DELA RAMA, petitioner, vs. HON. FRANCISCO G.
MENDIOLA, Judge, RTC Pasay City, THE COURT OF
APPEALS and TITAN CONSTRUCTION CORP., respondents.

Jose V. Dela Rama and Ceferino Padua Law Office for petitioner.
M.A. Aguinaldo & Associates and Angelito B. Bulao for respondents.

The Supreme Court granted the petition. The Court ruled that the elements of res judicata are
present in the case at bar. According to the Court, while the first case was a special civil action
for declaratory relief and the second case was a civil action for specific performance, the
difference in form and nature of the two actions is immaterial because the philosophy behind
the rule on res judicata prohibits the parties from litigating the same issue more than once. The
issue involved in the declaratory relief case was whether respondent has rights over the
property which was reconveyed to petitioner considering that he waived all his rights by
executing the Agreement to Sell and Buy. In the specific performance case, the issue involved
was the same, that is, whether respondent was entitled to the property reconveyed when the
petitioner failed to comply with the terms of their agreement embodied in the same Agreement
to Sell and Buy. Respondent's alleged right in both cases depends on one and the same
instrument, the Agreement. The Court further ruled that assuming that res judicata finds no
application in the case, the action for specific performance must nonetheless be dismissed
because the Agreement to Sell and Buy, being one of the prestations of the compromise
agreement which was judicially confirmed, and had long become final and executory, can no
longer be enforced in a separate action. DAaIHT

SYNOPSIS

SYLLABUS

Petitioner sold to the government on expropriation a parcel of land for use in the construction
of the EDSA Extension Project. The sale was subject to the reconveyance to petitioner of any
unused portion of the property after the project is completed. A few months thereafter,
petitioner entered into a "Contract to Sell," whereby he undertook to sell to respondent Titan
Construction Corporation a parcel of land adjacent to the one expropriated. Petitioner failed to
comply with his obligations under the "Contract to Sell"; thus respondent filed a complaint for
rescission/annulment of contract with the Regional Trial Court of Pasay City. The parties
entered into a compromise agreement, and pursuant to the compromise judgment, petitioner
executed a deed of absolute sale of the subject property in favor of respondent. Meanwhile,
petitioner sought the reconveyance of the unused portion of the property from the government.
The Office of the President executed the corresponding Deed of Reconveyance in favor of
petitioner over 303 square meters of unused land. Respondent filed with the Regional Trial
Court of Pasay City a Petition for Declaratory Relief, Prohibition, Mandamus and Preliminary
Injunction with Prayer for Restraining Order. The trial court dismissed the case. Thus,
respondent instituted a petition for certiorari before the Court which, however, was referred to
the Court of Appeals. Respondent then filed an action for specific performance based on the
compromise judgment with the Regional Trial Court of Pasay City. Petitioner also filed with
the Court of Appeals, in CA-G.R. SP No. 44094, a Motion for Direct Contempt and to Dismiss
based on Forum Shopping. He also filed a similar motion with the Regional Trial Court of
Pasay City in Civil Case No. 97-0734. Respondent, however, filed a motion to withdraw the
petition in CA-G.R. SP No. 44094, which the Court of Appeals granted. Thus, the case was
dismissed with finality. Meanwhile, the Regional Trial Court of Pasay City denied the motion
to dismiss and for direct contempt based on forum shopping filed by petitioner. Petitioner filed
a motion for reconsideration, which was denied. Hence, the present petition.

1. REMEDIAL LAW; CIVIL PROCEDURE; EFFECT OF JUDGMENTS AND FINAL

ORDERS; RES JUDICATA; ELEMENTS; PRESENT IN CASE AT BAR. There is res
judicata where the following four essential conditions concur, viz: (1) there must be a final
judgment or order; (2) the court rendering it must have jurisdiction over the subject matter and
the parties; (3) it must be a judgment or order on the merits; and (4) there must be, between the
two cases, identity of parties, subject matter and causes of action. Reviewing the records of the
case, there is no question that all the first three elements of res judicata are present. The
declaratory relief case, which was elevated by way of a petition for certiorari to the Court of
Appeals, has been dismissed with finality. The decision was rendered by a court of competent
jurisdiction and the case was resolved on its merits. As regards the fourth condition, it is clear
that there is identity of parties in the two cases. The declaratory relief case was filed by
respondent Titan against Executive Secretary Ruben D. Torres, DPWH Secretary Gregorio R.
Vigilar, the Register of Deed of Pasay City, petitioner Jose V. Dela Rama and Esperanza
Belmonte (deceased). On the other hand, the specific performance case was filed by respondent
Titan against petitioner Dela Rama and the heirs of Esperanza Belmonte. Although the public
respondents in the declaratory relief case were not impleaded in the specific performance case,
only a substantial identity is necessary to warrant the application of res judicata. The addition
or elimination of some parties does not alter the situation.
2. ID.; ID.; ID.; ID.; THE SUBJECT MATTER AND CAUSES OF ACTION OF THE TWO
CASES ARE IDENTICAL. The subject matters and causes of action of the two cases are
likewise identical. A subject matter is the item with respect to which the controversy has arisen,
or concerning which the wrong has been done, and it is ordinarily the right, the thing, or the
contract under dispute. In the case at bar, both the first and second actions involve the same
real property. A cause of action, broadly defined, is an act or omission of one party in violation
of the legal right of the other. Its elements are the following: (1) the legal right of plaintiff; (2)
the correlative obligation of the defendant, and (3) the act or omission of the defendant in

7
violation of said legal right. Causes of action are identical when there is an identity in the facts
essential to the maintenance of the two actions, or where the same evidence will sustain both
actions. If the same facts or evidence can sustain either, the two actions are considered the
same, so that the judgment in one is a bar to the other. It is true that the first case was a special
civil action for declaratory relief while the second case was a civil action for specific
performance. However, the difference in form and nature of the two actions is immaterial. The
philosophy behind the rule on res judicata prohibits the parties from litigating the same issue
more than once. The issue involved in the declaratory relief case was whether respondent has
rights over the property which was reconveyed to petitioner considering that he waived all his
rights by executing the Agreement to Sell and Buy. In the specific performance case, the issue
involved was the same, that is, whether respondent was entitled to the property reconveyed
when the petitioner failed to comply with the terms of their agreement embodied in the same
Agreement to Sell and Buy. Respondent's alleged right in both cases depends on one and the
same instrument, the Agreement to Sell and Buy. Clearly, respondent's ultimate objective in
instituting the two actions was to have the property reconveyed in its favor. IHCESD
3. ID.; ID.; ID.; ID.; ASSUMING RES JUDICATA FINDS NO APPLICATION IN THE
INSTANT CASE, THE ACTION FOR SPECIFIC PERFORMANCE MUST NONETHELESS
BE DISMISSED; THE AGREEMENT TO SELL AND BUY, BEING ONE OF THE
PRESTATIONS OF THE COMPROMISE AGREEMENT WHICH WAS JUDICIALLY
CONFIRMED AND HAD LONG BECOME FINAL AND EXECUTORY, CANNOT BE
ENFORCED IN A SEPARATE ACTION. When material facts or questions in issue in a
former action were conclusively settled by a judgment rendered therein, such facts or questions
constituteres judicata and may not be again litigated in a subsequent action between the same
parties or their privies regardless of the form of the latter. This is the essence of res judicata or
bar by prior judgment. The parties are bound not only as regards every matter offered and
received to sustain or defeat their claims or demand but as to any other admissible matter
which might have been offered for that purpose and of all other matters that could have been
adjudged in that case. Assuming res judicata finds no application in the instant case, the action
for specific performance must nonetheless be dismissed. The Agreement to Sell and Buy, being
one of the prestations of the compromise agreement which was judicially confirmed and had
long become final and executory, cannot be enforced in a separate action. The principle of res
judicata requires that stability be accorded to judgments. Controversies once decided on the
merits shall remain in repose for there should be an end to litigation which, without the
doctrine, would be endless. Given the circumstances in this case, we find that the trial court
committed grave abuse of discretion when it denied the motion to dismiss filed by petitioners.

DECISION

YNARES-SANTIAGO, J p:
This is a petition for certiorari under Rule 65 of the Revised Rules of Court assailing the
orders 1 of the Regional Trial Court of Pasay City, Branch 115, in Civil Case No. 97-0734
which denied petitioner's Motion to Dismiss and Motion For Direct Contempt based on Forum
Shopping, as well as his Motion for Reconsideration.

On December 1, 1978, petitioner sold to the government on expropriation a parcel of land

consisting of 1,225 square meters, which was part of Lot 831-A, covered by Transfer
Certificate of Title No. 22066, for use in the construction of the EDSA Extension Project. The
sale was subject to the reconveyance to petitioner of any unused portion of the property after
the project is completed. 2

On June 17, 1988, petitioner entered into a "Contract to Sell," whereby he undertook to sell to
respondent Titan Construction Corporation a parcel of land adjacent to the one
expropriated. 3 Subsequently, petitioner failed to comply with his obligations under the
"Contract to Sell"; thus respondent filed a complaint for rescission/annulment of contract with
the Regional Trial Court of Pasay City, Branch 116, which was docketed as Civil Case No.
6020. The parties entered into a compromise agreement and, on May 19, 1989, the trial court
rendered judgment approving the parties' compromise agreement. The pertinent portion of the
judgment reads:
1. That the parties shall execute a deed of absolute sale over the
subject property, including the improvements thereon in
the total amount of TWO MILLION FIVE HUNDRED
THOUSAND PESOS (P2,500,000.00);
2. That relative to the parcel of land sold to the government, a
separate agreement is likewise to be executed by the
parties;
3. That Atty. and Mrs. Dela Rama will be given a period of 60 days
from the signing of this document to fully vacate the
premises sold;
4. That failure on their part to vacate within the said period, an exparte ejectment writ of execution shall issue;
5. That the written agreement relative to the lease of houses in said
premises shall be respected. 4
Pursuant to the compromise judgment, petitioner executed a deed of absolute sale of the
subject property in favor of respondent. Likewise, he executed an Agreement to Sell and Buy,
stating among others:
1. That in the event the Republic of the Philippines will return to the
vendors (Jose Dela Rama and Esperanza Belmonte) the
area sold which is 1,224 sq. ms. or any portion therein, the
Vendee (Titan Construction Corporation) is given the
exclusive option to buy any area returned at P2,000.00 per
square meter.
2. That in consideration of said exclusive option granted to the said
Vendee by the Vendors, the Vendee upon registration of
this instrument at the back of T.C.T. No. 22066 shall pay
P200,000.00 to the Vendors. 5

8
After the execution of the Agreement to Sell and Buy, respondent paid petitioner the amount of
P200,000.00, for which the latter issued a receipt which contained the inscription: "amount is
not refundable & not deductible from the agreed price." 6

The decisive issue posed by petitioner is whether or not the specific performance case (Civil
Case No. 97-0734) is barred by the petition for declaratory relief case (Civil Case No. 96-1725
and CA-G.R. SP No. 44094) on the ground of res judicata.

Meanwhile, petitioner sought the reconveyance of the unused portion of the property from the
government. On December 4, 1996, the Office of the President executed the corresponding
Deed of Reconveyance in favor of petitioner over 303 square meters of unused land. 7

There is res judicata where the following four essential conditions concur, viz: (1) there must
be a final judgment or order; (2) the court rendering it must have jurisdiction over the subject
matter and the parties; (3) it must be a judgment or order on the merits; and (4) there must be,
between the two cases, identity of parties, subject matter and causes of action. 19

On January 3, 1997, respondent filed with the Regional Trial Court of Pasay City, Branch 110,
a Petition for Declaratory Relief, Prohibition,Mandamus and Preliminary Injunction with
Prayer for Restraining Order, 8 which was docketed as Civil Case No. 97-1275. It prayed that
the Deed of Reconveyance be declared void on the grounds that the same violated its right of
preemption under Article 1622 of the Civil Code; and that no public bidding was conducted,
resulting in a denial of respondent's right to bid considering that petitioners had waived any
and all rights over the land by virtue of their Deed of Agreement to Sell and Buy. Respondent
also prayed that the Office of the President be ordered to give due course to its application to
purchase the subject land. The trial court dismissed the case for lack of merit on March 5,
1997. 9 Thus, respondent instituted a petition for certiorari before this Court on March 24,
1997 which, however, was referred to the Court of Appeals, where it was docketed as CA-G.R.
SP No. 44094. 10
On June 4, 1997, respondent filed an action for specific performance based on the compromise
judgment with the Regional Trial Court of Pasay City, which was docketed as Civil Case No.
97-0734. 11 Petitioner thus filed with the Court of Appeals, in CA-G.R. SP No. 44094, a
Motion for Direct Contempt and to Dismiss based on Forum Shopping. 12 He also filed a
similar motion with the Regional Trial Court of Pasay City in Civil Case No. 97-0734. 13
On July 18, 1997, respondent filed a motion to withdraw the petition in CA-G.R. SP No.
44094, 14 which the Court of Appeals, in its Resolution dated December 10, 1997, granted.
Thus, the case was dismissed with finality. 15
Meanwhile, the Regional Trial Court of Pasay City denied the motion to dismiss and for direct
contempt based on forum shopping filed by petitioner. It held that the alleged violation
of Supreme Court Circular No. 04-94 was cured when CA-G.R. SP No. 44094 was dismissed
by the Court of Appeals. Moreover, petitioner failed to show that the two cases have the same
causes of action. 16 Petitioner filed a motion for reconsideration, which was denied. 17
Hence the instant petition based on the sole assigned error:
THE RESPONDENT COURT OF APPEALS GRAVELY ABUSED
ITS DISCRETION IN NOT RESOLVING PETITIONER'S MOTION
TO DISMISS AND FOR DIRECT CONTEMPT BASED ON
FORUM SHOPPING AND, BY REASON OF THAT SERIOUS
ABUSE
OF
DISCRETION,
IT
SANCTIONED
THE
CONTINUANCE
OF
SAID
ACTION
BEFORE
THE
RESPONDENT RTC WHICH ITSELF GRAVELY AND
SERIOUSLY ABUSED ITS DISCRETION AMOUNTING TO
LACK OR EXCESS OF JURISDICTION IN REFUSING TO
DISMISS
THE
CASE
BASED
ON AUTER
ACTION
PENDANT AND RES JUDICATA, AND TO PUNISH FOR DIRECT
CONTEMPT THE PRIVATE RESPONDENT AND ITS LAWYERS
BASED ON FORUM SHOPPING. 18

Reviewing the records of the case, there is no question that all the first three elements of res
judicata are present. The declaratory relief case, which was elevated by way of a petition
for certiorari to the Court of Appeals, has been dismissed with finality. The decision was
rendered by a court of competent jurisdiction and the case was resolved on its merits.
As regards the fourth condition, it is clear that there is identity of parties in the two cases. The
declaratory relief case was filed by respondent Titan against Executive Secretary Ruben D.
Torres, DPWH Secretary Gregorio R. Vigilar, the Register of Deed of Pasay City, petitioner
Jose V. Dela Rama and Esperanza Belmonte (deceased). On the other hand, the specific
performance case was filed by respondent Titan against petitioner Dela Rama and the heirs of
Esperanza Belmonte. Although the public respondents in the declaratory relief case were not
impleaded in the specific performance case, only a substantial identity is necessary to warrant
the application of res judicata. 20 The addition or elimination of some parties does not alter the
situation. 21
The subject matters and causes of action of the two cases are likewise identical. A subject
matter is the item with respect to which the controversy has arisen, or concerning which the
wrong has been done, and it is ordinarily the right, the thing, or the contract under dispute. In
the case at bar, both the first and second actions involve the same real property. A cause of
action, broadly defined, is an act or omission of one party in violation of the legal right of the
other. 22 Its elements are the following: (1) the legal right of plaintiff; (2) the correlative
obligation of the defendant, and (3) the act or omission of the defendant in violation of said
legal right. 23 Causes of action are identical when there is an identity in the facts essential to
the maintenance of the two actions, or where the same evidence will sustain both actions. If the
same facts or evidence can sustain either, the two actions are considered the same, so that the
judgment in one is a bar to the other. 24
It is true that the first case was a special civil action for declaratory relief while the second case
was a civil action for specific performance. However, the difference in form and nature of the
two actions is immaterial. The philosophy behind the rule on res judicata prohibits the parties
from litigating the same issue more than once. 25 The issue involved in the declaratory relief
case was whether respondent has rights over the property which was reconveyed to petitioner
considering that he waived all his rights by executing the Agreement to Sell and Buy. In the
specific performance case, the issue involved was the same, that is, whether respondent was
entitled to the property reconveyed when the petitioner failed to comply with the terms of their
agreement embodied in the same Agreement to Sell and Buy. Respondent's alleged right in
both cases depends on one and the same instrument, the Agreement to Sell and Buy. Clearly,
respondent's ultimate objective in instituting the two actions was to have the property
reconveyed in its favor.
When material facts or questions in issue in a former action were conclusively settled by a
judgment rendered therein, such facts or questions constitute res judicata and may not be again

9
litigated in a subsequent action between the same parties or their privies regardless of the form
of the latter. This is the essence of res judicata or bar by prior judgment. The parties are bound
not only as regards every matter offered and received to sustain or defeat their claims or
demand but as to any other admissible matter which might have been offered for that purpose
and of all other matters that could have been adjudged in that case. 26

Assuming res judicata finds no application in the instant case, the action for specific
performance must nonetheless be dismissed. The Agreement to Sell and Buy, being one of the
prestations of the compromise agreement which was judicially confirmed and had long become
final and executory, cannot be enforced in a separate action. In the case of Jose Dela Rama v.
Hon. Aurora P. Navarrete-Recina, 27 where petitioner assailed the validity of the Deed of
Absolute Sale executed pursuant to the compromise agreement, we held that:
Moreover, the Deed of Absolute Sale being impugned by the
petitioners is but an offshoot of the compromise agreement entered
into, with judicial confirmation, by the parties themselves. Thus, as
observed by the respondent court, any further prestations left undone,
with regard to the provisions of the compromise judgment, should be
the subject of proceedings on execution, and not a separate action.
In the earlier case of Arkoncel v. Lagamon, 28 we held:
The rule is that a judgment rendered in accordance with a
compromise agreement is immediately executory unless a motion is
filed to set aside the agreement on the ground of fraud, mistake or
duress in which case an appeal may be taken against the order
denying the motion. It then becomes ministerial for the lower court to
order the execution of its final executory judgment.
Even more than a contract which may be enforced by ordinary action
for specific performance, the compromise agreement is part and
parcel of the judgment, and may therefore be enforced as such by a
writ of execution.
Finally, when the terms of an amicable settlement are violated, as in
the case at bar, the remedy of the aggrieved party is to move for its
execution.
The principle of res judicata requires that stability be accorded to judgments. Controversies
once decided on the merits shall remain in repose for there should be an end to litigation
which, without the doctrine, would be endless. 29 Given the circumstances in this case, we find
that the trial court committed grave abuse of discretion when it denied the motion to dismiss
filed by petitioners.
WHEREFORE, in view of the foregoing, the petition is GRANTED. The Order of the
Regional Trial Court of Pasay City, Branch 115 in Civil Case No. 97-0734, denying petitioner's
"Motion to Dismiss Complaint and For Direct Contempt Based on Forum Shopping," as well
as the Order denying petitioner's "Motion for Reconsideration," are REVERSED and SET
ASIDE. The Regional Trial Court of Pasay City, Branch 115, is ordered to DISMISS Civil
Case No. 97-0734 on the ground of res judicata. Costs against private respondents. IDESTH

SO ORDERED.
Davide, Jr., C.J., Vitug, Carpio and Azcuna, JJ., concur.
||| (Dela Rama v. Mendiola, G.R. No. 135394, [April 29, 2003], 449 PHIL 754-766)

10

A.

5. II.

FIRST DIVISION
[G.R. No. 128349. September 25, 1998.]
BACHRACH
CORPORATION, petitioner, vs.
THE
HONORABLE COURT OF APPEALS and PHILIPPINE
PORTS AUTHORITY,respondents.

SYLLABUS
1. REMEDIAL LAW; JUDGMENT; RES JUDICATA; ELEMENTS THEREOF CITED.
There are four (4) essential conditions which must concur in order that res judicata may
effectively apply, viz.: (1) The judgment sought to bar the new action must be final; (2) the
decision must have been rendered by a court having jurisdiction over the subject matter and the
parties; (3) the disposition of the case must be a judgment or order on the merits; and (4) there
must be between the first and second action identity of parties, identity of subject matter, and
identity of causes of action.
2. ID., CIVIL PROCEDURE; ACTIONS; CAUSE OF ACTION DISTINGUISHED FROM
SUBJECT MATTER; CASE AT BAR. A cause of action, broadly defined, is an act or
omission of one party in violation of the legal right of the other. The subject matter, on the
other hand, is the item with respect to which the controversy has arisen, or concerning which
the wrong has been done, and it is ordinarily the right, the thing, or the contract under dispute.
In a breach of contract, the contract violated is the subject matter while the breach thereof by
the obligor is the cause of action. It would appear quite plain then that the RTC did act aptly in
taking cognizance of the specific performance case. In Civil Case No. 138838 of the MeTC,
the unlawful detainer case, the subject matter is the contract of lease between the parties while
the breach thereof, arising from petitioner's non-payment of rentals, constitutes the suit's cause
of action. In Civil Case No. 73399 of the RTC, the specific performance case, the subject
matter is the compromise agreement allegedly perfected between the same parties while the
cause of action emanates from the averred refusal of PPA to comply therewith. The ultimate
test in ascertaining the identity of causes of action is said to be to look into whether or not the
same evidence fully supports and establishes both the present cause of action and the former
cause of action, In the affirmative, the former judgment would be a bar; if otherwise, then that
prior judgment would not serve as such a bar to the second. The evidence needed to establish
the cause of action in the unlawful detainer case would be the lease contract and the violation
of that lease by Bachrach. In the specific performance case, what would be consequential is
evidence of the alleged compromise agreement and its breach by PPA.

3. ID.; ID.; FINAL JUDGMENT; EXECUTION OF; A MINISTERIAL DUTY OF THE

COURT WHICH CANNOT BE INTERFERED BY INJUNCTION; EXCEPTION, CITED
CASE AT BAR. The rule indeed is, and has almost invariably been, that after a judgment
has gained finality, it becomes the ministerial duty of the court to order its execution. No court,
perforce, should interfere by injunction or otherwise to restrain such execution. The rule,
however, concededly admits of exception; hence, when facts and circumstances later transpire
that would render execution inequitable or unjust, the interested party may ask a competent
court to stay its execution or prevent its enforcement. So, also, a change in the situation of the
parties can warrant an injunctive relief. Evidently, in issuing its orders of 13 July 1995 and 29
August 1995 assailed by PPA in the latter's petition forcertiorari and prohibition before the
Court of Appeals, the trial court in the case at bar would want to preserve status quo pending
its disposition of the specific performance case and to prevent the case from being mooted by
an early implementation of the ejectment writ. In holding differently and ascribing to the trial
court grave abuse of discretion amounting to lack or excess of jurisdiction, the appellate court,
in our considered view, has committed reversible error. DSHTaC

DECISION

VITUG, J p:
Bachrach Corporation ("Bachrach"), in its petition for review on certiorari, questions the
decision of the Court of Appeals in CA-G.R. SP No. 38763, promulgated on 12 November
1996, the dispositive part of which reading
"WHEREFORE, the petition is granted. The assailed RTC orders are
hereby NULLIFIED and SET ASIDE and public respondent is
ordered to dismiss the subject action before him under Civil Case No.
95-73399. No pronouncement as to costs." 1
on several counts; viz:
"I. THE COURT OF APPEALS GRAVELY ERRED IN NOT
DISMISSING CA-G.R. SP NO. 38673 DESPITE THE
FACT THAT A SIMILAR PETITION EARLIER FILED
BY PPA WAS DISMISSED FOR BEING INSUFFICIENT
NOT ONLY IN FORM BUT ALSO IN SUBSTANCE
WHICH
DISMISSAL
CONSTITUTES RES
JUDICATA INSOFAR AS THE ISSUES RAISED
THEREIN ARE CONCERNED. scaphoid
"II. THE COURT OF APPEALS GRAVELY ERRED IN RULING
THAT THE DECISION IN THE UNLAWFUL
DETAINER
CASE
CONSTITUTES RES

11
JUDICATA WHICH
BARS
PERFORMANCE CASE.

THE

SPECIFIC

during their 04 February 1994 conference that superseded the ejectment case. In its complaint,
Bachrach prayed for specific performance. LLjur

"III. THE COURT OF APPEALS GRAVELY ERRED IN RULING

THAT
THE
FILING
OF
THE
SPECIFIC
PERFORMANCE CASE VIOLATES THE RULE
AGAINST FORUM SHOPPING.

On 08 June 1995, PPA filed a motion for a writ of execution/garnishment in the ejectment case.
The next day, 09 June 1995, Bachrach filed an application in the specific performance case for
the issuance a temporary restraining order and/or a writ of preliminary injunction to enjoin the
MeTC from issuing the writ of execution/garnishment. PPA countered by filing a motion for
preliminary hearing on its affirmative defenses along the same grounds mentioned in its motion
to dismiss the specific performance case, to wit: (a) the pendency of another action between the
same parties for the same cause; (b) the violation of the anti-forum-shopping rule; (c) the
complaint's lack of cause of action; and (d) the unenforceable character of the compromise
agreement invoked by Bachrach. On 13 July 1995, the trial court issued an omnibus order,
granting the application of Bachrach for a writ of preliminary injunction, in this tenor

"IV. THE COURT OF APPEALS GRAVELY ERRED IN RULING

THAT THE WRIT OF PRELIMINARY INJUNCTION
ISSUED BY THE TRIAL COURT CONSTITUTES
INTERFERENCE WITH ITS JUDGMENT IN THE
UNLAWFUL DETAINER CASE. LLjur
"V. THE COURT OF APPEALS GRAVELY ERRED IN ORDERING
THE DISMISSAL OF CIVIL CASE NO. 95-73399
THEREBY RULING ON THE MERITS OF THE CASE
WHEN IN FACT, THE ONLY ISSUES FOR ITS
RESOLUTION WERE THE PROPRIETY OF THE
WRIT OF PRELIMINARY INJUNCTION ISSUED BY
THE TRIAL COURT AND THE DENIAL OF PPA'S
MOTION FOR PRELIMINARY HEARING ON
AFFIRMATIVE DEFENSES." 2
It would appear that petitioner corporation entered into two lease contracts with the Philippine
government covering two specified areas, Block 180 and Block 185, located at the Manila Port
Area, then under the control and management of the Director of Lands, for a term of ninetynine years each, the first lease to expire on 19 June 2017 and the other on 14 February 2018.
During her tenure, President Corazon Aquino issuedExecutive Order No. 321 transferring the
management and administration of the entire Port Area to herein respondent Philippine Ports
Authority ("PPA"). Shortly after its take-over, PPA issued a Memorandum increasing the rental
rates of Bachrach by 1,500%. Bachrach refused to pay the substantial increased rates
demanded by PPA. prLL
On 23 March 1992, PPA initiated unlawful detainer proceedings, docketed Civil Case No.
138838 of the Metropolitan Trial Court ("MeTC") of Manila, against Bachrach for nonpayment of rent. On 27 April 1993, MeTC rendered a decision ordering the eviction of
Bachrach from the leased premises. Bachrach appealed to the Regional Trial Court ("RTC") of
Manila which, on 21 September 1993, affirmed the decision of the lower court in toto. 3
Bachrach elevated the case to the Court of Appeals by way of a petition for review. On 29 July
1994, the appellate court affirmed the decision of the RTC. A motion for reconsideration was
filed by Bachrach; however, the resolution of the motion was put on hold pending submission
of a compromise agreement. 4 When the parties failed to submit the promised compromise
agreement, the Court of Appeals, on 15 May 1995, denied Bachrach's motion for
reconsideration. The decision of the appellate court in the ejectment suit became final and
executory on 20 May 1995. 5
Meanwhile on 28 March 1995, while the motion for reconsideration was yet pending with the
appellate court, Bachrach filed a complaint against PPA with the Manila RTC, docketed Civil
Case No. 95-73399 (hereinafter referred to also as the specific performance case), for refusing
to honor a compromise agreement said to have been perfected between Bachrach and PPA

"PREMISES CONSIDERED, this Court is of the opinion and so

holds (1) that plaintiff (Bachrach) is entitled to the injunctive relief
prayed for and upon the posting of a bond in the amount of
P300,000.00, let a writ of preliminary injunction be issued enjoining
the defendant (PPA), the Presiding Judge of the Metropolitan Trial
Court of Manila, Branch 2 from issuing a writ of
execution/garnishment in Civil Case No. 238838-CV entitled
'Philippine Ports Authority vs. Bachrach Corporation'; (2)
lifting/setting aside the order dated June 5, 1995 and (3) denying
defendant's motion for a preliminary hearing on affirmative
defenses." 6
PPA moved for reconsideration of the above order but the trial court denied the plea in its
order of 29 August 1995. prcd
On 25 September 1995, PPA filed a petition for certiorari and prohibition, with application for
the issuance of a temporary restraining order and/or writ of preliminary injunction, docketed
CA-G.R. SP No. 38508, before the Court of Appeals. The petition was dismissed by resolution
dated 28 September 1995, of the appellate court for being insufficient in form and substance,
i.e., the failure of PPA to properly attach a certified true copy each of the assailed order of 13
July 1995 and 29 August 1995 of the trial court. PPA received on 05 October 1995 7 a copy of
the resolution, dated 28 September 1995, of the appellate court. Undaunted, PPA filed 2 new
petition on 11 October 1995, now evidently in proper form, asseverating that since it had
received a copy of the assailed resolution of the trial court only on 07 September 1995, the
refiling of the petition with the Court of Appeals within a period of less than two months from
the date of such receipt was well within the reasonable time requirement under the Rules for a
special civil action for certiorari. 8 In the meantime, the resolution, dated 28 September 1995,
of the Court of Appeals which dismissed CA-G.R No. 38508 became final on 21 October
1955. 9

In its newly filed petition, docketed CA-G.R. SP No. 38673, PPA invoked the following
grounds for its allowance: prLL
"I. That respondent Judge acted without, or in excess of jurisdiction,
or with grave abuse of discretion when it issued a writ of preliminary
injunction against the final and executory resolution of the Honorable

12
Court. of Appeals (Annex 'I') inspite of the well-established rule
that courts are not allowed to interfere with each other's judgment or
decrees by injunction, and worse, in this case,against the execution of
the judgment of a superior or collegiate court which had already
become final and executory.
"II. That respondent Judge acted without, or in excess of jurisdiction,
or with grave abuse of discretion when it also denied petitioner's
motion for a preliminary hearing on its affirmative defenses or in
failing to have the case below outrightly dismissed on the grounds
stated in its affirmative defenses, when respondent Judge pronounced
there is no identity as to the causes of action between the case
decided by the Court of Appeals (CA-G.R. SP No. 32630) and the
case below (Civil Case No. 95-73399) when clearly the causes of
action in both cases revolve on the same issue of possession of the
subject leased premises. cdrep
"III. That respondent Judge acted without, or in excess of jurisdiction,
or with grave abuse of discretion in refusing to take cognizance (of),
abide (by) and acknowledge the final judgment of the Court of
Appeals which, on said ground alone, is enough justification for the
dismissal of the case grounded on res judicata. Moreover private
respondent is guilty of forum-shopping and the penalty therefor is the
dismissal of its case " 10
On 12 November 1996, the Court of Appeals rendered the assailed decision nullifying
and setting aside the orders of the RTC and ordering the latter to dismiss the specific
performance case.
The Court finds merit in the instant appeal interposed by petitioner. LLjur
Verily, the decisive issue raised by the parties before the Court in the instant petition is whether
or not the specific performance case (Civil Case No. 73399) should be held barred by the
unlawful detainer case on the ground of res judicata. There are four (4) essential conditions
which must concur in order that res judicata may effectively apply, viz: (1) The judgment
sought to bar the new action must be final; (2) the decision must have been rendered by a court
having jurisdiction over the subject matter and the parties; (3) the disposition of the case must
be a judgment or order on the merits; and (4) there must be between the first and second action
identity of parties, identity of subject matter, and identity of causes of action." 11 There is no
question about the fact that all the first three elements of res judicata are here extant; it is the
final condition requiring an identity of parties, of subject matter and of causes of action,
particularly the last two, i.e, subject matter and cause of action, that presents a problem.
A cause of action, broadly defined, is an act or omission of one party in violation of the legal
right of the other. 12 The subject matter, on the other hand, is the item with respect to which
the controversy has arisen, or concerning which the wrong has been done, and it is ordinarily
the right, the thing, or the contract under dispute. 13 In a breach of contract, the contract
violated is the subject matter while the breach thereof by the obligor is the cause of action. It
would appear quite plain then that the RTC did act aptly in taking cognizance of the specific
performance case. In Civil Case No. 138838 of the MeTC, the unlawful detainer case, the
subject matter is the contract of lease between the parties while the breach thereof, arising from
petitioner's non-payment of rentals, constitutes the suit's cause of action. In Civil Case No.

73399 of the RTC, the specific performance case, the subject matter is the compromise
agreement allegedly perfected between the same parties while the cause of action emanates
from the averred refusal of PPA to comply therewith. The ultimate test in ascertaining the
identity of causes of action is said to be to look into whether or not the same evidence fully
supports and establishes both the present cause of action and the former cause of action. In the
affirmative, the former judgment would be a bar; if otherwise, then that prior judgment would
not serve as such a bar to the second 14 The evidence needed to establish the cause of action in
the unlawful detainer case would be the lease contract and the violation of that lease by
Bachrach. In the specific performance case, what would be consequential is evidence of the
alleged compromise agreement and its breach by PPA. prcd
The next thing to ask, of course, would be the question of whether or not the issuance by the
trial court of the writ of preliminary injunction was an improper interference with the judgment
in the unlawful detainer suit. It could be argued that, instead of filing a separate action for
specific performance. Bachrach should just have presented the alleged compromise agreement
in the unlawful detainer case. Unfortunately, the refusal of PPA to honor the agreement after its
alleged perfection effectively prevented Bachrach from seeking the coercive power of the court
to enforce the compromise in the unlawful detainer case. The situation virtually left Bachrach
with but the remedy of independently initiating the specific performance case in a court of
competent jurisdiction. In its challenged decision, the Court of Appeals, on its part, has said
that respondent PPA's prayer for the issuance of a writ of execution and garnishment is but the
necessary and legal consequence of its affirmance of the lower court's decision in the unlawful
detainer case which has by then become final and executory. 15 The rule indeed is, and has
almost invariably been, that after a judgment has gained finality, it becomes the ministerial
duty of the court to order its execution. 16 No court, perforce, should interfere by injunction or
otherwise to restrain such execution. The rule, however, concededly admits of exceptions;
hence, when facts and circumstances later transpire that would render execution inequitable or
unjust, the interested party may ask a competent court to stay its execution or prevent its
enforcement. 17 So, also, a change in the situation of the parties can warrant an injunctive
relief. 18 Evidently, in issuing its orders of 13 July 1995 and 29 August 1995 assailed by PPA
in the latter's petition for certiorari and prohibition before the Court of Appeals, the trial court
in the case at bar would want to preserve status quo pending its disposition of the specific
performance case and to prevent the case from being mooted by an early implementation of the
ejectment writ. In holding differently and ascribing to the trial court grave abuse of discretion
amounting to lack or excess of jurisdiction, the appellate court, in our. considered view, has
committed reversible error. cdasia
Having reached the above conclusions, other incidental issues raised by petitioner no longer
need to be passed upon.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals is reversed
and set aside; Civil Case No. 73399 along with the assailed orders of the Regional Trial Court,
aforedated, are hereby reinstated. No costs.
SO ORDERED.
||| (Bachrach Corp. v. Court of Appeals, G.R. No. 128349, [September 25, 1998], 357 PHIL
483-493)

13

B.

SOURCES OF OBLIGATIONS
1.
LAW

render medical assistance to their daughter-in-law who was about to give birth to a child;
that therefore, and after consultation with the attending physician, Dr. Escano, it was
found necessary, on account of the difficult birth, to remove the fetus by means of forceps
which operation was performed by the plaintiff, who also had to remove the after birth, in
which service he was occupied until the following morning, and that afterwards, on the
same day, he visited the patient several times; that the just and equitable value of the
services rendered by him was P500, which the defendants refuse to pay without alleging
any good reason there for; that for said reason he prayed that judgment be entered in his
favor as against the defendants, or any of them, for the sum of P500 and costs, together
with any other relief that might be deemed proper.

EN BANC
[G.R. No. 4089. January 12, 1909.]
ARTURO
PELAYO, plaintiff-appellant, vs.
LAURON, ET AL., defendants-appellees.

MARCELO

J. H. Junquera, for appellant.

Filemon Sotto, for appellees.

SYLLABUS
1. RECIPROCAL OBLIGATION OF HUSBAND AND WIFE; SUPPORT.
Among the reciprocal obligations existing between a husband and wife is that of support,
which obligation is established by law.
2. ID.; SUPPORT OF STRANGERS. The law does not compel any person
to support a stranger unless such person bound himself to do so by an express contract.
3. ID.; SUPPORT OF WIFE. Where a husband whom the law compels to
support his wife in living, the father and mother-in-law of the latter are under no liability
to provide for her.

DECISION

TORRES, J p:
On the 23d of November, 1906, Arturo Pelayo, a physician-residing in Cebu,
filed a complaint against Marcelo Lauron and Juana Abella setting forth that on or about
the 13th of October of said year, at night, the plaintiff was called to the house of the
defendants, situated in San Nicolas, and that upon arrival he was requested by them to

In answer to the complaint counsel for the defendants denied all of the
allegations therein contained and alleged as a special defense, that their daughter-in-law
had died in consequence of the said childbirth, and that when she was alive she lived with
her husband independently and in a separate house without any relation whatever with
them, and that, if on the day when she gave birth she was in the house of the defendants,
her stay there was accidental and due to fortuitous circumstances; therefore, he prayed
that the defendants be absolved of the complaint with costs against the plaintiff.
The plaintiff demurred to the above answer, and the court below sustained the
demurrer, directing the defendants, on the 23d of January, 1907, to amend their answer. In
compliance with this order the defendants presented, on the same date, their amended
answer, denying each and every one of the allegations contained in the complaint, and
requesting that the same be dismissed with costs.
As a result of the evidence adduced by both parties, judgment was entered by
the court below on the 5th of April, 1907, whereby the defendants were absolved from
the former complaint, on account of the lack of sufficient evidence to establish a right of
action against the defendants, with costs against the plaintiff, who excepted to the said
judgment and in addition moved for a new trial on the ground that the judgment was
contrary to law; the motion was overruled and the plaintiff excepted and in due course
presented the corresponding bill of exceptions. The motion of the defendants requesting
that the declaration contained in the judgment that the defendants had demanded he
professional services of the plaintiff he eliminated therefrom, for the reason that,
according to the evidence, no such request had been made, was also denied, and to the
decision the defendants excepted.
Assuming that it is a real fact acknowledged by the defendants, that the
plaintiff, by virtue of having been sent for by the former, attended as physician and
rendered professional services to a daughter-in-law of the said defendants during a
difficult and laborious childbirth, in order to decide the claim of the said physician
regarding the recovery of his fees, it becomes necessary to decide who is bound to pay
the bill, whether the father and mother-in-law of the patient, or the husband of the latter.
According to article 1089 of the Civil Code, obligations are created by law, by
contracts, by quasi-contracts, and by illicit acts and omissions or by those in which any
kind of fault or negligence occurs.
Obligations arising from law are not presumed. Those expressly determined in
the code or in special laws, etc., are the only demandable ones. Obligations arising from

14
contracts have legal force between the contracting parties and must be fulfilled in
accordance with their stipulations. (Arts. 1090 and 1091.)

pay fees which they are under no liability to pay because it does not appear that they
consented to bind themselves.

The rendering of medical assistance in case of illness is comprised among the

mutual obligations to which spouses are bound by way of mutual support. (Arts. 142 and
143.).

The foregoing suffices to demonstrate that the first and second errors assigned
to the judgment below are unfounded, because, if the plaintiff has no right of action
against the defendants, it is needless to declare whether or not the use of forceps is a
surgical operation.

If every obligation consists in giving, doing, or not doing something (art.

1088), and spouses are mutually bound to support each other, there can be no question
but that, when either of them by reason of illness should be in need of medical assistance,
the other is under the unavoidable obligation to furnish the necessary services of a
physician in order that health may be restored, and he or she may be freed from the
sickness by which life is jeopardized; the party bound to furnish such support is therefore
liable for all expenses, including the fees of the medical expert for his professional
services. This liability originates from the above-cited mutual obligation which the law
has expressly established between the married couple.
In the face of the above legal precepts it is unquestionable that the person
bound to pay the fees due to the plaintiff for the professional services that he rendered to
the daughter-in-law of the defendants during her childbirth is the husband of the patient
and not her father and mother- in-law, the defendants herein. The fact that it was not the
husband who called the plaintiff and requested his assistance for his wife is no bar to the
fulfillment of the said obligation, as the defendants, in view of the imminent danger to
which the life of the patient was at that moment exposed, considered that medical
assistance was urgently needed, and the obligation of the husband to furnish his wife with
the indispensable services of a physician at such critical moments is specially established
by the law, as has been seen, and compliance therewith is unavoidable; therefore, the
plaintiff, who believes that he is entitled to recover his fees, must direct his action against
the husband who is under obligation to furnish medical assistance to his lawful wife in
such an emergency.
From the foregoing it, may readily be understood that it was improper to have
brought an action against the defendants simply because they were the parties who called
the plaintiff and requested him to assist the patient during her difficult confinement, and
also, possibly, because they were her father and mother-in-law and the sickness occurred
in their house. The defendants were not, nor are they now, under any obligation by virtue
of any legal provision, to pay the fees claimed, nor in consequence of any contract
entered into between them and the plaintiff from which such obligation might have
arisen.
In applying the provisions of the Civil Code in an action for support, the
supreme court of Spain, while recognizing the validity and efficiency of a contract to
furnish support wherein a person bound himself to support another who was not his
relative, established the rule that the law does impose the obligation to pay for the support
of a stranger, but as the liability arose out of a contract, the stipulations of the agreement
must be upheld. (Decision of May 11 1897.)
Within the meaning of the law, the father and mother law are strangers with
respect to the obligation that devolves upon the husband to provide support, among which
is the furnishing of medical assistance to his wife at the time of her confinement; and, on
the other hand, it does not appear that a contract existed between the defendants and the
plaintiff physician, for which reason it is obvious that the former can not be compelled to

Therefore, in view of the considerations hereinbefore set forth, it is our

opinion that the judgment appealed from should be affirmed with the costs against the
appellant. So ordered.
Mapa and Tracey, JJ., concur.
Arellano, C.J. and Carson. J., concur in the result.
Willard, J., dissents.
||| (Pelayo v. Lauron, G.R. No. 4089, [January 12, 1909], 12 PHIL 453-457)

15

EN BANC
[G.R. No. L-7089. August 31, 1954.]
DOMINGO DE LA CRUZ, plaintiff-appellant, vs. NORTHERN
THEATRICAL ENTERPRISES INC., ET AL,defendantsappellees.

Conrado Rubio, for appellant.

Ruiz, Ruiz, Ruiz, Ruiz, and Benjamin Guerrero, for appellees.

SYLLABUS
1. EMPLOYER AND EMPLOYEE; DAMAGES CAUSED TO EMPLOYEE
BY A STRANGER CAN NOT BE RECOVERED FROM EMPLOYER GIVING
LEGAL ASSISTANCE TO EMPLOYEE IS NOT A LEGAL BUT A MORAL
OBLIGATION. A claim of an employee against his employer for damages caused to
the former by a stranger or outsider while said employee was in the performance of his
duties, presents a novel question which under present legislation can not be decided in
favor of the employee. While it is to the interest of the employer to give legal help to, and
defend, its employees charged criminally in court, in order to show that he was not guilty
of any crime either deliberately or through negligence, because should the employee be
finally held criminally liable and he is found to be insolvent, the employer would be
subsidiarily liable, such legal assistance might be regarded as a moral obligation but it
does not at present count with the sanction of man-made laws. If the employer is not
legally obliged to give legal assistance to its employee and provide him with a lawyer,
naturally said employee may not a recover from his employer the amount he may have
paid a lawyer hired by him.

MONTEMAYOR, J p:
The facts in this Case based on an agreed statement of facts are simple. In the
year 1941 the Northern Theatrical Enterprises Inc., a domestic corporation operated a
movie house in Laoag, Ilocos Norte, and among the persons employed by it was the
plaintiff DOMINGO DE LA CRUZ, hired as a special guard whose duties were to guard
the main entrance of the cine, to maintain peace and order and to report the commission
of disorders within the premises. As such guard he carried a revolver. In the afternoon of
July 4, 1941, one Benjamin Martin wanted to crash the gate or entrance of the movie
house. Infuriated by the refusal of plaintiff De la Cruz to let him in without first
providing himself with a ticket, Martin attacked him with a bolo. De la Cruz defended
himself as best he could until he was cornered, at which moment to save himself he shot
the gate crasher, resulting in the latter's death.
For the killing, De la Cruz was charged with homicide in Criminal Case No.
8449 of the Court of First Instance of Ilocos Norte. After a re-investigation conducted by
the Provincial Fiscal the latter filed a motion to dismiss the complaint, which was granted
by the court in January 1943. On July 8, 1947, De la Cruz was again accused of the same
crime of homicide, in Criminal Case No. 431 of the same Court. After trial, he was finally
acquitted of the charge on January 31, 1948. In both criminal cases De la Cruz employed
a lawyer to defend him. He demanded from his former employer reimbursement of his
expenses but was refused, after which he filed the present action against the movie
corporation and the three members of its board of directors, to recover not only the
amounts he had paid his lawyers but also moral damages said to have been suffered, due
to his worry, his neglect of his interests and his family as well in the supervision of the
cultivation of his land, a total of P15,000. On the basis of the complaint and the answer
filed by defendants wherein they asked for the dismissal of the complaint, as well as the
agreed statement of facts, the Court of First Instance of Ilocos Norte after rejecting the
theory of the plaintiff that he was an agent of the defendants and that as such agent he
was entitled to reimbursement of the expenses incurred by him in connection with the
agency (Arts. 1709-1729 of the old Civil Code), found that plaintiff had no cause of
action and dismissed the complaint without costs. De la Cruz appealed directly to this
Tribunal for the reason that only questions of law are involved in the appeal.

2. ID.; ID.; PARTIES WHO MAY BE HELD RESPONSIBLE FOR

DAMAGES. If despite the absence of any criminal responsibility on the part of the
employee he was accused of homicide, the responsibility for the improper accusation
may be laid at the door of the heirs of the deceased at whose instance the action was filed
by the State through the Fiscal. This responsibility can not be transferred to his employer,
who in no way intervened, much less initiated the criminal proceedings and whose only
connection or relation to the whole affair was that it employed plaintiff to perform a
specific duty or task, which was performed lawfully and without negligence.

We agree with the trial court that the relationship between the movie
corporation and the plaintiff was not that of principal and agent because the principle of
representation was in no way involved. Plaintiff was not employed to represent the
defendant corporation in its dealings with third parties. He was a mere employee hired to
perform a certain specific duty or task, that of acting as special guard and staying at the
main entrance of the movie house to stop gate crashers and to maintain peace and order
within the premises. The question posed by this appeal is whether an employee or servant
who in line of duty and while in the performance of the task assigned to him, performs an
act which eventually results in his incurring in expenses, caused not directly by his
master or employer or his fellow servants or by reason of his performance of his duty, but
rather by a third party or stranger not in the employ of his employer, may recover said
damages against his employer.

DECISION

The learned trial court in the last paragraph of its decision dismissing the
complaint said that "after studying many laws or provisions of law to find out what law is

16
applicable to the facts submitted and admitted by the parties, has found none and it has no
other alternative than to dismiss the complaint." The trial court is right. We confess that
we are not aware of any law or judicial authority that is directly applicable to the present
case, and realizing the importance and far-reaching effect of a ruling on the subjectmatter we have searched, though vainly, for judicial authorities and enlightenment. All
the laws and principles of law we have found, as regards master and servants, or
employer and employee, refer to cases of physical injuries, light or serious, resulting in
loss of a member of the body or of any one of the senses, or permanent physical disability
or even death, suffered in line of duty and in the course of the performance of the duties
assigned to the servant or employee, and these cases are mainly governed by the
Employer's Liability Act and the Workmen's Compensation Act. But a case involving
damages caused to an employee by a stranger or outsider while said employee was in the
performance of his duties, presents a novel question which under present legislation we
are neither able nor prepared to decide in favor of the employee.
In a case like the present or a similar case of say a driver employed by a
transportation company, who while in the course of employment runs over and inflicts
physical injuries on or causes the death of a pedestrian; and such driver is later charged
criminally in court, one can imagine that it would be to the interest of the employer to
give legal help to and defend its employee in order to show that the latter was not guilty
of any crime either deliberately or through negligence, because should the employee be
finally held criminally liable and he is found to be insolvent, the employer would be
subsidiarily liable. That is why, we repeat, it is to the interest of the employer to render
legal assistance to its employee. But we are not prepared to say and to hold that the
giving of said legal assistance to its employees is a legal obligation. While it might yet
and possibly be regarded as a moral obligation, it does not at present count with the
sanction of man-made laws.
If the employer is not legally obliged to give, legal assistance to its employee
and provide him with a lawyer, naturally said employee may not recover the amount he
may have paid a lawyer hired by him.
Viewed from another angle it may be said that the damage suffered by the
plaintiff by reason of the expenses incurred by him in remunerating his lawyer, is not
caused by his act of shooting to death the gate crasher but rather by the filing of the
charge of homicide which made it necessary for him to defend himself with the aid of
counsel. Had no criminal charge been filed against him, there would have been no
expenses incurred or damage suffered. So the damage suffered by plaintiff was caused
rather by the improper filing of the criminal charge, possibly at the instance of the heirs
of the deceased gate crasher and by the State through the Fiscal. We say improper filing,
judging by the results of the court proceedings, namely, acquittal. In other words, the
plaintiff was innocent and blameless. If despite his innocence and despite the absence of
any criminal responsibility on his part he was accused of homicide, then the
responsibility for the improper accusation may be laid at the door of the heirs of the
deceased and the State, and so theoretically, they are the parties that may be held
responsible civilly for damages and if this is so, we fail to see how this responsibility can
be transferred to the employer who in no way intervened, much less initiated the criminal
proceedings and whose only connection or relation to the whole affairs was that he
employed plaintiff to perform a specific duty or task, which task or duty was performed
lawfully and without negligence.

Still another point of view is that the damages incurred here consisting of the
payment of the lawyer's fee did not flow directly from the performance of his duties but
only indirectly because there was an efficient, intervening cause, namely, the filing of the
criminal charges. In other words, the shooting to death of the deceased by the plaintiff
was not the proximate cause of the damages suffered but may be regarded as only a
remote cause, because from the shooting to the damages suffered there was not that
natural and continuous sequence required to fix civil responsibility.
In view of the foregoing, the judgment of the lower court is affirmed. No
costs.
Bengzon, Padilla, Reyes, A., Bautista Angelo, Labrador,
Concepcin, and Reyes, J.B.L., JJ., concur.
||| (De La Cruz v. Northern Theatrical Enterprises, Inc., G.R. No. L-7089, [August 31, 1954],
95 PHIL 739-744)

17

THIRD DIVISION

6.He shall take full responsibility for all the furniture and fixtures to
be assigned to the designated headquarters.

[G.R. No. 173320. April 11, 2012.]

EDUARDO B. MANZANO, petitioner, vs. ANTONIO B.
LAZARO, respondent.

7.He shall develop programs and projects in aid of ensuring the

winnability of the candidate.
Responsibilities of the First Party.

DECISION
PERALTA, J p:
Before us is a Petition for Review on Certiorari of the Decision 1 and Resolution 2 of the
Court of Appeals in CA-G.R. CV No. 82753, dated February 28, 2006 and June 21, 2006,
respectively, affirming the Decision 3 of the Regional Trial Court (RTC), Branch 97, Quezon
City, in Civil Case No. Q-98-35924. EHTSCD
On February 16, 1998, petitioner Eduardo B. Manzano and respondent Antonio B. Lazaro
entered into a Professional Services Contract 4 pertaining to the former's candidacy for the
Vice-Mayoralty post in Makati City. Petitioner as the first party and respondent as the second
party agreed that the contract shall take effect on February 16, 1998 until May 15, 1998. The
contract provided among others:
II.Roles and Responsibilities of Contracting Parties
Responsibilities of the Second Party:
1.He shall head the organizational machinery of the First Party.
2.He shall be responsible in hiring and firing the required personnel to
man the different positions of the organization.
3.He shall authorize the expenditures of the campaign.
4.He shall assist in the mobilization of resources for the campaign.
5.He shall set-up administrative mechanisms to safeguard the efficient
and effective use of resources.

1.He shall ensure the provision of financial resources and other

logistical requirements for the conduct of operations.
2.He shall compensate the second party as stipulated in the Section III
for Remuneration and Manner of Payment.
III.Remuneration and Manner of Payment:
A.The monthly rate due for the Second Party is
SEVENTY THOUSAND PESOS (P70,000.00). This will
be given in two equal tranches, on the 15th and 30th of
each month, from February 16, 1998 up to May 15, 1998,
or a total of three (3) months.
B.A bonus pay amounting to TWO HUNDRED
THOUSAND PESOS (P200,000.00) shall be given to the
second party in the event that the First Party win the ViceMayoralty post. 5 HSaCcE
Subsequently, petitioner won as Vice-Mayor of Makati. Respondent, thereafter, learned in a
transmittal letter 6 dated June 16, 1998 representing the last payroll of certain individuals,
which included him, that he would be paid the amount of P15,000.00 only and the balance of
P20,000.00 shall be forwarded only upon his final inventory of materials used during the
campaign. Hence, respondent, in his letter 7 dated July 3, 1998 to petitioner, wrote that he had
already turned over the equipment used for the campaign. Respondent then demanded the
payment of P20,000.00 as balance of his compensation and the P200,000.00 bonus pay agreed
upon.
Petitioner acknowledged respondent's demand letter and the delivery of the campaign
equipment and furniture in his letter 8dated July 17, 1998, but wrote that he needed to receive
the liquidation of the expenses incurred during the campaign, which task was requested shortly
after the May 11, 1998 elections.

18
In his letter 9 dated July 30, 1998, respondent wrote that the preparation of the audited
financial report of the campaign was not part of his responsibilities as he was not in charge of
the management of campaign funds; that such function was assigned to Robert Gomez and
Soliman Cruz (Cruz) who acted as petitioner's Director for Finance with petitioner's brother,
Angie Manzano (Angie), as the auditor. He reiterated the payment of P220,000.00 due him.
On even date, Cruz wrote petitioner a letter 10 dated July 30, 1998, stating that he did not
volunteer respondent to prepare the liquidation of expenses, as respondent had nothing to do
with the campaign accounting records; and that petitioner's request for liquidation of campaign
expenses was another switch in petitioner's condition prior to settling his obligation with
respondent.
As respondent's demand for petitioner to pay him remained unheeded, he filed with the RTC an
action for collection of sum of money against petitioner.
In his defense, petitioner argued that he hired respondent's services because of the latter's
representation of being a seasoned and an experienced campaign manager. However, during the
campaign period, he discovered that respondent had no expertise or capacity for political
organization and was often absent during campaign sorties and public meetings; that he failed
to provide petitioner with poll watchers to safeguard his chances of winning against electoral
fraud. Petitioner deemed it best to merely exclude him from the strategic planning sessions
rather than confront him as he had already the knowledge of the campaign activities and
supporters. Petitioner opined that he won the elections due to his popularity and the support of
his family and friends; and that respondent was not entitled to a bonus pay, since respondent
failed to show any significant contribution or role in his electoral victory.

2.Thirty Thousand Pesos (PHP30,000.00) as Attorney's

Fees. 11
In so ruling, the RTC said that to allege that petitioner's consent was vitiated would not justify
the refusal to pay the agreed remuneration in the absence of a court ruling annulling the subject
contract; and that unless said contract was annulled, the terms therein remained enforceable. As
to the alleged failure to comply with the responsibilities set forth in the contract, the RTC said
that the power to rescind obligation is implied in reciprocal ones, but in the absence of a
stipulation to the contrary, the power must be invoked judicially and cannot be exercised solely
on a party's own judgment that the other has committed a breach of obligation. It also found
petitioner's allegation of breach of contract inconsistent with the statement in the last payroll
where petitioner acknowledged the balance due respondent, since if petitioner believed that
respondent failed to perform his responsibilities, he should not have stated in the last payroll
that the balance due respondent would be given upon submission of the inventory of the
campaign materials. The RTC concluded that petitioner's contention was merely used as an
excuse to evade payment after respondent had complied with the conditions requiring the latter
to submit such inventory. The RTC awarded attorney's fees, because of petitioner's refusal to
pay respondent's claim which compelled him to litigate.
Dissatisfied, petitioner filed his appeal with the CA. Respondent filed his Comment and
petitioner his Reply thereto. Thereafter, the case was submitted for decision.
On February 28, 2006, the CA rendered its assailed Decision, which dismissed the appeal and
affirmed the RTC decision.
Petitioner's motion for reconsideration was denied in a Resolution dated June 21, 2006.

On June 7, 2004, the RTC rendered its Decision, the dispositive portion of which
reads: SCHIcT
WHEREFORE, premises considered, Decision is hereby rendered
directing the defendant Eduardo B. Manzano to pay to the plaintiff
the following:
1.Two Hundred Twenty Thousand Pesos (PHP220,000.00)
representing the plaintiff's professional service
fee covering the May 1-15, 1998 period and
bonus for the defendant's electoral victory as
stipulated in the Professional Service Contract,
plus legal interests from 03 July 1998 until
fully paid; and

Hence, the instant petition which raises the following errors:

I
THE COURT OF APPEALS GRAVELY ERRED IN LIMITING
THE DISCUSSION OF ITS QUESTIONED DECISION ONLY TO
THE SUBJECT OF THE PROFESSIONAL SERVICES
CONTRACT BETWEEN PETITIONER AND RESPONDENT
BEING VOIDABLE AND ITS ALLEGED RATIFICATION BY
PETITIONER. THE RULING OF THE COURT OF APPEALS,
DOES NOT, IN ANY WAY, TOUCH UPON THE ISSUE OF
RESPONDENT'S MATERIAL BREACH OF THE CONTRACT,
AND WHETHER HE IS ENTITLED TO THE BONUS OF
P200,000.00 AS A RESULT OF SUCH BREACH.

19
II
THE COURT OF APPEALS GRAVELY ERRED IN FAILING TO
HOLD THAT RESPONDENT COMMITTED SERIOUS BREACH
BY FAILING TO PERFORM HIS DUTIES UNDER HIS
PROFESSIONAL SERVICES CONTRACT WITH PETITIONER
AS HEAD OF THE LATTER'S CAMPAIGN AND
ORGANIZATIONAL MACHINERY.
III
THE COURT OF APPEALS GRAVELY ERRED IN NOT FINDING
THAT RESPONDENT COMMITTED A BREACH OF HIS
PROFESSIONAL SERVICES CONTRACT WITH PETITIONER
BY MISREPRESENTING THAT HE WAS AN EXPERT IN
ESTABLISHING A POLITICAL CAMPAIGN
MACHINERY. EaDATc
IV
THE COURT OF APPEALS GRAVELY ERRED IN NOT
HOLDING THAT RESPONDENT SHOULD NOT BE PAID THE
BALANCE OF HIS REMUNERATION ON THE BASIS OF
EQUITY AND SUBSTANTIAL JUSTICE, AND BECAUSE HE
WILL BE UNJUSTLY ENRICHED AS A RESULT OF SUCH
PAYMENT. 12
Petitioner contends that the CA decision was limited to the issue that the contract was merely
voidable and its alleged ratification by petitioner but did not take into account respondent's
breach of his obligations which goes into the heart of the issue of respondent's entitlement to
the bonus; and that awarding him of bonus despite such breach would result to unjust
enrichment. He argues that respondent was always absent or unavailable during the campaign
sorties and public meetings which resulted in petitioner's having to continue his campaign with
little or no assistance from respondent; that he failed to provide the required personnel to man
the different positions of the organization since the personnel provided by respondent were also
working for another candidate in Mandaluyong City; that there was no assistance extended in
the mobilization of resources for his campaign because of the less visibility of the personnel
hired to serve as his advance party to the territories covered by petitioner's campaign which
constrained petitioner to proceed to the areas on his own; and that during the canvassing of
votes, respondent only made a brief appearance and was thereafter gone with his whereabouts
unknown; and that he also failed to provide petitioner with poll watchers in the precinct level
to ensure that all votes cast for him were all accounted for.

Petitioner also argues that respondent misrepresented himself to be an expert in carrying out a
political campaign, thus, his consent into entering the contract with respondent was vitiated by
fraud and mistake as to the latter's qualifications and credentials.
We find no merit in the petition.
The above-stated arguments by petitioner raise factual matters. As a rule, only questions of law
may be appealed to the Court by a petition for review. The Court is not a trier of facts, its
jurisdiction being limited to errors of law. Moreover, factual findings of the trial court,
particularly when affirmed by the Court of Appeals, are generally binding on this Court. 13 In
weighing the evidence of the parties, the RTC, as affirmed by the CA, found respondent's
evidence to be sufficient in proving his case. We found no reason to disturb such finding as it
was borne by the evidence on record.
Under the Professional Services Contract executed between petitioner and respondent on
February 16, 1998, particularly under the subheading of remuneration and manner of payment,
it was provided that:
A.The monthly rate due for the Second Party is SEVENTY
THOUSAND PESOS (P70,000.00). This will be given in two equal
tranches, on the 15th and 30th of each month, from February 16, 1998
up to May 15, 1998, or a total of three (3) months. DHEACI
B.A bonus pay amounting to TWO HUNDRED THOUSAND PESOS
(P200,000.00) shall be given to the second party in the event that the
First Party wins the Vice-Mayoralty post.
It is basic that a contract is the law between the parties. Obligations arising from contracts have
the force of law between the contracting parties and should be complied with in good
faith. 14 Unless the stipulations in a contract are contrary to law, morals, good customs, public
order or public policy, the same are binding as between the parties. 15
In this case, the three-month period stated in the contract had already elapsed and petitioner
won as Vice-Mayor of Makati in the 1998 elections, thus, respondent is entitled not only to the
full payment of his compensation but also to a bonus pay. However, respondent's compensation
for the period from May 1 to 15, 1998 was not yet paid in full as there was still a balance of
P20,000.00 as well as his bonus pay. Petitioner refuses to pay the said amounts on the
allegation that respondent failed to fulfill his obligations under the contract.
We are not persuaded.

20
Petitioner's claim of breach of obligation consisted only of his uncorroborated and self-serving
statement which was contradicted by the evidence on record.
In the June 1998 remittance of the last payroll, it was stated that respondent would be paid the
amount of P15,000.00 and the balance of P20,000.00 shall be forwarded upon his final
inventory of equipment used during the campaign. Clearly, the payment of the balance of
P20,000.00 was conditioned upon respondent's final inventory of the equipment used in the
campaign. On July 3, 1998, respondent wrote petitioner a letter informing the latter that he had
already turned over the equipment by delivering the same to petitioner's doorstep on July 2,
1998; and that his final act of turning over his obligation merited petitioner's reciprocal action.
Consequently, respondent demanded the payment of P20,000.00 as well as the P200,000.00
bonus pay as petitioner won the Vice-Mayoralty race.
Petitioner admitted having received the equipment in his letter reply dated July 17, 1998 to
respondent as he wrote:
. . . I appreciate your delivering the inventory at my doorstep even
though it was never requested. With regards to my reciprocal action, I
have yet to receive the liquidation of the expenses incurred during the
campaign. Mrs. Rufino informed me about two weeks back that when
we requested said liquidation from Mr. S. Cruz he volunteered that
you would be the individual who will be preparing the report. We
have yet to receive the breakdown from either you or Mr. Cruz
considering it was requested shortly after the May 11, 1998 elections.
I, more than anyone else, would like to end this chapter of my life. I
hope to hear from either of you soonest. 16 cDCHaS
In respondent's letter reply dated July 30, 1998, he clearly indicated that the preparation of the
audited financial report was not part of his responsibilities as he was not in charge of the
management of campaign funds; that such function was assigned to Cruz who would write a
separate letter to support his statement.
In his letter to petitioner, Cruz clarified that there was never a request for liquidation of
expenses, as what Ms. Rufino requested from him was the preparation of the summary of
transportation and other expenses which would form part of the petitioner's campaign expenses
to be filed with the Comelec; that he did not volunteer respondent to prepare anything as he
had nothing to do with the campaign's accounting records; that he only instructed his secretary
to assemble the needed information and asked her to seek respondent's help for expediency. He
also wrote that to ask respondent with the liquidation of campaign expenses was another switch
in petitioner's condition prior to settling his obligation with respondent.

As shown by the foregoing exchange of correspondences, the first condition imposed before
the payment of P20,000.00 balance was the inventory of campaign equipment. After
respondent complied with such condition which petitioner even acknowledged, respondent
asked for the payment of the balance as well as his bonus. However, a subsequent condition
was imposed on respondent before payment would be given, i.e., submission of report on the
liquidation of expenses incurred during the campaign, which respondent and Cruz wrote that
respondent had nothing to do with, to which petitioner failed to show evidence to the contrary.
Surprisingly, respondent's alleged breach of obligation was never brought up by petitioner
during the time that the former was asking for the payment of the amounts owing to him which
betrays the falsity of petitioner's allegation. Noteworthy to mention is the fact that petitioner
had even paid respondent his salary for the three-month period with only a balance of
P20,000.00, conditioned upon respondent's delivery of the inventory of campaign equipment.
Such payment established that indeed respondent had performed his responsibilities under the
contract. We, therefore, agree with the RTC's conclusion that petitioner's claim of breach of
contract was merely used as an excuse to evade payment of the amounts due respondent.
Petitioner's contention that respondent's misrepresentation that he had the expertise in
establishing a political machinery for his campaign, was not at all true thus his consent was
vitiated, is not meritorious. Again, petitioner's allegation was not supported by the evidence on
record. We find apropos what the CA said on this issue, to wit:
It bears emphasis that vitiated consent does not make a contract
unenforceable but merely voidable. Such contract is binding on all the
contracting parties until annulled and set aside by a court of law. If
indeed appellant's consent was vitiated, his remedy would have been
to annul the contract, considering that voidable contracts produce
legal effects until they are annulled. This is the clear import of Article
1390 (2) of the Civil Code, which provides:
Art. 1390. The following contracts are voidable or
annullable, even though there may have been no damage
to the contracting parties. aIAEcD
1.Those where one of the parties is incapable of giving
consent to a contract.
2.Those where the consent is vitiated by mistake, violence,
intimidation, undue influence or fraud.
These contracts are binding, unless they are annulled by a
proper action in court. They are susceptible of ratification.

21
Pursuant to the above-quoted provision, the alleged fraud committed
by appellee upon appellant made the contract for professional
services a voidable contract. Being a voidable contract, it is
susceptible of either ratification or annulment. If the contract is
ratified, the action to annul it is extinguished and the contract is
cleansed from all its defects. But if the contract is annulled, the
contracting parties are restored to their respective situations before
the contract and mutual restitution follows as a consequence.
As stated earlier, an annullable contract may be rendered perfectly
valid by ratification, which can be express or implied. Implied
ratification may take the form of accepting and retaining the benefits
of a contract. This is what happened in this case. No action was taken
by appellant to annul the professional service contract. Appellant also
did not confront appellee regarding the latter's poor campaign
services. This silence, taken together with appellant's demand for
appellee to make an inventory of equipment and a liquidation of the
funds used during the campaign, constitutes in itself an effective
ratification of the original agreement in accordance with Article 1393
of the Civil Code, which reads:
xxx xxx xxx
If appellant was, indeed, tricked into contracting with appellee and
was unsatisfied with the latter's services, he should have taken steps
in order for the latter not to expect any bonus. After all, the bonus was
dependent solely on the condition of appellant's victory in the
elections. Or he could have immediately instituted an action for
annulment of their contract. But none of these happened. As the
records show, appellant even went further by giving appellant other
election related tasks. This bolsters the view that, indeed there was
ratification. One cannot continue on demanding a certain task to be
performed but at the same time contend that the contract cannot be
enforced because of poor performance and misrepresentation.
Notably, it was only when appellee already demanded the payment of
the stipulated amount that appellant raised the defense of vitiated
consent. Clearly, appellant was agreeable to the contract except that
appellee's expertise fell short of appellant's expectations. 17
We also affirm the award of attorney's fees, as respondent was compelled to litigate and incur
expenses to protect his interest because of petitioner's unjust refusal to satisfy respondent's
claim. 18 TIESCA

The RTC, as affirmed by the CA, ordered petitioner to pay respondent the amount of
P220,000.00 plus legal interest, however, the legal rate of interest was not specified. As to
computation of legal interest, Eastern Shipping Lines, Inc. v. Court of Appeals19 laid down the
following guidelines, thus:
xxx xxx xxx
II.With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1.. . .
2.When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at
the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established
with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only
from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be on the
amount finally adjudged.
3.When the judgment of the court awarding a sum of money becomes
final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall
be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an
equivalent to a forbearance of credit. 20
In this case, petitioner's obligation does not constitute a loan or forbearance of money, but a
contract for professional service of respondent as petitioner's campaign manager. Hence, the
amount of P220,000.00 owing to respondent shall earn an interest of 6% per annum to be
computed from the time the extrajudicial demand for payment was made on July 3, 1998 until

22
the finality of this decision. As ruled in Eastern Shipping, after a judgment has become final
and executory, the rate of legal interest, whether the obligation was in the form of a loan or
forbearance of money or otherwise, shall be 12% per annum from such finality until its
satisfaction. Thus, from the date the liability for the principal obligation has become final and
executory, an annual interest of 12% shall be imposed until its final satisfaction, this interim
period being deemed to be by then an equivalent to a forbearance of credit. 21
WHEREFORE, in view of all the foregoing, the instant petition is DENIED. The Decision
dated February 28, 2006 and the Resolution dated June 21, 2006 of the Court of Appeals in
CA-G.R. CV No. 82753, which affirmed the RTC decision ordering petitioner to pay
respondent the amount of P220,000.00, plus P30,000.00 as attorney's fees,
are AFFIRMED with theMODIFICATION that the award of P220,000.00 shall earn interest
at the rate of 6% per annum from July 3, 1998 until the finality of this decision. After this
decision becomes final and executory, petitioner is ORDERED to pay interest at 12% per
annum on the principal obligation until full payment. ECaTAI
SO ORDERED.
Velasco, Jr., Abad, Mendoza and Reyes, * JJ., concur.
Footnotes

||| (Manzano v. Lazaro, G.R. No. 173320, [April 11, 2012])

23

SECOND DIVISION
[G.R. No. 142830. March 24, 2006.]
WILLIAM
GOLANGCO
CONSTRUCTION
CORPORATION, petitioner, vs. PHILIPPINE COMMERCIAL
INTERNATIONAL BANK * , respondent.
DECISION
CORONA, J p:
The facts of this case are straightforward. 1
William Golangco Construction Corporation (WGCC) and the Philippine Commercial
International Bank (PCIB) entered into a contract for the construction of the extension of PCIB
Tower II (denominated as PCIB Tower II, Extension Project [project]) 2 on October 20, 1989.
The project included, among others, the application of a granitite wash-out finish 3 on the
exterior walls of the building.
PCIB, with the concurrence of its consultant TCGI Engineers (TCGI), accepted the turnover of
the completed work by WGCC in a letter dated June 1, 1992. To answer for any defect arising
within a period of one year, WGCC submitted a guarantee bond dated July 1, 1992 issued by
Malayan Insurance Company, Inc. in compliance with the construction contract. 4
The controversy arose when portions of the granitite wash-out finish of the exterior of the
building began peeling off and falling from the walls in 1993. WGCC made minor repairs after
PCIB requested it to rectify the construction defects. In 1994, PCIB entered into another
contract with Brains and Brawn Construction and Development Corporation to re-do the entire
granitite wash-out finish after WGCC manifested that it was "not in a position to do the new
finishing work," though it was willing to share part of the cost. PCIB incurred expenses
amounting to P11,665,000 for the repair work.
PCIB filed a request for arbitration with the Construction Industry Arbitration Commission
(CIAC) for the reimbursement of its expenses for the repairs made by another contractor. It
complained of WGCC's alleged non-compliance with their contractual terms on materials and
workmanship. WGCC interposed a counterclaim for P5,777,157.84 for material cost
adjustment.

The CIAC declared WGCC liable for the construction defects in the project. 5 WGCC filed a
petition for review with the Court of Appeals (CA) which dismissed it for lack of merit. 6 Its
motion for reconsideration was similarly denied. 7
In this petition for review on certiorari, WGCC raises this main question of law: whether or
not petitioner WGCC is liable for defects in the granitite wash-out finish that occurred after the
lapse of the one-year defects liability period provided in Art. XI of the construction contract. 8
We rule in favor of WGCC. TADIHE
The controversy pivots on a provision in the construction contract referred to as the defects
liability period:
ARTICLE XI GUARANTEE
Unless otherwise specified for specific works, and without prejudice
to the rights and causes of action of the OWNER under Article 1723
of the Civil Code, the CONTRACTOR hereby guarantees the
work stipulated in this Contract, and shall make good any defect
in materials and workmanship which [becomes] evident within
one (1) year after the final acceptance of the work. The
CONTRACTOR shall leave the work in perfect order upon
completion and present the final certificate to the ENGINEER
promptly.
If in the opinion of the OWNER and ENGINEER, the
CONTRACTOR has failed to act promptly in rectifying any defect in
the work which appears within the period mentioned above, the
OWNER and the ENGINEER may, at their own discretion, using the
Guarantee Bond amount for corrections, have the work done by
another contractor at the expense of the CONTRACTOR or his
bondsmen.
However, nothing in this section shall in any way affect or relieve
the CONTRACTOR'S responsibility to the OWNER. On the
completion of the [w]orks, the CONTRACTOR shall clear away and
remove from the site all constructional plant, surplus materials,
rubbish and temporary works of every kind, and leave the whole of
the [s]ite and [w]orks clean and in a workmanlike condition to the
satisfaction of the ENGINEER and OWNER. 9 (emphasis ours)

24
Although both parties based their arguments on the same stipulations, they reached conflicting
conclusions. A careful reading of the stipulations, however, leads us to the conclusion that
WGCC's arguments are more tenable.

INTERPRETATION OF CONTRACTS
To challenge the guarantee period provided in Article XI of the contract, PCIB calls our
attention to Article 62.2 which provides:

AUTONOMY OF CONTRACTS
62.2 Unfulfilled Obligations
The autonomous nature of contracts is enunciated in Article 1306 of the Civil Code.
Article 1306. The contracting parties may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided
they are not contrary to law, morals, good customs, public order, or
public policy.
Obligations arising from contracts have the force of law between the parties and should be
complied with in good faith. 10 In characterizing the contract as having the force of law
between the parties, the law stresses the obligatory nature of a binding and valid agreement.
The provision in the construction contract providing for a defects liability period was not
shown as contrary to law, morals, good customs, public order or public policy. By the nature of
the obligation in such contract, the provision limiting liability for defects and fixing specific
guaranty periods was not only fair and equitable; it was also necessary. Without such
limitation, the contractor would be expected to make a perpetual guarantee on all materials and
workmanship.
The adoption of a one-year guarantee, as done by WGCC and PCIB, is established usage in the
Philippines for private and government construction contracts. 11 The contract did not specify
a different period for defects in the granitite wash-out finish; hence, any defect therein should
have been brought to WGCC's attention within the one-year defects liability period in the
contract. SaICcT
We cannot countenance an interpretation that undermines a contractual stipulation freely and
validly agreed upon. The courts will not relieve a party from the effects of an unwise or
unfavorable contract freely entered into. 12
[T]he inclusion in a written contract for a piece of work [,] such as the
one in question, of a provision defining a warranty period against
defects, is not uncommon. This kind of a stipulation is of particular
importance to the contractor, for as a general rule, after the lapse of
the period agreed upon therein, he may no longer be held accountable
for whatever defects, deficiencies or imperfections that may be
discovered in the work executed by him. 13

Notwithstanding the issue of the Defects Liability Certificate[,] the

Contractor and the Owner shall remain liable for the fulfillment
of any obligation[,] incurred under the provisions of the Contract
prior to the issue of the Defects Liability Certificate[,] which
remains unperformed at the time such Defects Liability
Certificate is issued[. And] for the purpose of determining the nature
and extent of any such obligation, the Contract shall be deemed to
remain in force between the parties of the Contract. (emphasis ours)
The defects in the granitite wash-out finish were not the "obligation" contemplated in Article
62.2. It was not an obligation that remained unperformed or unfulfilled at the time the defects
liability certificate was issued. The alleged defects occurred more than a year from the final
acceptance by PCIB.
An examination of Article 1719 of the Civil Code is enlightening:
Art. 1719. Acceptance of the work by the employer relieves the
contractor of liability for any defect in the work, unless:
(1) The defect is hidden and the employer is not, by his
special knowledge, expected to recognize the
same; or
(2) The employer expressly reserves his rights against the
contractor by reason of the defect.
The lower courts conjectured that the peeling off of the granitite wash-out finish was
probably due to "defective materials and workmanship." This they characterized as
hidden or latent defects. We, however, do not agree with the conclusion that the alleged
defects were hidden.
First, PCIB's team of experts 14 (who were specifically employed to detect such defects early
on) supervised WGCC's workmanship. Second, WGCC regularly submitted progress reports
and photographs. Third, WGCC worked under fair and transparent circumstances. PCIB had

25
access to the site and it exercised reasonable supervision over WGCC's work. Fourth, PCIB
issued several "punch lists" for WGCC's compliance before the issuance of PCIB's final
certificate of acceptance. Fifth, PCIB supplied the materials for the granitite wash-out finish.
And finally, PCIB's team of experts gave their concurrence to the turnover of the project.
The purpose of the defects liability period was precisely to give PCIB additional, albeit limited,
opportunity to oblige WGCC to make good any defect, hidden or otherwise, discovered within
one year.
Contrary to the CA's conclusion, the first sentence of the third paragraph of Article XI on
guarantee previously quoted did not operate as a blanket exception to the one-year guarantee
period under the first paragraph. Neither did it modify, extend, nullify or supersede the
categorical terms of the defects liability period. cEISAD
Under the circumstances, there were no hidden defects for which WGCC could be held liable.
Neither was there any other defect for which PCIB made any express reservation of its rights
against WGCC. Indeed, the contract should not be interpreted to favor the one who caused the
confusion, if any. The contract was prepared by TCGI for PCIB. 15
WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals in
CA-G.R. SP No. 41152 is ANNULLED and SET ASIDE.
SO ORDERED.
Puno, Sandoval-Gutierrez, Azcuna and Garcia, JJ., concur.

||| (William Golangco Construction Corp. v. Philippine Commercial International Bank, G.R.
No. 142830, [March 24, 2006], 520 PHIL 167-174)

26

FIRST DIVISION
[G.R. No. 169578. November 30, 2006.]
TERESITA DIO, petitioner, vs. ST. FERDINAND MEMORIAL
PARK, INC. and MILDRED F. TANTOCO,respondents.
DECISION
CALLEJO, SR., J p:
Before us is a Petition for Review on Certiorari assailing the Decision 1 of the Court of
Appeals (CA) in CA-G.R. CV No. 52311 which affirmed the decision of the Regional Trial
Court (RTC), Branch 57 of Lucena City, in Civil Case No. 86-152. Likewise sought to be
reversed and set aside is the resolution of the appellate court denying reconsideration of the
assailed decision.
On December 11, 1973, Teresita Dio agreed to buy, on installment basis, a memorial lot from
the St. Ferdinand Memorial Park, Inc. (SFMPI) in Lucena City. The 36-square-meter memorial
lot is particularly described as Block 2, Section F, Lot 15. The purchase was evidenced by a
Pre-Need Purchase Agreement 2 dated December 11, 1973 and denominated as Contract No.
384. She obliged herself to abide by all such rules and regulations governing the SFMPI dated
May 25, 1972.
SFMPI issued a Deed of Sale and Certificate of Perpetual Care 3 dated April 1, 1974
denominated as Contract No. 284. The ownership of Dio over the property was made subject to
the rules and regulations of SFMPI, as well as the government, including all amendments,
additions and modifications that may later be adopted. Rule 69 of the Rules reads:
Rule 69. Mausoleum building and memorials should be constructed
by the Park Personnel. Lot Owners cannot contract other
contractors for the construction of the said buildings and
memorial, however, the lot owner is free to give their own
design for the mausoleum to be constructed, as long as it is
in accordance with the park standards. The construction
shall be under the close supervision of the Park
Superintendent.
Meanwhile, the mortal remains of Dio's husband and father were interred in the lot at her own
expense, without the knowledge and intervention of SFMPI. She engaged the services of a

private contractor for the fabrication of niches and improvements on her lot. In August 1974,
the remains of Dio's daughter were likewise interred in the niche constructed on the lot, again
without the knowledge and intervention of SFMPI. TcICEA
In 1986, Dio decided to build a mausoleum on the lot. In September that year, she caused the
preparation of a design-plan for the construction of a mausoleum and the bidding out of the
project.
In the early part of October 1986, Dio informed SFMPI, through its president and controlling
stockholder, Mildred F. Tantoco, that she was planning to build a mausoleum on her lot and
sought the approval thereof. Dio even showed to Tantoco the plans and project specifications
accomplished by her private contractor at an estimated cost of P60,000.00. The plans and
specifications were approved, but Tantoco insisted that the mausoleum be built by it or its
agents at a minimum cost of P100,000.00 as provided in Rule 69 of the Rules and Regulations
the SFMPI issued on May 25, 1972. The total amount excluded certain specific designs in the
approved plan which if included would cost Dio much more. In a letter 4 dated October 13,
1986, Dio, through counsel, demanded that she be allowed to construct the mausoleum within
10 days, otherwise, she would be impelled to file the necessary action/s against SFMPI and
Tantoco.
On October 17, 1986, SFMPI wrote Dio informing her that under Rule 69 of SFMPI Rules and
Regulations, she was prohibited from engaging an outside contractor for the construction of
buildings, improvements and memorials. A lot owner was only allowed to submit a preferred
design as long as it is in accordance with park standards.
On December 23, 1986, Dio filed a Complaint for Injunction with Damages 5 against SFMPI
and Tantoco before the RTC of Lucena City. She averred that she was not aware of Rule 69 of
the SFMPI Rules and Regulations; the amount of P100,000.00 as construction cost of the
mausoleum was unconscionable and oppressive. She prayed that, after trial, judgment be
rendered in her favor, granting a final injunction perpetually restraining defendants from
enforcing the invalid Rule 69 of SFMPI's "Rules for Memorial Work in the Mausoleum of the
Park" or from refusing or preventing the construction of any improvement upon her property in
the park. 6 The court issued a cease and desist order against defendants.
In their answer with counterclaim, defendants averred that the construction of a mausoleum on
plaintiff's lot at a minimum cost of P100,000.00 was not oppressive and unconscionable. They
averred that the estimated amount was commensurate to the plan and specified expensive
materials to be used in the construction from which defendants did not expect any
unreasonable gain. They stressed that Rule 69 was made in good faith and was adopted prior to
plaintiff's purchase of the lot in question. They insisted that plaintiff was aware of the existence
of Rule 69 when the Pre-Need Purchase Agreement and Deed of Sale was executed, that

27
plaintiff made no protest thereto, and was therefore estopped from questioning its application
and enforcement.
Plaintiff testified that when she bought the memorial lot from defendant, she transferred the
remains of her father and husband on the said property. In August 1974, her daughter
Serconsicion died and was likewise buried in the memorial lot. 7She narrated that she wanted a
mausoleum to be constructed over the niches of her loved ones to protect the remains of her
dead relatives. She requested Engr. Alex Tan to prepare a plan for a mausoleum. The blueprint
for the mausoleum was estimated at P60,000.00. Thereafter, plaintiff informed defendant
Tantoco of her intention to build a mausoleum on her lot. Tantoco retorted that plaintiff could
not hire an outside contractor to build a mausoleum. 8 Plaintiff was initially surprised by
Tantoco's statement because she knew that their contract did not provide for such stipulation.
Tantoco then offered to construct the mausoleum but at the lowest cost of P100,000.00,
excluding the stainless name and the Coloroof. 9 She also testified that when she bought the lot
on December 11, 1973, the agreement was that she would cause the construction of the niche
and all improvements necessary for the tombs. When asked by the court if the witness had read
the rules and regulations stated in the Pre-Need Purchase Agreement and the Deed of Sale and
Certificate of Perpetual Care, she answered in the negative. 10
Plaintiff presented National Bureau of Investigation (NBI) Document Examiner Bienvenido
Albacea to prove that the rules and regulations of SFMPI were not yet in existence on May 25,
1972. The witness declared that, as a document examiner since 1976, he examines documents
being questioned to determine their authenticity and source. Papers are likewise examined to
check if there is any forgery, and photographed to compare the original from the photocopy. He
declared that he conducted a laboratory examination and analysis of the original of the rules
and regulations of defendant and subjected the same under stereoscopic microscope. He used
measuring test plates to calibrate the size of the typewriter, the horizontal and vertical pitch and
slots of the typewriter used in the document. He concluded that the date "May 25, 1972" was
an intercalation on page one of defendant's rules and regulations and were not typed in one and
the same occasion as the other provisions on the document. 11
On cross-examination, Albacea admitted that it was possible that the date "May 25, 1972" was
typed on the same day when the other entries in the rules and regulations were typed. He also
admitted that the date could have been typed after the whole page one was removed from the
typewriter. 12 He produced test plates, a photograph enlargement, and the laboratory analysis
result of the original specimens, as well as the carbon duplicate of SFMPI Rules and
Regulations. HCacDE
On August 3, 1995, the trial court rendered judgment in favor of defendants. 13 The dispositive
portion of the decision reads:

WHEREFORE, premises considered, this Court hereby renders

Judgment against the plaintiff and in favor of the defendants.
Consequently, [the] instant Complaint is hereby DISMISSED.
No pronouncement on award of damages could be made as the same
has not been sufficiently proven.
SO ORDERED. 14
The trial court rejected the claim of plaintiff that defendants failed to inform her of the rules
and regulations of SFMPI. The court declared that she even informed them of her intention to
construct a mausoleum. According to the court a quo, this was proof that plaintiff was fully
aware of the rules and regulations of the memorial park; otherwise, she would not have sought
the permission of defendants of her intention to build a mausoleum. Plaintiff was obliged to
abide by the terms and conditions of the Pre-Need Purchase Agreement and the Deed of Sale
and the rules and regulations issued by defendant SFMPI.
On appeal, the CA affirmed the decision of the trial court. 15 The appellate court ratiocinated
that when the parties executed the Pre-Need Purchase Agreement, Dio agreed to be bound not
only by the existing rules and regulations for the use and governance of the cemetery, but also
future ones.
Aggrieved, Dio, now petitioner, filed the present petition for review on certiorari, alleging
that:
I. THE APPELLATE COURT ERRED IN RULING THAT THE
DATE "MAY 25, 1972" COULD NOT HAVE BEEN A
BELATED ATTEMPT TO SHOW THAT RULE 69 WAS
ADOPTED PRIOR TO PETITIONER'S PURCHASE OF
THE MEMORIAL LOT BECAUSE IT WAS POSSIBLE
THAT SAID DATE COULD HAVE BEEN TYPED
RIGHT AFTER THE DOCUMENT CONTAINING
RULE 69 WAS PREPARED.
II. THE APPELLATE COURT ERRED IN RULING THAT
PETITIONER WAS BOUND NOT ONLY BY RULES
EXISTING AT THE TIME OF THE PURCHASE OF
THE MEMORIAL LOT BUT ALSO BY THOSE THAT
MAY BE ADOPTED BY RESPONDENTS AFTER THE
PURCHASE.

28
The petition is denied for lack of merit.
III. THE APPELLATE COURT ERRED IN RULING THAT
PETITIONER WAS BOUND BY THE RULES
BECAUSE SHE VOLUNTARILY ENTERED INTO THE
SALE AND PURCHASE OF THE MEMORIAL LOT.
IV. THE APPELLATE COURT ERRED IN SUSTAINING THE
VALIDITY OF RULE 69 DESPITE THE FACT THAT IT
WAS VOID FOR BEING CONTRARY TO LAW,
MORALS, PUBLIC ORDER, AND PUBLIC POLICY.
V. THE APPELLATE COURT ERRED IN NOT ORDERING
RESPONDENTS TO PAY PETITIONER DAMAGES AS
PRAYED FOR IN HER COMPLAINT AND PROVED
DURING THE TRIAL. 16
The issues are whether or not petitioner had knowledge of Rule 69 of SFMPI Rules and
Regulations for memorial works in the mausoleum areas of the park when the Pre-Need
Purchase Agreement and the Deed of Sale was executed; and whether the said rule is valid and
binding upon petitioner. TSIDEa
Petitioner argues that respondents failed to prove that respondent SFMPI approved the rules
and regulations on May 25, 1972, before she purchased the lot. Petitioner avers that as testified
to by NBI Document Examiner Albacea, the rules and regulations were not drafted on May 25,
1972. In any event, she never consented to comply with the memorial park rules and
regulations, and all amendments, additions, and modifications thereto. Petitioner further avers
that the questioned Rule 69 is unreasonable and oppressive, therefore, void for being contrary
to law, morals, public order, and public policy. Petitioner additionally denies being in estoppel
as she never made any admission or representation in the contracts she signed, which,
according to petitioner, were both contracts of adhesion.
Respondents, on the other hand, contend that petitioner's plea for injunction had become moot
and academic because petitioner had already caused the completion of said mausoleum as early
as July 8, 1997, in patent violation of the trial and appellate courts' orders to cease and desist
construction. Moreover, petitioner presented NBI Document Examiner Albacea as a witness,
and is thus barred from assailing the probative weight thereof. Respondents maintain that the
Pre-Need Purchase Agreement as well as the Deed of Sale and Certificate of Perpetual Care are
not contracts of adhesion, and petitioner could have easily refused to enter into said contracts if
she truly had concerns regarding any of the stipulations therein. Rule 69 of the SFMPI Rules
and Regulations does not permanently deprive the owners of their right to use their own
property; hence, the rule is not oppressive or unconscionable.

Time and again the Court has emphasized that findings of facts of lower courts, particularly
when affirmed by the appellate court, are deemed final and conclusive. The Supreme Court
cannot go over such findings on appeal, especially when they are borne out by the records or
are based on substantial evidence. It is not the function of this Court to analyze or weigh the
evidence all over again, unless there is a showing that the findings of the lower court are
entirely devoid of support or are glaringly erroneous as to constitute palpable error or grave
abuse of discretion. 17
The reason for the rule is that the trial court is in a better position to examine the demeanor of
the witnesses while testifying. Our jurisdiction is in principle limited to reviewing errors of law
that might have been committed by the CA. A fortiori, as in this case, where the factual
findings of the trial court are affirmed in toto by the CA, there is great reason for not disturbing
such findings and for regarding them as not reviewable by this Court. 18 There are also settled
exceptions to this rule: (1) when the factual findings of the CA and the trial court are
contradictory; (2) when the conclusion is a finding grounded entirely on speculation, surmises,
or conjectures; (3) when the inference made by the CA from its findings of fact is manifestly
mistaken, absurd, or impossible; (4) when there is a grave abuse of discretion in the
appreciation of facts; (5) when the appellate court, in making its findings, went beyond the
issues of the case and such findings are contrary to the admissions of both appellant and
appellee; (6) when the judgment of the CA is premised on a misapprehension of facts; (7) when
the CA failed to notice certain relevant facts which, if properly considered, would justify a
different conclusion; (8) when the findings of fact are themselves conflicting; (9) when the
findings of fact are conclusions without citation of the specific evidence on which they are
based; and (10) when the findings of fact of the CA are premised on the absence of evidence
but such findings are contradicted by the evidence on record. 19 In the case at bar, none of
these exceptions is present which would warrant a review of the factual findings of the courts
below. TCacIA
Under the Pre-Need Purchase Agreement executed by petitioner and respondents, the parties
covenanted that upon the completion of all payments by the purchaser, the seller would convey
to the purchaser a certificate of ownership to the aforesaid interment property for the interment
of human remains only. The certificate of SFMPI now existing or which may hereafter be
adopted for the government of said cemetery and said certificate shall be in the form used by
the seller, a copy of which petitioner acknowledged she had examined and approved. Petitioner
agreed to abide by all such rules and regulations governing SFMPI, 20 among them Rule 69
which prevents lot owners from "contract[ing] other contractors for the construction of the said
buildings and memorial" but gives the owners free rein "to give their own design for the
mausoleum to be constructed, as long as it is in accordance with the park standards."
Under the Deed of Sale and Certificate of Perpetual Care, petitioner agreed to be bound not
only by the existing rules but also by future rules and regulations that may be adopted by

29
respondent SFMPI. It is also stated in the said rules and regulations kept in the office of
respondent which could be inspected by petitioner at any time:
2. The PURCHASER, his heirs, successors and assigns, shall have,
hold and use the property subject to the rules and regulations of
SELLER for the government of the cemetery now in force and those
which may hereafter be adopted. A copy of said rules and regulations
and all amendments, additions and modifications thereto is kept in the
office of the SELLER and is subject to inspection by the
PURCHASER at all times during normal office hours. Said rules and
regulations and all amendments, additions, and modifications thereto
are hereby incorporated herein and made integral parts hereof by
reference as if set forth herein in full. 21
Thus, when petitioner executed the Pre-Need Purchase Agreement and conformed to the Deed
of Sale, it was with full knowledge of the terms and conditions thereof, including the rules and
regulations issued by respondent SFMPI. Hence, petitioner is precluded from asserting that she
had no knowledge of said rules and regulations, and that she never consented to comply with
them. More importantly, petitioner cannot feign ignorance of said rules. In law, whatever fairly
puts a person on inquiry is sufficient notice, where the means of knowledge are at hand, which
if pursued by the proper inquiry, the full truth might have been ascertained. 22 In this case, the
appellate court declared:
x x x [k]knowledge will be imputed and may be implied from
circumstances where the circumstances known to one concerning a
matter in which he is interested are sufficient to require him, as an
honest and prudent person, to investigate concerning the rights of
others in the same matter, and diligent investigation will lead to
discovery of any right conflicting with his own. 23

if she is not barred by the rules and regulations to do the same. When
she signed the contract between [sic] the defendants, she is [sic]
estopped to question and attack the legality of said contract later on.
(Emphasis supplied) 24
Petitioner is obliged to abide by the terms and conditions of the Pre-Need Purchase Agreement
and the Deed of Sale, as well as said rules and regulations which formed integral parts of said
deeds.
Basic is the principle that contracts, once perfected, bind both contracting parties. 25 The
parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided these are not contrary to law, morals, good customs, public order, or
public policy. It follows that obligations arising from contracts have the force of law between
the contracting parties and should be complied with in good faith. 26
We quote with approval the ruling of the trial court:
The appellant's ownership of the memorial lot was subject to the rules
and regulations legally and validly restricting her enjoyment and use
of the property. Art. 428, Civil Code, states that the owner has the
right to enjoy and dispose of a thing without other limitations than
those established by law. It is recognized that the limitations include
those that are imposed by the will of the transmitting owner, that is,
the transmitting owner transfers his property by whatever title and
imposes on the acquirer whatever limitations he wishes as long as the
limitations are not contrary to the nature of ownership and not
prohibited by law (e.g., servitudes, encumbrances, prohibition against
alienation).

For its part, the trial court made the following findings:
Plaintiff's allegation that she was not aware of the said Rules and
Regulations lacks credence. Admittedly, in her Complaint and during
the trial, plaintiff testified that she informed the defendants of her
intention to construct a mausoleum. Even counsel for the plaintiff,
who is the son of the plaintiff, informed the Court during the trial in
this case that her mother, the plaintiff herein, informed the defendants
of her plan to construct and erect a mausoleum. This act of the
plaintiff clearly shows that she was fully aware of the said rules and
regulations otherwise she should not consult, inform and seek
permission from the defendants of her intention to build a mausoleum

Otherwise stated, the appellant should adhere to and comply with the
terms and conditions of the pre-need purchase agreement and
the deed of sale and certificate of perpetual care. Her perceived
disadvantage does not amount to her deprivation of property or other
rights without due process of law considering that she had voluntarily
entered into the purchase and considering also that she remains free to
exercise her right as property owner, under which she can build a
mausoleum provided she does so in accordance with the memorial
park's standards and rules common to all owners of lots. 27

30
Petitioner is an experienced businesswoman. She doubtlessly dealt with numerous documents,
and is therefore presumed to know the import thereof. It cannot be further emphasized that it
behooves every contracting party to learn and know the contents of an instrument before
signing and agreeing to it. 28
We are not persuaded by petitioner's claim that Rule 69 of respondent's rules and regulations is
unreasonable and oppressive because the provision unduly restricts her right of ownership over
the property. Rule 69 of the said rules and regulations is neither excessive nor despotic. The
rule itself specifies that the "lot owner is free to give their own design for the mausoleum to be
constructed, as long as it is in accordance with the park standards." Clearly, the rule allows the
construction of a mausoleum but with certain restrictions. Moreover, as the proprietor of the
entire memorial park, the formulation of a reasonable set of rules and regulations is within the
power of the management of respondent SFMPI. It is noteworthy that the same rule permits
petitioner, or any other buyer of memorial lot, to use the property for the purpose for which it
was contemplated. DaIACS
A contract of adhesion, wherein one party imposes a readymade form of contract on the other,
is not strictly against the law.29 A contract of adhesion is as binding as ordinary contracts, the
reason being that the party who adheres to the contract is free to reject it entirely. 30 Contrary
to petitioner's contention, not every contract of adhesion is an invalid agreement. As we had the
occasion to state in Development Bank of the Philippines v. Perez: 31
x x x In discussing the consequences of a contract of adhesion, we
held in Rizal Commercial Banking Corporation v. Court of Appeals:
It bears stressing that a contract of adhesion is just as
binding as ordinary contracts. It is true that we have, on
occasion, struck down such contracts as void when the
weaker party is imposed upon in dealing with the
dominant bargaining party and is reduced to the alternative
of taking it or leaving it, completely deprived of the
opportunity to bargain on equal footing, Nevertheless,
contracts of adhesion are not invalid per se; they are not
entirely prohibited. The one who adheres to the contract is
in reality free to reject it entirely; if he adheres, he gives
his consent. 32
The validity or enforceability of the impugned contracts will have to be determined by the
peculiar circumstances obtaining in each case and the situation of the parties concerned.
Indeed, Article 24 of the New Civil Code provides that "[in] all contractual, property or other
relations, when one of the parties is at a disadvantage on account of his moral dependence,
ignorance, indigence, mental weakness, tender age, or other handicap, the courts must be

vigilant for his protection." 33 In this case, however, there is no reason for the Court to apply
the rule on stringent treatment towards contracts of adhesion. To reiterate, not only is petitioner
educated, she is likewise a well-known and experienced businesswoman; thus, she cannot
claim to be the weaker or disadvantaged party in the subject contracts so as to call for a strict
interpretation against respondents. Moreover, she executed the Pre-Need Purchase Agreement
and Deed of Sale without any complaint or protest. She assailed Rule 69 of the Rules and
Regulations of respondent SFMPI only when respondents rejected her request to cause the
construction of the mausoleum.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Appeals in CAG.R. CV No. 52311 dated May 10, 2005, and the Resolution dated September 6, 2005, are
AFFIRMED. Costs against petitioner.
SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Chico-Nazario, JJ., concur.
||| (Dio v. St. Ferdinand Memorial Park, Inc., G.R. No. 169578, [November 30, 2006], 538
PHIL 944-960)

31

FIRST DIVISION
[G.R. No. 156437. March 1, 2004.]
NATIONAL HOUSING AUTHORITY, petitioner, vs. GRACE
BAPTIST CHURCH and the COURT OF APPEALS,respondents.
DECISION
YNARES-SANTIAGO, J p:
This is a petition for review under Rule 45 of the Rules of Court, seeking to reverse the
Decision of the Court of Appeals dated February 26, 2001, 1 and its Resolution dated
November 8, 2002, 2 which modified the decision of the Regional Trial Court of Quezon City,
Branch 90, dated February 25, 1997. 3
On June 13, 1986, respondent Grace Baptist Church (hereinafter, the Church) wrote a letter to
petitioner National Housing Authority (NHA), manifesting its interest in acquiring Lots 4 and
17 of the General Mariano Alvarez Resettlement Project in Cavite. 4 In its letter-reply dated
July 9, 1986, petitioner informed respondent:
In reference to your request letter dated 13 June 1986, regarding your
application for Lots 4 and 17, Block C-3-CL, we are glad to inform
you that your request was granted and you may now visit our Project
Office at General Mariano Alvarez for processing of your application
to purchase said lots.

On April 8, 1991, the Church tendered to the NHA a managers check in the amount of
P55,350.00, purportedly in full payment of the subject properties. 9 The Church insisted that
this was the price quoted to them by the NHA Field Office, as shown by an unsigned piece of
paper with a handwritten computation scribbled thereon. 10 Petitioner NHA returned the
check, stating that the amount was insufficient considering that the price of the properties have
changed. The Church made several demands on the NHA to accept their tender of payment, but
the latter refused. Thus, the Church instituted a complaint for specific performance and
damages against the NHA with the Regional Trial Court of Quezon City, 11 where it was
docketed as Civil Case No. Q-91-9148.
On February 25, 1997, the trial court rendered its decision, the dispositive portion of which
reads:
WHEREFORE, premises considered, judgment is hereby rendered as
follows:
1. Ordering the defendant to reimburse to the plaintiff the amount of
P4,290.00 representing the overpayment made for Lots 1, 2, 3, 18, 19
and 20;
2. Declaring that there was no perfected contract of sale with respect
to Lots 4 and 17 and ordering the plaintiff to return possession of the
property to the defendant and to pay the latter reasonable rental for
the use of the property at P200.00 per month computed from the time
it took possession thereof until finally vacated. Costs against
defendant.
SO ORDERED. 12

We hereby advise you also that prior to approval of such application

and in accordance with our existing policies and guidelines, your
other accounts with us shall be maintained in good standing. 5
Respondent entered into possession of the lots and introduced improvements thereon. 6
On February 22, 1991, the NHA's Board of Directors passed Resolution No. 2126, approving
the sale of the subject lots to respondent Church at the price of P700.00 per square meter, or a
total price of P430,500.00. 7 The Church was duly informed of this Resolution through a letter
sent by the NHA. 8

On appeal, the Court of Appeals, affirmed the trial courts finding that there was indeed no
contract of sale between the parties. However, petitioner was ordered to execute the sale of the
lots to Grace Baptist Church at the price of P700.00 per square meter, with 6% interest per
annum from March 1991. The dispositive portion of the Court of Appeals decision, dated
February 26, 2001, reads:
WHEREFORE, the appealed Decision is hereby AFFIRMED with the
MODIFICATION that defendant-appellee NHA is hereby ordered to
sell to plaintiff-appellant Grace Baptist Church Lots 4 and 17 at the
price of P700.00 per square meter, or a total cost P430,000.00 with
6% interest per annum from March, 1991 until full payment in cash.

32
SO ORDERED. 13
The appellate court ruled that the NHA's Resolution No. 2126, which earlier approved the sale
of the subject lots to Grace Baptist Church at the price of P700.00 per square meter, has not
been revoked at any time and was therefore still in effect. As a result, the NHA was estopped
from fixing a different price for the subject properties. Considering further that the Church had
been occupying the subject lots and even introduced improvements thereon, the Court of
Appeals ruled that, in the interest of equity, it should be allowed to purchase the subject
properties. 14
Petitioner NHA filed a Motion for Reconsideration which was denied in a Resolution dated
November 8, 2002. Hence, the instant petition for review on the sole issue of: Can the NHA be
compelled to sell the subject lots to Grace Baptist Church in the absence of any perfected
contract of sale between the parties?
Petitioner submits that the Court cannot compel it to sell the subject property to Grace Baptist
Church without violating its freedom to contract. 15 Moreover, it contends that equity should
be applied only in the absence of any law governing the relationship between the parties, and
that the law on sales and the law on contracts in general apply to the present case. 16
We find merit in petitioners submission.
Petitioner NHA is not estopped from selling the subject lots at a price equal to their fair market
value, even if it failed to expressly revoke Resolution No. 2126. It is, after all, hornbook law
that the principle of estoppel does not operate against the Government for the act of its
agents, 17 or, as in this case, their inaction. HTcDEa
On the application of equity, it appears that the crux of the controversy involves the
characterization of equity in the context of contract law. Preliminarily, we reiterate that this
Court, while aware of its equity jurisdiction, is first and foremost, a court of law. While equity
might tilt on the side of one party, the same cannot be enforced so as to overrule positive
provisions of law in favor of the other. 18 Thus, before we can pass upon the propriety of an
application of equitable principles in the case at bar, we must first determine whether or not
positive provisions of law govern.
It is a fundamental rule that contracts, once perfected, bind both contracting parties, and
obligations arising therefrom have the force of law between the parties and should be complied
with in good faith. 19 However, it must be understood that contracts are not the only source of
law that govern the rights and obligations between the parties. More specifically, no contractual
stipulation may contradict law, morals, good customs, public order or public policy. 20 Verily,
the mere inexistenceof a contract, which would ordinarily serve as the law between the parties,
does not automatically authorize disposing of a controversy based on equitable principles

alone. Notwithstanding the absence of a perfected contract between the parties, their
relationship may be governed by other existing laws which provide for their reciprocal rights
and obligations.
It must be remembered that contracts in which the Government is a party are subject to the
same rules of contract law which govern the validity and sufficiency of contract between
individuals. All the essential elements and characteristics of a contract in general must be
present in order to create a binding and enforceable Government contract. 21
It appearing that there is no dispute that this case involves an unperfected contract, the Civil
Law principles governing contracts should apply. In Vda. de Urbano v. Government Service
Insurance System, 22 it was ruled that a qualified acceptance constitutes a counter-offer as
expressly stated by Article 1319 of the Civil Code. In said case, petitioners offered to redeem
mortgaged property and requested for an extension of the period of redemption. However, the
offer was not accepted by the GSIS. Instead, it made a counter-offer, which petitioners did not
accept. Petitioners again offer to pay the redemption price on staggered basis. In deciding said
case, it was held that when there is absolutely no acceptance of an offer or if the offer is
expressly rejected, there is no meeting of the minds. Since petitioners offer was denied twice
by GSIS, it was held that there was clearly no meeting of the minds and, thus, no perfected
contract. All that is established was a counter-offer. 23
In the case at bar, the offer of the NHA to sell the subject property, as embodied in Resolution
No. 2126, was similarly not accepted by the respondent. 24 Thus, the alleged contract involved
in this case should be more accurately denominated asinexistent. There being no concurrence
of the offer and acceptance, it did not pass the stage of generation to the point of
perfection. 25 As such, it is without force and effect from the very beginning or from its
incipiency, as if it had never been entered into, and hence, cannot be validated either by lapse
of time or ratification. 26 Equity can not give validity to a void contract, 27 and this rule
should apply with equal force to inexistent contracts.
We note from the records, however, that the Church, despite knowledge that its intended
contract of sale with the NHA had not been perfected, proceeded to introduce improvements on
the disputed land. On the other hand, the NHA knowingly granted the Church temporary use of
the subject properties and did not prevent the Church from making improvements thereon.
Thus, the Church and the NHA, who both acted in bad faith, shall be treated as if they
were both in good faith. 28 In this connection, Article 448 of the Civil Code provides:
The owner of the land on which anything has been built, sown or
planted in good faith, shall have the right to appropriate as his own
the works, sowing or planting, after payment of the indemnity
provided for in articles 546 and 548, or to oblige the one who built or
planted to pay the price of the land, and the one who sowed, the

33
proper rent. However, the builder or planter cannot be obliged to buy
the land and if its value is considerably more than that of the building
or trees. In such case, he shall pay reasonable rent, if the owner of the
land does not choose to appropriate the building or trees after proper
indemnity. The parties shall agree upon the terms of the lease and in
case of disagreement, the court shall fix the terms thereof.

Pursuant to our ruling in Depra v. Dumlao, 29 there is a need to remand this case to the trial
court, which shall conduct the appropriate proceedings to assess the respective values of the
improvements and of the land, as well as the amounts of reasonable rentals and indemnity, fix
the terms of the lease if the parties so agree, and to determine other matters necessary for the
proper application of Article 448, in relation to Articles 546 and 548, of the Civil Code.
WHEREFORE, in view of the foregoing, the petition is GRANTED. The Court of Appeals'
Decision dated February 26, 2001 and Resolution dated November 8, 2002 are REVERSED
and SET ASIDE. The Decision of the Regional Trial Court of Quezon City-Branch 90, dated
February 25, 1997, is REINSTATED. This case is REMANDED to the Regional Trial Court of
Quezon City, Branch 90, for further proceedings consistent with Articles 448 and 546 of the
Civil Code.
No costs.
SO ORDERED.
Davide, Jr., C J., Carpio and Azcuna, JJ., concur.
Panganiban, J., is on official leave.
||| (National Housing Authority v. Grace Baptist Church, G.R. No. 156437, [March 1, 2004],
468 PHIL 266-276)

34

SECOND DIVISION
[G.R. No. 104404. May 6, 1993.]
SPOUSES TIU PECK and LEE YOK YAN, petitioners, vs. THE
HONORABLE COURT OF APPEALS (Seventeenth Division)
and SPOUSES CONCHITA M. RUBIATO and TAN
KING, respondents.
J.P. Villanueva & Associates for petitioners.
Estanislao L. Cesa, Jr. for private respondents.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACT, LAW BETWEEN THE
PARTIES; CASE AT BAR. There is no question that petitioners and the private respondents
voluntarily entered into the agreement to apportion or divide their businesses, whether as
partners or co-owners. That agreement is the law between them. Contracts shall be obligatory
in whatever form they may have been entered into, provided all the essential requisites for their
validity are present. The fact that after signing the agreement both parties immediately took
possession of their respective shares is the most compelling evidence that there was indeed a
binding partition of the properties. Contracts, once perfected, have the force of law between the
parties who are bound to comply therewith in good faith, and neither one may, without the
consent of the other, renege therefrom.
2. ID.; ID.; CONTRACTS; MAY NOT BE OVERTURNED BY INCONCLUSIVE PROOF.
Contracts solemnly and deliberately entered into may not be overturned by inconclusive
proof or by reason of mistake of one of the parties to which the other in no way has
contributed.
3. ID.; ID.; ID.; TITLE THEREOF DOES NOT NECESSARILY DETERMINE ITS NATURE.
The title of the contract does not necessarily determine its true nature.
DECISION

This is a petition for review on certiorari of the decision 1 of the Seventeenth Division of
respondent Court of Appeals in CA-G.R. CV No. 24912, dated 11 October 1991, modifying the
trial court's judgment.
The antecedent facts of the case are as follows:
In his lifetime, Joaquin Tiu Singco; father of petitioner Tiu Peck, owned and operated the
Argentina Trading, a business engaged in the buying and selling of lumber, hardware and
general merchandise in San Marcelino, Zambales. Helping him run the business were private
respondents: Tan King who helped manage the store and receiving P200.00 a month, while his
wife Conchita M. Rubiato did the marketing and cooking for which work she received a salary
of around P180.00 to P240.00 a month. The business license was, however, in the name of
Conchita M. Rubiato. LLphil
After the death of Joaquin Tiu Singco in 1974, Tiu Peck took over and continued the business
left by his father. Tan King and Conchita M. Rubiato continued to help him in the management
of the said business, eventually becoming partners thereof.
Sometime in 1983, petitioners and private respondents decided to end their business
partnership. Accordingly, they sought the help of five (5) respected members of the Filipino
Chinese Chamber of Commerce and Industry of Olongapo City (of which petitioners and
private respondents are members) to act as middlemen. Together with the five (5) middlemen,
Tiu Peck and Tan King discussed the manner of their separation and the liquidation of the
partnership properties. As a result of the discussion, an "Agreement on the Apportionment of
Partnership Business" was drawn up. Tiu Peck, also known as Lim Yan Chiao, and Tan King,
also known as Tiu To Suan, both signed the Agreement to which the five (5) middlemen also
affixed their signatures as witnesses.
The abovesaid Agreement reads as follows:
"AGREEMENT ON THE APPORTION OF
PARTNERSHIP BUSINESSES
The undersigned LIM YAN CHIAO and TIU TO SUAN hereby
agreed to terminate their partnership in business and apportion(ment)
of their lumber and hardware store and piggery farm under following
conditions:

PADILLA, J p:
First: The joint business shall be divided and apportioned on a lottery
basis.

35
Second: The collection of accounts receivable to the partnerships (sic)
shall be divided into four phases, such accounts shall be collected by
the person who gets the lot, and the collected funds shall be divided
equally by the partners after deducting commissions as follows:

(Sgd.) LIM YAN CHIAO (Sgd.) TIU TO SAUNA

Lim
Yan
Chiao
got
the
Tiu To Suan got the lot of the piggery.

lot

of

the

Lumber

First phase 20% commission

Witnesses:

Second phase 30% commission

(Sgd.)
CHUA
PUN
SU (Sgd.)
CO
CHU
TONG
(Sgd.)
Ting
Kok
Bin (Sgd.)
CHENG
SUY
LEY
(Sgd.) Ting Kim Yek" 2

Third phase 40% commission

Fourth phase 50% commission
Third: The partnership shall appropriate an amount of funds for the
separation of employees of the partnership, which shall be sole
responsibility of the lot winners concerned henceforth.
Fourth: The partnership shall likewise appropriate an amount of funds
to the lot winners concerned for the payment of unpaid taxes and
fees. cdphil
Fifth: The joint business are estimated of its assets as follows:.
(a) Lumber & Hardware One Million and
Six Hundred Thousand Pesos (P1,600,000.00) including
building and lot, and all the merchandise.
(b) Piggery

One
Million
Pesos
(P1,000.000.00) including the building and lot and all the
goods including the feeds.
Sixth: The person who win(s) the lot for the lumber and hardware
shall give Three Hundred Thousand Pesos (P300,000.00) to the
person who got (sic) the lot for the piggery.
Seventh: This agreement shall take effect upon the lottery.
Done on the 31st day of August on the year of our Lord Nineteen
Hundred and Eighty-Three.

Immediately thereafter, Tiu Peck took possession of the lumber and hardware business
including the lot and building as well as the merchandise therein. On the other hand, Tan King
and Conchita M. Rubiato took possession of the piggery business, the lot and all the
improvements thereon as well as the hogs.
After three (3) years, or specifically on 21 April 1986, private respondents wrote petitioners
demanding partition of the same properties subject of the Agreement of 31 August 1983.
Eventually, private respondents filed an action against petitioners for partition of the parcel of
land covered by TCT No. T-24999 where the lumber and hardware business was conducted and
the parcel of land covered by Tax Declaration No. 10985 where the piggery business was
located.
After trial, the Regional Trial Court of the Third Judicial Region, Branch 72, Olongapo City,
rendered judgment, declaring, among other things, that the parcels of land covered by Transfer
Certificate of Title No. T-24999 and Tax Declaration No. 10985 are owned in common by the
plaintiffs (private respondents) and the defendants (petitioners) in pro-indiviso equal shares;
that the plaintiffs (private respondents) are the owners of the building covered by Tax
Declaration No. 59345 built on the parcel of land covered by TCT No. T-24999; and ordering
plaintiffs and defendants to partition the said parcels of land among themselves. prLL
Petitioners (as defendants) appealed the above decision to respondent Court of Appeals. On 11
October 1991, respondent Court promulgated the challenged decision modifying the trial
court's judgment as follows:
"WHEREFORE, the judgment appealed from is modified, to read as
follows:
1. The parcel of land covered by Transfer Certificate of Title No. T24999 (Exhibit A), the building erected thereon covered by Tax
Declaration No. 59345 (Exhibit B), and the parcel of land covered by

36
Tax Declaration No. 10985 (Exhibit I) are declared owned in common
by the plaintiffs spouses Conchita M. Rubiato and Tan King and the
appellants spouses Tiu Peck and Lee Yok Yan, pro-indiviso in equal
shares, which properties are hereby ordered partitioned in accordance
with the provisions of Rule 69 of the Revised Rules of Court, the trial
Court to follow the procedure provided therein;
2. The defendants are ordered to return to the plaintiffs the personal
belongings kept in the building covered by Tax Declaration No.
59345 (Exhibit B); and
3. The defendants' counterclaim against the plaintiffs is dismissed.
No pronouncement as to costs in this instance.
SO ORDERED." 3
Undaunted, petitioners are now before us seeking a review of respondent court's decision and
assigning the following errors to said court:
"A. THE HONORABLE COURT OF APPEALS SERIOUSLY
ERRED IN DISREGARDING THE RESULT OF THE PARTITION
AGREEMENT ENTITLED 'AGREEMENT ON THE APPORTION
(SIC) OF PARTNERSHIP BUSINESSES' BY DECLARING THE
PROPERTIES SUBJECT THEREIN AGAIN AS OWNED IN
COMMON BY THE PETITIONERS AND RESPONDENT PRO
INDIVISOAND ORDERING A NEW PARTITION UNDER RULE
69 THUS SUPERSEDING AND VIOLATING THE BINDING
AGREEMENT THAT WERE (SIC) ALREADY EXECUTED AND
CONSUMMATED BY AND BETWEEN THE CO-OWNERS,
WHICH TOOK EFFECT THREE YEARS AGO, BEFORE THE
RESPONDENT FILED THE PETITION FOR PARTITION.
B. THE HONORABLE COURT OF APPEALS SERIOUSLY
ERRED IN DISREGARDING THE PRINCIPLE THAT THE
CONTRACT ONCE PERFECTED HAS THE FORCE OF LAW
BETWEEN THE PARTIES WITH WHICH THEY ARE BOUND TO
COMPLY IN GOOD FAITH AND NEITHER ONE OF THE
PARTIES WITHOUT THE CONSENT OF THE OTHER RENEGE
ON (SIC) THEREFROM.

C. THE HONORABLE COURT OF APPEALS SERIOUSLY

ERRED IN COMPLETELY IGNORING THE PRINCIPLE OF
EQUITY APPLICABLE IN THE CASE AT BAR IN ORDER TO
PROTECT THE VESTED RIGHTS THAT ACCRUED TO THE
PETITIONERS WHEN THE PARTIES HAD ACTUALLY
IMPLEMENTED
AND
EXECUTED
THE
PARTITION
AGREEMENT, AND WHO HAD EXERCISE(D) OWNERSHIP OR
ACTS OF STRICT DOMINION OVER THE PROPERTIES
ALLOTED TO EACH BY VIRTUE OF THE AGREEMENT.
D. THE HONORABLE COURT OF APPEALS SERIOUSLY
ERRED IN COMPLETELY IGNORING THE PRINCIPLE OF
ESTOPPEL APPLICABLE AGAINST THE RESPONDENT THAT
HAS BARRED THEM FROM QUESTIONING THE BINDING
FORCE AND EFFECT OF THE AGREEMENT." 4
The foregoing recital of errors may be reduced to two (2) principal issues.
The first issue concerns the alleged business partnership between Tiu Peck on the one hand and
the spouses Tan King and Conchita M. Rubiato on the other. LLjur
We agree with the resolution of the respondent court on this issue.
"To begin with, it cannot be said that there was a business partnership
between the appellants on the one hand and the appellees on the other,
absent the required public instrument constituting the partnership,
immovable properties having been contributed by the parties (Article
1771, Civil Code) and recording thereof in the Securities and
Exchange Commission (Article 1772, Civil Code).

Nonetheless, the parties may be deemed as co-owners of the real

properties and the businesses they are engaged in mentioned in the
agreement aforequoted (Exhibits 62 and 63). (Underscoring
supplied).
But the parties be (they) partners or co-owners as the case may be, the
parcel of land mentioned in the agreement (Exhibits 62 and 63) where
the lumber and hardware business wag conducted, covered by TCT
No. 24999 (Exhibit A), and the building erected thereon covered by

37
Tax Declaration No. 59345 (Exhibit B); and the parcel of land where
their piggery business was located, covered by Tax Declaration No.
10985 (Exhibit I), 'including the building and lot and all the goods
including the feeds' therein belong to appellants on the one hand and
appellees on the other." 5
Following the abovequoted ratiocination of respondent court, we expected it to then rule on the
validity and binding effect of the partition of the subject properties between the two (2)
contending parties as co-owners. Unfortunately, it diverted from the trend of its position when
it disregarded the real intention of the parties which was to divide the businesses and properties
owned by them in common. Respondent court itself perceived this intention when it stated:
". . . Such is the import of their agreement where appellant Tiu Peck
and appellee Tan King 'agreed to terminate their partnership in
business and apportion' their lumber and hardware business valued
P1,600,000, 'including (the) building and lot, and all the merchandise'
and piggery valued P1,000,000, `including the building and lot and all
the goods including the feeds' (Exhibits 62 and 63)." 6 (Emphasis
supplied).
It should be noted that private respondent Conchita M. Rubiato initiated the move to terminate
the so-called partnership when she informed Tiu Peck that since their children were already
grown-up, it was a propitious time for them to separate their businesses. To this proposal, Tiu
Peck agreed. With the help of five (5) respected middlemen, they drew up on 31 August 1983
the Agreement on the Apportionment of Partnership Businesses which they all signed. There
can be no doubt, therefore, that the two (2) parties wanted to go their separate ways in their
business and to get their respective shares of the properties which they owned in common
when they drew up and executed the 31 August 1983 agreement.

And, as held by respondent court, even though petitioner Lee Yok Yan and respondent
Conchita M. Rubiato were not actual signatories to the agreement, nonetheless, such agreement
is persuasive for or against them. Indeed, private respondents have no justification to refuse
delivery of TCT No. T-24999 to petitioners after they agreed to the partition and consequently
took possession of the piggery business and operated it for three (3) years before changing their
minds and seeking a new partition. It has not been explained by them as perhaps
explanation is not possible why it took them three (3) years before they decided for another
partition of the same properties subject of their agreement on 31 August 1983. LLjur
". . . Contracts solemnly and deliberately entered into may not be
overturned by inconclusive proof or by reason of mistake of one of
the parties to which the other in no way has contributed." 9
The respondent court, in our view, erred in ordering another partition after ruling that there is
no partnership but a co-ownership of the real properties and businesses between the petitioners
and private respondents.
Moreover, the title of the contract does not necessarily determine its true nature.
"The acts of the contracting parties, subsequent to, and in connection
with, the performance of the contract must be considered in the
interpretation of the contract . . . To determine the nature of a
contract, courts do not have or are not bound to rely upon the name or
title given it by the contracting parties . . . but the way the contracting
parties do or perform their respective obligations, stipulated or agreed
upon may be shown and inquired into, and should such performance
conflict with the name or title given the contract by the parties, the
former must prevail over the latter." 10

This brings us to the second issue: whether or not the agreement of 31 August 1983 is valid and
binding between the petitioners and private respondents.

WHEREFORE, in view of the foregoing, the decision appealed from ordering the partition of
the properties in question is hereby SET ASIDE. Accordingly:

There is no question that petitioners and the private respondents voluntarily entered into the
agreement to apportion or divide their businesses, whether as partners or co-owners. That
agreement is the law between them. Contracts shall be obligatory in whatever form they may
have been entered into, provided all the essential requisites for their validity are present. 7 The
fact that after signing the agreement both parties immediately took possession of their
respective shares is the most compelling evidence that there was indeed a binding partition of
the properties. Contracts, once perfected, have the force of law between the parties who are
bound to comply therewith in good faith, and neither one may, without the consent of the other,
renege therefrom. 8

1. the partition of the properties subject of the Agreement On the Apportionment of Partnership
Businesses, dated 31 August 1983, is hereby declared valid and binding between petitioners
and the private respondents;
2. Transfer Certificate of Title No. T-24999 (Exhibit A) covering the lot of the lumber and
hardware business as well as Tax Declaration No. 59345 covering the building thereon are
hereby ordered consolidated in the name of petitioners;

38
3. the Register of Deeds of Zambales is hereby ordered to issue a new Transfer Certificate of
Title in the names of petitioners Tiu Peck and Lee Yok Yan in lieu of TCT No. T-24999, Book
No. T-230, page 199; and
4. the lot covered by Tax Declaration No. 10985 and all improvements therein devoted to the
piggery business are declared properties of the private respondents; and
5. the petitioners are ordered to return to private respondents the personal belongings kept in
the building covered by Tax Declaration No. 59345 (Exhibit B).
Cost against private respondents. LLphil
SO ORDERED.
Narvasa, C .J ., Regalado and Nocon, JJ ., concur.
||| (Spouses Tiu Peck and Lee Yok Yan v. Court of Appeals, G.R. No. 104404, [May 6, 1993])

39

FIRST DIVISION
[G.R. No. 146021. March 10, 2006.]
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs.
ELIZABETH G. SARMIENTO, respondent.
DECISION
AUSTRIA-MARTINEZ, J p:
Before the Court is a petition for review on certiorari filed by Bank of the Philippine Islands
(petitioner) seeking to annul the Decision dated September 15, 2000 1 and the Resolution dated
November 13, 2000 2 of the Court of Appeals (CA) in CA G.R. CV No. 50135 affirming in
toto the decision of the Regional Trial Court of Quezon City dismissing the complaint for sum
of money filed by petitioner against Elizabeth Sarmiento (respondent).
The factual backdrop as found by the CA is as follows:
Appellee Sarmiento was the assistant manager of appellant bank's
Espaa Branch. Sometime in 1987, the Espaa Branch was
investigated for several alleged anomalous transactions involving
time deposits (Exhibit A). Among the suspects in the alleged scam
was appellee Sarmiento. From October 10, 1987 to June 30, 1988,
appellee Sarmiento did not regularly report for work but went to her
office in the bank only once in a while. She however received her full
salary for the said period totaling P116,003.52. Subsequently, she
received a demand from the appellant bank to return said amount
because it was mistakenly paid to her. She refused to do so and so
appellant bank instituted an action for collection in the court below.
Appellant bank asserted that since appellee Sarmiento did not actually
work during the period adverted to, she was not therefore, entitled to
receive any salary. The payment to her of said salary was a mistake.
According to appellee Sarmiento however, when an internal audit was
being undertaken in connection with the investigation of the alleged
bank scam, Vice President Arturo Kimseng of the Audit Department
of appellant bank verbally directed her to stop working while the
investigation was going on. This directive was obviously for the

purpose of preventing appellee Sarmiento from tampering with the

records or from influencing her subordinates to cover-up for her. It
was because of said oral instruction that appellee Sarmiento went to
office sparingly. 3
On April 3, 1995, the Regional Trial Court of Quezon City, Branch 98, dismissed 4 the
complaint for failure of petitioner to establish its case by preponderance of evidence with costs
against it. The trial court found that the principle of solutio indebitiupon which petitioner based
its complaint for a sum of money is untenable. It ruled that since respondent was petitioner's
Assistant Manager at the Espaa Branch, she was a managerial employee who was not under
obligation to punch in her card in the bundy clock; that she was allowed to visit the business
establishments of petitioner's several clients thus she could not be seen reporting for work
which was not a conclusive proof that she was not rendering service to her employer; that
respondent was lawfully entitled for payment of her salaries for the period from October 10,
1987 to June 30, 1988, amounting to P116,003.52; that petitioner's averment that during the
periods aforementioned respondent had already ceased reporting rest on a very shaky ground
since respondent claimed that she was instructed by petitioner's Assistant Vice-President of the
Auditing Department to refrain from reporting regularly inasmuch as there was an on-going
internal audit; that petitioner failed to present countervailing evidence on this point, hence such
claim remained unrebutted; and that petitioner did not even bother to adduce clear and
convincing evidence when the services of respondent was terminated. TCaEIc
Petitioner filed its appeal with the CA which in a Decision dated September 15, 2000 affirmed
the Decision of the trial court and dismissed the appeal. Petitioner's motion for reconsideration
was likewise denied in a Resolution dated November 13, 2000.
In finding for the respondent, the CA made the following disquisition:
These are admitted or fully established facts which constitute the
foundation of this Court's verdict, to wit:
1. Appellee Sarmiento was an assistant manager of appellant bank's
Espaa Branch and therefore was a managerial employee.
2. As a managerial employee, appellee Sarmiento was not required to
report for work in accordance with a definite time schedule.
3. For the period, October 10, 1987 to June 30, 1988, appellee
Sarmiento went to her office only once in a while but received her full
salary for said period.

40
4. According to appellant bank, appellee Sarmiento's services in said
bank were terminated on August 26, 1988. Consequently, for the
period, October 10, 1987 to June 30, 1988, appellee was still an
employee of the bank.

work a reasonable price to pay for ensuring the integrity of the

records under the control and to avoid influence being exerted upon
subordinate employees who may be potential witnesses against the
former.

5. During the period in question, appellee Sarmiento was not

suspended from office.

If there had been no such instruction to appellee Sarmiento, why did

not the branch manager or even higher corporate officials call her
attention for not reporting to office regularly? If her attention was
called but she continued to be absent, why was she not suspended?
Why was her salary paid? These questions were not satisfactorily
answered by appellant bank.

6. No criminal, civil or administrative action has been instituted by

appellant bank against appellee Sarmiento.
In this suit, the basis of appellant's bank's claim for reimbursement of
the salary paid to appellee Sarmiento for the period in question is the
rule of "no work, no pay". Since she did not work during the period in
question, she was not entitled to any salary. Appellee Sarmiento
counters this position with the argument that the reason why she did
not report for work regularly was because she was verbally instructed
by Vice-President Arturo Kimseng not to report for work while the
investigation in the bank was going on. Consequently, it was not her
desire, much less her fault, that she went to office very rarely.
The only issue to resolve is whether or not appellee Sarmiento was
indeed verbally instructed by Vice President Arturo Kimseng not to
report for work while the investigation was still going on.
It is true that Vice President Arturo Kimseng denied having given said
oral instruction to appellee Sarmiento. That notwithstanding, this
Court shares the view of the lower court that indeed appellee
Sarmiento was enjoined from reporting for work during the period of
investigation.
This is plausible because it jibes with the common practice in the
business world. When a managerial employee is under investigation,
the employer has three options. First: to suspend the managerial
employee during the period of investigation but this entails notice
and hearing to comply with the demands of administrative due
process. Second: to allow the managerial employee to continue
working during the period of investigation so that the employer can
derive benefit out of the salary being paid to the former. Third: to let
the managerial employee discontinue working during the period of
investigation but continue paying his salary. Usually, the employers
choose the third option because they consider the salary paid without

Accordingly, this Court holds that the payment of the salary to

appellee Sarmiento during the period in question was correct and the
latter's receipt was legal. She has therefore, no obligation to return
it. 5
Hence, the instant petition for review on the following grounds:
I. The Honorable Court of Appeals erred in holding based on a
misapprehension of facts that the "only issue to resolve is whether it
is true or not that appellee Sarmiento was indeed verbally instructed
by Vice President Arturo Kimseng not to report for work while the
investigation was still going on."
II. In connection with the foregoing, the Honorable Court of Appeals
also erred in holding without any basis at all, that it "shares the view
of the lower court that indeed appellee Sarmiento was enjoined from
reporting for work during the period of investigation."
III. The Honorable Court of Appeals erred in holding based entirely
on speculations, surmises or conjectures that "the payment of the
salary to appellee Sarmiento during the period in question was correct
and the latter's receipt (thereof) was legal" and accordingly, "she has
therefore no obligation to return it."
IV. The Honorable Court of Appeals erred in dismissing the appeal of
BPI and affirming the Decision under appeal. 6
Respondent filed her Comment. Subsequently, upon directive of the Court, the parties
submitted their respective memoranda.

41
Petitioner claims that: when the CA declared that the only issue to resolve is whether it is true
or not that appellee Sarmiento was indeed verbally instructed by Assistant Vice-President
Arturo Kimseng (AVP Kimseng) not to report for work while the investigation was still going
on, the CA impliedly acknowledged that it is convinced that respondent did not report for work
while the investigation was going on; petitioner fully agrees with the CA in making such an
assumption as it was based on the evidence on record; it was even respondent who admitted in
her Answer to the complaint as well as in her testimony in cross-examination that she stopped
reporting for work on September 12, 1987; the CA erred in its assumption that AVP Kimseng
had the power or authority to order or direct respondent not to report for work since no
evidence was presented by the defense to that effect; AVP Kimseng rebutted such claim when
he testified that he had no authority to do so; if it was really petitioner's intention not to allow
respondent to report for work and yet pay her salaries, there is no reason why it should now
proceed to recover from her; it is not uncommon for an employee who is under investigation to
cease from reporting for work on her own because she does not want to cooperate or to
participate in the investigation being conducted. DEHcTI

The Court dismisses the petition.

It is a settled rule that in the exercise of the Supreme Court's power of review, the Court is not
a trier of facts and does not normally undertake the re-examination of the evidence presented
by the contending parties during the trial of the case considering that the findings of facts of the
CA are conclusive and binding on the Court. 7 Jurisprudence has recognized several exceptions
in which factual issues may be resolved by this Court, such as: (1) when the findings are
grounded entirely on speculation, surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4)
when the judgment is based on a misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the appellee; (7)
when the findings are contrary to the trial court; (8) when the findings are conclusions without
citation of specific evidence on which they are based; (9) when the facts set forth in the petition
as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10)
when the findings of fact are premised on the supposed absence of evidence and contradicted
by the evidence on record; or (11) when the Court of Appeals manifestly overlooked certain
relevant facts not disputed by the parties, which, if properly considered, would justify a
different conclusion. 8 None of these exceptions find application in the present case.
After a thorough review of the instant case, the Court finds that the petition raises no
substantial question of law. The questions raised as to whether or not respondent was verbally
instructed not to report for work by petitioner's AVP Kimseng while the investigation was
going on and whether he possesses such authority considering that on rebuttal, he denied
having given such instruction claiming that he had no authority to do so, are patently questions

of fact beyond the pale of Rule 45 of the Rules of Court which mandates that only questions of
law be raised in the petition.
The Court finds no cogent reason to deviate from the findings of the trial court and the CA that
respondent is entitled to the payment of her salary from October 10, 1987 to June 30, 1988.
Petitioner's witness, Eduardo Cascarro, Head of the Branches Division Investigation Unit,
testified that respondent was terminated only on August 26, 1988, 9 thus, there is no question
that respondent was still an employee of petitioner during the period in question. There was no
showing that respondent was even suspended during the said period.
Although respondent testified that she stopped reporting for work on September 12, 1987, she
also testified on cross-examination that she still went to her office from September to
December 1987 although admittedly she was not doing anything but she still received her
salary. The Court likewise agrees with the CA that respondent could not be faulted for not
reporting for work because she merely complied with the verbal instruction of AVP Kimseng
not to report for work when the latter was conducting the investigation of the branch for
anomalies. While AVP Kimseng denied that he made such instruction and declared that he had
no authority to give such instruction, the trial court gave more credence to the testimony of
respondent that indeed she was instructed not to report for work.
We find no cogent reason to disturb the findings of the trial court in light of the settled rule that
the evaluation of the testimonies of witnesses by the trial court is entitled to the highest respect
because such court has the direct opportunity to observe the witnesses' demeanor and manner
of testifying and thus, is in a better position to assess their credibility. 10
The CA finding was supported by the evidence on record. Petitioner contends that respondent
was not reporting for work from October 10, 1987 to June 30, 1988, however, petitioner failed
to show why its Espaa Branch Manager allowed respondent to be absent or not to do anything
during that period if indeed there was no such instruction from AVP Kimseng for her not to
report for work. It bears stressing that as an Assistant Branch Manager, respondent has some
official duties to perform pertaining to the internal operation of petitioner's branch and yet her
Branch Manager allowed her to be absent for such a long period of time without calling her
attention on such absences. The only plausible explanation is that, as declared by respondent,
which remained unrebutted, she had relayed to her Branch Manager the verbal instruction of
AVP Kimseng for her not to report for work while the investigation was on-going. If indeed
there was no such instruction, the Branch Manager could have immediately called respondent's
attention regarding her absences and that she should have been required to perform her official
duties inside the branch office. And if she continued to be absent, she could have been
sanctioned or given the corresponding memorandum. Moreover, there is no evidence to show
that such absences, if unauthorized, were reported by the Branch Manager to higher authorities
of petitioner. On the contrary, without qualification or reservation, respondent's salary and
other benefits were given to her by petitioner during the said period. CHcESa

42
Petitioner insists that its payment of respondent's salary was by mistake since respondent who
chose not to report for work was not entitled to it under the principle of "no work, no pay", thus
she has the obligation to return the same. Petitioner based such contention on the principle
of solutio indebiti under Article 2154 11 of the Civil Code.
There is solutio indebiti where: (1) payment is made when there exists no binding relation
between the payor, who has no duty to pay, and the person who received the payment; and (2)
the payment is made through mistake, and not through liberality or some other cause. . . . The
quasi-contract of solutio indebiti is based on the ancient principle that no one shall enrich
himself unjustly at the expense of another. 12
Both elements are lacking in the present case. Mr. Cascarro, the Head of the Branches Division
Investigation Unit, had categorically stated that respondent was only terminated from service
on August 26, 1988. Respondent was not suspended from office. Consequently, during the
period in question, there still existed an employer-employee relationship between petitioner
and respondent which entitled respondent to the payment of her salary during the said period.
Thus, there can be no mistaken payment in this case. Moreover, it has been shown that the
payment of respondent's salary was with the knowledge and approval of respondent's
immediate superior officers. Hence, the principle of solutio indebiti finds no application in this
case.
WHEREFORE, the petition is DENIED and the Decision dated September 15, 2000 and the
Resolution dated November 13, 2000 of the Court of Appeals are AFFIRMED.
Costs against petitioner.
SO ORDERED.
Panganiban, C.J., Ynares-Santiago, Callejo, Sr. and Chico-Nazario, JJ., concur.
||| (Bank of the Philippine Islands v. Sarmiento, G.R. No. 146021, [March 10, 2006], 519 PHIL
247-257)

43

EN BANC
[G.R. No. 1299. November 16, 1903.]
VICENTE PEREZ, plaintiff-appellee, vs. EUGENIO POMAR,
Agent of the Compania-General de Tabacos,defendant-appellant.

Francisco Dominguez for appellant.

Ledesma, Sumulong & Quintos for appellee.

SYLLABUS
1. CONTRACTS; CONSENT. Contracts resulting from an implied consent
of the parties are valid and enforceable.
2. ID.; ID.; HIRING. Where one has rendered services to another, and
these services are accepted by the latter, in the absence of proof that the service was
rendered gratuitously, an obligation results to pay the reasonable worth of the services
rendered upon the implied contract of hiring.
3. ID.; ID.; ID. Although no fixed amount may have been determined as
the consideration for the contract of hiring, the contract is nevertheless valid if the
amount of the implied compensation can be determined by custom or frequent use in the
place where the services were rendered.

DECISION

TORRES, J p:
In a decision dated February 9, 1903, the judge of the Sixth Judicial District,
deciding a case brought by the plaintiff against the defendant for the recovery of wages
due and unpaid, gave judgment against the latter for the sum of $600 and the costs of suit,
less the sum of $50, Mexican.
On August 27, 1902, Don Vicente Perez filed in the Court of First Instance of Laguna a
complaint, which was amended on the 17th of January of this year, asking that the court
determine the amount due the plaintiff, at the customary rate of compensation for interpreting

in these Islands, for services rendered the Tabacalera Company, and that, in view of the
circumstances of the case, judgment be rendered in his favor for such sum. The complaint also
asked that the defendant be condemned to the payment of damages in the sum of $3,200, gold,
together with the costs of suit. In this complaint it was alleged that Don Eugenio Pomar, as
general agent of the Compania General de Tabacos in the said province, verbally requested the
plaintiff on the 8th of December, 1901, to act as interpreter between himself and the military
authorities, that after the date mentioned the plaintiff continued to render such services up to
and including May 31, 1902; that he had accompanied the defendant, Pomar during that time at
conferences between the latter and the colonel commanding the local garrison, and with
various officers and doctors residing in the capital, and at conferences with Captain Lemen in
the town of Pilar, and with the major in command at the town of Pagsanjan, concerning the
shipment of goods from Manila, and with respect to goods shipped from the towns of Santa
Cruz, Pilar, and Pagsanjan to this city; that the plaintiff during this period of time was at the
disposal of the defendant, Pomar, and held himself in readiness to render services whenever
required; that on this account his private business, and especially a soap factory established in
the capital, was entirely abandoned; that to the end that such services might be punctually
rendered, the agent, Pomar, assured him that the Tabacalera Company always generously
repaid services rendered it, and that he therefore did not trouble himself about his inability to
devote the necessary amount of time to his business, the defendant going so far as to make him
flattering promises of employment with the company, which he did not accept; that these
statements were made in the absence of witnesses and that therefore his only proof as to the
same was Mr. Pomar's word as a gentleman; that the employees of the company did not
understand English, and by reason of the plaintiff's mediation between the agent and the
military authorities large profits were obtained, as would appear from the account and
letterpress books of the agency corresponding to those dates. In the amended complaint it was
added that the defendant, on behalf of the company, offered to remunerate the plaintiff for the
services rendered in the most advantageous manner in which such services are compensated, in
view of the circumstances under which they were requested; and that the plaintiff, by rendering
the company such services, was obliged to abandon his own business, the manufacture of soap,
and thereby suffered damages in the sum of $3,200, United States currency.
The defendant, on the 25th of September, 1902, filed an answer asking for the dismissal of the
complaint, with costs to the plaintiff. In his answer the defendant denied the allegation in the
first paragraph of the complaint, stating that it was wholly untrue that the company, and the
defendant as its agent, had solicited the services of the plaintiff as interpreter before the
military authorities for the period stated, or for any other period, or that the plaintiff had
accompanied Pomar at the conferences mentioned, concerning shipments from Manila and
exports from some of the towns of the province to this capital. He stated that he especially
denied paragraph 2 of the complaint, as it was absolutely untrue that the plaintiff had been at
the disposal of the defendant for the purpose of rendering such services; that he therefore had
not been obliged to abandon his occupation or his soap factory, and that the statement that an
offer of employment with the company had been made to him was false. The defendant also
denied that through the mediation of the plaintiff the company and himself had obtained large
profits. The statements in paragraphs 6, 7, 8, and 9 of the complaint were also denied. The
defendant stated that, on account of the friendly relations which sprang up between the plaintiff
and himself, the former borrowed from him from time to time money amounting to $175 for
the purposes of his business, and that he had also delivered to the plaintiff 36 arrobas of oil
worth $106, and three packages of resin for use in coloring his soap; that the plaintiff

44
accompanied the defendant to Pagsanjan, Pilar, and other towns when the latter made business
trips to them for the purpose of extending his business and mercantile relations therein; that on
these excursions, as well as on private and official visits which he had to make, the plaintiff
occasionally accompanied him through motives of friendship, and especially because of the
free transportation given him, and not on behalf of the company of which he was never
interpreter and for which he rendered no services; that the plaintiff in these conferences acted
as interpreter of his own free will, without being requested to do so by the defendant and
without any offer of payment or compensation; that therefore there existed no legal relation
whatever between the company and the plaintiff, and that the defendant, when accepting the
spontaneous voluntary, and officious services of the plaintiff, did so in his private capacity and
not as agent of the company, and that it was for this reason that he refused to enter into
negotiations with the plaintiff, he being in no way indebted to the latter. The defendant
concluded by saying that he answered in his individual capacity.
A complaint having been filed against the Compania General de Tabacos and Don Eugenio
Polmar, its agent in the Province of Laguna, the latter, having been duly summoned, replied to
the complaint, which was subsequently amended, and stated that he made such reply in his
individual capacity and not as agent of the company, with which the plaintiff had no legal
relations. The suit was instituted between the plaintiff and Pomar, who, as such, accepted the
issue and entered into the controversy without objection, opposed the claim of the plaintiff, and
concluded by asking that the complaint be dismissed, with the costs to the plaintiff. Under
these circumstances and construing the statutes liberally, we think it proper to decide the case
pending between both parties in accordance with law and the strict principles of justice.
From the oral testimony introduced at the trial, it appears that the plaintiff, Perez, did on
various occasions render Don Eugenio Pomar services as interpreter of English; and that he
obtained passes and accompanied the defendant upon his journeys to some of the towns in the
Province of Laguna. It does not appear from the evidence, however, that the plaintiff was
constantly at the disposal of the defendant during the period of six months or that he rendered
services as such interpreter continuously and daily during that period of time.
It does not appear that any written contract was entered into between the parties for the
employment of the plaintiff as interpreter, or that any other innominate contract was entered
into; but whether the plaintiff's services were solicited or whether they were offered to the
defendant for his assistance, inasmuch as these services were accepted and made use of by the
latter, we must consider that there was a tacit and mutual consent as to the rendition of the
services. This gives rise to the obligation upon the person benefited by the services to make
compensation therefor, since the bilateral obligation to render service as interpreter, on the one
hand, and on the other to pay for the services rendered, is thereby incurred. (Arts. 1088, 1089,
and 1262 of the Civil Code). The supreme court of Spain in its decision of February 12, 1889,
holds, among other things, "that not only is there an express and tacit consent which produces
real contracts but there is also a presumptive consent which is the basis of quasi contracts, this
giving rise to the multiple juridical relations which result in obligations for the delivery of a
thing or the rendition of a service."
Notwithstanding the denial of the defendant, it is unquestionable that it was with his consent
that the plaintiff rendered him-services as interpreter, thus aiding him at a time when, owing to
the existence of an insurrection in the province, the most disturbed conditions prevailed. It
follows, hence, that there was consent on the part of both in the rendition of such services as
interpreter. Such service not being contrary to law or to good custom, it was a perfectly licit

object of contract, and such a contract must necessarily have existed between the parties, as
alleged by the plaintiff. (Art. 1271, Civil Code.)

The consideration for the contract is also evident, it being clear that a mutual benefit was
derived in consequence of the service rendered. It is to be supposed that the defendant accepted
these services and that the plaintiff in turn rendered them with the expectation that the benefit
would be reciprocal. This shows the concurrence of the three elements necessary under article
1261 of the Civil Code to constitute a contract of lease of service, or other innominate contract,
from which an obligation has arisen and whose fulfillment is now demanded.
Article 1254 of the Civil Code provides that a contract exists the moment that one or more
persons consent to be bound. With respect to another or others, to deliver some thing or to
render some service. Article 1255 provides that the contracting parties may establish such
covenants, terms, and conditions as they deem convenient, provided they are not contrary to
law, morals, or public policy. Whether the service was solicited or offered, the fact remains that
Perez rendered to Pomar services as interpreter. As it does not appear that he did this
gratuitously, the duty is imposed upon the defendant, he having accepted the benefit of the
service, to pay a just compensation therefor, by virtue of the innominate contract of facio ut
desimplicitly established.
The obligations arising from this contract are reciprocal, and, apart from the general provisions
with respect to contracts and obligations, the special provisions concerning contracts for lease
of services are applicable by analogy.
In this special contract, as determined by article 1544 of the Civil Code, one of the parties
undertakes to render the other a service for a price certain. The tacit agreement and consent of
both parties with respect to the service rendered by the plaintiff, and the reciprocal benefits
accruing to each, are the best evidence of the fact that there was an implied contract sufficient
to create a legal bond, from which arose enforceable rights and obligations of a bilateral
character.
In contracts the will of the contracting parties is law, this being a legal doctrine based upon the
provisions of articles 1254, 1258, 1262, 1278, 1281, 1282, and 1289 of the Civil Code. If it is a
fact sufficiently proven that the defendant, Pomar, on various occasions consented to accept an
interpreter's services, rendered in his behalf and not gratuitously, it is but just that he should
pay a reasonable remuneration therefor, because it is a well-known principle of law that no one
should be permitted to enrich himself to the damage of another.
With respect to the value of the services rendered on different occasions, the most important of
which was the first, as it does not appear that any salary was fixed upon by the parties at the
time the services were accepted, it devolves upon the court to determine, upon the evidence
presented, the value of such services, taking into consideration the few occasions on which
they were rendered. The fact that no fixed or determined consideration for the rendition of the
services was agreed upon does not necessarily involve a violation of the provisions of article
1544 of the Civil Code, because at the time of the agreement this consideration was capable of
being made certain. The discretionary power of the court, conferred upon it by the law, is also
supported by the decisions of the supreme court of Spain, among which may be cited that of
October 18, 1899, which holds as follows: "That as stated in the article of the Code cited,
which follows the provisions of law 1 title 8, of the fifth partida, the contract for lease of
services is one in which one of the parties undertakes to make some thing or to render some

45
service to the other for a certain price, the existence of such a price being understood, as this
court has held not only when the price has been expressly agreed upon but also when it may be
determined by the custom and frequent use of the place in which such services were rendered."
No exception was taken to the judgment below by the plaintiff on account of the rejection of
his claim for damages. The decision upon this point is, furthermore, correct.
Upon the supposition that the recovery of the plaintiff should not exceed 200 Mexican pesos,
owing to the inconsiderable number of times he acted as interpreter, it is evident that the
contract thus implicitly entered into was not required to be in writing and that therefore it does
not fall within article 1280 of the Civil Code; nor is it included within the provisions of section
335 of the Code of Civil Procedure, as this innominate contract is not covered by that section.
The contract of lease of services is not included in any of the cases expressly designated by that
section of the procedural law, as affirmed by the appellant. The interpretation of the other
articles of the Code alleged to have been infringed has also been stated fully in this opinion.
For the reasons stated, we are of the opinion that judgment should be rendered against Don
Eugenio Pomar for the payment to the plaintiff of the sum of 200 Mexican pesos, from which
will be deducted the sum of 50 pesos due the defendant by the plaintiff. No special declaration
is made as to the costs of this instance. The judgment below is accordingly affirmed in so far as
it agrees with this opinion, and reversed in so far as it may be in conflict therewith. Judgment
will be entered accordingly twenty days after this decision is filed.
Arellano, C .J ., Willard and Mapa, JJ ., concur.

Separate Opinions
McDONOUGH, J ., with whom concurs COOPER, J ., dissenting:
I dissent from the opinion of the majority. In my opinion there is no legal evidence in the case
from which the court may conclude that the recovery should be 200 Mexican pesos. I am
therefore in favor of affirming the judgment.
Johnson, J ., did not sit in this case.

||| (Perez v. Pomar, G.R. No. 1299, [November 16, 1903], 2 PHIL 682-689)

46

FIRST DIVISION

just, equitable and proper for the trial court to order the deposit of the ten million down
payment to prevent unjust enrichment by Reyes at the expense of Lim.

[G.R. No. 134241. August 11, 2003.]

SYLLABUS
DAVID
REYES
(Substituted
by
Victoria
R.
Fabella), petitioner, vs. JOSE LIM, CHUY CHENG KENG and
HARRISON LUMBER, INC.,respondents.
Romulo Mabanta Buenaventura Sayoc & Delos Angeles for petitioner.
Limqueco & Macaraeg Law Office for respondents.
Beltran & Reyes-Beltran for Chuy Cheng Keng and Harrison Lumber, Inc.
SYNOPSIS
Petitioner Reyes filed a complaint for annulment of contract and damages against respondents
alleging that petitioner as seller and respondent Lim as buyer entered into a contract to sell a
parcel of land. Lim paid ten million pesos as down payment upon the signing of the contract.
However, before the payment of the balance, Lim learned that Reyes had already sold the
property to another buyer. Lim sought the cancellation of the contract to sell and requested in
open court that Reyes be ordered to deposit the ten million down payment with the trial court
which was granted by the latter. Reyes filed a Motion to Set Aside the Order but the same was
denied. Reyes filed a Petition for Certiorari with the Court of Appeals (CA), but it was
dismissed. Hence, this petition for review.
In affirming the decision of the CA, the Supreme Court ruled that the trial court, in the exercise
of its equity jurisdiction, may validly order the deposit of the ten million down payment in
court. The purpose of the exercise of equity jurisdiction in this case is to prevent unjust
enrichment and to ensure restitution. The application of equity always involves the balancing
of the equities in a particular case, a matter addressed to the sound discretion of the court.
Here, the Court found the equities weigh heavily in favor of Lim, who paid the ten million
down payment in good faith, only to discover that Reyes had subsequently sold the subject
property to another buyer.
The Court further held that rescission creates the obligation to return the things that are the
subject of the contract. Thus, since Reyes is demanding to rescind the contract to sell, he
cannot refuse to deposit the ten million down payment in court. Such deposit will ensure
restitution of the ten million to its rightful owner. Lim, on the other hand, has nothing to
refund, as he has not received anything under the contract to sell. Moreover, in this case, it was

1. REMEDIAL LAW; COURTS; EQUITY JURISDICTION; AIMS TO DO COMPLETE

JUSTICE IN CASES WHERE A COURT OF LAW IS UNABLE TO ADAPT ITS
JUDGMENTS TO THE SPECIAL CIRCUMSTANCES OF A CASE BECAUSE OF THE
INFLEXIBILITY OF ITS STATUTORY OR LEGAL JURISDICTION; CASE AT BAR.
The instant case ... is precisely one where there is a hiatus in the law and in the Rules of Court.
If left alone, the hiatus will result in unjust enrichment to Reyes at the expense of Lim.
The hiatusmay also imperil restitution, which is a precondition to the rescission of the Contract
to Sell that Reyes himself seeks. This is not a case of. equity overruling a positive provision of
law or judicial rule for there is none that governs this particular case. This is a case of silence
or insufficiency of the law and the Rules of Court. In this case, Article 9 of the Civil Code
expressly mandates the courts to make a ruling despite the "silence, obscurity or insufficiency
of the laws." This calls for the application of equity, which "fills the open spaces in the law."
Thus, the trial court in the exercise of its equity jurisdiction may validly order the deposit of
the P10 million down payment in court. The purpose of the exercise of equity jurisdiction in
this case is to prevent unjust enrichment and to ensure restitution. Equity jurisdiction aims to
do complete justice in cases where a court of law is unable to adapt its judgments to the special
circumstances of a case because of the inflexibility of its statutory or legal jurisdiction. Equity
is the principle by which substantial justice may be attained in cases where the prescribed or
customary forms of ordinary law are inadequate. ... The application of equity always involves a
balancing of the equities in a particular case, a matter addressed to the sound discretion of the
court. Here, we find the equities weigh heavily in favor of Lim, who paid the P10 million down
payment in good faith only to discover later that Reyes had subsequently sold the Property to
another buyer.
2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; RESCISSIBLE CONTRACTS;
RESCISSION CREATES THE OBLIGATION TO RETURN THE THINGS THAT ARE THE
OBJECT OF THE CONTRACT; CASE AT BAR. Under Article 1385 of the Civil Code,
rescission creates the obligation to return the things that are the object of the contract.
Rescission is possible only when the person demanding rescission can return whatever he may
be obliged to restore. A court of equity will not rescind a contract unless there is restitution,
that is, the parties are restored to the status quo ante. Thus, since Reyes is demanding to
rescind the Contract to Sell, he cannot refuse to deposit the P10 million down payment in
court. Such deposit will ensure restitution of the P10 million to its rightful owner. Lim, on the
other hand, has nothing to refund, as he has not received anything under the Contract to Sell. ...
[A] court may not permit a seller to retain, pendente lite, money paid by a buyer if the seller
himself seeks rescission of the sale because he has subsequently sold the same property to
another buyer. By seeking rescission, a seller necessarily offers to return what he has received

47
from the buyer. Such a seller may not take back his offer if the court deems it equitable, to
prevent unjust enrichment and ensure restitution, to put the money in judicial deposit.
3. ID:; UNJUST ENRICHMENT; THE PRINCIPLE OF UNJUST ENRICHMENT MAY BE
INVOKED BY AN AGGRIEVED PARTY WHO HAS NO OTHER ACTION BASED ON
CONTRACT, QUASI-CONTRACT, CRIME, QUASI-DELICT OR ANY OTHER
PROVISION OF LAW. The principle that no person may unjustly enrich himself at the
expense of another is embodied in Article 22 of the Civil Code. This principle applies not only
to substantive rights but also to procedural remedies. One condition for invoking this principle
is that the aggrieved party has no other action based on contract, quasi-contract, crime, quasidelict or any other provision of law. Courts can extend this condition to the hiatus in the Rules
of Court where the aggrieved party, during the pendency of the case, has no other recourse
based on the provisional remedies of the Rules of Court.
4. ID.; ID.; WHEN PRESENT: CASE AT BAR. There is unjust enrichment when a person
unjustly retains a benefit to the loss of another, or when a person retains money or property of
another against the fundamental principles of justice, equity and good conscience. In this case,
it was just, equitable and proper for the trial court to order the deposit of the P10 million down
payment to prevent unjust enrichment by Reyes at the expense of Lim.
DECISION
CARPIO, J p:
The Case
This is a petition for review on certiorari of the Decision 1 dated 12 May 1998 of the Court of
Appeals in CA-G.R. SP No. 46224. The Court of Appeals dismissed the petition
for certiorari assailing the Orders dated 6 March 1997, 3 July 1997 and 3 October 1997 of the
Regional Trial Court of Paraaque, Branch 260 2 ("trial court") in Civil Case No. 95-032.
The Facts
On 23 March 1995, petitioner David Reyes ("Reyes") filed before the trial court a complaint
for annulment of contract and damages against respondents Jose Lim ("Lim"), Chuy Cheng
Keng ("Keng") and Harrison Lumber, Inc. ("Harrison Lumber").
The complaint 3 alleged that on 7 November 1994, Reyes as seller and Lim as buyer entered
into a contract to sell ("Contract to Sell") a parcel of land ("Property") located along F.B.
Harrison Street, Pasay City. Harrison Lumber occupied the Property as lessee with a monthly
rental of P35,000. The Contract to Sell provided for the following terms and conditions:

1. The total consideration for the purchase of the aforedescribed

parcel of land together with the perimeter walls found therein is
TWENTY EIGHT MILLION (P28,000,000.00) PESOS payable as
follows:
(a) TEN MILLION (P10,000,000.00)
signing of this Contract to Sell;

PESOS

upon

(b) The
balance
of
EIGHTEEN
MILLION
(P18,000,000.00) PESOS shall be paid on or before March
8, 1995 at 9:30 A.M. at a bank to be designated by the
Buyer but upon the complete vacation of all the tenants or
occupants of the property and execution of the Deed of
Absolute Sale. However, if the tenants or occupants have
vacated the premises earlier than March 8, 1995, the
VENDOR shall give the VENDEE at least one week
advance notice for the payment of the balance and
execution of the Deed of Absolute Sale.
2. That in the event, the tenants or occupants of the premises subject
of this sale shall not vacate the premises on March 8, 1995 as stated
above, the VENDEE shall withhold the payment of the balance of
P18,000,000.00 and the VENDOR agrees to pay a penalty of Four
percent (4%) per month to the herein VENDEE based on the amount
of the downpayment of TEN MILLION (P10,000,000.00) PESOS
until the complete vacation of the premises by the tenants therein. 4
The complaint claimed that Reyes had informed Harrison Lumber to vacate the Property before
the end of January 1995. Reyes also informed Keng 5 and Harrison Lumber that if they failed
to vacate by 8 March 1995, he would hold them liable for the penalty of P400,000 a month as
provided in the Contract to Sell. The complaint further alleged that Lim connived with
Harrison Lumber not to vacate the Property until the P400,000 monthly penalty would have
accumulated and equaled the unpaid purchase price of P18,000,000.
On 3 May 1995, Keng and Harrison Lumber filed their Answer 6 denying they connived with
Lim to defraud Reyes. Keng and Harrison Lumber alleged that Reyes approved their request
for an extension of time to vacate the Property due to their difficulty in finding a new location
for their business. Harrison Lumber claimed that as of March 1995, it had already started
transferring some of its merchandise to its new business location in Malabon. 7

48
On 31 May 1995, Lim filed his Answer 8 stating that he was ready and willing to pay the
balance of the purchase price on or before 8 March 1995. Lim requested a meeting with Reyes
through the latter's daughter on the signing of the Deed of Absolute Sale and the payment of
the balance but Reyes kept postponing their meeting. On 9 March 1995, Reyes offered to
return the P10 million down payment to Lim because Reyes was having problems in removing
the lessee from the Property. Lim rejected Reyes' offer and proceeded to verify the status of
Reyes' title to the Property. Lim learned that Reyes had already sold the Property to Line One
Foods Corporation ("Line One") on 1 March 1995 for P16,782,840. After the registration of the
Deed of Absolute Sale, the Register of Deeds issued to Line One TCT No. 134767 covering the
Property. Lim denied conniving with Keng and Harrison Lumber to defraud Reyes. TAEcCS
On 2 November 1995, Reyes filed a Motion for Leave to File Amended Complaint due to
supervening facts. These included the filing by Lim of a complaint for estafa against Reyes as
well as an action for specific performance and nullification of sale and title plus damages
before another trial court. 9 The trial court granted the motion in an Order dated 23 November
1995.

Hence, this petition for review.

The Ruling of the Court of Appeals
The Court of Appeals ruled the trial court could validly issue the assailed orders in the exercise
of its equity jurisdiction. The court may grant equitable reliefs to breathe life and force to
substantive law such as Article 1385 16 of the Civil Code since the provisional remedies under
the Rules of Court do not apply to this case.
The Court of Appeals held the assailed orders merely directed Reyes to deposit the P10 million
to the custody of the trial court to protect the interest of Lim who paid the amount to Reyes as
down payment. This did not mean the money would be returned automatically to Lim.
The Issues
Reyes raises the following issues:

In his Amended Answer dated 18 January 1996, 10 Lim prayed for the cancellation of the
Contract to Sell and for the issuance of a writ of preliminary attachment against Reyes. The
trial court denied the prayer for a writ of preliminary attachment in an Order dated 7 October
1996.
On 6 March 1997, Lim requested in open court that Reyes be ordered to deposit the P10
million down payment with the cashier of the Regional Trial Court of Paraaque. The trial
court granted this motion.
On 25 March 1997, Reyes filed a Motion to Set Aside the Order dated 6 March 1997 on the
ground the Order practically granted the reliefs Lim prayed for in his Amended Answer. 11 The
trial court denied Reyes' motion in an Order 12 dated 3 July 1997. Citing Article 1385 of the
Civil Code, the trial court ruled that an action for rescission could prosper only if the party
demanding rescission can return whatever he may be obliged to restore should the court grant
the rescission.
The trial court denied Reyes' Motion for Reconsideration in its Order 13 dated 3 October 1997.
In the same order, the trial court directed Reyes to deposit the P10 million down payment with
the Clerk of Court on or before 30 October 1997.
On 8 December 1997, Reyes 14 filed a Petition for Certiorari 15 with the Court of Appeals.
Reyes prayed that the Orders of the trial court dated 6 March 1997, 3 July 1997 and 3 October
1997 be set aside for having been issued with grave abuse of discretion amounting to lack of
jurisdiction. On 12 May 1998, the Court of Appeals dismissed the petition for lack of merit.

1. Whether the Court of Appeals erred in holding the trial court could
issue the questioned Orders dated March 6, 1997, July 3,
1997 and October 3, 1997, requiring petitioner David
Reyes to deposit the amount of Ten Million Pesos
(P10,000,000.00) during the pendency of the action, when
deposit is not among the provisional remedies enumerated
in Rule 57 to 61 of the 1997 Rules on Civil Procedure.
2. Whether the Court of Appeals erred in finding the trial court could
issue the questioned Orders on grounds of equity when
there is an applicable law on the matter, that is, Rules 57 to
61 of the 1997 Rules on Civil Procedure. 17
The Court's Ruling
Reyes' contentions are without merit.
Reyes points out that deposit is not among the provisional remedies enumerated in the 1997
Rules of Civil Procedure. Reyes stresses the enumeration in the Rules is exclusive. Not one of
the provisional remedies in Rules 57 to 61 18 applies to this case. Reyes argues that a court
cannot apply equity and require deposit if the law already prescribes the specific provisional
remedies which do not include deposit. Reyes invokes the principle that equity is "applied only
in the absence of, and never against, statutory law or . . . judicial rules of procedure." 19 Reyes

49
adds the fact that the provisional remedies do not include deposit is a matter of dura lex sed
lex. 20

equities weigh heavily in favor of Lim, who paid the P10 million down payment in good faith
only to discover later that Reyes had subsequently sold the Property to another buyer.

The instant case, however, is precisely one where there is a hiatus in the law and in the Rules
of Court. If left alone, the hiatuswill result in unjust enrichment to Reyes at the expense of
Lim. The hiatus may also imperil restitution, which is a precondition to the rescission of the
Contract to Sell that Reyes himself seeks. This is not a case of equity overruling a positive
provision of law or judicial rule for there is none that governs this particular case. This is a case
of silence or insufficiency of the law and the Rules of Court. In this case, Article 9 of the Civil
Code expressly mandates the courts to make a ruling despite the "silence, obscurity or
insufficiency of the laws." 21 This calls for the application of equity, 22 which "fills the open
spaces in the law." 23

In Eternal Gardens Memorial Parks Corp. v. IAC, 33 this Court held the plaintiff could not
continue to benefit from the property or funds in litigation during the pendency of the suit at
the expense of whomever the court might ultimately adjudge as the lawful owner. The Court
declared:

Thus, the trial court in the exercise of its equity jurisdiction may validly order the deposit of
the P10 million down payment in court. The purpose of the exercise of equity jurisdiction in
this case is to prevent unjust enrichment and to ensure restitution. Equity jurisdiction aims to
do complete justice in cases where a court of law is unable to adapt its judgments to the special
circumstances of a case because of the inflexibility of its statutory or legal
jurisdiction. 24 Equity is the principle by which substantial justice may be attained in cases
where the prescribed or customary forms of ordinary law are inadequate. 25
Reyes is seeking rescission of the Contract to Sell. In his amended answer, Lim is also seeking
cancellation of the Contract to Sell. The trial court then ordered Reyes to deposit in court the
P10 million down payment that Lim made under the Contract to Sell. Reyes admits receipt of
the P10 million down payment but opposes the order to deposit the amount in court. Reyes
contends that prior to a judgment annulling the Contract to Sell, he has the "right to use,
possess and enjoy" 26 the P10 million as its "owner" 27 unless the court orders its preliminary
attachment. 28
To subscribe to Reyes' contention will unjustly enrich Reyes at the expense of Lim. Reyes sold
to Line One the Property even before the balance of P18 million under the Contract to Sell with
Lim became due on 8 March 1995. On 1 March 1995, Reyes signed a Deed of Absolute
Sale 29 in favor of Line One. On 3 March 1995, the Register of Deeds issued TCT No.
134767 30 in the name of Line One. 31 Reyes cannot claim ownership of the P10 million down
payment because Reyes had already sold to another buyer the Property for which Lim made the
down payment. In fact, in his Comment 32 dated 20 March 1996, Reyes reiterated his offer to
return to Lim the P10 million down payment. TCHEDA
On balance, it is unreasonable and unjust for Reyes to object to the deposit of the P10 million
down payment. The application of equity always involves a balancing of the equities in a
particular case, a matter addressed to the sound discretion of the court. Here, we find the

In the case at bar, a careful analysis of the records will show that
petitioner admitted among others in its complaint in Interpleader that
it is still obligated to pay certain amounts to private respondent; that it
claims no interest in such amounts due and is willing to pay whoever
is declared entitled to said amounts. . . . .
Under the circumstances, there appears to be no plausible reason for
petitioner's objections to the deposit of the amounts in litigation after
having asked for the assistance of the lower court by filing a
complaint for interpleader where the deposit of aforesaid amounts is
not only required by the nature of the action but is a contractual
obligation of the petitioner under the Land Development Program
(Rollo, p. 252).
There is also no plausible or justifiable reason for Reyes to object to the deposit of the P10
million down payment in court. The Contract to Sell can no longer be enforced because Reyes
himself subsequently sold the Property to Line One. Both Reyes and Lim are now seeking
rescission of the Contract to Sell. Under Article 1385 of the Civil Code, rescission creates the
obligation to return the things that are the object of the contract. Rescission is possible only
when the person demanding rescission can return whatever he may be obliged to restore. A
court of equity will not rescind a contract unless there is restitution, that is, the parties are
restored to the status quo ante. 34

Thus, since Reyes is demanding to rescind the Contract to Sell, he cannot refuse to deposit the
P10 million down payment in court. 35 Such deposit will ensure restitution of the P10 million
to its rightful owner. Lim, on the other hand, has nothing to refund, as he has not received
anything under the Contract to Sell. 36
In Government of the Philippine Islands v. Wagner and Cleland Wagner, 37 the Court ruled
the refund of amounts received under a contract is a precondition to the rescission of the
contract. The Court declared:

50
The Government, having asked for rescission, must restore to the
defendants whatever it has received under the contract. It will only be
just if, as a condition to rescission, the Government be required to
refund to the defendants an amount equal to the purchase price, plus
the sums expended by them in improving the land. (Civil Code, Art.
1295.)
The principle that no person may unjustly enrich himself at the expense of another is embodied
in Article 22 38 of the Civil Code. This principle applies not only to substantive rights but also
to procedural remedies. One condition for invoking this principle is that the aggrieved party
has no other action based on contract, quasi-contract, crime, quasi-delict or any other provision
of law. 39 Courts can extend this condition to the hiatus in the Rules of Court where the
aggrieved party, during the pendency of the case, has no other recourse based on the
provisional remedies of the Rules of Court.
Thus, a court may not permit a seller to retain, pendente lite, money paid by a buyer if the
seller himself seeks rescission of the sale because he has subsequently sold the same property
to another buyer. 40 By seeking rescission, a seller necessarily offers to return what he has
received from the buyer. Such a seller may not take back his offer if the court deems it
equitable, to prevent unjust enrichment and ensure restitution, to put the money in judicial
deposit.
There is unjust enrichment when a person unjustly retains a benefit to the loss of another, or
when a person retains money or property of another against the fundamental principles of
justice, equity and good conscience. 41 In this case, it was just, equitable and proper for the
trial court to order the deposit of the P10 million down payment to prevent unjust enrichment
by Reyes at the expense of Lim. 42
WHEREFORE, we AFFIRM the Decision of the Court of Appeals.
SO ORDERED.
Davide, Jr., C .J ., Vitug, Ynares-Santiago and Azcuna, JJ ., concur.
||| (Reyes v. Lim, G.R. No. 134241, [August 11, 2003], 456 PHIL 1-14)

51

THIRD DIVISION

"2. Ordering the defendant to pay the plaintiff the sum equivalent to
25% of the total amount due and collectible; and

[G.R. No. 109087. May 9, 2001.]

"3. Ordering the defendant to pay the costs of the suit." 5
RODZSSEN SUPPLY CO. INC., petitioner, vs. FAR EAST BANK
& TRUST CO., respondent.
DECISION

The Facts
The factual and procedural antecedents of the case are summarized by the Court of Appeals as
follows:

PANGANIBAN, J p:
When both parties to a transaction are mutually negligent in the performance of their
obligations, the fault of one cancels the negligence of the other. Thus, their rights and
obligations may be determined equitably. No one shall enrich oneself at the expense of another.
The Case
Before us is a Petition for Review on Certiorari 1 under Rule 45 of the Rules of Court,
assailing the January 21, 1993 Decision 2of the Court of Appeals 3 (CA) in CA-GR CV No.
26045. The challenged Decision affirmed with modification the ruling of the Regional Trial
Court of Bacolod City in Civil Case No. 2296. The CA ruled as follows:
"WHEREFORE, the decision under appeal should be, as it is hereby
affirmed in all its aspects, except for the deletion of paragraph 2 of its
dispositive portion, which paragraph shall be replaced by a new
paragraph which shall read as follows:
'2. ordering the defendant to pay the plaintiff the sum
equivalent to 10% of the total amount due and collectible,
as attorney's fees; and'
"No pronouncement as to costs." 4
On the other hand, the trial court had rendered this judgment:
"1. Ordering the defendant to pay the plaintiff the sum of P76,000.00,
representing the principal amount being claimed in this action, plus
interest thereon at the rate of 12% per annum counted from October
1979 until fully paid;

"In the complaint from which the present proceedings originated, it is

alleged that on January 15, 1979, defendant Rodzssen Supply, Inc.
opened with plaintiff Far East Bank and Trust Co. a 30-day domestic
letter of credit, LC No. 52/0428/79-D, in the amount of P190,000.00
in favor of Ekman and Company, Inc. (Ekman) for the purchase from
the latter of five units of hydraulic loaders, to expire on February 15,
1979; that subsequent amendments extended the validity of said LC
up to October 16, 1979; that on March 16, 1979, three units of the
hydraulic loaders were delivered to defendant for which plaintiff on
March 26, 1979, paid Ekman the sum of P114,000.00, which amount
defendant paid plaintiff before the expiry date of the LC; that the
shipment of the remaining two units of hydraulic loaders valued at
P76,000.00 sent by Ekman was 'readily received by the defendant'
before the expiry date [of] subject LC; that upon Ekman's
presentation of the documents for the P76,000.00 'representing final
negotiation' on the LC before the expiry date, and 'after a series of
negotiations', plaintiff paid to Ekman the amount of P76,000.00; and
that upon plaintiff's demand on defendant to pay for said amount
(P76,000.00), defendant' refused to pay . . . without any valid reason'.
Plaintiff prays for judgment ordering defendant to pay the
abovementioned P76,000.00 plus due interest thereon, plus 25% of
the amount of the award as attorney's fees.
"In the Answer, defendant interposed, inter alia, by way of special
and affirmative defenses that plaintiff ha[d] no cause of action against
defendant; that there was a breach of contract by plaintiff who in bad
faith paid Ekman, knowing that the two units of hydraulic loaders had
been delivered to defendant after the expiry date of subject LC; and
that in view of the breach of contract, defendant offered to return to
plaintiff the two units of hydraulic loaders, 'presently still with the
defendant' but plaintiff refused to take possession thereof.

52
"The trial court's ruling that plaintiff [was] entitled to recover from
defendant the amount of P76,000.00 was based on its following
findings/conclusions: (1) under the contract of sale of the five loaders
between Ekman and defendant, upon Ekman's delivery to, and
acceptance by, defendant of the two remaining units of the five
loaders, defendant became liable to Ekman for the payment of said
two units. However, as defendant did not pay Ekman, the latter
pressed plaintiff for the payment of said two loaders in the amount of
P76,000.00. In the honest belief that it was still under obligation to
Ekman for said amount, considering that Ekman had presented all the
necessary documents, plaintiff voluntarily paid the said amount to
Ekman. Plaintiff's . . . voluntary and lawful act of payment g[a]ve rise
to a quasi-contract between plaintiff and defendant; and if defendant
should escape liability for said amount, the result would be to allow
defendant to enrich itself at plaintiff's expense . . . . SEHTA.
". . . . While defendant, indeed offered to return the two loaders to
plaintiff, . . . this offer was made 3 years after defendant's receipt of
the goods, when plaintiff pressed for payment. By said voluntary
acceptance of the two loaders, estoppel works against defendant who
should have refused delivery of, and/or immediately offered to return,
the goods.
"Accordingly, judgment was rendered in favor of the plaintiff and
against the defendant . . . ." 6
The CA Ruling
The CA rejected petitioner's imputation of bad faith and negligence to respondent bank for
paying for the two hydraulic loaders, which had been delivered after the expiration of the
subject letter of credit. The appellate court pointed out that petitioner received the equipment
after the letter of credit had expired. "To absolve defendant from liability for the price of the
same," the CA explained, "is to allow it to get away with its unjust enrichment at the expense
of the plaintiff."
Hence, this Petition. 7
Issues
Petitioner presents the following issues for resolution:

"1. Whether or not it is proper for a banking institution to pay a letter

of credit which has long expired or been cancelled.
"2. Whether or not respondent courts were correct in their conclusion
that there was a consummated sale between petitioner and Ekman Co.
"3. Whether or not Respondent Court of Appeals was correct in
evading the issues raised in the appeal that under the trust receipt,
petitioner was merely the depositary of private respondent with
respect to the goods covered by the trust receipt." 8
The Court's Ruling
We affirm the Court of Appeals, but lower the interest rate to only 6 percent and delete the
award of attorney's fees.
First Issue:
Efficacy of Letter of Credit
Petitioner asserts that respondent bank was negligent in paying for the two hydraulic loaders,
when it no longer had any obligation to do so in view of the expiration and cancellation of the
Letter of Credit.
Petitioner Rodzssen Supply Inc. applied for and obtained an irrevocable 30-day domestic
Letter of Credit from Far East Bank and Trust Company Inc. on January 15, 1979, in favor of
Ekman and Company Inc., in order to finance the purchase of five units of hydraulic loaders in
the amount of P190,000. Originally set to expire on February 15, 1979, the subject Letter of
Credit was amended several times to extend its validity until October 16, 1979.
The Letter of Credit expressly restricted the negotiation to respondent bank and specifically
instructed Ekman and Company Inc. to tender the following documents: (1) delivery receipt
duly acknowledged by the buyer, (2) accepted draft, and (3) duly signed commercial invoices.
Likewise, the instrument contained a provision with regard to its expiration date. 9
For the first three hydraulic loaders that were delivered, the bank paid the amount specified in
the letter of credit. The present dispute pertains only to the last two hydraulic loaders.
Clearly, the bank paid Ekman when the former was no longer bound to do so under the subject
Letter of Credit. The records show that respondent paid the latter P76,000 for the last two

53
hydraulic loaders on March 14, 1980, 10 five months after the expiration of the Letter of Credit
on October 16, 1979. 11 In fact, on December 27, 1979, the bank had informed Rodzssen of
the cancellation of the commercial paper and credited P22,800 to the account of the latter. The
amount represented the marginal deposit, which petitioner had been required to put up for the
unnegotiated portion of the Letter of Credit P76,000 for the two hydraulic loaders. 12
The subject Letter of Credit had become invalid upon the lapse of the period fixed
therein. 13 Thus, respondent should not have paid Ekman; it was not obliged to do so. In the
same vein, of no moment was Ekman's presentation, within the prescribed period, of all the
documents necessary for collection, as the Letter of Credit had already expired and had in fact
been cancelled.
Second Issue:
Was Petitioner Liable to Respondent?
Be that as it may, we agree with the CA that petitioner should pay respondent bank the amount
the latter expended for the equipment belatedly delivered by Ekman and
voluntarily received and kept by petitioner.
Respondent bank's right to seek recovery from petitioner is anchored, not upon the
inefficacious Letter of Credit, but on Article 2142 of the Civil Code which reads as follows:
"Certain lawful, voluntary and unilateral acts give rise to the juridical
relation of quasi-contract to the end that no one shall be unjustly
enriched or benefited at the expense of another."
Indeed, equitable considerations behoove us to allow recovery by respondent. True, it erred in
paying Ekman, but petitioner itself was not without fault in the transaction. It must be noted
that the latter had voluntarily received and kept the loaders since October 1979.
Petitioner claims that it accepted the late delivery of the equipment, only because it was bound
to accept it under the company's trust receipt arrangement with respondent bank.
Granting that petitioner was bound under such arrangement to accept the late delivery of the
equipment, we note its unexplained inaction for almost four years with regard to the status of
the ownership or possession of the loaders. Bewildering was its lack of action to validate the
ownership and possession of the loaders, as well as its stolidity over the purported failed sales
transaction. Significant too is the fact that it formalized its offer to return the two pieces of
equipment only after respondent's demand for payment, which came more than three years
after it accepted delivery.

When both parties to a transaction are mutually negligent in the performance of their
obligations, the fault of one cancels the negligence of the other and, as in this case, their rights
and obligations may be determined equitably under the law proscribing unjust enrichment.
Payment of Interest
We, however, disagree with both the CA and the trial court's imposition of 12 percent interest
on the sum to be paid by petitioner. In Eastern Shipping Lines v. CA, 14 the Court laid down
the following guidelines in the imposition of interest:
"xxx xxx xxx
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can be
established with reasonable certainty. Accordingly, where the demand
is established with reasonable certainty, the interest shall begin to run
from the time the claim is made judicially or extrajudicially (Art.
1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been
reasonably ascertained). The actual base for the computation of legal
interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit."
Although the sum of money involved in this case was payable to a bank, the present factual
milieu clearly shows that it was not a loan or forbearance of money. Thus, pursuant to
established jurisprudence and Article 2009 of the Civil Code, petitioner is bound to pay interest
at 6 percent per annum, computed from April 7, 1983, the time respondent bank demanded
payment from petitioner. From the finality of the judgment until its satisfaction, the interest
shall be 12 percent per annum.

54
Attorney's Fees
Considering that negligence is imputable to both parties, both should bear their respective costs
of the suit. We also delete the award of attorney's fees in favor of respondent bank. 15
WHEREFORE, the Petition is DENIED and the assailed Decision of the Court of Appeals
AFFIRMED with the following MODIFICATIONS:
1. Petitioner Rodzssen Supply Co., Inc. is ORDERED to reimburse
Respondent Far East Bank and Trust Co., Inc. P76,000 plus interest
thereon at the rate of 6 percent per annum computed from April 7,
1983. After this judgment becomes final, the interest shall be 12
percent per annum. HDITCS
2. The award of attorney's fees in favor of respondent is DELETED.
3. No pronouncement as to costs.
SO ORDERED.
Melo, Vitug, Gonzaga-Reyes and Sandoval-Gutierrez, JJ., concur.
||| (Rodzssen Supply Co. Inc. v. Far East Bank & Trust Co., G.R. No. 109087, [May 9, 2001],
409 PHIL 706-717)

55

THIRD DIVISION
[G.R. Nos. 134143-47. October 5, 2000.]
PEOPLE OF
THE
PHILIPPINES, appellee, vs.
ALFREDO CATUBIG Jr., NIO P. REPIA, JOHN DOE, PETER
DOE and WILLIAM DOE, accused.
ALFREDO CATUBIG, Jr., appellant.
The Solicitor General for plaintiff-appellee.
Public Attorney's Office for accused-appellant.
SYNOPSIS
In five (5) similarly worded Informations, all dated April 12, 1996, Alfredo Catubig, Jr. and
several other unidentified persons were charged with five counts of rape. The incident was said
to have happened in the evening of September 22, 1995. AlfredoCatubig and several other
companions allegedly took turns in raping a certain Cherry Genotiva. The case was tried before
the Pasay City Regional Trial Court. On February 19, 1998, the trial court rendered a judgment
of conviction. Catubig filed this appeal questioning the credibility of the prosecution evidence.
The records did not present any reason to disturb the findings of the trial court. Complainant
was straightforward in testifying that appellant and the four other accused intimidated her and
helped one another in raping her. Indeed, when an alleged rape victim says she was violated,
she says in effect all that is necessary to show that she was raped. As the trial court pointed out,
there was no reason for her to testify falsely against appellant, whom she did not even know
prior to the incident.

2. ID.; ID.; ID.; TESTIMONY OF RAPE VICTIM, GENERALLY SUFFICIENT TO PROVE

RAPE. When an alleged rape victim says she was violated, she says in effect all that is
necessary to show that she was raped.
3. ID.; ID.; ID.; THE FACT THAT THE RAPE WAS COMMITTED IN A POPULATED
AREA DOES NOT DISCREDIT THE RAPE CLAIM. The mere fact that the rape was
committed inside a room in a thickly populated squatters' area during a wake does not by itself
discredit the claim of complainant. Moreover, having been threatened by appellant and his
cohorts, she was thereby prevented from shouting or otherwise effectively attracting attention
to her ordeal. DHIaTS
4. ID.; ID.; ID.; RAPE VICTIMS HAVE NO UNIFORM REACTION TO SEXUAL
ASSAULT; CASE AT BAR. We are not convinced by appellant's argument that the account
of the victim was not credible because she had "shouted not so soft and not so loud." The wellsettled rule is that rape victims have no uniform reaction to sexual assault. While one may offer
strong resistance by shouting at the top of her voice, another may be too cowed and thus suffer
her ordeal in silence. In this case, the victim showed that the sexual assault was against her will
by shouting, though not very loudly.
5. ID.; ID.; ID.; THE FACT THAT VICTIM WAS A PROSTITUTE IS NOT TANTAMOUNT
TO A VOLUNTARY SEXUAL CONGRESS. Appellant also submits that the sexual
congress was voluntary because the victim was a prostitute or a woman of loose morals. Even
assuming that she was one, such fact did not give appellant or his gang any license to terrorize
her and vent their lust on her. As she herself testified, appellant had pointed a knife at her.
Moreover, she vividly described how some of the conspirators had held her hand and feet
during the assault. Clearly, there was no sufficient showing that she had voluntarily submitted
to their carnal, desires in the practice of her alleged trade.
DECISION
PANGANIBAN, J p:

SYLLABUS
1. REMEDIAL LAW; EVIDENCE; CREDIBILITY OF WITNESSES; FACTUAL FINDINGS
OF TRIAL COURT, GENERALLY UPHELD ON APPEAL. It is axiomatic that the
assessment by a trial court of the credibility of witnesses is entitled to the highest respect,
because it heard them and observed their behavior at the witness stand. Absent any showing
that it overlooked some facts or circumstances of weight and substance that would affect the
result of the case, its factual findings will not be disturbed on appeal.

Rape is not a respecter of time or place. The crime may be committed even inside a room in a
crowded squatters' colony and even during a wake.
The Case
Alfredo Catubig Jr. y Quebedo 1 appeals the February 19, 1998 Decision 2 of the Regional
Trial Court (RTC) of Pasay City, Branch 109, in Criminal Case Nos. 96-8764-68, which
convicted him of five counts of rape and sentenced him to five terms ofreclusion perpetua.

56
Acting on the sworn Complaint of Cherry Genotiva, Assistant Pasay City Prosecutor Leopoldo
C. Lluz filed five similarly worded Informations, all dated April 12, 1996, charging appellant
and four other unidentified persons 3 with five counts of rape. The accusatory portion of each
Information reads as follows: 4
"That on or about the 22nd day of September 1995, in Pasay City,
Metro Manila, Philippines and within the jurisdiction of this
Honorable Court, the above-named accused, conspiring and
confederating together and mutually helping one another, by means of
force and intimidation employed upon the person of Cherry Genotiva
y Bulasa, did then and there willfully, unlawfully, and feloniously
have carnal knowledge of the said complainant Cherry Genotiva y
Bulasa against her will and consent."
After the five cases were consolidated, 5 appellant, with the assistance of Counsel de
Oficio Reynaldo Casas, pleaded not guilty. 6 After trial, the lower court rendered its Decision,
the dispositive portion of which reads:
"IN VIEW OF ALL THE FOREGOING, the court finds that the
prosecution has proven the guilt of the accused AlfredoCatubig, Jr. Y
Quevedo for five (5) counts of Rape in Criminal Cases Nos. 96-8764
to 96-8768 and hereby sentences him as follows:
1. In Criminal Case No. 96-8764 to Reclusion Perpetua and ordered
to indemnify the victim of P50,000.00;
2. In Criminal Case No. 96-8765 to Reclusion Perpetua and ordered
to indemnify the victim of P50,000.00;
3. In Criminal Case No. 96-8766 to Reclusion Perpetua and ordered
to indemnify the victim of P50,000.00;
4. In Criminal Case No. 96-8767 to Reclusion Perpetua and ordered
to indemnify the victim of P50,000.00
5. In Criminal Case No. 96-8768 to Reclusion Perpetua and ordered
to indemnify the victim of P50,000.00. HIEASa
"SO ORDERED."
Hence, this appeal. 7

The Facts
Version of the Prosecution
The prosecution's version of the facts is summarized by the Office of the Solicitor General in
its Brief as follows: 8
"On September 10, 1995, Cherry Genotiva y Bulasa, a fifteen (15)
year old high school dropout, left her parent's house after being
scolded by the latter. From then on until she was gang raped on
September 23, 1995, she stayed with friends in their respective
houses.
"During that period, Cherry met an acquaintance named Ricky. At
about 6:00 AM on September 22, 1995, Ricky brought along Cherry
to F. Victor St. in Pasay where a vigil was then in place for appellant's
deceased brother. (Tsn. October 2, 1996, p. 16). F. Victor Street is a
thickly populated area (October 10, 1996, p. 5). The two stayed in the
wake until 10:00 AM and then they proceeded to see Ricky's friend,
Larry, who lived just several houses away. (ibid, p. 7). When evening
came, Ricky introduced her to one Nio whose family name she came
to know later as Repia. Ricky told her to go with Nio Repia (October
10, 1996, p. 6). When Cherry consented, Nio brought her to the
house of appellant Alfredo Catubig, Jr. which is also located at a
street alley near F. Victor St., Pasay City. (ibid. p. 8). Along the alley,
she saw appellant, along with five (5) other men, engaged in a
drinking session. When she became apprehensive, she expressed to
Nio her desire to go home but the latter would not let her go.
Thereafter, Nio engaged appellant in a muted conversation. Cherry
reiterated her desire to go home but the two refused to let her go. At
this point, appellant pointed a knife at Cherry's neck. He dragged her
inside the house while his companions followed. Cherry shouted for
help but appellant hit her and slapped her on both cheeks. Then,
appellant ordered Cherry to undress. When she refused, the former
pulled her arms and blouse and hit her. As appellant pointed his knife
at Cherry and threatened to kill her, he ordered his other co-accused
to undress her. While appellant and his co-accused held Cherry by her
hands and feet, one of the accused, a stout man went on top of her.
The rest of the accused watched laughing while the stout man raped
her. Cherry shouted 'have pity on me' but the same was drowned by
laughter. After the stout man another followed and abused her. The
third man kissed and touched the delicate parts of her body. Then
another man followed and also abused her. At this point, appellant

57
told his friends to hurry and finish up. As a final salvo, appellant, with
knife pointed at Cherry, thrust his organ inside Cherry's vagina.
"Thru the help of another person, Cherry was able to escape from
appellant's house. She returned home and revealed her ordeal to her
mother. On October 12, 1995, Cherry reported the incident to the
police and was medically examined by Dr. Maximo Reyes of the NBI
Medico-Legal Office. While no physical injuries on the external
portion of the victim's body were observed at the time of the
examination, the genital examination revealed the presence of
contusion located on the vestibular mucosa at the 7:00 o'clock
position showing that some form of injurious substance penetrated the
same and may have been caused by the entry of a fully [erect] male
organ. The doctor likewise found the victim's hymen . . . ostensible
and elastic. Finally, he opined that the contusions which he found on
the vestibular mucosa at 7:00 o'clock position were compatible with
the alleged date of the offense (TSN, Oct. 1, 1996, pp. 2-15; Oct. 2,
1996, pp. 2-24)."
Version of the Defense
Alleging that he paid complainant to have sexual intercourse with her, appellant in his Brief
presents the following version of the facts: 9
"JOVY NACE REYES testified that Ms. Cherry Genotiva was
introduced to him by Nio and Larry Bawang sometime in May,
1994. He knew her to be a stand-by at Holiday Plaza, ''pakawala' or a
pick-up girl. He had seen her in the company of Ricky Uy and Rick
Ong. (TSN, June 5, 1997, pp. 2-12) CScaDH

"Accused ALFREDO CATUBIG, JR. testified that he first saw

Cherry Genotiva in the company of Nio, Ricky, Larry and
hisbarkadas at the wake of his brother on September 22, 1995
between 6:00 and 7:00 p.m. He was then drinking with his friends in
front of his grandmother's house when Nio Repia together with the
complainant approached him and asked permission to stay for a while
in the house being built at the back of his house as they would have
sex. He allowed them to stay there but warned them to do it fast for
they might be seen by his brother. At about 10:00 pm. Nio and the
complainant went to the wake, the latter asked for a beer. They drank

[u]p to 4:00 o'clock in the morning. Complainant intimated to him

that she was 'bitin' with Nio. Not minding such utterance, he
attended to his visitor from Tagaytay whom he [brought] to the house
of his friend to sleep. Returning to the vigil, he approached the
complainant and asked what she meant by 'bitin'. They continued to
drink beer. Then Nio invited them to have shabu. They went at the
back of his house and consumed P200 worth of shabu. Nio intimated
to him that he could use the complainant, a pick-up girl at Holiday
Inn. Thereafter, Nio left, leaving the complainant with him. With the
complainant left to him, he asked her how much he should pay her
and she answered it [was] up to him. After their sex, which lasted
only for a short time, he paid her P300.00. Complainant intimately
told him that she had been raped by her stepfather, and she allowed
herself to be used because of shabu.
"He denied that he and his friends sexually molested the complainant
from 9:00 p.m. of September 22, 1995 to 6:00 a.m. of the following
day. He admitted he had sex with h[er] at 5:30 a.m. [during] which
she did not resist [or shout] for help. He did not do it at the point of a
knife. Complainant was good in sex and knew various positions.
(TSN, June 6, 1997, pp. 2-5; June 9, 1997, pp. 2-58)"
Ruling of the Trial Court
The trial court gave credence to the testimony of complainant that appellant and the four other
accused conspired to rape her. Ruling that she had no motive to testify falsely, it opined that her
lone declaration was sufficient to sustain conviction. TIEHDC
It rejected appellant's claim that complainant was a prostitute, because it had "observed the
victim to be a comely 17-year-old girl with no affectations or mundane attributes. If at all, she
appears to be naive and innocent . . . ." Likewise, it disbelieved the claim that she was a former
drug addict.
Assignment of Errors
In his Brief, appellant imputes to the trial court this lone error:
"The trial court failed to prove beyond reasonable doubt that
complainant Cherry Genotiva was gang raped by accused-appellant
Alfredo Catubig, Jr. and his friends." 10

58
In the main, appellant questions the credibility of the prosecution evidence.

Q. Then what happened next?

The Court's Ruling

A. Catubig's friend who was stout went on top of me and all of them
were laughing.

The appeal is devoid of merit.

xxx xxx xxx
Main Issue:
Q. What happened when this stout man, a friend of Catubig, [lay] on
top of you?

Credibility of Prosecution Evidence

Appellant argues that complainant's testimony is improbable. He points out that rape could not
have been perpetrated inside a room in a thickly populated squatters' area, where the houses
were made of light materials and built close to each other. Moreover, there was a wake for
appellant's dead brother at the time. He also maintains that the victim did not shout or resist the
alleged gang rape.

A He used me (ginalaw ako.). HScaCT

Q. During that time, the other male companion[s] were holding your
hands and feet while the stout man was on top of you?
A. Yes sir." 13

We are not persuaded. It is axiomatic that the assessment by a trial court of the credibility of
witnesses is entitled to the highest respect 11 because it heard them and observed their behavior
at the witness stand. Absent any showing that it overlooked some facts or circumstances of
weight and substance that would affect the result of the case, its factual findings will not be
disturbed on appeal. 12
In the present case, neither the records nor appellant's arguments present any reason to disturb
the findings of the trial court. On the contrary, it appears that complainant was straightforward
in testifying that appellant and the four other accused intimidated her and helped one other in
raping her. She testified as follows:
"Q. And so, what happened after accused Catubig threatened you that
he will kill you?

The process was repeated as the other accused took turns in raping her. She explained the role
of appellant in this wise:
"Q. . . . . Who is this Junjun you are referring to?
A. That Junjun I am referring to is accused Alfredo Catubig.
Interpreter:
Witness pointing to the accused.

A. Then he called his friends and asked them to undress me.

Q. Earlier you narrated how you were rape[d]. Who was the very first
who abused you?

Q. And so Catubig's friend were able to undress you?

A. The first one to abuse me was the fat man.

A. Yes,

sir. Catubig's friends were able to

Thereafter Catubig went out of the room.

undress

me.

Q. This Junjun appearing in question and answer no. 9, was he the

second, third, fourth or fifth person?

Q. And so what happened after they were able to undress you?

A. Junjun was the fourth to use me.

A. Catubig's friends held me by my hands and feet.

Q. Where were you sexually abused by this accused Alfredo Catubig?

59
A. Also in that room.

Appellant also submits that the sexual congress was voluntary because the victim was a
prostitute or a woman of loose morals. We reject this grave allegation.

Q. Also on that same night?

A. Yes, sir.
Q. And how were you abused by this Alfredo Catubig?
A. He pointed a knife at my neck. He abused me while pointing a
knife at my neck.
xxx xxx xxx

First, we find no adequate showing that she was a prostitute, other than the bare allegation of
appellant and his witness.Second, even assuming that she was one, such fact did not give
appellant or his gang any license to terrorize her and vent their lust on her. 18 As she herself
testified, appellant had pointed a knife at her. Moreover, she vividly described how some of the
conspirators had held her hand and feet during the assault. Clearly, there was no sufficient
showing that she had voluntarily submitted to their carnal desires in the practice of her alleged
trade.
WHEREFORE, the appeal is hereby DENIED and the assailed Decision of the Regional Trial
Court AFFIRMED. Costs against appellant.

Q. And all along what were you doing there?

SO ORDERED.

A. I was pleading, sir." 14

Melo, Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.

Indeed, when an alleged rape victim says she was violated, she says in effect all that is
necessary to show that she was raped.15 As the trial court pointed out, there was no reason for
her to testify falsely against appellant, whom she did not even know prior to the incident.
Alleged Improbabilities
The Court has repeatedly held that rape is not a respecter of place or time. 16 Hence, the mere
fact that the rape was committed inside a room in a thickly populated squatters' area during a
wake does not by itself discredit the claim of complainant. Moreover, having been threatened
by appellant and his cohorts, she was thereby prevented from shouting or otherwise effectively
attracting attention to her ordeal.
We are not convinced by appellant's argument that the account of the victim was not credible
because she had "shouted not so soft and not so loud." The well-settled rule is that rape victims
have no uniform reaction to sexual assault. While one may offer strong resistance by shouting
at the top of her voice, another may be too cowed and thus suffer her ordeal in silence. 17In
this case, the victim showed that the sexual assault was against her will by shouting, though not
very loudly. CIAcSa
Sexual Congress
Not Voluntary

||| (People v. Catubig, Jr., G.R. Nos. 134143-47, [October 5, 2000], 396 PHIL 345-355)

60

363 scra 621

EN BANC
[G.R. No. 137842. August 23, 2001.]
PEOPLE OF THE PHILIPPINES, plaintiff-appellee, vs. DANILO
CATUBIG y HORIO, accused-appellant.
The Solicitor General for plaintiff-appellee.
Public Attorney's Office for accused-appellant.
SYNOPSIS
Danilo Catubig was charged with the crime of rape before the Regional Trial Court, Branch 78
of Malolos, Bulacan. Prosecution evidence showed that on November 27, 1997, at around 4:00
o'clock in the afternoon, 12-year old Dannilyn Catubig and her four younger siblings were
watching television in the sala of their house. When Dannilyn's father, Danilo Catubig, arrived,
the latter told Dannilyn's sibling to go to her aunt's house which is just located nearby.
Thereafter, Danilo told Dannilyn to go inside the room and to lie down on the bed. After
Dannilyn had complied, Danilo removed Dannilyn's shorts and panty. Danilo, after removing
his brief and t-shirt, laid on top of Dannilyn and succeeded in inserting his penis to her vagina.
Dannilyn did not resist because she is afraid her father who beat and raped her in the past.
However, Dannilyn's aunt who got suspicious of what Danilo was doing to Dannilyn, informed
the latter's mother. Thus, when confronted by her mother, Dannilyn was forced to reveal that
she was indeed raped by her father. Contrarily, Danilo denied the accusation against him. He
claimed that the rape charge was brought about because of the ill will between him and his
wife and daughter Dannilyn, following a quarrel. Thus, the trial court convicted Danilo of the
crime charged and the penalty of death was imposed upon him. Hence, this automatic review.
The Court ruled that Dannilyn had given her testimony in a plain, categorical, spontaneous and
frank manner, remaining consistent throughout, and there was hardly anything on record that
can cast doubt on her sincerity. The revelations of an innocent child whose chastity had been
abused, coupled with her willingness to face police investigation and to undergo the trouble
and humiliation of a public trial, should merit credence unless strong justifications dictate
otherwise. Indeed, it would take a most senseless kind of depravity for a young daughter to just
make up a story which could put her own father to an undeserved indictment and even to
possibly face death in the hands of the law. However, the information failed to state the
minority of the victim and her relationship with the offender, both special qualifying

circumstances under Republic Act No. 7659, and for want of such allegations, the trial court
erred in imposing the death penalty on the accused. Appellant could only thus be convicted
under Article 335 of the Revised Penal Code, as amended, of simple rape punishable
by reclusion perpetua. HCEcAa
SYLLABUS
1. REMEDIAL LAW; EVIDENCE; CREDIBILITY OF WITNESSES; REVELATIONS OF
INNOCENT, CHILD MERIT CREDENCE. Dannilyn has given her testimony in a plain,
categorical, spontaneous and frank manner, remaining consistent throughout, and there is
hardly, anything on record that can cast doubt on her sincerity. The revelations of an innocent
child whose chastity has been abused, coupled with her willingness to face police investigation
and to undergo the trouble and humiliation of a public trial, should merit credence unless
strong justifications dictate otherwise. Indeed, it would take a most senseless kind of depravity
for a young daughter to just make up a story which could put her own father to an undeserved
indictment and to even possibly face death in the hands of the law.
2. CRIMINAL LAW; RAPE; INCESTUOUS RAPE; MORAL ASCENDANCY AND
INFLUENCE OF THE FATHER SUBSTITUTE THE REQUISITE FOR VIOLENCE AND
INTIMIDATION. When rape is committed against one's own daughter, the moral
ascendancy and influence of the father, that necessarily flows from his parental authority, can
sufficiently cow the child to submission and can rightly be held to substitute for the requisite
"violence or intimidation" that, normally, would be characterized by physical acts and uttered
threats made on the victim.
3. REMEDIAL LAW; EVIDENCE; ALIBI AND DENIAL; CANNOT PREVAIL OVER
POSITIVE AND CATEGORICAL STATEMENTS OF PRIVATE COMPLAINANT. The
trite defenses of alibi and denial proferred by appellant cannot prevail over the positive and
categorical statements of private complainant. Alibi is often viewed with suspicion and
received with caution not only because it is inherently weak and unreliable but also because it
is easy to fabricate. In order that this defense can prosper, it must be convincing to preclude
any doubt on the physical impossibility of the presence of the accused at the locus criminis at
the time of the incident. These conditions have not been met in the case at bar.
4. ID.; ID.; CREDIBILITY OF WITNESSES; MERE RESENTMENT OF A WIFE AND
DAUGHTER IS NOT SO COMPELLING TO MOTIVATE THEM TO WRONGLY LODGE
A COMPLAINT FOR A MORE SERIOUS CRIME THAN EXPECTED. The contention of
appellant that his wife and daughter Dannilyn have accused him merely because of his violent
ways is much too flimsy to be believed. The mere resentment of a wife and daughter is not so
compelling as to have motivated them to wrongly lodge a complaint for a crime much more
serious than might, if at all, be expected.

61
5. ID.; ID.; ID.; ASSESSMENT MADE BY THE TRIAL COURT DESERVES GREAT
REGARD AND WEIGHT ON APPEAL. It is likewise a settled doctrine that the assessment
made by the trial court on the credibility of witnesses deserves great regard and weight on
appeal. The rule is not without reason; the trial judge has a unique position of hearing first
hand the witnesses and observing their deportment, conduct and attitude during the course of
the testimony in open court. There is no valid reason to now ignore this long accepted
jurisprudence in this instance.
6. CRIMINAL LAW; RAPE; FOR IMPOSITION OF DEATH PENALTY, SPECIAL
QUALIFYING CIRCUMSTANCES MUST BE ALLEGED IN THE COMPLAINT OR
INFORMATION. The concurrence of the minority of the victim and her relationship to the
offender are special qualifying circumstances that are needed to be alleged in the complaint or
information for the penalty of death to be decreed. The Constitution guarantees to be inviolable
the, right of an accused to be informed of the nature and cause of the accusation against him. It
is a requirement that renders it essential for every element of the offense with which he is
charged to be properly alleged in the complaint or information.
7. ID.; ID.; ID.; NOT COMPLIED WITH IN CASE AT BAR. [T]he information failed to
state the minority of the victim and her relationship with the offender, both special qualifying
circumstances under Republic Act No. 7659, and for want of such allegations, the trial court
erred in imposing the death penalty on the accused. Appellant could only thus be convicted
under Article 335 of the Revised Penal Code, as amended, of simple rape punishable
by reclusion perpetua.
8. CRIMINAL LAW; RAPE; CIVIL LIABILITY; P50,000.00 AS MORAL DAMAGES,
P50,000.00 AS CIVIL INDEMNITY, COMPENSATORY DAMAGES AND P25,000.00 AS
EXEMPLARY DAMAGES. Anent the award of damages, the trial court has correctly
awarded P50,000.00 moral damages, an award that rests on the jural foundation that the crime
of rape necessarily brings with it shame, mental anguish, besmirched reputation, moral shock
and social humiliation to the offended party. In addition, the offended party deserves to receive
the amount of P50,000.00 civil indemnity, the equivalent of compensatory damages, and
exemplary damages in the amount of P25,000.00.
9. CIVIL LAW; DAMAGES; EXEMPLARY DAMAGES; ATTENDANCE OF
AGGRAVATING CIRCUMSTANCES IN THE PERPETRATION OF CRIME JUSTIFY AN
AWARD THEREOF. The attendance of aggravating circumstances in the perpetration of the
crime serves to increase the penalty (the criminal liability aspect), as well as to justify an award
of exemplary or corrective damages (the civil liability aspect), moored on the greater perversity
of the offender manifested in the commission of the felony such as may be shown by (1) the
motivating power itself, (2) the place of commission, (3) the means and ways employed, (4)
the time, or (5) the personal circumstances of the offender or the offended party or both. There
are various types of aggravating circumstances, among them, the ordinary and the qualifying.
Relationship is an alternative circumstance under Article 15 of the Revised Penal Code. . . . As

a rule, relationship is held to be aggravating in crimes against chastity, such as rape and acts of
lasciviousness, whether the offender is a higher or a lower degree relative of the offended
party.
10. ID.; ID.; ID.; ID.; "AGGRAVATING CIRCUMSTANCES," TO BE UNDERSTOOD IN
ITS BROAD OR GENERIC SENSE. The term "aggravating circumstances" used by the
Civil Code, the law not having specified otherwise, is to be understood in its broad or generic
sense. The commission of an offense has a two-pronged effect, one on the public as it breaches
the social order and the other upon the private victim as it causes personal sufferings, each of
which is addressed by, respectively, the prescription of heavier punishment for the accused and
by an award of additional damages to the victim. The increase of the penalty or a shift to a
graver felony underscores the exacerbation of the offense by the attendance of aggravating
circumstances, whether ordinary or qualifying, in its commission. Unlike the criminal liability
which is basically a State concern, the award of damages, however, is likewise, if not primarily,
intended for the offended party who suffers thereby. It would make little sense for an award of
exemplary damages to be due the private offended party when the aggravating circumstance is
ordinary but to be withheld when it is qualifying. Withal, the ordinary or qualifying nature of
an aggravating circumstance is a distinction that should only be of consequence to the criminal,
rather than to the civil, liability of the offender. In fine, relative to the civil aspect of the case,
an aggravating circumstance, whether ordinary or qualifying, should entitle the offended party
to an award of exemplary damages within the unbridled meaning of Article 2230 of the Civil
Code.

11. ID.; ID.; ID.; PURPOSE. Also known as "punitive" or "vindictive" damages, exemplary
or corrective damages are intended to serve as a deterrent to serious wrongdoings, and as a
vindication of undue sufferings and wanton invasion of the rights of an injured or a punishment
for those guilty of outrageous conduct.
12. ID.; ID.; ID.; DIFFERENTIATED FROM PUNITIVE OR VINDICTIVE DAMAGES.
These terms are generally, but not always, used interchangeably. In common law, there is
preference in the use of exemplary damages when the award is to account for injury to feelings
and for the sense of indignity and humiliation suffered by a person as a result of an injury that
has been maliciously and wantonly inflicted, the theory being that there should be
compensation for the hurt caused by the highly reprehensible conduct of the defendant
associated with such circumstances as willfulness; wantonness; malice, gross negligence or
recklessness, oppression, insult or fraud or gross fraud that intensifies the injury. The terms
punitive or vindictive damages are often used to refer to those species of damages that may be
awarded against a person to punish him for his outrageous conduct. In either case, these
damages are intended in good measure to deter the wrongdoer and other like him from similar
conduct in the future.

62
13. REMEDIAL LAW; REVISED RULES ON CRIMINAL PROCEDURE; REQUIRED
AGGRAVATING CIRCUMSTANCES TO BE STATED IN THE COMPLAINT OR
INFORMATION. [T]he Revised Rules on Criminal Procedure, made effective on 01
December 2000, requires aggravating circumstances, whether ordinary or qualifying, to be
stated in the complaint or information. . . . A court would thus be precluded from considering in
its judgment the attendance of "qualifying or aggravating circumstances" if the complaint or
information is bereft of any allegation of the presence of such circumstances.
14. ID.; ID; CIVIL LIABILITY INCURRED BY ACCUSED PRIOR TO THE EFFECTIVITY
THEREOF REMAINS UNAFFECTED; CASE AT BAR. The retroactive application of
procedural rules, nevertheless, cannot adversely affect the rights of the private offended party
that have become vested prior to the effectivity of said rules. Thus, in the case at bar, although
relationship has not been alleged in the information, the offense having been committed,
however, prior to the effectivity of the new rules, the civil liability already incurred by
appellant remains unaffected thereby.
DECISION
VITUG, J p:
In an information, dated 29 January 1998, the accused, Danilo Catubig y Horio, was charged
with the crime of rape before the Regional Trial Court, Branch 78, of Malolos, Bulacan; viz:
"The undersigned Asst. Provincial Prosecutor on complaint of the
offended party Dannilyn Catubig y Lazaro accuses Danilo Catubig y
Horio of the crime of rape, penalized under the provisions of Art. 335
of the Revised Penal Code, committed as follows:
"That on or about the 27th day of November, 1997, in the
municipality of San Jose del Monte, province of Bulacan, Philippines,
and within the jurisdiction of this Honorable Court, the above-named
accused, did then and there wilfully, unlawfully and feloniously, by
means of force, threats and intimidation and with lewd design have
carnal knowledge of the said offended party against her will." 1
When arraigned on 16 July 1998, accused Catubig, represented by counsel de oficio, pleaded
"not guilty" to the offense charged; forthwith, trial ensued.
The case for the prosecution was laid bare in Appellee's Brief submitted by the Office of the
Solicitor General.

"On November 27, 1997, at around 4:00 o'clock in the afternoon,

private complainant Dannilyn Catubig, who was born on August 9,
1985, and her four (4) younger siblings were watching television in
the sala of their house located at Sunlife Subdivision, San Jose del
Monte, Bulacan.
"After an hour, Dannilyn's father, herein appellant Danilo Catubig,
arrived and told Dannilyn's siblings to proceed, as in fact they did
proceed, to her aunt's house which is just located nearby. Thereafter,
appellant told Dannilyn to go inside a room and to lie down on the
bed. After Dannilyn had complied, appellant removed Dannilyn's
shorts and panty, while appellant, after removing his brief and t-shirt,
[laid] on top of Dannilyn. Afraid of appellant who beat and raped her
in the past, Dannilyn was not able to resist appellant who succeeded
in inserting his penis into Dannilyn's vagina.
"However, Dannilyn's aunt, who got suspicious of what appellant was
doing to Dannilyn, informed the latter's mother, Jocelyn Catubig,
about the said suspicion. Thus, when confronted by her mother,
Dannilyn was forced to reveal that she was indeed raped by appellant.
The sexual assault was reported to the San Jose del Monte Police
Station where Dannilyn's sworn statement was subsequently taken on
December 3, 1997.
"Upon the request of the police authorities, Dannilyn was examined
on December 1, 1997 by Dr. Wilfredo E. Tiera, Medico-Legal Officer
of the National Bureau of Investigation, who found out that
Dannilyn's healed laceration in the hymen was caused by sexual
intercourse." 2
The accused denied the accusation against him. He claimed that the rape charge was brought
about only because of the ill-will between him, on the one hand, and his wife and daughter
Dannilyn, on the other hand, following a quarrel. On 27 November 1997, he asseverated, he
had fought with his wife, hitting her and his daughter. His wife then threatened him that it was
the last time that she would allow him to harm her and that he would regret what he did. True
to her foreboding, the next day, he was arrested and a complaint for rape was filed against
him. ICHcTD
On 11 December 1998, the Regional Trial Court rendered a decision holding the accused guilty
of the crime of rape; it adjudged:

63
"WHEREFORE, in view of the foregoing, the Court hereby finds
accused DANILO CATUBIG Y HORIO GUILTY beyond reasonable
doubt of the crime of Rape defined and penalized under Article 335 of
the Revised Penal Code, as amended by Republic Act No. 7659, and
hereby sentences him to suffer the penalty of DEATH, and to pay
private complainant Dannilyn Catubig the amount of Fifty Thousand
Pesos (P50,000.00) as moral damages." 3
With the imposition of the death penalty by the trial court, the records were elevated to this
Court for automatic review.

"A My father entered the room.

"Q And when your father entered the room, what did he do next?
"A He removed my short [pants] and my panty.
"Q What was your position at that time when your father removed
your short pants and panty?
"A I was lying.

In his brief, appellant submitted thusly:

"Q When you entered the room, did you lie immediately?
"1. The lower court erred in finding the accused guilty of the crime of
rape in violation of Article 335 of the Revised Penal Code as
amended by Republic Act 7659.
"2. The lower court erred in not taking into consideration the fact that
the information was defective for failure to state that the accused is
the father of the victim and that the victim was under 18 years [of]
age at the time of the commission of the alleged rape." 4
Private complainant Dannilyn Catubig narrated how she was repeatedly abused by her own
father; she testified:
"Q Now, after your sisters and brother [went] to the house of your
aunt, what did your father do?

"A No, I just sat.

"Q How come as you claimed a while ago, you were lying when your
father removed your short pants and panty?
"A Once I entered the room, I was sitting then he removed my short
[pants] and panty.
"Q You said upon entering the room, you sat and while sitting, all of a
sudden your father removed your short pants and panty
while already lying at that time, how come you were lying
when according to you, you were sitting inside the room?
"A I was sitting first and he instructed me to lie down.

"A He instructed me to go inside the room.

"Q How many rooms were there in your house? IDaCcS

"Q While you were sitting inside the room and you were instructed by
your father to lie, what comes to your mind?

"A Only one.

"A That he will rape me.

"Q Did you go to the room per instruction?

"Q How did you come to know that?

"A Yes, sir.

"A He was raping me before, doing that before.

"Q And what happened inside the room?

"Q In other words, that was not the first time your father raped you on
that particular date?

64
"A No, sir.

"Q And what was the movement of the body of your father while he
was lying on top of you?

"Q When was the first time, if you remember? CTAIDE

"A Push and pull movement.
"A When I was still in grade 1.
"Q How many times were you raped by your father?

"Q For how long did your father stay on top of you doing that push
and pull movement?

"A I can no longer remember how many it was several.

"A That must be about 1 hour, but my aunt arrived.

"Q When was the last time your father raped you?

"Q Aside from the pain, what else did you feel? AacSTE

"A November 27.

"A Mahapdi at parang may pumipitik sa loob ng ari ko.

"Q Now, when your father removed your short pants and panty, what
did he do next?

"Q Did you not try to resist?

"A No, because I am afraid of him.

"A He removed his brief and shirt.

"Q You are afraid of your father?
"Q After removing his brief and shirt, what did he do?
"A Yes, sir.
"A He [laid] on top me.
"Q Afraid of what?
"Q When your father [laid] on top of you, what did he do?
"A Because he was beating us, hitting us.
"A He was inserting his penis to my vagina.
"Q Why, what was the reason why your father was hitting you?
"Q At this juncture, may we make of record that witness starts to cry.
"A To threaten us.
"Q How did you know your father inserted his penis to your vagina?
"Q For what purpose?
"A I can feel it and it is painful.
"Q That was the time when your father was already lying on top of
you?
"A Yes, sir.

"A Whenever my mother sided with us, my father and mother

engaged in a fight.
"Q In this case, you were raped and sexually abused by your father,
what made you afraid of him? CSIHDA

65
"ARTICLE 335. When and how rape is committed. . . .
"A Because we were afraid of my father since childhood." 5
Dannilyn has given her testimony in a plain, categorical, spontaneous and frank manner,
remaining consistent throughout, and there is hardly anything on record that can cast doubt on
her sincerity. The revelations of an innocent child whose chastity has been abused, coupled
with her willingness to face police investigation and to undergo the trouble and humiliation of
a public trial, should merit credence unless strong justifications dictate otherwise. Indeed, it
would take a most senseless kind of depravity for a young daughter to just make up a story
which could put her own father to an undeserved indictment and to even possibly face death in
the hands of the law. 6
When rape is committed against one's own daughter, the moral ascendancy and influence of the
father, that necessarily flows from his parental authority, can sufficiently cow the child to
submission and can rightly be held to substitute for the requisite "violence or intimidation"
that, normally, would be characterized by physical acts and uttered threats made on the victim.
The trite defenses of alibi and denial proferred by appellant cannot prevail over the positive
and categorical statements of private complainant. Alibi is often viewed with suspicion and
received with caution not only because it is inherently weak and unreliable but also because it
is easy to fabricate. In order that this defense can prosper, it must be convincing to preclude
any doubt on the physical impossibility of the presence of the accused at the locus criminis at
the time of the incident. These conditions have not been met in the case at bar.
The contention of appellant that his wife and daughter Dannilyn have accused him merely
because of his violent ways is much too flimsy to be believed. The mere resentment of a wife
and daughter is not so compelling as to have motivated them to wrongly lodge a complaint for
a crime much more serious than might, if at all, be expected.
It is likewise a settled doctrine that the assessment made by the trial court on the credibility of
witnesses deserves great regard and weight on appeal. The rule is not without reason; the trial
judge has a unique position of hearing first hand the witnesses and observing their deportment,
conduct and attitude during the course of the testimony in open court. There is no valid reason
to now ignore this long accepted jurisprudence in this instance.
This Court, however, finds the second assignment of error impressed with merit.
Article 335 of the Revised Penal Code, as amended by Section 11 of Republic Act No. 7659, at
times also referred to as theDeath Penalty Law, states in part:

"xxx xxx xxx

"The death penalty shall also be imposed if the crime of rape is
committed with any of the following attendant circumstances:
"1. When the victim is under eighteen (18) years of age and the
offender is a parent, ascendant, step-parent, guardian, relative by
consanguinity or affinity within the third civil degree, or the commonlaw spouse of the parent of the victim."
The concurrence of the minority of the victim and her relationship to the offender are
special qualifying circumstances that are needed to be alleged in the complaint or
information for the penalty of death to be decreed. 7 The Constitution guarantees to be
inviolable the right of an accused to be informed of the nature and cause of the accusation
against him. 8It is a requirement that renders it essential for every element of the offense
with which he is charged to be properly alleged in the complaint or information.
Here, the information failed to state the minority of the victim and her relationship with the
offender, both special qualifying circumstances under Republic Act No. 7659, and for want of
such allegations, the trial court erred in imposing the death penalty on the accused. 9 Appellant
could only thus be convicted under Article 335 of the Revised Penal Code, as amended, of
simple rape punishable by reclusion perpetua.
Anent the award of damages, the trial court has correctly awarded P50,000.00 moral damages,
an award that rests on the jural foundation that the crime of rape necessarily brings with it
shame, mental anguish, besmirched reputation, moral shock and social humiliation to the
offended party. 10 In addition, the offended party deserves to receive the amount of P50,000.00
civil indemnity, 11 the equivalent of compensatory damages, and exemplary damages in the
amount of P25,000.00.
An apparent discord in the award of exemplary damages in simple and qualified rape cases
perhaps deserves more than just a passing remark.
The Civil Code of the Philippines provides, in respect to exemplary or corrective damages,
thusly:
"ARTICLE 2229. Exemplary or corrective damages are imposed, by
way of example or correction for the public good, in addition to the
moral, temperate, liquidated or compensatory damages. DTAcIa

66
"ARTICLE 2230. In criminal offenses, exemplary damages as a part
of the civil liability may be imposed when the crime was committed
with one or more aggravating circumstances. Such damages are
separate and distinct from fines and shall be paid to the offended
party.

"ARTICLE 15. Their concept. Alternative circumstances are those

which must be taken into consideration as aggravating or mitigating
according to the nature and effects of the crime and other conditions
attending its commission. They are relationship, intoxication, and
degree of instruction and education of the offender.

"ARTICLE 2231. In quasi-delicts, exemplary damages may be

granted if the defendant acted with gross negligence.

"The alternative circumstance of relationship shall be taken into

consideration when the offended party is the spouse, ascendant,
descendant, legitimate, natural, or adopted brother or sister, or relative
by affinity in the same degree of the offender."

"ARTICLE 2232. In contracts and quasi-contracts, the court may

award exemplary damages if the defendant acted in a wanton,
fraudulent, reckless, oppressive, or malevolent manner.
"ARTICLE 2233. Exemplary damages cannot be recovered as a
matter of right; the court will decide whether or not they should be
adjudicated.
"ARTICLE 2234. While the amount of the exemplary damages need
not be proved, the plaintiff must show that he is entitled to moral,
temperate or compensatory damages before the court may consider
the question of whether or not exemplary damages should be
awarded. In case liquidated damages have been agreed upon,
although no proof of loss is necessary in order that such liquidated
damages may be recovered, nevertheless, before the court may
consider the question of granting exemplary in addition to the
liquidated damages, the plaintiff must show that he would be entitled
to moral, temperate or compensatory damages were it not for the
stipulation for liquidated damages. DIEACH
"ARTICLE 2235. A stipulation whereby exemplary damages are
renounced in advance shall be null and void."
The attendance of aggravating circumstances in the perpetration of the crime serves to increase
the penalty (the criminal liability aspect), 12 as well as to justify an award of exemplary or
corrective damages (the civil liability aspect), 13 moored on the greater perversity of the
offender manifested in the commission of the felony such as may be shown by (1) the
motivating power itself, (2) the place of commission, (3) the means and ways employed, (4)
the time, or (5) the personal circumstances of the offender or the offended party or both. There
are various types of aggravating circumstances, among them, the ordinary and the qualifying.
Relationship is an alternative circumstance under Article 15 of the Revised Penal Code.

As a rule, relationship is held to be aggravating in crimes against chastity, such as rape

and acts of lasciviousness, whether the offender is a higher or a lower degree relative of
the offended party. 14
Under Section 11 of Republic Act No. 7659, amending Article 335 of the Revised Penal Code,
the death penalty is to be imposed in rape cases "when the victim is under eighteen (18) years
of age and the offender is a parent, ascendant, step-parent, guardian, relative by consanguinity
or affinity within the third civil degree, or the common-law spouse of the parent of the victim."
The Court has since held that the circumstances enumerated by the amendatory law are to be
regarded as special qualifying (aggravating) circumstances. Somehow doubts linger on whether
relationship may then be considered to warrant an award for exemplary damages where it is
used to qualify rape as a heinous crime, thereby becoming an element thereof, as would subject
the offender to the penalty of death. Heretofore, the Court has not categorically laid down a
specific rule, preferring instead to treat the issue on a case to case basis.
In People
vs. Fundano, 15 People
vs. Ramos, 16 People
vs. Medina, 17 People
vs. Dimapilis, 18 People vs. Calayca, 19 People vs.Tabion, 20 People vs. Bayona, 21 People
vs. Bayya, 22 and People vs. Nuez, 23 along with still other cases, the Court has almost
invariably appreciated relationship as an ordinary aggravating circumstance in simple rape and
thereby imposed exemplary damages upon the offender whether or not the offense has been
committed prior to or after the effectivity of Republic Act No. 7659. Exceptionally, as
in People
vs. Decena, 24 People
vs. Perez, 25 People
vs. Perez, 26 and People
vs. Ambray, 27 the Court has denied the award of exemplary damages following the effectivity
of that law. In qualified rape cases, such as inPeople vs. Magdato, 28 People
vs. Arizapa, 29 and People vs. Alicante, 30 the Court decreed the payment of exemplary
damages to the offended party but it did not so do as in People vs. Alba, 31 People
vs. Mengote, 32 and People vs. Maglente. 33

67
It may be time for the Court to abandon its pro hac vice stance and provide, for the guidance of
the bar and the bench, a kind of standard on the matter. caTESD

no designation of the offense, reference shall be made to the section

or subsection of the statute punishing it.

Also known as "punitive" or "vindictive" damages, exemplary or corrective damages are

intended to serve as a deterrent to serious wrongdoings and as a vindication of undue sufferings
and wanton invasion of the rights of an injured or a punishment for those guilty of outrageous
conduct. These terms are generally, but not always, used interchangeably. In common law,
there is preference in the use of exemplary damages when the award is to account for injury to
feelings and for the sense of indignity and humiliation suffered by a person as a result of an
injury that has been maliciously and wantonly inflicted, 34 the theory being that there should
be compensation for the hurt caused by the highly reprehensible conduct of the defendant
associated with such circumstances as willfulness, wantonness, malice, gross negligence or
recklessness, oppression, insult or fraud or gross fraud 35 that intensifies the injury. The
terms punitive or vindictive damages are often used to refer to those species of damages that
may be awarded against a person to punish him for his outrageous conduct. In either case,
these damages are intended in good measure to deter the wrongdoer and others like him from
similar conduct in the future. 36

"SECTION 9. Cause of the accusation. The acts or omissions

complained of as constituting the offense and the qualifying and
aggravating circumstances must be stated in ordinary and concise
language and not necessarily in the language used in the statute but in
terms sufficient to enable a person of common understanding to know
what offense is being charged as well as its qualifying and
aggravating circumstances and for the court to pronounce judgment."

The term "aggravating circumstances" used by the Civil Code, the law not having specified
otherwise, is to be understood in its broad or generic sense. The commission of an offense has
a two-pronged effect, one on the public as it breaches the social order and the other upon the
private victim as it causes personal sufferings, each of which is addressed by, respectively, the
prescription of heavier punishment for the accused and by an award of additional damages to
the victim. The increase of the penalty or a shift to a graver felony underscores the
exacerbation of the offense by the attendance of aggravating circumstances, whether ordinary
or qualifying, in its commission. Unlike the criminal which is basically a State concern, the
award of damages, however, is likewise, if not primarily, intended for the offended party who
suffers thereby. It would make little sense for an award of exemplary damages to be due the
private offended party when the aggravating circumstance is ordinary but to be withheld when
it is qualifying. Withal, the ordinary or qualifying nature of an aggravating circumstance is a
distinction that should only be of consequence to the criminal, rather than to the civil, liability
of the offender. In fine, relative to the civil aspect of the case, an aggravating circumstance,
whether ordinary or qualifying, should entitle the offended party to an award of exemplary
damages within the unbridled meaning of Article 2230 of the Civil Code. TaCDcE
Relevantly, the Revised Rules on Criminal Procedure, made effective on 01 December 2000,
requires aggravating circumstances, whether ordinary or qualifying, to be stated in the
complaint or information. Sections 8 and 9 of Rule 110 of the Rules of Court now provide:
"SECTION 8. Designation of the offense. The complaint or
information shall state the designation of the offense given by the
statute, aver the acts or omissions constituting the offense,
and specify its qualifying and aggravating circumstances. If there is

A court would thus be precluded from considering in its judgment the attendance of
"qualifying or aggravating circumstances" if the complaint or information is bereft of any
allegation on the presence of such circumstances.
The retroactive application of procedural rules, nevertheless, cannot adversely affect the rights
of the private offended party that have become vested prior to the effectivity of said rules.
Thus, in the case at bar, although relationship has not been alleged in the information, the
offense having been committed, however, prior to the effectivity of the new rules, the civil
liability already incurred by appellant remains unaffected thereby.
WHEREFORE, the decision of the court a quo is AFFIRMED with MODIFICATION in that
appellant Danilo Catubig y Horio is found guilty only of simple rape and not in its qualified
form, and he is hereby sentenced to suffer the penalty of reclusion perpetua and to pay
complainant Dannilyn Catubig P50,000.00 civil indemnity, P50,000.00 moral damages and
P25,000.00 exemplary damages. Costs de oficio.
SO ORDERED.
Davide, Jr., C.J., Bellosillo, Melo, Kapunan, Mendoza, Panganiban, Quisumbing, Pardo,
Buena, Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr., and Sandoval-Gutierrez, JJ., concur.
Puno, J., concurs in the result.
||| (People v. Catubig y Horio, G.R. No. 137842, [August 23, 2001], 416 PHIL 102-121)

68

EN BANC
[G.R. No. L-21438. September 28, 1966.]
AIR FRANCE, petitioner, vs. RAFAEL CARRASCOSO and THE
HONORABLE COURT OF APPEALS, respondents.

6. ID.; ID.; EFFECT OF AFFIRMANCE BY COURT OF APPEALS OF TRIAL COURT'S

DECISION. When the Court of Appeals affirms a judgment of the trial court, and the
findings of fact of said appellate court are not in any way at war with those of the trial court,
nor is said affirmance upon a ground or grounds different from those which were made the
basis of the trial court's conclusions, such judgment of affirmance is (1) a determination by the
Court of Appeals that the proceeding in the lower court was free from prejudicial error; (7) that
all questions raised by the assignments of error and all questions that might have been so raised
have been finally adjudicated as free from all error.

Lichauco, Picazo & Agcaoili for petitioner.

Bengzon, Villegas & Zarraga for respondent R. Carrascoso.
SYLLABUS
1. JUDGMENT; FINDINGS OF FACT; REQUIREMENT OF LAW. Courts of justice are
not burdened with the obligation to specify in the sentence every bit and piece of evidence
presented by the parties upon the issues raised. The law solely insists that a decision state the
"essential ultimate facts" upon which the court's conclusion is drawn.
2. ID.; ID.; ID.; APPEAL AND ERROR; FAILURE TO MAKE FINDINGS ON EVIDENCE
AND CONTENTIONS OF ONE PARTY, EFFECT OF; DECISION NOT TO BE CLOGGED
WITH DETAILS. The mere failure to make specific findings of fact on the evidence
presented for the defense or to specify in the decision the contentions of the appellant and the
reasons for refusing to believe them is not sufficient to hold the same contrary to the
requirement of the law and the Constitution. There is no law that so requires. A decision is not
to be clogged with details such that prolixity, if not confusion, may result.
3. ID.; ID.; ID.; FINDINGS OF FACT BY COURTS DEFINED. Findings of fact may be
defined as the written statement of the ultimate facts as found by the court and essential to
support the decision and judgment rendered thereon; they consist of the court's "conclusions
with respect to the determinative facts on issue."
4. ID.; ID.; ID.; QUESTION OF LAW EXPLAINED. A question of law is "one which does
not call for an examination of the probative value of the evidence presented by the parties."
5. PLEADING AND PRACTICE; APPEAL; WHAT MAY BE RAISED ON APPEAL FROM
COURT OF APPEALS. It is not appropriately the business of the Supreme Court to alter
the facts or to review the questions of fact because, by statute, only questions of law may be
raised in an appeal by certiorari from a judgment of the Court of Appeals, which judgment is
conclusive as to the facts.

7. ID.; COMPLAINT; SPECIFIC MENTION OF THE TERM "BAD FAITH" IN THE

COMPLAINT NOT REQUIRED. Although there is no specific mention of the term bad
faith in the complaint, the inference of bad faith may be drawn from the facts and
circumstances set forth therein. 8. EVIDENCE; FINDING OF COURT OF APPEALS THAT
RESPONDENT WAS ENTITLED TO A FIRST CLASS SEAT. The Court of Appeals
properly found that a first class-ticket holder is entitled to first class seat, given the fact that
seat availability in specific flights is therein confirmed; otherwise, an air passenger will be
placed in the hollow of the hands of an airline, because it will always be easy for an airline to
strike out the very stipulations in the ticket and say that there was verbal agreement to the
contrary. If only to achieve stability in the relations between passenger and air carrier,
adherence to the ticket so issued is desirable.
9. ID.; LACK OF SPECIFIC AVERMENT OF BAD FAITH CURED BY NOTICE TO
DEFENDANT OF WHAT PLAINTIFF INTENDS TO PROVE AND BY EVIDENCE
PRESENTED WITHOUT OBJECTION; AMENDMENT OF COMPLAINT TO CONFORM
TO EVIDENCE UNNECESSARY. If there was lack of specific averment of bad faith in the
complaint, such deficiency was cured by notice, right at the start of the trial, by plaintiff's
counsel to defendant as to what plaintiff intended to prove: while in the plane in Bangkok,
plaintiff was ousted by defendant's manager who gave his seat to a white man; and by evidence
of bad faith in the fulfillment of the contract presented without objection on the part of the
defendant. An amendment of the complaint to conform to the evidence is not even required.
10. ID.; ADMISSIBILITY OF TESTIMONY ON AN ENTRY IN A NOTEBOOK;
TESTIMONY NOT COVERED BY BEST EVIDENCE RULE. The testimony of a witness
that the purser made an entry in his notebook reading "First Class passenger was forced to go
to the tourist class against his will and that the captain refused to intervene," is competent and
admissible because the subject of the inquiry is not the entry but the ouster incident. It does not
come within the prescription of the best evidence rule.
11. CONTRACT OF CARRIAGE; QUASI-DELICT; LIABILITY OF COMMON
CARRIERS; CASE AT BAR. Neglect or malfeasance of the carrier's employees could give
ground for an action for damages. Damages here are proper because the stress of respondent's

69
action is placed upon his wrongful expulsion, which is a violation of a public duty by
petitioner-aircarrier a case of quasi-delict.

DECISION
SANCHEZ, J p:

12. ID.; ID.; ID.; AWARD OF MORAL DAMAGES FOR BREACH OF CONTRACT.
Award of moral damages is proper, despite petitioner's argument that respondent's action is
planted upon breach of contract, where the stress of the action is put on wrongful expulsion,
the contract having been averred only to establish the relation between the parties.
13. ID.; ID.; ID.; EMPLOYER IS RESPONSIBLE FOR TORTIOUS ACTS OF HIS
EMPLOYEE; CASE AT BAR. The responsibility of an employer for the tortious act of his
employees is well settled in law. (Art. 2130, Civil Code). Petitioner-aircarrier must answer for
the willful, malevolent act of its manager.
14. ID.; ID.; ID.; LIABILITY FOR EXEMPLARY DAMAGES; POWER OF COURTS TO
GRANT; CASE AT BAR. The Civil Code gives the court ample power to grant exemplary
damages, the only condition being that defendant should have "acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner." As the manner of ejectment of plaintiff from his
first class seat fits into this legal precept, exemplary damages are well awarded, in addition to
moral damages.
15. ID.; ID.; LIABILITY FOR ATTORNEY'S FEES; COURT DISCRETION WELL
EXERCISED SHOULD NOT BE DISTURBED. The grant of exemplary damages justifies
a similar judgment for attorney's fees. The court below felt that it is but just and equitable that
attorney's fees be given and the Supreme Court does not intend to break faith with the tradition
that discretion well-exercised as it is here should not be disturbed.
16. ID.; RIGHTS OF PASSENGERS. Passengers do not contract merely for transportation.
They have a right to be treated by the carrier's employees with kindness, respect, courtesy and
due consideration. They are entitled to be protected against personal misconduct, injurious
language, indignities and abuses from such employees. So, any rude or discourteous conduct
on the part of employees towards a passenger gives the latter an action for damages against the
carrier. (4 R. C. L-1174-1175).
17. ID.; BREACH OF CONTRACT MAY BE A TORT. Although the relation of passenger
and carrier is contractual both in origin and nature, nevertheless, the act that breaks the contract
may also be a tort.
18. WORDS AND PHRASES; BAD FAITH DEFINED. "Bad faith", as understood in law,
contemplates a state of mind affirmatively operating with furtive design or with some motive
of self-interest or ill will or for ulterior purpose

The Court of First Instance of Manila 1 sentenced petitioner to pay respondent Rafael
Carrascoso P25,000.00 by way of moral damages; P10,000.00 as exemplary damages; P393.20
representing the difference in fare between first class and tourist class for the portion of the trip
Bangkok-Rome, these various amounts with interest at the legal rate, from the date of the filing
of the complaint until paid; plus P3,000.00 for attorneys' fees; and the costs of suit.
On appeal, 2 the Court of Appeals slightly reduced the amount of refund on Carrascoso's plane
ticket from P393.20 to P383.10, and voted to affirm the appealed decision "in all other
respects", with costs against petitioner.
The case is now before us for review on certiorari.
The facts declared by the Court of Appeals as "fully supported by the evidence of record", are:
"Plaintiff, a civil engineer, was a member of a group of 48 Filipino
pilgrims that left Manila for Lourdes on March 30, 1958.
On March 28, 1958, the defendant, Air France, through its authorized
agent, Philippine Air Lines, Inc., issued to plaintiff a 'first class' round
trip airplane ticket from Manila to Rome. From Manila to Bangkok,
plaintiff traveled in 'first class', but at Bangkok, the Manager of the
defendant airline forced plaintiff to vacate the 'first class' seat that he
was occupying because, in the words of the witness Ernesto G.
Cuento, there was a 'white man', who, the Manager alleged, had a
'better right to the seat. When asked to vacate his 'first class' seat, the
plaintiff, as was to be expected, refused, and told defendant's
Manager that his seat would be taken over his dead body; a
commotion ensued, and, according to said Ernesto G. Cuento, many
of the Filipino passengers got nervous in the tourist class; when they
found out that Mr. Carrascoso was having a hot discussion with the
white man [manager], they came all across to Mr. Carrascoso and
pacified Mr. Carrascoso to give his seat to the 'white man' (Transcript,
p. 12, Hearing of May 26, 1959); and plaintiff reluctantly gave his
'first class' seat in the plane." 3
1. The thrust of the relief petitioner now seeks is that we review "all the findings" 4 of
respondent Court of Appeals. Petitioner charges that respondent court failed to make complete

70
findings of fact on all the issues properly laid before it. We are asked to consider facts
favorable to petitioner, and then, to overturn the appellate court's decision.

With these guideposts, we now face the problem of whether the findings of fact of the Court of
Appeals support its judgment.

Coming into focus is the constitutional mandate that "No decision shall be rendered by any
court of record without expressing therein clearly and distinctly the facts and the law on which
it is based". 5 This is echoed in the statutory demand that a judgment determining the merits of
the case shall state "clearly and distinctly the facts and the law on which it is based", 6 and that
"Every decision of the Court of Appeals shall contain complete findings of fact on all issues
properly raised before it." 7

3. Was Carrascoso entitled to the first class seat he claims?

A decision with absolutely nothing to support it is a nullity. It is open to direct attack. 8 The
law, however, solely insists that a decision state the "essential ultimate facts" upon which the
court's conclusion is drawn. 9 A court of justice is not hidebound to write in its decision every
bit and piece of evidence 10 presented by one party and the other upon the issues raised.
Neither is it to be burdened with the obligation "to specify in the sentence the facts" which a
party "considered as proved". 11 This is but a part of the mental process from which the Court
draws the essential ultimate facts. A decision is not to be so clogged with details such that
prolixity, if not confusion, may result. So long as the decision of the Court of Appeals contains
the necessary facts to warrant its conclusions, it is no error for said court to withhold therefrom
"any specific finding of facts with respect to the evidence for the defense". Because, as this
Court well observed, "There is no law that so requires". 12 Indeed, "the mere failure to specify
(in the decision) the contentions of the appellant and the reasons for refusing to believe them is
not sufficient to hold the same contrary to the requirements of the provisions of law and the
Constitution". It is in this setting that in Manigque, it was held that the mere fact that the
findings "were based entirely on the evidence for the prosecution without taking into
consideration or even mentioning the appellant's side in the controversy as shown by his own
testimony", would not vitiate the judgment. 13 If the court did not recite in the decision the
testimony of each witness for, or each item of evidence presented by, the defeated party, it does
not mean that the court has overlooked such testimony or such item of evidence. 14 At any
rate, the legal presumptions are that official duty has been regularly performed, and that all the
matters within an issue in a case were laid before the court and passed upon by it. 15
Findings of fact, which the Court of Appeals is required to make, may be defined as "the
written statement of the ultimate facts as found by the court . . . and essential to support the
decision and judgment rendered thereon". 16 They consist of the court's "conclusions with
respect to the determinative facts in issue" 17 A question of law, upon the other hand, has been
declared as "one which does not call for an examination of the probative value of the evidence
presented by the parties." 18
2. By statute, "only questions of law may be raised" in an appeal by certiorari from a judgment
of the Court of Appeals 19That judgment is conclusive as to the facts. It is not appropriately
the business of this Court to alter the facts or to review the questions of fact. 20

It is conceded in all quarters that on March 28, 1958 he paid to and received from petitioner a
first class ticket. But petitioner asserts that said ticket did not represent the true and complete
intent and agreement of the parties; that said respondent knew that he did not have confirmed
reservations for first class on any specific flight, although he had tourist class protection; that,
accordingly, the issuance of a first class ticket was no guarantee that he would have a first class
ride, but that such would depend upon the availability of first class seats.
These are matters which petitioner has thoroughly presented and discussed in its brief before
the Court of Appeals under its third assignment of error, which reads: "The trial court erred in
finding that plaintiff had confirmed reservations for, and a right to, first class seats on the
'definite' segments of his journey, particularly that from Saigon to Beirut." 21
And, the Court of Appeals disposed of this contention thus:
"Defendant seems to capitalize on the argument that the issuance of a
first-class ticket was no guarantee that the passenger to whom the
same had been issued, would be accommodated in the first-class
compartment, for as in the case of plaintiff he had yet to make
arrangements upon arrival at every station for the necessary first class
reservation. We are not impressed by such a reasoning. We cannot
understand how a reputable firm like defendant airplane company
could have the indiscretion to give out ticket it never meant to honor
at all. It received the corresponding amount in payment of first-class
tickets end yet it allowed the passenger to be at the mercy of its
employees. It is more in keeping with the ordinary course of business
that the company should know whether or not the tickets it issues are
to be honored or not." 22
Not that the Court of Appeals is alone. The trial court similarly disposed of petitioner's
contention, thus:
"On the fact that plaintiff paid for, and was issued a 'First class ticket,
there can be no question. Apart from his testimony, see plaintiffs
Exhibits 'A', 'A-1' 'B', 'B-1', 'B-2', 'C' and 'C-1', and defendant's own
witness, Rafael Altonaga, confirmed plaintiff's testimony and testified
as follows:

71
Q. In these tickets there are marks 'O.K.' From
what you know, what does this O.K.
mean?
A. That the space is confirmed.
Q. Confirmed for first class?
A. Yes, 'first class'. (Transcript, p. 169)
xxx xxx xxx
"Defendant tried to prove by the testimony of its witnesses Luis
Zaldariaga and Rafael Altonaga that although plaintiff paid for, and
was issued a 'first class' airplane ticket, the ticket was subject to
confirmation in Hongkong. The court cannot give credit to the
testimony of said witnesses. Oral evidence cannot prevail over written
evidence, and plaintiff's Exhibits 'A', 'A1', 'B', 'B-1', 'C' and 'C- 1'
belie the testimony of said witnesses, and clearly show that the
plaintiff was issued, and paid for, a first class ticket without any
reservation whatever.
Furthermore, as hereinabove shown, defendant's own witness Rafael
Altonaga testified that the reservation for a 'first class'
accommodation for the plaintiff was confirmed. The court cannot
believe that after such confirmation ,defendant had a verbal
understanding with plaintiff that the 'first class' ticket issued to him by
defendant would be subject to confirmation in Hongkong." 23
We have heretofore adverted to the fact that except for a slight difference of a few pesos in the
amount refunded on Carrascoso's ticket, the decision of the Court of First Instance was
affirmed by the Court of Appeals in all other respects. We hold the view that such a judgment
of affirmance has merged the judgment of the lower court. 24 Implicit in that affirmance is a
determination by the Court of Appeals that the proceeding in the Court of First Instance was
free from prejudicial error and that 'all questions raised by the assignments of error and all
questions that might have been so raised are to be regarded as finally adjudicated against the
appellant". So also, the judgment affirmed "must be regarded as free from all error" 25 We
reached this policy construction because nothing in the decision of the Court of Appeals on this
point would suggest that its findings of fact are in any way at war with those of the trial court.
Nor was said affirmance by the Court of Appeals upon a ground or grounds different from
those which were made the basis of the conclusions of the trial court. 26

If, as petitioner underscores, a first-class-ticket holder is not entitled to a first class seat,
notwithstanding the fact that seat availability in specific flights is therein confirmed, then an air
passenger is placed in the hollow of the hands of an airline. What security then can a passenger
have? It will always be an easy matter for an airline aided by its employees, to strike out the
very stipulations in the ticket, and say that there was a verbal agreement to the contrary. What
if the passenger had a schedule to fulfill? We have long learned that, as a rule, a written
document speaks a uniform language; that spoken word could be notoriously unreliable. If only
to achieve stability in the relations between passenger and air carrier, adherence to the ticket so
issued is desirable. Such is the case here. The lower courts refused to believe the oral evidence
intended to defeat the covenants in the ticket.
The foregoing are the considerations which point to the conclusion that there are facts upon
which the Court of Appeals predicated the finding that respondent Carrascoso had a first class
ticket and was entitled to a first class seat at Bangkok, which is a stopover in the Saigon to
Beirut leg of the flight, 27 We perceive no "welter of distortions by the Court of Appeals of
petitioner's statement of its position", as charged by petitioner. 28 Nor do we subscribe to
petitioners accusation that respondent Carrascoso "surreptitiously took a first class seat to
provoke an issue". 29 And this because, as petitioner states, Carrascoso went to see the
Manager at his office in Bangkok "to confirm my seat and because from Saigon I was told
again to see the Manager. 30 Why, then, was he allowed to take a first class seat in the plane at
Bangkok, if he had no seat? Or, if another had a better right to the seat?
4. Petitioner assails respondent court's award of moral damages. Petitioner's trenchant claim is
that Carrascoso's action is planted upon breach of contract; that to authorize an award for moral
damages there must be an averment of fraud or bad faith; 31 and that the decision of the Court
of Appeals fails to make a finding of bad faith. The pivotal allegations in the complaint bearing
on this issue are:
"3. That . . . plaintiff entered into a contract of air carriage with the
Philippine Air Lines for a valuable consideration, the latter acting as
general agents for and in behalf of the defendant, under which aid
contract, plaintiff was entitled to, as defendant agreed to furnish
plaintiff, First Class passage on defendant's plane during the entire
duration of plaintiff's tour of Europe with Hongkong as starting point
up to and until plaintiff's return trip to Manila, . . .
4. That during the first two legs of the trip from Hongkong to Saigon
and from Saigon to Bangkok, defendant furnished to the plaintiff First
Class accommodation but only after protestations, arguments and/or
insistence were made by the plaintiff with defendant's employees.

72
5. That finally, defendant failed to provide First Class passage, but
instead furnished plaintiff only Tourist Classaccommodations from
Bangkok to Teheran and/or Casablanca, . . . the plaintiff has
been compelled by defendant's employees to leave the First Class
accommodation berths at Bangkok after he was already seated.
6. That consequently, the plaintiff, desiring no repetition of the
inconvenience and embarrassments brought by defendant's breach of
contract was forced to take a Pan American World Airways plane on
his return trip from Madrid to Manila. 32
xxx xxx xxx
2. That likewise, as a result of defendant's failure to furnish First
Class accommodations aforesaid, plaintiff suffered inconveniences,
embarrassments, and humiliations, thereby causing plaintiff mental
anguish, serious anxiety, wounded feelings, social humiliation, and
the like injury, resulting in moral damages in the amount of
P30,000.00." 33
xxx xxx xxx
The foregoing, in our opinion, substantially aver: First, That there was a contract to furnish
plaintiff a first class passage covering, amongst others, the Bangkok-Teheran leg; Second, That
said contract was breached when petitioner failed to furnish first class transportation at
Bangkok; and Third, That there was bad faith when petitioner's employee compelled
Carrascoso to leave his first class accommodation berth "after he was already seated" and to
take a seat in the tourist class, by reason of which he suffered inconvenience, embarrassments
and humiliations, thereby causing him mental anguish, serious anxiety, wounded feelings and
social humiliation, resulting in moral damages. It is true that there is no specific mention of the
term bad faith in the complaint. But, the inference of bad faith is there; it may be drawn from
the facts and circumstances set forth therein. 34 The contract was averred to establish the
relation between the parties. But the stress of the action is put on wrongful expulsion.
Quite apart from the foregoing is that (a) right at the start of the trial, respondent's counsel
placed petitioner on guard on what Carrascoso intended to prove: That while sitting in the
plane in Bangkok, Carrascoso was ousted by petitioner's manager who gave his seat to a white
man; 35 and (b) evidence of bad faith in the fulfillment of the contract was presented without
objection on the part of the petitioner. It is, therefore, unnecessary to inquire as to whether or
not there is sufficient averment in the complaint to justify an award for moral damages.
Deficiency in the complaint, if any, was cured by the evidence. An amendment thereof to

conform to the evidence is not even required. 36 On the question of bad faith, the Court of
Appeals declared:
"That the plaintiff was forced out of his seat in the first class
compartment of the plane belonging to the defendant Air France
while at Bangkok, and was transferred to the tourist class not only
without his consent but against his will, has been sufficiently
established by plaintiff in his testimony before the court, corroborated
by the corresponding entry made by the purser of the plane in his
notebook which notation reads as follows:
'First-class passenger was forced to go to
the tourist class against his will and that the captain
refused to intervene',
and by the testimony of an eye-witness Ernesto G. Cuento,
who was a co-passenger. The captain of the plane who was
asked by the manager of defendant company at Bangkok to
intervene even refused to do so. It is noteworthy that no one
on behalf of defendant ever contradicted or denied this
evidence for the plaintiff. It could have been easy for
defendant to present its manager at Bangkok to testify at the
trial of the case, or yet to secure his deposition; but defendant
did neither. 37
The Court of Appeals further stated
"Neither is there evidence as to whether or ,not a prior reservation
was made by the white man. Hence, if the employees of the defendant
at Bangkok sold a first-class ticket to him when all the seats had
already been taken, surely the plaintiff should not have been picked
out as the one to suffer the consequences and to be subjected to the
humiliation and indignity of being ejected from his seat in the
presence of others. Instead of explaining to the white man the
improvidence committed by defendant's employees, the manager
adopted the more drastic step of ousting the plaintiff who was then
safely ensconced in his rightful seat. We are strengthened in our belief
that this probably was what happened there, by the testimony of
defendant's witness Rafael Altonaga who, when asked to explain the
meaning of the letters 'O.K., appearing on the tickets of plaintiff, said
that 'the space is confirmed' for first class. Likewise, Zenaida

73
Faustino, another witness for defendant, who was the chief of the
Reservation Office of defendant, testified as follows:
'Q. How does the person in the ticket-issuing
office know what reservation the
passenger has arranged with you?
A. They call us up by phone and ask for the
confirmation.' (t.s.n., p. 247, June 19,
1959)
In this connection, we quote with approval what the trial Judge has said on this point:
'Why did the, using the words of witness Ernesto G. Cuento, 'white
man' have a 'better right' to the seat occupied by Mr. Carrascoso? The
record is silent. The defendant airline did not prove 'any better', nay,
any right on the part of the 'white man' to the 'First class' seat that the
plaintiff was occupying and for which he paid and was issued a
corresponding 'first class' ticket.
'If there was a justified reason for the action of the defendant's
Manager in Bangkok, the defendant could have easily proven it by
having taken the testimony of the said Manager by deposition, but
defendant did not do so; the presumption is that evidence willfully
suppressed would be adverse if produced [Sec. 69, par. (e) Rules of
Court]; and, under the circumstances, the Court is constrained to find,
as it does find, that the Manager of the defendant airline in Bangkok
not merely asked but threatened the plaintiff to throw him out of the
plane if he did not give up his 'first class' seat because the said
Manager wanted to accommodate using the words of the witness
Ernesto G. Cuento, the 'white man'." 38
It is really correct to say that the Court of Appeals in the quoted portion first transcribed did not
use the term "bad faith". But can it be doubted that the recital of facts therein points to bad
faith? The manager not only prevented Carrascoso from enjoying his right to a first class seat;
worse, he imposed his arbitrary will; he forcibly ejected him from his seat, made him suffer the
humiliation of having to go to the tourist class compartment just to give way to another
passenger whose right thereto has not been established. Certainly, this is bad faith. Unless, of
course, bad faith has assumed a meaning different from what is understood in law. For, "bad
faith" contemplates a "state of mind affirmatively operating with furtive design or with some
motive of self-interest or ill will or for ulterior purposes." 39

And if the foregoing were not yet sufficient, there is the express finding of bad faith in the
judgment of the Court of First Instance, thus:
"The evidence shows that defendant violated its contract of
transportation with plaintiff in bad faith, with the aggravating
circumstances that defendant's Manager in Bangkok went to the
extent of threatening the plaintiff in the presence of many passengers
to have him thrown out of the airplane to give the 'first class' seat that
he was occupying to, again using the words of witness Ernesto G.
Cuento, a 'white man' whom he (defendant's Manager) wished to
accommodate, and the defendant has not proven that this 'white man'
had any 'better right' to occupy the 'first class' seat that the plaintiff
was occupying, duly paid for, and for which the corresponding 'first
class' ticket was issued by the defendant to him." 40
5. The responsibility of an employer for the tortuous act of its employees-need not be essayed.
It is well settled in law. 41For the willful malevolent act of petitioner's manager, petitioner's his
employer, must answer. Article 21 of the Civil Code says:
"Art. 21. Any person who willfully causes loss or injury to another in
a manner that is contrary to morals, good customs or public policy
shall compensate the latter for the damage."
In parallel circumstances, we applied the foregoing legal precept; and, we held that upon the
provisions of Article 2219 (10), Civil Code, moral damages are recoverable. 42
6. A contract to transport passengers is quite different in kind and degree from any other
contractual relation. 43 And this, because of the relation which an air-carrier sustains with the
public. Its business is mainly with the travelling public. It invites people to avail of the
comforts and advantages it offers. The contract of air carriage, therefore, generates a relation
attended with a public duty. Neglect or malfeasance of the carrier's employees, naturally, could
give ground for an action for damages.
Passengers do not contract merely for transportation. They have a light to be treated by the
carrier's employees with kindness, respect, courtesy and due consideration. They are entitled to
be protected against personal misconduct, injurious language, indignities and abuses from such
employees. So it is, that any rude or discourteous conduct on the part of employees towards a
passenger gives the latter an action for damages against the carrier. 44
Thus, "Where a steamship company 45 had accepted a passenger's check, it was a breach of
contract and a tort, giving a right of action for its agent in the presence of third persons to
falsely notify her that the check was worthless and demand payment under threat of ejection,

74
though the language used was not insulting and she was not ejected. 46 And this, because,
altho the relation of passenger and carrier is "contractual both in origin and nature"
nevertheless "the act that breaks the contract may be also a tort". 47 And in another case,
"Where a passenger on a railroad train, when the conductor came to collect his fare, tendered
him the cash fare to a point where the train was scheduled not to stop, and told him that as soon
as the train reached such point he would pay the cash fare from that point to destination, there
was nothing in the conduct of the passenger which justified the conductor in using insulting
language to him, as by calling him a lunatic," 48 and the Supreme Court of South Carolina
there held the carrier liable for the mental suffering of said passenger.
Petitioner's contract with Carrascoso is one attended with public duty. The stress of
Carrascoso's action as we have said, is placed upon his wrongful expulsion. This is a violation
of public duty by the petitioner-air carrier a case of quasi-delict. Damages are proper.
7. Petitioner draws our attention to respondent Carrascoso's testimony, thus
"Q. You mentioned about an attendant. Who is
that attendant and purser?
A. When we left already that was already in
the trip I could not help it. So one
of the flight attendants approached me
and requested from me my ticket and I
said, What for? and she said, 'We will
note that you were transferred to the
tourist class'. I said, 'Nothing of that
kind. That is tantamount to accepting
my transfer.' And I also said, You are
not going to note anything there
because I am protesting to this
transfer.
Q. Was she able to note it?
A. No, because I did not give my ticket.

went to the pantry that was next to me

and the purser was there. He told me,
'I have recorded the incident in my
notebook.' He read it and translated it
to me because it was recorded in
French 'First class passenger was
forced to go to the tourist class against
his will, and that the captain refused to
intervene.'
MR. VALTE
I move to strike out the last part of the testimony
of the witness because the best
evidence would be the notes. Your
Honor.
COURT
I will allow that as part of his testimony." 49
Petitioner charges that the finding of the Court of Appeals that the purser made an entry in his
notebooks reading "First class passenger was forced to go to the tourist class against his will,
and that the captain refused to intervene" is predicated upon evidence [Carrascoso's testimony
above] which is incompetent. We do not think so. The subject of inquiry is not the entry, but
the ouster incident. Testimony of the entry does not come within the proscription of the best
evidence rule. Such testimony is admissible. 49
Besides, from a reading of the transcript just quoted, when the dialogue happened, the impact
of the startling occurrence was still fresh and continued to be felt. The excitement had not as
yet died down. Statements then, in this environment, are admissible as part of the res
gestae. 50 For, they grow "out of the nervous excitement and mental and physical condition of
the declarant". 51 The utterance of the purser regarding his entry in the notebook was
spontaneous, and related to the circumstances of the ouster incident. Its trustworthiness has
been guaranteed. 52 It thus escapes the operation of the hearsay rule. It forms part of the res
gestae.

Q. About that purser?

A. Well, the seats there are so close that you feel
uncomfortable and you don't have
enough leg room, I stood up and I

At all events, the entry was made outside the Philippines. And, by an employee of petitioner. It
would have been an easy matter for petitioner to have contradicted Carrascoso's testimony. If it
were really true that no such entry was made, the deposition of the purser could have cleared
up the matter.

75
We, therefore, hold that the transcribed testimony of Carrascoso is admissible in evidence.
8. Exemplary damages are well awarded. The Civil Code gives the Court ample power to grant
exemplary damages in contracts and quasi-contracts. The only condition is that defendant
should have "acted in a wanton, fraudulent, reckless, oppressive, or malevolent
manner". 53 The manner of ejectment of respondent Carrascoso from his first class seat fits
into this legal precept. And this, in addition to moral damages. 54
9. The right to attorneys' fees is fully established. The grant of exemplary damages justifies a
similar judgment for attorneys' fees. The least that can be said is that the courts below felt that
it is but just and equitable that attorneys' fees be given. 55 We do not intend to break faith with
the tradition that discretion well exercised as it was here should not be disturbed.
10. Questioned as excessive are the amounts decreed by both the trial court and the Court of
Appeals, thus: P25,000.00 as moral damages; P10,000.00, by way of exemplary damages, and
P3,000.00 as attorney's fees. The task of fixing these amounts is primarily with the trialcourt. 56 The Court of Appeals did not interfere with the same. The dictates of good sense
suggest that we give our imprimatur thereto. Because, the facts and circumstances point to the
reasonableness thereof. 57
On balance, we say that the judgment of the Court of Appeals does not suffer from reversible
error. We accordingly vote to affirm the same. Costs against petitioner. So ordered.
Concepcion, C.J., Reyes J.B.L., Barrera, Dizon, Regala, Makalintal, Zaldivar and Castro,
JJ., concur.
Bengzon, J.P., J., did not take part.
||| (Air France v. Carrascoso, G.R. No. L-21438, [September 28, 1966], 124 PHIL 722-742)

76

THIRD DIVISION
[G.R. No. 138814. April 16, 2009.]
MAKATI STOCK EXCHANGE, INC., MA. VIVIAN
YUCHENGCO, ADOLFO M. DUARTE, MYRON C. PAPA,
NORBERTO C. NAZARENO, GEORGE UY-TIOCO,
ANTONIO A. LOPA, RAMON B. ARNAIZ, LUIS J.L. VIRATA,
and ANTONIO GARCIA, JR. petitioners, vs. MIGUEL V.
CAMPOS, substituted by JULIA ORTIGAS VDA. DE
CAMPOS,1 respondent.

The SICD subsequently issued another Order on 10 March 1994 granting respondent's
application for a Writ of Preliminary Injunction, to continuously enjoin, during the pendency of
SEC Case No. 02-94-4678, the implementation or enforcement of the MKSE Board Resolution
in question. Petitioners assailed this SICD Order dated 10 March 1994 in a Petition
for Certiorarifiled with the SEC en banc, docketed as SEC-EB No. 393.
On 11 March 1994, petitioners filed a Motion to Dismiss respondent's Petition in SEC Case
No. 02-94-4678, based on the following grounds: (1) the Petition became moot due to the
cancellation of the license of MKSE; (2) the SICD had no jurisdiction over the Petition; and (3)
the Petition failed to state a cause of action.

DECISION

The SICD denied petitioner's Motion to Dismiss in an Order dated 4 May 1994. Petitioners
again challenged the 4 May 1994 Order of SICD before the SEC en banc through another
Petition for Certiorari, docketed as SEC-EB No. 403.

This is a Petition for Review on Certiorari under Rule 45 seeking the reversal of the
Decision 2 dated 11 February 1997 and Resolution dated 18 May 1999 of the Court of Appeals
in CA-G.R. SP No. 38455. ADCIca

In an Order dated 31 May 1995 in SEC-EB No. 393, the SEC en banc nullified the 10 March
1994 Order of SICD in SEC Case No. 02-94-4678 granting a Writ of Preliminary Injunction in
favor of respondent. Likewise, in an Order dated 14 August 1995 in SEC-EB No. 403, the
SEC en banc annulled the 4 May 1994 Order of SICD in SEC Case No. 02-94-4678 denying
petitioners' Motion to Dismiss, and accordingly ordered the dismissal of respondent's Petition
before the SICD. aDcEIH

CHICO-NAZARIO, J p:

The facts of the case are as follows:

SEC Case No. 02-94-4678 was instituted on 10 February 1994 by respondent Miguel V.
Campos, who filed with the Securities, Investigation and Clearing Department (SICD) of the
Securities and Exchange Commission (SEC), a Petition against herein petitioners Makati Stock
Exchange, Inc. (MKSE) and MKSE directors, Ma. Vivian Yuchengco, Adolfo M. Duarte,
Myron C. Papa, Norberto C. Nazareno, George Uy-Tioco, Antonio A, Lopa, Ramon B. Arnaiz,
Luis J.L. Virata, and Antonio Garcia, Jr. Respondent, in said Petition, sought: (1) the
nullification of the Resolution dated 3 June 1993 of the MKSE Board of Directors, which
allegedly deprived him of his right to participate equally in the allocation of Initial Public
Offerings (IPO) of corporations registered with MKSE; (2) the delivery of the IPO shares he
was allegedly deprived of, for which he would pay IPO prices; and (3) the payment of P2
million as moral damages, P1 million as exemplary damages, and P500,000.00 as attorney's
fees and litigation expenses.
On 14 February 1994, the SICD issued an Order granting respondent's prayer for the issuance
of a Temporary Restraining Order to enjoin petitioners from implementing or enforcing the 3
June 1993 Resolution of the MKSE Board of Directors.

Respondent filed a Petition for Certiorari with the Court of Appeals assailing the Orders of the
SEC en banc dated 31 May 1995 and 14 August 1995 in SEC-EB No. 393 and SEC-EB No.
403, respectively. Respondent's Petition before the appellate court was docketed as CA-G.R.
SP No. 38455.
On 11 February 1997, the Court of Appeals promulgated its Decision in CA-G.R. SP No.
38455, granting respondent's Petition for Certiorari, thus:
WHEREFORE, the petition in so far as it prays for annulment of the
Orders dated May 31, 1995 and August 14, 1995 in SEC-EB Case
Nos. 393 and 403 is GRANTED. The said orders are hereby rendered
null and void and set aside.
Petitioners filed a Motion for Reconsideration of the foregoing Decision but it was denied by
the Court of Appeals in a Resolution dated 18 May 1999.
Hence, the present Petition for Review raising the following arguments:

77
I.
THE SEC EN BANC DID NOT COMMIT GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WHEN IT DISMISSED THE PETITION FILED
BY RESPONDENT BECAUSE ON ITS FACE, IT FAILED TO
STATE A CAUSE OF ACTION.
II.
THE GRANT OF THE IPO ALLOCATIONS IN FAVOR OF
RESPONDENT WAS A MERE ACCOMMODATION GIVEN TO
HIM BY THE BOARD OF [DIRECTORS] OF THE MAKATI
STOCK EXCHANGE, INC.
III.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE
SEC EN BANC COMMITTED GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN
IT MADE AN EXTENDED INQUIRY AND PROCEEDED TO
MAKE A DETERMINATION AS TO THE TRUTH OF
RESPONDENT'S ALLEGATIONS IN HIS PETITION AND USED
AS BASIS THE EVIDENCE ADDUCED DURING THE HEARING
ON THE APPLICATION FOR THE WRIT OF PRELIMINARY
INJUNCTION TO DETERMINE THE EXISTENCE OR VALIDITY
OF A STATED CAUSE OF ACTION. DaIACS
IV.
IPO ALLOCATIONS GRANTED TO BROKERS ARE NOT TO BE
BOUGHT BY THE BROKERS FOR THEMSELVES BUT ARE TO
BE DISTRIBUTED TO THE INVESTING PUBLIC. HENCE,
RESPONDENT'S CLAIM FOR DAMAGES IS ILLUSORY AND
HIS PETITION A NUISANCE SUIT. 3
On 18 September 2001, counsel for respondent manifested to this Court that his client died on
7 May 2001. In a Resolution dated 24 October 2001, the Court directed the substitution of
respondent by his surviving spouse, Julia Ortigas vda. de Campos.

Petitioners want this Court to affirm the dismissal by the SEC en banc of respondent's Petition
in SEC Case No. 02-94-4678 for failure to state a cause of action. On the other hand,
respondent insists on the sufficiency of his Petition and seeks the continuation of the
proceedings before the SICD.
A cause of action is the act or omission by which a party violates a right of another. 4 A
complaint states a cause of action where it contains three essential elements of a cause of
action, namely: (1) the legal right of the plaintiff, (2) the correlative obligation of the
defendant, and (3) the act or omission of the defendant in violation of said legal right. If these
elements are absent, the complaint becomes vulnerable to dismissal on the ground of failure to
state a cause of action.
If a defendant moves to dismiss the complaint on the ground of lack of cause of action, he is
regarded as having hypothetically admitted all the averments thereof. The test of sufficiency of
the facts found in a complaint as constituting a cause of action is whether or not admitting the
facts alleged, the court can render a valid judgment upon the same in accordance with the
prayer thereof. The hypothetical admission extends to the relevant and material facts well
pleaded in the complaint and inferences fairly deducible therefrom. Hence, if the allegations in
the complaint furnish sufficient basis by which the complaint can be maintained, the same
should not be dismissed regardless of the defense that may be assessed by the defendant. 5
Given the foregoing, the issue of whether respondent's Petition in SEC Case No. 02-94-4678
sufficiently states a cause of action may be alternatively stated as whether, hypothetically
admitting to be true the allegations in respondent's Petition in SEC Case No. 02-94-4678, the
SICD may render a valid judgment in accordance with the prayer of said Petition.
A reading of the exact text of respondent's Petition in SEC Case No. 02-94-4678 is, therefore,
unavoidable. Pertinent portions of the said Petition reads: aEIADT
7. In recognition of petitioner's invaluable services, the general
membership of respondent corporation [MKSE] passed a resolution
sometime in 1989 amending its Articles of Incorporation, to include
the following provision therein:
"ELEVENTH WHEREAS, Mr. Miguel Campos is the
only surviving incorporator of the Makati Stock Exchange,
Inc. who has maintained his membership;
"WHEREAS, he has unselfishly served the Exchange in
various capacities, as governor from 1977 to the present
and as President from 1972 to 1976 and again as President
from 1988 to the present;

78
"WHEREAS, such dedicated service and leadership which
has contributed to the advancement and well being not
only of the Exchange and its members but also to the
Securities industry, needs to be recognized and
appreciated;

the ground that these shares were allegedly benefiting Gerardo O.

Lanuza, Jr., who these individual respondents wanted to get even
with, for having filed cases before the Securities and Exchange *
(SEC) for their disqualification as member of the Board of Directors
of respondent corporation.

"WHEREAS, as such, the Board of Governors in its

meeting held on February 09, 1989 has correspondingly
adopted a resolution recognizing his valuable service to
the Exchange, reward the same, and preserve for posterity
such recognition by proposing a resolution to the
membership body which would make him as Chairman
Emeritus for life and install in the Exchange premises a
commemorative bronze plaque in his honor;

12. Hence, from June 3, 1993 up to the present time, petitioner has
been deprived of his right to subscribe to the IPOs of corporations
listing in the stock market at their offering prices.

"NOW, THEREFORE, for and in consideration of the

above premises, the position of the "Chairman Emeritus"
to be occupied by Mr. Miguel Campos during his lifetime
and irregardless of his continued membership in the
Exchange with the Privilege to attend all membership
meetings as well as the meetings of the Board of
Governors of the Exchange, is hereby created."
8. Hence, to this day, petitioner is not only an active member of the
respondent corporation, but its Chairman Emeritus as well.
9. Correspondingly, at all times material to this petition, as an active
member and Chairman Emeritus of respondent corporation, petitioner
has always enjoyed the right given to all the other members to
participate equally in the Initial Public Offerings (IPOs for brevity) of
corporations.
10. IPOs are shares of corporations offered for sale to the public, prior
to the listing in the trading floor of the country's two stock exchanges.
Normally, Twenty Five Percent (25%) of these shares are divided
equally between the two stock exchanges which in turn divide these
equally among their members, who pay therefor at the offering
price. TcIaHC
11. However, on June 3, 1993, during a meeting of the Board of
Directors of respondent-corporation, individual respondents passed a
resolution to stop giving petitioner the IPOs he is entitled to, based on

13. The collective act of the individual respondents in depriving

petitioner of his right to a share in the IPOs for the aforementioned
reason, is unjust, dishonest and done in bad faith, causing petitioner
substantial financial damage. 6
There is no question that the Petition in SEC Case No. 02-94-4678 asserts a right in favor of
respondent, particularly, respondent's alleged right to subscribe to the IPOs of corporations
listed in the stock market at their offering prices; and stipulates the correlative obligation of
petitioners to respect respondent's right, specifically, by continuing to allow respondent to
subscribe to the IPOs of corporations listed in the stock market at their offering prices.
However, the terms right and obligation in respondent's Petition are not magic words that
would automatically lead to the conclusion that such Petition sufficiently states a cause of
action. Right and obligation are legal terms with specific legal meaning. A right is a claim or
title to an interest in anything whatsoever that is enforceable by law. 7 An obligation is defined
in the Civil Code as a juridical necessity to give, to do or not to do. 8 For every right enjoyed
by any person, there is a corresponding obligation on the part of another person to respect such
right. Thus, Justice J.B.L. Reyes offers 9 the definition given by Arias Ramos as a more
complete definition:
An obligation is a juridical relation whereby a person (called the
creditor) may demand from another (called the debtor) the observance
of a determinative conduct (the giving, doing or not doing), and in
case of breach, may demand satisfaction from the assets of the latter.
The Civil Code enumerates the sources of obligations:
Art. 1157. Obligations arise from:

79
(1) Law;
(2) Contracts;
(3) Quasi-contracts;
(4) Acts or omissions punished by law; and
(5) Quasi-delicts. cTAaDC
Therefore, an obligation imposed on a person, and the corresponding right granted to another,
must be rooted in at least one of these five sources. The mere assertion of a right and claim of
an obligation in an initiatory pleading, whether a Complaint or Petition, without identifying the
basis or source thereof, is merely a conclusion of fact and law. A pleading should state
theultimate facts essential to the rights of action or defense asserted, as distinguished from
mere conclusions of fact orconclusions of law. 10 Thus, a Complaint or Petition filed by a
person claiming a right to the Office of the President of this Republic, but without stating the
source of his purported right, cannot be said to have sufficiently stated a cause of action. Also,
a person claiming to be the owner of a parcel of land cannot merely state that he has a right to
the ownership thereof, but must likewise assert in the Complaint either a mode of acquisition
of ownership or at least a certificate of title in his name.
In the case at bar, although the Petition in SEC Case No. 02-94-4678 does allege respondent's
right to subscribe to the IPOs of corporations listed in the stock market at their offering prices,
and petitioners' obligation to continue respecting and observing such right, the Petition utterly
failed to lay down the source or basis of respondent's right and/or petitioners' obligation.
Respondent merely quoted in his Petition the MKSE Board Resolution, passed sometime in
1989, granting him the position of Chairman Emeritus of MKSE for life. However, there is
nothing in the said Petition from which the Court can deduce that respondent, by virtue of his
position as Chairman Emeritus of MKSE, was granted by law, contract, or any other legal
source, the right to subscribe to the IPOs of corporations listed in the stock market at their
offering prices.
A meticulous review of the Petition reveals that the allocation of IPO shares was merely
alleged to have been done in accord with a practice normally observed by the members of the
stock exchange, to wit:
IPOs are shares of corporations offered for sale to the public, prior to
their listing in the trading floor of the country's two stock
exchanges. Normally, Twenty-Five Percent (25%) of these shares

are divided equally between the two stock exchanges which in

turn divide these equally among their members, who pay therefor
at the offering price. 11(Emphasis supplied)
A practice or custom is, as a general rule, not a source of a legally demandable or enforceable
right. 12 Indeed, in labor cases, benefits which were voluntarily given by the employer, and
which have ripened into company practice, are considered as rights that cannot be diminished
by the employer. 13 Nevertheless, even in such cases, the source of the employees' right is not
custom, but ultimately, the law, since Article 100 of the Labor Code explicitly prohibits
elimination or diminution of benefits. SEIcAD
There is no such law in this case that converts the practice of allocating IPO shares to MKSE
members, for subscription at their offering prices, into an enforceable or demandable right.
Thus, even if it is hypothetically admitted that normally, twenty five percent (25%) of the IPOs
are divided equally between the two stock exchanges which, in turn, divide their respective
allocation equally among their members, including the Chairman Emeritus, who pay for IPO
shares at the offering price the Court cannot grant respondent's prayer for damages which
allegedly resulted from the MKSE Board Resolution dated 3 June 1993 deviating from said
practice by no longer allocating any shares to respondent.
Accordingly, the instant Petition should be granted. The Petition in SEC Case No. 02-94-4678
should be dismissed for failure to state a cause of action. It does not matter that the SEC en
banc, in its Order dated 14 August 1995 in SEC-EB No. 403, overstepped its bounds by not
limiting itself to the issue of whether respondent's Petition before the SICD sufficiently stated a
cause of action. The SEC en banc may have been mistaken in considering extraneous evidence
in granting petitioners' Motion to Dismiss, but its discussion thereof are merely superfluous
and obiter dictum. In the main, the SEC en banc did correctly dismiss the Petition in SEC Case
No. 02-94-4678 for its failure to state the basis for respondent's alleged right, to wit:
Private respondent Campos has failed to establish the basis or
authority for his alleged right to participate equally in the IPO
allocations of the Exchange. He cited paragraph 11 of the amended
articles of incorporation of the Exchange in support of his position
but a careful reading of the said provision shows nothing therein that
would bear out his claim. The provision merely created the position
of chairman emeritus of the Exchange but it mentioned nothing about
conferring upon the occupant thereof the right to receive IPO
allocations. 14
With the dismissal of respondent's Petition in SEC Case No. 02-94-4678, there is no more need
for this Court to resolve the propriety of the issuance by SCID of a writ of preliminary
injunction in said case.

80
WHEREFORE, the Petition is GRANTED. The Decision of the Court of Appeals dated 11
February 1997 and its Resolution dated 18 May 1999 in CA-G.R. SP No. 38455 are
REVERSED and SET ASIDE. The Orders dated 31 May 1995 and 14 August 1995 of the
Securities and Exchange Commission en banc in SEC-EB Case No. 393 and No. 403,
respectively, are hereby reinstated. No pronouncement as to costs.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Peralta, JJ., concur.
||| (Makati Stock Exchange, Inc. v. Campos, G.R. No. 138814, [April 16, 2009], 603 PHIL 121134)

81

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

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.

ROSENDO O. CHAVES, plaintiff-appellant, vs. FRUCTUOSO

GONZALES, defendant-appellee.

DECISION

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

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

Sulpicio E. Platon for defendant-appellee.

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.

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 defendantappellee 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.

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).

82
"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 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 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. 2 The 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

83
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 defendant-appellee 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.
||| (Chaves v. Gonzales, G.R. No. L-27454, [April 30, 1970], 143 PHIL 317-322)

84

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

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?

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

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.

BARREDO, J p:
SO ORDERED." 1 (Record on Appeal pp. 28-30.)
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 plaintiffsappellants "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.

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

85
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 PLAINTIFFS-APPELLANTS."
(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

86
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.
||| (Piczon v. Piczon, G.R. No. L-29139, [November 15, 1974], 158 PHIL 726-731)

87

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. T-39023 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

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 5admitted the amended complaint.

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 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 a Deed 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.

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

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

88
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-in-Intervention 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 Manifestationdated 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.

89
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 pendens annotated 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.

90
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.

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

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

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.

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

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; 32symbolical
tradition such as the delivery of the keys of the place where the movable sold is being
kept; 33 traditio longa manuor 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

91
have first taken possession thereof in good faith, if it should be
movable property.

subsequent annotation of lis pendens has no effect at all on the consummated sale between
SLDC and the Spouses Lu.

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.

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 theProperty Registration
Decree (P.D. No. 1529) which reads, thus:

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

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-inIntervention 44 that at the instance of Pacita Lu it issued a check for P200,000.00 payable to

92
Babasanta and the confirmatory testimony of Pacita Lu herself on crossexamination. 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 Mortgage in 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.
||| (San Lorenzo Development Corp. v. Court of Appeals, G.R. No. 124242, [January 21, 2005],
490 PHIL 7-27)

93

THIRD DIVISION

retail stores, or other business purposes if the owner thereof and his family actually live therein
and use it principally for dwelling purposes: . . .."

[G.R. No. 77365. April 7, 1992.]

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]).

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. 25enumerates 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,

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]).

94
DECISION

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.

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.

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

95
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.

||| (Caleon v. Agus Development Corp., G.R. No. 77365, [April 7, 1992])

96

FIRST DIVISION

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

[G.R. No. 117190. January 2, 1997.]

DECISION
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 L47896, 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

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

97
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.

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.

We reverse the appellate court on the first issue but sustain it on the second.

F. O. B. Laguna

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 letterproposal (Exh. "1") are reproduced hereunder

Contract Price
P60,000.00

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
P87,000.00

PRICE

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

98
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 creditordebtor 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

99
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 one-year
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.
||| (Tanguilig v. Court of Appeals, G.R. No. 117190, [January 2, 1997], 334 PHIL 68-76)

100

THIRD DIVISION

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.

[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. PCIC45541 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.

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.

101
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.

1.Claimant was legally justified in terminating the Contract;

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.

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

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

3.Dynamic's percentage of accomplishment as of the date of the

termination of the Contract was 57.33% at P71,089,200.

On August 20, 2004, PCIC denied CCP's claims against the three bonds. 14

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.

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

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;

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.

2.Under Performance Bond Nos. PCIC-45541 [Bond Endorsement

Nos. E-2003/12527] and PCIC-46172, the amount of
Php6,892,890.73 plus legal interest from the date of demand until full
payment thereof; and

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.

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:

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.

102
9.Surety is not barred by estoppel from denying liability under the
Surety and Performance Bonds.

scaffoldings which were appropriated by the former or the total

amount of P4,232,264.12.

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.

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

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

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

103
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. E2003/12527), 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:

104
Performance Bond in the amount of

ATTY. G. Q. ENRIQUEZ:

MR. CRISPINO P. REYES:

Okay. IETCAS

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:

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.

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

105
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. 43Hence, 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, 44 Performance Bond PCIC-45541 45 and PCIC46172 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

cancelled. cACHSE

and be

deemed absolutely

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:

106
. . . . 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
CONTRACTOR in fulfilling its obligation;

of

the

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. 61 DHITSc
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

107
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.
||| (Philippine Charter Insurance Corp. v. Central Colleges of the Philippines, G.R. Nos.
180631-33, [February 22, 2012], 682 PHIL 507-526)

108
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
B.

1. 2.

SYLLABUS
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.

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, selfserving 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

109
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.

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.

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.

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

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

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

110
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.

respondent corporation wanted to avoid when it continually refused to settle with petitioner at
less than what was actually due under their contract. ATHCac

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.

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.

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

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

111
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 partydefendant, 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 co-maker
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 comaker'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 ShortTerm 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

112
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 65-year 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, selfserving 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

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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.

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

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

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.

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

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. 34 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 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

114
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.

115
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.
||| (Palmares v. Court of Appeals, G.R. No. 126490, [March 31, 1998], 351 PHIL 664-691)

116

B.1.3.

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.
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.

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:

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

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

117
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 Third-Party 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 ex-parte 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 CA-G.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 coplaintiffs, 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

118
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 DavidGarlitos 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 appelleesbuyers, 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.

119
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.
||| (Binalbagan Tech. Inc. v. Court of Appeals, G.R. No. 100594, [March 10, 1993])

120

B.1.4

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

121
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 twentyfourth 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.

122
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

123
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.
||| (Barzaga v. Court of Appeals, G.R. No. 115129, [February 12, 1997], 335 PHIL 568-579)

124

B.1.5

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

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.

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

[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.

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 8signed by Rodolfo J. Lagera and Jaime B.
Lo, as follows:

The Facts

1.Financial Building Corporation ("FBC") shall complete and deliver

the Project to Rudlin International, Inc. ("RII") on or before 10 June
1986.

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-

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.

125
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

25%
25%
25%
25%

TOTAL PAYMENTS DUE

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

126
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 courtappointed 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.

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 selfserving 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 LetterAgreement 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

SO ORDERED. 17
Both FBC and Rudlin filed notices of appeal.

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

Ruling of the CA

The Cases

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

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

127
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 courtauthorized 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
ashold ]? 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:

128
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 allinstructions 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:

129
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
ISBIRD
&
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

130
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 subcontractors, 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

131
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. 38Consequently, 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

P6,933,268.00
P1,074,385.53

Total Additive Cost

P8,007,653.53

3.
Deductives
P886,706.45
4.
Direct Payment
P4,874,920.14
5.
Chargeable Materials
P727,688.90
6.
Rebates
P9,793.22

Total Payments
P6,499,188.71

TOTAL UNPAID BALANCE

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 LetterAgreement 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.

132
The term "agreement" includes wills.

(4)In case of a clearly unfounded civil action or proceeding against

the plaintiff;

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." 43HIaSDc

(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;

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, 44the 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;

(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.
||| (Financial Building Corp. v. Rudlin International Corp., G.R. No. 164186, 164347, [October
4, 2010], 646 PHIL 327-357)

133

B.1.6

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
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 L47896, 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

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 Merchandisingproposed 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 Answerbefore 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

134
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 letterproposal (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
P87,000.00

PRICE

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

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.

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

135
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 creditordebtor 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 one-year
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.
||| (Tanguilig v. Court of Appeals, G.R. No. 117190, [January 2, 1997], 334 PHIL 68-76)

136

B.1.7

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.
SECOND DIVISION
SYLLABUS
[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

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."

137
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.

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

DECISION

C. Quantity : 500MT - 100 MT Ex-Basay

138
400 MT Ex-Sangi
D. Price : US$
Negros Or.

50.00/MT

FOB

Cotcot,

Basay,

US$ 54.00/MT - FOB Sangi, Cebu

E. Payment : Cash
in
Philippine
to
Philippine
Phosphate
(MAKATI)
at
PCIB
selling
time
of
payment
at
least
prior to shipment date.

currency
payable
Fertilizer
Corp.
rate
at
the
five
(5)
days

F. Shipping Conditions
1. Laycan : July

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.

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

Atlas Pier, Sangi, Cebu

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

xxx xxx xxx

11. Other terms and Conditions: To be mutually agreed upon.
Very truly yours,
Philippine Phosphate
Fertilizer Corp.
Signed:

Herman

J.

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

Rustia
Sr.

Manager,

Materials & Logistics

"We recently charter another vessel M/T DON VICTOR who will be
authorized by us to lift the balance approximately 272.49 MT.

Signed: Mr. Melecio Hernandez

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

Manager

March 20, 1987

CONFORME:
AEROSPACE INDUSTRIES, INC.

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

"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.

139
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 acid P72,830.36

151.51 MT sulfuric acid 176,966.27 (249,796.63)

Balance P303,483.37
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 to force majeure. According
to the trial court, it was private respondent who committed a breach of contract when it failed

140
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
thatforce majeure intervened 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. . . .

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.

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

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

141
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

142
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

143
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

". . . 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.

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.

Article 1170 of the Civil Code provides:

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) 29pesos, 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:

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.

'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 letter-contract
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

144
Costs against the petitioner.
SO ORDERED.
Bellosillo, Mendoza and Buena, JJ., concur.
||| (Aerospace Chemical Industries, Inc. v. Court of Appeals, G.R. No. 108129, [September 23,
1999], 373 PHIL 710-733)

145

10. RESPONSIBILITY FROM FRAUD

EN BANC
[G.R. No. 108164. February 23, 1995.]
FAR EAST BANK AND TRUST COMPANY, petitioner, vs. THE
HONORABLE COURT OF APPEALS, LUIS A. LUNA and
CLARITA S. LUNA, respondents.

SYLLABUS
1. CIVIL LAW; DAMAGES; MORAL DAMAGES; WHEN MAY BE RECOVERED IN
CASE OF CULPA CONTRACTUAL; RULE; CASE AT BAR. In culpa contractual, moral
damages may be recovered where the defendant is shown to have acted in bad faith or with
malice in the breach of the contract. Bad faith, in this context, includes gross, but not simple,
negligence. Exceptionally, in contract of carriage, moral damages are also allowed in case of
death of a passenger attributable to the fault (which is presumed) of the common carrier.
Concededly, the bank was remiss in indeed neglecting to personally inform Luis of his own
card's cancellation. Nothing in the findings of the trial court and the appellate court, however,
can sufficiently indicate any deliberate intent on the part of FEBTC to cause harm to private
respondents. Neither could FEBTC's negligence in failing to give personal notice to Luis be
considered so gross as to amount to malice or bad faith. Malice or bad faith implies a conscious
and intentional design to do a wrongful act for a dishonest purpose or moral obliquity; it is
different from the negative idea of negligence in that malice or bad faith contemplates a state
of mind affirmatively operating with furtive design or ill-will. Article 21 of the Code, it should
be observed, contemplates a conscious act to cause harm. Thus, even if we are to assume that
the provision could properly relate to a breach of contract, its application can be warranted
only when the defendant's disregard of his contractual obligation is so deliberate as to
approximate a degree of misconduct certainly no less worse than fraud or bad faith. Most
importantly, Article 21 is a mere declaration of a general principle in human relations that
clearly must, inany case, give way to the specific provision of Article 2220 of the Civil Code
authorizing the grant of moral damages in culpa contractual solely when the breach is due to
fraud or bad faith.
2. ID.; ID.; ID.; ID.; ID.; APPLICATION OF THE PROVISION ON QUASI-DELICT. The
Court has not in the process overlooked another rule that a quasi-delict can be the cause for
breaching a contract that might thereby permit the application of applicable principles on tort
even where there is a pre-existing contract between the plaintiff and the defendant (Phil.
Airlines vs. Court of Appeals, 106 SCRA 143; Singson vs. Bank of the Phil. Islands, 23 SCRA
1117; and Air France vs. Carrascoso, 18 SCRA 155). This doctrine, unfortunately, cannot
improve private respondents' case for it can aptly govern only where the act or omission

complained of would constitute an actionable tort independently of the contract. The test
(whether a quasi-delict can be deemed to underlie the breach of a contract) can be stated
thusly: Where, without a pre-existing contract between two parties, an act or omission can
nonetheless amount to an actionable tort by itself, the fact that the parties are contractually
bound is no bar to the application of quasi-delict provisions to the case. Here, private
respondents' damage claim is predicated solely on their contractual relationship; without such
agreement, the act or omission complained of cannot by itself be held to stand as a separate
cause of action or as an independent actionable tort.
3. ID.; ID.; EXEMPLARY OR CORRECTIVE DAMAGES; WHEN AVAILABLE.
Exemplary or corrective damages, in turn, are intended to serve as an example or as correction
for the public good in addition to moral, temperate, liquidated or compensatory damages (Art.
2229, Civil Code; seePrudenciado vs. Alliance Transport System, 148 SCRA 440; Lopez vs.
Pan American World Airways, 16 SCRA 431). In criminal offenses, exemplary damages are
imposed when the crime is committed with one or more aggravating circumstances (Art. 2230,
Civil Code). In quasi-delicts, such damages are granted if the defendant is shown to have been
so guilty of gross negligence as to approximate malice (See Art. 2231, Civil Code;CLLC E.G.
Gochangco Workers Union vs. NLRC, 161 SCRA 655; Globe Mackay Cable and Radio Corp.
vs. CA, 176 SCRA 778. In contracts and quasi-contracts, the court may award exemplary
damages if the defendant is found to have acted in a wanton, fraudulent, reckless, oppressive,
or malevolent manner (Art. 2232, Civil Code; PNB vs. Gen. Acceptance and Finance Corp.,
161 SCRA 449).
4. ID.; ID.; NOMINAL DAMAGES; WHEN AVAILABLE; APPLICATION IN CASE AT
BAR. The bank's failure, even perhaps inadvertent, to honor its credit card issued to private
respondent Luis should entitle him to recover a measure of damages sanctioned under Article
2221 of the Civil Code providing thusly: "Art. 2221. Nominal damages are adjudicated in order
that a right of the plaintiff, which has been violated or invaded by the defendant, may be
vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss
suffered by him."

DECISION

VITUG, J p:
Some time in October 1986, private respondent Luis A. Luna applied for, and
was accorded, a FAREASTCARD issued by petitioner Far East Bank and Trust Company
("FEBTC") at its Pasig Branch. Upon his request, the bank also issued a supplemental
card to private respondent Clarita S. Luna.
In August 1988, Clarita lost her credit card. FEBTC was forthwith informed.
In order to replace the lost card, Clarita submitted an affidavit of loss. In cases of this
nature, the banks internal security procedures and policy would appear to be to

146
meanwhile so record the lost card, along with the principal card, as a "Hot Card" or
"Cancelled Card" in its master file.
On 06 October 1988, Luis tendered a despedida lunch for a close friend, a
Filipino-American, and another guest at the Bahia Rooftop Restaurant of the Hotel
Intercontinental Manila. To pay for the lunch, Luis presented his FAREASTCARD to the
attending waiter who promptly had it verified through a telephone call to the bank's
Credit Card Department. Since the card was not honored, Luis was forced to pay in cash
the bill amounting to P588.13. Naturally, Luis felt embarrassed by this incident.
In a letter, dated 11 October 1988, private respondent Luis Luna, through
counsel, demanded from FEBTC the payment of damages. Adrian V. Festejo, a vicepresident of the bank, expressed the bank's apologies to Luis. In his letter, dated 03
November 1988, Festejo, in part, said:

circumstances, such damages are justly due. The same rule applies to
breaches of contract where the defendant acted fraudulently or in bad
faith." (Emphasis supplied)cdasia
Bad faith, in this context, includes gross, but not simple, negligence. 3 Exceptionally, in a
contract of carriage, moral damages are also allowed in case of death of a passenger
attributable to the fault (which is presumed 4 ) of the common carrier. 5
Concededly, the bank was remiss in indeed neglecting to personally inform
Luis of his own cards cancellation. Nothing in the findings of the trial court and the
appellate court, however, can sufficiently indicate any deliberate intent on the part of
FEBTC to cause harm to private respondents. Neither could FEBTC's negligence in
failing to give personal notice to Luis be considered so gross as to amount to malice or
bad faith. llcd

"In cases when a card is reported to our office as lost,

FAREASTCARD undertakes the necessary action to avert its
unauthorized use (such as tagging the card as hotlisted), as it is
always our intention to protect our cardholders.

Malice or bad faith implies a conscious and intentional design to do a

wrongful act for a dishonest purpose or moral obliquity; it is different from the negative
idea of negligence in that malice or bad faith contemplates a state of mind affirmatively
operating with furtive design or ill will.6

"An investigation of your case however, revealed that

FAREASTCARD failed to inform you about its security policy.
Furthermore, an overzealous employee of the Bank's Credit Card
Department did not consider the possibility that it may have been you
who was presenting the card at that time (for which reason, the
unfortunate incident occurred)." 1

We are not unaware of the previous rulings of this Court, such as in American
Express International, Inc. vs. Intermediate Appellate Court(167 SCRA 209) and Bank of
Philippine Islands vs. Intermediate Appellate Court (206 SCRA 408), sanctioning the
application of Article 21, in relation to Article 2217 and Article 2219 7 of the Civil Code
to a contractual breach similar to the case at bench. Article 21 states:

Festejo also sent a letter to the Manager of the Bahia Rooftop Restaurant to
assure the latter that private respondents were "very valued clients" of FEBTC. William
Anthony King, Food and Beverage Manager of the Intercontinental Hotel, wrote back to
say that the credibility of private respondent had never been "in question." A copy of this
reply was sent to Luis by Festejo.
Still evidently feeling aggrieved, private respondents, on 05 December 1988,
filed a complaint for damages with the Regional Trial Court ("RTC") of Pasig against
FEBTC.
On 30 March 1990, the RTC of Pasig, given the foregoing factual settings,
rendered a decision ordering FEBTC to pay private respondents (a) P300,000.00 moral
damages; (b) P50,000.00 exemplary damages; and (c) P20,000.00 attorney's fees.
On appeal to the Court of Appeals, the appellate court affirmed the decision of
the trial court.
Its motion for reconsideration having been denied by the appellate court,
FEBTC has come to this Court with this petition for review.
There is merit in this appeal.
In culpa contractual, moral damages may be recovered where the defendant is
shown to have acted in bad faith or with malice in the breach of the contract. 2 The Civil
Code provides:
"Art. 2220. Willful injury to property may be a legal ground for
awarding moral damages if the court should find that, under the

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

147
"'ART. 2219. Moral damages may be recovered in the
following and analogous cases:
'(1) A criminal offense resulting in physical injuries;
'(2) Quasi-delicts causing physical injuries;
xxx xxx xxx
'ART. 2220. Willful injury to property may be a legal
ground for awarding moral damages if the court should
find that, under the circumstances, such damages are justly
due. The same rule applies to breaches of contract where
the defendant acted fraudulently or in bad faith.'
"By contrasting the provisions of these two articles it
immediately becomes apparent that:
"(a) In case of breach of contract (including one of
transportation) proof of bad faith or fraud
(dolus), i.e., wanton or deliberately injurious
conduct, is essential to justify an award of
moral damages; and
"(b) That a breach of contract can not be considered
included in the descriptive term 'analogous
cases' used in Art. 2219; not only because Art.
2220 specifically provides for the damages that
are caused contractual breach, but because the
definition of quasi-delict in Art. 2176 of the
Code expressly excludes the cases where there
is a 'pre-exisiting contractual relations between
the parties.' LexLib
"'Art. 2176. Whoever by act or omission causes damage to
another, there being fault or negligence, is obliged to pay
for the damage done. Such fault or negligence, if there is
no pre-existing contractual relation between the parties, is
called a quasi-delict and is governed by the provisions of
this Chapter.'
"The exception to the basic rule of damages now under consideration
is a mishap resulting in the death of a passenger, in which case Article
1764 makes the common carrier expressly subject to the rule of Art.
2206, that entitles the spouse, descendants and ascendants of the
deceased passenger to 'demand moral damages for mental anguish by
reason of the death of the deceased' (Necesito vs. Paras, 104 Phil. 84,
Resolution on Motion to Reconsider, September 11, 1958). But the
exceptional rule of Art. 1764 makes it all the more evident that where
the injured passenger does not die, moral damages are not recoverable
unless it is proved that the carrier was guilty of malice or bad faith.
We think it is clear that the mere carelessness of the carrier's driver

does not per se constitute or justify an inference of malice or bad faith

on the part of the carrier; and in the case at bar there is no other
evidence of such malice to support the award of moral damages by
the Court of Appeals. To award moral damages for breach of contract,
therefore, without proof of bad faith or malice on the part of the
defendant, as required by Art. 2220, would be to violate the clear
provisions of the law, and constitute unwarranted judicial legislation.
"xxx xxx xxx.
"The distinction between fraud, bad faith or malice in the sense of
deliberate or wanton wrong doing and negligence (as mere
carelessness) is too fundamental in our law to be ignored (Arts. 11701172); their consequences being clearly differentiated by the
Code.cdasia
"'ART. 2201. In contracts and quasi-contracts, the damages
for which the obligor who acted in good faith is liable
shall be those that are the natural and probable
consequences of the breach of the obligation, and which
the parties have foreseen or could have reasonably
foreseen at the time the obligation was constituted.
'In case of fraud, bad faith, malice or wanton attitude, the
obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the
obligation."
"It is to be presumed, in the absence of statutory provision to the
contrary, that this difference was in the mind of the lawmakers when
in Art. 2220 they limited recovery of moral damages to breaches of
contract in bad faith. It is true that negligence may be occasionally so
gross as to amount to malice; but the fact must be shown in evidence,
and a carrier's bad faith is not to be lightly inferred from a mere
finding that the contract was breached through negligence of the
carriers employees." LLphil
The Court has not in the process overlooked another rule that a quasi-delict
can be the cause for breaching a contract that might thereby permit the application of
applicable principles on tort 9 even where there is a pre-existing contract between the
plaintiff and the defendant (Phil. Airlines vs. Court of Appeals, 106 SCRA 143; Singson
vs. Bank of Phil. Islands, 23 SCRA 1117; and Air France vs. Carrascoso, 18 SCRA 155).
This doctrine, unfortunately, cannot improve private respondents' case for it can aptly
govern only where the act or omission complained of would constitute an actionable tort
independently of the contract. The test (whether a quasi-delict can be deemed to underlie
the breach of a contract) can be stated thusly: Where, without a pre-existing contract
between two parties, an act or omission can nonetheless amount to an actionable tort by
itself, the fact that the parties are contractually bound is no bar to the application of quasidelict provisions to the case. Here, private respondents' damage claim is predicated solely
on their contractual relationship; without such agreement, the act or omission complained
of cannot by itself be held to stand as a separate cause of action or as an independent
actionable tort. cdll

148
The Court finds, therefore, the award of moral damages made by the court a
quo, affirmed by the appellate court, to be inordinate and substantially devoid of legal
basis.
Exemplary or corrective damages, in turn, are intended to serve as an example
or as correction for the public good in addition to moral, temperate, liquidated or
compensatory damages (Art. 2229, Civil Code; see Prudenciado vs. Alliance Transport
System, 148 SCRA 440; Lopez vs. Pan American World Airways, 16 SCRA 431).
In criminal offenses, exemplary damages are imposed when the crime is committed with
one or more aggravating circumstances (Art. 2230, Civil Code). In quasi-delicts, such
damages are granted if the defendant is shown to have been so guilty of gross negligence
as to approximate malice (See Art. 2231, Civil Code; CLLC E.G. Gochangco Workers
Union vs. NLRC, 161 SCRA 655;Globe Mackay Cable and Radio Corp. vs. CA, 176
SCRA 778. In contracts and quasi-contracts, the court may award exemplary damages if
the defendant is found to have acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner (Art. 2232, Civil Code; PNB vs. Gen. Acceptance and Finance Corp.,
161 SCRA 449).cdasia
Given the above premises and the factual circumstances here obtaining, it
would also be just as arduous to sustain the exemplary damages granted by the courts
below (see De Leon vs. Court of Appeals, 165 SCRA 166).
Nevertheless, the bank's failure, even perhaps inadvertent, to honor its credit
card issued to private respondent Luis should entitle him to recover a measure of
damages sanctioned under Article 2221 of the Civil Code providing thusly:
"Art. 2221. Nominal damages are adjudicated in order that a right of
the plaintiff, which has been violated or invaded by the defendant,
may be vindicated or recognized, and not for the purpose of
indemnifying the plaintiff for any loss suffered by him." llcd
Reasonable attorney's fees may be recovered where the court deems such
recovery to be just and equitable (Art. 2208, Civil Code). We see no misuse of sound
discretion on the part of the appellate court in allowing the award thereof by the trial
court.
WHEREFORE, the petition for review is given due course. The appealed
decision is MODIFIED by deleting the award of moral and exemplary damages to private
respondents; in its stead, petitioner is ordered to pay private respondent Luis A. Luna an
amount of P5,000.00 by way of nominal damages. In all other respects, the appealed
decision is AFFIRMED. No costs.
SO ORDERED.
Narvasa, C.J ., Feliciano, Padilla, Bidin, Regalado, Davide, Jr ., Romero,
Bellosillo, Melo, Quiason, Puno, Kapunan, Mendoza and Francisco, JJ., concur.
||| (Far East Bank and Trust Co. v. Court of Appeals, G.R. No. 108164, [February 23, 1995],
311 PHIL 783-794)

149

11. RESPONSIBILITY FROM NEGLIGENCE

1.

SECOND DIVISION
[G.R. No. 126152. September 28, 1999.]
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF
APPEALS and LILY S. PUJOL, respondents.

The Chief Legal Counsel (PNB) for petitioner.

Rilloraza Africa de Ocampo and Africa for private respondent.

SYNOPSIS
The case under consideration is a petition for review on certiorari under Rule 45 of the Rules
of Court assailing the decision of the Court of Appeals which affirmed the award of damages
by the Regional Trial Court of Pasig City in favor of private respondent. Petitioner alleged that
the appellate court erred in (a) holding that petitioner was estopped from denying the existence
of a "Combo Account" and the fact that it was operational at the time of the issuance of the
checks because respondent was issued a saving account passbook bearing the printed words
"combo deposit plan"; and (b) not holding that the award by the trial court of moral damages of
P100,000.00 and attorney's fees of P20,000.00 was inordinately disproportionate and
unconscionable.
The Court found the petition devoid of merit. Particularly, herein petitioner was considered
estopped to deny the existence of and perfection of the combination deposit agreement with
respondent because it placed in the passbook of the respondent, either by deliberate act or by
its own negligence, the word "combo deposit plan." Anent the issue of damages, the Court
ruled that while petitioner's negligence in this case may not have been attended with malice
and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to private
respondent for which the respondent is entitled to recover reasonable moral damages. Damages
are not intended to enrich the complainant at the expense of the defendant and there is no hardand-fast rule in the determination of what would be a fair amount of moral damages since each
case must be governed by its own peculiar facts. The yardstick should be that it is not palpably
and scandalously excessive. In this case, the award of P100,000.00 is reasonable considering
the reputation and social standing of private respondent and applying the rulings in similar
cases involving banks' negligence with regard to the accounts of their depositors. The award of
attorney's fees in the amount of P20,000.00 was proper; for respondent was compelled to
litigate to protect her interest. Accordingly, the instant petition was denied. THEcAS

SYLLABUS
1. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT AND CONCLUSION OF LOWER
COURTS ARE ENTITLED TO GREAT WEIGHT ON APPEAL. Findings of fact and
conclusions of the lower courts are entitled to great weight on appeal and will not be disturbed
except for strong and cogent reasons, and for that matter, the finding of the Court of Appeals
especially when they affirm the trial court, and which are supported by substantial evidence,
are almost beyond the power of review by the Supreme Court. Petitioner does not dispute the
fact that private respondent Pujol maintained a Savings Account as well as a Current Account
with its Mandaluyong Branch and that private respondent applied for a "Combination Deposit
Plan" where checks issued against the Current Account of the drawer shall be charged
automatically against the latter's Savings Account if her funds in the Current Account be
insufficient to cover her checks. There was also no question that the Savings Account passbook
of respondent Pujol contained the printed words "Combo Deposit Plan" without qualification
or condition that it would take effect only after submission of certain requirements. Although
petitioner presented evidence before the trial court to prove that the arrangement was not yet
operational at the time respondent Pujol issued the two (2) checks, it failed to prove that she
had actual knowledge that it was not yet operational at the time she issued the checks
considering that the passbook in her Savings Account already indicated the words "Combo
Deposit Plan." Hence, respondent Pujol had justifiable reason to believe, based on the
description in her passbook, that her accounts were effectively covered by the arrangement
during the issuance of the checks. Either by its own deliberate act, or its negligence in causing
the "Combo Deposit Plan" to be placed in the passbook, petitioner is considered estopped to
deny the existence of and perfection of the combination deposit agreement with respondent
Pujol.
2. CIVIL LAW; OBLIGATIONS AND CONTRACTS; ESTOPPEL IN PAIS; DEFINED.
Estoppel in pais or equitable estoppel arises when one, by his acts, representations or
admissions, or by his silence when he ought to speak out, intentionally or through culpable
negligence, induces another to believe certain facts to exist and such other rightfully relies and
acts on such belief so that he will be prejudiced if the former is permitted to deny the existence
of such facts.
3. ID.; DAMAGES; NOT INTENDED TO ENRICH THE COMPLAINANT AT THE
EXPENSE OF THE DEFENDANT. Damages are not intended to enrich the complainant at
the expense of the defendant, and there is no hard-and-fast rule in the determination of what
would be a fair amount of moral damages since each case must be governed by its own
peculiar facts. The yardstick should be that it is not palpably and scandalously excessive. In
this case, the award of P100,000.00 is reasonable considering the reputation and social
standing of private respondent Pujol and applying our rulings in similar cases involving banks'
negligence with regard to the accounts of their depositors. The award of attorney's fees in the
amount of P20,000.00 is proper for respondent Pujol was compelled to litigate to protect her
interest. ASHICc

DECISION

150
BELLOSILLO, J p:
PHILIPPINE NATIONAL BANK filed this petition for review on certiorari under Rule 45 of
the Rules of Court assailing the Decision of the Court of Appeals 1 which affirmed the award
of damages by the Regional Trial Court, Branch 154, Pasig City in favor of private respondent
Lily S. Pujol. 2
Sometime prior to 23 October 1990 private respondent Lily S. Pujol opened with petitioner
Philippine National Bank, Mandaluyong Branch (PNB for brevity), an account denominated as
"Combo Account," a combination of Savings Account and Current Account in private
respondent's business name "Pujol Trading," under which checks drawn against private
respondent's checking account could be charged against her Savings Account should the funds
in her Current Account be insufficient to cover the value of her checks. Hence, private
respondent was issued by petitioner a passbook on the front cover of which was typewritten the
words "Combo Deposit Plan."
On 23 October 1990, private respondent issued a check in the amount of P30,000.00 in favor of
her daughter-in-law, Dr. Charisse M. Pujol. When issued and presented for payment, private
respondent had sufficient funds in her Savings Account. However, petitioner dishonored her
check allegedly for insufficiency of funds and debited her account with P250.00 as penalty
charge. cda
On 24 October 1990 private respondent issued another check in the amount of P30,000.00 in
favor of her daughter, Ms. Venus P. De Ocampo. When issued and presented for payment
petitioner had sufficient funds in her Savings Account. But, this notwithstanding, petitioner
dishonored her check for insufficiency of funds and debited her account with P250.00 as
penalty charge. On 4 November 1990, after realizing its mistake, petitioner accepted and
honored the second check for P30,000.00 and re-credited to private respondent's account the
P250.00 previously debited as penalty.
Private respondent Lily S. Pujol filed with the Regional Trial Court of Pasig City a complaint
for moral and exemplary damages against petitioner for dishonoring her checks despite
sufficiency of her funds in the bank.
Petitioner admitted in its answer that private respondent Pujol opened a "Combo Account," a
combination of Savings Account and Current Account, with its Mandaluyong branch. It
however justified the dishonor of the two (2) checks by claiming that at the time of their
issuance private respondent Pujol's account was not yet operational due to lack of documentary
requirements, to wit: (a) Certificate of Business Registration; (b) Permit to Operate Business;
(c) ID Card; and, (d) Combination Agreement. Petitioner further alleged that despite the noncompliance with such requirements petitioner placed the sign "Combo Flag" on respondent
Pujol's account out of courtesy and generosity. Petitioner also admitted that it later honored
private respondent's second check, debited the amount stated therein from her account and recredited the amount of P250.00 initially charged as penalty. llcd
On 27 September 1994 the trial court rendered a decision ordering petitioner to pay private
respondent Pujol moral damages of P100,000.00 and attorney's fees of P20,000.00. It found
that private respondent suffered mental anguish and besmirched reputation as a result of the
dishonor of her checks, and that being a former member of the judiciary who was expected to
be the embodiment of integrity and good behavior, she was subjected to embarrassment due to
the erroneous dishonor of her checks by petitioner.

The Court of Appeals affirmed in toto the decision of the trial court. Hence, petitioner comes to
this Court alleging that the appellate court erred (a) in holding that petitioner was estopped
from denying the existence of a "Combo Account" and the fact that it was operational at the
time of the issuance of the checks because respondent Pujol was issued a Savings Account
passbook bearing the printed words "Combo Deposit Plan;" and, (b) in not holding that the
award by the trial court of moral damages of P100,000.00 and attorney's fees of P20,000.00
was inordinately disproportionate and unconscionable. cdtai
We cannot sustain petitioner. Findings of fact and conclusions of the lower courts are entitled
to great weight on appeal and will not be disturbed except for strong and cogent reasons, and
for that matter, the findings of the Court of Appeals especially when they affirm the trial court,
and which are supported by substantial evidence, are almost beyond the power of review by the
Supreme Court. 3

Petitioner does not dispute the fact that private respondent Pujol maintained a Savings Account
as well as a Current Account with its Mandaluyong Branch and that private respondent applied
for a "Combination Deposit Plan" where checks issued against the Current Account of the
drawer shall be charged automatically against the latter's Savings Account if her funds in the
Current Account be insufficient to cover her checks. There was also no question that the
Savings Account passbook of respondent Pujol contained the printed words "Combo Deposit
Plan" without qualification or condition that it would take effect only after submission of
certain requirements. Although petitioner presented evidence before the trial court to prove that
the arrangement was not yet operational at the time respondent Pujol issued the two (2) checks,
it failed to prove that she had actual knowledge that it was not yet operational at the time she
issued the checks considering that the passbook in her Savings Account already indicated the
words "Combo Deposit Plan." Hence, respondent Pujol had justifiable reason to believe, based
on the description in her passbook, that her accounts were effectively covered by the
arrangement during the issuance of the checks. Either by its own deliberate act, or its
negligence in causing the "Combo Deposit Plan" to be placed in the passbook, petitioner is
considered estopped to deny the existence of and perfection of the combination deposit
agreement with respondent Pujol. Estoppel in pais or equitable estoppel arises when one, by
his acts, representations or admissions, or by his silence when he ought to speak out,
intentionally or through culpable negligence, induces another to believe certain facts to exist
and such other rightfully relies and acts on such belief so that he will be prejudiced if the
former is permitted to deny the existence of such facts. 4
As found by the Court of Appeals, petitioner knew it committed a mistake in dishonoring the
checks of respondent Pujol. This was based on the testimony of Pedro Lopez, petitioner's
employee, that after the second check was dishonored, petitioner examined respondent Pujol's
account and learned that there was sufficient funds in the Savings Account, and that only after
the second check was dishonored did petitioner rectify its error. 5The appellate court also
found that respondent Pujol, who is a retired judge and community leader, issued the first
check dated 23 October 1990 to her daughter-in-law, Dr. Charisse Pujol, who in turn indorsed
the check to her mother. The latter needed the money to refloat two (2) of their vessels which
sank during a typhoon. When the check was dishonored for insufficient funds, private
respondent's daughter-in-law confronted the former which subjected her to embarrassment and
humiliation. Petitioner issued the second check dated 24 October 1990 to daughter Venus de
Ocampo as payment for the expenses of her round trip ticket to the United States which were
shouldered by her son-in-law, husband of Venus de Ocampo. When the second check was

151
initially dishonored for insufficiency of funds, she again suffered serious anxiety and mental
anguish that her son-in-law would no longer hold her in high esteem. 6
This Court has ruled that a bank is under obligation to treat the accounts of its depositors with
meticulous care whether such account consists only of a few hundred pesos or of millions of
pesos. Responsibility arising from negligence in the performance of every kind of obligation is
demandable. While petitioner's negligence in this case may not have been attended with malice
and bad faith, nevertheless, it caused serious anxiety, embarrassment and humiliation to private
respondent Lily S. Pujol for which she is entitled to recover reasonable moral damages. 7 In
the case of Leopoldo Araneta v. Bank of America 8 we held that it can hardly be possible that a
customer's check can be wrongfully refused payment without some impeachment of his credit
which must in fact be an actual injury, although he cannot, from the nature of the case, furnish
independent and distinct proof thereof. llcd
Damages are not intended to enrich the complainant at the expense of the defendant, and there
is no hard-and-fast rule in the determination of what would be a fair amount of moral damages
since each case must be governed by its own peculiar facts. The yardstick should be that it is
not palpably and scandalously excessive. In this case, the award of P100,000.00 is reasonable
considering the reputation and social standing of private respondent Pujol and applying our
rulings in similar cases involving banks' negligence with regard to the accounts of their
depositors. 9 The award of attorney's fees in the amount of P20,000.00 is proper for respondent
Pujol was compelled to litigate to protect her interest. 10
WHEREFORE, the petition is DENIED and the Decision of the Court of Appeals which
affirmed the award by the Regional Trial Court of Pasig City of moral damages of P100,000.00
and attorney's fees of P20,000.00 in favor of private respondent Lily S. Pujol is AFFIRMED.
Costs against petitioner.LLpr
SO ORDERED.
Mendoza, Quisumbing and Buena, JJ., concur.
||| (PNB v. Court of Appeals, G.R. No. 126152, [September 28, 1999], 373 PHIL 942-949)

152

12. RESPONSIBILITY FROM NEGLIGENCE

cause of the damage suffered by private respondents' house. In view thereof, the petition is
granted and the challenged decision is reversed.

THIRD DIVISION
SYLLABUS
[G.R. No. 126389. July 10, 1998.]
SOUTHEASTERN COLLEGE, INC., petitioner, vs. COURT OF
APPEALS, JUANITA DE JESUS VDA. DE DIMAANO,
EMERITA
DIMAANO,
REMEDIOS
DIMAANO,
CONSOLACION
DIMAANO
and
MILAGROS
DIMAANO, respondents.

Eladio B Samson for petitioner.

Galileo P. Brion for private respondents.

SYNOPSIS
Private respondents filed a complaint for damages before the RTC of Pasay City against the
petitioner for the damages. They alleged that on October 11, 1989, at about 6:30 in the
morning, a powerful typhoon "Saling" hit Metro Manila. Buffeted by very strong winds, the
roof of petitioner's building was partly ripped off and blown away, landing on and destroying
portions of the roofing of private respondents' house. After trial on the merits, the court a
quo rendered a decision in favor of the private respondents and ordering petitioner to pay the
amount of P117,116.00 as actual damages, P1,000,000.00 as moral damages, P100,000.00 as
attorney's fees and costs of suit. In its decision, the trial court gave credence to the ocular
inspection report conducted by Pasay City building officials to the effect that subject school
building owned by petitioner had a defective roofing structure. On appeal, the Court of Appeals
affirmed the RTC decision, but reduced the award of moral damages from P1,000,000.00 to
P200,000.00. Petitioner moved for reconsideration but to no avail. Hence, the instant petition.
The Supreme Court finds the petition meritorious. The Court finds no clear and convincing
evidence to sustain the judgment of the appellate court. In this case, other than the said ocular
inspection, no investigation was conducted to determine the real cause of the partial unroofing
of petitioner's school building. Private respondents did not even show that the plans,
specifications and design of said building were deficient and defective. Neither did they prove
any substantial deviation from the approved plans and specifications. Nor did they
conclusively establish that the construction of such building was basically flawed. In sum, the
Court holds that petitioner has not been shown negligent or at fault regarding the construction
and maintenance of its school building in question and that typhoon Saling was the proximate

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; FORTUITOUS EVENT;

DEFINITION. The antecedent of fortuitous event or caso fortuito is found in
the Partidas which defines it as "an event which takes place by accident and could not have
been foreseen." Escriche elaborates it as "an unexpected event or act of God which could
neither be foreseen nor resisted." Civilist Arturo M. Tolentino adds that "[f]ortuitous events
may be produced by two general causes: (1) by nature, such as earthquakes, storms, floods,
epidemics, fires, etc. and (2) by the act of man, such as an armed invasion, attack by bandits
governmental prohibitions, robbery, etc."
2. ID.; ID.; ID.; AN ACT OF GOD CANNOT BE INVOKED FOR THE PROTECTION OF A
PERSON WHO HAS BEEN GUILTY OF GROSS NEGLIGENCE IN NOT TRYING TO
FORESTALL ITS POSSIBLE ADVERSE CONSEQUENCE. In order that a fortuitous
event may exempt a person from liability, it is necessary that he be free from any previous
negligence or misconduct by reason of which the loss may have been occasioned. An act of
God cannot be invoked for the protection of a person who has been guilty of gross negligence
in not trying to forestall its possible adverse consequences. When a person's negligence
concurs with an act of God in producing damage or injury to another, such person is not
exempt from liability by showing that the immediate or proximate cause of the damage or
injury was a fortuitous event. When the effect is found to be partly the result of the
participation of man whether it be from active intervention, or neglect, or failure to act
the whole occurrence is hereby humanized, and removed from the rules applicable to acts of
God.
3. ID.; ID.; ID.; A PERSON CANNOT BE MADE TO ANSWER FOR A PURELY
FORTUITOUS EVENT; CASE AT BAR. It bears emphasizing that a person claiming
damages for the negligence of another has the burden of proving the existence of fault or
negligence causative of his injury or loss. The facts constitutive of negligence must be
affirmatively established by competent evidence, not merely by presumptions and conclusions
without the basis in fact. Private respondents, in establishing the culpability of petitioner,
merely relied on the aforementioned report submitted by a team which made
an ocular inspection of petitioner's school building after the typhoon. As the term imparts,
an ocular inspection is one by means of actual sight or viewing. What is visual to the eye
though, is not always reflective of the real cause behind. For instance, one who hears a gunshot
and then sees a wounded person, cannot always definitely conclude that a third person shot the
victim. It could have been self-inflicted or caused accidentally by a stray bullet. The
relationship of cause and effect must be clearly shown. In the present case, other than the said
ocular inspection, no investigation was conducted to determine the real cause of the partial
unroofing of petitioner's school building. Private respondents did not even show that the plans,
specifications and design of said school building were deficient and defective. Neither did they
prove any substantial deviation from the approved plans and specifications. Nor did they
conclusively establish that the construction of such building was basically flawed. . . . In light

153
of the foregoing, we find no clear and convincing evidence to sustain the judgment of the
appellate court. We thus hold that petitioner has not been shown negligent or at fault regarding
the construction and maintenance of its school building in question and that typhoon "Saling"
was the proximate cause of the damage suffered by private respondents house. With this
disposition on the pivotal issue, private respondents claim for actual and moral damages as
well as attorney's fees must fail. Petitioner cannot be made to answer for a purely fortuitous
event. More so because no bad faith or willful act to cause damage was alleged and proven to
warrant moral damages.
4. ID.; ACTUAL DAMAGES; IT IS NOT ENOUGH THAT THE DAMAGE BE CAPABLE
OF PROOF BUT MUST BE ACTUALLY PROVED WITH REASONABLE DEGREE OF
CERTAINTY; CASE AT BAR. Private respondents failed to adduce adequate and
competent proof of the pecuniary loss they actually incurred. It is not enough that the damage
be capable of proof but must be actually proved with a reasonable degree of certainty, pointing
out specific facts that afford a basis for measuring whatever compensatory damages are borne.
Private respondents merely submitted an estimated amount needed for the repair of the roof of
their subject building. What is more, whether the necessary repairs were caused ONLY by
petitioner's alleged negligence in the maintenance of its school building, or included the
ordinary wear and tear of the house itself, is an essential question that remains indeterminable.

DECISION

PURISIMA, J p:
Petition for review under Rule 45 of the Rules of Court seeking to set aside the
Decision 1 promulgated on July 31, 1996, and Resolution 2 dated September 12, 1996 of the
Court of Appeals 3 in CA-G.R. No. 41422, entitled "Juanita de Jesus vda. de Dimaano, et al.
vs. Southeastern College, Inc.", which reduced the moral damages awarded below from
P1,000,000.00 to P200,000.00. 4 The Resolution under attack denied petitioner's motion for
reconsideration. cdtai
Private respondents are owners of a house at 326 College Road, Pasay City, while petitioner
owns a four-storey school building along the same College Road. On October 11, 1989, at
about 6:30 in the morning, a powerful typhoon "Saling" hit Metro Manila. Buffeted by very
strong winds, the roof of petitioner's building was partly ripped off and blown away, landing on
and destroying portions of the roofing of private respondents' house. After the typhoon had
passed, an ocular inspection of the destroyed buildings was conducted by a team of engineers
headed by the city building official, Engr. Jesus L. Reyna. Pertinent aspects of the latter's
Report 5 dated October 18, 1989 stated, as follows:
"5. One of the factors that may have led to this calamitous event is
the formation of the buildings in the area and the general direction of
the wind. Situated in the peripheral lot is an almost U-shaped
formation of 4-storey building. Thus, with the strong winds having a
westerly direction, the general formation of the buildings becomes a
big funnel-like structure, the one situated along College Road,

receiving the heaviest impact of the strong winds. Hence, there are
portions of the roofing, those located on both ends of the building,
which remained intact after the storm.
6. Another factor and perhaps the most likely reason for the
dislodging of the roofings structural trusses is the improper
anchorage of the said trusses to the roof beams. The " diameter
steel bars embedded on the concrete roof beams which serve as truss
anchorage are not bolted nor nailed to the trusses. Still, there are
other steel bars which were not even bent to the trusses, thus, those
trusses are not anchored at all to the roof beams."
It then recommended that "to avoid any further loss and damage to lives, limbs and
property of persons living in the vicinity," the fourth floor of subject school building be
declared as a "structural hazard."
In their Complaint 6 before the Regional Trial Court of Pasay City, Branch 117, for damages
based on culpa aquiliana, private respondents alleged that the damage to their house rendered
the same uninhabitable, forcing them to stay temporarily in others' houses. And so they sought
to recover from petitioner P117,116.00, as actual damages, P1,000,000.00, as moral damages,
P300,000.00, as exemplary damages and, P100,000.00, for and as attorney's fees; plus costs.

In its Answer, petitioner averred that subject school building had withstood several devastating
typhoons and other calamities in the past, without its roofing or any portion thereof giving
way; that it has not been remiss in its responsibility to see to it that said school building, which
houses school children, faculty members, and employees, is "in tip-top condition", and
furthermore, typhoon "Saling" was "an act of God and therefore beyond human control" such
that petitioner cannot be answerable for the damages wrought thereby, absent any negligence
on its part.
The trial court, giving credence to the ocular inspection report to the effect that subject school
building had a "defective roofing structure," found that, while typhoon "Saling" was
accompanied by strong winds, the damage to private respondents' house "could have been
avoided if the construction of the roof of [petitioner's] building was not faulty." The dispositive
portion of the lower court's decision 7 reads, thus:
"WHEREFORE, in view of the foregoing, the Court renders judgment
(sic) in favor of the plaintiff (sic) and against the defendants, (sic)
ordering the latter to pay jointly and severally the former as follows:
a) P117,116.00, as actual damages, plus litigation expenses;
b) P1,000,000.00 as moral damages;
c) P100,000.00 as attorney's fees;
d) Costs of the instant suit.
The claim for exemplary damages is denied for the reason that the
defendants (sic) did not act in a wanton fraudulent, reckless,
oppressive or malevolent manner."

154
In its appeal to the Court of Appeals, petitioner assigned as errors, 8 that:
I
THE TRIAL COURT ERRED IN HOLDING THAT TYPHOON
"SALING", AS AN ACT OF GOD, IS NOT "THE SOLE AND
ABSOLUTE REASON" FOR THE RIPPING-OFF OF THE SMALL
PORTION OF THE ROOF OF SOUTHEASTERN'S FOUR (4)
STOREY SCHOOL BUILDING.
II
THE TRIAL COURT ERRED IN HOLDING THAT "THE
CONSTRUCTION OF THE ROOF OF DEFENDANT'S SCHOOL
BUILDING WAS FAULTY" NOTWITHSTANDING THE
ADMISSION THAT THERE WERE TYPHOONS BEFORE BUT
NOT AS GRAVE AS TYPHOON "SALING" WHICH IS THE
DIRECT AND PROXIMATE CAUSE OF THE INCIDENT.
III
THE TRIAL COURT ERRED IN AWARDING ACTUAL AND
MORAL DAMAGES AS WELL AS ATTORNEY'S FEES AND
LITIGATION EXPENSES AND COSTS OF SUIT TO DIMAANOS
WHEN THEY HAVE NOT INCURRED ACTUAL DAMAGES AT
ALL AS DIMAANOS HAVE ALREADY SOLD THEIR
PROPERTY, AN INTERVENING EVENT THAT RENDERS THIS
CASE MOOT AND ACADEMIC.
IV
THE TRIAL COURT ERRED IN ORDERING THE ISSUANCE OF
THE WRIT OF EXECUTION INSPITE OF THE PERFECTION OF
SOUTHEASTERN'S APPEAL WHEN THERE IS NO
COMPELLING REASON FOR THE ISSUANCE THERETO.
As mentioned earlier, respondent Court of Appeals affirmed with modification the trial court's
disposition by reducing the award of moral damages from P1,000,000.00 to P200,000.00.
Hence, petitioner's resort to this Court, raising for resolution the issues of:
"1. Whether or not the award of actual damage [sic] to respondent
Dimaanos on the basis of speculation or conjecture, without proof or
receipts of actual damage, [sic] legally feasible or justified.
2. Whether or not the award of moral damages to respondent
Dimaanos, without the latter having suffered, actual damage has legal
basis.
3. Whether or not respondent Dimaanos who are no longer the owner
of the property, subject matter of the case, during its pendency, has
the right to pursue their complaint against petitioner when the case
was already rendered moot and academic by the sale of the property
to third party.

4. Whether or not the award of attorney's fees when the case was
already moot and academic [sic] legally justified.
5. Whether or not petitioner is liable for damage caused to others by
typhoon "Saling" being an act of God.
6. Whether or not the issuance of a writ of execution pending appeal,
ex-parte or without hearing, has support in law."
The pivot of inquiry here, determinative of the other issues, is whether the damage on the roof
of the building of private respondents resulting from the impact of the falling portions of the
school building's roof ripped off by the strong winds of typhoon "Saling", was, within legal
contemplation, due to fortuitous event? If so, petitioner cannot be held liable for the damages
suffered by the private respondents. This conclusion finds support in Article 1174 of the Civil
Code, which provides:
"Art 1174. Except in cases expressly specified by the law, or when it
is otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen, or which,
though foreseen, were inevitable."
The antecedent of fortuitous event or caso fortuito is found in the Partidas which defines it as
"an event which takes place by accident and could not have been foreseen." 9 Escriche
elaborates it as "an unexpected event or act of God which could neither be foreseen nor
resisted." 10 Civilist Arturo M. Tolentino adds that "[f]ortuitous events may be produced by
two general causes: (1) by nature, such as earthquakes, storms, floods, epidemics, fires, etc.
and (2) by the act of man, such as an armed invasion, attack by bandits, governmental
prohibitions, robbery, etc." 11
In order that a fortuitous event may exempt a person from liability, it is necessary that he be
free from any previous negligence or misconduct by reason of which the loss may have been
occasioned. 12 An act of God cannot be invoked for the protection of a person who has been
guilty of gross negligence in not trying to forestall its possible adverse consequences. When a
person's negligence concurs with an act of God in producing damage or injury to another, such
person is not exempt from liability by showing that the immediate or proximate cause of the
damage or injury was a fortuitous event. When the effect is found to be partly the result of the
participation of man whether it be from active intervention, or neglect, or failure to act
the whole occurrence is hereby humanized, and removed from the rules applicable to acts of
God. 13
In the case under consideration, the lower court accorded full credence to the finding of the
investigating team that subject school building's roofing had "no sufficient anchorage to hold it
in position especially when battered by strong winds." Based on such finding, the trial court
imputed negligence to petitioner and adjudged it liable for damages to private respondents.
After a thorough study and evaluation of the evidence on record, this Court believes otherwise,
notwithstanding the general rule that factual findings by the trial court, especially when
affirmed by the appellate court, are binding and conclusive upon this Court. 14 After a careful
scrutiny of the records and the pleadings submitted by the parties, we find exception to this
rule and hold that the lower courts misappreciated the evidence proffered. prcd

155
There is no question that a typhoon or storm is a fortuitous event, a natural occurrence which
may be foreseen but is unavoidable despite any amount of foresight, diligence or care. 15 In
order to be exempt from liability arising from any adverse consequence engendered thereby,
there should have been no human participation amounting to a negligent act. 16 In other words,
the person seeking exoneration from liability must not be guilty of negligence. Negligence, as
commonly understood, is conduct which naturally or reasonably creates undue risk or harm to
others. It may be the failure to observe that degree of care, precaution, and vigilance which the
circumstances justly demand, 17 or the omission to do something which a prudent and
reasonable man, guided by considerations which ordinarily regulate the conduct of human
affairs, would do. 18 From these premises, we proceed to determine whether petitioner was
negligent, such that if it were not, the damage caused to private respondents' house could have
been avoided?
At the outset, it bears emphasizing that a person claiming damages for the negligence of
another has the burden of proving the existence of fault or negligence causative of his injury or
loss. The facts constitutive of negligence must be affirmatively established by competent
evidence, 19 not merely by presumptions and conclusions without basis in fact. Private
respondents, in establishing the culpability of petitioner, merely relied on the aforementioned
report submitted by a team which made an ocular inspection of petitioner's school building
after the typhoon. As the term imparts, an ocular inspection is one by means of actual sight or
viewing. 20 What is visual to the eye though, is not always reflective of the real cause behind.
For instance, one who hears a gunshot and then sees a wounded person, cannot always
definitely conclude that a third person shot the victim. It could have been self-inflicted or
caused accidentally by a stray bullet. The relationship of cause and effect must be clearly
shown.
In the present case, other than the said ocular inspection, no investigation was conducted to
determine the real cause of the partial unroofing of petitioner's school building. Private
respondents did not even show that the plans, specifications and design of said school building,
were deficient and defective. Neither did they prove any substantial deviation from the
approved plans and specifications. Nor did they conclusively establish that the construction of
such building was basically flawed. 21
On the other hand, petitioner elicited from one of the witnesses of private respondents, city
building official Jesus Reyna, that the original plans and design of petitioner's school building
were approved prior to its construction. Engr. Reyna admitted that it was a legal requirement
before the construction of any building to obtain a permit from the city building official (city
engineer, prior to the passage of the Building Act of 1977). In like manner, after construction of
the building, a certification must be secured from the same official attesting to the readiness for
occupancy of the edifice. Having obtained both building permit and certificate of occupancy,
these are, at the very least, prima facie evidence of the regular and proper construction of
subject school building. 22

Furthermore, when part of its roof needed repairs of the damage inflicted by typhoon "Saling",
the same city official gave the go-signal for such repairs without any deviation from the
original design and subsequently, authorized the use of the entire fourth floor of the same
building. These only prove that subject building suffers from no structural defect, contrary to
the report that its "U-shaped" form was "structurally defective." Having given his unqualified

imprimatur, the city building official is presumed to have properly performed his duties 23 in
connection therewith.
In addition, petitioner presented its vice president for finance and administration who testified
that an annual maintenance inspection and repair of subject school building were regularly
undertaken. Petitioner was even willing to present its maintenance supervisor to attest to the
extent of such regular inspection but private respondents agreed to dispense with his testimony
and simply stipulated that it would be corroborative of the vice president's narration.
Moreover, the city building official, who has been in the city government service since 1974,
admitted in open court that no complaint regarding any defect on the same structure has ever
been lodged before his office prior to the institution of the case at bench. It is a matter of
judicial notice that typhoons are common occurrences in this country. If subject school
building's roofing was not firmly anchored to its trusses, obviously, it could not have withstood
long years and several typhoons even stronger than "Saling."
In light of the foregoing, we find no clear and convincing evidence to sustain the judgment of
the appellate court. We thus hold that petitioner has not been shown negligent or at fault
regarding the construction and maintenance of its school building in question and that typhoon
"Saling" was the proximate cause of the damage suffered by private respondents' house.
With this disposition on the pivotal issue, private respondents' claim for actual and moral
damages as well as attorney's fees must fail. 24 Petitioner cannot be made to answer for a
purely fortuitous event. 25 More so because no bad faith or willful act to cause damage was
alleged and proven to warrant moral damages.
Private respondents failed to adduce adequate and competent proof of the pecuniary loss they
actually incurred. 26 It is not enough that the damage be capable of proof but must be actually
proved with a reasonable degree of certainty, pointing out specific facts that afford a basis for
measuring whatever compensatory damages are borne. 27 Private respondents merely
submitted an estimated amount needed for the repair of the roof of their subject building. What
is more, whether the "necessary repairs" were caused ONLY by petitioner's alleged negligence
in the maintenance of its school building, or included the ordinary wear and tear of the house
itself, is an essential question that remains indeterminable.
The Court deems unnecessary to resolve the other issues posed by petitioner.
As regards the sixth issue, however, the writ of execution issued on April 1, 1993 by the trial
court is hereby nullified and set aside. Private respondents are ordered to reimburse any
amount or return to petitioner any property which they may have received by virtue of the
enforcement of said writ.
WHEREFORE, the petition is GRANTED and the challenged Decision is REVERSED. The
complaint of private respondents in Civil Case No. 7314 before the trial court a quo is ordered
DISMISSED and the writ of execution issued on April 1, 1993 in said case is SET ASIDE.
Accordingly, private respondents are ORDERED to return to petitioner any amount or property
received by them by virtue of said writ. Costs against the private respondents.
SO ORDERED. prcd
Narvasa, C .J ., Romero and Kapunan, JJ ., concur.

156
||| (Southeasthern College, Inc. v. Court of Appeals, G.R. No. 126389, [July 10, 1998], 354
PHIL 434-447)

157

12. DEGREE OF DELIGENCE. 1.

Four days later or on February 9, 1985, petitioner Manolo Samson saw private
respondent in the latter's house and offered to buy the store of Santos & Sons and his
right to lease the subject premises.7 Petitioner was advised to return after a week.
SECOND DIVISION

[G.R. No. 108245. November 25, 1994.]

MANOLO P. SAMSON, petitioner, vs. COURT OF APPEALS,
SANTOS & SONS, INC., and ANGEL SANTOS, respondents.

On February 15, 1985, petitioner returned to private respondent's house to

confirm his offer. On said occasion, private respondent presented petitioner with a letter
containing his counter proposal, thus:
"MANOLO SAMSON
Marikina, Metro Manila
Sir:
In line with our negotiation to sell our rights in the
Madrigal building at Recto, Rizal Avenue, I propose the following:

DECISION

PUNO, J p:
Petitioner MANOLO P. SAMSON prays for the reversal of the Decision of
the Court of Appeals, dated November 27, 1992, 1 modifying the decision of the Regional
Trial Court of Pasig, Branch 157, dated November 29, 1990, and absolving private
respondent Angel Santos from liability for the damages sustained by petitioner. cdphil
The antecedent facts, as borne by the records, are as follows:
The subject matter of this case is a commercial unit at the Madrigal Building,
located at Claro M. Recto Avenue, Sta. Cruz, Manila. The building is owned by Susana
Realty Corporation and the subject premises was leased to private respondent Angel
Santos. The lessee's haberdashery store, Santos & Sons, Inc., occupied the premises for
almost twenty (20) years on a yearly basis.2 Thus, the lease contract in force between the
parties in the year 1983 provided that the term of the lease shall be one (1) year, starting
on August 1, 1983 until July 31, 1984. 3
On June 28, 1984, the lessor Susana Realty Corporation, through its
representative Mr. Jes Gal R. Sarmiento, Jr., informed respondents that the lease contract
which was to expire on July 31, 1984 would not be renewed. 4
Nonetheless, private respondent's lease contract was extended until December
31, 1984. 5 Private respondent also continued to occupy the leased premises beyond the
extended term.
On February 5, 1985, private respondent received a letter 6 from the lessor,
through its Real Estate Accountant Jane F. Bartolome, informing him of the increase in
rentals, retroactive to January 1985, pending renewal of his contract until the arrival of
Ms. Ma. Rosa Madrigal(one of the owners of Susana Realty).

1. The lease contract between Santos and Sons, Inc. and

Madrigal was impliedly renewed. It will be formally renewed this
monthly (sic) when Tanya Madrigal arrives.
2. To avoid breach of contract with Madrigal, I suggest
that you acquire all our shares in Santos and Sons, Inc.
3. I will answer and pay all obligations of Santos and
Sons, Inc. as of February 28, 1985.
Very truly
yours,
Angel C.
Santos"
Petitioner affixed his signature on the letter-proposal signifying his acceptance.8 They
agreed that the consideration for the sale of the store and leasehold right of Santos &
Sons, Inc. shall be P300,000.00.
On February 20, 1985, petitioner paid P150,000.00 to private respondent
representing the value of existing improvements in the Santos & Sons store. The parties
agreed that the balance of P150,000.00 shall be paid upon the formal renewal of the lease
contract between private respondent and Susana Realty. It was also a condition precedent
to the transfer of the leasehold right of private respondent to petitioner. 9
In March 1985, petitioner began to occupy the Santos & Sons store. He
utilized the store for the sale of his own goods. 10
All went well for a few months. In July 1985, however, petitioner received a
notice from Susana Realty, addressed to Santos & Sons, Inc., directing the latter to vacate
the leased premises on or before July 15, 1985. 11 Private respondent failed to renew his
lease over the premises and petitioner was forced to vacate the same on July 16,
1985. LLpr
Petitioner then filed an action for damages against private respondent. He
imputed fraud and bad faith against private respondent when the latter stated in his letter-

158
proposal that his lease contract with Susana Realty has been impliedly renewed.
Petitioner claimed that this misrepresentation induced him to purchase the store of Santos
& Sons and the leasehold right of private respondent.
In defense, respondent alleged that their agreement was to the effect that the
consideration for the sale was P300,000.00, broken down as follows: P150,000.00 shall
be for the improvements in the store, and the balance of P150,000.00 shall be for the sale
of the leasehold right of Santos & Sons over the subject premises. The balance shall be
paid only after the formal renewal of the lease contract and its actual transfer to
petitioner.
Trial on the merits ensued. On November 29, 1990, the trial court rendered a
decision 12 in favor of petitioner. The dispositive portion reads:
"WHEREFORE, AND IN VIEW OF ALL THE
FOREGOING, judgment is hereby rendered in favor of plaintiff
Manolo P. Samson and against defendants Santos and Sons, Inc., and
Angel C. Santos, ordering the said defendants to pay jointly and
severally unto the plaintiff:
"1. The sum of P150,000.00, representing the cash
advance payment for the store and the right to occupy its leased
premises subject matter of the sale involved, with interest thereon at
the legal rate from the filing of the complaint on November 5, 1985
until the same is fully paid;
"2. The sum of P70,000.00 representing the cost of
additional improvements of the store sold, also with legal interest
from November 5, 1985 until the full payment thereof;
"3. The sum of P150,000.00, representing the loss that the
plaintiff suffered from the sale at bargain prices of the goods taken
out of the store, with legal interest thereon from the (d)ate of this
decision until the same is fully paid;
"4. The sum of P100,000.00 representing the profits which
plaintiff failed to realize from the sale of the goods referred to above,
with legal interest thereon from the date of the decision until said
amount is fully paid;
"5. The amounts of P100,000.00 and P50,000.00 as moral
and exemplary damages, respectively, also with legal interest thereon,
from the date of this judgment until fully paid; and
"6. The sum of P45,000.00 as and for attorney's fees and
expenses of litigation, in addition to judicial costs.
"On the defendants' counterclaim, the plaintiff is ordered
to return to the defendants the latter's steel filing cabinet, adding
machine, typewriter and all its unused sales invoices, receipts and
blank checks, if the plaintiff still has any of the said papers or
documents.
"SO ORDERED." 13

Private respondent appealed to the Court of Appeals. In a Decision dated

November 27, 1992,14 the appellate court modified the decision of the trial court after
finding that private respondent did not exercise fraud or bad faith in its dealings with
petitioner. The dispositive portion of the impugned decision reads:
"WHEREFORE, the appealed decision is hereby
MODIFIED by reducing the amounts the trial court awarded to
appellee Manolo P. Samson in that appellants Santos & Sons, Inc. and
Angel C. Santos are ordered to pay appellee, by way of
reimbursement, the P150,000.00 which the latter gave appellants as
advance payment for their store and lease right with legal interest to
be reckoned from the promulgation date of this decision; and
AFFIRMED with respect to the trial court's judgment ordering
appellee to return to appellants the latter's filing cabinet, adding
machine, typewriter, and all their unused sales invoices, receipts and
blank checks, if appellee still has any of these documents. No costs.
"SO ORDERED." 15
Hence this petition for review with the following assigned errors:
I
WHETHER OR NOT THE COURT OF APPEALS ERRED IN
DISREGARDING THE FOLLOWING FACTUAL FINDINGS OF
THE TRIAL COURT:
1. THAT RESPONDENTS DELIBERATELY AND
FRAUDULENTLY CONCEALED FROM THE PETITIONER THE
FACT THAT THE LEASE ON THE SUBJECT STORE PREMISES
HAD ALREADY EXPIRED AND WOULD NO LONGER BE
RENEWED BY THE LESSOR.
2. THAT SOLELY BY REASON OF RESPONDENTS'
FRAUDULENT CONDUCT AND BAD FAITH, PETITIONER
EXERCISING THE DILIGENCE REQUIRED UNDER THE
CIRCUMSTANCES, THE LATTER INCURRED DAMAGES AND
LOSSES.
II
WHETHER OR NOT THE COURT OF APPEALS ERRED IN
HOLDING RESPONDENTS FREE FROM LIABILITY TO
PETITIONER FOR THE DAMAGES THE LATTER HAD
INCURRED ON ACCOUNT OF THE RESPONDENTS' BAD
FAITH.
The pivotal issue in the case at bench is whether or not private respondent
Angel Santos committed fraud or bad faith in representing to petitioner that his contract
of lease over the subject premises has been impliedly renewed by Susana Realty.
Undoubtedly, it was this representation which induced petitioner to enter into the subject
contract with private respondent. LexLib
We find the petition devoid of merit.

159
Bad faith is essentially a state of mind affirmatively operating with furtive
design or with some motive of ill-will. 16 It does not simply connote bad judgment or
negligence. It imports a dishonest purpose or some moral obliquity and conscious doing
of wrong. 17 Bad faith is thus synonymous with fraud and involves a design to mislead or
deceive another, not prompted by an honest mistake as to one's rights or duties, but by
some interested or sinister motive. 18
In contracts, the kind of fraud that will vitiate consent is one where, through
insidious words or machinations of one of the contracting parties, the other is induced to
enter into a contract which, without them, he would not have agreed to. 19 This is known
as dolo causante or causal fraud which is basically a deception employed by one party
prior to or simultaneous to the contract in order to secure the consent of the other.
Petitioner claims that their agreement was that the amount of P300,000.00 is
the consideration for the transfer of private respondent's leasehold right to him and he
paid P150,000.00 as downpayment therefor. He insists that private respondent acted in
bad faith in assuring him that his lease contract with Susana Realty has been impliedly
renewed and would be formally renewed upon the arrival of Tanya Madrigal
(representative of Susana Realty). As evidence of private respondent's bad faith,
petitioner stresses that private respondent himself admitted that prior to February 15,
1985, he was informed by his lawyer that he could not yet sell his lease right to petitioner
for his lease over the premises has not been renewed by Susana Realty Corporation.
After carefully examining the records, we sustain the finding of public
respondent Court of Appeals that private respondent was neither guilty of fraud nor bad
faith in claiming that there was implied renewal of his contract of lease with Susana
Realty. The records will bear that the original contract of lease between the lessor Susana
Realty and the lessee private respondent was for a period of one year, commencing on
August 1, 1983 until July 31, 1984. Subsequently, however, private respondent's lease
was extended until December 31, 1984. At this point, it was clear that the lessor had no
intention to renew the lease contract of private respondent for another year. However, on
February 5, 1985, the lessor, thru its Real Estate Accountant, sent petitioner a letter20 of
even date, worded as follows:
"February 5, 1985
Mr. Angel Santos
1609-1613 C.M. Recto Avenue
Sta. Cruz, Manila
Dear Mr. Santos:
This is to notify you that the rentals for the 1609-1613 C.M. Recto
Avenue, Sta. Cruz, Manila, which you are leasing with (sic) us has
been increased from P77.81 to P100.00 per square meter retroactive
January 1985 (as you have not vacated the place) pending renewal of
your contract until the arrival of Miss Ma. Rosa A.S. Madrigal.
Thus, your new rate will be PESOS: FOURTEEN THOUSAND
TWO HUNDRED FIFTY ONLY (P14,250.00) since you are
occupying One Hundred Forty-Two and 50/100 square meters.

Please note that we are charging the same for everybody and they all
agreed to pay the new rate.
We do expect your full cooperation with regards (sic) to this matter.
Very truly yours,
(Sgd.) JANE F. BARTOLOME
Accountant-Real Estate"
Clearly, this letter led private respondent to believe and conclude that his lease
contract was impliedly renewed and that formal renewal thereof would be made upon the
arrival of Tanya Madrigal. This much was admitted by petitioner himself when he
testified during cross-examination that private respondent initially told him of the fact
that his lease contract with Susana Realty has already expired but he was anticipating its
formal renewal upon the arrival of Madrigal. 21 Thus, from the start, it was known to
both parties that, insofar as the agreement regarding the transfer of private respondent's
leasehold right to petitioner was concerned, the object thereof relates to a future
right. 22 It is a conditional contract recognized in civil law, 23 the efficacy of which
depends upon an expectancy the formal renewal of the lease contract between private
respondent and Susana Realty.
The records would also reveal that private respondent's lawyer informed him
that he could sell the improvements within the store for he already owned them but the
sale of his leasehold right over the store could not as yet be made for his lease contract
had not been actually renewed by Susana Realty. Indeed, it was precisely pursuant to this
advice that private respondent and petitioner agreed that the improvements in the store
shall be sold to petitioner for P150,000.00 24 while the leasehold right shall be sold for
the same amount of P150,000.00, payable only upon the formal renewal of the lease
contract and the actual transfer of the leasehold right to petitioner. 25 The efficacy of the
contract between the parties was thus made dependent upon the happening of this
suspensive condition.
Moreover, public respondent Court of Appeals was correct when it faulted
petitioner for failing to exercise sufficient diligence in verifying first the status of private
respondent's lease. We thus quote with approval the decision of the Court of Appeals
when it ruled, thus:
"When appellant Angel C. Santos said that the lease
contract had expired but that it was impliedly renewed, that
representation should have put appellee on guard. To protect his
interest, appellee should have checked with the lessor whether that
was so, and this he failed to do; or he would have simply deferred his
decision on the proposed sale until Miss Madrigal's arrival, and this
appellee also failed to do. In short, as a buyer of the store and lease
right in question or as a buyer of any object of commerce for that
matter appellee was charged with the obligation of caution aptly
expressed in the universal maxim caveat emptor." 26
Indeed, petitioner had every opportunity to verify the status of the lease
contract of private respondent with Susana Realty. As held by this Court in the case
of Caram, Jr. v. Laureta, 27 the rule caveat emptor requires the purchaser to be aware of
the supposed title of the vendor and he who buys without checking the vendor's title takes

160
all the risks and losses consequent to such failure. In the case at bench, the means of
verifying for himself the status of private respondent's lease contract with Susana Realty
was open to petitioner. Nonetheless, no effort was exerted by petitioner to confirm the
status of the subject lease right. 28 He cannot now claim that he has been deceived.
In sum, we hold that under the facts proved, private respondent cannot be held
guilty of fraud or bad faith when he entered into the subject contract with petitioner.
Causal fraud or bad faith on the part of one of the contracting parties which allegedly
induced the other to enter into a contract must be proved by clear and convincing
evidence. This petitioner failed to do.
IN VIEW WHEREOF, the appealed decision is hereby AFFIRMED in toto.
Costs against petitioner.
SO ORDERED.
Narvasa, C.J. Chairman, Regalado and Mendoza, JJ., concur.
||| (Samson v. Court of Appeals, G.R. No. 108245, [November 25, 1994])

161

12. DEGREE OF DELIGENCE. 2

individual in the situation of defendant Laureano. Article 1174 of the Civil Code guards
against the possibility of its being visited with such reproach.
EN BANC

[G.R. No. L-25906. May 28, 1970.]

PEDRO
D.
DIOQUINO, plaintiff-appellee, vs. FEDERICO
LAUREANO, AIDA DE LAUREANO and JUANITO
LAUREANO, defendants-appellants.

Pedro D. Dioquino in his own behalf.

Arturo E. Valdomero, Jose L. Almario and Rolando S. Relova for defendants-appellants.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; FORTUITOUS EVENT; NO
RESPONSIBILITY THEREFOR. The express language of Article 1174 of the present Civil
Code which is a restatement of Article 1105 of the Old Civil Code, except for the addition of
the nature of an obligation requiring the assumption of risk reads thus: "Except in cases
expressly specified by law, or when it is otherwise declared by stipulation, or when the nature
of the obligation requires the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which though foreseen were inevitable.
2. ID.; ID.; ID.; ID.; BASIS. Its basis, as Justice Moreland stressed, is the Roman law
principle major casus est, cui humana infirmintas resistere non potest.
3. ID.; ID.; ID.; CONCERNING OBLIGATION ARISING FROM CONTRACT.
Authorities of repute are in agreement, more specifically considering an obligation arising from
contract "that some extraordinary circumstance independent of the will of the obligor, or of his
employees, is an essential element of a caso fortuito." If it could be shown that such indeed
was the case, liability is ruled out. There is no requirement of "diligence beyond what human
care and foresight can provide."
4. ID.; ID.; ID.; INSTANT CASE. Where, as in the instant case, the car borrowed by
defendant from plaintiff and driven by the latter's driver and with defendant as the sole
passenger while on the way to the P.C. Barracks at Masbate, was stoned by some mischievous
boys and its windshield was broken, said defendant should not be liable for such damages for
what happened was clearly unforeseen. It was fortuitous event resulting in a loss which must
be borne by the owner of the car. An element of reasonableness in the law would be manifestly
lacking if, on the circumstances as thus disclosed, legal responsibility could be imputed to an

5. ID.; ID.; ID.; ID.; ARTICLE 1174 PRESENT CIVIL CODE CONSTRUED. The very
wording of Article 1174, Civil Code of the Philippines dispels any doubt that what is therein
contemplated is the resulting liability even if caused by a fortuitous event where the party
charged may be considered as having assumed the risk incident in the nature of the obligation
to be performed.
6. ID.; ID.; ID.; EXPLAINED. Caso fortuito or force majeure (which in law are identical in
so far as they exempt an obligor from liability) by definition, are extraordinary events not
foreseeable or avoidable, events that could not be foreseen, or which, though foreseen, were or
anticipated, as is commonly believed, but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee the same: "un hecho no
constituye caso fortuito por la sola circunstancia de que su existencia haga mas dificilo mas
onerosa la accion diligente del presente ofensor." (Peirano Facio, Responsibilidad Extracontractual, p. 465; Mezand, Traite dela Responsibilite Civile, Vol. 2, Sec. 1569)
7. ID.; ID.; ID.; ASSUMPTION OF RISK; CASE OF REPUBLIC vs. LUZON
STEVEDORING CORP. DISTINGUISHED FROM INSTANT CASE. In the case of
Republic vs. Luzon Stevedoring Corp., appellant took all the precautions necessary for safety
however, these very precautions completely destroy the appellant's defense force majeure. In
that instant case then, the risk was quite evident and the nature of the obligation such that a
party could rightfully be deemed as having assumed it. It is not so in the instant case. It is
anything but that. If the lower court, therefore, were duly mindful of what this particular legal
provision contemplates, it could not have reached the conclusion that defendant Federico
Laureano could beheld liable. To repeat, that was clear error on its part.
8. ID.; ID.; RIGHT TO DAMAGES FOR WRONG INCLUSION OF PARTIES IN
COMPLAINT; NOT ALLOWED IN INSTANT CASE. As regards appellant's position to
have plaintiff pay damages for having joined appellant's wife and father-in-law in the
complaint, We are not disposed to view the matter thus: "Considering the equities of the
situation, plaintiff having suffered a pecuniary loss which, while resulting from a fortuitous
event, perhaps would not have occurred at all had not defendant Federico Laureano borrowed
his car, we feel that he is not to be penalized further by his mistaken view of the law including
them in his complaint.
9. REMEDIAL LAW; ACTIONS; COSTS; PART OF SOCIAL BURDEN. Well worth
paraphrasing is the thought expressed in a United States Supreme Court decision as to be
existence of an abiding and fundamental principle that the expenses and annoyance of litigation
from part of the social burden of living in a society which seeks to attain social control through
law.

DECISION

162
FERNANDO, J p:
The present lawsuit had its origin in a relationship, if it could be called such, the use of a car
owned by plaintiff Pedro D. Dioquino by defendant Federico Laureano, clearly of a character
casual and temporary but unfortunately marred by an occurrence resulting in its windshield
being damaged. A stone thrown by a boy who, with his other companions, was thus engaged in
what undoubtedly for them must have been mistakenly thought to be a none-too-harmful prank
did not miss its mark. Plaintiff would hold defendant Federico Laureano accountable for the
loss thus sustained, including in the action filed the wife, Aida de Laureano, and the father,
Juanito Laureano. Plaintiff prevailed in the lower court, the judgment however going only
against the principal defendant, his spouse and his father being absolved of any responsibility.
Nonetheless, all three of them appealed directly to us, raising two questions of law, the first
being the failure of the lower court to dismiss such a suit as no liability could have been
incurred as a result of a fortuitous event and the other being its failure to award damages
against plaintiff for the unwarranted inclusion of the wife and the father in this litigation. We
agree that the lower court ought to have dismissed the suit, but it does not follow that thereby
damages for the inclusion of the above two other parties in the complaint should have been
awarded appellants.
The facts as found by the lower court follow: "Attorney Pedro Dioquino, a practicing lawyer of
Masbate, is the owner of a car. On March 31, 1964, he went to the office of the MVO,
Masbate, to register the same. He met the defendant Federico Laureano, a patrol officer of said
MVO office, who was waiting for a jeepney to take him to the office of the Provincial
Commander. PC, Masbate. Attorney Dioquino requested the defendant Federico Laureano to
introduce him to one of the clerks in the MVO Office, who could facilitate the registration of
his ear and the request was graciously attended to. Defendant Laureano rode on the car of Atty.
Dioquino on his way to the P.C. Barracks at Masbate. While about to reach their destination,
the car driven by plaintiff's driver and with defendant Federico Laureano as the sole passenger,
was stoned by some 'mischievous boys,' and its windshield was broken. Defendant Federico
Laureano chased the boys and he was able to catch one of them The boy was taken to Atty.
Dioquino [and] admitted having thrown the stone that broke the car's windshield. The plaintiff
and the defendant Federico Laureano with the boy returned to the P.C. barracks and the father
of the boy was called, but no satisfactory arrangements [were] made about the damage to the
windshield." 1
It was likewise noted in the decision now on appeal: "The defendant Federico Laureano
refused to file any charges against the boy and his parents because he thought that the stonethrowing was merely accidental and that it was due to force majeure. So he did not want to take
any action and after delaying the settlement, after perhaps consulting a lawyer, the defendant
Federico Laureano refused to pay the windshield himself and challenged that the case be
brought to court for judicial adjudication. There is no question that the plaintiff tried to
convince the defendant, Federico Laureano just to pay the value of the windshield and he even
came to the extent of asking the wife to convince her husband to settle the matter amicably but
the defendant Federico Laureano refused to make any settlement, clinging [to] the belief that
he could not be held liable because a minor child threw a stone accidentally on the windshield
and therefore, the same was due to force majeure." 2
1. The law being what it is, such a belief on the part of defendant Federico Laureano was
justified. The express language of Art. 1174 of the present Civil Code which is a restatement of
Art. 1105 of the Old Civil Code, except for the addition of the nature of an obligation requiring
the assumption of risk, compels such a conclusion. It reads thus: "Except in cases expressly

specified by the law, or when it is otherwise declared by stipulation or when the nature of the
obligation requires the assumption of risk, no person shall be responsible for those events
which could not be foreseen, or which, though foreseen, were inevitable." Even under the old
Civil Code then, as stressed by us in the first decision dating back to 1908, in an opinion by
Justice Mapa, the rule was well-settled that in the absence of a legal provision or an express
covenant, "no one should be held to account for fortuitous cases." 3 Its basis, as Justice
Moreland stressed, is the Roman law principle major casus est, cui humana infirmitas resistere
non potest. 4 Authorities of repute are in agreement, more specifically concerning an obligation
arising from contract "that some extraordinary circumstance independent of the will of the
obligor, or of his employees, is an essential element of a caso fortuito." 5 If it could be shown
that such indeed was the case, liability is ruled out. There is no requirement of "diligence
beyond what human care and foresight can provide." 6

The error committed by the lower court in holding defendant Federico Laureano liable appears
to be thus obvious. Its own findings of fact repel the motion that he should be made to respond
in damages to the plaintiff for the broken windshield. What happened was clear]y unforeseen.
It was a fortuitous event resulting in a loss which must be borne by the owner of the car. An
element of reasonableness in the law would be manifestly lacking if, on the circumstances as
thus disclosed, legal responsibility could be imputed to an individual in the situation of
defendant Laureano. Art. 1174 of the Civil Code guards against the possibility of its being
visited with such a reproach. Unfortunately, the lower court was of a different mind and thus
failed to heed its command.
It was misled, apparently, by the inclusion of the exemption from the operation of such a
provision of a party assuming the risk, considering the nature of the obligation undertaken. A
more careful analysis would have led the lower court to a different and correct interpretation.
The very wording of the law dispels any doubt that what is therein contemplated is the
resulting liability even if caused by a fortuitous event where the party charged may be
considered as having assumed the risk incident in the nature of the obligation to be performed
It would be an affront, not only to the logic but to the realities of the situation, if in the light of
what transpired, as found by the lower court, defendant Federico Laureano could be held as
bound to assume a risk of this nature. There was no such obligation on his part.
Reference to the leading case of Republic v. Luzon Stevedoring Corp. 7 will illustrate when the
nature of the obligation is such that the risk could be considered as having been assumed. As
noted in the opinion of Justice J.B.L. Reyes, speaking for the Court: "The appellant strongly
stresses the precautions taken by it on the day in question: that it assigned two of its most
powerful tugboats to tow down river its barge L-1892; that it assigned to the task the more
competent and experienced among its patrons, had the towlines, engines and equipment
double-checked and inspected; that it instructed its patrons to take extra precautions; and
concludes that it had done all it was called to do, and that the accident, therefore, should be
held due to force majeure or fortuitous event." Its next paragraph explained clearly why the
defense of caso fortuito or force majeure does not lie. Thus: "These very precautions, however,
completely destroy the appellant's defense. For caso fortuito or force majeure (which in law are
identical in so far as they exempt an obligor from liability) by definition, are extraordinary
events not foreseeable or avoidable, 'events that could not be foreseen, or which, though
foreseen, were inevitable' (Art. 1174, Civ. Code of the Philippines). It is, therefore, not enough
that the event should not have been foreseen or anticipated, as is commonly believed, but it
must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is

163
not impossibility to foresee the same: 'un hecho no constituye caso fortuito por la sola
circunstancia de que su existencia haga mas dificil o mas onerosa la accion diligente dal
presenta ofensor' (Peirano Facio, Responsibilidad Extra-contractual, p. 465; Mazeaud, Traite
de la Responsabilite Civile, Vol. 2, sec. 1569). The very measures adopted by appellant prove
that the possibility of danger was not only foreseeable, but actual]y foreseen, and was not caso
fortuito."
In that case then, the risk was quite evident and the nature of the obligation such that a party
could rightfully be deemed as having assumed it. It is not so in the case before us. It is
anything but that. If the lower court, therefore, were duly mindful of what this particular legal
provision contemplates, it could not have reached the conclusion that defendant Federico
Laureano could be held liable. To repeat, that was clear error on its part.
2. Appellants do not stop there. It does not suffice for them that defendant Federico Laureano
would be freed from liability. They would go farther. They would take plaintiff to task for his
complaint having joined the wife, Aida de Laureano, and the father, Juanito Laureano. They
were far from satisfied with the lower court's absolving these two from any financial
responsibility. Appellants would have plaintiff pay damages for their inclusion in this litigation.
We are not disposed to view the matter thus.
It is to be admitted, of course, that plaintiff, who is a member of the bar, ought to have
exercised greater care in selecting the parties against whom he would proceed. It may be said
that his view of the law that would consider defendant Federico Laureano liable on the facts as
thus disclosed, while erroneous, is not bereft of plausibility. Even the lower court, mistakenly
of course, entertained a similar view. For plaintiff, however, to have included the wife and the
father would seem to indicate that his understanding of the law is not all that it ought to have
been.
Plaintiff apparently was not entirely unaware that their inclusion in the suit filed by him was
characterized by unorthodoxy. He did attempt to lend some color of justification by explicitly
setting forth that the father was joined as party defendant in the case as he was the
administrator of the inheritance of an undivided property to which defendant Federico
Laureano could lay claim and that the wife was likewise proceeded against because the
conjugal partnership would be made to respond for whatever liability would be adjudicated
against the husband.
It cannot be said that such an attempt at justification is impressed with a high persuasive
quality. Far from it. Nonetheless, mistaken as plaintiff apparently was, it cannot be concluded
that he was prompted solely by the desire to inflict needless and unjustified vexation on them.
Considering the equities of the situation, plaintiff having suffered a pecuniary loss which,
while resulting from a fortuitous event, perhaps would not have occurred at all had not
defendant Federico Laureano borrowed his car, we feel that he is not to be penalized further by
his mistaken view of the law in including them in his complaint. Well-worth paraphrasing is
the thought expressed in a United States Supreme Court decision as to the existence of an
abiding and fundamental principle that the expenses and annoyance of litigation form part of
the social burden of living in a society which seeks to attain social control through law. 8
WHEREFORE, the decision of the lower court of November 2, 1965 insofar as it orders
defendant Federico Laureano to pay plaintiff the amount of P30,000.00 as damages plus the
payment of costs, is hereby reversed. It is affirmed insofar as it dismissed the case against the

other two defendants, Juanito Laureano and Aida de Laureano, and declared that no moral
damages should be awarded the parties. Without pronouncement as to costs.
Concepcion,
C.J.,
Reyes,
J.B.L.,
Barredo and Villamor, JJ., concur.

Dizon,

Makalintal,

Zaldivar,

Castro, J., is on leave.

||| (Dioquino v. Laureano, G.R. No. L-25906, [May 28, 1970], 144 PHIL 78-86)

Teehankee,

164

12. DEGREE OF DELIGENCE. 3.

durable. Criselda should be absolved from any contributory negligence. The petition was
denied and the decision of the Court of Appeals was affirmed.
FIRST DIVISION
SYLLABUS

[G.R. No. 129792. December 21, 1999.]

JARCO MARKETING CORPORATION, LEONARDO KONG,
JOSE
TIOPE
and
ELISA
PANELO, petitioners, vs.
HONORABLE COURT OF APPEALS, CONRADO C.
AGUILAR and CRISELDA R. AGUILAR, respondents.

Estrella & Virtudazo Law Firm for petitioners.

Florante A. Bautista for private respondents.

SYNOPSIS
Petitioner Jarco Marketing Corporation is the owner of Syvel's Department Store, Makati City
(Syvel's), while the private respondents are spouses and the parents of Zhieneth Aguilar. While
Criselda and her child Zhieneth were at the 2nd floor of Syvel's, a terrible accident happened,
which caused the life of the six-year old Zhieneth. She was pinned by the bulk of the store's
gift-wrapping counter structure which collapsed. Fourteen days later, Zhieneth died at the
hospital, which was attributed to the injuries she sustained. Private respondents filed a
complaint for damages wherein they sought the payment of P157,522.86 for actual damages,
P300,000.00 for moral damages, P20,000.00 for attorney's fees and an unspecified amount for
loss income and exemplary damages. Petitioners, however, denied any liability for the injuries
and consequent death of Zhieneth. They sought the dismissal of the complaint and an award of
moral and exemplary damages and attorney's fees in their favor. The trial court dismissed the
complaint, finding that the preponderance of the evidence favored petitioners. The Court of
Appeals decided in favor of private respondents and reversed the appealed judgment. It found
that petitioners were negligent in maintaining a structurally dangerous counter. It also declared
Zhieneth, who was below seven at the time, was absolutely incapable of negligence or other
tort. The appellate court then awarded private respondents P99,420.86 as actual damages,
representing hospitalization expenses. It denied the award for funeral expenses for lack of
proof. Instead, compensatory damages were awarded for the death of Zhieneth. Petitioners
sought the reversal of the Court of Appeals' decision and the reinstatement of the judgment of
the trial court. EHTSCD
The Supreme Court ruled that the tragedy which befell Zhieneth was no accident and her death
could only be attributed to negligence. The physical analysis of the counter by both the trial
court and the Court of Appeals and a scrutiny of the evidence on record revealed that it was not

1. CIVIL LAW; DAMAGES. ACCIDENT AND NEGLIGENCE; DISTINGUISHED. An

accident pertains to an unforeseen event in which no fault or negligence attaches to the
defendant. It is "a fortuitous circumstance, event or happening; an event happening without any
human agency, or if happening wholly or partly through human agency, an event which under
the circumstances is unusual or unexpected by the person to whom it happens." On the other
hand, negligence is the omission to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do, or the doing
of something which a prudent and reasonable man would not do. Negligence is "the failure to
observe, for the protection of the interest of another person, that degree of care, precaution and
vigilance which the circumstances justly demand, whereby such other person suffers injury."
2. ID.; ID.; ID.; TEST TO DETERMINE NEGLIGENCE. The test in determining the
existence of negligence is enunciated in the landmark case ofPicart v. Smith, (37 Phil. 809
[1918]) thus: Did the defendant in doing the alleged negligent act use that reasonable care and
caution which an ordinarily prudent person would have used in the same situation? If not, then
he is guilty of negligence.
3. REMEDIAL LAW; EVIDENCE; TESTIMONY; EXCEPTION TO HEARSAY RULE;
PART OF RES GESTAE, DEFINED. The testimony of witness Gonzales pertaining to
ZHIENETH's statement formed (and should be admitted as) part of the res gestae under
Section 42, Rule 130 of the Rules of Court, thus: Part of res gestae. Statements made by a
person while a startling occurrence is taking place or immediately prior or subsequent thereto
with respect to the circumstances thereof, may be given in evidence as part of the res gestae.
So, also, statements accompanying an equivocal act material to the issue, and giving it a legal
significance, may be received as part of the res gestae. It is axiomatic that matters relating to
declarations of pain or suffering and statements made to a physician are generally considered
declarations and admissions.
4. ID.; ID.; ID.; ID.; REQUIREMENTS FOR ADMISSIBILITY; PRESENT IN CASE AT
BAR. All that is required for their admissibility as part of the res gestae is that they be made
or uttered under the influence of a startling event before the declarant had the time to think and
concoct a falsehood as witnessed by the person who testified in court. Under the
circumstances, it is unthinkable for ZHIENETH, a child of such tender age and in extreme
pain, to have lied to a doctor whom she trusted with her life. We accord credence to Gonzales'
testimony on the matter, i.e., ZHIENETH performed no act that facilitated her tragic death.
5. ID.; ID.; ID.; CREDIBILITY OF WITNESSES; FINDINGS OF THE TRIAL COURT
GENERALLY NOT DISTURBED ON APPEAL; EXCEPTIONS; NOT PRESENT IN CASE
AT BAR. It is settled that when the issue concerns the credibility of witnesses, the appellate
courts will not as a general rule disturb the findings of the trial court, which is in a better
position to determine the same. The trial court has the distinct advantage of actually hearing

165
the testimony of and observing the deportment of the witnesses. However, the rule admits of
exceptions such as when its evaluation was reached arbitrarily or it overlooked or failed to
appreciate some facts or circumstances of weight and substance which could affect the result of
the case. In the instant case, petitioners failed to bring their claim within the exception.
6. ID.; ID.; PRESUMPTION; CHILDREN BELOW NINE YEARS OLD, CONCLUSIVELY
PRESUMED TO BE INCAPABLE OF CONTRIBUTORY NEGLIGENCE; CASE AT BAR.
Anent the negligence imputed to ZHIENETH, we apply the conclusive presumption that
favors children below nine (9) years old incapable of contributory negligence. In his book, (I
Philippine Law on Torts and Damages, 70-71 [1993]), former Judge Cezar S. Sangco stated: In
our jurisdiction, a person under nine years of age is conclusively presumed to have acted
without discernment, and is, on that account, exempt from criminal liability. The same
presumption and a like exemption from criminal liability obtains in a case of a person over
nine and under fifteen years of age, unless it is shown that he has acted with discernment. Since
negligence may be a felony and a quasi-delict and required discernment as a condition of
liability, either criminal or civil, a child under nine years of age is, by analogy, conclusively
presumed to be incapable of negligence; and that the presumption of lack of discernment or
incapacity for negligence in the case of a child over nine but under fifteen years of age is a
rebuttable one, under our law. The rule, therefore, is that a child under nine years of age must
be conclusively presumed incapable of contributory negligence as a matter of law. SDIACc

ZHIENETH was quickly rushed to the Makati Medical Center where she was operated on. The
next day ZHIENETH lost her speech and thereafter communicated with CRISELDA by writing
on a magic slate. The injuries she sustained took their toil on her young body. She died
fourteen (14) days after the accident or on 22 May 1983, on the hospital bed. She was six years
old. 4
The cause of her death was attributed to the injuries she sustained. The provisional medical
certificate 5 issued by ZHIENETH's attending doctor described the extent of her injuries:
Diagnoses:
1. Shock, severe, sec. to intra-abdominal injuries due to blunt injury
2. Hemorrhage, massive, intraperitoneal sec. to laceration, (L) lobe
liver
3. Rupture, stomach, anterior & posterior walls
4. Complete transection, 4th position, duodenum
5. Hematoma, extensive, retroperitoneal
6. Contusion, lungs, severe

DECISION

DAVIDE, JR., C.J p:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioners seek
the reversal of the 17 June 1996 decision 1 of the Court of Appeals in C.A. G.R. No. CV 37937
and the resolution 2 denying their motion for reconsideration. The assailed decision set aside
the 15 January 1992 judgment of the Regional Trial Court (RTC), Makati City, Branch 60 in
Civil Case No. 7119 and ordered petitioners to pay damages and attorney's fees to private
respondents Conrado and Criselda (CRISELDA) Aguilar. cdasia
Petitioner Jarco Marketing Corporation is the owner of Syvel's Department Store, Makati City.
Petitioners Leonardo Kong, Jose Tiope and Elisa Panelo are the store's branch manager,
operations manager, and supervisor, respectively. Private respondents are spouses and the
parents of Zhieneth Aguilar (ZHIENETH).
In the afternoon of 9 May 1983, CRISELDA and ZHIENETH were at the 2nd floor of Syvel's
Department Store, Makati City. CRISELDA was signing her credit card slip at the payment and
verification counter when she felt a sudden gust of wind and heard a loud thud. She looked
behind her. She then beheld her daughter ZHIENETH on the floor, her young body pinned by
the bulk of the store's gift-wrapping counter/structure. ZHIENETH was crying and screaming
for help. Although shocked, CRISELDA was quick to ask the assistance of the people around
in lifting the counter and retrieving ZHIENETH from the floor. 3

CRITICAL
After the burial of their daughter, private respondents demanded upon petitioners the
reimbursement of the hospitalization, medical bills and wake and funeral expenses 6 which
they had incurred. Petitioners refused to pay. Consequently, private respondents filed a
complaint for damages, docketed as Civil Case No. 7119 wherein they sought the payment of
P157,522.86 for actual damages, P300,000 for moral damages, P20,000 for attorney's fees and
an unspecified amount for loss of income and exemplary damages.

In their answer with counterclaim, petitioners denied any liability for the injuries and
consequent death of ZHIENETH. They claimed that CRISELDA was negligent in exercising
care and diligence over her daughter by allowing her to freely roam around in a store filled
with glassware and appliances. ZHIENETH too, was guilty of contributory negligence since
she climbed the counter, triggering its eventual collapse on her. Petitioners also emphasized
that the counter was made of sturdy wood with a strong support; it never fell nor collapsed for
the past fifteen years since its construction.
Additionally, petitioner Jarco Marketing Corporation maintained that it observed the diligence
of a good father of a family in the selection, supervision and control of its employees. The
other petitioners likewise raised due care and diligence in the performance of their duties and
countered that the complaint was malicious for which they suffered besmirched reputation and
mental anguish. They sought the dismissal of the complaint and an award of moral and
exemplary damages and attorney's fees in their favor. Cdpr
In its decision 7 the trial court dismissed the complaint and counterclaim after finding that the
preponderance of the evidence favored petitioners. It ruled that the proximate cause of the fall
of the counter on ZHIENETH was her act of clinging to it. It believed petitioners' witnesses

166
who testified that ZHIENETH clung to the counter, afterwhich the structure and the girl fell
with the structure falling on top of her, pinning her stomach. In contrast, none of private
respondents' witnesses testified on how the counter fell. The trial court also held that
CRISELDA's negligence contributed to ZHIENETH's accident.
In absolving petitioners from any liability, the trial court reasoned that the counter was situated
at the end or corner of the 2nd floor as a precautionary measure hence, it could not be
considered as an attractive nuisance. 8 The counter was higher than ZHIENETH. It has been in
existence for fifteen years. Its structure was safe and well-balanced. ZHIENETH, therefore,
had no business climbing on and clinging to it.
Private respondents appealed the decision, attributing as errors of the trial court its findings
that: (1) the proximate cause of the fall of the counter was ZHIENETH's misbehavior; (2)
CRISELDA was negligent in her care of ZHIENETH; (3) petitioners were not negligent in the
maintenance of the counter; and (4) petitioners were not liable for the death of ZHIENETH.
Further, private respondents asserted that ZHIENETH should be entitled to the conclusive
presumption that a child below nine (9) years is incapable of contributory negligence. And
even if ZHIENETH, at six (6) years old, was already capable of contributory negligence, still it
was physically impossible for her to have propped herself on the counter. She had a small
frame (four feet high and seventy pounds) and the counter was much higher and heavier than
she was. Also, the testimony of one of the store's former employees, Gerardo Gonzales, who
accompanied ZHIENETH when she was brought to the emergency room of the Makati
Medical Center belied petitioners' theory that ZHIENETH climbed the counter. Gonzales
claimed that when ZHIENETH was asked by the doctor what she did, ZHIENETH replied,
"[N]othing, I did not come near the counter and the counter just fell on me." 9 Accordingly,
Gonzales' testimony on ZHIENETH's spontaneous declaration should not only be considered
as part of res gestae but also accorded credit.
Moreover, negligence could not be imputed to CRISELDA for it was reasonable for her to have
let go of ZHIENETH at the precise moment that she was signing the credit card slip.
Finally, private respondents vigorously maintained that the proximate cause of ZHIENETH's
death, was petitioners' negligence in failing to institute measures to have the counter
permanently nailed.
On the other hand, petitioners argued that private respondents raised purely factual issues
which could no longer be disturbed. They explained that ZHIENETH's death while unfortunate
and tragic, was an accident for which neither CRISELDA nor even ZHIENETH could entirely
be held faultless and blameless. Further, petitioners adverted to the trial court's rejection of
Gonzales' testimony as unworthy of credence.
As to private respondent's claim that the counter should have been nailed to the ground,
petitioners justified that it was not necessary. The counter had been in existence for several
years without any prior accident and was deliberately placed at a corner to avoid such
accidents. Truth to tell, they acted without fault or negligence for they had exercised due
diligence on the matter. In fact, the criminal case 10 for homicide through simple negligence
filed by private respondents against the individual petitioners was dismissed; a verdict of
acquittal was rendered in their favor.
The Court of Appeals, however, decided in favor of private respondents and reversed the
appealed judgment. It found that petitioners were negligent in maintaining a structurally

dangerous counter. The counter was shaped like an inverted "L" 11 with a top wider than the
base. It was top heavy and the weight of the upper portion was neither evenly distributed nor
supported by its narrow base. Thus, the counter was defective, unstable and dangerous; a
downward pressure on the overhanging portion or a push from the front could cause the
counter to fall. Two former employees of petitioners had already previously brought to the
attention of the management the danger the counter could cause. But the latter ignored their
concern. The Court of Appeals faulted the petitioners for this omission, and concluded that the
incident that befell ZHIENETH could have been avoided had petitioners repaired the defective
counter. It was inconsequential that the counter had been in use for some time without a prior
incident.
The Court of Appeals declared that ZHIENETH, who was below seven (7) years old at the time
of the incident, was absolutely incapable of negligence or other tort. It reasoned that since a
child under nine (9) years could not be held liable even for an intentional wrong, then the sixyear old ZHIENETH could not be made to account for a mere mischief or reckless act. It also
absolved CRISELDA of any negligence, finding nothing wrong or out of the ordinary in
momentarily allowing ZHIENETH to walk while she signed the document at the nearby
counter. LLjur
The Court of Appeals also rejected the testimonies of the witnesses of petitioners. It found
them biased and prejudiced. It instead gave credit to the testimony of disinterested witness
Gonzales. The Court of Appeals then awarded P99,420.86 as actual damages, the amount
representing the hospitalization expenses incurred by private respondents as evidenced by the
hospital's statement of account. 12 It denied an award for funeral expenses for lack of proof to
substantiate the same. Instead, a compensatory damage of P50,000 was awarded for the death
of ZHIENETH.
We quote the dispositive portion of the assailed decision, 13 thus:
WHEREFORE, premises considered, the judgment of the lower court
is SET ASIDE and another one is entered against [petitioners],
ordering them to pay jointly and severally unto [private respondents]
the following:
1. P50,000.00 by way of compensatory damages for the death of
Zhieneth Aguilar, with legal interest (6% p.a.) from 27
April 1984;
2. P99,420.86 as reimbursement for hospitalization expenses
incurred; with legal interest (6% p.a.) from 27 April 1984;
3. P100,000.00 as moral and exemplary damages;
4. P20,000.00 in the concept of attorney's fees; and
5. Costs.
Private respondents sought a reconsideration of the decision but the same was denied in the
Court of Appeals' resolution 14 of 16 July 1997.
Petitioners now seek the reversal of the Court of Appeals' decision and the reinstatement of the
judgment of the trial court. Petitioners primarily argue that the Court of Appeals erred in

167
disregarding the factual findings and conclusions of the trial court. They stress that since the
action was based on tort, any finding of negligence on the part of the private respondents
would necessarily negate their claim for damages, where said negligence was the proximate
cause of the injury sustained. The injury in the instant case was the death of ZHIENETH. The
proximate cause was ZHIENETH's act of clinging to the counter. This act in turn caused the
counter to fall on her. This and CRISELDA's contributory negligence, through her failure to
provide the proper care and attention to her child while inside the store, nullified private
respondents' claim for damages. It is also for these reasons that parents are made accountable
for the damage or injury inflicted on others by their minor children. Under these circumstances,
petitioners could not be held responsible for the accident that befell ZHIENETH.
Petitioners also assail the credibility of Gonzales who was already separated from Syvel's at the
time he testified; hence, his testimony might have been tarnished by ill-feelings against them.
For their part, private respondents principally reiterated their arguments that neither
ZHIENETH nor CRISELDA was negligent at any time while inside the store; the findings and
conclusions of the Court of Appeals are substantiated by the evidence on record; the testimony
of Gonzales, who heard ZHIENETH comment on the incident while she was in the hospital's
emergency room should receive credence; and finally, ZHIENETH's part of the res
gestae declaration "that she did nothing to cause the heavy structure to fall on her" should be
considered as the correct version of the gruesome events.
We deny the petition.
The two issues to be resolved are: (1) whether the death of ZHIENETH was accidental or
attributable to negligence; and (2) in case of a finding of negligence, whether the same was
attributable to private respondents for maintaining a defective counter or to CRISELDA and
ZHIENETH for failing to exercise due and reasonable care while inside the store premises.

An accident pertains to an unforeseen event in which no fault or negligence attaches to the

defendant. 15 It is "a fortuitous circumstance, event or happening; an event happening without
any human agency, or if happening wholly or partly through human agency, an event which
under the circumstances is unusual or unexpected by the person to whom it happens." 16
On the other hand, negligence is the omission to do something which a reasonable man, guided
by those considerations which ordinarily regulate the conduct of human affairs, would do, or
the doing of something which a prudent and reasonable man would not do. 17 Negligence is
"the failure to observe, for the protection of the interest of another person, that degree of care,
precaution and vigilance which the circumstances justly demand, whereby such other person
suffers injury." 18
Accident and negligence are intrinsically contradictory; one cannot exist with the other.
Accident occurs when the person concerned is exercising ordinary care, which is not caused by
fault of any person and which could not have been prevented by any means suggested by
common prudence.19
The test in determining the existence of negligence is enunciated in the landmark case
of Picart v. Smith, 20 thus: Did the defendant in doing the alleged negligent act use that
reasonable care and caution which an ordinarily prudent person would have used in the same
situation? If not, then he is guilty of negligence. 21

We rule that the tragedy which befell ZHIENETH was no accident and that ZHIENETH's
death could only be attributable to negligence. LLjur
We quote the testimony of Gerardo Gonzales who was at the scene of the incident and
accompanied CRISELDA and ZHIENETH to the hospital:
Q While at the Makati Medical Center, did you hear or notice
anything while the child was being treated?
A At the emergency room we were all surrounding the child. And
when the doctor asked the child "what did you do," the
child said "nothing, I did not come near the counter and
the counter just fell on me."
Q (COURT TO ATTY. BELTRAN)
You want the words in Tagalog to be translated?
ATTY. BELTRAN
Yes, your Honor.
COURT
Granted. Intercalate "wala po, hindi po ako lumapit doon. Basta
bumagsak." 22
This testimony of Gonzales pertaining to ZHIENETH's statement formed (and should be
admitted as) part of the res gestae under Section 42, Rule 130 of the Rules of Court, thus:
Part of res gestae. Statements made by a person while a startling
occurrence is taking place or immediately prior or subsequent thereto
with respect to the circumstances thereof, may be given in evidence
as part of the res gestae. So, also, statements accompanying an
equivocal act material to the issue, and giving it a legal significance,
may be received as part of the res gestae.
It is axiomatic that matters relating to declarations of pain or suffering and statements made to
a physician are generally considered declarations and admissions. 23 All that is required for
their admissibility as part of the res gestae is that they be made or uttered under the influence
of a startling event before the declarant had the time to think and concoct a falsehood as
witnessed by the person who testified in court. Under the circumstances thus described, it is
unthinkable for ZHIENETH, a child of such tender age and in extreme pain, to have lied to a
doctor whom she trusted with her life. We therefore accord credence to Gonzales' testimony on
the matter, i.e., ZHIENETH performed no act that facilitated her tragic death. Sadly, petitioners
did, through their negligence or omission to secure or make stable the counter's base.
Gonzales' earlier testimony on petitioners' insistence to keep and maintain the structurally
unstable gift-wrapping counter proved their negligence, thus:
Q When you assumed the position as gift wrapper at the second floor,
will you please describe the gift wrapping counter, were
you able to examine?

168
A Because every morning before I start working I used to clean that
counter and since it is not nailed and it was only standing
on the floor, it was shaky.
xxx xxx xxx
Q Will you please describe the counter at 5:00 o'clock [sic] in the
afternoon on [sic] May 9, 1983?
A At that hour on May 9, 1983, that counter was standing beside the
verification counter. And since the top of it was heavy and
considering that it was not nailed, it can collapsed at
anytime, since the top is heavy.
xxx xxx xxx
Q And what did you do?
A I informed Mr. Maat about that counter which is [sic] shaky and
since Mr. Maat is fond of putting display decorations on
tables, he even told me that I would put some
decorations. But since I told him that it not [sic] nailed
and it is shaky he told me "better inform also the company
about it." And since the company did not do anything
about the counter, so I also did not do anything about the
counter. 24 [Emphasis supplied]
Ramon Guevarra, another former employee, corroborated the testimony of Gonzales, thus:
Q Will you please described [sic] to the Honorable Court the counter
where you were assigned in January 1983?
xxx xxx xxx
A That counter assigned to me was when my supervisor ordered me
to carry that counter to another place. I told him that the
counter needs nailing and it has to be nailed because it
might cause injury or accident to another since it was
shaky. LibLex
Q When that gift wrapping counter was transferred at the second floor
on February 12, 1983, will you please describe that to the
honorable Court?
AI

told

her that the counter wrapper [sic] is really in

good [sic] condition; it was shaky. I told her that we had
to nail it.

Q When you said she, to whom are you referring to [sic]?

A I am referring to Ms. Panelo, sir.

Q And what was the answer of Ms. Panelo when you told her that the
counter was shaky?
A She told me "Why do you have to teach me. You are only my
subordinate and you are to teach me? And she even got
angry at me when I told her that.
xxx xxx xxx
Q From February 12, 1983 up to May 9, 1983, what if any, did Ms.
Panelo or any employee of the management do to that [sic]
xxx xxx xxx
Witness:
None, sir. They never nailed the counter. They only nailed the
counter after the accident happened. 25 [Emphasis
supplied]
Without doubt, petitioner Panelo and another store supervisor were personally informed of the
danger posed by the unstable counter. Yet, neither initiated any concrete action to remedy the
situation nor ensure the safety of the store's employees and patrons as a reasonable and
ordinary prudent man would have done. Thus, as confronted by the situation petitioners
miserably failed to discharge the due diligence required of a good father of a family.
On the issue of the credibility of Gonzales and Guevarra, petitioners failed to establish that the
former's testimonies were biased and tainted with partiality. Therefore, the allegation that
Gonzales and Guevarra's testimonies were blemished by "ill feelings" against petitioners
since they (Gonzales and Guevarra) were already separated from the Company at the time their
testimonies were offered in court was but mere speculation and deserved scant
consideration.
It is settled that when the issue concerns the credibility of witnesses, the appellate courts will
not as a general rule disturb the findings of the trial court, which is in a better position to
determine the same. The trial court has the distinct advantage of actually hearing the testimony
of and observing the deportment of the witnesses. 26 However, the rule admits of exceptions
such as when its evaluation was reached arbitrarily or it overlooked or failed to appreciate
some facts or circumstances of weight and substance which could affect the result of the
case. 27 In the instant case, petitioners failed to bring their claim within the exception.
Anent the negligence ZHIENETH, we apply the conclusive presumption that favors children
below nine (9) years old in that they are incapable of contributory negligence. In his
book, 28 former Judge Cezar S. Sangco stated:
In our jurisdiction, a person under nine years of age is conclusively
presumed to have acted without discernment, and is, on that account,
exempt from criminal liability. The same presumption and a like
exemption from criminal liability obtains in a case of a person over
nine and under fifteen years of age, unless it is shown that he has
acted with discernment. Since negligence may be a felony and a
quasi-delict and required discernment as a condition of liability, either

169
criminal or civil, a child under nine years of age is, by analogy,
conclusively presumed to be incapable of negligence; and that the
presumption of lack of discernment or incapacity for negligence in
the case of a child over nine but under fifteen years of age is a
rebuttable one, under our law. The rule, therefore, is that a child
under nine years of age must be conclusively presumed incapable of
contributory negligence as a matter of law. [Emphasis supplied]
Even if we attribute contributory negligence to ZHIENETH and assume that she climbed over
the counter, no injury should have occurred if we accept petitioners' theory that the counter was
stable and sturdy. For if that was the truth, a frail six-year old could not have caused the
counter to collapse. The physical analysis of the counter by both the trial court and Court of
Appeals and a scrutiny of the evidence 29 on record reveal otherwise, i.e., it was not durable
after all. Shaped like an inverted "L," the counter was heavy, huge, and its top laden with
formica. It protruded towards the customer waiting area and its base was not secured. 30
CRISELDA too, should be absolved from any contributory negligence. Initially, ZHIENETH
held on to CRISELDA's waist, later to the latter's hand. 31CRISELDA momentarily released
the child's hand from her clutch when she signed her credit card slip. At this precise moment, it
was reasonable and usual for CRISELDA to let go of her child. Further, at the time
ZHIENETH was pinned down by the counter, she was just a foot away from her mother; and
the gift-wrapping counter was just four meters away from CRISELDA. 32 The time and
distance were both significant. ZHIENETH was near her mother and did not loiter as
petitioners would want to impress upon us. She even admitted to the doctor who treated her at
the hospital that she did not do anything; the counter just fell on her.

WHEREFORE, in view of all the foregoing, the instant petition is DENIED and the challenged
decision of the Court of Appeals of 17 June 1996 in C.A. G.R. No. CV 37937 is hereby
AFFIRMED.
Costs against petitioners.
SO ORDERED. LibLex
Puno, Kapunan, Pardo and Ynares-Santiago, JJ., concur.
||| (Jarco Marketing Corp. v. Court of Appeals, G.R. No. 129792, [December 21, 1999], 378
PHIL 991-1008)

170

12. DEGREE OF DELIGENCE. 4.

nicknamed "Hataw," was a grade three pupil whose education was sponsored by the Spouses
Petinato, an American couple, through an educational foundation. 4
The appellant was an officer of the Philippine National Police detailed in the Traffic
Management Group (TMG) based in Camp Crame, Quezon City, but was on detached service
with the Motorcycle Unit of the Metropolitan Manila Development Authority (MMDA).

EN BANC
[G.R. No. 137347. March 4, 2004.]
PEOPLE OF
THE
PHILIPPINES, appellee, vs.
FERDINAND FALLORINA Y FERNANDO, appellant.

PO3

DECISION

CALLEJO, SR., J p:
For automatic review is the Decision 1 of the Regional Trial Court of Quezon City, Branch 95,
convicting appellant PO3 Ferdinand Fallorina yFernando of murder for the killing of elevenyear-old Vincent Jorojoro, Jr. while the latter was flying his kite on top of a roof. The court a
quosentenced the appellant to suffer the death penalty.
The accusatory portion of the Information charging the appellant with murder reads:
That on or about the 26th day of September 1998, in Quezon City,
Philippines, the said accused, with intent to kill, by means of
treachery and taking advantage of superior strength, did then and
there, wilfully, unlawfully and feloniously attack, assault and employ
personal violence upon the person of VINCENT JOROJORO,
JR. y MORADAS, a minor, eleven (11) years of age, by then and
there, shooting him with a gun, hitting him on the head, thereby
inflicting upon him serious and mortal wound which was the direct
and immediate cause of his death, to the damage and prejudice of the
heirs of the said offended party.
CONTRARY TO LAW. 2
Upon arraignment on October 20, 1998, the appellant, with the assistance of counsel, pleaded
not guilty. Thereafter, trial ensued.

At about 2:30 p.m. of September 26, 1998, Vincent asked permission from his mother
Felicisima if he could play outside. She agreed. 5 Together with his playmate Whilcon
"Buddha" Rodriguez, Vincent played with his kite on top of the roof of an
abandoned carinderia beside the road in Sitio Militar, Barangay Bahay Toro. Beside
this carinderia was a basketball court, where fourteen-year-old Ricardo Salvo and his three
friends, nicknamed L.A., Nono and Puti, were playing backan, a game of basketball.
Ricardo heard the familiar sound of a motorcycle coming from the main road across the
basketball court. He was nonplussed when he looked at the person driving the motorcycle and
recognized the appellant. Ricardo knew that the appellant abhorred children playing on the roof
of thecarinderia and berated them for it. His friend Ong-ong had previously been scolded by
the appellant for playing on the roof.
Ricardo called on Vincent and Whilcon to come down from the roof. When the appellant saw
Vincent and Whilcon, the former stopped his motorcycle and shouted at them, "Putang inang
mga batang ito, hindi kayo magsibaba d'yan!" After hearing the shouts of the appellant,
Whilcon immediately jumped down from the roof. 6 Vincent, meanwhile, was lying on his
stomach on the roof flying his kite. When he heard the appellant's shouts, Vincent stood up and
looked at the latter. Vincent turned his back, ready to get down from the roof. Suddenly, the
appellant pointed his .45 caliber pistol 7 towards the direction of Vincent and fired a shot.
Vincent was hit on the left parietal area. He fell from the roof, lying prostrate near the canal
beside the abandoned carinderia and the basketball court. 8
Whilcon rushed to help Vincent up but was shocked when he saw blood on the latter's head.
Whilcon retreated and left his friend. 9 The appellant approached Vincent and carried the
latter's hapless body in a waiting tricycle and brought him to the Quezon City General
Hospital. Vincent was pronounced dead on arrival.
Meantime, word reached Vincent's parents that their son was shot and brought to the hospital.
They rushed to the hospital, only to see their son's already lifeless body. The appellant was
nowhere to be found.
Dr. Ravell Ronald R. Baluyot of the Medico-Legal Division of the National Bureau of
Investigation (NBI) conducted an autopsy where he made the following findings:
Cyanosis, lips and nailbeds.

Case for the Prosecution 3

Abrasion, 7.0 x 2.0 cms., right arm, middle third, postero-lateral

aspect.

Eleven-year-old Vincent Jorojoro, Jr. was the third child of Vicente and Felicisima Jorojoro.
The family lived at Sitio Militar, Barangay Bahay Toro, Project 8, Quezon City. Vincent,

Contused-abrasion, 14.5 x 2.5 cms., postero-lateral chest wall, right

side.

171
Gunshot Wound, Entrance, 3.0 x 0.8 cms., roughly ovaloid, with
irregular edges, abrasion collar widest postero-inferiorly, located at
the head, left parietal area, 9.0 cms. above and 8.0 cms. behind the
left external auditory meatus, directed forward upward and from left
to right, involving the scalp, fracturing the left parietal bone
(punched-in), lacerating the left and right cerebral hemispheres of the
brain, fracturing the right parietal bone (punched-out), lacerating the
scalp, making an Exit wound, 3.3 x 1.0 cms., stellate with everted and
irregular edges, 12.0 cms. above and 2.0 cms. in front of the right
external auditory meatus.
Intracranial hemorrhage, subdural and subarachnoid, extensive,
bilateral.
Scalp hematoma, fronto-parietal areas, bilateral.
Visceral organs, congested.
Stomach, one-fourth (1/4) filled with partially digested food particles.
CAUSE OF DEATH: GUNSHOT WOUND, HEAD. 10
Dr. Baluyot testified that the victim died from a single gunshot wound in the head. The bullet
entered the left upper back portion of the head (above the level of the left ear) 11 and exited to
the right side. 12 Dr. Baluyot signed Vincent's certificate of death. 13
At about 3:00 p.m., SPO2 Felix Pajarillo and Police Inspector Abelardo P. Aquino proceeded to
the scene of the shooting but failed to find the victim and the appellant. They proceeded to the
Quezon City General Hospital where they heard that the victim had died. They returned to the
crime scene and recovered an empty shell from a .45 caliber gun. 14
On September 28, 1998, Major Isidro Suyo, the Chief of the MMDA Motorcycle Unit to which
the appellant was assigned on detached service, reported to the Sangandaan Police Station that
the appellant had not reported for duty. 15 At 2:10 p.m. of September 29, 1998, Police Senior
Superintendent Alfonso Nalangan, the Regional Director of the PNP-TMG, NCR, surrendered
the appellant to the Sangandaan Police Station together with his .45 caliber pistol bearing
Serial No. AOC-38701. 16
Meantime, upon the urging of Vicente Jorojoro, Ricardo was brought to the Department of
Justice where he was enrolled under its Witness Protection Program. He gave his sworn
statement to NBI Special Agent Roberto Divinagracia on September 29, 1998. 17 On the same
date, P/Insp. Abelardo Aquino wrote the Chief of the PNP Crime Laboratory Examination Unit
requesting for the ballistic examination of the .45 caliber pistol with Serial No. AOC-38701
and the empty shell of a .45 caliber gun found at the scene of the shooting. 18 Before noon on
September 30, 1998, Divinagracia arrived at the station and turned over two witnesses,
Raymond Castro and Ricardo Salvo. He also turned over the witnesses' sworn
statements. 19 On October 2, 1998, on orders of the police station commander, 20 Pajarillo
took pictures of the crime scene, including the carinderiaand the roof with a bullet hole as part
of the office filing. 21 He did not inform the prosecution that he took such pictures, nor did he
furnish it with copies thereof. However, the appellants counsel learned of the existence of the
said pictures.

On October 5, 1998, P/Insp. Mario Prado signed Firearms Identification Report No. FAIB-12498 stating that: CHcETA
FINDINGS:
Microscopic examination and comparison of the specimen marked
FAP revealed the same individual characteristics with cartridge
cases fired from the above-mentioned firearm.
CONCLUSION:
The specimen marked FAP was fired from the above-mentioned
caliber .45 Thompson Auto Ordinance pistol with serial number
AOC-38701. 22
Vincents family suffered mental anguish as a result of his death. As evidenced by receipts,
they spent P49,174 for the funeral. 23
Case for the Appellant
The appellant denied shooting Vincent. He testified that at about 1:30 p.m. of September 26,
1998, Macario Ortiz, a resident of Sitio San Jose, Quezon City, asked for police assistance;
Macarios brother-in-law was drunk and armed with a knife, and was creating trouble in their
house. The appellants house was located along a narrow alley (eskinita) perpendicular to the
main road. It was 200 meters away from Macarios house. 24Responding to the call, the
appellant took his .45 service revolver, cocked it, put the safety lock in place and tucked the
gun at his right waistline. He brought out his motorcycle from the garage and slowly negotiated
the bumpy alley leading to the main road. Macario, who was waiting for him at the main road,
called his attention to his revolver which was about to fall off from his waist. The appellant got
distracted and brought his motorcycle to the right side of the road, near the
abandoned carinderia where he stopped. As he stepped his right foot on the ground to keep
himself from falling, the appellant lost his balance and slipped to the right. At this point, the
revolver fell to the ground near his foot and suddenly went off. Bystanders shouted, Ano yon,
ano yon, mukhang may tinamaan. He picked up his gun and examined it. He put the safety
latch back on and tucked it at his right waistline. He then told Macario to wait for a while to
check if somebody was really hit. He went near the abandoned carinderiaand saw Vincent
sprawled to the ground. He picked up the bloodied child, boarded him on a tricycle on queue
and instructed its driver, Boy Candaje, to bring the boy to the hospital. 25 On board the tricycle
were Jeffrey Dalansay and Milbert Doring.

The appellant rode his motorcycle and proceeded to his mother's house in Caloocan City but
did not inform her of the incident. He then called his superior officer, Major Isidro Suyo, at the
Base 103, located at Roces Avenue, Quezon City. The appellant informed Major Suyo that he
met an accident; that his gun fell and fired; and, that the bullet accidentally hit a child. He also
told his superior that he might not be able to report for work that day and the following day. He
assured his superior that he would surrender later. He then went to Valenzuela City to the house
of his friend PO3 Angelito Lam, who was a motorcycle unit cop. The appellant stayed there for
three days. He also visited friends during that time.

172
On September 29, 1998, he went to the office of Major Suyo and surrendered his .45 caliber
pistol. Major Suyo accompanied and turned over the appellant to the commanding officer at
Camp Crame, Quezon City. The appellant was subjected to a neuro and drug test. He stated
that the results of the drug test were negative. The appellant was then referred to the
Sangandaan Police Station for investigation. 26 The pictures 27 of the crime scene were given
to him by Barangay Tanod Johnny Yaket, shown in one of the pictures pointing to a bullet hole.
The appellants testimony was corroborated in pari materia by Macario Ortiz.
Leonel Angelo Balaoro, Vincent's thirteen-year-old playmate, testified that at 1:30 p.m. of
September 26, 1998, he was playing basketball at Barangay Bahay Toro, at the basketball court
along the road beside the chapel. With him were Ricardo, Puti and Nono. Vincent was on the
rooftop of the carinderia with Whilcon. While Puti was shooting the ball, an explosion ensued.
He and Ricardo ran beside the chapel near the basketball court. He looked back towards the
basketball court and saw the appellant, about 15 meters away from the canal, holding the
prostrate and bloodied Vincent. He did not see the appellant shoot Vincent. He did not report
what he saw to the police authorities. He was ordered by his father to testify for the appellant.
He also testified that his mother was related to Daniel, the appellant's brother.
On January 19, 1999, the trial court rendered judgment convicting the appellant of murder,
qualified by treachery and aggravated by abuse of public position. The trial court did not
appreciate in favor of the appellant the mitigating circumstance of voluntary surrender. The
decretal portion of the decision reads:
WHEREFORE, judgment is hereby rendered finding the accused PO3
Ferdinand Fallorina y Fernando GUILTY beyond reasonable doubt of
the crime of Murder defined in and penalized by Article 248 of the
Revised Penal Code, as amended by Republic Act No. 7659, and in
view of the presence of the aggravating circumstance of taking
advantage by the accused of his public position (par. 1, Art. 14,
Revised Penal Code), is hereby sentenced to suffer the penalty of
DEATH.
The accused is hereby ordered to indemnify the heirs of the late
Vincent Jorojoro, Jr. the amounts of P49,174.00, as actual damages;
P50,000.00, as moral damages; P25,000.00, as exemplary damages;
and, P50,000.00, as death indemnity.
The accused is to pay the costs.
The .45 caliber pistol, service firearm (Exh. R) of the accused, shall
remain under the custody of the Court and shall be disposed of in
accordance with the existing rules and regulations upon the finality of
this decision. 28
The appellant assigned the following errors for resolution:
1. THE COURT A QUO SERIOUSLY ERRED IN NOT GIVING
DUE CREDENCE TO RELEVANT PHYSICAL
EVIDENCE, WHICH IF CONSIDERED COULD HAVE
ALTERED THE CONCLUSIONS ARRIVED AT BY
THE COURT AND THE OUTCOME OF THE CASE.

2. THE

COURT A
QUO SERIOUSLY
ERRED
BY
OVERSTEPPING THE LINE OF JUDGING AND
ADVOCACY, AND GOING INTO THE REALM OF
SPECULATION, PATENTLY DEMONSTRATING BIAS
AND PARTIALITY.

3. THE COURT A QUO ERRED IN GIVING UNDUE CREDENCE

TO THE TESTIMONY OF RICARDO SALVO,
ALLEGED PROSECUTION EYEWITNESS, WHOSE
TESTIMONY IS WANTING IN PROBABILITY, AS IT
IS CONTRARY TO THE COMMON EXPERIENCE OF
MANKIND.
4. THE COURT A QUO GRAVELY ERRED IN INEQUITABLY
APPRECIATING
EXCULPATORY
AND
INCULPATORY FACTS AND CIRCUMSTANCES
WHICH SHOULD HAVE BEEN CONSIDERED IN
FAVOR OF THE ACCUSED.
5. THE COURT A QUO ERRED IN FAILING TO APPRECIATE
THE
MITIGATING
CIRCUMSTANCE
OF
VOLUNTARY SURRENDER IN FAVOR OF THE
ACCUSED.
6. THE COURT A QUO GRAVELY ERRED IN APPRECIATING
THE AGGRAVATING CIRCUMSTANCE OF TAKING
ADVANTAGE OF HIS POSITION BY ACCUSED. 29
The appellant asserts that the trial court failed to appreciate in his favor the physical
evidence, viz., the hole found on the rooftop of the carinderiawhere Vincent was when he was
shot. The appellant contends that the picture 30 taken on October 2, 1998 by no less than SPO2
Felix Pajarillo, one of the principal witnesses of the prosecution, and the pictures 31 showing
Barangay Tanod Yaket pointing to a hole on the roof buttress the defense of the appellant that
the shooting was accidental. The appellant maintains that his service revolver fell to the
ground, hit a hard object, and as the barrel of the gun was pointed to an oblique direction, it
fired, hitting the victim who was on the rooftop. The bullet hit the back portion of the victim's
head, before exiting and hitting the rooftop. The appellant posits that the pictures belie
Ricardo's testimony that he deliberately shot the victim, and, instead, complements Dr.
Baluyot's testimony that the gunshot wound came from somewhere behind the victim,
somewhere lower than the point of entrance. The appellant invokes P/Insp. Mario Prados
testimony that if a gun hits the ground in an oblique position, the gun will fire and the bullet
will exit in the same position as the gun, that is, also in an oblique position.
The Office of the Solicitor General, for its part, asserts that the contention of the appellant is
based on speculations and surmises, the factual basis for his conclusion not having been proven
by competent and credible evidence. There is no evidence on record that the hole shown in the
pictures32 was caused by a bullet from a .45 caliber pistol. The appellant did not present
Barangay Tanod Johnny Yaket, who was shown in the pictures, to testify on the matter. The
appellant failed to prove that any slug was found on the rooftop or under the roof which came
from the appellants .45 caliber pistol. According to the Solicitor General, the pictures relied

173
upon by the appellant cannot overcome the positive and straightforward testimony of the young
eyewitness Ricardo Salvo.
We agree with the Office of the Solicitor General. Whether or not the appellant is exempt from
criminal liability is a factual issue. The appellant was burdened to prove, with clear and
convincing evidence, his affirmative defense that the victims death was caused by his gun
accidentally going off, the bullet hitting the victim without his fault or intention of causing it;
hence, is exempt from criminal liability under Article 12, paragraph 4 of the Revised Penal
Code which reads
The following are exempt from criminal liability:
xxx xxx xxx
4. Any person who, while performing a lawful act with due care,
causes an injury by mere accident without fault or intention of
causing it.
The basis for the exemption is the complete absence of intent and negligence on the part of the
accused. For the accused to be guilty of a felony, it must be committed either with criminal
intent or with fault or negligence. 33
The elements of this exempting circumstance are (1) a person is performing a lawful act; (2)
with due care; (3) he causes an injury to another by mere accident; and (4) without any fault or
intention of causing it. 34 An accident is an occurrence that "happens outside the sway of our
will, and although it comes about through some act of our will, lies beyond the bounds of
humanly foreseeable consequences." If the consequences are plainly foreseeable, it will be a
case of negligence.
In Jarco Marketing Corporation v. Court of Appeals, 35 this Court held that an accident is a
fortuitive circumstance, event or happening; an event happening without any human agency, or
if happening wholly or partly through human agency, an event which under the circumstance is
unusual or unexpected by the person to whom it happens. Negligence, on the other hand, is the
failure to observe, for the protection of the interest of another person, that degree of care,
precaution and vigilance which the circumstances justly demand without which such other
person suffers injury. Accident and negligence are intrinsically contradictory; one cannot exist
with the other. 36 In criminal negligence, the injury caused to another should be unintentional,
it being simply the incident of another act performed without malice. 37 The appellant must
rely on the strength of his evidence and not on the weakness of that of the prosecution because
by admitting having caused the death of the victim, he can no longer be acquitted.
In this case, the appellant failed to prove, with clear and convincing evidence, his defense.
First. The appellant appended to his counter-affidavit in the Office of the Quezon City
Prosecutor the pictures showing the hole on the roof of thecarinderia 38 to prove that he shot
the victim accidentally. However, when the investigating prosecutor propounded clarificatory
questions on the appellant relating to the pictures, the latter refused to answer. This can be
gleaned from the resolution of the investigating prosecutor, thus:
Classificatory questions were propounded on the respondent but were
refused to be answered. This certainly led the undersigned to cast
doubt on respondents allegations. The defenses set forth by the

respondent are evidentiary in character and best appreciated in a fullblown trial; and that the same is not sufficient to overcome probable
cause. 39

Second. The appellant did not see what part of the gun hit the victim. 40 There is no evidence
showing that the gun hit a hard object when it fell to the ground, what part of the gun hit the
ground and the position of the gun when it fell from the appellant's waist.
Third. In answer to the clarificatory questions of the court, the appellant testified that the
chamber of his pistol was loaded with bullets and was cocked when he placed it on his right
waistline. 41 He also testified that the gun's safety lock was on. He was asked if the gun would
fire if the hammer is moved backward with the safety lock in place, and the appellant admitted
that even if he pulled hard on the trigger, the gun would not fire:
Q Is this your service firearm?
A Yes, Your Honor.
Q So the chamber might have been loaded when you went out of the
house?
A Yes, Your Honor.
Q What about the hammer, how was the hammer at that time when
you tucked the gun in your waistline?
A The hammer was cocked like this.
COURT:
Can you not stipulate that the hammer is moved backwards near the
safety grip.
ATTY. AND PROS. SINTAY:
Admitted, Your Honor.
ATTY. PEREZ:
Yes, Your Honor.
COURT: (to the witness)
Q You are a policeman, if there is a bullet inside the barrel of the gun
and then the hammer is moved backwards and therefore it
is open, that means that if you pull the trigger, the bullet
will fire because the hammer will move forward and then
hit the base of the bullet?
A Yes, Your Honor.
Q Therefore, the gun was cocked when you came out?

174
A Yes, Your Honor.

The Court gave the gun to the accused for him to demonstrate.

Q You did not place the safety lock before you went out of your
house?

(to the witness)

A I safety (sic) it, sir.

Q So when you boarded the motorcycle, the gun was on a safety
lock?
A Yes, Your Honor.
Q Will you please place the safety lock of that gun, point it upwards.
(witness did as instructed)
It is now on a safety locked (sic)?
A Yes, Your Honor.
Q Pull the trigger if the hammer will move forward?
(witness did as instructed)
A It will not, Your Honor.
COURT: (to the parties)
Q Can you not admit that at this position, the accused pulled the
trigger, the hammer did not move forward?

You push it forward in order to push the hammer. Hard if you want
but do not remove the safety lock.
(witness did as instructed)
The witness tried to push the safety grip and it does not touch the
hammer even if the hammer is cocked. 42
Fourth. The trial court was witness as the appellant's counsel himself proved that the defense
proffered by the appellant was incredible. This can be gleaned from the decision of the trial
court:
3. More importantly, and which the Court considers it as providential,
when the counsel of the accused was holding the gun in a cocked
position and the safety lock put in place, the gun accidentally dropped
on the cemented floor of the courtroom and the gun did not fire and
neither was the safety lock moved to its unlock position to cause the
hammer of the gun to move forward. The safety lock of the gun
remained in the same position as it was when it dropped on the
floor. 43
Fifth. After the shooting, the appellant refused to surrender himself and his service firearm. He
hid from the investigating police officers and concealed himself in the house of his friend
SPO3 Angelito Lam in Valenzuela City, and transferred from one house to another for three
days to prevent his arrest:

PROS. SINTAY AND ATTY. PRINCIPE:

Q So did you surrender that afternoon of September 26, 1998?

Admitted, Your Honor.

A No, Your Honor.

COURT: (to the witness)

Q I thought you were surrendering to Major Suyo?

Q And therefore at this position, even if I pull the trigger many times,
a bullet will not come out from the muzzle of the gun
because the hammer is on a safety locked (sic)?

A I was but I was not able to surrender to Major Suyo, Your Honor.

A Yes, Your Honor.

A Because at that time I was already confused and did not know what
to do, Your Honor.

Q Even if I pushed it very hard, it will not fire the gun?

A Yes, Your Honor.
Q Alright, I will ask you again a question. If the hammer of the gun is
like this and therefore it is open but it is on a safety lock,
there is space between the safety grip which is found
below the hammer, there is a space, is it not?
A Yes, Your Honor.
Q That even if I pushed the safety grip forward, like this.

Q Why, you were already able to talk to Major Suyo?

ATTY. PRINCIPE: (to the witness)

Q What is your relation with PO3 Angelito Lam of Valenzuela?
A Just my co-motorcycle unit cop in the TMG, sir.
Q Did I hear you right that you slept at the residence of PO3 Lam for
three days?
A Yes, sir.

175
Q Why instead of going home to your residence at Bahay Toro?
A Because I am worried, sir.
COURT: (to the witness)
Q So what did you do for three days in the house of PO3 Lam?
A During daytime, I go to my friends, other friends and in the
evening, I go back to the house of PO3 Lam, Your Honor.
Q So if you were able to visit your friends on September 27 or 28,
1998 and then returned to the house of PO3 Lam in the
evening, why did you not go to Major Suyo or to your 103
Base?
A Your Honor, during those days I am really calling Major Suyo.
Q Why did you not go to your office at Camp Crame, Quezon City?
A At that time, I did not have money, Your Honor.
Q What is the connection of you having money to that of informing
your officer that you will surrender?
A What I know, Your Honor, is that if I do that I will already be
detained and that I will have no money to spend.
ATTY. PRINCIPE: (to the witness)
Q Mr. Witness, from the time of the incident up to Sept. 29, 1998, you
did not even visit your family in Barangay Bahay Toro?
A No, sir.
COURT: (to the witness)
Q Did you send somebody to visit your family?

The coup de grace against the claim of the accused, a policeman, that
the victim was accidentally shot was his failure to surrender himself
and his gun immediately after the incident. As a police officer, it is
hard to believe that he would choose to flee and keep himself out of
sight for about three (3) days if he indeed was not at fault. It is
beyond human comprehension that a policeman, who professes
innocence would come out into the open only three (3) days from the
incident and claim that the victim was accidentally shot. Human
behavior dictates, especially when the accused is a policeman, that
when one is innocent of some acts or when one is in the performance
of a lawful act but causes injury to another without fault or
negligence, he would, at the first moment, surrender to the authorities
and give an account of the accident. His failure to do so would invite
suspicion and whatever account or statement he would give later on
becomes doubtful.
For the accused, therefore, to claim that Vincent was accidentally
shot is odious, if not, an insult to human intelligence; it is incredible
and unbelievable, and more of a fantasy than a reality. It was a
deliberate and intentional act, contrary to accuseds claim, that it
happened outside the sway of his will. 45
It is a well-entrenched rule that findings of facts of the trial court, its calibration of the
testimonies of the witnesses, its assessment of the credibility of the said witnesses and the
probative weight of their testimonies are accorded high respect, if not conclusive effect by the
appellate court, as the trial judge was in a better position to observe the demeanor and conduct
of the witnesses as they testified. 46 We have carefully reviewed the records of the case and
found no reason to deviate from the findings of the trial court.
The testimony of prosecution witness Ricardo Salvo deserves credence. He testified in a
positive and straightforward manner, which testimony had the earmarks of truth and sincerity.
Even as he was subjected to a grueling cross-examination by the appellants counsel, he never
wavered in his testimony. He positively identified the appellant as the assailant and narrated in
detail how the latter deliberately aimed his gun and shot the victim. The relevant portions of his
testimony are quoted:

A No, Your Honor.

Q: While playing basketball with Nono, LA and Puti, do you

remember of any unusual incident which took place?

ATTY. PRINCIPE: (to the witness)

A: Yes, sir.

Q Did you cause to blotter the shooting incident of Vincent?

Q: What was that unusual incident?

A I was not able to do that, sir.

A: When Vincent was shot, sir.

Q You did not even talk to the Bgy. Officials in Bgy. Bahay Toro?

Q: Who shot Vincent?

A No sir, because I already brought the child to the hospital. 44

A: Ferdinand Fallorina, sir.

The conduct of the appellant after the shooting belies his claim that the death of the victim was
accidental and that he was not negligent.
We agree with the encompassing disquisitions of the trial court in its decision on this matter:

xxx xxx xxx

Q: And in what place that Vincent was shot by Fallorina?

176
A: He was at the roof of the karinderia, sir.

A: He ran, sir. He jumped in this place, sir.

Q: Was there any companion of Vincent?

(Witness is pointing to a place near the canal already marked as

Exhibit O-14).

A: Yes, sir.
Q: What was the position of Vincent at that time that you saw him
and Fallorina shot him?

Q: Now from the witness stand that you are now seated. Can you tell
the Court how far where (sic) you from Fallorina at that
time of the shooting?

A: "Nakatalikod po siya."

COURT:
xxx xxx xxx

Q: You included in this Exhibit O your drawing the figure of a certain

Jeffrey and you and his tricycle? Why did you include this
drawing?
A: Because it was in the tricycle where Vincent was boarded to and
brought to the hospital.
(Witness referring to Exhibit O-11)

Can the prosecution and the accused stipulate that the distance
pointed to by the witness is more or less 7 meters.
xxx xxx xxx
ATTY. PRINCIPE: (to the witness)
Q: How about the distance of Fallorina from Vincent, can you tell
that?
COURT: (to the witness)

Q: And who was the driver of that tricycle?

A: It was Jeffrey who drove the tricycle, sir.

Can you point a distance between Fallorina and the boy at that time
the body (sic) was shot?

Q: You also drew here a motorcycle already marked as Exhibit O-7.

Why did you include the motorcycle?

COURT:

A: Because Fallorina was riding on that motorcycle at that time.

xxx xxx xxx

COURT: (to the witness)

Q: So when Ferdinand Fallorina shot the boy, the motorcycle was
moving?
A: It was stationary, your Honor.
Q: Did

10 meters more or less?

you see where he came from, I am

to Fallorina before you saw him shot the boy?

Q: How long have you known Ferdinand Fallorina before the

incident?
A: More or less two years, sir.
Q: Why do you know him?

referring

A: I usually see him in that place at Sitio Militar, especially on

Sundays, sir.
xxx xxx xxx

xxx xxx xxx

A: He came from their house, Your Honor.
Q: What was his attire, I am referring to Ferdinand Fallorina?
A: He was wearing white shirt and blue pants, Your Honor.
xxx xxx xxx
ATTY. PRINCIPE: (to the witness)
Q: At that time that Fallorina shot the victim, was Buddha still there?

Q: How many shots did you hear?

A: Only one, sir.
Q: Do you recognize the gun used by Fallorina?
A: Yes, sir.
Q: What was that gun?
A: .45 cal., sir.

177
Q: Are you familiar with .45 cal.?
A: No, sir.
Q: Why do you know that it was .45 cal.?
A: Because that kind of gun, I usually see that in the movies, sir.
Q: Ricardo, you said that you have known Fallorina for two (2) years
and you saw him shot Vincent on September 26, 1998 at
around 2:30 in the afternoon. Please look around the
courtroom now and point at the person of PO3
Ferdinand Fallorina?
CT. INTERPRETER:
Witness is pointing to a male person the one seated at the back of the
lady and wearing a yellow shirt and maong pants and
when asked of his name, he stated his name as
Ferdinand Fallorina.
ATTY. PRINCIPE: (to the witness)
Q: Can you tell to the Court whether you heard utterances at that time
that he shot the victim?
xxx xxx xxx
A: Yes, sir.

The appellant even uttered invectives at the victim and Whilcon before he shot the victim. In
fine, his act was deliberate and intentional.
It bears stressing that of the eyewitnesses listed in the Information as witnesses for the
prosecution, only Ricardo Salvo remained steadfast after he was brought under the Witness
Protection Program of the Department of Justice. He explained that the reason why he testified
for the prosecution, despite the fact that the appellant was a policeman, was because he pitied
the victim's mother who was always crying, 48 unable to obtain justice for her son. We find no
ill motive why Ricardo would falsely testify against the appellant. It was only his purest
intention of ferreting out the truth in this incident and that justice be done to the
victim. 49 Hence, the testimony of Ricardo is entitled to full faith and credence.
The Crime Committed by the Appellant
We agree with the trial court that the appellant committed murder under Article 248 of the
Revised Penal Code qualified by treachery. As the trial court correctly pointed out, Vincent was
shot intentionally while his back was turned against the appellant. The little boy was merely
flying his kite and was ready to get down from the roof when the appellant fired a shot directed
at him. The essence of treachery is the sudden and unexpected attack on an unsuspecting
victim without the slightest provocation on his part. 50 Nonetheless, Vincent was an elevenyear-old boy. He could not possibly put up a defense against the appellant, a police officer who
was armed with a gun. It is not so much as to put emphasis on the age of the victim, rather it is
more of a description of the young victim's state of helplessness. 51 Minor children, who by
reason of their tender years, cannot be expected to put up a defense. When an adult person
illegally attacks a child, treachery exists. 52 The abuse of superior strength as alleged in the
Information is already absorbed by treachery and need not be considered as a separate
aggravating circumstance. 53
We, however, note that the trial court appreciated the aggravating circumstance of abuse of
public position in this case. We reverse the trial court on this score.

Q: What was that?

A: "Putang inang mga batang ito, hindi kayo magsisibaba diyan!"
xxx xxx xxx
Q: After Fallorina shot Vincent Jorojoro, you saw Vincent Jorojoro
falling from the roof, what about Fallorina, what did he
do?
A: He was still on board his motorcycle and then he went at the back
of the karinderia where Vincent fell, Your Honor.
Q: And after he went at the back of the karinderia and looked at
Vincent Jorojoro, what did he do?
A: He carried Vincent, Your Honor.
Q: And after carrying Vincent, what did he do?
A: He boarded Vincent in the tricycle.
Q: What about the gun, what did he do with the gun?
A: I do not know anymore. 47

There is no dispute that the appellant is a policeman and that he used his service firearm, the .
45 caliber pistol, in shooting the victim. However, there is no evidence on record that the
appellant took advantage of his position as a policeman when he shot the victim. 54 The
shooting occurred only when the appellant saw the victim on the rooftop playing with his kite.
The trial court erred in appreciating abuse of public position against the appellant.
The trial court did not, however, err in ruling that the appellant is not entitled to the mitigating
circumstance of voluntary surrender. Surrender is said to be voluntary when it is done by the
accused spontaneously and made in such a manner that it shows the intent of the accused to
surrender unconditionally to the authorities, either because he acknowledges his guilt or he
wishes to save them the trouble and expense necessarily incurred in his search and capture. 55
In this case, the appellant deliberately evaded arrest, hid in the house of PO3 Lam in
Valenzuela City, and even moved from one house to another for three days. The appellant was
a policeman who swore to obey the law. He made it difficult for his brother-officers to arrest
him and terminate their investigation. It was only after the lapse of three days that the appellant
gave himself up and surrendered his service firearm.
Under Article 248 of the Revised Penal Code, the penalty for murder is reclusion perpetua to
death. Since there is no modifying circumstance in the commission of the crime, the appellant

178
should be sentenced to suffer the penalty of reclusion perpetua, conformably to Article 63 of
the Revised Penal Code.
IN LIGHT OF ALL THE FOREGOING, the Decision of the Regional Trial Court of Quezon
City, Branch 95, is AFFIRMED WITH MODIFICATION. The appellant PO3
Ferdinand Fallorina y Fernando is found guilty beyond reasonable doubt of the crime of
murder under Article 248 of the Revised Penal Code and, there being no modifying
circumstances in the commission of the crime, is hereby sentenced to suffer the penalty
of reclusion perpetua. He is also ordered to pay the heirs of the victim Vincent Jorojoro, Jr. the
amount of P49,174 as actual damages; P50,000 as moral damages; P50,000 as civil indemnity;
and P25,000 as exemplary damages. aHcDEC
SO ORDERED.
Davide, Jr., C.J., Vitug, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio, AustriaMartinez, Corona, Carpio Morales, Azcuna and Tinga, JJ.,concur.
Puno, J., is on leave.
Panganiban, J., is on official leave.
||| (People v. Fallorina y Fernando, G.R. No. 137347, [March 4, 2004], 468 PHIL 816-841)

179

12. DEGREE OF DELIGENCE. 5.

FIRST DIVISION
[G.R. No. L-46558. July 31, 1981.]
PHILIPPINE AIR LINES, INC., petitioner, vs. THE COURT OF
APPEALS and JESUS V. SAMSON, respondents.

Belo, Abiera, San Juan and Pagunsan for petitioner.

Ruben R. Bala for respondents.

SYNOPSIS
Respondent Jesus V. Samson, a regular co-pilot of the petitioner Philippine Airlines, suffered
physical injuries in the head, in a crash landing of petitioner's aircraft, allegedly due to the
gross negligence of petitioner airlines in allowing Captain Delfin Bustamante who was
suffering from a long standing tumor of the Nasopharynx and who was allowed by Civil
Aeronautics Administration to fly only as a co-pilot, to fly the plane to Daet as commanding
pilot and whose slow reaction and poor judgment resulted in the accident. Instead of providing
private respondent with expert medical assistance as demanded by him to determine the cause
of his periodic attack of dizzy spell and headache, petitioner discharged him on the ground of
physical disability. In a complaint for damages filed by private respondent, the Court of First
Instance of Albay denied petitioner's motion to dismiss claiming that the complaint is
essentially a Workmen's Compensation case not cognizable by the court and rendered a
decision awarding compensatory and moral damages, attorney's fees and costs. On appeal, The
Court of Appeals affirmed the decision of the lower court but modified the award of damages
by imposing legal rate of interest on the unearned income from the filing of the complaint.
On review by certiorari the Supreme Court held that the duty to exercise the utmost diligence
on the part of common carriers as required by Art. 1732 New Civil Code is for the safety of
passengers as well as for the members of the crew or the complement operating the carrier, and
agrees with the modification made by the Court of Appeals in ordering payment of legal
interest from the date of judicial demand.
Judgment affirmed.

SYLLABUS

1. CIVIL LAW; COMMON CARRIERS; DISCHARGE OF DUTY AND BUSINESS OF

CARRIAGE; NATURE OF CARE REQUIRED. The law is clear in requiring a common
carrier to exercise the highest degree of care in the discharge of its duty and business of
carriage and transportation under Arts. 1733, 1755 and 1756 of the New Civil Code.
2. ID.; ID.; ID.; ID.; COVERAGE; CASE AT BAR. The duty to exercise the utmost
diligence on the part of common carriers is for the safety of passengers as well as for the
members of the crew or the complement operating the carrier, the airplane in the case at bar.
And this must be so for any omission, lapse or neglect thereof will certainly result to the
damage, prejudice, and injuries and even death to all aboard the plane, passengers and crew
members alike.
3. ID.; DAMAGES; COMPENSATORY DAMAGES FOR EMPLOYEE'S INJURY DUE TO
GROSS NEGLIGENCE OF EMPLOYER; JUSTIFIED UNDER THE NEW CIVIL CODE IN
CASE AT BAR. The Supreme Court affirms the award of damages or compensation in the
case at bar, under the provisions of Art. 1711 and 1712 of the New Civil Code where the gross
negligence of Philippine Air Lines have been affirmed in allowing Capt. Delfin Bustamante to
fly the plane to Daet on January 8, 1951 whose slow reaction and poor judgment was the cause
of the crash-landing of the plane which resulted in private respondent Samson hitting his head
against the windshield and causing him injuries for which reason Philippine Air Lines
terminated his services and employment as pilot after refusing to provide him with the
necessary medical treatment of respondent's periodic spells, headache and general debility
produced from said injuries. The grant of compensatory damages to the private respondent
made by the trial court and affirmed by the appellate court is justified.
4. ID.; ID.; MORAL DAMAGES; RECOVERY JUSTIFIED IN QUASI-DELICT; CASE AT
BAR. The fact that private respondent suffered physical injuries in the head when the plane
crash-landed due to the negligence of Capt. Bustamante is undeniable and the negligence of the
latter is clearly a quasi-delict under Article 2219, (2) New Civil Code justifying the recovery of
moral damages.
5. ID.; ID.; ID.; RECOVERY JUSTIFIED WHEN PROVISIONS OF THE CIVIL CODE ON
HUMAN RELATIONS ARE VIOLATED; CASE AT BAR. The justification in the award of
moral damages under Article 19 of the New Civil Code on Human Relations is well taken
where respondent appellate court held that "The act of defendant-appellant in unjustly refusing
plaintiff-appellee's demand for special medical service abroad for the reason that plaintiffappellee's deteriorating physical condition was not due to the accident violates the provisions
of Article 19 of the Civil Code on human relations" to act with justice, give everyone his due
and observe honesty and good faith and the Supreme Court hereby gives affirmance thereto.
6. ID.; ID.; ATTORNEY'S FEES; CLAIMANT ENTITLED TO RECOVERY THEREOF,
WHEN FORCED TO LITIGATE TO ENFORCE HIS VALID CLAIM. The award of
attorney's fees is correct where as pointed out in the decision of the Court of Appeals, "the
plaintiff is entitled to attorney's fees because he was forced to litigate in order to enforce his
valid claim (Ganaban vs. Bayle, 30 SCRA 365; De la Cruz vs. De la Cruz, 22 SCRA 33; and
many others); defendant acted in bad faith in refusing plaintiff's valid claim (Filipino Pipe
Foundry Corporation vs. Central Bank, 23 SCRA 1044); and plaintiff was dismissed and was
forced to go to court to vindicate his right (Nadura vs. Benguet Consolidated, Inc. 5 SCRA
879).

180
7. ID.; ID.; COMPENSATORY DAMAGES; INTEREST BEGINS TO ACCRUE UPON
FILING OF DEMAND, EXTRAJUDICIAL OR JUDICIAL; CASE AT BAR. The Supreme
Court agrees with the modification made by the appellate court in ordering payment of legal
interest from the date judicial demand was made by Pilot Samson against Philippine Air Lines
with the filing of the complaint in the lower court and affirms the ruling of respondent court
which reads: "Articles 1169, 2209 and 2212 of the Civil Code govern when interest shall be
computed. Thereunder interest begins to accrue upon demand, extrajudicial or judicial. A
complaint is a judicial demand (Cabarroguis vs. Vicente, 107 Phil. 340). Under Article 2212 of
the Civil Code, interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point." (CA Resolution pp. 153-154, Records)

DECISION

GUERRERO, J p:
This is a petition for review on certiorari of the decision of the Court of Appeals 1 dated April
18, 1977, affirming with modification the decision of the Court of First Instance of Albay in
Civil Case No. 1279, entitled "Jesus V. Samson, plaintiff, vs. Philippine Air Lines, Inc.,
defendant," for damages.
The dispositive portion of the trial court's decision reads:
"WHEREFORE, for all the foregoing considerations, judgment is
hereby rendered in favor of the plaintiff and against the defendant
ordering the defendant to pay the plaintiff, the following sums:
P1988,000.00 as unearned income or damages; P50,000.00 for moral
damages; P20,000.00 as attorney's fees and P5,000.00 as expenses of
litigation, or a total of P273,000.00. Costs against the defendant."
The appellate court modified the above decision, to wit:
"However, plaintiff-appellee, who has been deprived of his job since
1954, is entitled to the legal rate of interest on the P198,000.00
unearned income from the filing of the complaint (Sec. 8, Rule 51,
Rules of Court).
WHEREFORE, with the modification indicated above, the judgment
appealed from is affirmed, with costs against defendant-appellant."
The complaint filed on July 1, 1954 by plaintiff Jesus V. Samson, private respondent herein,
averred that on January 8, 1951, he flew as co-pilot on a regular flight from Manila to Legaspi
with stops at Daet, Camarines Norte and Pili, Camarines Sur, with Captain Delfin Bustamante
as commanding pilot of a C-47 plane belonging to defendant Philippine Air Lines, Inc., now
the herein petitioner; that on attempting to land the plane at Daet airport, Captain Delfin
Bustamante due to his very slow reaction and poor judgment overshot the airfield and as a
result, notwithstanding the diligent efforts of the plaintiff co-pilot to avert an accident, the

airplane crashlanded beyond the runway; that the jolt caused the head of the plaintiff to hit and
break through the thick front windshield of the airplane causing him severe brain concussion,
wounds and abrasions on the forehead with intense pain and suffering (par. 6, complaint). Cdpr
The complaint further alleged that instead of giving plaintiff expert and proper medical
treatment called for by the nature and severity of his injuries, defendant simply referred him to
a company physician, a general medical practitioner, who limited the treatment to the exterior
injuries without examining the severe brain concussion of plaintiff (par. 7, complaint); that
several days after the accident, defendant Philippine Air Lines called back the plaintiff to active
duty as co-pilot, and inspite of the latter's repeated request for expert medical assistance,
defendant had not given him any (par. 8, complaint); that as a consequence of the brain injury
sustained by plaintiff from the crash, he had been having periodic dizzy spells and had been
suffering from general debility and nervousness (par. 9, complaint); that defendant airline
company instead of submitting the plaintiff to expert medical treatment, discharged the latter
from its employ on December 21, 1953 on grounds of physical disability, thereby causing
plaintiff not only to lose his job but to become physically unfit to continue as aviator due to
defendant's negligence in not giving him the proper medical attention (pars. 10-11, complaint).
Plaintiff prayed for damages in the amount of P180,000.00 representing his unearned income,
P50,000.00 as moral damages, P20,000.00 as attorney's fees and P5,000.00 as expenses, or a
total of P255,000.00.

In its answer filed on July 28, 1954, defendant PAL denied the substantial averments in the
complaint, alleging among others, that the accident was due solely and exclusively to
inevitable unforeseen circumstances whereby plaintiff sustained only superficial wounds and
minor injuries which were promptly treated by defendant's medical personnel (par. 5, answer);
that plaintiff did not sustain brain injury or cerebral concussion from the accident since he
passed the annual physical and medical examination given thereafter on April 24, 1951; that
the headaches and dizziness experienced by plaintiff were due to emotional disturbance over
his inability to pass the required up-grading or promotional course given by defendant
company (par. 6, answer), and that, as confirmed by an expert neuro-surgeon, plaintiff was
suffering-from neurosis and in view of this unfitness and disqualification from continuing as a
pilot, defendant had to terminate plaintiff's employment (pars. 7, 9, answer).
Further, defendant alleged that by the very nature of its business as a common carrier, it is
bound to employ only pilots who are proficient and in good mental, emotional and physical
condition; that the pilot, Captain Delfin Bustamante, was a competent and proficient pilot, and
although he was already afflicted with a tumor of the nasopharynx even before the accident of
January 8, 1951, the Civil Aeronautics Administration, in passing upon the fitness of pilots,
gave Capt. Bustamante a waiver of physical standards to enable him to retain his first class
airman certificate since the affliction had not in the least affected his proficiency (pars. 16-17,
answer). By way of counterclaim, defendant prayed for P10,000.00 as expenses for the
litigation.
On March 25, 1958, defendant filed a Motion to Dismiss on the ground that the complaint is
essentially a Workmen's Compensation claim, stating a cause of action not cognizable within
the general jurisdiction of the court. The Motion to Dismiss was denied in the order of April
14, 1958. After the reception of evidence, the trial court rendered on January 15, 1973 the
decision, the dispositive portion of which has been earlier cited. prcd

181
The defendant Philippine Air Lines, Inc. appealed the decision to the Court of Appeals as being
contrary to law and unsupported by the evidence. It raised as errors of the trial court (a) the
holding that the damages allegedly suffered by plaintiff are attributable to the accident of
January 8, 1951 which was due to the negligence of defendant in having allowed Capt. Delfin
Bustamante to continue flying despite his alleged slow reaction and poor judgment; (b) the
finding that defendant was negligent in not having given plaintiff proper and adequate expert
medical treatment and assistance for the injuries allegedly sustained in the accident of January
8, 1951; and (c) in ordering defendant to pay actual or compensatory damages, moral damages
and attorney's fees to the plaintiff. cdrep
On April 18, 1977, the Court of Appeals rendered its decision affirming the judgment of the
lower court but modified the award of damages by imposing legal rate of interest on the
P198,000.00 unearned income from the filing of the complaint, citing Sec. 8, Rule 51 of the
Rules of Court.
Its motion for reconsideration of the above judgment having been denied, Philippine Air Lines,
Inc. filed this instant petition for certiorari on the ground that the decision is not in accord with
law or with the applicable jurisprudence, aside from its being replete with findings in the
nature of speculation, surmises and conjectures not borne out by the evidence on record
thereby resulting to misapprehension of facts and amounting to a grave abuse of discretion (p.
7, Petition).
Petitioner raises the fundamental question in the case at bar as follows: Is there a causal
connection between the injuries suffered by private respondent during the accident on 8
January 1951 and the subsequent "periodic dizzy spells, headache and general debility" of
which private respondent complained every now and then, on the one hand, and such "periodic
dizzy spells, headache and general debility" allegedly caused by the accident and private
respondent's eventual discharge from employment, on the other? PAL submits that respondent
court's award of damages to private respondent is anchored on findings in the nature of
speculations, surmises and conjectures and not borne out by the evidence on record, thereby
resulting in a misapprehension of facts and amounting to a grave abuse of discretion.
Petitioner's submission is without merit.
As found by the respondent court, the following are the essential facts of the case:
"It appears that plaintiff, a licensee aviator, was employed by
defendant a few years prior to January 8, 1951 as a regular co-pilot on
a guaranteed basic salary of P750.00 a month. He was assigned to
and/or paired with pilot Delfin Bustamante.
Sometime in December 1950, he complained to defendant through its
authorized official about the slow reaction and poor judgment of pilot
Delfin Bustamante. Notwithstanding said complaint, defendant
allowed the pilot to continue flying.
On January 8, 1951, the two manned the regular afternoon flight of
defendant's plane from Manila to Legaspi, with stops at Daet,
Camarines Norte, and Pili, Camarines Sur. Upon making a landing at
Daet, the pilot, with his slow reaction and poor judgment, overshot
the airfield and, as a result of and notwithstanding diligent efforts of
plaintiff to avert an accident, the airplane crash-landed beyond the

runway into a mangrove. The jolt and impact caused plaintiff to hit
his head upon the front windshield of the plane thereby causing his
brain concussions and wounds on the forehead, with concomittant
intense pain.
Plaintiff was not given proper medical attention and treatment
demanded by the nature and severity of his injuries. Defendant
merely referred him to its clinic attended by general practitioners on
his external injuries. His brain injury was never examined, much less
treated. On top of that negligence, defendant recalled plaintiff to
active duty as a co-pilot, completely ignoring his plea for expert
medical assistance.
Suffering periodic dizzy spells, headache and general debility,
plaintiff every now and then complained to defendant. To make
matters worst for plaintiff, defendant discharged him from his
employment on December 21, 1953. In consequence, plaintiff has
been beset with additional worries, basically financial. He is now a
liability instead of a provider, of his family.
On July 1, 1954, plaintiff filed a complaint for damages. Defendant
vainly sought to dismiss the complaint after filing an answer. Then,
the judgment and this appeal."
Continuing, the respondent Court of Appeals further held:
"There is no question about the employment of plaintiff by defendant,
his age and salary, the overshooting by pilot Bustamante of the
airfield and crashlanding in a mangrove, his hitting his head on the
front windshield of the plane, his intermittent dizzy spells, headache
and general debility for which he was discharged from his
employment on December 21, 1953. As the lower court aptly stated:
'From the evidence adduced by the parties, the Court finds the
following facts to be uncontroverted: That the plaintiff Jesus V.
Samson, on January 8, 1951 and a few years prior thereto, December
21, 1953, was a duly licensed pilot employed as a regular co-pilot of
the defendant with assignment in its domestic air service in the
Philippines; that on January 8, 1951, the defendant's airplane met an
accident in crashlanding at the Daet Airport, Camarines Norte by
overshooting the runway and reaching the mangroves at the edge of
the landing strip; that the jolt caused plaintiff's head to hit the front
windshield of the airplane causing him to suffer wounds and abrasion
on the forehead; that the defendant, instead of giving the plaintiff
expert and proper medical treatment called for by the nature and
severity of the injuries of the plaintiff, simply referred him to the
clinic of the defendant's physicians who are only general medical
practitioners and not brain specialists; that the defendant's physicians
limited their treatment to the exterior injuries on the forehead of the
plaintiff and made no examination of the severe concussion of the
brain of the plaintiff; that the Medical Director and Flight Surgeon of

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the defendant were not able to definitely determine the cause of the
complaint of the plaintiff as to the periodic attack of dizziness, spells
and headache; that due to this laxity of the defendant's physician and
the continuous suffering of the ailment of the plaintiff complained of,
he demanded for expert medical assistance for his brain injury and to
send him to the United States, which demand was turned down and in
effect denied by the defendant; that instead the defendant referred the
plaintiff to a neurologist, Dr. Victor Reyes; that from the time that
said accident occurred on January 21, 1953, he was ordered grounded
on several occasions because of his complaint of dizzy spells and
headache; that instead of submitting the plaintiff to expert medical
treatment as demanded by him and denied by the defendant, he was
discharged from its employment on December 21, 1953 on the ground
of physical disability, and that the plaintiff, at the time when the
defendant's plane met the accident, up to the time he was discharged,
was regularly employed as a co-pilot and receiving a basic salary of
P750.00 a month plus extra pay for flying time, and bonuses
amounting to P300.00 a month.'
Even defendant-appellant itself admits as not controverted the
following facts which generally admit what have been stated above as
not controverted.
"In the case at bar, the following facts are not the subject of
controversy:
'(1) First, that from July 1950 to 21 December 1953, plaintiff was
employed with defendant company as a first officer or co-pilot and
served in that capacity in defendant's domestic services.

(2) Second, that on January 1951, plaintiff did fly on defendant's PI-C
94, as first officer or co-pilot, with the late Capt. Delfin Bustamante
in command as pilot; that while making a landing at the Daet airport
on that date, PI-C 94 did meet an accident as stated above.
(3) Third, that at or about the time of the discharge from defendant
company, plaintiff had complained of "spells of dizziness,"
"headaches" and "nervousness", by reason of which he was grounded
from flight duty. In short, that at that time, or approximately from
November 1953 up to the date of his discharge on 21 December 1953,
plaintiff was actually physically unfit to discharge his duties as pilot.
(4) Fourth, that plaintiff's unfitness for flight duty was properly
established after a thorough medical examination by competent
medical experts.' (pp. 11-12, appellant's brief)
hence, there can hardly be an issue, factual, legal or
medical."

Taking exception from "the rest of the essential facts of the case as found by the respondent
court" PAL claims said facts are not fully borne out by the evidence on record and insists that
the injuries suffered by private respondent during the accident on January 8, 1951 were
superficial in nature; that the "periodic spells, headache, and general debility" complaint of
every now and then by private respondent subsequent to the Jan. 8, 1951 incident were due to
emotional disturbances and that no negligence can be attributed to Capt. Delfin Bustamante
much less to PAL for the occurrence on January 8, 1951, hence PAL cannot be held liable for
damages.
Petitioner claims absence of any causal connection between private respondent's superficial
injuries and his alleged subsequent "periodic spells, headache and general debility," pointing
out that these subsequent ailments were found by competent physician, including an expert
neuro-surgeon, to be due to emotional disturbances insights the conclusions of Dr. Trajano V.
Bernardo that respondent's complaints were "psychosomatic symptoms" on the basis of
declarations made by respondent himself, which conclusions are supported by similar
diagnosis made by Drs. Damaceno J. Ago and Villaraza stating that respondent Samson was
suffering from neurosis as well as the report of Dr. Victor Reyes, a neurological specialist,
indicating that the symptoms were probably, most probably due to psychogenic factors and
have no organic basis. cdll
In claiming that there is no factual basis for the finding of the respondent court that the crashlanding caused respondent's "brain concussion . . ., with concomittant intense pain, for on the
contrary, testimonial evidence establish the superficiality of the injuries sustained by
respondent during the accident of January 8, 1951," petitioner quotes portions of the testimony
of Dr. Manuel S. Sayas, who declared that he removed the band-aid on the forehead of
respondent and that he found out after removal that the latter had two contussed superficial
wounds over the supra orbiter regions or just above the eyes measuring one centimeter long
and one millimeter deep. He examined and found his blood pressure normal, no discharges
from the nose and ears. Dr. Trajano V. Bernardo also testified that when he examined
respondent Samson three days after the accident, the wound was already healed and found
nothing wrong with his ears, nose and throat so that he was declared fit for duty after the sixth
day.
Petitioner goes further. It contends that there is no causal connection between respondent's
superficial injuries sustained during the accident on January 8, 1951 and plaintiff's discharge
from employment with PAL on December 21, 1953. According to PAL, it was the repeated
recurrence of respondent's neurasthenic symptoms (dizzy spells, headache, nervousness) which
prompted PAL's Flight Surgeon, Dr. Bernardo, to recommend that plaintiff be grounded
permanently as respondent was "psychologically unfit to resume his duties as pilot." PAL
concludes that respondent's eventual discharge from employment with PAL was effected for
absolutely valid reasons, and only after he was thoroughly examined and found unfit to carry
out his responsibilities and duties as a pilot. Cdpr
We agree with the respondent court in finding that the dizzy spells, headache and general
debility of private respondent Samson was an after-effect of the crash-landing and We find that
such holding is supported by substantial evidence, which We quote from the court's decision, to
wit:
"Defendant would imply that plaintiff suffered only superficial
wounds which were treated and not brain injury. It would, by the
opinion of its company doctors, Dr. Bernardo and Dr. Reyes, attribute

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the dizzy spells and headache to organic or as phychosomatic,
neurasthenic or psychogenic, which we find outlandishly
exaggerated.
That plaintiff's condition as psychosomatic rather than organic in
nature is allegedly confirmed by the fact that on six (6) separate
occasions after the accident he passed the required CAA physical
examination for airman's certificate. (Exhs. 78, 79, 80, 81, 83 and 92).
We noticed, however, that there were other similar physical
examinations conducted by the CAA on the person of plaintiff the
report on which were not presented in evidence. Obviously, only
those which suited defendants cause were hand-picked and offered in
evidence.
We hesitate to accept the opinion of the defendant's two physicians,
considering that Dr. Bernardo admittedly referred to Dr. Reyes
because he could not determine the cause of the dizzy spells and
headache and the latter admitted that 'it is extremely hard to be certain
of the cause of his dizzy spells,' and suggested a possibility that it
'was due to postraumatic syndrome, evidently due to the injuries
suffered by the plaintiff in hitting the forehead against the windshield
of the plane during the accident.' Judgment are not based on
possibilities.
The admitted difficulty of defendant's doctors in determining the
cause of the dizzy spells and headache cannot be a sound basis for
finding against the plaintiff and in favor of defendant. Whatever it
might be, the fact is that such dizzy spells, headache and general
debility was an after-effect of the crash-landing. Be it brain injury or
psychosomatic, neurasthenic or psychogenic, there is no gainsaying
the fact that it was caused by the crash-landing. As an effect of the
cause, not fabricated or concocted, plaintiff has to be indemnified.
The fact is that such effect caused his discharge.

of Dr. Ador Dionisio, Dr. Marquez, Dr. Jose O. Chan, Dr. Yambao and
Dr. Sandico.
Even the doctors presented by defendant admit vital facts about
plaintiff's brain injury. Dr. Bernardo admits that due to the incident,
the plaintiff continuously complained of his fainting spells, dizziness
and headache everytime he flew as a co-pilot and everytime he went
to defendant's clinic no less than 25 times (Exhibits "15" to "36"), that
he complained of the same to Dr. Reyes; that he promised to help
send plaintiff to the United States for expert medical assistance
provided that whatever finding thereat should not be attributed to the
crash-landing incident to which plaintiff did not agree and that
plaintiff was completely ignored by the defendant in his plea for
expert medical assistance. They admitted that they could not
determine definitely the cause of the fainting spells, dizziness and
headache, which justifies the demand for expert medical assistance."
We also find the imputation of gross negligence by respondent court to PAL for having allowed
Capt. Delfin Bustamante to fly on that fateful day of the accident on January 8, 1951 to be
correct, and We affirm the same, duly supported as it is by substantial evidence, clearly
established and cited in the decision of said court which states as follows:
"The pilot was sick. He admittedly had tumor of the nasopharynx
(nose). He is now in the Great Beyond. The spot is very near the brain
and the eyes. Tumor on the spot will affect the sinus, the breathing,
the eyes which are very near it. No one will certify the fitness to fly a
plane of one suffering from the disease.

Dr. Conrado Aramil, a neurologist and psychiatrist with experience in

two hospitals abroad, found abnormality reflected by the
electroencephalogram examination in the frontal area on both sides of
plaintiff's head (Exhibits "K", "K-1").

". . . The fact First Pilot Bustamante has a long standing tumor of the
Nasopharynx for which reason he was grounded since November
1947 is admitted in the letter (Exh. 69-A) of Dr. Bernardo to the
Medical Director of the CAA requesting waiver of physical standards.
The request for waiver of physical standards is itself a positive proof
that the physical condition of Capt. Bustamante is short of the
standard set by the CAA. The Deputy Administrator of the CAA
granted the request relying on the representation and recommendation
made by Dr. Bernardo (See Exh. 69). We noted, however, that the
request (Exh. 69-A) says that 'it is believed that his continuing to
fly as a co-pilotdoes not involve any hazard.' (Italics supplied).
Flying as a First Officer entails a very different responsibility than
flying as a mere co-pilot. Defendant requested the CAA to allow
Capt. Bustamante to fly merely as a co-pilot and it is safe to conclude
that the CAA approved the request thus allowing Bustamante to fly
only as a co-pilot. For having allowed Bustamante to fly as a First
Officer on January 8, 1951, defendant is guilty of gross negligence
and therefore should be made liable for the resulting accident.

The opinion of these two specialist renders unnecessary that of

plaintiff's wife who is a physician in her own right and because of her
relation to the plaintiff, her testimony and opinion may not be
discussed here, although her testimony is crystallized by the opinions

As established by the evidence, the pilot used to get treatments from

Dr. Sycangco. He used to complain of pain in the face more

We are prone to believe the testimony of the plaintiff's doctors.

Dr. Morales, a surgeon, found that blood was coming from plaintiff's
ears and nose. He testified that plaintiff was suffering from cerebral
concussion as a result of traumatic injury to the brain caused by his
head hitting on the windshield of the plane during the crash-landing
(Exhibit "G").

184
particularly in the nose which caused him to have sleepless nights.
Plaintiff's observation of the pilot was reported to the Chief Pilot who
did nothing about it. Captain Carbonel of the defendant corroborated
plaintiff of this matter. The complaint against the slow reaction of the
pilot at least proved the observation. The observation could be
disregarded. The fact that the complaint was not in writing does not
detract anything from the seriousness thereof, considering that a
miscalculation would not only cause the death of the crew but also of
the passengers.

Capt. Bustamante was not at fault. It merely relates in chronological

sequence what Capt. Bustamante and plaintiff did from the take-off
from Manila to the landing in Daet which resulted in an accident. On
the contrary, We may infer the negligence of Bustamante from the
following portion of the Report, to wit:

One month prior to the crash-landing, when the pilot was preparing to
land in Daet, plaintiff warned him that they were not in the vicinity of
Daet but above the town of Ligao. The plane hit outside the airstrip.
In another instance, the pilot would hit the Mayon Volcano had not
plaintiff warned him. These more than prove what plaintiff had
complained of. Disregard thereof by defendant is condemnable.

It was during the above precise instance that Capt.

Bustamante lost his bearing and disposition. Had he
maintained the pressure on the brakes the plane would not
have overshot the runway. Verily, Bustamante displayed slow
reaction and poor judgment. (CA decision, pp. 8-12).

To bolster the claim that Capt. Bustamante has not suffered from any
kind of sickness which hampered his flying ability, appellant contends
that for at least one or more years following the accident of January 8,
1951, Capt. Bustamante continued to fly for defendant company as a
pilot, and did so with great skill and proficiency, and without any
further accident or mishap, citing tsn. pp. 756-765, January 20, 1965.
We have painstakingly perused the records, particularly the transcript
of stenographic notes cited, but found nothing therein to substantiate
appellant's contention. Instead, We discovered that the citation covers
the testimony of Dr. Bernardo on the physical condition of
Bustamante and nothing about his skills or proficiency to fly nor on
the mishaps or accidents, matters which are beyond Dr. Bernardo's
competence anyway.
Assuming that the pilot was not sick or that the tumor did not affect
the pilot in managing the plane, the evidence shows that the
overshooting of the runway and crash-landing at the mangrove was
caused by the pilot for which acts the defendant must answer for
damages caused thereby. And for this negligence of defendant's
employee, it is liable (Joaquin vs. Aniceto, 12 SCRA 308). At least,
the law presumes the employer negligent imposing upon it the burden
of proving that it exercised the diligence of a good father of a family
in the supervision of its employees.
Defendant would want to tie plaintiff to the report he signed about the
crash-landing. The report was prepared by his pilot and because the
latter pleaded that he had a family too and would have nowhere to go
if he lost his job, plaintiff's compassion would not upturn the truth
about the crash-landing. We are for the truth not logic of any
argumentation.
At any rate, it is incorrect to say that the Accident Report (Exh. 12 &
12-A), signed by plaintiff, exculpated Capt. Bustamante from any
fault. We observed that the Report does not categorically state that

". . . I felt his brakes strong but as we neared the intersection of the
NE-SW runway, the brakes were not as strong and I glanced at the
system pressure which indicated 900 lbs. per sq. m."

This Court is not impressed by, much less can We accept petitioner's invocation to calibrate
once again the evidence testified to in detail and plucked from the voluminous transcript to
support petitioner's own conclusion. It is not the task of this Court to discharge the functions of
a trier of facts much less to enter into a calibration of the evidence, notwithstanding petitioner's
wail that the judgment of the respondent court is based entirely on speculations, surmises and
conjectures. We are convinced that respondent court's judgment is supported by strong, clear
and substantial evidence. Cdpr
Petitioner is a common carrier engaged in the business of carrying or transporting passengers
or goods or both, by land, water, or air, for compensation, offering their services to the public,
as defined in Art. 1732, New Civil Code. The law is clear in requiring a common carrier to
exercise the highest degree of care in the discharge of its duty and business of carriage and
transportation under Arts. 1733, 1755 and 1756 of the New Civil Code. These Articles provide:
Art. 1733. Common carriers, from the nature of their business and for
reasons of public policy, are bound to observe extraordinary diligence
in the vigilance over the goods and for the safety of the passengers
transported by them, according to all the circumstances of each case.
Such extraordinary diligence in the vigilance over the goods is further
expressed in Articles 1734, and 1745, Nos. 5, 6, and 7, while the
extraordinary diligence for the safety of the passengers is further set
forth in articles 1755 and 1756.
Art. 1755. A common carrier is bound to carry the passenger safely as
far as human care and foresight can provide, using the utmost
diligence of very cautious persons, with a due regard for all the
circumstances.
Art. 1756. In case of death of or injuries to passengers, common
carriers are presumed to have been at fault or to have acted
negligently, unless they prove that they observed extraordinary
diligence as prescribed in Articles 1733 and 1755.
The duty to exercise the utmost diligence on the part of common carriers is for the safety of
passengers as well as for the members of the crew or the complement operating the carrier, the

185
airplane in the case at bar. And this must be so for any omission, lapse or neglect thereof will
certainly result to the damage, prejudice, nay injuries and even death to all aboard the plane,
passengers and crew members alike.
Now to the damages. The Court of Appeals affirmed the award of damages made by the trial
court, stating that "the damages awarded plaintiff by the lower court are in accordance with the
facts, law and jurisprudence." The court further observed that "defendant-appellant is still
fortunate, considering that the unearned income was reckoned with only up to 1968 and not up
to the present as plaintiff-appellee is still living. Whatever mathematical error defendantappellant could show by abstract argumentation, the same must be compensated by such
deficiency of the damages awarded to plaintiff-appellee."
As awarded by the trial court, private respondent was entitled to P198,000.00 as unearned
income or compensatory damages; P50,000.00 for moral damages, P20,000.00 as attorney's
fees and P5,000.00 as expenses of litigation, or a total of P273,000.00.
The trial court arrived at the sum of P198,000.00 as unearned income or damages by
considering that respondent Samson "could have continued to work as airline pilot for fifteen
more years, he being only 38 years at the time the services were terminated by the defendant
(PAL) and he would have earned P120,000.00 from 1954 to 1963 or a period of ten (10) years
at the rate of one thousand per month (P750.00 basic salary plus P300.00 extra pay for extra
flying time and bonuses; and considering further that in 1964 the basic pay of defendant's pilot
was increased to P12,000.00 annually, the plaintiff could have earned from 1964 to 1968 the
sum of P60,000.00 in the form of salaries and another P18,000.00 as bonuses and extra pay for
extra flying time at the same rate of P300 a month, or a grand total of P198,000.00 for the
entire period. This claim of the plaintiff for loss or impairment of earning capacity is based on
the provision of Article 2205 of the New Civil Code of the Philippines which provides that
"damages may be recovered for loss or impairment of earning capacity in cases of temporary
or permanent personal injury." This provision of law has been construed and interpreted in the
case of Aureliano Ropato, et al. vs. La Mallorca General Partnership, 56 O.G., 7812, which
rules that law allows the recovery of damages for loss or impairment of earning capacity in
cases of temporary or permanent personal injury." (Decision, CFI, pp. 98-99, Record on
Appeal) prcd
The respondent appellate court modified the above award by ordering payment of legal interest
on the P198,000.00 unearned income from the filing of the claim, citing Sec. 8, Rule 51 of the
Rules of Court.
Petitioner assails the award of the total sum of P198,000.00 as unearned income up to 1968 as
being tenuous because firstly, the trial court's finding affirmed by the respondent court is
allegedly based on pure speculation and conjecture and secondly, the award of P300.00 a
month as extra pay for extra flying time from 1954 to 1968 is likewise speculative. PAL
likewise rejects the award of moral damages in the amount of P50,000.00 on the ground that
private respondent's action before the trial court does not fall under any of the cases
enumerated in the law (Art. 2219 of the New Civil Code) for which moral damages are
recoverable and that although private respondent's action gives the appearance that it is
covered under quasi-delict as provided in Art. 21 of the New Civil Code, the definition of
quasi-delict in Art. 2176 of the New Civil Code expressly excludes cases where there is a preexisting contractual relation between the parties, as in the case under consideration, where an
employer-employee relationship existed between PAL and private respondent. It is further
argued that private respondent's action cannot be deemed to be covered by Art. 21, inasmuch as

there is no evidence on record to show that PAL "wilfully cause(d) loss or injury to (private
respondent) in a manner that is contrary to morals, good customs or public policy . . ." Nor can
private respondent's action be considered "analogous" to either of the foregoing, for the reasons
are obvious that it is not." (Memorandum of petitioner, pp. 418-421, Records)

Having affirmed the gross negligence of PAL in allowing Capt. Delfin Bustamante to fly the
plane to Daet on January 8, 1951 whose slow reaction and poor judgment was the cause of the
crash-landing of the plane which resulted in private respondent Samson hitting his head against
the windshield and causing him injuries for which reason PAL terminated his services and
employment as pilot after refusing to provide him with the necessary medical treatment of
respondent's periodic spells, headache and general debility produced from said injuries, We
must necessarily affirm likewise the award of damages or compensation under the provisions
of Art. 1711 and Art. 1712 of the New Civil Code which provide:
Art. 1711. Owners of enterprises and other employers are obliged to
pay compensation for the death or injuries to their laborers, workmen,
mechanics or other employees, even though the event may have been
purely accidental or entirely due to a fortuitous cause, if the death or
personal injury arose out of and in the course of the employment. The
employer is also liable for compensation if the employee contracts
any illness or disease caused by such employment or as the result of
the nature of the employment. If the mishap was due to the
employee's own notorious negligence, or voluntary act, or
drunkenness, the employer shall not be liable for compensation.
When the employee's lack of due care contributed to his death or
injury, the compensation shall be equitably reduced.
Art. 1712. If the death or injury is due to the negligence of a fellowworker, the latter and the employer shall be solidarily liable for
compensation. If a fellow-worker's intentional or malicious act is the
only cause of the death or injury, the employer shall not be
answerable, unless it should be shown that the latter did not exercise
due diligence in the selection or supervision of the plaintiffs fellowworker.
The grant of compensatory damages to the private respondent made by the trial court and
affirmed by the appellate court by computing his basic salary per annum at P750.00 a month as
basic salary and P300.00 a month for extra pay for extra flying time including bonus given in
December every year is justified. The correct computation however should be P750 plus P300
x 12 months = P12,600 per annum x 10 years = P126,000.00 (not P120,000.00 as computed by
the court a quo). The further grant of increase in the basic pay of the pilots to P12,000 annually
for 1964 to 1968 totalling P60,000.00 and another P18,000.00 as bonuses and extra pay for
extra flying time at the same rate of P300.00 a month totals P78,000.00. Adding P126,000.00
(1964 to 1968 compensation) makes a grand total of P204,000.00 (not P198,000.00 as
originally computed).
As to the grant of moral damages in the sum of P50,000.00 We also approve the same. We have
noted and considered the holding of the appellate court in the matter of bad faith on the part of
PAL, stated hereunder, this wise:

186
"None of the essential facts material to the determination of the case
have been seriously assailed: the overshooting of runway and crashlanding into the mangroves; the hitting of plaintiff's head to the front
windshield of the plane; the oozing of blood out of his ears, nose and
mouth; the intermittent dizzy spells, headaches and general debility
thereafter for which he was discharged from his employment; the
condition of not to attribute the cause of the ailment to the crashlanding imposed in bad faith for a demanded special medical service
abroad; and the resultant brain injury which defendant's doctors could
not understand nor diagnose."
xxx xxx xxx
"The act of defendant-appellant in unjustly refusing plaintiffappellee's demand for special medical service abroad for the reason
that plaintiff-appellee's deteriorating physical condition was not due
to the accident violates the provisions of Article 19 of the Civil Code
on human relations "to act with justice, give everyone his due, and
observe honesty and good faith." (CA Resolution, pp. 151-152,
Records)
We reject the theory of petitioner that private respondent is not entitled to moral damages.
Under the facts found by the trial court and affirmed by the appellate court and under the law
and jurisprudence cited and applied, the grant of moral damages in the amount of P50,000.00 is
proper and justified.
The fact that private respondent suffered physical injuries in the head when the plane crashlanded due to the negligence of Capt. Bustamante is undeniable. The negligence of the latter is
clearly a quasi-delict and therefore Article 2219, (2) New Civil Code is applicable, justifying
the recovery of moral damages.
Even from the standpoint of the petitioner that there is an employer-employee relationship
between it and private respondent arising from the contract of employment, private respondent
is still entitled to moral damages in view of the finding of bad faith or malice by the appellate
court, which finding We hereby affirm, applying the provisions of Art. 2220, New Civil Code
which provides that willful injury to property may be a legal ground for awarding moral
damages if the court should find that, under the circumstances, such damages are justly due.
The same rule applies to breaches of contract where the defendant acted fraudulently or in bad
faith.
The justification in the award of moral damages under Art. 19 of the New Civil Code on
Human Relations which requires that every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and
good faith, as applied by respondent court is also well-taken and We hereby give Our
affirmance thereto. llcd
With respect to the award of attorney's fees in the sum of P20,000.00 the same is likewise
correct. As pointed out in the decision of the Court of Appeals, "the plaintiff is entitled to
attorney's fees because he was forced to litigate in order to enforce his valid claim
(Ganaban vs. Bayle, 30 SCRA 365; De la Cruz vs. De la Cruz, 22 SCRA 33; and many others);
defendant acted in bad faith in refusing plaintiff's valid claim (Filipino Pipe Foundry

Corporation vs. Central Bank, 23 SCRA 1044); and plaintiff was dismissed and was forced to
go to court to vindicate his right (Nadura vs. Benguet Consolidated, Inc., 5 SCRA 879)."
We also agree with the modification made by the appellate court in ordering payment of legal
interest from the date judicial demand was made by Pilot Samson against PAL with the filing
of the complaint in the lower court. We affirm the ruling of the respondent court which reads:
"Lastly, the defendant-appellant claims that the legal rate of interest
on the unearned compensation should be computed from the date of
the judgment in the lower court, not from the filing of the complaint,
citing a case where the issue raised in the Supreme Court was limited
to when the judgment was rendered in the lower court or in the
appellate court, which does not mean that it should not be computed
from the filing of the complaint.
Articles 1169, 2209 and 2212 of the Civil Code govern when interest
shall be computed. Thereunder interest begins to accrue upon
demand, extrajudicial or judicial. A complaint is a judicial demand
(Cabarroguis vs. Vicente, 107 Phil. 340). Under Article 2212 of the
Civil Code, interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent upon this
point." (CA Resolution, pp. 153-154, Records).
The correct amount of compensatory damages upon which legal interest shall
accrue from the filing of the complaint is P204,000.00 as herein computed and not
P198,000.00.
WHEREFORE, in view of all the foregoing, the judgment of the appellate court is hereby
affirmed with slight modification in that the correct amount of compensatory damages is
P204,000.00. With costs against petitioner.
SO ORDERED.
Makasiar and De Castro, JJ., concur.
Teehankee and Melencio-Herrera, JJ., concur in the result.
||| (PAL, Inc. v. Court of Appeals, G.R. No. L-46558, [July 31, 1981], 193 PHIL 560-581)

187

12. DEGREE OF DELIGENCE. 6.

EN BANC
[G.R. No. L-20761. July 27, 1966.]
LA MALLORCA, petitioner, vs. HONORABLE COURT OF APP
EALS, MARIANO BELTRAN, ET AL., respondents.

G. E. Yabut, R. Monterey and M. C. Lagman for petitioner.

Achmed Garcia for respondents.

SYLLABUS
1. COMMON CARRIERS; CARRIER - PASSENGER RELATION CONTINUES UNTIL
PASSENGER HAS REASONABLE TIME TO LEAVE CARRIER'S PREMISES. The
relation of carrier and passenger does not cease at the moment the passenger alights from the
carrier's vehicle at a place selected by the carrier at the point of destination, but continues until
the passenger has had a reasonable time or a reasonable opportunity to leave the carrier's
premises (Ormond vs. Hayes, 60 Tex. 180, cited in 10 C.J. 626).
2. ID.; ID.; "REASONABLE TIME" CONSTRUED. What is a reasonable time or a
reasonable delay is to be determined from all the circumstances. Thus, a person who, after
alighting from a train, walks along the station platform, is considered still a passenger
(Keefe vs. Boston, etc. R. Co., 142 Mass. 251, 7 N.E. 874). So also, where a passenger has
alighted at his destination and is proceeding by the usual way to leave the company's premises,
but before actually doing so is halted by the report that his brother, a fellow passenger, has
been shot, and he in good faith and without intent of engaging in the difficulty, returns to
relieve his brother, he is deemed reasonably and necessarily delayed and thus continues to be a
passenger entitled as such to the protection of the railroad and company and its agents
(Layne vs. Chesapeake, etc., R. Co., 68 W. Va. 213, 69 S.E. 700, 31 L.R.A., [N.S.] 414).
3. ID.; ID.; CARRIER'S RESPONSIBILITY FOR NEGLIGENCE; CASE AT BAR. In the
present case, the father returned to the bus to get one of his baggages which was not unloaded
when he end other members of his family alighted from the bus. The victim, one of his minor
daughters, must have followed her father. However, although the father was still on the running
board of the bus awaiting for the conductor to hand to him the bag or bayong, the bus started to
run, so that even he (the father) had to jump down from the moving vehicle. It was at this
instance that the child, who must be near the bus, was run over and killed. Held: In the
circumstances, it cannot be claimed that the carrier's agent had exercised the "utmost diligence"

of a "very cautious person" required by Article 1755 of the Civil Code to be observed by a
common carrier in the discharge of its obligation to transport safely its passengers. In the first
place, the driver, although stopping the bus, did not put off the engine. Secondly, he started to
run the bus even before the bus conductor gave him the signal to go and while the latter was
still unloading a baggage of some passengers. The presence of said passengers near the bus
was not unreasonable and they are, therefore, to be considered still as passengers of the carrier,
entitled to the protection under their contract of carriage.
4. ID.; ID.; ID.; AVERMENT FOR QUASI-DELICT, ALTHOUGH INCOMPATIBLE WITH
CLAIM UNDER CONTRACT OF CARRIAGE, PERMISSIBLE. The inclusion of the
averment for quasi-delict in appellee's complaint in the court a quo, while incompatible with
the other claim under the contract of carriage, is permissible under Section 2, Rule 8 of the new
Rules of Court, which allows a plaintiff to allege causes of action in the alternative, be they
compatible with each other or not, to the end that the real matter in controversy may be
resolved and determined (Nelayan, et al. vs. Nelayan, et al., 109 Phil., 183).
5. ID.; ID.; ID.; ID.; EFFECT OF PRESENTATION OF PROOF OF CARRIER'S
NEGLIGENCE; CASE AT BAR. - The presentation of proof of the negligence of its employee
gave rise to the presumption that the defendant employer did not exercise the diligence of a
good father of the family in the selection and supervision of its employees. This presumption
not having been overcome, the employer must be adjudged pecuniarily liable for the death of
the passenger.
6. ID.; ID.; ID.; ID.; ID.; SUFFICIENT ALLEGATION IN THE COMPLAINT; CASE AT
BAR. The allegation in the complaint to the effect that "the death of Raquel Beltran,
plaintiffs' daughter, was caused by the negligence and want of exercise of the utmost diligence
of a very cautious person on the part of the defendants and their agent," sufficiently pleads
the culpa or negligence upon which the claim was predicated. This allegation was proved when
it was established during the trial that the driver, even before receiving the proper signal from
the conductor, and while there were still persons on the running board of the bus and near it,
started to run off the vehicle.
7. APPEALS; WHAT CAN BE PASSED UPON ON APPEAL; CASE AT BAR. Generally,
the appellate court can only pass upon and consider questions or issues raised and argued in
appellant's brief. In the case at bar, plaintiffs did not appeal from that portion of the judgment
of the trial court awarding them only P3,000.00 as damages for the death of their daughter.
Neither did they point out in their brief in the Court of Appeals that the award was inadequate,
or that the inclusion of that figure was merely a clerical error, in order that the matter may be
treated as an exception to the general rule (Section 7, Rule 51, new Rules of Court).
The Court of Appeals therefore erred in raising the amount of the award.

DECISION

BARRERA, J .:

188
La Mallorca seeks the review of the decision of the Court of Appeals in CA- G. R. No. 23267R, holding it liable for quasi-delict and ordering it to pay to respondents Mariano Beltran, et al.
P6,000.00 for the death of his minor daughter Raquel Beltran, plus P400.00 as actual
damages. cdrep
The facts of the case, as found by the Court of Appeals, briefly are:
"On December 20, 1953, at about noontime, plaintiffs, husband and
wife, together with their minor daughters, namely Milagros, 13 years
old, Raquel, about 4-1/2 years old, and Fe, over 2 years old, boarded
the Pambusco Bus No. 352, bearing plate TPU No. 757 (1953
Pampanga), owned and operated by the defendant, at San Fernando,
Pampanga, bound for Anao, Mexico, Pampanga. At the time, they
were carrying with them four pieces of baggages containing their
personal belongings. The conductor of the bus who happened to be a
half-brother of plaintiff Mariano Beltran, issued three tickets (Exhs.
A, B, & C) covering the full fares of the plaintiff and their eldest
child, Milagros. No fare was charged on Raquel and Fe, since both
were below the height at which fare is charged in accordance with the
appellant's rules and regulations.
"After about an hour's trip, the bus reached Anao, whereat it stopped
to allow the passengers bound therefor, among whom were the
plaintiffs and their children to get off. With respect to the group of the
plaintiffs, Mariano Beltran, then carrying some of their baggages, was
the first to get down the bus, followed by his wife and his children.
Mariano led his companions to a shaded spot on the left pedestrians
side of the road about four or five meters away from the vehicle.
Afterwards, he returned to the bus in controversy to get his
other bayong, which he had left behind, but in so doing, his daughter
Raquel followed him unnoticed by her father. While said Mariano
Beltran was on the running board of the bus waiting for the conductor
to hand him his bayong which he left under one of its seats near the
door; the bus, whose motor was not shut off while unloading,
suddenly started moving forward, evidently to resume its trip,
notwithstanding the fact that the conductor has not given the driver
the customary signal to start, since said conductor was still attending
to the baggage left behind by Mariano Beltran. Incidentally, when the
bus was again placed into a complete stop, it had travelled about ten
meters from the point where the plaintiffs had gotten off.
"Sensing that the bus was again in motion, Mariano Beltran
immediately jumped from the running board without getting
his bayongfrom the conductor. He landed on the side of the road
almost in front of the shaded place where he left his wife and
children. At that precise time, he saw people beginning to gather
around the body of the child lying prostrate on the ground, her skull,
crushed, and without life. The child was none other than his daughter
Raquel, who was run over by the bus in which she rode earlier
together with her parents.

"For the death of their said child, the plaintiffs commenced the
present suit against the defendant seeking to recover from the latter an
aggregate amount of P6,000 to cover moral damages and actual
damages sustained as a result thereof and attorney's fees. After trial on
the merits the court below rendered the judgment in question."
On the basis of these facts, the trial court found defendant liable for breach of contract of
carriage and sentenced it to pay P3,000.00 for the death of the child and P400.00 as
compensatory damages representing burial expenses and costs. LLpr
On appeal to the Court of Appeals, La Mallorca claimed that there could not be a breach of
contract in the case, for the reason that when the child met her death, she was no longer a
passenger of the bus involved in the incident and, therefore, the contract of carriage had
already terminated. Although the Court of Appeals sustained this theory, it nevertheless found
the defendant-appellant guilty of quasi- delict and held the latter liable for damages, for the
negligence of its driver, in accordance with Article 2180 of the Civil Code. And,
the Court of Appeals did not only find the petitioner liable, but increased the damages awarded
the plaintiffs-appellees to P6,000.00, instead of P3,000.00 granted by the trial court.
In its brief now before us, La Mallorca contends that the Court of Appeals erred (1) in holding
it liable for quasi- delict, considering that respondents' complaint was one for breach of
contract, and (2) in raising the award of damages from P3,000.00 to P6,000.00 although
respondents did not appeal from the decision of the lower court.

Under the facts as found by the Court of Appeals we have to sustain the judgment holding
petitioner liable for damages for the death of the child, Raquel Beltran. It may be pointed out
that although it is true that respondent Mariano Beltran, his wife, and their children (including
the deceased child) had alighted from the bus at a place designated for disembarking or
unloading of passengers, it was also established that the father had to return to the vehicle
(which was still at a stop) to get one of his bags or bayong that was left under one of the seats
of the bus. There can be no controversy that as far as the father is concerned, when he returned
to the bus for his bayong which was not unloaded, the relation of passenger and carrier
between him and the petitioner remained subsisting. For, the relation of carrier and passenger
does not necessarily cease where the latter, after alighting from the car, aids the carrier's
servant or employee in removing his baggage from the car. 1 The issue to be determined here is
whether as to the child, who was already led by the father to a place about 5 meters away from
the bus, the liability of the carrier for her safety under the contract of carriage also
persisted. LexLib
It has been recognized as a rule that the relation of carrier and passenger does not cease at the
moment the passenger alights from the carrier's vehicle at a place selected by the carrier at the
point of destination, but continues until the passenger has had a reasonable time or a reasonable
opportunity to leave the carrier's premises. And, what is a reasonable time or a reasonable
delay within this rule is to be determined from all the circumstances. Thus, a person who, after
alighting from a train, walks along the station platform is considered still a passenger. 2 So
also, where a passenger has alighted at his destination and is proceeding by the usual way to
leave the company's premises, but before actually doing so is halted by the report that his
brother, a fellow passenger, has been shot, and he in good faith and without intent of engaging
in the difficulty, returns to relieve his brother, he is deemed reasonably and necessarily delayed

189
and thus continues to be a passenger entitled as such to the protection of the railroad and
company and its agents. 3
In the present case, the father returned to the bus to get one of his baggages which was not
unloaded when they alighted from the bus. Raquel, the child that she was, must have followed
the father. However, although the father was still on the running board of the bus awaiting for
the conductor to hand him the bag or bayong, the bus started to run, so that even he (the father)
had to jump down from the moving vehicle. It was at this instance that the child, who must be
near the bus, was run over and killed. In the circumstances, it cannot be claimed that the
carrier's agent had exercised the "utmost diligence" of a "very cautious person" required by
Article 1755 of the Civil Code to be observed by a common carrier in the discharge of its
obligation to transport safely its passengers. In the first place, the driver, although stopping the
bus, nevertheless did not put off the engine. Secondly, he started to run the bus even before the
bus conductor gave him the signal to go and while the latter was still unloading part of the
baggages of the passengers Mariano Beltran and family. The presence of said passengers near
the bus was not unreasonable and they are, therefore, to be considered still as passengers of the
carrier, entitled to the protection under their contract of carriage.
But even assuming arguendo that the contract of carriage has already terminated, herein
petitioner can be held liable for the negligence of its driver, as ruled by the Court of Appeals,
pursuant to Article 2180 of the Civil Code. Paragraph 7 of the complaint, which reads
"That aside from the aforesaid breach of contract, the death of Raquel
Beltran, plaintiff's daughter, was caused by the negligence and want
of uxorious of the utmost diligence of a very cautious person on the
part of the defendants and their agent, necessary to transport plaintiffs
and their daughter safely as far as human and care and foresight can
provide in the operation of their vehicle."
is clearly an allegation for quasi-delict. The inclusion of this averment for quasi-delict, while
incompatible with the other claim under the contract of carriage, is permissible under Section 2
of Rule 8 of the New Rules of Court, which allows a plaintiff to allege causes of action in the
alternative, be they compatible with each other or not, to the end that the real matter in
controversy may be resolved and determined. 4
The plaintiffs sufficiently pleaded the culpa or negligence upon which the claim was
predicated when it was alleged in the complaint that "the death of Raquel Beltran, plaintiffs'
daughter, was caused by the negligence and want of exercise of the utmost diligence of a very
cautious person on the part of the defendants and their agent." This allegation was also proved
when it was established during the trial that the driver, even before receiving the proper signal
from the conductor, and while there were still persons on the running board of the bus and near
it, started to run off the vehicle. The presentation of proof of the negligence of its employee
gave rise to the presumption that the defendant employer did not exercise the diligence of a
good father of the family in the selection and supervision of its employees. And this
presumption, as the Court of Appeals found, petitioner had failed to overcome. Consequently,
petitioner must be adjudged pecuniarily liable for the death of the child Raquel Beltran.
The increase of the award of damages from P3,000.00 to P6,000.00 by the Court of Appeals,
however, cannot be sustained. Generally, the appellate court can only pass upon and consider
questions or issues raised and argued in appellant's brief. Plaintiffs did not appeal from that
portion of the judgment of the trial court awarding them only P3,000.00 damages for the death

of their daughter. Neither does it appear that, as appellees in the Court of Appeals, plaintiffs
have pointed out in their brief the inadequacy of the award, or that the inclusion of the figure
P3,000.00 was merely a clerical error, in order that the matter may be treated as an exception to
the
general
rule. 5 Herein
petitioner's
contention,
therefore,
that
the Court of Appeals committed error in raising the amount of the award for damages is,
evidently, meritorious. cdrep
WHEREFORE, the decision of the Court of Appeals is hereby modified by sentencing the
petitioner to pay to the respondents Mariano Beltran, et al., the sum of P3,000.00 for the death
of the child, Raquel Beltran, and the amount of P400.00 as actual damages. No costs in this
instance. So ordered.
Concepcion, C.J ., J.B.L., Reyes, Dizon, Regala, J.P. Bengzon, Zaldivar, Sanchez and Castro,
JJ ., concur.
Makalintal, J., concurs in the result.
||| (La Mallorca v. Court of Appeals, G.R. No. L-20761, [July 27, 1966], 124 PHIL 145-153)

190

13. FORTUITOUS EVENTS. 1.

xxx xxx xxx

SECOND DIVISION
[G.R. No. 153827. April 25, 2006.]
ASIAN
CONSTRUCTION
AND
DEVELOPMENT
CORPORATION, petitioner, vs. PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, respondent.

DECISION

2.02 Prompt and faithful payment of all the foregoing promissory

notes was secured by the following deeds of assignment
executed by ASIAKONSTRUKT in favor of PCIBANK:
(a) Deed of Assignment of Receivables/Contract Proceeds
dated 20 July 1994 . . . where
ASIAKONSTRUKT assigned its receivables
from its Contract . . . with the National Power
Corporation (NPC) in the amount of . . .
P54,500,000;
(b) Deed of Assignment of Receivables . . . dated 28 June
1995 . . . where ASIAKONSTRUKT assigned
its receivables from its Contract . . . with the
NPC in the amount of . . . P26,281,000.00;
(c) Deed of Assignment of Receivables dated 28 August
1995 . . . where ASIAKONSTRUKT assigned
its receivables from its Sub-Contract with ABB
Power, Inc., in the amount of P43,000,000.00;

GARCIA, J p:
In this petition for review under Rule 45 of the Rules of Court, petitioner Asian Construction
and Development Corporation or "ASIAKONSTRUKT," seeks the reversal and setting aside of
the decision 1 dated March 15, 2002 and the Resolution 2 dated June 3, 2002 of the Court of
Appeals (CA) inCA-G.R. CV No. 68189. The assailed decision affirm with modification
the Summary Judgment rendered by the Regional Trial Court (RTC) of Makati City in an
action for a sum of money thereat commenced by the herein respondent, Philippine
Commercial International Bank (PCIBANK) against the petitioner, while the challenged
resolution denied petitioner's motion for reconsideration.
The facts:
On February 24, 1999, in the RTC of Makati City, respondent PCIBANK filed a
complaint 3 for a sum of money with prayer for a writ of preliminary attachment against
petitioner ASIAKONSTRUKT. Docketed as Civil Case No. 99-432, the complaint
alleged, inter alia, as follows:
FIRST CAUSE OF ACTION
2.01 On various occasions, ASIAKONSTRUKT obtained U.S. dollar
denominated credit accommodations from PCIBANK in
the amount of Four Million Four Hundred Eighty Seven
Thousand U.S. dollars (US$4,487,000.00), exclusive of
interests, charges and fees thereon and the cost of
collecting the same. These credit accommodations are
covered by the following promissory notes:

(d) Deed of Assignment of Contract Proceeds dated 27

March 1996 . . . where ASIAKONSTRUKT
assigned its receivables from its contracts with
PNOC . . . in the aggregate amount of
P46,000,000.00; and cSHIaA
(e) Deed of Assignment of Contract Proceeds . . . dated 20
February 1997 . . . where ASIAKONSTRUKT
assigned its receivables from the Ormat
Philippines, Inc., in the aggregate amount of
US$3,350,000.00;
2.03 All the foregoing deeds of assignments stipulate, among others,
the following terms and conditions:
a) The assignment is for the purpose of securing payment
of the principal amount and the interests and
bank charges accruing thereon, the costs of
collecting the same and all other expenses
which PCIBANK may be put in connection
with or as an incident of the assignment;
b) That the assignment secures also any extension or
renewal of the credit which is the subject
thereof as any and all other obligations of
ASIAKONSTRUKT of whatever kind and
nature as appear in the records of PCIBANK,

191
which ASIAKONSTRUKT accepts as the final
and conclusive evidence of such obligations to
PCIBANK, "whether contracted before, during
or after the constitution of [the assignment
agreement]";
c) That PCIBANK authorizes ASIAKONSTRUKT, at the
latter's expense, to "collect and receive for
[PCIBANK] all the Receivables"; and
d) That ASIAKONSTRUKT "shall have no right, and
agrees not to use any of the proceeds of any
collections, it being agreed by the parties that
[ASIAKONSTRUKT] divests itself of all the
rights, title and interest in said Receivables and
the proceeds of the collection received
thereon."
2.04 The promissory notes have remained not fully paid despite their
having become due and demandable. Repeated verbal and
written demands were made upon ASIAKONSTRUKT,
but to no avail. It has failed and refused, and continues to
fail and refuse, to pay its outstanding obligations to
PCIBANK. . .;
2.05 As a result of ASIAKONSTRUKT's refusal to pay its
outstanding obligations, PCIBANK was constrained to
refer the matter . . . to counsel and thus incur attorney's
fees and legal costs.
2.06 The aggregate unpaid obligation of ASIAKONSTRUKT to
PCIBANK, as of 31 December 1998, amounts to. . .
US$4,553,446.06, broken down as follows:
Principal US$ 4,067,867.23
Interest US$ 291,263.27
Penalties US$ 194,315.56
TOTAL US$ 4,553,446.06
For its second cause of action, PCIBANK alleged in the same complaint as follows:
SECOND CAUSE OF ACTION
4.02 . . . as a result of the fraudulent acts of ASIAKONSTRUKT,
PCIBANK suffered the following damages, all of which
ASIAKONSTRUKT must be held to pay PCIBANK:
4.02.1 Exemplary damages, in the interest of public good
and purposes of correction, in the amount of
not less than . . . P50,000.00;

4.02.2 Attorney's fees in the amount of not less than . . .

P1,800,000.00; and DHSaCA
4.02.3 Costs of suit.
In support of its prayer for a writ of preliminary attachment embodied in the complaint,
plaintiff PCIBANK alleges the following:
3.02 . . . ASIAKONSTRUKT is guilty of fraud in contracting the
debt, in the performance thereof, or both, . . . ;
303. PCIBANK agreed to enter into the above-mentioned credit
accommodations primarily because of the existence of the
deeds of assignment listed above. However, from
telephone inquiries made with responsible officers of the
National Power Corporation, ABB Power, Inc., PNOC and
Ormat Philippines, Inc., PCIBANK was surprised to learn
that ASIAKONSTRUKT had long ago collected the
contract proceeds, or portions thereof, which were
previously assigned to PCIBANK. However, to date, it has
yet to turn over these proceeds to PCIBANK. Worse,
PCIBANK learned that the contract proceeds were used by
ASIAKONSTRUKT for its own purposes clear
evidence of fraud, which has deprived PCIBANK of its
security. ASIAKONSTRUKT's unauthorized use of the
contract proceeds for its own purposes was subsequently
confirmed by Mr. Napoleon Garcia, Vice President for
Finance of ASIAKONSTRUKT, in a telephone discussion
on 12 January 1999 with Ms. Maricel E. Salaveria of
PCIBANK. . . . Needless to say, ASIAKONSTRUKT has
fraudulently collected such receivables to the prejudice of
PCIBANK.
3.04 . . . it is evident that ASIAKONSTRUKT never had any
intention of complying with the deeds of assignment.
ASIAKONSTRUKT only misled PCIBANK into
believing that it had sufficient security to ensure payment
of its loan obligations.
3.05 Alternatively,
granting, in
argumenti
gratia,
that
ASIAKONSTRUKT, at the time it executed the foregoing
deeds of assignment, really intended to abide by their
terms and conditions, it nevertheless committed manifest
fraud when it collected the contract proceeds, and instead
of remitting them to PCIBANK, used them for its own
purposes.
In an order 4 dated April 13, 1999, the trial court, after receiving ex parte PCIBANK's
evidence in support of its prayer for preliminary attachment, directed the issuance of the
desired writ, thus:

192
WHEREFORE, let a writ of preliminary attachment issue against all
the property of defendant not exempt from execution or so much
thereof as may be sufficient to satisfy plaintiff's principal claim of
US$4,553,446.06, representing the alleged unpaid obligation of
defendant, inclusive of interest and penalty charges, as of December
31, 1998, which is equivalent to P174,260,380.72, upon plaintiff's
filing of a bond in an equal amount to answer for all it may sustain by
reason of the attachment if the Court shall finally adjudge that
plaintiff was not entitled thereto.
SO ORDERED.
With plaintiff PCIBANK having posted the requisite bond, a writ of preliminary attachment
was thereafter issued by the trial court. Per records, defendant ASIAKONSTRUKT did not file
any motion for the quashal or dissolution of the writ.
Meanwhile, on August 27, 1999, defendant ASIAKONSTRUKT filed its Answer, 5 thereunder
making admissions and denials. Defendant admits, subject to its defenses, the material
allegations of the Complaint as regards its indebtedness to plaintiff PCIBANK and its
execution of the various deeds of assignment enumerated therein. It, however, denies, for lack
of knowledge sufficient to form a belief as to the truth thereof, the averments in the Complaint
that it has not paid, despite demands, its due and demandable obligations, as well as the
amounts due the plaintiff as itemized in paragraph 2.06, supra, of the Complaint. It likewise
denies PCIBANK's allegations in the same Complaint in support of its prayer for a writ of
preliminary attachment, particularly its having fraudulently misappropriated for its own use the
contract proceeds/receivables under the contracts mentioned in the several deeds of
assignments, claiming in this respect that it has still remaining receivables from those
contracts. SEHaDI
By way of defenses, defendant pleads in its Answer the alleged "severe financial and currency
crisis" which hit the Philippines in July 1997, which adversely affected and ultimately put it
out of business. Defendant adds that the deeds of assignments it executed in favor of
PCIBANK were standard forms proposed by the bank as pre-condition for the release of the
loans and therefore partake of the nature of contracts of adhesion, leaving the defendant to the
alternative of "taking it or leaving it." By way of counterclaim, defendant prayed for an award
of P1,000,000.00 as and for attorney's fees and P200,000.00 as litigation expenses.
On January 24, 2000, plaintiff PCIBANK filed a verified Motion for Summary
Judgment, 6 therein contending that the defenses interposed by the defendant are sham and
contrived, that the alleged financial crisis pleaded in the Answer is not a fortuitous event that
would excuse debtors from their loan obligations, nor is it an exempting circumstance under
Article 1262 of the New Civil Code where, as here, the same is attended by bad faith. In the
same motion, PCIBANK also asserts that the deeds of assignments executed in its favor are not
contracts of adhesion, and even if they were, the same are valid.

To the Motion for Summary Judgment, defendant interposed an Opposition 7 insisting that its
Answer tendered or raised genuine and substantial issues of material facts which require fullblown trial, namely:

1. Whether or not defendant received all or part of the

proceeds/receivables due from the contracts mentioned in the deeds
of assignment at the time the complaint was filed;
2. Granting that defendant received those proceeds/receivables,
whether or not defendant fraudulently misappropriated the same;
3. Whether or not defendant is virtually insolvent as a result of the
regionwide economic crisis that hit Asia, causing the Philippine peso
to depreciate drastically; and
4. Whether the parties dealt with each other on equal footing with
respect to the execution of the deeds of assignment as to give the
defendant an honest opportunity to reject the onerous terms imposed
therein.
Significantly, defendant did not append to its aforementioned Opposition any affidavit in
support of the alleged genuine issues of material facts mentioned therein. AICTcE
Before the pending incident (motion for summary judgment) could be resolved by the trial
court, plaintiff PCIBANK waived its claim for exemplary damages and agreed to reduce its
claim for attorney's fees from P1,800,000.00 to P1,260,000.00, but made it clear that its waiver
of exemplary damages and reduction of attorney's fees are subject to the condition that a full
and final disposition of the case is obtained via summary judgment.
On May 16, 2000, the trial court, acting favorably on PCIBANK's motion for summary
judgment, came out with its Summary Judgment, 8 the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered ordering defendant to
pay plaintiff:
1. the sum of US$4,553,446.06, or its equivalent in
Philippine currency at the time of payment,
with interest thereon at the rate of 8.27% per
annum from February 24, 1999 until fully paid;
2. P1,260,000.00 as and for attorney's fees; and
3. the costs of suit.
SO ORDERED.
Explains the trial court in rendering its Summary Judgment:
A thorough examination of the parties' pleadings and their respective
stand in the foregoing motion, the court finds that indeed with
defendant's admission of the first cause of action there remains no
question of facts in issue. Further, the proffered defenses are
worthless, unsubstantial, sham and contrived.
Considering that there is no more issue to be resolved, the court
hereby grants plaintiff's Motion and renders Judgment in favor of the

193
plaintiff against the defendant based on their respective pleadings in
accordance with Section 4, Rule 35 of the Rules of Court.
In time, petitioner went to the CA whereat its appellate recourse was docketed as CA-G.R. CV
No. 68189. As stated at the threshold hereof, the CA, in its decision 9 of May 15, 2002,
affirmed with modification the Summary Judgment rendered by the trial court, the modification
being as regards the award for attorney's fees which the CA reduced to P1,000,000.00, to wit:
IN THE LIGHT OF ALL THE FOREGOING, the appeal is
PARTIALLY GRANTED. The "Decision" appealed from is
AFFIRMED with theMODIFICATION THAT THE AWARD FOR
ATTORNEY'S FEES is reduced to P1,000,000.00.
SO ORDERED.
With its motion for reconsideration having been denied by the CA in its Resolution 10 of June
3, 2002, petitioner is now with us via the present recourse, raising the following issues:
I WHETHER OR NOT THERE IS A GENUINE ISSUE AS TO A
MATERIAL FACT WHICH RULES OUT THE
PROPRIETY OF A SUMMARY JUDGMENT. caIEAD
II WHETHER OR NOT THE AWARD OF ATTORNEY'S FEES IS
EXORBITANT OR UNCONSCIONABLE.
We DENY.
As in the two courts below, it is petitioner's posture that summary judgment is improper in this
case because there are genuine issues of fact which have to be threshed out during trial, to wit:
(a) whether or not petitioner was able to collect only a portion of the contract
proceeds/receivables it was bound to deliver, remit and tender to respondent under the several
deeds of assignment it executed in favor of the latter; and (b) whether or not petitioner
fraudulently misappropriated and used for its benefit the said proceeds/receivables. Ergo, so
petitioner maintains, genuine triable issues of fact are present in this case, which thereby
precludes rendition of summary judgment.
We are not persuaded.
Under Rule 35 of the 1997 Rules of Procedure, as amended, except as to the amount of
damages, when there is no genuine issue as to any material fact and the moving party is
entitled to a judgment as a matter of law, summary judgment may be allowed. 11 Summary or
accelerated judgment is a procedural technique aimed at weeding out sham claims or defenses
at an early stage of litigation thereby avoiding the expense and loss of time involved in a
trial. 12
Under the Rules, summary judgment is appropriate when there are no genuine issues of fact
which call for the presentation of evidence in a full-blown trial. Even if on their face the
pleadings appear to raise issues, when the affidavits, depositions and admissions show that
such issues are not genuine, then summary judgment as prescribed by the Rules must ensue as
a matter of law. The determinative factor, therefore, in a motion for summary judgment, is the
presence or absence of a genuine issue as to any material fact.

A "genuine issue" is an issue of fact which requires the presentation of evidence as

distinguished from a sham, fictitious, contrived or false claim. When the facts as pleaded
appear uncontested or undisputed, then there is no real or genuine issue or question as to the
facts, and summary judgment is called for. The party who moves for summary judgment has
the burden of demonstrating clearly the absence of any genuine issue of fact, or that the issue
posed in the complaint is patently unsubstantial so as not to constitute a genuine issue for trial.
Trial courts have limited authority to render summary judgments and may do so only when
there is clearly no genuine issue as to any material fact. When the facts as pleaded by the
parties are disputed or contested, proceedings for summary judgment cannot take the place of
trial. 13
The CA, in its challenged decision, stated and we are in full accord with it:
In the present recourse, the [petitioner] relied not only on the judicial
admissions . . . in its pleadings, more specifically its "Answer" to the
complaint, the testimony of Maricel Salaveria as well as Exhibits
"A" to "T-3", adduced in evidence by the [respondent], during the
hearing on its plea for the issuance, by the Court a quo, of a writ of
preliminary attachment. Significantly, the [petitioner] did not bother
filing a motion for the quashal of the "Writ" issued by the Court a
quo. CIScaA
It must be borne in mind, too, that the [petitioner] admitted, in its
"Answer" . . . the due execution and authenticity of the documents
appended to the complaint . . . . The [petitioner] did not deny its
liability for the principal amount claimed by the [respondent] in its
complaint. The [petitioner] merely alleged, by way of defenses, that it
failed to pay its account . . . because of the region-wide economic
crisis that engulfed Asia, in July, 1997, and the "Deeds of
Assignment" executed by it in favor of the [respondent] were
contracts of adhesion:
xxx xxx xxx
The [petitioner] elaborated on and catalogued its defenses in its
"Appellants Brief" what it believed, as "genuine issues".
"(i) Whether or not [petitioner] received all or part of the
proceeds/receivables due from the construction
contracts at the time the civil action was filed;
(ii) Granting
that
[petitioner]
received
the
proceeds/receivables from the construction
contracts, whether or not [petitioner]
fraudulently misappropriated the same;
(iii) Whether or not [petitioner] had become virtually
insolvent as a result of the region-wide
economic crisis that hit Asia, causing the
Philippine peso to depreciate dramatically; and

194
(iv) Whether or not [respondent] and [petitioner] dealt
with each other on equal footing with respect to
the execution of the deeds of assignment of
receivables as to give [petitioner] an honest
opportunity to reject the onerous terms
imposed on it."

If, indeed, the [petitioner] believed it that was prevented from

complying with its obligations to the [respondent], under its contracts,
it should have interposed a counterclaims for rescission of contracts,
conformably with the pronouncement of our Supreme Court, thus:

However, the [petitioner] failed to append, to its "Opposition" to the

"Motion for Summary Judgment", . . . "Affidavits" showing the
factual basis for its defenses of "extraordinary deflation," including
facts, figures and data showing its financial condition before and after
the economic crisis and that the crisis was the proximate cause of its
financial distress. It bears stressing that the [petitioner] was burdened
to demonstrate, by its "Affidavits" and documentary evidence, that,
indeed, the Philippines was engulfed in an extraordinary deflation of
the Philippine Peso and that the same was the proximate cause of the
financial distress, it claimed, it suffered.

The [petitioner] did not. This only exposed the barrenness of the pose
of the [petitioner]. CDAcIT

xxx xxx xxx

Where, on the basis of the records, inclusive of the pleadings of the
parties, and the testimonial and documentary evidence adduced by the
[respondent], supportive of its plea for a writ of preliminary
attachment, the [respondent] had causes of action against the
[petitioner], it behooved the [petitioner] to controvert the same with
affidavits/documentary evidence showing a prima facie genuine
defense. As the Appellate Court of Illinois so aptly declared:
The defendant must show that he has a bona fide defense
to the action, one which he may be able to establish. It
must be a plausible ground of defense, something fairly
arguable and of a substantial character. This he must show
by affidavits or other proof.
The trial court, of course, must determine from the
affidavits filed whether the defendant has interposed a
sufficiently good defense to entitle it to defend, but where
defendant's affidavits present no substantial triable issues
of fact, the court will grant the motion for summary
judgment.

xxx xxx xxx

The failure of the [petitioner] to append to its "Opposition" any
"Affidavits" showing that its defenses were not contrived or cosmetic
to delay judgment . . . created a presumption that the defenses of the
[petitioner] were not offered in good faith and that the same could not
be sustained (Unites States versus Fiedler, et al., Federal Reported,
2nd, 578).

xxx xxx xxx

The [petitioner] may have experienced financial difficulties because

of the "1997 economic crisis" that ensued in Asia. However, the same
does not constitute a valid justification for the [petitioner] to renege
on its obligations to the [respondent]. The [petitioner] cannot even
find solace in Articles 1266 and 1267 of the New Civil Code for, as
declared by our Supreme Court:
It is a fundamental rule that contracts, once perfected, bind
both contracting parties, and obligations arising therefrom
have the force of law between the parties and should be
complied with in good faith. But the law recognizes
exceptions to the principle of the obligatory force of
contracts. One exception is laid down in Article 1266 of
the Civil Code, which reads: 'The debtor in obligations to
do shall also be released when the prestation becomes
legally or physically impossible without the fault of the
obligor.'
Petitioner cannot, however, successfully take refuge in the said
article, since it is applicable only to obligations "to do," and not
obligations "to give." An obligation "to do" includes all kinds of work
or service; while an obligation "to give" is a prestation which consists
in the delivery of a movable or an immovable thing in order to create
a real right, or for the use of the recipient, or for its simple possession,
or in order to return it to its owner.
xxx xxx xxx
In this case, petitioner wants this Court to believe that the abrupt
change in the political climate of the country after the EDSA
Revolution and its poor financial condition "rendered the
performance of the lease contract impractical and inimical to the
corporate survival of the petitioner." (Philippine National
Construction Corporation versus Court of Appeals, et al., 272
SCRA 183, at pages 191-192, supra)
The [petitioner] even failed to append any "Affidavit" to its
"Opposition" showing how much it had received from its
construction contracts and how and to whom the said collections had
been appended. The [petitioner] had personal and sole knowledge of
the aforesaid particulars while the [respondent] did not.

195
In fine, we rule and so hold that the CA did not commit any reversible error in affirming the
summary judgment rendered by the trial court as, at bottom, there existed no genuine issue as
to any material fact. We also sustain the CA's reduction in the award of attorney's fees to only
P1,000,000.00, given the fact that there was no full-blown trial. DaACIH
WHEREFORE, the assailed CA decision is AFFIRMED in toto and this petition is DENIED
for lack of merit.
Costs against petitioner.
SO ORDERED.
Sandoval-Gutierrez, Corona and Azcuna, JJ., concur.
Puno, J., is on leave.
||| (Asian Construction and Development Corp. v. PCI Bank, G.R. No. 153827, [April 25,
2006], 522 PHIL 168-182)

196

13. FORTUITOUS EVENTS. 2.

the development of its condominium project, it failed to fulfill its contractual obligations to the
spouses. And following Article 1475 3 of the Civil Code, upon perfection of the contract, the
parties, here the spouses Go, may demand performance. And under Article 1191 4 of the same
code, should one of the parties, in this instance Fil-Estate, fail to comply with the obligation,
the aggrieved party may choose between fulfillment or rescission of the obligation, with
damages in either case. Inasmuch as Fil-Estate could no longer fulfill its obligation, the
spouses Go may ask for rescission of the contract with damages. The dispositive portion of the
decision reads:

SECOND DIVISION
[G.R. No. 165164. August 17, 2007.]
FIL-ESTATE PROPERTIES, INC., petitioner, vs.
GONZALO and CONSUELO GO, respondents.

SPOUSES

RES OLUTIO N

QUISUMBING, J p:
For review on certiorari are the Decision 1 dated June 9, 2004 of the Court of Appeals in CAG.R. SP No. 79624, and its Resolution 2 dated August 3, 2004, denying the motion for
reconsideration.
The basic facts in this case are undisputed.
On December 29, 1995, petitioner Fil-Estate Properties, Inc. (Fil-Estate) entered into a contract
to sell a condominium unit to respondent spouses Gonzalo and Consuelo Go at "Eight Sto.
Domingo Place", a condominium project of petitioner located on Sto. Domingo Avenue,
Quezon City. The spouses paid a total of P3,439,000.07 of the full contract price set at
P3,620,000.00. AaSHED
Because petitioner failed to develop the condominium project, on August 4, 1999, the spouses
demanded the refund of the amount they paid, plus interest. When petitioner did not refund the
spouses, the latter filed a complaint against petitioner for reimbursement of P3,620,000
representing the lump sum price of the condominium unit, plus interest, P100,000 attorney's
fees, and expenses of litigation before the Housing and Land Use Regulatory Board (HLURB).
In answer, petitioner claimed that respondents had no cause of action since the delay in the
construction of the condominium was caused by the financial crisis that hit the Asian region, a
fortuitous event over which petitioner had no control.
On July 18, 2000, the HLURB Regional Director approved the decision of the Housing and
Land Use Arbiter in favor of the spouses Go. The HLURB ratiocinated that the Asian financial
crisis that resulted in the depreciation of the peso is not a fortuitous event as any fluctuation in
the value of the peso is a daily occurrence which is foreseeable and its deleterious effects
avoided by economic measures. The HLURB went on to say that when petitioner discontinued

WHEREFORE, the foregoing considered, judgment is hereby

rendered as follows:
1. Ordering the respondent, Fil-Estate Properties, Inc., to refund to the
complainants, P3,439,000.07 (the amount proved) plus
12% interest thereon reckoned from 09 August 1999 (the
date the respondent received the demand letter) until the
same is fully paid.
2. Ordering the respondent to pay to the complainants P25,000.00
attorney's fees as and by way of damages.
All other claims and counterclaims are dismissed.
IT IS SO ORDERED. 5
The Board of Commissioners of the HLURB denied petitioner's petition for review and
consequent motion for reconsideration. 6 The Office of the President dismissed petitioner's
appeal and denied its motion for reconsideration. 7
On appeal, asserting that both the HLURB and the Office of the President
committed reversible errors, Fil-Estate asked the Court of Appeals to set aside the orders
it is appealing. cSCTID
The Court of Appeals affirmed the actions taken by the HLURB and the Office of the President
and declared that the Asian financial crisis could not be considered a fortuitous event and that
respondents' right is provided for in Section 23 8 of Presidential Decree (P.D.)
No. 957, otherwise known as "The Subdivision and Condominium Buyers' Protective Decree."
The appellate court also noted that there was yet no crisis in 1995 and 1996 when the project
should have been started, and petitioner cannot blame the 1997 crisis for failure of the project,
nor for even not starting it, because the project should have been completed by 1997.
The appellate court denied petitioner's motion for reconsideration.
Hence, this petition raising two issues for our resolution as follows:
I.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT THE ASIAN FINANCIAL CRISIS IS NOT A FORTUITOUS
EVENT THAT WOULD EXCUSE THE DELIVERY BY

197
PETITIONER OF THE SUBJECT CONDOMINIUM UNIT TO
RESPONDENTS.
II.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
PETITIONER LIABLE FOR THE PAYMENT OF ATTORNEY'S
FEES. 9

Also, we cannot generalize that the Asian financial crisis in 1997 was unforeseeable and
beyond the control of a business corporation. It is unfortunate that petitioner apparently met
with considerable difficulty e.g. increase cost of materials and labor, even before the scheduled
commencement of its real estate project as early as 1995. However, a real estate enterprise
engaged in the pre-selling of condominium units is concededly a master in projections on
commodities and currency movements and business risks. The fluctuating movement of the
Philippine peso in the foreign exchange market is an everyday occurrence, and fluctuations in
currency exchange rates happen everyday, thus, not an instance ofcaso fortuito. TSaEcH

On the first issue, did the Court of Appeals err in ruling that the Asian financial crisis was not a
fortuitous event?

Are respondents entitled to reimbursement of the amount paid, plus interest and attorney's
fees?

Petitioner, citing Article 1174 10 of the Civil Code, argues that the Asian financial crisis was a
fortuitous event being unforeseen or inevitable. Petitioner likewise cites Servando v. Philippine
Steam Navigation Co., 11 to bolster its case. Petitioner explains that the extreme economic
exigency and extraordinary currency fluctuations could not have been reasonably foreseen and
were beyond the contemplation of both parties when they entered the contract. Petitioner
further asserts that the resultant economic collapse of the real estate industry was unforeseen
by the whole Asia and if it was indeed foreseeable, then all those engaged in the real estate
business should have foreseen the impending fiasco. Petitioner adds that it had not committed
any fraud; that it had all the required government permits; and that it had not abandoned the
project but only suspended the work. It also admits its obligation to complete the project. It
says that it had in fact asked the HLURB for extension to complete it. 12 aIcDCH

Yes. Section 23 of P.D. No. 957 is clear on this point.

In their Comment, respondents submit that the instant petition be rejected outright for the
reason that petitioner has not raised any question of law in the instant petition. The questions of
whether or not the Asian financial crisis is a fortuitous event, and whether or not attorney's fees
should be granted, are questions of facts which the Court of Appeals recognized as such.
Respondent spouses reiterate that contrary to what petitioner avers, the delay in the
construction of the building was not attributable to the Asian financial crisis which happened in
1997 13 because petitioner did not even start the project in 1995 when it should have done, so
that it could have finished it in 1997, as stipulated in the contract.
Preliminarily, respondents bring to the attention of this Court the strange discrepancy in the
dates of notarization of the Certification of Non-Forum Shopping and the Affidavit of Service
both notarized on September 24, 2004, while the Secretary's Certification was notarized a day
earlier on September 23, 2004. However, we shall not delve into technicalities, but we shall
proceed with the resolution of the issues raised on the merits.
Indeed, the question of whether or not an event is fortuitous is a question of fact. As a general
rule, questions of fact may not be raised in a petition for review for as long as there is no
variance between the findings of the lower court and the appellate court, as in this case where
the HLURB, the Office of the President, and the Court of Appeals were agreed on the fact.
Worthy of note, in a previous case, Asian Construction and Development Corporation v.
Philippine Commercial International Bank, 14 the Court had said that the 1997 financial crisis
that ensued in Asia did not constitute a valid justification to renege on obligations. We
emphatically stressed the same view in Mondragon Leisure and Resorts Corporation v. Court
of Appeals, 15 that the Asian financial crisis in 1997 is not among the fortuitous events
contemplated under Article 1174 of the Civil Code.

It will be noted that respondents sent a demand letter dated August 4, 1999 to Fil-Estate asking
for the return of "the total amount paid including amortization interests" and "legal interest due
thereon." 16 The latter did not respond favorably, and so the spouses filed a complaint
demanding the reimbursement of P3,620,000 representing the lump sum price of the
condominium unit with interest at the legal rate, and P100,000 attorney's fees. But the
respondents actually sought the refund of P3,620,000.00, the lump sum cost of the
condominium, more than their actual payment of P3,439,000.07. We are thus constrained to
award only P3,439,000.07, representing the sum of their actual payments plus amortization
interests and interest at legal rate which is 6% per annum from the date of demand on August 4,
1999. We are not unaware that the appellate court pegged the interest rate at 12% on the basis
of Resolution No. R-421, Series of 1988 of the HLURB. But, conformably with our ruling
inEastern Shipping Lines, Inc. v. Court of Appeals, 17 the award of 12% interest on the amount
of refund must be reduced to 6%.

Moreover, we are constrained to modify the Court of Appeals' grant of attorney's fees from
P25,000 to P100,000 as just and equitable since respondents were compelled to secure the
services of counsel over eight years to protect their interest due to petitioner's delay in the
performance of their clear obligation.
WHEREFORE, the petition is DENIED for lack of merit. Petitioner is hereby ordered (1) to
reimburse respondents P3,439,000.07 at 6% interest starting August 4, 1999 until full payment,
and (2) to pay respondents P100,000.00 attorney's fees. Costs against petitioner.
SO ORDERED. HDATSI
Carpio, Carpio-Morales, Tinga and Velasco, Jr., JJ., concur.
||| (Fil-Estate Properties, Inc. v. Spouses Go, G.R. No. 165164, [August 17, 2007], 557 PHIL
377-386)

198

13. FORTUITOUS EVENTS. 3.

FIRST DIVISION
[G.R. No. L-6648. July 25, 1955.]
VICTORIAS PLANTERS ASSOCIATION, INC., NORTH
NEGROS PLANTERS ASSOCIATION, INC., FERNANDO
GONZAGA, JOSE GASTON and CESAR L. LOPEZ, on their
own behalf and on behalf of other sugar cane planters in,
Manapla, Cadiz and Victorias Districts, petitioners-appellees, vs.
VICTORIAS MILLING CO., INC., respondent-appellant.

Ross, Selph, Carrascoso & Janda for appellant.

Taada, Pelaez & Teehankee for appellees.

SYLLABUS
1. CONTRACTS, INTERPRETATION OF; EFFECT OF FAILURE OF
OBLIGOR TO FILL THE CONTRACTUAL OBLIGATION DUE TO "FORCE
MAJEURE". The petitioners (sugar planters) and the respondent central company
entered into milling contract whereby they stipulated a 30-year period within which the
came sugar cane produced by the petitioners would be milled by the respondent central.
The parties also stipulated that in the event of force majeure, the contract shall be deemed
suspended during said period. The petitioners failed to deliver sugar cane during the four
years of the Japanese occupation and the two years after liberation when the mill was
being rebuilt or a total of six years.Question: Could the petitioners be compelled to
deliver sugar cane to the respondent central for six more years after the expiration of the
30-year period, to make up for what they failed to deliver during the six years? Held:
Fortuitous event relieves the obligor from fulfilling a contractual obligation (Article
1105, old Civil Code: Article 1174, new Civil Code). The stipulation in the contract that
in the event of force majeure the contract shall be deemed suspended during said period
does not mean that the happening of any of those events stops the running of the period
agreed upon. It only relieves the parties from the fulfillment of their respective
obligations during that the petitioners from delivering sugar cane and the respondent
central from milling it. In order that the respondent central may be entitled to demand
from the petitioners the fulfillment of their perform it but failed or refused to do so and
not when they were prevented by force majeure such as war. To require the petitioners to
deliver the sugar cane which they failed to deliver during the six years is to demand from
them the fulfillment of an obligation which was impossible of performance at the time it

became due. Nemo tenetur ad impossibilia. The respondent central not being entitled to
demand from the petitioners the performance of the latter's part of the contracts under
those circumstances cannot later on demand its fulfillment. The performance of what the
law has written off cannot be demanded and required. the prayer that the petitioners be
compelled to deliver sugar cane for six more years to make up for what failed to deliver,
the fulfillment of which was impossible, if granted would in effect be an extension of the
terms of the contracts entered into by and between the parties.

DECISION

PADILLA, J p:
This is an action for declaratory judgment under Rule 66. The relief prayed for
calls for an interpretation of contracts entered into by and between the sugar cane planters
in the districts of Manapla, Cadiz and Victorias, Occidental Negros, and the Victorias
Milling Company, Inc. After issues had been joined the parties submitted the case for
judgment upon the testimony of Jesus Jose Ossorio and the following stipulation of facts:
1. That petitioners Victorias Planters Association, Inc. and
North Negros Planters Association, Inc. are non-stock corporations
duly established and existing under and by virtue of the laws of the
Philippines, with main offices at Victorias, Negros Occidental, and
Manapla, Negros Occidental, respectively, and were organized by,
and are composed of, sugar cane planters in the districts of Victorias,
Manapla and Cadiz, respectively, having been established principally
as the representative entities of the numerous sugar cane planters in
said districts whose sugar cane productions are milled by the
respondent corporation, with the main object of safeguarding their
interests and of taking up with the latter problems and questions
which from time to time, may come up between the said respondent
corporation the said sugar cane planters; the other petitioners are
Filipinos, of legal age, and together with numerous other sugar cane
planters who own sugar cane producing properties at Victorias,
Manapla, and Cadiz Districts, Negros Occidental, are bona
fide officials and members of either one of the two petitioner
associations; that petitioner Fernando Gonzaga is a resident of
Victorias, Negros Occidental, petitioner Jose Gaston is a resident of
Victorias, Negros Occidental, and petitioner Cesar L. Lopez is a
resident of Bacolod City, Negros Occidental; and that said petitioners
bring this action for the benefit and on behalf of all their fellow sugar
cane planters, owners of sugar cane producing lands in the said
districts of Victorias, Manapla, and Cadiz, whose sugar cane
productions are milled by respondent corporation, and who are so

199
numerous that it would be impractical to include them all as parties
herein;

4 years of the last World War II and 2 years of post-war

reconstruction of respondent's central at Victorias, Negros Occidental.

2. That respondent Victorias Milling Co., Inc. is a

corporation likewise duly organized and established under and by
virtue of the laws of the Philippines, with main offices at Ayala
Building Manila, where it may be served with summons;

5. That after the liberation, the North Negros Sugar Co.,

Inc. did not reconstruct its destroyed central at Manapla, Negros
Occidental, and in 1946, it advised the North Negros Planters
Association, Inc. that it had made arrangements with the respondent
Victorias Milling Co., Inc. for said respondent corporation to mill the
sugar cane produced by the planters of Manapla and Cadiz holding
milling contracts with it. Thus, after the war, all the sugar cane
produced by the planters of petitioner associations, in Manapla,
Cadiz, as well as in Victorias, who held milling contracts, were milled
in only one central, that of the respondent corporation at Victorias;

3. That at various dates, from the year 1917 to 1934, the

sugar cane planters pertaining to the districts of Manapla and Cadiz,
Negros Occidental, executed identical milling contracts, setting forth
the terms and conditions under which the sugar central "North Negros
Sugar Co. Inc." would mill the sugar produced by the sugar cane
planters of the Manapla and Cadiz districts;
A copy of the standard form of said milling contracts with
North Negros Sugar Co., Inc. is hereto attached and made an integral
part hereof as Annex "A."
As may be seen from the said standard form of milling
contract, Annex "A," the sugar cane planters of Manapla and Cadiz,
Negros Occidental had executed on November 17, 1916 with Miguel
J. Ossorio, a contract entitled "Contrato de la Central Azucarrera de
300 Toneladas," whereby said Miguel J. Ossorio was given a period
up to December 31, 1916 within which to make a study of and decide
whether he would construct a sugar central or mill with a capacity of
milling 300 tons of sugar cane every 24 hours and setting forth the
mutual obligations and undertakings of such central and the planters
and the terms and conditions under which the sugar cane produced by
said sugar cane planters would be milled in the event of the
construction of such sugar central by said Miguel J. Ossorio. Such
central was in fact constructed by said Miguel J. Ossorio in Manapla,
Negros Occidental, through the North Negros Sugar Co., Inc., where
after the standard form of milling contracts (Annex "A") were
executed, as above stated.
The parties cannot stipulate as to the milling contracts
executed by the planters by Victorias, Negros Occidental, other than
as follows; a number of them executed such milling contracts with the
North Negros Sugar Co., Inc., as per the standard forms hereto
attached and made an integral part as Annexes "B" and "B-1," while a
number of them executed milling contracts with the Victorias Milling
Co., Inc., which was likewise organized by Miguel J. Ossorio and
which had constructed another Central at Victorias, Negros
Occidental, as per the standard form hereto attached and made an
integral part hereof as Annex "C".
4. The North Negros Sugar Co., Inc. had its
first molienda or milling during the 1918-1919 crop year, and the
Victorias Milling Co., had its first molienda or milling during the
1921-1922 crop year.
Subsequent moliendas or millings took place every
successive crop year thereafter, except the 6-year period, comprising

6. Beginning with the year 1948, and in the following

years, when the planters-members of the North Negros Planters
Association, Inc. considered that the stipulated 30-year period of their
milling contracts executed in the year 1918 had already expired and
terminated in the crop year 1947-1948, and the planters-members of
the Victorias Planters Association, Inc. likewise considered the
stipulated 30 year period of their milling contracts, as having likewise
expired and terminated in the crop year 1948-1949, under the
pertinent provisions of the standard milling contract (Annex "A") on
the duration thereof, which provided in Par. 21 thereof as follows:
"(a) Que entregaran a la Central de la 'North Negros Sugar
Co., Inc.' o a la que se construya en Victorias por Don Miguel J.
Ossorio o sus cesionarios por espacio de treinta (30) aos desde la
primera molienda, la caa que produzcan sus respectivas haciendas,
obligandose ademas a sembrar anualmente con caadulce por lo
menos en tres quintas partes de su extension total apropiado para
caa, incluyendo en esta denominacion tanto la siembra con puntas
nuevas como el cultivo del retoo o cala-anan y sujetando la siembra
a las epocas convenientes designadas por el comite de hacenderos a
fin de poder proporcionar caa a la Central de conformidad con las
clausulas 17 y 18 de esta escritura.
xxx xxx xxx
"(i) 'Los hacenderos' imponen sobre sus haciendas
mencionadas y citadas en esta escritura servidumbres voluntarias a
favor de Don Miguel J. Ossorio de sembrar caa por lo menos en tres
quintas partes (3/5) de su extension superficial y entregar la caa que
produzcan a Don Miguel J. Ossorio, de acuerdo con este contrato, por
espacio de treinta (30) aos, a contar un (1) ao desde la fecha de la
primera molienda."
repeated representation were made with respondent corporation for
negotiations regarding the execution of new milling contracts which
would take into consideration the changed circumstances presently
prevailing in the sugar industry as compared with those prevailing

200
over 30 years ago and would provide for an increased participation in
the milled sugar for the benefit of the planters and their workers.

The trial court rendered judgment the dispositive part of which is

flood, typhoon, earthquake, or other force majeure,war, insurrection, civil commotion,

organized strike, etc., the contract shall be deemed suspended during said period, does
not mean that the happening of any of those events stops the running of the period agreed
upon. It only relieves the parties from the fulfillment of their respective obligations
during that time the planters from delivering sugar cane and the central from milling
it. In order that the central, the herein appellant, may be entitled to demand from the other
parties the fulfillment of their part in the contracts, the latter must have been able to
perform it but failed or refused to do so and not when they were prevented by force
majeure such as war. To require the planters to deliver the sugar cane which they failed to
deliver during the four years of the Japanese occupation and the two years after liberation
when the mill was being rebuilt is to demand from the obligors the fulfillment of an
obligation which was impossible of performance at the time it became due.Nemo tenetur
ad impossibilia. The obligee not being entitled to demand from the obligors the
performance of the latters' part of the contracts under those circumstances cannot later on
demand its fulfillment. The performance of what the law has written off cannot be
demanded and required. The prayer that the plaintiffs be compelled to deliver sugar cane
to the appellant for six more years to make up for what they failed to deliver during those
trying years, the fulfillment of which was impossible, if granted, would in effect be an
extension of the term of the contracts entered into by and between the parties.

Wherefore, the Court renders judgment in favor of the

petitioners and against the respondent and declares that the milling
contracts executed between the sugar cane planters of Victorias,
Manapla and Cadiz, Negros Occidental, and the respondent
corporation or its predecessors in interest, the North Negros Sugar
Co., Inc., expired and terminated upon the lapse of the therein
stipulated 30-year period, and that respondent corporation is not
entitled to claim any extension of or addition to the said 30-year term
or period of said milling contracts by virtue of an equivalent to 6
years of the last war and reconstruction of its central, during which
there was no planting and/or milling.

In accord with the rule laid down in the case of Lacson vs. Diaz, 47 Off. Gaz.,
Supp. No. 12, p. 337, where despite the fact that the lease contract stipulated seven sugar
crops and not seven crop years as the term thereof, we held that such stipulation
contemplated seven consecutive agricultural years and affirmed the judgment which
declared that the lessee was not entitled to an extension of the term of the lease for the
number of years the country was occupied by the Japanese Army during which no sugar
cane was planted 1 we are of the opinion and so hold that the thirty-year period stipulated
in the contracts expired on the thirtieth agricultural year. The period of six years four
during the Japanese occupation when the appellant did not operate its mill and the last
two during which the appellant reconstructed its mill cannot be deducted from the
thirty-year period stipulated in the contracts.

7. That notwithstanding these repeated representations

made by the herein petitioners with the respondent corporation for the
negotiation and execution of new milling contracts, the herein
respondent has refused and still refuses to accede to the same,
contending that under the provisions of the mining contract (Annex
"A".) "It is the view of the majority of the stockholder-investors, that
our contracts with the planters call for 30 years of milling not 30
years in time" and that "as there was no milling during 4 years of the
recent war and two years of reconstruction, when these six years are
added on to the earliest of our contracts in Manapla, the contracts by
this view terminate in the autumn of 1952," and the "the contracts for
the Victorias Planters would terminate in 1957, and still later for those
in the Cadiz districts," and that "apart from the contractual
agreements, the Company believes these war and reconstruction years
acrue to it in equity."

From this judgment the respondent corporation has appealed.

The appellant contends that the term stipulated in the contracts is thirty
milling years and not thirty calendar years and postulates that the planters fulfill their
obligation the six installments of their indebtedness which they failed to perform
during the six milling years from 1941-42 to 1946-47. The reason the planters failed to
deliver the sugar cane was the war or a fortuitous event. The appellant ceased to run its
mill due to the same cause.
Fortuitous event relieves the obligor from fulfilling a contractual
obligation. 1 The fact that the contracts make reference to "first milling" does not make
the period of thirty years one of thirty milling years. The term "first milling" used in the
contracts under consideration was for the purpose of reckoning the thirty-year period
stipulated therein. Even if the thirty-year period provided for in the contracts be construed
as milling years, the deduction or extension of six years would not be justified. At most
on the last year of the thirty-year period stipulated in the contracts the delivery of sugar
cane could be extended up to a time when all the amount of sugar cane raised and
harvested should have been delivered to the appellant's mill as agreed upon. The seventh
paragraph of Annex "C", not found in the earlier contracts (Annexes "A", "B", and "B1"), quoted by the appellant in its brief, where the parties stipulated that in the event of

The judgment appealed from is affirmed, with costs against the appellant.
Bengzon, Acting C.J., Montemayor, Reyes, A., Jugo, Bautista Angelo,
Labrador, Concepcion and Reyes, J.B.L., JJ., concur.
||| (Victorias Planters Ass'n., Inc. v. Victorias Milling Co., Inc., G.R. No. L-6648, [July 25,
1955], 97 PHIL 318-325)

201

13. FORTUITOUS EVENTS. 4.

DECISION

SECOND DIVISION
MENDOZA, J p:
[G.R. No. 119729. January 21, 1997.]
ACE-AGRO DEVELOPMENT CORPORATION, petitioner, vs.
COURT OF APPEALS and COSMOS BOTTLING
CORPORATION,respondents.

This case originated in a complaint for damages for breach of contract which petitioner filed
against private respondent. From the decision of the Regional Trial Court, Branch 72, Malabon,
Metro Manila, finding private respondent guilty of breach of contract and ordering it to pay
damages, private respondent appealed to the Court of Appeals which reversed the trial court's
decision and dismissed the complaint for lack of merit. Petitioner in turn moved for a
reconsideration, but its motion was denied. Hence, this petition for review on certiorari.
The facts are as follows:

Jimeno, Jalandoni, Cope, and Associates Law Offices for petitioners.

Mariano V . Ampil, Jr. for private respondent.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF
OBLIGATION; FORCE MAJEURE IN CASE AT BAR, NOT VALID CAUSE FOR
TERMINATION OF CONTRACT, BUT ONLY FOR ITS SUSPENSION. Article 1231 of
the New Civil Code on extinguishment of obligations does not specifically mention unilateral
termination as a mode of extinguishment of obligation but, according to Tolentino, "there are
other causes of extinguishment of obligations which are not expressly provided for in this
chapter" (Tolentino, Civil Code of the Phils., Vol. IV, 1986 ed., p. 273). He further said: But in
some contracts either because of its indeterminate duration or because of the nature of the
prestation which is its object, one of the parties may free himself from the contractual tie by his
own will. (Unilateral extinguishment) . . . Both parties admitted that the April 25, 1990 fire was
a force majeure or unforeseen event and that the same even burned practically all the soft drink
bottles and wooden shells which are the objects of the agreement. But the story did not end
there. It is true that defendant-appellant still had other bottles that needed cleaning and
wooden shells that needed repairing (pp. 110-111, orig. rec.); therefore the suspension of the
work of the plaintiff-appellee brought about by the fire is, at best, temporary as found by the
trial court. The court thus rejects private respondent's claim that, as a result of the fire, the
obligation of contract must be deemed to have been extinguished. Cdpr
2. ID.; ID.; SUSPENSION OF CONTRACT BROUGHT BY FORCE MAJEURE, DOES NOT
JUSTIFY AN EXTENSION OF THE TERM THEREOF. As the appellate court correctly
ruled, the suspension of work under the contract was brought about by force majeure.
Therefore, the period during which work was suspended did not justify an extension of the
term of the contract. For the fact is that the contract was subject to a resolutory period which
relieved the parties of their respective obligations but did not stop the running of the period of
their contract.

Petitioner Ace-Agro Development Corporation and private respondent Cosmos Bottling

Corporation are corporations duly organized and existing under Philippine laws. Private
respondent Cosmos Bottling Corp. is engaged in the manufacture of soft drinks. Since 1979
petitioner Ace-Agro Development Corp. (Ace-Agro) had been cleaning soft drink bottles and
repairing wooden shells for Cosmos, rendering its services within the company premises in San
Fernando, Pampanga. The parties entered into service contracts which they renewed every
year. On January 18, 1990, they signed a contract covering the period January 1, 1990 to
December 31, 1990. Private respondent had earlier contracted the services of Aren Enterprises
in view of the fact that petitioner could handle only from 2,000 to 2,500 cases a day and could
not cope with private respondent's daily production of 8,000 cases. Unlike petitioner, Aren
Enterprises rendered service outside private respondent's plant. cdtai
On April 25, 1990, fire broke out in private respondent's plant, destroying, among other places,
the area where petitioner did its work. As a result, petitioner's work was stopped.
On May 15, 1990, petitioner asked private respondent to allow it to resume its service, but
petitioner was advised that on account of the fire, which had "practically burned all . . . old soft
drink bottles and wooden shells," private respondent was terminating their contract.
Petitioner expressed surprise at the termination of the contract and requested private
respondent, on June 13, 1990, to reconsider its decision and allow petitioner to resume its work
in order to "cushion the sudden impact of the unemployment of many of [its] workers." As it
received no reply from private respondent, petitioner, on June 20, 1990, informed its
employees of the termination of their employment. Petitioner's memorandum1 read:
MEMORANDUM TO: All Workers/Union Members
THRU : Mr. Angelito B. Catalan
Local Chapter President
Bisig Manggagawa sa Ace Agro-NAFLU

202
This is to inform you that the Cosmos Bottling Corp. has sent a letter
to Ace Agro-Development Corp. terminating our contract with them.

Yours very
truly,

However, we are still doing, what we can to save our contract and
resume our operations, though this might take some time.

ACE AGRO-DEVELOPMENT CORP.

(Sgd.) ANTONIO I. ARQUIZA

We will notify you whatever would be the outcome of our negotiation

with them in due time.
Truly
yours
,
ACE AGRODEVELOPMENT CORP.
(Sgd.) ANTONIO L.
ARQUIZA
Manager
This led the employees to file a complaint for illegal dismissal before the Labor Arbiter against
petitioner and private respondent.
On July 17, 1990, petitioner sent another letter to private respondent, reiterating its request for
reconsideration. Its letter 2 read:
COSMOS BOTTLING CORPORATION
San Isidro, MacArthur Highway
San Fernando, Pampanga

Attention: Mr. Norman P. Uy

General Services Manager
Gentlemen:
In our letter to you dated June 13, 1990 seeking your kind
reconsideration of your sudden drastic decision to terminate our
mutually beneficial contract of long standing, it is more than a month
now but our office has not received a reply from you.

Manager
In response, private respondent advised petitioner on August 28, 1990 that the latter could
resume the repair of wooden shells under terms similar to those contained in its contract but
work had to be done outside the company premises. Private respondent's letter 3 read:
MR. ANTONIO I. ARQUIZA
Manager
ACE-AGRO DEVELOPMENT CORPORATION
165 J.P. Bautista Street
Malabon, Metro Manila
Dear Mr. Arquiza:
We are pleased to inform you that COSMOS BOTTLING
CORPORATION, San Fernando Plant is again accepting job-out
contract for the repair of our wooden shells.
Work shall be done outside the premises of the plant and under
similar terms you previously had with the company. We intend to give
you priority so please see or contact me at my office soonest for the
particulars regarding the job.
Here is looking forward to doing business with you at the earliest
possible time.
(Sgd.) DANILO
M.
DE
CASTRO
Plant
General
Manager

Our workers, who have been anxiously waiting for the resumption of
the operations and who are the ones most affected by your sudden
decision, are now becoming restless due to the financial difficulties
they are now suffering.

Petitioner refused the offer, claiming that to do its work outside the company's premises would
make it (petitioner) incur additional costs for transportation which "will eat up the meager
profits that [it] realizes from its original contract with Cosmos." In subsequent meetings with
Danilo M. de Castro, Butch Cea and Norman Uy of Cosmos, petitioner's manager, Antonio I.
Arquiza, asked for an extension of the term of the contract in view of the suspension of work.
But its request was apparently turned down.

We are, therefore, again seeking for the reconsideration of your

decision to help alleviate the sufferings of the displaced workers,
which we also have to consider for humanitarian reason.

On November 7, 1990, private respondent advised petitioner that the latter could then resume
its work inside the plant in accordance with its original contract with Cosmos. Private
respondent's letter 4 stated:

203
MR. ANTONIO I. ARQUIZA

Thank you very much.

General Manager

Very truly yours,

Ace-Agro Development Corporation

ACE AGRODEVELOPMENT
CORP.

165 J. P. Bautista St., Malabon

Metro Manila

(Sgd.) ANTONIO I.
ARQUIZA

Dear Mr. Arquiza:

This is to officially inform you that you can now resume the repair of
wooden shells inside the plant according to your existing contract
with the Company.
Please see Mr. Ener G. Ocampo, OIC-PDGS, on your new job site in
the Plant.
Very
yours,

Manager
On January 3, 1991, petitioner brought this case against private respondent for breach of
contract and damages in the Regional Trial Court of Malabon. It complained that the
termination of its service contract was illegal and arbitrary and that, as a result, it stood to lose
profits and to be held liable to its employees for backwages, damages and/or separation pay.

truly

COSMOS BOTTLING
CORPORATION
(Sgd.) MICHAEL M. ALBINO
VP-Luzon/Plant General Manager
On November 17, 1990, petitioner rejected private respondent's offer, this time, citing the fact
that there was a pending labor case. Its letter 5 to private respondent stated:

On January 16, 1991, a decision was rendered in the labor case, finding petitioner liable for the
claims of its employees. Petitioner was ordered to reinstate the employees and pay them
backwages. However, private respondent Cosmos was absolved from the employees' claims on
the ground that there was no privity of contract between them and private respondent.
On the other hand, in its decision rendered on November 21, 1991, the RTC found private
respondent guilty of breach of contract and ordered it to pay damages to petitioner. Petitioner's
claim for reimbursement for what it had paid to its employees in the labor case was denied.
The dispositive portion of the trial court's decision read:

VP-Luzon/Plant General Manager

WHEREFORE, premises considered, judgment is hereby rendered in

favor of plaintiff Ace-Agro Development Corporation and against
defendant Cosmos Bottling Corporation, ordering, the latter to pay to
the former the following:

Cosmos Bottling Corporation

a) The amount of P1,008,418.01 as actual damages;

San Fernando, Pampanga

b) P100,000.00 as corrective or exemplary damages;

Mr. Michael M. Albino

Dear Mr. Albino,

This is in connection with your letter dated November 7, 1990
regarding the resumption of the repair of your wooden shells inside
San Fernando, Pampanga Plant according to the existing contract with
your company.
At present, there is a pending case before the Department of Labor
and Employment in San Fernando, Pampanga which was a result of
the premature termination of the said existing contract with your
company. In view of that, we find it proper for us to work for the
resolution of the said pending case and include in the Compromise
Agreement the matter of the resumption of the repair of wooden
shells in your San Fernando, Pampanga Plant.

c) The amount of P50,000.00 as and for attorney's fees; and

d) Costs and expenses of litigation.
Defendant's counterclaims are dismissed.
SO ORDERED.
Private respondent appealed to the Court of Appeals, which on December 29, 1994, reversed
the trial court's decision and dismissed petitioner's complaint. The appellate court found that it
was petitioner which had refused to resume work, after failing to secure an extension of its
contract. Petitioner now seeks a review of the Court of Appeals' decision.
First. Petitioner claims that the appellate court erred "in ruling that respondent was justified in
unilaterally terminating the contract on account of aforce majeure." Quite possibly it did not

204
understand the appellate court's decision. or it would not be contending that there was no valid
cause for the termination of the contract but only for its suspension. The following is what the
appellate court said: 6
Article 1231 of the New Civil Code on extinguishment of obligations
does not specifically mention unilateral termination as a mode of
extinguishment of obligation but, according to Tolentino, "there are
other causes of extinguishment of obligations which are not expressly
provided for in this chapter" (Tolentino, Civil Code of the Phils., Vol.
IV, 1986 ed., p. 273). He further said:
But in some contracts, either because of its indeterminate
duration or because of the nature of the prestation which is
its object, one of the parties may free himself from the
contractual tie by his own will (unilateral extinguishment);
. . . (p. 274-275, Ibid)
And that was just what defendant-appellant did when it unilaterally
terminated the agreement it had with plaintiff-appellee by sending,
the May 23, 1990 letter. As per its letter, the reason given by
defendant-appellant for unilaterally terminating, the agreement was
because the April 25, 1990 fire practically burned all of the softdrink
bottles and wooden shells which plaintiff-appellee was working on
under the agreement. What defendant-appellant was trying to say was
that the prestation or the object of their agreement had been lost and
destroyed in the above-described fire. Apparently, the defendantappellant would like this situation to fall within what according to
Tolentino would be:
. . . (O)bligations may be extinguished by the happening of
unforeseen events, under whose influence the obligation
would never have been contracted, because in such cases,
the very basis upon which the existence of the obligation
is founded would be wanting.
Both parties admitted that the April 25, 1990 fire was a force
majeure or unforeseen event and that the same even burned
practically all the softdrink bottles and wooden shells which are
the objects of the agreement. But the story did not end there.
It is true that defendant-appellant still had other bottles that needed
cleaning and wooden shells that needed repairing (pp. 110-111,
orig. rec.); therefore the suspension of the work of the plaintiffappellee brought about by the fire is at best temporary as found by
the trial court. Hence, plaintiff-appellee's letters of reconsideration of
the termination of the agreement addressed to defendant-appellant
dated June 13, 1990 and July 17, 1990.
It is obvious that what petitioner thought was the appellate court's ruling is merely its summary
of private respondent's allegations. Precisely the appellate court does not agree with private
respondent, that is why, in the last paragraph of the above excerpt, the court says that there was
no cause for terminating the contract but at most a "temporary suspension of work." The court

thus rejects private respondent's claim that, as a result of the fire, the obligation of contract
must be deemed to have been extinguished.
Nonetheless, the Court of Appeals found that private respondent had reconsidered its decision
to terminate the contract and tried to accommodate the request of petitioner, first, by notifying
petitioner on August 28, 1990 that it could resume work provided that this was done outside the
premises and, later, on November 7, 1990, by notifying petitioner that it could then work in its
premises, under the terms of their contract. However, petitioner unjustifiably refused the offer
because it wanted an extension of the contract to make up for the period of inactivity. As the
Court of Appeals said in its decision: 7
It took defendant-appellant time to make a reply to plaintiff-appellee's
letters. But when it did on August 28, 1990, it granted plaintiffappellee priority to resume its work under the terms of their
agreement (but outside its premises), and the plaintiff-appellee
refused the same on the ground that working outside the defendantappellant's San Fernando Plant would mean added transportation
costs that would offset any profit it would earn.
The appellee was without legal ground to refuse resumption of work
as offered by the appellant, under the terms of their above agreement
It could not legally insist on staying inside property it did not own,
nor was under lease to it. . . . In its refusal to resume its work because
of the additional transportation costs to be brought about by
working outside the appellant's San Fernando plant, the appellee
could be held liable for damages for breach of contract.
Thereafter, appellant sent its November 7, 1990 letter to appellee, this
time specifically stating that plaintiff-appellee can now resume work
in accordance with their existing agreement. This time, it could not be
denied that by the tenor of the letter, appellant was willing to honor
its agreement with appellee, that it had finally made a reconsideration
of appellee's plea to resume work under the contract. But again,
plaintiff-appellee refused this offer to resume work.
Why did the appellee refuse to resume work? Its November 17, 1990
letter stated that it had something to do with the settlement of the
NLRC case filed against it by its employees. But that was not the real
reason. In his cross-examination, the witness for appellee stated that
its real reason for refusing to resume work with the appellant was
as in its previous refusal because it wanted an extension of the
period or duration of the contract beyond December 31, 1991, to
cover the period within which it was unable to work.
The agreement between the appellee and the appellant is with a
resolutory period, beginning from January 1, 1990 and ending on
December 31, 1990. When the fire broke out on April 25, 1990, there
resulted a suspension of the appellee's work as per agreement. But
this suspension of work due to force majeure did not merit an
automatic extension of the period of the agreement between them
According, to Tolentino:

205
The stipulation that in the event of a fortuitous event or
force majeure the contract shall be deemed suspended
during the said period does not mean that the happening of
any of those went stops the running of the period the
contract has been agreed upon to run. It only relieves the
parties from the fulfillment of their respective obligations
during that time. If during six of the thirty years fixed as
the duration of a contract, one of the parties is prevented
by force majeure to perform his obligation during those
years, he cannot after the expiration of the thirty-year
period, be compelled to perform his obligation for six
more years to make up for at he failed to perform during
the said six years, because it would in effect be all
extension of the term of the contract. The contract is
stipulated to run for thirty years. and the period expires on
the thirtieth year; the period of six years during which
performance by one of the parties is prevented by force
majeure cannot be deducted from the period stipulated.
In fine, the appellant withdrew its unilateral termination of its
agreement with appellee in its letter dated November 7, 1990. But the
appellee's refusal to resume work was, in effect, a unilateral
termination of the parties' agreement an act that was without basis.
When the appellee asked for an extension of the period of the contract
beyond December 31, 1990 it was, in effect, asking for a new contract
which needed the consent of defendant-appellant. The appellee might
be forgiven for its first refusal (pertaining to defendant-appellant's
August 28, 1990 letter), but the second refusal must be construed as a
breach of contract by plaintiff-appellee. . . .
The Court of Appeals was right that petitioner had no basis for refusing private respondent's
offer unless petitioner was allowed to carry out its work in the company premises. That
petitioner would incur additional cost for transportation was not a good reason for its refusal.
Petitioner has not shown that on August 28, 1990, when it was notified of the private
respondent's offer, the latter's premises had so far been restored so as to permit petitioner to
resume work there. In fact, even when petitioner was finally allowed to resume work within the
plant, it was not in the former work place but in a new one, which shows that private
respondent's reason for not granting petitioner's request was not just a pretext.

Nor was petitioner justified in refusing to resume work on November 7 when it was again
notified by petitioner to work. Although it cited the pending labor case as reason for turning
down private respondent's offer, it would appear that the real reason for petitioner's refusal was
the fact that the term of the contract was expiring in two months and its request for an
extension was not granted. But, as the appellate court correctly ruled, the suspension of work
under the contract was brought about by force majeure. Therefore, the period during which
work was suspended did not justify an extension of the term of the contract. 8 For the fact is
that the contract was subject to a resolutory period which relieved the parties of their respective
obligations but did not stop the running of the period of their contract.

The truth of the matter is that while private respondent had made efforts towards
accommodation, petitioner was unwilling to make adjustments as it insisted that it "cannot
profitably resume operation under the same terms and conditions [of] the terminated contract
but with an outside work venue [as] transportation costs alone will eat up the meager profit that
Ace-Agro realizes from its original contract." 9 While this so-called "job-out offer of private
respondent had the effect of varying the terms of the contract in the sense that it could increase
its cost, what petitioner did not seem to realize was that the change was brought about by
circumstances not of private respondent's making.
Again when private respondent finally advised petitioner on November 7, 1990 to work under
the strict terms of its contract and inside the plant, petitioner thought only of its interest by
insisting that the contract be extended. Petitioner's manager, Antonio I. Arquiza, testified that
he tried to secure a term extension for his company but his request was turned down because
the management of private respondent wanted a new contract after the expiration of the
contract on December 31, 1990. Arquiza testified: 10
A [Butch Cea] told me that Cosmos is agreeable to allow us to
resume our operation and when I inquired about the
extension of the contract he told me that I better refer the
matter to Mr. Norman Uy.
Q Did you see Mr. Norman Uy?
A Yes, sir, when I went to see Mr. Norman Uy he asked me why I was
there and he told me why I did not start operation I told
him that what we are expecting that Mr. Cea would give
me the formal letter regarding the resumption of the
operation and honoring of contract and he said that our
price was so high and if we are willing to use said contract
and when I said yes he told me that we will just send you a
letter considering that another contractor repairing our
damaged shells and cleaning of dirty bottles. When I asked
him that does that mean that the meeting I had with Mr.
Cea, he told me that was null and void and he told me
that Mr. Cea want a new contract.
As already stated, because the suspension of work was due to force majeure, there was no
justification for petitioner's demand for an extension of the terms of the contract. Private
respondent was justified in insisting that after the expiration of the contract, the parties must
negotiate a new one as they had done every year since the start of their business relations in
1979.
Second. Petitioner slams the Court of Appeals for ruling that "it was [petitioner's] unjustified
refusal which finally terminated the contract between the parties." This contention is likewise
without merit. Petitioner may not be responsible for the termination of the contract, but neither
is private respondent, since the question in this case is whether private respondent is guilty of
breach of contract. The trial court held that private respondent committed a breach of contract
because, even as its August 28, 1990 letter allowed petitioner to resume work, private
respondent's offer was limited to the repairs of wooden shells and this had to be done outside
the company's premises. On the other hand, the final offer made on November 7, 1990, while
allowing the "repair of wooden shells [to be done] inside the plant according to your contract

206
with the company," was still limited to the repair of the wooden shells, when the fact was that
the parties' contract was both for the repair of wooden crates and for the cleaning of soft drink
bottles.
But this was not the petitioner's complaint. There was never an issue whether the company's
offer included the cleaning of bottles. Both parties understood private respondent's offer as
including the cleaning of empty soft drink bottles and the repair of the wooden crates. Rather,
the discussions between petitioner and private respondent's representatives focused first, on the
insistence of petitioner that it be allowed to work inside the company plant and, later, on its
request for the extension of the life of the contract.
Petitioner claims that private respondent had a reason to want to terminate the contract and that
was to give the business to Aren Enterprises, as the latter offered its services at a much lower
rate than petitioner. Aren Enterprises' rate was P2.50 per shell while petitioner's rates were
P4.00 and P6.00 per shell for ordinary and super sized bottles, respectively. 11
The contention has no basis in fact. The contract between private respondent and Aren
Enterprises had been made on March 29, 1990 before the fire broke out. The contract
between petitioner and private respondent did not prohibit the hiring by private respondent of
another service contractor. With private respondent hitting production at 8,000 bottles of soft
drinks per day, petitioner could clearly not handle the business, since it could clean only 2,500
bottles a day. 12 These facts show that although Aren Enterprises' rate was lower than
petitioner's, they did not affect private respondent's business relation with petitioner. Despite
private respondent's contract with Aren Enterprises, private respondent continued doing
business with petitioner and would probably have done so were it not for the fire. On the other
hand, Aren Enterprises could not be begrudged for being allowed to continue rendering service
even after the fire because it was doing its work outside private respondent's plant. For that
matter, after the fire, private respondent on August 28, 1990 offered to let petitioner resume its
service provided this was done outside the plant. cda
Petitioner may not be to blame for the failure to resume work after the fire, but neither is
private respondent. Since the question is whether private respondent is guilty of breach of
contract, the fact that private respondent is blameless can only lead to the conclusion that the
appealed decision is correct.
WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED.
Regalado, Romero, Puno and Torres, Jr., JJ., concur.
||| (Ace-Agro Development Corp. v. Court of Appeals, G.R. No. 119729, [January 21, 1997],
334 PHIL 392-406)

207

14. USURIOUS TRANSACTIONS. 1.

10%
interest
April 1992 100,000.00

for

the

month

of

FIRST DIVISION

10%
interest
May 1992 100,000.00

for

the

month

of

[G.R. No. 158382. January 27, 2004.]

10%
interest
June 1992 100,000.00

for

the

month

of

for

the

month

of

8%
interest
for
August 1992 80,000.00

the

month

of

MANSUETO CUATON, petitioner, vs. REBECCA SALUD and

COURT
OF
APPEALS
(Special
Fourteenth
Division), respondents.

8%
interest
July 1992 80,000.00

DECISION

Total amount as of August 1992 P1,610,000.00 4

The dispositive portion of the trial court's decision, reads:

YNARES-SANTIAGO, J p:

WHEREFORE, premises considered, judgment is hereby rendered:

Before the Court is a petition for review on certiorari assailing the August 31, 2001
Decision 1 of the Court of Appeals in CA-G.R. CV No. 54715 insofar as it affirmed the
Judgment 2 of the Regional Trial Court of General Santos City, Branch 35, in SPL. Civil Case
No. 359, imposing interest at the rate of 8% to 10% per month on the one-million-peso loan of
petitioner.
On January 5, 1993, respondent Rebecca Salud, joined by her husband Rolando Salud,
instituted a suit for foreclosure of real estate mortgage with damages against petitioner
Mansueto Cuaton and his mother, Conchita Cuaton, with the Regional Trial Court of General
Santos City, Branch 35, docketed as SPL. Civil Case No. 359. 3 The trial court rendered a
decision declaring the mortgage constituted on October 31, 1991 as void, because it was
executed by Mansueto Cuaton in favor of Rebecca Salud without expressly stating that he was
merely acting as a representative of Conchita Cuaton, in whose name the mortgaged lot was
titled. The court ordered petitioner to pay Rebecca Salud, inter alia, the loan secured by the
mortgage in the amount of One Million Pesos plus a total P610,000.00 representing interests of
10% and 8% per month for the period February 1992 to August 1992, thus
Original loan P1,000,000.00
10%
interest
February
balance only 50,000.00

for

the

month

of
1992

a) Declaring the mortgage executed by Mansueto Cuaton over the

property owned by Conchita Cuaton, covered by TCT NO. T-34460,
dated October 31, 1991, in favor of Rebecca Salud as unauthorized,
void and unenforceable against defendant, Conchita Cuaton hence,
the TRO issued against the foreclosure thereof is hereby made
permanent. The annotation of the mortgage over said property is
likewise cancelled;
b) Ordering defendant Mansueto Cuaton to pay plaintiff, Rebecca
Salud, the sum of One Million Six Hundred Ten Thousand
(P1,610,000.00) Pesos, with legal interest thereon, from January 5,
1993 until fully paid;
c) Ordering defendant, Mansueto Cuaton, to pay Attorney's fees of
P25,000.00 in favor of the plaintiff, Rebecca Salud and to pay the cost
of this suit.
Defendants' counterclaims, being merely a result of the filing of
plaintiff's complaint are hereby DISMISSED.
SO ORDERED. 5
Both parties filed their respective notices of appeal. 6

10%
interest
for
March 1992 100,000.00

the

month

of

On August 31, 2001, the Court of Appeals rendered the assailed decision affirming the
judgment of the trial court. Petitioner filed a motion for partial reconsideration of the trial

208
court's decision with respect to the award of interest in the amount of P610,000.00, arguing that
the same was iniquitous and exorbitant. 7 This was denied by the Court of Appeals on May 7,
2003. 8
Hence, the instant petition on the sole issue of whether the 8% and 10% monthly interest rates
imposed on the one-million-peso loan obligation of petitioner to respondent Rebecca Salud are
valid.
We find merit in the petition.
In Ruiz v. Court of Appeals, 9 we declared that the Usury Law was suspended by Central Bank
Circular No. 905, s. 1982, effective on January 1, 1983, and that parties to a loan agreement
have been given wide latitude to agree on any interest rate. However, nothing in the said
Circular grants lenders carte blanche authority to raise interest rates to levels which will either
enslave their borrowers or lead to a hemorrhaging of their assets. The stipulated interest rates
are illegal if they are unconscionable.
Thus, in Medel v. Court of Appeals, 10 and Spouses Solangon v. Salazar, 11 the Court annulled
a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan and a 6% per
month or 72% per annum interest on a P60,000.00 loan, respectively, for being excessive,
iniquitous, unconscionable and exorbitant. In both cases, the interest rates were reduced to 12%
per annum.
In the present case, the 10% and 8% interest rates per month on the one-million-peso loan of
petitioner are even higher than those previously invalidated by the Court in the above cases.
Accordingly, the reduction of said rates to 12% per annum is fair and reasonable.
Stipulations authorizing iniquitous or unconscionable interests are contrary to morals ('contra
bonos mores'), if not against the law. 12 Under Article 1409 of the Civil Code, these contracts
are inexistent and void from the beginning. They cannot be ratified nor the right to set up their
illegality as a defense be waived. 13
Moreover, the contention regarding the excessive interest rates cannot be considered as an
issue presented for the first time on appeal. The records show that petitioner raised the validity
of the 10% monthly interest in his answer filed with the trial court. 14 To deprive him of his
right to assail the imposition of excessive interests would be to sacrifice justice to technicality.
Furthermore, an appellate court is clothed with ample authority to review rulings even if they
are not assigned as errors. This is especially so if the court finds that their consideration is
necessary in arriving at a just decision of the case before it. We have consistently held that an
unassigned error closely related to an error properly assigned, or upon which a determination
of the question raised by the error properly assigned is dependent, will be considered by the
appellate court notwithstanding the failure to assign it as an error. 15 Since respondents pointed
out the matter of interest in their Appellants' Brief 16 before the Court of Appeals, the fairness
of the imposition thereof was opened to further evaluation. The Court therefore is empowered
to review the same.
The case of Eastern Shipping Lines, Inc. v. Court of Appeals, 17 laid down the following
guidelines on the imposition of interest, to wit:
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing.

Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded. In the absence of stipulation, the rate
of interest shall be 12% per annum to be computed from default,i.e.,
from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 23 of the Civil Code.
xxx xxx xxx
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.
Applying the foregoing rules, the interest of 12% per annum imposed by the Court (in lieu of
the invalidated 10% and 8% per month interest rates) on the one-million-peso loan should be
computed from the date of the execution of the loan on October 31, 1991 until finality of this
decision. After the judgment becomes final and executory until the obligation is satisfied, the
amount due shall further earn interest at 12% per year.
WHEREFORE, in view of all the foregoing, the instant petition is GRANTED. The August 31,
2001 Decision of the Court of Appeals in CA-G.R. CV No. 54715, which affirmed the
Decision of the Regional Trial Court of General Santos City, Branch 35, in SPL. Civil Case
No. 359, is MODIFIED. The interest rates of 10% and 8% per month imposed by the trial court
is reduced to 12% per annum, computed from the date of the execution of the loan on October
31, 1991 until finality of this decision. After the judgment becomes final and executory until
the obligation is satisfied, the amount due shall further earn interest at 12% per year. TaCIDS
SO ORDERED.
Davide, Jr., C.J., Panganiban and Carpio, JJ., concur.
Azcuna, J., is on official leave.
||| (Cuaton v. Salud, G.R. No. 158382, [January 27, 2004])

209

14. USURIOUS TRANSACTIONS. 2.

Court in regards to allegations of usury, procedural in nature, should be considered repealed

with retroactive effect.

FIRST DIVISION
DECISION
[G.R. No. L-30771. May 28, 1984.]
LIAM LAW, plaintiff-appellee, vs. OLYMPIC SAWMILL CO. and
ELINO LEE CHI, defendants-appellants.

Felizardo S.M. de Guzman for plaintiff-appellee.

Mariano M. de Joya for defendants-appellants.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; PRESUMPTION OF EXISTENCE
AND LEGALITY OF OBLIGATIONS; MUST BE OVERCOME BY PROOF; CASE AT
BAR. Under Article 1354 of the Civil Code, in regards to the agreement of the parties
relative to the P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the
debtor proves the contrary." No evidentiary hearing having been held, it has to be concluded
that defendants had not proven that the P6,000.00 obligation was illegal. Confirming the Trial
Court's finding, we view the P6,000.00 obligation as liquidated damages suffered by plaintiff,
as of March 17, 1960, representing loss of interest income, attorney's fees and incidentals.
2. MERCANTILE LAW; USURY LAW; REQUIRES DEFENDANT TO SPECIFICALLY
DENY, UNDER OATH, ALLEGATION OF USURY; REQUIREMENT DOES NOT APPLY
WHERE IT IS THE DEFENDANT, NOT THE PLAINTIFF, WHO ALLEGES USURY; CASE
AT BAR. The main thrust of defendants' appeal is the allegation in their Answer that the
P6,000.00 constituted usurious interest. They insist the claim of usury should have been
deemed admitted by the plaintiff as it was "not denied specifically and under oath" pursuant to
Section 1, Rule 9 of the Rules of Court and Section 9 of the Usury Law (Act 2655). The
foregoing provision envisages a complaint filed against an entity which has committed usury,
for the recovery of the usurious interest paid. In that case, if the entity sued shall not file its
answer under oath denying the allegation of usury, the defendant shall be deemed to have
admitted the usury. The provision does not apply to a case, as in the present, where it is the
defendant, not the plaintiff, who is alleging usury.
3. ID.; ID.; USURY, AT PRESENT, IS LEGALLY NON-EXISTENT, For sometime now,
usury has been legally non-existent. Interest can now be charged as lender and borrower may
agree upon (Central Bank Circular No. 905, Series of 1982, 78 Off. Gaz. 7336). The Rules of

MELENCIO-HERRERA, J p:
This is an appeal by defendants from a Decision rendered by the then Court of First Instance of
Bulacan. The appeal was originally taken to the then Court of Appeals, which endorsed it to
this instance stating that the issue involved was one of law. cdrep
It appears that on or about September 7, 1957, plaintiff loaned P10,000.00, without interest, to
defendant partnership and defendant Elino Lee Chi, as the managing partner. The loan became
ultimately due on January 31, 1960, but was not paid on that date, with the debtors asking for
an extension of three months, or up to April 30, 1960.
On March 17, 1960, the parties executed another loan document. Payment of the P10,000.00
was extended to April 30, 1960, but the obligation was increased by P6,000.00 as follows:
"That the sum of SIX THOUSAND PESOS (P6,000.00), Philippine
currency shall form part of the principal obligation to answer for
attorney's fees, legal interest, and other cost incident thereto to be
paid unto the creditor and his successors in interest upon the
termination of this agreement."
Defendants again failed to pay their obligation by April 30, 1960 and, on September 23, 1960,
plaintiff instituted this collection case. Defendants admitted the P10,000.00 principal
obligation, but claimed that the additional P6,000.00 constituted usurious interest.
Upon application of plaintiff, the Trial Court issued, on the same date of September 23, 1960, a
writ of Attachment on real and personal properties of defendants located at Karanglan, Nueva
Ecija. After the Writ of Attachment was implemented, proceedings before the Trial Court
versed principally in regards to the attachment. cdrep
On January 18, 1961, an Order was issued by the Trial Court stating that " after considering the
manifestation of both counsel in Chambers, the Court hereby allows both parties to
simultaneously submit a Motion for Summary Judgment. 1 The plaintiff filed his Motion for
Summary Judgment on January 31, 1961, while defendants filed theirs on February 2, 1961. 2
On June 26, 1961, the Trial Court rendered decision ordering defendants to pay plaintiff "the
amount of P10,000.00 plus the further sum of P6,000.00 by way of liquidated damages . . .
with legal rate of interest on both amounts from April 30, 1960." It is from this judgment that
defendants have appealed.

210
We have decided to affirm.
Under Article 1354 of the Civil Code, in regards to the agreement of the parties relative to the
P6,000.00 obligation, "it is presumed that it exists and is lawful, unless the debtor proves the
contrary". No evidentiary hearing having been held, it has to be concluded that defendants had
not proven that the P6,000.00 obligation was illegal. Confirming the Trial Court's finding, we
view the P6,000.00 obligation as liquidated damages suffered by plaintiff, as of March 17,
1960, representing loss of interest income, attorney's fees and incidentals. LLpr
The main thrust of defendants' appeal is the allegation in their Answer that the P6,000.00
constituted usurious interest. They insist the claim of usury should have been deemed admitted
by plaintiff as it was "not denied specifically and under oath". 3
Section 9 of the Usury Law (Act 2655) provided:
"SEC. 9. The person or corporation sued shall file its answer in
writing under oath to any complaint brought or filed against said
person or corporation before a competent court to recover the money
or other personal or real property, seeds or agricultural products,
charged or received in violation of the provisions of this Act. The lack
of taking an oath to an answer to a complaint will mean the admission
of the facts contained in the latter."
The foregoing provision envisages a complaint filed against an entity which has committed
usury, for the recovery of the usurious interest paid. In that case, if the entity sued shall not file
its answer under oath denying the allegation of usury, the defendant shall be deemed to have
admitted the usury. The provision does not apply to a case, as in the present, where it is the
defendant, not the plaintiff, who is alleging usury. LLphil
Moreover, for sometime now, usury has been legally non-existent. Interest can now be charged
as lender and borrower may agree upon. 4 The Rules of Court in regards to allegations of
usury, procedural in nature, should be considered repealed with retroactive effect.
"Statutes regulating the procedure of the courts will be construed as
applicable to actions pending and undetermined at the time of their
passage. Procedural laws are retrospective in that sense and to that
extent." 5
". . . Section 24(d), Republic Act No. 876, known as the Arbitration
Law, which took effect on 19 December 1953, and may be
retroactively applied to the case at bar because it is procedural in
nature . . ." 6
WHEREFORE, the appealed judgment is hereby affirmed, without pronouncement as to costs.
SO ORDERED.
Teehankee, Plana, Relova, Gutierrez, Jr. and De la Fuente, JJ ., concur.
||| (Law v. Olympic Sawmill Co., G.R. No. L-30771, [May 28, 1984], 214 PHIL 385-389)

211

15. PRESUMPTIONS. 1.

EN BANC
[G.R. No. L-16477. May 31, 1961.]
MANILA
TRADING
&
SUPPLY
CO., plaintiffappellee, vs. MARIANO MEDINA, defendant-appellant.

Ross, Selph, & Carrascoso for plaintiff-appellee.

Campos, Mirasol & Mediodic for defendant-appellant.

SYLLABUS
1. OBLIGATIONS AND CONTRACTS; SALES ON INSTALLMENTS; PRESUMPTION OF
PAYMENT OF PRIOR INSTALLMENTS, PRIMA FACIE. The presumption that prior
installments were paid upon the presentation of a receipt of payment subsequent thereto, is
only prima facie.

DECISION

REYES, J.B.L., J p:
This case was certified to us by the Court of Appeals because the claims involved totalled more
than P200,000.00 (Resolution, C.A., 14 Nov. 1959).
The facts appear to be that prior to May 7, 1956, the defendant- appellant Mariano Medina had
certain accounts with appellee Manila Trading & Supply Co. These accounts were on said date
consolidated into a total balance due of P60,000.00 for which Medina executed a promissory
note (Exh. "A") for Sixty Thousand Pesos (60,000.00), with interest at 12% per annum,
payable in monthly installments of P4,000.00 plus interest. The note provided that upon failure
to pay any of the installments, "the whole sum remaining then unpaid will immediately become
due and payable, at the option of the holder of this note," fees and expenses of collection, in
addition to the costs of the suit.

On January 8, 1957, the payee Manila Trading & Supply Co., filed a complaint against
appellant Medina in the Court of First Instance of Manila, claiming that the said debtor had
failed to meet the installments due on the note for the months of September, 1956 up to and
including January 7, 1957, and that due to such default, the balance of the note amounting to
P43,596.22, plus 12% interest and collection expenses, had become due and demandable; and
prayed for judgment in the amounts stated. On January 4, 1957, upon petition of plaintiff, a
writ of attachment was issued and levied upon eleven of defendant's buses.
On March 10, 1957, Medina filed an answer (Record on Appeal, p. 11), admitting the
allegations of paragraphs 2, 3, and 4 of the complaint (i.e., the execution of the note; the failure
to pay the monthly installments for September, 1956 up to January, 1957; the maturity of the
balance due of P43,596.22; and the lack of sufficient security). He also admitted the allegations
of the complaint concerning the 12% interest on the principal, but contended unconscionable.
Medina further pleaded, by way of defense, that he was induced to pay P4,000.00 additional on
January 24, 1957, upon promise that he would not be sued, and that he would be allowed to
pay the balance "paulatinamente", and that instead, his trucks were attached. By way of
counterclaim, Medina asked for damages due to lost earnings of the trucks attached, at the rate
of P900.00 per day. These defenses and counterclaim were traversed by the plaintiff.
Trial was set for September 10, 1957, and because of non- appearance of defendant and his
counsel, the court commissioned the Clerk to receive plaintiff's evidence, which showed that
from June 6, 1956 to January 21, 1957, defendant had made twenty-one payments totalling
P24,311.34 of which P4,413.76 corresponded to interest and the balance (P19,982.15) to the
principal.
Upon seasonable motion of defendant Medina, the court reopened the case to give him
opportunity to present his evidence. Thereupon, he testified and asserted that in addition to the
twenty-one payments acknowledged by plaintiff company, he had made ten other payments
that, added to the former, showed that he (Medina) had paid more than P4,000.00 a month
since the execution of the note up to the filing of the complaint, and was, therefore, not in
default. To bolster his claims, Medina exhibited ten additional receipts signed by the plaintiff's
cashier, but without numbers or year dates, because they were allegedly eaten by anay;
however, defendant wrote thereon the supposed numbers that the receipts originally bore,
based on a memorandum book where he purported to have noted his payment to plaintiff.
Medina also testified that by reason of the attachment of his buses, he had lost net earnings of
P550.00 per day, and his business in building truck bodies had been affected to the extent of
P50,000.00; and that he had been forced to engage counsel at stipulated fees of P7,000.00.
Considering that the attachment was maintained for over two years, the damages claimed by
defendant would amount to over P300,000.00.
In rebuttal, the assistant accountant of the Manila Trading denied that the ten additional
receipts exhibited by the defendant corresponded to the period covered by the promissory note
Exh. "A"; that the numbers attributed to them by plaintiff were not in the proper sequence,
because as of July 28, 1956, the company has adopted a new numbering of its receipts; and that
in the absence of the correct numbers and the years of issue, it was impossible to locate the
record of the payments claimed.
After considering the evidence, the trial court entertained doubts as to the veracity of the
receipts produced by the defendant, and refused to credit him with the amounts shown therein.

212
It therefore, gave judgment for the plaintiff for the balance due of P40,102.42 on the note, plus
12% interest from January 21, 1957 until payment; but reduced the attorney's fees from 331/3% of the sum due to only P1,000.00. Defendant appealed from the decision.
Our examination of the evidence satisfied us that the ten additional receipts produced by the
defendant (Exhs. 3-D, 3-F, 3-H, 3-L, 3-S, 3-U, 3-W, 3-Z, 3-BB. and 3-CC), while issued by
plaintiff, were not for payments made on the dates claimed by defendant, nor are they
chargeable to the balance of the promissory note Exh. "A". As pointed out by the trial court, it
is highly suspicious that these receipts should be mutilated precisely at the places where the
serial numbers and the year of issue must appear, while the receipts for the intervening
payments recognized by the plaintiff remained intact. Moreover, these contested receipts
appear identical in shape, size, and color to those issued by plaintiff company prior to July 28,
1956, before the form of its receipts were changed, such as Exhs. 3 to 3-C, and Exhs. 7 to 7-D,
but differ radically in color, size, and particulars from those issued after July 28, 1956. In
addition, the numbers that Medina attributed to them are not in sequence as can be seen from
the list Exh. 4. Thus, defendant claims that Exh. 3-D was issued in June (or July) 29, 1956 and
bore No. 2898; yet the acknowledged receipt for July 28, 1956 is numbered 0096, receipt Exh.
3-F, allegedly for August 1, 1956, is numbered, according to defendant, 3438, while the
admittedly authentic receipt Exh. 3-G for August 3 has a lower number, 0813.
Moreover, receipt Exh. 3-H that defendant claims to be dated August 18, 1956, is numbered
1584, a number lower than that of Exh. 3- F dated August 1st (No. 3438), when the latter was
issued earlier. The same inconsistency between dates and serial numbers is true with the other
contested receipts. It is difficult to believe that a trading company should issue receipts
numbered at random, since it would make auditing control impossible.
The lower court also correctly noted that the genuine receipts from and after July 23 invariably
specify the amount charged to interest as well as that credited to the principal for each
payment, while the disputed receipts contain no such specification.
These differences between the defendant's disputed receipts and those admitted by plaintiff,
when coupled with the fact that appellant Medina's answer expressly admitted the balance due
as well as his failure to meet the monthly installments from September, 1956 to January, 1957,
his lack of corroboration, and the further circumstance that the admissions in his answer were
never withdrawn nor was the answer containing them ever amended, irresistibly show that the
trial court's rejection of the genuineness and validity of the disputed receipts constituted no
error. The authenticity of the signatures appended to them does not prove that they were issued
in 1956 or 1957, as claimed by the appellant, nor that should be credited to the note Exh. "A".
It is not all improbable that these mutilated receipts were among those issued to the appellant
prior to the consolidation of his accounts and the execution of the promissory note.
Appellant avers that the genuine receipts dated January, 1957 raise the presumption that prior
installments were paid. This might be true if such receipts recited that they were issued for the
installments corresponding to the month of January, 1957; but nowhere does that fact appear.
And even if such recital had been made, the resulting presumption would only be prima
facie, and the evidence before us is clear that the payments made do not correspond to the
installment falling due on the dates of the genuine receipts.
We find no error in the judgment appealed from, and therefore the same is hereby affirmed.
Costs in both instances against appellant Mariano Medina.

Padilla, Bautista Angelo, Labrador,

Leon and Natividad, JJ., concur.

Concepcion,

Barrera,

Paredes,

Dizon,

Bengzon, C.J., took no part.

||| (Manila Trading & Supply Co. v. Medina, G.R. No. L-16477, [May 31, 1961], 112 PHIL
449-454)

De

213

15. PRESUMPTIONS. 2.

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

EN BANC
[G.R. No. L-18335. July 31, 1963.]
SALUD LEDESMA, petitioner, vs. ALBERTO REALUBIN and
COURTS OF APPEALS, respondents.

From the Baguio Caltex service station owned by the respondent, Alberto Realubin, the
petitioner, Salud Ledesma, purchased on credit, on different dates, through her drivers, gasoline
and motor oil, from June to September, 1956, for amounts summed up by the month, as
follows:
June P908.55
July 920.201
August 522.00
September 439.85

C. Q. Crucillo and F. C. Tumale for petitioner.

Paulino C. Order for respondent.

P2,790.60
All the credit purchases were invoiced in the same printed form. The earliest, Exhibit
"A", is, in words and figures, as follows:

SYLLABUS
1. OBLIGATIONS AND CONTRACTS; PAYMENT, PRESUMPTION OF; CANNOT
PREVAIL OVER PROVEN FACT OF NON-PAYMENT. Where the creditor proved as a
fact that prior purchases were for cash, the presumption of payment of prior obligations under
Article 1171 of the new Civil Code cannot prevail. Between a proven fact and a
presumption pro tanto, the former stands, and the latter falls.
2. APPEALS; JUDGMENTS; ATTORNEYS FEES CAN BE INCREASED DESPITE
WINNING PARTY'S INTERPOSING NO APPEAL THEREON. The appellate court's
decision to increase the attorney's fees beyond those awarded by the trial court in spite of
respondent interposing no appeal thereon is held to be correct, because the fees determined by
the Court of First Instance could not have included the service of counsel on appeal, none
having been therefore interposed, and the Court of Appeals could fix counsel fees in
accordance with justice and equity.
3. ID.; ID.; INTEREST ON MAIN INDEBTEDNESS CANNOT BE INCREASED WHERE
CREDITOR INTERPOSED NO APPEAL THEREON. The Appeals Court erred in
increasing the interest on the main indebtedness from the 6% awarded in the court of first
instance to 12%, because plaintiff's failure to appeal from the decision signified his assent to
the rate fixed by the trial judge, despite the party's knowledge that the documents called for
12% interest.

DECISION

"Tel. No. 21-38 No. 55968

Baguio CALTEX Service Station
Naguilian, Bower & Bokawkan Road Baguio City.

Corner

Mr. & Mrs. A. REALUBIN Prop.

Sold to Mrs. S. Ledesma
Address
License No. 1541 Date 6-1-56
Qnty. Articles Unit Price Amount
87 GASOLINE 19.60
2 ENGINE OIL C 1.80
GEAR OIL
HYDRAULIC FLUID
TOTAL P21.40
Purchaser hereby agrees that a charge of 1% per
month shall be added to all overdue accounts; (accounts
more than 30 days shall be counted overdue) an additional
25% of the amount will also be charged for attorney's fees
plus cost of collection; (in cases where such services are
required.) It is agreed further that the courts of Baguio

214
will have exclusive jurisdiction over any litigation arising
from this transaction.
(Sgd.) Manuel Buenconsejo
Salesman Purchaser or Agent"
The respondent follows this business practice: Each invoice is done in triplicate the original,
in white paper; the two others, in blue and pink paper, respectively. For purchases in cash, the
original or white invoice is issued to the customer, but for purchases on credit, the pink copy is
issued, the station proprietor retaining the original and blue copies; when payment is made on
credit purchases, the white or original copy is then released to the customer.
At the time of the trial, the plaintiff (respondent herein) was in possession of the original or
white copies of the invoice for purchases made in the months hereinabove stated (June to
September), all of which were signed by the petitioner's truck drivers.
Due to repeated verbal demands upon to pay, the petitioner sent to Alberto Realubin the
following handwritten letter:
"Nov. 25, 1967
Mr. Realubin,
My son told me that you came to see me. To tell
you the truth Mr. Realubin, I am just waiting for the money
of Miss Casisca from the National Power Corporation, after
she can finish the 24 houses she contracted after everything
will be paid. I will be the one to go to you, and not you to see
me, because that is my obligation to you. I am really very
ashamed for all that happened to me that I cannot even pay
my obligation.
I hope you understand what I mean. Just be
patient Mr. Realubin. Very soon I will settle my account to
you.
Sincerely,
(Sgd.) Mrs. Ledesma"
Salud Ledesma was, in the court below, first adjudged in default, but on petition for relief, the
default was set aside. In her subsequent answer to the complaint, she denied the purchases, and
averred, as a special defense, that her truck drivers did not have the authority to purchase
gasoline in her behalf. The drivers' authority to sign, however, was admitted during the trial,
but Salud Ledesma testified that the amounts which the plaintiff was collecting from her had
been fully paid. She tried to prove payment by her sole testimony and by presenting as exhibits
the pink copies of the invoices she had in her possession. Salud Ledesma also contended that
the handwritten letter, previously transcribed, is a forgery. On this point, the Court of Appeals
made the following observation:
"The handwriting of the letter is that a convent bred and
educated woman; the signature, Mrs. Ledesma', is in the

same handwriting, and the contents of the letter express the

fine sentiments of a woman apologizing for her failure to pay
her obligation. Appellant's two samples of her signature
affixed during the trial on Exhibit 12, and her admitted
signatures on Exhibits 13 and 14 seem to be the same hand
that wrote and signed the letter. As appellant's testimony
denying having written and signed the letter was on material
matter, we deem it proper to order the holding of a
preliminary investigation to determine whether the crime of
perjury or false testimony has probably been committed."
The trial court found for the plaintiff, and the Court of Appeals sustained the decision with
certain modifications. The petitioner then took an ultimate appeal to this Court.
The petitioner argues here that it was error for the Court of Appeals to take against her the
circumstance that her answer had only one special defense, pointing out that evidence
presented on her other defenses was not objected to during the trial. We see no point in this
assignment since the Court of Appeals merely stated the truth, that in petitioner's answer she
only alleged one special defense: "to wit, lack of authority of her truck drivers to sign the
purchase invoices on her behalf, . . ." The appellate court did not question the admissibility of
the evidence adduced in support of her other defense of payment, though it was not alleged in
her answer, but declined to give it weight, as it had sound discretion to do. To admit evidence
and not to believe it are not incompatible with each other, and this Court can not alter the
conclusions of the Court of Appeals on the credibility to be accorded to the evidence of the
parties.
The second assignment of error refers to the failure of the Court of Appeals to apply the
presumption of payment. Invoking Article 1176 of the Civil Code (New), petitioner claims that
inasmuch as she admittedly paid her October, 1956 purchase, it is to be presumed that her prior
purchases were likewise paid, because her account with the respondent was a running account.
We cannot agree. Realubin proved as a fact that the prior purchases were not paid, and that the
October purchases were for cash, and the Court of Appeals so found. Therefore, the
presumption of payment of prior obligations (assuming its applicability for argument's sake)
cannot prevail. Between a proven fact and a presumption pro tanto, the former stands, and the
latter falls.
The petitioner assails the appellate court's decision to increase the attorney's fees beyond those
awarded by the trial court in spite of respondent's interposing no appeal thereon. This objection
lacks merit, because the fees determined by the Court of First Instance could not have included
the service of counsel on appeal, none having been theretofore interposed and the Court of
Appeals could fix counsel fees in accordance with justice and equity.
We agree with appellant, however, that the Appeals Court erred in increasing the interest on the
main indebtedness from the 6% awarded in the court of first instance to 12%, because
plaintiff's failure to appeal from the decision signified his assent to the rate fixed by the trial
judge, despite the party's knowledge that the documents called for 12% interest.
WHEREFORE, with the sole modification that the main award shall earn interest at the legal
rate from July 18, 1959 until fully paid, the decision of the Court of Appeals is affirmed. No
costs in this instance.

215
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes,
Dizon and Regala, JJ., concur.
Makalintal, J., took no part.
||| (Ledesma v. Realubin, G.R. No. L-18335, [July 31, 1963], 118 PHIL 625-630)

216

16. REMEDIES OF THE CREDITOR

SECOND DIVISION

neither under this provision of the former Constitution nor that of C.A. No. 539 can petitioners
claim any right since the grant of preference therein applies only to bona fide tenants, after the
expropriation or purchase by the government of the land they are occupying. Petitioners were
not tenants of the land in question in this case. Nor has the land been acquired by the
government for their benefit.

[G.R. No. 119466. November 25, 1999.]

SYLLABUS
SALVADOR
ADORABLE
and
LIGAYA
ADORABLE, petitioners, vs. COURT OF APPEALS, HON. JOSE
O. RAMOS, FRANCISCO BARENG and SATURNINO
BARENG, respondents.

Lopez Law Office for petitioners.

Ariel C. Vallejo for Francisco and Saturnino Bareng.
Virgilio T. Velasco for Judge J.O. Ramos

SYNOPSIS
Petitioners were lessees of 200 sq. meters of land, owned by Saturnino Bareng. On April 29
1985 Saturnino Bareng and his son Francisco Bareng obtained a loan from the petitioners in
the amount of P26,000.00. Later, Saturnino sold 18,500 sq. meters of the said lot to his son,
Francisco. In turn, Francisco sold 3,000 square meters of the said lot to Jose Ramos which
included the portion being rented by the petitioners. When the maturity date of the loan arrived,
Francisco Bareng failed to pay. Petitioners, upon learning of the sale made by Francisco
Bareng to Jose Ramos filed a complaint with the Regional Trial Court, Branch 24 of Echague,
Isabela for the annulment or rescission of the sale anchoring their right as creditors of
Francisco Bareng, as well as their claim of preference as lessees to the sale of the contested lot.
After trial, the court a quo rendered judgment dismissing the complaint for lack of cause of
action. On appeal, the Court of Appeals affirmed the said decision.
In this petition, the Court ruled that as creditors, petitioners did not have such material interest
as to allow them to sue for rescission of the contract of sale. At the outset, petitioners' right
against private respondents is only a personal right to receive payment for the loan; it is not a
real right over the lot subject of the deed of sale.
Nor did petitioners enjoy any preference to buy the questioned property. Petitioners attempted
to establish such legal injury through a claim of preference created under C.A. No. 539. This
statute was passed to implement Art. XIII, 4 of the 1935 Constitution which provided that
"The Congress may authorize, upon payment of just compensation, the expropriation of lands
to be subdivided into small lots and conveyed at cost to individuals." It was obvious that

1.REMEDIAL LAW; CIVIL PROCEDURE; PERSONAL RIGHT AND REAL RIGHT;

DISTINGUISHED. A personal right is the power of one person to demand of another, as a
definite passive subject, the fulfillment of a prestation to give, to do, or not to do. On the other
hand, a real right is the power; belonging to a person over a specific thing, without a passive
subject individually determined, against whom, such right may be personally exercised.
2.CIVIL LAW; OBLIGATIONS AND CONTRACTS; MEASURES TO BE TAKEN BY A
CREDITOR BEFORE HE CAN BRING AN ACTION FOR RESCISSION OF AN
ALLEGEDLY FRAUDULENT SALE. Thus, the following successive measures must be
taken by a creditor before he may bring an action for rescission of an allegedly fraudulent sale:
(1) exhaust the properties of the debtor through levying by attachment and execution upon all
the property of the debtor, except such as are exempt by law from execution; (2) exercise all
the rights and actions of the debtor, save those personal to him (accion subrogatoria); and (3)
seek rescission of the contracts executed by the debtor in fraud of their rights ( accion
pauliana).
3.ID.; ID.; ID.; ACTION FOR RESCISSION IS A SUBSIDIARY REMEDY. Indeed, an
action for rescission is a subsidiary remedy; it cannot be instituted except when the party
suffering damage has no other legal means to obtain reparation for the same. Thus, Art. 1380 of
the Civil Code provides: The following contracts are rescissible: . . . (3) Those undertaken in
fraud of creditors when the latter cannot in any other manner collect the claims due them.
4.ID.; ID.; ID.; ID.; NOT PROPER IN CASE AT BAR. Petitioners have not shown that they
have no other means of enforcing their credit. As the Court of Appeals pointed out in its
decision: In this case, plaintiffs-appellants had not even commenced an action against
defendants-appellees Bareng for the collection of the alleged indebtedness. Plaintiffsappellants had not even tried to exhaust the property of defendants-appellees Bareng.
Plaintiffs-appellants, in seeking for the rescission of the contracts of sale entered into between
defendants-appellees, failed to show and prove that defendants-appellees Bareng had no other
property, either at the time of the sale or at the time this action was filed, out of which they
could have collected this (sic) debts.
5.ID., ID.; ID.; ID.; MAY BE FILED BY PERSON NOT PRIVY TO CONTRACT WHO
SHOWS THAT INJURY WOULD POSITIVELY RESULT TO HIM. InAldecoa
v. Hongkong and Shanghai Banking Corporation, it was held that in order that one who is not
obligated in a contract either principally or subsidiarily may maintain an action for nullifying
the same, his complaint must show the injury that would positively result to him from the
contract in which he has not intervened, with regard at least to one of the contracting parties.

217
6.POLITICAL
LAW;
CONSTITUTIONAL
LAW;
EMINENT
DOMAIN;
COMMONWEALTH ACT NO. 539; GRANT OF PREFERENCE APPLIES ONLY TOBONA
FIDE TENANTS; NOT APPLICABLE IN CASE AT BAR. Petitioners attempt to establish
such legal injury through a claim of preference created under C.A. No. 539, the pertinent
provision of which provides: SEC. 1. The President of the Philippines is authorized to acquire
private lands or any interest therein, through purchase or expropriation, and to subdivide the
same into horse lots or small farms for resale at reasonable prices and under such conditions as
he may fix to their bona fide tenants or occupants or to private individuals who will work the
lands themselves and who are qualified to acquire and own lands in the Philippines. This
statute was passed to implement Art. XIII, 4 of the 1935 Constitution which provided that
"The Congress may authorize, upon payment of just compensation, the expropriation of lands
to be subdivided into small lots and conveyed at cost to individuals." It is obvious that neither
under this provision of the former Constitution nor that of C.A. No. 539 can petitioners claim
any right since the grant of preference therein applies only to bona fide tenants, after the
expropriation or purchase by the government of the land they are occupying. Petitioners are not
tenants of the land in question in this case. Nor has the land been acquired by the government
for their benefit.
7.REMEDIAL LAW; SPECIAL CIVIL ACTION; CERTIORARI; GRAVE ABUSE OF
DISCRETION; NOT COMMITTED BY COURT THAT DECIDES TO PROCEED WITH
TRIAL OF CASE RATHER THAN POSTPONE THE HEARING TO ANOTHER DAY
BECAUSE OF THE ABSENCE OF PARTY. We cannot find grave abuse of discretion
simply because a court decides to proceed with the trial of a case rather than postpone the
hearing to another day, because of the absence of a party. That the absence of a party during
trial constitutes waiver of his right to present evidence and cross-examine the opponent's
witnesses is firmly supported by jurisprudence. To constitute grave abuse of discretion
amounting to lack or excess of jurisdiction, the refusal of the court to postpone the hearing
must be characterized by arbitrariness or capriciousness. Here, as correctly noted by the Court
of Appeals, petitioners' counsel was duly notified through registered mail of the scheduled
trials. His only excuse for his failure to appear at the scheduled hearing is that he "comes from
Makati" This excuse might hold water if counsel was simply late in arriving in the courtroom.
But this was not the case. He did not appear at all.

DECISION

MENDOZA, J p:
This is a petition for review under Rule 45 of the decision 1 of the Court of Appeals, dated
January 6, 1995, sustaining the dismissal by Branch 24 of the Regional Trial Court, Echague,
Isabela, of the complaint filed by petitioners, spouses Salvador and Ligaya Adorable, for lack
of cause of action. cdphil
The facts are as follows:
Private respondent Saturnino Bareng was the registered owner of two parcels of land, one
identified as Lot No. 661-D-5-A, with an area of 20,000 sq. m., covered by TCT No. T-162837,

and the other known as Lot No. 661-E, with an area of 4.0628 hectares, covered by TCT No. T60814, both of which are in San Fabian, Echague, Isabela. Petitioners were lessees of a 200
sq.m. portion of Lot No. 661-D-5-A.
On April 29, 1985, Saturnino Bareng and his son, private respondent Francisco Bareng,
obtained a loan from petitioners amounting to twenty six thousand pesos (P26,000), in
consideration of which they promised to transfer the possession and enjoyment of the fruits of
Lot No. 661-E.
On August 3, 1986, Saturnino sold to his son Francisco 18,500 sq.m. of Lot No. 661-D-5-A.
The conveyance was annotated on the back of TCT No. T-162873. In turn, Francisco sold on
August 27, 1986 to private respondent Jose Ramos 3,000 sq.m. of the lot. The portion of land
being rented to petitioners was included in the portion sold to Jose Ramos. The deeds of sale
evidencing the conveyances were not registered in the office of the register of deeds. LexLib
As the Barengs failed to pay their loan, petitioners complained to Police Captain Rodolfo Saet
of the Integrated National Police (INP) of Echague through whose mediation a Compromise
Agreement was executed between Francisco Bareng and the Adorables whereby the former
acknowledged his indebtedness of P56,385.00 which he promised to pay on or before July 15,
1987. When the maturity date arrived, however, Francisco Bareng failed to pay. A demand
letter was sent to Francisco Bareng, but he refused to pay.

Petitioners, learning of the sale made by Francisco Bareng to Jose Ramos, then filed a
complaint with the Regional Trial Court, Branch 24, Echague, Isabela for the annulment or
rescission of the sale on the ground that the sale was fraudulently prepared and executed.
During trial, petitioners presented as witness Jose Ramos. After his testimony, the next hearing
was set on August 4 and 5, 1990. On said hearing dates, however, petitioners were absent. The
trial court therefore ordered the presentation of evidence for petitioners terminated and allowed
private respondents to present their evidence ex parte. On February 15, 1991, the trial court
rendered judgment dismissing the complaint for lack of cause of action, declaring the contract
of sale between Francisco Bareng and Jose Ramos valid and ordering Francisco Bareng to pay
the amount he owed petitioners.
On appeal, the Court of Appeals affirmed the decision of the Regional Trial Court, with
modification as to the amount of Francisco Bareng's debt to petitioners.
Hence, this petition for review, raising the following issues: (1) whether the Court of Appeals
erred in dismissing the complaint for lack of cause of action; (2) whether petitioners enjoyed
legal preference to purchase the lots they lease; and (3) whether the Court of Appeals erred in
sustaining the lower court's order terminating petitioners' presentation of evidence and
allowing private respondents to present their evidence ex parte.
In sustaining the decision of the trial court dismissing the complaint for lack of cause of action,
the Court of Appeals premised its decision on Rule 3, 2 of the former Rules of Court which
provided: Cdpr
Parties in interest. Every action must be prosecuted and defended
in the name of the real party in interest. All persons having an interest
in the subject of the action and in obtaining the relief demanded shall

218
be joined as plaintiffs. All persons who claim an interest in the
controversy or who are necessary to a complete determination or
settlement of the questions involved therein shall be joined as
defendants.
A real party in interest is one who would be benefited or injured by the judgment, or who is
entitled to the avails of the suit. "Interest," within the meaning of this rule, should be material,
directly in issue and to be affected by the decree, as distinguished from a mere incidental
interest or in the question involved. 2 Otherwise put, an action shall be prosecuted in the name
of the party who, by the substantive law, has the right sought to be enforced. 3
Petitioners anchor their interest on their right as creditors of Francisco Bareng, as well as on
their claim of preference over the sale of the contested lot. 4 They contend that the sale
between Francisco Bareng and Jose Ramos prejudiced their interests over the property as
creditors of Francisco Bareng. Moreover, they claim that, under Commonwealth Act No. 539,
they have a preferential right, as tenants or lessees, to purchase the land in question.
The petition has no merit.
First. We hold that, as creditors, petitioners do not have such material interest as to allow them
to sue for rescission of the contract of sale. At the outset, petitioners' right against private
respondents is only a personal right to receive payment for the loan; it is not a real right over
the lot subject of the deed of sale.
A personal right is the power of one person to demand of another, as a definite passive subject,
the fulfillment of a prestation to give, to do, or not to do. On the other hand, a real right is the
power belonging to a person over a specific thing, without a passive subject individually
determined, against whom such right may be personally exercised. 5 In this case, while
petitioners have an interest in securing payment of the loan they extended, their right to seek
payment does not in any manner attach to a particular portion of the patrimony of their debtor,
Francisco Bareng. prLL
Nor can we sustain petitioners' claim that the sale was made in fraud of creditors. Art. 1177 of
the Civil Code provides:
The creditors, after having pursued the property in possession of the
debtor to satisfy their claims, may exercise all the rights and bring all
the actions of the latter for the same purpose, save those which are
inherent in his person; they may also impugn the actions which the
debtor may have done to defraud them. (Emphasis added)
Thus, the following successive measures must be taken by a creditor before he may bring an
action for rescission of an allegedly fraudulent sale: (1) exhaust the properties of the debtor
through levying by attachment and execution upon all the property of the debtor, except such
as are exempt by law from execution; (2) exercise all the rights and actions of the debtor, save
those personal to him (accion subrogatoria); and (3) seek rescission of the contracts executed
by the debtor in fraud of their rights (accion pauliana). Without availing of the first and second
remedies, i.e., exhausting the properties of the debtor or subrogating themselves in Francisco
Bareng's transmissible rights and actions, petitioners simply undertook the third measure and
filed an action for annulment of the sale. This cannot be done.

Indeed, an action for rescission is a subsidiary remedy; it cannot be instituted except when the
party suffering damage has no other legal means to obtain reparation for the same. 6 Thus, Art.
1380 of the Civil Code provides:
The following contracts are rescissible:
xxx xxx xxx
(3)Those undertaken in fraud of creditors when the latter cannot in
any other manner collect the claims due them;
Petitioners have not shown that they have no other means of enforcing their credit. As the
Court of Appeals pointed out in its decision:
In this case, plaintiffs-appellants had not even commenced an action
against defendants-appellees Bareng for the collection of the alleged
indebtedness. Plaintiffs-appellants had not even tried to exhaust the
property of defendants-appellees Bareng. Plaintiffs-appellants, in
seeking for the rescission of the contracts of sale entered into between
defendants-appellees, failed to show and prove that defendantsappellees Bareng had no other property, either at the time of the sale
or at the time this action was filed, out of which they could have
collected this (sic) debts. cdtai
Second. Nor do petitioners enjoy any preference to buy the questioned property. In Aldecoa
v. Hongkong and Shanghai Banking Corporation, 7 it was held that in order that one who is
not obligated in a contract either principally or subsidiarily may maintain an action for
nullifying the same, his complaint must show the injury that would positively result to him
from the contract in which he has not intervened, with regard at least to one of the contracting
parties.
Petitioners attempt to establish such legal injury through a claim of preference created
under C.A. No. 539, the pertinent provision of which provides:
SEC. 1.The President of the Philippines is authorized to acquire
private lands or any interest therein, through purchase or
expropriation, and to subdivide the same into home lots or small
farms for resale at reasonable prices and under such conditions as he
may fix to their bona fide tenants or occupants or to private
individuals who will work the lands themselves and who are qualified
to acquire and own lands in the Philippines.
This statute was passed to implement Art. XIII, 4 of the 1935 Constitution which provided
that "The Congress may authorize, upon payment of just compensation, the expropriation of
lands to be subdivided into small lots and conveyed at cost to individuals." It is obvious that
neither under this provision of the former Constitution nor that of C.A. No. 539 can petitioners
claim any right since the grant of preference therein applies only to bona fide tenants, after the
expropriation or purchase by the government of the land they are occupying. 8 Petitioners are
not tenants of the land in question in this case. Nor has the land been acquired by the
government for their benefit.

219
Third. Finally, we hold that no error was committed by the Court of Appeals in affirming the
order of the trial court terminating the presentation of petitioners' evidence and allowing
private respondents to proceed with theirs because of petitioners' failure to present further
evidence at the scheduled dates of trial. Cdpr
Petitioners contend that since their counsel holds office in Makati, the latter's failure to appear
at the trial in Isabela at the scheduled date of hearing should have been treated by the court
with a "sense of fairness." 9
This is more a plea for compassion rather than explanation based on reason. We cannot find
grave abuse of discretion simply because a court decides to proceed with the trial of a case
rather than postpone the hearing to another day, because of the absence of a party. That the
absence of a party during trial constitutes waiver of his right to present evidence and crossexamine the opponent's witnesses is firmly supported by jurisprudence. 10 To constitute grave
abuse of discretion amounting to lack or excess of jurisdiction, the refusal of the court to
postpone the hearing must be characterized by arbitrariness or capriciousness. Here, as
correctly noted by the Court of Appeals, petitioners' counsel was duly notified through
registered mail of the scheduled trials. 11 His only excuse for his failure to appear at the
scheduled hearings is that he "comes from Makati." This excuse might hold water if counsel
was simply late in arriving in the courtroom. But this was not the case. He did not appear at all.
WHEREFORE, the petition for review is DENIED, and the decision of the Court of Appeals is
AFFIRMED.
SO ORDERED. prcd
Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.
||| (Spouses Adorable v. Court of Appeals, G.R. No. 119466, [November 25, 1999], 377 PHIL
210-221)

220

1. and all persons claiming possession of the premises through

[Toyota], to vacate the leased properties and return possession thereof
to [Insular Life];
THIRD DIVISION
[G.R. No. 137884. March 28, 2008.]

2. to pay reasonable compensation at the rate of P585,640.00 a

month until possession of the subject premises is surrendered to
the [Insular Life].
3. to pay attorney's fees in the sum of P50,000.00;

THE
INSULAR
LIFE
ASSURANCE
COMPANY,
LTD., petitioner, vs. TOYOTA BEL-AIR, INC., respondent.

4. to pay expenses of litigation in the amount of P20,000.00;

5. to pay the costs of the suit.
SO ORDERED. 6 (Emphasis supplied).

DECISION

AUSTRIA-MARTINEZ, J p:
Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
assailing the Decision 1 dated September 30, 1998 of the Regional Trial Court (RTC), Branch
148, Makati City in Civil Case No. 98-2075 which nullified the Writ of Execution dated
August 12, 1998 issued by the Metropolitan Trial Court (MeTC), Branch 63, Makati City in
Civil Case No. 59089, and the RTC Order 2 dated March 5, 1999 denying the Motion for
Reconsideration.
The principal issue raised in the present petition pertains to the propriety of the decision of the
RTC in declaring as void the writ of execution issued by the MeTC and in ordering the
consignation of rentals. Being pure questions of law, direct resort to this Court is proper under
Section 2 (c), Rule 41 of the Rules of Court.
The factual antecedents of the case are as follows:
Toyota Bel-Air, Inc. (Toyota) entered into a Contract of Lease 3 over a 3,700-square meter lot
and building owned by Insular Life Assurance Company, Ltd. (Insular Life) in Pasong Tamo
Street, Makati City, for a five-year period, from April 16, 1992 to April 15, 1997. Upon
expiration of the lease, Toyota remained in possession of the property. Despite repeated
demands, Toyota refused to vacate the property. Thus, on January 28, 1998, Insular Life filed a
Complaint 4 for unlawful detainer against Toyota in the MeTC.
On July 3, 1998, MeTC rendered a Decision, 5 the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of [Insular Life]
and against [Toyota]. The Court hereby orders [Toyota]:

On July 23, 1998, Insular Life filed a Motion for Execution 7 of the decision. Toyota, on the
other hand, filed a Notice of Appeals 8 of the decision. Subsequently, Insular Life filed a
Notice of Partial Appeal 9 of the decision insofar as the issue of monthly compensation was
concerned. Both parties, however, later filed separate motions to withdraw their respective
appeals. 10
On August 12, 1998, the MeTC issued an Order approving the withdrawal of notice of appeal
of both parties. It also issued a Writ of Execution, 11 on the following premise:
WHEREAS, in a certain action for "EJECTMENT" of the following
described premises, to wit: a parcel of Land and Building located at
Pasong Tamo, Makati City under TCT No. 64737 of the Registry of
Deeds of Rizal, . . . judgment was rendered on the 3rd day of July,
1998 that [Insular Life] and all persons claiming under him/her/them
have restitution of the premises and also that he/she/they recover the
sum of P585,640.00 a month from April 15, 1997 until possession of
the subject premises is surrendered to plaintiff; to recover the sum of
P50,000.00 as and for attorney's fees; P20,000.00 as expenses of
litigation and costs of suit. 12 . . . (Emphasis supplied)
Subsequently, the Deputy Sheriff of the MeTC executed the writ by levying on Toyota's
personal and real properties, and garnishing its bank accounts. He scheduled the auction of the
levied properties on August 28, 1998.
On August 24, 1998, Toyota filed a Petition for Certiorari 13 with prayer for injunctive relief
in the RTC. It charged the MeTC with grave abuse of discretion in issuing the Writ of
Execution since the writ amended the dispositive portion of the decision it sought to execute by
giving retroactive effect to the payment of reasonable compensation of P585,640.00 by the
inclusion of the phrase "from April 15, 1997."
On August 27, 1998, the RTC issued a temporary restraining order (TRO) enjoining the auction
sale of Toyota's levied properties. 14

221
On August 28, 1998, Insular Life filed with the MeTC a Motion to Clarify Decision Dated July
3, 1998 15 praying that the court issue an order clarifying the dispositive portion of the
Decision dated July 3, 1998.
On September 14, 1998, the MeTC issued an Order, 16 clarifying paragraph 2 of the
dispositive portion of the Decision dated July 3, 1998 to read as: "2. to pay reasonable
compensation in the amount of P585,640.00 as of April 15, 1997 until possession of the
subject premises is surrendered to plaintiff." 17
On September 25, 1998, Toyota filed with the RTC a Motion to Consignate P1,171,280.00 in
favor of Insular Life and to submit the case for decision.18 The amount of P1,171,280.00
represented the reasonable compensation for the months of July and August 1998.
Five days later, or on September 30, 1998, the RTC rendered the herein assailed
Decision, 19 holding that the MeTC acted with grave abuse of discretion in issuing the Writ of
Execution dated August 12, 1998 by giving retroactive effect to the reasonable compensation
judgment of P585,640.00 by inserting the date "April 15, 1997" which was not provided for in
the dispositive portion of the MeTC Decision; that the clarificatory order issued by the MeTC
did not cure the ambiguity in the decision since it omitted the phrase "a month" as originally
stated in the Decision; that considering the Writ of Execution is void, the levy effected by the
Sheriff is also void; and that consignation of rentals is proper since Toyota has been in
possession of the property since July 3, 1998.
On October 13, 1998, Insular Life filed a Motion for Reconsideration 20 of the RTC Decision.
On the same day, it filed with the MeTC a Second Motion to Clarify Decision Dated July 3,
1998. 21
On October 28, 1998, the MeTC issued its second clarificatory order to correct paragraph 2 of
the dispositive portion of the Decision dated July 3, 1998 to read as: "2. [t]o pay reasonable
compensation at the rate of P585,640.00 a month as of April 15, 1997 until possession of
the subject premises is surrendered to the plaintiff." 22
On March 5, 1999, the RTC issued an Order 23 denying Insular Life's motion for
reconsideration.
On April 19, 1999, Insular Life then filed herein Petition for Review on Certiorari 24 with this
Court anchored on the following grounds:
I
THE RTC COMMITTED A GRAVE ABUSE OF DISCRETION
TANTAMOUNT TO LACK OR IN EXCESS OF ITS
JURISDICTION IN VOIDING THE WRIT OF EXECUTION
ISSUED BY THE MTC.
i. THE WRIT OF EXECUTION IS IN HARMONY
WITH THE INTENT, SPIRIT AND TERMS
OF THE MTC'S DECISION DATED JULY 3,
1998.
ii. THE WRIT OF EXECUTION IS VALID AND
ENFORCEABLE.

iii. THE

RTC SANCTIONED TBA'S CRAFTY

CIRCUMVENTION OF THE RULES.
II

ASSUMING ARGUENDO THAT THE MTC EXCEEDED ITS

JURISDICTION IN ORDERING IN THE WRIT OF EXECUTION
THAT THE REASONABLE COMPENSATION BE COMPUTED
FROM APRIL 15, 1997, STILL, THE RTC COMMITTED A
GRAVE ABUSE OF DISCRETION TANTAMOUNT TO LACK OR
IN EXCESS OF ITS JURISDICTION IN VOIDING THE ENTIRE
WRIT OF EXECUTION.
III
THE RTC COMMITTED A GRAVE ABUSE OF DISCRETION
TANTAMOUNT TO LACK OR IN EXCESS OF ITS
JURISDICTION IN ORDERING IN THE CERTIORARI
PROCEEDING A QUO THE CONSIGNATION OF RENTALS.
IV
THE RTC COMMITTED A GRAVE ABUSE OF DISCRETION
TANTAMOUNT TO LACK OR IN EXCESS OF ITS
JURISDICTION IN NOT DISMISSING THE CERTIORARI
PETITION A QUO FOR TBA (PETITIONER BELOW) HAD A
PLAIN, SPEEDY AND ADEQUATE REMEDY IN THE COURSE
OF LAW AND DID NOT AVAIL OF THE SAME. 25
Insular Life contends that the case falls within the recognized exceptions to the rule that only
the dispositive portion of the decision controls the execution of judgment; that the pleadings,
findings of fact and conclusion of law expressed in the text of the MeTC's Decision dated July
13, 1998 should be resorted to, to clarify the ambiguity in the dispositive portion of the
decision; that the intent to order payment of rent as reasonable compensation from April 15,
1997, when possession became unlawful, can be inferred from the text of the decision; that the
RTC should not have nullified the entire Writ of Execution since only the matter of reasonable
compensation from April 15, 1997 was at issue; that consignation of rentals was improper since
the office of a writ of certiorari is to correct defects in jurisdiction solely and the legal
requisites for a valid consignation were not present; and that Toyota failed to resort to available
remedies before availing itself of the extraordinary remedy of certiorari. On the matter of the
compromise agreement, Insular Life reiterated that the agreement was a conditional
compromise agreement which was voided for Toyota's failure to comply with the
conditions. 26
Toyota claims that the parties had entered into a Compromise Agreement dated May 7, 1999
whereby Toyota was obligated to pay Insular Life P8 million under the following terms and
conditions: (a) the delivery of 3 Toyota vehicles worth P1.5 million; (b) the issuance of 12
postdated corporate checks to answer for the balance of P6.5 million in 12 monthly
installments; and (c) the posting of a surety bond which shall guarantee payment of
installments. 27 Toyota insists that the Compromise Agreement dated May 7, 1999 should be
given effect considering that the preconditions contained in the Compromise Agreement were
complied with, or at the very least substantially complied with; 28 and prayed that the case

222
should be remanded to the lower court for the purpose of approving the Compromise
Agreement dated May 7, 1999. 29
In a Resolution dated August 8, 2001, the Court remanded the case to the RTC for further
proceedings to determine whether Toyota had complied with the conditions contained in the
Compromise Agreement dated May 7, 1999 and thereafter elevate its findings and records
thereof to the Court. 30

In its Compliance 31 dated March 24, 2003, the RTC found that Toyota failed to comply with
conditions in the Compromise Agreement dated May 7, 1999 relating to the issuance of the 12
postdated corporate checks and the posting of a surety bond; that the postdated checks were not
accepted since they were drawn from Toyota's garnished Metrobank account; that the checks
could have been encashed had Insular Life lifted the garnishment; that the surety bond was
rejected for not having been issued by a surety company that is among Insular Life's list of
acceptable surety companies; that as substitute collateral, Toyota offered a Bukidnon real
property but Insular Life turned it down since the owner's duplicate of title could not be found
and the property was not owned by Toyota but by three corporations; that a subsequent
reconstitution of the title and the authorization by the three co-owner corporations to mortgage
the Bukidnon real property and to use it to stand as security for the postdated checks failed to
entice Insular Life to accept the proposal; and that Toyota acted in good faith in dealing with
Insular Life when it tried to comply with the conditions in the Compromise Agreement.
By Resolution 32 dated August 27, 2003, the Court required both parties to submit
supplemental memoranda, taking into account the Compliance dated March 24, 2003 of the
RTC.
In its Supplemental Memorandum, 33 Insular Life maintains that Toyota failed to comply with
the conditions relating to the postdated checks and the surety bond; that the garnishment of
Toyota's bank accounts was a known fact; that it would have been absolutely foolhardy for
Insular Life to cause the immediate lifting of the garnishment upon Toyota's mere delivery to it
of the postdated checks; that the lifting of the garnishment is one of the consequences once all
the conditions of the compromise are met; that Toyota admitted in a Letter dated May 21, 1999
to Insular Life its inability to comply with the surety bond requirement; that Toyota's good faith
is immaterial; that Toyota cannot claim substantial compliance since it failed to comply with
the conditions of the Compromise Agreement.
On the other hand, in its Supplemental Memorandum, 34 Toyota submits that it substantially
complied with the terms of the Compromise Agreement since the compromised amount was
reduced from P8 million to P6.5 million upon delivery of the three Toyota vehicles worth P1.5
million; that it could have complied with the requirement of the delivery of 12 postdated
checks had Insular Life lifted the garnishment on Toyota's bank accounts effected by virtue of
the Writ of Execution dated August 12, 1998; that since the Writ of Execution was voided by
the RTC, the garnishment was also nullified; and that Insular Life's unjustified refusal to give
due course to the postdated checks, by not lifting the garnishment, prevented said checks from
being encashed.
It is necessary to resolve the matter involving the efficacy of the Compromise Agreement
between the parties before the merits of the petition can be discussed.

Jurisprudence teaches us that when a contract is subject to a suspensive condition, its birth or
effectivity can take place only if and when the event which constitutes the condition happens or
is fulfilled, 35 and if the suspensive condition does not take place, the parties would stand as if
the conditional obligation has never existed. 36
In this case, the Compromise Agreement clearly stipulates that it shall become valid and
binding only upon the occurrence of all the conditions in the agreement, to wit:
2. This Agreement when signed by the parties shall take effect and
shall become valid and binding only upon the occurrence
of all of the following based on a certification or
acknowledgment certified and issued by INSULAR
LIFE:
2.1. transfer of ownership and delivery of the
aforementioned three (3) motor vehicles in
favor of INSULAR LIFE in accordance with
the provisions of Section 1.1. hereof;
2.2. TBA's execution, issuance and delivery of twelve (12)
post-dated TBA corporate checks signed by
ROBERT L. YUPANGCO in favor of
INSULAR LIFE in accordance with the
provisions of this Agreement;
2.3. the issuance of the Surety Company and delivery of
the Bond in the amount of PESOS: SIX
MILLION FIVE HUNDRED THOUSAND
(P6,500,000.00) to and in favor of INSULAR
LIFE under this Agreement. 37 . . . (Emphasis
supplied)
Thus, the issuance of 12 postdated checks and the posting of a surety bond are positive
suspensive conditions of the Compromise Agreement, the non-compliance with which was not
a breach, casual or serious, but a situation that prevented the obligation under the Compromise
Agreement from acquiring obligatory force. For its non-fulfillment, there was no contract or
agreement to speak of, Toyota having failed to comply or perform the suspensive conditions
which enforce a juridical relation. 38 Since Toyota was unable to comply with the last two
conditions of the agreement, which were suspensive conditions, Insular Life cannot be
compelled to comply with its obligation to end the present litigation. No right in favor of
Toyota arose and no obligation on the part of Insular Life was created. 39
Toyota faults Insular Life for its failure to comply with the requirements of the Compromise
Agreement because Insular Life refused to accept checks from Toyota's garnished account.
However, Insular Life should not be blamed for this. It would be imprudent and foolhardy on
Insular Life's part to lift the garnishment on Toyota's bank accounts. The garnishment was one
of the effects of the issuance of the Writ of Execution, and while the RTC nullified the Writ of
Execution, its decision on the matter is not yet final as it is, in fact, subject of the present
petition.
Besides, even if Insular Life accepted the postdated checks, Toyota still failed to comply with
the requirement of posting of a surety bond from Insular Life's list of acceptable sureties which

223
would guarantee the payment of installments. Even the substitute collateral proposed by Toyota
was not accepted by Insular Life. Since the conditions of the Compromise Agreement were not
met or fulfilled by Toyota, the parties stand as if no agreement to end the litigation was
reached.
And now on the merits of the petition.
The Court finds the petition impressed with merit for the following reasons:
First, the RTC erred in giving due course to Toyota's petition for certiorari. The filing of the
petition for certiorari was premature and unwarranted. The cardinal rule is that before a
petition for certiorari can be brought against an order of the lower court, all remedies available
in that court must first be exhausted. Thus, for the special civil action for certiorari to prosper,
there must be "no appeal nor any plain, speedy and adequate remedy in the ordinary course of
law." 40 The court must be given sufficient opportunity to correct the error it may have
committed. The reason for this rule is that issues, which courts of first instance are bound to
decide, should not be taken summarily from them and submitted to an appellate court, without
first giving the lower courts an opportunity to dispose of the same with due deliberation. 41
While there are exceptions to the rule, such as where the order complained of is void for being
violative of due process; or there are special circumstances which warrant immediate and more
direct action; or the lower court has taken an unreasonably long time to resolve the motions
before it and a further delay would prejudice the party concerned; or the motion will raise the
same point which has already been squarely stated before the court; or the proceeding in which
the order occurred is a patent nullity, as the court acted without jurisdiction, Toyota failed to
show that any of the exceptions apply. Toyota may not arrogate to itself the determination of
whether recourse to an available remedy is necessary or not. 42In the instant case, it appears
that Toyota had adequate remedies under the law. It could have filed with the MeTC a motion
to quash the writ of execution or a motion to clarify the dispositive portion of the decision.
There is no showing that either motion would not be a prompt and adequate remedy, or that
there was such urgent necessity for relief that only recourse to certiorari was proper.
Second, while the general rule is that the portion of a decision that becomes the subject of
execution is that ordained or decreed in the dispositive part thereof, there are recognized
exceptions to this rule: (a) where there is ambiguity or uncertainty, the body of the opinion may
be referred to for purposes of construing the judgment, because the dispositive part of a
decision must find support from the decision's ratio decidendi; 43 and (b) where extensive and
explicit discussion and settlement of the issue is found in the body of the decision. 44
Considering the circumstances of the instant case, the Court finds that the exception to the
general rule applies to the instant case. The RTC should have referred to the body of the
decision for purposes of construing the reasonable compensation judgment, because the
dispositive part of a decision must find support from the decision's ratio decidendi. Findings of
the court are to be considered in the interpretation of the dispositive portion of the
judgment. 45
Indeed, to grasp and delve into the true intent and meaning of a decision, no specific portion
thereof should be resorted to the decision must be considered in its entirety. 46 The Court
may resort to the pleadings of the parties, its findings of fact and conclusions of law as
expressed in the body of the decision to clarify any ambiguities caused by any inadvertent
omission or mistake in the dispositive portion thereof. 47

In Reinsurance Company of the Orient, Inc. v. Court of Appeals, 48 the Court held:

In Republic Surety and Insurance Company, Inc. v. Intermediate

Appellate Court, the Court applying the above doctrine said:
. . . We clarify, in other words, what we did affirm. What is
involved here is not what is ordinarily regarded as a
clerical error in the dispositive part of the decision of the
Court of First Instance, which type of error is perhaps best
typified by an error in arithmetical computation. At the
same time, what is involved here is not a correction of an
erroneous judgment or dispositive portion of a judgment.
What we believe is involved here is in the nature of
an inadvertent omission on the part of the Court of
First Instance (which should have been noticed by private
respondent's counsel who had prepared the complaint), of
what might be described as a logical follow-through of
something set forth both in the body of the decision
and in the dispositive portion thereof: the inevitable
follow-through, or translation into, operational or
behavioral terms, of the annulment of the Deed of Sale
with Assumption of Mortgage, from which petitioners'
title or claim of title embodied in TCT 133153
flow. 49 (Emphasis supplied)
In the present case, the omission of the award of payment of rental from April 15, 1997 was
obviously through mere inadvertence. The pleadings, findings of fact and conclusions of law of
the MeTC bear out that upon the termination of the lease on April 15, 1997, Toyota's
possession of the property became unlawful; thus, from that date, payment of rents must be
reckoned. The importance of April 15, 1997 as termination date of the lease was emphasized
by the MeTC in the body of its Decision, thus:
The claim of [Toyota] that notice to vacate was made on them only on
December 9, 1997 is belied by Exhibits C, D, E and F which are
attached to the affidavit of Januario Flores, the Asst. Vice-President of
[Insular Life]. These exhibits are letters written by Asst. VicePresident Flores to Mr. Isidro Laforteza Vice-President of [Toyota]
dated March 1, 1994, March 4, 1996, March 3, 1997 and April 14,
1997, respectively. These letters show that as early as 1994,
[Insular Life] had already informed [Toyota] if its intention to
take back possession of the leased premises by not renewing the
lease contract upon its expiration on April 15, 1997. Hence the
continued possession of [Toyota] after the expiration of the lease
contract did not bear the acquiescence of [Insular Life]. In fact,
[Toyota] was informed by [Insular Life] to vacate the leased premises
on or before April 30, 1997 (Exh. "F" to the affidavit of Mr. Flores).
The existence of Exh. "F" negates that an implied lease was
established between [Insular Life] and [Toyota]. It is now apparent

224
that [Toyota] is unlawfully withholding possession of the leased
premises.
xxx xxx xxx
[Toyota], having enjoyed the use and possession of the leased
property over the objection of [Insular Life] . . . [Insular Life] is
entitled to reasonable compensation of Five Hundred Eighty Five
Thousand Six Hundred Forty Pesos (P585,640.00) a month until
possession thereof is returned to [Insular Life] which amount is
double the amount of the last monthly rental paid by [Toyota] to
[Insular Life]. 50 . . . (Emphasis supplied).
Third, the RTC erred in granting Toyota's motion for consignation. It was precipitate and
unauthorized. It is basic that certiorari under Rule 65 is a remedy narrow in scope and
inflexible in character. It is not a general utility tool in the legal workshop. 51 It offers only a
limited form of review. Its principal function is to keep an inferior tribunal within its
jurisdiction. 52 It can be invoked only for an error of jurisdiction, that is, one in which the act
complained of was issued by the court, officer or a quasi-judicial body without or in excess of
jurisdiction, or with grave abuse of discretion which was tantamount to lack or excess of
jurisdiction; 53 it is not to be used for any other purpose, 54 such as to cure errors in
proceedings or to correct erroneous conclusions of law or fact. 55
The only issue involved in the RTC was whether the writ of execution issued by the MeTC was
issued in excess of jurisdiction.
The determination of the propriety of consignation as ordered by the RTC is a factual matter
which by the weight of judicial precedents cannot be inquired into by the RTC in a petition
for certiorari. The sole office of the writ of certiorari is the correction of errors of jurisdiction
including the commission of grave abuse of discretion amounting to lack or excess of
jurisdiction.
Nevertheless, in the interest of prompt disposition of the present case, the Court opts to resolve
the question whether consignation is proper under the undisputed circumstances.
Consignation is the act of depositing the thing due with the court or judicial authorities
whenever the creditor cannot accept or refuses to accept payment and it generally requires a
prior tender of payment. 56 In order that consignation may be effective, the debtor must show
that: (1) there was a debt due; (2) the consignation of the obligation was made because the
creditor to whom tender of payment had been made refused to accept it or was absent or
incapacitated, or because several persons claimed to be entitled to receive the amount due, or
because the title to the obligation was lost; (3) previous notice of the consignation was given to
the person interested in the performance of the obligation; (4) the amount due was placed at the
disposal of the court; and (5) after the consignation had been made, the person interested was
notified thereof. 57 Failure in any of these requirements is enough ground to render a
consignation ineffective.
In the present case, Toyota failed to allege (2) and (3) above, much less prove that any of the
requirements was present. The mere fact that Toyota had been in possession of the property
since July 3, 1998, when the MeTC Decision was promulgated, is not a sufficient justification
to grant the motion to consign the rents due.

Finally, the Court cannot help but call the RTC's attention to the prejudice it has wittingly or
unwittingly caused Insular Life by voiding the entire writ of execution when what was assailed
was simply the inclusion of the phrase "from April 15, 1997" in the reasonable compensation
judgment of the MeTC. The order for Toyota to vacate the lease properties and return
possession thereof to Insular Life, and pay attorney's fees and litigation expenses was not
assailed and should have been enforced.
The factual milieu of the present case demonstrates eloquently that Toyota misused all known
technicalities and remedies to prolong the proceedings in a simple ejectment case. The
equitable remedy provided by the summary nature of ejectment proceedings has been
frustrated by Toyota to the great prejudice of Insular Life and the time of this Court.
Ironically, the precipitate action of the RTC in giving due course to Toyota's petition
for certiorari prolonged the litigation and unnecessarily delayed the case, in the process
causing the very evil it apparently sought to avoid. Instead of unclogging dockets, it has
actually increased the work load of the justice system as a whole. Such action does not inspire
public confidence in the administration of justice.
WHEREFORE, the petition is hereby GRANTED. The Decision dated September 30, 1998
and Order dated March 5, 1999 of the Regional Trial Court, Branch 148, Makati City are
REVERSED and SET ASIDE. The Writ of Execution dated August 12, 1998 as clarified in the
Order dated October 28, 1998 of the Metropolitan Trial Court, Branch 63, Makati, is declared
VALID.
Double costs against petitioner.
SO ORDERED.
Tinga, * Chico-Nazario, Nachura and Reyes, JJ., concur.
||| (The Insular Life Assurance Co., Ltd. v. Toyota Bel-Air, Inc., G.R. No. 137884, [March 28,
2008], 573 PHIL 222-240)

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THIRD DIVISION
[G.R. No. 103577. October 7, 1996.]
ROMULO A. CORONEL, ALARICO A. CORONEL, ANNETTE
A. CORONEL, ANNABELLE C. GONZALES (for herself and on
behalf of Floraida C. Tupper, as attorney-in-fact), CIELITO A.
CORONEL, FLORAIDA A. ALMONTE, and CATALINA
BALAIS MABANAG,petitioners, vs. THE COURT OF APPEALS,
CONCEPCION D. ALCARAZ and RAMONA PATRICIA
ALCARAZ, assisted by GLORIA F. NOEL as attorney-infact, respondents.

Leven S. Puno for petitioners.

Perpetuo G. Paner for private respondents.

SYLLABUS
1. CIVIL LAW; SALES; ESSENTIAL ELEMENTS THEREOF. Sale, by its very nature, is
a consensual contract because it is perfected by mere consent. The essential elements of a
contract of sale are the following: a) consent or meeting of the minds, that is, consent to
transfer ownership in exchange for the price; b) determinate subject matter; and c) price certain
in money or its equivalent. DCScaT
2. ID.; ID.; CONTRACT TO SELL DISTINGUISHED FROM CONDITIONAL CONTRACT
OF SALE. Under this definition, a Contract to Sell may not be considered as a
Contract of Sale because the first essential element is lacking. In a contract to sell, the
prospective seller explicitly reserves the transfer of title to the prospective buyer, meaning, the
prospective seller does not as yet agree or consent to transfer ownership of the property subject
of the contract to sell until the happening of an event, which for present purposes we shall take
as the full payment of the purchase price. What the seller agrees or obliges himself to do is to
fulfill his promise to sell the subject property when the entire amount of the purchase price is
delivered to him. . . . In a contract to sell, upon the fulfillment of the suspensive condition
which is the full payment of the purchase price, ownership will not automatically transfer to
the buyer although the property may have been previously delivered to him. The prospective
seller still has to convey title to the prospective buyer by entering into a contract of absolute
sale. A contract to sell as defined hereinabove, may not even be considered as a conditional
contract of sale where the seller may likewise reserve title to the property subject of the sale
until the fulfillment of a suspensive condition, because in a conditional contract of sale, the
first element of consent is present, although it is conditioned upon the happening of a
contingent event which may or may not occur. If the suspensive condition is not fulfilled, the

perfection of the contract of sale is completely abated (cf. Homesite and Housing Corp. vs.
Court of Appeals, 133 SCRA 777 [1984]). However, if the suspensive condition is fulfilled, the
contract of sale is thereby perfected, such that if there had already been previous delivery of the
property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer
by operation of law without any further act having to be performed by the seller.
3. ID.; ID.; ID.; SALE OF SUBJECT PROPERTY TO A THIRD PERSON; EFFECTS
THEREOF. It is essential to distinguish between a contract to sell and a conditional contract
of sale specially in cases where the subject property is sold by the owner not to the party the
seller contracted with, but to a third person, as in the case at bench. In a contract to sell, there
being no previous sale of the property, a third person buying such property despite the
fulfillment of the suspensive condition such as the full payment of the purchase price, for
instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot seek the
relief of reconveyance of the property. There is no double sale in such case. Title to the
property will transfer to the buyer after registration because there is no defect in the ownerseller's title per se, but the latter, of course, may be sued for damages by the intending buyer. In
a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the
sale becomes absolute and this will definitely affect the seller's title thereto. In fact, if there had
been previous delivery of the subject property, the seller's ownership or title to the property is
automatically transferred to the buyer such that, the seller will no longer have any title to
transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the
property who may have had actual or constructive knowledge of such defect, cannot be a
registrant in good faith. Such second buyer cannot defeat the first buyer's title. In case a title is
issued to the second buyer, the first buyer may seek reconveyance of the property subject of the
sale.
4. ID.; ID.; CONTRACT OF SALE; INTERPRETATION OF WORDS USED THEREIN
SHOULD BE GIVEN ORDINARY MEANING; CASE AT BENCH. It is a canon in the
interpretation of contracts that the words used therein should be given their natural and
ordinary meaning unless a technical meaning was intended (Tan vs. Court of Appeals, 212
SCRA 586 [1992]). Thus, . . . When the "Receipt of Down Payment" is considered in its
entirety, it becomes more manifest that there was a clear intent on the part of petitioners to
transfer title to the buyer, but since the transfer certificate of title was still in the name of
petitioner's father, they could not fully effect such transfer although the buyer was then willing
and able to immediately pay the purchase price. Therefore, petitioners-sellers undertook upon
receipt of the down payment from private respondent Ramona P. Alcaraz, to cause the issuance
of a new certificate of title in their names from that of their father, after which, they promised
to present said title, now in their names, to the latter and to execute the deed of absolute sale
whereupon, the latter shall, in turn, pay the entire balance of the purchase price. The agreement
could not have been a contract to sell because the sellers herein made no express reservation of
ownership or title to the subject parcel of land. Furthermore, the circumstance which prevented
the parties from entering into an absolute contract of sale pertained to the sellers themselves
(the certificate of title was not in their names) and not the full payment of the purchase price.
Under the established facts and circumstances of the case, the Court may safely presume that,
had the certificate of title been in the names of petitioners-sellers at that time, there would have
been no reason why an absolute contract of sale could not have been executed and
consummated right there and then.

226
5. ID.; ID.; ID.; WHEN RECIPROCAL OBLIGATIONS OF SELLER AND BUYER AROSE
IN CASE AT BENCH. On January 19, 1985, as evidenced by the document denominated as
"Receipt of Down Payment" (Exh. "A", Exh. "1"), the parties entered into a contract of sale
subject only to the suspensive condition that the sellers shall effect the issuance of new
certificate of title from that of their father's name to their names. . . . On February 6, 1985, this
condition was fulfilled (Exh. "D"; Exh. "4"). We therefore, hold that, in accordance with
Article 1187 . . . the rights and obligations of the parties with respect to the perfected contract
of sale became mutually due and demandable as of the time of fulfillment or occurrence of the
suspensive condition on February 6, 1985. As of that point in time, reciprocal obligations of
both seller and buyer arose, that is, . . . petitioners, as sellers, were obliged to present the
transfer certificate of title already in their names to private respondent Ramona P. Alcaraz, the
buyer, and to immediately execute the deed of absolute sale, while the buyer on her part, was
obliged to forthwith pay the balance of the purchase price amounting to P1,190,000.00.
6. ID.; WILLS AND SUCCESSION; RIGHTS THERETO TRANSMITTED FROM
MOMENT OF DECEDENT'S DEATH; CASE AT BENCH. Petitioners also argue there
could be no perfected contract on January 19, 1985 because they were then not yet the absolute
owners of the inherited property. We cannot sustain this argument. Article 774 of the Civil
Code defines succession as a mode of transferring ownership as follows: Art. 774. Succession
is a mode of acquisition by virtue of which the property, rights and obligations to the extent
and value of the inheritance of a person are transmitted through his death to another or others
by his will or by operation of law. Petitioners-sellers in the case at bar being the sons and
daughters of the decedent Constancio P. Coronel are compulsory heirs who were called to
succession by operation of law. Thus, at the point their father drew his last breath, petitioners
stepped into his shoes insofar as the subject property is concerned, such that any rights or
obligations pertaining thereto became binding and enforceable upon them. It is expressly
provided that rights to the succession are transmitted from the moment of death of the decedent
(Article 777, Civil Code; Cuison vs. Villanueva, 90 Phil. 850 [1952]).
7. ID.; SALES; CONTRACT OF SALE; ESTOPPEL; PETITIONERS PRECLUDED FROM
DENYING OWNERSHIP OF SUBJECT PROPERTY AT TIME OF SALE; CASE AT
BENCH. Aside from this, petitioners are precluded from raising their supposed lack of
capacity to enter into an agreement at that time and they cannot be allowed to now take a
posture contrary to that which they took when they entered into the agreement with private
respondent Ramona P. Alcaraz. . . . Having represented themselves as the true owners of the
subject property at the time of sale, petitioners cannot claim now that they were not yet the
absolute owners thereof at that time.
8. ID.; ID.; ID.; RESCISSION; PHYSICAL ABSENCE OF BUYER NOT A GROUND
THEREFOR IN CASE AT BENCH. Petitioners also contend that although there was in fact
a perfected contract of sale between them and Ramona P. Alcaraz, the latter breached her
reciprocal obligation when she rendered impossible the consummation thereof by going to the
United States of America, without leaving her address, telephone number, and Special Power
of Attorney (Paragraphs 14 and 15, Answer with Compulsory Counterclaim to the Amended
Complaint, p. 2; Rollo, p. 43), for which reason, so petitioners conclude, they were correct in
unilaterally rescinding the contract of sale. We do not agree with petitioners that there was a
valid rescission of the contract of sale in the instant case. We note that these supposed grounds
for petitioners' rescission, are mere allegations found only in their responsive pleadings, which
by express provision of the rules, are deemed controverted even if no reply is filed by the
plaintiffs (Sec. 11, Rule 6, Revised Rules of Court). The records are absolutely bereft of any
supporting evidence to substantiate petitioners' allegations. We had stressed time and again that

allegations must be proven by sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882
[1961]; Recaro vs. Embisan, 2 SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca
vs. De Vera, 79 Phil. 376 [1947]). Even assuming arguendo that Ramona P. Alcaraz was in the
United States of America on February 6, 1985, we cannot justify petitioners-sellers' act of
unilaterally and extrajudicially rescinding the contract of sale, there being no express
stipulation authorizing the sellers to extrajudicially rescind the contract of sale. (cf Dignos vs.
CA, 158 SCRA 375 [1988]; Taguba vs. Vda. de Leon, 132 SCRA 722 [1984]). Moreover,
petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz because
although the evidence on record shows that the sale was in the name of Ramona P. Alcaraz as
the buyer, the sellers had been dealing with Concepcion D. Alcaraz, Ramona's mother, who had
acted for and in behalf of her daughter, if not also in her own behalf. Indeed, the down payment
was made by Concepcion D. Alcaraz with her own personal check (Exh. "B"; Exh. "2") for and
in behalf of Ramona P. Alcaraz. There is no evidence showing that petitioners ever questioned
Concepcion's authority to represent Ramona P. Alcaraz when they accepted her personal check.
Neither did they raise any objection as regards payment being effected by a third person.
Accordingly, as far as petitioners are concerned, the physical absence of Ramona P. Alcaraz is
not a ground to rescind the contract of sale.

9. ID.; ID.; ID.; ID.; ID.; BUYER NOT CONSIDERED IN DEFAULT IN CASE AT BENCH.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her
obligation to pay the full purchase price is concerned. Petitioners who are precluded from
setting up the defense of the physical absence of Ramona P. Alcaraz as above-explained offered
no proof whatsoever to show that they actually presented the new transfer certificate of title in
their names and signified their willingness and readiness to execute the deed of absolute sale in
accordance with their agreement. Ramona's corresponding obligation to pay the balance of the
purchase price in the amount of P1,190,000.00 (as buyer) never became due and demandable
and, therefore, she cannot be deemed to have been in default. Article 1169 of the Civil Code
defines when a party in a contract involving reciprocal obligations may be considered in
default, . . . There is thus neither factual nor legal basis to rescind the contract of sale between
petitioners and respondents.
10. ID.; ID.; DOUBLE SALE; WHEN SECOND BUYER IS ENTITLED TO TITLE OR
OWNERSHIP OF PROPERTY. With the foregoing conclusions, the sale to the other
petitioner, Catalina B. Mabanag, gave rise to a case of double sale where Article 1544 of the
Civil Code will apply. . . . The record of the case shows that the Deed of Absolute Sale dated
April 25, 1985 as proof of the second contract of sale was registered with the Registry of
Deeds of Quezon City giving rise to the issuance of a new certificate of title in the name of
Catalina B. Mabanag on June 5, 1985. Thus, the second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to the first buyer,
the exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the
first buyer, and (b) should there be no inscription by either of the two buyers, when the second
buyer, in good faith, acquires possession of the property ahead of the first buyer. Unless, the
second buyer satisfies these requirements, title or ownership will not transfer to him to the
prejudice of the first buyer.
11. ID.; ID.; ID.; ID.; CASE AT BENCH. Petitioners point out that the notice of lis
pendens in the case at bar was annotated on the title of the subject property only on February
22, 1985, whereas, the second sale between petitioners Coronels and petitioner. Mabanag was
supposedly perfected prior thereto or on February 18, 1985. The idea conveyed is that at the

227
time petitioner Mabanag, the second buyer, bought the property under a clean title, she was
unaware of any adverse claim or previous sale, for which reason she is a buyer in good faith.
We are not persuaded by such argument. In a case of double sale, what finds relevance and
materiality is not whether or not the second buyer was a buyer in good faith but whether or not
said second buyer registers such second sale in good faith, that is, without knowledge of any
defect in the title of the property sold. As clearly borne out by the evidence in this case,
petitioner Mabanag could not have in good faith, registered the sale entered into on February
18, 1985 because as early as February 22, 1985, a notice of lis pendens had been annotated on
the transfer certificate of title in the names of petitioners, whereas petitioner Mabanag
registered the said sale sometime in April, 1985. At the time of registration, therefore,
petitioner Mabanag knew that the same property had already been previously sold to private
respondents, or, at least, she was charged with knowledge that a previous buyer is claiming title
to the same property. Petitioner Mabanag cannot close her eyes to the defect in petitioners' title
to the property at the time of the registration of the property. CAScIH

We bind ourselves to effect the transfer in our names from our

deceased father, Constancio P. Coronel, the transfer certificate of
title immediately upon receipt of the down payment above-stated.

DECISION

3. Upon the transfer in their names of the subject property, the

Coronels will execute the deed of absolute sale in favor of Ramona
and the latter will pay the former the whole balance of One Million
One Hundred Ninety Thousand (P1,190,000.00) Pesos.

MELO, J p:
The petition before us has its roots in a complaint for specific performance to compel herein
petitioners (except the last named, Catalina Balais Mabanag) to consummate the sale of a
parcel of land with its improvements located along Roosevelt Avenue in Quezon City entered
into by the parties sometime in January 1985 for the price of P1,240,000.00

On our presentation of the TCT already in our name, We will

immediately execute the deed of absolute sale of said property and
Miss Ramona Patricia Alcaraz shall immediately pay the balance of
the P1,190,000.00.
Clearly, the conditions appurtenant to the sale are the following:
1. Ramona will make a down payment of Fifty Thousand
(P50,000.00) Pesos upon execution of the document aforestated;
2. The Coronels will cause the transfer in their names of the title of
the property registered in the name of their deceased father upon
receipt of the Fifty Thousand (P50,000.00) Pesos down payment;

On the same date (January 15, 1985), plaintiff-appellee Concepcion

D. Alcaraz (hereinafter referred to as Concepcion), mother of
Ramona, paid the down payment of Fifty Thousand (P50,000.00)
Pesos (Exh. "B", Exh. "2").

The undisputed facts of the case were summarized by respondent court in this wise:

On February 6, 1985, the property originally registered in the name of

the Coronels' father was transferred in their names under TCT No.
327043 (Exh. "D"; Exh. "4")

On January 19, 1985, defendants-appellants Romulo Coronel, et al.

(hereinafter referred to as Coronels) executed a document entitled
"Receipt of Down Payment" (Exh. "A") in favor of plaintiff Ramona
Patricia Alcaraz (hereinafter referred to as Ramona) which is
reproduced hereunder:

On February 18, 1985, the Coronels sold the property covered by

TCT No. 327043 to intervenor-appellant Catalina B. Mabanag
(hereinafter referred to as Catalina) for One Million Five Hundred
Eighty Thousand (P1,580,000.00) Pesos after the latter has paid Three
Hundred Thousand (P300,000.00) Pesos (Exhs. "F-3"; Exh. "6-C")

RECEIPT OF DOWN PAYMENT

P1,240,000.00 Total amount
50,000.00 Down payment

P1,190,000.00 Balance
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon
City, the sum of Fifty Thousand Pesos purchase price of our inherited
house and lot, covered by TCT No. 119627 of the Registry of Deeds of
Quezon City, in the total amount of P1,240,000.00.

For this reason, Coronels canceled and rescinded the contract (Exh.
"A") with Ramona by depositing the down payment paid by
Concepcion in the bank in trust for Ramona Patricia Alcaraz.
On February 22, 1985, Concepcion, et al., filed a complaint for
specific performance against the Coronels and caused the annotation
of a notice of lis pendens at the back of TCT No. 327403 (Exh. "E";
Exh. "5").
On April 2, 1985, Catalina caused the annotation of a notice of
adverse claim covering the same property with the Registry of Deeds
of Quezon City (Exh. "F"; Exh. "6").
On April 25, 1985, the Coronels executed a Deed of Absolute Sale
over the subject property in favor of Catalina (Exh. "G"; Exh. "7").

228
On June 5, 1985, a new title over the subject property was issued in
the name of Catalina under TCT No. 351582 (Exh. "H"; Exh. "8").

p
.

(Rollo, pp. 134-136)

In the course of the proceedings before the trial court (Branch 83, RTC, Quezon City) the
parties agreed to submit the case for decision solely on the basis of documentary exhibits.
Thus, plaintiffs therein (now private respondents) proffered their documentary evidence
accordingly marked as Exhibits "A" through "J", inclusive of their corresponding submarkings.
Adopting these same exhibits as their own, then defendants (now petitioners) accordingly
offered and marked them as Exhibits "1" through "10", likewise inclusive of their
corresponding submarkings. Upon motion of the parties, the trial court gave them thirty (30)
days within which to simultaneously submit their respective memoranda, and an additional 15
days within which to submit their corresponding comment or reply thereto, after which, the
case would be deemed submitted for resolution.
On April 14, 1988, the case was submitted for resolution before Judge Reynaldo Roura, who
was then temporarily detailed to preside over Branch 82 of the RTC of Quezon City. On March
1, 1989, judgment was handed down by Judge Roura from his regular bench at Macabebe,
Pampanga for the Quezon City branch, disposing as follows:
WHEREFORE, judgment for specific performance is hereby rendered
ordering defendant to execute in favor of plaintiffs a deed of absolute
sale covering that parcel of land embraced in and covered by Transfer
Certificate of Title No. 327403 (now TCT No. 331582) of the
Registry of Deeds for Quezon City, together with all the
improvements existing thereon free from all liens and encumbrances,
and once accomplished, to immediately deliver the said document of
sale to plaintiffs and upon receipt thereof, the plaintiffs are ordered to
pay defendants the whole balance of the purchase price amounting to
P1,190,000.00 in cash. Transfer Certificate of Title No. 331582 of the
Registry of Deeds for Quezon City in the name of intervenor is
hereby canceled and declared to be without force and effect.
Defendants and intervenor and all other persons claiming under them
are hereby ordered to vacate the subject property and deliver
possession thereof to plaintiffs. Plaintiffs' claim for damages and
attorney's fees, as well as the counterclaims of defendants and
intervenors are hereby dismissed.
No pronouncement as to costs.
So Ordered.
Macabebe, Pampanga for Quezon City, March 1, 1989.
(
R
o
l
l
o
,

1
0
6
)
A motion for reconsideration was filed by petitioners before the new presiding judge of the
Quezon City RTC but the same was denied by Judge Estrella T. Estrada, thusly:

The prayer contained in the instant motion, i.e., to annul the decision
and to render anew decision by the undersigned Presiding Judge
should be denied for the following reasons: (1) The instant case
became submitted for decision as of April 14, 1988 when the parties
terminated the presentation of their respective documentary evidence
and when the Presiding Judge at that time was Judge Reynaldo Roura.
The fact that they were allowed to file memoranda at some future date
did not change the fact that the hearing of the case was terminated
before Judge Roura and therefore the same should be submitted to
him for decision; (2) When the defendants and intervenor did not
object to the authority of Judge Reynaldo Roura to decide the case
prior to the rendition of the decision, when they met for the first time
before the undersigned Presiding Judge at the hearing of a pending
incident in Civil Case No. Q-46145 on November 11, 1988, they were
deemed to have acquiesced thereto and they are now estopped from
questioning said authority of Judge Roura after they received the
decision in question which happens to be adverse to them; (3) While
it is true that Judge Reynaldo Roura was merely a Judge-on-detail at
this Branch of the Court, he was in all respects the Presiding Judge
with full authority to act on any pending incident submitted before
this Court during his incumbency. When he returned to his Official
Station at Macabebe, Pampanga, he did not lose his authority to
decide or resolve such cases submitted to him for decision or
resolution because he continued as Judge of the Regional Trial Court
and is of co-equal rank with the undersigned Presiding Judge. The
standing rule and supported by jurisprudence is that a Judge to whom
a case is submitted for decision has the authority to decide the case
notwithstanding his transfer to another branch or region of the same
court (Sec. 9, Rule 135, Rule of Court).
Coming now to the twin prayer for reconsideration of the Decision
dated March 1, 1989 rendered in the instant case, resolution of which
now pertains to the undersigned Presiding Judge, after a meticulous
examination of the documentary evidence presented by the parties,
she is convinced that the Decision of March 1, 1989 is supported by
evidence and, therefore, should not be disturbed.

229
IN VIEW OF THE FOREGOING, the "Motion for Reconsideration
and/or to Annul Decision and Render Anew Decision by the
Incumbent Presiding Judge" dated March 20, 1989 is hereby
DENIED.
SO ORDERED.
Quezon City, Philippines, July 12, 1989.
(Roll
o, pp.
108109)
Petitioners thereupon interposed an appeal, but on December 16, 1991, the Court of Appeals
(Buena, Gonzaga-Reyes, Abad Santos (P), JJ.) rendered its decision fully agreeing with the
trial court.
Hence, the instant petition which was filed on March 5, 1992. The last pleading, private
respondents' Reply Memorandum, was filed on September 15, 1993. The case was, however,
re-raffled to undersigned ponente only on August 28, 1996, due to the voluntary inhibition of
the Justice to whom the case was last assigned.
While we deem it necessary to introduce certain refinements in the disquisition of respondent
court in the affirmance of the trial court's decision, we definitely find the instant petition bereft
of merit.
The heart of the controversy which is the ultimate key in the resolution of the other issues in
the case at bar is the precise determination of the legal significance of the document entitled
"Receipt of Down Payment" which was offered in evidence by both parties. There is no dispute
as to the fact that said document embodied the binding contract between Ramona Patricia
Alcaraz on the one hand, and the heirs of Constancio P. Coronel on the other, pertaining to a
particular house and lot covered by TCT No. 119627, as defined in Article 1305 of the Civil
Code of the Philippines which reads as follows:
Art. 1305. A contract is a meeting of minds between two persons
whereby one binds himself, with respect to the other, to give
something or to render some service.
While, it is the position of private respondents that the "Receipt of Down Payment" embodied
a perfected contract of sale, which perforce, they seek to enforce by means of an action for
specific performance, petitioners on their part insist that what the document signified was a
mere executory contract to sell, subject to certain suspensive conditions, and because of the
absence of Ramona P. Alcaraz, who left for the United States of America, said contract could
not possibly ripen into a contract of absolute sale.
Plainly, such variance in the contending parties' contentions is brought about by the way each
interprets the terms and/or conditions set forth in said private instrument. Withal, based on
whatever relevant and admissible evidence may be available on record, this Court, as were the
courts below, is now called upon to adjudge what the real intent of the parties was at the time
the said document was executed.

The Civil Code defines a contract of sale, thus:

Art. 1458. By the contract of sale one of the contracting parties
obligates himself to transfer the ownership of and to deliver a
determinate thing, and the other to pay therefor a price certain in
money or its equivalent.
Sale, by its very nature, is a consensual contract because it is perfected by mere consent. The
essential elements of a contract of sale are the following:
a) Consent or meeting of the minds, that is, consent to transfer
ownership in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.
Under this definition, a Contract to Sell may not be considered as a Contract of Sale because
the first essential element is lacking. In a contract to sell, the prospective seller explicitly
reserves the transfer of title to the prospective buyer, meaning, the prospective seller does not
as yet agree or consent to transfer ownership of the property subject of the contract to sell until
the happening of an event, which for present purposes we shall take as the full payment of the
purchase price. What the seller agrees or obliges himself to do is to fulfill his promise to sell
the subject property when the entire amount of the purchase price is delivered to him. In other
words the full payment of the purchase price partakes of a suspensive condition, the nonfulfillment of which prevents the obligation to sell from arising and thus, ownership is retained
by the prospective seller without further remedies by the prospective buyer. In Roque
vs. Lapuz (96 SCRA 741 [1980]), this Court had occasion to rule:
Hence, We hold that the contract between the petitioner and the
respondent was a contract to sell where the ownership or title is
retained by the seller and is not to pass until the full payment of the
price, such payment being a positive suspensive condition and failure
of which is not a breach, casual or serious, but simply an event that
prevented the obligation of the vendor to convey title from acquiring
binding force.
Stated positively, upon the fulfillment of the suspensive condition which is the full payment of
the purchase price, the prospective seller's obligation to sell the subject property by entering
into a contract of sale with the prospective buyer becomes demandable as provided in Article
1479 of the Civil Code which states:
Art. 1479. A promise to buy and sell a determinate thing for a price
certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing
for a price certain is binding upon the promissor if the promise is
supported by a consideration distinct from the price.
A contract to sell may thus be defined as a bilateral contract whereby the prospective seller,
while expressly reserving the ownership of the subject property despite delivery thereof to the

230
prospective buyer, binds himself to sell the said property exclusively to the prospective buyer
upon fulfillment of the condition agreed upon, that is, full payment of the purchase price.
A contract to sell as defined hereinabove, may not even be considered as a conditional contract
of sale where the seller may likewise reserve title to the property subject of the sale until the
fulfillment of a suspensive condition, because in a conditional contract of sale, the first element
of consent is present, although it is conditioned upon the happening of a contingent event
which may or may not occur. If the suspensive condition is not fulfilled, the perfection of the
contract of sale is completely abated (cf. Homesite and Housing Corp. vs. Court of
Appeals, 133 SCRA 777 [1984]). However, if the suspensive condition is fulfilled, the contract
of sale is thereby perfected, such that if there had already been previous delivery of the
property subject of the sale to the buyer, ownership thereto automatically transfers to the buyer
by operation of law without any further act having to be performed by the seller.
In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment
of the purchase price, ownership will not automatically transfer to the buyer although the
property may have been previously delivered to him. The prospective seller still has to convey
title to the prospective buyer by entering into a contract of absolute sale.
It is essential to distinguish between a contract to sell and a conditional contract of sale
specially in cases where the subject property is sold by the owner not to the party the seller
contracted with, but to a third person, as in the case at bench. In a contract to sell, there being
no previous sale of the property, a third person buying such property despite the fulfillment of
the suspensive condition such as the full payment of the purchase price, for instance, cannot be
deemed a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance
of the property. There is no double sale in such case. Title to the property will transfer to the
buyer after registration because there is no defect in the owner-seller's title per se, but the latter,
of course, may be sued for damages by the intending buyer.

In a conditional contract of sale, however, upon the fulfillment of the suspensive condition, the
sale becomes absolute and this will definitely affect the seller's title thereto. In fact, if there had
been previous delivery of the subject property, the seller's ownership or title to the property is
automatically transferred to the buyer such that, the seller will no longer have any title to
transfer to any third person. Applying Article 1544 of the Civil Code, such second buyer of the
property who may have had actual or constructive knowledge of such defect in the seller's title,
or at least was charged with the obligation to discover such defect, cannot be a registrant in
good faith. Such second buyer cannot defeat the first buyer's title. In case a title is issued to the
second buyer, the first buyer may seek reconveyance of the property subject of the sale.
With the above postulates as guidelines, we now proceed to the task of deciphering the real
nature of the contract entered into by petitioners and private respondents.
It is a canon in the interpretation of contracts that the words used therein should be given their
natural and ordinary meaning unless a technical meaning was intended (Tan vs. Court of
Appeals, 212 SCRA 586 [1992]). Thus, when petitioners declared in the said "Receipt of Down
Payment" that they
Received from Miss Ramona Patricia Alcaraz of 146 Timog, Quezon
City, the sum of Fifty Thousand Pesos purchase price of our inherited

house and lot, covered by TCT No. 1199627 of the Registry of Deeds
of Quezon City, in the total amount of P1,240,000.00.
without any reservation of title until full payment of the entire purchase price, the natural
and ordinary idea conveyed is that they sold their property.
When the "Receipt of Down Payment" is considered in its entirety, it becomes more manifest
that there was a clear intent on the part of petitioners to transfer title to the buyer, but since the
transfer certificate of title was still in the name of petitioner's father, they could not fully effect
such transfer although the buyer was then willing and able to immediately pay the purchase
price. Therefore, petitioners-sellers undertook upon receipt of the down payment from private
respondent Ramona P. Alcaraz, to cause the issuance of a new certificate of title in their names
from that of their father, after which, they promised to present said title, now in their names, to
the latter and to execute the deed of absolute sale whereupon, the latter shall, in turn, pay the
entire balance of the purchase price.
The agreement could not have been a contract to sell because the sellers herein made no
express reservation of ownership or title to the subject parcel of land. Furthermore, the
circumstance which prevented the parties from entering into an absolute contract of sale
pertained to the sellers themselves (the certificate of title was not in their names) and not the
full payment of the purchase price. Under the established facts and circumstances of the case,
the Court may safely presume that, had the certificate of title been in the names of petitionerssellers at that time, there would have been no reason why an absolute contract of sale could not
have been executed and consummated right there and then.
Moreover, unlike in a contract to sell, petitioners in the case at bar did not merely promise to
sell the property to private respondent upon the fulfillment of the suspensive condition. On the
contrary, having already agreed to sell the subject property, they undertook to have the
certificate of title changed to their names and immediately thereafter, to execute the written
deed of absolute sale.
Thus, the parties did not merely enter into a contract to sell where the sellers, after compliance
by the buyer with certain terms and conditions, promised to sell the property to the latter. What
may be perceived from the respective undertakings of the parties to the contract is that
petitioners had already agreed to sell the house and lot they inherited from their father,
completely willing to transfer full ownership of the subject house and lot to the buyer if the
documents were then in order. It just so happened, however, that the transfer certificate of title
was then still in the name of their father. It was more expedient to first effect the change in the
certificate of title so as to bear their names. That is why they undertook to cause the issuance of
a new transfer of the certificate of title in their names upon receipt of the down payment in the
amount of P50,000.00. As soon as the new certificate of title is issued in their names,
petitioners were committed to immediately execute the deed of absolute sale. Only then will
the obligation of the buyer to pay the remainder of the purchase price arise.
There is no doubt that unlike in a contract to sell which is most commonly entered into so as to
protect the seller against a buyer who intends to buy the property in installment by withholding
ownership over the property until the buyer effects full payment therefor, in the contract
entered into in the case at bar, the sellers were the ones who were unable to enter into a
contract of absolute sale by reason of the fact that the certificate of title to the property was still
in the name of their father. It was the sellers in this case who, as it were, had the impediment
which prevented, so to speak, the execution of a contract of absolute sale.

231
What is clearly established by the plain language of the subject document is that when the said
"Receipt of Down Payment" was prepared and signed by petitioners Romulo A. Coronel, et al.,
the parties had agreed to a conditional contract of sale, consummation of which is subject only
to the successful transfer of the certificate of title from the name of petitioners' father,
Constancio P. Coronel to their names.
The Court significantly notes that this suspensive condition was, in fact, fulfilled on February
6, 1985 (Exh. "D"; Exh. "4"). Thus, on said date, the conditional contract of sale between
petitioners and private respondent Ramona P. Alcaraz became obligatory, the only act required
for the consummation thereof being the delivery of the property by means of the execution of
the deed of absolute sale in a public instrument, which petitioners unequivocally committed
themselves to do as evidenced by the "Receipt of Down Payment."
Article 1475, in correlation with Article 1181, both of the Civil Code, plainly applies to the
case at bench. Thus,

p
.
1
6
)
Petitioners themselves recognized that they entered into a contract of sale subject to
a suspensive condition. Only, they contend, continuing in the same paragraph, that:
. . . Had petitioners-sellers not complied with this condition of first
transferring the title to the property under their names, there could be
no perfected contract of sale. (Emphasis supplied.)
(
I
b
i
d
.
)

Art. 1475. The contract of sale is perfected at the moment there is a

meeting of minds upon the thing which is the object of the contract
and upon the price.
From that moment, the parties may reciprocally demand performance,
subject to the provisions of the law governing the form of contracts.

not aware that they have set their own trap for themselves, for Article 1186 of the Civil Code
expressly provides that:

Art. 1181. In conditional obligations, the acquisition of rights, as well

as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition.

Art. 1186. The condition shall be deemed fulfilled when the obligor
voluntarily prevents its fulfillment.

Since the condition contemplated by the parties which is the issuance of a certificate of title in
petitioners' names was fulfilled on February 6, 1985, the respective obligations of the parties
under the contract of sale became mutually demandable, that is, petitioners, as sellers, were
obliged to present the transfer certificate of title already in their names to private respondent
Ramona P. Alcaraz, the buyer, and to immediately execute the deed of absolute sale, while the
buyer on her part, was obliged to forthwith pay the balance of the purchase price amounting to
P1,190,000.00.
It is also significant to note that in the first paragraph in page 9 of their petition, petitioners
conclusively admitted that:
3. The petitioners-sellers Coronel bound themselves "to effect the
transfer in our names from our deceased father Constancio P. Coronel,
the transfer certificate of title immediately upon receipt of the
downpayment above-stated." The sale was still subject to this
suspensive condition. (Emphasis supplied.)

Besides, it should be stressed and emphasized that what is more controlling these
mere hypothetical arguments is the fact that the condition herein referred to was actually and
indisputably fulfilled on February 6, 1985, when a new title was issued in the names of
petitioners as evidenced by TCT No. 327403 (Exh. "D"; Exh. "4").
The inevitable conclusion is that on January 19, 1985, as evidenced by the document
denominated as "Receipt of Down Payment" (Exh. "A"; Exh. "1"), the parties entered into a
contract of sale subject only to the suspensive condition that the sellers shall effect the issuance
of new certificate of title from that of their father's name to their names and that, on February
6, 1985, this condition was fulfilled (Exh. "D"; Exh "4").
We, therefore, hold that, in accordance with Article 1187 which pertinently provides
Art. 1187. The effects of conditional obligation to give, once the
condition has been fulfilled, shall retroact to the day of the
constitution of the obligation . . .

(
R
o
l
l
o
,

In obligations to do or not to do, the courts shall determine, in each

case, the retroactive effect of the condition that has been complied
with.
the rights and obligations of the parties with respect to the perfected contract of sale
became mutually due and demandable as of the time of fulfillment or occurrence of the
suspensive condition on February 6, 1985. As of that point in time, reciprocal obligations
of both seller and buyer arose.

232

Petitioners also argue there could be no perfected contract on January 19, 1985 because they
were then not yet the absolute owners of the inherited property.
We cannot sustain this argument.
Article 774 of the Civil Code defines Succession as a mode of transferring ownership as
follows:
Art. 774. Succession is a mode of acquisition by virtue of which the
property, rights and obligations to the extent and value of the
inheritance of a person are transmitted through his death to another or
others by his will or by operation of law.
Petitioners-sellers in the case at bar being the sons and daughters of the decedent Constancio P.
Coronel are compulsory heirs who were called to succession by operation of law. Thus, at the
point their father drew his last breath, petitioners stepped into his shoes insofar as the subject
property is concerned, such that any rights or obligations pertaining thereto became binding
and enforceable upon them. It is expressly provided that rights to the succession are transmitted
from the moment of death of the decedent (Article 777, Civil Code; Cuison vs. Villanueva, 90
Phil. 850 [1952]).
Be it also noted that petitioners' claim that succession may not be declared unless the creditors
have been paid is rendered moot by the fact that they were able to effect the transfer of the title
to the property from the decedent's name to their names on February 6, 1985.
Aside from this, petitioners are precluded from raising their supposed lack of capacity to enter
into an agreement at that time and they cannot be allowed to now take a posture contrary to
that which they took when they entered into the agreement with private respondent Ramona P.
Alcaraz. The Civil Code expressly states that:
Art. 1431. Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be denied
or disproved as against the person relying thereon.
Having represented themselves as the true owners of the subject property at the time of
sale, petitioners cannot claim now that they were not yet the absolute owners thereof at
that time.
Petitioners also contend that although there was in fact a perfected contract of sale between
them and Ramona P. Alcaraz, the latter breached her reciprocal obligation when she rendered
impossible the consummation thereof by going to the United States of America, without
leaving her address, telephone number, and Special Power of Attorney (Paragraphs 14 and 15,
Answer with Compulsory Counterclaim to the Amended Complaint, p. 2; Rollo, p. 43), for
which reason, so petitioners conclude, they were correct in unilaterally rescinding the contract
of sale.
We do not agree with petitioners that there was a valid rescission of the contract of sale in the
instant case. We note that these supposed grounds for petitioners' rescission, are mere
allegations found only in their responsive pleadings, which by express provision of the rules,
are deemed controverted even if no reply is filed by the plaintiffs (Sec. 11, Rule 6, Revised
Rules of Court). The records are absolutely bereft of any supporting evidence to substantiate

petitioners' allegations. We have stressed time and again that allegations must be proven by
sufficient evidence (Ng Cho Cio vs. Ng Diong, 110 Phil. 882 [1961]; Recaro vs. Embisan, 2
SCRA 598 [1961]). Mere allegation is not an evidence (Lagasca vs. De Vera, 79 Phil. 376
[1947]).
Even assuming arguendo that Ramona P. Alcaraz was in the United States of America on
February 6, 1985, we cannot justify petitioners-sellers' act of unilaterally and extrajudicially
rescinding the contract of sale, there being no express stipulation authorizing the sellers to
extrajudicially rescind the contract of sale. (cf Dignos vs. CA, 158 SCRA 375 [1988]; Taguba
vs. Vda. de Leon, 132 SCRA 722 [1984]).
Moreover, petitioners are estopped from raising the alleged absence of Ramona P. Alcaraz
because although the evidence on record shows that the sale was in the name of Ramona P.
Alcaraz as the buyer, the sellers had been dealing with Concepcion D. Alcaraz, Ramona's
mother, who had acted for and in behalf of her daughter, if not also in her own behalf. Indeed,
the down payment was made by Concepcion D. Alcaraz with her own personal check (Exh.
"B"; Exh. "2") for and in behalf of Ramona P. Alcaraz. There is no evidence showing that
petitioners ever questioned Concepcion's authority to represent Ramona P. Alcaraz when they
accepted her personal check. Neither did they raise any objection as regards payment being
effected by a third person. Accordingly, as far as petitioners are concerned, the physical
absence of Ramona P. Alcaraz is not a ground to rescind the contract of sale.
Corollarily, Ramona P. Alcaraz cannot even be deemed to be in default, insofar as her
obligation to pay the full purchase price is concerned. Petitioners who are precluded from
setting up the defense of the physical absence of Ramona P. Alcaraz as above-explained offered
no proof whatsoever to show that they actually presented the new transfer certificate of title in
their names and signified their willingness and readiness to execute the deed of absolute sale in
accordance with their agreement. Ramona's corresponding obligation to pay the balance of the
purchase price in the amount of P1,190,000.00 (as buyer) never became due and demandable
and, therefore, she cannot be deemed to have been in default.
Article 1169 of the Civil Code defines when a party in a contract involving reciprocal
obligations may be considered in default, to wit:
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.
xxx xxx xxx
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
fulfill his obligation, delay by the other begins. (Emphasis supplied.)
There is thus neither factual nor legal basis to rescind the contract of sale between petitioners
and respondents.
With the foregoing conclusions, the sale to the other petitioner, Catalina B. Mabanag, gave rise
to a case of double sale where Article 1544 of the Civil Code will apply, to wit:

233
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 record of the case shows that the Deed of Absolute Sale dated April 25, 1985 as proof of
the second contract of sale was registered with the Registry of Deeds of Quezon City giving
rise to the issuance of a new certificate of title in the name of Catalina B. Mabanag on June 5,
1985. Thus, the second paragraph of Article 1544 shall apply.
The above-cited provision on double sale presumes title or ownership to pass to the first buyer,
the exceptions being: (a) when the second buyer, in good faith, registers the sale ahead of the
first buyer, and (b) should there be no inscription by either of the two buyers, when the second
buyer, in good faith, acquires possession of the property ahead of the first buyer. Unless, the
second buyer satisfies these requirements, title or ownership will not transfer to him to the
prejudice of the first buyer.
In his commentaries on the Civil Code, an accepted authority on the subject, now a
distinguished member of the Court, Justice Jose C. Vitug, explains:
The governing principle is prius tempore, potior jure (first in time,
stronger in right). Knowledge by the first buyer of the second sale
cannot defeat the first buyer's rights except when the second buyer
first registers in good faith the second sale (Olivares vs. Gonzales,159
SCRA 33). Conversely, knowledge gained by the second buyer of the
first sale defeats his rights even if he is first to register, since
knowledge taints his registration with bad faith (see also Astorga vs.
Court of Appeals, G.R. No. 58530, 26 December 1984). In Cruz vs.
Cabana (G.R. No. 56232, 22 June 1984, 129 SCRA 656), it was held
that it is essential, to merit the protection of Art. 1544, second
paragraph, that the second realty buyer must act in good faith in
registering his deed of sale (citing Carbonell vs. Court of Appeals, 69
SCRA 99, Crisostomo vs. CA, G.R. No. 95843, 02 September 1992).
(J. Vitug, Compendium of Civil Law and Jurisprudence, 1993 Edition, p. 604).
Petitioners point out that the notice of lis pendens in the case at bar was annotated on the title
of the subject property only on February 22, 1985, whereas, the second sale between
petitioners Coronels and petitioner Mabanag was supposedly perfected prior thereto or on
February 18, 1985. The idea conveyed is that at the time petitioner Mabanag, the second buyer,
bought the property under a clean title, she was unaware of any adverse claim or previous sale,
for which reason she is a buyer in good faith.

We are not persuaded by such argument.

In a case of double sale, what finds relevance and materiality is not whether or not the second
buyer was a buyer in good faith but whether or not said second buyer registers such second sale
in good faith, that is, without knowledge of any defect in the title of the property sold.
As clearly borne out by the evidence in this case, petitioner Mabanag could not have in good
faith, registered the sale entered into on February 18, 1985 because as early as February 22,
1985, a notice of lis pendens had been annotated on the transfer certificate of title in the names
of petitioners, whereas petitioner Mabanag registered the said sale sometime in April, 1985. At
the time of registration, therefore, petitioner Mabanag knew that the same property had already
been previously sold to private respondents, or, at least, she was charged with knowledge that a
previous buyer is claiming title to the same property. Petitioner Mabanag cannot close her eyes
to the defect in petitioners' title to the property at the time of the registration of the property.

This Court had occasions to rule that:

If a vendee in a double sale registers the sale after he has acquired
knowledge that there was a previous sale of the same property to a
third party or that another person claims said property in a previous
sale, the registration will constitute a registration in bad faith and will
not confer upon him any right. (Salvoro vs. Tanega, 87 SCRA 349
[1978]; citing Palarca vs. Director of Land, 43 Phil. 146; Cagaoan
vs. Cagaoan, 43 Phil. 554; Fernandez vs. Mercader, 43 Phil. 581.)
Thus, the sale of the subject parcel of land between petitioners and Ramona P. Alcaraz,
perfected on February 6, 1985, prior to that between petitioners and Catalina B. Mabanag on
February 18, 1985, was correctly upheld by both the courts below.
Although there may be ample indications that there was in fact an agency between Ramona as
principal and Concepcion, her mother, as agent insofar as the subject contract of sale is
concerned, the issue of whether or not Concepcion was also acting in her own behalf as a cobuyer is not squarely raised in the instant petition, nor in such assumption disputed between
mother and daughter. Thus, We will not touch this issue and no longer disturb the lower courts'
ruling on this point.
WHEREFORE, premises considered, the instant petition is hereby DISMISSED and the
appealed judgment AFFIRMED.
SO ORDERED.
Narvasa, C .J ., Davide, Jr. and Francisco, JJ ., concur.
Panganiban, J ., took no part.
||| (Coronel v. Court of Appeals, G.R. No. 103577, [October 7, 1996], 331 PHIL 294-323)

234

FIRST DIVISION
[G.R. No. 112127. July 17, 1995.]
CENTRAL PHILIPPINE UNIVERSITY, petitioner, vs. COURT
OF APPEALS, REMEDIOS FRANCO, FRANCISCO N. LOPEZ,
CECILIA P. VDA. DE LOPEZ, REDAN LOPEZ AND
REMARENE LOPEZ, respondents.

Juanito M. Acanto for petitioner.

Santos B. Aguadera for private respondents.

SYLLABUS
1. CIVIL LAW; PROPERTY; MODES OF ACQUIRING OWNERSHIP; DONATION;
CONSIDERED ONEROUS WHEN EXECUTED FOR A VALUABLE CONSIDERATION
WHICH IS CONSIDERED THE EQUIVALENT OF THE DONATION. A clear perusal of
the condition set forth in the deed of donation executed by Don Ramon Lopez, Sr., gives us no
alternative but to conclude that his donation was onerous, one executed for a valuable
consideration which is considered the equivalent of the donation itself, e.g., when a donation
imposes a burden equivalent to the value of the donation. A gift of land to the City of Manila
requiring the latter to erect schools, construct a children's playground and open streets on the
land was considered an onerous donation. Similarly, where Don Ramon Lopez donated the
subject parcel of land to petitioner but imposed an obligation upon the latter to establish a
medical college thereon, the donation must be for an onerous consideration.
2. ID.; ID.; ID.; ID.; MAY BE REVOKED FOR NON-FULFILLMENT OR NONCOMPLIANCE OF THE CONDITIONS SET FORTH THEREIN; CASE AT BAR. Under
Art. 1181 of the Civil Code, on conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event
which constitutes the condition. Thus, when a person donates land to another on the condition
that the latter would build upon the land a school, the condition imposed was not a condition
precedent or a suspensive condition but a resolutory one. It is not correct to say that the
schoolhouse had to be constructed before the donation became effective, that is, before the
donee could become the owner of the land, otherwise, it would be invading the property rights
of the donor. The donation had to be valid before the fulfillment of the condition. If there was
no fulfillment or compliance with the condition, such as what obtains in the instant case, the
donation may now be revoked and all rights which the donee may have acquired under it.
3. ID.; ID.; ID.; ID.; DONEE'S ACCEPTANCE AND ACKNOWLEDGMENT OF ITS
OBLIGATION PROVIDED IN THE DEED, SUFFICIENT TO PREVENT THE STATUTE
OF LIMITATION FROM BARRING THE ACTION OF DONOR UPON THE ORIGINAL

CONTRACT. The claim of petitioner that prescription bars the instant action of private
respondents is unavailing. The condition imposed by the donor, i.e., the building of a medical
school upon the land donated, depended upon the exclusive will of the donee as to when this
condition shall be fulfilled. When petitioner accepted the donation, it bound itself to comply
with the condition thereof. Since the time within which the condition should be fulfilled
depended upon the exclusive will of the petitioner, it has been held that its absolute acceptance
and the acknowledgment of its obligation provided in the deed of donation were sufficient to
prevent the statute of limitations from barring the action of private respondents upon the
original contract which was the deed of donation.
4. ID.; ID.; ID.; ID.; IN CASE OF REVOCATION, A CAUSE OF ACTION ARISES WHEN
THAT WHICH SHOULD HAVE BEEN DONE IS NOT DONE, OR THAT WHICH
SHOULD NOT HAVE BEEN DONE IS DONE. The time from which the cause of action
accrued for the revocation of the donation and recovery of the property donated cannot be
specifically determined in the instant case. A cause of action arises when that which should
have been done is not done, or that which should not have been done is done. In cases where
there is no special provision for such computation, recourse must be had to the rule that the
period must be counted from the day on which the corresponding action could have been
instituted. It is the legal possibility of bringing the action which determines the starting point
for the computation of the period. In this case, the starting point begins with the expiration of a
reasonable period and opportunity for petitioner to fulfill what has been charged upon it by the
donor.
5. ID.; ID.; ID.; ID.; GENERALLY, WHEN THE OBLIGATION DOES NOT FIX A PERIOD
BUT FROM ITS NATURE AND CIRCUMSTANCES IT CAN BE INFERRED THAT A
PERIOD WAS INTENDED, COURT MAY FIX THE PERIOD FOR COMPLIANCE. The
period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of
the presence of several factors and circumstances involved in the erection of an educational
institution, such as government laws and regulations pertaining to education, building
requirements and property restrictions which are beyond the control of the donee. Thus, when
the obligation does not fix a period but from its nature and circumstances it can be inferred that
a period was intended, the general rule provided in Art. 1197 of the Civil Code applies, which
provides that the courts may fix the duration thereof because the fulfillment of the obligation
itself cannot be demanded until after the court has fixed the period for compliance therewith
and such period has arrived.
6. ID.; ID.; ID.; ID.; WHEN OBLIGOR CANNOT COMPLY WITH WHAT IS INCUMBENT
UPON HIM, THE OBLIGEE MAY SEEK RESCISSION; EXCEPTION. This general rule
however cannot be applied considering the different set of circumstances existing in the instant
case. More than a reasonable period of fifty (50) years has already been allowed petitioner to
avail of the opportunity to comply with the condition even if it be burdensome, to make the
donation in its favor forever valid. But, unfortunately, it failed to do so. Hence, there is no
more need to fix the duration of a term of the obligation when such procedure would be a mere
technicality and formality and would serve no purpose than to delay or lead to an unnecessary
and expensive multiplication of suits. Moreover, under Art. 1191 of the Civil Code, when one
of the obligors cannot comply with what is incumbent upon him, the obligee may seek
rescission and the court shall decree the same unless there is just cause authorizing the fixing

235
of a period. In the absence of any just cause for the court to determine the period of the
compliance, there is no more obstacle for the court to decree the rescission claimed.
7. ID.; ID.; ID.; ID.; IN CASE OF GRATUITOUS DONATION DOUBTS SHOULD BE
RESOLVED IN FAVOR OF THE LEAST TRANSMISSION OF RIGHTS AND INTERESTS.
Finally, since the questioned deed of donation herein is basically a gratuitous one, doubts
referring to incidental circumstances of a gratuitous contract should be resolved in favor of the
least transmission of rights and interests. Records are clear and facts are undisputed that since
the execution of the deed of donation up to the time of filing of the instant action, petitioner has
failed to comply with its obligation as donee. Petitioner has slept on its obligation for an
unreasonable length of time. Hence, it is only just and equitable now to declare the subject
donation already ineffective and, for all purposes, revoked so that petitioner as donee should
now return the donated property to the heirs of the donor, private respondents herein, by means
of reconveyance.
DAVIDE, JR., J, dissenting opinion:
1. CIVIL LAW; PROPERTY, MODES OF ACQUIRING OWNERSHIP; DONATION; IN
LAW OF DONATION, "CONDITIONS" REFERS TO OBLIGATION OR CHARGES
IMPOSED BY THE DONOR ON THE DONEE. There is no conditional obligation to
speak of in this case. It seems that the "conditions" imposed by the donor and as the word is
used in the law of donations confused with "conditions" as used in the law of obligations. In
his annotation of Article 764 of the Civil Code on Donations, Arturo M. Tolentino, citing the
well-known civilists such as Castan, Perez Gonzalez and Alguer, and Colin & Capitant, states
clearly the context within which the term "conditions" is used in the law of donations, to wit:
The word "conditions" in this article does not refer to uncertain events on which the birth or
extinguishment of a juridical relation depends, but it is used in the vulgar sense ofobligations
or charges imposed by the donor on the donee. It is used, not in its technical or strict legal
sense, but in its broadest sense. (Italics supplied) Clearly then, when the law and the deed of
donation speaks of "conditions" of a donation, what are referred to are actually the obligations,
charges or burdens imposed by the donor upon the donee and which would characterize the
donation as onerous. In the present case, the donation is, quite obviously, onerous, but it is
more properly called a "modal donation." A modal donation is one in which the donor imposes
a prestation upon the donee. The establishment of the medical college as the condition of the
donation in the present case is one such prestation.
2. ID.; ID.; ID.; ID.; WHEN NO FIXED PERIOD IN WHICH THE CONDITION SHOULD
BE FULFILLED, IT IS THE DUTY OF THE COURT TO FIX A SUITABLE TIME FOR ITS
FULFILLMENT. J. Davide, Jr., cannot subscribe to the view that the provisions of Article
1197 cannot be applied here. The conditions/obligations imposed by the donor herein are
subject to a period. I draw this conclusion/based on our previous ruling which, although made
almost 90 years ago, still finds application in the present case. In Barreto vs. City of Manila,
we said that when the contract of donation, as the one involved therein, has no fixed period in
which the condition should be fulfilled, the provisions of what is now Article 1197 (then
Article 1128) are applicable and it is the duty of the court to fix a suitable time for its
fulfillment. Indeed, from the nature and circumstances of the conditions/obligations of the
present donation, it can be inferred that a period was contemplated by the donor. Don Ramon
Lopez could not have intended his property to remain idle for a long period of time when in
fact, he specifically burdened the donee with the obligation to set up a medical college therein
and thus put his property to good use. There is a need to fix the duration of the time within
which the conditions imposed are to be fulfilled.

3. ID.; ID.; ID.; ID.; MERE FACT THAT THERE IS NO TIME FIXED AS TO WHEN THE
CONDITION THEREOF ARE TO BE FULFILLED DOES NOT IPSO FACTO MEAN THAT
THE STATUTE OF LIMITATION WILL NOT APPLY. There is misplaced reliance again
on a previous decision of this Court inOsmea vs. Rama. That case does not speak of a deed of
donation as erroneously quoted and cited by the majority opinion. It speaks of a contract for a
sum of money where the debtor herself imposed a condition which will determine when she
will fulfill her obligation to pay the creditor, thus, making the fulfillment of her obligation
dependent upon her will. What we have here, however, is not a contract for a sum of money but
a donation where the donee has not imposed any conditions on the fulfillment of its
obligations. Although it is admitted that the fulfillment of the conditions/obligations of the
present donation may be dependent on the will of the donee as to when it will comply
therewith, this did not arise out of a condition which the donee itself imposed. It is believed
that the donee was not meant to and does not have absolute control over the time within which
it will perform its obligations. It must still do so within a reasonable time. What that reasonable
time is, under the circumstances, for the courts to determine. Thus, the mere fact that there is
no time fixed as to when the conditions of the donation are to be fulfilled does not ipso
facto mean that the statute of limitations will not apply anymore and the action to revoke the
donation becomes imprescriptible.
4. ID.; ID.; ID.; ID.; ACTION TO REVOKE THEREOF PRESCRIBES IN FOUR (4) YEARS.
More recently, in De Luna vs. Abrigo, this Court reiterated the ruling in Parks and said that:
It is true that under Article 764 of the New Civil Code, actions for the revocation of a donation
must be brought within four (4) years from the non-compliance of the conditions of the
donation. However, it is Our opinion that said article does not apply to onerous donations in
view of the specific provision of Article 733 providing that onerous donations are governed by
the rules on contracts. In the light of the above, the rules on contracts and the general rules on
prescription and not the rules on donations are applicable in the case at bar. The law applied in
both cases is Article 1144(1). It refers to the prescription of an action upon a written contract,
which is what the deed of an onerous donation is. The prescriptive period is ten years from the
time the cause of action accrues, and that is, from the expiration of the time within which the
donee must comply with the conditions/obligations of the donation. As to when this exactly is
remains to be determined, and that is for the courts to do as reposed upon them by Article 1197.

DECISION

BELLOSILLO, J p:
CENTRAL PHILIPPINE UNIVERSITY filed this petition for review on certiorari of the
decision of the Court of Appeals which reversed that of the Regional trial Court of Iloilo City
directing petitioner to reconvey to private respondents the property donated to it by their
predecessor-in-interest.
Sometime in 1939, the late Don Ramon Lopez, Sr., who was then a member of the Board of
Trustees of the Central Philippine College (now Central Philippine University [CPU]),

236
executed a deed of donation in favor of the latter of a parcel of land identified as Lot No. 3174B-1 of the subdivision plan Psd-1144, then a portion of Lot No. 3174-B, for which Transfer
Certificate of Title No. T-3910-A was issued in the name of the donee CPU with the following
annotations copied from the deed of donation.
1. The land described shall be utilized by the CPU exclusively for the
establishment and use of a medical college with all its buildings as
part of the curriculum:
2. The said college shall not sell, transfer or convey to any third party
nor in any way encumber said land;
3. The said land shall be called "RAMON LOPEZ CAMPUS", and
the said college shall be under obligation to erect a cornerstones
bearing that name. Any net income from the land or any of its parks
shall be put in a fund to be known as the "RAMON LOPEZ
CAMPUS FUND" to be used for improvements of said campus and
erection of a building thereon. " 1
On 31 May 1989, privates respondents, who are the heirs of Don Ramon Lopez, Sr., filed an
action for annulment of donation, reconveyance and damages against CPU alleging that since
1939 up to the time the action was filed the latter had not complied with the conditions of the
donation. Private respondents also argued that petitioner had in fact negotiated with the
National Housing Authority (NHA) to exchange the donated property with another land owned
by the latter.
In its answer petitioner alleged that the right of private respondents to file the action had
prescribe; that it did not violate any of the conditions in the deed of donation because it never
used the donated properly for any other purpose than that for which it was intended; and, that it
did not sell, transfer or convey it to any third party.
On 31 May 11991, the trial court held that petitioner failed to comply with the conditions of the
donation and declared it null and void. The court a quo further directed petitioner to execute a
deed of reconveyance of the property in favor of the heirs of the donor, namely, private
respondents herein.
Petitioner appealed to the Court of Appeals which on 18 June 1993 ruled that
the ruled that the annotations at the back of petitioner's certificate of title were resolutory
conditions breach of which should terminate the rights of the donee thus making the
donation revocable.
The appellate court also found that while the first condition mandated
petitioner to utilize the donated property for the establishment of a medical school, the
donor did not fix a period within which the condition must be fulfilled, hence, until a
period was fixed for the fulfillment of the condition, petitioner could not be considered as
having failed to comply with its part of the bargain. Thus, the appellate court rendered its
decision reversing the appealed decision and remanding the case to the court of origin for
the determination of the time within which petitioner should comply with the first
condition annotated in the certificate of title.
Petitioner now alleged that the court of Appeals erred: (a) in holding that the
quoted annotations in the certificate of title of petitioner are onerous obligations and
resolutory conditions of the donation which must be fulfilled non-compliance of which

would render the donation revocable; (b) in holding that the issue of prescription does not
deserve "disquisition;" and, (c) in remanding the case to the trial court for the fixing of
the period within which petitioner would establish a medical college. 2
We find it difficult to sustain the petition. A clear perusal of the conditions set
forth in the deed of donation executed by Don Ramon Lopez, Sr., gives us no alternative
but to conclude that this donation was onerous, one executed for a valuable consideration
which is considered the equivalent of the donation itself, e.g., when a donation imposes a
burden equivalent to the value of the donation. A gift of land to the City of Manila
requiring the latter to erect schools, construct a children's playground and open streets on
the land was considered an onerous donation.3 Similarly, where Don Ramon Lopez
donated the subject parcel of land to petitioner but imposed an obligation upon the latter
to establish a medical college thereon, the donation must be for an onerous consideration.
Under Art. 1181 of the Civil Code, on conditional obligations, the acquisition
of rights, as well as the extinguishment or loss of those already acquired, shall depend
upon the happening of the event which constitutes the condition. Thus, when a person
donates land to another on the condition that the latter would build upon the land a
school, the condition imposed was not a condition precedent or a suspensive condition
but a resolutory one. 4 It is not correct to say that the schoolhouse had to be constructed
before the donation became effective, that is, before the donee could become the owner
of the land, otherwise, it would be invading the property rights of the donor. The donation
had to be valid before the fulfillment of the condition. 5 If there was no fulfillment or
compliance with the condition, such as what obtains in the instant case, the donation may
now be revoked and all rights which the donee may have acquired under it shall be
deemed lost and extinguished.
The claim of petitioner that prescription bars the instant action of private
respondents is unavailing. The condition imposed by the donor, i.e., the building of a
medical school upon the land donated, depended upon the exclusive will of the donee as
to when this condition shall fulfilled. When petitioner accepted the donation, it bound
itself to comply with the condition thereof. Since the time within which the condition
should be fulfilled depended upon the exclusive will of the petitioner, it has been held
that its absolute acceptance and the acknowledgement of its obligation provided in the
deed of donation were sufficient to prevent the statute of limitations from barring the
action of private respondents upon the original contract which was the deed of
donation. 6
Moreover, the time from which the cause of action accrued for the revocation of the donation
and recovery of the property donated cannot be specifically determined in the instant case. A
cause of action arises when that which should have been done is not done, or that which should
not have been done is done. 7 In cases where there is no special provision for such
computation, recourse must be had to the rule that the period must be counted from the day on
which the corresponding action could have been instituted. It is the legal possibility of bringing
the action which determines the starting point for the computation of the period. In this case,
the starting point begins with the expiration of a reasonable period and opportunity for
petitioner to fulfill what has been charged upon it by the donor.

The period of time for the establishment of a medical college and the necessary buildings and
improvements on the property cannot be quantified in a specific number of years because of
the presence of several factors and circumstances involved in the erection of an educational

237
institution, such as government laws and regulations pertaining to government laws and
regulations pertaining to education, building requirements and property restrictions which are
beyond the control of the donee. LibLex

I agree with the view in the majority opinion that the donation in question in onerous
considering the conditions imposed by the donor on the donee which created reciprocal
obligations upon both parties. Beyond that, I beg to disagree.

Thus, when the obligation does not fix a period but from its nature and
circumstances it can be inferred that a period was intended, the general rule provided
in Art. 1197 of the Civil Code applies, which provides that the courts may fix the
duration thereof because the fulfillment of the obligation itself cannot be demanded until
after the court has fixed the period for compliance therewith and such period has
arrived. 8

First of all, may I point out an inconsistency in the majority opinion's description of the
donation in question. In one part, it says that the donation in question is onerous. Thus, on page
4 it states: LLpr

This general rule however cannot be applied considering the different set of
circumstances existing in the instant case. More than a reasonable period of fifty (50)
years has already been allowed petitioner to avail of the opportunity to comply with the
condition even if it be burdensome, to make the donation in its favor forever valid. But,
unfortunately, it failed to do so. Hence, there is no more need to fix the duration of a term
of the obligation when such procedure would be a mere technicality and formality and
would serve no purpose that to delay or lead to an unnecessary and expensive
multiplication of suits. 9 Moreover, under Art. 1191 of the Civil Code, when one of the
obligors cannot comply with what is incumbent upon him, the obligee may seek
rescission and the court shall decree the same unless there is just cause authorizing the
fixing of a period. In the absence of any just cause for the court to determine the period of
the compliance, there is no more obstacle for the court to decree the rescission claimed.
Finally, since the questioned deed of donation herein is basically a gratuitous
one, doubts referring to incidental circumstances of a gratuitous contract should be
resolved in favor of the least transmission of rights and interest. 10 Records are clear and
facts are undisputed that since the execution of the deed of donation up to the time of
filing of the instant action, petitioner has failed to comply with its obligation as donee.
Petitioner has slept on its obligation for an unreasonable length of time. Hence, it is only
just and equitable now to declare the subject donation already ineffective and, for all
purposes, revoked so that petitioner as donee should now return the donated property to
the heirs of the donor, private respondents herein, by means of reconveyance.
WHEREFORE, the decision of the Regional Trial Court of Iloilo, Br. 34, of 31 May 1991 is
REINSTATED and AFFIRMED, and the decision of the Court of Appeals of 18 June 1993 is
accordingly MODIFIED. Consequently, petitioner is directed to reconvey to private
respondents Lot No. 3174-B-1 of the subdivision plan Psd-1144 covered by Transfer
Certificate of Title No. T-3910-A within thirty (30) days from the finality of this judgment.
Costs against petitioner.
SO ORDERED.
Quiason and Kapunan, JJ ., concur.

Separate Opinions
DAVIDE, JR., J ., dissenting:

We find it difficult to sustain the petition. A clear perusal of the conditions set forth in the deed
of donation executed by Don Ramon Lopez, Sr., give us no alternative but to conclude that his
donation was onerous, one executed for a valuable consideration which is considered the
equivalent of the donation itself, e.g., when a donation imposes a burden equivalent to the
value of the donation . . . (Italics supplied)
Yet, in the last paragraph of page 8 it states that the donation is basically a gratuitous one.
The pertinent portion thereof reads:
Finally, since the questioned deed of donation herein is basically a
gratuitous one, doubts referring to incidental circumstances of
agratuitous contract should be resolved in favor of the least
transmission of rights and interest . . . (Italics supplied)
Second, the discussion on conditional obligations is unnecessary. There is no conditional
obligation to speak of in this case. It seems that the "conditions" imposed by the donor and as
the world is used in the law of donations is confused with "conditions" as used in the law of
obligations. In his annotation of Article 764 of the Civil Code on Donations, Arturo M.
Tolentino, citing the well-known civilists such as Castan, Perez Gonzalez and Alguer, and
Colin & Capitant, states clearly the context within the term "conditions" is used in the law of
donations, to wit:
The word "conditions" in this article does not refer to uncertain events
on which the birth or extinguishment of a juridical relation depends,
but is used in the vulgar sense of obligations or charges imposed by
the donor on the donee. It is used, not in its technical or strict legal
sense, but in its broadest sense. 1 (Italics supplied)
Clearly then, when the law and the deed of donation speaks of "conditions" of a donation, what
are referred to are actually the obligations, charges or burdens imposed by the donor upon the
donee and which would characterize the donation as onerous. In the present case, the donation
is, quite obviously, onerous, but it is more properly called a "modal donation." A modal
donation is one in which the donor imposes a prestation upon the donee. The establishment of
the medical college as the condition of the donation in the present case is one such prestation.
The conditions imposed by the donor Don Ramon Lopez determines neither the existence nor
the extinguishment of the obligations of the donor and the donee with respect to the donation.
In fact, the conditions imposed by Don Ramon Lopez upon the donee are the very obligations
of the donation to build the medical college and use the property for the purposes specified
in the deed of donation. It is very clear that those obligations are unconditional, the fulfillment,
performance, existence or extinguishment of which is not dependent on any future or uncertain
event or past and unknown event, as the Civil Code would define a conditional obligation. 2
Reliance on the case of Parks vs. Province of Tarlac 3 as cited on page 5 of the majority
opinion is erroneous in so far as the latter stated that the condition in Parks is a resolutory one

238
and applied this on the present case. A more careful reading of this Court's decision would
reveal that nowhere did we say, whether explicitly or impliedly, that the donation in that case,
which also has a condition imposed to build a school and a public park upon the property
donated, is a resolutory condition. 4 It is incorrect to say that the "conditions" of the donation
there or in the present case are resolutory conditions because, applying Article 1181 of the
Civil Code, that would mean that upon fulfillment of the conditions, the rights already acquired
will be extinguished. Obviously, that could not have been the intention of the parties.
What the majority opinion probably had in mind was that the conditions are resolutory because
if they are not complied with, the rights of the donee as such will be extinguished and the
donation will be revoked. To my mind, though, it is more accurate to state that the conditions
here are not resolutory conditions but, for the reasons stated above, are the obligations imposed
by the donor.
Third, I cannot subscribe to the view that the provisions of Article 1197 cannot be applied here.
The conditions/obligations imposed by the donor herein are subject to a period. I draw this
conclusion based on our previous ruling which, although made almost 90 years ago, still finds
application in the present case. In Barretto vs. City of Manila, 5 we said that when the contract
of donation, as the one involved therein, has no fixed period in which the condition should be
fulfilled, the provisions of what is now Article 1197 (then Articles 1128) are applicable and it is
the duty of the court to fix a suitable time for its fulfillment. Indeed, from the nature and
circumstances of the conditions/obligations of the present donation, it can be inferred that a
period was contemplated by the donor. Don Ramon Lopez could not have intended his property
to remain idle for a long period of time when in fact, he specifically burdened the donee with
the obligation to set up a medical college therein and thus put his property to good use. There is
a need to fix the duration of the time within which the conditions imposed are to be fulfilled.
It is also important to fix the duration or period for the performance of the
conditions/obligations in the donation in resolving the petitioner's claim that prescription has
already barred the present action. I disagree once more with the ruling of the majority that the
action of the petitioners is not barred by the statute of limitations. There is misplaced reliance
again on a previous decision on this Court in Osmea vs. Rama. 6 That case does not speak of
a deed of donation as erroneously quoted and cited by the majority opinion. It speaks of a
contract for a sum of money where the debtor herself imposed a condition which will
determine when she will fulfill her obligation to pay the creditor, thus, making the fulfillment
of her obligation dependent upon her will. What we have here, however, is not a contract for a
sum of money but a donation where the donee has not imposed any conditions on the
fulfillment of its obligations. Although it is admitted that the fulfillment of the
conditions/obligations of the present donation may be dependent on the will of the donee as to
when it will comply therewith, this did not arise out of a condition which the donee itself
imposed. It is believed that the donee was not meant to and does not have absolute control over
the time within which it will perform its obligations. It must still do so within a reasonable
time. What that reasonable time is, under the circumstances, for the courts to determine. Thus,
the mere fact that there is no time fixed as to when the conditions of the donation are to be
fulfilled does not ipso facto mean that the statute of limitations will not apply anymore and the
action to revoke the donation becomes imprescriptible.

Admittedly, the donation now in question is an onerous donation and is

governed by the law on contracts (Article 733) and the case ofOsmea, being one

involving a contract, may apply. But we must not lose sight of the fact that it is still a
donation for which this Court itself applied the pertinent law to resolve situations such as
this. That the action to revoke the donation can still prescribe has been the
pronouncement of this Court as early as 1962 in the case of Parks which, on this point,
finds relevance in this case. There, this Court said,
[that] this action [for the revocation of the donation] is prescriptible,
there is no doubt. There is no legal provision which excludes this
class of action from the statute of limitations. And not only this, the
law itself recognizes the prescriptibility of the action for the
revocation of a donation, providing a special period of [four] years for
the revocation by the subsequent birth of children [Art. 646, now Art.
763], and . . . by reason of ingratitude. If no special period is provided
for the prescription of the action for revocation for noncompliance of
the conditions of the donation [Art. 647, now Art. 764], it is because
in this respect the donation is considered onerous and is governed by
the law of contracts and the general rules of prescription. 7
More recently, in De Lune v. Abrigo, 8 this Court reiterated the ruling in Parks and said
that:
It is true that under Article 764 of the New Civil Code, actions for the
revocation of a donation must be brought within four (4) years from
the noncompliance of the conditions of the donation. However, it is
Our opinion that said article does not apply to onerous donations in
view of the specific provisions of Article 733 providing that onerous
donations are governed by the rules on contracts.
In the light of the above, the rules on contracts and the general rules
on prescription and not the rules on donations are applicable in the
case at bar.
The law applied in both cases Article 1144(1). It refers to the prescription of an action upon a
written contract, which is what the deed of an onerous donation is. The prescriptive period is
ten years from the time the cause of action accrues, and that is, from the expiration of the time
within which the donee must comply with the conditions/obligations of the donation. As to
when this exactly is remains to be determined, and that is for the courts to do as reposed upon
them by Article 1197.
For the reasons expressed above, I register my dissent. According, the decision of the Court of
Appeals must be upheld, except its ruling that the conditions of the donation are resolutory.
Padilla, J ., concurs.
||| (Central Philippine University v. Court of Appeals, G.R. No. 112127, [July 17, 1995], 316
PHIL 616-634)

239

THIRD DIVISION

de Leon, 132 SCRA 722; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA
305)."

[G.R. No. 81158. May 22, 1992.]

3. ID.; ID.; ID.; OBLIGATIONS OF VENDEE; REMEDY OF VENDOR IN CASE OF NONPERFORMANCE THEREOF; EFFECT OF NON-COMPLIANCE. As stated earlier, in a
contract of sale, the remedy of an unpaid seller is either specific performance or rescission. The
latter, with respect to the sale of immovables, is specifically governed by Article 1592 of the
Civil Code. In the case at bar, there was non-compliance with the requirements prescribed in
these provisions. It is not controverted that private respondents had neither filed an action for
specific performance nor demanded the rescission of the agreement either judicially or by a
notarial act before the filing of the complaint in Civil Case No. 586. It is only in their Answer
that they belatedly raised the defense of resolution of the contract pursuant to Article 1191 by
reason of petitioners' breach of their obligation. Even if the general law on resolution, Article
1191 of the Civil Code, is to be applied, Our decision would still be for the petitioners. The
third paragraph of this Article reads: . . . "The Court shall decree the rescission claimed, unless
there be just cause authorizing the fixing of a period."

OSCAR
A.
JACINTO
and
LIBRADA
FRANCOJACINTO, petitioners, vs. ROGELIO
KAPARAZ,
RAUL
KAPARAZ and ROSE MARIET KAPARAZ, respondents.

Garcia, Iigo & Ledesma Law Office for petitioners.

SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SALE; CONTRACT OF SALE DISTINGUISHED
FROM CONTRACT TO SELL; REMEDY OF UNPAID SELLER; RULE. Vital to the
resolution of the controversy is the determination of the true nature of the questioned
agreement. Is it a contract of sale or a contract to sell? The two are not, of course, the same. In
the latter case, ownership is retained by the seller and is not to pass until full payment of the
price. Such payment is a positive suspensive condition the failure of which is not a breach,
casual or serious, but simply an event that prevents the obligation of the vendor to convey title
from acquiring binding force. In such a situation, to argue that there was only a casual breach is
to proceed from the assumption that the contract is one of absolute sale, where non-payment is
a resolutory question. Otherwise stated, as capsulized in Luzon Brokerage Co., vs. Maritime
Building Co., Inc., 46 SCRA 381 [1972] there can be no rescission or resolution of an
obligation as yet non-existent, because the suspensive condition did not happen. On the other
hand, since in a contract of sale, the non-payment of the price is a resolutory condition, the
remedy of the seller under Article 1191 of the Civil Code is to exact fulfillment or to rescind
the contract. In respect, however, to the sale of immovable property, this Article must be read
together with Article 1592 of the same Code: This Article applies to instances where no
stipulation for automatic rescission is made because it says "even though".
2. ID.; ID.; ID.; EARMARKS OF CONTRACT OF SALE; PRESENT IN CASE AT BAR.
The agreement in the instant case has all the earmarks of a contract of sale. The possession of
the portion sold was immediately delivered to the petitioners. They were granted the right to
enjoy all the improvements therein effective from the date of the execution of the agreement.
Private respondents unqualifiedly bound themselves to execute the final deed of sale "as soon
as the settlement or partition of the estate of the deceased Narcisa R. Kaparaz shall have been
consummated and effected, but not later than March 31, 1967" and only upon full payment of
the unpaid portion of the purchase price. The private respondents did not reserve unto
themselves the ownership of the property until full payment of the unpaid balance of
P1,000.00. Finally, there is no stipulation giving the private respondents the right to unilaterally
rescind the contract the moment the vendee fails to pay within a fixed period. (Taguba v. Vda.

4. ID.; CONTRACTS; RESCISSION; INTENT TO RESCIND MUST BE COMMUNICATED

TO THE OTHER PARTY; CASE AT BAR. Then too, at no time before the filing of their
Answer did private respondents declare their intention to rescind the agreement, or if they did,
communicate such intention to the petitioners. It was necessary for private respondents to have
done so. As this Court held in University of the Philippines vs. De los Angeles: "Of course, it
must be understood that the act of a party in treating a contract as canceled or resolved on
account of infractions by the other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by the proper court. If the other
party denies that rescission is justified, it is free to resort to judicial action in its own behalf,
and bring the matter to court. Them should the court, after due hearing, decide that the
resolution of the contract was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced. In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without previous court action, but
it proceeds at its own risk. For it is only the final judgment of the corresponding court that will
conclusively and finally settle whether the action taken was or was not correct in law. But the
law definitely does not require that the contracting party who believes itself injured must first
file suit and wait for a judgment before taking extrajudicial steps to protect its interest.
Otherwise, the party injured by the others' breach will have to passively sit and watch its
damages accumulate during the pendency of the suit until the final judgment of rescission is
rendered when the law itself requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203)."
5. ID.; ID.; ID.; NOT JUSTIFIED BY A CASUAL OR LIGHT BREACH OF THE
AGREEMENT; CASE AT BAR. the delay incurred by petitioners was but a casual or slight
breach of the agreement, which did not defeat the object of the parties in entering into the
agreement. A mere casual breach does not justify rescission. The prompt payment of the
monthly amortizations of the unpaid balance of P1,000.00 was not a condition precedent to the
execution of the final deed of sale. Besides, petitioners had already paid P1,000.00 of the total
consideration of P1,800.00, or exactly 77.77% of the purchase price within the period
stipulated. Moreover, they had in fact overpaid the private respondents by P100.00.

240
DECISION

aforementioned land bordering a proposed five-meter subdivision

road adjacent to the property of the PARTY OF THE SECOND
PART;

DAVIDE JR., J p:
Petitioners urge this Court to review and set aside the decision of the respondent Court of
Appeals of 30 July 1987 in C.A.-G.R. CV No. 69357, 1 the dispositive portion of which reads:
"WHEREFORE, the appealed decision is hereby REVERSED and
SET ASIDE and judgment is hereby rendered as follows:
1. The Complaint/Amended
hereby dismissed.

Complaint

is

2. The agreement between the parties dated

March 11, 1966 (Exhibit "A"; also marked as Exhibit "1")
is hereby declared extinguished.
3. To prevent unjust enrichment at the expense
of another, the defendants-appellants are hereby ordered to
reimburse to the plaintiffs-appellees the sum of P500.00
paid by the latter to the Development Bank of the
Philippines for the defendants-appellants' P2,600.00 loan
account.
No pronouncement as to costs. LLpr
SO ORDERED." 2
The undisputed antecedent facts are as follows:
On 11 March 1966, herein petitioners and private respondents entered into an agreement
(hereinafter referred to as Agreement) under which the private respondents agreed to sell and
convey to petitioners a portion consisting of six hundred (600) square meters of a lot located in
Matiao, Mati, Davao Oriental and covered by Transfer Certificate of Title No. T-3694 for a
total consideration of P1,800.00. A downpayment of P800.00 was paid upon execution of the
Agreement. The balance of P1,000.00 was to be paid by petitioners on installment at the rate of
P100.00 a month to the Development Bank of the Philippines (DBP) to be applied to private
respondents' loan accounts. Paragraphs 5, 6, 7 and 8 of the Agreement read as follows:
"That the PARTY OF THE FIRST PART is very much in need of cash
to pay the loan to the DEVELOPMENT BANK OF THE
PHILIPPINES herein abovementioned which is very much in arrears
and the PARTY OF THE SECOND PART is agreeable to advance the
sum of EIGHT HUNDRED (P800.00) PESOS as partial payment of
the said loan to the Development Bank of the Philippines provided
that the PARTY OF THE FIRST PARTY (sic) shall sell, transfer, cede
and convey absolutely to the party of the SECOND PART an area of
SIX HUNDRED (600) SQUARE METERS with a frontage of twenty
(20) METERS along the present national highway, at the corner of the

That for and in consideration of the foregoing premises and of the

sum of EIGHT HUNDRED (800.00) PESOS which the PARTY OF
THE FIRST PARTY (sic) hereby acknowledges to have received
from the PARTY OF THE SECOND PART, THE PARTY OF THE
FIRST PART hereby agrees, promises and binds himself to sell, cede,
transfer, and convey absolutely to the PARTY OF THE SECOND
PART SIX HUNDRED (600) SQUARE METERS portion of the
property covered by TRANSFER CERTIFICATE OF TITLE NO. T3694 together with all the improvements thereon, which portion is
situated along the national highway and shown as the shaded area in
the sketch at the back hereof; the total consideration of the sale of the
said SIX HUNDRED (600) SQUARE METERS shall be ONE
THOUSAND EIGHT HUNDRED PESOS (P1,800.00), including the
amount of EIGHT HUNDRED PESOS (P800.00) advanced by the
PARTY OF THE SECOND PART upon the execution of this
document;

That the unpaid balance of the total consideration of the sale

amounting to ONE THOUSAND (P1,000.00) PESOS shall be paid by
the PARTY OF THE SECOND PART directly to the
DEVELOPMENT BANK OF THE PHILIPPINES, DAVAO
BRANCH, in ten (10) equal monthly installments of ONE
HUNDRED (P100.00) PESOS each not later than the 15th day
following the end of each month beginning May 10, 1966;
That the PARTY OF THE SECOND PART has the right and privilege
by virtue of this (sic) presents to take possession of the area of SIX
HUNDRED (P600.00) SQUARE METERS subject of this agreement
and to appropriate for himself all the improvements existing thereon
effective from the date of execution of this agreement;" 3
Paragraph 9 thereof reads:
"That the PARTY OF THE FIRST PART agrees and binds himself to
acknowledge receipt of every and all monthly payments remitted to
the DEVELOPMENT BANK OF THE PHILIPPINES by the PARTY
OF THE SECOND PART and further agrees and binds himself to
execute the final deed of absolute sale of the SIX HUNDRED (600)
SQUARE METERS herein above referred to in favor of the PARTY
OF THE SECOND PART as soon as the settlement or partition of the
estate of the deceased NARCISA R. KAPARAZ hall have been
consummated and effected, but not later than March 31, 1967;" 4
Upon the execution of the agreement, petitioners paid the downpayment of P800.00 and were
placed in possession of the portion described therein. As to the P1,000.00 which was to be paid

241
directly to the DBP, petitioners claim that they had even made an excess payment of
P100.00. cdphil
In view of the refusal of private respondents to execute the deed of sale, petitioners filed
against them a complaint for specific performance with the then Court of First Instance (now
Regional Trial Court) of Davao Oriental. The complaint was docketed as Civil Case No. 586
and was amended on 23 January 1979. In their Answer filed on 28 June 1977, later amended on
19 December 1979 as a consequence of the filing of the amended complaint, private
respondents alleged that the sale did not materialize because of the failure of petitioners to
fulfill their promise to make timely payments on the stipulated price to the DBP; as a result of
such failure, they (private respondents) failed to secure the release of the mortgage on the
property. They then prayed for the dismissal of the case and a declaration that the agreement is
null and void.
After due trial, the court below rendered on 19 November 1981 a decision in favor of the
petitioners, the dispositive portion of which reads as follows:
"FOR ALL THE FOREGOING, judgment is hereby rendered in favor
of the plaintiffs and against the defendants
(1) Declaring the plaintiffs to be the owners of
the property consisting of six hundred (600) square
meters, more or less, denominated as Lot H-12, Psd-11000576, which was formerly a portion of the property
covered by Transfer Certificate of Title No. T-3694, and
now covered by Transfer Certificate of Title No. T-5824 in
the name of defendant Rogelio Kaparaz;
(2) Ordering defendant Rogelio Kaparaz to
reconvey this property to the plaintiffs herein;
(3) Ordering defendants to pay plaintiffs
reasonable attorney's fees in the amount of P3,000.00 and
to pay the costs.
SO ORDERED." 5
The facts as found by the trial court are as follows:
xxx xxx xxx
"The adduced evidence will show that the parties herein above
executed a certain agreement (Exh. "A" for the plaintiffs; Exhibit "1"
for the defendants) dated March 11, 1966, the pertinent portions of
which are hereunder quoted, to wit:
xxx xxx xxx
From the foregoing provisions of the said agreement, the defendants
herein have bound themselves to sell and convey a portion of the
property covered by Transfer Certificate of Title No. T-3694,
consisting of SIX HUNDRED (600) SQUARE METERS, to the
plaintiffs for a consideration of P1,800.00, P800.00 of which had

been received by the defendants upon the execution of the document

and the remaining balance of P1,000.00 shall be paid by the plaintiffs
directly to the Development Bank of the Philippines in `ten (10) equal
monthly installments of ONE HUNDRED (P100.00) PESOS EACH
not later than the 15th day following the end of each month beginning
May 10, 1966'. The defendants, on the other hand, have also bound
themselves to execute the final deed of absolute sale of the portion
above-mentioned in favor of the plaintiffs `as soon as the settlement
or partition of the estate of the deceased NARCISA R. KAPARAZ
shall have been consummated and effected, but not later than March
31, 1967.'
It appears that plaintiffs had paid defendant Domingo Kaparaz the
amount of P400.00 (Exh. "B"), the P200.00 which was paid by
plaintiffs to the Development Bank of the Philippines for the account
of the late Domingo Kaparaz and the P200.00 was given to said
defendant. Plaintiff Oscar Jacinto made another payment to the
Development Bank of the Philippines for the account of Domingo and
Narcisa Kaparaz covered by Official Receipt No. 1113990, dated
November 29, 1966, in the amount of P200.00 (Exh. "F"). Another
payment was again made to the Development Bank of the Philippines
for the same account by plaintiff Oscar Jacinto covered by Official
Receipt No. 1334193, dated December 5, 1968, in the amount of
P300.00 (Exh. "C") and another payment also was made on
December 9, 1968 in the amount of P200.00 covered by Official
Receipt No. 1334196 (Exh. "H"). all of these payments are certified
by the Development Bank of the Philippines (Exh. "E") to have been
made by plaintiff Oscar Jacinto and applied to the accounts of
Domingo and Narcisa Kaparaz,. For the subdivision survey of the lot
of six hundred (600) square meters involved in this case, plaintiffs
contributed the amount of P80.00 (Exh. "J") and another amount of
P350.00 was paid also to Engr. Ladera (Exh. "I"). Plaintiffs, all in all,
aside from the payments that they made to the Surveyor, have paid
the Development Bank of the Philippines for the account of the late
Domingo Kaparaz in the total amount of P700.00 which is already in
excess of the price consideration of P1,800.00 after defendants had
received the amount of P1,200.00. Plaintiff Oscar Jacinto explained
that the payment was in excess of P100.00 because the balance of
P600.00 which was originally intended to be paid for the surveyor
was instead to be paid by him to the bank plus P100.00 to cover the
accumulated interests. Thus (sic), making the total payments to the
Development Bank of the Philippines in the amount of P700.00. llcd
On the other (hand), defendant Rogelio Kaparaz testified that
plaintiffs did not comply with the terms of the agreement (Exh. "A")
by having failed to pay the ten (10) equal monthly installments. For
failure of plaintiffs to pay the monthly installments, as agreed (sic) in
the agreement (Exh. "A"), he decided to pay the Development Bank
of the Philippines of (sic) their accounts. The partial payment was
made on July 3, 1967 in the amount of P3,000.00 covered by Official
Receipt No. 1160314 (Exh. "2") and another payment for the balance

242
was made on August 15, 1967 in the amount of P3,124.11 covered by
Official Receipt No. 1160831 (Exh. "4").
It is likewise admitted that the estate of the late Narcisa R. Kaparaz
had already been settled and that six hundred (600) square meters
portion of the lot covered by Transfer Certificate of Title No. T-3694,
or Lot No. H-12, Psd-11-000576, has already been adjudicated to
defendant Rogelio Kaparaz and is now registered in his name under
Transfer Certificate of Title No. T-5824." 6
Private respondents appealed from said decision to the Court of Appeals which docketed the
case as C.A.-G.R. CV No. 69357. In their Brief, they contended that the trial court erred in: (a)
finding that petitioners had fully paid the consideration for the property subject of the
agreement, (b) ruling that the delay in the payments to the DBP is only a slight breach of the
agreement, (c) holding private respondents' failure to protest petitioners' delay of payment
amounted to implied waiver to rescind the agreement, (d) declaring that laches did not operate
against petitioners considering that the prescriptive period had not even expired, (e) not
holding that the parties are in pari delicto, and (f) ordering Rogelio Kaparaz to reconvey the
property in question to petitioners.
As earlier adverted to, in its decision of 30 July 1987, the respondent Court of Appeals
reversed the decision of the trial court. The respondent Court was of the opinion: (a) The
petitioners had not fully discharged their obligation under the agreement considering that their
last payments to DBP of P300.00 7 and P200.00 8 were "several months delayed beyond the
date/s agreed upon by the parties," and that the agricultural loan to which the amortizations of
the unpaid balance of P1,000.00 of the purchase price were to be applied had in fact been fully
settled by the private respondents. The application of these payments by the DBP to another
account of the private respondents was of no moment because the agreement of the parties
specifically referred to the agricultural loan. (b) No evidence supports the conclusion of the
trial court that private respondents failed to protest the delay in the payments. On the contrary,
the evidence discloses that private respondents demanded from the petitioners the balance of
the obligation after the latter had defaulted; having received no response, private respondents
themselves paid the agricultural loan. (c) The delay in the payments was not a slight breach.
The dates of the payments were so essential that they were specifically stipulated upon by the
parties. The primary importance of timely payments sprang from the nature of the subject bank
account consisting of a loan secured by a real estate mortgage which demanded up-to-date
amortization to prevent foreclosure. (d) While the trial court was correct in holding that both
parties defaulted in the performance of their respective obligations, petitioners were the first to
incur in delay. There is, therefore, greater justification to decree rescission. Moreover, even
granting that there was no evidence as to who violated the agreement first, then the contract is
deemed extinguished pursuant to the second sentence of Article 1192 of the Civil Code. This
Article provides that:

"In case both parties have committed a breach of the obligation, the
liability of the first infractor shall be equitably tempered by the
courts. If it cannot be determined which of the parties first violated
the contract, the same shall be deemed extinguished, and each shall
bear his own damage."

Unable to accept the above verdict, petitioner commenced this petition wherein they allege that
respondent Court erred in not finding that: (a) petitioners had fully paid the consideration for
the 600 square meters of Lot H; (b) private respondents' failure to protest the delay of
payments can be considered as estoppel on their part and an implied waiver of their right to
rescind the sale; (c) assuming that the last two payments to the DBP were not valid as they
were applied to another account, there was at least substantial performance by the petitioners of
their obligation; (d) the breach on the part of petitioners was only slight or casual and would
not warrant rescission of the sale; (e) under the circumstances, it was necessary for the
respondents to make a notarial demand or obtain prior judicial approval to effect rescission of
the sale, and finally, (f) the agreement was extinguished. prcd
After the filing of the Comments by private respondents, the reply thereto by petitioners and
the rejoinder to the latter by private respondents, the Court gave due course to the petition and
required the parties to submit simultaneously their respective Memoranda, 9 which they
subsequently complied with. 10
The petition is impressed with merit.
Vital to the resolution of the controversy is the determination of the true nature of the
questioned agreement. Is it a contract of sale or a contract to sell? The two are not, of course,
the same. In the latter case, ownership is retained by the seller and is not to pass until full
payment of the price. Such payment is a positive suspensive condition the failure of which is
not a breach, casual or serious, but simply an event that prevents the obligation of the vendor to
convey title from acquiring binding force. In such a situation, to argue that there was only a
casual breach is to proceed from the assumption that the contract is one of absolute sale, where
non-payment is a resolutory question. 11 Otherwise stated, as capsulized inLuzon Brokerage
Co., vs. Maritime Building Co., Inc.,12 there can be no rescission or resolution of an obligation
as yet non-existent, because the suspensive condition did not happen." Expanding on this point,
this Court, in said case, made the following disquisitions:
". . . The upshot of all these stipulation is that in seeking the ouster of
Maritime for failure to pay the price as agreed upon, Myers was not
rescinding (or more properly, resolving) the contract, but
precisely enforcing it according to its express terms. In its suit Myers
was not seeking restitution to it of the ownership of the thing sold
(since it was never disposed of), such restoration being the logical
consequence of the fulfillment of a resolutory condition, express or
implied (article 1190); neither was it seeking a declaration that its
obligation to sell was extinguished. What it sought was a judicial
declaration that because the suspensive condition (full and punctual
payment) had not been fulfilled, its obligation to sell to
Maritime never arose or never became effective and, therefore, it
(Myers) was entitled to repossess the property object of the contract,
possession being a mere incident to its right of ownership. It is
elementary that, as stated by Castan,
'b) Si la condicion suspensiva llega a faltar, la
obligacion se tiene por no existente, y el acreedor pierde
todo derecho, incluso el de utilizar las medidas
conservativas. (3 Castan, Derecho Civil, 7a Ed., p. 107).
(Also Puig Pea, Der. Civ., T. IV (1), p. 113).'"

243
On the other hand, since in a contract of sale, the non-payment of the price is a resolutory
condition, 13 the remedy of the seller under Article 1191 of the Civil Code is to exact
fulfillment or to rescind the contract. In respect, however, to the sale of immovable property,
this Article must be read together with Article 1592 of the same Code:
"ARTICLE 1592. In the sale of immovable property, even though it
may have been stipulated that upon failure to pay the price at the time
agreed upon the rescission of the contract shall of right take place, the
vendee may pay, even after the expiration of the period, as long as no
demand for rescission of the contract has been made upon him either
judicially or by a notarial act. After the demand, the court may not
grant him a new term."
This Article applies to instances where no stipulation for automatic rescission is made because
it says "even though". 14
The agreement in the instant case has all the earmarks of a contract of sale. The possession of
the portion sold was immediately delivered to the petitioners. They were granted the right to
enjoy all the improvements therein effective from the date of the execution of the agreement.
Private respondents unqualifiedly bound themselves to execute the final deed of sale "as soon
as the settlement or partition of the estate of the deceased Narcisa R. Kaparaz shall have been
consummated and effected, but not later than March 31, 1967" and only upon full payment of
the unpaid portion of the purchase price. The private respondents did not reserve unto
themselves the ownership of the property until full payment of the unpaid balance of
P1,000.00. Finally, there is no stipulation giving the private respondents the right to unilaterally
rescind the contract the moment the vendee fails to pay within a fixed period. In reality, the
agreement was an absolute sale which allowed the petitioners to pay the remaining balance of
the purchase price in installment. We agree with the submission of petitioners 15 that Dignos
vs. Court of Appeals 16 applies in this case. In said case, this Court stated: LLpr
"Thus, it has been held that a deed of sale is absolute in nature
although denominated as a `Deed of Conditional Sale' where nowhere
in the contract in question is a proviso or stipulation to the effect that
title to the property sold is reserved in the vendor until full payment
of the purchase price, nor is there a stipulation giving the vendor the
right to unilaterally rescind the contact the moment the vendee fails to
pay within a fixed period (Taguba v. Vda. de Leon, 132 SCRA 722;
Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA
305)."
As stated earlier, in a contract of sale, the remedy of an unpaid seller is either specific
performance or rescission. The latter, with respect to the sale of immovables, is specifically
governed by Article 1592 of the Civil Code. 17 In the case at bar, there was non-compliance
with the requirements prescribed in these provisions. It is not controverted that private
respondents had neither filed an action for specific performance nor demanded the rescission of
the agreement either judicially or by a notarial act before the filing of the complaint in Civil
Case No. 586. It is only in their Answer that they belatedly raised the defense of resolution of
the contract pursuant to Article 1191 by reason of petitioners' breach of their obligation.
Even if the general law on resolution, Article 1191 of the Civil Code, is to be applied, Our
decision would still be for the petitioners. The third paragraph of this Article reads:

xxx xxx xxx

"The Court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period."
It is not denied that petitioners made two (2) payments in the sums of P200.00 and P300.00 at a
time when what remained unsettled under the agreement was only P400.00. There was then an
excess payment of P100.00. These payments were made to the DBP which applied them to an
outstanding account of the private respondents. Private respondents neither complained of the
delay in these payments nor rejected their application to their account. They were, undoubtedly,
benefited by the application because it either satisfied their account or correspondingly reduced
it. The claim that the account to which it was applied was not the account stipulated in the
agreement is without merit. In the first place, the agreement fails to disclose an express
agreement that the monthly amortizations on the P1,000.00 unpaid balance of the purchase
price to be made to the DBP should be applied exclusively to the agricultural loan indicated in
the exordium of the agreement. The loan was mentioned only to lay the basis for private
respondents' need for the downpayment. In the second place, to allow private respondents to
reject the payment of P400.00, plus the excess of P100.00 after they benefited therefrom,
would be unjust.
Then too, at no time before the filing of their Answer did private respondents declare their
intention to rescind the agreement, or if they did, communicate such intention to the
petitioners. It was necessary for private respondents to have done so. As this Court held
in University of the Philippines vs. De los Angeles: 18
"Of course, it must be understood that the act of a party in treating a
contract as canceled or resolved on account of infractions by the other
contracting party must be made known to the other and is always
provisional, being ever subject to scrutiny and review by the proper
court. If the other party denies that rescission is justified, it is free to
resort to judicial action in its own behalf, and bring the matter to
court. Them should the court, after due hearing, decide that the
resolution of the contract was not warranted, the responsible party
will be sentenced to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded to the party
prejudiced.
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only the
final judgment of the corresponding court that will conclusively and
finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for a judgment
before taking extrajudicial steps to protect its interest. Otherwise, the
party injured by the others' breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203)."

244

Finally, the delay incurred by petitioners was but a casual or slight breach of the agreement,
which did not defeat the object of the parties in entering into the agreement. A mere casual
breach does not justify rescission. 19 The prompt payment of the monthly amortizations of the
unpaid balance of P1,000.00 was not a condition precedent to the execution of the final deed of
sale. Besides, petitioners had already paid P1,000.00 of the total consideration of P1,800.00, or
exactly 77.77% of the purchase price within the period stipulated. Moreover, they had in fact
overpaid the private respondents by P100.00.
Accordingly, We rule that rescission of the agreement was not available to private
respondents. Cdpr
We further rule that the respondent court erred in declaring the agreement extinguished
pursuant to the second sentence of article 1192 of the Civil Code. Having concluded, although
erroneously, that petitioners were the first to breach the agreement, it should have applied the
first sentence thereof by equitably tempering petitioners' liability. The second sentence applies
only to cases where it cannot be determined which of the parties first violated the contract.
The foregoing disquisitions render unnecessary any discussion on the other issues raised by
petitioners.
WHEREFORE, the petition is GRANTED. The challenged decision of the Court of Appeals is
REVERSED and the judgment of the lower court is hereby REINSTATED and AFFIRMED.
Costs against private respondent.
SO ORDERED.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.
||| (Jacinto v. Kaparaz, G.R. No. 81158, [May 22, 1992])

245

SECOND DIVISION
[G.R. No. L-58286. May 16, 1983.]
AGAPITO
B.
DUCUSIN
and
AGAPITO
T.
DUCUSIN,
JR., petitioners, vs. HON. COURT OF APPEALS, VIRGILIO S.
BALIOLA and LILIA S. BALIOLA, respondents.

Agapito Ducusin in his own behalf.

Roberto Brodette for respondents.

SYLLABUS
1. REMEDIAL LAW; EVIDENCE ADDUCED BEFORE THE TRIAL COURTS;
EXCLUSION THEREOF ON APPEAL TO THE APPELLATE COURT, A CASE OF GRAVE
ERROR. As pointed out by the petitioners, the testimony of petitioner Agapito Ducusin, Sr.
should have been given weight by the appellate court because he testified that his son Agapito
Jr. got married to Adela Villacorta on November 25, 1978 in Edmonton, Alberta, Canada at the
St. Anthony Church and that he knows this fact of marriage since he was present during the
wedding ceremony and pictures marked Exhibits "H," "I," "J," and "J-l" were taken of the
wedding party after the ceremony and wherein he identified himself in the picture (Exh. "J") as
"the gentleman in dark jacket on the right side" (t.s.n., June 5, 1979, pp. 19-21; pp. 177-179,
Records). And with the testimony of Arturo Ducusin, a brother of Agapito Jr., which may be
considered under Rule 130, Sec. 33 as an act or declaration about pedigree, the word
"pedigree" including relationship, family genealogy, birth, marriage, death, the dates when and
the places where these facts occurred, and the names of the relatives, as well as the
presentation of the marriage certificate of Agapito Ducusin, Jr. and Adela Villacorta (all of
which evidence were noted, admitted and considered in the decision of the case before the CFI
of Manila, Branch XVI (p. 87, Records) and in the decision of the City Court of Manila,
Branch XVI (p. 62, Records) both holding that the marriage has been sufficiently proved, the
Supreme Court ruled that the Court of Appeals gravely erred in excluding the evidence
described above and presented to prove the marriage of Agapito Ducusin, Jr.
2. ID.; ID.; INTENT TO USE LEASED PREMISES AS RESIDENCE OF THE IMMEDIATE
MEMBER OF LESSORS' FAMILY, SUFFICIENTLY AND SATISFACTORILY PROVED.
The Supreme Court likewise conclude that the intention to use the leased premises as the
residence of Ducusin, Jr. has been satisfactorily and sufficiently proved by clear, strong, and
substantial evidence found in the records of the case. The testimony of the petitioner, Ducusin
Sr., that his son needs the leased premises as he was getting married and did in fact got married
for which reason petitioner sent the "Notice to Terminate His Contract"; the testimony of
Arturo Ducusin that he had an overseas telephone talk with his brother Agapito Jr. informing

that the latter was coming home and that he and his wife were preparing their documents and
arriving within the month and the documentary evidence which is the letter of Agapito
Ducusin, Jr. where it stated that he intended to settle in the Philippines instead of Canada where
he was presently residing with his wife-all these evidence clearly and competently prove the
intention of petitioner Agapito Ducusin, Jr. to reside in the Philippines and use the leased
premises for his residence and his wife.
3. CIVIL LAW; LEASE CONTRACT; P.D. NO. 20; JUDICIAL EJECTMENT WHERE
LEASE IS FOR A DEFINITE PERIOD OR WHEN THE AGREED DEFINITE PERIOD HAS
EXPIRED, EXPRESSLY ALLOWED; DOCTRINE IN RANTAEL VS. COURT OF
APPEALS, APPLIED. The contention of the petitioner that the contract of lease in question
is for a definite period, being on a month-to-month basis beginning February 19, 1975 and is,
therefore, not covered by P.D. No. 20, is correct. The rule laid down by the Supreme Court in
Rantael vs. Court of Appeals and Teresa Llave, L-47519, April 30, 1980, 97 SCRA 453, is
squarely on all fours with the case at bar and is controlling. To quote; . . . "However, by express
exception of P.D. No. 20, judicial ejectment lies 'when the lease is for a definite period' or
when the fixed or definite period agreed upon has expired. The lease in the case at bar having a
definite period, it indubitably follows that the exception, rather than the general rule, applies
and therefore, respondent Llave's right to judicially eject petitioner Rantael from the premises
may be duly enforced. This has been the consistent administrative interpretation of the Office
of the President. Therefore, no error was committed by respondent appellate court . . . ."
4. REMEDIAL LAW; APPEAL; FINDINGS OF FACTS BY THE COURT OF APPEALS
GENERALLY ACCEPTED AS BASIS FOR REVIEW OF ITS DECISION; EXCEPTIONS.
Generally, the findings of fact by the Court of Appeals are deemed accepted as the basis for
review of the appellate court's decision. But this rule is not without exception such as shown in
the case before the Supreme Court where the Court of Appeals reversed the findings of fact
made by the trial court (City Court of Manila) and also the Court of First Instance, by
excluding evidence supposedly hearsay when they are not pursuant to the rules of evidence, by
ignoring evidence on record that are competent, clear and substantial and by misapprehending
the facts, thereby making manifest the commission of grave abuse of discretion on the part of
the respondent appellate court and so warrants and justifies a review not only of the law but
also the facts. In Tolentino vs. De Jesus, 56 SCRA 167, it was ruled that the findings of facts of
the Court of Appeals are not conclusive where there is grave abuse of discretion; the judgment
is based on misapprehension of facts; the findings of facts of the Court of Appeals are contrary
to those of the trial court or premised on the absence of evidence and is contradicted by
evidence on record; the conclusion is a finding grounded entirely on speculation, surmise and
conjectures; and the inference made is manifestly mistaken. These are the exceptions to the
general rule. The instant petition is such an exception.

DECISION

GUERRERO, J p:

246
Petition for certiorari praying that the judgment in CA-G.R No. SP-11473-PR entitled "Virgilio
S. Baliola and Lilia S. Baliola vs. Hon. Alfredo L. Benipayo, Judge, CFI of Manila, Branch
XVI, Agapito Ducusin and Agapito Ducusin, Jr." be set aside and reversed, the dispositive
portion of which reads:
"WHEREFORE, premises considered, the judgment appealed from is
hereby MODIFIED. The complaint for ejectment is hereby
DISMISSED. Petitioners are hereby ordered to pay private
respondent Agapito Ducusin Sr. the sum of P263.29 as their
proportionate share for the use of the booster pump. Petitioners are
likewise ordered to share in the expenses incurred for the use of the
booster pump in the future until the termination of the contract of
lease. No costs."
It appears from the records that on February 20, 1975, petitioner Agapito Ducusin leased to
private respondent, Virgilio S. Baliola, married to Lilia Baliola, a one-door apartment unit
located in 3319-A, Magistrado Araullo St., Bacood, Sta. Mesa, Manila under the contract of
lease, Exhibit "A", pertinent stipulations of which state: cdll
"xxx xxx xxx
"Now, therefore, for and in consideration of the foregoing premises
and covenants and stipulations herein contained in a monthly rental of
Two Hundred and Twenty (P220.00) Pesos, the Lessor hereby lease
the one-door residential apartment located at No. 3319-A Maj.
Araullo St., Bacood, Manila under the following terms, stipulations
and conditions:
"1. The lessees agrees to pay to the Lessor on
or before the 30th day of each and every month the sum of
Two Hundred and Twenty (P220.00) Pesos as rental fee
for the subject premises, without need of demand;
"2. The term of this contract shall be in a
month to month basis commencing on February 19, 1975
until terminated by the lessor on the ground that his
children need the premises for their own use or residence
or upon any ground provided for in accordance with law;
"3. The Lessees, hereby warrants that the
leased premises will be used by him exclusively as
residence only and that Lessees shall not directly or
indirectly sublease, assign, transfer, convey or in any
manner encumber the right of lease or in any part of the
leased premises under any circumstances whatsoever;
"4. The Lessees hereby agrees to keep and
maintain the premises clean or same in such good and
tenantable conditions, and shall comply with all
government sanitary regulations and safety, as well as
electrical regulations which may be imposed by the
government or the lessor himself;

"5. All utilities such as light, water, telephone,

gas service, etc. in the leased premises shall be paid for by
the Lessees;
"6. The Lessor hereby undertake to maintain
the Lessees in a peaceful enjoyment and possession of the
lease premises and warrants that the premises lease by him
to the lessees, are in good habitable condition;
"7. That all repairs necessary for the
preservation of the wire screens, electric switches and
other parts, plumbing fixtures, articles or toilet parts and
tubes, paints and payment for labor for repairs shall be for
the account of the Lessees, except big major repairs;
"8. That the Lessees agrees to deposit the
amount of four hundred and forty (P440.00) pesos rental
deposit to the Lessor. The said rental deposit which is
equivalent to payment of two months rental fee could be
used or be paid for the Lessees last two months stay in the
leased premises. . . . (Exhibit "A")." (Emphasis supplied)
The Baliola spouses occupied the apartment for almost two (2) years, paying its rentals when
on January 18, 1977, petitioner Ducusin sent a "Notice to Terminate Lease Contract" to private
respondents Baliolas terminating the lease and giving them until March 15, 1977 within which
to vacate the premises for the reason that his two children were getting married and will need
the apartment for their own use and residence Exhibit "B"). A second letter dated February 14,
1977 was thereafter sent by Ducusin to respondents Baliolas making an inquiry on any action
the latter had taken on the previous notice to terminate the lease contract. LLjur

Respondents made no reply to the "Notice to Terminate Lease Contract". Indeed, they wrote a
letter to the Secretary of National Defense dated February 12, 1977, reporting that Ducusin was
intent on evicting them from the leased premises (Exhibit "6").
So on April 14, 1977, petitioners filed an action for ejectment against the Baliola spouses in the
City Court of Manila, Branch XVI, alleging that having constructed the apartment complex for
the use and residence of his children (each to a unit) if and when they decide to marry and live
independently and that the apartment unit located at 3319-A Magistrado Araullo St., Bacood,
Manila having been allotted to his son, Agapito Ducusin, Jr., the said unit is now needed by
Agapito, Jr. who is getting married in the month of May, 1977 and that said Agapito, Jr. has
decided to live independently.
The complaint for eviction further alleged that the lessees have violated the terms of the
contract by subleasing the premises; that the lessees have not used the premises solely for
residential purposes but have used the same as factory and/or manufacturing premises for their
commercial goods; and that they have neglected to undertake repairs of the apartment and the
premises according to their agreement.

247
The lessees denied the allegations of the lessor and claimed in their Answer that the ejectment
suit "is a well-planned scheme to rid the defendants and family out of their apartment, and to
circumvent the law prohibiting raising the rental of apartments and houses."
The City Court of Manila, Branch XVI, decided in favor of the lessor Ducusin on the ground
that the "defendants' contract with the plaintiff has already terminated with the notice of
termination sent by the plaintiff to the defendants on the ground that he needs the premises for
his own children." The trial court's decision states the following dispositive portion:
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiffs and against the defendants, ordering the defendant and all
persons claiming possession under them to vacate the premises
known as 3319-A Magistrado Araulio St., Bacood, Sta. Mesa, Manila,
and surrender possession thereof to the plaintiffs herein; ordering the
defendants to pay the plaintiffs the amount of P220.00 monthly as
reasonable compensation for the use of the premises starting
December 1978 until the premises is finally vacated and possession
thereof surrendered to the plaintiffs; ordering the defendants to pay to
the plaintiffs the amount of P263.29 as reimbursement for the
expenses incurred for the use of the booster pump; ordering the
defendants to pay the plaintiff the amount of P700.00 as reasonable
attorney's fees, plus the costs of suit."
The lessees appealed to the Court of First Instance of Manila, Branch XVI, assigning the
following errors: (a) That the lower court erred in not finding that the written contract of lease
falls within the range of P.D. No. 20; (b) That the lower court erred in finding that the need of
the leased premises by the plaintiffs-appellees to be lawful and valid and satisfactorily proved
by them; (c) That the lower court erred in awarding damages in the form of reimbursement of
the expenses for the use of the booster pump and attorney's fees; and (d) That the lower court
erred in not allowing defendants-appellants' counter-claim. Cdpr
The Court of First Instance of Manila, Branch XVI, affirmed the decision of the City Court of
Manila, Branch XVI, based on its findings that : (1) mere allegation of the landlord in his need
of the premises for the use of the immediate members of his family "constitutes a cause to eject
the tenants . . ."; (2) the marriage of private respondent Agapito Ducusin, Jr. was proved by the
testimony of private respondent Agapito Ducusin, Sr., the latter's son Arturo, photographs
depicting married couple and a marriage certificate (Exhibits "F", "G", "H" and "I"; and (3)
that petitioners admitted the existence of the verbal agreement to share the expenses incurred
for the use of the booster pump.
The lessees, still not satisfied with the CFI decision, went to the Court of Appeals on a petition
for review submitting that: "(1) that the respondent CFI of Manila erred in holding that the
need of the premises in question by the private respondents is lawful and valid; (2) that the
respondent CFI of Manila erred in finding that the need of the premises a quo by the private
respondents has been sufficiently proven by them and legally entitle them to judicially eject the
petitioners from the premises; (3) that the respondent CFI of Manila erred in ruling that the
award by the trial court to private respondents of damages in the form of reimbursement of
expenses for the use of the booster pump is proper and legal."
In resolving the appeal, the respondent appellate court proceeded to "examine (the)
determination of the questions (1) whether or not an owner of a leased premises can

unilaterally terminate the contract of lease under the terms and conditions stated therein; and
(2) whether or not the happening of the resolutory condition re: the need of the immediate
members of the family of the lessor of the leased premises has been established by a
preponderance of evidence."
Sustaining the validity of the clause in the contract of lease in question, the Court of Appeals
held:
"The clause in the contract of lease dated February 20, 1975 at issue
in the instant case reads:
'xxx xxx xxx
'2. The term of this contract shall be in a month-to-month basis
commencing on February 19, 1975 until terminated by mutual
agreement or terminated by the lessor on the ground that his children
need the premises for their own use or residence or upon any ground
provided for in accordance with law;
'xxx xxx xxx
(Emphasis supplied.)
"The parties to the contract of lease agreed that the obligations arising
from the said contract shall be extinguished due to the following
causes: (1) termination of the contract by mutual consent of to parties;
(2) when the lessor elects to terminate the contract on the ground that
his children need the premises for their own use or residence; and (3)
for any cause as provided in accordance with law.
"In the complaint for ejectment, private respondents rely on three
causes of action to support their claim that the contract of lease
entered into with the petitioners was terminated: (1) violation of the
clause in the contract against sublease; (2) use of the leased premises
for commercial purposes and (3) happening of the resolutory
condition need of the leased premises by the lessor's children. The
trial court rejected the first two grounds as not being supported by
evidence presented but sustained the private respondents' third cause
of action.
"The validity of the terms and conditions in a contract is governed by
the following Civil Code provisions:
'Art. 1308. The contract must bind both
contracting parties; its validity or compliance cannot be
left to the will of one of them.'
'Art. 1182. When the fulfillment of the
condition depends upon the sole will of the debtor, the
conditional obligation shall be void. If it depends upon
chance or upon the will of a third person, the obligation

248
shall take effect in conformity with the provisions of this
Code.'
xxx xxx xxx
"The resolutory condition in the contract of lease re: the need of the
lessor's children of the leased premises is not a condition the
happening of which is dependent solely upon the will of the lessor.
The happening of the condition depends upon the will of a third
person - the lessor's children. Whenever the latter require the use of
the leased premises for their own needs, then the contract of lease
shall be deemed terminated. The validity of the said condition as
agreed upon by the parties stands."
We agree with the above ruling of the respondent Court and, therefore, affirm the same.
As to the second issue: whether the need of the immediate members of the family of the lessor
of the leased premises has been established by a preponderance of evidence, the respondent
court ruled against the lessor Ducusin and We quote: LLphil
"Upon a careful review of the records of the instant case, We are of
the opinion that the private respondents have not proved by a
preponderance of evidence the alleged need of the immediate
members of his family of the use of the leased premises in dispute.
"Private respondent Agapito Ducusin Sr. alleged in his complaint that
he needed the leased premises because his son Agapito Ducusin, Jr.
was getting married. In the proceedings at the trial Court, be testified
that Agapito Ducusin Jr. was getting married on May 1977, hence the
latter needed the leased premises (T.S.N., March 7, 1978, pp. 11-12).
"No proof of the marriage of private respondent Agapito Ducusin, Jr.
was presented from the time of the institution of the case against the
petitioners on April 13, 1977 until June 5, 1979 when Arturo Ducusin
testified for his father, Agapito Ducusin, Sr. In fact, evidence on the
alleged marriage of private respondent Agapito Ducusin, Jr. was only
presented after private respondents filed a `Motion To Reopen The
Case For Reception of Rebuttal Evidence For Plaintiffs.' The
evidence consists of photographs of a wedding (Exhibits "J" and "J1") and a marriage certificate (Exhibit "H"). An alleged letter of the
private respondent Agapito Ducusin, Jr. where it stated that the latter
intended to settle in the Philippines instead of Canada where he was
presently residing with his wife (Exhibits "F" & "G") was also
presented.
"To give weight and credence to the evidence presented by the private
respondents on the need of the landlord's children to occupy and use
the leased premises runs counter to the time-honored rule against
hearsay evidence.
`Private respondent Agapito Ducusin, Jr. though named a plaintiff in
the case at bar never appeared during the proceedings in the trial

Court. Even his presence in the Philippines in 1977 when the case
was instituted remains subject to conjecture. His father, private
respondent Agapito Ducusin Sr., merely intimated during the trial
Court proceedings that the younger Ducusin applied as an immigrant
to Canada (T.S.N, March 7, 1978, pp. 11-12).

"The letters of private respondent Agapito Ducusin, Jr. to his brother

Arturo Ducusin, photographs of the alleged wedding of the former
and the certificate of marriage of Agapito Ducusin, Jr. are all selfserving. Petitioners are entitled to cross-examine the person who
allegedly made the statements in the letter following the rulings
in Pastor v. Gaspar, 2 Phil. 529; U.S. v. Caligagan, 2 Phil. 433; U.S.
v. Manalo, 6 Phil 364. The evidence presented to prove the alleged
marriage of Agapito Ducusin, Jr. should be excluded in accordance
with the provisions of Rule 130, Sec, 30 of the Rules of Court which
states:
`Sec. 30. Testimony generally confined to
personal knowledge; hearsay excluded: A witness can
testify only to those facts which he knows of his own
knowledge; that is, which is derived from his own
perception, except as otherwise provided in these rules.'
"Moreover, even if We are satisfactorily
convinced of the marriage of private respondent Agapito
Ducusin, Jr., it does not establish the alleged need of the
latter to use the leased premises presently occupied by the
petitioners. Private respondent Agapito Ducusin, Sr. did
not show that the one-door apartment leased to the
petitioners was the only place available for the use of his
son, Agapito Ducusin, Jr. On the contrary, petitioner
Virgilio Baliola testified that private respondent Agapito
Ducusin, Sr. informed him before the action was instituted
against him that another apartment unit, No. 3319-D
similarly owned by the latter would soon be vacated
(T.S.N., July 27, 1978, pp. 17-18)."
According to the petitioners, the above ruling of the Court of Appeals is erroneous and should
be reversed because "I. The contract expired by the termination of the period of the lease and
upon notice to vacate, irrespective of the truth or not of petitioners' need of the subject
premises; II. The evidence of petitioners on the third cause of action was sufficient to show
their need of the premises for their personal use and occupation; and III. There being a
provision in the contract on the third cause of action, the house rental laws have not been
violated." (Petition, p. 11, Records).
We find for the petitioners. We do not agree with the holding of the respondent court that the
petitioners have not proved by a preponderance of evidence the alleged need of the immediate
members of his family for the use of the leased premises, which holding is grounded on the
assumption that "to give weight and credence to the evidence presented by the private

249
respondents on the need of the landlord's children to occupy and use the leased premises runs
counter to the time-honored rule against hearsay evidence." (CA Decision, p. 108,
Records). LLpr

"1. The source of disagreement between petitioner Rantael and

respondent Llave relates to the following quoted provisions of the
Agreement on Occupancy of Apartment dated August 1, 1974:

The Court of Appeals rejected the letters of petitioner Agapito Ducusin, Jr. to his brother,
Arturo Ducusin, the photographs of the wedding of Ducusin, Jr. and the certificate of marriage
of Ducusin, Jr. and Adela Villacorta as self-serving, citing Sec. 30, Rule 130 of the Rules of
Court which provides that the witness can testify only to those facts which he knows of his
own knowledge. And since the marriage was not proved, the appellate court reasoned out that
the need for the use of the leased premises by Ducusin, Jr. was not established.

`The undersigned TENANT hereby agrees with

Mrs. Teresa F. Llave as owner, to use, occupy and live in
the latter's apartment at Stand ford, Quezon City, known as
Door 51-A on a month to month basis, beginning today,
under the following terms and condition until the
premises, (are) completely vacated . . .'

We reject this holding of the respondent court. In the first place, as pointed out by the
petitioners, the testimony of petitioner Agapito Ducusin, Sr. should have been given weight by
the appellate court because he testified that his son Agapito Jr. got married to Adela Villacorta
on November 25, 1978 in Edmonton, Alberta, Canada at the St. Anthony Church and that he
knows this fact of marriage since he was present during the wedding ceremony and pictures
marked Exhibits "H", "I", "J" and "J-1" were taken of the wedding party after the ceremony
and wherein he identified himself in the picture (Exh. "J") as "the gentleman in dark jacket on
the right side" (t.s.n., June 5, 1979, pp. 19-21; pp. 177-179, Records). And with the testimony
of Arturo Ducusin, a brother of Agapito Jr., which may be considered under Rule 130, Sec. 33
as an act or declaration about pedigree, the word "pedigree" including relationship, family
genealogy, birth, marriage, death, the dates when and the places where these facts occurred,
and the names of the relatives, as well as the presentation of the marriage certificate of Agapito
Ducusin, Jr. and Adela Villacorta (all of which evidence were noted, admitted and considered
in the decision of the case before the CFI of Manila, Branch XVI (p. 87, Records) and in the
decision of the City Court of Manila, Branch XVI (p. 62, Records) both holding that the
marriage has been sufficiently proved, We rule that the Court of Appeals gravely erred in
excluding the evidence described above and presented to prove the marriage of Agapito
Ducusin, Jr.

The aforequoted provisions of the Agreement on Occupancy of

Apartment cannot but be read as providing for a definite period for
the lease. Period relates to `length of existence; duration' or even a
`series of years, months or days in which something is completed.'
Definite means' having distinct or certain limits; determinate in extent
or character; limited; fixed.' A definite period, therefore, refers to a
portion of time certain or ascertainable as to its beginning, duration
and termination. As already stated above, the parties further expressly
agreed that - (upon thirty (30) days notice, either party may
terminate this agreement, each fulfilling their respective obligations
herein agreed.

We likewise conclude that the intention to use the leased premises as the residence of Ducusin
Jr. has been satisfactorily and sufficiently proved by clear, strong, and substantial evidence
found in the records of the case. The testimony of the petitioner, Ducusin Sr., that his son needs
the leased premises as he was getting married and did in fact got married, for which reason
petitioner sent the "Notice to Terminate His Contract" (Exh. "B"); the testimony of Arturo
Ducusin that he had an overseas telephone talk with his brother Agapito Jr. informing that the
latter was coming home and that he and his wife were preparing their documents and arriving
within the month (t.s.n., pp. 13, 17, June 5, 1979; p. 15, Records) and the documentary
evidence (Exh. "F" and "G") which is the letter of the private respondent Agapito Ducusin, Jr.
where it stated that he intended to settle in the Philippines instead of Canada where he was
presently residing with his wife (CA decision, p, 108, Records) all these evidence clearly
and competently prove the intention of petitioner Agapito Ducusin, Jr. to reside in the
Philippines and use the leased premises for his residence and his wife.
The contention of the petitioner that the contract of lease in question is for a definite period,
being on a month-to-month basis beginning February 19, 1975 and is, therefore, not covered
by P.D. No. 20, is correct. The rule We laid down in Rantael vs. Court of Appeals and Teresa
Llave, L-47519, April 30, 97 SCRA 453, is squarely on all fours with the case at bar and is
controlling. The Supreme Court said, and We quote:

In the case at bar, the lease entered into between petitioner Rantael
and respondent Llave commenced, in accordance with the provisions
of the Agreement on Occupancy of Apartment, on August 1, 1974, the
date of execution of the said Agreement, considering that the parties
employed the phrase `beginning today' with reference to the starting
point of the period during which petitioner Rantael would have use
and occupancy of the premises of unit 51-A. As to the duration and
termination of the aforementioned contractual relations, the parties
used the phrase' on a month to month basis' in the Agreement with
reference to the length of true during which petitioner Rantael would
have use and occupancy of the leased premises. And month here
should be construed, in like manner as in the interpretation of laws
pursuant to the provisions of Article 12 of the Civil Code of the
Philippines, there being no reason to deviate therefrom, as a period
composed of thirty days. The contractual relations between petitioner
Rantael and respondent Llave ceased after the expiration of the first
thirty days reckoned from August 1, 1974 but continued for the next
thirty-day period and expired after the last day thereof, repeating
same cycle for the succeeding thirty-day periods, until the said
respondent Llave exercised her express prerogative under the
agreement to terminate the same.
xxx xxx xxx
"However, by express exception of P.D. No. 20, judicial ejectment
lies `when the lease is for a definite period' or when the fixed or
definite period agreed upon has expired. The lease in the case at bar
having a definite period, it indubitably follows that the exception,

250
rather than the general rule, applies and, therefore, respondent Llave's
right to judicially eject petitioner Rantael from the premises may be
duly enforced. This has been the consistent administrative
interpretation of the Office of the President, supra. Therefore, no error
was committed by respondent appellate court . . .
As to the holding of the respondent court that petitioner Ducusin, Sr. "did not show that the
one-door apartment leased to the petitioners was the only place available for the use of his son,
Agapito Ducusin, Jr.," on the contrary, We find in the records evidence that out of the eight
doors apartment building belonging to the petitioner Ducusin Sr., three doors, now 31 years
old, became untenantable due to wear and tear and the remaining five doors were all occupied
by tenants; first door, 3319, is occupied by Mr. Coluso, 3319-A by the Baliola spouses, 3319-B
by Mr. & Mrs. Magsano, 3319-C by Mr. & Mrs. de los Santos, and 3319-D by Videz. (pp. 1314, t.s.n,, July 27, 1978; see p. 14, Records). From this evidence may be deduced that there is
no other place available for the use and residence of petitioner's son, Agapito Ducusin, Jr.
Assuming that Agapito Ducusin, Sr. informed his tenant Virgilio Baliola that another apartment
unit No. 3319, would soon be vacated, the alleged vacancy is nearly speculative and there is no
showing that it actually became vacant and available.

There is, therefore, no factual and legal basis for the respondent court's decision dismissing the
complaint for ejectment and reversing the findings of facts of both the City Court of Manila,
Branch XVI, and the Court of First Instance of Manila, Branch XVI.
And that brings Us to the last point in the review of the case at bar. Generally, the findings of
fact by the Court of Appeals are deemed accepted as the basis for review of the appellate
court's decision. But this rule is not without exception such as shown in the case before Us
where the Court of Appeals reversed the findings of fact made by the trial court the City Court
of Manila) and also the Court of First Instance, by excluding evidence supposedly hearsay
when they are not pursuant to the rules of evidence, by ignoring evidence on record that are
competent, clear and substantial and by misapprehending the facts, thereby making manifest
the commission of grave abuse of discretion on the part of the respondent appellate court and
so warrants and justifies a review not only of the law but also the facts.
We reiterate Our doctrine in Tolentino vs. De Jesus, 56 SCRA 167, where it was ruled that the
findings of facts of the Court of Appeals are not conclusive where there is grave abuse of
discretion; the judgment is based on misapprehension of facts; the findings of facts of the
Court of Appeals are contrary to those of the trial court or premised on the absence of evidence
and is contradicted by evidence on record; the conclusion is a finding grounded entirely on
speculation, surmise and conjectures; and the inference made is manifestly mistaken. These are
the exceptions to the general rule. The instant petition is such an exception.
WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the respondent Court of
Appeals subject of this review is hereby REVERSED and SET ASIDE. The decision of the
City Court of Manila, Branch XVI and affirmed on appeal to the Court of First Instance of
Manila, Branch XVI is hereby reinstated and restored, with costs in favor of petitioners.
SO ORDERED.
Makasiar, Aquino, Concepcion, Jr., De Castro and Escolin, JJ., concur.

Abad Santos, J., took no part.

||| (Ducusin v. Court of Appeals, G.R. No. L-58286, [May 16, 1983], 207 PHIL 248-262)

251

THIRD DIVISION
[G.R. No. 70789. October 19, 1992.]
RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R.
TANTOCO,
SR.,
and
ROMEO
S.
VERGARA, petitioners, vs. THE INTERMEDIATE APPELLATE
COURT AND ILIGAN DIVERSIFIED PROJECTS, INC.,
ROMEO
A.
LLUCH
and
ROBERTO
G.
BORROMEO, respondents.

Napoleon J. Poblador for petitioner.

Pinito W. Mercado and Pablo S. Badong for respondents.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACT; POTESTATIVE CONDITION; MAY BE
OBLITERATED WITHOUT AFFECTING THE REST OF THE STIPULATIONS. The
matter of Tantoco's and Vergara's joint and several liability as a result of the alleged breach of
the contract is dependent, first of all, on whether Rustan Pulp and Paper Mills may legally
exercise the right of stoppage should there be a glut of raw materials at its plant.
And insofar as the express discretion on the part of petitioners is concerned regarding the right
of stoppage, We feel that there is cogent basis for private respondents' apprehension on the
illusory resumption of deliveries inasmuch as the prerogative suggests a condition solely
dependent upon the will of petitioners. Petitioners can stop delivery of pulp wood from private
respondents if the supply at the plant is sufficient as ascertained by petitioners, subject to redelivery when the need arises as determined likewise by petitioners. This is Our simple
understanding of the literal import of paragraph 7 of the obligation in question. A purely
potestative imposition of this character must be obliterated from the face of the contract
without affecting the rest of the stipulations considering that the condition relates to the
fulfillment of an already existing obligation and not to its inception. It is, a truism in legal
jurisprudence that a condition which is both potestative (or facultative) and resolutory may be
valid, even though the saving clause is left to the will of the obligor.
2. ID.; ID.; ID.; RIGHT OF STOPPAGE GUARANTEED IN THE CONTRACT, HELD
INOPERATIVE; REASON. Petitioners are of the impression that the letter dated September
30, 1968 sent to private respondents is well within the right of stoppage guaranteed to them by
paragraph 7 of the contract of sale which was construed by petitioners to be a temporary
suspension of deliveries. There is no doubt that the contract speaks loudly about petitioners'
prerogative but what diminishes the legal efficacy of such right is the condition attached to it
which, as aforesaid, is dependent exclusively on their will for which reason, We have no

alternative but to treat the controversial stipulation as inoperative (Article 1306, New Civil
Code). It is for this same reason that We are not inclined to follow the interpretation of
petitioners that the suspension of delivery was merely temporary since the nature of the
suspension itself is again conditioned upon petitioners' determination of the sufficiency of
supplies at the plant.
3. ID.; ID.; FRUSTRATION OF COMMERCIAL OBJECT AS GROUND FOR
TERMINATION OF THE CONTRACT, NOT ACCEPTABLE; REASONS. Neither are We
prepared to accept petitioners' exculpation grounded on frustration of the commercial object
under Article 1267 of the New Civil Code, because petitioners continued accepting deliveries
from the suppliers. This conduct will estop petitioners from claiming that the breakdown of the
machinery line was an extraordinary obstacle to their compliance to the prestation. It was
indeed incongruous for petitioners to have sent the letters calling for suspension and yet, they
in effect disregarded their own advice by accepting the deliveries from the suppliers. Knowing
fully well that they will encounter difficulty in producing output because of the defective
machinery line, petitioners opted to open the plant to greater loss, thus compounding the costs
by accepting additional supply to the stockpile. Verily, the Appellate Court emphasized the
absurdity of petitioners' action when they acknowledged that "if the plant could not be operated
on a commercial scale, it would then be illogical for defendant Rustan to continue accepting
deliveries of raw materials."
4. ID.; AGENCY; OFFICERS OF CORPORATIONS NOT LIABLE INDIVIDUALLY
UNDER THE CONTRACT SIGNED BY THEM IN THEIR OFFICIAL CAPACITY;
EXCEPTION. We have to agree with petitioners' citation of authority to the effect that the
President and Manager of a corporation who entered into and signed a contract in his official
capacity, cannot be made liable thereunder in his individual capacity in the absence of
stipulation to that effect due to the personality of the corporation being separate and distinct
from the persons composing it (Bangue Generale Belge vs. Walter Bull and Co., Inc., 84 Phil.
164). And because of this precept, Vergara's supposed non-participation in the contract of sale
although he signed the letter dated September 30, 1968 is completely immaterial. The two
exceptions contemplated by Article 1897 of the New Civil Code where agents are directly
responsible are absent and wanting.

DECISION

MELO, J p:
When petitioners informed herein private respondents to stop the delivery of pulp wood
supplied by the latter pursuant to a contract of sale between them, private respondents sued for
breach of their covenant. The court of origin dismissed the complaint but at the same time
enjoined petitioners to respect the contract of sale if circumstances warrant the full operation in
a commercial scale of petitioners' Baloi plant and to continue accepting and paying for
deliveries of pulp wood products from Romeo Lluch (page 14, Petition; page 20, Rollo). On

252
appeal to the then Intermediate Appellate Court, Presiding Justice Ramon G. Gaviola, Jr., who
spoke for the First Civil Cases Division, with Justices Caguioa, Quetulio-Losa, and Luciano,
concurring, modified the judgment by directing herein petitioners to pay private respondents,
jointly and severally, the sum of P30,000.00 as moral damages and P15,000.00 as attorney's
fees (pages 48-58, Rollo).
In the petition at bar, it is argued that the Appellate Court erred:
"A. . . . IN HOLDING PERSONALLY LIABLE UNDER THE
CONTRACT OF SALE PETITIONER TANTOCO WHO SIGNED
MERELY AS REPRESENTATIVE OF PETITIONER RUSTAN,
AND PETITIONER VERGARA WHO DID NOT SIGN AT ALL;
B. . . . IN HOLDING THAT PETITIONER RUSTAN'S DECISION
TO SUSPEND TAKING DELIVERY OF PULP WOOD FROM
RESPONDENT LLUCH, WHICH WAS PROMPTED BY SERIOUS
AND UNFORESEEN DEFECTS IN THE MILL, WAS NOT IN THE
LAWFUL EXERCISE OF ITS RIGHT UNDER THE CONTRACT
OF SALE; and
C. . . . IN AWARDING MORAL DAMAGES AND ATTORNEY'S
FEES IN THE ABSENCE OF FRAUD OR BAD FAITH."(page 18,
Petition; page 24, Rollo)

xxx xxx xxx

7. That the BUYER shall have the right to stop delivery of the said
raw materials by the seller covered by this contract when supply of
the same shall become sufficient until such time when need for said
raw materials shall have become necessary provided, however, that
the SELLER is given sufficient notice."(pages 8-9, Petition; pages 1415, Rollo)
In the installation of the plant facilities, the technical staff of Rustan Pulp and Paper Mills, Inc.
recommended the acceptance of deliveries from other suppliers of the pulp wood materials for
which the corresponding deliveries were made. But during the test run of the pulp mill, the
machinery line thereat had major defects while deliveries of the raw materials piled up, which
prompted the Japanese supplier of the machinery to recommend the stoppage of the deliveries.
The suppliers were informed to stop deliveries and the letter of similar advice sent by
petitioners to private respondents reads:
"Sept
ember 30, 1968
Iligan Diversified Projects, Inc.
Iligan City
Attention: Mr. Romeo A. Lluch.

The generative facts of the controversy, as gathered from the pleadings, are fairly simple.

Dear Mr. Lluch:

Sometime in 1966, petitioner Rustan established a pulp and paper mill in Baloi, Lanao del
Norte. On March 20, 1967, respondent Lluch, who is a holder of a forest products license,
transmitted a letter to petitioner Rustan for the supply of raw materials by the former to the
latter. In response thereto, petitioner Rustan proposed, among other things, in the letter-reply:

This is to inform you that the supply of raw materials to us has

become sufficient and we will not be needing further delivery from
you. As per the terms of our contract, please stop delivery thirty (30)
days from today.

"2. That the contract to supply is not exclusive because Rustan shall
have the option to buy from other suppliers who are qualified and
holder of appropriate government authority or license to sell and
dispose pulp wood."
These prefatory business proposals culminated in the execution, during the month of April,
1968, of a contract of sale whereby Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper
Mill, Inc. undertook to pay the price of P30.00 per cubic meter of pulp wood raw materials to
be delivered at the buyer's plant in Baloi, Lanao del Norte. Of pertinent significance to the
issue at hand are the following stipulations in the bilateral undertaking:

Very
truly yours,
RUSTAN PULP
AND PAPER
MILLS, INC.
By:
DR. ROMEO S.
VERGARA
Resident Manager"

"3. That BUYER shall have the option to buy from other SELLERS
who are equally qualified and holders of appropriate government
authority or license to sell or dispose, that BUYER shall not buy from
any other seller whose pulp woods being sold shall have been
established to have emanated from the SELLER'S lumber and/or
firewood concession. . . ."

Private respondent Romeo Lluch sought to clarify the tenor of the letter as to whether stoppage
of delivery or termination of the contract of sale was intended, but the query was not answered
by petitioners. This alleged ambiguity notwithstanding, Lluch and the other suppliers resumed
deliveries after the series of talks between Romeo S. Vergara and Romeo Lluch.

And that SELLER has the priority to supply the pulp wood materials
requirement of the BUYER;

On January 23, 1969, the complaint for contractual breach was filed which, as earlier noted,
was dismissed. In the process of discussing the merits of the appeal interposed therefrom,
respondent Court clarified the eleven errors assigned below by herein petitioners and it seems

253
that petitioners were quite satisfied with the Appellate Court's in seriatim response since
petitioners trimmed down their discourse before this Court to three basic matters, relative to the
nature of liability, the propriety of the stoppage, and the feasibility of awarding moral damages
including attorney's fees.

Furthermore, there is evidence on record that appellees have been

accepting deliveries of pulp wood materials from other sources, i.e.
Salem Usman, Fermin Villanueva and Pacasum even after September
30, 1968.

Respondent Court found it ironic that petitioners had to exercise the prerogative regarding the
stoppage of deliveries via the letter addressed to Iligan Diversified Projects, Inc. on September
30, 1968 because petitioners never really stopped accepting deliveries from private respondents
until December 23, 1968. Petitioner's paradoxical stance was portrayed in this manner:

Lastly, it would be unjust for the court a quo to rule that the contract
of sale be temporarily suspended until Rustan, et al., are ready to
accept deliveries from appellants. This would make the resumption of
the contract purely dependent on the will of one party the
appellees, and they could always claim, as they did in the instant case,
that they have more than sufficient supply of pulp wood when in fact
they have been accepting the same from other sources. Added to this,
the court a quo was imposing a new condition in the contract, one that
was not agreed upon by the parties."(Pages 8-10, Decision; Pages 5557, Rollo)

". . . We cannot accept the reasons given by appellees as to why they

were stopping deliveries of pulp wood materials. First, We find it
preposterous for a business company like the appellee to accumulate
stockpiles of cut wood even after its letter to appellants dated
September 30, 1968 stopping the deliveries because the supply of raw
materials has become sufficient. The fact that appellees were buying
and accepting pulp wood materials from other sources other than the
appellants even after September 30, 1968 belies that they have more
than sufficient supply of pulp wood materials, or that they are unable
to go into full commercial operation or that their machineries are
defective or even that the pulp wood materials coming from
appellants are sub-standard. Second, We likewise find the court a
quo's finding that "even with one predicament in which defendant
Rustan found itself wherein commercial operation was delayed, it
accommodated all its suppliers of raw materials, including plaintiff,
Romeo Lluch, by allowing them to deliver all its stockpiles of cut
wood" (Decision, page 202, Record on Appeal) to be both illogical
and inconsistent. Illogical, because as appellee Rustan itself claimed
"if the plant could not be operated on a commercial scale, it would
then be illogical for defendant Rustan to continue accepting deliveries
of raw materials." Inconsistent because this kind of "concern" or
"accommodation" is not usual or consistent with ordinary business
practice considering that this would mean adequate losses to the
company. More so, if We consider that appellee is a new company
and could not therefore afford to absorb more losses than it already
allegedly incurred by the consequent defects in the machineries. cdrep
Clearly therefore, this is a breach of the contract entered into by and
between appellees and appellants which warrants the intervention of
this Court."
xxx xxx xxx
. . . The letter of September 30, 1968, Exh. "D" shows that defendants
were terminating the contract of sale (Exh. "A"), and refusing any
future or further delivery whether on the ground that they had
sufficient supply of pulp wood materials or that appellants cannot
meet the standard of quality of pulp wood materials that Rustan needs
or that there were defects in appellees' machineries resulting in an
inability to continue full commercial operations.

The matter of Tantoco's and Vergara's joint and several liability as a result of the alleged breach
of the contract is dependent, first of all, on whether Rustan Pulp and Paper Mills may legally
exercise the right of stoppage should there be a glut of raw materials at its plant.
And insofar as the express discretion on the part of petitioners is concerned regarding the right
of stoppage, We feel that there is cogent basis for private respondents' apprehension on the
illusory resumption of deliveries inasmuch as the prerogative suggests a condition solely
dependent upon the will of petitioners. Petitioners can stop delivery of pulp wood from private
respondents if the supply at the plant is sufficient as ascertained by petitioners, subject to redelivery when the need arises as determined likewise by petitioners. This is Our simple
understanding of the literal import of paragraph 7 of the obligation in question. A purely
potestative imposition of this character must be obliterated from the face of the contract
without affecting the rest of the stipulations considering that the condition relates to the
fulfillment of an already existing obligation and not to its inception (Civil Code Annotated,
by Padilla, 1987 Edition, Volume 4, Page 160). It is, of course, a truism in legal jurisprudence
that a condition which is both potestative (or facultative) and resolutory may be valid, even
though the saving clause is left to the will of the obligor like what this Court, through Justice
Street, said in Taylor vs. Uy Tieng Piao and Tan Liuan (43 Phil. 873; 879; cited in
Commentaries and Jurisprudence on the Civil Code, by Tolentino, Volume 4, 1991 edition,
page 152). But the conclusion drawn from the Taylor case, which allowed a condition for
unilateral cancellation of the contract when the machinery to be installed on the factory did not
arrive in Manila, is certainly inappropriate for application to the case at hand because the
factual milieu in the legal tussle dissected by Justice Street conveys that the proviso relates to
the birth of the undertaking and not the fulfillment of an existing obligation. LLjur
In support of the second ground for allowance of the petition, petitioners are of the impression
that the letter dated September 30, 1968 sent to private respondents is well within the right of
stoppage guaranteed to them by paragraph 7 of the contract of sale which was construed by
petitioners to be a temporary suspension of deliveries. There is no doubt that the contract
speaks loudly about petitioners' prerogative but what diminishes the legal efficacy of such right
is the condition attached to it which, as aforesaid, is dependent exclusively on their will for
which reason, We have no alternative but to treat the controversial stipulation as inoperative
(Article 1306, New Civil Code). It is for this same reason that We are not inclined to follow the
interpretation of petitioners that the suspension of delivery was merely temporary since the

254
nature of the suspension itself is again conditioned upon petitioners' determination of the
sufficiency of supplies at the plant.
Neither are We prepared to accept petitioners' exculpation grounded on frustration of the
commercial object under Article 1267 of the New Civil Code, because petitioners continued
accepting deliveries from the suppliers. This conduct will estop petitioners from claiming that
the breakdown of the machinery line was an extraordinary obstacle to their compliance to the
prestation. It was indeed incongruous for petitioners to have sent the letters calling for
suspension and yet, they in effect disregarded their own advice by accepting the deliveries
from the suppliers. The demeanor of petitioners along this line was sought to be justified as an
act of generous accommodation, which entailed greater loss to them and "was not motivated by
the usual businessman's obsession with profit" (Page 34, Petition; Page 40, Rollo). Altruism
may be a noble gesture but petitioners' stance in this respect hardly inspires belief for such an
excuse is inconsistent with a normal business enterprise which takes ordinary care of its
concern in cutting down on expenses (Section 3, (d), Rule 131, Revised Rules of Court).
Knowing fully well that they will encounter difficulty in producing output because of the
defective machinery line, petitioners opted to open the plant to greater loss, thus compounding
the costs by accepting additional supply to the stockpile. Verily, the Appellate Court
emphasized the absurdity of petitioners' action when they acknowledged that "if the plant could
not be operated on a commercial scale, it would then be illogical for defendant Rustan to
continue accepting deliveries of raw materials." (Page 202, Record on Appeal; Page 8,
Decision; Page 55, Rollo).
Petitioners argue next that Tantoco and Vergara should not have been adjudged to pay moral
damages and attorney's fees because Tantoco merely represented the interest of Rustan Pulp
and Paper Mills, Inc. while Romeo S. Vergara was not privy to the contract of sale. On this
score, We have to agree with petitioners' citation of authority to the effect that the President
and Manager of a corporation who entered into and signed a contract in his official capacity,
cannot be made liable thereunder in his individual capacity in the absence of stipulation to that
effect due to the personality of the corporation being separate and distinct from the persons
composing it (Bangue Generale Belge vs. Walter Bull and Co., Inc., 84 Phil. 164). And because
of this precept, Vergara's supposed non-participation in the contract of sale although he signed
the letter dated September 30, 1968 is completely immaterial. The two exceptions
contemplated by Article 1897 of the New Civil Code where agents are directly responsible are
absent and wanting. LLjur

WHEREFORE, the decision appealed from is hereby MODIFIED in the sense that only
petitioner Rustan Pulp and Paper Mills is ordered to pay moral damages and attorney's fees as
awarded by respondent Court.
SO ORDERED.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ ., concur.

||| (Rustan Pulp & Paper Mills, Inc. v. Intermediate Appellate Court, G.R. No. 70789, [October
19, 1992])

255

FIRST DIVISION
[G.R. No. 4437. September 9, 1909.]
TOMAS
OSMEA, plaintiff-appellee, vs. CENONA
RAMA, defendant-appellant.

pay in full, a balance shall be struck, showing the amount outstanding

at the end of each June, including interest, and such balance as may
be outstanding against me shall be considered as capital which I will
always pay in sugar, together with the interest mentioned above. I
further promise that I will sell to the said Seor Osmea all the sugar
that I may harvest, and as a guarantee, pledge as security all of my
present and future property, and as special security the house with tile
roof and ground floor of stone in which I live in Pagina; in proof
whereof, I sign this document, and he shall be entitled to make claim
against me at the expiration of the term stated in this document.

Filemon Sotto for appellant.

(Signed) "CENONA RAMA.

"Witnesses:

J.H. Junquera for appellee.

"FAUSTO PEALOSA.
"FRANCISCO MEDALLE."

SYLLABUS

On the 27th day of October, 1891, the defendant executed and delivered to the
said Victoriano Osmea the following contract:
1. CONTRACT; CONDITIONAL PROMISE TO PAY. A condition
imposed upon a contract by the promisor, the performance of which depends upon his
exclusive will, is void, in accordance with the provisions of article 1115 of the Civil
Code.

DECISION

"EXHIBIT B.
"CEBU, October 27, 1891.
"On this date I have asked for a further loan and have
received from Don Victoriano Osmea the sum of seventy pesos in
cash, fifty pesos of which I have loaned to Don Evaristo Peares,
which we will pay in sugar in the month of January of the coming
year according to the former conditions.
(Signed) "CENONA RAMA.
"FROM Don Evaristo Peares P50

JOHNSON, J p:

"Doa Cenona Rama 20

It appears from the record that upon the 15th day of November, 1890, the
defendant herein executed and delivered to Victoriano Osmea the following contract:
"EXHIBIT A.
P200.00.
"CEBU, November 15, 1890.
"I, Doa Cenona Rama, a resident of this city, and of legal
age, have received from Don Victoriano Osmea the sum of two
hundred pesos in cash which I will pay in sugar in the month of
January or February of the coming year, at the price ruling on the day
of delivering the sugar into his warehouses, and I will pay him
interest at the rate of half a cuartillo per month on each peso,
beginning on this date until the day of the settlement; and if I can not

____
P70
"Received Evaristo Peares."
Some time after the execution and delivery of the above contracts, the said
Victoriano Osmea died. In the settlement and division of the property of his estate the
above contracts became the property of one of his heirs, Agustina Rafols. Later, the date
does not appear, the said Agustina Rafols ceded to the present plaintiff all of her right and
interest in said contracts.
On the 15th day of March, 1902, the plaintiff presented the contracts to the
defendant for payment and she acknowledged her responsibility upon said contracts by an
indorsement upon them in the following language:
"EXHIBIT C.

256
"CEBU, March 15, 1902.
"On this date I hereby promise, in the presence of two
witnesses, that, if the house of strong materials in which I live in
Pagina is sold, I will pay my indebtedness to Don Tomas Osmea as
set forth in this document.
(Signed) "CENONA RAMA."
The defendant not having paid the amount due on said contracts; the plaintiff,
upon the 26th day of June, 1906, commenced the present action in the Court of First
Instance of the Province of Cebu. The complaint filed in said cause alleged the execution
and delivery of the above contracts, the demand for payment, and the failure to pay on the
part of the defendant, and the prayer for a judgment for the amount due on the said
contracts. The defendant answered by filing a general denial and setting up the special
defense of prescription.
The case was finally brought on to trial in the Court of First Instance, and the
only witness produced during the trial was the plaintiff himself. The defendant did not
offer any proof whatever in the lower court.
After hearing the evidence adduced during the trial, the lower court rendered a
judgment in favor of the plaintiff and against the defendant for the sum of P200 with
interest at the rate of 18 3/4 per cent per annum, from the 15th day of November, 1890,
and for the sum of P20, with interest at the rate of 18 3/4 per cent per annum, from the
27th day of October, 1891, until the said sums were paid. From this judgment the
defendant appealed.
The lower court found that P50 of the P70 mentioned in Exhibit B had not
been borrowed by the defendant, but by one Evaristo Peares; therefore the defendant
had no responsibility for the payment of the said P50.
The only questions raised by the appellant were questions of fact. The
appellant alleges that the proof adduced during the trial of the cause was not sufficient to
support the findings of the lower court. It was suggested during the discussion of the case
in this court that, in the acknowledgment above quoted of the indebtedness made by the
defendant, she imposed the condition that she would pay the obligation if she sold her
house. If that statement found in her acknowledgment of the indebtedness should be
regarded as a condition, it was a condition which depended upon her exclusive will, and
is, therefore, void. (Art. 1115, Civil Code.) The acknowledgment, therefore, was an
absolute acknowledgment of the obligation and was sufficient to prevent the statute of
limitation from barring the action upon the original contract.
We are satisfied, from all of the evidence adduced during the trial, that the
judgment of the lower court should be affirmed. So ordered.
Arellano, C.J., Torres, Carson and Moreland, JJ., concur.
||| (Osmea v. Rama, G.R. No. 4437, [September 9, 1909], 14 PHIL 99-102)

SECOND DIVISION
[G.R. No. 107112. February 24, 1994.]
NAGA TELEPHONE CO., INC. (NATELCO) AND LUCIANO
M. MAGGAY, petitioners, vs. THE COURT OF APPEALS AND
CAMARINES SUR II ELECTRIC COOPERATIVE, INC.
(CASURECO II), respondents.

SYLLABUS
1. CIVIL LAW; OBLIGATION AND CONTRACTS; RULE WHERE A PERSON BY HIS
CONTRACT CHARGES HIMSELF WITH AN OBLIGATION POSSIBLE TO BE
PERFORMED. The case of Reyes v. Caltex (Philippines), Inc. enunciated the doctrine that
where a person by his contract charges himself with an obligation possible to be performed, he
must perform it, unless its performance is rendered impossible by the act of God, by the law, or
by the other party, it being the rule that in case the party desires to be excused from
performance in the event of contingencies arising thereto, it is his duty to provide the basis
therefor in his contract. With the enactment of the New Civil Code, a new provision was
included therein namely, Article 1267 which provides: "When the service has become so
difficult as to be manifestly beyond the contemplation of the parties, the obligor may also be
released therefrom, in whole or in part." In the report of the Code Commission, the rationale
behind this innovation was explained, thus: "The general rule is that impossibility of
performance releases the obligor. However, it is submitted that when the service has become so
difficult as to be manifestly beyond the contemplation of the parties, the court should be
authorized to release the obligor in whole or in part. The intention of the parties should govern
and if it appears that the service turns out to be so difficult as to have been beyond their
contemplation, it would be doing violence to that intention to hold the obligor still
responsible." In other words, fair and square consideration underscores the legal precept
therein.
2. ID.; ID.; "SERVICE" UNDER ART. 1267 REFERS TO THE PERFORMANCE OF AN
OBLIGATION; CASE AT BAR. Petitioners assert earnestly that Article 1267 of the New
Civil Code is not applicable primarily because the contract does not involve the rendition of
service or a personal prestation and it is not for future service with future unusual change.
Instead, the ruling in the case Occea, et al. v. Jabson, etc, et al., (G.R. No. L-44349, October
29, 1976, 73 SCRA 637) which interpreted the article, should be followed in resolving this
case. Besides, said article was never raised by the parties in their pleadings and was never the
subject of trial and evidence. Article 1267 speaks of "service" which has become so difficult.
Taking into consideration the rationale behind this provision, the term "service" should be
understood as referring to the "performance" of the obligation. In the present case, the
obligation of private respondent consists in allowing petitioners to use its posts in Naga City,
which is the service contemplated in said article. Furthermore, a bare reading of this article
reveals that it is not a requirement thereunder that the contract be for future service with future
unusual change. According to Senator Arturo M. Tolentino, Article 1267 states in our law the
doctrine of unforeseen events. This is said to be based on the discredited theory of rebus sic

257
stantibus in public international law; under this theory, the parties stipulate in the light of
certain prevailing conditions, and once these conditions cease to exist the contract also ceases
to exist. Considering practical needs and the demands of equity and good faith, the
disappearance of the basis of a contract gives rise to a right to relief in favor of the party
prejudiced.
3. ID.; ID.; POTESTATIVE CONDITION; MEANING THEREOF; APPLICATION IN CASE
AT BAR. A potestative condition is a condition, the fulfillment of which depends upon the
sole will of the debtor, in which case, the conditional obligation is void. Based on this
definition, respondent court's finding that the provision in the contract, to wit: "(a) That the
term or period of this contract shall be as long as the party of the first part (petitioner) has need
for the electric light posts of the party of the second part (private respondent) . . ." is a
potestative condition, is correct. However, it must have overlooked the other conditions in the
same provision, to wit: ". . . it being understood that this contract shall terminate when for any
reason whatsoever, the party of the second part (private respondent) is forced to stop,
abandoned (sic) its operation as a public service and it becomes necessary to remove the
electric light post (sic);" which are casual conditions since they depend on chance, hazard, or
the will of a third person. In sum, the contract is subject to mixed conditions, that is, they
depend partly on the will of the debtor and partly on chance, hazard or the will of a third
person, which do not invalidate the aforementioned provision.
4. ID.; PRESCRIPTION OF ACTIONS; RULE ON WRITTEN CONTRACT. Article 1144
of the New Civil Code provides, inter alia, that an action upon a written contract must be
brought within ten (10) years from the time the right of the action accrues. Clearly, the ten (10)
year period is to be reckoned from the time the right of action accrues which is not necessarily
the date of execution of the contract. As correctly ruled by respondent court, private
respondent's right of action arose "sometime during the latter part of 1982 or in 1983 when
according to Atty. Luis General, Jr. . . ., he was asked by (private respondent's) Board of
Directors to study said contract as it already appeared disadvantageous to (private respondent).
(Private respondent's) cause of action to ask for reformation of said contract should thus be
considered to have arisen only in 1982 or 1983, and from 1982 to January 2, 1989 when the
complaint in this case was filed, ten (10) years had not yet elapsed."

"When the service has become so difficult as to be manifestly beyond

the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part."
In the report of the Code Commission, the rationale behind this innovation was explained, thus:
"The general rule is that impossibility of performance releases the
obligor. However, it is submitted that when the service has become so
difficult as to be manifestly beyond the contemplation of the parties,
the court should be authorized to release the obligor in whole or in
part. The intention of the parties should govern and if it appears that
the service turns out to be so difficult as to have been beyond their
contemplation, it would be doing violence to that intention to hold the
obligor still responsible." 2
In other words, fair and square consideration underscores the legal precept therein.
Naga Telephone Co., Inc. remonstrates mainly against the application by the Court of Appeals
of Article 1267 in favor of Camarines Sur II Electric Cooperative, Inc. in the case before us.
Stated differently, the former insists that the complaint should have been dismissed for failure
to state a cause of action. prLL
The antecedent facts, as narrated by respondent Court of Appeals are, as follows:
Petitioner Naga Telephone Co., Inc. (NATELCO) is a telephone company rendering local as
well as long distance service in Naga City while private respondent Camarines Sur II Electric
Cooperative, Inc. (CASURECO II) is a private corporation established for the purpose of
operating an electric power service in the same city.
On November 1, 1977, the parties entered into a contract (Exh. "A") for the use by petitioners
in the operation of its telephone service the electric light posts of private respondent in Naga
City. In consideration therefor, petitioners agreed to install, free of charge, ten (10) telephone
connections for the use by private respondent in the following places:
"(a) 3 units The Main Office of (private respondent);
(b) 2 Units The Warehouse of (private respondent);

DECISION

NOCON, J p:
The case of Reyes v. Caltex (Philippines), Inc. 1 enunciated the doctrine that where a person by
his contract charges himself with an obligation possible to be performed, he must perform it,
unless its performance is rendered impossible by the act of God, by the law, or by the other
party, it being the rule that in case the party desires to be excused from performance in the
event of contingencies arising thereto, it is his duty to provide the basis therefor in his
contract. LibLex
With the enactment of the New Civil Code, a new provision was included therein
namely, Article 1267 which provides:

(c) 1 Unit The Sub-Station of (private respondent) at Concepcion

Pequea;
(d) 1 Unit The Residence of (private respondent's) President;
(e) 1 Unit The Residence of (private respondent's) Acting General
Manager; &
(f) 2 Units To be determined by the General Manager. 3
Said contract also provided:
"(a) That the term or period of this contract shall be as long as the
party of the first part has need for the electric light posts of the party
of the second part it being understood that this contract shall
terminate when for any reason whatsoever, the party of the second

258
part is forced to stop, abandoned [sic] its operation as a public service
and it becomes necessary to remove the electric lightpost;" (sic) 4
It was prepared by or with the assistance of the other petitioner, Atty. Luciano M.
Maggay, then a member of the Board of Directors of private respondent and at the same
time the legal counsel of petitioner.
After the contract had been enforced for over ten (10) years, private respondent filed on
January 2, 1989 with the Regional Trial Court of Naga City (Br. 28) C.C. No. 89-1642 against
petitioners for reformation of the contract with damages, on the ground that it is too one-sided
in favor of petitioners; that it is not in conformity with the guidelines of the National
Electrification Administration (NEA) which direct that the reasonable compensation for the use
of the posts is P10.00 per post, per month; that after eleven (11) years of petitioners' use of the
posts, the telephone cables strung by them thereon have become much heavier with the
increase in the volume of their subscribers, worsened by the fact that their linemen bore holes
through the posts at which points those posts were broken during typhoons; that a post now
costs as much as P2,630.00; so that justice and equity demand that the contract be reformed to
abolish the inequities thereon. prLL

As second cause of action, private respondent alleged that starting with the year 1981,
petitioners have used 319 posts in the towns of Pili, Canaman, Magarao and Milaor, Camarines
Sur, all outside Naga City, without any contract with it; that at the rate of P10.00 per post,
petitioners should pay private respondent for the use thereof the total amount of P267,960.00
from 1981 up to the filing of its complaint; and that petitioners had refused to pay private
respondent said amount despite demands.
And as third cause of action, private respondent complained about the poor servicing by
petitioners of the ten (10) telephone units which had caused it great inconvenience and
damages to the tune of not less than P100,000.00
In petitioners' answer to the first cause of action, they averred that it should be dismissed
because (1) it does not sufficiently state a cause of action for reformation of contract; (2) it is
barred by prescription, the same having been filed more than ten (10) years after the execution
of the contract; and (3) it is barred by estoppel, since private respondent seeks to enforce the
contract in the same action. Petitioners further alleged that their utilization of private
respondent's post could not have caused their deterioration because they have already been in
use for eleven (11) years; and that the value of their expenses for the ten (10) telephone lines
long enjoyed by private respondent free of charge are far in excess of the amounts claimed by
the latter for the use of the posts, so that if there was any inequity, it was suffered by them.
Regarding the second cause of action, petitioners claimed that private respondent had asked for
telephone lines in areas outside Naga City for which its posts were used by them; and that if
petitioners had refused to comply with private respondent's demands for payment for the use of
the posts outside Naga City, it was probably because what is due to them from private
respondent is more than its claim against them.
And with respect to the third cause of action, petitioners claimed, inter alia, that their
telephone service had been categorized by the National Telecommunication Corporation (NTC)
as "very high" and of "superior quality."

During the trial, private respondent presented the following witnesses:

(1) Dioscoro Ragragio, one of the two officials who signed the contract in its behalf, declared
that it was petitioner Maggay who prepared the contract; that the understanding between
private respondent and petitioners was that the latter would only use the posts in Naga City
because at that time, petitioners' capability was very limited and they had no expectation of
expansion because of legal squabbles within the company; that private respondent agreed to
allow petitioners to use its posts in Naga City because there were many subscribers therein who
could not be served by them because of lack of facilities; and that while the telephone lines
strung to the posts were very light in 1977, said posts have become heavily loaded in
1989. LLphil
(2) Engr. Antonio Borja, Chief of private respondent's Line Operation and Maintenance
Department, declared that the posts being used by petitioners totalled 1,403 as of April 17,
1989, 192 of which were in the towns of Pili, Canaman, and Magarao, all outside Naga City
(Exhs. "B" and "B-1"); that petitioners' cables strung to the posts in 1989 are much bigger than
those in November, 1977; that in 1987, almost 100 posts were destroyed by typhoon Sisang:
around 20 posts were located between Naga City and the town of Pili while the posts in
barangay Concepcion, Naga City were broken at the middle which had been bored by
petitioner's linemen to enable them to string bigger telephone lines; that while the cost per post
in 1977 was only from P700.00 to P1,000.00, their costs in 1989 went up from P1,500.00 to
P2,000.00, depending on the size; that some lines that were strung to the posts did not follow
the minimum vertical clearance required by the National Building Code, so that there were
cases in 1988 where, because of the low clearance of the cables, passing trucks would
accidentally touch said cables causing the posts to fall and resulting in brown-outs until the
electric lines were repaired.
(3) Dario Bernardez, Project Supervisor and Acting General Manager of private respondent and
Manager of Region V of NEA, declared that according to NEA guidelines in 1985 (Exh. "C"),
for the use by private telephone systems of electric cooperatives' posts, they should pay a
minimum monthly rental of P4.00 per post, and considering the escalation of prices since 1985,
electric cooperatives have been charging from P10.00 to P15.00 per post, which is what
petitioners should pay for the use of the posts.
(4) Engineer Antonio Macandog, Department Head of the Office of Services of private
respondent, testified on the poor service rendered by petitioners' telephone lines, like the
telephone in their Complaints Section which was usually out of order such that they could not
respond to the calls of their customers. In case of disruption of their telephone lines, it would
take two to three hours for petitioners to reactivate them notwithstanding their calls on the
emergency line.
(5) Finally, Atty. Luis General, Jr., private respondent's counsel, testified that the Board of
Directors asked him to study the contract sometime during the latter part of 1982 or in 1983, as
it had appeared very disadvantageous to private respondent. Notwithstanding his
recommendation for the filing of a court action to reform the contract, the former general
managers of private respondent wanted to adopt a soft approach with petitioners about the
matter until the term of General Manager Henry Pascual who, after failing to settle the matter
amicably with petitioners, finally agreed for him to file the present action for reformation of
contract.
On the other hand, petitioner Maggay testified to the following effect:

259
(1) It is true that he was a member of the Board of Directors of private respondent and at the
same time the lawyer of petitioner when the contract was executed, but Atty. Gaudioso Tena,
who was also a member of the Board of Directors of private respondent, was the one who saw
to it that the contract was fair to both parties.
(2) With regard to the first cause of action:
(a) Private respondent has the right under the contract to use ten (10) telephone units of
petitioners for as long as it wishes without paying anything therefor except for long distance
calls through PLDT out of which the latter get only 10% of the charges. LLpr

same date its monthly bills for the use and transfers of its telephones in Naga City at the same
rate that the public are paying. cdll
On private respondent's second cause of action, the trial court found that the contract does not
mention anything about the use by petitioners of private respondent's posts outside Naga City.
Therefore, the trial court held that for reason of equity, the contract should be reformed by
including therein the provision that for the use of private respondent's posts outside Naga City,
petitioners should pay a monthly rental of P10.00 per post, the payment to start on the date this
case was filed, or on January 2, 1989, and private respondent should also pay petitioners the
monthly dues on its telephone connections located outside Naga City beginning January, 1989.

(b) In most cases, only drop wires and not telephone cables have been strung to the posts,
which posts have remained erect up to present;
(c) Petitioners' linemen have strung only small messenger wires to many of the posts and they
need only small holes to pass through; and
(d) Documents existing in the NTC show that the stringing of petitioners' cables in Naga City
are according to standard and comparable to those of PLDT. The accidents mentioned by
private respondent involved trucks that were either overloaded or had loads that protruded
upwards, causing them to hit the cables.
(3) Concerning the second cause of action, the intention of the parties when they entered into
the contract was that the coverage thereof would include the whole area serviced by petitioners
because at that time, they already had subscribers outside Naga City. Private respondent, in
fact, had asked for telephone connections outside Naga City for its officers and employees
residing there in addition to the ten (10) telephone units mentioned in the contract. Petitioners
have not been charging private respondent for the installation, transfers and re-connections of
said telephones so that naturally, they use the posts for those telephone lines.
(4) With respect to the third cause of action, the NTC has found petitioners cable installations
to be in accordance with engineering standards and practice and comparable to the best in the
country.
On the basis of the foregoing countervailing evidence of the parties, the trial court found, as
regards private respondents first cause of action, that while the contract appeared to be fair to
both parties when it was entered into by them during the first year of private respondents
operation and when its Board of Directors did not yet have any experience in that business, it
had become disadvantageous and unfair to private respondent because of subsequent events
and conditions, particularly the increase in the volume of the subscribers of petitioners for
more than ten (10) years without the corresponding increase in the number of telephone
connections to private respondent free of charge. The trial court concluded that while in an
action for reformation of contract, it cannot make another contract for the parties, it can,
however, for reasons of justice and equity, order that the contract be reformed to abolish the
inequities therein. Thus, said court ruled that the contract should be reformed by ordering
petitioners to pay private respondent compensation for the use of their posts in Naga City,
while private respondent should also be ordered to pay the monthly bills for the use of the
telephones also in Naga City. And taking into consideration the guidelines of the NEA on the
rental of posts by telephone companies and the increase in the costs of such posts, the trial
court opined that a monthly rental of P10.00 for each post of private respondent used by
petitioners is reasonable, which rental it should pay from the filing of the complaint in this case
on January 2, 1989. And in like manner, private respondent should pay petitioners from the

And with respect to private respondent's third cause of action, the trial court found the claim
not sufficiently proved.
Thus, the following decretal portion of the trial court's decision dated July 20, 1990:
"WHEREFORE, in view of all the foregoing, decision is hereby
rendered ordering the reformation of the agreement (Exh. A);
ordering the defendants to pay plaintiff's electric poles in Naga City
and in the towns of Milaor, Canaman, Maragao and Pili, Camarines
Sur and in other places where defendant NATELCO uses plaintiff's
electric poles, the sum of TEN (P10.00) PESOS per plaintiff's pole,
per month beginning January, 1989 and ordering also the plaintiff to
pay defendant NATELCO the monthly dues of all its telephones
including those installed at the residence of its officers, namely; Engr.
Joventino Cruz, Engr. Antonio Borja, Engr. Antonio Macandog, Mr.
Jesus Opiana and Atty. Luis General, Jr. beginning January, 1989.
Plaintiff's claim for attorney's fees and expenses of litigation and
defendants' counterclaim are both hereby ordered dismissed. Without
pronouncement as to costs." llcd
Disagreeing with the foregoing judgment, petitioners appealed to respondent Court of
Appeals. In the decision dated May 28, 1992, respondent court affirmed the decision of
the trial court, 5 but based on different grounds to wit: (1) that Article 1267 of the New
Civil Code is applicable and (2) that the contract was subject to a potestative condition
which rendered said condition void. The motion for reconsideration was denied in the
resolution dated September 10, 1992. 6 Hence, the present petition.
Petitioners assign the following pertinent errors committed by respondent court:
1) in making a contract for the parties by invoking Article 1267 of the
New Civil Code;
2) in ruling that prescription of the action for reformation of the
contract in this case commenced from the time it became
disadvantageous to private respondent; and
3) in ruling that the contract was subject to a potestative condition in
favor of petitioners.

260
Petitioners assert earnestly that Article 1267 of the New Civil Code is not applicable primarily
because the contract does not involve the rendition of service or a personal prestation and it is
not for future service with future unusual change. Instead, the ruling in the case Occea, et al.
v. Jabson, etc, et al., 7 which interpreted the article, should be followed in resolving this case.
Besides, said article was never raised by the parties in their pleadings and was never the subject
of trial and evidence.
In applying Article 1267, respondent court rationalized:
"We agree with appellant that in order that an action for reformation
of contract would lie and may prosper, there must be sufficient
allegations as well as proof that the contract in question failed to
express the true intention of the parties due to error or mistake,
accident, or fraud. Indeed, in embodying the equitable remedy of
reformation of instruments in the New Civil Code, the Code
Commission gave its reasons as follows:
'Equity dictates the reformation of an instrument in order
that the true intention of the contracting parties may be
expressed. The courts by the reformation do not attempt to
make a new contract for the parties, but to make the
instrument express their real agreement. The rationale of
the doctrine is that it would be unjust and inequitable to
allow the enforcement of a written instrument which does
not reflect or disclose the real meeting of the minds of the
parties. The rigor of the legalistic rule that a written
instrument should be the final and inflexible criterion and
measure of the rights and obligations of the contracting
parties is thus tempered to forestall the effects of mistake,
fraud, inequitable conduct, or accident.' (pp. 55-56, Report
of Code Commission)
Thus, Articles 1359, 1361, 1362, 1363 and 1364 of the New Civil
Code provide in essence that where through mistake or accident on
the part of either or both of the parties or mistake or fraud on the part
of the clerk or typist who prepared the instrument, the true intention
of the parties is not expressed therein, then the instrument may be
reformed at the instance of either party if there was mutual mistake on
their part, or by the injured party if only he was mistaken. cdphil
Here, plaintiff-appellee did not allege in its complaint, nor does its
evidence prove, that there was a mistake on its part or mutual mistake
on the part of both parties when they entered into the agreement Exh.
"A", and that because of this mistake, said agreement failed to express
their true intention. Rather, plaintiff's evidence shows that said
agreement was prepared by Atty. Luciano Maggay, then a member of
plaintiff's Board of Directors and its legal counsel at that time, who
was also the legal counsel for defendant-appellant, so that as legal
counsel for both companies and presumably with the interests of both
companies in mind when he prepared the aforesaid agreement, Atty.
Maggay must have considered the same fair and equitable to both

sides, and this was affirmed by the lower court when it found said
contract to have been fair to both parties at the time of its execution.
In fact, there were no complaints on the part of both sides at the time
of and after the execution of said contract, and according to 73-year
old Justino de Jesus, Vice President and General manager of appellant
at the time who signed the agreement Exh. "A" in its behalf and who
was one of the witnesses for the plaintiff (sic), both parties complied
with said contract 'from the very beginning' (p. 5, tsn, April 17, 1989).
That the aforesaid contract has become iniquitous or unfavorable or
disadvantageous to the plaintiff with the expansion of the business of
appellant and the increase in the volume of its subscribers in Naga
City and environs through the years, necessitating the stringing of
more and bigger telephone cable wires by appellant to plaintiff's
electric posts without a corresponding increase in the ten (10)
telephone connections given by appellant to plaintiff free of charge in
the agreement Exh. "A" as consideration for its use of the latter's
electric posts in Naga City, appear, however, undisputed from the
totality of the evidence on record and the lower court so found. And it
was for this reason that in the later (sic) part of 1982 or 1983 (or five
or six years after the subject agreement was entered into by the
parties), plaintiff's Board of Directors already asked Atty. Luis
General who had become their legal counsel in 1982, to study said
agreement which they believed had become disadvantageous to their
company and to make the proper recommendation, which study Atty.
General did, and thereafter, he already recommended to the Board the
filing of a court action to reform said contract, but no action was
taken on Atty. General's recommendation because the former general
managers of plaintiff wanted to adopt a soft approach in discussing
the matter with appellant, until, during the term of General Manager
Henry Pascual, the latter, after failing to settle the problem with Atty.
Luciano Maggay who had become the president and general manager
of appellant, already agreed for Atty. General's filing of the present
action. The fact that said contract has become iniquitous or
disadvantageous to plaintiff as the years went by did not, however,
give plaintiff a cause of action for reformation of said contract, for the
reasons already pointed out earlier. But this does not mean that
plaintiff is completely without a remedy, for we believe that the
allegations of its complaint herein and the evidence it has presented
sufficiently make out a cause of action under Art. 1267 of the New
Civil Code for its release from the agreement in question. LibLex
xxx xxx xxx
The understanding of the parties when they entered into the
Agreement Exh. "A" on November 1, 1977 and the prevailing
circumstances and conditions at the time, were described by Dioscoro
Ragragio, the President of plaintiff in 1977 and one of its two officials
who signed said agreement in its behalf, as follows:

261
'Our understanding at that time is that we will allow
NATELCO to utilize the posts of CASURECO II only in
the City of Naga because at that time the capability of
NATELCO was very limited, as a matter of fact we do
[sic] not expect to be able to expand because of the legal
squabbles going on in the NATELCO. So, even at that
time there were so many subscribers in Naga City that
cannot be served by the NATELCO, so as a matter of
public service we allowed them to sue (sic) our posts
within the Naga City.' (p. 8, tsn April 3, 1989)
Ragragio also declared that while the telephone wires strung to the
electric posts of plaintiff were very light and that very few telephone
lines were attached to the posts of CASURECO II in 1977, said posts
have become 'heavily loaded' in 1989 (tsn, id.).
In truth, as also correctly found by the lower court, despite the
increase in the volume of appellant's subscribers and the
corresponding increase in the telephone cables and wires strung by it
to plaintiff's electric posts in Naga City for the more 10 years that the
agreement Exh. "A" of the parties has been in effect, there has been
no corresponding increase in the ten (10) telephone units connected
by appellant free of charge to plaintiff's offices and other places
chosen by plaintiff's general manager which was the only
consideration provided for in said agreement for appellant's use of
plaintiff's electric posts. Not only that, appellant even started using
plaintiff's electric posts outside Naga City although this was not
provided for in the agreement Exh. "A" as it extended and expanded
its telephone services to towns outside said city. Hence, while very
few of plaintiff's electric posts were being used by appellant in 1977
and they were all in the City of Naga, the number of plaintiff's electric
posts that appellant was using in 1989 had jumped to 1,403,192 of
which are outside Naga City (Exh. "B"). Add to this the destruction of
some of plaintiff's poles during typhoons like the strong typhoon
Sisang in 1987 because of the heavy telephone cables attached
thereto, and the escalation of the costs of electric poles from 1977 to
1989, and the conclusion is indeed ineluctable that the agreement
Exh. "A" has already become too one-sided in favor of appellant to
the great disadvantage of plaintiff, in short, the continued
enforcement of said contract has manifestly gone far beyond the
contemplation of plaintiff, so much so that it should now be released
therefrom under Art. 1267 of the New Civil Code to avoid appellant's
unjust enrichment at its (plaintiff's) expense. As stated by Tolentino in
his commentaries on the Civil Code citing foreign civilist Ruggiero,
'equity demands a certain economic equilibrium between the
prestation and the counter-prestation, and does not permit the
unlimited impoverishment of one party for the benefit of the other by
the excessive rigidity of the principle of the obligatory force of
contracts (IV Tolentino, Civil Code of the Philippines, 1986 ed., pp.
247-248). LexLib

We therefore, find nothing wrong with the ruling of the trial court,
although based on a different and wrong premise (i.e., reformation of
contract), that from the date of the filing of this case, appellant must
pay for the use of plaintiff's electric posts in Naga City at the
reasonable monthly rental of P10.00 per post, while plaintiff should
pay appellant for the telephones in the same City that it was formerly
using free of charge under the terms of the agreement Exh. "A" at the
same rate being paid by the general public. In affirming said ruling,
we are not making a new contract for the parties herein, but we find it
necessary to do so in order not to disrupt the basic and essential
services being rendered by both parties herein to the public and to
avoid unjust enrichment by appellant at the expense of plaintiff, said
arrangement to continue only until such time as said parties can renegotiate another agreement over the same subject-matter covered by
the agreement Exh. "A". Once said agreement is reached and
executed by the parties, the aforesaid ruling of the lower court and
affirmed by us shall cease to exist and shall be substituted and
superseded by their new agreement. . . ." 8
Article 1267 speaks of "service" which has become so difficult. Taking into consideration the
rationale behind this provision, 9 the term "service" should be understood as referring to the
"performance" of the obligation. In the present case, the obligation of private respondent
consists in allowing petitioners to use its posts in Naga City, which is the service contemplated
in said article. Furthermore, a bare reading of this article reveals that it is not a requirement
thereunder that the contract be for future service with future unusual change. According to
Senator Arturo M. Tolentino, 10 Article 1267 states in our law the doctrine of unforeseen
events. This is said to be based on the discredited theory of rebus sic stantibus in public
international law; under this theory, the parties stipulate in the light of certain prevailing
conditions, and once these conditions cease to exist the contract also ceases to exist.
Considering practical needs and the demands of equity and good faith, the disappearance of the
basis of a contract gives rise to a right to relief in favor of the party prejudiced.
In a nutshell, private respondent in the Occea case filed a complaint against petitioner before
the trial court praying for modification of the terms and conditions of the contract that they
entered into by fixing the proper shares that should pertain to them out of the gross proceeds
from the sales of subdivided lots. We ordered the dismissal of the complaint therein for failure
to state a sufficient cause of action. We rationalized that the Court of Appeals misapplied
Article 1267 because:
". . . respondent's complaint seeks not release from the subdivision
contract but that the court 'render judgment modifying the terms and
conditions of the contract . . . by fixing the proper shares that
should pertain to the herein parties out of the gross proceeds from the
sales of subdivided lots of subject subdivision'. The cited article
(Article 1267) does not grant the courts (the) authority to remake,
modify or revise the contract or to fix the division of shares between
the parties as contractually stipulated with the force of law between
the parties, so as to substitute its own terms for those covenanted by
the parties themselves. Respondent's complaint for modification of

262
contract manifestly has no basis in law and therefore states no cause
of action. Under the particular allegations of respondent's complaint
and the circumstances therein averred, the courts cannot even in
equity the relief sought." 11
The ruling in the Occea case is not applicable because we agree with respondent court
that the allegations in private respondent's complaint and the evidence it has presented
sufficiently made out a cause of action under Article 1267. We, therefore, release the
parties from their correlative obligations under the contract. However, our disposition of
the present controversy does not end here. We have to take into account the possible
consequences of merely releasing the parties therefrom: petitioners will remove the
telephone wires/cables in the posts of private respondent, resulting in disruption of their
essential service to the public; while private respondent, in consonance with the contract
12 will return all the telephone units to petitioners, causing prejudice to its business. We
shall not allow such eventuality. Rather, we require, as ordered by the trial court: 1)
petitioners to pay private respondent for the use of its posts in Naga City and in the towns
of Milaor, Canaman, Magarao and Pili, Camarines Sur and in other places where
petitioners use private respondent's posts, the sum of ten (P10.00) pesos per post, per
month, beginning January, 1989; and 2) private respondent to pay petitioner the monthly
dues of all its telephones at the same rate being paid by the public beginning January,
1989. The peculiar circumstances of the present case, as distinguished further from the
Occea case, necessitates exercise of our equity jurisdiction. 13 By way of emphasis, we
reiterate the rationalization of respondent court that: cdll
". . . In affirming said ruling, we are not making a new contract for
the parties herein, but we find it necessary to do so in order not to
disrupt the basic and essential services being rendered by both parties
herein to the public and to avoid unjust enrichment by appellant at the
expense of plaintiff . . . ." 1 4
Petitioners' assertion that Article 1267 was never raised by the parties in their pleadings and
was never the subject of trial and evidence has been passed upon by respondent court in its
well reasoned resolution, which we hereunder quote as our own:
"First, we do not agree with defendant-appellant that in applying Art.
1267 of the New Civil Code to this case, we have changed its theory
and decided the same on an issue not invoked by plaintiff in the lower
court. For basically, the main and pivotal issue in this case is whether
the continued enforcement of the contract Exh. "A" between the
parties has, through the years (since 1977), become too iniquitous or
disadvantageous to the plaintiff and too one-sided in favor of
defendant-appellant, so that a solution must be found to relieve
plaintiff from the continued operation of said agreement and to
prevent defendant-appellant from further unjustly enriching itself at
plaintiff's expense. It is indeed unfortunate that defendant had turned
deaf ears to plaintiff's requests for renegotiation, constraining the
latter to go to court. But although plaintiff cannot, as we have held,
correctly invoke reformation of contract as a proper remedy (there
having been no showing of a mistake or error in said contract on the
part of any of the parties so as to result in its failure to express their
true intent), this does not mean that plaintiff is absolutely without a

remedy in order to relieve itself from a contract that has gone far
beyond its contemplation and has become highly iniquitous and
disadvantageous to it through the years because of the expansion of
defendant-appellant's business and the increase in the volume of its
subscribers. And as it is the duty of the Court to administer justice, it
must do so in this case in the best way and manner it can in the light
of the proven facts and the law or laws applicable thereto. cdphil
It is settled that when the trial court decides a case in favor of a party
on a certain ground, the appellate court may uphold the decision
below upon some other point which was ignored or erroneously
decided by the trial court (Garcia Valdez v. Tuazon, 40 Phil. 943;
Relativo v. Castro, 76 Phil. 563; Carillo v. Salak de Paz, 18 SCRA
467). Furthermore, the appellate court has the discretion to consider
an unassigned error that is closely related to an error properly
assigned (Paterno v. Jao Yan, 1 SCRA 631; Hernandez v. Andal, 78
Phil. 196). It has also been held that the Supreme Court (and this
Court as well) has the authority to review matters, even if they are not
assigned as errors in the appeal, if it is found that their consideration
is necessary in arriving at a just decision of the case (Saura Import &
Export Co., Inc. v. Phil. International Surety Co. and PNB, 8 SCRA
143). For it is the material allegations of fact in the complaint, not the
legal conclusion made therein or the prayer, that determines the relief
to which the plaintiff is entitled, and the plaintiff is entitled to as
much relief as the facts warrant although that relief is not specifically
prayed for in the complaint (Rosales v. Reyes and Ordoveza, 25 Phil.
495; Cabigao v. Lim, 50 Phil. 844; Baguioro v. Barrios, 77 Phil. 120).
To quote an old but very illuminating decision of our Supreme Court
through the pen of American jurist Adam C. Carson:
'Under our system of pleading it is the duty of the courts to
grant the relief to which the parties are shown to be
entitled by the allegations in their pleadings and the facts
proven at the trial, and the mere fact that they themselves
misconstrue the legal effects of the facts thus alleged and
proven will not prevent the court from placing the just
construction thereon and adjudicating the issues
accordingly.' (Alzua v. Johnson, 21 Phil. 308)
And in the fairly recent case of Caltex Phil. Inc. v. IAC, 176 SCRA
741, the Honorable Supreme Court also held:
'We rule that the respondent court did not commit any
error in taking cognizance of the aforesaid issues, although
not raised before the trial court. The presence of strong
consideration of substantial justice has led this Court to
relax the well-entrenched rule that, except questions on
jurisdiction, no question will be entertained on appeal
unless it has been raised in the court below and it is within
the issues made by the parties in their pleadings (Cordero
v. Cabral, L-36789, July 25, 1983, 123 SCRA 532). . . .'

263

We believe that the above authorities suffice to show that this Court
did not err in applying Art. 1267 of the New Civil Code to this case.
Defendant-appellant stresses that the applicability of said provision is
a question of fact, and that it should have been given the opportunity
to present evidence on said question. But defendant-appellant cannot
honestly and truthfully claim that it (did) not (have) the opportunity to
present evidence on the issue of whether the continued operation of
the contract Exh. "A" has now become too one-sided in its favor and
too iniquitous, unfair, and disadvantageous to plaintiff. As held in our
decision, the abundant and copious evidence presented by both parties
in this case and summarized in said decision established the following
essential and vital facts which led us to apply Art. 1267 of the New
Civil Code to this case: Cdpr
xxx xxx xxx." 15
On the issue of prescription of private respondent's action for reformation of contract,
petitioners allege that respondent court's ruling that the right of action "arose only after said
contract had already become disadvantageous and unfair to it due to subsequent events and
conditions, which must be sometime during the latter part of 1982 or in 1983 . . ." 16 is
erroneous. In reformation of contracts, what is reformed is not the contract itself, but the
instrument embodying the contract. It follows that whether the contract is disadvantageous or
not irrelevant to reformation and therefore, cannot be an element in the determination of the
period for prescription of the action to reform.
Article 1144 of the New Civil Code provides, inter alia, that an action upon a written contract
must be brought within ten (10) years from the time the right of the action accrues. Clearly, the
ten (10) year period is to be reckoned from the time the right of action accrues which is not
necessarily the date of execution of the contract. As correctly ruled by respondent court, private
respondent's right of action arose "sometime during the latter part of 1982 or in 1983 when
according to Atty. Luis General, Jr. . . ., he was asked by (private respondent's) Board of
Directors to study said contract as it already appeared disadvantageous to (private respondent)
(p. 31, tsn, May 8, 1989). (Private respondent's) cause of action to ask for reformation of said
contract should thus be considered to have arisen only in 1982 or 1983, and from 1982 to
January 2, 1989 when the complaint in this case was filed, ten (10) years had not yet
elapsed." 17
Regarding the last issue, petitioners allege that there is nothing purely potestative about the
prestations of either party because petitioner's permission for free use of telephones is not made
to depend purely on their will, neither is private respondent's permission for free use of its
posts dependent purely on its will. llcd
Apart from applying Article 1267, respondent court cited another legal remedy available to
private respondent under the allegations of its complaint and the preponderant evidence
presented by it:
". . . we believe that the provision in said agreement
'(a) That the term or period of this contract shall be as long as the
party of the first part [herein appellant] has need for the electric light

posts of the party of the second part [herein plaintiff] it being

understood that this contract shall terminate when for any reason
whatsoever, the party of the second part is forced to stop, abandoned
[sic] its operation as a public service and it becomes necessary to
remove the electric light post [sic]'; (Emphasis supplied)
is invalid for being purely potestative on the part of appellant as it
leaves the continued effectivity of the aforesaid agreement to the
latter's sole and exclusive will as long as plaintiffs is in operation. A
similar provision in a contract of lease wherein the parties agreed that
the lessee could stay on the leased premises 'for as long as the
defendant needed the premises and can meet and pay said increases'
was recently held by the Supreme Court in Lim v. C.A., 191 SCRA
150, citing the much earlier case of Encarnacion v. Baldomar, 77 Phil.
470, as invalid for being 'a purely potestative condition because it
leaves the effectivity and enjoyment of leasehold rights to the sole
and exclusive will of the lessee.' Further held the High Court in the
Lim case: llcd
'The continuance, effectivity and fulfillment of a contract
of lease cannot be made to depend exclusively upon the
free and uncontrolled choice of the lessee between
continuing the payment of the rentals or not, completely
depriving the owner of any say in the matter. Mutuality
does not obtain in such a contract of lease of no equality
exists between the lessor and the lessee since the life of
the contract is dictated solely by the lessee.'
The above can also be said of the agreement Exh. "A" between the
parties in this case. There is no mutuality and equality between them
under the afore-quoted provision thereof since the life and continuity
of said agreement is made to depend as long as appellant needs
plaintiff's electric posts. And this is precisely why, since 1977 when
said agreement was executed and up to 1989 when this case was
finally filed by plaintiff, it could do nothing to be released from or
terminate said agreement notwithstanding that its continued
effectivity has become very disadvantageous and iniquitous to it due
to the expansion and increase of appellant's telephone services within
Naga City and even outside the same, without a corresponding
increase in the ten (10) telephone units being used by plaintiff free of
charge, as well as the bad and inefficient service of said telephones to
the prejudice and inconvenience of plaintiff and its customers. . . ." 18
Petitioners' allegations must be upheld in this regard. A potestative condition is a condition, the
fulfillment of which depends upon the sole will of the debtor, in which case, the conditional
obligation is void. 19 Based on this definition, respondent court's finding that the provision in
the contract, to wit:
"(a) That the term or period of this contract shall be as long as the
party of the first part (petitioner) has need for the electric light posts
of the party of the second part (private respondent) . . ." LLjur

264
is a potestative condition, is correct. However, it must have overlooked the other
conditions in the same provision, to wit:
". . . it being understood that this contract shall terminate when for
any reason whatsoever, the party of the second part (private
respondent) is forced to stop, abandoned (sic) its operation as a public
service and it becomes necessary to remove the electric light post
(sic);"
which are casual conditions since they depend on chance, hazard, or the will of a third
person. 20 In sum, the contract is subject to mixed conditions, that is, they depend partly
on the will of the debtor and partly on chance, hazard or the will of a third person, which
do not invalidate the aforementioned provision. 21 Nevertheless, in view of our
discussions under the first and second issues raised by petitioners, there is no reason to
set aside the questioned decision and resolution of respondent court.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals dated
May 28, 1992 and its resolution dated September 10, 1992 are AFFIRMED.
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Puno, JJ ., concur.
||| (Naga Telephone Co., Inc. v. Court of Appeals, G.R. No. 107112, [February 24, 1994])

265

THIRD DIVISION
[G.R. No. 96053. March 3, 1993.]
JOSEFINA TAYAG, RICARDO GALICIA, TERESITA
GALICIA, EVELYN GALICIA, JUAN GALICIA, JR. and
RODRIGO GALICIA,petitioners, vs. COURT OF APPEALS and
ALBRIGIDO LEYVA, respondents.

Facundo T. Bautista for petitioners.

2. ID.; ID.; IN RECIPROCAL CONTRACTS BOTH PARTIES ARE CONSIDERED

MUTUALLY OBLIGORS AND OBLIGEES OF EACH OTHER. Respondent court applied
Article 1186 of the Civil Code on constructive fulfillment which petitioners claim should not
have been appreciated because they are the obligees while the proviso in point speaks of the
obligor. But, petitioners must concede that in a reciprocal obligation like a contract of purchase
(Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p. 201), both parties are
mutually obligors and also obligees (4 Padilla, supra, at p. 197), and any of the contracting
parties may, upon non-fulfillment by the other privy of his part of the prestation, rescind the
contract or seek fulfillment (Article 1191, Civil Code). In short, it is puerile for petitioners to
say that they are the only obligees under the contract since they are also bound as obligors to
respect the stipulation in permitting private respondent to assume the loan with the Philippine
Veterans Bank which petitioners impeded when they paid the balance of said loan. As vendors,
they are supposed to execute the final deed of sale upon full payment of the balance as
determined hereafter.

Jesus T. Garcia for private respondent.

DECISION

SYLLABUS
1. CIVIL LAW; CONTRACTS; RESCISSION; WAIVER OF RIGHT THERETO. The
suggestion of petitioners that the covenant must be cancelled in the light of private respondent's
so-called breach seems to overlook petitioners' demeanor who, instead of immediately filing
the case precisely to rescind the instrument because of non-compliance, allowed private
respondent to effect numerous payments posterior to the grace periods provided in the contract.
This apathy of petitioners who even permitted private respondent to take the initiative in filing
the suit for specific performance against them, is akin to waiver or abandonment of the right to
rescind normally conferred by Article 1191 of the Civil Code. As aptly observed by Justice
Gutierrez, Jr. in Angeles vs. Calasanz (135 SCRA 323 [1985]; 4 Paras, Civil Code of the
Philippines Annotated, Twelfth Ed. [1989], p. 203): ". . . We agree with the plaintiffs-appellees
that when the defendants-appellants, instead of availing of their alleged right to rescind, have
accepted and received delayed payments of installments, though the plaintiffs-appellees have
been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the
defendants-appellants have waived, and are now estopped from exercising their alleged right of
rescission . . ." In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818;
cited in 4 Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a similar opinion
was expressed to the effect that: "In a perfected contract of sale of land under an agreed
schedule of payments, while the parties may mutually oblige each other to compel the specific
performance of the monthly amortization plan, and upon failure of the buyer to make the
payment, the seller has the right to ask for a rescission of the contract under Art. 1191 of the
Civil Code, this shall be deemed waived by acceptance of posterior payments." Both the trial
and appellate courts were, therefore, correct in sustaining the claim of private respondent
anchored on estoppel or waiver by acceptance of delayed payments under Article 1235 of the
Civil Code in that: "When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with."

MELO, J p:
The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr., prior to his demise in
1979, and Celerina Labuguin, in favor of Albrigido Leyva involving the undivided one-half
portion of a piece of land situated at Poblacion, Guimba, Nueva Ecija for the sum of
P50,000.00 under the following terms:
"1. The sum of PESOS: THREE THOUSAND (P3,000.00) is
HEREBY acknowledged to have been paid upon the execution of this
agreement;
2. The sum of PESOS: TEN THOUSAND (P10,000.00) shall be paid
within ten (10) days from and after the execution of this agreement;
3. The sum of PESOS: TEN THOUSAND (P10,000.00) represents
the VENDORS' indebtedness with the Philippine Veterans Bank
which is hereby assumed by the VENDEE; and
4. The balance of PESOS: TWENTY SEVEN THOUSAND
(P27,000.00) shall be paid within one (1) year from and after the
execution of this instrument." (p. 53, Rollo). cdll0
is the subject matter of the present litigation between the heirs of Juan Galicia, Sr. who
assert breach of the conditions as against private respondent's claim anchored on full
payment and compliance with the stipulations thereof.

266
The court of origin which tried the suit for specific performance filed by private respondent on
account of the herein petitioners' reluctance to abide by the covenant, ruled in favor of the
vendee (p. 64, Rollo) while respondent court practically agreed with the trial court except as to
the amount to be paid to petitioners and the refund to private respondent are concerned (p. 46,
Rollo).
There is no dispute that the sum of P3,000.00 listed as first installment was received by Juan
Galicia, Sr. According to petitioners, of the P10,000.00 to be paid within ten days from
execution of the instrument, only P9,707.00 was tendered to, and received by, them on
numerous occasions from May 29, 1975, up to November 3, 1979. Concerning private
respondent's assumption of the vendors' obligation to the Philippine Veterans Bank, the vendee
paid only the sum of P6,926.41 while the difference of the indebtedness came from Celerina
Labuguin (p. 73, Rollo). Moreover, petitioners asserted that not a single centavo of the
P27,000.00 representing the remaining balance was paid to them. Because of the apprehension
that the heirs of Juan Galicia, Sr. are disavowing the contract inked by their predecessor,
private respondent filed the complaint for specific performance.
In addressing the issue of whether the conditions of the instrument were performed by herein
private respondent as vendee, the Honorable Godofredo G. Rilloraza, Presiding Judge of
Branch 31 of the Regional Trial Court, Third Judicial Region stationed at Guimba, Nueva
Ecija, decided to uphold private respondent's theory on the basis of constructive fulfillment
under Article 1186 and estoppel through acceptance of piecemeal payments in line with Article
1235 of the Civil Code.
Anent the P10,000.00 specified as second installment, the lower court counted against the
vendors the candid statement of Josefina Tayag who sat on the witness stand and made the
admission that the check issued as payment thereof was nonetheless paid on a staggered basis
when the check was dishonored (TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p. 66,
Rollo). Regarding the third condition, the trial court noted that plaintiff below paid more than
P6,000.00 to the Philippine Veterans Bank but Celerina Labuquin, the sister and co-vendor of
Juan Galicia, Sr. paid P3,778.77 which circumstance was construed to be a ploy under Article
1186 of the Civil Code that "prematurely prevented plaintiff from paying the installment fully"
and "for the purpose of withdrawing the title to the lot". The acceptance by petitioners of the
various payments even beyond the periods agreed upon, was perceived by the lower court as
tantamount to faithful performance of the obligation pursuant to Article 1235 of the Civil Code.
Furthermore, the trial court noted that private respondent consigned P18,520.00, an amount
sufficient to offset the remaining balance, leaving the sum of P1,315.00 to be credited to
private respondent.
On September 12, 1984, judgment was rendered:
"1. Ordering the defendants heirs of Juan Galicia, to execute the
Deed of Sale of their undivided ONE HALF (1/2) portion of Lot No.
1130, Guimba Cadastre, covered by TCT No. NT-120563, in favor of
plaintiff Albrigido Leyva, with an equal frontage facing the national
road upon finality of judgment; that, in their default, the Clerk of
Court II, is hereby ordered to execute the deed of conveyance in line
with the provisions of Section 10, Rule 39 of the Rules of Court; prcd

2. Ordering the defendants, heirs of Juan Galicia, jointly and severally

to pay attorney's fees of P6,000.00 and the further sum of P3,000.00
for actual and compensatory damages;
3. Ordering Celerina Labuguin and the other defendants herein to
surrender to the Court the owner's duplicate of TCT No. NT-120563,
province of Nueva Ecija, for the use of plaintiff in registering the
portion, subject matter of the instant suit;
4. Ordering the withdrawal of the amount of P18,520.00 now
consigned with the Court, and the amount of P17,204.75 be delivered
to the heirs of Juan Galicia as payment of the balance of the sale of
the lot in question, the defendants herein after deducting the amount
of attorney's fees and damages awarded to the plaintiff hereof and the
delivery to the plaintiff of the further sum of P1,315.25 excess or over
payment and, defendants to pay the cost of the suit." (p. 69, Rollo).
and following the appeal interposed with respondent court, Justice Dayrit with whom
Justices Purisima and Aldecoa, Jr. concurred, modified the fourth paragraph of the
decretal portion to read:
"4. Ordering the withdrawal of the amount of P18,500.00 now
consigned with the Court, and that the amount of P16,870.52 be
delivered to the heirs of Juan Galicia, Sr. as payment to the unpaid
balance of the sale, including the reimbursement of the amount paid
to Philippine Veterans Bank, minus the amount of attorney's fees and
damages awarded in favor of plaintiff. The excess of P1,649.48 will
be returned to plaintiff. The costs against defendants." (p. 51, Rollo).

As to how the foregoing directive was arrived at, the appellate court declared:
"With respect to the fourth condition stipulated in the
contract, the period indicated therein is deemed modified by the parties
when the heirs of Juan Galicia, Sr. accepted payments without
objection up to November 3, 1979. On the basis of receipts presented
by appellee commencing from August 8, 1975 up to November 3,
1979, a total amount of P13,908.25 has been paid, thereby leaving a
balance of P13,091.75. Said unpaid balance plus the amount
reimbursable to appellant in the amount of P3,778.77 will leave an
unpaid total of P16,870.52. Since appellee consigned in court the sum
of P18,500.00, he is entitled to get the excess of P1,629.48. Thus, when
the heirs of Juan Galicia, Sr. (obligees) accepted the performance,
knowing its incompleteness or irregularity and without expressing any
protest or objection, the obligation is deemed fully complied with
(Article 1235, Civil Code)." (p. 50, Rollo)
Petitioners are of the impression that the decision appealed from, which agreed with the
conclusions of the trial court, is vulnerable to attack viathe recourse before Us on the principal
supposition that the full consideration of the agreement to sell was not paid by private
respondent and, therefore, the contract must be rescinded.

267
The suggestion of petitioners that the covenant must be cancelled in the light of private
respondent's so-called breach seems to overlook petitioners' demeanor who, instead of
immediately filing the case precisely to rescind the instrument because of non-compliance,
allowed private respondent to effect numerous payments posterior to the grace periods
provided in the contract. This apathy of petitioners who even permitted private respondent to
take the initiative in filing the suit for specific performance against them, is akin to waiver or
abandonment of the right to rescind normally conferred by Article 1191 of the Civil Code. As
aptly observed by Justice Gutierrez, Jr. in Angeles vs. Calasanz (135 SCRA 323 [1985];
4 Paras, Civil Code of the Philippines Annotated, Twelfth Ed. [1989], p. 203): prcd
" . . . We agree with the plaintiffs-appellees that when the defendantsappellants, instead of availing of their alleged right to rescind, have
accepted and received delayed payments of installments, though the
plaintiffs-appellees have been in arrears beyond the grace period
mentioned in paragraph 6 of the contract, the defendants-appellants
have waived, and are now estopped from exercising their alleged
right of rescission . . . "
In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818; cited in
4 Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a similar opinion was
expressed to the effect that:
"In a perfected contract of sale of land under an agreed schedule of
payments, while the parties may mutually oblige each other to compel
the specific performance of the monthly amortization plan, and upon
failure of the buyer to make the payment, the seller has the right to
ask for a rescission of the contract under Art. 1191 of the Civil Code,
this shall be deemed waived by acceptance of posterior payments."
Both the trial and appellate courts were, therefore, correct in sustaining the claim of private
respondent anchored on estoppel or waiver by acceptance of delayed payments under Article
1235 of the Civil Code in that:
"When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with."
considering that the heirs of Juan Galicia, Sr. accommodated private respondent by
accepting the latter's delayed payments not only beyond the grace periods but also during
the pendency of the case for specific performance (p. 27, Memorandum for petitioners; p.
166, Rollo). Indeed, the right to rescind is not absolute and will not be granted where
there has been substantial compliance by partial payments (4 Caguioa, Comments and
Cases on Civil Law, First Ed. [1968], p. 132). By and large, petitioners' actuation is
susceptible of but one construction that they are now estopped from reneging from
their commitment on account of acceptance of benefits arising from overdue accounts of
private respondent.
Now, as to the issue of whether payments had in fact been made, there is no doubt that the
second installment was actually paid to the heirs of Juan Galicia, Sr. due to Josefina Tayag's
admission in judicio that the sum of P10,000.00 was fully liquidated. It is thus erroneous for
petitioners to suppose that "the evidence in the records do not support this conclusion" (p. 18,
Memorandum for Petitioners; p. 157, Rollo). A contrario, when the court of origin, as well as

the appellate court, emphasized the frank representation along this line of Josefina Tayag
before the trial court (TSN, September 1, 1983, pp. 3-4; p. 5, Decision in CA-G.R. CV No.
13339, p. 50, Rollo; p. 3, Decision in Civil Case No. 681-G, p. 66, Rollo), petitioners chose to
remain completely mute even at this stage despite the opportunity accorded to them, for
clarification. Consequently, the prejudicial aftermath of Josefina Tayag's spontaneous reaction
may no longer be obliterated on the basis of estoppel (Article 1431, Civil Code; Section 4, Rule
129; Section 2(a), Rule 131, Revised Rules on Evidence).
Insofar as the third item of the contract is concerned, it may be recalled that respondent court
applied Article 1186 of the Civil Code on constructive fulfillment which petitioners claim
should not have been appreciated because they are the obligees while the proviso in point
speaks of the obligor. But, petitioners must concede that in a reciprocal obligation like a
contract of purchase (Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p.
201), both parties are mutually obligors and also obligees (4 Padilla, supra, at p. 197),
and any of the contracting parties may, upon non-fulfillment by the other privy of his part of
the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code). In short, it is
puerile for petitioners to say that they are the only obligees under the contract since they are
also bound as obligors to respect the stipulation in permitting private respondent to assume the
loan with the Philippine Veterans Bank which petitioners impeded when they paid the balance
of said loan. As vendors, they are supposed to execute the final deed of sale upon full payment
of the balance as determined hereafter. LibLex
Lastly, petitioners argue that there was no valid tender of payment nor consignation of the sum
of P18,520.00 which they acknowledge to have been deposited in court on January 22, 1981
five years after the amount of P27,000.00 had to be paid (p. 23, Memorandum for Petitioners;
p. 162, Rollo). Again this suggestion ignores the fact that consignation alone produced the
effect of payment in the case at bar because it was established below that two or more heirs of
Juan Galicia, Sr. claimed the same right to collect (Article 1256, (4), Civil Code; pp. 4-5,
Decision in Civil Case No. 681-G; pp. 67-68, Rollo). Moreover, petitioners did not bother to
refute the evidence on hand that, aside from the P18,520.00 (not P18,500.00 as computed by
respondent court) which was consigned, private respondent also paid the sum of P13,908.25
(Exhibits "F" to "CC"; p. 50, Rollo). These two figures representing private respondent's
payment of the fourth condition amount to P32,428.25, less the P3,778.77 paid by petitioners
to the bank, will lead us to the sum of P28,649.48 or a refund of P1,649.48 to private
respondent as overpayment of the P27,000.00 balance.
WHEREFORE, the petition is hereby DISMISSED and the decision appealed from is hereby
AFFIRMED with the slight modification of Paragraph 4 of the dispositive thereof which is
thus amended to read:
"4. ordering the withdrawal of the sum of P18,520.00 consigned with
the Regional Trial Court, and that the amount of P16,870.52 be
delivered by private respondent with legal rate of interest until fully
paid to the heirs of Juan Galicia, Sr. as balance of the sale including
reimbursement of the sum paid to the Philippine Veterans Bank,
minus the attorney's fees and damages awarded in favor of private
respondent. The excess of P1,649.48 shall be returned to private
respondent also with legal interest until fully paid by petitioners. With
costs against petitioners." cdrep
SO ORDERED.

268
Feliciano, Bidin, Davide, Jr. and Romero, JJ ., concur.
Gutierrez, Jr., J ., is on terminal leave.

||| (Tayag v. Court of Appeals, G.R. No. 96053, [March 3, 1993])

269

FIRST DIVISION
[G.R. No. 149140. September 12, 2006.]
VICTORIA ONG, petitioner, vs. ERNESTO BOGALBAL 1 and
HON. COURT OF APPEALS, respondents.

DECISION

CHICO-NAZARIO, J p:
In this Special Civil Action for Certiorari under Rule 65 of the Rules of Court, petitioner seeks
the nullification of a 22 May 2001 Court of Appeals Resolution denying her Motion for
Reconsideration of a 31 March 2000 Decision. 2
The Court of Appeals found the facts to be as follows:
On January 2, 1995, [herein respondent] Ernesto Bogalbal, an
architect-contractor doing business under the name and style of E.B.
Bogalbal Construction, entered into an "Owner-Contractor
Agreement" with [herein petitioner] Victoria Ong, a businesswoman,
for the construction of a proposed boutique owned by the latter to be
known as Les Galeries de Paris located at the 3rd Floor of the
Shangri-La Plaza, Epifanio Delos Santos Avenue corner Shaw
Boulevard, Mandaluyong City (Exhibits "A" and "1", pp. 100102, ibid). The agreement provides that in consideration of the sum of
two hundred thousand pesos (P200,000.00), the contractor agrees to
furnish labor, tools and equipment to complete the work on the
boutique as per specification within forty-five (45) days excluding
Sundays from the date of delivery of the construction materials.
Payment by the owner shall be made by progress billing to be
collected every two (2) weeks based on the accomplishment of work
value submitted by the contractor to the owner as certified for
payment by the architect assigned on site. The agreement likewise
provides for a change order as a result of fluctuation in the cost of
labor. Moreover, should the owner require the contractor to perform
work over and above that required, the additional cost shall be added
to the contract amount and if ordered to omit work as required by
their agreement, the cost of work omitted shall be deducted from the
contract amount.

Actual work on the project commenced on January 19, 1995. For

work accomplished during the period January 19 to 28, 1995,
[respondent Bogalbal] submitted and was paid his progress billing
no. 1 in the sum of P35,950.00 equivalent to 17.975% of the total job
to be performed (Exh. "E", p. 106, ibid). Partial billing nos. 2 and 3
for the period from January 29 to February 15, 1995 and February 16
to March 3, 1995 in the sum of P69,000.00 and P41,500.00,
equivalent to 34.65% and 20.63% of the total job, respectively, were
likewise made to respondent and paid for by the latter (Exhs. "F" and
"G", pp. 107-108, ibid.).
It is with respect to progress billing no. 4 that the present controversy
arose. When [respondent Bogalbal] submitted the fourth progress
billing on March 31, 1995 for the period covering March 4 to 18,
1995, in the sum of P30,950.00 equivalent to 15.47% of the total job
(Exh. "B", p. 103, ibid.), [petitioner Ong] refused to pay the same. As
in the previous three billings, the fourth billing was first evaluated
and recommended for payment by Supervising Architect John Noel
R. Cano, an employee of Balce-Sindac and Associates, the principal
designer of the [petitioner Ong's] boutique (Exh. "H-1", p. 110, ibid.).
The reason for [petitioner Ong's] refusal to pay the fourth (4th)
progress billing is not clear on the record. It is [respondent
Bogalbal's] contention that [petitioner Ong] refused to pay since she
was insisting that the flooring, which she asked to be changed from
vinyl tiles to kenzo flooring where polyurethane is to be used as
coating, be first completed within three (3) days from April 22, 1995.
[Respondent Bogalbal], however, insisted that the same is not
possible because the floor needed to be cured first to avoid adverse
chemical reaction of the polyurethane on the color of the flooring.
Due to the insistence of [petitioner Ong] that the flooring be finished
in time for the arrival of the furniture from abroad, [respondent
Bogalbal] proceeded with the work but the rushed work resulted in
the reddish reaction of the polyurethane on the floor, which was not
acceptable to respondent (TSN, March 28, 1996, pp. 30-32; June 21,
1996, pp. 15-18).
On the other hand, [petitioner Ong] contends that her refusal to pay
was because the fourth billing was allegedly in excess and over the
value of the work accomplished during the period. To settle the
matter, the parties purportedly met whereby [respondent Bogalbal]
supposedly agreed to finish the kenzo flooring on or before April 24,
1995 before [petitioner Ong] would pay the fourth (4th) progress
billing. However, instead of complying with his commitment,
[respondent Bogalbal] abandoned the project on April 24, 1995
when it became apparent that he could not complete the kenzo
flooring on the date agreed upon.

270
Due to [petitioner Ong's] continued refusal to pay [respondent
Bogalbal's] fourth (4th) progress billing despite written demands
from his counsel (Exhs. "C" and "D", pp. 104-105, ibid), the latter
was constrained to file an action for sum of money with damages with
the Metropolitan Trial Court (MeTC) of Caloocan City. EHSADc
The complaint, which was docketed as Civil Case No. 22143 and
raffled to Branch 49 of the court, prayed for actual damages in the
total sum of P50,450.00 representing P30,950.00 (4th progress
billing), P16,000.00 on the change order from vinyl tiles to kenzo
flooring and an unidentified amount. It likewise prayed for moral and
exemplary damages, as well as attorney's fees.
In her answer with counterclaim, [petitioner Ong] refused payment of
the fourth (4th) progress billing since [respondent Bogalbal] failed
to perform what was incumbent upon him under their agreement, but
instead abandoned the job to her great damage and prejudice. As to
the P16,000.00 value of the change order, she alleged that the same
was premature since she had never received any billing for said
change order duly certified for payment and approved by the
Architect assigned on site. Besides, [petitioner Ong] averred that the
P16,000.00 being charged by [respondent Bogalbal] was grossly
disproportionate with the quantity of the work actually accomplished
by the former. By way of counterclaim, [petitioner Ong] prayed for
actual damages by reason of [respondent Bogalbal's] refusal to finish
the job agreed upon which forced her to hire a new contractor to
complete the same for which she paid the sum of P78,000.00 and for
loss of business opportunity in the amount of P50,000.00. She
likewise prayed for moral, exemplary and liquidated damages, as well
as attorney's fees.
After trial on the merits, the [MeTC], in a Decision dated June 18,
1998, ruled in favor of [respondent Bogalbal,] awarding to him the
sum of P30,950.00 representing the fourth progress billing,
P13,000.00 representing the value of the accomplished work on the
kenzo flooring, P15,000.00 as attorney's fees, P20,000.00 and
P25,000.00 as moral and exemplary damages, respectively (p.
175, ibid.).
Aggrieved by the decision of the court, [petitioner Ong] elevated the
case on appeal to the Regional Trial Court (RTC) of Caloocan City.
The appeal was docketed as Civil Case No. C-18466 and raffled to
Branch 126 thereof.
The court a quo, after requiring the parties to submit their respective
memoranda, reversed and set aside the ruling of the MTC and
rendered judgment in favor of [petitioner Ong] in a Decision dated
February 18, 1999 (p. 407, ibid.). It is worthy to note that although
the RTC ruled in favor of [petitioner Ong], it did not specify the relief
granted to her in the dispositive portion of its decision. 3

Respondent Bogalbal then filed a Petition for Review with the Court of Appeals. On 31
March 2000, the Court of Appeals granted the Petition, disposing of the case as follows:
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is
hereby GRANTED. The Decision of the Regional Trial Court dated
February 18, 1999 is REVERSED and SET ASIDE, and the
Decision of the Metropolitan Trial Court dated June 18, 1998
is REINSTATED. No pronouncement as to costs. 4
The dispositive portion of the reinstated 18 June 1998 Metropolitan Trial Court (MeTC)
Decision is as follows:
WHEREFORE, after a careful consideration of the foregoing
evidence, the Court finds the same to strongly preponderates (sic) in
favor of the plaintiff and hereby orders defendant Victoria Ong to pay
plaintiff Ernesto Bognalbal the amount of THIRTY THOUSAND
NINE HUNDRED FIFTY PESOS (P30,950.00) representing the
value of his accomplished work for the period from March 4 to March
18, 1995, the amount of (P13,000.00) THIRTEEN THOUSAND
PESOS representing the value of his accomplished work on the kenzo
flooring equivalent to 60% of the agreed fee of P25,000.00 minus the
amount of P2,000.00 paid under the third progress billing, the amount
of FIFTEEN THOUSAND (P15,000.00) PESOS as and for attorney's
fees, the amount of TWENTY THOUSAND (P20,000.00) PESOS AS
MORAL damages and the amount of TWENTY-FIVE THOUSAND
(P25,000.00) PESOS as exemplary damages. Defendant is further
ordered to pay the costs of this suit. HDATCc
For lack of sufficient basis, the counterclaim of the defendant is
hereby dismissed. 5
On 22 May 2001, the Court of Appeals denied petitioner Ong's Motion for Reconsideration in
the assailed Resolution, a copy of which was received by petitioner, through counsel, on 11
June 2001.
In the instant Petition for Certiorari, filed on 10 August 2001, petitioner Ong alleges that:
THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF JURISDICTION IN
DENYING THE MOTION FOR RECONSIDERATION AND IN
RESOLVING THE ABOVE-ENTITLED CASE IN FAVOR OF THE
PRIVATE RESPONDENT. 6
Propriety/Impropriety
Civil
Action
Rule 65

of
for

Certiorari

Special
under

Petitioner claims that a special civil action for certiorari is proper since appeal
by certiorari under Rule 45 is limited only to questions of law. This is wrong. The writ
of certiorari is proper to correct errors of jurisdiction committed by the lower court, or grave
abuse of discretion which is tantamount to lack of jurisdiction. Where the error is not one of
jurisdiction but an error of law or fact which is a mistake of judgment, appeal is the remedy. 7

271
P200,000.00)
It is true that, as a general rule, in the exercise of the Supreme Court's power of review, the
Court is not a trier of facts and does not normally undertake the re-examination of the evidence
presented by the contending parties during the trial of the case considering that the findings of
facts of the Court of Appeals are conclusive and binding on the Court. However, the Court had
recognized several exceptions to this rule, to wit: (1) when the findings are grounded entirely
on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken,
absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in
making its findings the Court of Appeals went beyond the issues of the case, or its findings are
contrary to the admissions of both the appellant and the appellee; (7) when the findings are
contrary to the trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondent; (10) when the findings of
fact are premised on the supposed absence of evidence and contradicted by the evidence on
record; and (11) when the Court of Appeals manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different conclusion. 8
If the allegedly erroneous findings of fact by the Court of Appeals amounts to grave abuse of
discretion amounting to lack of or excess of jurisdiction, the proper remedy would indeed be a
petition for certiorari under Rule 65. However, if the allegedly erroneous findings of fact
constitute only a mistake of judgment, the proper remedy is a petition for review
on certiorari under Rule 45. Since the petition filed in the case at bar is one under Rule 65, we
would be constrained to dismiss the same if we find a mere error of judgment.
Credibility of Architect Noel Cano
The contract between petitioner and respondent provides:
4.01 Progress Billing will commence 15 days after the Contractor
receive[s] the notice to proceed from the Owner.
4.02 Balance will be collected every 2-weeks, based on the
accomplishment of work value submitted by the contractor
to the Owner and to be certified for payment by the
architect assigned on site.
4.03 Final and full payment of the consideration herein abovementioned shall be made by the owner to the contractor
upon fulfilling the condition set forth and approved by the
architect assigned on site. 9
Pursuant thereto, the architect on site, Architect John Noel Cano, certified for payment four
progress billings, which petitioner Ong paid on the following dates 10 :
Partial

Part of Project Date of Date of Full

Progress Date Sent Covered Amount Accomplished Partial Payment

Billing Period (contract Payment
price:

1st 28
January 19-28 6
1995 January P35,950.00 17.975 % 1995
2nd 15
1995 to
February

February 29

January 22
15 P69,300.00 34.650

3rd 8
March 16
February 24
1995 to 3 March P41,500.00 20.750 % 1995
4th 31
1995 P30,950.00 15.475 %

February

March 4-18

February 4

March 6

March
% 1995 1995

April

1995
March

Total P181,700.00 88.850 %

As earlier stated, this controversy arose with respect to the fourth partial billing. Petitioner Ong
claims that the fourth partial billing is not yet due and demandable, since only 60% of the work
has been accomplished. Petitioner Ong claims that Architect Cano's certification as to the
accomplishment of the work cannot be trusted, since Architect Cano was allegedly biased in
favor of respondent Bogalbal. 11
Petitioner Ong claims that "Arch. Cano was an associate of [respondent Bogalbal] in his
construction business, and because of this, he was partial, biased and unprofessional about his
work." 12 Petitioner Ong adds that work was conducted on the job site seven days a week, but
Architect Cano was present only twice or thrice a week, and therefore "[h]e was in no position
to determine whether or not [respondent Bogalbal] performed as claimed." 13
The afore-quoted Article 4.02 of the Owner-Contractor Agreement between petitioner Ong and
respondent Bogalbal, which provides that the "[b]alance shall be collected every 2-weeks,
based on the accomplishment of work value submitted by the contractor to the Owner and to be
certified for payment by the architect on site," 14 makes the second paragraph of the following
provision of the Civil Code applicable:
Art. 1730. If it is agreed that the work shall be accomplished to the
satisfaction of the proprietor, it is understood that in case of
disagreement the question shall be subject to expert
judgment. ECaTDc
If the work is subject to the approval of a third person, his decision
shall be final, except in case of fraud or manifest error.
The existence of fraud or manifest error, being an exception to the finality of the decision of a
third person under Article 1730, should be adequately proven by petitioner Ong.
Petitioner Ong, however, miserably failed to prove the same. Petitioner Ong's allegation that
"the certifications may have been purposely doctored or engineered in such a fashion as to
unduly favor [respondent Bogalbal], in the desire of Architect Cano to return a favor or repay
a debt of gratitude" 15 is a bare speculation that cannot be given any credence. It is utterly
inappropriate for petitioner Ong to paint Architect Cano as "biased, partial, and unprofessional"
just because Architect Cano's architectural firm, Balce-Sindac & Associates, was allegedly
recommended to her by respondent Bogalbal. The fact remains that it was petitioner Ong and

272
Balce-Sindac & Associates which had privity of contract with each other, petitioner Ong
having contracted with the latter firm for its project architectural design and plan. Balce-Sindac
& Associates, in turn, assigned Architect Cano as supervising architect on site. The alleged
recommendation by respondent Bogalbal is enormously inadequate to prove bad faith on the
part of Architect Cano. Good faith is always presumed. 16 It is the one who alleges bad faith
who has the burden to prove the same. 17
Neither was petitioner able to prove manifest error on the part of Architect Cano. The presence
of Architect Cano only twice or thrice a week was not adequately proven to have made him
incompetent to determine the completion of the project. Determination of project completion
requires inspection of a product rather than a process. Besides, whereas Architect Cano
provided a detailed progress report that substantiate respondent Bogalbal's allegation that
88.45% of the project had been accomplished, 18 petitioner Ong was not able to demonstrate
her repeated claim that only 60% of the project has been completed. 19 Petitioner Ong alleged
that the same was admitted by respondent Bogalbal in the pleadings filed with this
Court, 20 but we were unable to find any such admission. It seems that petitioner Ong was
referring to the Kenzo flooring, 60% of which respondent claims to have finished. 21
Time and again, this Court has ruled that the findings of the lower court respecting the
credibility of witnesses are accorded great weight and respect since it had the opportunity to
observe the demeanor of the witnesses as they testified before the court. Unless substantial
facts and circumstances have been overlooked or misunderstood by the latter which, if
considered, would materially affect the result of the case, this Court will undauntedly sustain
the findings of the lower court. 22 In the case at bar, the credibility of Architect Cano was
upheld by the MeTC, which had the opportunity to observe Architect Cano's demeanor as he
testified. Neither the Court of Appeals, nor the RTC, questioned such credibility, the RTC
having ruled in favor of petitioner Ong pursuant to an interpretation of law. 23
Alleged
novation
Contractor Agreement

of

the

Owner-

Petitioner Ong also claims, as a defense against payment of the fourth progress billing, that
"the only reason why the fourth billing was not paid was because [respondent Bogalbal]
himself agreed and committed to collect the fourth progress billing after he completed the
Kenzo flooring." 24Petitioner Ong claims that, because of this promise, her obligation to pay
respondent Bogalbal has not yet become due and demandable. 25
The Court of Appeals rejected this argument, ruling that respondent Bogalbal's stoppage of
work on the project prior to its completion cannot justify petitioner Ong's refusal to pay the
fourth progress billing and the value of respondent Bogalbal's accomplished work on the
Kenzo flooring. On the contrary, according to the Court of Appeals, respondent Bogalbal was
justified to refuse to continue the project due to petitioner Ong's failure to pay the fourth
progress billing. 26 According to the Court of Appeals:
Records reveal that [herein respondent Bogalbal] submitted his
fourth (4th) progress billing for work accomplished on [herein
petitioner Ong's] boutique for the period covering March 4 to 18,
1995 (Exh. "B", ibid.). Said billing was in accordance with the
parties' agreement that it will be collected every two (2) weeks, based
on the accomplishment of work value submitted by the contractor to
the owner and certified for payment by the architect assigned on site
(Article 4.02, Owner-contractor Agreement; Exh. "A-1", p.

101, ibid.). However, [petitioner Ong], immediately upon her receipt

of said billing, refused to pay the same since it was allegedly "in
excess and over the value of the work accomplished during the
period." This was, in fact, part of the statement/findings of the facts of
the lower court's decision (p. 2, RTC Decision; p. 400, ibid.).

[Petitioner Ong], at the very outset, refused to pay the fourth (4th)
billing despite actual work accomplished on her botique which was
certified by the architect on site, John Noel Cano, all in accordance
with the agreement of the parties. [Respondent Bogalbal's]
eventual decision not to proceed anymore with the contract cannot
be used as a reason to justify [petitioner Ong's] refusal to pay her
obligation. This notwithstanding the parties' supposed verbal
agreement that collection of said billing will be held in abeyance
until after [respondent Bogalbal] finished the work on the kenzo
flooring which [petitioner Ong] requested to be changed from its
original plan of vinyl tile flooring. The proven fact is that there was
work accomplished on [petitioner Ong's] boutique equivalent to the
bill being charged her in the fourth (4th) progress billing in
accordance with their contract. While the fourth (4th) billing covered
the accomplished work therefor as certified by the architect assigned
on site, the agreement as to the kenzo flooring is the subject of
another bill covered by the change order. (Emphasis supplied.) 27
The Court of Appeals is in error. If the parties indeed had a verbal agreement that collection of
said billing will be held on abeyance until after respondent Bogalbal finished the work on the
Kenzo flooring, there would have been a novation of petitioner Ong's obligation to pay the
price covered by the fourth billing by changing the principal conditions therefor. This falls
under the first type of novation under Article 1291 of the Civil Code which provides:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.
While the subject of novation is, in the Civil Code, included in Book IV, Title I, Chapter 4,
which refers to extinguishment of obligations, the effect of novation may be partial or total.
There is partial novation when there is only a modification or change in some principal
conditions of the obligation. It is total, when the obligation is completely
extinguished. 28 Also, the term principal conditions in Article 1291 should be construed to
include a change in the period to comply with the obligation. Such a change in the period
would only be a partial novation, since the period merely affects the performance, not the
creation of the obligation. 29
If petitioner Ong's allegation was true, then the fourth partial billing's principal condition
that the "(b)alance shall be collected every 2-weeks, based on the accomplishment of work
value submitted by the contractor to the Owner and to be certified for payment by the architect

273
assigned on site" 30 would have been modified to include another condition, that of the
finishing of the Kenzo flooring by respondent Bogalbal. CHTAIc
As previously discussed, the Court of Appeals did not bother to review the evidence on
petitioner Ong's allegation of respondent Bogalbal's promise to finish the Kenzo flooring
before the fourth progress billing shall be paid. The Court of Appeals instead brushed off the
contention with its explanation that "[respondent Bogalbal's] eventual decision not to proceed
anymore with the contract cannot be used as a reason to justify [petitioner Ong's] refusal to pay
her obligation, . . . notwithstanding the parties' supposed verbal agreement that collection of
said billing will be held on abeyance until after [respondent Bogalbal] finished the work on
the kenzo flooring which [petitioner Ong] requested to be changed from its original plan of
vinyl tile flooring."
Novation is never presumed. Unless it is clearly shown either by express agreement of the
parties or by acts of equivalent import, this defense will never be allowed. 31
The evidence preponderates in favor of respondent Bogalbal that there had been no novation
of the contract. At best, what was proven was a grudging accommodation on the part of
respondent Bogalbal to continue working on the project despite petitioner Ong's failure to pay
the fourth progress billing. Respondent Bogalbal's fourth partial billing demand letters dated
21 April 1995 and 15 May 1995, both of which were served upon petitioner Ong after the
alleged 20 April 1995 meeting, 32 is inconsistent with the theory that the meeting had
produced a novation of the petitioner Ong's obligation to pay the subject billing.
More importantly, assuming that there was indeed a novation of the obligation of petitioner
Ong to pay the fourth billing so as to include as additional condition the completion of the
Kenzo flooring, such new condition would, nevertheless, be deemed fulfilled. This is pursuant
to Article 1186 of the Civil Code, which provides:
Article 1186. The condition shall be deemed fulfilled when the
obligor voluntarily prevents its fulfillment.
According to petitioner Ong herself:
Petitioner sent [respondent Bogalbal] letters demanding that he
should return to the jobsite with his people and comply with his
commitment. When the demand letters were ignored, petitioner was
constrained to hire the services of another contractor, for which she
had to unnecessarily incur expenses in the amount of P78,000.00. But
just the same, the completion of the project was delayed for eighty
two (82) days, which also caused petitioner additional damages. 33

The Civil Code indeed provides that, "(i)f 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 be undone." 34 There is no question, however, that such allegation
constitutes an admission that Petitioner Ong had voluntarily prevented the fulfillment of
the condition which should have given rise to her obligation to pay the amount of the
fourth billing. Respondent Bogalbal would no longer have the opportunity to finish the
Kenzo flooring if another contractor had already finished the same. Such condition
would, hence, be deemed fulfilled under Article 1186 of the Civil Code, and, therefore,
petitioner Ong's obligation to pay the amount of the fourth billing has been converted to a
pure obligation.
Authority
to abandon work

of

respondent

Bogalbal

This Court has held that, even if respondent Bogalbal unjustifiably withdrew from the project,
petitioner Ong's obligation is nevertheless due and demandable because of the third-party
certification by Architect Cano on the completion of the fourth project billing as required by
their contract. This Court has also held that petitioner Ong has not sufficiently proven the
alleged contract novation adding a new condition for her payment of the fourth progress
billing.
The following arguments of petitioner Ong are already inconsequential as to whether she
should be held liable for the fourth billing: (1) that the power to resolve contracts under Article
1191 35 of the Civil Code cannot be invoked extrajudicially in the absence of stipulation to the
contrary; 36(2) that petitioner never rushed respondent Bogalbal to complete the Kenzo
flooring in three days; 37 (3) and that respondent Bogalbal failed to complete the Kenzo
flooring on time because of his incompetence. 38 All these arguments merely amplify
petitioner Ong's primary contention that respondent Bogalbal was not justified in abandoning
the project. 39
The issue of whether or not respondent Bogalbal is justified in abandoning the project is
relevant to the resolution of petitioner Ong's counterclaim against respondent Bogalbal.
The Court rules in favor of petitioner Ong on this score. There is nothing in the record which
would justify respondent Bogalbal's act of abandoning the project.
However, contrary to the finding of the RTC, Article 1724 is inapplicable to this case. Article
1724 provides:
Art. 1724. The contractor who undertakes to build a structure or any
other work for a stipulated price, in conformity with plans and
specifications agreed upon with the landowner, can neither withdraw
from the contract nor demand an increase in the price on account of
the higher cost of labor or materials, save when there has been a
change in the plans and specifications, provided:
(1) Such change has been authorized by the proprietor in writing; and
(2) The additional price to be paid to the contractor has been
determined in writing by both parties.

274
According to the RTC, the exception in Article 1724 (change in plans and specifications
authorized by the proprietor in writing, and the additional price therefor being determined by
the proprietor in writing) applies only with respect to the prohibition to "demand an increase in
the price on account of the higher cost of labor or materials" and not with respect to the
prohibition to "withdraw from the contract." There is therefore no exception allowed by law
insofar as withdrawal from the contract is concerned, and, hence, respondent Bogalbal cannot
claim the change order as a justification for his abandonment of the project. 40
This is incorrect. According to this Court in Arenas v. Court of Appeals, 41 Article 1724
contemplates disputes arising from increased costs of labor and materials. Article 1724 should,
therefore, be read as to prohibit a contractor from perpetrating two acts: (1) withdrawing from
the contract on account of the higher cost of the labor or materials; and (2) demanding an
increase in the price on account of the higher cost of the labor or materials. 42 This focus on
disputes arising from increased cost of labor and materials is even more evident when the
origin of Article 1754 is reviewed. Article 1754 of the 1950 Civil Code is based on Article
1593 43 of the Spanish Civil Code, which states:
Art. 1593. An architect or contractor who, for a lump sum, undertakes
the construction of a building, or any other work to be done in
accordance with a plan agreed upon with the owner of the ground,
may not demand an increase of the price, even if the cost of the
materials or labor has increased; but he may do so when any change
increasing the work is made in the plans, provided the owner has
given his consent thereto. THcaDA

Article 1593 of the Spanish Civil Code did not contain a similar prohibition against
abandonment, and was entirely focused on its apparent objective to providing an exception to
the rule that a contracting party cannot unilaterally amend (by increasing the contract price) the
contract despite supervening circumstances.
Neither party is claiming that the abandonment arose from increased costs of labor and
materials. Petitioner Ong claims that respondent Bogalbal failed to complete the Kenzo
flooring on time because of his incompetence. 44 Respondent Bogalbal claims, on the other
hand, that he abandoned the work because of petitioner Ong's continuing refusal to pay the
fourth progress billing in violation of their contract. 45 Since the dispute has nothing to do with
increased costs of labor and materials, Article 1724 is not applicable. 46
Thus, it is the general rules on contracts which are applicable. Expounding on the argument by
respondent Bogalbal, the Court of Appeals held:
It should be noted that the power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him (par. 1, Art. 1191, Civil Code).
[Herein petitioner Ong's] breach of contract was her failure to pay
what she was legally bound to pay under her contract with
[respondent Bogalbal]. Payment, being the very consideration of the
contract, is certainly not a mere casual or slight breach but a very
substantial and fundamental breach as to defeat the object of the
parties making the agreement, due to which rescission of the contract

may be had (Ang vs. Court of Appeals, 170 SCRA 286, 296).
[Petitioner Ong's] contention that [respondent Bogalbal] should have
had more capital to absorb a little delay in her payment is not quite
tenable (TSN, June 21 1996; p. 7). 47
This Court, however, has held in Tan v. Court of Appeals, 48 that:
[T]he power to rescind obligations is implied in reciprocal ones in
case one of the obligors should not comply with what is incumbent
upon him . . . . However, it is equally settled that, in the absence of a
stipulation to the contrary, this power must be invoked judicially; it
cannot be exercised solely on a party's own judgment that the other
has committed a breach of the obligation. Where there is nothing in
the contract empowering [a party] to rescind it without resort to the
courts, [such party's] action in unilaterally terminating the contract
. . . is unjustified.
In the case at bar, there is nothing in the Owner-Contractor Agreement empowering either party
to rescind it without resort to the courts. Hence, respondent Bogalbal's unilateral termination
the contract without a court action is unjustified.
Petitioner Ong's Counterclaim
Since respondent Bogalbal is unjustified in abandoning the project, should this Court award
damages to petitioner Ong? Considering that both parties committed a breach of their
respective obligations, Article 1192 of the Civil Code is on all fours:
Art. 1192. In case both parties have committed a breach of the
obligation, the liability of the first infractor shall be equitably
tempered by the courts. If it cannot be determined which of the
parties first violated the contract, the same shall be deemed
extinguished, and each shall bear his own damages.
Under this provision, the second infractor is not liable for damages at all; 49 the damages for
the second breach, which would have been payable by the second infractor to the first infractor,
being compensated instead by the mitigation of the first infractor's liability for damages arising
from his earlier breach. The first infractor, on the other hand, is liable for damages, but the
same shall be equitably tempered by the courts, since the second infractor also derived or
thought he would derive some advantage by his own act or neglect. 50 Article 2215, however,
seems contradictory, as it gives the court the option whether or not to equitably mitigate the
damages, and does not take into account which infractor first committed breach:
Art. 2215. In contracts, quasi-contracts, and quasi-delicts, the
court may equitably mitigate the damages under circumstances other
than the case referred to in the preceding article, 51 as in the
following instances:
(1) That the plaintiff himself has contravened the terms of
the contract; . . .
It is a cardinal principle that a statute must be so construed as to harmonize all apparent
conflicts, and give effect to all its provisions whenever possible. 52

275
Articles 1192 and 2215 of the Civil Code are not irreconcilably conflicting. The plaintiff
referred to in Article 2215(1) should be deemed to be the second infractor, while the one whose
liability for damages may be mitigated is the first infractor. Furthermore, the directions to
equitably temper the liability of the first infractor in Articles 1192 and 2215 are both subject to
the discretion of the court, despite the word "shall" in Article 1192, in the sense that it is for the
courts to decide what is equitable under the circumstances.
In the case at bar, both respondent Bogalbal and petitioner Ong claim that it was the other
party who first committed a breach of contractual obligations. 53 Considering this Court's
finding that there had been no contract novation requiring respondent Bogalbal to finish the
Kenzo flooring before the fourth progress billing shall be paid, it is crystal clear that it was
petitioner Ong who first violated the contract. As such, it is petitioner Ong who is liable to pay
damages, which may, however, be reduced, depending on what is equitable under the
circumstances. On the other hand, since respondent Bogalbal is the second infractor, he is not
liable for damages in petitioner Ong's counterclaim. SDHAEC
Care must, however, be judiciously taken when applying Article 1192 of the Civil Code to
contracts such as this where there has been partial performance on the part of either or both
reciprocal obligors. Article 1192, in making the first infractor liable for mitigated damages and
in exempting the second infractor from liability for damages, presupposes that the contracting
parties are on equal footing with respect to their reciprocal principal obligations. Actual
damages representing deficiencies in the performance of the principal obligation should be
taken out of the equation. 54
In the case at bar, the partial performance of respondent Bogalbal (88.85% 55 of the original
contract and 60% of the Kenzo flooring) is more than the partial payment of petitioner Ong
(73.375% 56 of the original contract and 0% of the Kenzo flooring).
For reference, the MeTC Decision, which was reinstated by the Court of Appeals, awarded the
following to respondent Bogalbal:
Value of accomplished work
for the period 4 to 18 March 1995:

on

the

Value of accomplished work on the

(60%
of
the
agreed
fee
of
P
paid under the third progress billing)

original

contract P30,950.00

Kenzo flooring P13,000.00

25,000,
minus
P2,000

Moral damages P20,000.00

Exemplary damages P25,000.00
TOTAL P88,950.00
Petitioner Ong should first be obliged to pay the value of the accomplished work (P30,950.00
and P13,000.00), before the damage scheme under Article 1192 of the Civil Code is applied.
Therefore, this Court would have been limited to determining how much of the moral and
exemplary damages, for which petitioner Ong is liable, may be mitigated by the amount of
damages caused by respondent Bogalbal, as provided under Article 1192.
As earlier discussed, however, this mitigation is subject to the discretion of the court,
depending on what is equitable under the circumstances. It would have been within this Court's
power to mitigate the moral and exemplary damages for which petitioner Ong is liable if she

had only filed an ordinary appeal under Rule 45 of the Rules of Court. It would be an
exaggeration to consider such non-mitigation by the Court of Appeals as grave abuse of
discretion leading to lack of or excess of jurisdiction, which would have been reviewable by
this Court in a certiorari proceeding under Rule 65. 57 Grave abuse of discretion implies a
capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or, when
the power is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive duty
enjoined or to act at all in contemplation of law. 58 Mere abuse of discretion is not enough
it must be grave. 59
All of the foregoing shows that while there had been some errors of law on the part of the
Court of Appeals, the Petition would still fail even if it were a Petition for Review under Rule
45. With more reason is this Court constrained to dismiss a Petition for Certiorari under Rule
65, which requires not a mere error in judgment, but a grave abuse of discretion amounting to
lack of or excess of jurisdiction.
Finally, this Court notices that the prayer in the instant Petition for Certiorari only seeks to
nullify the Resolution of the Court of Appeals on petitioner Ong's Motion for Reconsideration,
without praying for the nullification of the Decision itself sought to be reconsidered. The
reason seems to be the fact that petitioner Ong, through counsel, received the Decision more
than sixty days prior to the filing of the Petition. A Petition seeking to nullify such Decision
was, thus, perceived to be violative of Section 4, Rule 65 of the 1997 Rules of Civil Procedure,
which originallyprovides:
SEC. 4. Where petition filed. The petition may be filed not later
than sixty (60) days from notice of the judgment, order or resolution
sought to be assailed in the Supreme Court or, if it relates to the acts
or omissions of a lower court or of a corporation, board, officer or
person, in the Regional Trial Court exercising jurisdiction over the
territorial area as defined by the Supreme Court. It may also be filed
in the Court of Appeals whether or not the same is in aid of its
appellate jurisdiction, . . . .

Section 4, Rule 65 was, however, amended on 1 September 2000, several months before the
filing of this Petition, to insert the following provision:
In case a motion for reconsideration or new trial is timely filed,
whether such motion is required or not, the sixty (60) day period shall
be counted from notice of the denial of said motion.
This insertion gives petitioner Ong a fresh 60-day period to assail the Decision via a Petition
for Certiorari, which is what this Petition really seeks and which is how this Court has treated
the same.
WHEREFORE, the Decision of the Court of Appeals reinstating the Decision of the
Metropolitan Trial Court holding petitioner Victoria Ong liable for damages is affirmed. The
instant Petition for Certiorari is hereby DISMISSED for lack of merit. Costs against
petitioner. aATHIE
SO ORDERED.

276
Panganiban, C.J., Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ., concur.
||| (Ong v. Bogalbal, G.R. No. 149140, [September 12, 2006], 533 PHIL 139-169)

277

FIRST DIVISION
[G.R. No. L-23616. September 30, 1976.]
RODRIGO ENRIQUEZ, AUREA SORIANO DE DIZON and
URBANO DIZON, JR., plaintiffs-appellants, vs. SOCORRO A.
RAMOS,defendant-appellee.

DECISION

"If for any reason the mortgage cannot be registered, then the whole
obligation shall immediately become due and demandable.
"In the event that the Mortgagor should fail to pay the amount
secured by this mortgage or any part thereof in accordance with the
terms and conditions herein set forth, or should she fail to perform
any of the conditions stipulated herein, the Mortgagee shall have the
right . . . to foreclose this mortgage extrajudicially, and to that end the
Mortgage is hereby appointed the attorney-in-fact of the Mortgagor,
with full power of substitution, to enter upon and take possession of
the mortgaged property without the order of any court or any
authority other than that herein granted, and to sell and dispose of the
same to the highest bidder at public auction after the publication of
notice, in accordance with the provisions of Act No. 3135 of the
Philippine Legislature, as amended."
According to the plaintiffs-appellants in L-18077, the defendant-appellee violated the
terms of their agreement in the following respects:

CASTRO, C.J p:
This case is a direct appeal from an order of the Court of First Instance of Rizal (Quezon City)
dated December 3, 1963, reversing its decision dated October 8, 1963 in favor of the plaintiffsappellants Rodrigo Enriquez, Aurea Soriano de Dizon and Urbano Dizon, Jr., in civil case Q7229, an action for foreclosure of real estate mortgage. LLpr
This is the second time that the herein party litigants have come to this Court on basically the
same causes of action affecting the same deed of sale with real estate mortgage covenanted
between them.
In Rodrigo Enriquez, et al. vs. Socorro A. Ramos (G.R. No. L-18077, September 29, 1962), the
plaintiffs-appellants averred that on November 24, 1958 they sold to the defendant-appellee
Socorro A. Ramos 20 subdivision lots in Quezon City for the sum of P235,056 of which only
P35,056 had been paid. The balance of P200,000 was to be liquidated within two years from
the date of the execution of the deed of sale, with interest at six percent for the first year and
twelve percent thereafter until fully paid. To secure the payment of that balance, the defendantappellee executed in the same document a deed of mortgage in favor of the vendors on several
parcels of land variously situated in Quezon City, Pampanga and Bulacan. The deed of
mortgage embodies certain stipulations which the plaintiffs-appellants invoked, thus:
"During the term and existence of this mortgage, the Mortgagor shall
duly pay and discharge, at her expense, and on their maturity, all
lawful taxes or assessments levied or assessed upon the mortgaged
property; in default thereof the Mortgagee may pay and discharge
such taxes or assessments and insure the security of the property, and
any and all sums so paid by the Mortgagee shall be repayable on
demand with interest at 6% per annum and be a lien on the property
herein mortgaged.
"xxx xxx xxx

1. Inspite of repeated demands, the defendant-appellee refused to pay

the sum of P200,000 within the stipulated period;
2. The mortgage on the Bulacan property was never registered; and
3. The realty tax for 1959 on the lots mortgaged were not paid by the
defendant-appellee.
This Court upheld the findings and conclusions of the trial court which ruled that the actual
price of the lots sold to the defendant-appellee was only P185,056 instead of P235,056, and
that only if and when the roads shall have been constructed pursuant to the ordinances of
Quezon City "may the period of two years specified in the contract begin to run." These
conclusions were arrived at on account of a private deed entitled "Explanation" in which the
plaintiffs-appellants certified that of the consideration of P235,056 appearing in the questioned
deed of sale with mortgage, P50,000 "represent contribution of Mrs. Socorro A. Ramos for the
construction of roads, which we will undertake in accordance with the provisions of the City
Ordinances of Quezon City." cdphil
With reference to the non-payment of the 1959 realty tax and the non-registration of the
mortgaged Bulacan estate, this Court held that "aside from being minor matters, [they] appear
sufficiently explained in the brief of defendant-appellee." In her brief in L-18077, the
defendant-appellee had stated that she applied her backpay certificates to the payment of her
realty and income taxes but as she had not yet received said certificates the payment of the
taxes was delayed. On the other hand, the registration of the Bulacan property could not be
undertaken because it was then still registered in both her name and in the name of co-owner.
The defendant-appellee promised that she would pay the taxes in due time and undertake the
needed segregation and the annotation of the lien of the mortgage on the Bulacan property as
soon as the vendors proceeded with the construction of the roads on the purchased lots.
Now, returning to the case at bar, the plaintiffs-appellants charged on May 4, 1963 before the
Court of First Instance of Rizal (Quezon City) that the defendant-appellee has not yet paid the

278
sum of P200,000 despite the fact that the roads on the questioned lots were completed on May
9, 1960; that the mortgage on the Bulacan property has not yet been registered; and that the
realty taxes corresponding to the years 1959 to 1963 on the mortgaged lots had not been paid.
The defendant-appellee admits that she has not paid the realty taxes and has not registered the
mortgage on the Bulacan property, but argues that in L-18077 these matters were considered
minor ones and also sufficiently explained by her, invoking the rule of res judicata. The
defendant-appellee likewise does not dispute her non-payment of the sum of P200,000; she
contends, however, that the roads have not yet been completed in accordance with Ordinance
No. 2969 of Quezon City, the pertinent portions of which state:
"SEC. 10. The following subdivision improvements shall be
constructed or provided in accordance with the plans and/or
specifications as adopted by the Administrative Agency.
"(a) Street pavements. All streets shall be paved. Water-bound
macadam pavements on a suitable base shall be considered the
minimum standard or pavement that shall be used.

a reasonable time after the execution of a contract may be considered minor matters,
particularly where, in addition, the failure to do so was sufficiently explained, and the
mortgagor promised this Court that positive remedial action would be taken. The opinion of
this Court cannot however be taken as a license for the continued non-fulfillment by the
defendant-appellee of her contractual obligations. It was far from the intention of this Court to
allow or enable the litigants to utilize its decision as an instrument whereby solemnly
covenanted obligations could be avoided. In such situation, the continued violation by the
defendant-appellee of the express terms of her contract can no longer be countenanced. As it is,
not only has the defendant-appellee failed to perform the mentioned obligations, by she has
likewise entirely failed to deliver to the plaintiffs-appellants the sum of P50,000 which she
promised to contribute to the latter for the construction of the roads on her lots in accordance
with the ordinances of Quezon City. The deed of sale with mortgage makes it the express duty
of the defendant-appellee to pay the realty taxes on the mortgaged lots, to register the
mortgaged estates, and to contribute P50,000 for the construction of roads on the purchased
lots. By its express terms, if the defendant-appellee failed to fulfill these conditions her entire
obligation was to become immediately due and demandable and the mortgagee would have the
option to foreclose the mortgage. These terms of the contract have the force of law between the
parties thereto. 1

"(b) Curbs and gutters. All streets shall be provided with concrete
curbs and gutters.
"(c) Filling. The subdivision shall be filled up to the grade as may
be required by the Administrative Agency.
"(d) Drainage facilities. The subdivision shall be provided with
adequate drainage facilities as approved by the Administrative
Agency.
"(e) Tree Plantings. The subdivider shall plant and grow shade
trees, if none are yet existing for the purpose of this requirement, on
the side or sides of every lot adjacent to streets about three (3) meters
from the street line, with a maximum spacing of ten (10) meters.
"(f) Water facilities. The subdivider shall provide the subdivision
with adequate water facilities."
According to the defendant-appellee, the roads in question cannot be considered
completed because the plaintiffs-appellants have not yet planted trees nor put up water
facilities as required by the foregoing ordinance. Neither may said roads be considered
completed in the legal sense until their construction has been accepted by the Capital City
Planning Commission which was designated to implement Ordinance 2969. Moreover,
even if the roads in question have already been constructed in accordance with the
mentioned ordinance, still her obligation to pay the sum of P200,000 has not yet arisen as
no previous notice and demand for payment has been made on her.
We find the posture of the defendant-appellee to be untenable.
1. It is true that in L-18077 this Court held that the non-payment of the 1959 realty tax as well
as the non-registration of the mortgaged Bulacan estate by the defendant-appellee were minor
matters aside from being sufficiently explained by her. That pronouncement, however, should
be taken in the light of the environmental milieu under which L-18077 was decided. The nonpayment of the realty tax for a year and the non-registration of the mortgaged property, within

2. On the issue of whether the construction of the questioned roads has already been completed
in accordance with the ordinances of Quezon City, the evidence adduced below sufficiently
supports the plaintiffs-appellants' position.
At the trial below, the plaintiffs-appellants adduced the testimonies of two witnesses, Oscar
Delfin and Atty. Gelacio L. Dimaano (plaintiffs-appellants' counsel). Delfin testified that he
was a construction superintendent of Wendel Construction Co., Inc. which was contracted to
open up roads on the lots in question; that his outfit undertook the building of the said roads in
accordance with the ordinances of Quezon City, having laid out "type B gutters, concrete
curbs, pavement made of Vituminous macadam asphalt;" that construction commenced on
November 2, 1959 and was completed on May 9, 1960 for the sum of P100,000 which has
already been paid by the plaintiffs-appellants; that while the construction was in progress, the
defendant-appellee visited the worksite two or three times and inspected the work being done;
and that the certificate of turnover of the roads was given by the president of his firm to the
plaintiffs-appellants. Dimaano, in the main, corroborated Delfin's testimony, and added that
under the mentioned deed of sale with mortgage, the attorney's fees in case of litigation would
be 10% of the amount due. LLjur
At the trial below, the defendant-appellee, pursuant to a partial stipulation of facts, presented a
letter dated May 9, 1963 of the Acting City Engineer of Quezon City which states the
following:
This is in reply to your letter dated May 3, 1969 requesting inspection
of the Mindanao Avenue Subdivision, Quezon City in which you have
purchased thirty-one (31) lots.
"In that connection, I wish to advise you that an ocular inspection has
already been made by a representative of this Office and his report
points out that said subdivision is already provided with curbs and
gutters together with drainage facilities. The roads have already been

279
asphalted but no final test, verification and approval have been
undertaken by this Office.
"It was revealed also that water and lighting system have not yet been
installed thereat."
In connection with the aforequoted letter, the parties stipulated that the "test, verification and
approval mentioned in Exhibit 1-A is required only when the roads of the subdivision and
easements are to be donated to the City Government, and there is no law as to when the roads
of any subdivision are to be donated (to the) City Government." This stipulation was arrived at
after the counsel for the defendant-appellee had conferred with a representative of the Quezon
City Engineer's Office.
On the basis of the foregoing items of evidence, not contradicted by the defendant-appellee, the
completion of the roads in question must be regarded as having been sufficiently established.
3. The defendant-appellee, however, argues that the said roads "are not yet completed in the
technical, legal sense. This is because the final say or acceptance by the Administrative Agency
was not yet secured." This posture is inordinately technical and also is devoid of merit. There is
nothing at all in Ordinance 2969 of Quezon City which makes the acceptance by the said
agency a condition precedent before a street in Quezon City may be considered constructed in
accordance with Ordinance 2969.
4. The planting of trees and the installation of water facilities required by section 10 of
Ordinance 2969, supra, which the defendant-appellee says must first be made before the roads
in question may be considered legally completed are matters which could not have been
conceivably within the contemplation of the parties. In the first place, these activities involve a
substantial outlay of funds which, by its very nature, should have been unavoidably referred to
in the mentioned "Explanation." In the second place, the said requirements are imposed on
the subdivision owner, and it is obvious from this Court's decision in L-18077 that it was the
defendant-appellee who intended to develop the purchased lots into a subdivision. Thus, this
Court said in L-18077:
"We find no error in the conclusion reached by the court a quo for
indeed that is the condition to be expected by a person who desires to
purchase a big parcel of land for purposes of subdivision. In a
subdivision the main improvement to be undertaken before it could be
sold to the public is feeder roads as otherwise it would be inaccessible
and valueless and would offer no attraction to the buying public. And
so it is correct to presume as the court a quo did, that when the sale in
question was being negotiated, the construction of roads in the
prospective subdivision must have been uppermost in the mind of
defendant for her purpose in purchasing the property was to develop
it into a subdivision. . . ."
In the third place, no evidence has been adduced which would show that the planting of
trees and the putting up of water facilities were within the contemplation of the parties
when they were negotiating for the purchase of the lots in question. And in the fourth
place, there is nothing in Ordinance 2969 which would indicate that a street may be
considered completed only when trees are planted on both sides of the street and water
facilities are built on the subdivision. These activities are definitely segregable from the

laying out and construction of roads and cannot be deemed included within the scope of
the latter. llcd
5. As to the alleged lack of previous notice of completion and demand for payment, the filing
of the case below is sufficient notice to the defendant-appellee of the completion of the roads
in question and of the plaintiffs-appellants' desire to be paid the purchase price of the
questioned lots. The effect of such demand retroacts to the day of the constitution of the
defendant-appellee's obligation. Thus, Article 1187 provides that "The effects of a conditional
obligation to give, once the condition has been fulfilled, shall retroact to the day of the
constitution of the obligation. . . ." The contracted obligation of the defendant-appellee under
the facts of the case at bar was to pay the balance of P200,000 within two years from the date
the roads in question are completed. LLphil
Accordingly, the order of the court a quo dated December 3, 1963 is set aside, and judgment is
hereby rendered ordering the defendant-appellee to pay to the plaintiffs-appellants, within
ninety (90) days from the finality of this decision, the following:
1. The sum of P200,000 representing the unpaid balance of her
contractual obligation;
2. Interest thereon, as stipulated in the deed of sale with mortgage, at
the rate of 6% per annum from May 9, 1960 up to May 9,
1961, and, thereafter, 12% interest per annum until the
principal amount shall have been fully paid;
3. An amount equivalent to 5% of the mortgage indebtedness of
attorney's fees; and
4. The costs.
Should the defendant-appellee fail to pay the aforementioned mortgage indebtedness within the
period granted in this decision, the properties mortgaged shall be sold at public auction and the
proceeds thereof shall be applied to the satisfaction of this judgment and the costs of the
auction sale. Costs against the defendant-appellee. The motion of Guillermo N. Pablo "to join
defendant-appellee as co-party" is denied. cdasia
Makasiar, Muoz Palma and Martin, JJ ., concur.
Teehankee, J ., concurs in the result.
||| (Enriquez v. Ramos, G.R. No. L-23616, [September 30, 1976], 165 PHIL 119-129)

280

THIRD DIVISION
[G.R. No. 80479. July 28, 1989.]
AGUSTINA LIQUETTE TAN, petitioner, vs. COURT OF
APPEALS AND SPS. MARIANO SINGSON and VISITACION
SINGSON,respondents.

a third person, the obligor's part of the contract is complied with, if he does all that is in his
power and it then becomes incumbent upon the other contracting party to comply with the
terms of the contract.
7.ID.; ID.; DELAY IS INCURRED BY A PARTY BY A DEMAND MADE BY THE OTHER
TO FULFILL OBLIGATION. Where the sellers are ready, willing and able to comply with
their obligation to deliver title to the property subject of the sale and had already demanded
that petitioner pay the full amount of the purchase price, the petitioner must be considered as
having incurred in delay.
8.ID.; ID.; BREACH OF CONTRACT; REMEDY AVAILABLE TO AGGRIEVED PARTY.
The breach of a contract gives the aggrieved party under the law and even under general
principles of fairness, the right to rescind the contract or to ask for specific performance.

Noe Villanueva for petitioner.

Jose Beltran for private respondents.

SYLLABUS
1.CIVIL LAW; OBLIGATIONS AND CONTRACTS; RESCISSION; POWER TO RESCIND;
IMPLIED IN RECIPROCAL OBLIGATIONS. That the power to rescind obligations is
implied in reciprocal ones in case one of the obligors should not comply with what is
incumbent upon him is clear from a reading of the Civil Code provisions.

9.ID.; ID.; VOIDABLE CONTRACT; CONSENT MUST BE OBTAINED THROUGH

INSIDIOUS WORDS OR MACHINATIONS. The contract of sale is not voidable where no
evidence was shown that through insidious words or machinations under Article 1338 of the
Civil Code, the seller had induced the buyer to enter into the contract.
10.ID.; ID.; COURT, WITH DISCRETIONARY POWER TO ALLOW A PERIOD WITHIN
WHICH AN OBLIGATION MAY BE PERFORMED. The Court is given a discretionary
power to allow a period within which a person in default may be permitted to perform his
obligation.

2.ID.; ID.; ID.; HOW EFFECTED. In the absence of a stipulation to the contrary, this power
must be invoked judicially; it cannot be exercised solely on a party's own judgment that the
other has committed a breach of the obligation.
3.ID.; ID.; ID.; ALLOWED ONLY IN CASE OF SUBSTANTIAL BREACH. Rescission
will not be permitted for a slight or casual breach of the contract but only for such breaches as
are so substantial and fundamental as to defeat the object of the parties in making the
agreement.
4.ID.; ID.; ID.; ID.; DETERMINATION OF SUBSTANTIAL BREACH ADDRESSED TO
THE SOUND DISCRETION OF THE COURT. A court, in determining whether rescission
is warranted, must exercise its discretion judiciously considering that the question of whether a
breach of a contract is substantial depends upon the attendant circumstances.
5.ID.; ID.; ID.; SLIGHT DELAY IN THE PERFORMANCE OF OBLIGATION WHERE
TIME IS NOT OF THE ESSENCE, NOT A GROUND. Where time not the essence in the
agreement, a slight delay on the part of the party in the performance of their obligation, is not
sufficient ground for the resolution of the agreement more so when the delay was not totally
attributable to them.
6.ID.; ID.; FAILURE OF A THIRD PERSON TO FULFILL THE CONDITION OF A
CONTRACT WILL NOT PREJUDICE THE RIGHTS OF THE OBLIGOR WHO HAVE
SUBSTANTIALLY COMPLIED WITH HIS OBLIGATION. Where the fulfillment of the
condition (in a conditional obligation) does not depend on the will of the obligor, but on that of

DECISION

CORTES, J p:
The instant petition for review raises the main issue of whether the private respondents
committed a substantial breach of their obligation so as to warrant petitioner's exercise of her
right to rescind the contract of sale under Article 1191 of the Civil Code.
The antecedents of the instant controversy had been summarized in the respondent court's
decision ** as follows:
xxx xxx xxx
The evidence shows that defendants-appellants spouses (private
respondents herein) are the owners of a house and lot located at No.
34 Easter Road, Baguio City, and covered by T.C.T. No. T-13826,
which were then for sale. On June 14, 1984, plaintiff-appellee
together with her agent went to see said spouses at their residence
regarding the property. After appellants had shown appellee around
the house and had conversation about the encumbrances and/or liens

281
on the property, the parties finally agreed on the price of
P1,800,000.00, with appellee to advance earnest money of
P200,000.00 to enable appellants to secure the cancellation of the
mortgage and lien annotated on the title of the property and the
balance of the price to be paid by appellee on June 21, 1984.
Forthwith, appellee handed to appellants a check for P200,000.00 and
thereupon the parties signed a receipt (Exh. A) in the following tenor:
xxx xxx xxx
In turn, appellants handed to appellee a xerox copy of the title and
other papers pertaining to the property as well as an inventory of the
furnishings of the house that are included in the sale. There (3) days
thereafter, i.e., on June 17, 1984, appellee returned to appellants'
house together with her daughter Corazon and one Ines, to ask for a
reduction of the price to P1,750,000.00 and appellants spouses
agreed, and so another receipt entitled "Agreement" (Exh. B) was
signed by the parties as follows:
xxx xxx xxx
The very same day that appellants received the earnest money of
P200,000.00, they started paying their mortgage loan with the
Development Bank of the Philippines (DBP) to clear up the title of
the subject property. On June 14, 1984, appellants paid the bank
P30,000.00 per receipt, Exhibit B; on June 18, 1984 another
P50,000.00 (Exh. 4-c); on June 29, 1984, P20,000.00 (Exh. 4-D); and
on July 5, 1984, P70,909.59 and another P19,886.60 (Exhs. 4-F and
4-G) in full payment of the mortgage loan. On July 9, 1984, the DBP
executed a cancellation of mortgage, which was registered with the
Registry of Property of Baguio City in July 12, 1984. Appellants also
paid all the taxes due and in appears on the property. It likewise
appears that appellants paid in full on July 17, 1984 the cost price of
the 338 square meter lot which was awarded to appellant Visitacion
Singson per her townsite sale application for said property. And the
request of the City Sheriff of Baguio City to lift the notice of levy in
execution dated February 2, 1978 in Civil Case No. Q-10202, Pio S.
Acampado, et al. v. Mariano D. Singson, et al., was duly annotated on
the back of TCT No. T-13826 on August 2, 1979.
On June 25, 1984, appellee accompanied by her daughter Corazon
and her lawyer, Atty. Vicente Quitoriano, went to Baguio City to
inquire about the status of the property and appellants told her that the
Development Bank of the Philippines was taking some time
processing their payments and preparing the deed of cancellation of
the mortgage. On that occasion, the parties agreed on an extension of
two (2) weeks for the execution of the deed of sale. Here, the parties'
respective versions on the matter parted ways. According to
appellants, it was appellee who asked for the extension because she
was not yet ready to pay the balance of P1,550,000.00. On the other
hand, appellee said that it was appellants who asked for it because the

title of the property was not yet cleared. The court below believed
appellee because on said date the Development Bank had not yet
executed the deed of cancellation of mortgage, and no title has yet
been issued for the driveway although already fully paid for.
Immediately, upon execution by the DBP of the deed of cancellation
of mortgage of July 9, 1984, appellants tried to contact appellee
and/or her daughter Corazon to come to Baguio City for the formal
execution of the deed of sale, but to no avail. Instead, appellants
received a telegram from Atty. Quitoriano cancelling the sale and
demanding the return of the P200,000.00 earnest money. Appellants
countered with a letter of their lawyer, Atty. Teofisto Rodes, calling
on appellee to perform her part of the contract because "the title to the
house and lot right now suffers no imperfection or doubt. The levy on
execution has long been lifted, the mortgage indebtedness released,
the portion of the public land used as driveway has long been
awarded and fully paid for the City of Baguio. In short, the title can
now be transferred in your name upon execution of the contract of
sale. . . Your refusal will compel Us to sue for specific performance . .
."
Before appellants could make good their threat, appellee "jumped the
gun", so to speak, upon them by filing in court on August 27, 1984
the case for recovery of sum of money with damages which is now
this case on appeal before us.
In her complaint, appellee alleged that she gave appellants spouses
P200,000.00 upon their assurances that they could transfer to her the
house and lot she was buying from them free from any liens and
encumbrances, including the furnishings thereof and the adjacent lot
being used as driveway, on June 25, 1984, but that day had come and
passed without appellants being able to make good their promise,
because she "discovered to her shock and dismay that she had been
dealt with in bad faith by defendants" as the mortgage on the property
was not released or cancelled and the driveway was still public land
and could not be validly transferred to her as any disposition thereof
would yet require approval by the Secretary of Agriculture and
Natural Resources. Hence, the suit against appellants spouses for
recovery of the P200,000.00 earnest money which is, in essence and
concept, one for rescission with damages.
xxx xxx xxx
[CA Decision, pp. 1-6; Rollo, pp. 53-57.]
The Regional Trial Court which took cognizance of Civil Case No. 3709-V filed by petitioner
Agustina Liquette Tan rendered a decision disposing of the case as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against defendants:

282
(1)Ordering the rescission of the contracts entered into by and
between plaintiff and the defendants, which are embodied in Exhs.
"A" or "1 and "B" or "2";
(2)Ordering the defendants, spouses Mariano Singson and Visitacion
Singson to return to plaintiff the P200,000.00 earnest money given by
her to defendants;
(3)Ordering the defendants to pay plaintiff interest at the rate of 12%
per annum on the P200,000.00 from the filing of the complaint until
fully paid;

breach of their obligation and therefore, there was no legal basis for the judgment ordering
rescission of the contract. Petitioners maintain that since private respondents were not prepared
to convey the title to the subject property on the date agreed upon in view of the various liens
and encumbrances thereon, the former are entitled to rescind the contract pursuant to Article
1191 of the Civil Code which states:
Art. 1191.The power to rescind obligations is implied in reciprocal
ones, in case one of the obligors should not comply with what is
incumbent upon him.

(4)Ordering the defendant (sic) to pay plaintiff moral damages in the

sum of P50,000.00;

The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.

(5)Ordering the defendants to pay plaintiff the amount of P20,000.00

as attorney's fees; and

The court shall decree the rescission claimed, unless there be just
cause authorizing the fixing of a period.

(6)Ordering the defendants to pay the costs of this suit.

This is understood to be without prejudice to the rights of third

persons who have acquired the thing, in accordance with articles 1385
and 1388 and the Mortgage Law.

SO ORDERED. [Rollo. pp. 49-50.]

Private respondents interposed an appeal from said decision alleging that the trial court erred.
I.. . . in considering the consent of appellee to the agreement was
vitiated by fraud.
II.. . . in resolving in favor of the appellee the sole right of rescission.
III.. . . in considering the adjacent lot as part of the sale agreed upon
by the parties.
IV.. . . in deciding the case in favor of the appellee and awarding
damages.
On August 24, 1987, the respondent Court of Appeals promulgated a decision reversing that of
the trial court, the decretal portion of which reads as follows:
WHEREFORE, the appealed decision is REVERSED and SET
ASIDE and a new one is hereby entered ordering immediately upon
the finality of this judgment appellants spouses to execute and sign an
absolute deed of sale conveying to appellee free from any lien or
encumbrance the house and lot covered by T.C.T. No. 13826 of the
Registry of Deeds of Baguio City together with the furnishings and
appliances listed in Exhibit C and the adjacent lot used as driveway
covered by the Order of Award, Exhibit E-3 and appellee to pay
appellants spouses the sum of P1,550,000.00 plus interest at the legal
rate from the finality of this judgment until fully paid.
SO ORDERED. [Rollo, p. 61.]
Petitioners filed the instant petition for review on certiorari assailing the conclusion of the
respondent Court of Appeals that the private respondents had not committed a substantial

After a thorough examination of the allegations contained in the parties' pleadings, the Court
finds the instant petition to be devoid of any merit.
That the power to rescind obligations is implied in reciprocal ones in case one of the obligors
should not comply with what is incumbent upon him is clear from a reading of the Civil Code
provisions. However, it is equally settled that, in the absence of a stipulation to the contrary,
this power must be invoked judicially; it cannot be exercised solely on a party's own judgment
that the other has committed a breach of the obligation. Where there is nothing in the contract
empowering the petitioner to rescind it without resort to the courts, the petitioner's action in
unilaterally terminating the contract in this case is unjustified [Philippine Amusement
Enterprises, Inc. v. Natividad, G.R. No. L-12876. September 29, 1967, 21 SCRA 284].
In this case, petitioner received on July 17, 1984 through her daughter Cora Tan Singson, a
telegram from private respondent Visitacion Singson advising the former that the papers for the
sale of the property are ready for final execution. The parties likewise met on June 25, 1984,
the day agreed upon for the full payment of the purchase price, and they agreed on a further
extension of two weeks for the execution of the deed of sale. Despite this agreement, private
respondents suddenly received a telegram from Atty. Quitoriano, counsel for the petitioner,
unilaterally stopping the sale and demanding the return of the earnest money paid by petitioner
[Exhibit "9", Original Records, p. 99].
Petitioner, in rescinding the sale, claims that a substantial breach of the obligation has been
committed by the private respondents as indicated by the following facts proved to be existing
as of the date agreed upon for the consummation of the sale:
1.That no title has yet been issued by the Registry of Deeds of the
City of Baguio in the name of either of the respondents in connection
with the 338-square meter lot where the driveway is located;

283
2.That the private respondents have not paid in full the total
consideration for the said lot to the City of Baguio because they were
able to complete the payment of the purchase price only on July 17,
1984 as found out by the respondent court in its decision (Please see
page 8 of the Court of Appeals' decision, Annex "B");

DBP mortgage was entered by the Register of Deeds and duly noted on the title. Time not
being of the essence in the agreement, a slight delay on the part of the private respondents in
the performance of their obligation, is not sufficient ground for the resolution of the agreement
[Biando and Espanto v. Embestro and Bardaje, 105 Phil. 1164 (1959)], more so when the delay
was not totally attributable to them.

3.That private respondents have not acquired the "previous consent of

the Secretary of Natural Resources" for the said transfer to the
petitioner as required by the award;

As to the notice of levy and execution annotated on TCT No. T-13826, a request to lift the
same had already been filed with the Register of Deeds and duly noted on the title [Original
Records, p. 95]. The fact that said notice had not yet been cancelled by the Register of Deeds
as of June 25, 1984 cannot prejudice the sellers who must be deemed to have substantially
complied with their obligation. The rule in this jurisdiction is that where the fulfillment of the
condition (in a conditional obligation) does not depend on the will of the obligor, but on that of
a third person, the obligor's part of the contract is complied with, if he does all that is in his
power and it then becomes incumbent upon the other contracting party to comply with the
terms of the contract [Article 1182, Civil Code; Smith Bell and Co. v. Sotelo Matti, 44 Phil.
874 (1922)].

4.That the restrictions indicated in the AWARD makes whatever

conveyance to be made by the awardee of the lot within the
prohibited period as null and void and could cause the forfeiture of all
the payments already made as well as the improvements introduced
therein;
5.That there are still liens and encumbrances insofar as TCT No. T13826 consisting of a mortgage with the DBP and a notice of levy and
Writ of Execution. [Rollo, pp. 14-15.]
Alternatively, petitioner seeks annulment of the contract on the ground of fraud since private
respondents had misrepresented to her that they could validly convey title to the property
subject of the contract which however is encumbered with various existing liens.
1.The alleged breach of the obligation by the private respondents, which consists in a mere
delay for a few days in clearing the title to the property, cannot be considered substantial
enough to warrant rescission of the contract.
A thorough review of the records clearly indicates that private respondents had substantially
complied with their undertaking of clearing the title to the property which has a total land area
of 886 square meters. It must be pointed out that the subject lot consists of private land, with an
area of 548 square meters, covered by TCT No. T-13826 and of a portion of the public land
which has been awarded to the private respondents under Townsite Sales Application No. 7676-A. While TCT No. T-13826 was subject to a mortgage in favor of DBP, private
respondents, upon receipt of the earnest money paid by petitioner, utilized the same to settle its
obligations with DBP thus enabling them to secure a cancellation of the existing mortgage,
which was duly noted in the title to the property [See Original Records, p. 94].
It is a settled principle of law that rescission will not be permitted for a slight or casual breach
of the contract but only for such breaches as are so substantial and fundamental as to defeat the
object of the parties in making the agreement [Universal Food Corporation v. Court of Appeals,
G.R. No. L-29155, May 13, 1970, 33 SCRA 1; Philippine Amusement Enterprises, Inc. v.
Natividad, supra; Roque v. Lapuz, G.R. No. L-32811, March 31, 1980, 96 SCRA 741] . A
court, in determining whether rescission is warranted, must exercise its discretion judiciously
considering that the question of whether a breach of a contract is substantial depends upon the
attendant circumstances [Corpus v. Alikpala, et al., G.R. Nos. L-23720 and L-23707, January
17, 1968, 22 SCRA 104].
In this case, as to the lot covered by TCT No. T-13826, it is true that as of June 25, 1984, the
date set for the execution of the final deed of sale, the mortgage lien in favor of DBP annotated
in the title has not yet been cancelled as it took DBP some time in processing the papers
relative thereto. However, just a few days after, or on July 12, 1984, the cancellation of the

On the other hand, private respondents' interest in the public land used as a driveway can
likewise be conveyed to petitioner although no title has yet been issued in the name of
Visitacion Singson. Such portion of the public land has long been awarded to Singson in 1972
and payment of the purchase price thereof has already been completed as of July 17, 1984. The
fact that the consent of the Secretary of Agriculture and Natural Resources to the sale of the
property to petitioner has not yet been secured cannot be considered a substantial breach of
private respondents' obligation under the contract of sale.
In Juanico and Barredo v. American Land Commercial Co., Inc., et al. [97 Phil. 221 1955)],
this Court had ruled that the prior approval of the Secretary of Agriculture and Natural
Resources is required only in cases of sale and encumbrance of the public land during the
pendency of the application by the purchaser and before his compliance with the requirements
of the law. Thus:
. . . But such approval becomes unnecessary after the purchaser had
complied with all the requirements of the law, even if the patent has
not been actually issued, for in that case the rights of the purchaser
are already deemed vested, the issuance of the patent being a mere
ceremony. Thus, "the execution and delivery of the patent after the
right to it has become complete, are the mere ministerial acts of the
officers charged with that duty" . . . And, as it has been held, "One
who has done everything which is necessary in order to entitle him to
receive a patent for public land has, even before the patent is actually
issued by the land department, a complete acquitable estate in the
land which he can sell and convey, mortgage or lease. A fortiori a
contract to convey land made before the issuance of a patent but after
final proof has been made and the land paid for is not illegal". . .
[At 227: Emphasis supplied.]
Here, since the land in question had already been awarded to private respondents since 1972
and all the requirements of the law for the purchase of public land were subsequently complied

284
with, private respondents, as owners of said property, can properly convey title thereto to
petitioner.
Inasmuch as the private respondents are ready, willing and able to comply with their obligation
to deliver title to the property subject of the sale and had already demanded that petitioner pay
the full amount of the purchase price, the petitioner must be considered as having incurred in
delay. This conclusion is warranted by the clear provision of Article 1169 of the Civil Code
which states:
Art. 1169.Those obliged to deliver or to do something incur in delay
from the time the obligee judicially or extra-judicially demands from
them the fulfillment of their obligation.
xxx xxx xxx
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.
It is basic that the breach of a contract gives the aggrieved party under the law and even under
general principles of fairness, the right to rescind the contract or to ask for specific
performance [Nagarmull v. Binalbagan-Isabela Sugar Co., Inc., G.R. No. L-22470, May 28,
1970, 33 SCRA 46.] Petitioner having failed to comply with her obligation of paying the
balance of the purchase price despite demands by private respondents, private respondents
were clearly entitled to their counterclaim for specific performance, as correctly adjudged by
the respondent court.
2.The claim that petitioner's consent to the contract was vitiated by fraud and, therefore, the
contract in question is voidable is patently unmeritorious. The contract of sale is not voidable
where no evidence was shown that through insidious words or machinations under Article 1338
of the Civil Code, the seller had induced the buyer to enter into the contract (Caram v. Laureta,
Jr., G.R. No. L-28740, February 24, 1981, 103 SCRA 7].
In this case, the evidence on record fully supports the finding of the appellate court that private
respondents did not represent to petitioner that the house and lot they were selling were free
from liens and encumbrances. Rather, they told her that the property was mortgaged to the
DBP which was why they asked her to advance P200,000.00 as earnest money so that they
could settle the mortgage indebtedness and clear up the title [Rollo, p. 60]. The testimony of
petitioner herself shows that she was furnished with xerox copies of the title, at the back of
which was a memorandum of the encumbrances of the property [TSN, September 30, 1985, p.
4]. Further, it is undisputed that at the time petitioner entered into the agreement in question,
she was accompanied by her daughter Corazon and one Maria Lorenzo whom she could have
asked to explain the particulars of the transaction that she could not understand [Rollo, p. 61].
One final point, the decision of the respondent Court of Appeals ordered execution by private
respondents of the absolute deed of sale conveying the subject property to petitioner and
payment by petitioner of the balance of the purchase price immediately upon finality of such
judgment. However, under the third paragraph of Article 1191 of the Civil Code, the Court is
given a discretionary power to allow a period within which a person in default may be
permitted to perform his obligation [Kapisanan Banahaw v. Dejarme and Alvero, 55 Phil. 339
(1930)]. Considering the huge amount of money involved in this sale, the Court, in the exercise

of its sound discretion, hereby fixes a period of ninety (90) days within which petitioner shall
pay the balance of the purchase price amounting to one million and five hundred fifty thousand
pesos (P1,550,000.00) plus interest thereon at the legal rate from finality of this judgment until
fully paid. After such payment has been made, the private respondents are ordered to sign and
execute the necessary absolute deed of sale in favor of petitioner.
WHEREFORE, the assailed decision of the respondent Court of Appeals granting the
counterclaim for specific performance of herein private respondents is hereby AFFIRMED
with the MODIFICATION that the petitioner is given a period of ninety (90) days within
which to pay the sum of one million and five hundred fifty thousand pesos (P1,550,000.00)
representing the balance of the purchase price, with interest thereon at the legal rate from the
finality of this judgment until fully paid. The private respondents are ordered to sign and
execute the absolute deed of sale after the petitioner has completed payment of the purchase
price and the interest thereon.
SO ORDERED.
Fernan, (C.J.), Gutierrez, Jr., Feliciano and Bidin, JJ., concur.
||| (Tan v. Court of Appeals, G.R. No. 80479, [July 28, 1989], 256 PHIL 1048-1060)

285

THIRD DIVISION

SYLLABUS

[G.R. No. 108346. July 11, 2001.]

1. CIVIL LAW; SPECIAL CONTRACTS; SALES; CONSTRUED; CASE AT BAR. In a

contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate
thing, and the buyer to pay therefor a price certain in money or its equivalent. Private
respondents had already performed their obligation through the execution of the Deed of Sale,
which effectively transferred ownership of the property to petitioner through constructive
delivery. Prior physical delivery or possession is not legally required, and the execution of the
Deed of Sale is deemed equivalent to delivery.

Spouses MARIANO Z. VELARDE and AVELINA D.

VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A.
RAYMUNDO and GEORGE RAYMUNDO, respondents.

Marciano J. Cagatan and Mariano R. Logarta for petitioners.

M.B. Tomacruz for private respondents.

SYNOPSIS
Petitioners entered into a deed of sale with assumption of mortgage with private respondents
paying a downpayment of P800,000 and assuming the mortgage amount of P1.8M in favor of
BPI. Petitioners further agreed "to strictly and faithfully comply with all the terms and
conditions appearing in the real estate mortgage signed and executed by the vendor in favor of
BPI . . . as if the same were originally signed and executed by the vendee." As part of the deed,
petitioner Avelina with her husband's consent executed an undertaking that during the
pendency of the application for the assumption of mortgage she agreed to continue paying said
loan in accordance with the mortgage deed and that in the event of violation of any of the terms
and conditions of the deed of real estate mortgage, she agreed that the P800,000 downpayment
shall be forfeited as liquidated damages and the deed of sale with assumption of mortgage shall
be deemed automatically cancelled. When the bank denied the application for assumption of
mortgage, petitioners stopped making payments. Thus, notice of cancellation/rescission was
sent to petitioners for non-performance of their obligation. Aggrieved, petitioners filed a
complaint against private respondent for specific performance, nullity of cancellation, writ of
possession and damages. Both parties admitted that their agreement mandated that petitioners
should pay the purchase price balance of P1.8M to private respondents in case the request to
assume the mortgage would be disapproved. The trial court dismissed the complaint, but on
reconsideration, directed the parties to proceed with the sale. On appeal, the Court of Appeals
upheld the validity of the rescission. Hence, this recourse. ADCIca
The failure of the vendee to pay the balance of the purchase price constitutes a breach on the
performance of a reciprocal obligation, and not a violation of the terms and conditions of the
mortgage contract. This gave rise to the vendor's right to rescind the contract. However, the
automatic rescission and forfeiture of payment clauses in the mortgage contract does not apply.
Considering that the rescission of the contract was based on Article 1191 of the Civil Code,
mutual restitution by the parties is required.

2. ID.; ID.; RESCISSION; OBLIGOR'S FAILURE TO COMPLY WITH EXISTING

OBLIGATION. The right of rescission of a party to an obligation under Article 1191 of the
Civil Code is predicated on a breach of faith by the other party who violates the reciprocity
between them. The breach contemplated in the said provision is the obligor's failure to comply
with an existing obligation. When the obligor cannot comply with what is incumbent upon it,
the obligee may seek rescission and, in the absence of any just cause for the court to determine
the period of compliance, the court shall decree the rescission. IEHScT
3. ID.; ID.; ID.; ID.; CASE AT BAR. In the present case, private respondents validly
exercised their right to rescind the contract, because of the failure of petitioners to comply with
their obligation to pay the balance of the purchase price. Indubitably, the latter violated the
very essence of reciprocity in the contract of sale, a violation that consequently gave rise to
private respondents' right to rescind the same in accordance with law.
4. ID.; ID.; ID.; FORFEITURE OF PAYMENT DOES NOT APPLY WHERE BREACH WAS
NON-PERFORMANCE; MUTUAL RESTITUTION, REQUIRED. As discussed earlier,
the breach committed by petitioners was the nonperformance of a reciprocal obligation, not a
violation of the terms and conditions of the mortgage contract. Therefore, the automatic
rescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead,
Civil Code provisions shall govern and regulate the resolution of this controversy. Considering
that the rescission of the contract is based on Article 1191 of the Civil Code, mutual restitution
is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage
payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by
petitioners should be returned by private respondents, lest the latter unjustly enrich themselves
at the expense of the former.
5. ID.; ID.; ID.; OBLIGATION CREATED. Rescission creates the obligation to return the
object of the contract. It can be carried out only when the one who demands rescission can
return whatever he may be obliged to restore. To rescind is to declare a contract void at its
inception and to put an end to it as though it never was. It is not merely to terminate it and
release the parties from further obligations to each other, but to abrogate it from the beginning
and restore the parties to their relative positions as if no contract has been made. IDAEHT

DECISION

286
PANGANIBAN, J p:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner
prescribed by the contract, entitles the injured party to rescind the obligation. Rescission
abrogates the contract from its inception and requires a mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari 1 questioning the Decision 2 of the Court of
Appeals (CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its
Resolution 3 dated December 29, 1992 denying petitioner's motion for reconsideration. 4
The dispositive portion of the assailed Decision reads:
"WHEREFORE, the Order dated May 15, 1991 is hereby
ANNULLED and SET ASIDE and the Decision dated November 14,
1990 dismissing the [C]omplaint is REINSTATED. The bonds posted
by plaintiffs-appellees and defendants-appellants are hereby
RELEASED." 5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
" . . .. David Raymundo [herein private respondent] is the absolute
and registered owner of a parcel of land, together with the house and
other improvements thereon, located at 1918 Kamias St., Dasmarias
Village, Makati and covered by TCT No. 142177. Defendant George
Raymundo [herein private respondent] is David's father who
negotiated with plaintiffs Avelina and Mariano Velarde [herein
petitioners] for the sale of said property, which was, however, under
lease (Exh. '6', p. 232, Record of Civil Case No. 15952).
"On August 8, 1986, a Deed of Sale with Assumption of Mortgage
(Exh. 'A'; Exh. '1', pp. 11-12, Record) was executed by defendant
David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as
vendee, with the following terms and conditions:
'xxx xxx xxx
'That for and in consideration of the amount of EIGHT
HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, receipt of which in full is hereby
acknowledged by the VENDOR from the VENDEE, to his
entire and complete satisfaction, by these presents the
VENDOR hereby SELLS, CEDES, TRANSFERS,
CONVEYS AND DELIVERS, freely and voluntarily, with
full warranty of a legal and valid title as provided by law,
unto the VENDEE, her heirs, successors and assigns, the
parcel of land mentioned and described above, together
with the house and other improvements thereon.

'That the aforesaid parcel of land, together with the house

and other improvements thereon, were mortgaged by the
VENDOR to the BANK OF THE PHILIPPINE
ISLANDS, Makati, Metro Manila, to secure the payment
of a loan of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine
currency, as evidenced by a Real Estate Mortgage signed
and executed by the VENDOR in favor of the said Bank of
the Philippine Islands, on _________ and which Real
Estate Mortgage was ratified before Notary Public for
Makati, _________, as Doc. No. _____, Page No. ____,
Book No. ____, Series of 1986 of his Notarial Register.
'That as part of the consideration of this sale, the
VENDEE hereby assumes to pay the mortgage obligations
on the property herein sold in the amount of ONE
MILLION EIGHT HUNDRED THOUSAND PESOS
(P1,800,000.00), Philippine currency, in favor of Bank of
the Philippine Islands, in the name of the VENDOR, and
further agrees to strictly and faithfully comply with all the
terms and conditions appearing in the Real Estate
Mortgage signed and executed by the VENDOR in favor
of BPI, including interests and other charges for late
payment levied by the Bank, as if the same were originally
signed and executed by the VENDEE.
'It is further agreed and understood by the parties herein
that the capital gains tax and documentary stamps on the
sale shall be for the account of the VENDOR; whereas, the
registration fees and transfer tax thereon shall be for the
account of the VENDEE.' (Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff
Avelina Velarde, with the consent of her husband, Mariano, executed
an Undertaking (Exh. 'C', pp. 13-14, Record). the pertinent Portions
of which read, as follows:
'xxx xxx xxx
'Whereas, as per Deed of Sale with Assumption of
Mortgage, I paid Mr. David A. Raymundo the sum of
EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, and assume the mortgage obligations
on the property with the Bank of the Philippine Islands in
the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine
currency, in accordance with the terms and conditions of
the Deed of Real Estate Mortgage dated _________,
signed and executed by Mr. David A. Raymundo with the
said Bank, acknowledged before Notary Public for

287
Makati, ______, as Doc. No. ___, Page No. ____, Book
No. _____, Series of 1986 of his Notarial Register.

'WHEREAS, while my application for the assumption of

the mortgage obligations on the property is not yet
approved by the mortgagee Bank, I have agreed to pay the
mortgage obligations on the property with the Bank in the
name of Mr. David A. Raymundo, in accordance with the
terms and conditions of the said Deed of Real Estate
Mortgage, including all interests and other charges for late
payment.
'WHEREAS, this undertaking is being executed in favor
of Mr. David A. Raymundo, for purposes of attesting and
confirming our private understanding concerning the said
mortgage obligations to be assumed. cCEAHT
'NOW, THEREFORE, for and in consideration of the
foregoing premises, and the assumption of the mortgage
obligations of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine
currency, with the Bank of the Philippine islands, I, Mrs.
Avelina D. Velarde, with the consent of my husband,
Mariano Z. Velarde, do hereby bind and obligate myself,
my heirs, successors and assigns, to strictly and faithfully
comply with the following terms and conditions:
'1. That until such time as my assumption of the mortgage
obligations on the property purchased is approved by the
mortgagee bank, the Bank of the Philippine Islands, I shall
continue to pay the said loan in accordance with the terms
and conditions of the Deed of Real Estate Mortgage in the
name of Mr. David A. Raymundo, the original Mortgagor.
'2. That, in the event I violate any of the terms and
conditions of the said Deed of Real Estate Mortgage, I
hereby agree that my downpayment of P800,000.00, plus
all payments made with the Bank of the Philippine Islands
on the mortgage loan, shall be forfeited in favor of Mr.
David A. Raymundo, as and by way of liquidated
damages, without necessity of notice or any judicial
declaration to that effect, and Mr. David A. Raymundo
shall resume total and complete ownership and possession
of the property sold by way of Deed of Sale with
Assumption of Mortgage, and the same shall be deemed
automatically cancelled and be of no further force or
effect, in the same manner as if (the) same had never been
executed or entered into.

'3. That I am executing this Undertaking for purposes of

binding myself, my heirs, successors and assigns, to
strictly and faithfully comply with the terms and
conditions of the mortgage obligations with the Bank of
the Philippine Islands, and the covenants, stipulations and
provisions of this Undertaking.
'That, David A. Raymundo, the vendor of the property
mentioned and identified above, [does] hereby confirm
and agree to the undertakings of the Vendee pertinent to
the assumption of the mortgage obligations by the Vendee
with the Bank of the Philippine Islands. (Exh. 'C', pp. 1314, Record).'
"This undertaking was signed by Avelina and Mariano Velarde and
David Raymundo.
"It appears that the negotiated terms for the payment of the balance of
P1.8 million was from the proceeds of a loan that plaintiffs were to
secure from a bank with defendant's help. Defendants had a standing
approved credit line with the Bank of the Philippine Islands (BPI).
The parties agreed to avail of this, subject to BPI's approval of an
application for assumption of mortgage by plaintiffs. Pending BPI's
approval o[f] the application, plaintiffs were to continue paying the
monthly interests of the loan secured by a real estate mortgage.
"Pursuant to said agreements, plaintiffs paid BPI the monthly interest
on the loan secured by the aforementioned mortgage for three (3)
months as follows: September 19, 1986 at P27,225.00; October 20,
1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. 'E',
'H' & 'J', pp. 15, 17 and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application
for Assumption of Mortgage with BPI was not approved (Exh. 'J', p.
133, Record). This prompted plaintiffs not to make any further
payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs
informing the latter that their non-payment to the mortgage bank
constitute[d] non-performance of their obligation (Exh. '3', p. 220,
Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded,
as follows:
'This is to advise you, therefore, that our client is willing
to pay the balance in cash not later than January 21, 1987
provided: (a) you deliver actual possession of the property
to her not later than January 15, 1987 for her immediate
occupancy; (b) you cause the release of title and mortgage
from the Bank of P.I. and make the title available and free
from any liens and encumbrances; and (c) you execute an

288
absolute deed of sale in her favor free from any liens or
encumbrances not later than January 21, 1987.' (Exhs. 'K',
'4', p. 223, Record).
"On January 8, 1987, defendants sent plaintiffs a notarial notice of
cancellation/rescission of the intended sale of the subject property
allegedly due to the latter's failure to comply with the terms and
conditions of the Deed of Sale with Assumption of Mortgage and the
Undertaking (Exh. '5', pp. 225-226, Record)." ' 6
Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents
for specific performance, nullity of cancellation, writ of possession and damages. This was
docketed as Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case
was tried and heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this
Court), who dismissed the Complaint in a Decision dated November 14, 1990. 7 Thereafter,
petitioners filed a Motion for Reconsideration. 8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge
Salvador S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15,
1991, 9 Judge Abad Santos granted petitioners' Motion for Reconsideration and directed the
parties to proceed with the sale. He instructed petitioners to pay the balance of P1.8 million to
private respondents who, in turn, were ordered to execute a deed of absolute sale and to
surrender possession of the disputed property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeals
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's
earlier Decision dismissing petitioners' Complaint. Upholding the validity of the rescission
made by private respondents, the CA explained its ruling in this wise:
"In the Deed of Sale with Assumption of Mortgage, it was stipulated
that 'as part of the consideration of this sale, the VENDEE (Velarde)'
would assume to pay the mortgage obligation on the subject property
in the amount of P1.8 million in favor of BPI in the name of the
Vendor (Raymundo). Since the price to be paid by the Vendee Velarde
includes the downpayment of P800,000.00 and the balance of P1.8
million, and the balance of P1.8 million cannot be paid in cash,
Vendee Velarde, as part of the consideration of the sale, had to assume
the mortgage obligation on the subject property. In other words, the
assumption of the mortgage obligation is part of the obligation of
Velarde, as vendee, under the contract. Velarde further agreed 'to
strictly and faithfully comply with all the terms and conditions
appearing in the Real Estate Mortgage signed and executed by the
VENDOR in favor of BPI . . . as if the same were originally signed
and executed by the Vendee.' (p. 2, thereof, p. 12, Record). This was
reiterated by Velarde in the document entitled 'Undertaking' wherein
the latter agreed to continue paying said loan in accordance with the
terms and conditions of the Deed of Real Estate Mortgage in the
name of Raymundo. Moreover, it was stipulated that in the event of
violation by Velarde of any terms and conditions of said deed of real

estate mortgage, the downpayment of P800,000.00 plus all payments

made with BPI or the mortgage loan would be forfeited and the
[D]eed of [S]ale with [A]ssumption of [M]ortgage would thereby be
cancelled automatically and of no force and effect (pars. 2 & 3,
thereof, pp. 13-14, Record).
"From these 2 documents, it is therefore clear that part of the
consideration of the sale was the assumption by Velarde of the
mortgage obligation of Raymundo in the amount of P1.8 million. This
would mean that Velarde had to make payments to BPI under the
[D]eed of [R]eal [E]state [M]ortgage in the name of Raymundo. The
application with BPI for the approval of the assumption of mortgage
would mean that, in case of approval, payment of the mortgage
obligation will now be in the name of Velarde. And in the event said
application is disapproved, Velarde had to pay in full. This is alleged
and admitted in Paragraph 5 of the Complaint. Mariano Velarde
likewise admitted this fact during the hearing on September 15, 1997
(p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October
8, 1989). This being the case, the non-payment of the mortgage
obligation would result in a violation of the contract. And, upon
Velarde's failure to pay the agreed price, the[n] Raymundo may
choose either of two (2) actions (1) demand fulfillment of the
contract, or (2) demand its rescission (Article 1191, Civil Code).
"The disapproval by BPI of the application for assumption of
mortgage cannot be used as an excuse for Velarde's non-payment of
the balance of the purchase price. As borne out by the evidence,
Velarde had to pay in full in case of BPI's disapproval of the
application for assumption of mortgage. What Velarde should have
done was to pay the balance of P1.8 million. Instead, Velarde sent
Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which was
strongly given weight by the lower court in reversing the decision
rendered by then Judge Ynares-Santiago. In said letter, Velarde
registered their willingness to pay the balance in cash but enumerated
3 new conditions which, to the mind of this Court, would constitute a
new undertaking or new agreement which is subject to the consent or
approval of Raymundo. These 3 conditions were not among those
previously agreed upon by Velarde and Raymundo. These are mere
offers or, at most, an attempt to novate. But then again, there can be
no novation because there was no agreement of all the parties to the
new contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).

"It was likewise agreed that in case of violation of the mortgage

obligation, the Deed of Sale with Assumption of Mortgage would be
deemed 'automatically cancelled and of no further force and effect, as
if the same had never been executed or entered into.' While it is true
that even if the contract expressly provided for automatic rescission
upon failure to pay the price, the vendee may still pay, he may do so
only for as long as no demand for rescission of the contract has been

289
made upon him either judicially or by a notarial act (Article 1592,
Civil Code). In the case at bar, Raymundo sent Velarde a notarial
notice dated January 8, 1987 of cancellation/rescission of the contract
due to the latter's failure to comply with their obligation. The
rescission was justified in view of Velarde's failure to pay the price
(balance) which is substantial and fundamental as to defeat the object
of the parties in making the agreement. As adverted to above, the
agreement of the parties involved a reciprocal obligation wherein the
obligation of one is a resolutory condition of the obligation of the
other, the non-fulfillment of which entitles the other party to rescind
the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the nonpayment of the mortgage obligation by appellees Velarde would
create a right to demand payment or to rescind the contract, or to
criminal prosecution (Edca Publishing & Distribution Corporation vs.
Santos, 184 SCRA 614). Upon appellees' failure, therefore, to pay the
balance, the contract was properly rescinded (Ruiz vs. IAC, 184
SCRA 720). Consequently, appellees Velarde having violated the
contract, they have lost their right to its enforcement and hence,
cannot avail of the action for specific performance (Voysaw vs.
Interphil Promotions, Inc., 148 SCRA 635)." 10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum, 12 interpose the following assignment of errors:
"I
The Court of Appeals erred in holding that the non-payment of the
mortgage obligation resulted in a breach of the contract.
"II
The Court of Appeals erred in holding that the rescission (resolution)
of the contract by private respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7,
1987 letter gave three 'new conditions' constituting mere offers or an
attempt to novate necessitating a new agreement between the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract

Petitioners aver that their nonpayment of private respondents' mortgage obligation did not
constitute a breach of contract, considering that their request to assume the obligation had been
disapproved by the mortgagee bank. Accordingly, payment of the monthly amortizations
ceased to be their obligation and, instead, it devolved upon private respondents again.
However, petitioners did not merely stop paying the mortgage obligations; they also failed to
pay the balance of the purchase price. As admitted by both parties, their agreement mandated
that petitioners should pay the purchase price balance of P1.8 million to private respondents in
case the request to assume the mortgage would be disapproved. Thus, on December 15, 1986,
when petitioners received notice of the bank's disapproval of their application to assume
respondents' mortgage, they should have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such
payment only upon the fulfillment of certain conditions not originally agreed upon in the
contract of sale. Such conditional offer to pay cannot take the place of actual payment as would
discharge the obligation of a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in money or its equivalent. 13
Private respondents had already performed their obligation through the execution of the Deed
of Sale, which effectively transferred ownership of the property to petitioner through
constructive delivery. Prior physical delivery or possession is not legally required, and the
execution of the Deed of Sale is deemed equivalent to delivery. 14
Petitioners, on the other hand, did not perform their correlative obligation of paying the
contract price in the manner agreed upon. Worse, they wanted private respondents to perform
obligations beyond those stipulated in the contract before fulfilling their own obligation to pay
the full purchase price. IHcTDA
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents was not
justified, inasmuch as the former had signified their willingness to pay the balance of the
purchase price only a little over a month from the time they were notified of the disapproval of
their application for assumption of mortgage. Petitioners also aver that the breach of the
contract was not substantial as would warrant a rescission. They cite several cases 15 in which
this Court declared that rescission of a contract would not be permitted for a slight or casual
breach. Finally, they argue that they have substantially performed their obligation in good faith,
considering that they have already made the initial payment of P800,000 and three (3) monthly
mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment
of the mortgage obligations, as their nonperformance of their reciprocal obligation to pay the
purchase price under the contract of sale. Private respondents' right to rescind the contract finds
basis in Article 1191 of the Civil Code, which explicitly provides as follows:
"ARTICLE 1191. The power to rescind obligations is implied in
reciprocal ones, in case one of the obligors should not comply with
what is incumbent upon him.

290
The injured party may choose between fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission even after he has chosen fulfillment, if the latter
should become impossible."
The right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between
them. 16 The breach contemplated in the said provision is the obligor's failure to comply with
an existing obligation.17 When the obligor cannot comply with what is incumbent upon it, the
obligee may seek rescission and, in the absence of any just cause for the court to determine the
period of compliance, the court shall decree the rescission. 18
In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of the
purchase price. Indubitably, the latter violated the very essence of reciprocity in the contract of
sale, a violation that consequently gave rise to private respondents' right to rescind the same in
accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one
month after it became due; however, this was not equivalent to actual payment as would
constitute a faithful compliance of their reciprocal obligation. Moreover, the offer to pay was
conditioned on the performance by private respondents of additional burdens that had not been
agreed upon in the original contract. Thus, it cannot be said that the breach committed by
petitioners was merely slight or casual as would preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases 19 they cited, because the factual circumstances
in those cases are not analogous to those in the present one. In Song Fo there was, on the part
of the buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the
buyer's offer to pay was unconditional and was accepted by the seller. In Zepeda, the breach
involved a mere one-week delay in paying the balance of P1,000, which was actually paid.
In Tan, the alleged breach was private respondent's delay of only a few days, which was for the
purpose of clearing the title to the property; there was no reference whatsoever to the
nonpayment of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or
an irregularity; such breach would not normally defeat the intention of the parties to the
contract. Here, petitioners not only failed to pay the P1.8 million balance, but they also
imposed upon private respondents new obligations as preconditions to the performance of their
own obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation,
which was legally due and demandable under the contract of sale. Hence, private respondents
were left with the legal option of seeking rescission to protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a
reciprocal obligation, not a violation of the terms and conditions of the mortgage contract.
Therefore, the automatic rescission and forfeiture of payment clauses stipulated in the contract
does not apply. Instead, Civil Code provisions shall govern and regulate the resolution of this
controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code,
mutual restitution is required to bring back the parties to their original situation prior to the
inception of the contract. Accordingly, the initial payment of P800,000 and the corresponding
mortgage payments in the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00)
advanced by petitioners should be returned by private respondents, lest the latter unjustly
enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only
when the one who demands rescission can return whatever he may be obliged to restore. 20 To
rescind is to declare a contract void at its inception and to put an end to it as though it never
was. It is not merely to terminate it and release the parties from further obligations to each
other, but to abrogate it. from the beginning and restore the parties to their relative positions as
if no contract has been made. 21
Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third
issue raised by petitioners. Suffice it to say that the three conditions appearing on the January
7, 1987 letter of petitioners to private respondents were not part of the original contract. By
that time, it was already incumbent upon the former to pay the balance of the sale price. They
had no right to demand preconditions to the fulfillment of their obligation, which had become
due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that
private respondents are ordered to return to petitioners the amount of P874,150, which the
latter paid as a consequence of the rescinded contract, with legal interest thereon from January
8, 1987, the date of rescission. No pronouncement as to costs.
SO ORDERED. SDHCac
Melo, Vitug and Sandoval-Gutierrez, JJ ., concur.
Gonzaga-Reyes, J ., is on leave.
||| (Sps. Velarde v. Court of Appeals, G.R. No. 108346, [July 11, 2001], 413 PHIL 360-376)

291

FIRST DIVISION
[G.R. No. L-39778. September 13, 1985.]
VIRGILIO SIY, petitioner, vs. COURT OF APPEALS,
VALDEZ, AND VIRGINIA VALDEZ, respondents.

SERGIO

Quintin C. Pardes for petitioner.

Romeo L. Mendoza & Assoc. Law Office for private respondent.

DECISION

GUTIERREZ, JR., J p:
This is a petition for review which seeks to annul and set aside the decision of the Court of
Appeals, now Intermediate Appellate Court affirming the trial court's decision, ordering,
among others, the rescission of the contract of sale entered into between the petitioner and the
private respondents. cdll
The private respondents, spouses Valdez are the owners of a parcel of land containing an area
of 155 square meters, more or less, and the house constructed thereon, situated at No. 333
Jefferson Street, Makati, and covered by Transfer Certificate of Title No. 32718 of the Registry
of Deeds of Rizal. There is no dispute that the petitioner and private respondents entered into a
contract of sale regarding the said property. The controversy, however, stemmed from
subsequent agreements executed by the parties.
The first agreement entered into by the petitioner and private respondents was the Deed of
Conditional Sale (Exh. A) whereby for and in consideration of P22,000.00, the private
respondents as vendors agreed to sell to the petitioner as vendee the lot covered by TCT No.
32718 with all the improvements thereon. The sale was subject to the condition that
immediately upon the approval of the petitioner's loan with the Social Security System (SSS)
and its payment to the respondents, the vendor shall execute the deed of absolute sale in favor
of the vendee. The petitioner applied for a loan with the SSS, through the Home Financing
Commission (HFC). Since the property in question was mortgaged to the Government Service
Insurance System (GSIS), the HFC requested both parties to execute a Deed of Sale with
Assumption of Mortgage (Exh. G) which they did, stating among others that the respondents
sell, transfer, and convey to the petitioner the property for and in consideration of the sum of
P22,000.00, of which P6,400.00 (representing the amount allegedly incurred by the petitioners
for improvements on said property) had been paid and the balance of P15,600.00 payable upon

approval of the petitioners loan with the SSS. In reality, however, the respondents had not
received a single centavo from the petitioner at the time. Subsequently, the parties executed
three more contracts. The first contract (Exh. I) which was executed more than one month after
Exhibit A provided that the respondents agreed to sell the property to the petitioner at
P14,000.00 while the latter must negotiate a loan with the SSS in order to settle the amount
within a period of thirty days from March 17, 1963. The contract also provided for the payment
of rentals by the petitioner at P50.00 a month from March 1, 1963 until the date of final
settlement and damages at the rate of P30.00 a day for each day of delay. The next day, another
contract was executed by the parties which was essentially the same as Exh. "1". Respondent
Virginia Valdez explained that she did not agree with the granting of another thirty-day
extension to the petitioner and so Exh. "1" was torn up. However, the respondents changed
their minds after the mother of the petitioner pleaded with them for another extension. Thus,
Exh. "2" came into being. It provided that the full amount of P14,000.00 would be paid on or
before the 30th day from the date of the execution of the contract and that failure of the
petitioner to settle his obligation within that period shall make him liable for damages at
P30.00 for every day of delay. LibLex
The last agreement entered into by the parties, (Exh. 5), provided among others, that the
respondents agreed to receive the partial amount of P12,000.00 on the condition that the
balance of P4,376.00 is completely paid forty-five days after the date fixed by them and that
failure of the petitioner to pay the said balance on the agreed time will entitle the respondents
to damages at P20.00 for every day of delay until said balance shall have been fully paid.
Within the forty-five (45) days deadline, however, the petitioner failed to pay both the
P12,000.00 which was supposed to be received by the respondents upon the execution of the
agreement, (Exh. 5) and the balance of P4,376.00. Thus, when the petitioner's loan with the
SSS was finally ready for release, he requested the respondents to sign the deed of absolute
sale and other papers required by the SSS but the latter refused on the ground that the petitioner
had already breached their latest agreement (Exh. 5). The petitioner filed an action for specific
performance with writ of preliminary mandatory injunction seeking to compel the respondents
to execute the deed of absolute sale of the property and other such documents required by the
SSS for the immediate release of the approved loan.
In its first decision, the trial court rendered judgment in favor of the petitioner making the
following findings:
xxx xxx xxx
"Apparently, the defendants are of the impression that the provision in
the agreement that `failure of the plaintiff to settle said balance on or
before the stipulated date will entitle the defendants to collect P20.00
for every day of delay until balance is fully paid' and just because
plaintiff so failed to comply with it this will release them from
compliance with the condition mentioned in Exhibits 'A' and 'G', The
court agrees with the defendant that plaintiff committed a breach
granting that plaintiff failed to comply with the stated proviso but this
is not the breach contemplated by law and cannot be considered a
sufficient cause for them to depart from their unfulfilled obligation to
the plaintiff because as the provision clearly states, defendants' rights

292
are adequately protected and compensated in the form of damages
recoverable from the plaintiff in case of noncompliance by the
plaintiff.
"Under the law (Article 119, New Civil Code), in reciprocal
obligations, in case one of the obligors should not comply with what
is incumbent upon him, the injured party may choose between the
fulfillment and the rescission of the obligation with the payment of
damages in either case. In the instant case, plaintiff seeks not
rescission but fulfillment of the obligation. It is obvious when the
parties herein agreed that the consideration mentioned in Exhibits 'A'
& 'G' that will be paid upon the approval of the loan, they mean
approval and release of the loan. Weighing the evidence presented
both by the plaintiff and defendants, it is the opinion of the court that
the defendants by virtue of their contracts Exhibits 'A' and 'G', the
defendants can be compelled to fulfill the condition agreed thereon."
In due time, the private respondents filed a motion for reconsideration stating, among others,
that the decision of the lower court failed to consider the other contracts executed by the
parties. Among them was the agreement marked as Exhibit "5" which would clearly show that
there was a limited period within which the petitioner was given time to secure a loan from the
SSS and pay P14,000.00, the real consideration for the property agreed upon by the parties.
The petitioner filed his opposition to the respondents' motion for reconsideration. The
respondents in turn asked the lower court for five (5) days within which to submit a rejoinder.
The extension was granted in open court. However, even before the end of the five-day period,
the court already issued an order denying the respondents' motion for reconsideration. Another
motion to reconsider was, therefore, filed by the respondents praying that their rejoinder be
taken into account since the same was filed within the five-day period granted by the court.
Realizing its error, another decision was consequently rendered by the trial court, this time, in
favor of the private respondents, stating the following:

said amount. It is still to be received, and evidence of the plaintiff is

wanting to show that he paid this amount of P12,000.00. Neither is
there any showing that the balance of P4,763.00 agreed upon in
Exhibit '5' had been paid by the plaintiff within forty-five days from
July 9, 1963. This clearly constitutes a breach of their last agreement
Exhibit '5'. Article 1191 of the New Civil Code provides that the
power to rescind obligations is implied in reciprocal ones in case one
of the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the
rescission of the obligation, with the payment of damages in either
case. There is no dispute that all the contracts entered into by the
parties herein are reciprocal ones. There is, likewise, no question that
the plaintiff is guilty of delay and the defendants-spouses are entitled
to damages occasioned by it in the light of the provisions of Article
1170 of the New Civil Code providing that those who, in the
performance of their obligations, are guilty of delay and those who, in
any manner, contravene the tenor thereof, are liable for damages. The
defendants-spouses elected rescission of their agreement of purchase
and sale with damages."

The petitioner filed a motion for reconsideration which the trial court denied. On appeal, the
Court of Appeals affirmed the decision in toto. Hence, this petition.
The issues raised are:
I
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
FIRST DECISION OF THE TRIAL COURT WAS NOT FINAL WHEN THE SAME
WAS SET ASIDE AND SUPERSEDED BY THE SECOND DECISION AND THUS,
THE TRIAL COURT HAD NO MORE JURISDICTION TO RENDER SAID SECOND
DECISION, AND.

"This Court observes that Exhibit '5' is an implementation or

confirmation of the provisions of both Exhibits '1' and '2' which are
supplementary contracts providing for a definite period of payment of
the agreed purchase price of the property involved herein. This period
of payment is not provided for in Exhibits 'A' and 'G' thereby
modifying the later contracts in this regard. Article 1374 of the
newCivil Code of the Philippines, the Court believes, is also
applicable to the instant case wherein it is provided that the various
stipulations of a contract shall be interpreted together, attributing to
the doubtful ones that sense which may result from all of them taken
together. Exhibits 'A', 'G', '1', '2' and '5' being complementary
contracts, they should be construed to correctly arrive at the true
intention of the parties."

The petitioner maintains that the motions for reconsideration filed by the respondents are both
pro forma because they presented issues which the trial court had already considered and ruled
upon and that the second motion for reconsideration merely asked the court to consider two
documents which were already submitted by respondents in evidence. The petitioner argues
that the said motion did not interrupt the running of the period to appeal and thus, when the
second decision was rendered the trial court had already lost its jurisdiction over the case,
making such decision null and void.

xxx xxx xxx

The above contentions are untenable.

"The wordings of Exhibit '5' when it states that the defendantsspouses agreed to receive the partial amount of P12,000.00 only show
that when Exhibit '5' was executed, defendants did not yet receive

In the first place, the very purpose of a motion for reconsideration is to point out the findings
and conclusions of the decision which in the movant's view, are not supported by law or the

II
WHETHER OR NOT THE COURT OF APPEALS ERRED IN SUSTAINING THE
TRIAL COURT IN ORDERING THE RESCISSION OF THE AGREEMENT (EXHIBIT
5) AND THE PAYMENT OF DAMAGES AND ATTORNEY'S FEES.

293
evidence. The movant is, therefore, very often confined to the amplification or further
discussion of the same issues already passed upon by the court. Otherwise, his remedy would
not be a reconsideration of the decision but a new trial or some other remedy. In the case
of Via v. Court of Appeals (126 SCRA 381-382), we emphasized the nature of a motion for
reconsideration. We ruled:
"Contrary to petitioner's contention, REPUBLIC's Motion for
Reconsideration dated January 10, 1973 was not pro forma, even if
we were to concede that it was a reiteration of its previous Motion for
suspension of the proceedings.
". . . Among the ends to which a motion for reconsideration is
addressed, one is precisely to convince the court that its ruling is
erroneous and improper, contrary to the law or the evidence (Rule 37,
Section 1, subsection [c]; and in doing so, the movant has to dwell of
necessity upon the issues passed upon by the court. If a motion for
reconsideration may not discuss these issues, the consequence would
be that after a decision is rendered, the losing party would be
confined to filing only motions for reopening and new trial. We find
in the Rules of Court no warrant for ruling to that effect, a ruling that
would, in effect eliminate subsection (c) of Section 1 of Rule 37."
(Guerra Enterprises Co., Inc. v. Court of First Instance of Lanao del
Sur, 32 SCRA 317 [1970]).
Secondly, as far as the second motion of respondents is concerned, the same should not be
strictly construed as a motion for reconsideration although captioned as such because in reality,
it is merely a supplementary pleading aimed to call the court's attention to the fact that it had
given the respondents five days to file their rejoinder, with which they complied and, therefore,
said rejoinder should have been considered before the court acted upon the respondents' first
motion for reconsideration. Supplemental pleadings are meant to supply deficiencies in aid of
original pleadings, not to entirely substitute the latter (See Pasay City Government v. CFI of
Manila, 132 SCRA 169), and neither should they be considered independently nor separately
from such original pleadings. Cdpr
We, therefore, hold that the appellate court did not commit grave abuse of discretion in
upholding the trial court's jurisdiction when it rendered the second decision.
In the second assignment of error, the petitioner contends that the Court of Appeals committed
a reversible error in affirming the rescission of the contract when the respondents did not pray
for rescission and in ordering the payment of damages and attorney's fees notwithstanding the
fact that the complaint for specific performance was not instituted in bad faith.
It is noteworthy to mention that in their answer to the petitioner's complaint, the respondents
prayed for the annulment of both the Deed of Conditional Sale (Exh. 'A') and the Deed of Sale
with Assumption of Mortgage (Exh. 'G') which are the very bases of the supplemental
agreements (Exhs. '1', '2' and '5') executed between the petitioner and the respondent. The
technical argument that the respondents never prayed for the rescission of the contracts and
that the trial court and the appellate court should never have rescinded the same has no merit
Furthermore, by failing to pay the amount of P12,000.00 and the balance of P4,376.00 as
stipulated in the contract within the forty-five (45) days period, the petitioner clearly
committed a breach of contract which sufficiently and justly entitled the respondents to ask for

the rescission of the contracts. In the case of Nagarmull v. Binalbagan-Isabel Sugar Co.,
Inc. (33 SCRA 52), we ruled that ". . . The Breach of contract committed by appellee gave
appellant, under the law and even under general principles of fairness, the right to rescind the
contract or to ask for its specific performance, in either case with right to demand
damages . . .". It is evident, in the case at bar, that the respondents chose to rescind the
contracts after the petitioner repeatedly failed to pay not only the balance but the initial amount
as downpayment in consideration of which the contracts or agreements were executed. As a
matter of fact, the petitioner later asked the SSS to cancel his loan application. He thereby
abandoned his own claim for specific performance. Therefore, the appellate court correctly
affirmed the rescission of the above-mentioned contracts. It also correctly affirmed the
payment of attorney's fees. While the petitioner may not have acted in bad faith in filing his
complaint, still the payment of attorney's fees is warranted in this case because of the
environmental circumstances which compelled the respondents to litigate for the protection of
their interests. (See Bert Osmea & Associates v. Court of Appeals, 120 SCRA 401 and Article
2208 (2) New Civil Code).
We, however, find the award of damages in the amount of P4,376.00 unwarranted. In their
motion for reconsideration, the respondents explained how they arrived at this amount
"Plaintiff obliged himself to pay P30.00 for everyday of delay after
the lapse of thirty days from the execution of the document of March
17, 1963 (Exh. 1-Defendants). Thirty days from March 17, 1963
would be April 18, which will mark the beginning of the counting of
the days of delays. From April 18, 1963 to July 9, 1963, the number
of days of delay was 82 days. Plaintiff requested that this be reduced
to 70 days and defendants agreed. At P30.00 per day of delay the
amount in 70 days will be P2,100.00. The rental as provided for in the
same exhibit 1 for defendants was P50.00 per month. From March 1,
1963 to June 20, 1963, 4 months elapsed. At P50.00 per month the
rental would be P200.00. Plaintiff got or utilized adobe stones
belonging to defendant which he found in the premises when he and
his parents transferred to the lot in question in March, 1963 the value
of which was P76.00. Adding this to the P2,100.00 which is the
amount to be paid for the delay in making payments and the P200.00
for 4 months rental, the total will be P2,376.00. The agreed purchase
price was P14,000.00 but P12,000.00 was the amount of loan the
Social Security System was then willing to give to plaintiff so that
there will be a shortage of P2,000.00 more to complete the payment
of the purchase price. This shortage of P2,000.00 was added to the
P2,376.00 and the sum will be P4,376.00. Hence, in the agreement of
July 9, 1963, this amount of P4,376.00 was to be paid within 45 days
from the date thereof and the P12,000.00 which was the loan then
approved by the Social Security System was to be paid to defendants
on the day of the execution of the said agreement."
xxx xxx xxx
It is evident from the motion that the amount of P4,376.00 awarded by the appellate court as
damages is mainly based on "P30.00 per day of delay" penalty clause embodied in the
agreement marked Exhibit "1". Enforcement of the clause on daily penalties now would result
in excessive damages considering that the agreement was entered into way back in 1963.

294
Moreover, the P2,000.00 represents part of the purchase price of the sale which was already
rescinded.
Under Article 1191 of the Civil Code, "the injured party may choose between the fulfillment
and rescission of the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become impossible . . .."
The law, however, does not authorize the injured party to rescind the obligation and at the same
time seek its partial fulfillment under the guise of recovering damages.
The appellate court, therefore, erred in including both the penalty clause and the part of the
purchase price in the computation of damages. There is no question that the petitioner must pay
damages for the use of the house and lot until he vacates the premises. The petitioner and his
family have lived in the respondents' house all these years without paying either the price he
obligated himself to pay or the monthly rentals he agreed to pay as early as 1963. At the very
least, the petitioner should pay P50.00 monthly rentals with legal interest from March,
1963. LibLex
WHEREFORE, the decision appealed from is MODIFIED in that the award of damages in the
amount of P4,376.00 is set aside. The petitioner is ordered to vacate the disputed property and
to pay FIFTY PESOS (P50.00) as monthly rentals with interest at the legal rate from March,
1963 up to the time he and his successors-in-interest vacate the property in question. In all
other respects, the decision is AFFIRMED.

SO ORDERED.
Melencio-Herrera, Plana, Relova, De la Fuente and Patajo, JJ., concur.
Teehankee, J., reserves his vote.

||| (Siy v. Court of Appeals, G.R. No. L-39778, [September 13, 1985], 223 PHIL 136-146)

295

SECOND DIVISION
[G.R. No. L-28602. September 29, 1970.]
UNIVERSITY
OF
THE
PHILIPPINES, petitioner, vs. WALFRIDO DE LOS ANGELES,
in his capacity as JUDGE of the COURT OF FIRST INSTANCE
IN QUEZON CITY, ET AL, respondents.

Solicitor General Antonio P. Barredo, Solicitor Augusto M. Amores and Special Counsel
Perfecto V. Fernandez for petitioner.
Norberto J. Quisumbing for private respondents.

SYLLABUS
1. CIVIL LAW; CONTRACTS; BREACH OF CONTRACT; RESCISSION UNDER
ARTICLE 1191 OF THE CIVIL CODE. Where UP and ALUMCO had expressly stipulated
in the "Acknowledgment of Debt and Proposed Manner of Payments" that, upon default by the
debtor LUMCO, the creditor (UP) has "the right and the power to consider the Logging
Agreement dated 2 December 1960 as rescinded without the necessity of any judicial suit,"
respondent Alumco's contention that it is only after a final court decree declaring the contract
rescinded for violation of its terms that UP could disregard ALUMCO's rights under the
contract and treat the agreement as breached and of no force or effect is untenable. In
connection with Article 1191 of the Civil Code, it is not always necessary for the injured party
to resort to court for rescission of the contract. (Froilan vs. Pan Oriental Shipping Co., et al., L11897, 31 October 1964, 12 SCRA 276)
2. ID..; ID.; ID.; ID.; EXPLANATION. The act of a party in treating a contract as cancelled
or resolved on account of infractions by the other contracting party must be made known to the
other and is always provisional, being ever subject to scrutiny and review by the proper Court.
If the other party denies that rescission is justified, it is free to resort to judicial action in its
own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced.
3. ID.; ID.; ID.; ID.; WHEN JUDICIAL ACTION NECESSARY. There is no conflict
between the ruling that court action is not necessary to declare the contract rescinded where
there is agreement to such effect in case of violation of the terms thereof and the previous
jurisprudence of this court invoked by respondent declaring that judicial action is necessary for
the resolution of a reciprocal obligation, since in every case where the extrajudicial resolution
is contested, only the final award of the court of competent jurisdiction can conclusively settle

whether the resolution was proper or not. It is in this sense that judicial action will be
necessary, as without it, the extrajudicial resolution will remain contestable and subject to
judicial invalidation, unless attack thereon should become barred by acquiescence, estoppel or
prescription.
4. ID.; ID.; ID.; ID.; PRACTICAL EFFECT OF UNILATERAL RESCISSION. Fears have
been expressed that a stipulation providing for a unilateral rescission in case of breach of
contract may render nugatory the general rule requiring judicial action v. Footnote, Padilla,
Civil Law, Civil Code Anno. 1967, ed. Vol. IV, page 140) but, as already observed, in the case
of abuse or error by the rescinder, the other party is not barred from questioning in court such
abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the
initiative of instituting suit, instead of the rescinder.
5. ID.; ID.; ID.; ID.; ID.; CONSTRUCTION BY SUPREME COURT OF SPAIN. In fact,
even without express provision conferring the power of cancellation upon one contracting
party, the Supreme Court of Spain, in construing the effect of Article 1124 of the Spanish Civil
Code (of which Article 1191 of our own Civil Code is practically a reproduction) has
repeatedly held that a resolution of reciprocal or synallagmatic contracts may be made
extrajudicially unless successfully impugned in court.
6. ID.; ID.; ID.; ID.; COURT TO RECEIVE EVIDENCE ON ISSUES; FAILURE THEREOF
CONSTITUTES GRAVE ABUSE OF DISCRETION. The acts of the court a quo in
enjoining petitioner's measures to protect its interest without first receiving evidence on the
issues tendered by the parties and subsequently in refusing to dissolve the injunction, were in
grave abuse of discretion for the following reasons: l) Existence of a prima facie case of breach
of contract and default in payment by respondent ALUMCO; 2) The fact that respondent
company had profited from its operations previous to agreement of December 2, 1964; 3) That
the excuses offered for non-payment were not sufficient, and 4) That whatever prejudice which
may be suffered by ALUMCO is susceptible of compensation in damages.

DECISION

REYES, J.B.L., J p:
Three (3) orders of the Court of First Instance of Rizal (Quezon City), issued in its Civil Case
No. 9435, are sought to be annulled in this petition for certiorari and prohibition, filed by
herein petitioner University of the Philippines (or UP) against the above-named respondent
judge and the Associated Lumber Manufacturing Company, Inc. (or ALUMCO). The first
order, dated 25 February 1966, enjoined UP from awarding logging rights over its timber
concession (or Land Grant), situated at the Lubayat areas in the provinces of Laguna and
Quezon; the second order, dated 14 January 1967, adjudged UP in contempt of court, and
directed Sta. Clara Lumber Company, Inc. to refrain from exercising logging rights or

296
conducting logging operations on the concession; and the third order, dated 12 December 1967,
denied reconsideration of the order of contempt.
As prayed for in the petition, a writ of preliminary injunction against the enforcement or
implementation of the three (3) questioned orders was issued by this Court, per its resolution
on 9 February 1968.
The petition alleged the following:
That the above-mentioned Land Grant was segregated from the public domain and given as an
endowment to UP, an institution of higher learning, to be operated and developed for the
purpose of raising additional income for its support, pursuant to Act 3608;
That on or about 2 November 1960, UP and ALUMCO entered into a logging agreement under
which the latter was granted exclusive authority, for a period starting from the date of the
agreement to 31 December 1965, extendible for a further period of five (5) years by mutual
agreement, to cut, collect and remove timber from the Land Grant, in consideration of payment
to UP of royalties, forest fees, etc.; that ALUMCO cut and removed timber therefrom but, as of
8 December 1964, it had incurred an unpaid account of P219,362.94, which, despite repeated
demands, it had failed to pay; that after it had received notice that UP would rescind or
terminate the logging agreement, ALUMCO executed an instrument, entitled
"Acknowledgment of Debt and Proposed Manner of Payments," dated 9 December 1964,
which was approved by the president of UP, and which stipulated the following:
"3. In the event that the payments called for in Nos. 1 and 2 of this
paragraph are not sufficient to liquidate the foregoing indebtedness of
the DEBTOR in favor of the CREDITOR, the balance outstanding
after the said payments have been applied shall be paid by the
DEBTOR in full no later than June 30, 1965;
"xxx xxx xxx
"5. In the event that the DEBTOR fails to comply with any of its
promises or undertakings in this document, the DEBTOR agrees
without reservation that the CREDITOR shall have the right and the
power to consider the Logging Agreement dated December 2, 1960 as
rescinded without the necessity of any judicial suit, and the
CREDITOR shall be entitled as a matter of right to Fifty Thousand
Pesos (P50,000.00) by way of and for liquidated damages;"
ALUMCO continued its logging operations, but again incurred an unpaid account, for the
period from 9 December 1964 to 15 July 1965, in the amount of P61,133.74, in addition to the
indebtedness that it had previously acknowledged.
That on 19 July 1965, petitioner UP informed respondent ALUMCO that it had, as of that date,
considered as rescinded and of no further legal effect the logging agreement that they had
entered in 1960; and on 7 September 1965, UP filed a complaint against ALUMCO, which was
docketed as Civil Case No. 9435 of the Court of First Instance of Rizal (Quezon City), for the
collection or payment of the herein before stated sums of money and alleging the facts
hereinbefore specified, together with other allegations; it prayed for and obtained an order,
dated 30 September 1965, for preliminary attachment and preliminary injunction restraining
ALUMCO from continuing its logging operations in the Land Grant.

That before the issuance of the aforesaid preliminary injunction UP had taken steps to have
another concessionaire take over the logging operation, by advertising an invitation to bid; that
bidding was conducted, and the concession was awarded to Sta. Clara Lumber Company, Inc.;
the logging contract was signed on 16 February 1966.
That, meantime, ALUMCO had filed several motions to discharge the writs of attachment and
preliminary injunction but were denied by the court;
That on 12 November 1965, ALUMCO filed a petition to enjoin petitioner University from
conducting the bidding; on 27 November 1965, it filed a second petition for preliminary
injunction; and, on 25 February 1966, respondent judge issued the first of the questioned
orders, enjoining UP from awarding logging rights over the concession to any other party.
That UP received the order of 25 February 1966 after it had concluded its contract with Sta.
Clara Lumber Company, Inc., and said company had started logging operations.
That, on motion dated 12 April 1966 by ALUMCO and one Jose Rico, the court, in an order
dated 14 January 1967, declared petitioner UP in contempt of court and, in the same order,
directed Sta. Clara Lumber Company, Inc., to refrain from exercising logging rights or
conducting logging operations in the concession.

The UP moved for reconsideration of the aforesaid order, but the motion was denied on 12
December 1967.
Except that it denied knowledge of the purpose of the Land Grant, which purpose, anyway, is
embodied in Act 3608 and, therefore, conclusively known, respondent ALUMCO did not deny
the foregoing allegations in the petition. In its answer, respondent corrected itself by stating
that the period of the logging agreement is five (5) years not seven (7) years, as it had
alleged in its second amended answer to the complaint in Civil Case No. 9435. It reiterated,
however, its defenses in the court below, which may be boiled down to: blaming its former
general manager, Cesar Guy, in not turning over management of ALUMCO, thereby rendering
it unable to pay the sum of P219,382.94, that it failed to pursue the manner of payments, as
stipulated in the "Acknowledgment of Debt and Proposed Manner of Payments" because the
logs that it had cut turned out to be rotten and could not be sold to Sta. Clara Lumber
Company, Inc., under its contract "to buy and sell" with said firm, and which contract was
referred and annexed to the "Acknowledgment of Debt and Proposed Manner of Payments";
that UP's unilateral rescission of the logging contract, without a court order, was invalid, that
petitioner's supervisor refused to allow respondent to cut new logs unless the logs previously
cut during the management of Cesar Guy be first sold; that respondent was permitted to cut
logs in the middle of June, 1965 but petitioner's supervisor stopped all logging operations on
15 July 1965; that it had made several offers to petitioner for respondent to resume logging
operations but respondent received no reply.
The basic issue in this case is whether petitioner U.P. can treat its contract with ALUMCO
rescinded, and may disregard the same before any judicial pronouncement to that effect.
Respondent ALUMCO contended, and the lower court, in issuing the injunction order of 25
February 1966. apparently sustained it (although the order expresses no specific findings in this
regard), that it is only after a final court decree declaring the contract rescinded for violation of
its terms that U.P. could disregard ALUMCO's rights under the contract and treat the agreement
as breached and of no force or effect.

297
We find that position untenable.
In the first place, UP and ALUMCO had expressly stipulated in the "Acknowledgment of Debt
and Proposed Manner of Payments" that, upon default by the debtor ALUMCO, the creditor
(UP) has "the right and the power to consider the Logging Agreement dated 2 December 1960
as rescinded without the necessity of any judicial suit." As to such special stipulation, and in
connection with Article 1191 of the Civil Code, this Court stated in Froilan vs. Pan Oriental
Shipping Co., et al., L-11897, 31 October 1964, 12 SCRA 276:
"there is nothing in the law that prohibits the parties from entering
into agreement that violation of the terms of the contract would cause
cancellation thereof, even without court intervention. In other words,
it is not always necessary for the injured party to resort to court for
rescission of the contract."
Of course, it must be understood that the act of a party in treating a contract as cancelled or
resolved on account of infractions by the other contracting party must be made known to the
other and is always provisional, being ever subject to scrutiny and review by the proper court.
If the other party denies that rescission is justified, it is free to resort to judicial action in its
own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the responsible party will be sentenced to
damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity
awarded to the party prejudiced.
In other words, the party who deems the contract violated may consider it resolved or
rescinded, and act accordingly, without previous court action, but it proceeds at its own risk.
For it is only the final judgment of the corresponding court that will conclusively and finally
settle whether the action taken was or was not correct in law. But the law definitely does not
require that the contracting party who believes itself injured must first file suit and wait for a
judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured
by the other's breach will have to passively sit and watch its damages accumulate during the
pendency of the suit until the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own damages (Civil Code,
Article 2203).
We see no conflict between this ruling and the previous jurisprudence of this Court invoked by
respondent declaring that judicial action is necessary for the resolution of a reciprocal
obligation, 1 since in every case where the extrajudicial resolution is contested only the final
award of the court of competent jurisdiction can conclusively settle whether the resolution was
proper or not. It is in this sense that judicial action will be necessary, as without it, the
extrajudicial resolution will remain contestable and subject to judicial invalidation, unless
attack thereon should become barred by acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral rescission in case of
breach of contract may render nugatory the general rule requiring judicial action (v. Footnote,
Padilla, Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in
case of abuse or error by the rescinder, the other party is not barred from questioning in court
such abuse or error, the practical effect of the stipulation being merely to transfer to the
defaulter the initiative of instituting suit, instead of the rescinder.
In fact, even without express provision conferring the power of cancellation upon one
contracting party, the Supreme Court of Spain, in construing the effect of Article 1124 of the

Spanish Civil Code (of which Article 1191 of our own Civil Code is practically a
reproduction), has repeatedly held that a resolution of reciprocal or synallagmatic contracts
may be made extrajudicially unless successfully impugned in court.
"El articulo 1124 del Codigo Civil establece la facultad de resolver las
obligaciones reciprocas para el caso de que uno de los obligados no
cumpliese lo que le incumbe, facultad que, segun jurisprudencia de
este Tribunal, surge immediatamente despues que la otra parte
incumplio su deber, sin necesidad de una declaracion previa de los
Tribunales." (Sent. of the Tr. Sup. of Spain, of 10 April 1929; 106 Jur.
Civ. 897).
"Segun reiterada doctrina de esta Sala, el Art. 1124 regula la
resolucion como una `facultad' atribuida a la parte perjudicada por el
incumplimiento del contrato, la cual tiene derecho de opcion entre
exigir el cumplimiento " la resolucion de lo convenido, que puede
ejercitarse, ya en la via judicial, ya fuera de ella, por declaracion del
acreedor, a reserva, claro es, que si la declaracion de resolucion hecha
por una de las partes se impugna por la otra, queda aquella sometida
el examen y sancion de los Tribunales, que habran de declarar, en
definitiva, bien hecha la resolucion o por el contrario, no ajustada a
Derecho." (Sent. TS of Spain, 16 November 1956; Jurisp. Aranzadi,
3, 447).
"La resolucion de los contratos sinalagmaticos, fundada en el
incumplimiento por una de las partes de su respectiva prestacion,
puede tener lugar con eficacia: 1. Por la declaracion de voluntad de
la otra hecha extraprocesalmente, si no es impugnada en juicio luego
con exito; y 2. Por la demanda de la perjudicada, cuando no opta
por el cumplimiento con la indemnizacion de daos y perjuicios
realmente causados, siempre que se acredite, adem s, una actitud o
conducta persistente y rebelde de la adversa o la satisfaccion de lo
pactado, a un hecho obstativo que de un modo absoluto, definitivo o
irreformable lo impida, segun el art. 1.124, interpretado por la
jurisprudencia de esta Sala, contenida en las Ss. de 12 mayo 1955 y
16 nov. 1956, entre otras, inspiradas por el principio del Derecho
intermedio, recogido del Canonico, por el cual fragenti fidem, fides
non est servanda. (Ss de 4 nov. 1958 y 22 jun. 1959.)" (Emphasis
supplied)
In the light of the foregoing principles, and considering that the complaint of petitioner
University made out a prima facie case of breach of contract and defaults in payment by
respondent ALUMCO, to the extent that the court below issued a writ of preliminary injunction
stopping ALUMCO's logging operations, and repeatedly denied its motions to lift the
injunction; that it is not denied that the respondent company had profited from its operations
previous to the agreement of 5 December 1964 ("Acknowledgment of Debt and Proposed
Manner of Payment"); that the excuses offered in the second amended answer, such as the
misconduct of its former manager Cesar Guy, and the rotten condition of the logs in private
respondent's pond, which said respondent was in a better position to know when it executed the
acknowledgment of indebtedness, do not constitute on their face sufficient excuse for nonpayment; and considering that whatever prejudice may be suffered by respondent ALUMCO is

298
susceptible of compensation in damages, it becomes plain that the acts of the court a quo in
enjoining petitioner's measures to protect its interest without first receiving evidence on the
issues tendered by the parties, and in subsequently refusing to dissolve the injunction, were in
grave abuse of discretion, correctible by certiorari, since appeal was not available or adequate.
Such injunction, therefore, must be set aside.
For the reason that the order finding the petitioner UP in contempt of court has been appealed
to the Court of Appeals, and the case is pending therein, this Court abstains from making any
pronouncement thereon.

WHEREFORE, the writ of certiorari applied for is granted, and the order of the respondent
court of 25 February 1966, granting the Associated Lumber Company's petition for injunction,
is hereby set aside. Let the records be remanded for further proceedings conformably to this
opinion.
Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar,
JJ., concur.
Reyes, J.B.L., Actg. C.J., certifies that Mr. Chief Justice Concepcion is on official leave.
||| (UP v. De los Angeles, G.R. No. L-28602, [September 29, 1970], 146 PHIL 108-118)

299

SECOND DIVISION
[G.R. No. L-56076. September 21, 1983.]
PALAY, INC. and ALBERT ONSTOTT, petitioner, vs. JACOBO C.
CLAVE, Presidential Executive Assistant, NATIONAL HOUSING
AUTHORITY and NAZARIO DUMPIT, respondents.

Santos, Calcetas-Santos & Geronimo Law Office for petitioner.

Wilfredo E. Dizon for private respondent.

SYLLABUS
1. CIVIL LAW; CONTRACTS; WRITTEN NOTICE STILL REQUIRED THOUGH
JUDICIAL ACTION NOT NECESSARY FOR RESCISSION. Well settled is the rule, as
held in previous jurisprudence Torralba vs. de Los Angeles, 96 SCRA 69) that judicial action
for the rescission of a contract is not necessary where the contract provides that it may be
revoked and canceled for violation of any of its terms and conditions. However, even in the
cited case, there was at least a written notice sent to the defaulter informing him of the
rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles, 33 SCRA
102 (1970) the act of a party in treating a contract as cancelled should be made known to the
other.
2. ID.; ID.; EXTRAJUDICIAL RESCISSION; EFFECTIVE IF NOT OPPOSED. A
stipulation entitling one party to take possession of the land and building if the other party
violates the contract does not ex proprio vigore confer upon the former the right to take
possession thereof if objected to without judicial intervention and determination (Nera vs.
Vacante, 3 SCRA 505 (1961]). This was reiterated in Zulueta vs. Mariano (111 SCRA 206
[1982]) where we held that extrajudicial rescission has legal effect where the other party does
not oppose it (Tolentino, Civil Code of the Philippines, Vol. IV, 1962 ed., p. 168, citing
Magdalena Estate vs. Myrick, 71 Phil. 344). In other words, resolution of reciprocal contracts
may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the
declaration, it shall be subject to judicial determination (UP vs. de los Angeles, supra).
3. ID.; ID.; ID.; WAIVER OF RIGHT TO BE NOTIFIED; VALID ONLY WHERE LIBERTY
OF CHOICE FULLY ACCORDED. The indispensability of notice of cancellation to the
buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide
Protection to Buyers of Real Estate on Installment Payments" which took effect on September
14, 1972. The contention that private respondent had waived his right to be notified under
paragraph 6 of the contract is neither meritorious because it was a contract of adhesion, a
standard form of petitioner corporation, and private respondent had no freedom to stipulate. A
waiver must be certain and unequivocal, and intelligently made; such waiver follows only

where liberty of choice has been fully accorded (Chavez vs. Court of Appeals, 24 SCRA 663,
682-683(1968]). Moreover, it is a matter of public policy to protect buyers of real estate on
installment payments against onerous and oppressive conditions. Waiver of notice is one such
onerous and oppressive condition to buyers of real estate on installment payments.
4. ID.; ID.; ID.; RIGHT ACCORDED DEFAULTER. As a consequence of the resolution by
petitioners, tights to the lot should be restored to private respondent or the same should be
replaced by another acceptable lot. However, considering that the property had already been
sold to a third person and there is no evidence on record that other lots are still available,
private respondent is entitled to the refund of installments paid plus interest at the legal rate of
12% computed from the date of the institution of the action. (Vercelus vs. Edano, 46 Phil. 801
[1924]). It would be most inequitable if petitioners were to be allowed to retain private
respondent's payments and at the same time appropriate the proceeds of the second sale to
another.
5. CORPORATION LAW; CORPORATION; SEPARATE AND DISTINCT PERSONALITY;
PIERCING OF CORPORATE FICTION. It is basic that a corporation is invested by law
with a personality separate and distinct from those of the persons composing it as well as from
that of any other legal entity to which it may be related (Yutivo Sons Hardware Co. vs. Court
of Tax Appeals, 1 SCRA 160 [1961]). As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the legal entities to which it may be
connected and vice versa. However, the veil of corporate fiction may be pierced when it is used
as a shield to further an end subversive of justice (Emilio Cano Enterprises, Inc. vs. CIR, 13
SCRA 290 [1965]); or for purposes that could not have been intended by the law that created it
(McConnel vs. CA, 1 SCRA 722, 726 [1961]); or to defeat public convenience, justify wrong,
protect fraud, or defend crime (Yutivo Sons Hardware Co. vs. CTA, supra; McConnel vs. CA,
supra); or to perpetuate fraud or confuse legitimate issues (R.F. Sugay & Co., Inc. vs. Reyes,
12 SCRA 700 [1964]) or to circumvent the law or perpetuate deception; (Gregorio Araneta,
Inc. vs. De Paterno & Vidal, 91 Phil. 786 [1952]) or as an alter ego, adjunct or business conduit
for the sole benefit of the stockholders (McConnel vs. CA, supra; Commissioner of Internal
Revenue vs. Norton Harrison Co., 120 Phil. 684 [1964]).
6. ID.; ID.; ID.; MERE OWNERSHIP OF ALL CAPITAL STOCK; NOT GROUND FOR
DISREGARDING CORPORATE PERSONALITY. In this case, petitioner Onstott was
made liable because he was then the President of the corporation and he appeared to be the
controlling stockholder. No sufficient proof exists on record that said petitioner used the
corporation to defraud private respondent. He cannot, therefore, be made personally liable just
because he "appears to be the controlling stockholder." Mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality (Liddel & Co. vs.
Collector of Internal Revenue, 2 SCRA 632, 640 [1961]).

DECISION

300
MELENCIO-HERRERA, J p:
The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in
O.P. Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott, jointly and severally,
to refund to private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest
per annum, as resolved by the National Housing Authority in its Resolution of July 10, 1979 in
Case No. 2167, as well as the Resolution of October 28, 1980 denying petitioners' Motion for
Reconsideration of said Resolution of May 2, 1980, are being assailed in this petition. LLphil
On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott, executed in
favor of private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8,
Block IV) of the Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165
square meters, covered by TCT No. 90454, and owned by said corporation. The sale price was
P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00 and
monthly installments of P246.42 until fully paid. Paragraph 6 of the contract provided for
automatic extrajudicial rescission upon default in payment of any monthly installment after the
lapse of 90 days from the expiration of the grace period of one month, without need of notice
and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50.
The last payment was made on December 5, 1967 for installments up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to
update all his overdue accounts with interest, and seeking its written consent to the assignment
of his rights to a certain Lourdes Dizon. He followed this up with another letter dated June 20,
1973 reiterating the same request. Replying, petitioners informed respondent that his Contract
to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had
already been resold.
Questioning the validity of the rescission of the contract, respondent filed a letter complaint
with the National Housing Authority (NHA) for reconveyance with an alternative prayer for
refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission
void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto
Onstott, in his capacity as President of the corporation, jointly and severally, to refund
immediately to Nazario Dumpit the amount of P13,722.50 with 12% interest from the filing of
the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of said
Resolution was denied by the NHA in its Order dated October 23, 1979. 1
On appeal to the Office of the President, upon the allegation that the NHA Resolution was
contrary to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2,
1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied
for lack of merit. Thus, the present petition wherein the following issues are raised: LibLex
I
"Whether notice or demand is not mandatory under the circumstances
and, therefore, may be dispensed with by stipulation in a contract to
sell.
II

Whether petitioners may be held liable for the refund of the

installment payments made by respondent Nazario M. Dumpit.
III
Whether the doctrine of piercing the veil of corporate fiction has
application to the case at bar.
IV
"Whether respondent Presidential Executive Assistant committed
grave abuse of discretion in upholding the decision of respondent
NHA holding petitioners solidarily liable for the refund of the
installment payments made by respondent Nazario M. Dumpit
thereby denying substantial justice to the petitioners, particularly
petitioner Onstott."
We issued a Temporary Restraining Order on February 11, 1981 enjoining the enforcement of
the questioned Resolutions and of the Writ of Execution that had been issued on December 2,
1980. On October 28, 1981, we dismissed the petition but upon petitioners' motion,
reconsidered the dismissal and gave due course to the petition on March 15, 1982.

On the first issue, petitioners maintain that it was justified in cancelling the contract to sell
without prior notice or demand upon respondent in view of paragraph 6 thereof which
provides:
"6. That in case the BUYER fails to satisfy any monthly installment,
or any other payments herein agreed upon, the BUYER shall be
granted a month of grace within which to make the payment of the
account in arrears together with the one corresponding to the said
month of grace. It shall be understood, however, that should the
month of grace herein granted to the BUYER expire, without the
payments corresponding to both months having been satisfied, an
interest of ten (10%) per cent per annum shall be charged on the
amounts the BUYER should have paid; it is understood further, that
should a period of NINETY (90) DAYS elapse to begin from the
expiration of the month of grace hereinbefore mentioned, and the
BUYER shall not have paid all the amounts that the BUYER should
have paid with the corresponding interest up to the date, the SELLER
shall have the right to declare this contract cancelled and of no effect
without notice, and as a consequence thereof, the SELLER may
dispose of the lot/lots covered by this Contract in favor of other
persons, as if this contract had never been entered into. In case of
such cancellation of this Contract, all the amounts which may have
been paid by the BUYER in accordance with the agreement, together
with all the improvements made on the premises, shall be considered
as rents paid for the use and occupation of the above mentioned
premises and for liquidated damages suffered by virtue of the failure
of the BUYER to fulfill his part of this agreement: and the BUYER
hereby renounces his right to demand or reclaim the return of the

301
same and further obligates himself peacefully to vacate the premises
and deliver the same to the SELLER."
Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the
rescission of a contract is not necessary where the contract provides that it may be revoked and
cancelled for violation of any of its terms and conditions. However, even in the cited cases,
there was at least a written notice sent to the defaulter informing him of the rescission. As
stressed in University of the Philippines vs. Walfrido de los Angeles 3 the act of a party in
treating a contract as cancelled should be made known to the other. We quote the pertinent
excerpt: LLpr
"Of course, it must be understood that the act of a party in treating a
contract as cancelled or resolved in account of infractions by the other
contracting party must be made known to the other and is always
provisional being ever subject to scrutiny and review by the proper
court. If the other party denies that rescission is justified it is free to
resort to judicial action in its own behalf, and bring the matter to
court. Then, should the court, after due hearing, decide that the
resolution of the contract was not warranted, the responsible party
will be sentenced to damages; in the contrary case, the resolution will
be affirmed, and the consequent indemnity awarded to the party
prejudiced.
In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only the
final judgment of the corresponding court that will conclusively and
finally settle whether the action taken was or was not correct in law.
But the law definitely does not require that the contracting party who
believes itself injured must first file suit and wait for a judgment
before taking extrajudicial steps to protect its interest. Otherwise, the
party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself
requires that he should exercise due diligence to minimize its own
damages (Civil Code, Article 2203).
We see no conflict between this ruling and the previous jurisprudence
of this Court invoked by respondent declaring that judicial action is
necessary for the resolution of a reciprocal obligation (Ocejo, Perez &
Co., vs. International Banking Corp., 37 Phil. 631; Republic vs.
Hospital de San Juan De Dios, et al., 84 Phil 820) since in every case
where the extrajudicial resolution is contested only the final award of
the court of competent jurisdiction can conclusively settle whether the
resolution was proper or not. It is in this sense that judicial action will
be necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation unless attack thereon
should become barred by acquiescence, estoppel or prescription.
Fears have been expressed that a stipulation providing for a unilateral
rescission in case of breach of contract may render nugatory the

general rule requiring judicial action (v. Footnote, Padilla, Civil Law,
Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already
observed,in case of abuse or error by the rescinder, the other party is
not barred from questioning in court such abuse or error, the
practical effect of the stipulation being merely to transfer to the
defaulter the initiative of instituting suit, instead of the
rescinder." (Emphasis ours).
Of similar import is the ruling in Nera vs. Vacante 4 , reading:
"A stipulation entitling one party to take possession of the land and
building if the other party violates the contract does not ex proprio
vigore confer upon the former the right to take possession thereof if
objected to without judicial intervention and determination."
This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has
legal effect where the other party does not oppose it. 6Where it is objected to, a judicial
determination of the issue is still necessary. LLjur
In other words, resolution of reciprocal contracts may be made extrajudicially unless
successfully impugned in Court. If the debtor impugns the declaration, it shall be subject to
judicial determination. 7
In this case, private respondent has denied that rescission is justified and has resorted to
judicial action. It is now for the Court to determine whether resolution of the contract by
petitioners was warranted.
We hold that resolution by petitioners of the contract was ineffective and inoperative against
private respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra.
Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract
to rescind in court because from the moment the petitioner defaulted in the timely payment of
the installments, the contract between the parties was deemed ipso facto rescinded." However,
it should be noted that even in that case notice in writing was made to the vendee of the
cancellation and annulment of the contract although the contract entitled the seller to
immediate repossessing of the land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was to be later underscored
in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on
Installment Payments." which took effect on September 14, 1972, when it specifically
provided:
"Sec. 3(b) . . . the actual cancellation of the contract shall take place
after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial
act and upon full payment of the cash surrender value to the buyer."
(Emphasis supplied).
The contention that private respondent had waived his right to be notified under paragraph 6 of
the contract is neither meritorious because it was a contract of adhesion, a standard form of
petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be
certain and unequivocal, and intelligently made; such waiver follows only where liberty of

302
choice has been fully accorded. 9 Moreover, it is a matter of public policy to protect buyers of
real estate on installment payments against onerous and oppressive conditions. Waiver of
notice is one such onerous and oppressive condition to buyers of real estate on installment
payments.
Regarding the second issue on refund of the installment payments made by private respondent.
Article 1385 of the Civil Code provides:
"ART. 1385. Rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and
the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be
obliged to restore.
"Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.
"In this case, indemnity for damages may be demanded from the
person causing the loss."
As a consequence of the resolution by petitioners, rights to the lot should be restored to private
respondent or the same should be replaced by another acceptable lot. However, considering
that the property had already been sold to a third person and there is no evidence on record that
other lots are still available, private respondent is entitled to the refund of installments paid
plus interest at the legal rate of 12% computed from the date of the institution of the
action. 10 It would be most inequitable if petitioners were to be allowed to retain private
respondent's payments and at the same time appropriate the proceeds of the second sale to
another. cdphil
We come now to the third and fourth issues regarding the personal liability of petitioner
Onstott, who was made jointly and severally liable with petitioner corporation for refund to
private respondent of the total amount the latter had paid to petitioner company. It is basic that
a corporation is invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which it may be
related. 11 As a general rule, a corporation may not be made to answer for acts or liabilities of
its stockholders or those of the legal entities to which it may be connected and vice versa.
However, the veil of corporate fiction may be pierced when it is used as a shield to further an
end subversive of justice 12 ; or for purposes that could not have been intended by the law that
created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend
crime 14 ; or to perpetuate fraud or confuse legitimate issues; 15 or to circumvent the law or
perpetuate deception; 16 or as an alter ego, adjunct or business conduit for the sole benefit of
the stockholders. 17

We find no badges of fraud on petitioners part. They had literally relied, albeit mistakenly, on
paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the President of the
corporation and he appeared to be the controlling stockholder. No sufficient proof exists on

record that said petitioner used the corporation to defraud private respondent. He cannot,
therefore, be made personally liable just because he "appears to be the controlling
stockholder". Mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality. 18 In this respect then, a modification of the Resolution under
review is called for.
WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is
hereby modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit
the amount of P13,722.50, with interest at twelve (12%) percent per annum from November 8,
1974, the date of the filing of the Complaint. The temporary Restraining Order heretofore
issued is hereby lifted.
No costs.
SO ORDERED.
Plana, Relova and Gutierrez, Jr., JJ., concur.
Teehankee, J., concurs in the result.
||| (Palay, Inc. v. Clave, G.R. No. L-56076, [September 21, 1983], 209 PHIL 523-533)

303

EN BANC
[G.R. No. L-17858-9. July 13, 1962.]
MANUEL S. CAMUS, petitioner, vs. PRICE, INC., respondent.

[G.R. No. L-17865-6. July 13, 1962.]

PRICE, INC., vs. HON. COURT OF APPEALS and MANUEL
S. CAMUS, respondents.

SYLLABUS
1.CONTRACTS; LEASE; RECIPROCAL OBLIGATIONS; DEFAULT IN THE
PERFORMANCE OF CORRESPONDING DUTIES. Where, as in the present case, both
parties defaulted in the performance of their corresponding duties, but it could not be
determined with definiteness who of them committed the first infraction of the terms of the
contract, the parties are in pari delicto and the contract is deemed extinguished, with the parties
suffering their respective loses.
2.ID.; ID.; ID.; ID.; WHEN LESSEE MAY BE REQUIRED TO PAY FOR OCCUPANCY OF
PROPERTY. Considering that the lessee was in continuous occupancy of the premises
during the pendency of the case, conducting the pendency of the case, conducting the operating
its business therein and profiting thereby, whereas the lessor was not only deprived of the
possession of his property but also of the rentals therefor, said lessee must be required to
compensate the lessor for such occupancy until it vacates the premises.

Tambobong Estate, Psd-11759 of with an area of 1,700 square meters,

situated, lying, and being at No. 60 C. Arellano Street, Malabon,
Rizal, covered as Lots the Rural Progress Administration, to have and
to hold the same for the full term of ten (10) years from April 1, 1951
to March 31, 1960, inclusive, at the monthly of P300.00, Philippine
Currency, for the above-mentioned building, to be paid without the
necessity of express demand therefor on the 1st. five (5) days of each
ensuing month at the residence of the first part/Lessor at Malabon,
Rizal; and also at the monthly rental of One Hundred Pesos (P100.00)
Philippine Currency, for the use of the leased premises, payable
beginning when the construction of the factory is already finished,
and likewise payable at the time and place aforementioned;
"2.That the party of the second part/Lessee, shall have or cause to
erect, build or construct a Factory building and Warehouse of strong
materials appropriate to or in furtherance of the business of the party
of the second part/Lessee, on the said lot, the plan as to the form and
size and other specifications thereof being subject to the joint
approval of both parties concerned, at the expense of the party of the
second part/Lessee; and that the buildings thereon constructed shall
be insured with a competent Insurance Company by the party of the
second part/Lessee, in an amount equal to the insurable interest of
the party of the first part/Lessor, in the sum of the least Fifty
Thousand Pesos (P50,000.00) Philippine Currency, for himself, his
heirs and/or administrators as his beneficiary; and that the insured
shall automatically become, without cost, the property of the first
part/Lessor, immediately upon the termination of this contract;
xxx xxx xxx"

DECISION

"5.That the party of the first part/Lessor likewise covenants and

agrees to cause or make the necessary filling, at his sole expense,
within a year from the signing of this contract, the vacant portion of
the along the river with an area of about 500 square meters of
increase its elevation and enable the party of the second part/Lessee,
to facilitate or make use of the whole lot; as well as to construct,
building or cause to, erect the necessary concrete stone walls
provided with barbed with barbed wires on top thereof and all
expenses incurred or to incurred incident to the filing as well as to the
construction, building and erection of the stone walls, one (1) meter
high, with barbed wire to be borne solely by the party of the first
part/Lessor;

On March 30, 1951, Manuel S. Camus and Price, Inc. entered into a contract of lease, the
pertinent terms of which read:

xxx xxx xxx

BARRERA, J p:

"1.That said party of the first part/Lessor (Manuel S. Camus) hereby

grants, demise and let the said party of the second part/Lessee (Price,
Inc.), for lawful business purposes, all that certain strong material
building with the lot and parcel of land, Nos. 15 and 16, Block No. 1,

"14.Provided, always, that in case of a breach of any of the covenants

on the part of the party of the second part/Lessee, herein contained,
the party of the first part/Lessor, may, while default the shall continue,
and nothwithstanding any waiver of any prior breach of conditions,

304
without notice or demand, enter upon the premises, and thereby
terminate this lease and may thereupon expel and remove the party of
the second part/Lessee;

lower by 40 centimeters than the average elevation of said property

(see Annex L). Moreover, the pictures Annexes M, N, and O, taken on
February 16, 1954, reveal that said portion was then unfilled and even
under water. Anyhow, it is completed within the year, which expired
on March 20, 1952, stipulated in the contract of lease. In fact, the
answer filed by respondents before this Court impliedly admits the
failure of Camus to make the filling and construction within said
period. . .

"15.That it is still furthermore agreed that, in case of court litigation

by virtue of non-payment of the agreed rents or any other breach of
this contract on the part of the party of the second part/Lessee, the
party of the first part/Lessor, shall be entitled to collect P1,000.00 as
liquidated damages and P500.00 as attorney's fee's, exclusive of cost
legally taxable.". . . (Emphasis supplied.)
On January 19, 1954, the lessee instituted Civil Case No. 2582 of the court of First Instance of
Rizal against the lessor, for specific performance, damages and extension of the period of the
lease, allegedly due to the latter's failure to comply with the aforequoted provisions of
paragraph 5 of the contract. These days later, or on January 22, 1954, the Lessor, in turn, filed
in the Justice of the Peace Court of Malabon an action for unlawful detainer (ejectment) against
the Lessee (Civil Case No. 1159), allegedly by reason of said defendant's non-payment of
rentals since February 16, 1953.
On February 10, 1954, the justice of the Peace Court rendered a decision in the ejectment case,
in favor of the lessor, ordering the Lessee to vacate the premises and pay the plaintiff Lessor
rentals in arrears amounting until it finally delivers possession of the property to the Lessor;
liquidate damages in the sum of P1,000.00; attorney's fees for P500.00 and costs.
The Lessee appealed to the Court of First Instance of Rizal, filing therein a cash bond to cover
the amounts adjudged by the Justice of the Peace Court, as well as the current rentals. The
Lessor then filed a motion for execution of the decision appealed from, which was opposed by
the Lessee. As the Court of First Instance granted said motion for execution, the Lessee
instituted certiorari proceedings in this Court (G.R. No. L-8253).
In issuing the writ of certiorari prayed for therein, 1 on the ground that the CFI Judge
committed a grave abuse of discretion in issuing an order for the execution of the decision of
the Justice of the Peace Court despite the "strong equities in favor of Price (Lessee) and the
dubious legality or propriety of the decision of the justice of the peace court", this Court said:
"In their answer, respondents (Camus, et al.) admit some of the
allegations of the petition and deny other allegations thereof. Among
other things, they, moreover, allege that the obligations of Camus,
under the contract of lease, are independent of those of Price: that the
filling and construction provided in said contract, have 'already been
totally' completed; and that the order of July 24, 1954, and the writ of
execution were duly issued, for Price had failed, either to pay, or to
deposit, the amount of the rentals for April, May and June, 1954.
"At the outset, it should be noted that the very pictures submitted by
respondents, as Annexes 9 and 10 to their answer, dated October 11,
1954, show that the stone wall constructed by Camus is
of 'adobe', and has no barbed wire fence, whereas the contract of
lease provides for 'concrete stone walls . . . with barbed wire.'
Furthermore, although the portion of the leased property reproduced
in Annex 9 appears to have been filed, there is evidence (which has
not been contradicted) to the effect that the elevation of said portion is

"At any rate, there is prima facie, if not strong evidence

that Camus had not complied with some of his obligations under the
contract dates back to March 20, 1952, or about eleven (11) months
prior to the alleged default of Price in the payment of rentals (or from
February 16, 1953). . . .
It was then held that the obligations of the parties in the contract being reciprocal, the Lessee
did not incur delay until the Lessor complies with what was incumbent upon him applying
Article 1169 of the Civil Code.
After the case was remanded to the lower court for further proceedings, the 2 cases Civil
Cases Nos. 2582 (for specific performance filed byPrice, Inc.) and 2650 (for unlawful detainer
by Camus) were tried jointly during the parties adduced evidence in support of their respective
allegations. Later, the trial court rendered judgment ordering (1) the cancellation and return of
the bond to the Lessee (Price, Inc.); (2) said Lessee to insure the factory building and
warehouse for P50,000.00 within 1 month; and (3) the Lessor Camus to fill up the low portion
of the leased premises and enclose the from compliance by the Lessor of his aforementioned
obligation.
Only the lessor, Manuel Camus, appealed to the Court of Appeals.
The Case.
In its decision of September 14, 1960, the court of Appeals, passing upon the respective
obligations of the parties under the contract stated:
". . ., it was proved that the lot along the Malabon River, obviously an
accretion of lots Nos. 15 and 16, was declared for tax purposes by
Ricardo, now represented by his widow, Rosario Sevilla Vda.
de Camus, on March 12, 1951 (Tax Declaration No. 10202), and he
had been paying taxes therefor as follows: for 1948, 1949, 1950 and
1951 paid on March 15, 1951, for 1952, on March 26, 1952, for 1953
on March 30, 1953, for 1954 on March 17,, 1954, and for 1955 on
March 30, 1955 (Exh. 14-B). This shows that prior to March 20,
1951, when the contract of lease was executed and prior to the filing
of civil case No. 2582 by appellee (Price Inc.) against appellant
(Camus), Ricardo had already been claiming the possession, if not the
ownership, of the lot bordering the river, which had accumulated by
gradual accretion a total area of 1,425 square meters, the same having
been determined even prior to the execution of the contract of lease as
shown in the tax declaration issued on March 12, 1951. . . .

305
". . . Nevertheless, we cannot sustain appellant's contention that the
500 square meters which he obligated himself to fill up and construct
a fence should be inside the boundaries of lots Nos. 15 and 16,
irrespective of the vacant space therein, because paragraph 5 of the
contract of lease is clear that said portion of 500 square meters is
along the Malabon River. This portion is separate and distinct from
the 1,700 (should be 1,761) square meters of land leased under
paragraph 1 of said contract. Still, it is unreasonable to conclude that
appellant intended to include the entire area of 1,425 square meters
along the river, nor that he only miscalculated the exact area thereof,
as the land he leased to appellee. Under the stated facts, we, therefor,
hold that appellant, with the apparent conformity of Sy Suan, referred
in paragraph 5 of the contract of lease to only a portion of 500 square
of the entire area containing 1,425 square meters, and that he bound
himself to fill up said portion at his expense and to enclose with a
one-meter high stone wall and barbed wire on top within a period of
one year from March 20, 1951.
"To require appellant, as the lower court held, to finish filling up the
entire area bordering the Malabon River and to surround it with a
concrete wall throughout the river bank, would seem unfair to said
appellant and contrary to the true intention of the parties in the
contract of lease, the principal reason being that the entire area of the
lot along the river is undisputedly 1,425 square meters, and not only
500 square meters as stipulated in paragraph 5 of the contract.
Besides, it is illogical to allow appellee to utilize more than 500
square meters. Neither would it be just to compel appellant to incur
expenses in filling up and building a fence for more than 500 square
meters, even if appellee allegedly planned to build a 'hot room' and
'cool-room'. However, in failing to fill up 500 square meters of the
vacant lot along the Malabon River, appellant just the same violated
the contract.
". . . Although we subscribe to the view that reciprocal obligations are
embodied in the contract of lease, yet we cannot see our way clear
that it was appellant who first committed the breach thereof.
Undoubtedly, appellee did not insure the factory building and
warehouse. Sy Suan's testimony on this point that he tried to insure
but the premiums charged were too high on account of the absence of
a stone wall along the river bank, is unmeritorious. When asked, he
could not even mention the name of the insurance company he
approached, much less the amount of premiums allegedly charged.
"Moreover, upon failure of appellee to pay rentals, appellant wrote it
a letter on January 4, 1954. The question of filling up the vacant lot
along the river in accordance with paragraph 5 of the contract of lease
was brought up by appellee only in its letter or reply dated January
11, 1954. As things stand, in so far as the third issue is concerned, we
cannot really determine who between the parties was actually the first
who violated the contract. What we see, that the parties are in pari
delicto. . ."

Based on the foregoing findings, the Court of Appeals declared the contract extinguished, but
the parties were made to bear their own losses. (Art. 1192, Civil Code). However, as the Lessee
was found to be in continued possession of the parties and in operation of its business during
the pendency of the case, it was ordered to compensate the Lessor in the sum of P200.00 a
month from February 16, 1953 until it vacated the premises. Furthermore, the lifetime of the
contract, having expired on March 31, 1960, the factory building and the warehouse were
declared to have automatically become the properties of the Lessor.
From said decision, both parties appealed to this Court.
The Lessor, as appellant (in Nos. L-17858-59), contends that the Court of Appeals erred in not
finding the Lessee Price, Inc. as the first violator of the contract, and in requiring the latter to
pay him only the amount of P200.00 a month for the use and occupation of the properties from
February 16, 1953 until the same are finally vacated.
In its appeal (Nos. L-17865-66), the Lessee, on the other hand, maintains that the Court of
Appeals erred in not declaring the Lessor as the first to have committed the breach of the
agreement; in requiring said lessee to compensate Camus in the amount of P200.00 a month
notwithstanding its finding that the parties are in pari delicto, and must suffer their own
damages; and holding the lease to have terminated as of March 31, 1960.
From the findings of the Court of Appeals heretofore quoted , which we are not here to review,
it appears that the strip of land, with an area of 1,425 square meters, was not originally part of
lots 15 and 16 subject of the contract: that the Lessor actually started the filling in and fencing
of a portion of 500 square meters thereof, as undertaken by him, but did not completely comply
therewith, the fence being only of adobe stones without barbed wires, and the filling being 40
centimeters lower than the elevation of the lot under lease; that, on the other hand,
notwithstanding the completion of the factory building and warehouse, the Lessee, in his turn,
failed to secure insurance therefor to secure insurance therefor as stipulated; that the Lessee,
likewise, defaulted in the payment of the rentals as of February 16, 1953; and that the Lessor's
failure to comply with its obligation could not be the cause of their Lessee's non-fulfillment of
its commitments under the contract. With these established facts, the conclusion reached by the
Court of Appeals, that the parties were in pari delicto is not without foundation or justification.
Although in the incidental case G.R. No. L-8253, this Court in effect declared the Lessor
Camusprima facie to be the first to commit a breach of the agreement, it may be pointed out
that in making such pronouncement, only the matter of the Lessee's default in the payment of
rentals was considered. Upon the continuation of the proceedings, however, it was established,
as so found by the Court of Appeals, that the Lessee also failed to cover the buildings in
September, 1951, with insurance in violation of the specific terms of the contract. As a matter
of fact, until the instant cases were filed, no such insurance was drawn on the aforesaid factory
building and warehouse.
Upon the other hand, while it may be true that the duty imposed on the Lessor under the
contract, to increase the elevation of the low portion of the lot and erect thereon a concrete
stone wall topped with barbed wire was provided only to "facilitate or make use (by the
Lessee) of the whole lot" allegedly a subordinate and collateral condition of the contract
it is not herein denied that such condition was not complied with by the Lessor. And this
obligation matured in March, 1952. Even assuming, therefore, that the Lessee's obligation to
insure the building arose after the completion of the construction of the buildings in September,
1951, as the Lessor also defaulted in the performance of his corresponding duty, it can not

306
really be determined with definiteness who of the parties committed the first infraction of the
terms of the contract. Under the circumstances, the conclusion reached by the Court of
Appeals, that the parties are actually in pari delicto, must be sustained, and the contract deemed
extinguished, with the parties suffering their respective losses.
Considering, however, that the Lessee was (and must still be) in continuous occupancy of the
premises during the pendency of the case, conducting and operating its business therein as
usual and profiting thereby, whereas the Lessor was not only deprived of the possession of his
property but also of the rentals therefor since February 16, 953, said Lessee must be required to
compensate the Lessor for such occupancy. The Lessor, on the other hand, as a result of the
termination of the lease, will acquire the buildings of the lessee which were constructed on the
leased premises. Under the circumstances of the case, we find the decision of the Court of
Appeals directing the payment by Price, Inc. of the sum of P200.00 per month from February
16, 1953, until it vacates the premises, to be in accord with justice.
Wherefore, the decision of the Court of Appeals appealed from is hereby affirmed in all
respects without costs. So ordered.
Bengzon, C.J., Padilla, Labrador, Paredes, Dizon, Regal and Makalintal, JJ., concur.
||| (Camus v. Price, Inc., G.R. No. L-17858-9, L-17865-6, [July 13, 1962])

307

EN BANC
[G.R. No. L-11827. July 31, 1961.]
FERNANDO
A.
GAITE, plaintiff-appellee, vs. ISABELO
FONACIER, GEORGE KRAKOWER, LARAP MINES &
SMELTING CO., INC., SEGUNDINA VIVAS, FRANCISCO
DANTE,
PACIFICO
ESCANDOR
and
FERNANDO
TY, defendants-appellants.

Alejo Mabanag for plaintiff-appellee.

Simplicio U. Tapia Antonio Barredo and Pedro Guevarra for defendants-appellants.

SYLLABUS
1. OBLIGATIONS AND CONTRACTS; CONDITIONAL OBLIGATIONS; EFFICACY
SUBORDINATED TO THE HAPPENING OF A FUTURE AND UNCERTAIN EVENT.
What characterizes a conditional obligation is the fact that its efficacy or obligatory force is
subordinated to the happening of a future and uncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the conditional obligation had never
existed.
2. SALES; COMMUTATIVE AND ONEROUS NATURE OF CONTRACT OF SALES;
CONTINGENT CHARACTER OF OBLIGATION MUST CLEARLY APPEAR. A contract
of sale is normally commutative and onerous: not only does each of the parties assume a
correlative obligation, but each party anticipates performance by the other from the very start.
Although the obligation of one party can be lawfully subordinated to an uncertain event, so that
the other understands that he assumes the risk of receiving nothing for what he gives, it is not
in the usual course of business to do so; hence, the contingent character of the obligation must
clearly appear.
3. ID.; ID.; HOW DOUBT IN THE INTENTION OF PARTIES IS RESOLVED. Sale is
essentially onerous, and if there is doubt whether the parties intended a suspensive condition or
a suspensive period for the payment of the agreed price, the doubt shall be settled in favor of
the greatest reciprocity of interests, which will obtain if the buyer's obligation is deemed to be
actually existing, with only its maturity postponed or deferred.

DECISION

REYES, J.B.L., J p:
This appeal comes to us directly from the Court of First Instance because the claims involved
aggregate more than P200,000.
Defendant-appellant Isabelo Fonacier was the owner and/or holder, either by himself or in a
representative capacity, of 11 iron lode mineral claims, known as the Dawahan Group, situated
in the municipality of Jose Panganiban, province of Camarines Norte.
By a "Deed of Assignment" dated September 29, 1952 (Exhibit "3"), Fonacier constituted and
appointed plaintiff-appellee Fernando A. Gaite as his true and lawful attorney-in-fact to enter
into a contract with any individual or juridical person for the exploration and development of
the mining claims aforementioned on a royalty basis of not less than P0.50 per ton of ore that
might be extracted therefrom. On March 19, 1954, Gaite in turn executed a general assignment
(Record on Appeal, pp. 17-19) conveying the development and exploitation of said mining
claims unto the Larap Iron Mines, a single proprietorship owned solely by and belonging to
him, on the same royalty basis provided for in Exhibit "3". Thereafter Gaite embarked upon the
development and exploitation of the mining claims in question, opening and paving roads
within and outside their boundaries, making other improvements and installing facilities
therein for use in the development of the mines, and in time extracted therefrom what he
claimed and estimated to be approximately 24,000 metric tons of iron ore.
For some reason or another, Isabelo Fonacier decided to revoke the authority granted by him to
Gaite to exploit and develop the mining claims in question, and Gaite assented thereto subject
to certain conditions. As a result, a document entitled "Revocation of Power of Attorney and
Contract" was executed on December 8, 1954 (Exhibit "A"), wherein Gaite transferred to
Fonacier, for the consideration of P20,000, plus 10% of the royalties that Fonacier would
receive from the mining claims, all his rights and interests on all the roads, improvements, and
facilities in or outside said claims, the right to use the business name "Larap Iron Mines" and
its goodwill, and all the records and documents relative to the mines. In the same document,
Gaite transferred to Fonacier all his rights and interests over the "24,000 tons of iron ore, more
or less" that the former had already extracted from the mineral claims, in consideration of the
sum of P75,000, P10,000, of which was paid upon the signing of the agreement, and
"b. The balance of SIXTY-FIVE "THOUSAND PESOS (P65,000)
will be paid from and out of the first letter of credit covering the first
shipment of iron ores and or the first amount derived from the local
sale of iron ore made by the Larap Mines & Smelting Co., Inc., its
assigns, administrators, or successors in interests."
To secure the payment of the said balance of P65,000.00, Fonacier promised to execute in
favor of Gaite a surety bond; and pursuant to the promise, Fonacier delivered to Gaite a
surety bond dated December 8, 1954 with himself (Fonacier) as principal and the Larap
Mines and Smelting Co. and its stockholders George Krakower, Segundina Vivas,
Pacifico Escandor, Francisco Dante, and Fernando Ty as sureties (Exhibit "A-1"). Gaite
testified, however, that when this bond was presented to him by Fonacier together with
the "Revocation of Power of Attorney and Contract", Exhibit "A", on December 8, 1954,
he refused to sign said Exhibit "A" unless another bond underwritten by a bonding

308
company was put up by defendants to secure the payment of the P65,000 balance of the
price of the iron ore in the stockpiles in the mining claims. Hence, a second bond, also
dated December 8, 1954 (Exhibit "B"), was executed by the same parties to the first bond
Exhibit "A-I", with the Far Eastern Surety and Insurance Co. as additional surety, but it
provided that the liability of the surety company would attach only when there had been
an actual sale of iron ore by the Larap Mines & Smelting Co. for an amount of not less
than P65,000, and that, furthermore, the liability of said surety company would
automatically expire on December 8, 1955. Both bonds were attached to the "Revocation
of Power of Attorney and Contract", Exhibit "A" and made integral parts thereof.
On the same day that Fonacier revoked the power of attorney he gave to Gaite and the two
executed and signed the "Revocation of Power of Attorney and Contract", Exhibit "A",
Fonacier entered into a "Contract of Mining Operation", ceding, transferring, and conveying
unto the Larap Mines and Smelting Co., Inc. the right to develop, exploit, and explore the
mining claims in question, together with the improvements therein and the use of the name
"Larap Iron Mines" and its goodwill, in consideration of certain royalties. Fonacier likewise
transferred, in the same document, the complete title to the approximately 24,000 tons of iron
ore which he acquired from Gaite, to the Larap Mines & Smelting Co., in consideration for the
signing by the company and its stockholders of the surety bonds delivered by Fonacier to Gaite
(Record on Appeal, pp. 82-94).
Up to December 8, 1955, when the bond Exhibit "B" expired with respect to the Far Eastern
Surety and Insurance Company, no sale of the approximately 24,000 tons of iron ore had been
made by the Larap Mines & Smelting Co., Inc., nor had the 65,000 balance of the price of said
ore been paid to Gaite by Fonacier and his sureties. Whereupon, Gaite demanded from
Fonacier and his sureties payment of said amount, on the theory that they had lost every right
to make use of the period given them when their bond, Exhibit "B", automatically expired
(Exhibits "C" to "C-24"). And when Fonacier and his sureties failed to pay as demanded by
Gaite, the latter filed the present complaint against them in the Court of First Instance of
Manila (Civil Case No. 29310) for the payment of the P65,000 balance of the price of the ore,
consequential damages, and attorney's fees.
All the defendants except Francisco Dante set up the uniform defense that the obligation sued
upon by Gaite was subject to a condition that the amount of P65,000 would be payable out of
the first letter of credit covering the first shipment of iron ore and/or the first amount derived
from the local sale of the iron ore by the Larap Mines & Smelting Co., Inc.; that up to the time
of the filing of the complaint, no sale of the iron ore had been made, hence the condition had
not yet been fulfilled; and that consequently, the obligation was not yet due and demandable.
Defendant Fonacier also contended that only 7,573 tons of the estimated 24,000 tons of iron
ore sold to him by Gaite was actually delivered, and counterclaimed for more than P200,000
damages.
At the trial of the case, the parties agreed to limit the presentation of evidence to two issues:
(1) Whether or not the obligation of Fonacier and his sureties to pay Gaite P65,000 became due
and demandable when the defendants failed to renew the surety bond underwritten by the Far
Eastern Surety and Insurance Co., Inc. (Exhibit "B") which expired on December 8, 1955, and
(2) Whether the estimated 24,000 tons of iron ore sold by plaintiff Gaite to defendant Fonacier
were actually in existence in the mining claims when these parties executed the "Revocation of
Power of Attorney and Contract", Exhibit "A."

On the first question, the lower court held that the obligation of defendants to pay plaintiff the
P65,000 balance of the price of the approximately 24,000 tons of iron ore was one with a term:
i.e., that it would be paid upon the sale of sufficient iron ore by defendants, such sale to be
effected within one year or before December 8, 1955; that the giving of security was a
condition precedent to Gaite's giving of credit to defendants; and that as the latter failed to put
up a good and sufficient security in lieu of the Far Eastern Surety bond (Exhibit "B") which
expired on December 8, 1955, the obligation became due and demandable under Article 1198
of the New Civil Code.
As to the second question, the lower court found that plaintiff Gaite did have approximately
24,000 tons of the iron ore at the mining claims in question at the time of the execution of the
contract Exhibit "A."

Judgment was, accordingly, rendered in favor of plaintiff Gaite ordering defendants to pay him,
jointly and severally, P65,000 with interest at 6% per annum from December 9, 1965 until full
payment, plus costs. From this judgment, defendants jointly appealed to this Court.
During the pendency of this appeal, several incidental motions were presented for resolution: a
motion to declare the appellants Larap Mines & Smelting Co., Inc. and George Krakower in
contempt, filed by appellant Fonacier, and two motions to dismiss the appeal as having become
academic and a motion for new trial and/or to take judicial notice of certain documents, filed
by appellee Gaite. The motion for contempt is unmeritorious because the main allegation
therein that the appellants Larap Mines & Smelting Co., Inc. and Krakower had sold the iron
ore here in question, which allegedly is "property in litigation", has not been substantiated; and,
even if true, does not make these appellants guilty of contempt, because what is under litigation
in this appeal is appellee Gaite's right to the payment of the balance of the price of the ore, and
not the iron ore itself. As for the several motions presented by appellee Gaite, it is unnecessary
to resolve these motions in view of the result that we have reached in this case, which we shall
hereafter discuss.
The main issues presented by appellants in this appeal are:
(1) that the lower court erred in holding that the obligation of appellant Fonacier to pay
appellee Gaite the P65,000 (balance of the price of the iron ore in question) is one with a
period or term and not one with a suspensive condition, and that the term expired on December
8, 1955; and
(2) that the lower court erred in not holding that there were only 10,954.5 tons in the stockpiles
of iron ore sold by appellee Gaite to appellant Fonacier.
The first issue involves an interpretation of the following provision in the contract Exhibit "A":
"7. That Fernando Gaite or Larap Iron Mines hereby transfers to
Isabelo F. Fonacier all his rights and interests over the 24,000 tons of
iron ore, more or less, above-referred to together with all his rights
and interests to operate the mine in consideration of the sum of
SEVENTY-FIVE THOUSAND PESOS (P75,000) which the latter
binds to pay as follows:

309
a. TEN THOUSAND PESOS (P10,000) will be paid upon the signing
of this agreement.
b. The balance of SIXTY-FIVE THOUSAND PESOS (P65,000) will
be paid from and out of the first letter of credit covering first
shipment of iron ores and/or the first amount derived from the local
sale of iron ore made by the Larap Mines & Smelting Co., Inc., its
assigns, administrators, or successors in interest."
We find the court below to be legally correct in holding that the shipment or local sale of the
iron ore is not a condition precedent (or suspensive) to the payment of the balance of P65,000,
but was only a suspensive period or term. What characterizes a conditional obligation is the
fact that its efficacy or obligatory force (as distinguished from its demandability) is
subordinated to the happening of a future and uncertain event; so that if the suspensive
condition does not take place, the parties would stand as if the conditional obligation had never
existed. That the parties to the contract Exhibit "A" did not intend any such state of things to
prevail is supported by several circumstances:
1) The words of the contract express no contingency in the buyer's obligation to pay: "The
balance of Sixty-Five Thousand Pesos (P65,000) will be paid out of the first letter of credit
covering the first shipment of iron ore . . ." etc. There is no uncertainty that the payment will
have to be made sooner or later; what is undetermined is merely the exact date at which it will
be made. By the very terms of the contract, therefore, the existence of the obligation to pay is
recognized; only its maturity or demandability is deferred.
2) A contract of sale is normally commutative and onerous: not only does each one of the
parties assume a correlative obligation (the seller to deliver and transfer ownership of the thing
sold and the buyer to pay the price), but each party anticipates performance by the other from
the very start. While in a sale the obligation of one party can be lawfully subordinated to an
uncertain event, so that the other understands that he assumes the risk of receiving nothing for
what he gives (as in the case of a sale of hopes or expectations, emptio spei), it is not in the
usual course of business to do so; hence, the contingent character of the obligation must clearly
appear. Nothing is found in the record to evidence that Gaite desired or assumed to run the risk
of losing his rights over the ore without getting paid for it, or that Fonacier understood that
Gaite assumed any such risk. This is proved by the fact that Gaite insisted on a bond to
guarantee payment of the P65,000, and not only upon a bond by Fonacier, the Larap Mines &
Smelting Co., and the company's stockholders, but also on one by a surety company; and the
fact that appellants did put up such bonds indicates that they admitted the definite existence of
their obligation to pay the balance of P65,000.
3) To subordinate the obligation to pay the remaining P65,000 to the sale or shipment of the
ore as a condition precedent, would be tantamount to leaving the payment at the discretion of
the debtor, for the sale or shipment could not be made unless the appellants took steps to sell
the ore.
Appellants would thus be able to postpone payment indefinitely. The desirability of
avoiding such a construction of the contract Exhibit "A" needs no stressing.
4) Assuming that there could be doubt whether by the wording of the contract the parties
intended a suspensive condition or a suspensive period (dies ad quem) for the payment of the
P65,000, the rules of interpretation would incline the scales in favor of "the greatest reciprocity

of interests", since sale is essentially onerous. The Civil Code of the Philippines, Article 1378,
paragraph 1, in fine, provides:
"if the contract is onerous, the doubt shall be settled in favor of the
greatest reciprocity of interests."
and there can be no question that greater reciprocity obtains if the buyer's obligation is
deemed to be actually existing, with only its maturity (due date) postponed or deferred,
than if such obligation were viewed as non-existent or not binding until the ore was sold.
The only rational view that can be taken is that the sale of the ore to Fonacier was a sale on
credit, and not an aleatory contract where the transferor, Gaite, would assume the risk of not
being paid at all; and that the previous sale or shipment of the ore was not a suspensive
condition for the payment of the balance of the agreed price, but was intended merely to fix the
future date of the payment.
This issue settled, the next point of inquiry is whether appellants, Fonacier and his sureties, still
have the right to insist that Gaite should wait for the sale or shipment of the ore before
receiving payment; or, in other words, whether or not they are entitled to take full advantage of
the period granted them for making the payment.
We agree with the court below that the appellants have forfeited the right to compel Gaite to
wait for the sale of the ore before receiving payment of the balance of P65,000, because of
their failure to renew the bond of the Far Eastern Surety Company or else replace it with an
equivalent guarantee. The expiration of the bonding company's undertaking on December 8,
1955 substantially reduced the security of the vendor's rights as creditor for the unpaid
P65,000, a security that Gaite considered essential and upon which he had insisted when he
executed the deed of sale of the ore to Fonacier (Exhibit "A"). The case squarely comes under
paragraphs 2 and 3 of Article 1198 of the Civil Code of the Philippines:
(1) . . .
(2) When he does not furnish to the creditor the guaranties or
securities which he has promised.
(3) When by his own acts he has impaired said guaranties or
securities after their establishment, and when through fortuitous event
they disappear, unless he immediately gives new ones equally
satisfactory."
Appellants' failure to renew or extend the surety company's bond upon its expiration plainly
impaired the securities given to the creditor (appellee Gaite), unless immediately renewed or
replaced.
There is no merit in appellants' argument that Gaite's acceptance of the surety company's bond
with full knowledge that on its face it would automatically expire within one year was a waiver
of its renewal after the expiration date. No such waiver could have been intended, for Gaite
stood to lose and had nothing to gain thereby; and if there was any, it could be rationally
explained only if the appellants had agreed to sell the ore and pay Gaite before the surety
company's bond expired on December 8, 1955. But in the latter case the defendants- appellants'
obligation to pay became absolute after one year from the transfer of the ore to Fonacier by
virtue of the deed Exhibit "A."

310
All the alternatives, therefore, lead to the same result: that Gaite acted within his rights in
demanding payment and instituting this action one year from and after the contract (Exhibit
"A") was executed, either because the appellant debtors had impaired the securities originally
given and thereby forfeited any further time within which to pay; or because the term of
payment was originally of no more than one year, and the balance of P65,000 became due and
payable thereafter.
Coming now to the second issue in this appeal, which is whether there were really 24,000 tons
of iron ore in the stockpiles sold by appellee Gaite to appellant Fonacier, and whether, if there
had been a short-delivery as claimed by appellants, they are entitled to the payment of
damages, we must, at the outset, stress two things: first, that this is a case of a sale of a specific
mass of fungible goods for a single price or a lump sum, the quantity of "24,000 tons of iron
ore, more or less", stated in the contract Exhibit "A", being a mere estimate by the parties of
the total tonnage weight of the mass; and second, that the evidence shows that neither of the
parties had actually measured or weighed the mass, so that they both tried to arrive at the total
quantity by making an estimate of the volume thereof in cubic meters and then multiplying it
by the estimated weight per ton of each cubic meter.

The sale between the parties is a sale of a specific mass of iron ore because no provision was
made in their contract for the measuring or weighing of the ore sold in order to complete or
perfect the sale, nor was the price of P75,000 agreed upon by the parties based upon any such
measurement (see Art. 1480, second par., New Civil Code). The subject-matter of the sale is,
therefore, a determinate object, the mass, and not the actual number of units or tons contained
therein, so that all that was required of the seller Gaite was to deliver in good faith to his buyer
all of the ore found in the mass, notwithstanding that the quantity delivered is less than the
amount estimated by them (Mobile Machinery & Supply Co., Inc. vs. York Oilfield Salvage
Co., Inc. 171 So. 872, applying art. 2459 of the Luisiana Civil Code). There is no charge in this
case that Gaite did not deliver to appellants all the ore found in the stockpiles in the mining
claims in question; Gaite had, therefore, complied with his promise to deliver, and appellants in
turn are bound to pay the lump price.
But assuming that plaintiff Gaite undertook to sell and appellants undertook to buy, not a
definite mass, but approximately 24,000 tons of ore, so that any substantial difference in this
quantity promised and the quantity delivered would entitle the buyers to recover damages for
the short-delivery, was there really a short- delivery in this case?
We think not. As already stated, neither of the parties had actually measured or weighed the
whole mass of ore cubic meter by cubic meter, or ton by ton. Both parties predicate their
respective claims only upon an estimated number of cubic meters of ore multiplied by the
average tonnage factor per cubic meter.
Now, appellee Gaite asserts that there was a total of 7,375 cubic meters in the stockpiles of ore
that he sold to Fonacier, while appellants contend that by actual measurement, their witness
Cipriano Manlagit found the total volume of ore in the stockpiles to be only 6,609 cubic
meters. As to the average weight in tons per cubic meter, the parties are again in disagreement,
with appellants claiming the correct tonnage factor to be 2.18 tons to a cubic meter, while
appellee Gaite claims that the correct tonnage factor is about 3.7.
In the face of the conflict of evidence, we take as the most reliable estimate of the tonnage
factor of iron ore in this case to be that made by Leopoldo F. Abad, chief of the Mines and

Metallurgical Division of the Bureau of Mines, a government pensionado to the States and a
mining engineering graduate of the Universities of Nevada and California, with almost 22
years of experience in the Bureau of Mines. This witness placed the tonnage factor of every
cubic meter of iron ore at between 3 metric tons as minimum to 5 metric tons as maximum.
This estimate, in turn, closely corresponds to the average tonnage factor of 3.3 adopted in his
corrected report (Exhibits "FF" and "FF- 1") by engineer Nemesio Gamatero, who was sent by
the Bureau of Mines to the mining claims involved at the request of appellant Krakower,
precisely to make an official estimate of the amount of iron ore in Gaite's stockpiles after the
dispute arose.
Even granting, then, that the estimate of 6,609 cubic meters of ore in the stockpiles made by
appellants' witness Cipriano Manlagit is correct, if we multiply it by the average tonnage
factor of 3.3 tons to a cubic meter, the product is 21,809.7 tons, which is not very far from the
estimate of 24,000 tons made by appellee Gaite, considering that actual weighing of each unit
of the mass was practically impossible, so that a reasonable percentage of error should be
allowed anyone making an estimate of the exact quantity in tons found in the mass. It must not
be forgotten that the contract Exhibit "A" expressly stated the amount to be 24,000 tons, more
or less. (cf. Pine River Logging & Improvement Co. vs. U. S., 186 U.S. 279, 46, L. Ed. 1164).
There was, consequently, no short-delivery in this case as would entitle appellants to the
payment of damages, nor could Gaite have been guilty of any fraud in making any
misrepresentation to appellants as to the total quantity of ore in the stockpiles of the mining
claims in question, as charged by appellants since Gaite's estimate appears to be substantially
correct.
WHEREFORE, finding no error in the decision appealed from, we hereby affirm the same,
with costs against appellants.
Bengzon, C.J., Padilla, Labrador,
Leon and Natividad, JJ., concur.

Concepcion,

Barrera,

Paredes,

||| (Gaite v. Fonacier, G.R. No. L-11827, [July 31, 1961], 112 PHIL 720-733)

Dizon,

De

311

EN BANC
[G.R. No. 80231. October 18, 1988.]
CELSO A. FERNANDEZ, petitioner, vs. THE HONORABLE COURT
OF APPEALS and MIGUEL TANJANGCO, respondents.

Celso A. Fernandez for and in his own behalf.

Ricardo J. Lardizabal for private respondent.

SYLLABUS
1. CIVIL LAW; CONTRACTS; LEASE; WORDS "EXTENDIBLE" AND "RENEWABLE"
EXPLAINED. As a matter of dictionary meaning, "extendible" means "capable of
extension", and "renewable" means "capable of renewal"; both are oriented towards the future.
It may be seen that both "extendible" and "renewable", when considered in and of themselves,
are non-committal: they do not purport to answer the intensely practical question of who is
vested lessor or lessee or both acting together with the option to extend or renew a lease.
Again, neither term by itself pre-empts the question of what the specific terms and conditions
of the extended or renewed lease shall be: shall all terms and provisions of the old lease be
carried forward into the future, or shall all or some of them be renegotiated upon expiration of
the old lease.
2. ID.; ID.; ID.; RULINGS IN KOH VS. ONGSIACO (36 PHIL. 185 [1917] AND CRUZ VS.
ALBERTO (39 PHIL. 991 [1919]) OVERRULED. Both Kohand Cruz seem to impose an
impossible burden upon single words. Put a little differently, both Mr. Justice Torres and Mr.
Justice Street read too much into a single word: they read "extendible" as if it said
"extendible at the option of the lessee alone, all other terms and conditions remaining
unchanged". In effect, Koh and Cruz treated "extendible" as a highly technical and cryptic
term. We do not believe that the use of either "extendible" or "renewable" should be given
sacramental significance. The important task in contract interpretation is always the
ascertainment of the intention of the contracting parties and that task is of course to be
discharged by looking to the words they used to project that intention in their contract, all the
words not just a particular word or two, and words in context not words standing alone. It is
also important to bear in mind that in a reciprocal contract like a lease, the period of the lease
must be deemed to have been agreed upon for the benefit of both parties, absent language
showing that the term was deliberately set for the benefit of the lessee or lessor alone. We are
not aware of any presumption in law that the term of a lease is designed for the benefit of the
lessee alone. Koh and Cruz in effect rested upon such a presumption. But that presumption
cannot reasonably be indulged in casually in an era of rapid economic change, marked by,
among other things, volatile costs of living and fluctuations in the value of the domestic

currency. The longer the period the more clearly unreasonable such a presumption would be. In
an age like that we live in, very specific language is necessary to show an intent to grant a
unilateral faculty to extend or renew a contract of lease to the lessee alone, or to the lessor
alone for that matter. We hold that the above-quoted rulings in Koh v. Ongsiaco and Cruz v.
Alberto should be and are overruled.
3. ID.; ID.; ID.; VERBAL ASSURANCE OF RENEWAL OF LEASE; INADMISSIBLE
UNDER PAROLE EVIDENCE RULE. An alleged verbal assurance of renewal of a lease is
inadmissible to qualify the terms of the written lease agreement under the parole evidence rule,
and unenforceable under the Statute of Frauds.
4. ID.; ID.; ID.; INTERPRETATION OF PHRASE "RENEWABLE FOR ANOTHER TEN (10)
YEARS AT THE OPTION OF BOTH PARTIES UNDER SUCH TERMS, CONDITIONS AND
RENTAL REASONABLE AT THAT TIME." The only issue here relates to the interpretation
of the phrase "renewable for another ten (10) years at the option of both parties under such
terms, conditions and rental reasonable at that time", set out in paragraph (2) of the lease
contract in question. The Court of Appeals read the above contract language as comprising, not
technical terms or terms of legal art, but rather just plain and ordinary words. As such, the
Court of Appeals understood the above language as requiring "that the parties should
mutually agree on a new contract which may not be the same as the original, under such terms,
conditions and rental reasonable at that time. It follows therefore that the plaintiff [petitioner]
cannot renew the lease by his unilateral act of exercising his option. Simply stated, the option
must be mutually and consen[s]ually exercised, and not unilaterally as was erroneously done
by the plaintiff. Applied to the lease contract under consideration, it appears that the lease has
expressed in clear, unmistakable and unambiguous terms the intention of the parties that if the
lease contract was to be renewed, the option to renew should be made by both parties." We
agree with the respondent appellate court's reading: the intention of the parties to the lease
agreement is clearly discernible in the words of that agreement. The assent of both lessor and
lessee is essential for another contract to spring into juridical existence upon expiration of the
original one. The contract clause may be seen to consist of two (2) parts: first, the contract is
stipulated to be "renewable" for another ten years "at the option of both parties"; second, the
contract is specified to be "renewable under such terms, conditions and rental reasonable at
that time." The first part of the clause stresses that the option or faculty to renew was given, not
to the lessee alone nor to the lessor by himself, but to the two (2) simultaneously who hence
must both exercise the option to renew if a new contract is to come about. The second portion
of the contract clause addresses the future and directs the parties to negotiate and reach mutual
agreement on the terms and conditions of the new contract, including the new rental rate,
which terms and conditions must be reasonable under such situation as may be extent when the
time for renewal arrives. The only term on which there has been some pre-agreement is the
period of the new contract: "another ten years." Clearly, the requirement of future
mutual agreement as to renewal, has here been specified with adequate precision.

DECISION

312
FELICIANO, J p:
The controversy here revolves around the appropriate reading of a clause in a lease contract
that was executed about fifteen years ago.
On 31 July 1973, respondent Miguel Tanjangco, as lessor, and petitioner Celso A.
Fernandez, 1 as lessee, entered into a ten-year Contract of Lease 2over a piece of land situated
along Kahilum Street, Pandacan, Manila, where petitioner would put up the then proposed
New Zamora Market. The parties agreed that the lease, which was scheduled to end on 1 July
1983, would be "renewable for another ten (10) years at the option of both parties under such
terms, conditions and rental reasonable at that time" and that, upon expiration of the lease,
whatever improvements were then existing thereon should automatically belong to the lessor
without having to pay the lessee. prcd
Before the agreed term ended, or on 19 April 1983, respondent wrote petitioner about the
former's intention not to extend further or renew the lease. Petitioner replied, through a letter
dated 6 June 1983, that he had opted to renew the contract for another ten (10) years so that he
could recover all the expenses he had incurred in the construction of the market.
In another letter to petitioner dated 1 June 1983, respondent, through his lawyer, advised that
respondent could not accept petitioner's unilateral action to renew the lease because, under the
contract, any renewal or extension thereof was possible only "at the option of both parties."
On 23 June 1983, petitioner commenced an action against respondent before the Regional Trial
Court of Quezon City, Branch 84, alleging that petitioner was entitled to renew the lease
contract, under paragraph 3 Section 2 thereof, for another ten (10) years, which paragraph in
the contract should be construed in a liberal manner and with justice. In his prayer, he sought to
compel respondent to renew the lease agreement for another term, or asked the court to
consider the original contract as renewed for another ten (10) years or to fix another period for
the renewal contract.
Respondent, in his answer, contended that a judicial interpretation of the contract involved was
not necessary, the contract being simply worded and phrased in a categorical and unequivocal
manner that had expressed clearly the intention of the parties to it, in respect of their mutual
prestations.
On 5 November 1984, the trial court rendered judgment in favor of petitioner. The dispositive
portion of the decision reads:
"WHEREFORE, judgment is hereby rendered declaring the Contract
of Lease executed between the plaintiff and the defendant on July 30,
1973 (Exh. "A", "1") renewed for another ten (10) years from July 1,
1983 to June 30, 1993 with the corresponding increase of rental from
P750.00 to P1,500.00 a month from July 1, 1983 to June 30, 1988 and
to P3,760.00 a month from July 1, 1988 to June 30,
1993." 3 (Emphasis supplied)
Respondent immediately brought an appeal to the Court of Appeals, which court, on 9 June
1987, reversed the trial court's decision. A Motion for Reconsideration was denied. Hence this
Petition for Review on Certiorari.

By a Resolution dated 18 November 1987, respondent was required to file a Comment on the
Petition, to which a Reply was filed by petitioner on 27 January 1988.
The only issue here relates to the interpretation of the phrase "renewable for another ten (10)
years at the option of both parties under such terms, conditions and rental reasonable at that
time", set out in paragraph (2) of the lease contract in question.
The Court of Appeals read the above contract language as comprising, not technical terms or
terms of legal art, but rather just plain and ordinary words. As such, the Court of Appeals
understood the above language as requiring
"that the parties should mutually agree on a new contract which may
not be the same as the original, under such terms, conditions and
rental reasonable at that time. It follows therefore that the plaintiff
[petitioner] cannot renew the lease by his unilateral act of exercising
his option. Simply stated, the option must be mutually and
consen[s]ually exercised, and not unilaterally as was erroneously
done by the plaintiff.

Applied to the lease contract under consideration, it appears that the

lease has expressed in clear, unmistakable and unambiguous terms the
intention of the parties that if the lease contract was to be renewed,
the option to renew should be made by both parties." 4
We agree with the respondent appellate court's reading: the intention of the parties to the lease
agreement is clearly discernible in the words of that agreement. The assent of both lessor and
lessee is essential for another contract to spring into juridical existence upon expiration of the
original one. The contract clause may be seen to consist of two (2) parts: first, the contract is
stipulated to be "renewable" for another ten years "at the option of both parties"; second, the
contract is specified to be "renewable under such terms, conditions and rental reasonable at
that time." The first part of the clause stresses that the option or faculty to renew was given, not
to the lessee alone nor to the lessor by himself, but to the two (2) simultaneously who hence
must both exercise the option to renew if a new contract is to come about. The second portion
of the contract clause addresses the future and directs the parties to negotiate and reach mutual
agreement on the terms and conditions of the new contract, including the new rental rate,
which terms and conditions must be reasonable under such situation as may be extant when the
time for renewal arrives. The only term on which there has been some pre-agreement is the
period of the new contract: "another ten years." Clearly, the requirement of future
mutual agreement as to renewal, has here been specified with adequate precision. LibLex
In Millare vs. Hernando, 5 the Court had before it a lease contract which provided that the
contract "may be renewed after a period of five years under the terms and conditions as will be
mutually agreed upon by the parties at the time of renewal." The contract clause in the case at
bar may be seen to be closely similar to the contract stipulation in Millare, though the former is
worded with a slightly lower degree of particularity. InMillare, the respondent Judge ordered,
against the lessor's objection, the renewal of the lease for another five years and fixed the
monthly rentals at P700.00 a month payable in arrears. In setting aside the Judge's Order, the
Court said:

313
"We are otherwise unable to comprehend how he arrived at the
reading set forth above. Paragraph 13 of the Contract of Lease can
only mean that the lessor and lessee may agree to renew the contract
upon their reaching agreement on the terms and conditions to be
embodied in such renewal contract. Failure to reach agreement on
the terms and conditions of the renewal contract will of course
prevent the contract from being renewed at all. In the instant case, the
lessor and the lessee conspicuously failed to reach agreement both on
the amount of the rental to be payable during the renewal term, and
on the term of the renewed contract." 6 (Emphasis supplied).
Petitioner, however, invokes Koh vs. Ongsiaco 7 and Cruz vs. Alberto. 8 In Koh, the Court had
to construe the following provision in a contract of lease: "The term of the contract shall be
that of one year, counting from the 1st of December of the present year (1913), which term
shall be extendible at the will of both parties." After finding as a matter of fact that the phrase
"at the will of both parties" had been intercalated in the contract without the knowledge and
consent of the lessee, the Court held that the option to extend the term of the lease had in effect
been vested in the lessee alone:
"The word 'extendible,' contained in the contract executed between
the plaintiff and the defendant, means that the term of the contract
could be extended and is equivalent to a promise to extend made by
the defendant to the plaintiff-lessee, and, as a unilateral stipulation,
obliges the promisor to fulfill his promise. Both the defendant
Ongsiaco and the plaintiff Legarda Koh testified that the contract was
extendible at the expiration of its term, and the lessee, accepting the
promise, acquired the right to demand its fulfillment by virtue of the
special and obligatory juridic relation established between them.
The plaintiff-lessee, after notifying the lessor that he wished to
continue the contract, by virtue of the word 'extendible' acquired the
right to elect between continuing his occupancy of the properties in
accordance with the lease, a promise for the extension of the term of
which was made him, and of giving them up by refraining from
demanding the fulfillment of said promise. Therefore, the right
arising out of the grant of the extension of the term of the lease is
understood as having been created in favor of the lessee, who is
entitled to require that the lessor fulfill his promise a unilateral
one contained in the contract and accepted by the lessee. The
consequence of that promise is that its fulfillment shall depend solely
on the will of one of the contracting parties, the one to whom the
promise was made. Such a concession cannot be considered as
anomalous and opposed to the principles of law touching contracts,
inasmuch as the lessor was entirely free to make or not to make the
promise, within the most ample liberty enjoyed by every citizen in the
exercise of his rights; but once the promise was made and the contract
was made to read that the term of the latter should be extendible, the
lessor cannot be permitted afterwards to evade fulfillment of this
obligation which he freely assumed, . . ." 9 (Emphasis supplied)

In Cruz, the Court was faced with very similar language in another lease agreement written in
Spanish:
"That the term of this contract of lease shall be six years counted from
the date of execution, and extendible for another six years agreed
upon by both parties. (Que el termino de este contrato de
arrendamiento, sera el de seis (6) aos contados desde la fecha de su
otorgamiento, y prorrogable a otros seis (6) aos convenidos por
ambas partes.) 10 (Emphasis supplied)
The Court actually had before it at the same time another lease contract between the same
parties and covering a different portion of the same property: "Plus six years of extension
agreed upon by both parties (mas seis (6) aos de prorroga convenida por ambas partes).
"The Court read the above stipulation in Spanish as importing that the parties had already
previously agreed, at the time of execution of the contract, to give the lessee a unilateral
option to extend the period of the lease for another six years:
"It is contended on the part of the plaintiff-appellant that the
expression 'agreed upon by both parties' was used to denote that,
while the parties were agreed upon a future extension of the lease, the
same should not take place except by their mutual consent to be
expressed in the future, that is to say, upon the expiration of the
original term. These words, so it is insisted, do not refer to a past
transaction but to some future agreement.
The trial judge held, on the contrary, that the phrase in question had
the effect of conceding to the lessee a term of six full years in
addition to the original term, being in practical effect equivalent to
twelve years, if the lessee should elect, as he did, to have the term
extended. In this connection his Honor noted that the words 'agreed
upon are used adjectively in the contracts as written in the original
Spanish, to qualify 'years' and 'extension', respectively, and
furthermore, that in the form of the perfect participle those qualifying
words speak of something past and already determined.
We are of the opinion that the trial judge was entirely correct in his
interpretation of the contracts in question; and though it must be
admitted that this interpretation renders the words 'agreed upon by
both parties' superfluous, yet this does not involve any strain upon the
meaning of the entire passage. If the interpretation which the
appellant would have us adopt be true, the entire clause relative to the
extension of the term would be superfluous, for if the extension is
only to be effective upon a new agreement of the parties to be made at
the expiration of the original term, why should anything at all be said
about an extension? Parties who are free to make one contract of lease
are certainly free to make a new one when the old has expired without
being reminded of their faculty to do so by the insertion of a clause of
this kind in the first lease. This would not only be superfluous but
nonsensical. The clause relative to the extension of the lease, should,
if possible, be so interpreted as to give it some force.

314
As we interpret the contracts before us, the parties meant to express
the fact that they had already agreed that there might be an extension
of the lease and had agreed upon its duration, thus giving the
defendant the right of election to take for a second term or to quit
upon the expiration of the original term. The clause in question has
the same meaning as if the words 'agreed upon by both parties' had
been omitted and the passage had closed with a period after the word
'years' in the first contract and after 'extension' in the third
contract." 11 (Emphasis supplied).
Petitioner urges that Koh and Cruz should be applied in the present case. We do not believe,
however, that Koh and Cruz are controlling here. Upon the other hand, we believe that
the Koh and Cruz rulings need to be re-examined and we do that below.
On the purely linguistic level, we note that the important, operative word in the contract clause
in both Koh and Cruz was "extendible"; in the case at bar, the contract used the term
"renewable". In Koh, the Court has in effect looking at the word "extendible" standing alone:
Mr. Justice Torres found that the phrase "at the will of both parties" had been unilaterally
inserted by a stranger to the contract the lessor's caretaker of the property involved
without the consent of the lessee; the phrase therefore could be disregarded. In Cruz, Mr.
Justice Street felt compelled by what may well be too mechanical a rendering into English of
the past participle form in Spanish to read "convenidos por ambas partes" as referring to a
previous agreement contemporaneous with execution of the contract to grant the lessee a
unilateral option to continue with the lease beyond the original term; 12 in any event Mr.
Justice Street treated the phrase as a superfluity. 13 In the case at bar, "renewable"
does not stand alone: as noted earlier, it is qualified and amplified by two phrases, the one
stressing that the option to renew was not unilateral but mutual, and the other emphasizing the
need for future agreement between lessor and lessee on the detailed terms and conditions of
renewal. cdrep

As a matter of dictionary meaning, "extendible" means "capable of extension", and

"renewable" means "capable of renewal"; both are oriented towards the future. It may be seen
that both "extendible" and "renewable", when considered in and of themselves, are noncommittal: they do not purport to answer the intensely practical question of who is vested
lessor or lessee or both acting together with the option to extend or renew a lease. Again,
neither term by itself pre-empts the question of what the specific terms and conditions of the
extended or renewed lease shall be: shall all terms and provisions of the old lease be carried
forward into the future, or shall all or some of them be renegotiated upon expiration of the old
lease. 14 Thus, both Koh and Cruz seem to impose an impossible burden upon single words.
Put a little differently, both Mr. Justice Torres and Mr. Justice Street read too much into a single
word: they read "extendible" as if it said "extendible at the option of the lessee alone, all other
terms and conditions remaining unchanged". In effect, Koh and Cruz treated "extendible" as a
highly technical and cryptic term.
We do not believe that the use of either "extendible" or "renewable" should be given
sacramental significance. The important task in contract interpretation is always the
ascertainment of the intention of the contracting parties and that task is of course to be
discharged by looking to the words they used to project that intention in their contract, all the
words not just a particular word or two, and words in context not words standing alone. In the

case at bar, the intent of the parties is observable with sufficient clarity and specificity in the
language they used. cdrep
It is also important to bear in mind that in a reciprocal contract like a lease, the period of the
lease must be deemed to have been agreed upon for the benefit of both parties, absent language
showing that the term was deliberately set for the benefit of the lessee or lessor alone. 15 We
are not aware of any presumption in law that the term of a lease is designed for the benefit of
the lessee alone. Koh and Cruz in effect rested upon such a presumption. But that presumption
cannot reasonably be indulged in casually in an era of rapid economic change, marked by,
among other things, volatile costs of living and fluctuations in the value of the domestic
currency. The longer the period the more clearly unreasonable such a presumption would be. In
an age like that we live in, very specific language is necessary to show an intent to grant a
unilateral faculty to extend or renew a contract of lease to the lessee alone, or to the lessor
alone for that matter. We hold that the above-quoted rulings in Koh v. Ongsiaco andCruz v.
Alberto should be and are overruled. cdrep
Petitioner's contention that respondent had assured him over the telephone that the latter would
willingly renew the lease for another ten (10) years upon expiration of the original term, does
not persuade. Neither does his claim that he would not have agreed to retain the clause
providing for ownership of improvements made by the lessee vesting upon the lessor at the
expiration of the lease, had respondent not given him such assurance. The Court of Appeals
noted that petitioner is a lawyer and was, at the time of entering into the contract, aware of the
fact that private respondent might exercise the option not to renew and that the option to renew
was not his alone. Notwithstanding this awareness, petitioner entered into the lease agreement,
probably convinced that he would not only recover the costs of all the improvements he
proposed to introduce into the leased lot but also make profits in the process. In any event, an
alleged verbal assurance of renewal of a lease is inadmissible to qualify the terms of the written
lease agreement under the parole evidence rule, 16 and unenforceable under the Statute of
Frauds. 17
WHEREFORE, the Petition for Review is DENIED and the Decision of the Court of Appeals
dated 9 June 1987 is hereby AFFIRMED. Costs against petitioner.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras, Gancayco, Padilla,
Bidin, Sarmiento, Cortes, Grio-Aquino, Medialdea andRegalado, JJ., concur.
||| (Fernandez v. Court of Appeals, G.R. No. 80231, [October 18, 1988], 248 PHIL 806-818)

315

EN BANC
[G.R. No. L-18916. November 28, 1969.]
JOSE
ABESAMIS, plaintiff-appellee, vs.
WORKS, LTD., defendant-appellant.

appellant to pay P50,000 representing appellee's loss of credit is not based upon clear evidence,
such award should not be allowed. Actual or compensatory damages must be established by
clear evidence.

WOODCRAFT

Ramon O. de Veyra for plaintiff-appellee.

DECISION

MAKALINTAL, J p:

Zosimo Rivas for defendant-appellant.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; OBLIGATION OF APPELLANT IN
INSTANT CASE TO FURNISH VESSEL; CIRCUMSTANCES SHOWING SUCH FACT.
The following circumstances show that it was appellant who was obligated to furnish the
vessel to receive the shipment of logs from appellee: (1) the provisions in the contract,
particularly with respect to wharfage dues, demurrage and condition of the weather and of the
ship's machinery, would have been of little concern to appellant and would not have been
imposed by it if appellee were the one to furnish the vessel; (2)in the two shipments of logs in
March and April of 1961, the vessels were furnished by appellant; (3) in several telegraphic
communications between the parties, it was invariably appellee who requested information as
to the arrival of the vessels and it was appellant who gave the information accordingly; and (4)
during the trial, it was appellant's witness who explained at length the failure of appellant to
furnish the necessary vessels.
2. ID.; ID.; RECIPROCAL AND WITH A TERM OBLIGATION; EACH PARTY TO BEAR
LOSS IF FORTUITOUS EVENT STRUCK BEFORE END OF TERM. Where the
obligation is reciprocal and with a term, neither party could demand performance nor incur in
delay before the expiration of the term. In case of fortuitous event before the expiration of the
term, each party in such reciprocal obligation bears his own loss.
3. ID.; ID.; ID.; PARTY WHO WAIVES THE BENEFIT OF THE TERM AND FAILS TO
PERFORM HIS PART OF THE OBLIGATION BEARS LOSS. Where appellant waived
the benefit of the period by assuring appellee that it would take delivery of the logs on June 25,
1951, and appellee, on said date, was ready to comply with his part of the obligation but
appellant failed in its commitment, without any satisfactory explanation for such failure,
appellant should bear the corresponding loss amounting to P7,685.26, representing the value of
appellee's logs lost while waiting for appellant's vessel, the cost of rafting and other incidental
expenses.
4. ID.; DAMAGES; ACTUAL AND COMPENSATORY DAMAGES NOT CLEARLY
ESTABLISHED IN INSTANT CASE. Where the decision of the trial court sentencing the

The plaintiff, doing business under the name "East Samar Lumber Mills," was
the owner of a timber concession and sawmill located at Dolores, Samar. On November
8, 1950 the defendant Woodcraft Works, Ltd., entered into an agreement with the plaintiff
to purchase from the latter 300,000 board feet of Philippine round logs at P60.00 per
thousand board feet. Due to bad weather conditions and the failure of the defendant to
send the necessary vessels to Dolores, Samar, only 13,068 board feet of logs were
delivered.
On January 22, 1951 the parties entered into a new contract. The previous one was cancelled,
with the plaintiff waiving all his claims thereunder. Certain advances which had been given by
the defendant to the plaintiff, in the aggregate amount of P9,000.00, were transferred to and
considered as advances on the new contract. It was stipulated that the defendant would
purchase from the plaintiff 1,700,000 board feet of logs of the specifications stated in the
contract 1,300,000 board feet at P78.00 per thousand and the rest at P70.00. It was also
agreed that the shipment was to be "before the end of July, but will not commence earlier than
April with the option to make partial shipment depending on the availability of logs and
vessels."
Of the quantity of logs agreed upon, only two shipments were made, one in March and the
other in April, 1951, amounting to 333,832 board feet and 128,825 board feet, respectively, or a
total of 462,657 board feet. On September 13, 1951 the plaintiff filed in the Court of First
Instance of Leyte an action for rescission of the contract of January 22, 1951 and for recovery
of damages in the sum of P55,000.00 by reason of the defendant's failure to comply with its
obligations. The defendant filed an answer and later an amended answer, denying the material
allegations of the complaint, with special defenses and counterclaims.
After due trial the lower court rendered judgment as follows:
"WHEREFORE and on the strength of all the foregoing, the Court
renders judgment: declaring the aforementioned contract of January
22, 1951, rescinded; ordering the defendant to pay to the plaintiff for
actual damages suffered by the latter in the amount of P145,623.03,
plus the amount of P50,000.00 representing the plaintiff's actual loss
of credit in the operation of his business, and, another sum of

316
P5,000.00 as attorney's fees. The defendant is likewise ordered to pay
the costs."
The defendant appealed to this Court and now avers that the lower court erred: "(1) in stating
that Woodcraft Works, Ltd. was obligated to send the boat to receive the shipment of logs of
the East Samar Lumber Mills at Dolores, Samar, before the end of July 1951; (2) in deciding
that (appellee) had sufficient stock of logs to cover the contract on July 31, 1951; (3) in stating
that appellant failed to comply with the terms and conditions of the contract; (4) in granting
damages to appellee; and (5) in not granting damages and recovery of money in favor of herein
appellant."
The main issue before us is whether or not appellant Woodcraft Works, Ltd. failed to comply
with its obligations under the contract, or more specifically, whether or not it was obligated to
furnish the vessel to receive the shipment of logs from appellee. Appellant contends that it was
not.
The contract (Exh. A) does not expressly provide as to which of the parties should furnish the
vessel. But it does contain provisions which show clearly, albeit only by implication, that the
obligation to do so devolved upon appellant, thus:
Fees & Charges: Bureau of Forestry inspection charges and
Philippine Government wharfage fees
are for account of Woodcraft Works,
Ltd.
Dispatch of Ship: Immediately upon arrival of the vessel at Dolores,
Samar, you will commence loading at
the rate of 200,000 bd. ft. per working
day per four hatches. Should the
weather be unfavorable, be sure to
have a certificate signed by the captain
confirming time idle due to this fact.
Furthermore, in the event the ship's
gears are not functioning well, kindly
do likewise and get a statement from
the captain.
Demurrage: Failure to load 200,000 bd. ft. per working day, you
agree to pay us the sum of P800.00 per
day pro-rata.
The contract was in the form of a letter addressed by appellant to appellee, and the terms set
forth in the portions aforequoted, particularly with respect to wharfage dues, demurrage and
condition of the weather and of the ship's machinery, would have been of little concern to
appellant and would not have been imposed by it if appellee were the one to furnish the vessel.
Besides, the contemporaneous and subsequent acts of the parties, which under the law may be
taken into consideration to determine their intention (Art. 1371, Civil Code), point
unequivocally to the same conclusion. In the two shipments of logs in March and April of 1961
the vessels "SS AEULUS" and "SS DON JOSE" were furnished by appellant. In several
telegraphic communications exchanged between the parties it was invariably appellee who
requested information as to the arrival of the vessels and appellant who gave the information
accordingly.

Finally it was appellant, through its witness Irza Toeg, who had to explain at length during the
trial its failure to furnish the necessary vessels, as follows:
"A. Well, when the shipping firms in Manila learned about the
failures of the vessels which we sent to Dolores, Samar to load, and
news travels fast from one shipping company to the other, the other
shipping companies were very hesitant when we asked for a vessel to
call at the port of Dolores, Samar. They asked us whether any vessel
has already gone there to load and what is the loading rate for that
particular vessel. So the facts of loading rates that the East Samar
Lumber Mills was able to effect on the Bunyo Maru had a very bad
effect in obtaining additional vessels. Other shipping companies
instructed their vessels not to go to Dolores, Samar because shipping
companies as a rule do not want to gamble and sent vessels to a
loading port when they know of the place and they know that the
people operating there would not be able to handle the loading of the
vessels judging from their past performances.
". . . You will recall that the first vessel that loaded in this contract
was a foreign vessel which was the Bunyo Maru. Out of the expected
quantity of 400,000 bd. ft. of logs only 13,000 approximately was
loaded. Therefore, that had a very bad effect on the other foreign
vessels. The second and third vessels however were of Philippine
Registry, and it was only thru our good connection with the shipping
company that they even permitted their vessels to call at Dolores,
Samar. So, after the three sad experiences, each one with considerable
delay in the loading time with incomplete quantities that should have
been loaded, it was difficult for us to obtain vessels to call at that
port." (T.S.N. pp. 28-30, Deposition)
In the light of all these circumstances, appellant's claim that it was not obligated to furnish the
vessel cannot prevail.
It is next contended that appellee was not in a position to comply with his own obligation to
ship the quantities of logs called for under the contract. This was sought to be proven by means
of a certificate issued by the Bureau of Forestry (Exhs. 11 & 11-A), which is the official record
of timber cut under appellee's permit, showing that appellee's production from January to July,
1951, amounted only to 1,926.64 cubic meters or 816,795 board feet of logs, which was short
by 833,205 board feet of the quantity called for in the contract.

There is indeed a discrepancy between the certificate of production issued by the Bureau of
Forestry and the testimony of Francisco Abesamis regarding the quantity of the timber cut
under appellee's permit, but this was satisfactorily explained by him at the trial in this wise:
"A. Because my export grade logs is a big quantity, and if we
immediately report those export grade logs to the Bureau of Forestry
before shipment is made, we will be paying forest charges for the logs
for which we have not received payment yet. So we make it a practice
to report only the logs that are actually shipped. The forest charges
amount to so much money that we could hardly afford to pay this in

317
advance. This was more or less a convenience given to us by the
lumber grader. And besides that, we prepare a big quantity of logs but
the lumber grader usually is instructed by the buyer to grade only a
certain portion of it because of the limitation of cargo space in buyer's
vessel. For example, we have there prepared 1,000,000 board feet but
Mr. Selga is instructed to inspect only 400,000 board feet which is the
capacity of incoming vessel. So the balance of 600,000 board feet
could not be graded as this quantity could not be loaded."
Abesamis categorically stated on the witness stand that by the end of July 1951 he had
1,300,000 board feet of logs available 800,000 at hand and ready for loading and the rest
deposited at various stations; and that he advised appellant of that fact in a telegram dated July
31, 1951 (Exh. S), at the same time requesting that a grader and a vessel be dispatched to
Dolores immediately as the logs were in danger of deteriorating.
Nicanor Selga, lumber inspector of the Bureau of Forestry, reported to appellant that as of July
3, 1951 he had graded appellee's logs amounting to 488,015 board feet (Exh. aa). Of this
quantity appellant, in its reply telegram of July 13, 1951 (Exh. BB) said that it could accept
239,547 board feet, made up of logs at least 13 feet in length and 20 inches in diameter.
However, Selga likewise testified that appellee had other logs some 600,000 board feet in
all in the two barrios of Aroganga and Genolaso. After July 3, 1951, which was the last day
Selga made his inspection, there is evidence that appellee continued its logging operations,
such that there was enough to cover the quantity called for in the contract by due date, that is,
on July 31, 1951.
Appellee divides his claim for damages into three categories, each based on a separate breach
of contract by appellant.
First, appellee maintains that due to the failure of appellant to send a vessel to Dolores, Samar,
the storm on May 5, 1951 swept away almost all the logs then awaiting shipment, amounting to
410,000 board feet, valued at P73,537.77. On this point it should be noted that under the
contract shipment was to be made before the end of July 1951, but not to commence earlier
than April of the same year. The obligation between the parties was a reciprocal one, appellant
to furnish the vessel and appellee to furnish the logs. It was also an obligation with a term,
which obviously was intended for the benefit of both parties, the period having been agreed
upon in order to avoid the stormy weather in Dolores, Samar, during the months of January to
March. The obligation being reciprocal and with a period, neither party could demand
performance nor incur in delay before the expiration of the period. Consequently, when the
typhoon struck on May 5, 1951 there was yet no delay on the part of appellant, and the
corresponding loss must be shouldered by appellee.
As regards the second breach it has been established that after the storm of May 5, 1951
appellee continued its logging operations. Appellant was advised of the quantity of logs ready
for shipment and was urged to send a vessel to take delivery. It thereupon gave assurance that a
vessel, the "SS ALBAY," with a capacity of 450,000 board feet, was coming to Dolores, Samar,
to load on June 25, 1951, Appellee readied the necessary quantity of logs but the vessel did not
arrive. As a result, 60,000 board feet of logs which had been rafted broke loose and were lost.
Appellee's loss on this account amounted to a total of P7,685.26, representing the value of the
logs lost, the cost of rafting and other incidental expenses. It may be observed in this respect
that although the obligation would not become due until July 31, 1951 appellant waived the
benefit of the period by assuring appellee that it would take delivery of the logs on June 25,

1951. On that date appellee was ready to comply, but appellant failed on his commitment,
without any satisfactory explanation for such failure. Therefore, appellant should bear the
corresponding loss.
Third and finally, as heretofore pointed out, by the end of July 1951 appellee had sufficient
logs ready for shipment in accordance with the contract. But appellant, in spite of the
representations made by the former, failed to send a vessel on the aforesaid date. There is no
evidence that such failure was due to circumstances beyond appellant's control. As a result logs
totalling 800,000 board feet were destroyed by marine borers, causing a loss of P62,000.00, for
which appellant should be held liable.
The trial court sentenced appellant to pay P50,000.00 representing appellee's loss of credit in
the operation of his business. The decision does not say upon what evidence the award is
based. Nor is there any attempt in appellee's brief to justify the amount awarded. Actual or
compensatory damages must be established by clear evidence. In this case, other than a few
letters of demand for payment of money accounts received by appellee from its creditors and
presented as exhibits, there is nothing to go upon, and the mere fact that such demands were
made does not necessarily prove loss of credit. This item must therefore be eliminated.
IN VIEW OF THE FOREGOING, the judgment appealed from is affirmed, with the
modification that appellant Woodcraft Works, Ltd. is sentenced to pay appellee the aggregate
sum of P69,685.26 by way of damages, plus P5,000 as attorney's fees, without costs in this
instance.
Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Sanchez, Castro, Teehankee and Barredo,
JJ., concur.
||| (Abesamis v. Woodcraft Works, Ltd., G.R. No. L-18916, [November 28, 1969], 141 PHIL 7178)

318

EN BANC

DECISION

[G.R. No. L-22558. May 31, 1967.]

REYES, J.B.L., J p:
GREGORIO ARANETA, INC., petitioner, vs. THE PHILIPPINE
SUGAR ESTATES DEVELOPMENT CO., LTD., respondent.

Araneta, & Araneta for petitioner.

Rosauro Alvarez and Ernani Cruz Pao for respondent.

SYLLABUS
1. ACTION TO COMPEL PERFORMANCE UNDER CONTRACT; COURT HAS NO
AUTHORITY TO FIX PERIOD WHERE CONTRACT ESTABLISHES "REASONABLE
TIME". If the contract provided a "reasonable time", then there was a period fixed, and all
that the court should have done was to determine if that reasonable time had already elapsed
when suit was filed. If it had passed, then the court should declare that petitioner had breached
the contract, as averred in the complaint, and fix the resulting damages. On the other hand, if
reasonable time had not yet elapsed, the court perforce was bound to dismiss the action for
being premature. But in no case can it be logically held that under the facts above quoted the
intervention of the court to fix the period for performance was warranted, for Article 1197 is
precisely predicated on the absence of any period fixed by the parties.
2. PLEADING AND PRACTICE; ABSENCE OF PRAYER IN COMPLAINT FOR COURT
TO FIX PERIOD; EFFECT. The complaint not having sought that the Court should set a
period the court could not proceed to do so unless the complaint was first amended; for the
original decision is clear that the complaint proceeded on the theory that the period for
performance had already elapsed, that the contract had been breached and defendant was
already answerable in damages.
3. ACTION TO COMPEL PERFORMANCE; POWER OF COURT TO FIX DATE ART.
1197, CONSTRUED. Granting, however, that it lay within the Court's power to fix the
period of performance, still the amended decision is defective in that no basis is stated to
support the conclusion that the period should be set at two years after finality of the judgment.
The last paragraph of Article 1197 is clear that the period cannot be set arbitrarily. All the trial
court's amended decision (Rec. on Appeal, p. 124) says in this respect is that "the proven facts
precisely warrant the fixing of such a period", a statement manifestly insufficient to explain
how the two-year period given herein was derived at.

Petition for certiorari to review a judgment of the Court of Appeals, in its CA-G. R. No. 28249R, affirming with modification, an amendatory decision of the Court of First Instance of
Manila, in its Civil Case No. 36303, entitled "Philippine Sugar Estates Development Co., Ltd.,
plaintiff, versus J. M. Tuason & Co., Inc. and Gregorio Araneta, Inc. defendants".
As found by the Court of Appeals, the facts of this case are:
J. M. Tuason & Co., Inc. is the owner of a big tract of land situated in Quezon City, otherwise
known as the Sta. Mesa Heights Subdivision, and covered by a Torrens title in its name. On
July 28, 1950, through Gregorio Araneta, Inc., it (Tuason & Co.) sold a portion thereof with an
area of 43,034.4 square meters, more or less, for the sum of P430,514.00, to Philippine Sugar
Estates Development Co., Ltd. The parties stipulated, among others, in the contract of purchase
and sale with mortgage, that the buyer will
"Build on the parcel of land the Sto. Domingo church and convent;"
while the seller for its part will
"Construct streets on the NE and NW and SW sides of the land herein
sold so that the latter will be a block surrounded by streets on all four
sides; and the street on the NE side shall be named 'Sto. Domingo
Avenue';"
The buyer, Philippine Sugar Estates Development Co., Ltd., finished the construction of Sto.
Domingo Church and Convent, but the seller, Gregorio Araneta, Inc., which began constructing
the streets, is unable to finish the construction of the street in the Northeast side (named Sto.
Domingo Avenue) because a certain third party, by the name of Manuel Abundo, who has been
physically occupying a middle part thereof, refused to vacate the same; hence, on May 7, 1958,
Philippine Sugar Estates Development Co., Ltd., filed its complaint against J. M. Tuason &
Co., Inc., and Gregorio Araneta, Inc. in the above Court of First Instance, seeking to compel
the latter to comply with their obligation, as stipulated in the above-mentioned deed of sale,
and/or to pay damages in the event they failed or refused to perform said obligation.
Both defendants J. M. Tuason and Co. and Gregorio Araneta, Inc. answered the complaint, the
latter particularly setting up the principal defense that the action was premature since its
obligation to construct the streets in question was without a definite period which needs to be
fixed first by the court in a proper suit for that purpose before a complaint for specific
performance will prosper.
The issues having been joined, the lower court proceeded with the trial, and upon its
termination, it dismissed plaintiff's complaint (in a decision dated May 31, 1960), upholding
the defenses interposed by defendant Gregorio Araneta, Inc.

319
Plaintiff moved to reconsider and modify the above decision, praying that the court fix a period
within which defendants will comply with their obligation to construct the streets in question.

Unsuccessful in having the above decision reconsidered defendant- appellant Gregorio

Araneta, Inc. resorted to a petition for review by certiorari to this Court. We gave it due course.

Defendant Gregorio Araneta, Inc. opposed said motion, maintaining that plaintiff's complaint
did not expressly or impliedly allege and pray for the fixing of a period to comply with its
obligation and that the evidence presented at the trial was insufficient to warrant the fixing of
such a period.

We agree with the petitioner that the decision of the Court of Appeals, affirming that of the
Court of First Instance is legally untenable. The fixing of a period by the courts under Article
1197 of the Civil Code of the Philippines is sought to be justified on the basis that petitioner
(defendant below) placed the absence of a period in issue by pleading in its answer that the
contract with respondent Philippine Sugar Estates Development Co., Ltd., gave petitioner
Gregorio Araneta, Inc. "reasonable time within which to comply with its obligation to construct
and complete the streets." Neither of the courts below seems to have noticed that, on the
hypothesis stated, what the answer put in issue was not whether the court should fix the time of
performance, but whether or not the parties agreed that the petitioner should have reasonable
time to perform its part of the bargain. If the contract so provided, then there was a period
fixed, a "reasonable time"; and all that the court should have done was to determine if that
reasonable time had already elapsed when suit was filed. If it had passed, then the court should
declare that petitioner had breached the contract, as averred in the complaint, and fix the
resulting damages. On the other hand, if the reasonable time had not yet elapsed, the court
perforce was bound to dismiss the action for being premature. But in no case can it be logically
held that under the plea above quoted, the intervention of the court to fix the period for
performance was warranted, for Article 1197 is precisely predicated on the absence of any
period fixed by the parties.

On July 16, 1960, the lower court, after finding that "the proven facts precisely warrants the
fixing of such a period", issued an order granting plaintiff's motion for reconsideration and
amending the dispositive portion of the decision of May 31, 1960, to read as follows:
"WHEREFORE, judgment is hereby rendered giving defendant
Gregorio Araneta, Inc., a period of Two (2) Years from notice hereof,
within which to comply with its obligation under the contract, Annex
A"
Defendant Gregorio Araneta, Inc. presented a motion to reconsider the above quoted order,
which motion, plaintiff opposed.
On August 16, 1960, the lower court denied defendant Gregorio Araneta, Inc.'s motion; and the
latter perfected its appeal to the Court of Appeals.
In said appellate court, defendant-appellant Gregorio Araneta, Inc. contended mainly that the
relief granted, i.e. fixing of a period, under the amendatory decision of July 16, 1960, was not
justified by the pleadings and not supported by the facts submitted at the trial of the case in the
court below and that the relief granted in effect allowed a change of theory after the submission
of the case for decision.
Ruling on the above contention, the appellate court declared that the fixing of a period was
within the pleadings and that there was no true change of theory after the submission of the
case for decision since defendant-appellant Gregorio Araneta, Inc. itself squarely placed said
issue by alleging in paragraph 7 of the affirmative defenses contained in its answer which reads

"7. Under the Deed of Sale with Mortgage of July 28, 1950, herein
defendant has a reasonable time within which to comply with its
obligations to construct and complete the streets on the NE, NW and
SW sides of the lot in question; that under the circumstances, said
reasonable time has not elapsed;
Disposing of the other issues raised by appellant which were ruled as not meritorious and
which are not decisive in the resolution of the legal issues posed in the instant appeal before us,
said appellate court rendered its decision dated December 27, 1963, the dispositive part of
which reads
"IN VIEW WHEREOF, judgment affirmed and modified; as a
consequence, defendant is given Two (2) years from the date of
finality of this decision to comply with the obligation to construct
streets on the NE, NW and SW sides of the land sold to plaintiff so
that the same would be a block surrounded by streets on all four
sides."

Even on the assumption that the court should have found that no reasonable time or no period
at all had been fixed (and the trial court's amended decision nowhere declared any such fact)
still, the complaint not having sought that the Court should set a period, the court could not
proceed to do so unless the complaint was first amended; for the original decision is clear that
the complaint proceeded on the theory that the period for performance had elapsed already, that
the contract had been breached and defendant was already answerable in damages.

Granting, however, that it lay within the Court's power to fix the period of performance, still
the amended decision is defective in that no basis is stated to support the conclusion that the
period should be set at two years after finality of the judgment. The last paragraph of Article
1197 is clear that the period can not be set arbitrarily. The law expressly prescribes that
"the courts shall determine such period as may under the
circumstance have been probably contemplated by the parties."
All that the trial court's amended decision (Rec. on Appeal, p. 124) says in this respect is that
"the proven facts precisely warrant the fixing of such a period", a statement manifestly
insufficient to explain how the two-year period given to petitioner herein was arrived at.
It must be recalled that Article 1197 of the Civil Code involves a two-step process. The Court
must first determine that "the obligation does not fix a period" (or that the period is made to
depend upon the will of the debtor), "but from the nature and the circumstances it can be
inferred that a period was intended" (Art. 1197, pars. 1 and 2). This preliminary point settled,
the Court must then proceed to the second step, and decide what period was "probably
contemplated by the parties" (Do., par. 3). So that, ultimately, the Court can not fix a period
merely because in its opinion it is or should be reasonable, but must set the time that the parties
are shown to have intended. As the record stands, the trial Court appears to have pulled the

320
two-year period set in its decision out of thin air, since no circumstances are mentioned to
support it. Plainly, this is not warranted by the Civil Code.
In this connection, it is to be borne in mind that the contract shows that the parties were fully
aware that the land described therein was occupied by squatters, because the fact is expressly
mentioned therein (Rec. on Appeal, Petitioner's Appendix B, pp. 12- 13). As the parties must
have known that they could not take the law into their own hands, but must resort to legal
processes in evicting the squatters, they must have realized that the duration of the suits to be
brought would not be under their control nor could the same be determined in advance. The
conclusion is thus forced that the parties must have intended to defer the performance of the
obligations under the contract until the squatters were duly evicted, as contended by the
petitioner Gregorio Araneta, Inc.
The Court of Appeals objected to this conclusion that it would render the date of performance
indefinite. Yet, the circumstances admit no other reasonable view; and this very indefiniteness
is what explains why the agreement did not specify any exact periods or dates of performance.
It follows that there is no justification in law for the setting of the date of performance at any
other time than that of the eviction of the squatters occupying the land in question; and in not
so holding, both the trial Court and the Court of Appeals committed reversible error. It is not
denied that the case against one of the squatters, Abundo, was still pending in the Court of
Appeals when its decision in this case was rendered.
In view of the foregoing, the decision appealed from is reversed, and the time for the
performance of the obligations of petitioner Gregorio Araneta, Inc. is hereby fixed at the date
that all the squatters on affected areas are finally evicted therefrom.
Costs against respondent Philippine Sugar Estates Development, Co., Ltd. So ordered.
Concepcion, C.J., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and Castro,
JJ., concur.
||| (Gregorio Araneta, Inc. v. Philippine Sugar Estates Dev't. Co., Ltd., G.R. No. L-22558, [May
31, 1967], 126 PHIL 678-685)

321

THIRD DIVISION
[G.R. No. 138739. July 6, 2000.]
RADIOWEALTH FINANCE COMPANY, petitioner, vs. Spouses
VICENTE and MA. SUMILANG DEL ROSARIO, respondents.

Singson Valdez & Associates for petitioner.

Romeo R. Bringas & Associates for respondents.

SYNOPSIS
On March 2, 1991, herein respondents-spouses jointly and severally executed, signed and
delivered in favor of herein petitioner a promissory note for P138,948. Unfortunately,
respondents defaulted on the monthly installments. Despite repeated demands, they failed to
pay their obligations under their promissory note. On June 7, 1993 petitioner filed a complaint
for collection of sum of money. After the petitioner offered its evidence and rested its case,
respondents filed a demurrer to evidence for alleged lack of cause of action. On November 4,
1994, the trial court dismissed the complaint for failure of petitioner to substantiate its claims,
the evidence it had presented being merely hearsay. On appeal, the Court of Appeals (CA)
reversed the trial court and remanded the case for further proceedings. Aggrieved, Radiowealth
filed a petition for review oncertiorari questioning the decision rendered by the appellate court.
The Supreme Court found the petition meritorious. While the CA correctly reversed the trial
court, it erred in remanding the case for further proceedings. As provided by Rule 33, Section 1
of the 1997 Rules of Court, the CA should have rendered judgment on the basis of the evidence
submitted by the petitioner. The Court agreed with petitioner that the CA had sufficient
evidence on record to decide the collection suit. A remand is not only frowned upon by the
Rules, it is also logically unnecessary on the basis of the facts on record. The petition was
granted and the appealed decision was modified in that the remand was set aside and
respondents were ordered to pay P138,948.00 plus 2.5 penalty charge per month beginning
April 2, 1991 until fully paid and 10% of the amount due as attorney's fees.

SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; DEMURRER TO EVIDENCE;
CONSEQUENCE OF REVERSAL ON APPEAL. Explaining the consequence of a
demurrer to evidence, the Court in Villanueva Transit v. Javellana pronounced: "The rationale
behind the rule and doctrine is simple and logical. The defendant is permitted, without waiving

his right to offer evidence in the event that his motion is not granted, to move for a dismissal
(i.e., demur to the plaintiff's evidence) on the ground that upon the facts as thus established and
the applicable law, the plaintiff has shown no right to relief. If the trial court denies the
dismissal motion, i.e., finds that plaintiff's evidence is sufficient for an award of judgment in
the absence of contrary evidence, the case still remains before the trial court which should then
proceed to hear and receive the defendant's evidence so that all the facts and evidence of the
contending parties may be properly placed before it for adjudication as well as before the
appellate courts, in case of appeal. Nothing is lost. The doctrine is but in line with the
established procedural precepts in the conduct of trials that the trial court liberally receive all
proffered evidence at the trial to enable it to render its decision with all possibly relevant
proofs in the record, thus assuring that the appellate courts upon appeal have all the material
before them necessary to make a correct judgment, and avoiding the need of remanding the
case for retrial or reception of improperly excluded evidence, with the possibility thereafter of
still another appeal, with all the concomitant delays. The rule, however, imposes the condition
by the same token that if his demurrer is granted by the trial court, and the order of dismissal
is reversed on appeal, the movant loses his right to present evidence in his behalf and he shall
have been deemed to have elected to stand on the insufficiency of plaintiff's case and
evidence. In such event, the appellate court which reverses the order of dismissal shall proceed
to render judgment on the merits on the basis of plaintiff's evidence." In other words,
defendants who present a demurrer to the plaintiff's evidence retain the right to present their
own evidence, if the trial court disagrees with them; if the trial court agrees with them, but on
appeal, the appellate court disagreeswith both of them and reverses the dismissal order, the
defendants lose the right to present their own evidence. The appellate court shall, in addition,
resolve the case and render judgment on the merits, inasmuch as a demurrer aims to discourage
prolonged litigations.
2. CIVIL LAW; CONTRACTS; INTENT OF THE CONTRACTING PARTIES CAN BE
DETERMINED BY THEIR CONTEMPORANEOUS AND SUBSEQUENT ACTS; CASE AT
BAR. The contemporaneous and subsequent acts of the parties manifest their intention and
knowledge that the monthly installments would be due and demandable each month. In this
case, the conclusion that the installments had already became due and demandable is bolstered
by the fact that respondents started paying installments on the Promissory Note, even if the
checks were dishonored by their drawee bank. We are convinced neither by their avowals that
the obligation had not yet matured nor by their claim that a period for payment should be fixed
by a court. Convincingly, petitioner has established not only a cause of action against the
respondents, but also a due and demandable obligation. The obligation of the respondents had
matured and they clearly defaulted when their checks bounced. Per the acceleration clause, the
whole debt became due one month (April 2, 1991) after the date of the Note because the check
representing their first installment bounced.
3. REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; A PARTY WHO DID NOT APPEAL
CANNOT OBTAIN AFFIRMATIVE RELIEF OTHER THAN THAT GRANTED IN THE
APPEALED DECISION. As for the disputed documents submitted by the petitioner, the CA
ruling in favor of their admissibility, which was not challenged by the respondents, stands. A
party who did not appeal cannot obtain affirmative relief other than that granted in the appealed
decision.

322
4. CIVIL LAW; CONTRACTS; INTEREST; NOT GRANTED BECAUSE IT WAS NOT
EXPRESSLY STIPULATED IN THE NOTE; CASE AT BAR. Petitioner, in its Complaint,
prayed for "14% interest per annum from May 6, 1993 until fully paid." We disagree. The Note
already stipulated a late payment penalty of 2.5 percent monthly to be added to each unpaid
installment until fully paid. Payment of interest was not expressly stipulated in the Note. Thus,
it should be deemed included in such penalty.

DECISION

paid. Each installment shall be due every ____ day of each

month. A late payment penalty charge of two and a half
(2.5%) percent per month shall be added to each unpaid
installment from due date thereof until fully paid.
xxx xxx xxx
It is hereby agreed that if default be made in the payment of any of
the installments or late payment charges thereon as and when the
same becomes due and payable as specified above, the total principal
sum then remaining unpaid, together with the agreed late payment
charges thereon, shall at once become due and payable without need
of notice or demand.
xxx xxx xxx

PANGANIBAN, J p:
When a demurrer to evidence granted by a trial court is reversed on appeal, the reviewing court
cannot remand the case for further proceedings. Rather, it should render judgment on the basis
of the evidence proffered by the plaintiff. Inasmuch as defendants in the present case admitted
the due execution of the Promissory Note both in their Answer and during the pretrial, the
appellate court should have rendered judgment on the bases of that Note and on the other
pieces of evidence adduced during the trial. LLjur
The Case
Before us is a Petition for Review on Certiorari of the December 9, 1997 Decision 1 and the
May 3, 1999 Resolution 2 of the Court of Appeals in CA-GR CV No. 47737. The assailed
Decision disposed as follows:
"WHEREFORE, premises considered, the appealed order (dated
November 4, 1994) of the Regional Trial Court (Branch XIV) in the
City of Manila in Civil Case No. 93-66507 is hereby REVERSED
and SET ASIDE. Let the records of this case be remanded to the
court a quo for further proceedings. No pronouncement as to costs." 3
The assailed Resolution denied the petitioner's Partial Motion for Reconsideration. 4
The Facts
The facts of this case are undisputed. On March 2, 1991, Spouses Vicente and Maria Sumilang
del Rosario (herein respondents), jointly and severally executed, signed and delivered in favor
of Radiowealth Finance Company (herein petitioner), a Promissory Note 5 for P138,948.
Pertinent provisions of the Promissory Note read:
"FOR VALUE RECEIVED, on or before the date listed below, I/We
promise to pay jointly and severally Radiowealth Finance Co. or
order the sum of ONE HUNDRED THIRTY EIGHT THOUSAND
NINE HUNDRED FORTY EIGHT Pesos (P138,948.00) without need
of notice or demand, in installments as follows:
P11,579.00 payable for 12 consecutive months starting on
___________19__ until the amount of P11,579.00 is fully

If any amount due on this Note is not paid at its maturity and this
Note is placed in the hands of an attorney or collection agency for
collection, I/We jointly and severally agree to pay, in addition to the
aggregate of the principal amount and interest due, a sum equivalent
to ten (10%) per cent thereof as attorney's and/or collection fees, in
case no legal action is filed, otherwise, the sum will be equivalent to
twenty-five (25%) percent of the amount due which shall not in any
case be less than FIVE HUNDRED PESOS (P500.00) plus the cost of
suit and other litigation expenses and, in addition, a further sum of ten
per cent (10%) of said amount which in no case shall be less than
FIVE HUNDRED PESOS (P500.00), as and for liquidated
damages." 6

Thereafter, respondents defaulted on the monthly installments. Despite repeated demands, they
failed to pay their obligations under their Promissory Note.
On June 7, 1993, petitioner filed a Complaint 7 for the collection of a sum of money before the
Regional Trial Court of Manila, Branch 14. 8 During the trial, Jasmer Famatico, the credit and
collection officer of petitioner, presented in evidence the respondents' check payments, the
demand letter dated July 12, 1991, the customer's ledger card for the respondents, another
demand letter and Metropolitan Bank dishonor slips. Famatico admitted that he did not have
personal knowledge of the transaction or the execution of any of these pieces of documentary
evidence, which had merely been endorsed to him.
On July 4, 1994, the trial court issued an Order terminating the presentation of evidence for the
petitioner. 9 Thus, the latter formally offered its evidence and exhibits and rested its case on
July 5, 1994.
Respondents filed on July 29, 1994 a Demurrer to Evidence 10 for alleged lack of cause of
action. On November 4, 1994, the trial court dismissed 11the complaint for failure of petitioner
to substantiate its claims, the evidence it had presented being merely hearsay.
On appeal, the Court of Appeals (CA) reversed the trial court and remanded the case for further
proceedings.

323
Hence, this recourse. 12
Ruling of the Court of Appeals
According to the appellate court, the judicial admissions of respondents established their
indebtedness to the petitioner, on the grounds that they admitted the due execution of the
Promissory Note, and that their only defense was the absence of an agreement on when the
installment payments were to begin. Indeed, during the pretrial, they admitted the genuineness
not only of the Promissory Note, but also of the demand letter dated July 12, 1991. Even if the
petitioner's witness had no personal knowledge of these documents, they would still be
admissible "if the purpose for which [they are] produced is merely to establish the fact that the
statement or document was in fact made or to show its tenor[,] and such fact or tenor is of
independent relevance."
Besides, Articles 19 and 22 of the Civil Code require that every person must in the exercise
of rights and in the performance of duties act with justice, give all else their due, and
observe honesty and good faith. Further, the rules on evidence are to be liberally construed in
order to promote their objective and to assist the parties in obtaining just, speedy and
inexpensive determination of an action.
Issue
The petitioner raises this lone issue:
"The Honorable Court of Appeals patently erred in ordering the
remand of this case to the trial court instead of rendering judgment on
the basis of petitioner's evidence." 13
For an orderly discussion, we shall divide the issue into two parts: (a) legal effect of the
Demurrer to Evidence, and (b) the date when the obligation became due and demandable.
The Court's Ruling
The Petition has merit. While the CA correctly reversed the trial court, it erred in remanding
the case "for further proceedings."
Consequences of a Reversal, on Appeal,
of a Demurrer to Evidence
Petitioner contends that if a demurrer to evidence is reversed on appeal, the defendant should
be deemed to have waived the right to present evidence, and the appellate court should render
judgment on the basis of the evidence submitted by the plaintiff. A remand to the trial court
"for further proceedings" would be an outright defiance of Rule 33, Section 1 of the 1997
Rules of Court. LLpr
On the other hand, respondents argue that the petitioner was not necessarily entitled to its
claim, simply on the ground that they lost their right to present evidence in support of their
defense when the Demurrer to Evidence was reversed on appeal. They stress that the CA
merely found them indebted to petitioner, but was silent on when their obligation became due
and demandable.
The old Rule 35 of the Rules of Court was reworded under Rule 33 of the 1997 Rules, but the
consequence on appeal of a demurrer to evidence was not changed. As amended, the pertinent
provision of Rule 33 reads as follows:

"SECTION 1. Demurrer to evidence. After the plaintiff has

completed the presentation of his evidence, the defendant may move
for dismissal on the ground that upon the facts and the law the
plaintiff has shown no right to relief. If his motion is denied, he shall
have the right to present evidence. If the motion is granted but on
appeal the order of dismissal is reversed he shall be deemed to have
waived the right to present evidence." 14
Explaining the consequence of a demurrer to evidence, the Court in Villanueva Transit v.
Javellana, 15 pronounced:
"The rationale behind the rule and doctrine is simple and logical. The
defendant is permitted, without waiving his right to offer evidence in
the event that his motion is not granted, to move for a dismissal (i.e.,
demur to the plaintiff's evidence) on the ground that upon the facts as
thus established and the applicable law, the plaintiff has shown no
right to relief. If the trial court denies the dismissal motion,i.e., finds
that plaintiff's evidence is sufficient for an award of judgment in the
absence of contrary evidence, the case still remains before the trial
court which should then proceed to hear and receive the defendant's
evidence so that all the facts and evidence of the contending parties
may be properly placed before it for adjudication as well as before the
appellate courts, in case of appeal. Nothing is lost. The doctrine is but
in line with the established procedural precepts in the conduct of trials
that the trial court liberally receive all proffered evidence at the trial
to enable it to render its decision with all possibly relevant proofs in
the record, thus assuring that the appellate courts upon appeal have all
the material before them necessary to make a correct judgment, and
avoiding the need of remanding the case for retrial or reception of
improperly excluded evidence, with the possibility thereafter of still
another appeal, with all the concomitant delays. The rule, however,
imposes the condition by the same token that if his demurrer
is granted by the trial court, and the order of dismissal is reversed on
appeal, the movant losses his right to present evidence in his behalf
and he shall have been deemed to have elected to stand on the
insufficiency of plaintiff's case and evidence. In such event, the
appellate court which reverses the order of dismissal shall proceed to
render judgment on the merits on the basis of plaintiff's evidence."
(Italics supplied)
In other words, defendants who present a demurrer to the plaintiff's evidence retain the right to
present their own evidence, if the trial court disagrees with them; if the court agrees with
them, but on appeal, the appellate court disagrees with both of them and reverses the dismissal
order, the defendants lose the right to present their own evidence. 16 The appellate court shall,
in addition, resolve the case and render judgment on the merits, inasmuch as a demurrer aims
to discourage prolonged litigations. 17
In the case at bar, the trial court, acting on respondents' demurrer to evidence, dismissed the
Complaint on the ground that the plaintiff had adduced mere hearsay evidence. However, on
appeal, the appellate court reversed the trial court because the genuineness and the due
execution of the disputed pieces of evidence had in fact been admitted by defendants.

324
Applying Rule 33, Section 1 of the 1997 Rules of Court, the CA should have rendered
judgment on the basis of the evidence submitted by the petitioner. While the appellate court
correctly ruled that "the documentary evidence submitted by the [petitioner] should have been
allowed and appreciated . . .," and that "the petitioner presented quite a number of documentary
exhibits . . . enumerated in the appealed order," 18 we agree with petitioner that the CA had
sufficient evidence on record to decide the collection suit. A remand is not only frowned upon
by the Rules, it is also logically unnecessary on the basis of the facts on record.
Due and Demandable Obligation
Petitioner claims that respondents are liable for the whole amount of their debt and the interest
thereon, after they defaulted on the monthly installments.
Respondents, on the other hand, counter that the installments were not yet due and
demandable. Petitioner had allegedly allowed them to apply their promotion services for its
financing business as payment of the Promissory Note. This was supposedly evidenced by the
blank space left for the date on which the installments should have commenced. 19 In other
words, respondents theorize that the action for immediate enforcement of their obligation is
premature because its fulfillment is dependent on the sole will of the debtor. Hence, they
consider that the proper court should first fix a period for payment, pursuant to Articles 1180
and 1197 of the Civil Code.
This contention is untenable. The act of leaving blank the due date of the first installment did
not necessarily mean that the debtors were allowed to pay as and when they could. If this was
the intention of the parties, they should have so indicated in the Promissory Note. However, it
did not reflect any such intention. prLL

As for the disputed documents submitted by the petitioner, the CA ruling in favor of their
admissibility, which was not challenged by the respondents, stands. A party who did not appeal
cannot obtain affirmative relief other than that granted in the appealed decision. 21
It should be stressed that respondents do not contest the amount of the principal obligation.
Their liability as expressly stated in the Promissory Note and found by the CA is
"P13[8],948.00 22 which is payable in twelve (12) installments at P11,579.00 a month for
twelve (12) consecutive months." As correctly found by the CA, the "ambiguity" in the
Promissory Note is clearly attributable to human error. 23
Petitioner, in its Complaint, prayed for "14% interest per annum from May 6, 1993 until fully
paid." We disagree. The Note already stipulated a late payment penalty of 2.5 percent monthly
to be added to each unpaid installment until fully paid. Payment of interest was not expressly
stipulated in the Note. Thus, it should be deemed included in such penalty.
In addition, the Note also provided that the debtors would be liable for attorney's fees
equivalent to 25 percent of the amount due in case a legal action was instituted and 10 percent
of the same amount as liquidated damages. Liquidated damages, however, should no longer be
imposed for being unconscionable. 24 Such damages should also be deemed included in the
2.5 percent monthly penalty. Furthermore, we hold that petitioner is entitled to attorney's fees,
but only in a sum equal to 10 percent of the amount due which we deem reasonable under the
proven facts. 25
The Court deems it improper to discuss respondents' claim for moral and other damages. Not
having appealed the CA Decision, they are not entitled to affirmative relief, as already
explained earlier. 26

On the contrary, the Note expressly stipulated that the debt should be amortized monthly in
installments of P11,579 for twelve consecutive months. While the specific date on which each
installment would be due was left blank, the Note clearly provided that each installment should
be payable each month.

WHEREFORE, the Petition is GRANTED. The appealed Decision is MODIFIED in that the
remand is SET ASIDE and respondents are ordered TO PAY P138,948, plus 2.5 percent penalty
charge per month beginning April 2, 1991 until fully paid, and 10 percent of the amount due as
attorney's fees. No costs. cdrep

Furthermore, it also provided for an acceleration clause and a late payment penalty, both of
which showed the intention of the parties that the installments should be paid at a definite date.
Had they intended that the debtors could pay as and when they could, there would have been
no need for these two clauses.

SO ORDERED.

Verily, the contemporaneous and subsequent acts of the parties manifest their intention and
knowledge that the monthly installments would be due and demandable each month. 20 In this
case, the conclusion that the installments had already became due and demandable is bolstered
by the fact that respondents started paying installments on the Promissory Note, even if the
checks were dishonored by their drawee bank. We are convinced neither by their avowals that
the obligation had not yet matured nor by their claim that a period for payment should be fixed
by a court.
Convincingly, petitioner has established not only a cause of action against the respondents, but
also a due and demandable obligation. The obligation of the respondents had matured and they
clearly defaulted when their checks bounced. Per the acceleration clause, the whole debt
became due one month (April 2, 1991) after the date of the Note because the check
representing their first installment bounced.

Melo, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.

||| (Radiowealth Finance Co. v. Spouses Del Rosario, G.R. No. 138739, [July 6, 2000], 390
PHIL 601-614)

325

SECOND DIVISION
[G.R. No. 11433. December 20, 1916.]
ARTHUR F. ALLEN, plaintiff-appellant, vs. THE PROVINCE OF
ALBAY
and
THE
PROVINCE
OF
AMBOS
CAMARINES, defendants-appellees.

Lawrence, Ross & Block for appellant.

Attorney-General Avancea for appellees.

SYLLABUS
1. CONTRACTS; LIQUIDATED DAMAGE CLAUSE; WAIVER OF TIME
LIMIT. Where a contract for the construction of a reenforce concrete bridge fixes a
certain sum as liquidated damages for each day's delay in completing the work within the
time agreed, and it appears that the owners failed to promptly deliver the steel and
changed the plans, and the Government imposed a strict quarantine on all draft animals,
thereby causing a substantial delay, the time limit was waived and the contractor was
bound only to finish the construction within a reasonable time.
2. ID.; ID.; DELAY; APPORTIONMENT OF TIME. Where a strict
performance of a contract by the contractor has been prevented or waived by the owners
and the contractor failed to complete the work within a reasonable time, such time cannot
be apportioned by the courts, the only remedy left to the owners being a right of action
for the actual damages suffered.

DECISION

TRENT, J p:
On February 25,1913, the Director of Public Works, acting for the Provinces
of Albay and Ambos Camarines, advertised for sealed proposals, to be opened March 15,
1913, for the construction of a reenforced concrete bridge over the Argos River on the
Albay-Ambos Camarines boundary. At the request of the plaintiff, the opening of the bids
was postponed until March 20, on which date plaintiff submitted his bid to construct the

proposed bridge for the sum of P30,690. On April 25, 1913, the Director of Public Works
asked the provincial boards passed the necessary resolutions of May 6 and the plaintiff
was notified of their action on June 13. The formal contract was duly executed on June
26, 1913. The bridge was completed and accepted by the defendant provinces on April 1,
1914. The plaintiff was paid the contract price less P1,301.45, P925 being retained as
liquidated damages at the rate of P25 per day from February 15, 1914, to March 31,
1914; P175.03 for expenses of inspection from November 1, 1913, to February 15, 1914;
and P201.42 for the operation and maintenance of a ferry across the Argos River during
the last mentioned period. This action was instituted for the purpose of recovering the
amount of P1,301.45, P200 overcharges on steel not delivered, P2,000 for damages
caused by the defendants' delay, and P878 for extra work and material furnished on the
bridge at defendants' request. From a judgment in favor of the defendants dismissing the
complaint on the merits, with costs, the plaintiff appealed and now urges that the trial
court erred (1) in finding that the delay in completing the work under the contract in
question was due to the fault and negligence of the plaintiff and not to that of the
defendants; (2) in holding that the defendants were entitled to deduct from the contract
price for the construction of the bridge (a) the sum of P925 as a penalty or liquidated
damages, (b) the amount of P201.42 for the operation and maintenance of a ferry, and (c)
the amount of P175.03 for expenses of inspection; and (3) in rendering judgment in favor
of the defendants, dismissing the plaintiff's complaint and not rendering judgment for the
plaintiff for the amounts prayed for. The first and second alleged errors will be considered
together.
The contract which was, as we have said, duly executed on June 26, 1913,
provided in paragraph 4 for the completion of the bridge on or before the 1st day of
September, 1913. And in paragraph 5 it was agreed that in the event that the necessary
steel should be furnished by the provinces at ship side in Legaspi, a deduction from the
contract price should be made of 11 centavos per kilo of steel thus delivered. The
advertisement, instructions to bidders, general conditions, specifications, proposal, and
plans were made a part of the contract.
The plaintiff in his proposal stated:
"All work contemplated by this contract is to be completed
on or before four months after contractor furnishes sand and gravel."
The provincial board of Albay in its resolution of May 6 stated that it had
received a communication from the Director of Public Works to the effect that "Mr.
Allen's bid was the only one received for this work which the contractor agrees to finish
in four months." The time for the commencement of the work is not stated. The
provincial board of Ambos Camarines in its resolution of May 6 stated, "All work to be
completed on or before November 1, 1913." In "Information to bidders," which was made
a part of the contract, it was provided that "the contractor will be required to complete the
bridge and have same ready for traffic on or before September 1, 1913." The Province of
Ambos Camarines in its resolution of January 6, 1914, stated that the time for the
completion of the bridge was intended to be November 1, 1913, and the Province of
Albay in its resolution of May 5, 1914, stated that, "granting the contention of the
provincial board of Ambos Camarines, it was the intention of the parties to fix the
original date for the termination of the work on November 1, 1913, although the original
contract fixed September 1, 1913, . . ." On December 1, 1913, F. T. James, acting on

326
behalf of the plaintiff, addressed the following letter to the provincial board of the
Province of Albay:
"December 1, 1913.
"GENTLEMEN: I have the honor to request that an
extension of time be granted me for the construction of the Argos
River Bridge.
"Immediately upon entering into contract with the
Province of Albay on June 26, 1913, I ordered cement for the work,
but due to the shortage in the Manila market at that time did not
receive delivery until the middle of July, when same was shipped to
Legaspi where it arrived four days latter.
"I had made previous arrangements to have this cement
hauled to the bridge site by automobile truck, but when an attempt
was made to do so in July, the recent rains so softened the road
beyond Polangui that it was impossible to send a loaded truck over it
with any assurance of safe arrival of the cargo of cement at Argos
River in good condition. Therefore I was obliged to haul by truck to
Ligao only and from there to Argos by carabao carts.
"The contractor in Ligao then began to haul cement and
also the steel for the bridge. Shortly a quarantine on animals was put
into effect in the town of Polangui, and the hauling had to stop, when
I had delivered at the bridge site only a few barrels of cement and a
very small number of bars of steel for the piles. It was not until early
in October, therefore, that sufficient steel and cement were delivered
at the Argos River to warrant beginning work casting the piles. This
work began however immediately this condition obtained and the
sixty concrete piles were completed November 22.
"Due to the fact that the material in the Argos River, into
which the piles must be driven, is exceptionally hard and of a very
compact nature it is almost imperative that the piles have
considerably more than the usual thirty days for ripening before
driving, and of necessity I must wait at least until December 15
before handling even the first piles cast. My pile driver is being
shipped to Nueva Caceres at present writing. I am obliged to send all
my plant and balance of materials in by that port due to the fact that
nobody in Albay is willing to attempt hauling heavy machinery over
the road beyond Polangui for reasons best known to the honorable
board, and it is only a question of hauling same from Nueva Caceres
to Argos River as to the actual date of beginning driving.
"As was unforeseen, at the time of entering into contract
for this bridge, I have been obliged to use two plants on my work in
the Province of Bulacan where it was anticipated that one would be
enough, due to the unusual conditions and delays from floods and
typhoons, so I have not been able to ship my engine and driver so as
to have it at Argos River on the date expected. Therefore, for these
above-named reasons, I have the honor to request that I be granted an

extension of time until February 15, 1914, to complete the Argos

Bridge.
"Very respectfully.
"ARTHUR F. ALLEN, Contractor,
(Sgd.) "Per F. T. JAMES."
On May 5, 1914, the provincial board of the Province of Albay passed
resolution No. 227, the pertinent parts of which are as follows:
xxx xxx xxx
"Whereas there exists pending a petition of the contractor
for the extension of the termination of the work of the cited bridge
until the 15th day of February, 1914;
xxx xxx xxx
"Resolved, That this board proposes an amicable
settlement for the final settlement of this matter based upon the
following conditions:
"Grant extension to February 15, 1914, providing the
contractor will pay to the province the sum of P1,725.78, being the
amount for extra cost for inspection expense, interest on loan, cost of
ferry operation to February 15, and 37 days liquidated damages at
P25 per day for the time between February 15 and April 1, 1914.
xxx xxx xxx
"Resolved further, That all previous resolutions of this
board in regard to this matter which are in conflict hereof are hereby
repealed.
"Resolved lastly, That copies of this resolution be
furnished the district engineer, Albay, contractor Allen, provincial
treasure and provincial board of Ambos Camarines."
On June 17, 1914, the provincial board of Albay passed resolution No. 383
which, after stating the reasons for the resolution, reads:
"Resolved, That the final payment to A. F. Allen for the
construction of the Argos River Bridge be, and hereby is, authorized
according to the contract, deducting the amount of P1,301.45, same to
cover inspection charges from November 1, 1913, to February 15,
1914, operation and maintenance of ferry from November 1, 1913, to
February 15 to March 31, 1914, inclusive, Sundays and holidays
excepted, at P25 per day."
xxx xxx xxx
Copies of the above resolution were furnished the provincial treasurer and
district engineer of Albay, the provincial board of Ambos Camarines, and the plaintiff.

327
The provincial board of Ambos Camarines, in its resolution No. 669 passed
June 24, 1914, concurred in resolution No. 383 of the Province of Albay.
The provincial board of Ambos Camarines passed on January 6, 1914,
resolution No. 50, the pertinent parts of which read as follows:
"The recorder presented copy of resolution No. 1114 of the
provincial board of Albay, series of 1913, with accompanying papers,
being the application of Mr. A. F. Allen for an extension of the
contract time in which he is to complete the Argos Bridge. (on the
provincial boundary) and the recommendation of the Director of
Public Works and the district engineer of Albay.
"Being informed of the contents of said resolution and
accompanying papers,
"On motion,
"The board resolved as follows:
xxx xxx xxx
"(b) As to any further extension, the facts alleged by
contractor which must be basis of same, obstacles impeding the
transport of his supplies, occurring within the Province of Albay, this
board proposes to be guided by the recommendations of the board of
Albay in the matter. However, as it does appear that the contractor
acquiesces and accepted the extension and conditions embodied in the
resolution of the board of Albay, but on the contrary, Mr. James,
representing the contractor being present, informs the board of
Camarines that the contractor is not satisfied with the extension and
conditions embodied in the before-mentioned resolution of Albay,
therefore this board abstains from concurring in resolution No. 1114
of Albay and suggests that, if the Albay board finds cause for
extending the contract time past November 1, 1913, that the
contractor's concurrence and acceptance of such further extension be
procured before forwarding for the concurrence of this board. Further
this board believes that any arbitrary extensions (contractor not
concurring or accepting conditions) or extensions 'by grace' could
better and more properly be had upon completion of the bridge as a
final adjustment of the matter.
"Approved unanimously."
Resolution No. 1114 of the provincial board of Albay, series 1913, referred to
in resolution No. 50 of the provincial board of Ambos Camarines, was not presented
during the trial in the court below and forms no part of the record of this case.
The provinces, exercising their right under the contract, furnished all the steel
at shipside in Legaspi. The steel was received by the contractor on the following dates:
27,056 kilos on July 26, 1913; 3,636 kilos on August 4, 1913; and 7,890 kilos on
September 1, 1913. The bridge 1913; is 51.7 kilometers from Legaspi.
The first question to be determined is that relating to the time agreed upon for
the completion of the bridge. Did the contracting parties fix September 1, 1913, as the

date? On the one hand we have an explicit statement in the information to bidders that
"the contractor shall commence the work herein contracted to be done in ample time to
complete the contract within the time specified." In the contract it was expressly
stipulated that the contractor must complete the work on or before the 1st day of
September, 1913, or pay P25 a day as liquidated damages for every day thereafter. And
James in his letter of December 1, after referring to the fact that the contract was signed
on June 26, requested an extension of time for the completion of the work until February
15, 1914. While on the other hand, we have the statement of the plaintiff's proposal to the
effect that the work contemplated should be completed on or before four months after the
contractor furnished gravel and sand; the statement of the provincial board of Albay that
the contractor agreed to finish the bridge in four months; the same board's later statement
referring to the contention of the board of Ambos Camarines that it was the intention of
the parties to fix the time on November 1, the two statements of the provincial board of
Ambos Camarines to the effect that it understood that November 1 was the date agreed
on; and the fact that the provinces deducted inspection expenses and expenses for the
operation of the ferry from November 1.
It will thus be seen that the provinces did intent that the date for the
completion of the work should be November 1 and not September 1. Such were the
instructions to the Director of Public Works in consummating the contract, but the
Director did not comply with these instructions to the Director of Public Works in
consummating the contract, but the Director did not comply with these instructions as to
the date for the termination of the work. He and the contractor agreed that the date should
be September 1. Although this was not in accordance with the intention of the provinces,
yet they (the provinces) subsequently ratified the contract by their own acts furnishing
the steel and making payments. The result is that the provinces obligated themselves
through the Director of Public Works to furnish all the steel at ship side in Legaspi early
enough to permit the contractor to complete the bridge by September 1. This the
provinces did not do, as quite a large shipment of steel arrived in Legaspi on the very day
agreed upon for the completion of the bridge. It may be true that the contractor could not
have completed the bridge by September 1, if all of the steel had arrived in Legaspi
immediately after the signing of the contract.
Even admitting that the true date for the completion of the bridge was
November 1, yet the contractor could not have completed the work on or before that date
on account of the quarantine established and enforced by the authorities. James, in his
letter of December 1 asking for the extension of time, said, "The contractor in Ligao then
began to haul the cement and also the steel for the bridge. Shortly a quarantine on
animals was put into effect in the town of Polangui, and the hauling had to stop when I
had delivered at the bridge site only a few barrels of cement and a very small number of
bars of steel for the piles." And James in his testimony says, "Jaucian was unable to
promptly deliver these materials at the Argos bridge site, due to a rinderpest quarantine
placed, I think, by the Bureau of Agriculture on carabao and cattle passing on the
interprovincial road between Ambos Camarines, Albay, and in all of the towns north of
Ligao." Jaucian in his deposition testified that he encountered difficulties in hauling
materials for the bridge from Ligao to the Argos River; that the first difficulty was the
quarantine placed upon animals in Polangui; that he had been delivering the materials for
a week when the quarantine was ordered; that the quarantine, as he remembered,
commenced in July and was removed in October or November; that the quarantine was
uninterrupted during this time; and that it consisted in a definite or absolute prohibition
against the passage of animals from kilometer 30 to kilometer 40. So it is conclusively

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established that the only way that the contractor had of moving the materials from Ligao
to the bridge site was by means of animals and that this could not be done from sometime
in July until October or November on account of the quarantine.
Marshall, the district engineer who represented the provinces during the
construction of the bridge, testified that the plans called for the piles of the bridge to be
11 meters long; that the contract was signed on this basis; that after the contract had been
signed Von Schmelling, the former district engineer, was down there and in a verbal
conversation it was decided that instead of casting the piles 11 meters long they should be
cast 9 meters long, thereby saving something like 13 cubic meters of concrete; that on
October 11 or 12 there came a flood and the water rose about 15 centimeters higher than
the extreme high water shown in the original plans; that it was thereafter agreed to raise
the caps on the piles 42 centimeters higher; and that the raising of the bridge was outside
of the original specifications. The testimony of this witness is corroborated on this point
by both the plaintiff and James.
The plaintiff, through his agent, requested an extension of time until February
15, 1914, within which to complete the bridge, but the parties did not agree upon the
extension. From the resolution of the provincial board of Ambos Camarines, dated
January 6, 1914, it appears that Albay imposed certain conditions in consideration for the
extension, which were rejected by the plaintiff.
We must, therefore, conclude that the provinces waived the contract time,
whether it were September 1 or November 1, by their failure to deliver the steel promptly,
by reason of having placed the strict quarantine on animals and on account of the change
in the plan subsequent to October 12, and that the waver operated to eliminate the definite
date from which to assess liquidated damages; and though the plaintiff, in continuing the
work, was obligated to complete the same within a reasonable time, the liquidated
damage clause was not thereby restored and made applicable to an unreasonable time.
Where strict performance on the part of the contractor is prevented or waived by the other
party, a claim by such party of fines and penalties for delay or failure cannot be sustained.
(District of Columbia vs. Camden Iron Works, 181 U.S.. 453.) The same rule applies in
cases containing liquidated damage clauses. (United Engineering and Contracting Co. vs.
U.S., 47 Ct. Cls., 489 [1912].) If it be true that the plaintiff contractor was responsible for
a large number of days of delay and the provinces for only a few of the days thereof, yet,
under such circumstances, we cannot "apportion" such delay between the contracting
parties and hold the contractor liable in liquidated damages for the number of days
delayed by him in completing the bridge. (Jefferson Hotel Co. vs. Brumbaugh, 168 Fed.
Rep., 867 and cases cited therein; Willis vs. Webster, 37 N.Y. Sup., 354; Mosler Safe
Co. vs. Maiden Lane Safe Dep. Co., 199 N. Y., 479; 37 L. R. A. (N.S.) 363, decided in
1910.) The result is that the provinces are limited to such damages which they may have
suffered on account of an unreasonable delay on the part of the plaintiff in completing the
bridge, if there were, in fact, an unreasonable delay. It would seem, however, that as the
plaintiff asked for an extension on December 1, sometime after the quarantine had been
raised and also after the change in the plans had been made, until February 15, 1914, he
should have finished the work on or before the latter dated and all time thereafter would
constitute an unreasonable delay. However this may be, the provinces have proven no
actual damages resulting after February 15. It is true that they deducted P175.03 for
inspection charges, but this was done for such inspection prior to February 15, and the
same is true of the item of P201.42 for the maintenance of a ferry. Certainly there was no
unreasonable delay prior to February 15. Consequently, the provinces had no right to
withhold the P1,301.45.

The plaintiff sought to recover, in addition to the amount withheld, P200

overcharges on steel, P2,000 for damages caused by the defendants' delay, and P878 for
extra work and material furnished at defendants' request. While it is true that the question
whether the plaintiff is entitled to recover these amounts is raised by the third assignment
of error, yet no specific reference is made in the plaintiff's brief to said amounts, counsel
saying nothing more than, "It is respectfully submitted that appellant is entitled to a
reversal of the decision of the Court of First Instance, and to an order for judgment in
accordance with the prayer of his complaint." We have examined the record, however,
and find that the evidence is not sufficient to warrant an affirmative holding that the
plaintiff is entitled to recover these items or either of them.
For the foregoing reasons the judgment appealed from is reversed and
judgment will be entered in favor of the plaintiff and against the defendants for the sum
of P1,301.45, with legal interest from April 1, 1914. No costs will be allowed in this
instance. So ordered.
Torres, Johnson, and Carson, JJ., concur.
Araullo, J., concurs in the result.

Separate Opinions
MORELAND, J., dissenting:
This case arises over the construction by plaintiff, under a written contract, of
a reenforced cement bridge across the Argos River which forms the boundary line
between the Provinces of Albay and Ambos Camarines, defendants. The contract was
entered into June 26, 1913. The plaintiff was to construct the bridge for a certain sum and
furnish all labor, materials, tools, implements and machinery, and to complete the work
by the first day of November, 1913. It was agreed, however, that, if he desired, the
defendants would sell to plaintiff and plaintiff would buy of defendants, at a fixed price,
the steel necessary to reenforce the concrete bridge as well as the cement piles which
were to be driven as the foundation of the bridge. If the steel was purchased of defendants
they were to deliver it on board steamer in the harbor of Legaspi; and plaintiff was to
accept delivery there and, by his own means and at his own expense, transport it to the
bridge site on the Argos River, 51 kilometers inland from Legaspi. Nowhere in the
evidence or record does it appear when the steel was to be delivered under this contract.
On that point, and it is, under plaintiff's theory, the vital point in the case, the record is
absolutely silent. The contract provided that plaintiff should pay defendants as liquidated
damages P25 for every day after November 1, 1913, until the bridge was completed,
except Sundays and holidays.
The controversy which resulted in this action springs from the failure of
plaintiff to complete the work in time, i.e., within the time specified in the contract. The
failure is admitted by plaintiff. The sole defense in the court below, and here on this
appeal, is that his noncompliance with the contract in this regard was due to the failure of
the defendants to deliver in time the steel mentioned; and that such failure prevented his

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completing the bridge on time and, accordingly, relieved him from all damages caused to
the defendants thereby.
The Supreme Court finds that plaintiff's defense is well founded. How the
court arrives at this conclusion I am unable to understand. In my judgment the findings of
the court are not only unsupported by the evidence but they are contrary to the undisputed
evidence and the testimony and admissions of the plaintiff and his witnesses.
Let us look, first, at plaintiff's own words on the question of delay. They not
only help us in that connection but in several others. The true reasons for the plaintiff's
failure in not completing the structure by the 1st of November, 1913, are given by
plaintiff's engineer and superintendent, James, who had complete charge of the
construction of the bridge, the plaintiff being absent from the country. He was also his
attorney-in-fact and fully authorized to act for him in all ways. On the first day of
December, the piles for the foundation of the bridge not having yet been driven, the
plaintiff, through his engineer, superintendent, and attorney-in-fact, made, in the form of
a letter to the defendant provinces, an application for an extension of the time within
which the bridge was to be completed under the contract of construction. This
application, as appears upon the face thereof, contains a full statement of the reasons and
grounds upon which the application was based. Even a cursory reading discloses that it is
a complete and absolute refutation of every contention made by the plaintiff in this case
with respect to his failure to complete the bridge on time and is a complete and absolute
refutation of the opinion of this court upon that question. It reads as follows:
"GENTLEMEN: I have the honor to request that an
extension of time be granted me for the construction of the Argos
River Bridge.
"Immediately upon entering into contract with the
Province of Albay on June 26, 1913, I ordered cement for the work,
but due to the shortage in the Manila market at that time did not
receive delivery until the middle of July, when same was shipped to
Legaspi where it arrived four days later.
"I had made previous arrangements to have this cement
hauled to the bridge site by automobile truck, but when an attempt
was made to do so in July the recent rains so softened the road
beyond Polangui that it was impossible to send a loaded truck over it
with any assurance of safe arrival of the cargo of cement at Argos
River in good condition. Therefore I was obliged to haul by truck to
Ligao only and from there to Argos by carabao carts.
"The contractor in Ligao then began to haul the cement
and also the steel for the bridge. Shortly a quarantine on animals was
put into effect in the town of Polangui, and the hauling had to stop
when I had delivered at the bridge site only a few barrels of cement
and a very small number of bars of steel for the piles. It was not until
early in October, therefore, that sufficient steel and cement were
delivered at the Argos River to warrant beginning work of casting the
piles. This work began however immediately this condition obtained
and the sixty concrete piles were completed November 22.
"Due to the fact that the material in the Argos River into
which the piles must be driven is exceptionally hard and of a very

compact nature it is almost imperative that the piles have

considerably more than the usual thirty days for ripening before
driving, and of necessity I must wait until at least December 15
before handling even the first piles cast. My pile driver is being
shipped to Nueva Caceres at present writing. I am obliged to send all
my plant and balance of materials in by that port due to the fact that
nobody in Albay is willing to attempt hauling heavy machinery over
the road beyond Polangui for reasons best known to the honorable
board, and it is only a question of hauling same Nueva Caceres to
Argos River as to the actual date of beginning driving.
"As was unforeseen at the time of entering into contract
for this bridge, I have been obliged to use two plants on my work in
the Province of Bulacan where it was anticipated that one would be
enough, due to the unusual conditions and delays from floods and
typhoons, so I have not been able to ship my engine and driver so as
to have it at been able to ship my engine and driver so as to have it at
Argos River on the date expected. Therefor, for these above-named
reasons, I have the honor to request that I be granted an extension of
time until February 15th, 1914, to complete the Argos Bridge.
"Very respectfully,
"ARTHUR F. ALLEN, Contractor.
"(Sgd.) Per F. T. JAMES.
"The HONORABLE PROVINCIAL BOARD,
"Albay, Albay.
"Through The Director of Public Works, for indorsement."
Viewed in connection with the opinion of the Supreme Court, this is a striking
document in several particulars. Let us first consider the time of execution and the
purposes of the document. It was dated the 1st day of December, 1913, one month after
the time when the bridge should have been completed. Now it is clear that, if the
defendants had caused plaintiff's failure to complete the bridge by November 1, he was
relieved of all responsibility which would have otherwise arisen by reason of that failure;
and his only duty was to proceed with the work with ordinary diligence and skill. Under
such circumstances it was unnecessary for him to ask for an extension of time. It had
already been extended, at least for a time reasonably required to complete the structure,
by defendants causing plaintiff delay and failure. From plaintiff's point of view, then, his
request for the extension was unnecessary as it had already been extended. But from
defendant's point of view the request for extension was very significant. It meant that
plaintiff knew his failure was due to his own fault and that, by making the application for
an extension, he was trying to avoid the consequences of that failure. I believe this
inference is a fair one under all the circumstances. Men do not ordinarily ask for things
which they already have and claim as their own; and when they do so it instantly raises
the suspicion that they themselves doubt the validity of their title. According to plaintiff's
theory the time had already, in legal effect, been extended for a period reasonably
sufficient to complete the bridge by the omissions of the defendants, and plaintiff had
been operating for a month under that extension. Why, then, ask for an extension. Why,
then, ask for an extension? But, above all, why seek to excuse his own delay and failure

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to fulfill? ON the other hand, if it be urged that plaintiff was simply asking for the
recognition of a right which, by virtue of the defendants' delay, was already his, would
not the allegation of such delay in the letter asking for an extension of time have been the
strongest reason which plaintiff could possibly have offered to obtain what he was
seeking? Why present excuses for so many of his own failures as a ground for extension
if he could have closed the mouths of defendants against objection by alleging their own
failure? Why pray for a privilege when he could demand a right? Can any reasonable
man conclude that, if the defendants had failed as plaintiff now asserts they failed, he
would have neglected to mention that failure in his letter requesting an extension?
Second, let us consider the nature of the document. In the first place, it is
a prayer. It is not a declaration of a right and a demand for its express recognition. "I
have the honor to request that an extension of time be granted me" says the document at
the beginning and "therefore, for these above named reasons, I have the honor to request
that I be granted an extension of time" says the document at the closed. This is arequest,
a petition, a prayer and not a demand based on a claimed right or one for the express
recognition of a right already existing.
In the second place, it is an excuse for a failure to perform and not a
declaration that he had not, by his own neglect, failed to perform. Itadmits his failure and
seeks to excuse it. The whole document is filled with nothing but admissions and
excuses. It does not contain an allegation or a claim of a single right against the
defendants. It is filled from beginning to end with admissions that the plaintiff had failed
to fulfill his contract; but nowhere is there even a suggestion that the defendants had
failed to fulfill theirs.
The first excuse offered is that, although the plaintiff had ordered the cement
immediately after execution of the contract, nevertheless "due to the shortage in the
Manila market at that time did not received delivery until the middle of July, when same
was shipped to Legaspi where it arrived four days later." Although the contract was
signed on the 26th of June plaintiff did not obtain delivery of the cement at Legaspi until
about the 20th of July. This is the first reason offered to excuse his failure to perform.
Who was to blame here?
The second reason offered is that "I had made previous arrangements to have
this cement hauled to the bridge site by automobile truck, but when an attempt was made
to do so in July the recent rains so softened the road beyond Polangui that it was
impossible to send a loadedtruck over it with any assurance of safe arrival of the cargo of
cement at Argos River in good condition. Therefore I was obliged to haul by truck to
Ligao only and from there to Argos by carabao carts." From this it is clear that the
plaintiff began to haul the cement during the latter part of the month of July and that at
that time the road was so bad that the automobile truck could not pass over it. Whose
fault was it then that he was unable to transport his cement to the Argos river? Was it due
to any act of the defendants? Clearly this is an admission that it was due to his own
failure.
The third excuse is that the contractor in Ligao was obliged to discontinue the
hauling of the cement and steel from Ligao to the bridge site on account of a quarantine
on animals imposed by the Government. This occurred, says the plaintiff, "when I had
delivered at the bridge site only a few barrels of cement and a very small number of bars
of steel for the piles." Whose fault was this? Was it the fault of the defendants? The

plaintiff admits that it was not. That which caused all of the subsequent difficulties
including those arising from the quarantine was the failure of the plaintiff to begin the
delivery of his cement to the bridge site from Legis before the roads had been rendered
impassable by the rains. If he had delivered his cement in Legis in time he himself admits
that he would have been able to transport it to the bridge site in anautomobile truck and
would not have been obliged to rely on carabaos. The necessity, therefore, of using
carabaos was due to plaintiff's own negligence and procrastination in not procuring the
delivery of the cement in Legis prior to the beginning of the heavy rains. This is not only
a legitimate but an absolutely necessary inference from the document which we are
discussing.
The fourth excuse is that, by reason of the facts already stated, "it was not
until early in October, therefore, that sufficient steel and cement wee delivered at the
Argos River to warrant beginning work of casting the piles." This excuse needs no
discussion other than that already given respecting other excuses.
The fifth excuse given is that "due to the fact that the material in the Argos
River in which the piles must be driven is exceptionally hard and of a very compact
nature, it is almost imperative that the piles have considerably more than the usual thirty
days for ripening before driving, and of necessity I must wait until at least December 15
before handling even the first piles cast." Was the hardness of the soil attributable to the
defendants? Was the fact that he had to give the piles more than thirty days to ripen due
to any act of the defendants? Certainly not. It was a mere miscalculation in his part which
he offered as an excuse in the hope that the defendants would be generous and overlook it
with his other mistakes and omissions.
The sixth excuse offered for his failure is that "my pile driver is being shipped
to Nueva Caceres at present writing (December 1, 1913);" and it is admitted that it did
not arrive until January. The reason for this delay is given by the plaintiff as follows: "As
was unforeseen at the time of entering into contract for this bridge, I have been obliged to
use two plants on my work in the Province of Bulacan where it was anticipated that one
would be enough, due to the unusual conditions and delays from floods and typhoons, so
I have not been able to ship my engine and driver so a to have it at Argos River on the
date expected." Is not this clearly an excuse offered for plaintiff's own failure, for
his own negligence?
The document is not only an excuse, it is an admission. It is a comprehensive
admission on plaintiff's part that he alone was responsible for every delay that occurred. I
have already referred to several passages in the letter which show that it is
a confession and a prayer for clemency. "I failed in this; I failed in that; I failed in the
other thing;" says the plaintiff in the letter. "Wherefore," says he, "I . . . request that an
extension of time be granted me . . ." One does not request where he has the right to
demand; and one does not grant that which another has a right to require.
"I failed," says the plaintiff in effect, "to get the cement to
Legis before the rains made the road from there to the bridge site
impassable;" and this is the reason he gave in his letter for that
failure: "Immediately upon entering into contract with the Province of
Albay on June 26, 1913, I ordered cement for the work, but due to the
shortage in the Manila market at that time did not receive delivery
until the middle of July, when same was shipped to Legis where it
arrived four days later."

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The plaintiff further says, in effect: "I failed to deliver the cement at the bridge
site in time to complete the work as agreed;" and this is the reason he gives in his letter
for that failure: "I had made previous arrangements to have this cement hauled to the
bridge site by automobile truck, but, when an attempt was made to do so in July, the
recent rains so softened the road beyond Polangui that it was impossible to send a loaded
truck over it with any assurance of safe arrival of the cargo of cement at Argos River in
good condition. Therefore I was obliged to haul by truck to Ligao only and from there to
Argos by carabao carts. The contractor in Ligao then began to haul the cement and also
the steel for the bridge. Shortly a quarantine on animals was put into effect in the town of
Polangui, and the hauling had to stop when I had delivered at the bridge site only a few
barrels of cement and a very small number of bars of steel for the piles. It was not until
early in October, therefore, that sufficient steel and cement were delivered at the Argos
River to warrant beginning work of casting the piles. This work began however
immediately this condition obtained and the sixty concrete piles were completed
November 22."

"We must, therefore, conclude that the provinces waived

the contract time, whether it was September 1 of November 1, by
theirfailure to deliver the steel promptly, by reason of their
having placed a strict quarantine on animals and on account of
the change in the plans subsequent to October 12th, . . ."
Compare these findings and conclusions with plaintiff's own statement of the
reason why he failed to complete on time contained in the letter of December 1, and what
is the result? I repeat, plaintiff's own statement of the reasons why he failed to perform on
time are a confession that his inability to perform was brought about by his own acts and
omissions with which the defendants had nothing whatever to do. This is shown beyond
shadow of doubt by plaintiff's letter quoted above; and every fact and circumstance stated
in the letter is fully supported by the undisputed evidence in the case.
These facts are undisputed in the record. Most of them are established from
plaintiff's own mouth or the mouths of his witnesses:

This is, of course, a clear admission that, on account of a series of

circumstances with which the defendants had nothing to do, he failed to deliver
the cement at Legaspi before the rains made the roads impassable, and failed to deliver
the cement at the river until October. The defendants admittedly had nothing to do with
the cement; and it goes without saying that plaintiff could do absolutely nothing in the
construction of the bridge until the he had cement. The bridge was a cement bridge; the
piles were cement piles. He was utterly helpless until the cement arrived, no matter how
many tons of steel he may have had. Nowhere in all the case is there a shadow of claim
that the defendants interfered with the purchase or delivery of the cement and nowhere is
there a shred of evidence to show that an earlier delivery of steel would have availed
plaintiff anything.

1. That there was a nonperformance. That, while the agreement obliged him to
complete the bridge by the 1st day of November, 1913, it was not finished until the 31st
day of March, 1914.

In the passage last quoted plaintiff says in effect: "I failed to complete the
bridge on time because I did not finish casting the piles untilNovember 22." If, by lack of
cement he did not complete the piles until November 22, how could he have completed
the bridge November first, the date specified in the contract, even though he had
boatloads of steel at his disposal?

4. That, although the plaintiff began transporting the cement from Legaspi to
the bridge site soon after its arrival on the 20th of July, the rains had at that time so
softened the roads that transportation by automobile truck from Legaspi to the bridge site
was impossible; and that for that reason the cement did not reach the bridge site until the
last week in October.

Plaintiff further says in his letter, in effect: "I failed to drive the piles in time
to complete the bridge as agreed." We have already seen some of the reasons for this
failure, such as lack of cement and his failure to deliver it at the bridge site in time. But
plaintiff gives two additional reasons. The first one is stated in the letter as follows: "Due
to the fact that the material in the Argos River into which the piles must be driven is
exceptionally hard and of a very compact nature it is almost imperative that the piles have
considerably more than the usual thirty days for ripening before driving, and of necessity
I must wait until at least December 15 before handling even the first piles cast;" and the
second is that: "My pile driver is being shipped to Nueva Caceres at present writing;" and
"As was unforeseen, at the time of entering into contract for this bridge, I have been
obliged to use two plants on my work in the Province of Bulacan where it was anticipated
that one would be enough, due to the unusual conditions and delays from floods and
typhoons, so I have not been able to ship my engine and driver so as to have it at Argos
River on the date expected."

5. That the rains began before the arrival of the cement at Legaspi and they
had so softened the roads as to prevent the delivery of the cement from Legaspi direct to
the bridge the delivery of the cement from Legaspi direct to the bridge site by automobile
truck as plaintiff had planned; and that as a result thereof the cement did not reach the
bridge site until the last week in October.

The court makes the following findings:

2. That the bridge was to be a cement structure and that the cement necessary
for its construction and for the casting of the piles was to be furnished and delivered to
the bridge site by the plaintiff.
3. That although the contract was signed on the 26th day of June, 1913, and
the bridge was to be completed according to that contract on or before the 1st day of
November, 1913, the cement did not arrive at Legaspi until about the 20th day of July
and at the bridge site until the last week in October.

6. That the work of casting the cement piles was not begun until about the 1st
day of November and was not finished until the 22d of November.
7. That the piles were not seasoned enough to be driven until the 15th of
December, 1913.
8. That plaintiff's pile driver did not reach the bridge site until the month of
January, 1914, and the driving of the piles did not begin until that time.
Under these facts, which all parties admit, how can it be claimed that it was
the act or omission of the defendants which caused the contractor's failure to complete
the bridge on time? But let us go farther. With respect to the alleged failure of the

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defendants to deliver the steel in time, the following facts also stand uncontroverted in
the case:
9. That the steel to be furnished by the defendants was to be used by plaintiff
to reenforce the concrete bridge and the piles which were to be driven as the foundation
of the bridge and could not be used except jointly with the cement.
10. That the steel to be furnished by the defendants was to be delivered by
them in Legaspi on ship board from whence plaintiff was to transport it to the bridge site
fifty-one kilometers inland.
11. That defendants furnished all the steel required, namely, 38,582 kilos.
27,056 of the 38,582 kilos, that is, three-quarter of all the steel to be furnished, were
delivered at Legaspi on July 26, 1913; 3,636 kilos on August 4, and 7,890, the last
delivery under the contract and about one-sixth of the whole, on September 1. Note in
this connection that it is admitted that the cement which arrived in Legaspi on July 20, or
thereabouts, could not be transported to the bridge site on account of the condition of the
roads caused by the rains. Note, therefore, that thesteel could not be transported from
Legaspi to the bridge site for the same reason. In other words, plaintiff was just as late
with his cement as the defendants with their steel, even admitting that defendants were
late at all in its delivery.
12. That the plaintiff could have begun the transportation of the steel at the
same time that he actually began the transportation of the cement; that when he began the
transportation of the cement from Legaspi to the bridge site on the Argos River in an
automobile truck he found that (plaintiff's own words) "the recent rains so softened the
road beyond Polangui that it was impossible to send a loaded truck over it with any
assurance of safe arrival of the cargo of cement at Argos River in good condition."
Under these undisputed facts, and plaintiff's own statement already discussed,
what act of defendants caused the failure of plaintiff, conceded by all, to complete the
construction on time? When we note that plaintiff's sole contention is that the failure of
the defendants to deliver the steel in time caused his delay and then compare that
contention with the foregoing admitted facts, the contention become ridiculous. The
claim that plaintiff was hindered and delayed by defendants' alleged failure to deliver the
steel is, in the face of the admitted fact that the steel was at Legaspi almost as quick as
plaintiff's cement, that no attempt to transport the cement from Legaspi to the bridge site
was made until after the steel arrived in Legaspi, that the transportation of the cement
was at that time impossible, that, therefore, no cement was at the bridge site until the last
week in October, that the piles were not cast until November 22, that they would not be
driven until December 15, and that the pile driver did not arrive until January, 1914, so
devoid of merit as not to be entitled to serious consideration.
It must be remembered that, under the contract of construction, plaintiff
himself was to deliver everything at the bridge site on the Argos River, including the
steel. The defendants discharged their obligation as to the delivery of the steel when the
ship bearing it stood ready to unload in the harbor of Legaspi. The plaintiff was to
transport it from there to bridge site. He was to furnish and delivery there all machinery,
tools, and implements necessary to complete the bridge within the time specified in the
contract, November 1, 1913; yet he did not begin to transport his cement from Legaspi to
the bridge site until after the steel arrived in Legaspi, his cement did not reach the bridge
site until the last week in October, the piles, the driving of which was the very first act in
the construction of the bridge, as they were the foundation thereof, were not cast

until November 22, and were not ready to be driven until the 15th of December, and the
pile driver itself was not on the ground until the month of January, 1914. It is admitted
that the steel could not be used and, therefore, was not needed at the bridge site until
the cementarrived there, as the steel was to reenforce the cement piles; and that plaintiff
did not begin to cast the piles until November and they were not completed
until November 22. Defendants delivered three-fourths of the steel required by the 26th
of July. Another delivery was made a few days later and the balance, about one-sixth of
the whole, was at Legaspi September 1. Therefore, if plaintiff did not begin to cast the
piles until November, certainly it was not due to any act of defendants as they had
delivered the steel at Legaspi three months before that date, and substantially as soon as
he had delivered the cement and before plaintiff was prepared to begin the transportation
of his materials from Legaspi to the bridge site.
It is a proposition of law set down in plaintiff's brief on appeal that, before the
delay of defendants can be of service to the plaintiff in the defense offered for his failure
to perform on time, it must have delayed plaintiff, i. e., defendants' delay must have
caused or contributed materially to plaintiff's delay; and plaintiff cites many authorities
to that effect. Among them are the following:
"It is a well settled rule that, where one party demands
strict performance as to time by another party, he must perform on his
part all the conditions which are requisite in order to enable the other
party to perform his part; and a failure on the part of the party
demanding performance to do the preliminary work required in order
to enable the other party to complete his within the time limited,
operates as a waiver of the time provision in the contract." (Dannat vs.
Fuller 120 N.Y., 554.)
"There is no question with respect to the law applicable to
the case, for by the express terms of the contract, as well as under the
general rule of law, the time prescribed by the contract for the
performance of the plaintiff's work was abrogated by the owner's
delay, and the plaintiff had a reasonable time under all the
circumstances for completing performance after the expiration of the
delay caused by the owner." (Levering & Garrigues Co. vs. Century
Holding Co., 160 N.Y. 649.)
"The courts have laid down a very salutary rule to the
effect that they will not attempt to apportion such delays where the
causes thereof have been mutual, but will refuse under the
circumstances to enforce the penalty." (Jefferson Hotel Co. vs.
Brumbaugh, 168 Fed., 867.)
"Where the parties are mutually responsible for the delays,
because of which the date fixed by the contract for completion is
passed, the obligation for liquidated damages is annulled and, in the
absence of some provision under which another date can be
substituted, it cannot be revived." (Mosler Safe Co. vs. Maiden Lane
Safe Deposit Co., 199 N. Y., 479.)
"Here the delays of the Government prevented the
claimant from a strict performance, and thereby it waived the contract

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time within which to perform, and that waiver operated to eliminate
the definite date from which to assess liquidated damages . . .
Whatever loss the Government may have suffered by reason of the
claimant's breach to perform within a reasonable time must be
reduced to actual damages, if any, susceptible of proof." (United
Engineering & Contracting Co. vs. United States, 47 Court of Claims,
489.)
"The same doctrine is found in Allen vs. Province of
Bulacan, post, p. 875.
These cases assert expressly or impliedly the proposition that, if the owner's
failure to fulfill does not cause or contribute materially to the contractor's delay, then the
latter is not excused for failure to perform within the time specified; and he cannot take
refuge behind the delay of the owner. If the owner's delay does not hinder the contractor,
does not in the slightest degree impede or interfere with his progress, it does no charm, is
immaterial, and produces no effect; and it cannot, therefore, be made the basis of an
excuse for the contractor's failure to perform.
In the case before us, even admitting a delay on the part of defendants in
delivering the steel at Legaspi, still it was delivered before plaintiff began to transport
his cement from Legaspi to the bridge site, long before plaintiff could possibly use it, as
his cement did not reachLegaspi until just before the steel arrived there and did not reach
the bridge site until the last week in October, could not be used by the plaintiff until
November, and the piles made therefrom could not be driven until the pile driver arrived
in January. If it is a fact, and plaintiff admits it, that (I use plaintiff's own words) "It was
not until early in October, therefore, that sufficient steel and cement were delivered at the
Argos River to warrant beginning the work of casting the piles," then certainly the
delivery of the steel by defendants in July and August could not have contributed in the
slightest to plaintiff's delay. It could not have prevented his getting the cement at the
bridge site. It could not have prevented his getting the steel at the bridge site as he could
have begun the transportation of the steel, as he did his cement, from Legaspi the last of
July, as three-quarters of the steel was delivered on the 26th of July at Legaspi. Instead he
did not transport either the steel or the cement until the month of October, or the very last
part of September according to his own admission; and he did not begin the
transportation of his cementuntil after the steel arrived. Moreover, and this is also
important, the steel arrived at the bridge site as soon as the cement. How, then, did the
failure of the defendants to deliver at Legaspi before July 26 hinder or delay plaintiff?
There is only one answer to this query: It did not affect plaintiff's progress in the slightest
degree. Why should effect be given to something which in the very nature of things can
produce no effect? An athlete who is to run in a race to be held on June 1 makes a
contract with a dealer to hire a pair of racing shoes for the occasion, the dealer agreeing
to deliver the shoes on the race track at 9 a. m. of June 1. On May 31 the athlete loses
both legs in an accident. The dealer, learning of the accident, does not deliver the shoes as
agreed. Can the athlete legally claim that he lost the race or was injured or prejudiced in
any manner because of the failure of the dealer to deliver the shoes as agreed? Certainly
not; but why? Because neither law nor common sense requires the doing of an idle and
useless thing. What, then, can and should be said of a decision of a court which holds that
the failure of the shoe dealer to deliver the shoes at the race track at 9 o'clock in the
morning of June 1 caused or materially contributed to the failure of the athlete to win the
race, although at the very moment when the race took place he was in the hospital with
both legs off. Nevertheless that is what this court would have to hold if it followed the

principles enunciated in this decision. Take another view of it. An owner of a city lot
makes a contract in June to construct a house thereon, to be completed November 1, the
contractor to furnish all labor and materials, tools, implements, etc., except that the owner
was to furnish the roofing shingles which, under the contract, were to be delivered on the
ground July 1. Could the contractor, who did not complete the house until the first of
April of the year following the making of the contract, successfully defend an action for
breach of contract brought by the owner by proving that the latter did not deliver the
roofing shingles until July 26 instead of July 1, when the contractor, at the same time,
admitted that he did not even break ground for the foundation of the house until the
month of October, and that he could not possibly have used them before November even
if he had them? Certainly not. The contention is, of course, unsustainable that the failure
to deliver the roofing shingles at the time agreed on caused delay when they were
actually delivered before the foundation of the house was even laid and months before the
contractor could, under any circumstance, have used them. Nevertheless that is, in
substance, the contention which, in my judgment, this court has sustained in this case. It
has held that the failure of the defendants to deliver steel for reenforce concrete piles to
be driven as the foundation of a bridge caused a delay to the contractor in the
construction of the bridge from November 1 to the 31st of March following, although the
steel was actually delivered in Legaspi before plaintiff began the transportation of his
cement to the bridge site and could have been, and as a matter of fact was, transported at
the same time as the cement, was actually delivered months before the contractor could
possibly use it, months before the cement he himself was to furnish was on the ground,
months before he was able to begin casting the piles, and nearly six months before he had
even obtained a pile driver with which to sink the piles. Such a decision, it seems to me,
overrules the unquestioned doctrine that a breach of contract will be disregarded where
absolutely no injury results therefrom (Lassing vs. James, 107 Cal., 348). It is contrary to
the principle that the delay of the owner will be disregarded unless it causes or materially
contributes to the contractor's delay (Allen vs. Province of Bulacan, post, p. 875;
Dannat vs. Fuller, 120 N. Y., 554; Levering & Garrigues Co. vs. Century Holding Co.,
160 N. Y. Supp. 649; Chenery vs. Libby, 134 U.S., 68; Erickson vs. U.S., 107 Fed., 204;
Missouri Bridge & Iron Co. vs. Steward, 134 Mo. Ap.., 618; District of Columbia vs.
Camden Iron Works, 181 U.S., 453; Willis vs. Webster, 27 N. Y. Supp., 354; Weeks vs.
Little, 89 N. Y., 566; Ocorr & Rungg Co. vs. City of Little Falls, 178 N. Y., 622; Manistee
Iron Works vs. Shores Lumber Co., 92 Wis., 21; Wyant vs. U.S., 46 Court of Claims, 205;
Smith vs. United Stares, 48 Court of Claims, 205; Smith vs. United States, 48 Court of
Claims, 235). It is opposed to the rule that the failure to perform of any party to a contract
will not excuse performance by the other unless the breach is material or such as prevents
the other party from performing his part. (See cases above cited.)
Plaintiff claims that the defendants did not deliver the steel at Legaspi until
the rainy season had commenced and the roads were impassable. "But," reply the
defendants to the contractor, "you did not deliver the cement in Legaspi until after the
rainy season had commenced and the roads were impassable and you began the
transportation of the steel as soon as you actually began the transportation of the cement;"
and they say to him: "How could you have used the steel without the cement? What
difference would it have made if we had delivered the steel the first day of June (although
the contract was not made until the 26th of June)? Your cement was not there till the last
week in October and the steel could not have been used without the cement. Nothing
could have been done with it no matter how early it may have been there. It would have
had to lie there from June 2d to the last week in October without the possibility of being
used. How can you claim that we delayed you when, by reason of your own negligence

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and incompetency, you could not have used the steel no matter how early it might have
been delivered at Legaspi or at the bridge site? How can you say that you would have
completed the bridge by November 1 if we had delivered the steel at Legaspi earlier than
July 26, in the face of your own admission that you were wholly unable to deliver
the cement at the bridge site until the last week in October; in the face of your own
admission that the concrete piles were not cast until November 22; in the face of your
own admission that they were not ready to be driven until December 15; and in the face
of your own admission that you were wholly unable to get the pile driver on the
ground until the month of January, 1914?"
Not only is the decision contrary to the evidence of plaintiff, as I view the
record, but two of the three defenses which the court establishes in favor of the plaintiff
to protect him against his failure to perform in time were not presented as defenses in this
case. These two "defenses" are the quarantine and the change in plans. They were not
offered or considered as such in the court below; nor were they offered as such in this
court. The sole defense which plaintiff has presented in this case, and it is one which he
did not think of offering when he prayed for an extension of time December 1, is that the
defendants did not deliver the steel at Legaspi so that the plaintiff cold transport it to the
bridge site before the roads became impassable from rains. This is the only defense
alleged, offered or presented anywhere in the case.
To demonstrate the truth of this statement let us take first the allegations on
plaintiff's own pleadings as to his defense for his failure to perform on time, and there
are his only allegations on that subject. His complaint states:
"That plaintiff fully and faithfully complied with all the
terms and conditions of the said contract on his part to be performed,
and duly completed and delivered to defendants the said bridge, and
that the same was duly accepted by said defendants.
"That the defendants, in violation of the aforesaid contract,
and notwithstanding repeated requests on the part of plaintiff, failed,
neglected, and refused to furnish and deliver to plaintiff, at reasonable
times ad required and requested by plaintiff, and at the places agreed
upon the reenforcing steel necessary for the proper construction of the
said bridge, thereby hindering and delaying plaintiff in the
performance of his part of the said contract; that the first partial
delivery of the said steel was completed in Legaspi on or about July
10, 1914, and complete delivery was not made until September 30,
1914, in the said port of Legaspi; that at the time said steel arrived the
rainy season had commenced, and had so softened the direct roads,
means of communication between Legaspi and the site of the said
bridge, that plaintiff was compelled to incur extra expenditure for the
hauling of said steel, to wit, the sum of P2,000 which said sum,
notwithstanding repeated requests of plaintiff, has not been paid, nor
any part thereof, by defendant to plaintiff."
The later allegation is made for the purpose of obtaining pay for extra work
rather than as a defense of his failure to perform on time; but it shows plaintiff's theory as
to the cause of his delay. At that time there appears to have been no thought of the
quarantine or the change in plans as being primarily involved in causing his delay. The

whole theory was simply that failure to deliver the steel before the rains set in and
softened the road waived the time requirement in the contract.
Let us take, second, the opinion of the trial court 1 with reference to the matter
under discussion here. The trial court said:
"The third cause of action is for the recovery of P2,000 as
extra expenses caused plaintiff by the failure of defendants to deliver
the steel for the bridge within the time specified by the plaintiff."
Further on the opinion of the trial court said:
"James, the representative and attorney-in-fact of the
plaintiff, the person who had full charge and control of the
construction of the bridge on the Argos river, testifies that the steel
was delivered between July 26 or 27 and the first week in September,
1913; that when the steel arrived the rainy season had begun and it
was impossible to transport the materials from Polangui a town in
the Province of Albay to the bridge site except by vehicles drawn
by carabaos; that the result was not only a loss of time in the
transportation of the materials but extra expense also."
This is the only discussion in the opinion of the court below relative to
plaintiff's defense of his failure to perform in time. Nothing is said of quarantine or
change in plans.
Let us take, third, the brief of plaintiff-appellant in this court 1 and ascertain
from it what question he desired to present to this court. From that brief, the material
parts of which will be found in a foot-note, it is clear that plaintiff neither presented nor
relied upon either the quarantine or the change in plans as a defense to or an excuse of his
failure to perform. Neither is mentioned or even suggested in the argument. On the
contrary they are impliedly rejected. Counsel says:
"The date stipulated in the final contract, signed on June 26, for the
completion of the bridge, was September 1, 1913, 1 and defendants' right to retain any
sum as a penalty or liquidated damages must depend upon the contractor's failure to
finish the bridge by that date. It is true that the bridge was unfinished on September 1, but
it is readily shown by defendants' own evidence that the failure to finish the bridge by
September 1 was caused by their own delay in furnishing the necessary steel. . . . If the
decision of the trial court is correct, defendants may mulct the contractor for liquidated
damages because he did not complete a reinforced concrete bridge the very day on which
they furnished the materials."
From this quotation it is clear that there is no place in counsel's theory for the
defense of quarantine or of change in plans. What did the mischief, from plaintiff's point
of view, was the failure of the defendants to finish delivering the steel at Legaspi, more
than 51 kilometers from the bridge site, until September 1, the very day on which the
bridge was to be completed; and he triumphantly asks the question how could the
plaintiff be expected to complete the bridge on the very day the steel arrived. To
this sole contention plaintiff's brief joins the proposition of law that, "Time was the
essence of the contract, and defendants, by making it impossible for plaintiff to complete
the bridge on September 1, waived that date, and cold only hold plaintiff to a reasonable
time for performance." This theory excludes both the quarantine and the change of
plans as an excuse for failure to perform on time. If counsel had discussed the question of

335
whether the plaintiff performed within a reasonable time after September 1, then it is
possible that quarantine and change of plans might have been pertinent, if they had been
pleaded as such, a point which we now come to consider.
From these observations it is clear that at no stage of the proceedings in this
action has plaintiff claimed as an excuse for his failure to complete the bridge on time
that he was prevented from doing it by a quarantine of animals or by a change of plans.
Every pleading he has filed, every argument he has made, every word he has uttered, is
not only foreign to but excludes the possibility of their being urged in his favor; and the
only guided which this court has to do justice between the parties, that is, that which, if
we may so, frames the issues in this court and tells it on what theory the parties have
proceeded and desire to proceed, the question they present and wish to have decided,
namely, the briefs filed by the parties in this court, not only fails to present the defenses
on which this court absolves the plaintiff for his failure to perform, but the theory on
which the appellant relies excludes such defenses from consideration by this court.
But there is an additional consideration which, of itself, shows, in my humble
judgment, that the decision of this court is erroneous in that regard. Neither of these
defenses was pleaded by plaintiff's complaint. In their answer the defendants deny the
allegations of the complaint that plaintiff fully performed according to its terms his part
of the contract and allege the allegations of the complaint that plaintiff fully performed
according to its terms his part of the contract and allege that he negligently failed to
complete the bridge within the time agreed and that they were greatly damages thereby.
The only issue framed by the complaint and answer was whether plaintiff completed the
bridge within the time specified in the contract. They raised no question as to the failure
of defendants to perform as agreed. The plaintiff having alleged in his complaint
performance strictly in accordance with the terms of the contract could not be presumed
to have later alleged that he did not perform in accordance with the terms of the contract
but, on the contrary, failed so to perform, at the same time adding that such failure was
due to the branch of contract of defendants. Plaintiff made no reply to defendants' charge
of failure to perform; and therefore framed no issue on that subject except the one already
framed by the complaint and answer referred to, namely, whether plaintiff actually
performed in accordance with the terms of the contract, not whether he was excused for
or justified in his failure so to perform. It is true that, notwithstanding the failure of a
plaintiff to reply to new matter in an answer constituting in itself a cause of action, it is
deemed to be denied, nevertheless it is a mere denial and cannot be considered to be an
allegation of a special defense to the cause of action set out in the answer (sec. 104, Code
Civ. Proc.). It is simply a general denial; it is not a special defense, or a plea of
confession and avoidance, such as, in effect, would be the plea that plaintiff failed to
perform but that his failure was excused and justified by certain acts of the defendants.
Nor did the pleadings present an issue on the question of quarantine. If a
defense at all, it is one under article 1105 of the Civil Code which provides that:
"No one shall be held liable for events which could not be
foreseen (viz major) or those which, even when foreseen, were
inevitable, aside from the cases expressly stated by law or those in
which the obligation so declares."
This defense is one that must be specially pleaded. It is not one which can be
proved under a general denial.

It is apparent from what has been said that the pleadings raised no issue with
respect to an excuse for or justification of plaintiff's breach based either on defendants'
failure to perform, or in a change of plans, or in the happening of a fortuitous event,
which prevented timely performance on plaintiff's part. All these are special defenses
excusing a failure to perform on time and must be specially pleaded. They cannot be
proved under a general denial; and especially not when plaintiff's own pleading
affirmatively alleges, as does the complaint in this action, full performance on his part in
strict accordance with the terms of the contract. If defendants were to be charged with a
breach of contract they had a right to be notified of that charge by plaintiff's pleadings
and be given an opportunity to defend themselves in that regard. The mere allegation by
plaintiff to a complete performance in accordance with the terms of the contract and a
denial of full performance by the defendants coupled with an allegation of failure to
perform on plaintiff's part does not raise such as issue as would permit the introduction of
evidence tending to show a breach of contract on the part of the defendants.
The pleadings, therefore, were not framed with the intention or for the purpose
of charging the defendants with a breach of contract which should form the basis of an
excuse of the failure of the plaintiff to perform the contract according to its terms.
While, however, there was no issue framed by the pleadings with respect to
the failure of the defendants to deliver the steel at Legaspi in accordance with their
contract with the plaintiff, that question was raised in the trial court by the plaintiff
without objection on the part of the defendants and was there passed upon by the trial
court and has been presented to this court by the briefs of counsel. We have the right and
it is our duty, therefore, to determine that question lthough the pleadings filed by the
parties do not in law present such an issue or raise such a question (Lizarraga
Hermanos vs. Yap Tico, 24 Phil. Rep., 504).The other two defenses found by the court in
favor of the plaintiff were not so raised on the trial or passed upon by the trial court and
were not presented by briefs of counsel on this appeal. We have, therefore, no authority to
consider those defenses. To give the plaintiff the benefit thereof would be to surprise the
defendants who had never been notified that the plaintiff claimed any such a defense and
have never had an opportunity to meet it.
In my judgment there is no ground for the finding of the court that the
defendants actually failed to comply with their contract in the delivery of the steel at
Legaspi. I am unable to find any evidence in the record to establish such a breach of
contract. Even though we admit that the plaintiff alleges it, the defendants stoutly deny it
and plaintiff has not offered evidence to sustain his allegation. The contract for the
construction of the bridge itself does not mention the time when the steel shall be
delivered. There is no evidence in the case showing what the contract or arrangement was
between the parties relative to the time of the delivery of the steel. There is no evidence to
show when the plaintiff ordered the steel. There is some evidence to the effect that before
the contract was signed the plaintiff gave to the district engineer of the department of
public works of the Philippine Islands a list of the steel which would probably be
required. There is not, however, a scintilla of evidence in the record showing that there
was an agreement as to when the steel should be delivered, or at what time the defendants
were required to have it at Legaspi for transportation to the bridge site. From the signing
of the contract on the 26th of June forward, the record is naked of evidence showing that
the plaintiff ordered any steel of the defendants or that he ordered it delivered at any
particular time. There being no evidence as to when the steel was ordered there can be no

336
assumption as to when the steel was to be delivered; and there being no evidence as to
when the steel should be delivered there can be no assumption that it was not delivered as
required by the contract. But, says plaintiff, it was certainly intended that the steel should
be delivered before the time when the bridge should be completed under the contract. But
precisely the same may be said with regard to the cement. The cement was not all
delivered at the bridge site until the last week in October and was not delivered in
Legaspi until the last part of July, about the same time that the steel was delivered.
Certainly, if the defendants delivered the steel, or such portions as would give the
plaintiff the opportunity to begin his work without delay, as quickly as plaintiff himself
delivered his cement, there can be no presumption or claim that the steel was not
delivered in time or that it was not delivered in accordance with the contract. Defendants
delivered at Legaspi three-quarters of the quantity of steel finally used in the construction
of the bridge substantially as soon as plaintiff delivered his cement at Legaspi; and there
is no evidence whatever to show that if all of the steel had been required at that time or at
any particular time the defendants could not have furnished it as required. Why should
the defendants be presumed to have broken their contract for a failure to deliver the other
sixth of the steel in Legaspi when none of plaintiff's cement then in Legaspi could be
transported to the bridge site to be used in any way? All that any contract could have
required of defendants was that they deliver at Legaspi as fast as the plaintiff needed it. It
is clear that plaintiff did not need the steel either at Legaspi or in any other place until his
cement was delivered at Legaspi and there was a possibility of its being transported to the
bridge site. There can be no presumption that defendants broke their contract to deliver
the steel when, if it had been delivered the 1st day of June, 1913, and had been
transported to the bridge site on the 2d day of June, it could not possibly have been used
by the plaintiff until the last week in October, which was the time when his cement
arrived at the bridge site.
I repeat, therefore, that there is no evidence in the record showing what the
agreement of the parties was as to the delivery of the steel and, therefore, there is no
evidence showing that the defendants were guilty of a breach of contract in the delivery
of the steel; and especially is there no evidence in the record showing that even if there
was a breach of contract, it prejudiced the plaintiff in the slightest degree.
While the plaintiff claims that the contract provides that the bridge should be
completed by the 1st day of September, 1913, the defendants contend that it was to be
completed on or before the 1st day of November of that year. It is true that the written
contract provides that the bridge shall be completed on or before the 1st day of
September. That, however, was found by the trial court, upon evidence, to be a clerical
error and the date should have been November 1. Fixing the date of completion at
September 1 would make the delivery of the steel by the defendants at Legaspi in the last
part of July appear so late as compared with the date when the bridge should be
completed as to show that the defendants prevented the plaintiff from completing the
bridge on time. If the date when the bridge was to be completed was September 1 and the
delivery of the bulk of the steel did not occur until the last part of July, the argument that
defendants prevented the plaintiff from completing the bridge on time would be much
stronger than if the date of completion was November 1st. As we have seen from
plaintiff's brief, he has made full use of that argument. Plaintiff forgets, however, that the
plaintiff from completing the bridge on time would be much stronger than if the date of
completion was November 1st. As we have seen from plaintiff's brief, he has made full
use of that argument. Plaintiff forgets, however, that the earlier he makes the date of
completion the worse it is for him. His cement did not arrive in Legaspi until the latter

part of July and it was not delivered at the bridge site until late in October. His cement
piles were not ready for driving until December and his pile driver did not arrive on the
ground until January.
I think my position in this case is fully supported by the decision in the recent
case of Allen vs. Province of Bulacan, post, p. 875. That case is very much the same as
the case at bar; and involved many of the same questions, including that of the failure of
the province to deliver the steel in time, thereby causing a delay in the completion of the
bridges which plaintiff in that case had agreed to build for the defendant province and to
complete on or before a given date. There was in that case also the construction which
should be given to a letter directed by the plaintiff to the provincial board asking for an
extension of time. That letter is very similar in tone and substance to that involved in the
case at bar. In order to show that fact, as well as to demonstrate the different views taken
by the court of these two letters, I quote it:
"MALOLOS, BULACAN, July 25, 1913.
"GENTLEMEN: I have the honor to inform you that the
earliest date at which I could procure a proper kind of cement and in a
sufficient quantity for beginning work on the Mololos-Hagonoy and
Malolos-Calumpit Bridges, was June 16. The inclosed letter from
Messrs. Findlay, Richardson to the honorable board explains the
difficulty.
The notification of the awarding of the contract to us was forwarded by the
Director of Public Works during the last week in February. During that same week the
cement dealer made delivery of the last of an order placed in August, 1912, for an Ilocos
Sur contract, but until the abovementioned date (June 16) made none for the work in
Bulacan.
"Therefore, gentlemen, in view of this unavoidable delay
in the starting of work requiring this essential material, for its
construction, I have the honor to request an extension of time beyond
August 1, for completion of said bridges, of one hundred and ten
(110) working days, which is approximately the loss of time incurred
by nondelivery of cement.
"The piles have already been cast at Paombong, Sapang
Patay, and Pinagtuluyan Rivers, and will be cast at Baungun the
coming week and immediately following that at Kalumpang Creek.
Driving of these piles commence at an early date.
"Trusting that this will received your consideration from
the point of view that delays such as in this instance are not to be
foreseen and justify an extension of time, I am,
"Very respectfully yours,
(Sgd.) "FRANK T. JAMES, Contractor.
"The HONORABLE PROVINCIAL BOARD,
"Province of Bulacan, Malolos.
"Through the District Engineer."

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Concerning the letter just quoted and the alleged failure of the defendant to
deliver the steel in time, this court said in that case:
"The foregoing testimony and exhibits establish beyond
question that the failure on the part of the province to deliver the steel
earlier, after the contract had been executed, did not in any way cause
the delay in completing the bridges nor contribute thereto. James, in
his letter of July 25 to the provincial board, stated that the earliest
date that he could procure the proper kind of cement and in sufficient
quantity to begin work on two of the bridges was June 10; that the
piles for two others had been cast; that the piles for the fifth would be
cast the province to deliver the steel earlier, after the contract had
been executed, did not in any way cause the delay in completing the
bridges nor contribute thereto. James, in his letter of July 25 to the
provincial board, stated that the earliest dated that he could procure
the proper kind of cement and in sufficient quantity to begin work on
two of the bridges was June 10; that the piles for two others had been
cast; that the piles for the fifth would be cast the following week; and
that the driving of the piles would commence at an early date. Not a
word was said in this letter about the steel not being delivered in time.
In fact, out of the twenty-seven shipments of steel all had arrived
before June 16, except four and these four were to be used in the
Kalumpang Bridge, which, as late as November 3, had hardly been
commenced, the piles only having been cast. The three rolls of wire
mesh which were substituted for the defective ones did not arrive
until October 14, nevertheless, they could not be used before
November 3 in either of the bridges, with the possible exception of
Paombong, as James in his letter of that date states. The three rolls
were so small a portion of that kind of material that their delay
certainly could have made no difference, especially when taken into
consideration with the condition of the work even on November 3.
"As the province did not cause any delay in the
construction of the bridges by reason of not having delivered the steel
earlier after the signing of the contract, consequently, it is self-evident
that no delay was caused by reason of the failure to order the steel
before that time."
Are not these remarks equally applicable to the case at bar under the facts?
One of the strange features of the case is that, while defendants admit that
there was an extension of time to complete the bridge from the first of November till the
15th of February and offer the plaintiff the benefit of that extension, plaintiff contends
and asserts that there was no extension of time and he rejects the benefits which
defendants offer him arising from that fact. Plaintiff says in his brief:
"It is true that plaintiff, through his agent, requested an
extension of time; but that he refused to agree to the defendants'
proposition is plainly shown by the resolution of the provincial board
of Ambos Camarines (defendants' Exhibit 5)."
Another statement in the brief is to the effect:

"There is no agreement for the substitution of another date

in this case. Defendants arbitrarily set the time for completion as
February 15, 1914 an arrangement which was never agreed to by
the plaintiff."
If there was not extension of time then the defendants would have been
entitled to recover P25 a day for every day of delay specified in the contract from
November 1 to March 31. They only ask, however, for damages from February 15 to
March 31. That much they are entitled to under the decision in Allen vs. Province of
Bulacan, supra.
I am of the opinion, therefore, that the amount of the recovery should be
reduced by the amount of damages proved.
Footnotes
1.The following is the opinion of the court below:
The complaint contains four causes of action.
It alleges in the first place that the plaintiff and the defendants executed a contract
whereby the former agreed to perform all the labor and furnish the necessary
equipment and materials for the construction and termination of a bridge at a
point situated on the boundary line between the Province of Albay and Ambos
Camarines, which provinces agreed to pay to the plaintiff for this worked
P30,810. Of this sum there still remains to be paid P1,590, according to the
plaintiff: hence the first cause of action, to wit, the recovery of this amount.
The second cause of action is for the purposes of recovering P200, the price of 16 steel
bars which the defendants bound themselves to deliver to the plaintiff for the
construction of the said bridge and which, notwithstanding the stipulations in
the contract were not furnished by the defendants.
The third cause of action is for the recovery of P2,000 as the amount of the extra
expenses caused the plaintiff by the defendants' failure to deliver within the
time specified by the plaintiff the necessary steel for the construction of the
bridge.
And the last cause of action is to recover P1,790, the value of certain additional work
performed on the bridge at the defendants' requirement.
Under these different causes of action the total amount claimed is P5,580.
The defendant provinces, through their authorized legal representatives, filed an answer
which contains not only a general denial of the allegations of the complaint
but also several special defenses, all of them tending to show that the plaintiff
has absolutely no right whatever to claim any sum from the defendant
provinces.
The work entrusted to the plaintiff was the construction of a reenforced concrete bridge
across the Argos River which forms the boundary line between the Provinces
of Albay and Ambos Camarines. On June 26, 1913, the plaintiff and the
Director of Public Works entered into a contract to that effect, the former
[latter] in representation of the aforementioned provinces. The price of the

338
contract was fixed at P30,690. The plaintiff engaged not only to perform the
work of constructing the bridge, but also to furnish all the materials and
necessary machinery; but it was agreed that in case the necessary steel were
furnished by the interested provinces, its value, at the rate of eleven centavos
for each kilo of steel furnished, should be deducted from the stipulated price
and that this steel was to be delivered by the defendants and received by the
plaintiff at the latter's risk, at ship's side in the Port of Legaspi (Albay). The
date fixed for the termination of the work was September 1, 1913, but, at the
request of the plaintiff himself, the provincial boards of Albay and Ambos
Camarines decided to grant him an extension of time until February 15, 1914,
on condition that the plaintiff should pay, as losses and damages for the delay,
the expenses occasioned the defendants by the inspection of the work and the
maintenance of a raft or ford there was in and across the Argos River for the
passage of vehicles and pedestrians from one bank to the other expenses
which amounted to P386.45.
The work, however, was not turned over until April 1, 1914, that is, until thirty-seven
days after the last dated fixed for the completion of the bridge.
In settling the amount of what was owing Mr. Allen for the construction of the bridge,
the provincial boards of Ambos Camarines and Albay decided to deduct from
the stipulated price the sum of P1,301.45, itemized as follows:
Cost of inspection, from November 1, 1913, to February 15, 1914 P175.03
Operation and maintenance of the ford, November 1, 1913, to February 15, 1914 201.42
Liquidated damages for thirty-seven days, February 15, to March 31, 1914, inclusive,
except Sundays and holidays, at the rate
of P25 per day 925.00
_______
Total sum to be deducted from the contract price 1,301.45
The plaintiff admitted that he had been paid the price of the contract, less the sum of
P1,301.45, plus P120 for cement analysis made by the Government and
P87.04, the value of the steel that he did not receive.
In view of the terms and conditions of the contract and the document s accompanying
the same, the defendants are entitled to recover from the plaintiff the sum of
P25 as liquidated damages for each day that elapsed from the date when he
should have completed the work.
From the testimony given by Mr. James, the plaintiff's representative and attorney in
fact and the person who had charge of the construction work on the bridge
across the Argos River, it appears that he received the steel necessary for the
work on the bridge, between the 26th or 27th of July and the first week in
September, 1913. When the steel arrived the rainy season had commenced and
it was then no longer possible to transport the materials from Polangui, a town
in the Province of Albay, to the bridge site, except by carabao carts, and this

was the cause, not only of the delay in the transportation of the materials to
the place where the work was performed, but also of the extra expense.
However, Mr. James' testimony shows that all the materials were delivered at
the place where the construction work on the bridge was performed during the
last week of October.
In order that the plaintiff may be relieved from the payment of P25 for each day of the
delay, he must prove that he was in no manner responsible for the delay. On
the other hand, the record in this case does not show that the defendant
provinces were to blame for the failure to complete the work between the 1st
of November, 1913, and the 15th of February, 1914, a period of three and onehalf months.
Mr. James himself suggested to the provincial boards of Albay and Ambos Camarines
the date of February 15, 1914. If the plaintiff already had all the materials for
the work at his disposal toward the end of October, 1913, the defendants are
not responsible for the plaintiff's inability to finish the work within the period
of time he himself requested.
The real reason why the bridge was not finished on February 15, 1914, appears to be
suggested by the testimony of J. T. Marshall, district engineer of Albay and
Ambos Camarines at the time of the building of this bridge. This reason was
that the work of casting the piles was not commenced until very late, about the
middle of October, 1913, and they were begun to be driven only on January 1,
1914; all this was due to the fact that the proper machinery for the purpose
was not on the ground and that it only arrived there about December 25, 1913.
Had the required machinery been on hand in October, the bridge could have
been finished about February 15, 1914. Therefore the delay was due to the
plaintiff's own negligence and he is not entitled to recover the amount which
was deducted by the defendant provinces as liquidated damages; still less is he
entitled to recover the amount retained by the defendants' for cost of
inspection and for the maintenance of the ford for these conditions were
imposed upon the plaintiff and were accepted by him when he was granted an
extension of time within which to finish the work on the bridge.
The claim for the value of the 16 steel rods, the second cause of action, has not been
supported by any evidence at the trial and therefore must be disallowed. On
the contrary, Exhibits 2, 2-a, 2-b, 2-c, and 2-d, show that the plaintiff by his
agent B. F. Mills received all the steel that was furnished by the Province of
Albay.
The claim of P2,000 for extra expenses incurred by the plaintiff in the transportation of
materials from Legaspi to the bridge site, is wholly unfounded inasmuch as
the sole obligation undertaken by the defendants in the contract was that of
delivering the materials to be furnished by them, in the Port of Legaspi at
ship's side. It is immaterial that the delivery might not been made in time, for
this could only afford the plaintiff ground for a claim in the event that such
delay had been the cause of hindering the progress of the work.
The last cause of action is founded on the allegation that, at the defendants' request, an
alteration was made in the construction by raising the bridge about 42

339
centimeters. The record does not disclose that this alteration was authorized in
writing either by the Director of Public Works or by the defendant provinces;
therefore, in accordance with paragraphs 18 and 22 of the instructions to
bidders, which are a part of the contract, no payment can be made on account
of this change or alteration.

What occurred was this: After the contract had been signed, it was verbally agreed by
and between the then district engineer Von Schmelling and Mr. James, the
representative of the plaintiff-contractor, that the piles should be only nine
meters long instead of eleven, provided that, were it necessary for them to be
of greater length, the plaintiff would make good the difference, at his own
cost, either by building up the difference on the piles themselves or by
increasing the thickness of the top and head of the bridge. Subsequently, about
October 11, 1913, there was a flood and it was observed that the water rose 15
centimeters more than the highest water-mark indicated on the plan. Harrison,
the district engineer, then suggested to Mr. James that he should raise the
bridge instead of lowering it, to which Mr. James and Mr. Emerson agreed, as
to do so meant the same amount of work, steel and concrete, and perhaps a
little less; no demand was made for the payment of an additional amount for
this work, therefore the plaintiff is not entitle to recover on this account.
For the foregoing reasons, the defendant provinces should be absolved from the
complaint, with the costs against the plaintiff.
1.The following are the assignments of error and the argument of plaintiff-appellant in
the Supreme Court:

ASSIGNMENT OF ERRORS.

Now comes appellant, by his undersigned counsel, and avers that in the trial of the
above entitled cause, in the Court of First Instance of the city of Manila, there
was manifest error, prejudicial to appellant, in this, to wit:
I. That the said court found in its decision that the delay in completing the work under
the contract in question was due to the fault and negligence of the plaintiff.
II. That the said court did not find in its decision that the delay in completing the work
under the contract in question was due to the fault and negligence of the
defendants.
III. That the said court found in its decision that defendants were entitled to deduct a
certain part of the amount due from defendants to plaintiff, under the said
contract, as a penalty or liquidated damages.
IV. That the said court found in its decision that the defendants were entitled to deduct a
certain part of the amount due from defendants to plaintiff, under the said
contract, for expenses incurred in the operation of a ferry.

V. That the said court found in its decision that the defendants were entitled to deduct a
certain part of the amount due from defendants to plaintiff, under the said
contract, for expenses of inspection.
VI. That the said court rendered judgment in favor of defendants, dismissing plaintiff's
complaint, and did not render judgment for the plaintiff for the amount prayed
for in his complaint.
VII. That the said court denied plaintiff's motion for a new trial.

ARGUMENT.

Defendants' claim to the P925 deducted from the contract price of the bridge rests on
section 42 of the General Conditions, which was, by agreement, made a part
of the contract; reading as follows:
"It is understood that time is an essential feature of the contract herein contemplated,
and that, upon failure to complete the said contract within the time stipulated,
the contractor will be required to pay the Province of Ambos Camarines the
sum of P25, Philippine Currency, per idem, for each day of delay, Sundays
and legal holidays excepted, in the completion of the work, the said payment
to be made as liquidated damages, and not by way of penalty; and the
province may deduct from any sum due or to become due the contractor any
sums accruing for liquidated damages as herein stated."
The date stipulated in the final contract, signed on June 26, for the completion of the
bridge, was September 1, 1913, and defendants' right to retain any sum as a
penalty or liquidated damages must depend upon the contractor's failure to
finish the bridge by that date. It is true that the bridge was unfinished on
September 1st, but it is readily shown by defendants' own evidence that the
failure to finish the bridge by September 1 was caused by their own delay in
furnishing the necessary steel. As proven by defendants' Exhibits 2, 2-A, 2-B,
2-C, 2-D, the first shipment reached Legaspi July 26, a month after the signing
of the contract, and six weeks after plaintiff's requisition, while the last did not
arrive until September 1. If the decision of the trial court is correct, defendants
may mulct the contractor for liquidated damages because he did not complete
a reinforced concrete bridge the very day on which they furnished the
materials.
Defendants' negligence having made it quite impossible for the plaintiff to perform his
part of the contract within the time limited, the letter is thereby exempted from
liability for liquidated damages, and may be held only for actual damages
proven to have been caused by his delay. Tim was the essence of this contract,
and defendants, by making it impossible for plaintiff to complete the bridge
on September 1, waived that date, and could only hold plaintiff to a
reasonable time for performance. This view of the case has the support of a
long line of American and English authorities:

340
"When liquidated damages are stipulated, there must be a definite date from which they
are to run. If, by the operation of intervening circumstances, the date fixed by
the contract has ceased to be operative, and there is no provision in the
contract under which another date can be substituted, all right to recover the
sum stipulated as liquidated damages has been put an end to, because there is
no date from which the penalties can run." (3 Halsbury's Laws of England,
243.)
"It is a well settled rule that, where one party demands strict performance as to time by
another party, he must perform on his part all the conditions which are
requisite in order to enable the other party to perform his part; and a failure on
the part of the party demanding performance to do the preliminary work
required in order to enable the other party to complete his within the time
limited, operates as a waiver of the time provision in the contract." (Dannat vs.
Fuller, 120 N. Y. 554.)
"There is no question with respect to the law applicable to the case, for by the express
terms of the contract, as well as under the general rule of law, the time
prescribed by the contract for the performance of the plaintiff had a reasonable
time under all the circumstances for completing performance after the
expiration of the delay caused by the owner." (Levering & Garrigues Co. vs.
Century Holding Co., 160 N.Y. Supp., 649; Erickson vs. U.S., 107 Fed., 204;
Missouri Bridge & Iron Co. vs. Stewart, 134 Mo. Ap., 618; District of
Columbia vs. Camden Iron Works, 181 U.S., 453; Willis vs. Webster, 27 N. Y.
Supp., 354; Weeks vs. Little, 89 N. Y., 566; Ocorr & Rugg Co. vs. City of
Little Falls, 178 N. Y., 622; Manistee Iron Works vs. Shores Lumber Co., 92
Wis., 21; Wyant vs. U.S., 46 of Claims, 205; Smith vs. U.S., 48 Court of
Claims, 235.)
Even where both parties have been negligent, the courts have constantly held the
contractor to be absolved from liability for liquidated damages.
"The courts have laid down a very salutary rule to the effect that they will not attempt to
apportion such delays where the causes thereof have been mutual, but will
refuse, under the circumstances, to enforce the penalty." (Jefferson Hotel
Co. vs. Brumbaugh, 168 Fed., 867.)
"Where the parties are mutually responsible for the delays because of which the date
fixed by the contract for completion is passed, the obligation for liquidated
damages is annulled, and, in the absence of some provision under which
another date can be substituted, it cannot be revised." (Mosler Safe Co. vs.
Maiden Lane Safe Deposit Co., 199 N. Y., 479; 37 L. R. A., (N. S.) 363.)
There was no agreement for the substitution of another date in this case. Defendants
arbitrarily set the time for completion as February 15, 1914 an arrangement
which was never agreed to by the plaintiff (defendants' Exhibits 3, 4, and 5).
The provisions for liquidated damages having been waived by defendants' delay, the
contractor was bound only to complete the bridge within a reasonable time. If
he failed so to do, the defendants might set off against the contract price any
actual damage proven to have caused them by his delay beyond such a period.

They have produced no such proof of damage, but rather have rested their
case squarely upon the penalty clause.
"If the respondent failed to complete within a reasonable time after crediting the
appellant's delays, then the latter had a cause of action for the former's neglect,
and the measure of damages would be the actual loss proved to have been
sustained." (Mosler Safe Co. vs. Maiden Lane Safe Dep. Co., supra.)
Building contracts entered into with the Government of the United States have been a
fruitful source of litigation on facts almost identical with those in the present
case, and the United States Court of Claims has constantly reaffirmed the
authorities quoted above. In United Engineering & Contracting Co. vs. United
States (47 Court of Claims, 489), Chief Justice Peele, after an exhaustive
review of the previous decisions, says:
"Here the delays of the Government prevented the claimant from a strict performance,
and thereby it waived the contract time within which to perform, and that
waiver operated to eliminate the definite date from which to assess liquidated
damages . . . Whatever loss the Government may have suffered by reason of
the claimant's breach to perform within a reasonable time must be reduced to
actual damages, if any, susceptible of proof."
The trial court was obviously influenced by the so-called extension of time granted by
the defendant provinces after the bridge was finished. It is difficult to see what
effect any such extension of offer of compromise could have on plaintiff's
right to recover the contract price of the bridge. It is true that plaintiff, through
his agent, requested an extension of time; but that he refused to agree to the
defendants' proposition is plainly shown by the resolution of the provincial
board of Ambos Camarines (defendants' Exhibit 5). If, as we believe, the right
to claim liquidated damages was wiped out by defendants' delay occurring
before September 1, 1913, the acts of the parties after that date are entirely
immaterial, in the absence of proof of specific damage.

The retention of P376.45 for inspection charges from November 1 to February 15, and
for the maintenance of a ferry during the same period, was clearly unjustified.
Plaintiff never agreed that any such deduction be made, and absolutely no
proof was offered at the trial that such charges had ever been incurred.
It is respectfully submitted that appellant is entitled to a reversal of the decision of the
Court of First Instance, and to an order for a judgment in accordance with the
prayer of his complaint.
1.The real date was November 1 as will be shown later.

||| (Allen v. Province of Albay, G.R. No. 11433, [December 20, 1916], 35 PHIL 826-875)

341

SECOND DIVISION
[G.R. No. L-22738. December 2, 1924.]
ONG GUAN CAN and THE BANK OF THE PHILIPPINE
ISLANDS, plaintiffs-appellees, vs. THE CENTURY INSURANCE
CO., LTD.,defendant-appellant.

Eiguren & Razon for appellant.

Aurelio Montinola and Jose M. Hontiveros for appellees.

SYLLABUS
1. ALTERNATIVE OBLIGATIONS; CLAUSE OF INSURANCE POLICY.
The policy in question contains the following clause: "The Company may at its option
reinstate or replace the property damaged or destroyed, or any part thereof, instead of
paying the amount of the loss or damage, or may join with any other Company or
insurers in so doing, but the Company shall not be bound to reinstate exactly or
completely, but only as circumstances permit and in reasonable sufficient manner, and in
no case shall the Company be bound to expend more in reinstatement that it would have
cost to reinstate such property as it was at the time of the occurrence of such loss or
damage, nor more than the sum insured by the Company thereon." Held: That if this
clause of the policy is valid, it operates to make the obligation of the insurance company
an alternative one that is to say, that it may either pay the amount in which the house was
insured, or rebuilt it.
2. NOTICE OF ELECTION OF ALTERNATIVE PRESTATIONS. The
debtor must notify the creditor of his election, stating which prestation he is disposed to
fulfill, in accordance with article 1133 of the Civil Code.
3. EFFECT OF NOTICE. The effect of the notice is to give the creditor,
that is, the plaintiff in the instant case, opportunity to express his consent, or to impugn
the election take legal effect when consented by the creditor, or if impugned by the latter,
when declared improper by a competent court.

DECISION

VILLAMOR, J p:
On April 19, 1924, the Court of the First Instance of Iloilo rendered a
judgment in favor of the plaintiff, sentencing the defendant company to pay him the sum
of P45,000, the value of certain policies of fire insurance, with legal interest thereon from
February 28, 1923, until payment, with the costs. The defendant company appealed from
this judgment, and now insists that the same must be modified and that it must be
permitted to rebuild the house burnt, subject to the alignment of the street where the
building was erected, and that the appellant be relieved from the payment of the sum in
which said building was insured.
A building of the plaintiff was insured against fire by the defendant in the sum
of P30,000, as well as the goods and merchandise therein contained in the sum of
P15,000. The house and merchandise insured were burnt early in the morning of
February 28, 1923, while the policies issued by the defendant in favor of the plaintiff
were in force.
The appellant contends that under clause 14 of the conditions of the policies, it
may rebuilt the house burnt, and although the house may be smaller, yet it would be
sufficient indemnity to the insured for the actual loss suffered by him.
The clause cited by the appellant is as follows:
"The Company may at its option reinstate or replace the
property damaged or destroyed, or any part thereof, instead of paying
the amount of the loss or damage, or may join with any other
Company or insurers in so doing, but the Company shall not be bound
to reinstate exactly or completely, but only as circumstances permit
and in reasonable sufficient manner, and in no case shall the
Company be bound to expend more in reinstatement than it would
have cost to reinstate such property as it was at the time of the
occurrence of such loss or damage, nor more than the sum insured by
the Company thereon."
If this clause of the policies is valid, its effect is to make the obligation of the
insurance company an alternative one, that is to say, that it may either pay the insured
value of the house, or rebuild it. It must be noted that in alternative obligations, the
debtor, the insurance company in this case, must notify the creditor of his election, stating
which of the two presentations he is disposed to fulfill, in accordance with article 1133 of
the Civil Code. The object of this notice is to give the creditor, that is, the plaintiff in the
instant case, opportunity to express his consent, or to impugn the election made by the
debtor, and only after said notice shall the election take legal effect when consented by
the creditor, or if impugned by the latter, when declared proper by a competent court. In
the instant case, the record shows that the appellant company did not give a formal notice
of its election to rebuild, and while the witnesses, Cedrun and Cacho, speak of the
proposed reconstruction of the house destroyed, yet the plaintiff did not give his assent to
the proposition, for the reason that the new house would be smaller and of materials of
lower kind than those employed in the construction of the house destroyed. Upon this
point the trial judge very aptly says in his decision: "It would be an imposition

342
unequitable, as well as unjust, to compel the plaintiff to accept the rebuilding of a smaller
house than the one burnt, with a lower kind of materials that those of said house, without
offering him an additional indemnity for the difference in size between the two houses,
which circumstances were taken into account when the insurance applied for by the
plaintiff was accepted by the defendant." And we may add: Without tendering either the
insured value of the merchandise contained in the house destroyed, which amounts to the
sum of P15,000.
We find in the record nothing to justify the reversal of the finding of the trial
judge, holding that the election alleged by the appellant to rebuild the house burnt instead
of paying the value of the insurance is improper. To our mind, the judgment appealed
from is in accordance with the merits of the case and the law, and must be, as is hereby,
affirmed with the costs against the appellant. So ordered.
Johnson, Street, Malcolm, Avancea, Ostrand, Johns, and Romualdez,
JJ., concur.
||| (Ong Guan Can v. Century Insurance Co., Ltd., G.R. No. L-22738, [December 2, 1924], 46
PHIL 592-594)

343

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, selfserving 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

344
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

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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 partydefendant, 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

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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.

A. The Court of Appeals erred in ruling that Palmares acted as surety

and is therefore solidarily liable to pay the promissory note.

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 co-maker
with primary liability. 5

2. The promissory note contains provisions which establish the comaker's liability as that of a guarantor.

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.

4. The promissory note is a contract of adhesion and should be

construed against M.B. Lending Corporation.

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:

1. The terms of the promissory note are vague. Its conflicting

provisions do not establish Palmares' solidary liability.

3. There is no sufficient basis for concluding that Palmares' liability is

solidary.

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 ShortTerm 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

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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 65-year 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

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, selfserving 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

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.

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.

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

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

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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. 34 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 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,

349
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.

350
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.
||| (Palmares v. Court of Appeals, G.R. No. 126490, [March 31, 1998], 351 PHIL 664-691)

351

THIRD DIVISION
[G.R. No. 89252. May 24, 1993.]
RAUL SESBREO, petitioner, vs. HON. COURT OF APPEALS,
DELTA MOTORS
CORPORATION
and
PILIPINAS
BANK,respondents.

Salva, Villanueva & Associates for Delta Motors Corporation.

Reyes, Salazar & Associates for Pilipinas Bank.

SYLLABUS
1. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; NEGOTIATION
ASSIGNMENT AND TRANSFER, DIFFERENTIATED. The negotiation of a negotiable
instrument must be distinguished from the assignment or transfer of an instrument whether that
be negotiable or non-negotiable. Only an instrument qualifying as a negotiable instrument
under the relevant statute may be negotiated either by indorsement thereof coupled with
delivery, or by delivery alone where the negotiable instrument is in bearer form. A negotiable
instrument may, however, instead of being negotiated, also be assigned or transferred. The
legal consequences of negotiation as distinguished from assignment of a negotiable instrument
are, of course, different. A non-negotiable instrument may, obviously, not be negotiated; but it
may be assigned or transferred, absent an express prohibition against assignment or transfer
written in the face of the instrument.
2. ID.; ID.; PROMISSORY NOTE; NON-NEGOTIABILITY THEREOF DOES NOT
PROHIBIT ITS TRANSFERABILITY AND ASSIGNABILITY; CASE AT BAR. DMC PN
No. 2731, while marked "non-negotiable," was not at the same time stamped "nontransferrable" or "non-assignable." It contained no stipulation which prohibited Philfinance
from assigning or transferring, in whole or in part, that Note.
3. ID.; ID.; ID.; PARTIAL ASSIGNMENT OF A PROMISSORY NOTE IS LEGALLY
BINDING AND ENFORCEABLE. Delta adduced the "Letter of Agreement" which it had
entered into with Philfinance. We find nothing in his "Letter of Agreement" which can be
reasonably construed as a prohibition upon Philfinance assigning or transferring all or part of
DMC PN No. 2731, before the maturity thereof. It is scarcely necessary to add that, even had
this "Letter of Agreement" set forth an explicit prohibition of transfer upon Philfinance, such a
prohibition cannot be invoked against an assignee or transferee of the Note who parted with
valuable consideration in good faith and without notice of such prohibition. It is not disputed
that petitioner was such an assignee or transferee. Our conclusion on this point is reinforced by
the fact that what Philfinance and Delta were doing by their exchange of promissory notes was
this: Delta invested, by making a money market placement with Philfinance, approximately

P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that
placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and
DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not
P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.
4. ID.; ID.; ID.; ID.; CONSENT OF INVESTOR NOT NECESSARY FOR VALIDITY AND
ENFORCEABILITY OF ASSIGNMENT. Delta's complaint that the partial assignment by
Philfinance of DMC PN No. 2731 had been effected without the consent of Delta, we note that
such consent was not necessary for the validity and enforceability of the assignment in favor of
petitioner.
5. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONVENTIONAL SUBROGATION
MUST BE CLEARLY ESTABLISHED. Conventional subrogation, which in the first place
is never lightly inferred, must be clearly established by the unequivocal terms of the
substituting obligation or by the evident incompatibility of the new and old obligations on
every point. Nothing of the sort is present in the instant case.
6. MERCANTILE LAW; NEGOTIABLE INSTRUMENTS LAW; MONEY MARKET;
CONSTRUED. The money market is an 'impersonal market', free from personal
considerations.' The market mechanism is intended to provide quick mobility of money and
securities.' The impersonal character of the money market device overlooks the individual or
entities concerned. The issuer of a commercial paper in the money market necessarily knows in
advance that it would be expeditiously transacted and transferred to any investor/lender
without need of notice to said issuer. In practice, no notification is given to the borrower or
issuer of commercial paper of the sale or transfer to the investor. . . . There is need to
individuate a money market transaction, a relatively novel institution in the Philippine
commercial scene. It has been intended to facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by Presidential Decree No. 678, the investing
public must be given adequate and effective protection in availing of the credit of a borrower in
the commercial paper market." (Perez v. Court of Appeals, 127 SCRA 636 [1984]).
7. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONDENSATION; EFFECTS
THEREOF NOT AFFECTED BY SUBSEQUENT ASSIGNMENT OF CREDIT; CASE AT
BAR. We turn to Delta's arguments concerning alleged compensation or offsetting between
DMC PN No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time
Philfinance sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981,
no compensation had as yet taken place and indeed none could have taken place. The essential
requirements of compensation are listed in the Civil Code. On 9 February 1981, neither DMC
PN No. 2731 nor Philfinance PN No. 143-A was due. This was explicitly recognized by Delta
in its 10 April 1980 "Letter of Agreement" with Philfinance, where Delta acknowledged that
the relevant promissory notes were "to be off settled (sic) against [Philfinance] PN No. 143A upon co-terminal maturity." The record shows, however, that petitioner notified Delta of the
fact of the assignment to him only on 14 July 1981, that is, after the maturity not only of the
money market placement made by petitioner but also of both DMC PN No. 2731 and
Philfinance PN No. 143-A. In other words, petitioner notified Delta of his rights as assignee
after compensation had taken place by operation of law because the offsetting instruments had
both reached maturity. At the time that Delta was first put to notice of the assignment in
petitioner's favor on 14 July 1981, DMC PN No. 2731 had already been discharged by
compensation. It bears some emphasis that petitioner could have notified Delta of the

352
assignment in his favor as soon as that assignment or sale was effected on 9 February 1981. He
could have also notified Delta as soon as his money market placement matured on 13 March
1981 without payment thereof being made by Philfinance; at that time, compensation had yet
to set in and discharge DMC PN No. 2731. Again, petitioner could have notified Delta on 26
March 1981 when petitioner received from Philfinance the Denominated Custodianship
Receipt ("DCR") No. 10805 issued by private respondent Pilipinas in favor of petitioner.
Petitioner could, in fine, have notified Delta at any time before the maturity date of DMC PN
No. 2731. Because petitioner failed to do so, and because the record is bare of any indication
that Philfinance had itself notified Delta of the assignment to petitioner, the Court is compelled
to uphold the defense of compensation raised by private respondent Delta. Of course,
Philfinance remains liable to petitioner under the terms of the assignment made by Philfinance
to petitioner.
8. ID.; ID.; ASSIGNMENT; VALID WHEN MADE BEFORE COMPENSATION TAKES
PLACE; CASE AT BAR. As noted, the assignment to petitioner was made on 9 February
1981 or from forty-nine (49) days before the "co-terminal maturity" date, that is to say, before
any compensation had taken place. Further, the assignment to petitioner would have prevented
compensation from taking place between Philfinance and Delta, to the extent of P304,533.33,
because upon execution of the assignment in favor of petitioner, Philfinance and Delta would
have ceased to be creditors and debtors of each other in their own right to the extent of the
amount assigned by Philfinance to petitioner. Thus, we conclude that the assignment effected
by Philfinance in favor of petitioner was a valid one and that petitioner accordingly became
owner of DMC PN No. 2731 to the extent of the portion thereof assigned to him.
9. ID.; ID.; ID.; RIGHTS OF THE ASSIGNEE, NOT GREATER THAN THE RIGHTS OF
THE ASSIGNOR. It is a firmly settled doctrine that the rights of an assignee are not any
greater than the rights of the assignor, since the assignee is merely substituted in the place of
the assignor and that the assignee acquires his rights subject to the equities i.e., the defenses
which the debtor could have set up against the original assignor before notice of the
assignment was given to the debtor. (Article 1285 of the Civil Code)
10. ID.; ID.; SOLIDARY OBLIGATIONS; EXPRESS ASSUMPTION OF SOLIDARY
LIABILITY, REQUIRED; ABSENCE OF EVIDENCE TO SUPPORT ALLEGATION IN
CASE AT BAR. We find nothing in the DCR that establishes an obligation on the part of
Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in
solidum with Philfinance and Delta under DMC PN No. 2731. We find nothing written in
printers ink on the DCR which could reasonably be read as converting Pilipinas into an obligor
under the terms of DMC PN No. 2731 assigned to petitioner, either upon maturity thereof or at
any other time. We note that both in his complaint and in his testimony before the trial court,
petitioner referred merely to the obligation of private respondent Pilipinas to effect physical
delivery to him of DMC PN No. 2731. Accordingly, petitioner's theory that Pilipinas had
assumed a solidary obligation to pay the amount represented by the portion of the Note
assigned to him by Philfinance, appears to be a new theory constructed only after the trial court
had ruled against him. The solidary liability that petitioner seeks to impute to Pilipinas cannot,
however, be lightly inferred. Under Article 1207 of the Civil Code, "there is a solidary liability
only when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity." The record here exhibits no express assumption of solidary liability vis-avis petitioner, on the part of Pilipinas. Petitioner has not pointed us to any law which imposed
such liability upon Pilipinas nor has petitioner argued that the very nature of the custodianship
assumed by private respondent Pilipinas necessarily implies solidary liability under the
securities, custody of which was taken by Pilipinas. Accordingly, we are unable to hold

Pilipinas solidarily liable with Philfinance and private respondent Delta under DMC PN No.
2731.

11. ID.; ID.; DEPOSIT; ACT OF DESIGNATING PILIPINAS AS CUSTODIAN OR

DEPOSITORY BANK; CASE AT BAR. We believe and so hold that a contract of deposit
was constituted by the act of Philfinance in designating Pilipinas as custodian or depositary
bank. The depositor was initially Philfinance; the obligation of the depositary was owed,
however, to petitioner Sesbreo as beneficiary of the custodianship or depositary agreement.
We do not consider that this is a simple case of a stipulation pour autrui. The custodianship or
depositary agreement was established as an integral part of the money market transaction
entered into by petitioner with Philfinance. Petitioner bought a portion of DMC PN No. 2731;
Philfinance as assignor-vendor deposited that Note with Pilipinas in order that the thing sold
would be placed outside the control of the vendor. Indeed, the constituting of the depositary or
custodianship agreement was equivalent to constructive delivery of the Note (to the extent it
had been sold or assigned to petitioner) to petitioner. It will be seen that custodianship
agreements are designed to facilitate transactions in the money market by providing a basis for
confidence on the part of the investors or placers that the instruments bought by them are
effectively taken out of the pocket, as it were, of the vendors and placed safely beyond their
reach, that those instruments will be there available to the placers of funds should they have
need of them.
12. ID.; ID.; ID.; ID.; DEPOSITARY OBLIGED TO RETURN THE SECURITY OR THING
DEPOSITED UPON DEMAND OF DEPOSITOR; RATIONALE. The depositary in a
contract of deposit is obliged to return the security or the thing deposited upon demand of the
depositor (or, in the present case, of the beneficiary) of the contract, even though a term for
such return may have been established in the said contract. Accordingly, any stipulation in the
contract of deposit or custodianship that runs counter to the fundamental purpose of that
agreement or which was not brought to the notice of and accepted by the placer-beneficiary,
cannot be enforced as against such beneficiary-placer. We believe that the position taken above
is supported by considerations of public policy. If there is any party that needs the equalizing
protection of the law in money market transactions, it is the members of the general public who
place their savings in such market for the purpose of generating interest revenues. The
custodian bank, if it is not related either in terms of equity ownership or management control to
the borrower of the funds, or the commercial paper dealer, is normally a preferred or traditional
banker of such borrower or dealer (here, Philfinance). The custodian bank would have every
incentive to protect the interest of its client the borrower or dealer as against the placer of
funds. The providers of such funds must be safeguarded from the impact of stipulations
privately made between the borrowers or dealers and the custodian banks, and disclosed to
fund-providers only after trouble has erupted.
13. ID.; ID.; ID.; ID.; ID.; DEPOSITARY LIABLE FOR DAMAGES FOR BREACH OF
DUTY; CASE AT BAR. In the case at bar, the custodian-depositary bank Pilipinas refused
to deliver the security deposited with it when petitioner first demanded physical delivery
thereof on 2 April 1981. We must again note, in this connection, that on 2 April 1981, DMC PN
No. 2731 had not yet matured and therefore, compensation or offsetting against Philfinance PN
No. 143-A had not yet taken place. Instead of complying with the demand of petitioner,
Pilipinas purported to require and await the instructions of Philfinance, in obvious
contravention of its undertaking under the DCR to effect physical delivery of the Note upon
receipt of "written instructions" from petitioner Sesbreo. The ostensible term written into the

353
DCR (i.e., "should this [DCR] remain outstanding in your favor thirty [30] days after its
maturity") was not a defense against petitioner's demand for physical surrender of the Note on
at least three grounds: firstly, such term was never brought to the attention of petitioner
Sesbreo at the time the money market placement with Philfinance was made; secondly, such
term runs counter to the very purpose of the custodianship or depositary agreement as an
integral part of a money market transaction; and thirdly, it is inconsistent with the provisions of
Article 1988 of the Civil Code noted above. Indeed, in principle, petitioner became entitled to
demand physical delivery of the Note held by Pilipinas as soon as petitioner's money market
placement matured on 13 March 1981 without payment from Philfinance. We conclude,
therefore, that private respondent Pilipinas must respond to petitioner for damages sustained by
him arising out of its breach of duty. By failing to deliver the Note to the petitioner as
depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully deprived
petitioner of the Note deposited with it. Whether or not Pilipinas itself benefited from such
conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present
purposes.' Prima facie, the damages suffered by petitioner consisted of P304,533.33, the
portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge
of the Note by compensation, plus legal interest of six percent (6%) per annum counting from
14 March 1981.
14. MERCANTILE LAW; CORPORATION LAW; PIERCING OF CORPORATE ENTITIES;
ABSENCE OF EVIDENCE TO JUSTIFY DISREGARD OF SEPARATE CORPORATE
PERSONALITIES; CASE AT BAR. It is not disputed that Philfinance and private
respondents Delta and Pilipinas have been organized as separate corporate entities. Petitioner
asks us to pierce their separate corporate entities, but has been able only to cite the presence of
a common Director Mr. Ricardo Silverio, Sr., sitting on the Boards of Directors of all three
(3) companies. Petitioner has neither alleged nor proved that one or another of the three (3)
concededly related companies used the other two (2) as mere alter egos or that the corporate
affairs of the other two (2) were administered and managed for the benefit of one. There is
simply not enough evidence of record to justify disregarding the separate corporate
personalities of Delta and Pilipinas and to hold them liable for any assumed or undetermined
liability of Philfinance to petitioner.

DECISION

FELICIANO, J p:
On 9 February 1981, petitioner Raul Sesbreo made a money market placement in the amount
of P300,000.00 with the Philippine Underwriters Finance Corporation ("Philfinance"), Cebu
Branch; the placement, with a term of thirty-two (32) days, would mature on 13 March 1981.
Philfinance, also on 9 February 1981, issued the following documents to petitioner:
(a) the Certificate of Confirmation of Sale, "without recourse," No.
20496 of one (1) Delta Motors Corporation Promissory Note ("DMC
PN") No. 2731 for a term of 32 days at 17.0 % per annum;

(b) the Certificate of Securities Delivery Receipt No. 16587

indicating the sale of DMC PN No. 2731 to petitioner, with the
notation that the said security was in custodianship of Pilipinas Bank,
as per Denominated Custodian Receipt ("DCR") No. 10805 dated 9
February 1981; and
(c) post-dated checks payable on 13 March 1981 (i.e., the maturity
date of petitioner's investment), with petitioner as payee, Philfinance
as drawer, and Insular Bank of Asia and America as drawee, in the
total amount of P304,533.33.
On 13 March 1981, petitioner sought to encash the post-dated checks issued by Philfinance.
However, the checks were dishonored for having been drawn against insufficient funds.
On 26 March 1981, Philfinance delivered to petitioner the DCR No. 10805 issued by private
respondent Pilipinas Bank ("Pilipinas"). It read as follows:
"PILIPINAS BANK
Makati Stock Exchange Bldg.,
Ayala Avenue, Makati,
Metro Manila
F
e
b
r
u
a
r
y
9
,
1
9
8
1

V
A
L
U

354
E
D
A
T
E

We further certify that these securities may be inspected by you or

your duly authorized representative at any time during regular
banking hours.
Upon your written instructions we shall undertake physical delivery
of the above securities fully assigned to you should this Denominated
Custodianship Receipt remain outstanding in your favor thirty (30)
days after its maturity.'

TO Raul Sesbreo
Ap
ril
6,
198
1

MA
TU
RIT
Y
DA
TE.

PILIPINAS BANK
(By Elizabeth De
Villa
Illegible Signature)" 1
On 2 April 1981, petitioner approached Ms. Elizabeth de Villa of private respondent Pilipinas,
Makati Branch, and handed to her a demand letter informing the bank that his placement with
Philfinance in the amount reflected in the DCR No. 10805 had remained unpaid and
outstanding, and that he in effect was asking for the physical delivery of the underlying
promissory note. Petitioner then examined the original of the DMC PN No. 2731 and found:
that the security had been issued on 10 April 1980; that it would mature on 6 April 1981; that it
had a face value of P2,300,833.33, with Philfinance as "payee" and private respondent Delta
Motors Corporation ("Delta") as "maker;" and that on face of the promissory note was stamped
"NON-NEGOTIABLE." Pilipinas did not deliver the Note, nor any certificate of participation
in respect thereof, to petitioner.

N
O.
10805
DENOMINATED CUSTODIAN RECEIPT

'This confirms that as a duly Custodian Bank, and upon instruction of

PHILIPPINE UNDERWRITERS FINANCE CORPORATION, we
have in our custody the following securities to you [sic] the extent
herein indicated.

SERIAL MAT. FACE ISSUED REGISTERED AMOUNT

NUMBER DATE VALUE BY HOLDER PAYEE

2731 4-6-81 2,300,833.34 DMC PHIL. 307,933.33

UNDERWRITERS
FINANCE CORP.

Petitioner later made similar demand letters, dated 3 July 1981 and 3 August 1981, 2 again
asking private respondent Pilipinas for physical delivery of the original of DMC PN No. 2731.
Pilipinas allegedly referred all of petitioner's demand letters to Philfinance for written
instructions, as had been supposedly agreed upon in a "Securities Custodianship Agreement"
between Pilipinas and Philfinance. Philfinance never did provide the appropriate instructions;
Pilipinas never released DMC PN No. 2731, nor any other instrument in respect thereof, to
petitioner.

Petitioner also made a written demand on 14 July 1981 3 upon private respondent Delta for the
partial satisfaction of DMC PN No. 2731, explaining that Philfinance, as payee thereof, had
assigned to him said Note to the extent of P307,933.33. Delta, however, denied any liability to
petitioner on the promissory note, and explained in turn that it had previously agreed with
Philfinance to offset its DMC PN No. 2731 (along with DMC PN No. 2730) against
Philfinance PN No. 143-A issued in favor of Delta.
In the meantime, Philfinance, on 18 June 1981, was placed under the joint management of the
Securities and Exchange Commission ("SEC") and the Central Bank. Pilipinas delivered to the
SEC DMC PN No. 2731, which to date apparently remains in the custody of the SEC. 4
As petitioner had failed to collect his investment and interest thereon, he filed on 28 September
1982 an action for damages with the Regional Trial Court ("RTC") of Cebu City, Branch 21,
against private respondents Delta and Pilipinas. 5 The trial court, in a decision dated 5 August

355
1987, dismissed the complaint and counterclaims for lack of merit and for lack of cause of
action, with costs against petitioner.
Petitioner appealed to respondent Court of Appeals in C.A.-G.R. CV No. 15195. In a Decision
dated 21 March 1989, the Court of Appeals denied the appeal and held; 6
"Be that as it may, from the evidence on record, if there is anyone that
appears liable for the travails of plaintiff-appellant, it is Philfinance.
As correctly observed by the trial court:
'This act of Philfinance in accepting the
investment of plaintiff and charging it against DMC P.N.
No. 2731 when its entire face value was already obligated
or earmarked for set-off or compensation is difficult to
comprehend and may have been motivated with bad faith.
Philfinance, therefore, is solely and legally obligated to
return the investment of plaintiff, together with its
earnings, and to answer all the damages plaintiff has
suffered incident thereto. Unfortunately for plaintiff,
Philfinance was not impleaded as one of the defendants in
this case at bar; hence, this Court is without jurisdiction to
pronounce judgment against it. (p. 11, Decision).'
WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby
affirmed in toto. Cost against plaintiff-appellant."
Petitioner moved for reconsideration of the above Decision, without success.
Hence, this Petition for Review on Certiorari.
After consideration of the allegations contained and issues raised in the pleadings, the Court
resolved to give due course to the petition and required the parties to file their respective
memoranda. 7
Petitioner reiterates the assignment of errors he directed at the trial court decision, and
contends that respondent Court of Appeals gravely erred: (i) in concluding that he cannot
recover from private respondent Delta his assigned portion of DMC PN No. 2731; (ii) in
failing to hold private respondent Pilipinas solidarily liable on the DMC PN No. 2731 in view
of the provisions stipulated in DCR No. 10805 issued in favor of petitioner; and (iii) in
refusing to pierce the veil of corporate entity between Philfinance, and private respondents
Delta and Pilipinas, considering that the three (3) entities belong to the "Silverio Group of
Companies" under the leadership of Mr. Ricardo Silverio, Sr. 8
There are at least two (2) sets of relationships which we need to address: firstly, the
relationship of petitioner vis-a-vis Delta; secondly, the relationship of petitioner in respect of
Pilipinas. Actually, of course, there is a third relationship that is of critical importance: the
relationship of petitioner and Philfinance. However, since Philfinance has not been impleaded
in this case, neither the trial court nor the Court of Appeals acquired jurisdiction over the
person of Philfinance. It is, consequently, not necessary for present purposes to deal with this
third relationship, except to the extent it necessarily impinges upon or intersects the first and
second relationships.

I
We consider first the relationship between petitioner and Delta.
The Court of Appeals in effect held that petitioner acquired no rights vis-a-vis Delta in respect
of the Delta promissory note (DMC PN No. 2731) which Philfinance sold "without recourse"
to petitioner, to the extent of P304,533.33. The Court of Appeals said on this point:
"Nor could plaintiff-appellant have acquired any right over DMC P.N.
No. 2731 as the same is `non-negotiable' as stamped on its face
(Exhibit `6'), negotiation being defined as the transfer of an
instrument from one person to another so as to constitute the
transferee the holder of the instrument (Sec. 30, Negotiable
Instruments Law). A person not a holder cannot sue on the instrument
in his own name and cannot demand or receive payment (Section
51, id.)." 9
Petitioner admits that DMC PN No. 2731 was non-negotiable but contends that that Note
had been validly transferred, in part, to him by assignment and that as a result of such
transfer, Delta as debtor-maker of the Note, was obligated to pay petitioner the portion of
that Note assigned to him by the payee Philfinance. LLjur
Delta, however, disputes petitioner's contention and argues:
(1) that DMC PN No. 2731 was not intended to be negotiated or
otherwise transferred by Philfinance as manifested by the word "nonnegotiable" stamp across the face of the Note 10 and because maker
Delta and payee Philfinance intended that this Note would be offset
against the outstanding obligation of Philfinance represented by
Philfinance PN No. 143-A issued to Delta as payee;
(2) that the assignment of DMC PN No. 2731 by Philfinance was
without Delta's consent, if not against its instructions; and
(3) assuming (arguendo only) that the partial assignment in favor of
petitioner was valid, petitioner took that Note subject to the defenses
available to Delta, in particular, the offsetting of DMC PN No. 2731
against Philfinance PN No. 143-A. 11
We consider Delta's arguments seriatim.
Firstly, it is important to bear in mind that the negotiation of a negotiable instrument must be
distinguished from the assignment or transfer of an instrument whether that be negotiable or
non-negotiable. Only an instrument qualifying as a negotiable instrument under the relevant
statute may be negotiated either by indorsement thereof coupled with delivery, or by delivery
alone where the negotiable instrument is in bearer form. A negotiable instrument may,
however, instead of being negotiated, also be assigned or transferred. The legal consequences
of negotiation as distinguished from assignment of a negotiable instrument are, of course,
different. A non-negotiable instrument may, obviously, not be negotiated; but it may be
assigned or transferred, absent an express prohibition against assignment or transfer written in
the face of the instrument:

356
"The words 'not negotiable,' stamped on the face of the bill of
lading, did not destroy its assignability, but the sole effect was to
exempt the bill from the statutory provisions relative thereto, and a
bill, though not negotiable, may be transferred by assignment; the
assignee taking subject to the equities between the original
parties." 12 (Emphasis added)

V
ery
Truly
Yours,

DMC PN No. 2731, while marked "non-negotiable," was not at the same time stamped "nontransferrable" or "non-assignable." It contained no stipulation which prohibited Philfinance
from assigning or transferring, in whole or in part, that Note.
Delta adduced the "Letter of Agreement" which it had entered into with Philfinance and which
should be quoted in full:
"
A
p
r
i
l
1
0
,
1
9
8
0
Philippine
Benavidez
Metro Manila.
Attention:
SVP-Treasurer

Underwriters

Finance

Corp.
Makati

O.

Banaria

St.,
Mr.

Alfredo

GENTLEMEN:
This refers to our outstanding placement of P4,601,666.67 as
evidenced by your Promissory Note No. 143-A, dated April 10, 1980,
to mature on April 6, 1981.
As agreed upon, we enclose our non-negotiable Promissory Note No.
2730 and 2731 for P2,000,000.00 each, dated April 10, 1980, to be
offsetted [sic] against your PN No. 143-A upon co-terminal maturity.
Please deliver the proceeds of our PNs to our representative, Mr. Eric
Castillo.

(
S
g
d
.
)
F
l
o
r
e
n
c
i
o
B
.
B
i
a
g
a
n
S
e
n
i
o
r
V
i
c
e
P
r
e
s
i

357
d
e
n
t
"
1
3
We find nothing in his "Letter of Agreement" which can be reasonably construed as a
prohibition upon Philfinance assigning or transferring all or part of DMC PN No. 2731, before
the maturity thereof. It is scarcely necessary to add that, even had this "Letter of Agreement"
set forth an explicit prohibition of transfer upon Philfinance, such a prohibition cannot be
invoked against an assignee or transferee of the Note who parted with valuable consideration in
good faith and without notice of such prohibition. It is not disputed that petitioner was such an
assignee or transferee. Our conclusion on this point is reinforced by the fact that what
Philfinance and Delta were doing by their exchange of promissory notes was this: Delta
invested, by making a money market placement with Philfinance, approximately
P4,600,000.00 on 10 April 1980; but promptly, on the same day, borrowed back the bulk of that
placement, i.e., P4,000,000.00, by issuing its two (2) promissory notes: DMC PN No. 2730 and
DMC PN No. 2731, both also dated 10 April 1980. Thus, Philfinance was left with not
P4,600,000.00 but only P600,000.00 in cash and the two (2) Delta promissory notes.
Apropos Delta's complaint that the partial assignment by Philfinance of DMC PN No. 2731 had
been effected without the consent of Delta, we note that such consent was not necessary for the
validity and enforceability of the assignment in favor of petitioner. 14 Delta's argument that
Philfinance's sale or assignment of part of its rights to DMC PN No. 2731 constituted
conventional subrogation, which required its (Delta's) consent, is quite mistaken. Conventional
subrogation, which in the first place is never lightly inferred, 15 must be clearly established by
the unequivocal terms of the substituting obligation or by the evident incompatibility of the
new and old obligations on every point. 16 Nothing of the sort is present in the instant case.

It is in fact difficult to be impressed with Delta's complaint, since it released its DMC PN No.
2731 to Philfinance, an entity engaged in the business of buying and selling debt instruments
and other securities, and more generally, in money market transactions. In Perez v. Court of
Appeals, 1 7 the Court, speaking through Mme. Justice Herrera, made the following important
statement: Cdpr
"There is another aspect to this case. What is involved here is a
money market transaction. As defined by Lawrence Smith `the money
market is a market dealing in standardized short-term credit
instruments (involving large amounts) where lenders and borrowers
do not deal directly with each other but through a middle man or
dealer in the open market.' It involves 'commercial papers' which are
instruments 'evidencing indebtedness of any person or entity . . .,
which are issued, endorsed, sold or transferred or in any manner
conveyed to another person or entity, with or without recourse'. The
fundamental function of the money market device in its operation is
to match and bring together in a most impersonal manner both the

'fund users' and the 'fund suppliers.' The money market is

an'impersonal market', free from personal considerations.' The
market mechanism is intended to provide quick mobility of money and
securities.'
The impersonal character of the money market device overlooks the
individual or entities concerned. The issuer of a commercial paper in
the money market necessarily knows in advance that it would be
expeditiously transacted and transferred to any investor/lender
without need of notice to said issuer. In practice, no notification is
given to the borrower or issuer of commercial paper of the sale or
transfer to the investor.
xxx xxx xxx
There is need to individuate a money market transaction, a relatively
novel institution in the Philippine commercial scene. It has been
intended to facilitate the flow and acquisition of capital on an
impersonal basis. And as specifically required by Presidential Decree
No. 678, the investing public must be given adequate and effective
protection in availing of the credit of a borrower in the commercial
paper market." 18 (Citations omitted; emphasis supplied)
We turn to Delta's arguments concerning alleged compensation or offsetting between DMC PN
No. 2731 and Philfinance PN No. 143-A. It is important to note that at the time Philfinance
sold part of its rights under DMC PN No. 2731 to petitioner on 9 February 1981, no
compensation had as yet taken place and indeed none could have taken place. The essential
requirements of compensation are listed in the Civil Code as follows:
"Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be
at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are
consumable, they be of the same kind, and also of the same qualify if
the latter has been stated;
(3) That the two debts are due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy,
commenced by third persons and communicated in due time to the
debtor." (Emphasis supplied)
On 9 February 1981, neither DMC PN No. 2731 nor Philfinance PN No. 143-A was due.
This was explicitly recognized by Delta in its 10 April 1980 "Letter of Agreement" with
Philfinance, where Delta acknowledged that the relevant promissory notes were "to be
offsetted (sic) against [Philfinance] PN No. 143-A upon co-terminal maturity."
As noted, the assignment to petitioner was made on 9 February 1981 or from forty-nine (49)
days before the "co-terminal maturity" date, that is to say, before any compensation had taken

358
place. Further, the assignment to petitioner would have prevented compensation from taking
place between Philfinance and Delta, to the extent of P304,533.33, because upon execution of
the assignment in favor of petitioner, Philfinance and Delta would have ceased to be creditors
and debtors of each other in their own right to the extent of the amount assigned by Philfinance
to petitioner. Thus, we conclude that the assignment effected by Philfinance in favor of
petitioner was a valid one and that petitioner accordingly became owner of DMC PN No. 2731
to the extent of the portion thereof assigned to him.
The record shows, however, that petitioner notified Delta of the fact of the assignment to him
only on 14 July 1981, 19 that is, after the maturity not only of the money market placement
made by petitioner but also of both DMC PN No. 2731 and Philfinance PN No. 143-A. In other
words,petitioner notified Delta of his rights as assignee after compensation had taken place by
operation of law because the offsetting instruments had both reached maturity. It is a firmly
settled doctrine that the rights of an assignee are not any greater than the rights of the assignor,
since the assignee is merely substituted in the place of the assignor 20 and that the assignee
acquires his rights subject to the equities i.e., the defenses which the debtor could have
set up against the original assignor before notice of the assignment was given to the debtor.
Article 1285 of the Civil Code provides that:
"ART. 1285. The debtor who has consented to the assignment of
rights made by a creditor in favor of a third person, cannot set up
against the assignee the compensation which would pertain to him
against the assignor, unless the assignor was notified by the debtor at
the time he gave his consent, that he reserved his right to the
compensation.
If the creditor communicated the cession to him but the debtor did
not consent thereto, the latter may set up the compensation of
debts previous to the cession, but not of subsequent ones.
If the assignment is made without the knowledge of the debtor, he
may set up the compensation of all credits prior to the same and also
later ones until he had knowledge of the assignment." (Emphasis
supplied). llcd
Article 1626 of the same Code states that: "the debtor who, before having knowledge of
the assignment, pays his creditor shall be released from the obligation." In Sison v. YapTico, 21 the Court explained that:
"[n]o man is bound to remain a debtor; he may pay to him with whom
he contracted to pay; and if he pay before notice that his debt has
been assigned, the law holds him exonerated, for the reason that it is
the duty of the person who has acquired a title by transfer to demand
payment of the debt, to give his debtor notice." 22
At the time that Delta was first put to notice of the assignment in petitioner's favor on 14
July 1981, DMC PN No. 2731 had already been discharged by compensation. Since the
assignor Philfinance could not have then compelled payment anew by Delta of DMC PN
No. 2731, petitioner, as assignee of Philfinance, is similarly disabled from collecting
from Delta the portion of the Note assigned to him.

It bears some emphasis that petitioner could have notified Delta of the assignment in his favor
as soon as that assignment or sale was effected on 9 February 1981. He could have also
notified Delta as soon as his money market placement matured on 13 March 1981 without
payment thereof being made by Philfinance; at that time, compensation had yet to set in and
discharge DMC PN No. 2731. Again, petitioner could have notified Delta on 26 March 1981
when petitioner received from Philfinance the Denominated Custodianship Receipt ("DCR")
No. 10805 issued by private respondent Pilipinas in favor of petitioner. Petitioner could, in
fine, have notified Delta at any time before the maturity date of DMC PN No. 2731. Because
petitioner failed to do so, and because the record is bare of any indication that Philfinance had
itself notified Delta of the assignment to petitioner, the Court is compelled to uphold the
defense of compensation raised by private respondent Delta. Of course, Philfinance remains
liable to petitioner under the terms of the assignment made by Philfinance to petitioner.
II
We turn now to the relationship between petitioner and private respondent Pilipinas. Petitioner
contends that Pilipinas became solidarily liable with Philfinance and Delta when Pilipinas
issued DCR No. 10805 with the following words:
"Upon
your
written
instructions,
we
[Pilipinas] shall
undertake physical delivery of the above securities fully assigned to
you " 23
The Court is not persuaded. We find nothing in the DCR that establishes an obligation on the
part of Pilipinas to pay petitioner the amount of P307,933.33 nor any assumption of liability in
solidum with Philfinance and Delta under DMC PN No. 2731. We read the DCR as a
confirmation on the part of Pilipinas that:
(1) it has in its custody, as duly constituted custodian bank, DMC PN
No. 2731 of a certain face value, to mature on 6 April 1981 and
payable to the order of Philfinance;
(2) Pilipinas was, from and after said date of the assignment by
Philfinance to petitioner (9 February 1981), holding that Note on
behalf and for the benefit of petitioner, at least to the extent it had
been assigned to petitioner by payee Philfinance; 24
(3) petitioner may inspect the Note either "personally or by
authorized representative", at any time during regular bank hours; and
(4) upon written instructions of petitioner, Pilipinas would physically
deliver the DMC PN No. 2731 (or a participation therein to theextent
of P307,933.33) "should this Denominated Custodianship Receipt
remain outstanding in [petitioner's] favor thirty (30) days after its
maturity."
Thus, we find nothing written in printers ink on the DCR which could reasonably be read as
converting Pilipinas into an obligor under the terms of DMC PN No. 2731 assigned to
petitioner, either upon maturity thereof or at any other time. We note that both in his complaint
and in his testimony before the trial court, petitioner referred merely to the obligation of private
respondent Pilipinas to effect physical delivery to him of DMC PN No. 2731. 25 Accordingly,
petitioner's theory that Pilipinas had assumed a solidary obligation to pay the amount

359
represented by the portion of the Note assigned to him by Philfinance, appears to be a new
theory constructed only after the trial court had ruled against him. The solidary liability that
petitioner seeks to impute to Pilipinas cannot, however, be lightly inferred. Under Article 1207
of the Civil Code, "there is a solidary liability only when the obligation expressly so states, or
when the law or the nature of the obligation requires solidarity." The record here exhibits no
express assumption of solidary liability vis-a-vis petitioner, on the part of Pilipinas. Petitioner
has not pointed us to any law which imposed such liability upon Pilipinas nor has petitioner
argued that the very nature of the custodianship assumed by private respondent Pilipinas
necessarily implies solidary liability under the securities, custody of which was taken by
Pilipinas. Accordingly, we are unable to hold Pilipinas solidarily liable with Philfinance and
private respondent Delta under DMC PN No. 2731.

We do not, however, mean to suggest that Pilipinas has no responsibility and liability in respect
of petitioner under the terms of the DCR. To the contrary, we find, after prolonged analysis and
deliberation, that private respondent Pilipinas had breached its undertaking under the DCR to
petitioner Sesbreo. llcd
We believe and so hold that a contract of deposit was constituted by the act of Philfinance in
designating Pilipinas as custodian or depositary bank. The depositor was initially Philfinance;
the obligation of the depositary was owed, however, to petitioner Sesbreo as beneficiary of
the custodianship or depositary agreement. We do not consider that this is a simple case of a
stipulation pour autrui. The custodianship or depositary agreement was established as an
integral part of the money market transaction entered into by petitioner with Philfinance.
Petitioner bought a portion of DMC PN No. 2731; Philfinance as assignor-vendor deposited
that Note with Pilipinas in order that the thing sold would be placed outside the control of the
vendor. Indeed, the constituting of the depositary or custodianship agreement was equivalent to
constructive delivery of the Note (to the extent it had been sold or assigned to petitioner) to
petitioner. It will be seen that custodianship agreements are designed to facilitate transactions
in the money market by providing a basis for confidence on the part of the investors or placers
that the instruments bought by them are effectively taken out of the pocket, as it were, of the
vendors and placed safely beyond their reach, that those instruments will be there available to
the placers of funds should they have need of them. The depositary in a contract of deposit is
obliged to return the security or the thing deposited upon demand of the depositor (or, in the
present case, of the beneficiary) of the contract, even though a term for such return may have
been established in the said contract. 26 Accordingly, any stipulation in the contract of deposit
or custodianship that runs counter to the fundamental purpose of that agreement or which was
not brought to the notice of and accepted by the placer-beneficiary, cannot be enforced as
against such beneficiary-placer.
We believe that the position taken above is supported by considerations of public policy. If
there is any party that needs the equalizing protection of the law in money market transactions,
it is the members of the general public who place their savings in such market for the purpose
of generating interest revenues. 27 The custodian bank, if it is not related either in terms of
equity ownership or management control to the borrower of the funds, or the commercial paper
dealer, is normally a preferred or traditional banker of such borrower or dealer (here,
Philfinance). The custodian bank would have every incentive to protect the interest of its client
the borrower or dealer as against the placer of funds. The providers of such funds must be
safeguarded from the impact of stipulations privately made between the borrowers or dealers
and the custodian banks, and disclosed to fund-providers only after trouble has erupted.

In the case at bar, the custodian-depositary bank Pilipinas refused to deliver the security
deposited with it when petitioner first demanded physical delivery thereof on 2 April 1981. We
must again note, in this connection, that on 2 April 1981, DMC PN No. 2731 had not yet
matured and therefore, compensation or offsetting against Philfinance PN No. 143-A
had not yet taken place. Instead of complying with the demand of petitioner, Pilipinas
purported to require and await the instructions of Philfinance, in obvious contravention of its
undertaking under the DCR to effect physical delivery of the Note upon receipt of "written
instructions" from petitioner Sesbreo. The ostensible term written into the DCR (i.e., "should
this [DCR] remain outstanding in your favor thirty [30] days after its maturity") was not a
defense against petitioner's demand for physical surrender of the Note on at least three
grounds: firstly, such term was never brought to the attention of petitioner Sesbreo at the time
the money market placement with Philfinance was made; secondly, such term runs counter to
the very purpose of the custodianship or depositary agreement as an integral part of a money
market transaction; and thirdly, it is inconsistent with the provisions of Article 1988 of the
Civil Code noted above. Indeed, in principle, petitioner became entitled to demand physical
delivery of the Note held by Pilipinas as soon as petitioner's money market placement matured
on 13 March 1981 without payment from Philfinance.
We conclude, therefore, that private respondent Pilipinas must respond to petitioner for
damages sustained by him arising out of its breach of duty. By failing to deliver the Note to the
petitioner as depositor-beneficiary of the thing deposited, Pilipinas effectively and unlawfully
deprived petitioner of the Note deposited with it. Whether or not Pilipinas itself benefited from
such conversion or unlawful deprivation inflicted upon petitioner, is of no moment for present
purposes.' Prima facie, the damages suffered by petitioner consisted of P304,533.33, the
portion of the DMC PN No. 2731 assigned to petitioner but lost by him by reason of discharge
of the Note by compensation, plus legal interest of six percent (6%) per annum counting from
14 March 1981.
The conclusion we have here reached is, of course, without prejudice to such right of
reimbursement as Pilipinas may have vis-a-vis Philfinance.
III
The third principal contention of petitioner that Philfinance and private respondents Delta
and Pilipinas should be treated as one corporate entity need not detain us for long. LLphil
In the first place, as already noted, jurisdiction over the person of Philfinance was never
acquired either by the trial court nor by the respondent Court of appeals. Petitioner similarly
did not seek to implead Philfinance in the Petition before us.
Secondly, it is not disputed that Philfinance and private respondents Delta and Pilipinas have
been organized as separate corporate entities. Petitioner asks us to pierce their separate
corporate entities, but has been able only to cite the presence of a common Director Mr.
Ricardo Silverio, Sr., sitting on the Boards of Directors of all three (3) companies. Petitioner
has neither alleged nor proved that one or another of the three (3) concededly related
companies used the other two (2) as mere alter egos or that the corporate affairs of the other
two (2) were administered and managed for the benefit of one. There is simply not enough
evidence of record to justify disregarding the separate corporate personalities of Delta and
Pilipinas and to hold them liable for any assumed or undetermined liability of Philfinance to
petitioner. 28

360
WHEREFORE, for all the foregoing, the Decision and Resolution of the Court of Appeals in
C.A.-G.R. CV No. 15195 dated 21 March 1989 and 17 July 1989, respectively, are hereby
MODIFIED and SET ASIDE, to the extent that such Decision and Resolution had dismissed
petitioner's complaint against Pilipinas Bank. Private respondent Pilipinas Bank is hereby
ORDERED to indemnify petitioner for damages in the amount of P304,533.33, plus legal
interest thereon at the rate of six percent (6%) per annum counted from 2 April 1981. As so
modified, the Decision and Resolution of the Court of Appeals are hereby AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ ., concur.
||| (Sesbreo v. Court of Appeals, G.R. No. 89252, [May 24, 1993])

361

EN BANC

power of attorney was to mortgage, nor had they benefited from said loans, no estoppel can be
claimed by plaintiff bank as against defendants.

[G.R. No. L-24765. August 29, 1969.]

5. ID.; ID.; ID.; LIABILITY OF CO-OWNER WHO AUTHORIZED GRANTEE TO INCUR

LOANS. Where as in this case, Valeriana, one of the co-owners of the property involved,
granted Maximino not only the authority to mortgage said property but also the special power
of attorney to borrow money in connection therewith, her liability is not only on the mortgage
of her share in the property, but also for the said loans which Maximo had obtained from
plaintiff bank, and is joint pursuant to the provisions of Article 1204 of the Civil Code. It
should be noted that in the additional power of attorney, Exh. E-1, executed by Valeriana, she
did not grant Maximo the authority to bind her solidarity with him on any loans he might
secure thereunder.

PHILIPPINE
NATIONAL
BANK, plaintiff-appellee, vs.
MAXIMO STA. MARIA, ET AL., defendants, VALERIANA,
EMETERIA, TEOFILO, QUINTIN, ROSARIO, and LEONILA,
all surnamed STA. MARIA, defendants-appellants.

Tomas Besa and Jose B. Galang for plaintiff-appellee.

G. P. Nuguid Jr. for defendants-appellants.

SYLLABUS
1. CIVIL LAW; AGENCY; SPECIAL POWER OF ATTORNEY TO MORTGAGE REAL
PROPERTY IS LIMITED TO SUCH AUTHORITY. A special power of attorney to
mortgage real estate is limited to such authority to mortgage and does not bind the grantor
personally to other obligations contracted by the grantee, in the absence of any ratification or
other similar act that would estop the grantor from questioning or disowning such other
obligations contracted by the grantee.
2. ID.; ID.; ID.; INSTANT CASE. The authority granted by defendants-appellants (except
Valeriana) unto their brother, Maximo, was merely to mortgage the property jointly owned by
them. They did not grant Maximo any authority to contract for any loans in their names and
behalf. Maximo alone, with Valeriana who authorized him to borrow money, must answer for
said loans and the other defendants-appellants' only liability is that the real estate authorized by
them to be mortgaged would be subject to foreclosure and sale to respond for the obligations
contracted by Maximo. But they cannot be held personally liable for the payment of such
obligations, as erroneously held by the trial court.
3. ID.; ID.; ID.; LOANS INCURRED IN CONNECTION WITH SAID MORTGAGE
CANNOT BE CHARGED AGAINST OWNERS OF THE PROPERTY MORTGAGED.
The fact that Maximo presented to the plaintiff bank Valeriana's additional special power of
attorney expressly authorizing him to borrow money, Exh. E-1, aside from the authority to
mortgage executed by Valeriana together with the other defendants-appellants also in Maximo's
favor, lends support to our view that the bank was not satisfied with the authority to mortgage
alone. For otherwise, such authority to borrow would have been deemed unnecessary and a
surplusage.
4. ID.; ID.; ID.; ID.; CO-OWNERS NOT IN ESTOPPEL IN INSTANT CASE. Where there
was no express ratification by defendants-appellants of the loans incurred by Maximo from
plaintiff bank, secured by the real property owned by them and for which his only special

6. ID.; ATTORNEY'S FEES; BASIS OF AWARD IN INSTANT CASE. As to the 10%

award of attorney's fees, this Court believes that considering the resources of plaintiff bank and
the fact that the principal debtor, Maximo Sta. Maria, had not contested the suit, an award of
five (5%) per cent of the balance due on the principal, exclusive of interests, i.e. a balance of
P6,100.00 on the first cause of action and a balance of P9,346.44 on the second cause of action,
per the bank's statements of August 20, 1963 should be sufficient.

DECISION

TEEHANKEE, J p:
In this appeal certified to this Court by the Court of Appeals as involving purely legal issues,
we hold that a special power of attorney to mortgage real estate is limited to such authority to
mortgage and does not bind the grantor personally to other obligations contracted by the
grantee, in the absence of any ratification or other similar act that would estop the grantor from
questioning or disowning such other obligations contracted by the grantee.
Plaintiff bank filed this action on February 10, 1961 against defendant Maximo Sta. Maria and
his six brothers and sisters, defendants-appellants, Valeriana, Emeteria, Teofilo, Quintin,
Rosario and Leonila, all surnamed Sta. Maria, and the Associated Insurance & Surety Co., Inc.
as surety, for the collection of certain amounts representing unpaid balances on two agricultural
sugar crop loans due allegedly from defendants. 1
The said sugar crop loans were obtained by defendant Maximo Sta. Maria from plaintiff bank
under a special power of attorney, executed in his favor by his six brothers and sisters,
defendants- appellants herein, to mortgage a 16-odd hectare parcel of land, jointly owned by
all of them, the pertinent portion of which reads as follows:
"That we, VALERIANA, EMETERIA, TEOFILO, QUINTIN,
ROSARIO and LEONILA all surnamed STA. MARIA, sole heirs of
our deceased parents CANDIDO STA. MARIA and FRANCISCA DE

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LOS REYES, all of legal age, Filipinos, and residents of Dinalupihan,
Bataan, do hereby name, constitute and appoint Dr. MAXIMO STA.
MARIA, of legal age, married, and residing at Dinalupihan, Bataan to
be our true and lawful attorney of and in our place, name and stead to
mortgage, or convey as security to any bank, company or to any
natural or juridical person, our undivided shares over a certain
parcel of land together with the improvements thereon which parcel
of land is more particularly described as follows to wit:
"Situated in the barrio of Pinulot, municipality
of Dinalupihan, Bataan, containing an area of 16,7249
hectares and bounded as follows to wit: North by property
of Alejandro Benito; on the Northeast, by public land and
property of Tomas Tulop on the southeast, by property of
Ramindo Agustin; on the southwest, by properties of Jose
V. Reyes and Emilio Reyes; and on the northwest, by
excluded portion claimed by Emilio Reyes.
of which parcel of land aforementioned we are together with our said
attorney who is our brother, the owners in equal undivided shares as
evidenced by Transfer Certificate of Title No. T-2785 of the Registry
of Deeds of Bataan dated Feb. 26th 1951." (Exh. E) 2
In addition, Valeriana Sta. Maria alone also executed in favor of her brother, Maximo, a special
power of attorney to borrow money and mortgageany real estate owned by her, granting him
the following authority:
"For me and in my name to borrow money and make, execute, sign
and deliver mortgages of real estate now owned by me standing in my
name and to make, execute, sign and deliver any and all promissory
notes necessary in the premises."(EXH. E-1) 3
By virtue of the two above powers, Maximo Sta. Maria applied for two separate crop loans, for
the 1952-1953 and 1953-1954 crop years, with plaintiff bank, one in the amount of P15,000.00,
of which only the sum of P13,216.11 was actually extended by plaintiff, and the other in the
amount of P23,000.00, of which only the sum of P12,427.57 was actually extended by
plaintiff. As security for the two loans, Maximo Sta. Maria executed in his own name in favor
of plaintiff bank two chattel mortgages on the standing crops, guaranteed by surety bonds for
the full authorized amounts of the loans executed by the Associated Insurance & Surety Co.,
Inc. as surety with Maximo Sta. Maria as principal. The records of the crop loan application
further disclose that among the securities given by Maximo for the loans were a "2nd mortgage
on 25,3023 Has. of sugarland, including sugar quota rights therein" including the parcel of land
jointly owned by Maximo and his six brothers and sisters herein for the 1952-1953 crop loan,
with the notation that the bank already held a first mortgage on the same properties for the
1951-1952 crop loan of Maximo 4 and a 3rd mortgage on the same properties for the 19531954 crop loan. 5
The trial court rendered judgment in favor of plaintiff and against defendants thus:
"WHEREFORE, premises considered, judgment is hereby rendered
condemning the defendant Maximo R. Sta. Maria and his codefendants Valeriana, Quintin, Rosario, Emeteria, Teofilo, and

Leonila all surnamed Sta. Maria and the Associated Insurance and
Surety Company, Inc., jointly and severally, to pay the plaintiff, the
Philippine National Bank, Del Carmen Branch, as follows:
"1. On the first cause of action, the sum of P8,500.72 with a daily
interest of P0.83 on P6,100.00 at 6% per annum beginning August 21,
1963, until fully paid;
"2. On the second cause of action, the sum of P14,299.79 with a daily
interest of P1.53 on P9,346.44 at 6% per annum, until fully paid; and
"3. On both causes of action the further sum equivalent to 10% of the
total amount due as attorney's fee as of the date of execution of this
decision, and the costs." 6
Defendant Maximo Sta. Maria and his surety, defendant Associate Insurance & Surety Co., Inc.
who did not resist the action, did not appeal the judgment. This appeal has been taken by his
six brothers and sisters, defendants-appellants who reiterate in their brief their main contention
in their Answer to the complaint that under the special power of attorney, Exh. E, they had not
given their brother, Maximo, the authority to borrow money but only to mortgage the real
estate jointly owned by them; and that if they are liable at all, their liability should not go
beyond the value of the property which they had authorized to be given as security for the
loans obtained by Maximo. In their answer, defendants-appellants had further contended that
they did not benefit whatsoever from the loans, and that the plaintiff bank's only recourse
against them is to foreclose on the property which they had authorized Maximo to mortgage
We find the appeal of defendants-appellants, except for defendant Valeriana Sta. Maria who
had executed another special power of attorney, Exh. E-l, expressly authorizing Maximo to
borrow money on her behalf, to be well taken.

1. Plaintiff bank has not made out a cause of action against defendants-appellants (except
Valeriana), so as to hold them liable for the unpaid balances of the loans obtained by Maximo
under the chattel mortgages executed by him in his own name alone. In the early case of Bank
of P. I. vs. de Coster, this Court, in holding that the broad power of attorney given by the wife
to the husband to look after and protect the wife's interests and to transact her business did not
authorize him to make her liable as a surety for the payment of the pre-existing debt of a third
person, cited the fundamental construction rule that "where in an instrument powers and duties
are specified and defined, that all of such powers and duties are limited and confined to those
which are specified and defined, and that all other powers and duties are excluded." 7 This is
but in accord with the disinclination of courts to enlarge an authority granted beyond the
powers expressly given and those which incidentally flow or derive therefrom as being usual or
reasonably necessary and proper for the performance of such express powers. Even before the
filing of the present action this Court in the similar case of De Villa vs. Fabricantes 8 had
already ruled that where the power of attorney given to the husband by the wife was limited to
a grant of authority to mortgage a parcel of land titled in the wife's name, the wife may not be
held liable for the payment of the mortgage debt contracted by the husband, as the authority to
mortgage does not carry with it the authority to contract obligation. This Court thus held in the
said case:

363
"Appellant claims that the trial court erred in holding that only
Cesario A. Fabricante is liable to pay the mortgage debt and not his
wife who is exempt from liability. The trial court said: 'Only the
defendant. Cesario A. Fabricante is liable for the payment of this
amount because it does not appear that the other defendant Maria G.
de Fabricante had authorized Cesario A. Fabricante to contract the
debt also in her name. The power of attorney was not presented and it
is to be presumed that the power (of attorney) was limited to a grant
of authority to Cesario A. Fabricante to mortgage the parcel of land
covered by Transfer Certificate of Title in the name of Maria G. de
Fabricante.'
"We went over the contents of the deed of mortgage executed by
Cesario Fabricante in favor of Appellant on April 18, 1944, and there
is really nothing therein from which we may infer that Cesario was
authorized by his wife to contract the obligation in her name. The
deed shows that the authority was limited to the execution of the
mortgage insofar as the property of the wife is concerned. There is a
difference between authority to mortgage and authority to contract
obligation. Since the power of attorney was not presented as
evidence, the trial court was correct in presuming that power was
merely limited to a grant of authority to mortgage unless the contrary
is shown. " 9
2. The authority granted by defendants-appellants (except Valeriana) unto their brother,
Maximo, was merely to mortgage the property jointly owned by them. They did not grant
Maximo any authority to contract for any loans in their names and behalf. Maximo alone, with
Valeriana who authorized him-to borrow money, must answer for said loans and the other
defendants- appellants' only liability is that the real estate authorized by them to be mortgaged
would be subject to foreclosure and sale to respond for the obligations contracted by Maximo.
But they cannot be held personally liable for the payment of such obligations, as erroneously
held by the trial court.

3. The fact that Maximo presented to the plaintiff bank Valeriana's additional special power of
attorney expressly authorizing him to borrow money, Exh. E-l, aside from the authority to
mortgage executed by Valeriana together with the other defendants-appellants also in Maximo's
favor, lends support to our view that the bank was not satisfied with the authority to mortgage
alone. For otherwise, such authority to borrow would have been deemed unnecessary and a
surplusage. And having failed to require that Maximo submit a similar authority to borrow,
from the other defendants-appellants, plaintiff, which apparently was satisfied with the surety
bond for repayment put up by Maximo, cannot now seek to hold said defendants- appellants
similarly liable for the unpaid loans. Plaintiff's argument that "a mortgage is simply an
accessory contract, and that to effect the mortgage, a loan has to be secured" 10 falls far short
of the mark. Maximo had indeed secured the loan on his own account, and the defendantsappellants had authorized him to mortgage their respective undivided shares of the real
property jointly owned by them as security for the loan. But that was the extent of their
authority and consequent liability, to have the real property answer for the loan in case of nonpayment. It is not unusual in family and business circles that one would allow his property or
an undivided share in real estate to be mortgaged by another as security, either as an
accommodation or for valuable consideration, but the grant of such authority does not extend
to assuming personal liability, much less solidary liability, for any loan secured by the grantee
in the absence of express authority so given by the grantor.
4. The outcome might be different if there had been an express ratification of the loans by
defendants-appellants or if it had been shown that they had been benefited by the crop loans so
as to put them in estoppel. but the burden of establishing such ratification or estoppel falls
squarely upon plaintiff bank. It has not only failed to discharge this burden, but the record
stands undisputed that defendant-appellant Quintin Sta. Maria testified that he and his codefendants executed the authority to mortgage 'Sto accommodate (my) brother Dr. Maximo
Sta. Maria . . . and because he is my brother, I signed it to accommodate him as security for
whatever he may apply as loan. Only for that land, we gave hire as security" and that "we
brothers did not receive any centavo as benefit." 11 The record further shows plaintiff bank
itself admitted during the trial that defendants-appellants "did not profit from the loan" and that
they "did not receive any money (the loan proceeds) from (Maximo)" 12 No estoppel therefore
can be claimed by plaintiff as against defendants appellants.
5. Now, as to the extent of defendant Valeriana Sta. Maria's liability to plaintiff. As already
state above, Valeriana stands liable not merely on the mortgage of her share in the property, but
also for the loans which Maximo had obtained from plaintiff bank, since she had expressly
granted Maximo the authority to incur such loans. (Exh. E-1). Although The question has not
been raised in appellants' brief, we hold that Valeriana's liability for the loans secured by
Maximo is not joint and several or solidary as adjudged by the trial court, but only joint,
pursuant to the provisions of Article 1207 of the Civil Code that "(T)he concurrence . . . of two
or more debtors in one and the same obligation does not imply that . . . each one of the
(debtors) is bound to render entire compliance with the prestation. There is a solidary liability
only when the obligation expressly so states, or when the law or the nature of the obligation
requires solidarity." It should be noted that in the additional special power of attorney, Exh. E1, executed by Valeriana, she did not grant Maximo the authority to bind her solidarity with
him on any loans he might secure thereunder.
6. Finally, as to the 10% award of attorney's fees, this Court believes that considering the
resources of plaintiff bank and the fact that the principal debtor, Maximo Sta. Maria, had not
contested the suit, an award of five (5%) per cent of the balance due on the principal, exclusive
of interests, i.e. a balance of P6,100.00 on the first cause of action and a balance of P9,346.44

364
on the second cause of action, per the bank's statements of August 20, 1963, (Exhs. Q-1 and
BB-I, respectively) should be sufficient.
WHEREFORE, the judgment of the trial court-against defendants-appellants EMETERIA,
TEOFILQ, QUINTIN, ROSARIO and LEONILA, all surnamed STA. MARIA is hereby
reversed and set aside, with costs in both instances against plaintiff. The judgment against
defendant-appellant VALERIANA STA. MARIA is modified in that her liability is held to be
joint and not solidary, and the award of attorney's fees is reduced as set forth in the preceding
paragraph, without costs in this instance.
Concepcion, C. J., Dizon, Makalintal,
Capistrano and Barredo, JJ., concur.

Zaldivar,

Sanchez,

Castro,

Reyes, J.B.L., J., is on official leave.

||| (PNB v. Sta. Maria, G.R. No. L-24765, [August 29, 1969], 139 PHIL 781-790)

Fernando,

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FIRST DIVISION
[G.R. No. 72275. November 13, 1991.]
PACIFIC
BANKING CORPORATION, petitioner, vs. HON.
INTERMEDIATE APPELLATE COURT AND ROBERTO
REGALA, JR.,respondents.

3. ID.; ID.; ID.; ID.; DETERMINED BY THE CLAUSES IN THE CONTRACT OF

SURETYSHIP. A guarantor or surety does not incur liability unless the principal debtor is
held liable. It is in this sense that a surety, although solidarily liable with the principal debtor, is
different from the debtor. It does not mean, however, that the surety cannot be held liable to the
same extent as the principal debtor. The nature and extent of the liabilities of a guarantor or a
surety is determined by the clauses in the contract of suretyship (PCIB v. CA, L-34959, March
18, 1988, 159 SCRA 24).

DECISION

Ocampo, Dizon & Domingo for petitioner.

Angara, Concepcion, Regala & Cruz for private respondent.
MEDIALDEA, J p:
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; SURETYSHIP; DISTINGUISHED FROM
GUARANTY. A contract of surety as distinguished from a contract of guaranty where the
guarantor binds himself to the creditor to fulfill the obligation of the principal debtor only in
case the latter should fail to do so, in a contract of suretyship, the surety binds himself
solidarily with the principal debtor (Art. 2047, Civil Code of the Philippines).
2. ID.; ID.; ID.; LIABILITY OF SURETY; CASE AT BAR. As a surety he bound himself
jointly and severally with the debtor Celia Regala "to pay the Pacific Banking Corporation
upon demand, any and all indebtedness, obligations, charges or liabilities due and incurred by
said Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her) favor by
Pacific Banking Corporation." It is true that under Article 2054 of the Civil Code, "(A)
guarantor may bind himself for less, but not for more than the principal debtor, both as regards
the amount and the onerous nature of the conditions. It is likewise not disputed by the parties
that the credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala
succeeded in using the card beyond the original period of its effectivity, October 29, 1979. We
do not agree however, that Roberto Jr.'s liability should be limited to that extent. Private
respondent Roberto Regala, Jr., as surety of his wife, expressly bound himself up to the extent
of the debtor's (Celia) indebtedness likewise expressly waiving any "discharge in case of any
change or novation of the terms and conditions in connection with the issuance of the
Pacificard credit card." Roberto, in fact, made his commitment as a surety a continuing one,
binding upon himself until all the liabilities of Celia Regala have been fully paid. All these
were clear under the "Guarantor's Undertaking' Roberto signed. Private respondent Roberto
Regala, Jr. had been made aware by the terms of the undertaking of future changes in the terms
and conditions governing the issuance of the credit card to his wife and that notwithstanding,
he voluntarily agreed to be bound as a surety. As in guaranty, a surety may secure additional
and future debts of the principal debtor the amount of which is not yet known ( Article 2053,
Civil Code of the Philippines).

This is a petition for review on certiorari of the decision (pp. 21-31, Rollo) of the Intermediate
Appellate Court (now Court of Appeals) in AC-G.R. C.V. No. 02753, 1 which modified the
decision of the trial court against herein private respondent Roberto Regala, Jr., one of the
defendants in the case for sum of money filed by Pacific Banking Corporation.
The facts of the case as adopted by the respondent appellate court from herein petitioner's brief
before said court are as follows:
"On October 24, 1975, defendant Celia Syjuco Regala (hereinafter
referred to as Celia Regala for brevity), applied for and obtained from
the plaintiff the issuance and use of Pacificard credit card (Exhs. 'A',
'A-1'), under the "Terms and Conditions Governing the Issuance and
Use of Pacificard (Exh. 'B' and hereinafter referred to as Terms and
Conditions), a copy of which was issued to and received by the said
defendant on the date of the application and expressly agreed that the
use of the Pacificard is governed by said Terms and Conditions. On
the same date, the defendant-appellant Robert Regala, Jr., spouse of
defendant Celia Regala, executed a 'Guarantor's Undertaking' (Exh.
'A-1-a') in favor of the appellee Bank, whereby the latter agreed
'jointly and severally of Celia Aurora Syjuco Regala, to pay the
Pacific Banking Corporation upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred by said Celia
Aurora Syjuco Regala with the use of the Pacificard, or renewals
thereof, issued in her favor by the Pacific Banking Corporation'. It
was also agreed that 'any changes of or novation in the terms and
conditions in connection with the issuance or use of the Pacificard, or
any extension of time to pay such obligations, charges or liabilities
shall not in any manner release me/us from responsibility hereunder,
it being understood that I fully agree to such charges, novation or
extension, and that this understanding is a continuing one and shall

366
subsist and bind me until the liabilities of the said Celia Syjuco
Regala have been fully satisfied or paid.'
"Plaintiff-appellee Pacific Banking Corporation has contracted with
accredited business establishments to honor purchases of goods and
or services by Pacificard holders and the cost thereof to be advanced
by the plaintiff-appellee for the account of the defendant cardholder,
and the latter undertook to pay any statements of account rendered by
the plaintiff-appellee for the advances thus made within thirty (30)
days from the date of the statement, provided that any overdue
account shall earn interest at the rate of 14% per annum from date of
default.
"The defendant Celia Regala, as such Pacificard holder, had
purchased goods and/or services on credit (Exh. 'C', 'C-1' to 'C-112')
under her Pacificard, for which the plaintiff advanced the cost
amounting to P92,803.98 at the time of the filing of the complaint.
'In view of defendant Celia Regala's failure to settle her account for
the purchases made thru the use of the Pacificard, a written demand
(Exh. 'D') was sent to the latter and also to the defendant Roberto
Regala, Jr. ('Exh.' ') under his 'Guarantor's Undertaking.'
"A complaint was subsequently filed in Court for defendant's (sic)
repeated failure to settle their obligation. Defendant Celia Regala was
declared in default for her failure to file her answer within the
reglementary period. Defendant-appellant Roberto Regala, Jr., on the
other hand, filed his Answer with Counterclaim admitting his
execution of the 'Guarantor's Understanding, but with the
understanding that his liability would be limited to P2,000.00 per
month.'
"In view of the solidary nature of the liability of the parties, the
presentation of evidence ex-parte as against the defendant Celia
Regala was jointly held with the trial of the case as against the
defendant Roberto Regala.
"After the presentation of plaintiff's testimonial and documentary
evidence, fire struck the City Hall of Manila, including the court
where the instant case was pending, as well as all its records.
"Upon plaintiff-appellee's petition for reconstitution, the records of
the instant case were duly reconstituted. Thereafter, the case was set
for pre-trial conference with respect to the defendant-appellant
Roberto Regala on plaintiff-appellee's motion, after furnishing the
latter a copy of the same. No opposition thereto having been
interposed by defendant-appellant, the trial court set the case for pretrial conference. Neither did said defendant-appellant nor his counsel
appear on the date scheduled by the trial court for said conference
despite due notice. Consequently, plaintiff-appellee moved that the
defendant-appellant Roberto Regala be declared as in default and that
it be allowed to present its evidence ex-parte, which motion was

granted. On July 21, 1983, plaintiff-appellee presented its evidence

ex-parte. (pp. 23-26, Rollo).
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive portion of
which reads:
"WHEREFORE, the Court renders judgment for the plaintiff and
against the defendants condemning the latter, jointly and severally, to
pay said plaintiff the amount of P92,803.98, with interest thereon at
14% per annum, compounded annually, from the time of demand on
November 17, 1978 until said principal amount is fully paid; plus
15% of the principal obligation as and for attorney's fees and expense
of suit, and the costs.
"The counterclaim of defendant Roberto Regala, Jr. is dismissed for
lack of merit.
"SO ORDERED." (pp. 22-23, Rollo)
The defendants appealed from the decision of the court a quo to the Intermediate Appellate
Court.
On August 12, 1985, respondent appellate court rendered judgment modifying the decision of
the trial court. Private respondent Roberto Regala, Jr. was made liable only to the extent of the
monthly credit limit granted to Celia Regala, i.e., at P2,000.00 a month and only for the
advances made during the one year period of the card's effectivity counted from October 29,
1975 up to October 29, 1976. The dispositive portion of the decision states:
WHEREFORE, the judgment of the trial court dated December 5,
1983 is modified only as to appellant Roberto Regala, Jr., so as to
make him liable only for the purchases made by defendant Celia
Aurora Syjuco Regala with the use of the Pacificard from October 29,
1975 up to October 29, 1976 up to the amount of P2,000.00 per
month only, with interest from the filing of the complaint up to the
payment at the rate of 14% per annum without pronouncement as to
costs." (p. 32, Rollo). Cdpr
A motion for reconsideration was filed by Pacific Banking Corporation which the respondent
appellate court denied for lack of merit on September 19, 1985 (p. 33, Rollo).

On November 8, 1985, Pacificard filed this petition. The petitioner contends that while the
appellate court correctly recognized Celia Regala's obligation to Pacific Banking Corp. for the
purchases of goods and services with the use of a Pacificard credit card in the total amount of
P92,803.98 with 14% interest per annum, it erred in limiting private respondent Roberto
Regala, Jr.'s liability only for purchases made by Celia Regala with the use of the card from
October 29, 1975 up to October 29, 1976 up to the amount of P2,000.00 per month with 14%
interest from the filing of the complaint.
There is merit in this petition.

367
The pertinent portion of the "Guarantor's Undertaking' which private respondent Roberto
Regala, Jr. signed in favor of Pacific Banking Corporation provides:
"I/We, the undersigned, hereby agree, jointly and severally with Celia
Syjuco Regala to pay the Pacific Banking Corporation upon
demandany and all indebtedness, obligations, charges or liabilities
due and incurred by said Celia Syjuco Regala with the use of the
Pacificard or renewals thereof issued in his favor by the Pacific
Banking Corporation. Any changes of or Novation in the terms and
conditions in connection with the issuance or use of said Pacificard,
or any extension of time to pay such obligations, charges or liabilities
shall not in any manner release me/us from the responsibility
hereunder, it being understood that the undertaking is a continuing
one and shall subsist and bind me/us until all the liabilities of the
said Celia Syjuco Regala have been fully satisfied or paid." ( p.
12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's
Undertaking," was in substance a contract of surety. As distinguished from a contract of
guaranty where the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor only in case the latter should fail to do so, in a contract of suretyship, the
surety binds himself solidarily with the principal debtor (Art. 2047, Civil Code of the
Philippines).
We need not look elsewhere to determine the nature and extent of private respondent Roberto
Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally with the debtor
Celia Regala "to pay the Pacific Banking Corporation upon demand, any and all indebtedness,
obligations, charges or liabilities due and incurred by said Celia Syjuco Regala with the use of
Pacificard or renewals thereof issued in (her) favor by Pacific Banking Corporation." This
undertaking was also provided as a condition in the issuance of the Pacificard to Celia Regala,
thus:
"5. A Pacificard is issued to a Pacificard-holder against the joint and
several signature of a third party and as such, the Pacificard holder
and the guarantor assume joint and several liabilities for any and all
amount arising out of the use of the Pacificard." (p 14, Rollo).
The respondent appellate court held that "all the other rights of the guarantor are not thereby
lost by the guarantor becoming liable solidarily and therefore a surety." It further ruled that
although the surety's liability is like that of a joint and several debtor, it does not make him the
debtor but still the guarantor (or the surety), relying on the case of Government of the
Philippines v. Tizon, G.R. No. L-22108, August 30, 1967, 20 SCRA 1182. Consequently,
Article 2054 of the Civil Code providing for a limited liability on the part of the guarantor or
debtor still applies. LexLib
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for less,
but not for more than the principal debtor, both as regards the amount and the onerous nature of
the conditions. 2 It is likewise not disputed by the parties that the credit limit granted to Celia
Regala was P2,000.00 per month and that Celia Regala succeeded in using the card beyond the
original period of its effectivity, October 29, 1979. We do not agree however, that Roberto Jr.'s
liability should be limited to that extent. Private respondent Roberto Regala, Jr., as surety of his

wife,expressly bound himself up to the extent of the debtor's (Celia) indebtedness likewise
expressly waiving any "discharge in case of any change or novation of the terms and
conditions in connection with the issuance of the Pacificard credit card." Roberto, in fact,
made his commitment as a surety a continuing one, binding upon himself until all the liabilities
of Celia Regala have been fully paid. All these were clear under the "Guarantor's Undertaking'
Roberto signed, thus:
" . . . . Any changes of or novation in the terms and conditions in
connection with the issuance or use of said Pacificard, or any
extension of time to pay such obligations, charges or liabilities shall
not in any manner release me/us from the responsibility hereunder, it
being understood that the undertaking is a continuing one and shall
subsist and bind me/us until all the liabilities of of the said Celia
Syjuco Regala have been fully satisfied or paid." (p. 12, supra;
emphasis supplied).
Private respondent Roberto Regala, Jr. had been made aware by the terms of the undertaking of
future changes in the terms and conditions governing the issuance of the credit card to his wife
and that notwithstanding, he voluntarily agreed to be bound as a surety. As in guaranty, a surety
may secure additional and future debts of the principal debtor the amount of which is not yet
known (see Article 2053, supra).
The application by respondent court of the ruling in Government v. Tizon, supra is misplaced.
It was held in that case that:
" . . . , although the defendants bound themselves in solidum, the
liability of the Surety under its bond would arise only if its codefendants, the principal obligor, should fail to comply with the
contract. To paraphrase the ruling in the case of Municipality of Orion
vs. Concha, the liability of the Surety is 'consequent upon the liability'
of Tizon, or 'so dependent on that of the principal debtor' that the
Surety 'is considered in law as being the same party as the debtor in
relation to whatever is adjudged, touching the obligation of the latter';
or the liabilities of the two defendants herein 'are so interwoven and
dependent as to be inseparable.' Changing the expression, if the
defendants are held liable, their liability to pay the plaintiff would be
solidary, but the nature of the Surety's undertaking is such that it does
not incur liability unless and until the principal debtor is held liable."
A guarantor or surety does not incur liability unless the principal debtor is held liable. It is in
this sense that a surety, although solidarily liable with the principal debtor, is different from the
debtor. It does not mean, however, that the surety cannot be held liable to the same extent as
the principal debtor. The nature and extent of the liabilities of a guarantor or a surety is
determined by the clauses in the contract of suretyship (seePCIB v. CA, L-34959, March 18,
1988, 159 SCRA 24). prcd
ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent appellate
court is SET ASIDE and the decision of the trial court is REINSTATED.
SO ORDERED.
Narvasa, Cruz, Feliciano and Grio-Aquino, JJ., concur.

368
||| (Pacific Banking Corp. v. Intermediate Appellate Court, G.R. No. 72275, [November 13,
1991])

369

SECOND DIVISION
[G.R. No. L-55138. September 28, 1984.]
ERNESTO
V.
RONQUILLO, petitioner, vs. HONORABLE
COURT OF APPEALS AND ANTONIO P. SO, respondents.

Gloria A. Fortun for petitioner.

Roselino Reyes Isler for respondents.

SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; SPECIAL CIVIL ACTION; MOTION FOR
RECONSIDERATION; PROPRIETY OF FILING OF PETITION FOR CERTIORARI
DURING PENDENCY OF MOTION FOR RECONSIDERATION. Anent the first issue
raised, suffice it to state that while as a general rule, a motion for reconsideration should
precede recourse to certiorari in order to give the trial court an opportunity to correct the error
that it may have committed, the said rule is not absolute, (Vda. de Sayman vs. Court of
Appeals, 1-21 SCRA 650) and may be dispensed with in instances where filing of a motion for
reconsideration would serve no useful purpose, such as when the motion for reconsideration
would raise the same point stated in the motion, (Fortich-Celdran, et al vs. Celdran, et al, 19
SCRA. 502) or where the error is patent for the order is void, (Iligan Electric Light Co. vs.
Public Service Commission, 10 SCRA 46; Matute vs. Court of Appeals, 26 SCRA 768; Locsin
vs. Limaco, 26 SCRA 816) or where the relief is extremely urgent, as in cases where execution
had already been ordered, (Suco vs. Vda. de Leary, 12 SCRA 326) where the issue raised is
one purely of law (Central Bank of the Philippines vs. Cloribel, 44 SCRA 307) In the case at
bar, the records show that not only was a writ of execution issued but petitioner's properties
were already scheduled to be sold at public auction on April 2, 1980 at 10:00 a.m. The records
likewise show that petitioner's motion for reconsideration of the questioned Order of Execution
was filed on March 17, 1980 and was set for hearing on March 25, 1980 at 8:30 a.m., but upon
motion of private respondent the hearing was reset to April 2, 1980 at 8:30 a.m., the very same
day when petitioner's properties were to be sold at public auction. Needless to state that under
the circumstances, petitioner was faced with imminent danger of his properties being
immediately sold the moment his motion for reconsideration is denied. Plainly, urgency
prompted recourse to the Court of Appeals and the adequate and speedy remedy for petitioner
under the situation was to file a petition for certiorari with prayer for restraining order to stop
the sale. For him to wait until after the hearing of the motion for reconsideration on April 2,
1980 before taking recourse to the appellate court may already be too late since without a
restraining order, the public sale can proceed at 10:00 that morning.

2. CIVIL LAW; OBLIGATIONS AND CONTRACT; NATURE OF LIABILITY; MEANING

OF INDIVIDUALLY AND JOINTLY." Clearly then, by the express term of the
compromise agreement and the decision based upon it, the defendants obligated themselves to
pay their obligation "individually and jointly." The term "individually" has the same meaning
as collectively, " "separately," "distinctively," respectively or "severally." An agreement to be
"individually liable" undoubtedly creates a several obligation, (21 Words & Phrases,.
Permanent Ed., p. 194) and a "several obligation" is one by which one individual binds himself
to perform the whole obligation (39 Words & Phrases, Permanent Ed., p. 72). In the case of
Parot vs.
Gemora,
(7
Phil.
94,
97),
We
therein.,
ruled
that
"the
phrase juntos or separadamente used in the promissory note is an express statement making
each of the persons who signed it individually liable for the payment of the full amount of the
obligation contained therein." Likewise in Un Pak Leung vs. Negorra, (9 Phil. 381), We held
that "in the absence of a finding of facts that the defendants made themselves individually
liable for the debt incurred they are each liable only for one-half of said amount". The
obligation in the case at bar being described as "individually and jointly", the same is therefore
enforceable against one of the numerous obligors.

DECISION

CUEVAS, J p:
This is a petition to review the Resolution dated June 30, 1980 of the then Court of Appeals
(now the Intermediate Appellate Court) in CA-G.R. No. SP-10573, entitled "Ernesto V.
Ronquillo versus the Hon. Florellana Castro-Bartolome, etc." and the Order of said court dated
August 20, 1980, denying petitioner's motion for reconsideration of the above resolution.
Petitioner Ernesto V. Ronquillo was one of four (4) defendants in Civil Case No. 33958 of the
then Court of First Instance of Rizal (now the Regional Trial Court), Branch XV filed by
private respondent Antonio P. So, on July 23, 1979, for the collection of the sum of
P117,498.98 plus attorney's fees and costs. The other defendants were Offshore Catertrade,
Inc., Johnny Tan and Pilar Tan. The amount of P117,498.98 sought to be collected represents
the value of the checks issued by said defendants in payment for foodstuffs delivered to and
received by them. The said checks were dishonored by the drawee bank.
On December 13, 1979, the lower court rendered its Decision 1 based on the compromise
agreement submitted by the parties, the pertinent portion of which reads as follows:
"1. Plaintiff agrees to reduce its total claim of P117,498.95 to only
P110,000.00 and defendants agree to acknowledge the validity of
such claim and further bind themselves to initially pay out of the total
indebtedness of P110,000.00 the amount of P55,000.00 on orbefore
December
24,
1979, the
balance
of
P55,000.00,
defendants individually and jointly agree to pay within a period of six

370
months from January 1980, or before June 30, 1980; (Emphasis
supplied)
xxx xxx xxx
4. That both parties agree that failure on the part of either party to
comply with the foregoing terms and conditions, the innocent party
will be entitled to an execution of the decision based on this
compromise agreement and the defaulting party agrees and hold
themselves to reimburse the innocent party for attorney's fees,
execution fees and other fees related with the execution.
xxx xxx xxx"
On December 26, 1979, herein private respondent (then plaintiff) filed a Motion for Execution
on the ground that defendants failed to make the initial payment of P55,000.00 on or before
December 24, 1979 as provided in the Decision. Said motion for execution was opposed by
herein petitioner (as one of the defendants) contending that his inability to make the payment
was due to private respondent's own act of making himself scarce and inaccessible on
December 24, 1979. Petitioner then prayed that private respondent be ordered to accept his
payment in the amount of P13,750.00. 2
During the hearing of the Motion for Execution and the Opposition thereto on January 16,
1980, petitioner, as one of the four defendants, tendered the amount of P13,750.00, as his pro
rata share in the P55,000.00 initial payment. Another defendant, Pilar P. Tan, offered to pay the
same amount. Because private respondent refused to accept their payments, demanding from
them the full initial installment of P55,000.00, petitioner and Pilar Tan instead deposited the
said amount with the Clerk of Court. The amount deposited was subsequently withdrawn by
private respondent. 3
On the same day, January 16, 1980, the lower court ordered the issuance of a writ of execution
for the balance of the initial amount payable, against the other two defendants, Offshore
Catertrade, Inc. and Johnny Tan, 4 who did not pay their shares.
On January 22, 1980, private respondent moved for the reconsideration and/or modification of
the aforesaid Order of execution and prayed instead for the "execution of the decision in its
entirety against all defendants, jointly and severally." 5 Petitioner opposed the said motion
arguing that under the decision of the lower court being executed which has already become
final, the liability of the four (4) defendants was not expressly declared to be solidary,
consequently each defendant is obliged to pay only his own pro-rata or 1/4 of the amount due
and payable.
On March 17, 1980, the lower court issued an Order reading as follows:
"O R D E R
Regardless of whatever the compromise agreement has intended the
payment whether jointly or individually, or jointly and severally, the
fact is that only P27,500.00 has been paid. There appears to be a nonpayment in accordance with the compromise agreement of the
amount of P27,500.00 on or before December 24, 1979. The parties
are reminded that the payment is condition sine qua non to the lifting

of the preliminary attachment and the execution of an affidavit of

desistance.
WHEREFORE, let writ of execution issue as prayed for."
On March 17, 1980, petitioner moved for the reconsideration of the above order, and the same
was set for hearing on March 25, 1980.
Meanwhile, or more specifically on March 19, 1980, a writ of execution was issued for the
satisfaction of the sum of P82,500.00 as against the properties of the defendants (including
petitioner), "singly or jointly liable." 6
On March 20, 1980, Special Sheriff Eulogio C. Juanson of Rizal, issued a notice of sheriff's
sale, for the sale of certain furnitures and appliances found in petitioner's residence to satisfy
the sum of P82,500.00. The public sale was scheduled for April 2, 1980 at 10:00 a.m. 7
Petitioner's motion for reconsideration of the Order of Execution dated March 17, 1980 which
was set for hearing on March 25, 1980, was upon motion of private respondent reset to April 2,
1980 at 8:30 a.m. Realizing the actual threat to his property rights poised by the re-setting of
the hearing of his motion for reconsideration for April 2, 1980 at 8:30 a.m. such that if his
motion for reconsideration would be denied he would have no more time to obtain a writ from
the appellate court to stop the scheduled public sale of his personal properties at 10:00 a.m. of
the same day, April 2, 1980, petitioner filed on March 26, 1980 a petition for certiorari and
prohibition with the then Court of Appeals (CA-G.R. No. SP-10573), praying at the same time
for the issuance of a restraining order to stop the public sale. He raised the question of the
validity of the order of execution, the writ of execution and the notice of public sale of his
properties to satisfy fully the entire unpaid obligation payable by all of the four (4) defendants,
when the lower court's decision based on the compromise agreement did not specifically state
the liability of the four (4) defendants to be solidary.

On April 2, 1980, the lower court denied petitioner's motion for reconsideration but the
scheduled public sale in that same day did not proceed in view of the pendency of a certiorari
proceeding before the then Court of Appeals.
On June 30, 1980, the said court issued a Resolution, the pertinent portion of which reads as
follows:
"This Court, however, finds the present petition to have been filed
prematurely. The rule is that before a petition for certiorari can be
brought against an order of a lower court, all remedies available in
that court must first be exhausted. In the case at bar, herein petitioner
filed a petition without waiting for a resolution of the Court on the
motion for reconsideration, which could have been favorable to the
petitioner. The fact that the hearing of the motion for reconsideration
had been reset on the same day the public sale was to take place is of
no moment since the motion for reconsideration of the Order of
March 17, 1980 having been seasonably filed, the scheduled public
sale should be suspended. Moreover, when the defendants, including
herein petitioner, defaulted in their obligation based on the

371
compromise agreement, private respondent had become entitled to
move for an execution of the decision based on the said agreement.

relief is extremely urgent, as in cases where execution had already been ordered 12 where the
issue raised is one purely of law. 13

WHEREFORE, the instant petition for certiorari and prohibition with

preliminary injunction is hereby denied due course. The restraining
order issued in our resolution dated April 9, 1980 is hereby lifted
without pronouncement as to costs.

In the case at bar, the records show that not only was a writ of execution issued but petitioner's
properties were already scheduled to be sold at public auction on April 2, 1980 at 10:00 a.m.
The records likewise show that petitioner's motion for reconsideration of the questioned Order
of Execution was filed on March 17, 1980 and was set for hearing on March 25, 1980 at 8:30
a.m., but upon motion of private respondent, the hearing was reset to April 2, 1980 at 8:30
a.m., the very same day when petitioner's properties were to be sold at public auction. Needless
to state that under the circumstances, petitioner was faced with imminent danger of his
properties being immediately sold the moment his motion for reconsideration is denied.
Plainly, urgency prompted recourse to the Court of Appeals and the adequate and speedy
remedy for petitioner under the situation was to file a petition for certiorari with prayer for
restraining order to stop the sale. For him to wait until after the hearing of the motion for
reconsideration on April 2, 1980 before taking recourse to the appellate court may already be
too late since without a restraining order, the public sale can proceed at 10:00 that morning. In
fact, the said motion was already denied by the lower court in its order dated April 2, 1980 and
were it not for the pendency of the petition with the Court of Appeals and the restraining order
issued thereafter, the public sale scheduled that very same morning could have proceeded.

SO ORDERED."
Petitioner moved to reconsider the aforesaid Resolution alleging that on April 2, 1980, the
lower court had already denied the motion referred to and consequently, the legal issues being
raised in the petition were already "ripe" for determination. 8 The said motion was however
denied by the Court of Appeals in its Resolution dated August 20, 1980.
Hence, this petition for review, petitioner contending that the Court of Appeals erred in
(a) declaring as premature, and in denying due course to the petition to restrain implementation
of a writ of execution issued at variance with the final decision of the lower court filed barely
four (4) days before the scheduled public sale of the attached movable properties;
(b) denying reconsideration of the Resolution of June 30, 1980, which declared as premature
the filing of the petition, although there is proof on record that as of April 2, 1980, the motion
referred to was already denied by the lower court and there was no more motion pending
therein;
(c) failing to resolve the legal issues raised in the petition and in not declaring the liabilities of
the defendants, under the final decision of the lower court, to be only joint;
(d) not holding the lower court's order of execution dated March 17, 1980, the writ of
execution and the notice of sheriff's sale, executing the lower court's decision against "all
defendants, singly and jointly", to be at variance with the lower court's final decision which did
not provide for solidary obligation; and
(e) not declaring as invalid and unlawful the threatened execution, as against the properties of
petitioner who had paid his pro-rata share of the adjudged obligation, of the total unpaid
amount payable by his joint co-defendants.
The foregoing assigned errors maybe synthesized into the more important issues of
1. Was the filing of a petition for certiorari before the then Court of Appeals against the Order
of Execution issued by the lower court, dated March 17, 1980, proper, despite the pendency of
a motion for reconsideration of the same questioned Order?
2. What is the nature of the liability of the defendants (including petitioner), was it merely
joint, or was it several or solidary?
Anent the first issue raised, suffice it to state that while as a general rule, a motion for
reconsideration should precede recourse to certiorari in order to give the trial court an
opportunity to correct the error that it may have committed, the said rule is not absolute 9 and
may be dispensed with in instances where the filing of a motion for reconsideration would
serve no useful purpose, such as when the motion for reconsideration would raise the same
point stated in the motion 10 or where the error is patent for the order is void 11 or where the

The other issue raised refers to the nature of the liability of petitioner, as one of the defendants
in Civil Case No. 33958, that is whether or not he is liable jointly or solidarily. prLL
In this regard, Article 1207 and 1208 of the Civil Code provides
"Art. 1207. The concurrence of two or more debtors in one and the
same obligation does not imply that each one of the former has a right
to demand, or that each one of the latter is bound to render, entire
compliance with the prestation. There is a solidary liability only when
the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity.
Art. 1208. If from the law, or the nature or the wording of the
obligation to which the preceding article refers the contrary does not
appear, the credit or debt shall be presumed to be divided into as
many equal shares as there are creditors and debtors, the credits or
debts being considered distinct from one another, subject to the Rules
of Court governing the multiplicity of suits."
The decision of the lower court based on the parties' compromise agreement, provides:
"1. Plaintiff agrees to reduce its total claim of P117,498.95 to only
P110,000.00 and defendants agree to acknowledge the validity of
such claim and further bind themselves to initially pay out of the total
indebtedness of P110,000.00, the amount of P55,000.00 on or before
December
24,
1979,
the
balance
of
P55,000.00,
defendants individually and jointly agree to pay within a period of six
months from January 1980 or before June 30, 1980." (Emphasis
supplied)
Clearly then, by the express term of the compromise agreement and the decision based upon it,
the defendants obligated themselves to pay their obligation "individually and jointly"

372
The term "individually" has the same meaning as "collectively", "separately", "distinctively",
respectively or "severally". An agreement to be "individually liable" undoubtedly creates a
several obligation, 14 and a "several obligation" is one by which one individual binds himself
to perform the whole obligation. 15
In the case of Parot vs. Gemora 16 We therein ruled that "the phrase juntos or
separadamente used in the promissory note is an express statement making each of the persons
who signed it individually liable for the payment of the full amount of the obligation contained
therein." Likewise in Un Pak Leung vs. Negorra 17 We held that "in the absence of a finding of
facts that the defendants made themselves individually liable for the debt incurred they are
each liable only for one-half of said amount."
The obligation in the case at bar being described as "individually and jointly", the same is
therefore enforceable against one of the numerous obligors.
IN VIEW OF THE FOREGOING CONSIDERATIONS, the instant petition is hereby
DISMISSED. Cost against petitioner.
SO ORDERED.
Makasiar, Abad Santos and Escolin, JJ ., concur.
Aquino, J ., concurs in the result.
Concepcion, Jr. and Guerrero, JJ ., are on leave.
||| (Ronquillo v. Court of Appeals, G.R. No. L-55138, [September 28, 1984], 217 PHIL 269279)

373

FIRST DIVISION
[G.R. No. 93010. August 30, 1990.]
NICENCIO TAN QUIOMBING, petitioner, vs. COURT OF APPEALS,
and Sps. FRANCISCO and MANUELITA A. SALIGO, respondents.

M.B. Tomacruz Law Office for petitioner.

Jose J. Francisco for private respondents.

DECISION

CRUZ, J p:

On October 9, 1986, Quiombing filed a complaint for recovery of the said amount, plus
charges and interests, which the private respondents had acknowledged and promised to pay
but had not, despite repeated demands as the balance of the contract price for the
construction of their house. 4
Instead of filing an answer, the defendants moved to dismiss the complaint on February 4,
1987, contending that Biscocho was an indispensable party and therefore should have been
included as a co-plaintiff. The motion was initially denied but was subsequently reconsidered
and granted by the trial court. The complaint was dismissed, but without prejudice to the filing
of an amended complaint to include the other solidary creditor as a co-plaintiff. 5
Rather than file the amended complaint, Quiombing chose to appeal the order of dismissal to
the respondent court, where he argued that as a solidary creditor he could act by himself alone
in the enforcement of his claim against the private respondents. Moreover, the amounts due
were payable only to him under the second agreement, where Biscocho was not mentioned at
all. LexLib
The respondent court sustained the trial court and held that it was not correct at that point to
assume that Quiombing and Biscocho were solidary obligees only. It noted that as they had
also assumed the reciprocal obligation of constructing the house, they should also be
considered obligors of the private respondents under the contract. If, as was possible, the
answer should allege a breach of the agreement, "the trial court cannot decide the dispute
without the involvement of Biscocho whose rights will necessarily be affected since he is a part
of the First Party."

May one of the two solidary creditors sue by himself alone for the recovery of amounts due to
both of them without joining the other creditor as a co-plaintiff? In such a case, is the
defendant entitled to the dismissal of the complaint on the ground of non-joinder of the second
creditor as an indispensable party? More to the point, is the second solidary creditor an
indispensable party?

Refuting the petitioner's second contention, the respondent court declared that the "second
agreement referred to the Construction and Service Agreement as its basis and specifically
stated that it (was) merely a `part of the original agreement.'" 6

These questions were raised in the case at bar, with both the trial and respondent courts ruling
in favor of the defendants. The petitioner is now before us, claiming that the said courts
committed reversible error and misread the applicable laws in dismissing his complaint.

Distinguishing it from the joint obligation, Tolentino makes the following observations in his
distinguished work on the Civil Code:

This case stemmed from a "Construction and Service Agreement" 1 concluded on August 30,
1983, whereby Nicencio Tan Quiombing and Dante Biscocho, as the First Party, jointly and
severally bound themselves to construct a house for private respondents Francisco and
Manuelita Saligo, as the Second Party, for the contract price of P137,940.00, which the latter
agreed to pay.
On October 10, 1984, Quiombing and Manuelita Saligo entered into a second written
agreement 2 under which the latter acknowledged the completion of the house and undertook
to pay the balance of the contract price in the manner prescribed in the said second agreement.
On November 19, 1984, Manuelita Saligo signed a promissory note for P125,363.50
representing the amount still due from her and her husband, payable on or before December 31,
1984, to Nicencio Tan Quiombing. 3

The concept of the solidary obligation requires a brief restatement.

A joint obligation is one in which each of the debtors is liable only

for a proportionate part of the debt, and each creditor is entitled only
to a proportionate part of the credit. A solidary obligation is one in
which each debtor is liable for the entire obligation, and each creditor
is entitled to demand the whole obligation. Hence, in the former, each
creditor can recover only his share of the obligation, and each debtor
can be made to pay only his part; whereas, in the latter, each creditor
may enforce the entire obligation, and each debtor may be obliged to
pay it in full. 7
The same work describes the concept of active solidarity thus:
The essence of active solidarity consists in the authority of each
creditor to claim and enforce the rights of all, with the resulting
obligation of paying every one what belongs to him; there is no

374
merger, much less a renunciation of rights, but only mutual
representation. 8
It would follow from these observations that the question of who should sue the private
respondents was a personal issue between Quiombing and Biscocho in which the spouses
Saligo had no right to interfere. It did not matter who as between them filed the complaint
because the private respondents were liable to either of the two as a solidary creditor for the
full amount of the debt. Full satisfaction of a judgment obtained against them by Quiombing
would discharge their obligation to Biscocho, and vice versa; hence, it was not necessary for
both Quiombing and Biscocho to file the complaint. Inclusion of Biscocho as a co-plaintiff,
when Quiombing was competent to sue by himself alone, would be a useless formality. LibLex
Article 1212 of the Civil Code provides:
Each one of the solidary creditors may do whatever may be useful to
the others, but not anything which may be prejudice to the latter.
Suing for the recovery of the contract price is certainly a useful act that Quiombing could do by
himself alone.
Parenthetically, it must be observed that the complaint having been filed by the petitioner,
whatever amount is awarded against the debtor must be paid exclusively to him, pursuant
to Article 1214. This provision states that "the debtor may pay any of the solidary creditors; but
if any demand, judicial or extrajudicial, has been made by any one of them, payment should be
made to him."
If Quiombing eventually collects the amount due from the solidary debtors, Biscocho may later
claim his share thereof, but that decision is for him alone to make. It will affect only the
petitioner as the other solidary creditor and not the private respondents, who have absolutely
nothing to do with this matter. As far as they are concerned, payment of the judgment debt to
the complainant will be considered payment to the other solidary creditor even if the latter was
not a party to the suit.
Regarding the possibility that the private respondents might plead breach of contract in their
answer, we agree with the petitioner that it is premature to consider this conjecture for such
it is at this stage. The possibility may seem remote, indeed, since they have actually
acknowledged the completion of the house in the second agreement, where they also agreed to
pay the balance of the contract price. At any rate, the allegation, if made and proved, could still
be enforceable against the petitioner alone as one of the solidary debtors, subject to his right of
recourse against Biscocho.
The respondent court was correct in ruling that the second agreement, which was concluded
alone by the petitioner with the private respondents, was based on the original Construction
and Service Agreement. So too in fact was the promissory note later signed by Manuelita
Saligo since it was for the amount owing on the construction cost. However, this matter is not
really that important now in view of our conclusion that the complaint could have been filed
alone by the petitioner.
The rest of the pieces should easily fall into place.
Section 7, Rule 3 of the Rules of Court mandates the inclusion of indispensable parties as
follows:

Sec. 7. Compulsory joinder of indispensable parties. Parties in

interest without whom no final determination can be had of an action
shall be joined either as plaintiffs or defendants.
Indispensable parties are those with such an interest in the controversy that a final decree
would necessarily affect their rights, so that the court cannot proceed without their presence.
Necessary parties are those whose presence is necessary to adjudicate the whole controversy,
but whose interests are so far separable that a final decree can be made in their absence without
affecting them. 9 (Necessary parties are now called proper parties under the 1964 amendments
of the Rules of Court.) 10
According to Justice Jose Y. Feria, "where the obligation of the parties is solidary, either one of
the parties is indispensable, and the other is not even necessary (now proper) because complete
relief may be obtained from either." 11
We hold that, although he signed the original Construction and Service Agreement, Biscocho
need not be included as a co-plaintiff in the complaint filed by the petitioner against the private
respondents. Quiombing as solidary creditor can by himself alone enforce payment of the
construction costs by the private respondents and as a solidary debtor may by himself alone be
held liable for any possible breach of contract that may be proved by the private respondents.
In either case, the participation of Biscocho is not at all necessary, much less indispensable.
WHEREFORE, the petition is GRANTED. The decision of the respondent court dated March
27, 1990, is SET ASIDE, and the Regional Trial Court of Antipolo, Rizal, is directed to
REINSTATE Civil Case No. 913-A. Costs against the private respondents.
SO ORDERED.
Narvasa, Gancayco, Grio-Aquino and Medialdea JJ., concur.
||| (Quiombing v. Court of Appeals, G.R. No. 93010, [August 30, 1990], 267 PHIL 376-383)

375

SECOND DIVISION
[G.R. No. 96405. June 26, 1996.]
BALDOMERO INCIONG, JR., petitioner, vs. COURT
APPEALS
and
PHILIPPINE
BANK
COMMUNICATIONS, respondents.

OF
OF

difference between a solidary co-debtor, and a fiador in solidum (surety). The latter, outside of
the liability he assumes to pay the debt before the property of the principal debtor has been
exhausted, retains all the other rights, actions and benefits which pertain to him by reason of
the fiansa; while a solidary co-debtor has no other rights than those bestowed upon him in
Section 4, Chapter 3, Title I, Book IV of the Civil Code." [TOLENTINO, CIVIL CODE OF
THE PHILIPPINES, Vol. V, 1992 ed., p. 502]

DECISION
Emilio G. Abrogena for petitioner.
Teogenes X. Velez for private respondent.

ROMERO, J p:
SYLLABUS

1.REMEDIAL LAW; EVIDENCE; PAROL EVIDENCE RULE; DOES NOT SPECIFY THAT
THE WRITTEN AGREEMENT BE A PUBLIC INSTRUMENT. Clearly, the rule does not
specify that the written agreement be a public document. What is required is that the agreement
be in writing as the rule is in fact founded on "long experience that written evidence is so much
more certain and accurate than that which rests in fleeting memory only, that it would be
unsafe, when parties have expressed the terms of their contract in writing, to admit weaker
evidence to control and vary the stronger and to show that the parties intended a different
contract from that expressed in the writing signed by them" [FRANCISCO, THE RULES OF
COURT OF THE PHILIPPINES, Vol. VII, Part I, 1990 ed., p. 179] Thus, for the parol
evidence rule to apply, a written contract need not be in any particular form, or be signed by
both parties. As a general rule, bills, notes and other instruments of a similar nature are not
subject to be varied or contracted by parol or extrinsic evidence.
2.CIVIL LAW; OBLIGATIONS; SOLIDARY OR JOINT AND SEVERAL OBLIGATION,
DEFINED. A solidary or joint and several obligation is one in which each debtor is liable
for the entire obligation, and each creditor is entitled to demand the whole obligation.
[TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol. IV, 1991 ed., p. 217] Section 4,
Chapter 3, Title I, Book IV of the Civil Code states the law on joint and several obligations.
Under Art. 1207 thereof, when there are two or more debtors in one and the same obligation,
the presumption is that the obligation is joint so that each of the debtors is liable only for the
proportionate part of the debt. There is a solidary liability only when the obligation expressly
so states, when the law so provides or when the nature of the obligation so requires. [ Sesbreo
v. Court of Appeals, G.R. No. 89252, May 24, 1993, 222 SCRA 466, 481.]
3.ID.; GUARANTY; GUARANTOR AS DISTINGUISHED FROM SOLIDARY DEBTOR.
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains: "A guarantor
who binds himself in solidum with the principal debtor under the provisions of the second
paragraph does not become a solidary co-debtor to all intents and purposes. There is a

This is a petition for review on certiorari of the decision of the Court of

Appeals affirming that of the Regional Trial Court of Misamis Oriental, Branch
18, 1 which disposed of Civil Case No. 10507 for collection of a sum of money and
damages, as follows:
"WHEREFORE, defendant BALDOMERO L. INCIONG, JR. is
adjudged solidarily liable and ordered to pay to the plaintiff
Philippine Bank of Communications, Cagayan de Oro City, the
amount of FIFTY THOUSAND PESOS (P50,000.00), with interest
thereon from May 5, 1983 at 16% per annum until fully paid; and 6%
per annum on the total amount due, as liquidated damages or penalty
from May 5, 1983 until fully paid; plus 10% of the total amount due
for expenses of litigation and attorney's fees; and to pay the costs.
The counterclaim, as well as the cross claim, are dismissed for lack of
merit.
SO ORDERED."
Petitioner's liability resulted from the promissory note in the amount of
P50,000.00 which he signed with Rene C. Naybe and Gregorio D. Pantanosas on
February 3, 1983, holding themselves jointly and severally liable to private respondent
Philippine Bank of Communications, Cagayan de Oro City branch. The promissory note
was due on May 5, 1983.
Said due date expired without the promissors having paid their obligation.
Consequently, on November 14, 1983 and on June 8, 1984, private respondent sent
petitioner telegrams demanding payment thereof. 2 On December 11, 1984 private
respondent also sent by registered mail a final letter of demand to Rene C. Naybe. Since
both obligors did not respond to the demands made, private respondent filed on January
24, 1986 a complaint for collection of the sum of P50,000.00 against the three obligors.
On November 25, 1986, the complaint was dismissed for failure of the
plaintiff to prosecute the case. However, on January 9, 1987, the lower court reconsidered

376
the dismissal order and required the sheriff to serve the summonses. On January 27,
1987, the lower court dismissed the case against defendant Pantanosas as prayed for by
the private respondent herein. Meanwhile, only the summons addressed to petitioner was
served as the sheriff learned that defendant Naybe had gone to Saudi Arabia.
In his answer, petitioner alleged that sometime in January 1983, he was
approached by his friend, Rudy Campos, who told him that he was a partner of Pio Tio,
the branch manager of private respondent in Cagayan de Oro City, in the falcata logs
operation business. Campos also intimated to him that Rene C. Naybe was interested in
the business and would contribute a chainsaw to the venture. He added that, although
Naybe had no money to buy the equipment, Pio Tio had assured Naybe of the approval of
a loan he would make with private respondent. Campos then persuaded petitioner to act
as a "co-maker" in the said loan. Petitioner allegedly acceded but with the understanding
that he would only be a co-maker for the loan of P5,000.00.
Petitioner alleged further that five (5) copies of a blank promissory note were
brought to him by Campos at his office. He affixed his signature thereto but in one copy,
he indicated that he bound himself only for the amount of P5,000.00. Thus, it was by
trickery, fraud and misrepresentation that he was made liable for the amount of
P50,000.00.
In the aforementioned decision of the lower court, it noted that the typewritten
figure "P50,000-" clearly appears directly below the admitted signature of the petitioner
in the promissory note. 3 Hence, the latter's uncorroborated testimony on his limited
liability cannot prevail over the presumed regularity and fairness of the transaction, under
Sec. 5 (q) of Rule 131. The lower court added that it was "rather odd" for petitioner to
have indicated in a copy and not in the original, of the promissory note, his supposed
obligation in the amount of P5,000.00 only. Finally, the lower court held that, even
granting that said limited amount had actually been agreed upon, the same would have
been merely collateral between him and Naybe and, therefore, not binding upon the
private respondent as creditor-bank.
The lower court also noted that petitioner was a holder of a Bachelor of Laws
degree and a labor consultant who was supposed to take due care of his concerns, and
that, on the witness stand, Pio Tio denied having participated in the alleged business
venture although he knew for a fact that the falcata logs operation was encouraged by the
bank for its export potential.
Petitioner appealed the said decision to the Court of Appeals which, in its
decision of August 31, 1990, affirmed that of the lower court. His motion for
reconsideration of the said decision having been denied, he filed the instant petition for
review on certiorari.
On February 6, 1991, the Court denied the petition for failure of petitioner to
comply with the Rules of Court and paragraph 2 of Circular No. 1-88, and to sufficiently
show that respondent court had committed any reversible error in its questioned
decision. 4 His motion for the reconsideration of the denial of his petition was likewise
denied with finality in the Resolution of April 24, 1991. 5 Thereafter, petitioner filed a
motion for leave to file a second motion for reconsideration which, in the Resolution of
May 27, 1991, the Court denied. In the same Resolution, the Court ordered the entry of
judgment in this case. 6
Unfazed, petitioner filed a motion for leave to file a motion for clarification.
In the latter motion, he asserted that he had attached Registry Receipt No. 3268 to page

14 of the petition in compliance with Circular No. 1-88. Thus, on August 7, 1991, the
Court granted his prayer that his petition be given due course and reinstated the same. 7
Nonetheless, we find the petition unmeritorious.
Annexed to the petition is a copy of an affidavit executed on May 3, 1988, or
after the rendition of the decision of the lower court, by Gregorio Pantanosas, Jr., an
MTCC judge and petitioner's co-maker in the promissory note. It supports petitioner's
allegation that they were induced to sign the promissory note on the belief that it was
only for P5,000.00, adding that it was Campos who caused the amount of the loan to be
increased to P50,000.00.
The affidavit is clearly intended to buttress petitioner's contention in the
instant petition that the Court of Appeals should have declared the promissory note null
and void on the following grounds: (a) the promissory note was signed in the office of
Judge Pantanosas, outside the premises of the bank; (b) the loan was incurred for the
purpose of buying a second-hand chainsaw which cost only P5,000.00; (c) even a new
chainsaw would cost only P27,500.00; (d) the loan was not approved by the board or
credit committee which was the practice, at it exceeded P5,000.00; (e) the loan had no
collateral; (f) petitioner and Judge Pantanosas were not present at the time the loan was
released in contravention of the bank practice, and (g) notices of default are sent
simultaneously and separately but no notice was validly sent to him. 8Finally, petitioner
contends that in signing the promissory note, his consent was vitiated by fraud as,
contrary to their agreement that the loan was only for the amount of P5,000.00, the
promissory note stated the amount of P50,000.00.
The above-stated points are clearly factual. Petitioner is to be reminded of the
basic rule that this Court is not a trier of facts. Having lost the chance to fully ventilate
his factual claims below, petitioner may no longer be accorded the same opportunity in
the absence of grave abuse of discretion on the part of the court below. Had he presented
Judge Pantanosas' affidavit before the lower court, it would have strengthened his claim
that the promissory note did not reflect the correct amount of the loan.
Nor is there merit in petitioner's assertion that since the promissory note "is
not a public deed with the formalities prescribed by law but . . . a mere commercial paper
which does not bear the signature of . . . attesting witnesses," parol evidence may
"overcome" the contents of the promissory note. 9 The first paragraph of the parol
evidence rule 10 states:
"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."
Clearly, the rule does not specify that the written agreement be a public document.
What is required is that agreement be in writing as the rule is in fact founded
on "long experience that written evidence is so much more certain and accurate than that
which rests in fleeting memory only, that it would be unsafe, when parties have expressed
the terms of their contract in writing, to admit weaker evidence to control and vary the
stronger and to show that the parties intended a different contract from that expressed in
the writing signed by them." 11 Thus, for the parol evidence rule to apply, a written

377
contract need not be in any particular form, or be signed by both parties. 12 As a general
rule, bills, notes and other instruments of a similar nature are not subject to be varied or
contradicted by parol or extrinsic evidence. 13
By alleging fraud in his answer, 14 petitioner was actually in the right
direction towards proving that he and his co-makers agreed to a loan of P5,000.00 only
considering that, where a parol contemporaneous agreement was the inducing and
moving cause of the written contract, it may be shown by parol evidence. 15 However,
fraud must be established by clear and convincing evidence, mere preponderance of
evidence, not even being adequate. 16 Petitioner's attempt to prove fraud must, therefore,
fail as it was evidenced only by his own uncorroborated and, expectedly, self-serving
testimony.
Petitioner also argues that the dismissal of the complaint against Naybe, the
principal debtor, and against Pantanosas, his co-maker, constituted a release of his
obligation, especially because the dismissal of the case against Pantanosas was upon the
motion of private respondent itself. He cites as basis for his argument, Article 2080 of the
Civil Code which provides that:
"The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor, they cannot be
subrogated to the rights, mortgages, and preferences of the latter."
It is to be noted, however, that petitioner signed the promissory note as a
solidary co-maker and not as a guarantor. This is patent even from the first sentence of
the promissory note which states as follows:
"Ninety one (91) days after date, for value received, I/we, JOINTLY
and SEVERALLY promise to pay to the PHILIPPINE BANK OF
COMMUNICATIONS at its office in the City of Cagayan de Oro,
Philippines the sum of FIFTY THOUSAND ONLY (P50,000.00)
Pesos, Philippine Currency, together with interest . . . at the rate of
SIXTEEN (16) per cent per annum until fully paid."
A solidary or joint and several obligation is one in which each debtor is liable
for the entire obligation, and each creditor is entitled to demand the whole
obligation. 17 On the other hand, Article 2047 of the Civil Code states:
"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 a case the contract is called a suretyship."
(Emphasis supplied.)
While a guarantor may bind himself solidarily with the principal debtor, the liability of a
guarantor is different from that of a solidary debtor. Thus, Tolentino explains:
"A guarantor who binds himself in solidum with the principal debtor
under the provisions of the second paragraph does not become a
solidary co-debtor to all intents and purposes. There is a difference
between a solidary co-debtor, and a fiador in solidum (surety). The
later, outside of the liability he assumes to pay the debt before the

property of the principal debtor has been exhausted, retains all the
other rights, actions and benefits which pertain to him by reason of
the fianza; while a solidary co-debtor has no other rights than those
bestowed upon him in Section 4, Chapter 3, title I, Book IV of the
Civil Code." 18
Section 4, Chapter 3, Title I, Book IV of the Civil Code states the law on joint
and several obligations. Under Art. 1207 thereof, when there are two or more debtors in
one and the same obligation, the presumption is that the obligation is joint so that each of
the debtors is liable only for a proportionate part of the debt. There is a solidary liability
only when the obligation expressly so states, when the law so provides or when the nature
of the obligation so requires. 19
Because the promissory note involved in this case expressly states that the
three signatories therein are jointly and severally liable, any one, some or all of them may
be proceeded against for the entire obligation. 20 The choice is left to the solidary
creditor to determine against whom he will enforce collection. 21 Consequently, the
dismissal of the case against Judge Pontanosas may not be deemed as having discharged
petitioner from liability as well. As regards Naybe, suffice it to say that the court never
acquired jurisdiction over him. Petitioner, therefore, may only have recourse against his
co-makers, as provided by law.
WHEREFORE, the instant petition for review on certiorari is hereby DENIED
and the questioned decision of the Court of Appeals is AFFIRMED. Costs against
petitioner.
SO ORDERED.
Regalado, Puno, Mendoza and Torres, JJ ., concur.
||| (Inciong, Jr. v. Court of Appeals, G.R. No. 96405, [June 26, 1996], 327 PHIL 364-374)

378

SECOND DIVISION
[G.R. No. L-32162. September 28, 1984.]
THE PASAY CITY GOVERNMENT, THE CITY MAYOR OF
DEFENDANT PASAY CITY GOVERNMENT, THE MEMBERS
OF THE MUNICIPAL BOARD OF PASAY CITY and THE
CITY
TREASURER
OF
PASAY
CITY
GOVERNMENT, petitioners-appellants, vs. THE HONORABLE
COURT OF FIRST INSTANCE OF MANILA, BRANCH X and
VICENTE DAVID ISIP (doing business under the firm name V.D.
ISIP SONS & ASSOCIATES), respondents-appellees.

Enrico R. Castro for petitioners-appellants.

Lorenzo D. Fuggan and F . V . Castillo for respondents-appellees.

supplemental complaint filed by the respondent-appellee for by then the respondent Court had
no more jurisdiction over the subject matter. When a decision has become final and executory,
the court no longer has the power and jurisdiction to alter, amend or revoke, and its only power
thereof is to order its execution.
4. ID.; ID.; PLEADINGS AND PRACTICE; SUPPLEMENTAL PLEADINGS; PURPOSE
THEREOF NEGATES FILING OF SUPPLEMENTAL COMPLAINT IN CASE AT BAR.
Moreover, supplemental pleadings are meant to supply deficiencies in aid of original pleading,
not to entirely substitute the latter (British Traders' Insurance Co., Ltd. vs. Commissioner of
Internal Revenue, L-20501, 13 SCRA 719, 728 [April 30, 1965]). Here, the respondentappellee originally asked for specific performance which was later settled through a
compromise agreement. After this, the respondent-appellee asked for rescission of both the
contract and agreement and the compromise agreement using a supplemental complaint. It is
clear that the supplemental complaint We have before Us is not only to "supply deficiencies in
aid of original pleading" but is also meant as an entirely new "substitute" to the latter. A
supplemental complaint must be consistent with and in aid of, the cause of action set forth in
the original complaint and a new and independent cause of action cannot be set up by such
complaint (Bishop vs. Taylor, 210 App. Div. 1, 205 NYS 653), especially where judgment has
already been obtained by him in the original action.

SYLLABUS
1. CIVIL LAW; CONTRACTS; COMPROMISE AGREEMENT; NATURE. A compromise
agreement not contrary to law, public order, public policy, morals or good customs is a valid
contract which is the law between the parties themselves (Municipal Board of Cabanatuan
City vs. Samahang Magsasaka, Inc., 62 SCRA 435). A judgment on a compromise is final and
executory (Samonte vs. Samonte, 64 SCRA 524). It is immediately executory (Pamintuan vs.
Muoz, et al., L-26331, 22 SCRA 1109 [March 15, 1968]) in the absence of a motion to set the
same aside on the ground of fraud, mistake or duress (Cadano vs. Cadano, L-34998, 49 SCRA
33 [January 11, 1973]).
2. ID.; ID.; ID.; PARTIES TO A COMPROMISE AGREEMENT CANNOT AVAIL OF BOTH
OPTIONS PROVIDED IN ART. 2041, CIVIL CODE; CASE AT BAR. It is clear from the
language of the law, specifically Article 2041 of the New Civil Code that one of the parties to a
compromise has two options: 1) to enforce the compromise; or 2) to rescind the same and insist
upon his original demand. The respondent-appellee in the case herein before Us wants to avail
of both of these options. This cannot be done. The respondent-appellee cannot ask for
rescission of the compromise agreement after it has already enjoyed the first option of
enforcing the compromise by asking for a writ of execution resulting thereby in the
garnishment of the Pasay City funds deposited with the Philippine National Bank which
eventually was delivered to the respondent-appellee.
3. REMEDIAL LAW; CIVIL PROCEDURE; JUDGMENTS; COURTS LOSE
JURISDICTION TO ALTER OR AMEND DECISIONS UPON FINALITY THEREOF.
Having established that the compromise agreement was final and immediately executory, and
in fact was already enforced, the respondent Court was in error when it still entertained the

DECISION

MAKASIAR, J p:
This is a petition for review on certiorari of the order rendered by the Court of First Instance of
Manila, Branch X, presided by Honorable Judge Jose L. Moya on July 23, 1969, the
dispositive portion of which is as follows:
"WHEREFORE, the motions for reconsideration, dated July 21 and
July 22, 1969, are denied and it is ordered once more that the writ of
execution as well as of garnishment already issued be enforced by
taking possession of the amount of P613,096.00 from the deposits of
the Pasay City government in the branch of the Philippine National
Bank in Pasay City and delivering them to the plaintiff.
"SO ORDERED" (p. 78, rec.).
on the ground, among others, that:
xxx xxx xxx
"It is further argued that under the compromise, the plaintiff is
required to submit a performance bond upon the approval thereof and
that he has not yet done so. At the hearing of the motion of June 21, it

379
was in the amount of P60,000.00 which was thereafter increased to
P100,000.00 to make it equal to 20% of the cost of the next stage of
the construction to be undertaken by the plaintiff. This is a sufficient
compliance. Since the work is to be undertaken by stages, it would be
unreasonable to compel the plaintiff to submit a performance bond
equal to the cost of the entire project, it not being known when the
City of Pasay shall have the funds for the completion thereof and it
claims it does not even have money to pay for the phase of the work
finished years ago. Besides, there is nothing in the compromise which
makes the submission of the bond a condition precedent to the
payment of P613,096.00 to the plaintiff" (p. 76, rec.).
On August 12, 1964, respondent-appellee V.D. Isip, Sons & Associates represented by Vicente
David Isip entered into a contract with the City of Pasay represented by the then Mayor Pablo
Cuneta. The contract entitled "Contract and Agreement" was for the construction of a new
Pasay City Hall at F.B. Harrison St., Pasay City. Pertinent provision of the said contract is as
follows:
xxx xxx xxx
"Whereas one of the conditions set forth in the proposal is that the
Contractor shall start the construction of the Pasay City Hall Building
as per plans and specifications by stages advancing the necessary
amount needed for each stage of work and the Party of the First Part
(Pasay City) to reimburse the amount spent on the work accomplished
by the Contractor before proceeding on the next stage . . .
xxx xxx xxx
"2. That the work shall be done in stages to be determined by the City
Engineer considering structural and functional criteria and consistent
with funds immediately available for the purpose; . . .
"3. That the Contractor shall advance the necessary amount needed
for each stage of work; Provided that the Contractor, shall before
starting each stage of work, inform the First Party in writing as to the
amount necessary to be advanced by the former; . . .
"4. That the Party of the First Part shall reimburse the Contractor the
cost of the work completed as estimated by the City Engineer for each
stage of work before the Contractor proceed to the next stage; . . . "
(pp. 33-34, rec.).
Pursuant to the aforesaid contract, the respondent-appellee proceeded with the construction of
the new Pasay City Hall building as per duly approved plans and specifications. The
respondent-appellee accomplished under various stages of construction the amount of work
(including supplies and materials) equivalent to an estimated value of ONE MILLION SEVEN
HUNDRED THIRTEEN THOUSAND NINETY SIX PESOS (P1,713,096.00) of the total
contract price of FOUR MILLION NINE HUNDRED FOURTEEN THOUSAND FIVE
HUNDRED 80/100 PESOS (P4,914,500.80).
The appellants paid only the total amount of ONE MILLION ONE HUNDRED THOUSAND
PESOS (P1,100,000.00) to the respondent-appellee leaving an amount of SIX HUNDRED

THIRTEEN THOUSAND NINETY SIX PESOS (P613,096.00) immediately due from the
petitioner-appellants to the respondent-appellee.
Notwithstanding demands for payment thereof, the petitioner-appellants failed to remit the
aforesaid amount of P613,096.00 to the respondent-appellee.
On May 16, 1968, respondent appellee filed an action for specific performance with damages
against herein petitioners-appellants before the respondent Court.
On May 23, 1968, the appellants filed a motion for the amendment of the complaint and for bill
of particulars (p. 9, Appellant's Brief; p. 159, rec.). This was denied by the respondent Court.
The appellants later filed a motion for reconsideration. This was likewise denied. On August
10, 1968, the appellants filed their answer.
The parties arrived at a draft of amicable agreement which was submitted to the Municipal
Board of Pasay City for its consideration. Protracted pre-trial hearings and conferences were
held where the respondent Court suggested and advised that "under the principle of quantum
meruit, the plaintiff is forthwith entitled to at least that which is due to him for defendants
under the contract and that public interest must perforce require the continuity of construction
of a public work project, instead of delaying its immediate completion by litigating upon
technical grounds which would undoubtedly redound to public detriment" (p. 40, rec.).
On February 25, 1969, the Municipal Board of Pasay enacted Ordinance No. 1012 which
approved the Compromise Agreement and also authorized and empowered the incumbent City
Mayor Jovito Claudio to represent the appellant Pasay City Government, subject to the final
approval of the respondent Court herein.
On March 12, 1969, the respondent Court approved the said Compromise Agreement including
a Manifestation and Addendum thereto. Relevant provisions of the said compromise agreement
are as follows:
"1. That the contract and agreement, Annex 'A' hereof, dated August
12, 1964 . . . is hereby formally confirmed and officially approved by
the parties hereto, subject to the following changes and/or
modification only:
xxx xxx xxx
"B. That immediately upon final approval hereof by this Honorable
Court, the plaintiff contractor will submit and file in favor of Pasay
City Government a new performance bond in the amount required by
pertinent law, rules and regulations, in proportion to the remaining
value or cost of the unfinished work of the construction as per
approved plans and specifications . . .

xxx xxx xxx

"D. That if and when warranted by the finances and income of the
Pasay City Government and subject to the pertinent and applicable
government auditing and accounting rules and procedure, the plaintiff
contractor shall without delay finish and complete the construction as

380
per attached plans and specifications . . . within a period of one (1)
year from the date of final approval of this compromise agreement by
this Honorable Court, provided, however that in any case or event the
construction herein contemplated shall not extend beyond one and a
half (1 1/2) years from the date of the final approval hereof by this
Honorable Court;
xxx xxx xxx
"2. That within a reasonable period of time, at least ninety (90) days
from the final approval of this Compromise Agreement by this
Honorable Court, the defendant Pasay City Government shall pay and
remit the amount of SIX HUNDRED THIRTEEN THOUSAND
NINETY-SIX PESOS (P613,096.00) . . . to the plaintiff contractor,
who, in turn, immediately upon receipt thereof, shall be bound and
obliged to commence and start the construction work corresponding
to the next stage thereof;
"3. That within a similar period, the defendant Pasay City
Government shall pay and remit to plaintiff contractor an amount
equivalent to three (3%) per cent of the abovementioned amount of
SIX HUNDRED THIRTEEN THOUSAND NINETY-SIX PESOS
(P613,096.00), for and as adverse attorney's fees in this case;
"4. That any and all other claims of plaintiff contractor in its
complaint relative to and arising out of the contract, Annex 'A' hereof,
are hereby waived and relinquished and the case against the
defendants City Mayor, Jovito O. Claudio, City Treasurer and
Members of the Municipal Board of Pasay City, either in their official
or personal capacities, are hereby likewise waived, relinquished and
dismissed with prejudice;
"5. That any willful, gross, deliberate and wanton violation and/or
avoidance of the terms and conditions of this Compromise Agreement
by either of the parties herein shall, with due notice, forthwith entitle
the aggrieved party to an immediate execution hereof and to the
necessary and corresponding reliefs and remedies therefor" (pp. 4346, rec.).
On April 10, 1969, the appellants filed an urgent motion seeking a declaration of legality of the
original contract and agreement dated August 4, 1964 from the respondent Court. On May 10,
1969, the respondent Court issued an order declaring that the original contract is legal and
valid (p. 59, rec.).
On June 21, 1969, at the instance of the appellee, the respondent Court granted an order of
execution pursuant to which a writ of execution dated June 25, 1969 was issued.
On July 9, 1969, an application for and notice of garnishment were made and effected upon the
funds of appellant Pasay City Government with the Philippine National Bank (p. 61, rec.).
On July 11, 1969, the appellant filed an urgent motion to set aside the respondent Court's order
of June 21, 1969 and to quash the writ of execution issued pursuant thereto upon the following

grounds: 1) that the execution sought was then still premature, the period of 90 days stipulated
not having elapsed as yet; 2) that the obligations of the parties under the Compromise
Agreement were reciprocal and the appellee not having put up a new performance bond in the
sufficient amount equivalent to 20% of the remaining cost of construction as per agreement,
the appellants cannot be obliged to pay the sum due appellee as yet; 3) that the Sheriff has no
power or authority to levy or garnish on execution the general funds, especially more so, the
trust funds of the defendant Pasay City (pp. 63-66, rec.).
On July 19, 1969, the respondent Court issued an order stating that inasmuch as the defendant
has not yet paid the plaintiff as of this date then "the writ of execution and of garnishment are
declared to be again in full force and effect . . . " (p. 67, rec.).
On July 22, 1969, the appellants filed a motion for reconsideration on three grounds, to wit:
"1. That the same is not supported by the facts and pertinent law, rule
and regulation on the matter;
"2. That the funds of the defendant Pasay City Government which
were garnished by the City Sheriff are by law exempt from execution
and/or garnishment; and
"3. That plaintiff's claim may not as yet be enforceable by execution"
(pp. 68-71, rec.).
On July 22, 1969, the respondent Court denied and rejected the appellants' motion for
reconsideration. The respondent Court ordered the enforcement of the garnishment already
issued to the City Sheriff for Pasay by taking possession of the amount of P613,096.00 from
the deposits of appellant Pasay City Government with the Philippine National Bank, Pasay
City Branch and delivering the same to the plaintiff.
On July 23, 1969, the respondent Court issued an order, the pertinent provision of which is
now being questioned by the appellants in this petition for review on certiorari, to wit:
"It is further argued that under the compromise, the plaintiff is
required to submit a performance bond upon the approval thereof and
that he has not yet done so. At the hearing of the motion of June 21, it
was shown that the plaintiff has submitted a performance bond in the
amount of P60,000.00 which was thereafter increased to P100,000.00
to make it equal to 20% of the cost of the next stage of the
construction to be undertaken by the plaintiff. This is a sufficient
compliance. Since the work is to be undertaken by stages, it would be
unreasonable to compel the plaintiff to submit a performance bond
equal to the cost of the entire project, it not being known when the
City of Pasay shall have the funds for the completion thereof and it
claims it does not even have money to pay for the phase of the work
finished years ago. Besides, there is nothing in the compromise which
makes the submission of the bond a condition precedent to the
payment of P613,096.00 to the plaintiff" (p. 76, rec.).
On July 23, 1969, the appellants filed their notice of appeal from the orders of the respondent
Court dated June 21, July 19 and July 23, 1969 (p. 2, rec.).

381
On July 24, 1969, the appellants filed their manifestation and petition to suspend the writ of
execution and garnishment (pp. 80-82 rec.).
On July 25, 1969, the appellants filed their manifestation and withdrawal of notice of appeal.
On July 28, 1969 the respondent Court approved said withdrawal (p. 85 rec.).
On August 22, 1969, the appellants filed an amended notice of appeal (pp. 86-87, rec.) and a
record on appeal which were duly approved as per order of the respondent Court dated January
7, 1970 and a notice of transmittal dated May 29, 1970 (p. 89 rec.).
On October 23, 1969 the plaintiff, Vicente David Isip, in the original complaint for specific
performance filed an urgent motion for permit to serve a supplemental complaint seeking
rescission of the original contract titled Contract and Agreement and of the Compromise
Agreement and claiming damages in the sum of P672, 653.91 alleging the violations of the
defendants specially the Pasay City Government in complying with its obligations incumbent
upon it in the compromise agreement and in view of the rights granted to the plaintiff in
paragraph 5 of the resolutory clause of the compromise agreement.
On June 5, 1970, the Supreme Court resolved to require the petitioner-appellants to file a
petition for review on certiorari (p. 6 rec.).
On June 29, 1970, the defendants filed their cautionary answer to the supplemental complaint
alleging that the Court has no jurisdiction over the subject of the present supplemental
complaint; that the cause of action is already barred by prior judgment; that the principle of res
judicataapplies; that plaintiff's supplemental complaint states no cause of action and that the
present claim of plaintiff has been paid, waived abandoned and extinguished.
On July 14, 1970, the appellants filed their petition for review on certiorari (pp. 11-24, rec.).
This was denied for lack of merit by the Supreme Court.
On August 14, 1970, the respondent Court set for pre-trial the supplemental complaint.
On October 16, 1970, the Supreme Court granted the petitioner's motion for reconsideration
and their petition for review on certiorari was given due course (p. 102, rec.).
On July 21, 1971, the appellees filed their brief praying that the petition for review on
certiorari be dismissed since the issues involved in the supplemental complaint are prejudicial
to the present petition for review (p. 179, rec.). On December 6, 1971, the appellants filed their
manifestation and petition alleging that the supplemental complaint is not prejudicial to the
present petition for review (p. 199-201, rec.).
The two purposes of a compromise agreement are enunciated in Article 2028 of the New Civil
Code, to wit:
"A. 2028. A compromise is a contract whereby the parties, by making
reciprocal concessions, avoid a litigation or put an end to one already
commenced."
The first purpose "to avoid a litigation" occurs when there is a threat of an
impending litigation. At this point, no case has yet reached the courts. The moment a case
has been filed in court then the second purpose "to put an end to one already
commenced" applies.

In the herein case, We are concerned with the second purpose. The latter purpose is given effect
in Article 2037 of the New Civil Code which reads:
"Article 2037. A compromise has upon the parties the effect and
authority of res judicata; but there shall be no execution except in
compliance with a judicial compromise."
A compromise agreement not contrary to law, public order, public policy, morals or good
customs is a valid contract which is the law between the parties themselves (Municipal Board
of Cabanatuan City vs. Samahang Magsasaka, Inc., 62 SCRA 435). A judgment on a
compromise is a final and executory (Samonte vs. Samonte, 64 SCRA 524). It is immediately
executory (Pamintuan vs. Muos, et al., L-26331, 22 SCRA 1109 [March 15, 1968]) in the
absence of a motion to set the same aside on the ground of fraud, mistake or duress (Cadano
vs. Cadano, L-34998, 49 SCRA 33 [January 11, 1973]).

In fact in the herein case before Us, execution has already been issued. Considering this in the
light of Article 2041 of the New Civil Code, to wit:
"Art. 2041. If one of the parties fails or refuses to abide by the
compromise, the other party may either enforce the compromise or
regard it as rescinded and insist upon his original demand."
it is obvious that the respondent-appellee did not only succeed in enforcing the
compromise but said plaintiff-appellee likewise wants to rescind the said compromise. It
is clear from the language of the law, specifically Article 2041 of the New Civil Code that
one of the parties to a compromise has two options: 1) to enforce the compromise; or 2)
to rescind the same and insist upon his original demand. The respondent-appellee in the
case herein before Us wants to avail of both of these options. This can not be done. The
respondent-appellee cannot ask for rescission of the compromise agreement after it has
already enjoyed the first option of enforcing the compromise by asking for a writ of
execution resulting thereby in the garnishment of the Pasay City funds deposited with the
Philippine National Bank which eventually was delivered to the respondent-appellee.
Upon the issuance of the writ of execution, the petitioner-appellants moved for its quashal
alleging among other things the exemption of the government from execution. This move on
the part of the petitioner-appellant is at first glance laudable for "all government funds
deposited with the Philippine National Bank by any agency or instrumentality of the
government, whether by way of general or special deposit, remain government funds and may
not be subject to garnishment or levy (Commissioner of Public Highways vs. San Diego, L30098, 31 SCRA 616 [Feb. 18, 1970]). But, inasmuch as an ordinance has already been
enacted expressly appropriating the amount of P613,096.00 of payment to the respondentappellee, then the herein case is covered by the exception to the general rule stated in the case
of Republic vs. Palacio (L-20322, 23 SCRA 899 [May 29, 1968]), to wit:
"Judgments against a State in cases where it has consented to be sued,
generally operate merely to liquidate and establish plaintiff's claim in
the absence of express provision; otherwise they cannot be enforced
by processes of the law; and it is for the legislature to provide for the
payment in such manner as sees fit."

382
Hence, the respondent Court was correct in refusing to quash the writ of execution it has
issued.
Having established that the compromise agreement was final and immediately executory, and
in fact as already enforced, the respondent court was in error where it still entertained the
supplemental complaint filed by the respondent-appellee for by then the respondent Court had
no more jurisdiction over the subject matter. When a decision has become final and executory,
the court no longer has the power and jurisdiction to alter, amend or revoke, and its only power
thereof is to order its execution (Ocampo vs. Caluag, L-21113, 19 SCRA 791 [April 27, 1967]).
After the perfection of an appeal, the trial court loses jurisdiction over its judgment and cannot
vacate the same (Alama vs. Abbas, L-19616, 18 SCRA 679 [Nov. 29, 1966]; Commissioner of
Immigration vs. Romero, L-19782, 10 SCRA 216 [Jan. 31, 1964]; Valdez vs. CFI, etc., L-3366
[April 27, 1951] cited in Cabungcal vs. Fernandez, L-16520, 10 SCRA 731 [April 30, 1964];
Government vs. Mendoza, 51 Phil. 403; Ayllon vs. Siojo, 26 Phil. 195).
Moreover, supplemental pleadings are meant to supply deficiencies in aid of original pleading,
not to entirely substitute the latter (British Trader's Insurance Co., Ltd. vs. Commissioner of
Internal Revenue, L-20501, 13 SCRA 719, 728 [April 30, 1965]). Here, the respondentappellee originally asked for specific performance which was latter settled through a
compromise agreement. After this, the respondent-appellee asked for rescission of both the
contract and agreement and the compromise agreement using a supplemental complaint. It is
clear that the supplemental complaint We have before Us is not only to "supply deficiencies in
aid of original pleading" but is also meant as an entirely new "substitute" to the latter. A
supplemental complaint must be consistent with and in aid of, the cause of action set forth in
the original complaint and a new and independent cause of action cannot be set up by such
complaint (Bishop vs. Taylor, 210 App. Div. 1, 205 NYS 653), especially where judgment has
already been obtained by him in the original action (Anadarko National Bank vs. Anadarko
First National Bank, 39 Okl. 225, 134 Phil. 866).
WE find no error in the order of the respondent Court dated July 23, 1969. From the reading of
the premises and provisions of the contract and agreement which was "formally confirmed and
officially approved by the parties" in the compromise agreement later entered into by the same
parties, subject only to the enumerated changes and/or modifications, it is obvious that the
contracting parties envisioned a stage by stage construction (on the part of the respondentappellee) and payment (on the part of the defendant-appellant). This is manifested in the
contract and agreement, to quote:
xxx xxx xxx
"WHEREAS, one of the conditions set forth in the proposal is that the
Contractor shall start the construction of the Pasay City Hall building
as per plans and specifications by stages advancing the necessary
amount needed for each stage of work and the Party of the First Part
to reimburse the amount spent on the work accomplished by the
Contractor before proceeding on the next stage; Provided, the First
Party shall supply the cement needed;
xxx xxx xxx
"2. That the work shall be done in stages to be determined by the City
Engineer considering structural and functional criteria and consistent
with funds immediately available for the purpose;

"3. That the Contractor shall advance the necessary amount needed
for each stage of work; Provided that the Contractor shall, before
starting each stage of work, inform the First Party in writing as to the
amount necessary to be advanced by the former; . . .
"4. That the Party of the First Part shall reimburse the Contractor the
cost of the work completed as estimated by the City Engineer for each
stage of work before the Contractor proceed to the next stage;" (pp.
33-34, rec.).
And sub-paragraph H of paragraph 1 and paragraph 2 of the compromise agreement also
reiterated the stage by stage construction and payment as follows:
"H. That detailed, separate reports on the progress of the construction
work during each stage shall regularly be submitted to the City
Engineer and the City Mayor;
xxx xxx xxx
"2. That within a reasonable period of time, at least ninety (90) days
from the final approval of this Compromise Agreement by this
Honorable Court, the defendant Pasay City Government shall pay and
remit the amount of SIX HUNDRED THIRTEEN THOUSAND
NINETY-SIX PESOS (P613,096.00) . . . to the plaintiff contractor,
who, in turn, immediately upon receipt thereof, shall be bound and
obliged to commence and start the construction work corresponding
to the next stage thereof; . . . " (45, rec.).
Sub-paragraph B of paragraph 1 of the Compromise Agreement, to wit:
"B. That immediately upon final approval hereof by this Honorable
Court, the plaintiff contractor will submit and file in favor of Pasay
City Government a new performance bond in the amount required by
pertinent law, rules and regulations, in proportion to the remaining
value or cost of the unfinished work of the construction as per
approved plans and specifications . . ." (p. 4 rec.),
read together with the stage-by-stage construction and payment approach, would
inevitably lead to the conclusion that the parties to the compromise contemplated a
divisible obligation necessitating therefore a performance bond "in proportion to" the
uncompleted work.
What is crucial in sub-paragraph B of paragraph 1 of the compromise agreement are the words
"in proportion." If the parties really intended the legal rate of 20% performance bond to refer to
the whole unfinished work, then the provision should have required the plaintiff contractor to
submit and file a new performance bond to cover the remaining value/cost of the unfinished
work of the construction. Using the words inproportion then significantly changed the meaning
of the paragraph to ultimately mean a performance bond equal to 20% of the next stage of
work to be done.
And, We note that in the Contract and Agreement, the respondent-appellee was allowed to file
a performance bond of P222,250.00 which is but 5% of the total bid of P4,914,500.80. A
security bond was likewise filed with an amount of P97,290.00. The sum total of bond then

383
filed was P320,540.00 which is just 6.5% of the total bid. It is rather curious why all of a
sudden the petitioners-appellants are insisting on a 20% performance bond of the entire
unfinished work when they were quite content with a bond just 5% of the entire work. For Us
to allow the petitioners-appellants to adamantly stick to the 20% performance bond would be
tantamount to allowing them to evade their obligation in the compromise agreement. This
cannot be allowed. The bond of a contractor for a public work should not be extended beyond
the reasonable intent as gathered from the purpose and language of the instrument construed in
connection with the proposals, plans and specifications, and contract (John L. Roper Lumber
Co. vs. Lawson, 195 NC 840, 143 SE 847, 67 ALR 984).
The premium of the bond will be sizeable and will eat up the profit of the contractor, who is
faced with the fluctuation of prices of materials due to inflation and devaluation. Right now,
many contractors cannot proceed with the implementation of their contracts because of the
extraordinary rise in cost of materials and labor. No contractor would be willing to bid for
public works contracts under the oppressive interpretation by petitioners-appellants.

Again, the respondent Court was correct in ruling that the submission of the bond was not a
condition precedent to the payment of P613,096.00 to the plaintiff. Nowhere in the Contact and
Agreement nor in the Compromise Agreement could be found the fact that payment by the
petitioner-appellants of the amount of P613,096.00 was dependent upon the submission by the
respondent-appellee of the performance bond. It cannot be argued that reciprocal obligation
was created in the Compromise Agreement, for the obligation to pay on the part of the
petitioners-appellants was established several years ago when the respondents-appellee
finished some of the stages of construction. And, this argument is already moot and academic,
for the amount of P613,096.00 has already been collected through execution and garnishment
upon the funds of Pasay City with the Philippine National Bank.
Inasmuch as the parties in the herein case have agreed in the Compromise Agreement, to wit:
"3. That within a similar period the defendant Pasay City Government
shall pay and remit to plaintiff contractor an amount equivalent to
three (3%) percent of the above mentioned amount of SIX
HUNDRED THIRTEEN NINETY-SIX PESOS (P613,096.00), for
and as adverse attorney's fees in this case; . . . " (p. 45, rec.).
WE hereby grant the amount of P18,392.78 which is 3% of P613,096.00 as attorney's
fees in favor of the respondent-appellee.
WHEREFORE, THE ORDER OF THE RESPONDENT COURT DATED JULY 23, 1969 IS
HEREBY AFFIRMED AND THE PETITIONERS-APPELLANTS ARE HEREBY
DIRECTED TO PAY ATTORNEY'S FEES IN THE AMOUNT OF EIGHTEEN THOUSAND
THREE HUNDRED NINETY-TWO AND 78/100 (P18,392.78) PESOS. COSTS AGAINST
PETITIONERS-APPELLANTS.
SO ORDERED.
Abad Santos, Escolin and Cuevas, JJ ., concur.
Aquino, J ., concurs in the result.
Concepcion, Jr. and Guerrero, JJ ., are on leave.

||| (Pasay City Government v. Court of First Instance of Manila, Branch X, G.R. No. L-32162,
[September 28, 1984], 217 PHIL 153-169)

384

FIRST DIVISION

remains unpaid, hence this collection suit with prayer for moral
damages and attorney's fees.

[G.R. No. 162729. December 17, 2008.]

A perusal of the record showed that notwithstanding the leniency

graciously observed by this court in giving defendants several
extensions of time to file their answer with responsive pleading, they
failed to do the same thus, upon motion of plaintiff's counsel,
defendants were declared as in default on October 27, 1995 and
the ex-parte reception of plaintiff's evidence was delegated to the
Clerk of Court.

SOLEDAD LEONOR PEA SUATENGCO and ANTONIO

ESTEBAN SUATENGCO, complainants, vs. CARMENCITA O.
REYES,respondent.

DECISION

LEONARDO-DE CASTRO, J p:
This resolves the petition for review on certiorari seeking the modification of the
Decision 1 dated October 29, 2003 and the Resolution 2 dated March 10, 2004 of the Court of
Appeals (CA) in CA-G.R. CV No. 53185. The assailed decision affirmed with modification the
Decision 3 of the Regional Trial Court (RTC) of Marinduque, Branch 30 in Civil Case No. 954 in an action for collection of a sum of money with damages commenced by herein
respondent, Carmencita O. Reyes against herein petitioners, spouses Soledad Leonor Pea
Suatengco (also known as Sylvia Pea Suatengco) and Antonio Esteban Suatengco. STHAaD
The essential facts of the case, as recounted by the trial court, are as follows:
This is an action for Sum of Money with Damages filed by
Carmencita O. Reyes against defendants [petitioners] Spouses
Soledad Leonor Pea and Antonio Esteban Suatengco, wherein
plaintiff (respondent) claimed that sometime in the first quarter of
1994, defendant Sylvia (Soledad) approached her for the purpose of
borrowing a sum of money in order to pay her obligation to
Philippine Phosphate Fertilizer Corporation (Philphos for brevity). On
May 31, 1994, plaintiff paid Philphos the amount of P1,336,313.00
and by reason thereof defendants Spouses Sylvia (Soledad) and
Antonio executed on June 24, 1994 a Promissory Note binding
themselves jointly and severally to pay plaintiff the said amount in 31
monthly installments beginning June 30, 1994. Of the amount,
however, only one (1) payment in the amount of P15,000.00 on July
27, 1994 have been made by defendants. That pursuant to a specific
clause in the Promissory Note, defendants have unequivocally waived
the necessity of demand to be made upon them to pay as well as a
Notice of Dishonor and presentation with acceleration clause. As of
March 31, 1995 defendants owe plaintiff P1,321,313.00 exclusive of
interest, other charges which is already due and demandable but

At the ex-parte hearing, ATTY. EDMUNDO O. REYES, JR., a

lawyer by profession connected with the Siguion Reyna, Montecillo
and Ongsiako Law Offices, testified that he is the attorney-in-fact of
his mother Congresswoman Carmencita O. Reyes, herein plaintiff, to
enter into and execute, among other acts, any agreement with the
defendant Soledad Leonor Pea Suatengco to collect the amount of
around P1.4 MILLION and to hold the same in trust for her as shown
by a Special Power of Attorney marked Exhibits A to A-2. DcTAIH
Confronted with a document styled as "Promissory Note" dated June
24, 1994 (Exhibit "B"), he identified the signatures of Soledad Pea
Suatengco (also known as Sylvia Pea Suatengco) (Exhs. B-1, B-5,
B-10 and B-13), Antonio Suatengco (Exhs. B-2, B-6, B-11 and B-14),
Atty. Domingo Ganuelas (Exhs. B-3, B-7, B-9 and B-15) and his own
signatures (Exhs. B-4, B-8, B-12 and B-16). That their signatures
were signed in his presence on June 24, 1994 at the Siguion Reyna,
Montecillo and Ongsiako Law Offices. Atty. Domingo Ganuelas was
there at the time to assist and advise defendants before executing the
Promissory Note.
He explained that defendants own and manage Goldfields Business
Development Corporation. Of the P1,336,313.00 paid by plaintiff to
Philphos on May 31, 1994, which defendants jointly and severally
assumed to pay plaintiff under the Promissory Note (Exh. B), only
P15,000.00 had been paid by them thereby leaving an outstanding
balance of P1,321,313.00 plus 12% interest per annum computed
from May 31, 1994 and attorney's fees equivalent to 20% of
defendants total outstanding balance inclusive of interest, which he
believes to be reasonable based on experience considering that the
case will be prosecuted outside Metro Manila and the long distance
would entail quite an amount of travel for retained counsel.
To corroborate the testimony of Atty. Edmundo O. Reyes, Jr. and to
prove the obligation due as well as the damages prayed for, plaintiff
Congresswoman CARMENCITA O. REYES representative of the
lone district of Marinduque testified that she has been a member of
Congress since 1978 until it was abolished in 1986 but after which reelected in 1987, 1992 and 1995.

385
She identified her signature on Exhibit A Special Power of
Attorney (Exhs. A-1 and A-2) as well as her signature on the
verification portion of her complaint (page 8, Record) and affirmed
that she had caused the preparation of the same and that the contents
thereof are true and correct. STECAc
That on May 31, 1994, she paid Philphos the amount of
P1,336,313.00 representing defendants' obligation with Philphos. In
return for the sum she had advanced, defendants agreed to issue the
Promissory Note (Exh. B) for the total amount of indebtedness but
out of the said amount of P1,336,313.00 only P15,000.00 had been
paid by them. As a result, her feeling was hurt and wounded. She felt
degraded because after helping them to get out of their indebtedness
without asking for any interest, it would seem that they lost interest in
paying their obligations. She was even more deeply hurt when she
found out that the sheriff of this court who went to their place to take
some actions regarding this case, was even threatened exposing her
constituent to such danger. Said amount is substantial enough to help
her constituents because as much as possible she would not deny
them everytime they come to her since it would really be a matter of
life and death for them. 4
As can be gleaned from the above narration, the RTC declared the petitioners in default for
failure to file their Answer to the complaint. Thereafter, trial ex parte was delegated to the
Clerk of Court to receive respondent's evidence. Testimonial and documentary evidence were
all admitted.
On November 29, 1995, the lower court rendered its decision, the dispositive portion of which
reads as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against defendants ordering defendants:
a) To pay plaintiff actual damages in the amount of P1,321,313.00
plus interest at 12% per annum from May 31, 1994 representing the
total outstanding balance of defendants' indebtedness to plaintiff by
virtue of the Promissory Note dated June 24, 1994.
b) To pay plaintiff moral damages in the amount of P1,000,000.00;
c) To pay plaintiff attorney's fees in the amount of 20% of the
sum collected; and
d) To pay costs of suit.
SO ORDERED. 5
In their appeal to the CA, petitioners did not question the amount of the judgment debt for
which they were held liable but limited the issue to the award of attorney's fees. CacHES
On October 29, 2003, the CA promulgated a decision affirming with modification the trial
court's decision. It upheld the award of attorney's fees equivalent to 20% of the balance of

petitioners' obligation and modified the decision of the trial court by lowering the award of
moral damages from One Million Pesos (P1,000,000.00) to Two Hundred Thousand Pesos
(P200,000.00). Dispositively, the decision reads:
WHEREFORE, the assailed decision of Branch 30, of the Regional
Trial Court of Marinduque in Civil Case No. 95-4 is hereby
AFFIRMED with MODIFICATION. The defendant-appellants are
ordered to pay plaintiff-appellee moral damages in the amount of
P200,000.00. 6
Petitioners moved for the reconsideration of the CA's decision, but the same was denied by the
CA in its Resolution dated March 10, 2004.
Aggrieved, petitioners elevated the case to this Court via a petition for review
on certiorari under Rule 45 of the Rules of Court, submitting thusly
1. The Court of Appeals acted with grave abuse of discretion and
committed a mistake of law in awarding 20% attorney's
fees contrary to the 5% as stipulated in the promissory
note, Exhibit "B".
2. The Court of Appeals acted with grave abuse of discretion and
committed a mistake of law in not reducing the award of
the 12% penalty interest.
Clearly from the foregoing formulation of the issues in the present petition, petitioners do not
dispute the amount of their indebtedness. They only seek a modification of the decision of the
CA insofar as it upheld the RTC's award of attorney's fees equivalent to 20% of their total
indebtedness/obligation and the 12% per annum interest of the said obligation.
In support of their contention that the award of attorney's fees was illegal or erroneous,
petitioners point to the unqualified rate of 5% stipulated in the promissory note as the
"stipulated amount" which was way lower than the 20% as awarded by the RTC. Petitioners
cited the case of Chua v. Court of Appeals 7 where the Court ruled that is not the province of
the court to alter a contract by construction or to make a new contract for the parties; its duty is
confined to the interpretation of the one which they have made for themselves, without regard
to its wisdom or folly, as the court cannot supply material stipulations or read into contract
words which it does not contain. The testimony of Atty. Edmundo O. Reyes that the attorney's
fees should be 20% of the outstanding balance cannot prevail over the 5% stipulated in the
promissory note. Citing the case of Baas v. Asia Pacific Finance Corporation, 8 petitioners
maintained that oral evidence cannot prevail over the written agreement of the parties. TaEIcS

On the other hand, respondent contend that petitioners have already waived their rights to
question the award for attorney's fees because in their Appellant's Brief filed before the CA,
they stated that the stipulated attorney's fees was 20% (not 5%) of the total balance of the
outstanding indebtedness. Respondent adds that despite such stipulation, said attorney's fees
are subject to judicial control. According to respondent it was not surprising for the CA to
focus on the issue of reasonableness of the said attorney's fees because petitioners' line of
argument was focused on the same.

386
The petition is partly meritorious.
The fifth paragraph of the Promissory Note executed by petitioners in favor of respondent
undeniably carried a stipulation for attorney's fees and interest in case of the latter's default in
the payment of any installment due. It specifically provided that:
Failure on the part of Sylvia and/or Antonio Suatengco to pay any
installment due will render the entire unpaid balance immediately,
due and demandable and Cong. Reyes becomes entitled not only for
the unpaid balance but also for 12% interest per annum of the
outstanding balance of P1,336,313.00 from May 31, 1994 until fully
paid plus attorney's fees equivalent to 5% of the total outstanding
indebtedness.
Strictly speaking, the attorney's fees herein litigated are in the nature of liquidated damages and
not the attorney's fees recoverable as between attorney and client enunciated and regulated by
the Rules of Court. 9 Liquidated damages are those agreed upon by the parties to a contract to
be paid in case of breach thereof. 10 The stipulation on attorney's fees contained in the said
Promissory Note constitutes what is known as a penal clause. A penalty clause, expressly
recognized by law, is an accessory undertaking to assume greater liability on the part of the
obligor in case of breach of an obligation. It functions to strengthen the coercive force of
obligation and to provide, in effect, for what could be the liquidated damages resulting from
such a breach. The obligor would then be bound to pay the stipulated indemnity without the
necessity of proof on the existence and on the measure of damages caused by the breach. 11 It
is well-settled that so long as such stipulation does not contravene law, morals, or public order,
it is strictly binding upon the obligor. The attorney's fees so provided are awarded in favor of
the litigant, not his counsel. 12CDAHIT
In this case, there is a contractual stipulation in the Promissory Note that in case of petitioners'
default on the terms and conditions of the said Promissory Note by failing to pay any
installment due, then this will render the entire balance of the obligation immediately due and
payable. The total obligation of petitioners amounted to P1,321,313.00 (P1,336,313.00 less
P15,000.00) plus the 12% interest per annum of the said balance, as well as attorney's fees
equivalent to 5% of the total outstanding indebtedness. The Promissory Note was signed by
both parties voluntarily, thus the stipulation therein has the force of law between the parties and
should be complied with by them in good faith.
The RTC and CA, in awarding attorney's fees equivalent to 20% of petitioners' total obligation,
disregarded the stipulation expressly agreed upon in the Promissory Note and instead increased
the award of attorney's fees by giving weight and value to the testimony of prosecution witness
Atty. Reyes. In agreeing to the reasonableness of the attorney's fees, the CA erroneously took
into account the time spent, the extent of the services rendered, as well as the professional
standing of the lawyer. Oral evidence certainly cannot prevail over the written agreements of
the parties. The courts need only to rely on the faces of the written contracts to determine their
true intention on the principle that when the parties have reduced their agreements in writing, it
is presumed that they have made the writings the only repositories and memorials of their true
agreement. 13
Moreover, it is undeniable from the evidence submitted by respondent herself to the trial court
that the agreement of the parties with respect to attorney's fees is only 5% of the total
obligation and the trial court granted the 20% rate based on the testimony of respondent's

counsel who opined that the same is the reasonable amount of attorney's fees, despite the
unequivocal agreement of the parties. Even granting that petitioners may have erroneously
stated that the stipulated attorney's fees is 20% in their appellants' brief before the CA, they
have nonetheless squarely raised the matter of the lower rate of attorney's fees agreed upon by
the parties in the promissory note before that court in their motion for reconsideration. In our
mind, there was essentially no change in petitioners' theory of the case before the CA since in
their appellants' brief and their motion for reconsideration, their main contention remains the
same: that the attorney's fees awarded by the trial court and affirmed by the CA were
unwarranted and contrary to law. Neither can we give credence to respondent's assertion that
the 5% attorney's fees agreed upon in the promissory note were intended only to be the
minimum rate as the promissory note never mentioned a minimum. EcIaTA
In sum, we find it improper for both the RTC and the CA to increase the award of attorney's
fees despite the express stipulation contained in the said Promissory Note which we deem to be
proper under these circumstances, since it is not intended to be compensation for respondent's
counsel but was rather in the nature of a penalty or liquidated damages.
On the matter of interest, we affirm the amount of interest awarded by the two courts below,
there being a written stipulation as to its rate. InEastern Shipping Lines, Inc. v. Court of
Appeals, 14 we laid down the following guidelines on the imposition of legal interest:
xxx xxx xxx
II. With regard particularly to an award of interest in the concept of
actual and compensatory damages, the rate of interest, as well as the
accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a
sum of money, i.e., a loan or forbearance of money, the interest due is
that which may have been stipulated in writing. Furthermore, the
interest due shall itself earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the rate of interest shall be
12% per annum to be computed from default, i.e.,from judicial or
extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code. TaDAIS
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages awarded
may be imposed at the discretion of the court at the rate of 6% per
annum . . .
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether the
case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of credit.
The stipulated interest in this case is 12% per annum. As of July 1994, the total indebtedness of
petitioners amounted to P1,321,313.00. From then on, the P1,321,313.00 should have earned
the stipulated interest of 12% per annum plus attorney's fees equivalent to 5% of the total
outstanding indebtedness. However, once the judgment becomes final and executory and the
amount adjudged is still not satisfied, legal interest at the rate of 12% applies until full

387
payment. The rate of 12% per annum is proper because the interim period from the finality of
judgment, awarding a monetary claim and until payment thereof, is deemed to be equivalent to
a forbearance of credit. The actual base for the computation of this 12% interest is the amount
due upon finality of this decision. 15
WHEREFORE, the Decision dated October 29, 2003 of the Court of Appeals is hereby
MODIFIED in that the amount of attorney's fees is reduced to five percent (5%) of the total
balance of the outstanding indebtedness but the said Decision is AFFIRMED in all other
respects.
No costs.
SO ORDERED.
Puno, C.J., Carpio, Chico-Nazario * and Velasco, Jr., ** JJ., concur.
||| (Spouses Suatengco v. Reyes, G.R. No. 162729, [December 17, 2008], 594 PHIL 609-620)

388

SECOND DIVISION
[G.R. No. 153874. March 1, 2007.]
TITAN CONSTRUCTION CORPORATION, petitioner, vs. UNIFIELD ENTERPRISES, INC., respondent.

DECISION

CARPIO, J p:

Accordingly, therefore, judgment is hereby rendered for the plaintiff

[respondent] as against the defendant [petitioner] and ordering the
latter to pay the plaintiff [respondent] the following:
1. The principal amount of P1,404,114.00;
2. Interest Charges in the amount of P504,114.00 plus
accrued interest charges at 24% per annum
compounded yearly reckoned from July, 1995
up to the time of full payment;
3. Liquidated Damages in the amount of P324,147.94;
4. Attorney's Fees equivalent to 25% of whatever amount
is due and payable and accumulated
appearance fees at P1,000.00 per hearing; and
5. Costs of suits.

The Case
This is a petition for review 1 of the 7 January 2002 Decision 2 and 20 May 2002 Resolution
of the Court of Appeals in CA-G.R. CV No. 56816. The Court of Appeals affirmed the 9
September 1997 Decision 3 of the Regional Trial Court of Quezon City, Branch 224 (trial
court) in Civil Case No. Q-95-24170.
The Facts
Petitioner Titan Construction Corporation (petitioner) is engaged in the construction business,
while respondent Uni-Field Enterprises, Inc. 4(respondent) is engaged in the business of selling
various construction materials.
From 1990 to 1993, petitioner purchased on credit various construction supplies and materials
from respondent. Petitioner's purchases amounted to P7,620,433.12 but petitioner was only
able to pay P6,215,795.70, leaving a balance of P1,404,637.42. On 19 October 1994,
respondent sent a demand letter to petitioner. 5 But the balance remained unpaid.
On 26 June 1995, respondent filed with the trial court a complaint for collection of sum of
money with damages against petitioner.
In its Answer dated 18 August 1995, petitioner admitted the purchases but disputed the amount
claimed by respondent. Petitioner also interposed a counterclaim and sought to recover
P204,527.99 from respondent based on damaged vinyl tiles, non-delivery of materials, and
advances for utility expenses, dues, and insurance premiums on the condominium unit turned
over by petitioner to respondent.
On 9 September 1997, the trial court rendered judgment in favor of respondent. The 9
September 1997 Decision provides:

IT IS SO ORDERED. 6
Petitioner appealed to the Court of Appeals. In its 7 January 2002 Decision, the Court of
Appeals denied the appeal for lack of merit and affirmed the trial court's 9 September 1997
Decision.
In its 20 May 2002 Resolution, the Court of Appeals denied petitioner's motion for
reconsideration. Hence, this petition.
The Ruling of the Court of Appeals
The 7 January 2002 Decision of the Court of Appeals reads:
A careful reading of the records of the case shows that in the answer
to the complaint, the existence of the delivery receipts and invoices
were not denied by appellant, rather, it admitted the transactions
subject of the instant case. Clearly, if the damages alleged are
liquidated or stipulated, they are deemed admitted when not
specifically denied.
xxx xxx xxx
Further, appellant cannot question the interest rate on overdue
accounts as the same was provided for in the delivery receipts and
sales invoices, which have not been denied by it. Therefore, the terms
and conditions therein have become the law between the parties, and
both are bound by said conditions. Failure of a party to contest the
terms and conditions results in his admission thereof.
Appellant asserts that "nowhere is there any stipulation that plaintiff
is entitled to a 24% interest". This is absurd. The Sales Invoices and
Delivery Receipts, contained the provision that:

389
"This invoice is the written contract between Unifield
Enterprises, [I]nc. and the above-named customer. This is
payable on demand unless otherwise indicated
hereinabove. Interest of 24% per annum will be charged
on overdue accounts, compounded with the outstanding
principal obligation as they accrue. Claims or corrections
hereto or in the goods must be communicated in writing to
Uni-field Enterprises within two (2) days from receipt of
the goods. . . . Should Unifield Enterprises, Inc. be
constrained to effect collection through Court action and
proceedings before the Fiscal's [sic], said customer agrees
to pay the following additional sums: (1) 25% liquidated
damages based on the outstanding total obligation; (2)
25% attorney's fees based on the total claim including said
liquidated damages; (3) appearance fees of counsel at
P500.00 per hearing in addition to all other court costs and
expenses. . . ." SEcADa
It is emphasized that contracts are perfected by mere consent; the
stipulations of the contract being the law between the parties, courts
have no alternative but to enforce them as they are agreed upon and
written, there being no law or public policy against the stipulated
provisions.
Verily, this Court finds no reason to go against the findings of the
lower court considering that the assailed decision was arrived at "after
a careful review and perusal of the evidence presented by both parties
in their pleadings filed before the" lower court. 7 (Citations omitted)
The Issues
Petitioner raises the following issues:
1. THE COURT OF APPEALS ERRED IN FINDING LEGAL
BASIS FOR [AWARDING] LIQUIDATED DAMAGES,
ATTORNEY'S FEES AND INTEREST IN FAVOR OF
RESPONDENT; and
2. THE COURT OF APPEALS ERRED BY OVERLOOKING
CERTAIN FACTS OR CIRCUMSTANCES OF WEIGHT
AND INFLUENCE WHICH IF CONSIDERED WOULD
ALTER THE RESULTS OF THE CASE. 8
The Ruling of the Court
Factual Findings of the Trial Court and the Court of Appeals Bind the Court
Petitioner asks the Court to review the records of the case and re-examine the evidence
presented before the trial court and the Court of Appeals.
As a rule, only questions of law may be appealed to the Court by petition for review. The Court
is not a trier of facts, its jurisdiction being limited to errors of law. 9 Moreover, factual findings
of the trial court, particularly when affirmed by the Court of Appeals, are generally binding on

this Court.10 In this case, the factual findings of the trial court and the Court of Appeals were
based on substantial evidence which were not refuted with contrary proof by petitioner. We
thus find no reason to disturb the factual findings of the trial court and the Court of
Appeals. TIaEDC
On the Award of Interests, Liquidated Damages, and Attorney's Fees
Petitioner insists that the trial court and the Court of Appeals had no legal basis to award
interest, liquidated damages, and attorney's fees because the delivery receipts and sales
invoices, which served as the basis for the award, were not formally offered as evidence by
respondent. Petitioner also alleges that the delivery receipts and sales invoices were in the
nature of contracts of adhesion and petitioner had no option but to accept the conditions
imposed by respondent.
While the delivery receipts and sales invoices did not form part of respondent's formal offer of
evidence, 11 records show that the delivery receipts and sales invoices formed part of
petitioner's formal offer of evidence. 12 The delivery receipts and sales invoices expressly
stipulated the payment of interest, liquidated damages, and attorney's fees in case of overdue
accounts and collection suits. Petitioner did not only bind itself to pay the principal amount, it
also promised to pay (1) interest of 24% per annum on overdue accounts, compounded with the
principal obligations as they accrue; (2) 25% liquidated damages based on the outstanding total
obligation; and (3) 25% attorney's fees based on the total claim including liquidated damages.
Since petitioner freely entered into the contract, the stipulations in the contract are binding on
petitioner. Thus, the trial court and the Court of Appeals did not err in using the delivery
receipts and sales invoices as basis for the award of interest, liquidated damages, and attorney's
fees.
On the allegation that the delivery receipts and sales invoices are in the nature of contracts of
adhesion, the Court has repeatedly held that contracts of adhesion are as binding as ordinary
contracts. 13 Those who adhere to the contract are in reality free to reject it entirely and if they
adhere, they give their consent. 14 It is true that on some occasions the Court struck down such
contract as void when the weaker party is imposed upon in dealing with the dominant party and
is reduced to the alternative of accepting the contract or leaving it, completely deprived of the
opportunity to bargain on equal footing. 15
Considering that petitioner and respondent have been doing business from 1990 to 1993 and
that petitioner is not a small time construction company, petitioner is "presumed to have full
knowledge and to have acted with due care or, at the very least, to have been aware of the
terms and conditions of the contract." 16 Petitioner was free to contract the services of another
supplier if respondent's terms were not acceptable. Moreover, petitioner failed to show that in
its transactions with respondent it was the weaker party or that it was compelled to accept the
terms imposed by the respondent. In fact, petitioner only questioned the terms of the contract
after the trial court issued its 9 September 1997 Decision. The Court, therefore, upholds the
validity of the contract between petitioner and respondent.
However, the Court will reduce the amount of attorney's fees awarded by the trial court and the
Court of Appeals. In this case, aside from the award of P324,147.94 as liquidated damages, the
trial court and the Court of Appeals also ordered petitioner to pay respondent attorney's fees
"equivalent to 25% of whatever amount is due and payable." 17
The law allows a party to recover attorney's fees under a written agreement. 18 In Barons
Marketing Corporation v. Court of Appeals, the Court ruled that:

390

[T]he attorney's fees here are in the nature of liquidated damages and
the stipulation therefor is aptly called a penal clause. It has been said
that so long as such stipulation does not contravene law, morals, or
public order, it is strictly binding upon defendant. The attorney's fees
so provided are awarded in favor of the litigant, not his counsel. 19
On the other hand, the law also allows parties to a contract to stipulate on liquidated damages
to be paid in case of breach. 20 A stipulation on liquidated damages is a penalty clause where
the obligor assumes a greater liability in case of breach of an obligation. 21 The obligor is
bound to pay the stipulated amount without need for proof on the existence and on the measure
of damages caused by the breach. 22
Articles 1229 23 and 2227 24 of the Civil Code empower the courts to reduce the penalty if it
is iniquitous or unconscionable. The determination of whether the penalty is iniquitous or
unconscionable is addressed to the sound discretion of the court and depends on several factors
such as the type, extent, and purpose of the penalty, the nature of the obligation, the mode of
breach and its consequences. 25
The Court notes that respondent had more than adequately protected itself from a possible
breach of contract because of the stipulations on the payment of interest, liquidated damages,
and attorney's fees. The Court finds the award of attorney's fees "equivalent to 25% of
whatever amount is due and payable" to be exorbitant because it includes (1) the principal of
P1,404,114.00; (2) the interest charges of P504,114.00 plus accrued interest charges at 24% per
annum compounded yearly reckoned from July 1995 up to the time of full payment; and (3)
liquidated damages of P324,147.94. Moreover, the liquidated damages and the attorney's fees
serve the same purpose, that is, as penalty for breach of the contract. Therefore, we reduce the
award of attorney's fees to 25% of the principal obligation, or P351,028.50.
WHEREFORE, we AFFIRM the appealed Decision dated 7 January 2002 of the Court of
Appeals in CA-G.R. CV No. 56816 with MODIFICATION as regards the award of attorney's
fees. Petitioner Titan Construction Corporation is ordered to pay respondent Uni-Field
Enterprises, Inc. attorney's fees of P351,028.50.
SO ORDERED.
Quisumbing, Carpio-Morales, Tinga and Velasco, Jr., JJ., concur.

||| (Titan Construction Corp. v. Uni-Field Enterprises, Inc., G.R. No. 153874, [March 1, 2007])

391

THIRD DIVISION
[G.R. No. 146942. April 22, 2003.]
CORAZON G. RUIZ, petitioner, vs. COURT OF APPEALS and
CONSUELO TORRES, respondents.

Jose A. Suing for petitioner.

Leonardo Byron R. Perez, Jr. for private respondent.

SYNOPSIS
Petitioner obtained several loans from Torres for a total of P750,000, consolidated under one
promissory note. The same was secured by a real estate mortgage on a lot registered to
petitioner. Later, petitioner obtained three more loans from Torres under three separate
promissory notes. When petitioner failed to pay the said loans, Torres sought an extra-judicial
foreclosure of the real estate mortgage. The same, however, was enjoined by a writ of
preliminary injunction. Allegedly, the real estate mortgage was unenforceable for lack of
participation of petitioner's husband. Further, the promissory note was a unilateral contract of
adhesion drafted by Torres against petitioner.
The promissory note was not a contract of adhesion. There had been several loan transactions
with promissory notes and petitioner had all the time to study the stipulations therein. Further,
the real property covered by the mortgage was considered paraphernal property absent
sufficient evidence that the same was conjugal. As to the legal rate of interest, 12% per annum,
not 36% per annum, shall apply after the maturity dates of the notes until full payment of the
entire amount due. Surcharge was 1% of the principal loan for every month of default. The
proper attorney's fees was fixed to P50,000. The appealed decision of the Court of Appeals was
affirmed, with modification that the interest rate of 36% per annum shall be reduced to 12%
per annum.

SYLLABUS
1. CIVIL LAW; CONTRACTS; CONTRACT OF ADHESION; ELUCIDATED. In Sweet
Lines, Inc. vs. Teves, this Court discussed the nature of a contract of adhesion as follows: ". . .
there are certain contracts almost all the provisions of which have been drafted only by one
party, usually a corporation. Such contracts are called contracts of adhesion, because the only
participation of the other party is the signing of his signature or his 'adhesion' thereto.
Insurance contracts, bills of lading, contracts of sale of lots on the installment plan fall into this

category. ". . . it is drafted only by one party, usually the corporation, and is sought to be
accepted or adhered to by the other party . . . who cannot change the same and who are thus
made to adhere hereto on the 'take it or leave it' basis . . ." SAcaDE
2. REMEDIAL LAW; EVIDENCE; PRESUMPTIONS; PERSON TAKES ORDINARY CARE
OF HIS CONCERNS. As held by this Court in Lee, et al. vs. Court of Appeals, et al., it is
presumed that a person takes ordinary care of his concerns. Hence, the natural presumption is
that one does not sign a document without first informing himself of its contents and
consequences. This presumption acquires greater force in the case at bar where not only one
but several documents were executed at different times by petitioner in favor of private
respondent.
3. CIVIL LAW; FAMILY CODE; PROPERTY RELATIONS BETWEEN HUSBAND AND
WIFE; LAND IS PARAPHERNAL PROPERTY WHERE MARRIAGE IS MERELY
DESCRIPTIVE. We also affirm the ruling of the appellate court that the real property
covered by the subject deed of mortgage is paraphernal property. The property subject of the
mortgage is registered in the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz,
Filipinos." Thus, title is registered in the name of Corazon alone because the phrase "married to
Rogelio Ruiz" is merely descriptive of the civil status of Corazon and should not be construed
to mean that her husband is also a registered owner. Furthermore, registration of the property in
the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz" is not proof that such
property was acquired during the marriage, and thus, is presumed to be conjugal. The property
could have been acquired by Corazon while she was still single, and registered only after her
marriage to Rogelio Ruiz. Acquisition of title and registration thereof are two different acts.
The presumption under Article 116 of the Family Code that properties acquired during the
marriage are presumed to be conjugal cannot apply in the instant case. Before such
presumption can apply, it must first be established that the property was in fact acquired during
the marriage. In other words, proof of acquisition during the marriage is a condition sine qua
non for the operation of the presumption in favor of conjugal ownership. No such proof was
offered nor presented in the case at bar. Thus, on the basis alone of the certificate of title, it
cannot be presumed that said property was acquired during the marriage and that it is conjugal
property. Since there is no showing as to when the property in question was acquired, the fact
that the title is in the name of the wife alone is determinative of its nature as paraphernal, i.e.,
belonging exclusively to said spouse. The only import of the title is that Corazon is the owner
of said property, the same having been registered in her name alone, and that she is married to
Rogelio Ruiz.
4. ID.; SPECIAL CONTRACTS; LOAN; PROPER LEGAL INTEREST, SURCHARGE AND
ATTORNEY'S FEES. The legal rate of interest of 12% per annum shall apply after the
maturity dates of the notes until full payment of the entire amount due. Also, the only
permissible rate of surcharge is 1% per month, without compounding. We also uphold the
award of the appellate court of attorney's fees, the amount of which having been reasonably
reduced from the stipulated 25% (in the March 22, 1995 promissory note) and 10% (in the
other three promissory notes) of the entire amount due, to a fixed amount of P50,000.00. We
held that while the Usury Law has been suspended by Central Bank Circular No. 905, s. 1982,
effective on January 1, 1983, and parties to a loan agreement have been given wide latitude to
agree on any interest rate, still stipulated interest rates are illegal if they are unconscionable.
Nothing in the said circular grants lenders carte blanche authority to raise interest rates to

392
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets. On
the other hand, in Bautista vs. Pilar Development Corp., this Court upheld the validity of a
21% per annum interest on a P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained
the agreement of the parties to a 24% per annum interest on an P8,649,250.00 loan. It is on the
basis of these cases that we reduce the 36% per annum interest to 12%. An interest of 12% per
annum is deemed fair and reasonable. EIDaAH

months, payable every ________ of the month, and to start on April

1995and to mature on April 1996, subject to renewal.

5. ID.; DAMAGES; SURCHARGES. The 1% surcharge on the principal loan for every
month of default is valid. This surcharge or penalty stipulated in a loan agreement in case of
default partakes of the nature of liquidated damages under Art. 2227 of the New Civil Code,
and is separate and distinct from interest payment. Also referred to as a penalty clause, it is
expressly recognized by law. It is an accessory undertaking to assume greater liability on the
part of an obligor in case of breach of an obligation. The obligor would then be bound to pay
the stipulated amount of indemnity without the necessity of proof on the existence and on the
measure of damages caused by the breach. Although the courts may not at liberty ignore the
freedom of the parties to agree on such terms and conditions as they see fit that contravene
neither law nor morals, good customs, public order or public policy, a stipulated penalty,
nevertheless, may be equitably reduced if it is iniquitous or unconscionable.

Remaining balance as of the maturity date shall earn an interest at the

rate of ten percent a month, compounded monthly.

If the amount due is not paid on date due, a SURCHARGE of ONE

PERCENT of the principal loan, for every month default, shall be
collected.

It is finally agreed that the principal and surety in solidum, shall pay
attorney's fees at the rate of twenty-five percent (25%) of the entire
amount to be collected; in case this note is not paid according to the
terms and conditions set forth, and same is referred to a lawyer for
collection.
In computing the interest and surcharge, a fraction of the month shall
be considered one full month.
In the event of an amicable settlement, the principal and surety in
solidum shall reimburse the expenses of the plaintiff.

DECISION

(Sgd.) Corazon Ruiz ________________

Principal Surety"

PUNO, J p:
On appeal is the decision 1 of the Court of Appeals in CA-G.R. CV No. 56621 dated 25 August
2000, setting aside the decision 2 of the trial court dated 19 May 1997 and lifting the
permanent injunction on the foreclosure sale of the subject lot covered by TCT No. RT-96686,
as well as its subsequent Resolution 3 dated 26 January 2001, denying petitioner's Motion for
Reconsideration.
The facts of the case are as follows:
Petitioner Corazon G. Ruiz is engaged in the business of buying and selling jewelry. 4 She
obtained loans from private respondent Consuelo Torres on different occasions, in the
following amounts: P100,000.00; P200,000.00; P300,000.00; and P150,000.00. 5 Prior to their
maturity, the loans were consolidated under one (1) promissory note dated March 22, 1995,
which reads as follows: 6
"P750,000.00 Quezon City, March 22, 1995
PROMISSORY NOTE
For value received, I, CORAZON RUIZ, as principal and ROGELIO
RUIZ as surety in solidum, jointly and severally promise to pay to the
order of CONSUELO P. TORRES the sum of SEVEN HUNDRED
FIFTY THOUSAND PESOS (P750,000.00) Philippine Currency, to
earn an interest at the rate of three per cent (3%) a month, for thirteen

The consolidated loan of P750,000.00 was secured by a real estate mortgage on a 240-square
meter lot in New Haven Village, Novaliches, Quezon City, covered by Transfer Certificate of
Title (TCT) No. RT-96686, and registered in the name of petitioner. 7 The mortgage was
signed by Corazon Ruiz for herself and as attorney-in-fact of her husband Rogelio. It was
executed on 20 March 1995, or two (2) days before the execution of the subject promissory
note. 8

Thereafter, petitioner obtained three (3) more loans from private respondent, under the
following promissory notes: (1) promissory note dated 21 April 1995, in the amount of
P100,000.00; 9 (2) promissory note dated May 23, 1995, in the amount of P100,000.00; 10 and
(3) promissory note dated December 21, 1995, in the amount of P100,000.00. 11 These
combined loans of P300,000.00 were secured by P571,000.00 worth of jewelry pledged by
petitioner to private respondent. 12
From April 1995 to March 1996, petitioner paid the stipulated 3% monthly interest on the
P750,000.00 loan, 13 amounting to P270,000.00. 14 After March 1996, petitioner was unable
to make interest payments as she had difficulties collecting from her clients in her jewelry
business. 15
Due to petitioner's failure to pay the principal loan of P750,000.00, as well as the interest
payment for April 1996, private respondent demanded payment not only of the P750,000.00
loan, but also of the P300,000.00 loan. 16 When petitioner failed to pay, private respondent
sought the extra-judicial foreclosure of the aforementioned real estate mortgage. 17

393
On September 5, 1996, Acting Clerk of Court and Ex-Oficio Sheriff Perlita V. Ele, Deputy
Sheriff In-Charge Rolando G. Acal and Supervising Sheriff Silverio P. Bernas issued a Notice
of Sheriff's Sale of subject lot. The public auction was scheduled on October 8, 1996. 18
On October 7, 1996, one (1) day before the scheduled auction sale, petitioner filed a complaint
with the RTC of Quezon City docketed as Civil Case No. Q-96-29024, with a prayer for the
issuance of a Temporary Restraining Order to enjoin the sheriff from proceeding with the
foreclosure sale and to fix her indebtedness to private respondent to P706,000.00. The
computed amount of P706,000.00 was based on the aggregate loan of P750,000.00, covered by
the March 22, 1995 promissory note, plus the other loans of P300,000.00, covered by separate
promissory notes, plus interest, minus P571,000.00 representing the amount of jewelry pledged
in favor of private respondent. 19
The trial court granted the prayer for the issuance of a Temporary Restraining Order, 20 and on
29 October 1996, issued a writ of preliminary injunction. 21 In its Decision dated May 19,
1997, it ordered the Clerk of Court and Ex-Oficio Sheriff to desist with the foreclosure sale of
the subject property, and it made permanent the writ of preliminary injunction. It held that the
real estate mortgage is unenforceable because of the lack of the participation and signature of
petitioner's husband. It noted that although the subject real estate mortgage stated that
petitioner was "attorney-in-fact for herself and her husband," the Special Power of Attorney
was never presented in court during the trial. 22
The trial court further held that the promissory note in question is a unilateral contract of
adhesion drafted by private respondent. It struck down the contract as repugnant to public
policy because it was imposed by a dominant bargaining party (private respondent) on a
weaker party (petitioner). 23 Nevertheless, it held that petitioner still has an obligation to pay
the private respondent. Private respondent was further barred from imposing on petitioner the
obligation to pay the surcharge of one percent (1%) per month from March 1996 onwards, and
interest of ten percent (10%) a month, compounded monthly from September 1996 to January
1997. Petitioner was thus ordered to pay the amount of P750,000.00 plus three percent (3%)
interest per month, or a total of P885,000.00, plus legal interest from date of [receipt of] the
decision until the total amount of P885,000.00 is paid. 24
Aside from the foregoing, the trial court took into account petitioner's proposal to pay her other
obligations to private respondent in the amount of P392,000.00. 25
The trial court also recognized the expenses borne by private respondent with regard the
foreclosure sale and attorney's fees. As the notice of the foreclosure sale has already been
published, it ordered the petitioner to reimburse private respondent the amount of P15,000.00
plus attorney's fees of the same amount. 26

TOTAL P1,307,000.00
with legal interest from date of receipt of decision until payment of total amount of
P1,307,000.00 has been made. 27
Private respondent's motion for reconsideration was denied in an Order dated July 21, 1997.
Private respondent appealed to the Court of Appeals. The appellate court set aside the decision
of the trial court. It ruled that the real estate mortgage is valid despite the non-participation of
petitioner's husband in its execution because the land on which it was constituted is
paraphernal property of petitioner-wife. Consequently, she may encumber the lot without the
consent of her husband. 28 It allowed its foreclosure since the loan it secured was not paid.
Nonetheless, the appellate court declared as invalid the 10% compounded monthly
interest 29 and the 10% surcharge per month stipulated in the promissory notes dated May 23,
1995 and December 1, 1995, 30 and so too the 1% compounded monthly interest stipulated in
the promissory note dated 21 April 1995, 31 for being excessive, iniquitous, unconscionable,
and contrary to morals. It held that the legal rate of interest of 12% per annum shall apply after
the maturity dates of the notes until full payment of the entire amount due, and that the only
permissible rate of surcharge is 1% per month, without compounding. 32 The appellate court
also granted attorney's fees in the amount of P50,000.00, and not the stipulated 25% of the
amount due, following the ruling in the case of Medel v. Court of Appeals. 33
Now, before this Court, petitioner assigns the following errors:
(1) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN RULING THAT
THE PROMISSORY NOTE OF P750,000.00 IS NOT A CONTRACT OF ADHESION
DESPITE THE CLEAR SHOWING THAT THE SAME IS A READY-MADE CONTRACT
PREPARED BY (THE) RESPONDENT CONSUELO TORRES AND DID NOT REFLECT
THEIR TRUE INTENTIONS AS IT WEIGHED HEAVILY IN FAVOR OF RESPONDENT
AND AGAINST PETITIONER.
(2) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN DECLARING
THAT THE PROPERTY COVERED BY THE SUBJECT DEED OF MORTGAGE OF
MARCH 20, 1995 IS A PARAPHERNAL PROPERTY OF THE PETITIONER AND NOT
CONJUGAL EVEN THOUGH THE ISSUE OF WHETHER OR NOT THE MORTGAGED
PROPERTY IS PARAPHERNAL WAS NEVER RAISED, NOR DISCUSSED AND
ARGUED BEFORE THE TRIAL COURT.

Principal Loan P750,000.00

(3) PUBLIC RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

DISREGARDING THE TRIAL COURT'S COMPUTATION OF THE ACTUAL
OBLIGATIONS OF THE PETITIONER WITH (THE) RESPONDENT TORRES EVEN
THOUGH THE SAME IS BASED ON EVIDENCE SUBMITTED BEFORE IT.

Interest 135,000.00

The pertinent issues to be resolved are:

Other Loans 392,000.00

(1) Whether the promissory note of P750,000.00 is a contract of adhesion;

Publication Fees 15,000.00

(2) Whether the real property covered by the subject deed of mortgage dated March 20, 1995 is
paraphernal property of petitioner; and

Thus, the trial court computed petitioner's obligation to private respondent, as follows:

Attorney's Fees 15,000.00

394
(3) Whether the rates of interests and surcharges on the obligation of petitioner to private
respondent are valid.
I
We hold that the promissory note in the case at bar is not a contract of adhesion. In Sweet
Lines, Inc. vs. Teves, 34 this Court discussed the nature of a contract of adhesion as follows:
". . . there are certain contracts almost all the provisions of which
have been drafted only by one party, usually a corporation. Such
contracts are called contracts of adhesion, because the only
participation of the other party is the signing of his signature or his
'adhesion' thereto. Insurance contracts, bills of lading, contracts of
sale of lots on the installment plan fall into this category. 35
" . . . it is drafted only by one party, usually the corporation, and is
sought to be accepted or adhered to by the other party . . . who cannot
change the same and who are thus made to adhere hereto on the `take
it or leave it' basis . . ." 36
In said case of Sweet Lines, 37 the conditions of the contract on the 4 x 6 inches
passenger ticket are in fine print. Thus we held:
" . . . it is hardly just and proper to expect the passengers to examine
their tickets received from crowded/congested counters, more often
than not during rush hours, for conditions that may be printed
thereon, much less charge them with having consented to the
conditions, so printed, especially if there are a number of such
conditions in fine print, as in this case." 38
We further stressed in the said case that the questioned 'Condition No. 14' was prepared solely
by one party which was the corporation, and the other party who was then a passenger had no
say in its preparation. The passengers have no opportunity to examine and consider the terms
and conditions of the contract prior to the purchase of their tickets. 39
In the case at bar, the promissory note in question did not contain any fine print provision
which could not have been examined by the petitioner. Petitioner had all the time to go over
and study the stipulations embodied in the promissory note. Aside from the March 22, 1995
promissory note for P750,000.00, three other promissory notes of different dates and amounts
were executed by petitioner in favor of private respondent. These promissory notes contain
similar terms and conditions, with a little variance in the terms of interests and surcharges. The
fact that petitioner and private respondent had entered into not only one but several loan
transactions shows that petitioner was not in any way compelled to accept the terms allegedly
imposed by private respondent. Moreover, petitioner, in her complaint 40 dated October 7,
1990 filed with the trial court, never claimed that she was forced to sign the subject note.
Paragraph five of her complaint states:

"That on or about March 22, 1995 plaintiff was required by the

defendant Torres to execute a promissory note consolidating her
unpaid principal loan and interests which said defendant computed to
be in the sum of P750,000.00 . . ."

To be required is certainly different from being compelled. She could have rejected the
conditions made by private respondent. As an experienced businesswoman, she ought to
understand all the conditions set forth in the subject promissory note. As held by this
Court in Lee, et al. vs. Court of Appeals, et al., 41 it is presumed that a person takes
ordinary care of his concerns. 42 Hence, the natural presumption is that one does not sign
a document without first informing himself of its contents and consequences. This
presumption acquires greater force in the case at bar where not only one but several
documents were executed at different times by petitioner in favor of private respondent.
II
We also affirm the ruling of the appellate court that the real property covered by the subject
deed of mortgage is paraphernal property. The property subject of the mortgage is registered in
the name of "Corazon G. Ruiz, of legal age, married to Rogelio Ruiz, Filipinos." Thus, title is
registered in the name of Corazon alone because the phrase "married to Rogelio Ruiz" is
merely descriptive of the civil status of Corazon and should not be construed to mean that her
husband is also a registered owner. Furthermore, registration of the property in the name of
"Corazon G. Ruiz, of legal age, married to Rogelio Ruiz" is not proof that such property was
acquired during the marriage, and thus, is presumed to be conjugal. The property could have
been acquired by Corazon while she was still single, and registered only after her marriage to
Rogelio Ruiz. Acquisition of title and registration thereof are two different acts. 43 The
presumption under Article 116 of the Family Code that properties acquired during the marriage
are presumed to be conjugal cannot apply in the instant case. Before such presumption can
apply, it must first be established that the property was in fact acquired during the marriage. In
other words, proof of acquisition during the marriage is a condition sine qua non for the
operation of the presumption in favor of conjugal ownership. 44 No such proof was offered nor
presented in the case at bar. Thus, on the basis alone of the certificate of title, it cannot be
presumed that said property was acquired during the marriage and that it is conjugal property.
Since there is no showing as to when the property in question was acquired, the fact that the
title is in the name of the wife alone is determinative of its nature as
paraphernal, i.e., belonging exclusively to said spouse. 45 The only import of the title is that
Corazon is the owner of said property, the same having been registered in her name alone, and
that she is married to Rogelio Ruiz. 46
III
We now resolve the issue of whether the rates of interests and surcharges on the obligation of
petitioner to private respondent are legal.
The four (4) unpaid promissory notes executed by petitioner in favor of private respondent are
in the following amounts and maturity dates:
(1) P750,000.00, dated March 22, 1995 matured on April 21, 1996;
(2) P100,000.00, dated April 21, 1995 matured on August 21, 1995;
(3) P100,000.00, dated May 23, 1995 matured on November 23,
1995; and ,
(4) P100,000.00, dated December 21, 1995 matured on March 1,
1996.
The P750,000.00 promissory note dated March 22, 1995 has the following provisions:

395
(1) 3% monthly interest, from the signing of the note until its maturity
date;
(2) 10% compounded monthly interest on the remaining balance at
maturity date;
(3) 1% surcharge on the principal loan for every month of default;
and
(4) 25% attorney's fees.
The P100,000.00 promissory note dated April 21, 1995 has the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity
date;
(2) 10% monthly interest on the remaining balance at maturity date;
(3) 1% compounded monthly surcharge on the principal loan for
every month of default; and
(4) 10% attorney's fees.
The two (2) other P100,000.00 promissory notes dated May 23, 1995 and December 1, 1995
have the following provisions:
(1) 3% monthly interest, from the signing of the note until its maturity
date;
(2) 10% compounded monthly interest on the remaining balance at
maturity date;
(3) 10% surcharge on the principal loan for every month of default;
and
(4) 10% attorney's fees.
We affirm the ruling of the appellate court, striking down as invalid the 10% compounded
monthly interest, the 10% surcharge per month stipulated in the promissory notes dated May
23, 1995 and December 1, 1995, and the 1% compounded monthly interest stipulated in the
promissory note dated April 21, 1995. The legal rate of interest of 12% per annum shall apply
after the maturity dates of the notes until full payment of the entire amount due. Also, the only
permissible rate of surcharge is 1% per month, without compounding. We also uphold the
award of the appellate court of attorney's fees, the amount of which having been reasonably
reduced from the stipulated 25% (in the March 22, 1995 promissory note) and 10% (in the
other three promissory notes) of the entire amount due, to a fixed amount of P50,000.00.
However, we equitably reduce the 3% per month or 36% per annum interest present in all four
(4) promissory notes to 1% per month or 12% per annum interest.
The foregoing rates of interests and surcharges are in accord with Medel vs. Court of
Appeals, 47 Garcia vs. Court of Appeals, 48 Bautista vs. Pilar Development
Corporation, 49 and the recent case of Spouses Solangon vs. Salazar. 50 This Court
invalidated a stipulated 5.5% per month or 66% per annum interest on a P500,000.00 loan

in Medel 51 and a 6% per month or 72% per annum interest on a P60,000.00 loan
in Solangon 52 for being excessive, iniquitous, unconscionable and exorbitant. In both cases,
we reduced the interest rate to 12% per annum. We held that while the Usury Law has been
suspended by Central Bank Circular No. 905, s. 1982, effective on January 1, 1983, and parties
to a loan agreement have been given wide latitude to agree on any interest rate, still stipulated
interest rates are illegal if they are unconscionable. Nothing in the said circular grants lenders
carte blanche authority to raise interest rates to levels which will either enslave their borrowers
or lead to a hemorrhaging of their assets.53 On the other hand, in Bautista vs. Pilar
Development Corp., 54 this Court upheld the validity of a 21% per annum interest on a
P142,326.43 loan, and in Garcia vs. Court of Appeals, sustained the agreement of the parties to
a 24% per annum interest on an P8,649,250.00 loan. It is on the basis of these cases that we
reduce the 36% per annum interest to 12%. An interest of 12% per annum is deemed fair and
reasonable. While it is true that this Court invalidated a much higher interest rate of 66% per
annum in Medel 55 and 72% in Solangon 56 it has sustained the validity of a much lower
interest rate of 21% in Bautista 57 and 24% in Garcia. 58 We still find the 36% per annum
interest rate in the case at bar to be substantially greater than those upheld by this Court in the
two (2) aforecited cases.
The 1% surcharge on the principal loan for every month of default is valid. This surcharge or
penalty stipulated in a loan agreement in case of default partakes of the nature of liquidated
damages under Art. 2227 of the New Civil Code, and is separate and distinct from interest
payment. 59Also referred to as a penalty clause, it is expressly recognized by law. It is an
accessory undertaking to assume greater liability on the part of an obligor in case of breach of
an obligation. 60 The obligor would then be bound to pay the stipulated amount of indemnity
without the necessity of proof on the existence and on the measure of damages caused by the
breach. 61 Although the courts may not at liberty ignore the freedom of the parties to agree on
such terms and conditions as they see fit that contravene neither law nor morals, good customs,
public order or public policy, a stipulated penalty, nevertheless, may be equitably reduced if it
is iniquitous or unconscionable. 62 In the instant case, the 10% surcharge per month stipulated
in the promissory notes dated May 23, 1995 and December 1, 1995 was properly reduced by
the appellate court.
In sum, petitioner shall pay private respondent the following:
1. Principal of loan under promissory note dated
March 22, 1995 P750,000.00
a. 1%

interest
per
month
on
principal
from
March 22, 1995 until fully paid, less P270,000.00
paid
by
petitioner
as
interest
from April 1995 to March 1996

b. 1% surcharge per month on principal from May

1996 until fully paid
2. Principal
of
loan
under
April 21, 1995 P100,000.00
a. 1%

promissory

interest
per
month
on
April 21, 1995 until fully paid

note
principal

dated
from

396
b. 1%

surcharge per month on principal

September 1995 until fully paid

3. Principal
of
loan
under
May 23, 1995 P100,000.00

promissory

note

from
dated

a. 1%

interest
per
month
on
May 23, 1995 until fully paid

principal

from

b. 1%

surcharge per month, on principal

December 1995 until fully paid

from

4. Principal
of
loan
under
promissory
December 1, 1995 P100,000.00

note

dated

a. 1%

interest per month on principal

December 1, 1995 until fully paid

from

b. 1%

surcharge per month, on

April 1996 until fully paid

from

principal

5. Attorney's fees P50,000.00

Hence, since the mortgage is valid and the loan it secures remains unpaid, the foreclosure
proceedings may now proceed.
IN VIEW WHEREOF, the appealed Decision of the Court of Appeals is AFFIRMED, subject
to the MODIFICATION that the interest rate of 36% per annum is ordered reduced to 12% per
annum. CaDATc

SO ORDERED.
Panganiban, Sandoval-Gutierrez, Corona and Carpio-Morales, JJ., concur.
||| (Ruiz v. Court of Appeals, G.R. No. 146942, [April 22, 2003], 449 PHIL 419-436)

397

SECOND DIVISION
[G.R. No. 73345. April 7, 1993.]
SOCIAL SECURITY SYSTEM, petitioner, vs. MOONWALK
DEVELOPMENT & HOUSING CORPORATION, ROSITA U.
ALBERTO, ROSITA U. ALBERTO, JMA HOUSE, INC.,
MILAGROS SANCHEZ SANTIAGO, in her capacity as Register
of Deeds for the Province of Cavite, ARTURO SOLITO, in his
capacity as Register of Deeds for Metro Manila District IV,
Makati, Metro Manila and the INTERMEDIATE APPELLATE
COURT, respondents.

The Solicitor General for petitioner.

K.V. Faylona & Associates for private respondents.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS; PENAL DEFINED. A penal clause has been defined as
"an accessory obligation which the parties attach to a principal obligation for the purpose of
insuring the performance thereof by imposing on the debtor a special presentation (generally
consisting in the payment of a sum of money) in case the obligation is not fulfilled or is
irregularly or inadequately fulfilled" (3 Castan 8th Ed. p. 118).
2. ID.; ID.; ACCESSORY OBLIGATION, DEFINED. An accessory obligation has been
defined as that attached to a principal obligation in order to complete the same or take its place
in the case of breach (4 Puig Pea Part 1 p. 76). Note therefore that an accessory obligation is
dependent for its existence on the existence of a principal obligation. A principal obligation
may exist without an accessory obligation but an accessory obligation cannot exist without a
principal obligation. For example, the contract of mortgage is an accessory obligation to
enforce the performance of the main obligation of indebtedness. An indebtedness can exist
without the mortgage but a mortgage cannot exist without the indebtedness, which is the
principal obligation. In the present case, the principal obligation is the loan between the parties.
The accessory obligation of a penal clause is to enforce the main obligation of payment of the
loan. If therefore the principal obligation does not exist the penalty being accessory cannot
exist.
3. ID.; ID.; PENALTY; WHEN DEMANDABLE. A penalty is demandable in case of non
performance or late performance of the main obligation. In other words in order that the
penalty may arise there must be a breach of the obligation either by total or partial non
fulfillment or there is non fulfillment in point of time which is called mora or delay. The debtor
therefore violates the obligation in point of time if there is mora or delay. Now, there is no

mora or delay unless there is a demand. It is noteworthy that in the present case during all the
period when the principal obligation was still subsisting, although there were late amortizations
there was no demand made by the creditor, plaintiff-appellant for the payment of the penalty.
Therefore up to the time of the letter of plaintiff-appellant there was no demand for the
payment of the penalty, hence the debtor was no in mora in the payment of the penalty.
4. ID.; ID.; ID.; DUAL FUNCTION OF A PENAL CLAUSE. A penal clause is an
accessory undertaking to assume greater liability in case of breach.6 It has a double function:
(1) to provide for liquidated damages, and (2) to strengthen the coercive force of the obligation
by the threat of greater responsibility in the event of breach. From the foregoing, it is clear that
a penal clause is intended to prevent the obligor from defaulting in the performance of his
obligation. Thus, if there should be default, the penalty may be enforced. One commentator of
the Civil Code wrote; "Now when is the penalty deemed demandable in accordance with the
provisions of the Civil Code? We must make a distinction between a positive and a negative
obligation. With regard to obligations which are positive (to give and to do), the penalty is
demandable when the debtor is in mora; hence, the necessity of demand by the debtor unless
the same is excused . . ." 4 E.P. Caguioa, Comments and Cases on Civil Law 280 (1983 ed.)
5. ID.; ID.; DEFAULT, WHEN INCURRED; WHEN DEMAND NOT NECESSARY; NOT
APPLICABLE IN CASE AT BAR. Under the Civil Code, delay begins from the time the
obligee judicially or extrajudicially demands from the obligor the performance of the
obligation. There are only three instances when demand is not necessary to render the obligor
in default. These are the following: "(1) When the obligation or the law expressly so declares;
(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 the demand would be
useless, as when the obligor has rendered it beyond his power to perform." (Civil Code, Art.
1169) This case does not fall within any of the established exceptions. Hence, despite the
provision in the promissory note that "(a)ll amortization payments shall be made every first
five (5) days of the calendar month until the principal and interest on the loan or any portion
thereof actually released has been fully paid," petitioner is not excused from making a demand.
It has been established that at the time of payment of the full obligation, private respondent
Moonwalk has long been delinquent in meeting its monthly arrears and in paying the full
amount of the loan itself as the obligation matured sometime in January, 1977. But mere
delinquency in payment does not necessarily mean delay in the legal concept.
6. ID.; ID.; ID.; REQUISITES; NOT PRESENT IN CASE AT BAR. To be in default ". . . is
different from mere delay in the grammatical sense, because it involves the beginning of a
special condition or status which has its own peculiar effects or results." 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 and extrajudicially. Default generally
begins from the moment the creditor demands the performance of the obligation. Nowhere in
this case did it appear that SSS demanded from Moonwalk the payment of its monthly
amortizations. Neither did it show that petitioner demanded the payment of the stipulated
penalty upon the failure of Moonwalk to meet its monthly amortization. What the complaint
itself showed was that SSS tried to enforce the obligation sometime in September, 1977 by
foreclosing the real estate mortgages executed by Moonwalk in favor of SSS. But this

398
foreclosure did not push through upon Moonwalk's requests and promises to pay in full. The
next demand for payment happened on October 1, 1979 when SSS issued a Statement of
Account to Moonwalk. And in accordance with said statement, Moonwalk paid its loan in full.
What is clear, therefore, is that Moonwalk was never in default because SSS never compelled
performance. Though it tried to foreclose the mortgages, SSS itself desisted from doing so
upon the entreaties of Moonwalk. If the Statement of Account could properly be considered as
demand for payment, the demand was complied with on time. Hence, no delay occurred and
there was, therefore, no occasion when the penalty became demandable and enforceable. Since
there was no default in the performance of the main obligation payment of the loan SSS
was never entitled to recover any penalty, not at the time it made the Statement of Account and
certainly, not after the extinguishment of the principal obligation because then, all the more
that SSS had no reason to ask for the penalties. Thus, there could never be any occasion for
waiver or even mistake in the application for payment because there was nothing for SSS to
waive as its right to enforce the penalty did not arise.

DECISION

CAMPOS, JR., J p:
Before Us is a petition for review on certiorari of decision 1 of the then Intermediate Appellate
Court affirming in toto the decision of the former Court of First Instance of Rizal, Seventh
Judicial District, Branch XXIX, Pasay City.

The Order of October 6, 1980 dismissing the complaint followed the

submission by the parties on September 19, 1980 of the following
stipulation of Facts:
"1. On October 6, 1971, plaintiff approved the
application of defendant Moonwalk for an interim loan in
the
amount
of
THIRTY
MILLION
PESOS
(P30,000,000.00) for the purpose of developing and
constructing a housing project in the provinces of Rizal
and Cavite;
"2. Out of the approved loan of THIRTY
MILLION PESOS (P30,000,000.00), the sum of
P9,595,000.00 was released to defendant Moonwalk as of
November 28, 1973;
"3. A third Amended Deed of First Mortgage
was executed on December 18, 1973 Annex `D' providing
for restructuring of the payment of the released amount of
P9,595,000.00.
"4. Defendants Rosita U. Alberto and Rosita U.
Alberto, mother and daughter respectively, under
paragraph 5 of the aforesaid Third Amended Deed of First
Mortgage substituted Associated Construction and
Surveys Corporation, Philippine Model Homes
Development Corporation, Mariano Z. Velarde and
Eusebio T. Ramos, as solidary obligors;

The facts as found by the Appellate Court are as follows:

"On February 20, 1980, the Social Security System, SSS for brevity,
filed a complaint in the Court of First Instance of Rizal against
Moonwalk Development & Housing Corporation, Moonwalk for
short, alleging that the former had committed an error in failing to
compute the 12% interest due on delayed payments on the loan of
Moonwalk resulting in a chain of errors in the application of
payments made by Moonwalk and, in an unpaid balance on the
principal loan agreement in the amount of P7,053.77 and, also in not
reflecting in its statement or account an unpaid balance on the said
penalties for delayed payments in the amount of P7,517,178.21 as of
October 10, 1979.
Moonwalk answered denying SSS' claims and asserting that SSS had
the opportunity to ascertain the truth but failed to do so. LLjur
The trial court set the case for pre-trial at which pre-trial conference,
the court issued an order giving both parties thirty (30) days within
which to submit a stipulation of facts.

"5. On July 23, 1974, after considering

additional releases in the amount of P2,659,700.00, made
to defendant Moonwalk, defendant Moonwalk delivered to
the plaintiff a promissory note for TWELVE MILLION
TWO HUNDRED FIFTY FOUR THOUSAND SEVEN
HUNDRED PESOS (P12,254,700.00) Annex `E', signed
by Eusebio T. Ramos, and the said Rosita U. Alberto and
Rosita U. Alberto;
"6. Moonwalk made a total payment of
P23,657,901.84 to SSS for the loan principal of
P12,254,700.00 released to it. The last payment made by
Moonwalk in the amount of P15,004,905.74 were based
on the Statement of Account, Annex "F" prepared by
plaintiff SSS for defendant;
"7. After settlement of the account stated in
Annex 'F' plaintiff issued to defendant Moonwalk the
Release of Mortgage for Moonwalk's mortgaged
properties in Cavite and Rizal, Annexes 'G' and 'H' on
October 9, 1979 and October 11, 1979 respectively.

399
"8. In letters to defendant Moonwalk, dated
November 28, 1979 and followed up by another letter
dated December 17, 1979, plaintiff alleged that it
committed an honest mistake in releasing defendant.
"9. In a letter dated December 21, 1979,
defendant's counsel told plaintiff that it had completely
paid its obligations to SSS;
"10. The genuineness and due execution of the
documents marked as Annex (sic) 'A' to 'O' inclusive, of
the Complaint and the letter dated December 21, 1979 of
the defendant's counsel to the plaintiff are admitted.
"Manila for Pasay City, September 2, 1980." 2
On October 6, 1990, the trial court issued an order dismissing the complaint on the ground that
the obligation was already extinguished by the payment by Moonwalk of its indebtedness to
SSS and by the latter's act of cancelling the real estate mortgages executed in its favor by
defendant Moonwalk. The Motion for Reconsideration filed by SSS with the trial court was
likewise dismissed by the latter.
These orders were appealed to the Intermediate Appellate Court. Respondent Court reduced the
errors assigned by the SSS into this issue: ". . . are defendants-appellees, namely, Moonwalk
Development and Housing Corporation, Rosita U. Alberto, Rosita U. Alberto, JMA House, Inc.
still liable for the unpaid penalties as claimed by plaintiff-appellant or is their obligation
extinguished?" 3 As We have stated earlier, the respondent Court held that Moonwalk's
obligation was extinguished and affirmed the trial court.
Hence, this Petition wherein SSS raises the following grounds for review: cdll
"First, in concluding that the penalties due from Moonwalk are
"deemed waived and/or barred," the appellate court disregarded the
basic tenet that waiver of a right must be express, made in a clear and
unequivocal manner. There is no evidence in the case at bar to show
that SSS made a clear, positive waiver of the penalties, made with full
knowledge of the circumstances.
Second, it misconstrued the ruling that SSS funds are trust funds, and
SSS, being a mere trustee, cannot perform acts affecting the same,
including condonation of penalties, that would diminish property
rights of the owners and beneficiaries thereof. (United Christian
Missionary Society v. Social Security Commission, 30 SCRA 982,
988 [1969]).
Third, it ignored the fact that penalty at the rate of 12% p.a. is not
inequitable.
Fourth, it ignored the principle that equity will cancel a release on the
ground of mistake of fact." 4

The same problem which confronted the respondent court is presented before Us: Is the penalty
demandable even after the extinguishment of the principal obligation?
The former Intermediate Appellate Court, through Justice Eduard P. Caguioa, held in the
negative. It reasoned, thus:
"2. As we have explained under No. 1, contrary to what the plaintiffappellant states in its Brief, what is sought to be recovered in this case
is not the 12% interest on the loan but the 12% penalty for failure to
pay on time the amortization. What is sought to be enforced therefore
is the penal clause of the contract entered into between the parties.
Now, what is a penal clause. A penal clause has been defined as
"an accessory obligation which the parties
attach to a principal obligation for the purpose of insuring
the performance thereof by imposing on the debtor a
special presentation (generally consisting in the payment
of a sum of money) in case the obligation is not fulfilled or
is irregularly or inadequately fulfilled" (3 Castan 8th Ed.
p. 118).
Now an accessory obligation has been defined as that attached to a
principal obligation in order to complete the same or take its place in
the case of breach (4 Puig Pea Part 1 p. 76). Note therefore that an
accessory obligation is dependent for its existence on the existence of
a principal obligation. A principal obligation may exist without an
accessory obligation but an accessory obligation cannot exist without
a principal obligation. For example, the contract of mortgage is an
accessory obligation to enforce the performance of the main
obligation of indebtedness. An indebtedness can exist without the
mortgage but a mortgage cannot exist without the indebtedness,
which is the principal obligation. In the present case, the principal
obligation is the loan between the parties. The accessory obligation of
a penal clause is to enforce the main obligation of payment of the
loan. If therefore the principal obligation does not exist the penalty
being accessory cannot exist.
Now then when is the penalty demandable? A penalty is demandable
in case of non performance or late performance of the main
obligation. In other words in order that the penalty may arise there
must be a breach of the obligation either by total or partial non
fulfillment or there is non fulfillment in point of time which is called
mora or delay. The debtor therefore violates the obligation in point of
time if there is mora or delay. Now, there is no mora or delay unless
there is a demand. It is noteworthy that in the present case during all
the period when the principal obligation was still subsisting, although
there were late amortizations there was no demand made by the
creditor, plaintiff-appellant for the payment of the penalty. Therefore
up to the time of the letter of plaintiff-appellant there was no demand

400
for the payment of the penalty, hence the debtor was no in mora in the
payment of the penalty.
However, on October 1, 1979, plaintiff-appellant issued its statement
of account (Exhibit F) showing the total obligation of Moonwalk as
P15,004,905.74, and forthwith demanded payment from defendantappellee. Because of the demand for payment, Moonwalk made
several payments on September 29, October 9 and 19, 1979
respectively, all in all totalling P15,004,905.74 which was a complete
payment of its obligation as stated in Exhibit F. Because of this
payment the obligation of Moonwalk was considered extinguished,
and pursuant to said extinguishment, the real estate mortgages given
by Moonwalk were released on October 9, 1979 and October 10,
1979 (Exhibits G and H). For all purposes therefore the principal
obligation of defendant-appellee was deemed extinguished as well as
the accessory obligation of real estate mortgage; and that is the reason
for the release of all the Real Estate Mortgages on October 9 and 10,
1979 respectively. LibLex
Now, besides the Real Estate Mortgages, the penal clause which is
also an accessory obligation must also be deemed extinguished
considering that the principal obligation was considered extinguished,
and the penal clause being an accessory obligation. That being the
case, the demand for payment of the penal clause made by plaintiffappellant in its demand letter dated November 28, 1979 and its follow
up letter dated December 17, 1979 (which parenthetically are the only
demands for payment of the penalties) are therefore ineffective as
there was nothing to demand. It would be otherwise, if the demand
for the payment of the penalty was made prior to the extinguishment
of the obligation because then the obligation of Moonwalk would
consist of: 1) the principal obligation 2) the interest of 12% on the
principal obligation and 3) the penalty of 12% for late payment for
after demand, Moonwalk would be in mora and therefore liable for
the penalty.
Let it be emphasized that at the time of the demand made in the letters
of November 28, 1979 and December 17, 1979 as far as the penalty is
concerned, the defendant-appellee was not in default since there was
no mora prior to the demand. That being the case, therefore, the
demand made after the extinguishment of the principal obligation
which carried with it the extinguishment of the penal clause being
merely an accessory obligation, was an exercise in futility.
3. At the time of the payment made of the full obligation on October
10, 1979 together with the 12% interest by defendant-appellee
Moonwalk, its obligation was extinguished. It being extinguished,
there was no more need for the penal clause. Now, it is to be noted
that penalty at anytime can be modified by the Court. Even
substantial performance under Art. 1234 authorizes the Court to
consider it as complete performance minus damages. Now, Art,
1229 Civil Code of the Philippines provides:

"ART. 1229. The judge shall equitably reduce

the penalty when the principal obligation has been partly
or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced
by the courts if it is iniquitous or unconscionable."
If the penalty can be reduced after the principal obligation has been
partly or irregularly complied with by the debtor, which is
nonetheless a breach of the obligation, with more reason the penal
clause is not demandable when full obligation has been complied with
since in that case there is no breach of the obligation. In the present
case, there has been as yet no demand for payment of the penalty at
the time of the extinguishment of the obligation, hence there was
likewise an extinguishment of the penalty.

Let Us emphasize that the obligation of defendant-appellee was fully

complied with by the debtor, that is, the amount loaned together with
the 12% interest has been fully paid by the appellee. That being so,
there is no basis for demanding the penal clause since the obligation
has been extinguished. Here there has been a waiver of the penal
clause as it was not demanded before the full obligation was fully
paid and extinguished. Again, emphasis must be made on the fact that
plaintiff-appellant has not lost anything under the contract since in got
back in full the amount loan (sic) as well as the interest thereof. The
same thing would have happened if the obligation was paid on time,
for then the penal clause, under the terms of the contract would not
apply. Payment of the penalty does not mean gain or loss of plaintiffappellant since it is merely for the purpose of enforcing the
performance of the main obligation has been fully complied with and
extinguished, the penal clause has lost its raison d' entre." 5
We find no reason to depart from the appellate court's decision. We, however, advance the
following reasons for the denial of this petition.
Article 1226 of the Civil Code provides:
"Art. 1226. In obligations with a penal clause, he penalty shall
substitute the indemnity for damages and the payment of interests in
case of noncompliance, if there is no stipulation to the contrary.
Nevertheless, damages shall be paid if the obligor refuses to pay the
penalty or is guilty of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in
accordance with the provisions of this Code." (Emphasis Ours.)
A penal clause is an accessory undertaking to assume greater liability in case of
breach. 6 It has a double function: (1) to provide for liquidated damages, and (2) to
strengthen the coercive force of the obligation by the threat of greater responsibility in the
event of breach. 7 From the foregoing, it is clear that a penal clause is intended to prevent

401
the obligor from defaulting in the performance of his obligation. Thus, if there should be
default, the penalty may be enforced. One commentator of the Civil Code wrote: prcd
"Now when is the penalty deemed demandable in accordance with the
provisions of the Civil Code? We must make a distinction between a
positive and a negative obligation. With regard to obligations which
are positive (to give and to do), the penalty is demandable when the
debtor is in mora; hence, the necessity of demand by the debtor
unless the same is excused . . ." 8
When does delay arise? Under the Civil Code, delay begins from the time the obligee
judicially or extrajudicially demands from the obligor the performance of the obligation.
"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."
There are only three instances when demand is not necessary to render the obligor in
default. These are the following:
"(1) When the obligation or the law expressly so declares;
(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 the demand would be useless, as when the obligor has
rendered it beyond his power to perform." 9
This case does not fall within any of the established exceptions. Hence, despite the
provision in the promissory note that "(a)ll amortization payments shall be made every
first five (5) days of the calendar month until the principal and interest on the loan or any
portion thereof actually released has been fully paid," 10 petitioner is not excused from
making a demand. It has been established that at the time of payment of the full
obligation, private respondent Moonwalk has long been delinquent in meeting its
monthly arrears and in paying the full amount of the loan itself as the obligation matured
sometime in January, 1977. But mere delinquency in payment does not necessarily mean
delay in the legal concept. To be in default ". . . is different from mere delay in the
grammatical sense, because it involves the beginning of a special condition or status
which has its own peculiar effects or results." 11 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 and extrajudicially. 12 Default generally
begins from the moment the creditor demands the performance of the obligation. 13
Nowhere in this case did it appear that SSS demanded from Moonwalk the payment of its
monthly amortizations. Neither did it show that petitioner demanded the payment of the
stipulated penalty upon the failure of Moonwalk to meet its monthly amortization. What the
complaint itself showed was that SSS tried to enforce the obligation sometime in September,
1977 by foreclosing the real estate mortgages executed by Moonwalk in favor of SSS. But this
foreclosure did not push through upon Moonwalk's requests and promises to pay in full. The
next demand for payment happened on October 1, 1979 when SSS issued a Statement of

Account to Moonwalk. And in accordance with said statement, Moonwalk paid its loan in full.
What is clear, therefore, is that Moonwalk was never in default because SSS never compelled
performance. Though it tried to foreclose the mortgages, SSS itself desisted from doing so
upon the entreaties of Moonwalk. If the Statement of Account could properly be considered as
demand for payment, the demand was complied with on time. Hence, no delay occurred and
there was, therefore, no occasion when the penalty became demandable and enforceable. Since
there was no default in the performance of the main obligation payment of the loan SSS
was never entitled to recover any penalty, not at the time it made the Statement of Account and
certainly, not after the extinguishment of the principal obligation because then, all the more
that SSS had no reason to ask for the penalties. Thus, there could never be any occasion for
waiver or even mistake in the application for payment because there was nothing for SSS to
waive as its right to enforce the penalty did not arise.
SSS, however, in buttressing its claim that it never waived the penalties, argued that the funds
it held were trust funds and as trustee, the petitioner could not perform acts affecting the funds
that would diminish property rights of the owners and beneficiaries thereof. To support its
claim, SSS cited the case of United Christian Missionary Society v. Social Security
Commission. 14
We looked into the case and found out that it is not applicable to the present case as it dealt not
with the right of the SSS to collect penalties which were provided for in contracts which it
entered into but with its right to collect premiums and its duty to collect the penalty for delayed
payment or non-payment of premiums. The Supreme Court, in that case, stated:
"No discretion or alternative is granted respondent Commission in the
enforcement of the law's mandate that the employer who fails to
comply with his legal obligation to remit the premiums to the System
within the prescribed period shall pay a penalty of three (3%) per
month. The prescribed penalty is evidently of a punitive character,
provided by the legislature to assure that employers do not take
lightly the State's exercise of the police power in the implementation
of the Republic's declared policy "to develop, establish gradually and
perfect a social security system which shall be suitable to the needs of
the people throughout the Philippines and (to) provide protection to
employers against the hazards of disability, sickness, old age and
death . . ."
Thus, We agree with the decision of the respondent court on the matter which We quote, to wit:
"Note that the above case refers to the condonation of the penalty for
the non remittance of the premium which is provided for by Section
22(a) of the Social Security Act . . . In other words, what was sought
to be condoned was the penalty provided for by law for non
remittance of premium for coverage under the Social Security Act.
The case at bar does not refer to any penalty provided for by law nor
does it refer to the non remittance of premium. The case at bar refers
to a contract of loan entered into between plaintiff and defendant
Moonwalk Development and Housing Corporation. Note, therefore,
that no provision of law is involved in this case, nor is there any
penalty imposed by law nor a case about non-remittance of premium

402
required by law. The present case refers to a contract of loan payable
in installments not provided for by law but by agreement of the
parties. Therefore, the ratio decidendi of the case of United Christian
Missionary Society vs. Social Security Commission which plaintiffappellant relies is not applicable in this case; clearly, the Social
Security Commission, which is a creature of the Social Security Act
cannot condone a mandatory provision of law providing for the
payment of premiums and for penalties for non remittance. The life of
the Social Security Act is in the premiums because these are the funds
from which the Social Security Act gets the money for its purposes
and the non-remittance of the premiums is penalized not by the Social
Security Commission but by law.
xxx xxx xxx
It is admitted that when a government created corporation enters into
a contract with private party concerning a loan, it descends to the
level of a private person. Hence, the rules on contract applicable to
private parties are applicable to it. The argument therefore that the
Social Security Commission cannot waive or condone the penalties
which was applied in the United Christian Missionary Society cannot
apply in this case. First, because what was not paid were installments
on a loan but premiums required by law to be paid by the parties
covered by the Social Security Act. Secondly, what is sought to be
condoned or waived are penalties not imposed by law for failure to
remit premiums required by law, but a penalty for non payment
provided for by the agreement of the parties in the contract between
them . . ." 15

WHEREFORE, in view of the foregoing, the petition is DISMISSED and the decision of the
respondent court is AFFIRMED. LLpr
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.

||| (Social Security System v. Moonwalk Development & Housing Corp., G.R. No. 73345, [April
7, 1993])

403

SECOND DIVISION
[G.R. No. 11433. December 20, 1916.]
ARTHUR F. ALLEN, plaintiff-appellant, vs. THE PROVINCE OF
ALBAY
and
THE
PROVINCE
OF
AMBOS
CAMARINES, defendants-appellees.

Lawrence, Ross & Block for appellant.

Attorney-General Avancea for appellees.

SYLLABUS
1. CONTRACTS; LIQUIDATED DAMAGE CLAUSE; WAIVER OF TIME
LIMIT. Where a contract for the construction of a reenforce concrete bridge fixes a
certain sum as liquidated damages for each day's delay in completing the work within the
time agreed, and it appears that the owners failed to promptly deliver the steel and
changed the plans, and the Government imposed a strict quarantine on all draft animals,
thereby causing a substantial delay, the time limit was waived and the contractor was
bound only to finish the construction within a reasonable time.
2. ID.; ID.; DELAY; APPORTIONMENT OF TIME. Where a strict
performance of a contract by the contractor has been prevented or waived by the owners
and the contractor failed to complete the work within a reasonable time, such time cannot
be apportioned by the courts, the only remedy left to the owners being a right of action
for the actual damages suffered.

DECISION

TRENT, J p:
On February 25,1913, the Director of Public Works, acting for the Provinces
of Albay and Ambos Camarines, advertised for sealed proposals, to be opened March 15,
1913, for the construction of a reenforced concrete bridge over the Argos River on the
Albay-Ambos Camarines boundary. At the request of the plaintiff, the opening of the bids
was postponed until March 20, on which date plaintiff submitted his bid to construct the

proposed bridge for the sum of P30,690. On April 25, 1913, the Director of Public Works
asked the provincial boards passed the necessary resolutions of May 6 and the plaintiff
was notified of their action on June 13. The formal contract was duly executed on June
26, 1913. The bridge was completed and accepted by the defendant provinces on April 1,
1914. The plaintiff was paid the contract price less P1,301.45, P925 being retained as
liquidated damages at the rate of P25 per day from February 15, 1914, to March 31,
1914; P175.03 for expenses of inspection from November 1, 1913, to February 15, 1914;
and P201.42 for the operation and maintenance of a ferry across the Argos River during
the last mentioned period. This action was instituted for the purpose of recovering the
amount of P1,301.45, P200 overcharges on steel not delivered, P2,000 for damages
caused by the defendants' delay, and P878 for extra work and material furnished on the
bridge at defendants' request. From a judgment in favor of the defendants dismissing the
complaint on the merits, with costs, the plaintiff appealed and now urges that the trial
court erred (1) in finding that the delay in completing the work under the contract in
question was due to the fault and negligence of the plaintiff and not to that of the
defendants; (2) in holding that the defendants were entitled to deduct from the contract
price for the construction of the bridge (a) the sum of P925 as a penalty or liquidated
damages, (b) the amount of P201.42 for the operation and maintenance of a ferry, and (c)
the amount of P175.03 for expenses of inspection; and (3) in rendering judgment in favor
of the defendants, dismissing the plaintiff's complaint and not rendering judgment for the
plaintiff for the amounts prayed for. The first and second alleged errors will be considered
together.
The contract which was, as we have said, duly executed on June 26, 1913,
provided in paragraph 4 for the completion of the bridge on or before the 1st day of
September, 1913. And in paragraph 5 it was agreed that in the event that the necessary
steel should be furnished by the provinces at ship side in Legaspi, a deduction from the
contract price should be made of 11 centavos per kilo of steel thus delivered. The
advertisement, instructions to bidders, general conditions, specifications, proposal, and
plans were made a part of the contract.
The plaintiff in his proposal stated:
"All work contemplated by this contract is to be completed
on or before four months after contractor furnishes sand and gravel."
The provincial board of Albay in its resolution of May 6 stated that it had
received a communication from the Director of Public Works to the effect that "Mr.
Allen's bid was the only one received for this work which the contractor agrees to finish
in four months." The time for the commencement of the work is not stated. The
provincial board of Ambos Camarines in its resolution of May 6 stated, "All work to be
completed on or before November 1, 1913." In "Information to bidders," which was made
a part of the contract, it was provided that "the contractor will be required to complete the
bridge and have same ready for traffic on or before September 1, 1913." The Province of
Ambos Camarines in its resolution of January 6, 1914, stated that the time for the
completion of the bridge was intended to be November 1, 1913, and the Province of
Albay in its resolution of May 5, 1914, stated that, "granting the contention of the
provincial board of Ambos Camarines, it was the intention of the parties to fix the
original date for the termination of the work on November 1, 1913, although the original
contract fixed September 1, 1913, . . ." On December 1, 1913, F. T. James, acting on

404
behalf of the plaintiff, addressed the following letter to the provincial board of the
Province of Albay:
"December 1, 1913.
"GENTLEMEN: I have the honor to request that an
extension of time be granted me for the construction of the Argos
River Bridge.
"Immediately upon entering into contract with the
Province of Albay on June 26, 1913, I ordered cement for the work,
but due to the shortage in the Manila market at that time did not
receive delivery until the middle of July, when same was shipped to
Legaspi where it arrived four days latter.
"I had made previous arrangements to have this cement
hauled to the bridge site by automobile truck, but when an attempt
was made to do so in July, the recent rains so softened the road
beyond Polangui that it was impossible to send a loaded truck over it
with any assurance of safe arrival of the cargo of cement at Argos
River in good condition. Therefore I was obliged to haul by truck to
Ligao only and from there to Argos by carabao carts.
"The contractor in Ligao then began to haul cement and
also the steel for the bridge. Shortly a quarantine on animals was put
into effect in the town of Polangui, and the hauling had to stop, when
I had delivered at the bridge site only a few barrels of cement and a
very small number of bars of steel for the piles. It was not until early
in October, therefore, that sufficient steel and cement were delivered
at the Argos River to warrant beginning work casting the piles. This
work began however immediately this condition obtained and the
sixty concrete piles were completed November 22.
"Due to the fact that the material in the Argos River, into
which the piles must be driven, is exceptionally hard and of a very
compact nature it is almost imperative that the piles have
considerably more than the usual thirty days for ripening before
driving, and of necessity I must wait at least until December 15
before handling even the first piles cast. My pile driver is being
shipped to Nueva Caceres at present writing. I am obliged to send all
my plant and balance of materials in by that port due to the fact that
nobody in Albay is willing to attempt hauling heavy machinery over
the road beyond Polangui for reasons best known to the honorable
board, and it is only a question of hauling same from Nueva Caceres
to Argos River as to the actual date of beginning driving.
"As was unforeseen, at the time of entering into contract
for this bridge, I have been obliged to use two plants on my work in
the Province of Bulacan where it was anticipated that one would be
enough, due to the unusual conditions and delays from floods and
typhoons, so I have not been able to ship my engine and driver so as
to have it at Argos River on the date expected. Therefore, for these
above-named reasons, I have the honor to request that I be granted an

extension of time until February 15, 1914, to complete the Argos

Bridge.
"Very respectfully.
"ARTHUR F. ALLEN, Contractor,
(Sgd.) "Per F. T. JAMES."
On May 5, 1914, the provincial board of the Province of Albay passed
resolution No. 227, the pertinent parts of which are as follows:
xxx xxx xxx
"Whereas there exists pending a petition of the contractor
for the extension of the termination of the work of the cited bridge
until the 15th day of February, 1914;
xxx xxx xxx
"Resolved, That this board proposes an amicable
settlement for the final settlement of this matter based upon the
following conditions:
"Grant extension to February 15, 1914, providing the
contractor will pay to the province the sum of P1,725.78, being the
amount for extra cost for inspection expense, interest on loan, cost of
ferry operation to February 15, and 37 days liquidated damages at
P25 per day for the time between February 15 and April 1, 1914.
xxx xxx xxx
"Resolved further, That all previous resolutions of this
board in regard to this matter which are in conflict hereof are hereby
repealed.
"Resolved lastly, That copies of this resolution be
furnished the district engineer, Albay, contractor Allen, provincial
treasure and provincial board of Ambos Camarines."
On June 17, 1914, the provincial board of Albay passed resolution No. 383
which, after stating the reasons for the resolution, reads:
"Resolved, That the final payment to A. F. Allen for the
construction of the Argos River Bridge be, and hereby is, authorized
according to the contract, deducting the amount of P1,301.45, same to
cover inspection charges from November 1, 1913, to February 15,
1914, operation and maintenance of ferry from November 1, 1913, to
February 15 to March 31, 1914, inclusive, Sundays and holidays
excepted, at P25 per day."
xxx xxx xxx
Copies of the above resolution were furnished the provincial treasurer and
district engineer of Albay, the provincial board of Ambos Camarines, and the plaintiff.

405
The provincial board of Ambos Camarines, in its resolution No. 669 passed
June 24, 1914, concurred in resolution No. 383 of the Province of Albay.
The provincial board of Ambos Camarines passed on January 6, 1914,
resolution No. 50, the pertinent parts of which read as follows:
"The recorder presented copy of resolution No. 1114 of the
provincial board of Albay, series of 1913, with accompanying papers,
being the application of Mr. A. F. Allen for an extension of the
contract time in which he is to complete the Argos Bridge. (on the
provincial boundary) and the recommendation of the Director of
Public Works and the district engineer of Albay.
"Being informed of the contents of said resolution and
accompanying papers,
"On motion,
"The board resolved as follows:
xxx xxx xxx
"(b) As to any further extension, the facts alleged by
contractor which must be basis of same, obstacles impeding the
transport of his supplies, occurring within the Province of Albay, this
board proposes to be guided by the recommendations of the board of
Albay in the matter. However, as it does appear that the contractor
acquiesces and accepted the extension and conditions embodied in the
resolution of the board of Albay, but on the contrary, Mr. James,
representing the contractor being present, informs the board of
Camarines that the contractor is not satisfied with the extension and
conditions embodied in the before-mentioned resolution of Albay,
therefore this board abstains from concurring in resolution No. 1114
of Albay and suggests that, if the Albay board finds cause for
extending the contract time past November 1, 1913, that the
contractor's concurrence and acceptance of such further extension be
procured before forwarding for the concurrence of this board. Further
this board believes that any arbitrary extensions (contractor not
concurring or accepting conditions) or extensions 'by grace' could
better and more properly be had upon completion of the bridge as a
final adjustment of the matter.
"Approved unanimously."
Resolution No. 1114 of the provincial board of Albay, series 1913, referred to
in resolution No. 50 of the provincial board of Ambos Camarines, was not presented
during the trial in the court below and forms no part of the record of this case.
The provinces, exercising their right under the contract, furnished all the steel
at shipside in Legaspi. The steel was received by the contractor on the following dates:
27,056 kilos on July 26, 1913; 3,636 kilos on August 4, 1913; and 7,890 kilos on
September 1, 1913. The bridge 1913; is 51.7 kilometers from Legaspi.
The first question to be determined is that relating to the time agreed upon for
the completion of the bridge. Did the contracting parties fix September 1, 1913, as the

date? On the one hand we have an explicit statement in the information to bidders that
"the contractor shall commence the work herein contracted to be done in ample time to
complete the contract within the time specified." In the contract it was expressly
stipulated that the contractor must complete the work on or before the 1st day of
September, 1913, or pay P25 a day as liquidated damages for every day thereafter. And
James in his letter of December 1, after referring to the fact that the contract was signed
on June 26, requested an extension of time for the completion of the work until February
15, 1914. While on the other hand, we have the statement of the plaintiff's proposal to the
effect that the work contemplated should be completed on or before four months after the
contractor furnished gravel and sand; the statement of the provincial board of Albay that
the contractor agreed to finish the bridge in four months; the same board's later statement
referring to the contention of the board of Ambos Camarines that it was the intention of
the parties to fix the time on November 1, the two statements of the provincial board of
Ambos Camarines to the effect that it understood that November 1 was the date agreed
on; and the fact that the provinces deducted inspection expenses and expenses for the
operation of the ferry from November 1.
It will thus be seen that the provinces did intent that the date for the
completion of the work should be November 1 and not September 1. Such were the
instructions to the Director of Public Works in consummating the contract, but the
Director did not comply with these instructions to the Director of Public Works in
consummating the contract, but the Director did not comply with these instructions as to
the date for the termination of the work. He and the contractor agreed that the date should
be September 1. Although this was not in accordance with the intention of the provinces,
yet they (the provinces) subsequently ratified the contract by their own acts furnishing
the steel and making payments. The result is that the provinces obligated themselves
through the Director of Public Works to furnish all the steel at ship side in Legaspi early
enough to permit the contractor to complete the bridge by September 1. This the
provinces did not do, as quite a large shipment of steel arrived in Legaspi on the very day
agreed upon for the completion of the bridge. It may be true that the contractor could not
have completed the bridge by September 1, if all of the steel had arrived in Legaspi
immediately after the signing of the contract.
Even admitting that the true date for the completion of the bridge was
November 1, yet the contractor could not have completed the work on or before that date
on account of the quarantine established and enforced by the authorities. James, in his
letter of December 1 asking for the extension of time, said, "The contractor in Ligao then
began to haul the cement and also the steel for the bridge. Shortly a quarantine on
animals was put into effect in the town of Polangui, and the hauling had to stop when I
had delivered at the bridge site only a few barrels of cement and a very small number of
bars of steel for the piles." And James in his testimony says, "Jaucian was unable to
promptly deliver these materials at the Argos bridge site, due to a rinderpest quarantine
placed, I think, by the Bureau of Agriculture on carabao and cattle passing on the
interprovincial road between Ambos Camarines, Albay, and in all of the towns north of
Ligao." Jaucian in his deposition testified that he encountered difficulties in hauling
materials for the bridge from Ligao to the Argos River; that the first difficulty was the
quarantine placed upon animals in Polangui; that he had been delivering the materials for
a week when the quarantine was ordered; that the quarantine, as he remembered,
commenced in July and was removed in October or November; that the quarantine was
uninterrupted during this time; and that it consisted in a definite or absolute prohibition
against the passage of animals from kilometer 30 to kilometer 40. So it is conclusively

406
established that the only way that the contractor had of moving the materials from Ligao
to the bridge site was by means of animals and that this could not be done from sometime
in July until October or November on account of the quarantine.
Marshall, the district engineer who represented the provinces during the
construction of the bridge, testified that the plans called for the piles of the bridge to be
11 meters long; that the contract was signed on this basis; that after the contract had been
signed Von Schmelling, the former district engineer, was down there and in a verbal
conversation it was decided that instead of casting the piles 11 meters long they should be
cast 9 meters long, thereby saving something like 13 cubic meters of concrete; that on
October 11 or 12 there came a flood and the water rose about 15 centimeters higher than
the extreme high water shown in the original plans; that it was thereafter agreed to raise
the caps on the piles 42 centimeters higher; and that the raising of the bridge was outside
of the original specifications. The testimony of this witness is corroborated on this point
by both the plaintiff and James.
The plaintiff, through his agent, requested an extension of time until February
15, 1914, within which to complete the bridge, but the parties did not agree upon the
extension. From the resolution of the provincial board of Ambos Camarines, dated
January 6, 1914, it appears that Albay imposed certain conditions in consideration for the
extension, which were rejected by the plaintiff.
We must, therefore, conclude that the provinces waived the contract time,
whether it were September 1 or November 1, by their failure to deliver the steel promptly,
by reason of having placed the strict quarantine on animals and on account of the change
in the plan subsequent to October 12, and that the waver operated to eliminate the definite
date from which to assess liquidated damages; and though the plaintiff, in continuing the
work, was obligated to complete the same within a reasonable time, the liquidated
damage clause was not thereby restored and made applicable to an unreasonable time.
Where strict performance on the part of the contractor is prevented or waived by the other
party, a claim by such party of fines and penalties for delay or failure cannot be sustained.
(District of Columbia vs. Camden Iron Works, 181 U.S.. 453.) The same rule applies in
cases containing liquidated damage clauses. (United Engineering and Contracting Co. vs.
U.S., 47 Ct. Cls., 489 [1912].) If it be true that the plaintiff contractor was responsible for
a large number of days of delay and the provinces for only a few of the days thereof, yet,
under such circumstances, we cannot "apportion" such delay between the contracting
parties and hold the contractor liable in liquidated damages for the number of days
delayed by him in completing the bridge. (Jefferson Hotel Co. vs. Brumbaugh, 168 Fed.
Rep., 867 and cases cited therein; Willis vs. Webster, 37 N.Y. Sup., 354; Mosler Safe
Co. vs. Maiden Lane Safe Dep. Co., 199 N. Y., 479; 37 L. R. A. (N.S.) 363, decided in
1910.) The result is that the provinces are limited to such damages which they may have
suffered on account of an unreasonable delay on the part of the plaintiff in completing the
bridge, if there were, in fact, an unreasonable delay. It would seem, however, that as the
plaintiff asked for an extension on December 1, sometime after the quarantine had been
raised and also after the change in the plans had been made, until February 15, 1914, he
should have finished the work on or before the latter dated and all time thereafter would
constitute an unreasonable delay. However this may be, the provinces have proven no
actual damages resulting after February 15. It is true that they deducted P175.03 for
inspection charges, but this was done for such inspection prior to February 15, and the
same is true of the item of P201.42 for the maintenance of a ferry. Certainly there was no
unreasonable delay prior to February 15. Consequently, the provinces had no right to
withhold the P1,301.45.

The plaintiff sought to recover, in addition to the amount withheld, P200

overcharges on steel, P2,000 for damages caused by the defendants' delay, and P878 for
extra work and material furnished at defendants' request. While it is true that the question
whether the plaintiff is entitled to recover these amounts is raised by the third assignment
of error, yet no specific reference is made in the plaintiff's brief to said amounts, counsel
saying nothing more than, "It is respectfully submitted that appellant is entitled to a
reversal of the decision of the Court of First Instance, and to an order for judgment in
accordance with the prayer of his complaint." We have examined the record, however,
and find that the evidence is not sufficient to warrant an affirmative holding that the
plaintiff is entitled to recover these items or either of them.
For the foregoing reasons the judgment appealed from is reversed and
judgment will be entered in favor of the plaintiff and against the defendants for the sum
of P1,301.45, with legal interest from April 1, 1914. No costs will be allowed in this
instance. So ordered.
Torres, Johnson, and Carson, JJ., concur.
Araullo, J., concurs in the result.

Separate Opinions
MORELAND, J., dissenting:
This case arises over the construction by plaintiff, under a written contract, of
a reenforced cement bridge across the Argos River which forms the boundary line
between the Provinces of Albay and Ambos Camarines, defendants. The contract was
entered into June 26, 1913. The plaintiff was to construct the bridge for a certain sum and
furnish all labor, materials, tools, implements and machinery, and to complete the work
by the first day of November, 1913. It was agreed, however, that, if he desired, the
defendants would sell to plaintiff and plaintiff would buy of defendants, at a fixed price,
the steel necessary to reenforce the concrete bridge as well as the cement piles which
were to be driven as the foundation of the bridge. If the steel was purchased of defendants
they were to deliver it on board steamer in the harbor of Legaspi; and plaintiff was to
accept delivery there and, by his own means and at his own expense, transport it to the
bridge site on the Argos River, 51 kilometers inland from Legaspi. Nowhere in the
evidence or record does it appear when the steel was to be delivered under this contract.
On that point, and it is, under plaintiff's theory, the vital point in the case, the record is
absolutely silent. The contract provided that plaintiff should pay defendants as liquidated
damages P25 for every day after November 1, 1913, until the bridge was completed,
except Sundays and holidays.
The controversy which resulted in this action springs from the failure of
plaintiff to complete the work in time, i.e., within the time specified in the contract. The
failure is admitted by plaintiff. The sole defense in the court below, and here on this
appeal, is that his noncompliance with the contract in this regard was due to the failure of
the defendants to deliver in time the steel mentioned; and that such failure prevented his

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completing the bridge on time and, accordingly, relieved him from all damages caused to
the defendants thereby.
The Supreme Court finds that plaintiff's defense is well founded. How the
court arrives at this conclusion I am unable to understand. In my judgment the findings of
the court are not only unsupported by the evidence but they are contrary to the undisputed
evidence and the testimony and admissions of the plaintiff and his witnesses.
Let us look, first, at plaintiff's own words on the question of delay. They not
only help us in that connection but in several others. The true reasons for the plaintiff's
failure in not completing the structure by the 1st of November, 1913, are given by
plaintiff's engineer and superintendent, James, who had complete charge of the
construction of the bridge, the plaintiff being absent from the country. He was also his
attorney-in-fact and fully authorized to act for him in all ways. On the first day of
December, the piles for the foundation of the bridge not having yet been driven, the
plaintiff, through his engineer, superintendent, and attorney-in-fact, made, in the form of
a letter to the defendant provinces, an application for an extension of the time within
which the bridge was to be completed under the contract of construction. This
application, as appears upon the face thereof, contains a full statement of the reasons and
grounds upon which the application was based. Even a cursory reading discloses that it is
a complete and absolute refutation of every contention made by the plaintiff in this case
with respect to his failure to complete the bridge on time and is a complete and absolute
refutation of the opinion of this court upon that question. It reads as follows:
"GENTLEMEN: I have the honor to request that an
extension of time be granted me for the construction of the Argos
River Bridge.
"Immediately upon entering into contract with the
Province of Albay on June 26, 1913, I ordered cement for the work,
but due to the shortage in the Manila market at that time did not
receive delivery until the middle of July, when same was shipped to
Legaspi where it arrived four days later.
"I had made previous arrangements to have this cement
hauled to the bridge site by automobile truck, but when an attempt
was made to do so in July the recent rains so softened the road
beyond Polangui that it was impossible to send a loaded truck over it
with any assurance of safe arrival of the cargo of cement at Argos
River in good condition. Therefore I was obliged to haul by truck to
Ligao only and from there to Argos by carabao carts.
"The contractor in Ligao then began to haul the cement
and also the steel for the bridge. Shortly a quarantine on animals was
put into effect in the town of Polangui, and the hauling had to stop
when I had delivered at the bridge site only a few barrels of cement
and a very small number of bars of steel for the piles. It was not until
early in October, therefore, that sufficient steel and cement were
delivered at the Argos River to warrant beginning work of casting the
piles. This work began however immediately this condition obtained
and the sixty concrete piles were completed November 22.
"Due to the fact that the material in the Argos River into
which the piles must be driven is exceptionally hard and of a very

compact nature it is almost imperative that the piles have

considerably more than the usual thirty days for ripening before
driving, and of necessity I must wait until at least December 15
before handling even the first piles cast. My pile driver is being
shipped to Nueva Caceres at present writing. I am obliged to send all
my plant and balance of materials in by that port due to the fact that
nobody in Albay is willing to attempt hauling heavy machinery over
the road beyond Polangui for reasons best known to the honorable
board, and it is only a question of hauling same Nueva Caceres to
Argos River as to the actual date of beginning driving.
"As was unforeseen at the time of entering into contract
for this bridge, I have been obliged to use two plants on my work in
the Province of Bulacan where it was anticipated that one would be
enough, due to the unusual conditions and delays from floods and
typhoons, so I have not been able to ship my engine and driver so as
to have it at been able to ship my engine and driver so as to have it at
Argos River on the date expected. Therefor, for these above-named
reasons, I have the honor to request that I be granted an extension of
time until February 15th, 1914, to complete the Argos Bridge.
"Very respectfully,
"ARTHUR F. ALLEN, Contractor.
"(Sgd.) Per F. T. JAMES.
"The HONORABLE PROVINCIAL BOARD,
"Albay, Albay.
"Through The Director of Public Works, for indorsement."
Viewed in connection with the opinion of the Supreme Court, this is a striking
document in several particulars. Let us first consider the time of execution and the
purposes of the document. It was dated the 1st day of December, 1913, one month after
the time when the bridge should have been completed. Now it is clear that, if the
defendants had caused plaintiff's failure to complete the bridge by November 1, he was
relieved of all responsibility which would have otherwise arisen by reason of that failure;
and his only duty was to proceed with the work with ordinary diligence and skill. Under
such circumstances it was unnecessary for him to ask for an extension of time. It had
already been extended, at least for a time reasonably required to complete the structure,
by defendants causing plaintiff delay and failure. From plaintiff's point of view, then, his
request for the extension was unnecessary as it had already been extended. But from
defendant's point of view the request for extension was very significant. It meant that
plaintiff knew his failure was due to his own fault and that, by making the application for
an extension, he was trying to avoid the consequences of that failure. I believe this
inference is a fair one under all the circumstances. Men do not ordinarily ask for things
which they already have and claim as their own; and when they do so it instantly raises
the suspicion that they themselves doubt the validity of their title. According to plaintiff's
theory the time had already, in legal effect, been extended for a period reasonably
sufficient to complete the bridge by the omissions of the defendants, and plaintiff had
been operating for a month under that extension. Why, then, ask for an extension. Why,
then, ask for an extension? But, above all, why seek to excuse his own delay and failure

408
to fulfill? ON the other hand, if it be urged that plaintiff was simply asking for the
recognition of a right which, by virtue of the defendants' delay, was already his, would
not the allegation of such delay in the letter asking for an extension of time have been the
strongest reason which plaintiff could possibly have offered to obtain what he was
seeking? Why present excuses for so many of his own failures as a ground for extension
if he could have closed the mouths of defendants against objection by alleging their own
failure? Why pray for a privilege when he could demand a right? Can any reasonable
man conclude that, if the defendants had failed as plaintiff now asserts they failed, he
would have neglected to mention that failure in his letter requesting an extension?
Second, let us consider the nature of the document. In the first place, it is
a prayer. It is not a declaration of a right and a demand for its express recognition. "I
have the honor to request that an extension of time be granted me" says the document at
the beginning and "therefore, for these above named reasons, I have the honor to request
that I be granted an extension of time" says the document at the closed. This is arequest,
a petition, a prayer and not a demand based on a claimed right or one for the express
recognition of a right already existing.
In the second place, it is an excuse for a failure to perform and not a
declaration that he had not, by his own neglect, failed to perform. Itadmits his failure and
seeks to excuse it. The whole document is filled with nothing but admissions and
excuses. It does not contain an allegation or a claim of a single right against the
defendants. It is filled from beginning to end with admissions that the plaintiff had failed
to fulfill his contract; but nowhere is there even a suggestion that the defendants had
failed to fulfill theirs.
The first excuse offered is that, although the plaintiff had ordered the cement
immediately after execution of the contract, nevertheless "due to the shortage in the
Manila market at that time did not received delivery until the middle of July, when same
was shipped to Legaspi where it arrived four days later." Although the contract was
signed on the 26th of June plaintiff did not obtain delivery of the cement at Legaspi until
about the 20th of July. This is the first reason offered to excuse his failure to perform.
Who was to blame here?
The second reason offered is that "I had made previous arrangements to have
this cement hauled to the bridge site by automobile truck, but when an attempt was made
to do so in July the recent rains so softened the road beyond Polangui that it was
impossible to send a loadedtruck over it with any assurance of safe arrival of the cargo of
cement at Argos River in good condition. Therefore I was obliged to haul by truck to
Ligao only and from there to Argos by carabao carts." From this it is clear that the
plaintiff began to haul the cement during the latter part of the month of July and that at
that time the road was so bad that the automobile truck could not pass over it. Whose
fault was it then that he was unable to transport his cement to the Argos river? Was it due
to any act of the defendants? Clearly this is an admission that it was due to his own
failure.
The third excuse is that the contractor in Ligao was obliged to discontinue the
hauling of the cement and steel from Ligao to the bridge site on account of a quarantine
on animals imposed by the Government. This occurred, says the plaintiff, "when I had
delivered at the bridge site only a few barrels of cement and a very small number of bars
of steel for the piles." Whose fault was this? Was it the fault of the defendants? The

plaintiff admits that it was not. That which caused all of the subsequent difficulties
including those arising from the quarantine was the failure of the plaintiff to begin the
delivery of his cement to the bridge site from Legis before the roads had been rendered
impassable by the rains. If he had delivered his cement in Legis in time he himself admits
that he would have been able to transport it to the bridge site in anautomobile truck and
would not have been obliged to rely on carabaos. The necessity, therefore, of using
carabaos was due to plaintiff's own negligence and procrastination in not procuring the
delivery of the cement in Legis prior to the beginning of the heavy rains. This is not only
a legitimate but an absolutely necessary inference from the document which we are
discussing.
The fourth excuse is that, by reason of the facts already stated, "it was not
until early in October, therefore, that sufficient steel and cement wee delivered at the
Argos River to warrant beginning work of casting the piles." This excuse needs no
discussion other than that already given respecting other excuses.
The fifth excuse given is that "due to the fact that the material in the Argos
River in which the piles must be driven is exceptionally hard and of a very compact
nature, it is almost imperative that the piles have considerably more than the usual thirty
days for ripening before driving, and of necessity I must wait until at least December 15
before handling even the first piles cast." Was the hardness of the soil attributable to the
defendants? Was the fact that he had to give the piles more than thirty days to ripen due
to any act of the defendants? Certainly not. It was a mere miscalculation in his part which
he offered as an excuse in the hope that the defendants would be generous and overlook it
with his other mistakes and omissions.
The sixth excuse offered for his failure is that "my pile driver is being shipped
to Nueva Caceres at present writing (December 1, 1913);" and it is admitted that it did
not arrive until January. The reason for this delay is given by the plaintiff as follows: "As
was unforeseen at the time of entering into contract for this bridge, I have been obliged to
use two plants on my work in the Province of Bulacan where it was anticipated that one
would be enough, due to the unusual conditions and delays from floods and typhoons, so
I have not been able to ship my engine and driver so a to have it at Argos River on the
date expected." Is not this clearly an excuse offered for plaintiff's own failure, for
his own negligence?
The document is not only an excuse, it is an admission. It is a comprehensive
admission on plaintiff's part that he alone was responsible for every delay that occurred. I
have already referred to several passages in the letter which show that it is
a confession and a prayer for clemency. "I failed in this; I failed in that; I failed in the
other thing;" says the plaintiff in the letter. "Wherefore," says he, "I . . . request that an
extension of time be granted me . . ." One does not request where he has the right to
demand; and one does not grant that which another has a right to require.
"I failed," says the plaintiff in effect, "to get the cement to
Legis before the rains made the road from there to the bridge site
impassable;" and this is the reason he gave in his letter for that
failure: "Immediately upon entering into contract with the Province of
Albay on June 26, 1913, I ordered cement for the work, but due to the
shortage in the Manila market at that time did not receive delivery
until the middle of July, when same was shipped to Legis where it
arrived four days later."

409
The plaintiff further says, in effect: "I failed to deliver the cement at the bridge
site in time to complete the work as agreed;" and this is the reason he gives in his letter
for that failure: "I had made previous arrangements to have this cement hauled to the
bridge site by automobile truck, but, when an attempt was made to do so in July, the
recent rains so softened the road beyond Polangui that it was impossible to send a loaded
truck over it with any assurance of safe arrival of the cargo of cement at Argos River in
good condition. Therefore I was obliged to haul by truck to Ligao only and from there to
Argos by carabao carts. The contractor in Ligao then began to haul the cement and also
the steel for the bridge. Shortly a quarantine on animals was put into effect in the town of
Polangui, and the hauling had to stop when I had delivered at the bridge site only a few
barrels of cement and a very small number of bars of steel for the piles. It was not until
early in October, therefore, that sufficient steel and cement were delivered at the Argos
River to warrant beginning work of casting the piles. This work began however
immediately this condition obtained and the sixty concrete piles were completed
November 22."

"We must, therefore, conclude that the provinces waived

the contract time, whether it was September 1 of November 1, by
theirfailure to deliver the steel promptly, by reason of their
having placed a strict quarantine on animals and on account of
the change in the plans subsequent to October 12th, . . ."
Compare these findings and conclusions with plaintiff's own statement of the
reason why he failed to complete on time contained in the letter of December 1, and what
is the result? I repeat, plaintiff's own statement of the reasons why he failed to perform on
time are a confession that his inability to perform was brought about by his own acts and
omissions with which the defendants had nothing whatever to do. This is shown beyond
shadow of doubt by plaintiff's letter quoted above; and every fact and circumstance stated
in the letter is fully supported by the undisputed evidence in the case.
These facts are undisputed in the record. Most of them are established from
plaintiff's own mouth or the mouths of his witnesses:

This is, of course, a clear admission that, on account of a series of

circumstances with which the defendants had nothing to do, he failed to deliver
the cement at Legaspi before the rains made the roads impassable, and failed to deliver
the cement at the river until October. The defendants admittedly had nothing to do with
the cement; and it goes without saying that plaintiff could do absolutely nothing in the
construction of the bridge until the he had cement. The bridge was a cement bridge; the
piles were cement piles. He was utterly helpless until the cement arrived, no matter how
many tons of steel he may have had. Nowhere in all the case is there a shadow of claim
that the defendants interfered with the purchase or delivery of the cement and nowhere is
there a shred of evidence to show that an earlier delivery of steel would have availed
plaintiff anything.

1. That there was a nonperformance. That, while the agreement obliged him to
complete the bridge by the 1st day of November, 1913, it was not finished until the 31st
day of March, 1914.

In the passage last quoted plaintiff says in effect: "I failed to complete the
bridge on time because I did not finish casting the piles untilNovember 22." If, by lack of
cement he did not complete the piles until November 22, how could he have completed
the bridge November first, the date specified in the contract, even though he had
boatloads of steel at his disposal?

4. That, although the plaintiff began transporting the cement from Legaspi to
the bridge site soon after its arrival on the 20th of July, the rains had at that time so
softened the roads that transportation by automobile truck from Legaspi to the bridge site
was impossible; and that for that reason the cement did not reach the bridge site until the
last week in October.

Plaintiff further says in his letter, in effect: "I failed to drive the piles in time
to complete the bridge as agreed." We have already seen some of the reasons for this
failure, such as lack of cement and his failure to deliver it at the bridge site in time. But
plaintiff gives two additional reasons. The first one is stated in the letter as follows: "Due
to the fact that the material in the Argos River into which the piles must be driven is
exceptionally hard and of a very compact nature it is almost imperative that the piles have
considerably more than the usual thirty days for ripening before driving, and of necessity
I must wait until at least December 15 before handling even the first piles cast;" and the
second is that: "My pile driver is being shipped to Nueva Caceres at present writing;" and
"As was unforeseen, at the time of entering into contract for this bridge, I have been
obliged to use two plants on my work in the Province of Bulacan where it was anticipated
that one would be enough, due to the unusual conditions and delays from floods and
typhoons, so I have not been able to ship my engine and driver so as to have it at Argos
River on the date expected."

5. That the rains began before the arrival of the cement at Legaspi and they
had so softened the roads as to prevent the delivery of the cement from Legaspi direct to
the bridge the delivery of the cement from Legaspi direct to the bridge site by automobile
truck as plaintiff had planned; and that as a result thereof the cement did not reach the
bridge site until the last week in October.

The court makes the following findings:

2. That the bridge was to be a cement structure and that the cement necessary
for its construction and for the casting of the piles was to be furnished and delivered to
the bridge site by the plaintiff.
3. That although the contract was signed on the 26th day of June, 1913, and
the bridge was to be completed according to that contract on or before the 1st day of
November, 1913, the cement did not arrive at Legaspi until about the 20th day of July
and at the bridge site until the last week in October.

6. That the work of casting the cement piles was not begun until about the 1st
day of November and was not finished until the 22d of November.
7. That the piles were not seasoned enough to be driven until the 15th of
December, 1913.
8. That plaintiff's pile driver did not reach the bridge site until the month of
January, 1914, and the driving of the piles did not begin until that time.
Under these facts, which all parties admit, how can it be claimed that it was
the act or omission of the defendants which caused the contractor's failure to complete
the bridge on time? But let us go farther. With respect to the alleged failure of the

410
defendants to deliver the steel in time, the following facts also stand uncontroverted in
the case:
9. That the steel to be furnished by the defendants was to be used by plaintiff
to reenforce the concrete bridge and the piles which were to be driven as the foundation
of the bridge and could not be used except jointly with the cement.
10. That the steel to be furnished by the defendants was to be delivered by
them in Legaspi on ship board from whence plaintiff was to transport it to the bridge site
fifty-one kilometers inland.
11. That defendants furnished all the steel required, namely, 38,582 kilos.
27,056 of the 38,582 kilos, that is, three-quarter of all the steel to be furnished, were
delivered at Legaspi on July 26, 1913; 3,636 kilos on August 4, and 7,890, the last
delivery under the contract and about one-sixth of the whole, on September 1. Note in
this connection that it is admitted that the cement which arrived in Legaspi on July 20, or
thereabouts, could not be transported to the bridge site on account of the condition of the
roads caused by the rains. Note, therefore, that thesteel could not be transported from
Legaspi to the bridge site for the same reason. In other words, plaintiff was just as late
with his cement as the defendants with their steel, even admitting that defendants were
late at all in its delivery.
12. That the plaintiff could have begun the transportation of the steel at the
same time that he actually began the transportation of the cement; that when he began the
transportation of the cement from Legaspi to the bridge site on the Argos River in an
automobile truck he found that (plaintiff's own words) "the recent rains so softened the
road beyond Polangui that it was impossible to send a loaded truck over it with any
assurance of safe arrival of the cargo of cement at Argos River in good condition."
Under these undisputed facts, and plaintiff's own statement already discussed,
what act of defendants caused the failure of plaintiff, conceded by all, to complete the
construction on time? When we note that plaintiff's sole contention is that the failure of
the defendants to deliver the steel in time caused his delay and then compare that
contention with the foregoing admitted facts, the contention become ridiculous. The
claim that plaintiff was hindered and delayed by defendants' alleged failure to deliver the
steel is, in the face of the admitted fact that the steel was at Legaspi almost as quick as
plaintiff's cement, that no attempt to transport the cement from Legaspi to the bridge site
was made until after the steel arrived in Legaspi, that the transportation of the cement
was at that time impossible, that, therefore, no cement was at the bridge site until the last
week in October, that the piles were not cast until November 22, that they would not be
driven until December 15, and that the pile driver did not arrive until January, 1914, so
devoid of merit as not to be entitled to serious consideration.
It must be remembered that, under the contract of construction, plaintiff
himself was to deliver everything at the bridge site on the Argos River, including the
steel. The defendants discharged their obligation as to the delivery of the steel when the
ship bearing it stood ready to unload in the harbor of Legaspi. The plaintiff was to
transport it from there to bridge site. He was to furnish and delivery there all machinery,
tools, and implements necessary to complete the bridge within the time specified in the
contract, November 1, 1913; yet he did not begin to transport his cement from Legaspi to
the bridge site until after the steel arrived in Legaspi, his cement did not reach the bridge
site until the last week in October, the piles, the driving of which was the very first act in
the construction of the bridge, as they were the foundation thereof, were not cast

until November 22, and were not ready to be driven until the 15th of December, and the
pile driver itself was not on the ground until the month of January, 1914. It is admitted
that the steel could not be used and, therefore, was not needed at the bridge site until
the cementarrived there, as the steel was to reenforce the cement piles; and that plaintiff
did not begin to cast the piles until November and they were not completed
until November 22. Defendants delivered three-fourths of the steel required by the 26th
of July. Another delivery was made a few days later and the balance, about one-sixth of
the whole, was at Legaspi September 1. Therefore, if plaintiff did not begin to cast the
piles until November, certainly it was not due to any act of defendants as they had
delivered the steel at Legaspi three months before that date, and substantially as soon as
he had delivered the cement and before plaintiff was prepared to begin the transportation
of his materials from Legaspi to the bridge site.
It is a proposition of law set down in plaintiff's brief on appeal that, before the
delay of defendants can be of service to the plaintiff in the defense offered for his failure
to perform on time, it must have delayed plaintiff, i. e., defendants' delay must have
caused or contributed materially to plaintiff's delay; and plaintiff cites many authorities
to that effect. Among them are the following:
"It is a well settled rule that, where one party demands
strict performance as to time by another party, he must perform on his
part all the conditions which are requisite in order to enable the other
party to perform his part; and a failure on the part of the party
demanding performance to do the preliminary work required in order
to enable the other party to complete his within the time limited,
operates as a waiver of the time provision in the contract." (Dannat vs.
Fuller 120 N.Y., 554.)
"There is no question with respect to the law applicable to
the case, for by the express terms of the contract, as well as under the
general rule of law, the time prescribed by the contract for the
performance of the plaintiff's work was abrogated by the owner's
delay, and the plaintiff had a reasonable time under all the
circumstances for completing performance after the expiration of the
delay caused by the owner." (Levering & Garrigues Co. vs. Century
Holding Co., 160 N.Y. 649.)
"The courts have laid down a very salutary rule to the
effect that they will not attempt to apportion such delays where the
causes thereof have been mutual, but will refuse under the
circumstances to enforce the penalty." (Jefferson Hotel Co. vs.
Brumbaugh, 168 Fed., 867.)
"Where the parties are mutually responsible for the delays,
because of which the date fixed by the contract for completion is
passed, the obligation for liquidated damages is annulled and, in the
absence of some provision under which another date can be
substituted, it cannot be revived." (Mosler Safe Co. vs. Maiden Lane
Safe Deposit Co., 199 N. Y., 479.)
"Here the delays of the Government prevented the
claimant from a strict performance, and thereby it waived the contract

411
time within which to perform, and that waiver operated to eliminate
the definite date from which to assess liquidated damages . . .
Whatever loss the Government may have suffered by reason of the
claimant's breach to perform within a reasonable time must be
reduced to actual damages, if any, susceptible of proof." (United
Engineering & Contracting Co. vs. United States, 47 Court of Claims,
489.)
"The same doctrine is found in Allen vs. Province of
Bulacan, post, p. 875.
These cases assert expressly or impliedly the proposition that, if the owner's
failure to fulfill does not cause or contribute materially to the contractor's delay, then the
latter is not excused for failure to perform within the time specified; and he cannot take
refuge behind the delay of the owner. If the owner's delay does not hinder the contractor,
does not in the slightest degree impede or interfere with his progress, it does no charm, is
immaterial, and produces no effect; and it cannot, therefore, be made the basis of an
excuse for the contractor's failure to perform.
In the case before us, even admitting a delay on the part of defendants in
delivering the steel at Legaspi, still it was delivered before plaintiff began to transport
his cement from Legaspi to the bridge site, long before plaintiff could possibly use it, as
his cement did not reachLegaspi until just before the steel arrived there and did not reach
the bridge site until the last week in October, could not be used by the plaintiff until
November, and the piles made therefrom could not be driven until the pile driver arrived
in January. If it is a fact, and plaintiff admits it, that (I use plaintiff's own words) "It was
not until early in October, therefore, that sufficient steel and cement were delivered at the
Argos River to warrant beginning the work of casting the piles," then certainly the
delivery of the steel by defendants in July and August could not have contributed in the
slightest to plaintiff's delay. It could not have prevented his getting the cement at the
bridge site. It could not have prevented his getting the steel at the bridge site as he could
have begun the transportation of the steel, as he did his cement, from Legaspi the last of
July, as three-quarters of the steel was delivered on the 26th of July at Legaspi. Instead he
did not transport either the steel or the cement until the month of October, or the very last
part of September according to his own admission; and he did not begin the
transportation of his cementuntil after the steel arrived. Moreover, and this is also
important, the steel arrived at the bridge site as soon as the cement. How, then, did the
failure of the defendants to deliver at Legaspi before July 26 hinder or delay plaintiff?
There is only one answer to this query: It did not affect plaintiff's progress in the slightest
degree. Why should effect be given to something which in the very nature of things can
produce no effect? An athlete who is to run in a race to be held on June 1 makes a
contract with a dealer to hire a pair of racing shoes for the occasion, the dealer agreeing
to deliver the shoes on the race track at 9 a. m. of June 1. On May 31 the athlete loses
both legs in an accident. The dealer, learning of the accident, does not deliver the shoes as
agreed. Can the athlete legally claim that he lost the race or was injured or prejudiced in
any manner because of the failure of the dealer to deliver the shoes as agreed? Certainly
not; but why? Because neither law nor common sense requires the doing of an idle and
useless thing. What, then, can and should be said of a decision of a court which holds that
the failure of the shoe dealer to deliver the shoes at the race track at 9 o'clock in the
morning of June 1 caused or materially contributed to the failure of the athlete to win the
race, although at the very moment when the race took place he was in the hospital with
both legs off. Nevertheless that is what this court would have to hold if it followed the

principles enunciated in this decision. Take another view of it. An owner of a city lot
makes a contract in June to construct a house thereon, to be completed November 1, the
contractor to furnish all labor and materials, tools, implements, etc., except that the owner
was to furnish the roofing shingles which, under the contract, were to be delivered on the
ground July 1. Could the contractor, who did not complete the house until the first of
April of the year following the making of the contract, successfully defend an action for
breach of contract brought by the owner by proving that the latter did not deliver the
roofing shingles until July 26 instead of July 1, when the contractor, at the same time,
admitted that he did not even break ground for the foundation of the house until the
month of October, and that he could not possibly have used them before November even
if he had them? Certainly not. The contention is, of course, unsustainable that the failure
to deliver the roofing shingles at the time agreed on caused delay when they were
actually delivered before the foundation of the house was even laid and months before the
contractor could, under any circumstance, have used them. Nevertheless that is, in
substance, the contention which, in my judgment, this court has sustained in this case. It
has held that the failure of the defendants to deliver steel for reenforce concrete piles to
be driven as the foundation of a bridge caused a delay to the contractor in the
construction of the bridge from November 1 to the 31st of March following, although the
steel was actually delivered in Legaspi before plaintiff began the transportation of his
cement to the bridge site and could have been, and as a matter of fact was, transported at
the same time as the cement, was actually delivered months before the contractor could
possibly use it, months before the cement he himself was to furnish was on the ground,
months before he was able to begin casting the piles, and nearly six months before he had
even obtained a pile driver with which to sink the piles. Such a decision, it seems to me,
overrules the unquestioned doctrine that a breach of contract will be disregarded where
absolutely no injury results therefrom (Lassing vs. James, 107 Cal., 348). It is contrary to
the principle that the delay of the owner will be disregarded unless it causes or materially
contributes to the contractor's delay (Allen vs. Province of Bulacan, post, p. 875;
Dannat vs. Fuller, 120 N. Y., 554; Levering & Garrigues Co. vs. Century Holding Co.,
160 N. Y. Supp. 649; Chenery vs. Libby, 134 U.S., 68; Erickson vs. U.S., 107 Fed., 204;
Missouri Bridge & Iron Co. vs. Steward, 134 Mo. Ap.., 618; District of Columbia vs.
Camden Iron Works, 181 U.S., 453; Willis vs. Webster, 27 N. Y. Supp., 354; Weeks vs.
Little, 89 N. Y., 566; Ocorr & Rungg Co. vs. City of Little Falls, 178 N. Y., 622; Manistee
Iron Works vs. Shores Lumber Co., 92 Wis., 21; Wyant vs. U.S., 46 Court of Claims, 205;
Smith vs. United Stares, 48 Court of Claims, 205; Smith vs. United States, 48 Court of
Claims, 235). It is opposed to the rule that the failure to perform of any party to a contract
will not excuse performance by the other unless the breach is material or such as prevents
the other party from performing his part. (See cases above cited.)
Plaintiff claims that the defendants did not deliver the steel at Legaspi until
the rainy season had commenced and the roads were impassable. "But," reply the
defendants to the contractor, "you did not deliver the cement in Legaspi until after the
rainy season had commenced and the roads were impassable and you began the
transportation of the steel as soon as you actually began the transportation of the cement;"
and they say to him: "How could you have used the steel without the cement? What
difference would it have made if we had delivered the steel the first day of June (although
the contract was not made until the 26th of June)? Your cement was not there till the last
week in October and the steel could not have been used without the cement. Nothing
could have been done with it no matter how early it may have been there. It would have
had to lie there from June 2d to the last week in October without the possibility of being
used. How can you claim that we delayed you when, by reason of your own negligence

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and incompetency, you could not have used the steel no matter how early it might have
been delivered at Legaspi or at the bridge site? How can you say that you would have
completed the bridge by November 1 if we had delivered the steel at Legaspi earlier than
July 26, in the face of your own admission that you were wholly unable to deliver
the cement at the bridge site until the last week in October; in the face of your own
admission that the concrete piles were not cast until November 22; in the face of your
own admission that they were not ready to be driven until December 15; and in the face
of your own admission that you were wholly unable to get the pile driver on the
ground until the month of January, 1914?"
Not only is the decision contrary to the evidence of plaintiff, as I view the
record, but two of the three defenses which the court establishes in favor of the plaintiff
to protect him against his failure to perform in time were not presented as defenses in this
case. These two "defenses" are the quarantine and the change in plans. They were not
offered or considered as such in the court below; nor were they offered as such in this
court. The sole defense which plaintiff has presented in this case, and it is one which he
did not think of offering when he prayed for an extension of time December 1, is that the
defendants did not deliver the steel at Legaspi so that the plaintiff cold transport it to the
bridge site before the roads became impassable from rains. This is the only defense
alleged, offered or presented anywhere in the case.
To demonstrate the truth of this statement let us take first the allegations on
plaintiff's own pleadings as to his defense for his failure to perform on time, and there
are his only allegations on that subject. His complaint states:
"That plaintiff fully and faithfully complied with all the
terms and conditions of the said contract on his part to be performed,
and duly completed and delivered to defendants the said bridge, and
that the same was duly accepted by said defendants.
"That the defendants, in violation of the aforesaid contract,
and notwithstanding repeated requests on the part of plaintiff, failed,
neglected, and refused to furnish and deliver to plaintiff, at reasonable
times ad required and requested by plaintiff, and at the places agreed
upon the reenforcing steel necessary for the proper construction of the
said bridge, thereby hindering and delaying plaintiff in the
performance of his part of the said contract; that the first partial
delivery of the said steel was completed in Legaspi on or about July
10, 1914, and complete delivery was not made until September 30,
1914, in the said port of Legaspi; that at the time said steel arrived the
rainy season had commenced, and had so softened the direct roads,
means of communication between Legaspi and the site of the said
bridge, that plaintiff was compelled to incur extra expenditure for the
hauling of said steel, to wit, the sum of P2,000 which said sum,
notwithstanding repeated requests of plaintiff, has not been paid, nor
any part thereof, by defendant to plaintiff."
The later allegation is made for the purpose of obtaining pay for extra work
rather than as a defense of his failure to perform on time; but it shows plaintiff's theory as
to the cause of his delay. At that time there appears to have been no thought of the
quarantine or the change in plans as being primarily involved in causing his delay. The

whole theory was simply that failure to deliver the steel before the rains set in and
softened the road waived the time requirement in the contract.
Let us take, second, the opinion of the trial court 1 with reference to the matter
under discussion here. The trial court said:
"The third cause of action is for the recovery of P2,000 as
extra expenses caused plaintiff by the failure of defendants to deliver
the steel for the bridge within the time specified by the plaintiff."
Further on the opinion of the trial court said:
"James, the representative and attorney-in-fact of the
plaintiff, the person who had full charge and control of the
construction of the bridge on the Argos river, testifies that the steel
was delivered between July 26 or 27 and the first week in September,
1913; that when the steel arrived the rainy season had begun and it
was impossible to transport the materials from Polangui a town in
the Province of Albay to the bridge site except by vehicles drawn
by carabaos; that the result was not only a loss of time in the
transportation of the materials but extra expense also."
This is the only discussion in the opinion of the court below relative to
plaintiff's defense of his failure to perform in time. Nothing is said of quarantine or
change in plans.
Let us take, third, the brief of plaintiff-appellant in this court 1 and ascertain
from it what question he desired to present to this court. From that brief, the material
parts of which will be found in a foot-note, it is clear that plaintiff neither presented nor
relied upon either the quarantine or the change in plans as a defense to or an excuse of his
failure to perform. Neither is mentioned or even suggested in the argument. On the
contrary they are impliedly rejected. Counsel says:
"The date stipulated in the final contract, signed on June 26, for the
completion of the bridge, was September 1, 1913, 1 and defendants' right to retain any
sum as a penalty or liquidated damages must depend upon the contractor's failure to
finish the bridge by that date. It is true that the bridge was unfinished on September 1, but
it is readily shown by defendants' own evidence that the failure to finish the bridge by
September 1 was caused by their own delay in furnishing the necessary steel. . . . If the
decision of the trial court is correct, defendants may mulct the contractor for liquidated
damages because he did not complete a reinforced concrete bridge the very day on which
they furnished the materials."
From this quotation it is clear that there is no place in counsel's theory for the
defense of quarantine or of change in plans. What did the mischief, from plaintiff's point
of view, was the failure of the defendants to finish delivering the steel at Legaspi, more
than 51 kilometers from the bridge site, until September 1, the very day on which the
bridge was to be completed; and he triumphantly asks the question how could the
plaintiff be expected to complete the bridge on the very day the steel arrived. To
this sole contention plaintiff's brief joins the proposition of law that, "Time was the
essence of the contract, and defendants, by making it impossible for plaintiff to complete
the bridge on September 1, waived that date, and cold only hold plaintiff to a reasonable
time for performance." This theory excludes both the quarantine and the change of
plans as an excuse for failure to perform on time. If counsel had discussed the question of

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whether the plaintiff performed within a reasonable time after September 1, then it is
possible that quarantine and change of plans might have been pertinent, if they had been
pleaded as such, a point which we now come to consider.
From these observations it is clear that at no stage of the proceedings in this
action has plaintiff claimed as an excuse for his failure to complete the bridge on time
that he was prevented from doing it by a quarantine of animals or by a change of plans.
Every pleading he has filed, every argument he has made, every word he has uttered, is
not only foreign to but excludes the possibility of their being urged in his favor; and the
only guided which this court has to do justice between the parties, that is, that which, if
we may so, frames the issues in this court and tells it on what theory the parties have
proceeded and desire to proceed, the question they present and wish to have decided,
namely, the briefs filed by the parties in this court, not only fails to present the defenses
on which this court absolves the plaintiff for his failure to perform, but the theory on
which the appellant relies excludes such defenses from consideration by this court.
But there is an additional consideration which, of itself, shows, in my humble
judgment, that the decision of this court is erroneous in that regard. Neither of these
defenses was pleaded by plaintiff's complaint. In their answer the defendants deny the
allegations of the complaint that plaintiff fully performed according to its terms his part
of the contract and allege the allegations of the complaint that plaintiff fully performed
according to its terms his part of the contract and allege that he negligently failed to
complete the bridge within the time agreed and that they were greatly damages thereby.
The only issue framed by the complaint and answer was whether plaintiff completed the
bridge within the time specified in the contract. They raised no question as to the failure
of defendants to perform as agreed. The plaintiff having alleged in his complaint
performance strictly in accordance with the terms of the contract could not be presumed
to have later alleged that he did not perform in accordance with the terms of the contract
but, on the contrary, failed so to perform, at the same time adding that such failure was
due to the branch of contract of defendants. Plaintiff made no reply to defendants' charge
of failure to perform; and therefore framed no issue on that subject except the one already
framed by the complaint and answer referred to, namely, whether plaintiff actually
performed in accordance with the terms of the contract, not whether he was excused for
or justified in his failure so to perform. It is true that, notwithstanding the failure of a
plaintiff to reply to new matter in an answer constituting in itself a cause of action, it is
deemed to be denied, nevertheless it is a mere denial and cannot be considered to be an
allegation of a special defense to the cause of action set out in the answer (sec. 104, Code
Civ. Proc.). It is simply a general denial; it is not a special defense, or a plea of
confession and avoidance, such as, in effect, would be the plea that plaintiff failed to
perform but that his failure was excused and justified by certain acts of the defendants.
Nor did the pleadings present an issue on the question of quarantine. If a
defense at all, it is one under article 1105 of the Civil Code which provides that:
"No one shall be held liable for events which could not be
foreseen (viz major) or those which, even when foreseen, were
inevitable, aside from the cases expressly stated by law or those in
which the obligation so declares."
This defense is one that must be specially pleaded. It is not one which can be
proved under a general denial.

It is apparent from what has been said that the pleadings raised no issue with
respect to an excuse for or justification of plaintiff's breach based either on defendants'
failure to perform, or in a change of plans, or in the happening of a fortuitous event,
which prevented timely performance on plaintiff's part. All these are special defenses
excusing a failure to perform on time and must be specially pleaded. They cannot be
proved under a general denial; and especially not when plaintiff's own pleading
affirmatively alleges, as does the complaint in this action, full performance on his part in
strict accordance with the terms of the contract. If defendants were to be charged with a
breach of contract they had a right to be notified of that charge by plaintiff's pleadings
and be given an opportunity to defend themselves in that regard. The mere allegation by
plaintiff to a complete performance in accordance with the terms of the contract and a
denial of full performance by the defendants coupled with an allegation of failure to
perform on plaintiff's part does not raise such as issue as would permit the introduction of
evidence tending to show a breach of contract on the part of the defendants.
The pleadings, therefore, were not framed with the intention or for the purpose
of charging the defendants with a breach of contract which should form the basis of an
excuse of the failure of the plaintiff to perform the contract according to its terms.
While, however, there was no issue framed by the pleadings with respect to
the failure of the defendants to deliver the steel at Legaspi in accordance with their
contract with the plaintiff, that question was raised in the trial court by the plaintiff
without objection on the part of the defendants and was there passed upon by the trial
court and has been presented to this court by the briefs of counsel. We have the right and
it is our duty, therefore, to determine that question lthough the pleadings filed by the
parties do not in law present such an issue or raise such a question (Lizarraga
Hermanos vs. Yap Tico, 24 Phil. Rep., 504).The other two defenses found by the court in
favor of the plaintiff were not so raised on the trial or passed upon by the trial court and
were not presented by briefs of counsel on this appeal. We have, therefore, no authority to
consider those defenses. To give the plaintiff the benefit thereof would be to surprise the
defendants who had never been notified that the plaintiff claimed any such a defense and
have never had an opportunity to meet it.
In my judgment there is no ground for the finding of the court that the
defendants actually failed to comply with their contract in the delivery of the steel at
Legaspi. I am unable to find any evidence in the record to establish such a breach of
contract. Even though we admit that the plaintiff alleges it, the defendants stoutly deny it
and plaintiff has not offered evidence to sustain his allegation. The contract for the
construction of the bridge itself does not mention the time when the steel shall be
delivered. There is no evidence in the case showing what the contract or arrangement was
between the parties relative to the time of the delivery of the steel. There is no evidence to
show when the plaintiff ordered the steel. There is some evidence to the effect that before
the contract was signed the plaintiff gave to the district engineer of the department of
public works of the Philippine Islands a list of the steel which would probably be
required. There is not, however, a scintilla of evidence in the record showing that there
was an agreement as to when the steel should be delivered, or at what time the defendants
were required to have it at Legaspi for transportation to the bridge site. From the signing
of the contract on the 26th of June forward, the record is naked of evidence showing that
the plaintiff ordered any steel of the defendants or that he ordered it delivered at any
particular time. There being no evidence as to when the steel was ordered there can be no

414
assumption as to when the steel was to be delivered; and there being no evidence as to
when the steel should be delivered there can be no assumption that it was not delivered as
required by the contract. But, says plaintiff, it was certainly intended that the steel should
be delivered before the time when the bridge should be completed under the contract. But
precisely the same may be said with regard to the cement. The cement was not all
delivered at the bridge site until the last week in October and was not delivered in
Legaspi until the last part of July, about the same time that the steel was delivered.
Certainly, if the defendants delivered the steel, or such portions as would give the
plaintiff the opportunity to begin his work without delay, as quickly as plaintiff himself
delivered his cement, there can be no presumption or claim that the steel was not
delivered in time or that it was not delivered in accordance with the contract. Defendants
delivered at Legaspi three-quarters of the quantity of steel finally used in the construction
of the bridge substantially as soon as plaintiff delivered his cement at Legaspi; and there
is no evidence whatever to show that if all of the steel had been required at that time or at
any particular time the defendants could not have furnished it as required. Why should
the defendants be presumed to have broken their contract for a failure to deliver the other
sixth of the steel in Legaspi when none of plaintiff's cement then in Legaspi could be
transported to the bridge site to be used in any way? All that any contract could have
required of defendants was that they deliver at Legaspi as fast as the plaintiff needed it. It
is clear that plaintiff did not need the steel either at Legaspi or in any other place until his
cement was delivered at Legaspi and there was a possibility of its being transported to the
bridge site. There can be no presumption that defendants broke their contract to deliver
the steel when, if it had been delivered the 1st day of June, 1913, and had been
transported to the bridge site on the 2d day of June, it could not possibly have been used
by the plaintiff until the last week in October, which was the time when his cement
arrived at the bridge site.
I repeat, therefore, that there is no evidence in the record showing what the
agreement of the parties was as to the delivery of the steel and, therefore, there is no
evidence showing that the defendants were guilty of a breach of contract in the delivery
of the steel; and especially is there no evidence in the record showing that even if there
was a breach of contract, it prejudiced the plaintiff in the slightest degree.
While the plaintiff claims that the contract provides that the bridge should be
completed by the 1st day of September, 1913, the defendants contend that it was to be
completed on or before the 1st day of November of that year. It is true that the written
contract provides that the bridge shall be completed on or before the 1st day of
September. That, however, was found by the trial court, upon evidence, to be a clerical
error and the date should have been November 1. Fixing the date of completion at
September 1 would make the delivery of the steel by the defendants at Legaspi in the last
part of July appear so late as compared with the date when the bridge should be
completed as to show that the defendants prevented the plaintiff from completing the
bridge on time. If the date when the bridge was to be completed was September 1 and the
delivery of the bulk of the steel did not occur until the last part of July, the argument that
defendants prevented the plaintiff from completing the bridge on time would be much
stronger than if the date of completion was November 1st. As we have seen from
plaintiff's brief, he has made full use of that argument. Plaintiff forgets, however, that the
plaintiff from completing the bridge on time would be much stronger than if the date of
completion was November 1st. As we have seen from plaintiff's brief, he has made full
use of that argument. Plaintiff forgets, however, that the earlier he makes the date of
completion the worse it is for him. His cement did not arrive in Legaspi until the latter

part of July and it was not delivered at the bridge site until late in October. His cement
piles were not ready for driving until December and his pile driver did not arrive on the
ground until January.
I think my position in this case is fully supported by the decision in the recent
case of Allen vs. Province of Bulacan, post, p. 875. That case is very much the same as
the case at bar; and involved many of the same questions, including that of the failure of
the province to deliver the steel in time, thereby causing a delay in the completion of the
bridges which plaintiff in that case had agreed to build for the defendant province and to
complete on or before a given date. There was in that case also the construction which
should be given to a letter directed by the plaintiff to the provincial board asking for an
extension of time. That letter is very similar in tone and substance to that involved in the
case at bar. In order to show that fact, as well as to demonstrate the different views taken
by the court of these two letters, I quote it:
"MALOLOS, BULACAN, July 25, 1913.
"GENTLEMEN: I have the honor to inform you that the
earliest date at which I could procure a proper kind of cement and in a
sufficient quantity for beginning work on the Mololos-Hagonoy and
Malolos-Calumpit Bridges, was June 16. The inclosed letter from
Messrs. Findlay, Richardson to the honorable board explains the
difficulty.
The notification of the awarding of the contract to us was forwarded by the
Director of Public Works during the last week in February. During that same week the
cement dealer made delivery of the last of an order placed in August, 1912, for an Ilocos
Sur contract, but until the abovementioned date (June 16) made none for the work in
Bulacan.
"Therefore, gentlemen, in view of this unavoidable delay
in the starting of work requiring this essential material, for its
construction, I have the honor to request an extension of time beyond
August 1, for completion of said bridges, of one hundred and ten
(110) working days, which is approximately the loss of time incurred
by nondelivery of cement.
"The piles have already been cast at Paombong, Sapang
Patay, and Pinagtuluyan Rivers, and will be cast at Baungun the
coming week and immediately following that at Kalumpang Creek.
Driving of these piles commence at an early date.
"Trusting that this will received your consideration from
the point of view that delays such as in this instance are not to be
foreseen and justify an extension of time, I am,
"Very respectfully yours,
(Sgd.) "FRANK T. JAMES, Contractor.
"The HONORABLE PROVINCIAL BOARD,
"Province of Bulacan, Malolos.
"Through the District Engineer."

415
Concerning the letter just quoted and the alleged failure of the defendant to
deliver the steel in time, this court said in that case:
"The foregoing testimony and exhibits establish beyond
question that the failure on the part of the province to deliver the steel
earlier, after the contract had been executed, did not in any way cause
the delay in completing the bridges nor contribute thereto. James, in
his letter of July 25 to the provincial board, stated that the earliest
date that he could procure the proper kind of cement and in sufficient
quantity to begin work on two of the bridges was June 10; that the
piles for two others had been cast; that the piles for the fifth would be
cast the province to deliver the steel earlier, after the contract had
been executed, did not in any way cause the delay in completing the
bridges nor contribute thereto. James, in his letter of July 25 to the
provincial board, stated that the earliest dated that he could procure
the proper kind of cement and in sufficient quantity to begin work on
two of the bridges was June 10; that the piles for two others had been
cast; that the piles for the fifth would be cast the following week; and
that the driving of the piles would commence at an early date. Not a
word was said in this letter about the steel not being delivered in time.
In fact, out of the twenty-seven shipments of steel all had arrived
before June 16, except four and these four were to be used in the
Kalumpang Bridge, which, as late as November 3, had hardly been
commenced, the piles only having been cast. The three rolls of wire
mesh which were substituted for the defective ones did not arrive
until October 14, nevertheless, they could not be used before
November 3 in either of the bridges, with the possible exception of
Paombong, as James in his letter of that date states. The three rolls
were so small a portion of that kind of material that their delay
certainly could have made no difference, especially when taken into
consideration with the condition of the work even on November 3.
"As the province did not cause any delay in the
construction of the bridges by reason of not having delivered the steel
earlier after the signing of the contract, consequently, it is self-evident
that no delay was caused by reason of the failure to order the steel
before that time."
Are not these remarks equally applicable to the case at bar under the facts?
One of the strange features of the case is that, while defendants admit that
there was an extension of time to complete the bridge from the first of November till the
15th of February and offer the plaintiff the benefit of that extension, plaintiff contends
and asserts that there was no extension of time and he rejects the benefits which
defendants offer him arising from that fact. Plaintiff says in his brief:
"It is true that plaintiff, through his agent, requested an
extension of time; but that he refused to agree to the defendants'
proposition is plainly shown by the resolution of the provincial board
of Ambos Camarines (defendants' Exhibit 5)."
Another statement in the brief is to the effect:

"There is no agreement for the substitution of another date

in this case. Defendants arbitrarily set the time for completion as
February 15, 1914 an arrangement which was never agreed to by
the plaintiff."
If there was not extension of time then the defendants would have been
entitled to recover P25 a day for every day of delay specified in the contract from
November 1 to March 31. They only ask, however, for damages from February 15 to
March 31. That much they are entitled to under the decision in Allen vs. Province of
Bulacan, supra.
I am of the opinion, therefore, that the amount of the recovery should be
reduced by the amount of damages proved.
Footnotes
1.The following is the opinion of the court below:
The complaint contains four causes of action.
It alleges in the first place that the plaintiff and the defendants executed a contract
whereby the former agreed to perform all the labor and furnish the necessary
equipment and materials for the construction and termination of a bridge at a
point situated on the boundary line between the Province of Albay and Ambos
Camarines, which provinces agreed to pay to the plaintiff for this worked
P30,810. Of this sum there still remains to be paid P1,590, according to the
plaintiff: hence the first cause of action, to wit, the recovery of this amount.
The second cause of action is for the purposes of recovering P200, the price of 16 steel
bars which the defendants bound themselves to deliver to the plaintiff for the
construction of the said bridge and which, notwithstanding the stipulations in
the contract were not furnished by the defendants.
The third cause of action is for the recovery of P2,000 as the amount of the extra
expenses caused the plaintiff by the defendants' failure to deliver within the
time specified by the plaintiff the necessary steel for the construction of the
bridge.
And the last cause of action is to recover P1,790, the value of certain additional work
performed on the bridge at the defendants' requirement.
Under these different causes of action the total amount claimed is P5,580.
The defendant provinces, through their authorized legal representatives, filed an answer
which contains not only a general denial of the allegations of the complaint
but also several special defenses, all of them tending to show that the plaintiff
has absolutely no right whatever to claim any sum from the defendant
provinces.
The work entrusted to the plaintiff was the construction of a reenforced concrete bridge
across the Argos River which forms the boundary line between the Provinces
of Albay and Ambos Camarines. On June 26, 1913, the plaintiff and the
Director of Public Works entered into a contract to that effect, the former
[latter] in representation of the aforementioned provinces. The price of the

416
contract was fixed at P30,690. The plaintiff engaged not only to perform the
work of constructing the bridge, but also to furnish all the materials and
necessary machinery; but it was agreed that in case the necessary steel were
furnished by the interested provinces, its value, at the rate of eleven centavos
for each kilo of steel furnished, should be deducted from the stipulated price
and that this steel was to be delivered by the defendants and received by the
plaintiff at the latter's risk, at ship's side in the Port of Legaspi (Albay). The
date fixed for the termination of the work was September 1, 1913, but, at the
request of the plaintiff himself, the provincial boards of Albay and Ambos
Camarines decided to grant him an extension of time until February 15, 1914,
on condition that the plaintiff should pay, as losses and damages for the delay,
the expenses occasioned the defendants by the inspection of the work and the
maintenance of a raft or ford there was in and across the Argos River for the
passage of vehicles and pedestrians from one bank to the other expenses
which amounted to P386.45.
The work, however, was not turned over until April 1, 1914, that is, until thirty-seven
days after the last dated fixed for the completion of the bridge.
In settling the amount of what was owing Mr. Allen for the construction of the bridge,
the provincial boards of Ambos Camarines and Albay decided to deduct from
the stipulated price the sum of P1,301.45, itemized as follows:
Cost of inspection, from November 1, 1913, to February 15, 1914 P175.03
Operation and maintenance of the ford, November 1, 1913, to February 15, 1914 201.42
Liquidated damages for thirty-seven days, February 15, to March 31, 1914, inclusive,
except Sundays and holidays, at the rate
of P25 per day 925.00
_______
Total sum to be deducted from the contract price 1,301.45
The plaintiff admitted that he had been paid the price of the contract, less the sum of
P1,301.45, plus P120 for cement analysis made by the Government and
P87.04, the value of the steel that he did not receive.
In view of the terms and conditions of the contract and the document s accompanying
the same, the defendants are entitled to recover from the plaintiff the sum of
P25 as liquidated damages for each day that elapsed from the date when he
should have completed the work.
From the testimony given by Mr. James, the plaintiff's representative and attorney in
fact and the person who had charge of the construction work on the bridge
across the Argos River, it appears that he received the steel necessary for the
work on the bridge, between the 26th or 27th of July and the first week in
September, 1913. When the steel arrived the rainy season had commenced and
it was then no longer possible to transport the materials from Polangui, a town
in the Province of Albay, to the bridge site, except by carabao carts, and this

was the cause, not only of the delay in the transportation of the materials to
the place where the work was performed, but also of the extra expense.
However, Mr. James' testimony shows that all the materials were delivered at
the place where the construction work on the bridge was performed during the
last week of October.
In order that the plaintiff may be relieved from the payment of P25 for each day of the
delay, he must prove that he was in no manner responsible for the delay. On
the other hand, the record in this case does not show that the defendant
provinces were to blame for the failure to complete the work between the 1st
of November, 1913, and the 15th of February, 1914, a period of three and onehalf months.
Mr. James himself suggested to the provincial boards of Albay and Ambos Camarines
the date of February 15, 1914. If the plaintiff already had all the materials for
the work at his disposal toward the end of October, 1913, the defendants are
not responsible for the plaintiff's inability to finish the work within the period
of time he himself requested.
The real reason why the bridge was not finished on February 15, 1914, appears to be
suggested by the testimony of J. T. Marshall, district engineer of Albay and
Ambos Camarines at the time of the building of this bridge. This reason was
that the work of casting the piles was not commenced until very late, about the
middle of October, 1913, and they were begun to be driven only on January 1,
1914; all this was due to the fact that the proper machinery for the purpose
was not on the ground and that it only arrived there about December 25, 1913.
Had the required machinery been on hand in October, the bridge could have
been finished about February 15, 1914. Therefore the delay was due to the
plaintiff's own negligence and he is not entitled to recover the amount which
was deducted by the defendant provinces as liquidated damages; still less is he
entitled to recover the amount retained by the defendants' for cost of
inspection and for the maintenance of the ford for these conditions were
imposed upon the plaintiff and were accepted by him when he was granted an
extension of time within which to finish the work on the bridge.
The claim for the value of the 16 steel rods, the second cause of action, has not been
supported by any evidence at the trial and therefore must be disallowed. On
the contrary, Exhibits 2, 2-a, 2-b, 2-c, and 2-d, show that the plaintiff by his
agent B. F. Mills received all the steel that was furnished by the Province of
Albay.
The claim of P2,000 for extra expenses incurred by the plaintiff in the transportation of
materials from Legaspi to the bridge site, is wholly unfounded inasmuch as
the sole obligation undertaken by the defendants in the contract was that of
delivering the materials to be furnished by them, in the Port of Legaspi at
ship's side. It is immaterial that the delivery might not been made in time, for
this could only afford the plaintiff ground for a claim in the event that such
delay had been the cause of hindering the progress of the work.
The last cause of action is founded on the allegation that, at the defendants' request, an
alteration was made in the construction by raising the bridge about 42

417
centimeters. The record does not disclose that this alteration was authorized in
writing either by the Director of Public Works or by the defendant provinces;
therefore, in accordance with paragraphs 18 and 22 of the instructions to
bidders, which are a part of the contract, no payment can be made on account
of this change or alteration.

What occurred was this: After the contract had been signed, it was verbally agreed by
and between the then district engineer Von Schmelling and Mr. James, the
representative of the plaintiff-contractor, that the piles should be only nine
meters long instead of eleven, provided that, were it necessary for them to be
of greater length, the plaintiff would make good the difference, at his own
cost, either by building up the difference on the piles themselves or by
increasing the thickness of the top and head of the bridge. Subsequently, about
October 11, 1913, there was a flood and it was observed that the water rose 15
centimeters more than the highest water-mark indicated on the plan. Harrison,
the district engineer, then suggested to Mr. James that he should raise the
bridge instead of lowering it, to which Mr. James and Mr. Emerson agreed, as
to do so meant the same amount of work, steel and concrete, and perhaps a
little less; no demand was made for the payment of an additional amount for
this work, therefore the plaintiff is not entitle to recover on this account.
For the foregoing reasons, the defendant provinces should be absolved from the
complaint, with the costs against the plaintiff.
1.The following are the assignments of error and the argument of plaintiff-appellant in
the Supreme Court:

ASSIGNMENT OF ERRORS.

Now comes appellant, by his undersigned counsel, and avers that in the trial of the
above entitled cause, in the Court of First Instance of the city of Manila, there
was manifest error, prejudicial to appellant, in this, to wit:
I. That the said court found in its decision that the delay in completing the work under
the contract in question was due to the fault and negligence of the plaintiff.
II. That the said court did not find in its decision that the delay in completing the work
under the contract in question was due to the fault and negligence of the
defendants.
III. That the said court found in its decision that defendants were entitled to deduct a
certain part of the amount due from defendants to plaintiff, under the said
contract, as a penalty or liquidated damages.
IV. That the said court found in its decision that the defendants were entitled to deduct a
certain part of the amount due from defendants to plaintiff, under the said
contract, for expenses incurred in the operation of a ferry.

V. That the said court found in its decision that the defendants were entitled to deduct a
certain part of the amount due from defendants to plaintiff, under the said
contract, for expenses of inspection.
VI. That the said court rendered judgment in favor of defendants, dismissing plaintiff's
complaint, and did not render judgment for the plaintiff for the amount prayed
for in his complaint.
VII. That the said court denied plaintiff's motion for a new trial.

ARGUMENT.

Defendants' claim to the P925 deducted from the contract price of the bridge rests on
section 42 of the General Conditions, which was, by agreement, made a part
of the contract; reading as follows:
"It is understood that time is an essential feature of the contract herein contemplated,
and that, upon failure to complete the said contract within the time stipulated,
the contractor will be required to pay the Province of Ambos Camarines the
sum of P25, Philippine Currency, per idem, for each day of delay, Sundays
and legal holidays excepted, in the completion of the work, the said payment
to be made as liquidated damages, and not by way of penalty; and the
province may deduct from any sum due or to become due the contractor any
sums accruing for liquidated damages as herein stated."
The date stipulated in the final contract, signed on June 26, for the completion of the
bridge, was September 1, 1913, and defendants' right to retain any sum as a
penalty or liquidated damages must depend upon the contractor's failure to
finish the bridge by that date. It is true that the bridge was unfinished on
September 1st, but it is readily shown by defendants' own evidence that the
failure to finish the bridge by September 1 was caused by their own delay in
furnishing the necessary steel. As proven by defendants' Exhibits 2, 2-A, 2-B,
2-C, 2-D, the first shipment reached Legaspi July 26, a month after the signing
of the contract, and six weeks after plaintiff's requisition, while the last did not
arrive until September 1. If the decision of the trial court is correct, defendants
may mulct the contractor for liquidated damages because he did not complete
a reinforced concrete bridge the very day on which they furnished the
materials.
Defendants' negligence having made it quite impossible for the plaintiff to perform his
part of the contract within the time limited, the letter is thereby exempted from
liability for liquidated damages, and may be held only for actual damages
proven to have been caused by his delay. Tim was the essence of this contract,
and defendants, by making it impossible for plaintiff to complete the bridge
on September 1, waived that date, and could only hold plaintiff to a
reasonable time for performance. This view of the case has the support of a
long line of American and English authorities:

418
"When liquidated damages are stipulated, there must be a definite date from which they
are to run. If, by the operation of intervening circumstances, the date fixed by
the contract has ceased to be operative, and there is no provision in the
contract under which another date can be substituted, all right to recover the
sum stipulated as liquidated damages has been put an end to, because there is
no date from which the penalties can run." (3 Halsbury's Laws of England,
243.)
"It is a well settled rule that, where one party demands strict performance as to time by
another party, he must perform on his part all the conditions which are
requisite in order to enable the other party to perform his part; and a failure on
the part of the party demanding performance to do the preliminary work
required in order to enable the other party to complete his within the time
limited, operates as a waiver of the time provision in the contract." (Dannat vs.
Fuller, 120 N. Y. 554.)
"There is no question with respect to the law applicable to the case, for by the express
terms of the contract, as well as under the general rule of law, the time
prescribed by the contract for the performance of the plaintiff had a reasonable
time under all the circumstances for completing performance after the
expiration of the delay caused by the owner." (Levering & Garrigues Co. vs.
Century Holding Co., 160 N.Y. Supp., 649; Erickson vs. U.S., 107 Fed., 204;
Missouri Bridge & Iron Co. vs. Stewart, 134 Mo. Ap., 618; District of
Columbia vs. Camden Iron Works, 181 U.S., 453; Willis vs. Webster, 27 N. Y.
Supp., 354; Weeks vs. Little, 89 N. Y., 566; Ocorr & Rugg Co. vs. City of
Little Falls, 178 N. Y., 622; Manistee Iron Works vs. Shores Lumber Co., 92
Wis., 21; Wyant vs. U.S., 46 of Claims, 205; Smith vs. U.S., 48 Court of
Claims, 235.)
Even where both parties have been negligent, the courts have constantly held the
contractor to be absolved from liability for liquidated damages.
"The courts have laid down a very salutary rule to the effect that they will not attempt to
apportion such delays where the causes thereof have been mutual, but will
refuse, under the circumstances, to enforce the penalty." (Jefferson Hotel
Co. vs. Brumbaugh, 168 Fed., 867.)
"Where the parties are mutually responsible for the delays because of which the date
fixed by the contract for completion is passed, the obligation for liquidated
damages is annulled, and, in the absence of some provision under which
another date can be substituted, it cannot be revised." (Mosler Safe Co. vs.
Maiden Lane Safe Deposit Co., 199 N. Y., 479; 37 L. R. A., (N. S.) 363.)
There was no agreement for the substitution of another date in this case. Defendants
arbitrarily set the time for completion as February 15, 1914 an arrangement
which was never agreed to by the plaintiff (defendants' Exhibits 3, 4, and 5).
The provisions for liquidated damages having been waived by defendants' delay, the
contractor was bound only to complete the bridge within a reasonable time. If
he failed so to do, the defendants might set off against the contract price any
actual damage proven to have caused them by his delay beyond such a period.

They have produced no such proof of damage, but rather have rested their
case squarely upon the penalty clause.
"If the respondent failed to complete within a reasonable time after crediting the
appellant's delays, then the latter had a cause of action for the former's neglect,
and the measure of damages would be the actual loss proved to have been
sustained." (Mosler Safe Co. vs. Maiden Lane Safe Dep. Co., supra.)
Building contracts entered into with the Government of the United States have been a
fruitful source of litigation on facts almost identical with those in the present
case, and the United States Court of Claims has constantly reaffirmed the
authorities quoted above. In United Engineering & Contracting Co. vs. United
States (47 Court of Claims, 489), Chief Justice Peele, after an exhaustive
review of the previous decisions, says:
"Here the delays of the Government prevented the claimant from a strict performance,
and thereby it waived the contract time within which to perform, and that
waiver operated to eliminate the definite date from which to assess liquidated
damages . . . Whatever loss the Government may have suffered by reason of
the claimant's breach to perform within a reasonable time must be reduced to
actual damages, if any, susceptible of proof."
The trial court was obviously influenced by the so-called extension of time granted by
the defendant provinces after the bridge was finished. It is difficult to see what
effect any such extension of offer of compromise could have on plaintiff's
right to recover the contract price of the bridge. It is true that plaintiff, through
his agent, requested an extension of time; but that he refused to agree to the
defendants' proposition is plainly shown by the resolution of the provincial
board of Ambos Camarines (defendants' Exhibit 5). If, as we believe, the right
to claim liquidated damages was wiped out by defendants' delay occurring
before September 1, 1913, the acts of the parties after that date are entirely
immaterial, in the absence of proof of specific damage.

The retention of P376.45 for inspection charges from November 1 to February 15, and
for the maintenance of a ferry during the same period, was clearly unjustified.
Plaintiff never agreed that any such deduction be made, and absolutely no
proof was offered at the trial that such charges had ever been incurred.
It is respectfully submitted that appellant is entitled to a reversal of the decision of the
Court of First Instance, and to an order for a judgment in accordance with the
prayer of his complaint.
1.The real date was November 1 as will be shown later.
||| (Allen v. Province of Albay, G.R. No. 11433, [December 20, 1916], 35 PHIL 826-875)

419

FIRST DIVISION
[G.R. No. 112590. * July 12, 2001.]

P7,651,969.41 at the time of the trial of the case in 1988 which amounts are almost three times
more than the original investment of about P2,558,083.75 is rather unwarranted. While the
Court recognizes the right of the parties to enter into contracts and are expected to comply with
the terms and obligations, this rule is not absolute. The Court allowed to temper interest rates
when necessary. SIcTAC

STATE INVESTMENT HOUSE, INC., petitioner, vs. COURT OF

APPEALS, LOMUYON TIMBER INDUSTRIES, INC.,
AMANDA
MALONJAO
and
RUFINO
MALONJAO, respondents.

Escober & Alon Law Offices for petitioner.

DECISION

KAPUNAN, J p:

Abad Santos and Associates for private respondents.

SYNOPSIS

This is a petition for review of the decision of the Court of Appeals affirming in toto the
decision of the Regional Trial Court, National Capital Region, Branch 38 in Civil Case No. 8318464 for a sum of money.
The undisputed facts, as quoted from the respondent court's decision are as follows:

When private respondent failed to pay its obligation to petitioner SIHI, the two mortgaged
properties of the former were foreclosed and sold for P4,233,874. Allegedly, the obligation is
P6,833,021.62 at the time of the foreclosure sale and hence, SIHI is still entitled to a deficiency
payment. Both the trial court and appellate court, however, rejected the claim after considering
the penalty charge of 3% a month imposed on the principal obligation as a result of default in
payments. EaHIDC

in that sale that should a receivable remain unpaid, plaintiff , at its

discretion, may impose a penalty fee of 3% per month. To secure the
payment of the receivables, the Malonjaos also executed in favor of
plaintiff, a real estate mortgage over their real property covered by
Transfer Certificates of Title Nos. (445856) S-65586 and No.
(162775) S-65585 (Exh. "B").

The Court noted that the principal obligation of about P2,558,073.75 by private respondent
would not have ballooned to such horrendous amounts if not for the penalty charge of 3% per
month or 36% per annum which is iniquitous and unconscionable. Thus, it is in accordance
with Art. 1229 of the Civil Code to disallow the payment of deficiency here as this is merely a
court reduction, not deletion, of the penalty charges.

Pursuant to their agreement, on March 9, 10 and 15, 1978 and July

19, 1978, Lomuyon sold to plaintiff for a total consideration of
P2,558,073.75 (Exhs. "C", "D", "E" and "F"), various receivables
consisting of checks as follows:
TCBTC618821June 9, 1978P371,319.58

SYLLABUS

TCBTC618820September 9, 1978P371,319.58
TCBTC618819December 9, 1978P371,319.58

CIVIL LAW; OBLIGATIONS AND CONTRACTS; KINDS OF OBLIGATIONS;

OBLIGATIONS WITH A PENAL CLAUSE; EQUITABLE REDUCTION OF PENALTY
FOR BEING INIQUITOUS AND UNCONSCIONABLE. The respondent court disallowed
the payment of the deficiency altogether because it found that the principal obligation of the
private respondent would not have ballooned to such a horrendous amount of P4.8M as of
September 21, 1991 if not for the iniquitous and unconscionable penalty charge of 3% per
month or 36% per annum. Contrary to petitioner's contention, the respondent court acted in
accordance to Article 1229 as the disallowance of the payment of deficiency was in effect
merely a reduction of the penalty charges and not as a deletion of the penalties. To allow the
petitioner to recover the amount of P6,835,021.21 at the time of the foreclosure sale in 1983, or

TCBTC618818March 9, 1978P371,319.58
TCBTC618817June 9, 1979P371,319.58
TCBTC618816September 9, 1979P371,319.58
TCBTC618814December 9, 1979P371,319.58
TCBTC618828March 9, 1980P371,319.58
MBTC06659490September 30, 197860,000.00

420
(Exhs. "C-1", D-1", "E-1", "F-1" and "G" to "G-7").
TCBTC (The Consolidated Bank and Trust Corporation) checks were
all drawn by Amanda Malonjao to the order of payee Lomuyon which
in turn, indorsed the checks to plaintiff. The MBTC (Metropolitan
Bank and Trust Company) check was drawn by one Antonietta
Malonjao-Roque to the order of payee Amanda Malonjao who in turn,
indorsed said check to plaintiff.
When plaintiff presented the checks for payment to the drawee banks,
the same were dishonored for having been drawn against insufficient
funds (Exhs. "H" to "H-7") except for TCBTC 618821.
Plaintiff made repeated written demands on defendants to make good
the checks they indorsed and to pay the penalty charges it has
imposed thereon, (Exhs. "I", "J", "K", "L", "L-1", "M" and "N").
Defendants failed to pay the value of the checks. Plaintiff thus
decided to undertake foreclosure of the real estate mortgage.
On October 6, 1982, plaintiff filed with the Provincial Sheriff of Rizal
a petition for extrajudicial foreclosure of real estate mortgage dated
September 28, 1981. In said petition, plaintiff alleged among others,
that as of said date, September 28, 1981, defendants' outstanding
obligation, inclusive of interest and charges, is P4,809,187.12 (Exh.
"O").

"14.The value of the mortgaged properties sold at public

auction is more than sufficient to cover the obligation of
the defendants;
"15.The alleged purchase price of the mortgaged
properties sold at public auction is unconscionably very
very low;
"16.Assuming for the sake of argument, that the
outstanding obligation of the defendants as of September
26, 1981 (sic) was P4,809,187.12 per statement of account
as alleged in the complaint and the alleged purchase price
at public auction was P4,233,874.00, the deficiency would
only be P575,313.12 and not P2,601,147.62 as erroneously
alleged in the complaint.
"17.No demand was ever made upon the defendant;
"18.The interest and charges made by plaintiff is usurious
and unconscionable" (id., pp. 91-92). 1
On January 11, 1981, the trial court rendered its decision with the following dispositive
portion:
WHEREFORE, in view of all the foregoing, judgment is hereby
rendered:

On February 14, 1983, the Provincial Sheriff sold at public auction,

defendants' mortgaged properties to plaintiff who was the highest
bidder for P4,233,874.00. The following day, the Provincial Sheriff
issued a Certificate of Sale (Exh. "P").

1.Declaring that the plaintiff is not entitled to any deficiency amount

from the defendants;

On June 27, 1983, plaintiff filed the complaint alleging that after
deducting the price of the mortgaged properties from defendants'
outstanding obligation, there remains a deficiency of P2,601,147.62
as of February 14, 1983, which as of May 31, 1983 amounted to
P2,876,929.27 inclusive of interest and charges. As an alternative
cause of action, plaintiff alleged that it is entitled to recover from the
defendant the total value of the checks amounting to P2,239,237.10.
Plaintiff further prayed that it be awarded exemplary damages,
attorney's fees and litigation expenses (Records, pp. 1-38).

3.Ordering the plaintiff and defendants to pay the costs of suit.

In their answer, defendants admitted having incurred the obligation

with the plaintiff brought about by the dishonor of the checks.
However, defendants contended that plaintiff's computation of their
outstanding obligation is erroneous. Thus, by way of special
affirmative defenses, defendants alleged that:
"12.. . . .
"13.The complaint states no cause of action;

2.Dismissing defendants' counterclaim; and

SO ORDERED. 2
On appeal, petitioner assigned the following errors committed by the trial court:
I.THE LOWER COURT ERRED IN NOT FINDING THAT
DEFENDANTS-APPELLEES' OBLIGATION TO SIHI AS OF THE
TIME OF FORECLOSURE AUCTION SALE AMOUNTED TO
P6,835,021.62 THUS, AFTER DEDUCTING THE AUCTION
PRICE OF THE MORTGAGED PROPERTIES IN THE AMOUNT
OF P4,233,874.00, THE BALANCE WOULD BE P2,601,141.62.
II.THE LOWER COURT ERRED IN FINDING THAT SIHI HAD
ALREADY FULLY RECOVERED ITS RECEIVABLES FROM
THE DEFENDANTS.
III.THE LOWER COURT ERRED IN FINDING THAT SIHI IS
NOT ENTITLED TO ANY DEFICIENCY AMOUNT FROM THE
DEFENDANTS. 3

421
On August 27, 1992, the respondent court rendered the assailed decision disallowing the claim
for deficiency on the finding that the penalty charges imposed by petitioner on the principal
obligation were highly iniquitous and unconscionable. The subsequent motion for
reconsideration was, likewise, denied. Hence, petitioner filed the instant petition raising the
sole issue that:
THE COURT OF APPEALS GROSSLY MISAPPRECIATED THE
FACTS AND APPLICABLE LAW BY NOT DECLARING THAT
SIHI IS STILL ENTITLED TO THE DEFICIENCY AFTER THE
FORECLOSURE AUCTION SALE. 4
In disallowing the claim for deficiency, the respondent court found that the proceeds of the
auction sale was sufficient to cover the principal obligation of the private respondent including
interest, penalty and other charges. Both the respondent court and the trial court took particular
attention on the penalty charge of 3% a month which was imposed on the principal obligation
as a result of their default in payments. Undaunted by the disallowance of its claim in the
August 27, 1992 decision, petitioner reiterated its position in a motion for reconsideration,
averring that the respondent court and the trial court failed to reconcile the figures due
it. HAICTD
Petitioner asserts that as of September 26, 1981, private respondent's obligation amounted to
P4,809,187.12. At that time of the foreclosure sale on February 14, 1983, the obligation to SIHI
was computed to be P6,833,021.62 inclusive of interest and penalty charges. Considering that
the bid price of the foreclosed properties was only P4,233,874.00, petitioner was still entitled
to a deficiency of about P2,601,147.62. Petitioner further added that until the original
obligation is fully paid, private respondent's outstanding obligation continue to earn interest
and penalty charges from day to day. Thus, from the time of the foreclosure sale on February
14, 1983 (P2,601,147.62) up to the filing of the complaint for the deficiency claim on May 31,
1983 (P2,876,929.27), and up to the trial on June 3, 1988 in the RTC, private respondent's
outstanding obligation to SIHI rose to P7,651,969.41.

There is no dispute that the payment of penalty is sanctioned by the law, although the penalty
may be reduced by the courts if it is iniquitous or unconscionable. 5 Petitioner argues that
while it recognizes the authority of the court to reduce the penalty if it is iniquitous or
unconscionable, the court, however, does not have the authority to delete the payment of the
penalty charges altogether for this is in clear contravention of Article 1229 and the law of
contracts between the parties.
This contention is not well-taken.
The Court does not find any reversible error committed by the respondent court in ruling that
the petitioner was no longer entitled to recover any deficiency amount after the foreclosure sale
on February 14, 1983. Per Statement of Account dated September 21, 1981, the obligation of
the private respondent was computed to be P4,809,187.12 inclusive of interest and penalty
charges. Since the private respondent failed to fulfill its obligation, petitioner then decided to
foreclose the real estate mortgage on two properties of the private respondent. At the time of
the auction sale on February 14, 1983, the properties were sold in the amount of P4,223,874.00
with the petitioner as the highest bidder. Deducting this amount from the outstanding
obligation of P4,809,187.12 as stipulated in the Statement of Account, there would therefore be
a balance of only about P575,313.12.

Whether or not the alleged deficiency from the foreclosure sale was P575,313.12 or
P2,601,147.62 as claimed by petitioner was of no moment. The respondent court disallowed
the payment of the deficiency altogether because it found that the principal obligation of the
private respondent would not have ballooned to such a horrendous amount of P4.8M as of
September 21, 1991 if not for the penalty charge of 3% pa month or 36% per annum. The trial
court justified, to wit:
. . . [F]rom the various checks the defendants had sold originally to
the plaintiff at the beginning of their transactions, it is shown that the
amount including interests and other charges, is P2,970,556.64. For a
two year period from June 9, 1978 to March 9, 1980 and up to
September 26, 1981 the amount grew to P4,809.187.12. In other
words, the money of the plaintiff has already earned interests and
other charges to more or less P1,638,630.48. As alleged in plaintiff's
complaint, the total amount purchased by plaintiff was only for
P2,500,000.00. There is reason to believe that the P2,970,566.64
represented by the various checks include therein, the interest and
other charges upon their maturity dates. Deducting the amount of
P2,500,000.00 from P2,970,556.64 is P420,556.64. In brief, the
interests and charges that plaintiff has already earned from the time it
has foreclosed defendants' properties has passed the P2,000,000.00. 6
Contrary to petitioner's contention, the respondent court acted in accordance to Article 1229
when it declared that petitioner was no longer entitled to the payment of the deficiency amount.
The disallowance of the payment of deficiency was in effect merely a reduction of the penalty
charges and not as a deletion of the penalties as contended by the petitioner.
In the case of Rizal Commercial Banking Corporation vs. Court of Appeals, 7 we held that:
xxx xxx xxx
On the issue of payment of surcharges and penalties, we partly agree
that GOYU's pitiful situation must be taken into account. We do not
agree, however, that payment of any amount as surcharges and
penalties should altogether be deleted. . . .
Surcharges and penalties agreed to be paid by the debtor in case of
default partake of the nature of liquidated damages, covered by
Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227
thereof provides:
ARTICLE 2227.Liquidated damages, whether intended as
an indemnity or penalty, shall be equitably reduced if they
are iniquitous and unconscionable.
In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each
case. It should be stressed that the Court will not make any sweeping
ruling that surcharges and penalties imposed by banks for nonpayment of the loans extended by them are generally iniquitous and
unconscionable. What may be iniquitous and unconscionable in one
case, may be totally just and equitable in another. This provision of

422
law will have to be applied to the established facts of any given case.
Given the circumstances under which GOYU found itself after the
occurrence of the fire, the Court rules the surcharges rates ranging
anywhere from 9% to 27%, plus the penalty charges of 36%, to be
definitely iniquitous and unconscionable. . . .
Likewise, in the case at bar, the two courts below found the penalty charge of
3% a month or 36% pa annum iniquitous and unconscionable. Petitioner computed the
amount of P4,809,187.12 as the outstanding obligation of the petitioner as of September
21, 1981 after imposing the 3% penalty charge when petitioner defaulted in their
payments. This amount was no longer questioned and was particularly taken into
consideration when the mortgaged properties was foreclosed and sold at the auction sale
in 1983, obtaining a sum of about P4,223,874.00. These foreclosed properties located in
Makati 8 are undoubtedly valuable properties whose market value has greatly appreciated
to substantially satisfy the payment of the outstanding obligation. Notwithstanding the
balance of P575,313.12, petitioner has clearly recouped its investment and earned more
than enough profit in two years (1978-1981) by way of penalty charges. Although
petitioner claims that the penalty charge was well within the banking and business
practice, no proof was adduced thereof. To allow the petitioner to recover the amount of
P6,835,021.21 at the time of the foreclosure sale in 1983, or P7,651,969.41 at the time of
the trial of the case in 1988 which amounts are almost three times more than the original
investment of about P2,558,073.75 is rather unwarranted. We quote with favor the
respondent court's ratiocination: AcHEaS
The lower court did not err in its ruling under its statement that "since
plaintiff had already recovered fully the receivables from the
defendants, the court; considering that the plaintiff for the two
properties foreclosed by it bidded the amount of P4,233,874.00, far
and above the amount it had originally given to the defendants which
was only over P2,000,000.00, it is rather most shocking and
unconscionable for plaintiff to still collect from the defendants the
alleged collectibles of P2,601,147.62 with 3% penalty charges. The
plaintiff should have stopped imposing the 3% penalty charges and
other burdens when it had consolidated finally the two titles of the
properties it had foreclosed" (Decision, p. 8). After due consideration
and reflection on all the factual circumstances obtaining in the case at
bar, it is Our opinion that the lower court properly exercised its
discretion under Article 1229 of the Civil Code to reduce the penalty
charges for being highly and grossly unconscionable. . . . 9
While the Court recognizes the right of the parties to enter into contracts and are expected to
comply with the terms and obligations, this rule is not absolute. The Court allowed to temper
interest rates when necessary. Article 1229 of the New Civil Code clearly provides:
ARTICLE 1229.The judge shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with
by the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable.
Likewise, Article 2227 provides:

ARTICLE 2227.Liquidated damages, whether intended as an

indemnity or penalty, shall be equitably reduced if they are iniquitous
and unconscionable.
ACCORDINGLY, the judgment appealed from is hereby AFFIRMED.
SO ORDERED. ESHAcI
Davide, Jr., C.J., Puno, Pardoand Ynares-Santiago, JJ., concur.
||| (State Investment House, Inc. v. Court of Appeals, G.R. No. 112590. * , [July 12, 2001])

423

THIRD DIVISION

P500,000.00 was not usurious, but ordered that the same be equitably reduced for being
iniquitous, unconscionable and exorbitant. In the case at bar, petitioners were required to pay
the stipulated interest rate of 6% per month or 72% per annum, which the Court found to be
definitely outrageous and inordinate. Hence, the Court ordered that the interest be reduced
equitably to 12% per annum.

[G.R. No. 125944. June 29, 2001.]

SPOUSES
DANILO
SOLANGON
SOLANGON, petitioners, vs.
JOSE
SALAZAR, respondent.

and

URSULA
AVELINO

Pedro Delgado Diwa for petitioners.

Ernesto P. Fernandez for respondent.

SYNOPSIS
Petitioners obtained from respondent three separate loans of P60,000.00, P136,512.00 and
P230,000.00 secured by real estate mortgage with an interest of 6% per month or 72% per
annum. For failure of petitioners to pay their third loan obligation in the amount of
P230,000.00 plus the stipulated interest, respondent foreclosed the mortgage. Hence,
petitioners filed a complaint for annulment of mortgage before the Regional Trial Court of
Malolos, Bulacan. Petitioners contended, among others, that the real estate mortgage was
executed to secure payment of the P60,000.00 loan and that the subsequent mortgages were
merely continuations of the first one, which were null and void because it provided for
unconscionable rate of interest. Petitioners further claimed that they signed the third mortgage
contract in view of the respondent's assurance that the same will not be foreclosed as long as
the stipulated interest was paid. The trial court did not give credence to the testimonies of the
petitioners. Hence, it dismissed the complaint. Petitioners then elevated the case to the Court of
Appeals. The appellate court affirmed the decision of the trial court, ruling, among others, that
the stipulated interest rate of 72% per annum or 6% per month was not unconscionable. In
sustaining the stipulated interest, the appellate court, ratiocinated that since the Usury Law had
been repealed by Central Bank Circular No. 905, there is no more maximum rate of interest
and the rate will just depend on the mutual agreement of the parties. Hence, this petition.
The Supreme Court affirmed the decision of the Court of Appeals with modification.
The Court found that the petitioners raised issues of fact in their petition. The settled rule is
that findings of fact of the lower courts including the Court of Appeals are final and conclusive
and will not be reviewed on appeal. The rule is not without exceptions. The Court held that
none of these exceptions were extant in the present case.
While the Usury Law ceiling on interest rates was lifted by C.B. Circular No. 905, nothing in
the said circular grants lenders carte blanche authority to raise interest rates to levels which
will either enslave their borrowers or lead to a hemorrhaging of their assets. The Court, in
the Medel case (299 SCRA 481), decreed that the 5.5% per month on a loan amounting to

SYLLABUS
1. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF LOWER COURTS AND THE
COURT OF APPEALS ARE FINAL AND CONCLUSIVE; EXCEPTIONS; NOT PRESENT
IN CASE AT BAR. In a petition for review under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, only questions of law may be raised and they must be distinctly set
forth. The settled rule is that findings of fact of the lower courts (including the Court of
Appeals) are final and conclusive and will not be reviewed on appeal except: (1) when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) when the
inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the
findings of facts are conflicting; (6) when the Court of Appeals, in making its findings, went
beyond the issues of the case and such findings are contrary to the admission of both appellant
and appellee; (7) when the findings of the Court of Appeals are contrary to those of the trial
court; and (8) when the findings of fact are conclusions without citation of specific evidence on
which they are based. None of these instances are extant in the present case. aITDAE
2. COMMERCIAL LAW; CENTRAL BANK OF THE PHILIPPINES; C.B. CIRCULAR NO.
905; DOES NOT GRANT LENDERS CARTE BLANCHEAUTHORITY TO RAISE
INTEREST RATES TO LEVELS WHICH WILL ENSLAVE THEIR BOROWERS OR LEAD
TO HEMORRHAGING OF THEIR ASSETS. While the Usury Law ceiling on interest rates
was lifted by C.B. Circular No. 905, nothing in the said circular grants lenders carte
blanche authority to raise interest rates to levels which will either enslave their borrowers or
lead to a hemorrhaging of their assets.
3. CIVIL LAW; OBLIGATIONS AND CONTRACTS; INTEREST; STIPULATED
INTEREST RATE OF 5.5% PER MONTH NOT USURIOUS BUT CONSIDERED
INIQUITOUS, UNCONSCIONABLE AND EXORBITANT. In Medel v. Court of Appeals,
this court had the occasion to rule on this question whether or not the stipulated rate of
interest at 5.5% per month on a loan amounting to P500,000.00 is usurious. While decreeing
that the aforementioned interest was not usurious, this Court held that the same must be
equitably reduced for being iniquitous, unconscionable and exorbitant, thus: "We agree with
petitioners that the stipulated rate of interest at 5.5% per month on the P500,000.00 loan is
excessive, iniquitous, unconscionable and exorbitant. However, we can not consider the rate
'usurious' because this Court has consistently held that Circular No. 905 of the Central Bank,
adopted on December 22, 1982, has expressly removed the interest ceilings prescribed by the
Usury Law and that the Usury Law is now 'legally inexistent.' Nevertheless, we find the
interest at 5.5% per month, or 66% per annum, stipulated upon by the parties in the
promissory note iniquitous or unconscionable, and hence, contrary to morals ('contra bonos
mores'), if not against the law. The stipulation is void. The courts shall reduce equitably

424
liquidated damages, whether intended as an indemnity or a penalty if they are iniquitous or
unconscionable."
4. ID.; ID.; ID.; STIPULATED INTEREST RATE OF 6% PER ANNUM IS OUTRAGEOUS
AND INORDINATE; INTEREST OF 12% PER ANNUM DEEMED FAIR AND
REASONABLE. In the case at bench, petitioners stand on a worse situation. They are
required to pay the stipulated interest rate of 6% per month or 72% per annum which is
definitely outrageous and inordinate. Surely, it is more consonant with justice that the said
interest rate be reduced equitably. An interest of 12% per annum is deemed fair and reasonable.

DECISION

SANDOVAL-GUTIERREZ, J p:
Petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as
amended, of the decision of the Court of Appeals in CA-G.R. CV No. 37899, affirming the
decision of the Regional Trial Court, Branch 16, Malolos, Bulacan, in Civil Case No. 375-M91, "Spouses Danilo andUrsula Solangon vs. Jose Avelino Salazar" for annulment of mortgage.
The dispositive portion of the RTC decision reads:
"WHEREFORE, judgment is hereby rendered against the plaintiffs in
favor of the defendant Salazar, as follows:
1. Ordering the dismissal of the complaint;
2. Ordering the dissolution of the preliminary injunction issued on
July 8, 1991;
3. Ordering the plaintiffs to pay the defendant the amount of
P10,000.00 by way of attorney's fees; and
4. To pay the costs.
SO ORDERED." 1
The facts as summarized by the Court of Appeals in its decision being challenged are:
"On August 22, 1986, the plaintiffs-appellants executed a deed or real
estate mortgage in which they mortgaged a parcel of land situated in
Sta. Maria, Bulacan, in favor of the defendant-appellee, to secure
payment of a loan of P60,000.00 payable within a period of four (4)
months, with interest thereon at the rate of 6% per month (Exh. "B").

On May 27, 1987, the plaintiffs-appellants executed a deed of real

estate mortgage in which they mortgaged the same parcel of land to
the defendant-appellee, to secure payment of a loan of P136,512.00,
payable within a period of one (1) year, with interest thereon at the
legal rate (Exh. "1").
On December 29, 1990, the plaintiffs-appellants executed a deed of
real estate mortgage in which they mortgaged the same parcel of land
in favor of defendant-appellee, to secure payment of a loan in the
amount of P230,000.00 payable within a period of four (4) months,
with interest thereon at the legal rate (Exh. "2", Exh. "C").
This action was initiated by the plaintiffs-appellants to prevent the
foreclosure of the mortgaged property. They alleged that they
obtained only one loan from the defendant-appellee, and that was for
the amount of P60,000.00, the payment of which was secured by the
first of the above-mentioned mortgages. The subsequent mortgages
were merely continuations of the first one, which is null and void
because it provided for unconscionable rate of interest. Moreover, the
defendant-appellee assured them that he will not foreclose the
mortgage as long as they pay the stipulated interest upon maturity or
within a reasonable time thereafter. They have already paid the
defendant-appellee P78,000.00 and tendered P47,000.00 more, but
the latter has initiated foreclosure proceedings for their alleged failure
to pay the loan P230,000.00 plus interest. AcHCED
On the other hand, the defendant-appellee Jose Avelino Salazar
claimed that the above-described mortgages were executed to secure
three separate loans of P60,000.00, P136,512.00 and P230,000.00,
and that the first two loans were paid, but the last one was not. He
denied having represented that he will not foreclose the mortgage as
long as the plaintiffs-appellants pay interest."
In their petition, spouses Danilo and Ursula Solangon ascribe to the Court of Appeals the
following errors:
1. The Court of Appeals erred in holding that three (3) mortgage
contracts were executed by the parties instead of one (1);

2. The Court of Appeals erred in ruling that a loan obligation secured

by a real estate mortgage with an interest of 72% per cent
per annum or 6% per month is not unconscionable;
3. The Court of Appeals erred in holding that the loan of P136,512.00
HAS NOT BEEN PAID when the mortgagee himself
states in his ANSWER that the same was already paid; and
4. The Court of Appeals erred in not resolving the SPECIFIC ISSUES
raised by the appellants.

425
In his comment, respondent Jose Avelino Salazar avers that the petition should not be given
due course as it raises questions of facts which are not allowed in a petition for review
on certiorari.
We find no merit in the instant petition.
The core of the present controversy is the validity of the third contract of mortgage which was
foreclosed.
Petitioners contend that they obtained from respondent Avelino Salazar only one (1) loan in the
amount of P60,000.00 secured by the first mortgage of August 1986. According to them, they
signed the third mortgage contract in view of respondent's assurance that the same will not be
foreclosed. The trial court, which is in the best position to evaluate the evidence presented
before it, did not give credence to petitioners' corroborated testimony and ruled:
The testimony is improbable. The real estate mortgage was signed not
only by Ursula Solangon but also by her husband including the
Promissory Note appended to it. Signing a document without
knowing its contents is contrary to common experience. The
uncorroborated testimony of Ursula Solangon cannot be given
weight." 2
Petitioners likewise insist that, contrary to the finding of the Court of appeals, they had paid the
amount of P136,512.00, or the second loan. In fact, such payment was confirmed by
respondent Salazar in his answer to their complaint. EISCaD
It is readily apparent that petitioners are raising issues of fact in this petition. In a petition for
review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, only questions of law
may be raised and they must be distinctly set forth. The settled rule is that findings of fact of
the lower courts (including the Court of Appeals) are final and conclusive and will not be
reviewed on appeal except: (1) when the conclusion is a finding grounded entirely on
speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken,
absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when
the Court of Appeals, in making its findings, went beyond the issues of the case and such
findings are contrary to the admission of both appellant and appellee; (7) when the findings of
the Court of Appeals are contrary to those of the trial court; and (8) when the findings of fact
are conclusions without citation of specific evidence on which they are based. 3
None of these instances are extant in the present case.
Parenthetically, petitioners are questioning the rate of interest involved here. They maintain
that the Court of Appeals erred in decreeing that the stipulated interest rate of 72% per annum
or 6% per month is not unconscionable.
The Court of Appeals, in sustaining the stipulated interest rate, ratiocinated that since the Usury
Law had been repealed by Central Bank Circular No. 905 there is no more maximum rate of
interest and the rate will just depend on the mutual agreement of the parties. Obviously, this
was in consonance with our ruling in Liam Law v. Olympic Sawmill Co. 4
The factual circumstances of the present case require the application of a different
jurisprudential instruction. While the Usury Law ceiling on interest rates was lifted by C.B.

Circular No. 905, nothing in the said circular grants lenders carte blanche authority to raise
interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of
their assets. 5 In Medel v. Court of Appeals, 6 this court had the occasion to rule on this
question whether or not the stipulated rate of interest at 5.5% per month on a loan
amounting to P500,000.00 is usurious. While decreeing that the aforementioned interest was
not usurious, this Court held that the same must be equitably reduced for being iniquitous,
unconscionable and exorbitant, thus:
"We agree with petitioners that the stipulated rate of interest at 5.5%
per month on the P500,000.00 loan is excessive, iniquitous,
unconscionable and exorbitant. However, we can not consider the
rate 'usurious' because this Court has consistently held that Circular
No. 905 of the Central Bank, adopted on December 22, 1982, has
expressly removed the interest ceilings prescribed by the Usury Law
and that the Usury Law is now 'legally inexistent.'
In Security Bank and Trust Company vs. Regional Trial Court of
Makati, Branch 61 the Court held that CB Circular No. 905 did not
repeal nor in any way amend the Usury Law but simply suspended
the latter's effectivity. Indeed, we have held that 'a Central Bank
Circular can not repeal a law. Only a law can repeal another law. In
the recent case of Florendo v. Court of Appeals, the Court reiterated
the ruling that 'by virtue of CB Circular 905, the Usury Law has been
rendered ineffective.' 'Usury Law has been legally non-existent in our
jurisdiction. Interest can now be charged as lender and borrower may
agree upon.'
Nevertheless, we find the interest at 5.5% per month, or 66% per
annum, stipulated upon by the parties in the promissory note
iniquitous or unconscionable, and hence, contrary to morals ('contra
bonos mores'), if not against the law. The stipulation is void. The
courts shall reduce equitably liquidated damages, whether intended
as an indemnity or a penalty if they are iniquitous or
unconscionable." (Italics supplied)
In the case at bench, petitioners stand on a worse situation. They are required to pay the
stipulated interest rate of 6% per month or 72% per annum which is definitely outrageous and
inordinate. Surely, it is more consonant with justice that the said interest rate be reduced
equitably. An interest of 12% per annum is deemed fair and reasonable.
WHEREFORE, the appealed decision of the Court of Appeals is AFFIRMED subject to the
MODIFICATION that the interest rate of 72% per annum is ordered reduced to 12% per
annum.
SO ORDERED.
Melo, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.
||| (Spouses Solangon v. Salazar, G.R. No. 125944, [June 29, 2001], 412 PHIL 816-823)

426

THIRD DIVISION
[G.R. No. 126486. February 9, 1998.]
BARONS MARKETING CORP., petitioner, vs. COURT OF
APPEALS and PHELPS DODGE PHILS., INC., respondents.

directly with Meralco is not supported by the evidence. At most, such supposition is considered
by the Court merely speculative. The Court having ruled that private respondent's acts did not
transgress the provisions of Article 21, petitioner cannot be entitled to moral damages or for
that matter, exemplary damages. The Court, however, found the amount of attorney's fees and
collection fees of 25% of the principal to be manifestly exorbitant, and, accordingly, reduced it
to 10%.

SYLLABUS
Vero B. Librojo for petitioner.
Ponce Enrile Reyes & Manalastas for private respondent.

SYNOPSIS
On August 31, 1973, private respondent Phelps Dodge Phils., Inc. appointed petitioner Barons
Marketing Corporation as one of its dealers of electrical wires and cables. During the period
covering December 1986 to August 1987, petitioner purchased on credit from respondent
various electrical wires and cables in the total amount of P4,102,438.30. On September 7,
1987, petitioner paid respondent the amount of P300,000.00 out of its total purchases abovestated. On several occasions, respondent wrote petitioner demanding payment of its
outstanding obligations due respondent. In response, petitioner wrote respondent requesting the
latter if it could pay its outstanding account in monthly installments of P500,000.00 plus 1%
interest per month. Respondent, however, rejected petitioner's offer and reiterated its demand
for full payment of petitioner's account. Respondent then filed a complaint before the Pasig
Regional Trial Court against petitioner for the recovery of P3,802,478.20 representing the
value of the wires and cables the former had delivered to the latter, including interest. After
hearing, the trial court rendered its decision ordering petitioner to pay respondent: 1)
P3,108,000.00 constituting the unpaid balance, plus interest; 2) 25% of the preceding
obligation for and as attorney's fees; 3) P10,000.00 as exemplary damages; and 4) the costs of
suit. Both parties appealed to the Court of Appeals. The appellate court modified the decision
of the trial court ordering petitioner to pay respondent P3,802,478.20, the amount which
appeared in the body of the complaint and proven during the trial rather than P3,108,000.00,
the latter amount appearing in petitioner's prayer supposedly as a result of a typographical
error, as well as 5% of the amount awarded for and as attorney's fees. Petitioner now invokes
Articles 19 and 21 of the Civil Code, claiming that private respondent abused its rights when it
rejected petitioner's offer of settlement and subsequently filed the action for
collection. CHaDIT
The Supreme Court found petitioner's theory untenable. The Court held that to constitute an
abuse of rights under Article 19 the defendant must act with bad faith or intent to prejudice the
plaintiff. In the case at bar, petitioner has failed to prove bad faith on the part of private
respondent. Petitioner's allegation that private respondent was motivated by a desire to
terminate its agency relationship with petitioner so that private respondent itself may deal

1. CIVIL LAW; HUMAN RELATIONS; GOOD FAITH IS ALWAYS PRESUMED AND THE
BURDEN OF PROVING BAD FAITH RESTS UPON THE PARTY ALLEGING THE
SAME; IN CASE AT BAR, PETITIONER FAILED TO PROVE BAD FAITH ON THE PART
OF THE PRIVATE RESPONDENT. We hold in the negative. It is an elementary rule in this
jurisdiction that good faith is presumed and that the burden of proving bad faith rests upon the
party alleging the same. In the case at bar, petitioner has failed to prove bad faith on the part of
private respondent. Petitioner's allegation that private respondent was motivated by a desire to
terminate its agency relationship with petitioner so that private respondent itself may deal
directly with Meralco is simply not supported by the evidence. At most, such supposition is
merely speculative. Moreover, we find that private respondent was driven by very legitimate
reasons for rejecting petitioner's offer and instituting the action for collection before the trial
court. As pointed out by private respondent, the corporation had its own "cash position to
protect in order for it to pay its own obligations." This is not such "a lame and poor
rationalization" as petitioner purports it to be. For if private respondent were to be required to
accept petitioner's offer, there would be no reason for the latter to reject similar offers from its
other debtors. Clearly, this would be inimical to the interests of any enterprise, especially a
profit-oriented one like private respondent. It is plain to see that what we have here is a
mere exercise of rights, not an abuse thereof. Under these circumstances, we do not deem
private respondent to have acted in a manner contrary to morals, good customs or public policy
as to violate the provisions of Article 21 of the Civil Code.
2. ID.; ID.; DAMAGES; PETITIONER IS NOT ENTITLED TO MORAL DAMAGES OR
EXEMPLARY DAMAGES; REASONS. Having ruled that private respondent's acts did not
transgress the provisions of Article 21, petitioner cannot be entitled to moral damages or, for
that matter, exemplary damages. While the amount of exemplary damages need not be proved,
petitioner must show that he is entitled to moral, temperate or compensatory damages before
the court may consider the question of whether or not exemplary damages should be awarded.
As we have observed above, petitioner has failed to discharge this burden.
3. ID.; CONTRACTS; IN THE ABSENCE OF ANY ABUSE OF RIGHT, PRIVATE
RESPONDENT CANNOT BE ALLOWED TO PERFORM ITS OBLIGATIONS UNDER
SUCH CONTRACT IN PARTS; THE PRINCIPLE OF AUTONOMY OF CONTRACTS
MUST BE RESPECTED. It may not be amiss to state that petitioner's contract with private
respondent has the force of law between them. Petitioner is thus bound to fulfill what has been
expressly stipulated therein. In the absence of any abuse of right, private respondent cannot be
allowed to perform its obligation under such contract in parts. Otherwise, private respondent's

427
right under Article 1248 will be negated, the sanctity of its contract with petitioner defiled. The
principle of autonomy of contracts must be respected.
4. ID.; ID.; DAMAGES; COLLECTION AND ATTORNEY'S FEES REDUCED BY THE
COURT FOR BEING EXORBITANT. Under Article 1229 of the Civil Code courts are
empowered to reduce such penalty if the same is "iniquitous or unconscionable." It is true that
we have upheld the reasonableness of penalties in the form of attorney's fees consisting of
twenty-five percent (25%) of the principal debt plus interest. In the case at bar, however, the
interest alone runs to some four and a half million pesos (P4.5M), even exceeding the principal
debt amounting to almost four million pesos (P4.0M). Twenty five percent (25%) of the
principal and interest amounts to roughly two million pesos (P2M). In real terms, therefore, the
attorney's fees and collection fees are manifestly exorbitant. Accordingly, we reduce the same
to ten percent (10%) of the principal.
5. ID.; ID.; ID.; POWER OF THE COURT TO REVIEW MATTERS EVEN THEY ARE NOT
ASSIGNED AS ERRORS. Private respondent argues that petitioner failed to question the
award of attorney's fees on appeal before respondent court and raised the issue only in its
motion for reconsideration. Consequently, petitioner should be deemed to have waived its right
to question such award. Private respondent's attempts to dissuade us from reducing the penalty
are futile. The Court is clothed with ample authority to review matters, even if they are not
assigned as errors in their appeal, if it finds that their consideration is necessary in arriving at a
just decision of the case. cIECaS

DECISION

KAPUNAN, J p:
The instant petition raises two issues: (1) whether or not private respondent is guilty of abuse
of right; and (2) whether or not private respondent is entitled to interest and attorney's
fees. prcd
The facts are undisputed:
On August 31, 1973, plaintiff [Phelps Dodge, Philippines, Inc. private
respondent herein] appointed defendant [petitioner Barons Marketing,
Corporation] as one of its dealers of electrical wires and cables
effective September 1, 1973 (Exh. A). As such dealer, defendant was
given by plaintiff 60 days credit for its purchases of plaintiff's
electrical products. This credit term was to be reckoned from the date
of delivery by plaintiff of its products to defendant (Exh. 1).
During the period covering December 1986 to August 17, 1987,
defendant purchased, on credit, from plaintiff various electrical wires
and cables in the total amount of P4,102,438.30 (Exh. B to K). These
wires and cables were in turn sold, pursuant to previous
arrangements, by defendant to MERALCO, the former being the

accredited supplier of the electrical requirements of the latter. Under

the sales invoices issued by plaintiff to defendant for the subject
purchases, it is stipulated that interest at 12% on the amount due for
attorney's fees and collection (Exh. BB). 1 On September 7, 1987,
defendant paid plaintiff the amount of P300,000.00 out of its total
purchases as above-stated (Exh. S), thereby leaving an unpaid
account on the aforesaid deliveries of P3,802,478.20. On several
occasions, plaintiff wrote defendant demanding payment of its
outstanding obligations due plaintiff (Exhs. L, M, N, and P). In
response, defendant wrote plaintiff on October 5, 1987 requesting the
latter if it could pay its outstanding account in monthly installments
of P500,000.00 plus 1% interest per month commencing on October
15, 1987 until full payment (Exh. O and O-4). Plaintiff, however,
rejected defendant's offer and accordingly reiterated its demand for
the full payment of defendant's account (Exh. P). 2
On 29 October 1987, private respondent Phelps Dodge Phils., Inc. filed a complaint before the
Pasig Regional Trial Court against petitioner Barons Marketing Corporation for the recovery of
P3,802,478.20 representing the value of the wires and cables the former had delivered to the
latter, including interest. Phelps Dodge likewise prayed that it be awarded attorney's fees at the
rate of 25% of the amount demanded, exemplary damages amounting to at least P100,000.00,
the expenses of litigation and the costs of suit.

Petitioner, in its answer, admitted purchasing the wires and cables from private respondent but
disputed the amount claimed by the latter. Petitioner likewise interposed a counterclaim against
private respondent, alleging that it suffered injury to its reputation due to Phelps Dodge's acts.
Such acts were purportedly calculated to humiliate petitioner and constituted an abuse of
rights.
After hearing, the trial court on 17 June 1991 rendered its decision, the dispositive portion of
which reads:
WHEREFORE, from all the foregoing considerations, the Court finds
Phelps Dodge Phils., Inc. to have preponderantly proven its case and
hereby orders Barons Marketing, Inc. to pay Phelps Dodge the
following:
1. P3,108,000.00 constituting the unpaid balance of
defendant's purchases from plaintiff and interest thereon at 12% per
annum computed from the respective expiration of the 60 day credit
term, vis-a-vis the various sales invoices and/or delivery receipts;
2. 25% of the preceding obligation for and as attorney's
fees;
3. P10,000.00 as exemplary damages;
4. Costs of suit. 3

428
Both parties appealed to respondent court. Private respondent claimed that the trial court
should have awarded it the sum of P3,802,478.20, the amount which appeared in the body of
the complaint and proven during the trial rather than P3,108,000.00. The latter amount appears
in petitioner's prayer supposedly as a result of a typographical error.
On the other hand, petitioner reiterated its claims for damages as a result of "creditor's abuse."
It also alleged that private respondent failed to prove its cause of action against it. cdll
On 25 June 1996, the Court of Appeals rendered a decision modifying the decision of the trial
court, thus:
WHEREFORE, from all the foregoing considerations, the Court finds
Phelps Dodge Phils., Inc. to have preponderantly proven its case and
hereby orders Barons Marketing, Inc. to pay Phelps Dodge the
following:
1. P3,802,478.20 constituting the unpaid balance of defendant's
purchases from plaintiff and interest thereon at 12% per annum
computed from the respective expiration of the 60 day credit term,
vis-a-vis the various sales invoices and/or delivery receipts; and
2. 5% of the preceding obligation for and as attorney's fees.
No costs. 4
Petitioner Barons Marketing is now before this Court alleging that respondent court erred when
it held (1) private respondent Phelps Dodge not guilty of "creditor's abuse," and (2) petitioner
liable to private respondent for interest and attorney's fees.
I
Petitioner does not deny private respondent's rights to institute an action for collection and to
claim full payment. Indeed, petitioner's right to file an action for collection is beyond
cavil. 5 Likewise, private respondent's right to reject petitioner's offer to pay in installments is
guaranteed byArticle 1248 of the Civil Code which states:
ART. 1248. Unless there is an express stipulation to that effect, the
creditor cannot be compelled partially to receive the prestations in
which the obligation consists. Neither may the debtor be required to
make partial payments.
However, when the debt is in part liquidated and in part unliquidated,
the creditor may demand and the debtor may effect the payment of
the former without waiting for the liquidation of the latter.
Under this provision, the prestation, i.e., the object of the obligation, must be performed
in one act, not in parts.
Tolentino concedes that the right has its limitations:
Partial Prestations. Since the creditor cannot be compelled to
accept partial performance, unless otherwise stipulated, the creditor
who refuses to accept partial prestations does not incur in delay

or mora accipiendi, except when there is abuse of right or if good

faith requires acceptance. 6
Indeed, the law, as set forth in Article 19 of the Civil Code, prescribes a "primordial
limitation on all rights" by setting certain standards that must be observed in the exercise
thereof. 7 Thus:
ART. 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Petitioner now invokes Article 19 and Article 21 8 of the Civil Code, claiming that private
respondent abused its rights when it rejected petitioner's offer of settlement and subsequently
filed the action for collection considering:
. . . that the relationship between the parties started in 1973 spanning
more than 13 years before the complaint was filed, that the petitioner
had been a good and reliable dealer enjoying a good credit standing
during the period before it became delinquent in 1987, that the
relationship between the parties had been a fruitful one especially for
the private respondent, that the petitioner exerted its outmost efforts
to settle its obligations and avoid a suit, that the petitioner did not
evade in the payment of its obligation to the private respondent, and
that the petitioner was just asking a small concession that it be
allowed to liquidate its obligation to eight (8) monthly installments of
P500,000.00 plus 1% interest per month on the balance which
proposal was supported by post-dated checks. 9
Expounding on its theory, petitioner states:
In the ordinary course of events, a suit for collection of a sum of
money filed in court is done for the primary purpose of collecting a
debt or obligation. If there is an offer by the debtor to pay its debt or
obligation supported by post-dated checks and with provision for
interests, the normal response of a creditor would be to accept the
offer of compromise and not file the suit for collection. It is of
common knowledge that proceedings in our courts would normally
take years before an action is finally settled. It is always wiser and
more prudent to accept an offer of payment in installment rather than
file an action in court to compel the debtor to settle his obligation in
full in a single payment.
xxx xxx xxx
. . . Why then did private respondent elect to file a suit for collection
rather than accept petitioner's offer of settlement, supported by postdated checks, by paying monthly installments of P500,000.00 plus
1% per month commencing on October 15, 1987 until full payment?
The answer is obvious. The action of private respondent in filling a
suit for collection was an abuse of right and exercised for the sole
purpose of prejudicing and injuring the petitioner. 10

429
Petitioner prays that the Court order private respondent to pay petitioner moral and exemplary
damages, attorney's fees, as well as the costs of suit. It likewise asks that it be allowed to
liquidate its obligation to private respondent, without interests, in eight equal monthly
installments.
Petitioner's theory is untenable. prLL
Both parties agree that to constitute an abuse of rights under Article 19 the defendant must act
with bad faith or intent to prejudice the plaintiff. They cite the following comments of
Tolentino as their authority:
Test of Abuse of Right. Modern jurisprudence does not permit acts
which, although not unlawful, are anti-social. There is undoubtedly
an abuse of right when it is exercised for the only purpose of
prejudicing or injuring another. When the objective of the actor is
illegitimate, the illicit act cannot be concealed under the guise of
exercising a right. The principle does not permit acts which, without
utility or legitimate purpose cause damage to another, because they
violate the concept of social solidarity which considers law as rational
and just. Hence, every abnormal exercise of a right, contrary to its
socio-economic purpose, is an abuse that will give rise to
liability. The exercise of a right must be in accordance with the
purpose for which it was established, and must not be excessive or
unduly harsh; there must be no intention to injure another.
Ultimately, however, and in practice, courts, in the sound exercise of
their discretion, will have to determine all the facts and circumstances
when the exercise of a right is unjust, or when there has been an
abuse of right. 11
The question, therefore, is whether private respondent intended to prejudice or injure petitioner
when it rejected petitioner's offer and filed the action for collection.
We hold in the negative. It is an elementary rule in this jurisdiction that good faith is presumed
and that the burden of proving bad faith rests upon the party alleging the same. 12 In the case
at bar, petitioner has failed to prove bad faith on the part of private respondent. Petitioner's
allegation that private respondent was motivated by a desire to terminate its agency
relationship with petitioner so that private respondent itself may deal directly with Meralco is
simply not supported by the evidence. At most, such supposition is merely speculative.
Moreover, we find that private respondent was driven by very legitimate reasons for rejecting
petitioner's offer and instituting the action for collection before the trial court. As pointed out
by private respondent, the corporation had its own "cash position to protect in order for it to
pay its own obligations." This is not such "a lame and poor rationalization" as petitioner
purports it to be. For if private respondent were to be required to accept petitioner's offer, there
would be no reason for the latter to reject similar offers from its other debtors. Clearly, this
would be inimical to the interests of any enterprise, especially a profit-oriented one like private
respondent. It is plain to see that what we have here is a mere exercise of rights, not
an abuse thereof. Under these circumstances, we do not deem private respondent to have acted
in a manner contrary to morals, good customs or public policy as to violate the provisions of
Article 21 of the Civil Code.

Consequently, petitioner's prayer for moral and exemplary damages must thus be rejected.
Petitioner's claim for moral damages is anchored onArticle 2219 (10) of the Civil Code which
states:

ART. 2219. Moral damages may be recovered in the following and

analogous cases:
xxx xxx xxx
(10) Acts and actions referred to in articles 21, 26, 27, 28, 29, 30, 32,
34, and 35.
xxx xxx xxx
Having ruled that private respondent's acts did not transgress the provisions of Article 21,
petitioner cannot be entitled to moral damages or, for that matter, exemplary damages.
While the amount of exemplary damages need not be proved, petitioner must show that
he is entitled tomoral, temperate or compensatory damages before the court may consider
the question of whether or not exemplary damages should be awarded. 13 As we have
observed above, petitioner has failed to discharge this burden.
It may not be amiss to state that petitioner's contract with private respondent has the force of
law between them. 14 Petitioner is thus bound to fulfill what has been expressly stipulated
therein. 15 In the absence of any abuse of right, private respondent cannot be allowed to
perform its obligation under such contract in parts. Otherwise, private respondent's right under
Article 1248 will be negated, the sanctity of its contract with petitioner defiled. The principle
of autonomy of contracts 16 must be respected.
II
Under said contract, petitioner is liable to private respondent for the unpaid balance of its
purchases from private respondent plus 12% interest. Private respondent's sales invoices
expressly provide that:
. . . Interest at 12% per annum will be charged on all overdue
account plus 25% on said amount for attorney's fees and collection. . .
. 17
It may also be noted that the above stipulation, insofar as it provides for the payment of "25%
on said amount for attorney's fees and collection (sic)," constitutes what is known as a penal
clause. 18 Petitioner is thus obliged to pay such penalty in addition to the 12% annual interest,
there being an express stipulation to that effect. dctai
Petitioner nevertheless urges this Court to reduce the attorney's fees for being "grossly
excessive," "considering the nature of the case which is a mere action for collection of a sum of
money." It may be pointed out however that the above penalty is supposed to answer not only
for attorney's fees but for collection fees as well. Moreover:
. . . the attorneys' fees here provided is not, strictly speaking, the
attorneys' fees recoverable as between attorney and client spoken of
and regulated by the Rules of Court. Rather, the attorneys' fees here

430
are in the nature of liquidated damages and the stipulation therefor is
aptly called a penal clause. It has been said that so long as such
stipulation does not contravene law, morals, or public order, it is
strictly binding upon defendant. The attorneys' fees so provided are
awarded in favor of the litigant, not his counsel. It is the litigant, not
counsel, who is the judgment creditor entitled to enforce the judgment
by execution. 19
Nonetheless, courts are empowered to reduce such penalty if the same is "iniquitous or
unconscionable." Article 1229 of the Civil Code states thus:
ART. 1229. The judge shall equitably reduce the penalty when the
principal obligation has been partly or irregularly complied with by
the debtor. Even if there has been no performance, the penalty may
also be reduced by the courts if it is iniquitous or unconscionable.
(Emphasis supplied.)
The sentiments of the law are echoed in Article 2227 of the same Code:
ART. 2227. Liquidated damages, whether intended as an indemnity or
a penalty, shall be equitably reduced if they are iniquitous or
unconscionable.
It is true that we have upheld the reasonableness of penalties in the form of attorney's fees
consisting of twenty-five percent (25%) of the principal debt plus interest. 20 In the case at bar,
however, the interest alone runs to some four and a half million pesos (P4.5M), even exceeding
the principal debt amounting to almost four million pesos (P4.0M). Twenty five percent (25%)
of the principal and interest amounts to roughly two million pesos (P2M). In real terms,
therefore, the attorney's fees and collection fees are manifestly exorbitant. Accordingly, we
reduce the same to ten percent (10%) of the principal.
Private respondent, however, argues that petitioner failed to question the award of attorney's
fees on appeal before respondent court and raised the issue only in its motion for
reconsideration. Consequently, petitioner should be deemed to have waived its right to question
such award. LexLib
Private respondent's attempts to dissuade us from reducing the penalty are futile. The Court is
clothed with ample authority to review matters, even if they are not assigned as errors in their
appeal, if it finds that their consideration is necessary in arriving at a just decision of the
case. 21
WHEREFORE, the decision of the Court of Appeals is hereby MODIFIED in that the
attorney's and collection fees are reduced to ten percent (10%) of the principal but is
AFFIRMED in all other respects.
SO ORDERED.
Narvasa, C .J ., Romero, Francisco and Purisima, JJ ., concur.
||| (Barons Marketing Corp. v. Court of Appeals, G.R. No. 126486, [February 9, 1998], 349
PHIL 769-781)

431

EN BANC
[G.R. No. L-46533. October 28, 1939.]
THE MANILA RACING CLUB, INC., plaintiff-appellant, vs. THE
MANILA JOCKEY CLUB, ET AL., defendants-appellees.

Sotto & Sotto for appellant.

Araneta, Zaragoza & Araneta for appellees, Manila Jockey Club et al.
Orense & Belmonte for appellees Napkil Vda. de Bautista and Montenegro de
Butte.

The purchaser Campos made the down payment of P50,000 upon signing the
contract and on September 28, 1938 paid the second installment of P50,000.
On October 22, 1936, the Manila Racing Club, Inc., was organized and
Campos transferred to it all his rights and obligations under his contract with the Manila
Jockey Club.

SYLLABUS
1. PURCHASE AND SALE; VALIDITY OF CLAUSE REGARDING
FORFEITURE OF PARTIAL PAYMENT; PENAL CLAUSE. The clause of the
contract referring to the forfeiture of the P100,000 already paid, should the purchaser C
fail to pay the subsequent installments, is valid. It is in the nature of a penal clause which
may be legally established by the parties (articles 1152 and 1255 of the Civil Code). In its
double purpose of insuring compliance with the contract and of otherwise measuring
before hand the damages which may result from non-compliance, it is not contrary to law,
morals or public order because it was voluntarily and knowingly agreed upon by the
parties. Viewing concretely the true effects thereof in the present case, the amount
forfeited constitutes only eight percent of the stipulated price, which is not excessive if
considered as the profit which would have been obtained had the contract been complied
with. There is, moreover, evidence that the defendants, because of this contract with C.,
had to reject other propositions to buy the same property. At any rate, the penal clause
does away with the duty to prove the existence and measure of the damages cause a by
the breach.

DECISION

AVANCEA, J p:

On September 18, 1936 Rafael J. Campos entered into a contract (Exhibit C)

with the Manila Jockey Club, an unregistered partnership, whereby he purchased from it
the parcel of land described in transfer certificate of title No. 8724 with its improvements,
the good-will, and certain personal property. The price agreed upon in this transaction is
P1,200,000, payable as follows: P50,000 upon the signing of the contract; P50,000 on or
before September 28, 1936; P300,000 on or before December 24, 1936; P200,000 on or
before March 24, 1937; and P600,000 on or before September 24, 1937. It was agreed
that should the purchaser fail to pay the amount corresponding to each installment in due
time, the vendor may rescind the contract and keep the amounts paid for itself. One of the
clauses of the deed also states that the purchaser may form a corporation called the
Manila Racing Club, Inc., to whom he may transfer all his rights and obligations under
the contract.

As the third installment of P300,000 became due on December 24, 1936, and
the purchaser could not pay it, the vendor, on January 11, 1937, declared the contract cancelled and kept the amount of P100,000 already paid, corresponding to the first two
installments. The purchaser was, however, granted an extension until January 22, 1937, to
revive the contract by paying the P300,000, but having failed to do this, the partners of
the vendor ratified on January 23, 1937, the cancellation of the contract agreed upon by
its board of directors and the forfeiture of the P100,000 paid by the purchaser. Although
the plaintiff contends that the Manila Jockey Club granted to purchaser Campos an
indefinite time to pay the P300,000, corresponding to the third installment, there is no
sufficient evidence thereof and, on the contrary, Campos admits, and defendants'
evidence so indicate, that January 22, 1937, was the last extension granted to him to make
this payment.
On March 23, 1937 the Manila Jockey Club, Inc., was organized and to it
were transferred all the properties, rights and actions of the Manila Jockey Club.
This action is filed by the plaintiff against the Manila Jockey Club and its
partners for the recovery from them of the forfeited amount of P100,000 and for the
payment of P50,000 as damages. The appealed judgment absolves the defendants.
Assuming these facts to be true, if the clause of the contract referring to the
forfeiture of the P100,000 already paid, should the purchaser Campos fail to pay the
subsequent installments, is valid, the case does not present any difficulty because the
contract is clear on this point.
This clause regarding the forfeiture of what has been partially paid is valid. It
is in the nature of a penal clause which may be legally established by the parties (articles
1152 and 1255 of the Civil Code). In its double purpose of insuring compliance with the
contract and of otherwise measuring beforehand the damages which may result from noncompliance, it is not contrary to law, morals or public order because it was voluntarily
and knowingly agreed upon by the parties. Viewing concretely the true effects thereof in

432
the present case, the amount forfeited constitutes only eight per cent of the stipulated
price, which is not excessive if considered as the profit which would have been obtained
had the contract been complied with. There is, moreover, evidence that the defendants,
because of this contract with Campos, had to reject other propositions to buy the same
property. At any rate, the penal clause does away with the duty to prove the existence and
measure of the damages caused by the breach.
On the other hand, the allegation that the defendants were responsible for the
non-compliance with the contract is in no wise justified. It is said that the majority of the
members of the Manila Jockey Club promised to subscribe to one-half of the shares of
the plaintiff, and for failure to live up to this promise, the money to pay the third
installment of P300,000 could not be raised. There is, however, no sufficient evidence of
such promise which, according to Campos, was merely verbal. Furthermore, Campos
himself attributes the failure to pay the third installment to the fact that the public, due to
the state of the stock market, did not respond to the expectations of the incorporators of
the plaintiff. But it seems that even this is not the cause of the breach, for on the date the
third installment became due, the plaintiff had subscribed shares of its capital stock in the
amount of P600,000, paid in part and the remainder payable on demand. The deduction
from all this is that the breach of the contract cannot be attributed to the defendants and,
much less, to the company which, it is also alleged, the defendants brought into being to
defeat the organization of the plaintiff.
In view of the foregoing considerations, the appealed judgment is affirmed,
with the costs to the appellant. So ordered.
Villa-Real, Imperial, Diaz, Laurel, Concepcion and Moran, JJ., concur.
||| (Manila Racing Club, Inc. v. Manila Jockey Club, G.R. No. L-46533, [October 28, 1939], 69
PHIL 55-58)

433

THIRD DIVISION

SYLLABUS

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

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; PENALTY CLAUSE, CONSTRUED.

A penalty clause, expressly recognized by law, is an accessory undertaking to assume
greater liability on the part of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation and to provide, in effect, for what could be the
liquidated damages resulting from such a breach. The obligor would then be bound to pay the
stipulated indemnity without the necessity of proof on the existence and on the measure of
damages caused by the breach. Although a court may not at liberty ignore the freedom of the
parties to agree on such terms and conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be
equitably reduced by the courts if it is iniquitous or unconscionable or if the principal
obligation has been partly or irregularly complied with.

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

Florimundo C. Rous for petitioners.

Castro Bias Samillano & Mangrobang for private respondent.

SYNOPSIS
Petitioners obtained a loan from respondent bank in the amount of P120,000.00 at 15.189%
interest per annum with a 5% penalty per month in case of default and 10% attorney's fees if a
suit were instituted for collection. When petitioners defaulted in payment, respondent bank
sued for recovery of the amount due. Two years after the case was submitted for decision
without petitioners presenting their evidence, petitioners filed a motion for reconsideration of
the order declaring them as having waived their right to present evidence and prayed that they
be allowed to prove their case. The motion was denied by the trial court which eventually
rendered a decision in favor of respondent bank ordering petitioners to pay the amount due
with the agreed interest rate of 15.189%, 5% penalty charge and 10% attorney's fees. The
decision was affirmed on appeal by the Court of Appeals. On reconsideration, the appellate
court reduced the penalty interest from 5% to 3%. Petitioners filed a second motion for
reconsideration and to admit newly discovered evidence that the real estate mortgage they
executed novated the contract of loan. The mortgage, however, did not contain an express
stipulation that the parties intended to supersede the existing loan agreement but was an
accessory contract to secure the loan. The Court of Appeals denied the same. Hence, this
recourse, with petitioners raising for the first time the reasonableness of the interest rate.
A penalty clause is an accessory undertaking to strengthen the coercive force of the obligation
and that the 3% penalty interest rate considering the repeated acts of breach of petitioners'
contractual obligations is not iniquitous.
The issue of reasonableness of interest rate cannot be raised for the first time on appeal. In any
event, the Court held that the stipulated interest of 15.189% per annum is not excessive.
An obligation to pay a sum of money is not extinctively novated by a new instrument which
merely supplements the old contract.

2. ID.; ID.; ID.; 3% PENALTY INTEREST A MONTH, REASONABLE; CASE AT BAR.

The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not necessarily confined
to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the standing and relationship of the parties, and
the like, the application of which, by and large, is addressed to the sound discretion of the
court. The Court of Appeals, exercising its good judgment in the instant case, has reduced the
penalty interest from 5% a month to 3% a month which petitioner still disputes. Given the
circumstances, not to mention the repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the ruling of the appellate court. HEcaIC
3. ID.; ID.; ID.; INTEREST STIPULATION, FUNDAMENTAL PART OF THE BANKING
BUSINESS AND THE CORE OF A BANK'S EXISTENCE. Anent the stipulated interest of
15.189% per annum, petitioners, for the first time, question its reasonableness and prays that
the Court reduce the amount. This contention is a fresh issue that has not been raised and
ventilated before the courts below. In any event, the interest stipulation, on its face, does not
appear as being that excessive. The essence or rationale for the payment of interest, quite often
referred to as cost of money, is not exactly the same as that of a surcharge or a penalty. A
penalty stipulation is not necessarily preclusive of interest, if there is an agreement to that
effect, the two being distinct concepts which may separately be demanded. What may justify a
court in not allowing the creditor to impose full surcharges and penalties, despite an express
stipulation therefor in a valid agreement, may not equally justify the non-payment or reduction
of interest. Indeed, the interest prescribed in loan financing arrangements is a fundamental part
of the banking business and the core of a bank's existence.
4. ID.; DAMAGES; PAYMENT OF 10% ATTORNEY'S FEES, REASONABLE IN CASE AT
BAR. Petitioners next assail the award of 10% of the total amount of indebtedness by way
of attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time
spent and the extent of services rendered by counsel for the bank and the nature of the case.
Bearing in mind that the rate of attorney's fees has been agreed to by the parties and intended to
answer not only for litigation expenses but also for collection efforts as well, the Court, like the
appellate court, deems the award of 10% attorney's fees to be reasonable.

434
5. REMEDIAL LAW; CIVIL PROCEDURE; NEW TRIAL; NEWLY DISCOVERED
EVIDENCE; MUST NOT BE EXISTING AT TIME WHEN APPEAL OR FIRST MOTION
FOR RECONSIDERATION WAS FILED; CASE AT BAR. Neither can the appellate court
be held to have erred in rejecting petitioners' call for a new trial or to admit newly discovered
evidence. As the appellate court so held in its resolution of 14 May 1999 "Under Section 2,
Rule 52 of the 1997 Rules of Civil Procedure, no second motion for reconsideration of a
judgment or final resolution by the same party shall be entertained. Considering that the instant
motion is already a second motion for reconsideration, the same must therefore be denied.
"Furthermore, it would appear from the records available to this court that the newlydiscovered evidence being invoked by defendants-appellants have actually been existent when
the case was brought on appeal to this court as well as when the first motion for
reconsideration was filed. Hence, it is quite surprising why defendants-appellants raised the
alleged newly-discovered evidence only at this stage, when they could have done so in the
earlier pleadings filed before this court.
6. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINCTIVE NOVATION;
REQUISITES. Extinctive novation requires, first, a previous valid obligation; second, the
agreement of all the parties to the new contract; third, the extinguishment of the obligation;
and fourth, the validity of the new one. In order that an obligation may be extinguished by
another which substitutes the same, it is imperative that it be so declared in unequivocal terms,
or that the old and the new obligation be on every point incompatible with each other.
7. ID.; ID.; ID.; MUST PRODUCE INCOMPATIBILITY IN ANY OF THE ESSENTIAL
ELEMENTS OF THE OBLIGATION. An obligation to pay a sum of money is not
extinctively novated by a new instrument which merely changes the terms of payment or
adding compatible covenants or where the old contract is merely supplemented by the new one.
When not expressed, incompatibility is required so as to ensure that the parties have indeed
intended such novation despite their failure to express it in categorical terms. The
incompatibility, to be sure, should take place in any of the essential elements of the
obligation, i.e., (1) the juridical relation or tie, such as from a mere commodatum to lease of
things, or from negotiorumgestio to agency, or from a mortgage to antichresis, or from a sale to
one of loan; (2) the object or principal conditions, such as a change of the nature of the
prestation; or (3) the subjects, such as the substitution of a debtor or the subrogation of the
creditor. Extinctive novation does not necessarily imply that the new agreement should be
complete by itself; certain terms and conditions may be carried, expressly or by implication,
over to the new obligation. CSTHca

DECISION

Petitioners Tolomeo Ligutan and Leonidas dela Llana obtained on 11 May 1981 a loan in the
amount of P120,000.00 from respondent Security Bank and Trust Company. Petitioners
executed a promissory note binding themselves, jointly and severally, to pay the sum borrowed
with an interest of 15.189% per annum upon maturity and to pay a penalty of 5% every month
on the outstanding principal and interest in case of default. In addition, petitioners agreed to
pay 10% of the total amount due by way of attorney's fees if the matter were indorsed to a
lawyer for collection or if a suit were instituted to enforce payment. The obligation matured on
8 September 1981; the bank, however, granted an extension but only up until 29 December
1981.
Despite several demands from the bank, petitioners failed to settle the debt which, as of 20
May 1982, amounted to P114,416.10. On 30 September 1982, the bank sent a final demand
letter to petitioners informing them that they had five days within which to make full payment.
Since petitioners still defaulted on their obligation, the bank filed on 3 November 1982, with
the Regional Trial Court of Makati, Branch 143, a complaint for recovery of the due amount.

After petitioners had filed a joint answer to the complaint, the bank presented its evidence and,
on 27 March 1985, rested its case. Petitioners, instead of introducing their own evidence, had
the hearing of the case reset on two consecutive occasions. In view of the absence of
petitioners and their counsel on 28 August 1985, the third hearing date, the bank moved, and
the trial court resolved, to consider the case submitted for decision.
Two years later, or on 23 October 1987, petitioners filed a motion for reconsideration of the
order of the trial court declaring them as having waived their right to present evidence and
prayed that they be allowed to prove their case. The court a quo denied the motion in an order,
dated 5 September 1988, and on 20 October 1989, it rendered its decision, 1 the dispositive
portion of which read:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendants, ordering the latter to pay, jointly and
severally, to the plaintiff, as follows:
"1. The sum of P114,416.00 with interest thereon at the
rate of 15.189% per annum, 2% service charge
and 5% per month penalty charge, commencing
on 20 May 1982 until fully paid;
"2. To pay the further sum equivalent to 10% of the total
amount of indebtedness for and as attorney's
fees; and
"3. To pay the costs of the suit." 2

VITUG, J p:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
assailing the decision and resolutions of the Court of Appeals in CA-G.R. CV No. 34594,
entitled "Security Bank and Trust Co. vs. Tolomeo Ligutan, et al."

Petitioners interposed an appeal with the Court of Appeals, questioning the rejection by the
trial court of their motion to present evidence and assailing the imposition of the 2% service
charge, the 5% per month penalty charge and 10% attorney's fees. In its decision 3 of 7 March
1996, the appellate court affirmed the judgment of the trial court except on the matter of the
2% service charge which was deleted pursuant to Central Bank Circular No. 783. Not fully
satisfied with the decision of the appellate court, both parties filed their respective motions for
reconsideration. 4Petitioners prayed for the reduction of the 5% stipulated penalty for being

435
unconscionable. The bank, on the other hand, asked that the payment of interest and penalty be
commenced not from the date of filing of complaint but from the time of default as so
stipulated in the contract of the parties.
On 28 October 1998, the Court of Appeals resolved the two motions thusly:
"We find merit in plaintiff-appellee's claim that the principal sum of
P114,416.00 with interest thereon must commence not on the date of
filing of the complaint as we have previously held in our decision but
on the date when the obligation became due.
"Default generally begins from the moment the creditor demands the
performance of the obligation. However, demand is not necessary to
render the obligor in default when the obligation or the law so
provides.
"In the case at bar, defendants-appellants executed a promissory note
where they undertook to pay the obligation on its maturity date
'without necessity of demand.' They also agreed to pay the interest in
case of non-payment from the date of default.
"xxx xxx xxx
"While we maintain that defendants-appellants must be bound by the
contract which they acknowledged and signed, we take cognizance of
their plea for the application of the provisions of Article 1229 . . . .
"Considering that defendants-appellants partially complied with their
obligation under the promissory note by the reduction of the original
amount of P120,000.00 to P114,416.00 and in order that they will
finally settle their obligation, it is our view and we so hold that in the
interest of justice and public policy, a penalty of 3% per month or
36% per annum would suffice.
"xxx xxx xxx
"WHEREFORE, the decision sought to be reconsidered is hereby
MODIFIED. The defendants-appellants Tolomeo Ligutan and
Leonidas dela Llana are hereby ordered to pay the plaintiff-appellee
Security Bank and Trust Company the following:
"1. The sum of P114,416.00 with interest thereon at the
rate of 15.189% per annum and 3% per month
penalty charge commencing May 20, 1982
until fully paid;
"2. The sum equivalent to 10% of the total amount of the
indebtedness as and for attorney's fees." 5
On 16 November 1998, petitioners filed an omnibus motion for reconsideration and to admit
newly discovered evidence, 6 alleging that while the case was pending before the trial court,
petitioner Tolomeo Ligutan and his wife Bienvenida Ligutan executed a real estate mortgage
on 18 January 1984 to secure the existing indebtedness of petitioners Ligutan and dela Llana

with the bank. Petitioners contended that the execution of the real estate mortgage had the
effect of novating the contract between them and the bank. Petitioners further averred that the
mortgage was extrajudicially foreclosed on 26 August 1986, that they were not informed about
it, and the bank did not credit them with the proceeds of the sale. The appellate court denied
the omnibus motion for reconsideration and to admit newly discovered evidence, ratiocinating
that such a second motion for reconsideration cannot be entertained under Section 2, Rule 52,
of the 1997 Rules of Civil Procedure. Furthermore, the appellate court said, the newlydiscovered evidence being invoked by petitioners had actually been known to them when the
case was brought on appeal and when the first motion for reconsideration was filed. 7
Aggrieved by the decision and resolutions of the Court of Appeals, petitioners elevated their
case to this Court on 9 July 1999 via a petition for review on certiorari under Rule 45 of the
Rules of Court, submitting thusly
"I. The respondent Court of Appeals seriously erred in not holding
that the 15.189% interest and the penalty of three (3%)
percent per month or thirty-six (36%) percent per annum
imposed by private respondent bank on petitioners' loan
obligation are still manifestly exorbitant, iniquitous and
unconscionable.
"II. The respondent Court of Appeals gravely erred in not reducing to
a reasonable level the ten (10%) percent award of
attorney's fees which is highly and grossly excessive,
unreasonable and unconscionable.
"III. The respondent Court of Appeals gravely erred in not admitting
petitioners' newly discovered evidence which could not
have been timely produced during the trial of this case.
"IV. The respondent Court of Appeals seriously erred in not holding
that there was a novation of the cause of action of private
respondent's complaint in the instant case due to the
subsequent execution of the real estate mortgage during
the pendency of this case and the subsequent foreclosure
of the mortgage." 8
Respondent bank, which did not take an appeal, would, however, have it that the penalty
sought to be deleted by petitioners was even insufficient to fully cover and compensate for the
cost of money brought about by the radical devaluation and decrease in the purchasing power
of the peso, particularly vis-a-vis the U.S. dollar, taking into account the time frame of its
occurrence. The Bank would stress that only the amount of P5,584.00 had been remitted out of
the entire loan of P120,000.00. 9
A penalty clause, expressly recognized by law, 10 is an accessory undertaking to assume
greater liability on the part of an obligor in case of breach of an obligation. It functions to
strengthen the coercive force of the obligation 11 and to provide, in effect, for what could be
the liquidated damages resulting from such a breach. The obligor would then be bound to pay
the stipulated indemnity without the necessity of proof on the existence and on the measure of
damages caused by the breach. 12 Although a court may not at liberty ignore the freedom of
the parties to agree on such terms and conditions as they see fit that contravene neither law nor
morals, good customs, public order or public policy, a stipulated penalty, nevertheless, may be

436
equitably reduced by the courts if it is iniquitous or unconscionable or if the principal
obligation has been partly or irregularly complied with. 13
The question of whether a penalty is reasonable or iniquitous can be partly subjective and
partly objective. Its resolution would depend on such factors as, but not necessarily confined
to, the type, extent and purpose of the penalty, the nature of the obligation, the mode of breach
and its consequences, the supervening realities, the standing and relationship of the parties, and
the like, the application of which, by and large, is addressed to the sound discretion of the
court. In Rizal Commercial Banking Corp. vs. Court of Appeals, 14 just an example, the Court
has tempered the penalty charges after taking into account the debtor's pitiful situation and its
offer to settle the entire obligation with the creditor bank. The stipulated penalty might likewise
be reduced when a partial or irregular performance is made by the debtor. 15 The stipulated
penalty might even be deleted such as when there has been substantial performance in good
faith by the obligor, 16 when the penalty clause itself suffers from fatal infirmity, or when
exceptional circumstances so exist as to warrant it. 17
The Court of Appeals, exercising its good judgment in the instant case, has reduced the penalty
interest from 5% a month to 3% a month which petitioner still disputes. Given the
circumstances, not to mention the repeated acts of breach by petitioners of their contractual
obligation, the Court sees no cogent ground to modify the ruling of the appellate court.
Anent the stipulated interest of 15.189% per annum, petitioners, for the first time, question its
reasonableness and prays that the Court reduce the amount. This contention is a fresh issue that
has not been raised and ventilated before the courts below. In any event, the interest stipulation,
on its face, does not appear as being that excessive. The essence or rationale for the payment of
interest, quite often referred to as cost of money, is not exactly the same as that of a surcharge
or a penalty. A penalty stipulation is not necessarily preclusive of interest, if there is an
agreement to that effect, the two being distinct concepts which may separately be
demanded. 18 What may justify a court in not allowing the creditor to impose full surcharges
and penalties, despite an express stipulation therefor in a valid agreement, may not equally
justify the nonpayment or reduction of interest. Indeed, the interest prescribed in loan financing
arrangements is a fundamental part of the banking business and the core of a bank's
existence. 19

Petitioners next assail the award of 10% of the total amount of indebtedness by way of
attorney's fees for being grossly excessive, exorbitant and unconscionable vis-a-vis the time
spent and the extent of services rendered by counsel for the bank and the nature of the case.
Bearing in mind that the rate of attorney's fees has been agreed to by the parties and intended to
answer not only for litigation expenses but also for collection efforts as well, the Court, like the
appellate court, deems the award of 10% attorney's fees to be reasonable.
Neither can the appellate court be held to have erred in rejecting petitioners' call for a new trial
or to admit newly discovered evidence. As the appellate court so held in its resolution of 14
May 1999
"Under Section 2, Rule 52 of the 1997 Rules of Civil Procedure, no
second motion for reconsideration of a judgment or final resolution
by the same party shall be entertained. Considering that the instant
motion is already a second motion for reconsideration, the same must
therefore be denied.

"Furthermore, it would appear from the records available to this court

that the newly-discovered evidence being invoked by defendantsappellants have actually been existent when the case was brought on
appeal to this court as well as when the first motion for
reconsideration was filed. Hence, it is quite surprising why
defendants-appellants raised the alleged newly-discovered evidence
only at this stage when they could have done so in the earlier
pleadings filed before this court.
"The propriety or acceptability of such a second motion for
reconsideration is not contingent upon the averment of 'new' grounds
to assail the judgment, i.e., grounds other than those theretofore
presented and rejected. Otherwise, attainment of finality of a
judgment might be stayed off indefinitely, depending on the party's
ingeniousness or cleverness in conceiving and formulating 'additional
flaws' or 'newly discovered errors' therein, or thinking up some injury
or prejudice to the rights of the movant for reconsideration." 20
At any rate, the subsequent execution of the real estate mortgage as security for the
existing loan would not have resulted in the extinguishment of the original contract of
loan because of novation. Petitioners acknowledge that the real estate mortgage contract
does not contain any express stipulation by the parties intending it to supersede the
existing loan agreement between the petitioners and the bank. 21Respondent bank has
correctly postulated that the mortgage is but an accessory contract to secure the loan in
the promissory note. SAHEIc
Extinctive novation requires, first, a previous valid obligation; second, the agreement of all the
parties to the new contract; third, the extinguishment of the obligation; and fourth, the validity
of the new one. 22 In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old
and the new obligation be on every point incompatible with each other. 23 An obligation to pay
a sum of money is not extinctively novated by a new instrument which merely changes the
terms of payment or adding compatible covenants or where the old contract is merely
supplemented by the new one. 24 When not expressed, incompatibility is required so as to
ensure that the parties have indeed intended such novation despite their failure to express it in
categorical terms. The incompatibility, to be sure, should take place in any of the essential
elements of the obligation, i.e., (1) the juridical relation or tie, such as from a
mere commodatum to lease of things, or from negotiorum gestio to agency, or from a mortgage
to antichresis, 25 or from a sale to one of loan; 26 (2) the object or principal conditions, such as
a change of the nature of the prestation; or (3) the subjects, such as the substitution of a
debtor 27 or the subrogation of the creditor. Extinctive novation does not necessarily imply that
the new agreement should be complete by itself; certain terms and conditions may be carried,
expressly or by implication, over to the new obligation.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Melo, Panganiban, Sandoval-Gutierrez and Carpio, JJ., concur.
||| (Ligutan v. Court of Appeals, G.R. No. 138677, [February 12, 2002], 427 PHIL 42-55)

437

438

THIRD DIVISION
[G.R. No. 138018. July 26, 2002.]
RIDO MONTECILLO, petitioner, vs. IGNACIA REYNES and
SPOUSES REDEMPTOR and ELISA ABUCAY, respondents.

Francisco M. Malilong, Jr. for petitioner.

V. L. Legaspi for respondents.

SYNOPSIS
Respondent Reynes was the owner of the subject lot containing an area of 448 square meters.
She sold 185 square meters of the lot to the Abucay Spouses. Subsequently, she signed a Deed
of Sale of the lot in favor of Montecillo. For failure of Montecillo to pay the purchase price,
Reynes unilaterally revoked the sale and she executed a Deed of Sale transferring to the
Abucay spouses the entire subject lot, at the same time confirming the previous sale of the 185square meter portion of the lot. Montecillo claimed that the consideration for the sale of the lot
was the amount he paid to Cebu Ice Storage for the mortgaged debt of Bienvenido Jayag.
Montecillo argued that the release of the mortgage was necessary since the mortgage
constituted a lien on the lot. The trial court declared the Deed of Sale to Montecillo null and
void for lack of cause or consideration because he never paid the purchase price, and it ordered
the cancellation of his Transfer Certificate of Title and the issuance of a new Certificate of Title
in favor of the Abucay Spouses. On appeal, the Court of Appeals affirmed the decision of the
trial court. Hence, this petition for review on certiorari.
In affirming the decision of the Court of Appeals, the Supreme Court ruled that absent any
showing that Reynes had agreed to the payment of the purchase price to any other party, the
payment to be effective must be made to Reynes, the vendor in the sale. Thus, Montecillo's
payment to Cebu Ice Storage is not the payment that would extinguish Montecillo's obligation
to Reynes under the Deed of Sale.

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF

OBLIGATIONS; 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. Absent any evidence showing that
Reynes had agreed to the payment of the purchase price to any other party, the payment to be
effective must be made to Reynes, the vendor in the sale. Article 1240 of the Civil Code
provides as follows: "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." Thus,
Montecillo's payment to Cebu Ice Storage is not the payment that would extinguish
Montecillo's obligation to Reynes under the Deed of Sale.
2. REMEDIAL LAW; CIVIL PROCEDURE; APPEAL; PETITION FOR REVIEW ON
CERTIORARI; ONLY QUESTIONS OF LAW CAN BE RAISED THEREIN. We find no
reason to disturb the factual findings of the trial court. In petitions for review on certiorari as a
mode of appeal under Rule 45, as in the instant case, a petitioner can raise only questions of
law. This Court is not the proper venue to consider a factual issue as it is not a trier of
facts. HCacDE
3. ID.; EVIDENCE; CREDIBILITY OF WITNESSES; FACTUAL FINDINGS OF TRIAL
COURT, GENERALLY NOT DISTURBED ON APPEAL. Factual findings of the trial
court are binding on us, especially if the Court of Appeals affirms such findings. We do not
disturb such findings unless the evidence on record clearly does not support such findings or
such findings are based on a patent misunderstanding of facts, which is not the case here. Thus,
we find no reason to deviate from the findings of both the trial and appellate courts that no
valid consideration supported Montecillo's Deed of Sale.
4. CIVIL LAW; OBLIGATIONS AND CONTRACTS; CONTRACT OF SALE; LACK OF
CONSENT AND LACK OF CONSIDERATION, DISTINGUISHED. One of the three
essential requisites of a valid contract is consent of the parties on the object and cause of the
contract. In a contract of sale, the parties must agree not only on the price, but also on the
manner of payment of the price. An agreement on the price but a disagreement on the manner
of its payment will not result in consent, thus preventing the existence of a valid contract
for lack of consent. This lack of consent is separate and distinct from lack of consideration
where the contract states that the price has been paid when in fact it has never been paid.

DECISION

The Court likewise ruled that where the deed of sale states that the purchase price has been
paid but in fact has never been paid, the deed of sale is null and void ab initio for lack of
consideration.
CARPIO, J p:
SYLLABUS

The Case
On March 24, 1993, the Regional Trial Court of Cebu City, Branch 18, rendered a
Decision 1 declaring the deed of sale of a parcel of land in favor of petitioner null and void ab
initio. The Court of Appeals, 2 in its July 16, 1998 Decision 3 as well as its February 11, 1999

439
Order 4 denying petitioner's Motion for Reconsideration, affirmed the trial court's decision in
toto. Before this Court now is a Petition for Review on Certiorari 5 assailing the Court of
Appeals' decision and order.
The Facts
Respondents Ignacia Reynes ("Reynes" for brevity) and Spouses Abucay ("Abucay Spouses"
for brevity) filed on June 20, 1984 a complaint for Declaration of Nullity and Quieting of Title
against petitioner Rido Montecillo ("Montecillo" for brevity). Reynes asserted that she is the
owner of a lot situated in Mabolo, Cebu City, covered by Transfer Certificate of Title No.
74196 and containing an area of 448 square meters ("Mabolo Lot" for brevity). In 1981,
Reynes sold 185 square meters of the Mabolo Lot to the Abucay Spouses who built a
residential house on the lot they bought.
Reynes alleged further that on March 1, 1984 she signed a Deed of Sale of the Mabolo Lot in
favor of Montecillo ("Montecillo's Deed of Sale" for brevity). Reynes, being illiterate, 6 signed
by affixing her thumb-mark 7 on the document. Montecillo promised to pay the agreed
P47,000.00 purchase price within one month from the signing of the Deed of Sale. Montecillo's
Deed of Sale states as follows:
"That I, IGNACIA T. REYNES, of legal age, Filipino, widow, with
residence and postal address at Mabolo, Cebu City, Philippines, for
and in consideration of FORTY SEVEN THOUSAND (P47,000.00)
PESOS, Philippine Currency, to me in hand paid by RIDO
MONTECILLO, of legal age, Filipino, married, with residence and
postal address at Mabolo, Cebu City, Philippines, the receipt hereof is
hereby acknowledged, have sold, transferred, and conveyed, unto
RIDO MONTECILLO, his heirs, executors, administrators, and
assigns, forever, a parcel of land together with the improvements
thereon, situated at Mabolo, Cebu City, Philippines, free from all liens
and encumbrances, and more particularly described as follows:
A parcel of land (Lot 203-B-2-B of
the subdivision plan Psd-07-01-00 2370, being
a portion of Lot 203-B-2, described on plan
(LRC) Psd-76821, L.R.C. (GLRO) Record No.
5988), situated in the Barrio of Mabolo, City of
Cebu. Bounded on the SE., along line 1-2 by
Lot 206; on the SW., along line 2-3, by Lot
202, both of Banilad Estate; on the NW., along
line 4-5, by Lot 203-B-2-A of the subdivision
of Four Hundred Forty Eight (448) square
meters, more or less.
of which I am the absolute owner in accordance with the provisions
of the Land Registration Act, my title being evidenced by Transfer
Certificate of Title No. 74196 of the Registry of Deeds of the City of
Cebu, Philippines. That This Land Is Not Tenanted and Does Not Fall
Under the Purview of P.D. 27." 8 (Emphasis supplied)
Reynes further alleged that Montecillo failed to pay the purchase price after the lapse of the
one-month period, prompting Reynes to demand from Montecillo the return of the Deed of

Sale. Since Montecillo refused to return the Deed of Sale, 9 Reynes executed a document
unilaterally revoking the sale and gave a copy of the document to Montecillo. ISAaTH
Subsequently, on May 23, 1984 Reynes signed a Deed of Sale transferring to the Abucay
Spouses the entire Mabolo Lot, at the same time confirming the previous sale in 1981 of a 185square meter portion of the lot. This Deed of Sale states:
"I, IGNACIA T. REYNES, of legal age, Filipino, widow and resident
of Mabolo, Cebu City, do hereby confirm the sale of a portion of Lot
No. 74196 to an extent of 185 square meters to Spouses Redemptor
Abucay and Elisa Abucay covered by Deed per Doc. No. 47, Page
No. 9, Book No. V, Series of 1981 of notarial register of Benedicto
Alo, of which spouses is now in occupation;
That for and in consideration of the total sum of FIFTY THOUSAND
(P50,000) PESOS, Philippine Currency, received in full and receipt
whereof is herein acknowledged from SPOUSES REDEMPTOR
ABUCAY and ELISA ABUCAY, do hereby in these presents, SELL,
TRANSFER and CONVEY absolutely unto said Spouses Redemptor
Abucay and Elisa Abucay, their heirs, assigns and successors-ininterest the whole parcel of land together with improvements thereon
and more particularly described as follows:
TCT No. 74196
A parcel of land (Lot 203-B-2-B of
the subdivision plan psd-07-01-002370, being a
portion of Lot 203-B-2, described on plan
(LRC) Psd 76821, LRC (GLRO) Record No.
5988) situated in Mabolo, Cebu City, along
Arcilla Street, containing an area of total
FOUR HUNDRED FORTY EIGHT (448)
Square meters.
of which I am the absolute owner thereof free from all liens and
encumbrances and warrant the same against claim of third persons
and other deeds affecting said parcel of land other than that to the said
spouses and inconsistent hereto is declared without any effect.
In witness whereof, I hereunto signed this 23rd day of May, 1984 in
Cebu City, Philippines." 10
Reynes and the Abucay Spouses alleged that on June 18, 1984 they received information that
the Register of Deeds of Cebu City issued Certificate of Title No. 90805 in the name of
Montecillo for the Mabolo Lot.
Reynes and the Abucay Spouses argued that "for lack of consideration there (was) no meeting
of the minds" 11 between Reynes and Montecillo. Thus, the trial court should declare null and
void ab initio Montecillo's Deed of Sale, and order the cancellation of Certificate of Title No.
90805 in the name of Montecillo.

440
In his Answer, Montecillo, a bank executive with a B.S. Commerce degree, 12 claimed he was
a buyer in good faith and had actually paid the P47,000.00 consideration stated in his Deed of
Sale. Montecillo, however, admitted he still owed Reynes a balance of P10,000.00. He also
alleged that he paid P50,000.00 for the release of the chattel mortgage which he argued
constituted a lien on the Mabolo Lot. He further alleged that he paid for the real property tax as
well as the capital gains tax on the sale of the Mabolo Lot.
In their Reply, Reynes and the Abucay Spouses contended that Montecillo did not have
authority to discharge the chattel mortgage, especially after Reynes revoked Montecillo's Deed
of Sale and gave the mortgagee a copy of the document of revocation. Reynes and the Abucay
Spouses claimed that Montecillo secured the release of the chattel mortgage through
machination. They further asserted that Montecillo took advantage of the real property taxes
paid by the Abucay Spouses and surreptitiously caused the transfer of the title to the Mabolo
Lot in his name.
During pre-trial, Montecillo claimed that the consideration for the sale of the Mabolo Lot was
the amount he paid to Cebu Ice and Cold Storage Corporation ("Cebu Ice Storage" for brevity)
for the mortgage debt of Bienvenido Jayag ("Jayag" for brevity). Montecillo argued that the
release of the mortgage was necessary since the mortgage constituted a lien on the Mabolo Lot.
Reynes, however, stated that she had nothing to do with Jayag's mortgage debt except that the
house mortgaged by Jayag stood on a portion of the Mabolo Lot. Reynes further stated that the
payment by Montecillo to release the mortgage on Jayag's house is a matter between
Montecillo and Jayag. The mortgage on the house, being a chattel mortgage, could not be
interpreted in any way as an encumbrance on the Mabolo Lot. Reynes further claimed that the
mortgage debt had long prescribed since the P47,000.00 mortgage debt was due for payment
on January 30, 1967.
The trial court rendered a decision on March 24, 1993 declaring the Deed of Sale to Montecillo
null and void. The trial court ordered the cancellation of Montecillo's Transfer Certificate of
Title No. 90805 and the issuance of a new certificate of title in favor of the Abucay Spouses.
The trial court found that Montecillo's Deed of Sale had no cause or consideration because
Montecillo never paid Reynes the P47,000.00 purchase price, contrary to what is stated in the
Deed of Sale that Reynes received the purchase price. The trial court ruled that Montecillo's
Deed of Sale produced no effect whatsoever for want of consideration. The dispositive portion
of the trial court's decision reads as follows:
"WHEREFORE, in view of the foregoing consideration, judgment is
hereby rendered declaring the deed of sale in favor of defendant null
and void and of no force and effect thereby ordering the cancellation
of Transfer Certificate of Title No. 90805 of the Register of Deeds of
Cebu City and to declare plaintiff Spouses Redemptor and Elisa
Abucay as rightful vendees and Transfer Certificate of Title to the
property subject matter of the suit issued in their names. The
defendants are further directed to pay moral damages in the sum of
P20,000.00 and attorney's fees in the sum of P2,000.00 plus cost of
the suit.
xxx xxx xxx"
Not satisfied with the trial court's Decision, Montecillo appealed the same to the Court of
Appeals.

Ruling of the Court of Appeals

The appellate court affirmed the Decision of the trial court in toto and dismissed the
appeal 13 on the ground that Montecillo's Deed of Sale is void for lack of consideration. The
appellate court also denied Montecillo's Motion for Reconsideration 14 on the ground that it
raised no new arguments.
Still dissatisfied, Montecillo filed the present petition for review on certiorari.
The Issues
Montecillo raises the following issues:
1. "Was there an agreement between Reynes and Montecillo that the
stated consideration of P47,000.00 in the Deed of Sale be
paid to Cebu Ice and Cold Storage to secure the release of
the Transfer Certificate of Title?"
2. "If there was none, is the Deed of Sale void from the beginning or
simply rescissible?" 15
The Ruling of the Court
The petition is devoid of merit.
First issue: manner of payment of the P47,000.00 purchase price.
Montecillo's Deed of Sale does not state that the P47,000.00 purchase price should be paid by
Montecillo to Cebu Ice Storage. Montecillo failed to adduce any evidence before the trial court
showing that Reynes had agreed, verbally or in writing, that the P47,000.00 purchase price
should be paid to Cebu Ice Storage. Absent any evidence showing that Reynes had agreed to
the payment of the purchase price to any other party, the payment to be effective must be made
to Reynes, the vendor in the sale. Article 1240 of the Civil Code provides as follows: TCDHaE
"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."
Thus, Montecillo's payment to Cebu Ice Storage is not the payment that would
extinguish 16 Montecillo's obligation to Reynes under the Deed of Sale.
It militates against common sense for Reynes to sell her Mabolo Lot for P47,000.00 if this
entire amount would only go to Cebu Ice Storage, leaving not a single centavo to her for giving
up ownership of a valuable property. This incredible allegation of Montecillo becomes even
more absurd when one considers that Reynes did not benefit, directly or indirectly, from the
payment of the P47,000.00 to Cebu Ice Storage.
The trial court found that Reynes had nothing to do with Jayag's mortgage debt with Cebu Ice
Storage. The trial court made the following findings of fact:
". . .. Plaintiff Ignacia Reynes was not a party to nor privy of the
obligation in favor of the Cebu Ice and Cold Storage Corporation, the
obligation being exclusively of Bienvenido Jayag and wife who
mortgaged their residential house constructed on the land subject
matter of the complaint. The payment by the defendant to release the

441
residential house from the mortgage is a matter between him and
Jayag and cannot by implication or deception be made to appear as an
encumbrance upon the land." 17
Thus, Montecillo's payment to Jayag's creditor could not possibly redound to the benefit 18 of
Reynes. We find no reason to disturb the factual findings of the trial court. In petitions for
review on certiorari as a mode of appeal under Rule 45, as in the instant case, a petitioner can
raise only questions of law. 19 This Court is not the proper venue to consider a factual issue as
it is not a trier of facts.
Second issue: whether the Deed of Sale is void ab initio or only rescissible.
Under Article 1318 of the Civil Code, "[T]here is no contract unless the following requisites
concur: (1) Consent of the contracting parties; (2) Object certain which is the subject matter of
the contract; (3) Cause of the obligation which is established." Article 1352 of the Civil Code
also provides that "[C]ontracts without cause . . . produce no effect whatsoever."
Montecillo argues that his Deed of Sale has all the requisites of a valid contract. Montecillo
points out that he agreed to purchase, and Reynes agreed to sell, the Mabolo Lot at the price of
P47,000.00. Thus, the three requisites for a valid contract concur: consent, object certain and
consideration. Montecillo asserts there is no lack of consideration that would prevent the
existence of a valid contract. Rather, there is only non-payment of the consideration within the
period agreed upon for payment.
Montecillo argues there is only a breach of his obligation to pay the full purchase price on
time. Such breach merely gives Reynes a right to ask for specific performance, or for
annulment of the obligation to sell the Mabolo Lot. Montecillo maintains that in reciprocal
obligations, the injured party can choose between fulfillment and rescission, 20 or more
properly cancellation, of the obligation under Article 1191 21 of the Civil Code. This Article
also provides that the "court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of the period." Montecillo claims that because Reynes failed to make a
demand for payment, and instead unilaterally revoked Montecillo's Deed of Sale, the court has
a just cause to fix the period for payment of the balance of the purchase price.
These arguments are not persuasive.
Montecillo's Deed of Sale states that Montecillo paid, and Reynes received, the P47,000.00
purchase price on March 1, 1984, the date of signing of the Deed of Sale. This is clear from the
following provision of the Deed of Sale:
"That I, IGNACIA T. REYNES, . . . for and in consideration of
FORTY SEVEN THOUSAND (P47,000.00) PESOS, Philippine
Currency, to me in hand paid by RIDO MONTECILLO . . . , receipt of
which is hereby acknowledged, have sold, transferred, and conveyed,
unto RIDO MONTECILLO, . . . a parcel of land . . .."
On its face, Montecillo's Deed of Absolute Sale 22 appears supported by a valuable
consideration. However, based on the evidence presented by both Reynes and Montecillo, the
trial court found that Montecillo never paid to Reynes, and Reynes never received from
Montecillo, the P47,000.00 purchase price. There was indisputably a total absence of
consideration contrary to what is stated in Montecillo's Deed of Sale. As pointed out by the
trial court

"From the allegations in the pleadings of both parties and the oral and
documentary evidence adduced during the trial, the court is convinced
that the Deed of Sale (Exhibits "1" and "1-A") executed by plaintiff
Ignacia Reynes acknowledged before Notary Public Ponciano Alvinio
is devoid of any consideration. Plaintiff Ignacia Reynes through the
representation of Baudillo Baladjay had executed a Deed of Sale in
favor of defendant on the promise that the consideration should be
paid within one (1) month from the execution of the Deed of Sale.
However, after the lapse of said period, defendant failed to pay even a
single centavo of the consideration. The answer of the defendant did
not allege clearly why no consideration was paid by him except for
the allegation that he had a balance of only P10,000.00. It turned out
during the pre-trial that what the defendant considered as the
consideration was the amount which he paid for the obligation of
Bienvenido Jayag with the Cebu Ice and Cold Storage Corporation
over which plaintiff Ignacia Reynes did not have a part except that the
subject of the mortgage was constructed on the parcel of land in
question. Plaintiff Ignacia Reynes was not a party to nor privy of the
obligation in favor of the Cebu Ice and Cold Storage Corporation, the
obligation being exclusively of Bienvenido Jayag and wife who
mortgaged their residential house constructed on the land subject
matter of the complaint. The payment by the defendant to release the
residential house from the mortgage is a matter between him and
Jayag and cannot by implication or deception be made to appear as an
encumbrance upon the land." 23

Factual findings of the trial court are binding on us, especially if the Court of Appeals affirms
such findings. 24 We do not disturb such findings unless the evidence on record clearly does
not support such findings or such findings are based on a patent misunderstanding of
facts, 25 which is not the case here. Thus, we find no reason to deviate from the findings of
both the trial and appellate courts that no valid consideration supported Montecillo's Deed of
Sale.
This is not merely a case of failure to pay the purchase price, as Montecillo claims, which can
only amount to a breach of obligation with rescission as the proper remedy. What we have here
is a purported contract that lacks a cause one of the three essential requisites of a valid
contract. Failure to pay the consideration is different from lack of consideration. The former
results in a right to demand the fulfillment or cancellation of the obligation under an existing
valid contract 26 while the latter prevents the existence of a valid contract
Where the deed of sale states that the purchase price has been paid but in fact has never been
paid, the deed of sale is null and void ab initio for lack of consideration. This has been the
well-settled rule as early as Ocejo Perez & Co. v. Flores, 27 a 1920 case. As subsequently
explained inMapalo v. Mapalo 28
"In our view, therefore, the ruling of this Court in Ocejo Perez & Co.
vs. Flores, 40 Phil. 921, is squarely applicable herein. In that case we
ruled that a contract of purchase and sale is null and void and
produces no effect whatsoever where the same is without cause or

442
consideration in that the purchase price which appears thereon as paid
has in fact never been paid by the purchaser to the vendor."
The Court reiterated this rule in Vda. De Catindig v. Heirs of Catalina Roque, 29 to wit
"The Appellate Court's finding that the price was not paid or that the
statement in the supposed contracts of sale (Exh. 6 to 26) as to the
payment of the price was simulated fortifies the view that the alleged
sales were void. "If the price is simulated, the sale is void . . ." (Art.
1471, Civil Code)
A contract of sale is void and produces no effect whatsoever where
the price, which appears thereon as paid, has in fact never been paid
by the purchaser to the vendor (Ocejo, Perez & Co. vs. Flores and
Bas, 40 Phil. 921; Mapalo vs. Mapalo, L-21489, May 19, 1966, 64
O.G. 331, 17 SCRA 114, 122). Such a sale is non-existent (Borromeo
vs. Borromeo, 98 Phil. 432) or cannot be considered consummated
(Cruzado vs. Bustos and Escaler, 34 Phil. 17; Garanciang vs.
Garanciang, L-22351, May 21, 1969, 28 SCRA 229)."
Applying this well-entrenched doctrine to the instant case, we rule that Montecillo's Deed
of Sale is null and void ab initio for lack of consideration.
Montecillo asserts that the only issue in controversy is "the mode and/or manner of payment
and/or whether or not payment has been made." 30Montecillo implies that the mode or manner
of payment is separate from the consideration and does not affect the validity of the contract. In
the recent case of San Miguel Properties Philippines, Inc. v. Huang, 31 we ruled that
"In Navarro v. Sugar Producers Cooperative Marketing Association,
Inc. (1 SCRA 1181 [1961]), we laid down the rule that the manner of
payment of the purchase price is an essential element before a valid
and binding contract of sale can exist. Although the Civil Code does
not expressly state that the minds of the parties must also meet on the
terms or manner of payment of the price, the same is needed,
otherwise there is no sale. As held in Toyota Shaw, Inc. v. Court of
Appeals (244 SCRA 320 [1995]), agreement on the manner of
payment goes into the price such that a disagreement on the manner
of payment is tantamount to a failure to agree on the price."
(Emphasis supplied)
One of the three essential requisites of a valid contract is consent of the parties on the object
and cause of the contract. In a contract of sale, the parties must agree not only on the price, but
also on the manner of payment of the price. An agreement on the price but a disagreement on
the manner of its payment will not result in consent, thus preventing the existence of a valid
contract for lack of consent. This lack of consent is separate and distinct from lack of
consideration where the contract states that the price has been paid when in fact it has never
been paid. cTaDHS
Reynes expected Montecillo to pay him directly the P47,000.00 purchase price within one
month after the signing of the Deed of Sale. On the other hand, Montecillo thought that his
agreement with Reynes required him to pay the P47,000.00 purchase price to Cebu Ice Storage
to settle Jayag's mortgage debt. Montecillo also acknowledged a balance of P10,000.00 in

favor of Reynes although this amount is not stated in Montecillo's Deed of Sale. Thus, there
was no consent, or meeting of the minds, between Reynes and Montecillo on the manner of
payment. This prevented the existence of a valid contract because of lack of consent.
In summary, Montecillo's Deed of Sale is null and void ab initio not only for lack of
consideration, but also for lack of consent. The cancellation of TCT No. 90805 in the name of
Montecillo is in order as there was no valid contract transferring ownership of the Mabolo Lot
from Reynes to Montecillo.
WHEREFORE, the petition is DENIED and the assailed Decision dated July 16, 1998 of the
Court of Appeals in CA-G.R. CV No. 41349 is AFFIRMED. Costs against petitioner.
SO ORDERED.
Puno, Panganiban and Sandoval-Gutierrez, JJ., concur.
||| (Montecillo v. Reynes, G.R. No. 138018, [July 26, 2002], 434 PHIL 456-471)

443

SECOND DIVISION
[G.R. No. 108630. April 2, 1996.]
PHILIPPINE NATIONAL BANK, petitioner, vs. COURT OF
APPEALS and LORETO TAN, respondents.

Santiago, Jr., Vidad, Corpus & Associates for petitioner.

Jose G. Jover, Jr. for private respondent.

SYLLABUS

4. ID.; ID.; ID.; PAYMENT OF OBLIGATION NEGATED BY FAILURE TO PRESENT

SPECIAL POWER OF ATTORNEY IN CASE AT BAR. Considering that the contents of
the SPA are also in issue here, the best evidence rule applies. Hence, only the original
document (which has not been presented at all) is the best evidence of the fact as to whether or
not private respondent indeed authorized Sonia Gonzaga to receive the check from petitioner.
In the absence of such document, petitioner's arguments regarding due payment must fall.
5. CIVIL LAW; DAMAGES; ATTORNEYS' FEES; AVAILABLE TO PARTY WHO WAS
COMPELLED TO LITIGATE. Regarding the award of attorney's fees, we hold that private
respondent Tan is entitled to the same. Art. 2208 of the Civil Code allows attorney's fees to be
awarded if the claimant is compelled to litigate with third persons or to incur expenses to
protect his interest by reason of an unjustified act or omission of the party from whom it is
sought.
6. ID.; ID; EXEMPLARY DAMAGES; WHEN RECOVERABLE. Under Art. 2232 of the
Civil Code, exemplary damages may be awarded if a party acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner. However, they cannot be recovered as a matter of
right; the court has yet to decide whether or not they should be adjudicated.

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; A DEBT IS PAID BY COMPLETE

DELIVERY OF THE THING OR RENDITION OF SERVICE. There is no question that no
payment had ever been made to private respondent as the check was never delivered to him.
When the court ordered petitioner to pay private respondent the amount of P32,480.00, it had
the obligation to deliver the same to him. Under Art. 1233 of the Civil Code, 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.

7. ID.; ID.; ID.; REQUIREMENTS FOR GRANT. Jurisprudence has set down the
requirements for exemplary damages to be awarded: 1. they may be imposed by way of
example in addition to compensatory damages, and only after the claimant's right to them has
been established; 2. they cannot be recovered as a matter of right, their determination
depending upon the amount of compensatory damages that may be awarded to the claimant; 3.
the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner.

2. REMEDIAL LAW; EVIDENCE; BURDEN OF PROOF OF PAYMENT OF OBLIGATION

LIES WITH THE DEBTOR; PAYMENT NOT PROVED IN CASE AT BAR. The burden
of proof of such payment lies with the debtor. In the instant case, neither the SPA nor the check
issued by petitioner was ever presented in court. The testimonies of petitioner's own witnesses
regarding the check were conflicting. Tagamolila testified that the check was issued to the
order of "Sonia Gonzaga as attorney-in-fact of Loreto Tan," while Elvira Tibon, assistant
cashier of PNB (Bacolod Branch), stated that the check was issued to the order of "Loreto
Tan." Furthermore, contrary to petitioner's contention that all that is needed to be proved is the
existence of the SPA, it is also necessary for evidence to be presented regarding the nature and
extent of the alleged powers and authority granted to Sonia Gonzaga; more specifically, to
determine whether the document indeed authorized her to receive payment intended for private
respondent. However, no such evidence was ever presented.

8. ID.; ID.; ID.; CANNOT BE RECOVERED WHERE THERE IS NO CLEAR BREACH OF

OBLIGATION TO PAY OR THAT A PARTY ACTED IN FRAUDULENT, WANTON,
RECKLESS OR OPPRESSIVE MANNER. As for the award of exemplary damages, we
agree with the appellate court that the same should be deleted. In the case at bench, while there
is a clear breach of petitioner's obligation to pay private respondents, there is no evidence that
it acted in a fraudulent, wanton, reckless or oppressive manner. Furthermore, there is no award
of compensatory damages which is a prerequisite before exemplary damages may be awarded.
Therefore, the award by the trial court of P5,000.00 as exemplary damages is baseless.

3. ID.; ID.; BEST EVIDENCE RULE; WHEN SECONDARY EVIDENCE IS ALLOWED.

Section 4, Rule 130 of the Rules of Court allows the presentation of secondary evidence when
the original is lost or destroyed.

DECISION

ROMERO, J p:
Petitioner Philippine National Bank (PNB) questions the decision 1 of the Court of Appeals
partially affirming the judgment of the Regional Trial Court, Branch 44, Bacolod City. The
dispositive portion of the trial court's decision states:

444
"WHEREFORE, premises considered, the Court hereby renders
judgment in favor of the plaintiff and against the defendants as
follows:
1) Ordering defendants to pay plaintiff jointly and severally the sum
of P32,480.00, with legal rate of interest to be computed from May 2,
1979, date of filing of this complaint until fully paid;
2) Ordering defendants to pay plaintiff jointly and severally the sum
of P5,000.00 as exemplary damages;
3) Ordering defendants to pay plaintiff jointly and severally the sum
of P5,000.00 as attorney's fees;
4) To pay the costs of this suit.
SO ORDERED." 2
The facts are the following:
Private respondent Loreto Tan (Tan) is the owner of a parcel of land abutting the national
highway in Mandalagan, Bacolod City. Expropriation proceedings were instituted by the
government against private respondent Tan and other property owners before the then Court of
First Instance of Negros Occidental, Branch IV, docketed as Civil Case No. 12924.
Tan filed a motion dated May 10, requesting issuance of an order for the release to him of the
expropriation price of P32,480.00.
On May 22, 1978, petitioner PNB (Bacolod Branch) was required by the trial court to release
to Tan the amount of P32,480.00 deposited with it by the government.

When he failed to recover the amount from PNB, private respondent filed a motion with the
court to require PNB to pay the same to him.
Petitioner filed an opposition contending that Sonia Gonzaga presented to it a copy of the May
22, 1978 order and a special power of attorney by virtue of which petitioner delivered the
check to her.
The matter was set for hearing on July 21, 1978 and petitioner was directed by the court to
produce the said special power of attorney thereat. However, petitioner failed to do so.
The court decided that there was need for the matter to be ventilated in a separate civil action
and thus private respondent filed a complaint with the Regional Trial Court in Bacolod City
(Branch 44) against petitioner and Juan Tagamolila, PNB's Assistant Branch Manager, to
recover the said amount.
In its defense, petitioner contended that private respondent had duly authorized Sonia Gonzaga
to act as his agent.
On September 28, 1979, petitioner filed a third-party complaint against the spouses Nilo and
Sonia Gonzaga praying that they be ordered to pay private respondent the amount of
P32,480.00. However, for failure of petitioner to have the summons served on the Gonzagas
despite opportunities given to it, the third-party complaint was dismissed.
Tagamolila, in his answer, stated that Sonia Gonzaga presented a Special Power of Attorney to
him but borrowed it later with the promise to return it, claiming that she needed it to encash the
check.
On June 7, 1989, the trial court rendered judgment ordering petitioner and Tagamolila to pay
private respondent jointly and severally the amount of P32,480.00 with legal interest, damages
and attorney's fees.

On May 24, 1978, petitioner, through its Assistant Branch Manager Juan Tagamolila, issued a
manager's check for P32,480.00 and delivered the same to one Sonia Gonzaga without Tan's
knowledge, consent or authority. Sonia Gonzaga deposited it in her account with Far East Bank
and Trust Co. (FEBTC) and later on withdrew the said amount.

Both petitioner and Tagamolila appealed the case to the Court of Appeals.

Private respondent Tan subsequently demanded payment in the amount of P32,480.00 from
petitioner, but the same was refused on the ground that petitioner had already paid and
delivered the amount to Sonia Gonzaga on the strength of a Special Power of Attorney (SPA)
allegedly executed in her favor by Tan.

On August 31, 1992, the Court of Appeals affirmed the decision of the trial court against
petitioner, with the modification that the award of P5,000.00 for exemplary damages and
P5,000.00 for attorney's fees by the trial court was deleted.

On June 8, 1978, Tan executed an affidavit before petitioner's lawyer, Alejandro S. Somo,
stating that:
1) he had never executed any Special Power of Attorney in favor of Sonia S. Gonzaga;
2) he had never authorized Sonia Gonzaga to receive the sum of P32,480.00 from petitioner;
3) he signed a motion for the court to issue an Order to release the said sum of money to him
and gave the same to Mr. Nilo Gonzaga (husband of Sonia) to be filed in court. However, after
the Order was subsequently issued by the court, a certain Engineer Decena of the Highway
Engineer's Office issued the authority to release the funds not to him but to Mr. Gonzaga.

In a resolution dated April 8, 1991, the appellate court dismissed Tagamolila's appeal for
failure to pay the docket fee within the reglementary period.

Hence, this petition.

Petitioner PNB states that the issue in this case is whether or not the SPA ever existed. It argues
that the existence of the SPA need not be proved by it under the "best evidence rule" because it
already proved the existence of the SPA from the testimonies of its witnesses and by the
certification issued by the Far East Bank and Trust Company that it allowed Sonia Gonzaga to
encash Tan's check on the basis of the SPA.

We find the petition unmeritorious.

445
There is no question that no payment had ever been made to private respondent as the check
was never delivered to him. When the court ordered petitioner to pay private respondent the
amount of P32,480.00, it had the obligation to deliver the same to him. Under Art. 1233 of the
Civil Code, 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.
The burden of proof of such payment lies with the debtor. 3 In the instant case, neither the SPA
nor the check issued by petitioner was ever presented in court.
The testimonies of petitioner's own witnesses regarding the check were conflicting. Tagamolila
testified that the check was issued to the order of "Sonia Gonzaga as attorney-in-fact of Loreto
Tan," 4 while Elvira Tibon, assistant cashier of PNB (Bacolod Branch), stated that the check
was issued to the order of "Loreto Tan." 5
Furthermore, contrary to petitioner's contention that all that is needed to be proved is the
existence of the SPA, it is also necessary for evidence to be presented regarding the nature and
extent of the alleged powers and authority granted to Sonia Gonzaga; more specifically, to
determine whether the document indeed authorized her to receive payment intended for private
respondent. However, no such evidence was ever presented.
Section 2, Rule 130 of the Rules of Court states that:
"SECTION 2. Original writing must be produced; exceptions.
There can be no evidence of a writing the contents of which is the
subject of inquiry, other than the original writing itself, except in the
following cases:
(a) When the original has been lost, destroyed, or cannot be produced
in court;
(b) When the original is in the possession of the party against whom
the evidence is offered, and the latter fails to produce it after
reasonable notice;

"SECTION 4. Secondary evidence when original is lost or destroyed.

When the original writing has been lost or destroyed, or cannot be
produced in court, upon proof of its execution and loss or destruction,
or unavailability, its contents may be proved by a copy, or by a recital
of its contents in some authentic document, or by the recollection of
witnesses."
Considering that the contents of the SPA are also in issue here, the best evidence rule applies.
Hence, only the original document (which has not been presented at all) is the best evidence of
the fact as to whether or not private respondent indeed authorized Sonia Gonzaga to receive the
check from petitioner. In the absence of such document, petitioner's arguments regarding due
payment must fail.
Regarding the award of attorney's fees, we hold that private respondent Tan is entitled to the
same. Art. 2208 of the Civil Code allows attorney's fees to be awarded if the claimant is
compelled to litigate with third persons or to incur expenses to protect his interest by reason of
an unjustified act or omission of the party from whom it is sought. 6
In Rasonable v. NLRC, et al., 7 we held that when a party is forced to litigate to protect his
rights, he is entitled to an award of attorney's fees.
As for the award of exemplary damages, we agree with the appellate court that the same should
be deleted.
Under Art. 2232 of the Civil Code, exemplary damages may be awarded if a party acted in a
wanton, fraudulent, reckless, oppressive, or malevolent manner. However, they cannot be
recovered as a matter of right; the court has yet to decide whether or not they should be
adjudicated. 8
Jurisprudence has set down the requirements for exemplary damages to be awarded:
1. they may be imposed by way of example in addition to compensatory damages, and only
after the claimant's right to them has been established;

(c) When the original is a record or other document in the custody of

a public officer;

2. they cannot be recovered as a matter of right, their determination depending upon the
amount of compensatory damages that may be awarded to the claimant;

(d) When the original has been recorded in an existing

record a certified copy of which is made evidence by law;

3. the act must be accompanied by bad faith or done in a wanton, fraudulent, oppressive or
malevolent manner. 9

(e) When the original consists of numerous accounts or

other documents which cannot be examined in court without great
loss of time and the fact sought to be established from them is only
the general result of the whole."

In the case at bench, while there is a clear breach of petitioner's obligation to pay private
respondents, there is no evidence that it acted in a fraudulent, wanton, reckless or oppressive
manner. Furthermore, there is no award to compensatory damages which is a prerequisite
before exemplary damages may be awarded. Therefore, the award by the trial court of
P5,000.00 as exemplary damages is baseless.

Section 4, Rule 130 of the Rules of Court allows the presentation of secondary evidence when
the original is lost or destroyed, thus:

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the modification that
the award by the Regional Trial Court of P5,000.00 as attorney's fees is REINSTATED.
SO ORDERED.
Regalado, Puno and Mendoza, JJ., concur.

446
Torres, Jr., J., on leave.
||| (PNB v. Court of Appeals, G.R. No. 108630, [April 2, 1996], 326 PHIL 46-55)

447

SECOND DIVISION
[G.R. No. 90169. April 7, 1993.]
PILAR PAGSIBIGAN, petitioner, vs. COURT OF APPEALS and
PLANTERS DEVELOPMENT BANK, respondents.

Juanito Cruz for petitioner.

Raymundo S. Senga for private respondent.

SYLLABUS
1. CIVIL LAW; CONTRACT OF LOAN; SUBSTANTIAL PERFORMANCE BY OBLIGOR,
RECOGNIZED; CASE AT BAR. From the conduct of the respondent bank it is clear that it
neither enforced its right under the acceleration clause nor its right to foreclose under the
mortgage contract, For more than four years, the respondent bank made petitioner believe that
it was applying her payment on the loan and interest just like before when the respondent bank
accepted such payment and issued a receipt therefor. It is bound by estoppel to apply the same
as payment for petitioner's obligation as it did when it received previous payments on three
occasions. Its act of applying said payments to accounts payable is clearly prejudicial to
petitioner. We cannot countenance this act of the bank. We hold that the payment amounting to
P8,650.00 for the balance of P3,558.20 as of August 26, 1978 plus the P1,000.00 it was asked
to pay on April 24, 1984 would at the very least constitute substantial performance. Article
1234 of the Civil Code, provides: "Article 1234. If the obligation has been substantially
performed in good faith, the obligor may recover as though there had been a strict and
complete fulfillment, less damages suffered by the obligee." Petitioner in this case has the right
to move for the cancellation of the mortgage and the release of the mortgaged property, upon
payment of the balance of the loan. Thus, aside from the fact that the respondent bank was
estopped from enforcing its right to foreclose by virtue of its acceptance of the delayed
payments for a period of more than six years, the application of such payment to the interest
and the principal during the first three payments constitutes a virtual waiver of the acceleration
clause provided in the contract. We cannot sustain the legality of the foreclosure under the
peculiar facts of this case, because there is substantial performance of the obligation on the part
of petitioner. Under Article 1235 of the Civil Code, when the creditor accepts performance,
knowing its incompleteness and irregularity without protest or objection, the obligation is
deemed complied with.
2. ID.; MORAL DAMAGES, WHEN AVAILABLE; CASE AT BAR. This Court cannot
ignore the fact that the respondent bank succeeded in taking advantage of the ignorance of
petitioner in transactions such as the one involved in the case at bar by lodging the bulk of
petitioner's payment to account payable based on the flimsy reason that she had been in default,

and then considering the entire debt pursuant to an acceleration clause as earning interest and
penalty charges at an exorbitant rate of 19% each from the date of first default up to the date of
foreclosure, thus bringing the obligation to an astronomical amount of P29,554.81. This
indicates bad faith on the part of the respondent bank. For the mental anguish, sleepless nights
and serious anxiety this has caused petitioner, the respondent bank is liable for moral damages
which this Court fixes at P50,000.00.
3. ID.; EXEMPLARY DAMAGES; ATTORNEY'S FEES; IMPOSED UPON THE BANK TO
DETER REPEATING SIMILAR ACT; CASE AT BAR. To serve as a deterrent for the
respondent bank from repeating similar acts and to set an example and correction for the public
good, this Court likewise awards exemplary damages. In view of its nature, it should be
imposed in such amount as to sufficiently and effectively deter similar acts in the future by the
respondent bank and other banks, which amount this court fixes at P20,000.00 on top of the
forfeiture of whatever balance on the loan which the respondent may actually have in its favor.
Attorney's fees by way of damages is likewise awarded for the same reason that exemplary
damages is awarded and this is fixed at P10,000.00.

DECISION

CAMPOS, JR., J p:
This is a petition for review on certiorari of the decision ** of the Court of Appeals in CA-G.R.
CV No. 18385 entitled "Pilar Pagsibigan, Plaintiff-appellee vs. Planters Development Bank,
Defendant-appellant," the decretal portion of which reads: LLpr
"WHEREFORE, the decision appealed from is hereby reversed and
another one entered ordering plaintiff-appellee Norma Manalili, to
pay the deficiency of P21,391.81. No pronouncement is made as to
costs.
"SO ORDERED." 1
The undisputed facts are summarized by the respondent court as follows:
"Stripped of non-essentials, it appears that on August 4, 1974,
plaintiff-appellee, [petitioner, herein] through her daughter as
attorney-in-fact, obtained an agricultural loan from the Planters
Development Bank (formerly Bulacan Development Bank), in the
sum of P4,500.00 secured by a mortgage over a parcel of land
covered by Transfer Certificate of Title No. T-129603 (Exhibit "A";
"A-1"), which loan was later fully paid (Exhibits "B"; "B-1" to "B-3".
Another loan for the same amount was obtained from the bank on
November 3, 1977 [year 1977 should read 1976 instead] secured by
the same parcel of land. The Promissory Note for the second loan

448
(Exhibit "1") stipulated that for a first payment to be made on May 3,
1977 and payments every six months thereafter at P1,018.14 with
19% interest for unpaid amortizations. The said Promissory Note,
containing an acceleration clause (Exhibit "1-A"), was not denied by
plaintiff-appellee [petitioner] (TSN, December 10, 1986, pp. 9-10).
Initial payment was made on July 6, 1978 [year 1978 should read
1977 instead] followed by several payments in the total amount of
P11,900.00 (Exhibits "D"; "D-1" to "D-7"). However, only four of
these payments were applied to the loan (TSN, March 16, 1987, pp.
14-16), while the rest were "temporarily lodged to accounts payable
since the account was already past due" (TSN, June 1, 1987, pp. 1516). On the basis of a Petition for Extrajudicial Foreclosure of
Mortgage (Exhibit "6") and the statement of Account (Exhibit "12"),
the property was foreclosed extrajudicially on May 7, 1984 for failure
to pay an outstanding balance of P29,554.81 (Exhibit "13"). This
resulted in the property being sold to the bank for P8,163.00, and the
bank thereafter claimed a deficiency of P21,391.81.
In the action for annulment of sale with damages and writ of
preliminary injunction instituted by plaintiff-appellee, the lower court
sustained appellee's [petitioner] theory of overpayment (Decision, p.
3), as against the propriety of the foreclosure." 2 [Bracketed words
Ours]. LLphil
Petitioner submits the following Issues for resolution:
"1. Whether or not the foreclosure and auction sale of the property is
valid and justified under the circumstances; and
2. Whether or not petitioner is entitled to recover damages as well as
attorney's fees as a result of the foreclosure and auction sale."3
It is petitioner's contention that the bank has no right to foreclose the mortgage, there having
been full payment of the principal obligation. As per their computation 4 the payment which
they have made totalling P11,900.00 more than sufficiently covered their total obligation with
respect to their loan, there having been, in fact, an overpayment of either P4,642.38 or
P6,106.75 based on the interest rate used in the computation. Thus, the principal obligation
having been extinguished by payment, the accessory obligation of mortgage is necessarily
extinguished, and the foreclosure thereof is improper and not valid.
The respondent bank on the other hand countered that the computation relied upon by
petitioner is not in consonance with the Promissory Note 5which she signed because the
Promissory Note contains an acceleration clause. Respondent bank also averred that upon
petitioner's failure to pay her first installment, the entire obligation became due and
demandable and its right to foreclose the mortgage has accrued. Thus, when it foreclosed the
mortgage in 1984, with the outstanding obligation at P29,554.81, it was acting well within its
rights.
We note at this point that the respondent bank does not dispute the fact that petitioner had made
several payments in an amount totalling to P11,900.00. It likewise admits that only part of the
amount tendered was applied to the loan and the bulk of such payment was "temporarily

lodged to accounts payable since the account was already past due" 6 [Emphasis Ours].
Petitioner assails the respondent bank for not applying her payment to the loan. Because of said
act, the loan remained outstanding when it should have been extinguished and should have also
extinguished the accessory contract of real estate mortgage.
Petitioner wants Us to rule not only on the regularity or legality of the foreclosure but also on
its propriety in the light of the attending circumstances.
There is no question that the respondent bank has the right to foreclose the mortgage upon the
first default of petitioner on May 3, 1977, but the records show that it did not. When it received
payment of petitioner on July 6, 1977, which had been 2 months and 3 days delayed, it applied
P154.80 to the principal, P210.00 to interest, and only P25.20 to penalty. From this act of
receiving delayed payment, it is clear that the respondent bank had waived its right under the
acceleration clause so that instead of claiming penalty charges on the entire amount of
P4,500.00, it only computed the penalty based on the defaulted amortization payment which is
P1,018.14. If it computed the penalty charge at 19% of the entire amount of P4,500.00 which
would have been due and demandable by virtue of the acceleration clause, the penalty charges
would be much more than P25.20.
This is similarly observed in payments which the respondent bank received on June 6, 1978
and August 26, 1978. We also noticed that in Exhibit "D-3", the receipt which the respondent
bank issued to petitioner for the August 26, 1978 partial payment, it waived its right under
Article 1253 7 of the Civil Code on Application of Payments when it applied the payment to
the principal instead of the interest. Thus, on that date the outstanding obligation of petitioner
was already reduced to P3,558.21 after she had paid a total of P2,200.00 over a period of nine
months from the time the loan was obtained. LLpr

From this conduct of the respondent bank it is clear that it neither enforced its right under the
acceleration clause nor its right to foreclose under the mortgage contract, For more than four
years, the respondent bank made petitioner believe that it was applying her payment on the
loan and interest just like before when the respondent bank accepted such payment and issued a
receipt therefor. It is bound by estoppel to apply the same as payment for petitioner's obligation
as it did when it received previous payments on three occasions. Its act of applying said
payments to accounts payable is clearly prejudicial to petitioner. We cannot countenance this
act of the bank.
We hold that the payment amounting to P8,650.00 for the balance of P3,558.20 as of August
26, 1978 8 plus the P1,000.00 it was asked to pay on April 24, 1984 would at the very least
constitute substantial performance.
Article 1234 of the Civil Code, provides:
"Article 1234. If the obligation has been substantially performed in
good faith, the obligor may recover as though there had been a strict
and complete fulfillment, less damages suffered by the obligee."
Petitioner in this case has the right to move for the cancellation of the mortgage and the
release of the mortgaged property, upon payment of the balance of the loan. Definitely, it
would not be in the amount demanded by the respondent bank, which the trial court held
to be P29,554.81.

449
This Court, in Angeles vs. Calasanz 9 held that:
"The breach of the contract adverted to by the defendants-appellants
is so slight and casual when we consider that apart from the initial
downpayment of P392.00 the plaintiffs-appellees had already paid the
monthly installments for a period of almost nine (9) years. In other
words, in only a short time, the entire obligation would have been
paid. Furthermore, although the principal obligation was only
P3,920.00 excluding the 7 percent interests, the plaintiffs-appellees
had already paid an aggregate amount of P4,533.38. To sanction the
rescission made by the defendants-appellants will work injustice to
the plaintiffs-appellees. It would unjustly enrich the defendantsappellants.
Article 1234 of the Civil Code which provides that:
xxx xxx xxx
also militates against the unilateral act of the defendants-appellants in
cancelling the contract."
Thus, aside from the fact that the respondent bank was estopped from enforcing its right to
foreclose by virtue of its acceptance of the delayed payments for a period of more than six
years, the application of such payment to the interest and the principal during the first three
payments constitutes a virtual waiver of the acceleration clause provided in the contract. We
cannot sustain the legality of the foreclosure under the peculiar facts of this case, because there
is substantial performance of the obligation on the part of petitioner. Under Article 1235 of the
Civil Code, when the creditor accepts performance, knowing its incompleteness and
irregularity without protest or objection, the obligation is deemed complied with.
This Court cannot ignore the fact that the respondent bank succeeded in taking advantage of
the ignorance of petitioner in transactions such as the one involved in the case at bar by lodging
the bulk of petitioner's payment to account payable based on the flimsy reason that she had
been in default, and then considering the entire debt pursuant to an acceleration clause as
earning interest and penalty charges at an exorbitant rate of 19% each from the date of first
default up to the date of foreclosure, thus bringing the obligation to an astronomical amount of
P29,554.81. This indicates bad faith on the part of the respondent bank. For the mental
anguish, sleepless nights and serious anxiety this has caused petitioner, the respondent bank is
liable for moral damages which this Court fixes at P50,000.00. prcd
To serve as a deterrent for the respondent bank from repeating similar acts and to set an
example and correction for the public good, this Court likewise awards exemplary damages. In
view of its nature, it should be imposed in such amount as to sufficiently and effectively deter
similar acts in the future 10 by the respondent bank and other banks, which amount this court
fixes at P20,000.00 on top of the forfeiture of whatever balance on the loan which the
respondent may actually have in its favor.
This Court likewise orders the annulment of the foreclosure sale and the reconveyance of the
property subject of the real estate mortgage pursuant to the annotation of lis pendens in the
certificate of title of the subject property.

Attorney's fees by way of damages is likewise awarded for the same reason that exemplary
damages is awarded and this is fixed at P10,000.00.
WHEREFORE, the appealed decision is hereby SET ASIDE and a new one entered ordering
the reconveyance of the foreclosed property and the payment of moral damages, exemplary
damages and attorney's fees as above specified, with costs against private respondent Planters
Development Bank.
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Nocon, JJ ., concur.
||| (Pagsibigan v. Court of Appeals, G.R. No. 90169, [April 7, 1993])

450

THIRD DIVISION
[G.R. No. 96053. March 3, 1993.]
JOSEFINA TAYAG, RICARDO GALICIA, TERESITA
GALICIA, EVELYN GALICIA, JUAN GALICIA, JR. and
RODRIGO GALICIA,petitioners, vs. COURT OF APPEALS and
ALBRIGIDO LEYVA, respondents.

Facundo T. Bautista for petitioners.

2. ID.; ID.; IN RECIPROCAL CONTRACTS BOTH PARTIES ARE CONSIDERED

MUTUALLY OBLIGORS AND OBLIGEES OF EACH OTHER. Respondent court applied
Article 1186 of the Civil Code on constructive fulfillment which petitioners claim should not
have been appreciated because they are the obligees while the proviso in point speaks of the
obligor. But, petitioners must concede that in a reciprocal obligation like a contract of purchase
(Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p. 201), both parties are
mutually obligors and also obligees (4 Padilla, supra, at p. 197), and any of the contracting
parties may, upon non-fulfillment by the other privy of his part of the prestation, rescind the
contract or seek fulfillment (Article 1191, Civil Code). In short, it is puerile for petitioners to
say that they are the only obligees under the contract since they are also bound as obligors to
respect the stipulation in permitting private respondent to assume the loan with the Philippine
Veterans Bank which petitioners impeded when they paid the balance of said loan. As vendors,
they are supposed to execute the final deed of sale upon full payment of the balance as
determined hereafter.

Jesus T. Garcia for private respondent.

DECISION

SYLLABUS
1. CIVIL LAW; CONTRACTS; RESCISSION; WAIVER OF RIGHT THERETO. The
suggestion of petitioners that the covenant must be cancelled in the light of private respondent's
so-called breach seems to overlook petitioners' demeanor who, instead of immediately filing
the case precisely to rescind the instrument because of non-compliance, allowed private
respondent to effect numerous payments posterior to the grace periods provided in the contract.
This apathy of petitioners who even permitted private respondent to take the initiative in filing
the suit for specific performance against them, is akin to waiver or abandonment of the right to
rescind normally conferred by Article 1191 of the Civil Code. As aptly observed by Justice
Gutierrez, Jr. in Angeles vs. Calasanz (135 SCRA 323 [1985]; 4 Paras, Civil Code of the
Philippines Annotated, Twelfth Ed. [1989], p. 203): ". . . We agree with the plaintiffs-appellees
that when the defendants-appellants, instead of availing of their alleged right to rescind, have
accepted and received delayed payments of installments, though the plaintiffs-appellees have
been in arrears beyond the grace period mentioned in paragraph 6 of the contract, the
defendants-appellants have waived, and are now estopped from exercising their alleged right of
rescission . . ." In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818;
cited in 4 Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a similar opinion
was expressed to the effect that: "In a perfected contract of sale of land under an agreed
schedule of payments, while the parties may mutually oblige each other to compel the specific
performance of the monthly amortization plan, and upon failure of the buyer to make the
payment, the seller has the right to ask for a rescission of the contract under Art. 1191 of the
Civil Code, this shall be deemed waived by acceptance of posterior payments." Both the trial
and appellate courts were, therefore, correct in sustaining the claim of private respondent
anchored on estoppel or waiver by acceptance of delayed payments under Article 1235 of the
Civil Code in that: "When the obligee accepts the performance, knowing its incompleteness or
irregularity, and without expressing any protest or objection, the obligation is deemed fully
complied with."

MELO, J p:
The deed of conveyance executed on May 28, 1975 by Juan Galicia, Sr., prior to his demise in
1979, and Celerina Labuguin, in favor of Albrigido Leyva involving the undivided one-half
portion of a piece of land situated at Poblacion, Guimba, Nueva Ecija for the sum of
P50,000.00 under the following terms:
"1. The sum of PESOS: THREE THOUSAND (P3,000.00) is
HEREBY acknowledged to have been paid upon the execution of this
agreement;
2. The sum of PESOS: TEN THOUSAND (P10,000.00) shall be paid
within ten (10) days from and after the execution of this agreement;
3. The sum of PESOS: TEN THOUSAND (P10,000.00) represents
the VENDORS' indebtedness with the Philippine Veterans Bank
which is hereby assumed by the VENDEE; and
4. The balance of PESOS: TWENTY SEVEN THOUSAND
(P27,000.00) shall be paid within one (1) year from and after the
execution of this instrument." (p. 53, Rollo). cdll0
is the subject matter of the present litigation between the heirs of Juan Galicia, Sr. who
assert breach of the conditions as against private respondent's claim anchored on full
payment and compliance with the stipulations thereof.

451
The court of origin which tried the suit for specific performance filed by private respondent on
account of the herein petitioners' reluctance to abide by the covenant, ruled in favor of the
vendee (p. 64, Rollo) while respondent court practically agreed with the trial court except as to
the amount to be paid to petitioners and the refund to private respondent are concerned (p. 46,
Rollo).
There is no dispute that the sum of P3,000.00 listed as first installment was received by Juan
Galicia, Sr. According to petitioners, of the P10,000.00 to be paid within ten days from
execution of the instrument, only P9,707.00 was tendered to, and received by, them on
numerous occasions from May 29, 1975, up to November 3, 1979. Concerning private
respondent's assumption of the vendors' obligation to the Philippine Veterans Bank, the vendee
paid only the sum of P6,926.41 while the difference of the indebtedness came from Celerina
Labuguin (p. 73, Rollo). Moreover, petitioners asserted that not a single centavo of the
P27,000.00 representing the remaining balance was paid to them. Because of the apprehension
that the heirs of Juan Galicia, Sr. are disavowing the contract inked by their predecessor,
private respondent filed the complaint for specific performance.
In addressing the issue of whether the conditions of the instrument were performed by herein
private respondent as vendee, the Honorable Godofredo G. Rilloraza, Presiding Judge of
Branch 31 of the Regional Trial Court, Third Judicial Region stationed at Guimba, Nueva
Ecija, decided to uphold private respondent's theory on the basis of constructive fulfillment
under Article 1186 and estoppel through acceptance of piecemeal payments in line with Article
1235 of the Civil Code.
Anent the P10,000.00 specified as second installment, the lower court counted against the
vendors the candid statement of Josefina Tayag who sat on the witness stand and made the
admission that the check issued as payment thereof was nonetheless paid on a staggered basis
when the check was dishonored (TSN, September 1, 1983, pp. 3-4; p. 3, Decision; p. 66,
Rollo). Regarding the third condition, the trial court noted that plaintiff below paid more than
P6,000.00 to the Philippine Veterans Bank but Celerina Labuquin, the sister and co-vendor of
Juan Galicia, Sr. paid P3,778.77 which circumstance was construed to be a ploy under Article
1186 of the Civil Code that "prematurely prevented plaintiff from paying the installment fully"
and "for the purpose of withdrawing the title to the lot". The acceptance by petitioners of the
various payments even beyond the periods agreed upon, was perceived by the lower court as
tantamount to faithful performance of the obligation pursuant to Article 1235 of the Civil Code.
Furthermore, the trial court noted that private respondent consigned P18,520.00, an amount
sufficient to offset the remaining balance, leaving the sum of P1,315.00 to be credited to
private respondent.
On September 12, 1984, judgment was rendered:
"1. Ordering the defendants heirs of Juan Galicia, to execute the
Deed of Sale of their undivided ONE HALF (1/2) portion of Lot No.
1130, Guimba Cadastre, covered by TCT No. NT-120563, in favor of
plaintiff Albrigido Leyva, with an equal frontage facing the national
road upon finality of judgment; that, in their default, the Clerk of
Court II, is hereby ordered to execute the deed of conveyance in line
with the provisions of Section 10, Rule 39 of the Rules of Court; prcd

2. Ordering the defendants, heirs of Juan Galicia, jointly and severally

to pay attorney's fees of P6,000.00 and the further sum of P3,000.00
for actual and compensatory damages;
3. Ordering Celerina Labuguin and the other defendants herein to
surrender to the Court the owner's duplicate of TCT No. NT-120563,
province of Nueva Ecija, for the use of plaintiff in registering the
portion, subject matter of the instant suit;
4. Ordering the withdrawal of the amount of P18,520.00 now
consigned with the Court, and the amount of P17,204.75 be delivered
to the heirs of Juan Galicia as payment of the balance of the sale of
the lot in question, the defendants herein after deducting the amount
of attorney's fees and damages awarded to the plaintiff hereof and the
delivery to the plaintiff of the further sum of P1,315.25 excess or over
payment and, defendants to pay the cost of the suit." (p. 69, Rollo).
and following the appeal interposed with respondent court, Justice Dayrit with whom
Justices Purisima and Aldecoa, Jr. concurred, modified the fourth paragraph of the
decretal portion to read:
"4. Ordering the withdrawal of the amount of P18,500.00 now
consigned with the Court, and that the amount of P16,870.52 be
delivered to the heirs of Juan Galicia, Sr. as payment to the unpaid
balance of the sale, including the reimbursement of the amount paid
to Philippine Veterans Bank, minus the amount of attorney's fees and
damages awarded in favor of plaintiff. The excess of P1,649.48 will
be returned to plaintiff. The costs against defendants." (p. 51, Rollo).

As to how the foregoing directive was arrived at, the appellate court declared:
"With respect to the fourth condition stipulated in the
contract, the period indicated therein is deemed modified by the parties
when the heirs of Juan Galicia, Sr. accepted payments without
objection up to November 3, 1979. On the basis of receipts presented
by appellee commencing from August 8, 1975 up to November 3,
1979, a total amount of P13,908.25 has been paid, thereby leaving a
balance of P13,091.75. Said unpaid balance plus the amount
reimbursable to appellant in the amount of P3,778.77 will leave an
unpaid total of P16,870.52. Since appellee consigned in court the sum
of P18,500.00, he is entitled to get the excess of P1,629.48. Thus, when
the heirs of Juan Galicia, Sr. (obligees) accepted the performance,
knowing its incompleteness or irregularity and without expressing any
protest or objection, the obligation is deemed fully complied with
(Article 1235, Civil Code)." (p. 50, Rollo)
Petitioners are of the impression that the decision appealed from, which agreed with the
conclusions of the trial court, is vulnerable to attack viathe recourse before Us on the principal
supposition that the full consideration of the agreement to sell was not paid by private
respondent and, therefore, the contract must be rescinded.

452
The suggestion of petitioners that the covenant must be cancelled in the light of private
respondent's so-called breach seems to overlook petitioners' demeanor who, instead of
immediately filing the case precisely to rescind the instrument because of non-compliance,
allowed private respondent to effect numerous payments posterior to the grace periods
provided in the contract. This apathy of petitioners who even permitted private respondent to
take the initiative in filing the suit for specific performance against them, is akin to waiver or
abandonment of the right to rescind normally conferred by Article 1191 of the Civil Code. As
aptly observed by Justice Gutierrez, Jr. in Angeles vs. Calasanz (135 SCRA 323 [1985];
4 Paras, Civil Code of the Philippines Annotated, Twelfth Ed. [1989], p. 203): prcd
" . . . We agree with the plaintiffs-appellees that when the defendantsappellants, instead of availing of their alleged right to rescind, have
accepted and received delayed payments of installments, though the
plaintiffs-appellees have been in arrears beyond the grace period
mentioned in paragraph 6 of the contract, the defendants-appellants
have waived, and are now estopped from exercising their alleged
right of rescission . . . "
In Development Bank of the Philippines vs. Sarandi (5 CAR (25) 811; 817-818; cited in
4 Padilla, Civil Code Annotated, Seventh Ed. [1987], pp. 212-213) a similar opinion was
expressed to the effect that:
"In a perfected contract of sale of land under an agreed schedule of
payments, while the parties may mutually oblige each other to compel
the specific performance of the monthly amortization plan, and upon
failure of the buyer to make the payment, the seller has the right to
ask for a rescission of the contract under Art. 1191 of the Civil Code,
this shall be deemed waived by acceptance of posterior payments."
Both the trial and appellate courts were, therefore, correct in sustaining the claim of private
respondent anchored on estoppel or waiver by acceptance of delayed payments under Article
1235 of the Civil Code in that:
"When the obligee accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or
objection, the obligation is deemed fully complied with."
considering that the heirs of Juan Galicia, Sr. accommodated private respondent by
accepting the latter's delayed payments not only beyond the grace periods but also during
the pendency of the case for specific performance (p. 27, Memorandum for petitioners; p.
166, Rollo). Indeed, the right to rescind is not absolute and will not be granted where
there has been substantial compliance by partial payments (4 Caguioa, Comments and
Cases on Civil Law, First Ed. [1968], p. 132). By and large, petitioners' actuation is
susceptible of but one construction that they are now estopped from reneging from
their commitment on account of acceptance of benefits arising from overdue accounts of
private respondent.
Now, as to the issue of whether payments had in fact been made, there is no doubt that the
second installment was actually paid to the heirs of Juan Galicia, Sr. due to Josefina Tayag's
admission in judicio that the sum of P10,000.00 was fully liquidated. It is thus erroneous for
petitioners to suppose that "the evidence in the records do not support this conclusion" (p. 18,
Memorandum for Petitioners; p. 157, Rollo). A contrario, when the court of origin, as well as

the appellate court, emphasized the frank representation along this line of Josefina Tayag
before the trial court (TSN, September 1, 1983, pp. 3-4; p. 5, Decision in CA-G.R. CV No.
13339, p. 50, Rollo; p. 3, Decision in Civil Case No. 681-G, p. 66, Rollo), petitioners chose to
remain completely mute even at this stage despite the opportunity accorded to them, for
clarification. Consequently, the prejudicial aftermath of Josefina Tayag's spontaneous reaction
may no longer be obliterated on the basis of estoppel (Article 1431, Civil Code; Section 4, Rule
129; Section 2(a), Rule 131, Revised Rules on Evidence).
Insofar as the third item of the contract is concerned, it may be recalled that respondent court
applied Article 1186 of the Civil Code on constructive fulfillment which petitioners claim
should not have been appreciated because they are the obligees while the proviso in point
speaks of the obligor. But, petitioners must concede that in a reciprocal obligation like a
contract of purchase (Ang vs. Court of Appeals, 170 SCRA 286 [1989]; 4 Paras, supra, at p.
201), both parties are mutually obligors and also obligees (4 Padilla, supra, at p. 197),
and any of the contracting parties may, upon non-fulfillment by the other privy of his part of
the prestation, rescind the contract or seek fulfillment (Article 1191, Civil Code). In short, it is
puerile for petitioners to say that they are the only obligees under the contract since they are
also bound as obligors to respect the stipulation in permitting private respondent to assume the
loan with the Philippine Veterans Bank which petitioners impeded when they paid the balance
of said loan. As vendors, they are supposed to execute the final deed of sale upon full payment
of the balance as determined hereafter. LibLex
Lastly, petitioners argue that there was no valid tender of payment nor consignation of the sum
of P18,520.00 which they acknowledge to have been deposited in court on January 22, 1981
five years after the amount of P27,000.00 had to be paid (p. 23, Memorandum for Petitioners;
p. 162, Rollo). Again this suggestion ignores the fact that consignation alone produced the
effect of payment in the case at bar because it was established below that two or more heirs of
Juan Galicia, Sr. claimed the same right to collect (Article 1256, (4), Civil Code; pp. 4-5,
Decision in Civil Case No. 681-G; pp. 67-68, Rollo). Moreover, petitioners did not bother to
refute the evidence on hand that, aside from the P18,520.00 (not P18,500.00 as computed by
respondent court) which was consigned, private respondent also paid the sum of P13,908.25
(Exhibits "F" to "CC"; p. 50, Rollo). These two figures representing private respondent's
payment of the fourth condition amount to P32,428.25, less the P3,778.77 paid by petitioners
to the bank, will lead us to the sum of P28,649.48 or a refund of P1,649.48 to private
respondent as overpayment of the P27,000.00 balance.
WHEREFORE, the petition is hereby DISMISSED and the decision appealed from is hereby
AFFIRMED with the slight modification of Paragraph 4 of the dispositive thereof which is
thus amended to read:
"4. ordering the withdrawal of the sum of P18,520.00 consigned with
the Regional Trial Court, and that the amount of P16,870.52 be
delivered by private respondent with legal rate of interest until fully
paid to the heirs of Juan Galicia, Sr. as balance of the sale including
reimbursement of the sum paid to the Philippine Veterans Bank,
minus the attorney's fees and damages awarded in favor of private
respondent. The excess of P1,649.48 shall be returned to private
respondent also with legal interest until fully paid by petitioners. With
costs against petitioners." cdrep
SO ORDERED.

453
Feliciano, Bidin, Davide, Jr. and Romero, JJ ., concur.
Gutierrez, Jr., J ., is on terminal leave.

||| (Tayag v. Court of Appeals, G.R. No. 96053, [March 3, 1993])

454

FIRST DIVISION

irrevocable) is a new agreement in diem as to the definite sale price, and without the
payment of the stipulated amount., the ownership is not irrevocably transferred. Cdpr

[G.R. No. L-2001. February 14, 1907.]

SALVADOR PANGANIBAN, plaintiff-appellee, vs.
CUEVAS, defendant-appellant.

DECISION

AGUSTIN

Del-Pan, Ortigas, & Fisher, for appellant.

Isabelo Artacho, for appellee.

SYLLABUS
1. REALTY; SALE WITH RIGHT OF REPURCHASE. P. on the 10th day
of December, 1897, made a conditional sale of a certain lot and camarin to G. for the sum
of 1,300 pesos, on condition that P. might repurchase the property within six months, and,
in case of his failure to do so within the said period, G. might become the absolute owner
of the property by paying to P. the additional sum of 200 pesos. On the 1st of August,
1900, G. sold the said property to C. under the same conditions existing between the
former and P. Later, in the month of August, 1900, C. obtained judicial possession of the
said property, depositing the said 200 pesos in the court. In the month of May, 1898. P.
attempted to effect the repurchase of the said property, but by reason of the fact that G.
was absent from his place of residence he was unable to do so. The revolutionary
government in 1898 seize said property. On the 12th day of November, 1898, P. brought
an action against C. to recover said property. Held, That P. had the right to repurchase
said property of C. by paying to the latter the amount of the original contract and that C.
was obliged to execute to P. a deed of resale.
2. CIVIL CODE, ARTICLE 1164. This article, according to which
"Payment made in good faith to the person who is in possession of the credit shall
released the debtor," is in no wise applicable to a case in which the payment was made to
one who had done nothing more than to make an attachment, without being in actual
possession, for attachment, not having the character of confiscation, does not deprive the
real, lawful owner of any of the rights of ownership. cdlex

ARELLANO, C.J p:
This is an appeal from a judgment of the Court of First Instance of the
Province of Pangasinan, wherein it was held that the land and camarin in question were
the property of Salvador Panganiban, and the defendant, Agustin Cuevas, was ordered to
return the said property to the plaintiff, Panganiban, and to pay the costs of proceedings,
the court reserving to the said plaintiff the right to bring an action for damages against the
defendant and holding that the deposit in the hands of the clerk, amounting to 200 pesos,
Mexican currency, made by Cuevas was improperly made, which said sum the court
ordered refunded to the said Cuevas. This case was tried in accordance with the
provisions of the former Code of Civil Procedure, and it appears:
(1) That on the 10th of December, 1897, Salvador Panganiban was the owner
of a camarin and lot, the camarin being of bamboo nipa construction, divided into five
apartments, each apartment having two doors opening on the front, the whole property
being more specifically described in the instrument executed by the said Panganiban,
wherein he sold and transferred the same to one Francisco Gonzales for the sum of 1,300
pesos, it having been stipulated therein, among other things: "Seventh. The vendor
reserves the right to repurchase the property within six months from date, after
complying with the obligations mentioned in article 1518 of the Civil Code, and in case
of his failure to do so within the tome stipulated, the vendee will pay to him the
additional sum of 200 pesos and will become the absolute owner of the property and the
vendee may dispose of the same, as long as the condition subsequent continues to exist
with the limitations provided by the Mortgage Law, of the provisions of which he has
been duly informed." (Record, p. 45.) This deed was recorded in the Register of Property
on the 13th of August, 1900.

3. CIVIL CODE, ARTICLE 1163. The article, which provides that

Payment made to a third person hall also be valid in so far as it may have been beneficial
to the creditor," can not be invoked without conclusive proof of the benefit to the creditor,
and especially when there is not the slighted evidence that the third person, to whom
payment was made, had any claim whatever to the creditor's right.

(2) That on the let of August, 1900, Francisco Gonzales sold the property to
Agustin Cuevas for the same price, the following statement appearing in the deed of sale:
"Second. That the vendor (Panganiban) reserves to himself the right to repurchase the
property thus sold within the period of six months from the tenth of December, 1897, for
the same price, thirteen hundred pesos, and in case he fails to do so, the said Gonzales
will pay to the vendor, Salvador Panganiban, the additional sum of two hundred pesos . . .
." (Record, p. 49.) This instrument was recorded on the same date as the instrument
executed on the 13th of August, 1900. cdasia

4. INCREASE IN THE SELLING PRICE FOR AN ABSOLUTE SALE

UNDER AN AGREEMENT OF "PACTO DE RETRO." The agreement regarding the
increase in the price over the price fixed for the conditional sale (should the same become

(3) That on the said 13th of August, 1900, Cuevas Asked for and was granted,
in ex parte proceedings, the judicial possession of the property on the 14th of the said
month, notice thereof having been given to those who occupied the various apartments,

455
among them Panganiban's wife in the latter's absence. (Record, pp. 52-55.) Subsequently,
on the 10th of August, he attempted to pay Panganiban the sum of 200 pesos, which he
deposited in court, and Cuevas, in a petition presented to the said court stated: ". . . I have
succeeded to all the rights of the former purchaser, Francisco Gonzales, and desiring to
acquire the ownership of the property irrevocably, I deposit the additional sum of two
hundred pesos which my grantor undertook to pay . . ." (Record, p. 133.) This sum
Panganiban refused to receive. (Record, p. 135.)
(4) That on the 1st of October of the same year, 1900, Cuevas brought an
action for ejectment against Panganiban. (Record, pp. 138141.)
(5) And that on the 12th of the same month Panganiban filed a complaint in
this action for the recovery of possession, the proceedings in the action for ejectment
having been suspended. (Record, pp. 27-39.)
Such are the antecedents of the present case.
The complaint contains the following allegation:
(1) That in the month of May, 1898, Panganiban attempted to effect the
repurchase of the property, but the creditor, Gonzales, being absent from his place of
residence on account of the war, he was unable to do so, nor was he able to deposit the
purchase price with the clerk of the court for the same reason; and (2) that the revolution
broke out that time and the land and improvements in question were seizes by the
Filipino government from Francisco Gonzales, the property having been redeemed by
Panganiban from the Filipino government on the 12th of November, 1898. These facts
the plaintiff attempted to prove by the records of the proceedings relating to the said
seizure and repurchase, which records he attached to his complaint and made a part
thereof, and further by the receipt of the purchase price paid to the revolutionary
government which had seized the land from Gonzales.
The defendant, Cuevas, objected to the introduction of evidence upon these
points, admitting the facts, and stated: "(1) That both parties were bound by the terms of
the contract which is the basis of this action: (2) that there is no doubt that the deposit
alleged to have been made by the plaintiff could not have been made: and (3) that the
other facts alleged by the plaintiff, even though they were fully established, such as the
fact that Panganiban was absent from the town . . . , that Hison was then commissioned
by the Filipino government to resell the property, and other facts of minor importance,
would not change the essence of the question . . . .," (Record, p. 120.) cdll
From the evidence of record we draw the following conclusions:
The appellee alleges, and the appellant admits, that the property in question
was repurchased (properly or improperly ) by the appellee from the revolutionary
government. The first, second, third, and sixth assignments of error refer to this point.
The fact was established by the original document appearing on page 180 of the record
and by the testimony of the witnesses for the appellee, uncontradicted by the appellant.
It is a fact admitted by the appellant that the property of Francisco Gonzales
was seized by the revolutionary government and subsequently returned to him by the
latter.
Several witnesses testified, and their testimony appears uncontradicted by the
appellant, that when the property seized from Francisco Gonzales, among the same the
house and lot in question, was returned to him, the latter property was retained by the

revolutionary government without any protest on his part, and that on November, 1898,
the said house and lot was resold to Panganiban by the revolutionary government some
time before Gonzalez's property was returned to him. LexLib
It is an evident fact that from November, 1898, until the 15th of August, 1900,
when Cuevas took judicial possession of the property by an ex parte proceeding,
Panganiban had been in the quiet and peaceful possession of the property. This fact was
established by the testimony of the witnesses referred to and by the judicial proceedings
introduced in evidence in this case, from which it appears that when the occupants of the
various apartments of Panganiban's house were notified of the judicial possession given
to Cuevas, Faustina Terrado, "who occupied one of the apartments of the said house,"
was else notified, as the "wife of Salvador Panganiban, who was absent when the notice
was served upon the said occupant." (Record, p. 54.)
If Panganiban had not been absent and had simply objected to the possession
sought by Cuevas, the latter could not have been given possession of the premises in such
an ex parte proceedings as that instituted by him for this purpose, and it would have
necessary for Cuevas to bring an ordinary action, everything remaining as it was prior to
the institution of such ex parte proceeding.
It was sufficient to restore everything to its former condition in order to
preserve the regularity and consistency required in judicial proceedings by the old Code
of Civil Procedure, which provided that the proper action in such cases should be a
plenary action for possession. cdtai
Panganiban was in possession of the property in question from November,
1898, until the 14th of August, 1900 that is to say, for more than a year quietly and
peacefully, with title in good faith. He could not therefore, be called upon to surrender the
said possession, particularly in view of the fact that he had not acquired the same by
forcible or unlawful means. Cuevas or Gonzales had a right to deposit the 200 pesos in
court and attempt to acquire in a separate action the ownership of the property in question
by virtue of the stipulation contained in the deed.
In view of the fact that all these rights and actions have been discussed in
these proceedings, this court, by virtue of the authority and powers vested in it, will now
proceed to decide all the questions raised on this appeal.
The first question relates to the repurchase made by the appellee, as to which
the appellant claims that the Court of First Instance erred in deciding that the sale made
by the revolutionary government was valid and that all the obligations incurred by
Panganiban in favor of Gonzales had been extinguished as the result of the repurchase.
(Assignments of error 1, 2, 3, and 6.) The appellee in his complaint relied, however, for
the validity and efficacy of the said sale upon article 1164 and paragraph 2, article 1163,
of the Civil Code, and his brief filed in this court he relies upon the provisions of
paragraph 3, article 1203, and articles 1209, 1210,1249 and 1253 of the same code.
Article 1164 of the Civil Code provides that "a payment made in good faith to
the person who is in possession of the credit shall release the debtor," and article 1163,
paragraph 2, reads as follows: "A payment made to a third person shall also be valid in so
far as it may have been beneficial to the creditor."

456
But the revolutionary government to which the payment was made not in
possession of the credit; it did nothing but seize the property of the vendor, including the
house and lot in question. Seizure is not, in itself, a confiscation. The appellee in his brief
admits that there was no confiscation. The reason why the seizure was made does not
appear. A seizure or embargo is nothing but a prohibition enjoining the owner from
disposing of his property. By the mere embargo of a property the owner does not lose his
title thereto. The authorities (lawful or unlawful) who, legally or illegally, order the
seizure do not become the owners of the same. What the vendor in this case did was to
attempt to reacquire the ownership of the property transferred to the vendee from a third
person to whom the property had not been transferred by the said vendee in any manner
whatsoever. Therefore, the vendor from a person who was not the owner of the same.
This is obvious. cdrep
If the revolutionary government, by reason of the seizure or the embargo, did
not acquire the title to the property or vested in the vendee, neither could the purchaser
have acquired from the latter, even though an embargo, the credit which the said vendee
had under the right of redemption in case such redemption should take place; the property
of the vendee thus seized had included the right to demand the stipulated price for the
repurchase, perhaps the payment of such price to the person rightfully entitled to it under
the embargo would have been proper. But there was nothing, it is alleged, but an embargo
of the real estate of the vendee including the property in question. So that article 1164 of
the Civil Code is not applicable to the case at bar, nor is paragraph 2 of article 1163
applicable to this case, because their is nothing in the record to show that a payment
made by Panganiban to the revolutionary government was for the benefit of Gonzales.
"That the creditor was benefited by the payment made to a third person by his debtor can
not be presumed, and must, therefore, be satisfactorily established by the person
interested in proving this fact." Manresa, 8 Civil Code, 257.)
Finally assuming, without deciding, that the payment of the 1,300 pesos in
question to the revolutionary government was properly made, yet it does not appear that
the deed of sale had been canceled that is to say, that no other deed of repurchase
canceling the said deed of sale had been executed in short, the obligation the payment
of which was necessary to redeem the property was not canceled. This is also one of the
conclusions arrived at by the court below in the decision. A credit is not extinguished
against the will of creditor except by the judgment of a court or by the expiration of the
period prescribed by the statue of limitations. LLjur
Paragraph 3 of article 1203 provides that "obligations may be modified by
subrogating a third person to the rights of the creditor." Article 1209 provides that "the
subrogation of a third person to the rights of a creditor can not be presumed except in the
cases expressly mentioned in the code, it being necessary in other cases to prove such
subrogation clearly in order that it may be effective." Paragraph 3 of article 1210
provides that "when the person who is interested in the fulfillment of the obligation pays,
subrogation shall be presumed." Article 1249 provides that "presumptions are not
admissible, except when the fact from which they are to be deduced is fully proved." And
article 1253 provides that "in order that presumptions, not established by law, may be
admitted as means of evidence, it is indispensable that between the fact demonstrated and
the one it is desired to deduce there should exist a precise and direct connection
according to the rules of human judgment." All these provisions of law are relied upon by
the appellee in his brief in support of the following proposition: "All the facts above set
out, and particularly those relating to the embargo and the deposit of the property of
Gonzales and the return of the same after redemption, established the presumption of the

existence of an obligation on the part of Gonzales in favor of the so called Philippine

government either for war taxes or some other indebtedness . . ." (Brief, p. 9.)
But no other fact except the embargo of Gonzalez's property and the return of
the same to Panganiban having been proved, the contention of the appellee is absolutely
contrary to the provision of article 1209 of the Civil Code above quoted. cda
In conclusion, we hold that the court below committed the errors pointed out
by the appellant under the first, second, third, and sixth assignments.
The payment made by Panganiban to the revolutionary government of the
1,300 pesos which he should have paid to Francisco Gonzales in order to redeem the
property, could not have extinguished the obligation incurred by him in favor of the latter.
The supreme court of Spain, in a judgment rendered on the 28th of February, 1896, said:
"The payment of the debt in order to extinguish the obligation must be made to the
person or persons in whose favor it was incurred or to his or their duly authorized agent.
It follows, therefore, that the payment made to a third person, even through error and in
good faith, shall not release the debtor of the obligation to pay and will not deprive the
creditor of his right to demand payment. If it becomes impossible to recover what was
unduly paid, any loss resulting therefrom shall be borne by the deceived debtor, who is
the only one responsible for his own acts unless there is a stipulation to the contrary or
unless the creditor himself is responsible for the wrongful payment."
The fourth and fifth assignments of error relate to the second question, in so
far as the appellant claims that the court below erred in holding that neither Gonzales nor
Cuevas ever had a title to the property in question, they not having paid as stipulated in
the contract the additional 200 pesos, and in holding that the irrevocability of the sale
depended upon the payment of the said additional sum of 200 pesos. The question arises
whether there were one or two conditions stipulated in the contract which should be
complied with in order to make the conditional sale irrevocable. The appellant contends
that there was only one condition stipulated, to wit, the lapse of a period of six months,
whereas the appellee claims that there were two conditions, viz, the lapse of the period of
six months and the payment of 200 pesos in addition to the purchase price.
This question may be decided as a matter of fact by reference to appellant's
own statement as set out in the third paragraph of this decision, wherein he is quoted as
saying: "Desiring to acquire the ownership of the property irrevocably, I deposit the
additional sum of two hundred pesos. . . ." So that prior to that deposit he had the
conviction of he had not as yet acquired the ownership of the property irrevocably. And
as a matter of law, first, by the terms of the agreement itself, according to which, after
setting forth the true conditions, to wit, the lapse of the time provided therein and the
additional payment of 200 pesos, the appellant, referring to the acquisition of the
ownership in an irrevocable manner, stipulated as follows: "Shall pay the sum of two
hundred pesos in addition to the sum already stated, the vendee acquiring the ownership
of the property irrevocably;" and, second, because the agreement to pay an additional
sum of 200 pesos presupposes that the first conditional sale was made in consideration of
the sum of 1.300 pesos, but the consideration for the irrevocable and definite sale was
1,500 pesos; and it is well known that where property is sold, the consideration therefor
being paid at the time of the sale, title does not pass to the vendee unless the property is
actually delivered and the purchase price actually received. Cdphil

457
There can be no question, therefore, that up to the 10th of August, 1900, when
Cuevas deposited the 200 pesos in court for the purpose, as stated, of acquiring the
ownership irrevocably, the property could have been redeemed.
The third question is whether after the deposit of the 200 pesos on August 10,
1900, the vendor lost his right to repurchase the property.
The provisions of the Civil Code relating to this subject are as follows:
"Consignation shall be made by depositing the things due
at the disposal of the judicial authorities before whom the tender shall
be proved in a proper case and the notice of the consignation in other
cases." (Art. 1178.) There is nothing in the record to show that
Cuevas tendered the payment of the 200 pesos in question to
Panganiban or that he gave notice of his intention to deposit the said
sum in court in case said tender was refused by Panganiban.
According to article 1176, "If the creditor to whom the tender of
payment has been made should refuse to accept it, without reason, the
debtor shall remain released from all liability by the consignation of
the thing due," and, further, that "the same effect shall be produced by
the consignation alone when made in the absence of the creditor, or
when the latter shall be incapacitated to accept the payment when it is
due, and when several persons claim to have a right to collect it, or
when the instrument mentioning the obligation has been mislaid."
There being no evidence of anything except the consignation and the
plaintiff Panganiban not being either absent or incapacitated so that
the consignation alone could have produced the effect of releasing the
debtor, it follows that the consignation made by Cuevas did not
produce the effect which it would have produced had it been made as
provided in the code. It is therefore evident that Cuevas never
complied with the condition stipulated in the contract in order to
acquire the ownership irrevocably.
It appears, therefore, from the facts as established in this case:
(1) That Salvador Panganiban did not comply with the condition stipulated in
the contract in order to reacquire the ownership of the property sold by him on condition
of redemption, for the reason that he did not pay the price agreed upon to the creditor or
to his duly authorized agent or to the person entitled to receive the same for the creditor.
(2) That Agustin Cuevas did not comply with the other condition imposed
upon him (or upon Gonzales) by the terms of the contract in order to acquire the
ownership of the property irrevocably, as he did not make the additional payment agreed
upon for the definite sale of the property in such a manner as would have relieved him of
this liability under the law. cdlex
So that even after the 10th of August, 1900, and up to the present date, the
redemption of the property could have been effected and the parties could have enforced
their respective rights as though nothing had been done, for nothing was done in the
manner prescribed by law so as to have sufficient force to create a juridical status or
become res adjudicata.
The judgment of the court below is accordingly reversed without special
provision as to costs. And being of the opinion that this action was brought for the

purpose of securing the repurchase of the property, and for this purpose we shall consider
the complaint amended so as to make it conform to the facts established by the evidence,
we hold that Salvador Panganiban may repurchase the property if he so desires; and the
court below is accordingly directed to require the said Panganiban to comply with the
provisions of article 1518 of the Civil Code, and in case he complies therewith to the
satisfaction of the court, to enter judgment authorizing the repurchase and requiring
Agustin Cuevas to execute the deed of resale, canceling the former deed of sale and the
entry thereof made in the Registry of Property, or otherwise to dismiss the action. After
the expiration of twenty days let judgment be entered in accordance herewith and ten
days thereafter the case be remanded to the court below for execution. So ordered. LLpr
Torres, Mapa, and Johnson, JJ., concur.
Carson, J., concurs in the result.
||| (Panganiban v. Cuevas, G.R. No. L-2001, [February 14, 1907], 7 PHIL 477-488)

458

FIRST DIVISION
[G.R. No. 104612. May 10, 1994.]
BANK OF THE PHILIPPINE ISLANDS (successor-in-interest of
COMMERCIAL BANK AND TRUST CO.), petitioner, vs. HON.
COURT OF APPEALS, EASTERN PLYWOOD CORP. and
BENIGNO D. LIM, respondents.

SYLLABUS
1. COMMERCIAL LAW; NEGOTIABLE INSTRUMENT; HOLDER IN DUE COURSE;
WHEN NOT CONSIDERED; CONSEQUENCE. The collection suit of BPI is based on the
promissory note for P73,000.00. On its face, the note is an unconditional promise to pay the
said amount, and as stated by the respondent Court of Appeals, "[t]here is no question that the
promissory note is a negotiable instrument." It further correctly ruled that BPI was not a holder
in due course because the note was not indorsed to BPI by the payee, CBTC. Only a
negotiation by indorsement could have operated as a valid transfer to make BPI a holder in due
course. It acquired the note from CBTC by the contract of merger or sale between the two
banks. BPI, therefore, took the note subject to the Holdout Agreement.
2. ID.; ID.; HOLDOUT AGREEMENT; CONSTRUED; CASE AT BAR. The Court
disagrees, with the Court of Appeals in its interpretation of the Holdout Agreement. It is clear
from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest, had every right to
demand that Eastern and Lim settle their liability under the promissory note. It cannot be
compelled to retain and apply the deposit in Lim and Velasco's joint account to the payment of
the note. What the agreement conferred on CBTC was a power, not a duty. Generally, a bank is
under no duty or obligation to make the application. (9 C.J.S. Banks and Banking S 301 [1938]
and other cases cited) To apply the deposit to the payment of a loan is a privilege, a right of setoff which the bank has the option to exercise. (See Lowden vs. Iowa-Des Moines Nat. Bank
and Trust Co., 10 F. Supp. 430 (D.C. Iowa 1935) and other cases cited.) Also, paragraph 05 of
the Holdout Agreement itself states that notwithstanding the agreement, CBTC was not in any
way precluded from demanding payment from Eastern and from instituting an action to recover
payment of the loan. What it provides is an alternative, not an exclusive, method of enforcing
its claim on the note. When it demanded payment of the debt directly from Eastern and Lim,
BPI had opted not to exercise its right to apply part of the deposit subject of the Holdout
Agreement to the payment of the promissory note for P73,000.00. Its suit for the enforcement
of the note was then in order and it was error for the trial court to dismiss it on the theory that it
was set off by an equivalent portion in C/A No. 2310-001-42 which BPI should have debited.
The Court of Appeals also erred in affirming such dismissal. The "suspensive condition" theory
of the petitioner is, therefore, untenable.
3. ID.; BANKS; RELATIONSHIP WITH THE DEPOSITORS; CASE AT BAR. The Court
of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and Lim for the

return of the P331,261.44 was equivalent to a demand that they be allowed to withdraw their
deposit with the bank. Article 1980 of the Civil Code expressly provides that "[f]ixed, savings,
and current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loan." in Serrano vs. Central Bank of the Philippines, (96 SCRA
96 [1980]. See also, Guingona vs. City Fiscal of Manila, 128 SCRA 577 [1984]; People vs.
Ong, 204 SCRA 942 [1991]), we held that bank deposits are in the nature of irregular deposits;
they are really loans because they earn interest. The relationship then between a depositor and
a bank is one of creditor and debtor. The deposit under the questioned account was an ordinary
bank deposit; hence, it was payable on demand of the depositor. (10 Am Jur 2d, Banks, S 356)
4. ID.; ID.; OBLIGATIONS TO DEPOSITORS; CASE AT BAR. The account was proved
and established to belong to Eastern even if it was deposited in the names of Lim and Velasco.
As the real creditor of the bank, Eastern has the right to withdraw it or to demand payment
thereof. BPI cannot be relieved of its duty to pay Eastern simply because it already allowed the
heirs of Velasco to withdraw the whole balance of the account. The petitioner should not have
allowed such withdrawal because it had admitted in the Holdout Agreement the questioned
ownership of the money deposited in the account. As early as 12 May 1979, CBTC was
notified by the Corporate Secretary of Eastern that the deposit in the joint account of Velasco
and Lim was being claimed by them and that one-half was being claimed by the heirs of
Velasco. Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of
Velasco to withdraw the account. BPI was not specifically ordered to release the account to the
said heirs; hence, it was under no judicial compulsion to do so. The authorization given to the
heirs of Velasco cannot be construed as a final determination or adjudication that the account
belonged to Velasco. We have ruled that when the ownership of a particular property is
disputed, the determination by a probate court of whether that property is included in the estate
of a deceased is merely provisional in character and cannot be the subject of execution.
(Valera vs. Inserto, 149 SCRA 533 [1987]) Because the ownership of the deposit remained
undetermined, BPI, as the debtor with respect thereto, had no right to pay to persons other than
those in whose favor the obligation was constituted or whose right or authority to receive
payment is indisputable. The payment of the money deposited with BPI that will extinguish its
obligation to the creditor-depositor is payment to the person of the creditor or to one authorized
by him or by the law to receive it. (See Article 1240, New Civil Code) Payment made by the
debtor to the wrong party does not extinguish the obligation as to the creditor who is without
fault or negligence, even if the debtor acted in utmost good faith and by mistake as to the
person of the creditor, or through error induced by fraud of a third person. (IV Arturo
Tolentino, Civil Code of the Philippines 285 (1991 ed.) The payment then by BPI to the heirs
of Velasco, even if done in good faith, did not extinguish its obligation to the true depositor,
Eastern.

DECISION

DAVIDE, JR., J p:

459
The petitioner urges us to review and set aside the amended Decision 1 of 6 March 1992 of
respondent Court of Appeals in CA-G.R. CV No. 25739 which modified the Decision of 15
November 1990 of Branch 19 of the Regional Trial Court (RTC) of Manila in Civil Case No.
87-42967, entitledBank of the Philippine Islands (successor-in-interest of Commercial Bank
and Trust Company) versus Eastern Plywood Corporation and Benigno D. Lim. The Court of
Appeals had affirmed the dismissal of the complaint but had granted the defendants'
counterclaim for P331,261.44 which represents the outstanding balance of their account with
the plaintiff.
As culled from the records and the pleadings of the parties, the following facts were duly
established:
Private respondents Eastern Plywood Corporation (Eastern) and Benigno D. Lim (Lim), an
officer and stockholder of Eastern, held at least one joint bank account ("and/or" account) with
the Commercial Bank and Trust Co. (CBTC), the predecessor-in-interest of petitioner Bank of
the Philippine Islands (BPI). Sometime in March 1975, a joint checking account ("and"
account) with Lim in the amount of P120,000.00 was opened by Mariano Velasco with funds
withdrawn from the account of Eastern and/or Lim. Various amounts were later deposited or
withdrawn from the joint account of Velasco and Lim. The money therein was placed in the
money market. LLjur
Velasco died on 7 April 1977. At the time of his death, the outstanding balance of the account
stood at P662,522.87. On 5 May 1977, by virtue of an Indemnity Undertaking executed by Lim
for himself and as President and General Manager of Eastern, 2 one-half of this amount was
provisionally released and transferred to one of the bank accounts of Eastern with CBTC. 3
Thereafter, on 18 August 1978, Eastern obtained a loan of P73,000.00 from CBTC as
"Additional Working Capital," evidenced by the "Disclosure Statement on Loan/Credit
Transaction" (Disclosure Statement) signed by CBTC through its branch manager, Ceferino
Jimenez, and Eastern, through Lim, as its President and General Manager. 4 The loan was
payable on demand with interest at 14% per annum.
For this loan, Eastern issued on the same day a negotiable promissory note for P73,000.00
payable on demand to the order of CBTC with interest at 14% per annum. 5 The note was
signed by Lim both in his own capacity and as President and General Manager of Eastern. No
reference to any security for the loan appears on the note. In the Disclosure Statement, the box
with the printed word "UNSECURED" was marked with "X". meaning unsecured, while
the line with the words "this loan is wholly/partly secured by" is followed by the typewritten
words "Hold-Out on 1:1 on C/A No. 2310-001-42," which refers to the joint account of Velasco
and Lim with a balance of P331,261.44.
In addition, Eastern and Lim, and CBTC signed another document entitled "Holdout
Agreement," also dated 18 August 1978, 6 wherein it was stated that "as security for the Loan
[Lim and Eastern] have offered [CBTC] and the latter accepts a holdout on said [Current
Account No. 2310-011-42 in the joint names of Lim and Velasco] to the full extent of their
alleged interests therein as these may appear as a result of final and definitive judicial action or
a settlement between and among the contesting parties thereto." 7 Paragraph 02 of the
Agreement provides as follows: LLjur
"Eastply [Eastern] and Mr. Lim hereby confer upon Comtrust
[CBTC], when and if their alleged interests in the Account Balance
shall have been established with finality, ample and sufficient power

as shall be necessary to retain said Account Balance and enable

Comtrust to apply the Account Balance for the purpose of liquidating
the Loan in respect of principal and/or accrued interest."

And paragraph 05 thereof reads:

"The acceptance of this holdout shall not impair the right of Comtrust
to declare the loan payable on demand at any time, nor shall the
existence hereof and the non-resolution of the dispute between the
contending parties in respect of entitlement to the Account Balance,
preclude Comtrust from instituting an action for recovery against
Eastply and/or Mr. Lim in the event the Loan is declared due and
payable and Eastply and/or Mr. Lim shall default in payment of all
obligations and liabilities thereunder."
In the meantime, a case for the settlement of Velasco's estate was filed with Branch 152 of the
RTC of Pasig, entitled "In re Intestate Estate of Mariano Velasco," and docketed as Sp. Proc.
No. 8959. In the said case, the whole balance of P331,261.44 in the aforesaid joint account of
Velasco and Lim was being claimed as part of Velasco's estate. On 9 September 1986, the
intestate court granted the urgent motion of the heirs of Velasco to withdraw the deposit under
the joint account of Lim and Velasco and authorized the heirs to divide among themselves the
amount withdrawn. 8
Sometime in 1980, CBTC was merged with BPI. 9 On 2 December 1987, BPI filed with the
RTC of Manila a complaint against Lim and Eastern demanding payment of the promissory
note for P73,000.00. The complaint was docketed as Civil Case No. 87-42967 and was raffled
to Branch 19 of the said court, then presided over by Judge Wenceslao M. Polo. Defendants
Lim and Eastern, in turn, filed a counterclaim against BPI for the return of the balance in the
disputed account subject of the Holdout Agreement and the interests thereon after deducting
the amount due on the promissory note.
After due proceedings, the trial court rendered its decision on 15 November 1990 dismissing
the complaint because BPI failed to make out its case. Furthermore, it ruled that "the
promissory note in question is subject to the 'hold-out' agreement," 10 and that based on this
agreement, "it was the duty of plaintiff Bank [BPI] to debit the account of the defendants under
the promissory note to set off the loan even though the same has no fixed maturity." 11 As to
the defendants' counterclaim, the trial court, recognizing the fact that the entire amount in
question had been withdrawn by Velasco's heirs pursuant to the order of the intestate court in
Sp. Proc. No. 8959, denied it because the "said claim cannot be awarded without disturbing the
resolution" of the intestate court. 12
Both parties appealed from the said decision to the Court of Appeals. Their appeal was
docketed as CA-G.R. CV No. 25739. prLL
On 23 January 1991, the Court of Appeals rendered a decision affirming the decision of the
trial court. It, however, failed to rule on the defendants' (private respondents') partial appeal
from the trial court's denial of their counterclaim. Upon their motion for reconsideration, the
Court of Appeals promulgated on 6 March 1992 an Amended Decision 13 wherein it ruled that
the settlement of Velasco's estate had nothing to do with the claim of the defendants for the
return of the balance of their account with CBTC/BPI as they were not privy to that case, and

460
that the defendants, as depositors of CBTC/BPI, are the latter's creditors; hence, CBTC/BPI
should have protected the defendants' interest in Sp. Proc. No. 8959 when the said account was
claimed by Velasco's estate. It then ordered BPI "to pay defendants the amount of P331,261.44
representing the outstanding balance in the bank account of defendants." 14
On 22 April 1992, BPI failed the instant petition alleging therein that the Holdout Agreement in
question was subject to a suspensive condition stated therein, viz., that the "P331,261.44 shall
become a security for respondent Lim's promissory note only if respondents' Lim and Eastern
Plywood Corporation's interests to that amount are established as a result of a final and
definitive judicial action or a settlement between and among the contesting parties
thereto." 15 Hence, BPI asserts, the Court of Appeals erred in affirming the trial court's
decision dismissing the complaint on the ground that it was the duty of CBTC to debit the
account of the defendants to set off the amount of P73,000.00 covered by the promissory note.

deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option
to exercise. 19
Also, paragraph 05 of the Holdout Agreement itself states that notwithstanding the agreement,
CBTC was not in any way precluded from demanding payment from Eastern and from
instituting an action to recover payment of the loan. What it provides is an alternative, not an
exclusive, method of enforcing its claim on the note. When it demanded payment of the debt
directly from Eastern and Lim, BPI had opted not to exercise its right to apply part of the
deposit subject of the Holdout Agreement to the payment of the promissory note for
P73,000.00. Its suit for the enforcement of the note was then in order and it was error for the
trial court to dismiss it on the theory that it was set off by an equivalent portion in C/A No.
2310-001-42 which BPI should have debited. The Court of Appeals also erred in affirming
such dismissal.

Private respondents Eastern and Lim dispute the "suspensive condition" argument of the
petitioner. They interpret the findings of both the trial and appellate courts that the money
deposited in the joint account of Velasco and Lim came from Eastern and Lim's own account as
a finding that the money deposited in the joint account of Lim and Velasco "rightfully
belong[ed] to Eastern Plywood Corporation and/or Benigno Lim." And because the latter are
the rightful owners of the money in question, the suspensive condition does not find any
application in this case and the bank had the duty to set off this deposit with the loan. They add
that the ruling of the lower court that they own the disputed amount is the final and definitive
judicial action required by the Holdout Agreement; hence, the petitioner can only hold the
amount of P73,000.00 representing the security required for the note and must return the
rest. 16

The "suspensive condition" theory of the petitioner is, therefore, untenable. LLphil

The petitioner filed a Reply to the aforesaid Comment. The private respondents filed a
Rejoinder thereto.

The account was proved and established to belong to Eastern even if it was deposited in the
names of Lim and Velasco. As the real creditor of the bank, Eastern has the right to withdraw it
or to demand payment thereof. BPI cannot be relieved of its duty to pay Eastern simply
because it already allowed the heirs of Velasco to withdraw the whole balance of the account.
The petitioner should not have allowed such withdrawal because it had admitted in the Holdout
Agreement the questioned ownership of the money deposited in the account. As early as 12
May 1979, CBTC was notified by the Corporate Secretary of Eastern that the deposit in the
joint account of Velasco and Lim was being claimed by them and that one-half was being
claimed by the heirs of Velasco. 23

We gave due course to the petition and required the parties to submit simultaneously their
memoranda. prLL
The key issues in this case are whether BPI can demand payment of the loan of P73,000.00
despite the existence of the Holdout Agreement and whether BPI is still liable to the private
respondents on the account subject of the Holdout Agreement after its withdrawal by the heirs
of Velasco.
The collection suit of BPI is based on the promissory note for P73,000.00. On its face, the note
is an unconditional promise to pay the said amount, and as stated by the respondent Court of
Appeals, "[t]here is no question that the promissory note is a negotiable instrument." 17 It
further correctly ruled that BPI was not a holder in due course because the note was not
indorsed to BPI by the payee, CBTC. Only a negotiation by indorsement could have operated
as a valid transfer to make BPI a holder in due course. It acquired the note from CBTC by the
contract of merger or sale between the two banks. BPI, therefore, took the note subject to the
Holdout Agreement.
We disagree, however, with the Court of Appeals in its interpretation of the Holdout
Agreement. It is clear from paragraph 02 thereof that CBTC, or BPI as its successor-in-interest,
had every right to demand that Eastern and Lim settle their liability under the promissory note.
It cannot be compelled to retain and apply the deposit in Lim and Velasco's joint account to the
payment of the note. What the agreement conferred on CBTC was a power, not a duty.
Generally, a bank is under no duty or obligation to make the application. 18 To apply the

The Court of Appeals correctly decided on the counterclaim. The counterclaim of Eastern and
Lim for the return of the P331,261.44 20 was equivalent to a demand that they be allowed to
withdraw their deposit with the bank. Article 1980 of the Civil Code expressly provides that
"[f]ixed, savings, and current deposits of money in banks and similar institutions shall be
governed by the provisions concerning simple loan." In Serrano vs. Central Bank of the
Philippines, 21 we held that bank deposits are in the nature of irregular deposits; they are really
loans because they earn interest. The relationship then between a depositor and a bank is one of
creditor and debtor. The deposit under the questioned account was an ordinary bank deposit;
hence, it was payable on demand of the depositor. 22

Moreover, the order of the court in Sp. Proc. No. 8959 merely authorized the heirs of Velasco
to withdraw the account. BPI was not specifically ordered to release the account to the said
heirs; hence, it was under no judicial compulsion to do so. The authorization given to the heirs
of Velasco cannot be construed as a final determination or adjudication that the account
belonged to Velasco. We have ruled that when the ownership of a particular property is
disputed, the determination by a probate court of whether that property is included in the estate
of a deceased is merely provisional in character and cannot be the subject of execution. 24

Because the ownership of the deposit remained undetermined, BPI, as the debtor with respect
thereto, had no right to pay to persons other than those in whose favor the obligation was
constituted or whose right or authority to receive payment is indisputable. The payment of the
money deposited with BPI that will extinguish its obligation to the creditor-depositor is
payment to the person of the creditor or to one authorized by him or by the law to receive
it. 25 Payment made by the debtor to the wrong party does not extinguish the obligation as to

461
the creditor who is without fault or negligence, even if the debtor acted in utmost good faith
and by mistake as to the person of the creditor, or through error induced by fraud of a third
person. 26 The payment then by BPI to the heirs of Velasco, even if done in good faith, did not
extinguish its obligation to the true depositor, Eastern.
In the light of the above findings, the dismissal of the petitioner's complaint is reversed and set
aside. The award on the counterclaim is sustained subject to a modification of the interest.
WHEREFORE, the instant petition is partly GRANTED. The challenged amended decision in
CA-G.R. CV No. 25735 is hereby MODIFIED. As modified:cdrep
(1) Private respondents are ordered to pay the petitioner the
promissory note for P73,000.00 with interest at:
(a) 14% per annum on the principal, computed
from 18 August 1978 until payment;
(b) 12% per annum on the interest which had
accrued up to the date of the filing of the complaint,
computed from that date until payment pursuant to Article
2212 of the Civil Code.
(2) The award of P331,264.44 in favor of the private respondents
shall bear interest at the rate of 12% per annum computed from the
filing of the counterclaim.
No pronouncement as to costs.
SO ORDERED.
Cruz, Bellosillo, Quiason and Kapunan, JJ., concur.
||| (Bank of the Philippine Islands v. Court of Appeals, G.R. No. 104612, [May 10, 1994])

462

THIRD DIVISION

there are several provisions or particulars, such a construction is, if possible, to be adopted as
will give effect to all (Rule 130, Sec. 9, Rules of Court).

[G.R. No. 72703. November 13, 1992.]

5. ID.; ID.; APPLICATION OF PAYMENTS; INTENTION

SHOWN
BY
CONTEMPORANEOUS AND SUBSEQUENT ACTS. In order to judge the intention of
the contracting parties, their contemporaneous and subsequent acts shall be principally
considered (Art. 1253, Civil Code). The foregoing subsequent acts of the parties clearly show
that they did not intend the Deed of Assignment to have the effect of totally extinguishing the
obligations of private respondent without payment of the applicable interest charges on the
overdue account.

CALTEX
(PHILIPPINES),
INC., petitioner, vs. The
INTERMEDIATE APPELLATE COURT and ASIA PACIFIC
AIRWAYS, INC.,respondents.

Bito, Misa & Lozada for petitioner.

Carpio, Villaraza & Cruz for private respondent.

6. ID.; ID.; ID.; PRINCIPAL CONSIDERED PAID AFTER INTERESTS HAVE BEEN
COVERED. Finally, the payment of applicable interest charges on overdue account,
separate from the principal obligation of P4,072,682.13 was expressly stipulated in the Deed of
Assignment. The law provides that "if the debt produces interest, payment of the principal shall
not be deemed to have been made until the interests have been covered." (Art. 1253, Civil
Code).

SYLLABUS
1. REMEDIAL LAW; MOTION FOR NEW TRIAL OR RECONSIDERATION;
RESOLUTION OF MAY 30, 1986 GIVEN PROSPECTIVE APPLICATION. We held in
the case of Habaluyas Enterprises, Inc., et. al. vs. Japson et. al. (138 SCRA 46 [1985])
promulgated August 5, 1985), that the "15-day period for appealing or for filing a motion for
reconsideration cannot be extended". Subsequently, the Court, acting on respondent's motion
for reconsideration in the same entitled case (142 SCRA 208 [1986]), restated and clarified the
rule on this point for the guidance of the Bench and Bar by giving the rule prospective
application in its resolution dated May 30, 1986.
2. ID.; ID.; ID.; ONE MONTH GRACE PERIOD; CASE AT BAR. When petitioner herein
filed its Motion for Extension of time to file motion for reconsideration on September 20,
1985, the said motion was filed within the one-month grace period, which expired on June 30,
1986, and may still be allowed. Consequently, the Motion for Reconsideration filed by
petitioner on September 26, 1985, was also filed on time.
3. CIVIL LAW; OBLIGATION AND CONTRACT; DATION IN PAYMENT; WHEN
OBLIGATION IS EXTINGUISHED. A dation in payment does not necessarily mean total
extinguishment of the obligation. The obligation is totally extinguished only when the parties,
by agreement, express or implied, or by their silence, consider the thing as equivalent to the
obligation.
4. ID.; ID.; INTERPRETATION OF CONTRACT; LITERAL MEANING OF STIPULATION
CONTROLS. As aptly argued by petitioner, if it were the intention of the parties to limit or
fix respondent's obligation to P4,072.682.13, they should have so stated and there would have
been no need for them to qualify the statement of said amount with the clause "as of June 30,
1980 plus any applicable interest charges on overdue account" and the clause "and other
avturbo fuel lifting and deliveries that ASSIGNOR may from time to time receive from the
ASSIGNEE". The terms of the Deed of Assignment being clear, the literal meaning of its
stipulations should control (Art. 1370, Civil Code). In the construction of an instrument where

DECISION

BIDIN, J p:
This is a petition for certiorari seeking the annulment of the decision dated August 27, 1985 of
the then Intermediate Appellate Court in CA-G.R. No. 02684, which reversed the judgment of
the trial court and ordered petitioner to return the amount of P510,550.63 to private respondent
plus interest at the legal rate of 14% per annum. prLL
The facts of the case are as follows:
On January 12, 1978, private respondent Asia Pacific Airways Inc. entered into an agreement
with petitioner Caltex (Philippines) Inc., whereby petitioner agreed to supply private
respondent's aviation fuel requirements for two (2) years, covering the period from January 1,
1978 until December 31, 1979. Pursuant thereto, petitioner supplied private respondent's fuel
supply requirements. As of June 30, 1980, private respondent had an outstanding obligation to
petitioner in the total amount of P4,072,682.13, representing the unpaid price of the fuel
supplied. To settle this outstanding obligation, private respondent executed a Deed of
Assignment dated July 31, 1980, wherein it assigned to petitioner its receivables or refunds of
Special Fund Import Payments from the National Treasury of the Philippines to be applied as
payment of the amount of P4,072,683.13 which private respondent owed to petitioner. On
February 12, 1981, pursuant to the Deed of Assignment, Treasury Warrant No. B04708613 in
the amount of P5,475,294.00 representing the refund to respondent of Special Fund Import
Payment on its fuel purchases was issued by the National Treasury in favor of petitioner. Four
days later, on February 16, 1981, private respondent, having learned that the amount remitted

463
to petitioner exceeded the amount covered by the Deed of Assignment, wrote a letter to
petitioner, requesting a refund of said excess. Petitioner, acting on said request, made a refund
in the amount of P900,000.00 plus in favor of private respondent. The latter, believing that it
was entitled to a larger amount by way of refund, wrote petitioner anew, demanding the refund
of the remaining amount. In response thereto, petitioner informed private respondent that the
amount not returned (P510,550.63) represented interest and service charges at the rate of 18%
per annum on the unpaid and overdue account of respondent from June 1, 1980 to July 31,
1981. LLphil
Thus, on September 13, 1982, private respondent filed a complaint against petitioner in the
Regional Trial Court of Manila, to collect the sum of P510,550.63.00.
Petitioner (defendant in the trial court) filed its answer, reiterating that the amount not returned
represented interest and service charges on the unpaid and overdue account at the rate of 18%
per annum. It was further alleged that the collection of said interest and service charges is
sanctioned by law, and is in accordance with the terms and conditions of the sale of petroleum
products to respondent, which was made with the conformity of said private respondent who
had accepted the validity of said interest and service charges.
On November 7, 1983, the trial court rendered its decision dismissing the complaint, as well as
the counterclaim filed by defendant therein.
Private respondent (plaintiff) appealed to the Intermediate Appellate Court (IAC). On August
27, 1985, a decision was rendered by the said appellate court reversing the decision of the trial
court, and ordering petitioner to return the amount of P510,550.63 to private respondent.
Counsel of petitioner received a copy of the appellate court's decision on September 6, 1985.
On September 20, 1985, or 14 days after receipt of the aforesaid decision, an Urgent Motion
fur extension of five days within which to file a motion for reconsideration was filed by
petitioner. On September 26, 1985, the Motion for Reconsideration was filed. The following
day, petitioner filed a motion to set the motion for reconsideration for hearing.
In a Resolution dated October 24, 1985, the appellate court denied the aforesaid three motions.
The first motion praying for an extension of five days within which to file a motion for
reconsideration was denied by the appellate court citing the new ruling of the Supreme Court in
Habaluyas Enterprises Inc. vs. Japzon (138 SCRA 46 [1985]) as authority. The appellate court,
following said ruling, held that the 15-day period for filing a motion for reconsideration cannot
be extended. Thus, the motion for reconsideration filed on September 26, 1985 was stricken
from the record, having been filed beyond the non-extendible 15-day reglementary period. The
third motion was likewise denied for being moot and academic.
On November 4, 1985, the prevailing party (respondent herein) filed an Urgent Motion for
Entry of Judgment. Two days later, or on November 6, 1985, the petitioner filed a Motion for
Reconsideration of the Resolution dated October 24, 1985. LLjur
The appellate court in a Resolution dated November 12, 1985 granted the motion for entry of
judgment filed by private respondent. It directed the entry of judgment and ordered the remand
of the records of the case to the court of origin for execution.

On November 14, 1985, petitioner, without waiting for the resolution of the appellate court in
the urgent motion for reconsideration it filed on November 6, 1985, filed the instant petition to
annul and set aside the resolution of the appellate court dated October 24, 1985 which denied
the Motion for Reconsideration of its decision dated August 27, 1985.
In a motion dated November 21, 1985, petitioner prayed for the issuance of a temporary
restraining order to enjoin the appellate court from remanding the records of the case for
execution of judgment. The petitioner also filed a Supplement to Petition for Certiorari, dated
November 21, 1985.
In a Resolution dated November 27, 1985, this Court, acting on the petition, required private
respondent to file its Comment; granted the prayer of the petitioner in his urgent motion, and a
temporary restraining order was issued enjoining the appellate court from remanding the
records of the case for execution of judgment.
Private respondent filed its COMMENT dated December 14, 1985.
In a Resolution dated January 27, 1986, the Court resolved to give due course to the petition,
and required the parties to submit their memoranda. In compliance with the said Resolution,
the parties filed their respective memoranda.
On August 15, 1986, petitioner filed a Motion to Remand Records to the Court of Appeals in
view of the resolution of this Court dated May 30, 1986 in the Habaluyas case which
reconsidered and set aside its decision dated August 5, 1985 by giving it prospective
application beginning one month after the promulgation of said Resolution. This motion was
opposed by private respondent. On September 22, 1986, petitioner filed its Reply to Opposition
to which private respondent filed its rejoinder. In a Resolution dated December 3, 1986, the
motion to remand records was denied.

Petitioner's Brief raised six (6) assignment of errors, to wit:

I.
THE IAC ERRED IN APPLYING THE NEW POLICY OF NOT
GRANTING ANY EXTENSION OF TIME TO FILE MOTION FOR
RECONSIDERATION.
II.
THE IAC ERRED IN RULING THAT THE OBLIGATION OF
RESPONDENT
WAS
LIMITED
TO
P4,072,682.13
NOTWITHSTANDING THE FACT THAT THE DEED OF
ASSIGNMENT (THE CONTRACT SUED UPON) ITSELF
EXPRESSLY AND REPEATEDLY SPEAKS OF RESPONDENT'S
OBLIGATIONS AS "THE AMOUNT OF P4,072,682.13 AS OF
JUNE 30, 1986 PLUS APPLICABLE INTEREST CHARGES ON
OVERDUE ACCOUNT AND OTHER AVTURBO FUEL LIFTING
AND DELIVERIES THAT ASSIGNOR MAY FROM TIME TO
TIME RECEIVE FROM THE ASSIGNEE".
III.

464
THE IAC ERRED IN RULING THAT THE DEED OF
ASSIGNMENT SATISFIES THE REQUISITES OF DATION IN
PAYMENT (WHICH HAS THE EFFECT OF IMMEDIATE
EXTINGUISHMENT OF THE OBLIGATION) DESPITE THE
FACT THAT SAID DEED OF ASSIGNMENT (1) COVERS
FUTURE OBLIGATIONS FOR "APPLICABLE INTEREST
CHARGES ON OVER DUE ACCOUNT AND OTHER AVTURBO
FUEL LIFTING AND DELIVERIES THAT ASSIGNOR MAY
FROM TIME TO TIME RECEIVE FROM ASSIGNEES" AND (2)
INCLUDES AN EXPRESS RESERVATION BY ASSIGNEE TO
DEMAND FULL PAYMENT OF THE OBLIGATIONS OF THE
ASSIGNOR "IN CASE OF UNREASONABLE DELAY OR NONRECEIPT OF ASSIGNEE OF THE AFOREMENTIONED FUNDS
AND/OR REFUND OF SPECIAL FUND IMPORT PAYMENT
FROM THE GOVERNMENT DUE TO ANY CAUSE OR REASON
WHATSOEVER"
IV.
THE IAC ERRED IN FAILING TO TAKE INTO ACCOUNT THE
CONTEMPORANEOUS AND SUBSEQUENT ACTS OF THE
PARTIES WHICH ALSO CLEARLY SHOW THAT THEY DID
NOT INTEND THE DEED OF ASSIGNMENT TO HAVE EFFECT
OF DATION IN PAYMENT.
V.
IF THE DEED OF ASSIGNMENT HAD THE EFFECT OF A
DATION IN PAYMENT, THEN THE IAC ERRED IN NOT
RULING THAT PETITIONER HAS A RIGHT TO RETAIN THE
ENTIRE CREDIT ASSIGNED TO IT IN LIEU OF PAYMENT OF
RESPONDENT'S OBLIGATIONS INSTEAD OF BEING
REQUIRED TO RETURN PORTION OF THE CREDIT WHICH IS
CLAIMED TO BE IN EXCESS OF RESPONDENT'S
OBLIGATION.
VI.
ASSUMING THAT PETITIONER IS LIABLE TO MAKE A
RETURN OF A PORTION OF THE CREDIT ASSIGNED, THE IAC
ERRED IN AWARDING "INTEREST AT THE LEGAL RATE OF
14% PER ANNUM FROM THE FILING OF THE COMPLAINT".
We find merit in the instant petition.
The two vital issues presented to the Court for resolution are as follows: LexLib
1. Whether or not the Urgent Motion for Extension of Time to File a Motion for
Reconsideration filed by petitioner on September 20, 1985, as well as the Motion for
Reconsideration filed on September 26, 1985 (within the period of extension prayed for), may
be validly granted; and

2. Whether or not the Deed of Assignment entered into by the parties herein on July 31, 1980
constituted dacion en pago, as ruled by the appellate court, such that the obligation is totally
extinguished, hence after said date, no interest and service charges could anymore be imposed
on private respondent, so that petitioner was not legally authorized to deduct the amount of
P510,550.63 as interest and service charges on the unpaid and overdue accounts of private
respondent.
Anent the first issue, we rule in the affirmative.
We held in the case of Habaluyas Enterprises, Inc., et. al. vs. Japson et. al. (138 SCRA 46
[1985]) promulgated August 5, 1985), that the "15-day period for appealing or for filing a
motion for reconsideration cannot be extended". Subsequently, the Court, acting on
respondent's motion for reconsideration in the same entitled case (142 SCRA 208 [1986]),
restated and clarified the rule on this point for the guidance of the Bench and Bar by giving the
rule prospective application in its resolution dated May 30, 1986:
"After considering the able arguments of counsels for petitioners and
respondents, the Court resolved that the interest of justice would be
better served if the ruling in the original decision were applied
prospectively from the time herein stated. The reason is that it would
be unfair to deprive parties of the right to appeal simply because they
availed themselves of a procedure which was not expressly prohibited
or allowed by the law or the Rules. On the other hand, a motion for
new trial or reconsideration is not a pre-requisite to an appeal, a
petition for review or a petition for review on certiorari, and since the
purpose of the amendments above referred to is to expedite the final
disposition of cases, a strict but prospective application of the said
ruling is in order. Hence, for the guidance of the Bench and Bar, the
Court restates and clarifies the rules on this point, as follows:
1.) Beginning one month after the promulgation of this Resolution,
the rule shall be strictly enforced that no motion for extension of time
to file a motion for new trial or reconsideration may be filed with the
Metropolitan or Municipal Trial Courts, the Regional Trial Courts,
and the Intermediate Appellate Court. Such a motion may be filed
only in cases pending with the Supreme Court as the court of last
resort, which may in its sound discretion either grant or deny the
extension requested."
In Singh vs. IAC, (148 SCRA 277 [1987]), this Court applying the aforesaid ruling in the
Habaluyas case, held:
"In other words, there is a one month grace period from the
promulgation on May 30, 1986, of this Court's Resolution in the
clarificatory Habaluyas case, or up to June 30, 1986, within which the
rule barring extensions of time to file motions for new trial or
reconsideration is, as yet, not strictly enforceable (Bayaca vs. IAC,
G.R. No. 74824, September 15, 1986).
"Since petitioners herein filed their Motion for Extension on August
6, 1985, it was still within the grace period, which expired on June
30, 1986, and may still be allowed."

465
Similarly, when petitioner herein filed its Motion for Extension of time to file motion for
reconsideration on September 20, 1985, the said motion was filed within the one-month grace
period, which expired on June 30, 1986, and may still be allowed. Consequently, the Motion
for Reconsideration filed by petitioner on September 26, 1985, was also filed on time.
With respect to the second issue, We rule that the Deed of Assignment executed by the parties
on July 31, 1980 is not a dation in payment and did not totally extinguish respondent's
obligations as stated therein. llcd
The then Intermediate Appellate Court ruled that the three (3) requisites of dacion en pago * are
all present in the instant case, and concluded that the Deed of Assignment of July 31, 1980
(Annex "C" of Partial Stipulation of Facts) constitutes a dacion in payment provided for in
Article 1245 ** of the Civil Code which has the effect of extinguishing the obligation, thus
supporting the claim of private respondent for the return of the amount retained by petitioner.
This Court, speaking of the concept of dation in payment, in the case of Lopez vs. Court of
Appeals (114 SCRA 671, 685 [1982], among others, stated:
"'The dation in payment extinguishes the obligation to the extent of
the value of the thing delivered, either as agreed upon by the parties
or as may be proved, unless the parties by agreement, express or
implied, or by their silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally extinguished.' (8
Manresa 324; 3 Valverde 174 fn.)"
From the above, it is clear that a dation in payment does not necessarily mean total
extinguishment of the obligation. The obligation is totally extinguished only when the parties,
by agreement, express or implied, or by their silence, consider the thing as equivalent to the
obligation.

charges on overdue accounts; and (3) the other avturbo fuel lifting and deliveries that assignor
(private respondent) may from time to time receive from assignee (Petitioner). As aptly argued
by petitioner, if it were the intention of the parties to limit or fix respondent's obligation to
P4,072.682.13, they should have so stated and there would have been no need for them to
qualify the statement of said amount with the clause "as of June 30, 1980 plus any applicable
interest charges on overdue account" and the clause "and other avturbo fuel lifting and
deliveries that ASSIGNOR may from time to time receive from the ASSIGNEE". The terms of
the Deed of Assignment being clear, the literal meaning of its stipulations should control (Art.
1370, Civil Code). In the construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect to all (Rule 130,
Sec. 9, Rules of Court). LibLex
Likewise, the then Intermediate Appellate Court failed to take into consideration the
subsequent acts of the parties which clearly show that they did not intend the Deed of
Assignment to totally extinguish the obligation (1) After the execution of the Deed of
Assignment on July 31, 1980, petitioner continued to charge respondent with interest on its
overdue account up to January 31, 1981 (Annexes "H", "I", "J" and "K" of the Partial
Stipulation of Facts). This was pursuant to the Deed of Assignment which provides for
respondent's obligation for "applicable interest charges on overdue account". The charges for
interest were made every month and not once did respondent question or take exception to the
interest; and (2) In its letter of February 16, 1981 (Annex "J", Partial Stipulation of Facts),
respondent addressed the following request to petitioner:

"Moreover, we would also like to request for a consideration in the

following:
1. Interest charges be limited up to December 31, 1980
only; and

In the instant case, the then Intermediate Appellate Court failed to take into account the
following express recitals of the Deed of Assignment
"That Whereas, ASSIGNOR has an outstanding obligation with
ASSIGNEE in the amount of P4,072,682.13 as of June 30, 1980, plus
any applicable interest on overdue account. (p. 2, Deed of
Assignment).
"Now therefore in consideration of the foregoing premises,
ASSIGNOR by virtue of these presents, does hereby irrevocably
assign and transfer unto ASSIGNEE any and all funds and/or Refund
of Special Fund Payments, including all its rights and benefits
accruing out of the same, that ASSIGNOR might be entitled to, by
virtue of and pursuant to the decision in BOE Case No. 80-123, in
payment of ASSIGNOR's outstanding obligation plus any applicable
interest charges on overdue account and other avturbo fuel lifting
and deliveries that ASSIGNOR may from time to time receive from the
ASSIGNEE, and ASSIGNEE does hereby accepts such assignment in
its favor." (p. 2, Deed of Assignment) (Emphasis supplied).
Hence, it could easily be seen that the Deed of Assignment speaks of three (3) obligations
(1) the outstanding obligation of P4,072,682.13 as of June 30, 1980; (2) the applicable interest

2. Reduction of 2% on 18% interest rate p.a.

"We are hoping for your usual kind consideration on this matter."
In order to judge the intention of the contracting parties, their contemporaneous and subsequent
acts shall be principally considered (Art. 1253, Civil Code). The foregoing subsequent acts of
the parties clearly show that they did not intend the Deed of Assignment to have the effect of
totally extinguishing the obligations of private respondent without payment of the applicable
interest charges on the overdue account.
Finally, the payment of applicable interest charges on overdue account, separate from the
principal obligation of P4,072,682.13 was expressly stipulated in the Deed of Assignment. The
law provides that "if the debt produces interest, payment of the principal shall not be deemed to
have been made until the interests have been covered." (Art. 1253, Civil Code). prLL
WHEREFORE, the decision of the then Intermediate Appellate Court dated August 27, 1985 is
hereby SET ASIDE, and the November 7, 1983 decision of the trial court is REINSTATED.
SO ORDERED.
Gutierrez, Jr., Davide, Jr., Romero and Melo, JJ ., concur.

466
Footnotes
*s/s 263. same; requisites. In order that there be a valid dation in payment, the following are
the requisites: (1) There must be the performance of the prestation in lieu of
payment (animo solvendi) which may consist in the delivery of a corporeal thing
or a real right or a credit against the third person; (2) There must be some
difference between the prestation due and that which is given in substitution
(aliud pro alio); (3) There must be an agreement between the creditor and debtor
that the obligation is immediately extinguished by reason of the performance of a
prestation different from that due." (3 Castan, Vol. I, 8th Ed., page 283 cited in
IV Caguioa 'Comments and Cases in Civil Law', s/s263, page 325; emphasis
supplied).
**Art. 1245. Dation in payment; whereby property is alienated to the creditor in satisfaction
of a debt in money, shall be governed by the law of sales.

||| (Caltex (Philippines), Inc. v. Intermediate Appellate Court, G.R. No. 72703, [November 13,
1992])

467

THIRD DIVISION
[G.R. No. 138588. August 23, 2001.]
FAR EAST BANK & TRUST COMPANY, petitioner, vs. DIAZ
REALTY INC., respondent.

Ponce Enrile Reyes & Manalastas for petitioner.

tendered check and converting it into money, petitioner is presumed to have accepted it as
payment. To hold otherwise would be inequitable and unfair to the obligor. Consequently,
because there was a valid tender of payment made on November 14, 1988, the accrual of
interest based on the stipulated rate should stop on that date. Thus, respondent should pay
petitioner-bank its principal obligation in the amount of P1,067,000 plus accrued interest
thereon at 20 percent per annum until November 14, 1988, less interest payments given to
PaBC from December 1986 to July 8, 1988. Thereafter, the interest shall be computed at 12
percent per annum until full payment.

SYLLABUS

Roberto T. Sencio for respondent.

SYNOPSIS
Sometime in August 1973, Diaz and Company got a loan from the former Pacific Banking
Corporation (PaBC) in the amount of P720,000.00 which was secured by a real estate
mortgage of two parcels of land located in Davao City owned by Diaz Realty, Inc.. In 1981,
Allied Banking Corporation rented an office space in the building constructed on the said
mortgaged properties. With the conformity of the mortgagee PaBC, the parties agreed that the
monthly rentals shall be paid directly to the mortgagee for the lessor's account, either to partly
or fully pay off the mortgage indebtedness. Consequently, Allied Bank paid the monthly rentals
to PaBC, instead of paying to Diaz Realty, Inc. On July 5, 1985, the Central Bank closed PaBC
and placed it under receivership. In December 1986, Far East Bank & Trust Company
(FEBTC) purchased the credit of Diaz & Company in favor of PaBC but it was only on March
23, 1988 that Diaz Realty, Inc. was informed about it. Upon inquiry, Antonio Diaz, President of
Diaz and Company, was informed that the obligation totalled P1,447,142.03. On November 14,
1988, FEBTC received from Diaz an Interbank Check dated November 13, 1988 bearing the
amount of P1,450,000.00 with notation "Re: Full Payment of Pacific Bank Account now turn
over to Far East Bank". However, FEBTC did not accept it as payment and instead Diaz was
asked to deposit the amount with the FEBTC-Davao City Branch Office, allegedly pending the
approval of Central Bank Liquidator Renan Santos. The check was subsequently cleared and
honored by Interbank. Later, Diaz wrote FEBTC asking that the interest be reduced from 20%
to 12% per annum, but no reply was ever made. When there was still no news from the FEBTC
whether or not it would accept his tender of payment, Diaz filed a case with the Regional Trial
Court of Davao City. FEBTC, on the other hand, claimed, among others, that sometime in
December 1986, it purchased from the PaBC the account of Diaz and Company for a total
consideration of P1,828,875.00 but despite such purchase, PaBC Davao Branch continued to
collect interests and penalty charges on the said loan from January 6, 1987 to July 8, 1988.
After trial, the court a quo ruled that there was a valid tender of payment in the sum of
P1,450,000.00, made by Diaz Realty, Inc. in favor of FEBTC. The said decision was affirmed
by the Court of Appeals. Hence, FEBTC filed the instant petition. cHSIDa
The Court ruled that the tender was made by respondent for the purpose of settling its
obligation. It was incumbent upon petitioner to refuse, or accept it as payment. The latter did
not have the right or the option to accept and treat it as a deposit. Thus, by accepting the

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF

OBLIGATIONS; PAYMENT; CHECK IS NOT LEGAL TENDER AND CREDITOR HAS
OPTION AND DISCRETION OF REFUSING OR ACCEPTING IT. True, jurisprudence
holds that, in general, a check does not constitute legal tender, and that a creditor may validly
refuse it. It must be emphasized, however, that this dictum does not prevent a creditor from
accepting a check as payment. In other words, the creditor has the option and the discretion of
refusing or accepting it.
2. ID.; ID.; ID.; ID.; TENDER OF PAYMENT, DEFINED. [T]ender of payment is the
definitive act of offering the creditor what is due him or her, together with the demand that the
creditor accept the same. More important, there must be a fusion of intent, ability and
capability to make good such offer, which must be absolute and must cover the amount due.
3. ID.; ID.; ID.; ID.; PRESENT IN CASE AT BAR. That respondent intended to settle its
obligation with petitioner is evident from the records of the case. After learning that its loan
balance was P1,447,142.03, it presented to petitioner a check in the amount of P1,450,000,
with the specific notation that it was for full payment of its Pacific Bank account that had been
purchased by petitioner. The latter accepted the check, even if it now insists that it considered
the same as a mere deposit. The check was sufficiently funded, as in fact it was honored by the
drawee bank. When petitioner refused to release the mortgage, respondent instituted the
present case to compel the bank to acknowledge the tender of payment, accept payment and
cancel the mortgage. These acts demonstrate respondent's intent, ability and capability to fully
settle and extinguish its obligation to petitioner.
4. ID.; ID.; ID.; ID.; SUBSEQUENT WITHDRAWAL OF THE MONEY FROM THE
CREDITOR BANK BY THE DEBTOR IS OF NO MOMENT. That respondent
subsequently withdrew the money from petitioner-bank is of no moment, because such
withdrawal would not affect the efficacy or the legal ramifications of the tender of payment
made on November 14, 1988. As already discussed, the tender of payment to settle
respondent's obligation as computed by petitioner was accepted, the check given in payment
thereof converted into money, and the money kept in petitioner's possession for several
months.
5. ID.; ID.; ID.; ID.; BY ACCEPTING THE TENDERED CHECK AND CONVERTING IT
INTO MONEY, THE CREDITOR IS PRESUMED TO HAVE ACCEPTED IT AS PAYMENT.

468
[T]he tender was made by respondent for the purpose of settling its obligation. It was
incumbent upon petitioner to refuse, or accept it as payment. The latter did not have the right or
the option to accept and treat it as a deposit. Thus, by accepting the tendered,
check andconverting it into money, petitioner is presumed to have accepted it as payment. To
hold otherwise would be inequitable and unfair to the obligor.
6. ID.; ID.; ID.; ID.; CONSIGNATION; WHEN NECESSARY. For a consignation to be
necessary, the creditor must have refused, without just cause, to accept the debtor's payment.
7. ID.; ID.; ID.; NOVATION; NOT PRESENT IN CASE AT BAR. [T]he transfer of
respondent's credit from PaBC to petitioner was an assignment of credit. Petitioner's
acquisition of respondent's credit did not involve any changes in the original agreement
between PaBC and respondent; neither did it vary the rights and the obligations of the parties.
Thus, no novation by conventional subrogation could have taken place.
8. ID.; ID.; ASSIGNMENT OF CREDIT; ELUCIDATED. An assignment of credit is an
agreement by virtue of which the owner of a credit (known as the assignor), by a legal cause
such as sale, dation in payment, exchange or donation and without the need of the debtor's
consent, transfers that credit and its accessory rights to another (known as the assignee), who
acquires the power to enforce it, to the same extent as the assignor could have enforced it
against the debtor.
9. ID.; ID.; ID.; PRESENT IN CASE AT BAR. In the present case, it is undisputed that
petitioner purchased respondent's loan from PaBC. In doing so, the former acquired all of the
latter's rights against respondent. Thus, petitioner had the right to collect the full value of the
credit from respondent, subject to the terms as originally agreed upon in the Promissory Note.
10. ID.; ID.; EXTINGUISHMENT OF OBLIGATIONS; TENDER OF PAYMENT; WHEN
VALIDLY DONE, ACCRUAL OF INTEREST SHOULD STOP ON THAT DATE. Because
there was a valid tender of payment made on November 14, 1988, the accrual of interest based
on the stipulated rate should stop on that date. Thus, respondent should pay petitioner-bank its
principal obligation in the amount of P1,067,000 plus accrued interest thereon at 20 percent per
annum until November 14, 1988, less interest payments given to PaBC from December 1986 to
July 8, 1988. Thereafter, the interest shall be computed at 12 percent per annum until full
payment.
11. ID.; ID.; ASSIGNMENT OF CREDIT; CONTRACT OF LEASE BETWEEN THE
DEBTOR AND THE THIRD PARTY WITH CONFORMITY OF THE ORIGINAL
CREDITOR SHOULD BE RESPECTED; CASE AT BAR. The Real Estate Mortgage
executed between respondent and PaBC to secure the former's principal obligation, as well as
the provision in the Contract of Lease between respondent and Allied Bank with regard to the
application of rent payment to the former's indebtedness, should subsist until full and final
settlement of such obligation pursuant to the guidelines set forth in this Decision. Thereafter,
the parties are free to negotiate a renewal of either or both contracts, or to end any and all of
their contractual relations.

DECISION

PANGANIBAN, J p:
For a valid tender of payment, it is necessary that there be a fusion of intent,
ability and capability to make good such offer, which must be absolute and must cover the
amount due. Though a check is not legal tender, and a creditor may validly refuse to accept it if
tendered as payment, one who in fact accepted a fully funded check after the debtor's
manifestation that it had been given to settle an obligation is estopped from later on
denouncing the efficacy of such tender of payment. HIaSDc
The Case
The foregoing principle is used by this Court in resolving the Petition for
Review 1 on Certiorari before us, challenging the January 26, 1999 Decision2 of the Court of
Appeals 3 (CA) in GA-GR CV No. 45349. The dispositive portion of the assailed Decision
reads as follows:

"WHEREFORE, the judgment appealed from is hereby MODIFIED,

to read as follows:
'WHEREFORE,
ORDERING:

JUDGMENT

IS

HEREBY

RENDERED

'1. The plaintiffs to pay Far East Bank & Trust Company the principal
sum of P1,067,000.00 plus interests thereon computed at 12% per
annum from July 9, 1988 until fully paid;
'2. The parties to negotiate for a new lease over the subject premises;
and
'3. The defendant to pay the plaintiff the sum of fifteen thousand
(P15,000.00) pesos as and for attorney's fees plus the costs of
litigation.
"All other claims of the parties against each other are DENIED." 4
Likewise assailed is the May 4, 1999 CA Resolution, 5 which denied petitioner's Motion for
Reconsideration.
The Facts
The court a quo summarized the antecedents of the case as follows:
"Sometime in August 1973, Diaz and Company got a loan from the
former PaBC [Pacific Banking Corporation] in the amount of
P720,000.00, with interest at 12% per annum, later increased to 14%,
16%, 18% and 20%. The loan was secured by a real estate mortgage
over two parcels of land owned by the plaintiff Diaz Realty, both
located in Davao City. In 1981, Allied Banking Corporation rented an
office space in the building constructed on the properties covered by
the mortgage contract, with the conformity of mortgagee PaBC,
whereby the parties agreed that the monthly rentals shall be paid

469
directly to the mortgagee for the lessor's account, either to partly or
fully pay off the aforesaid mortgage indebtedness. Pursuant to such
contract, Allied Bank paid the monthly rentals to PaBC instead of to
the plaintiffs. On July 5, 1985, the Central Bank closed PaBC, placed
it under receivership, and appointed Renan Santos as its liquidator.
Sometime in December 1986, appellant FEBTC purchased the credit
of Diaz & Company in favor of PaBC, but it was not until March 23,
1988 that Diaz was informed about it.
"According to the plaintiff as alleged in the complaint and testified to
by Antonio Diaz (President of Diaz & Company and Vice-President
of Diaz Realty), on March 23, 1988, he went to office of PaBC which
by then housed FEBTC and was told that the latter had acquired
PaBC; that Cashier Ramon Lim told him that as of such date, his loan
was P1,447,142.03; that he (Diaz) asked the defendant to make an
accounting of the monthly rental payments made by Allied Bank; that
on December 14, 1988, 6 Diaz tendered to FEBTC the amount of
P1,450,000.00 through an Interbank check, in order to prevent the
imposition of additional interests, penalties and surcharges on its
loan; that FEBTC did not accept it as payment; that instead, Diaz was
asked to deposit the amount with the defendant's Davao City Branch
Office, allegedly pending the approval of Central Bank Liquidator
Renan Santos; that in the meantime, Diaz wrote the defendant, asking
that the interest rate be reduced from 20% to 12% per annum, but no
reply was ever made; that subsequently, the defendant told him to
change the P1,450,000.00 deposit into a money market placement,
which he did; that the money market placement expired on April 14,
1989; that when there was still no news from the defendant whether
or not it [would] accept his tender of payment, he filed this case at the
Regional Trial Court of Davao City.
"In its responsive pleading, the defendant set up the following
special/affirmative defenses: that sometime in December 1986,
FEBTC purchased from the PaBC the account of the plaintiffs for a
total consideration of P1,828,875.00; that despite such purchase,
PaBC Davao Branch continued to collect interests and penalty
charges on the loan from January 6, 1987 to July 8, 1988; that it was
therefore not FEBTC which collected the interest rates mentioned in
the complaint, but PaBC; that it is not true that FEBTC was trying to
impose [exorbitant] rates of interest; that as a matter of fact, after the
transfer of plaintiff's account, it sought to negotiate with the plaintiffs,
and in fact, negotiations were made for a settlement and possible
reduction of charges; that FEBTC has no knowledge of the rates of
interest imposed and collected by PaBC prior to the purchase of the
account from the latter, hence it could not be held responsible for
those transactions which transpired prior to the purchase; and that the
defendant acted at the opportune time for the settlement of the
account, albeit exercising prudence in the handling of such account.
The rest of the 'affirmative defenses' are bare denials. ECTIcS

"After trial, the court a quo rendered judgment on August 6, 1993, the
dispositive portion of which reads as follows:
'WHEREFORE, judgment is hereby rendered as follows:
'1. The plaintiff and defendant shall jointly compute the
interest due on the P1,057,000.00 loan from April 18,
1985 until November 14, 1988 at 12% per annum (IBAA
Salazar Case Supra).
'2. That the parties shall then add the result of the joint
computation mentioned in paragraph one of the dispositive
portion to the P1,057,000.00 principal.
'3. The result of the addition of the P1,057,000.00
principal and the interests arrived at shall then be
compared with the P1,450,000.00 deposit and if
P1,450,000.00 is not enough, then the plaintiff shall pay
the difference/deficiency between the P1,450,000.00
deposit and what the parties jointly computed[;]
conversely, if the P1,450,000.00 is more than what the
parties have arrived [at] after the computation, the
defendant shall return the difference or the excess to the
plaintiffs.
'4. The defendant shall cancel the mortgage.
'5. Paragraph eight of the Lease Contract between Allied
Bank and the plaintiffs in which the defendant's
predecessor, Pacific Banking gave its conformity (Exh.
'H') is hereby cancelled, so that the rental should now be
paid to the plaintiffs.
'6. The defendant shall pay the plaintiffs the sums:
'6-A. Fifteen thousand pesos as attorney's fees.
'6-B. Three [h]undred [t]housand [p]esos (P300,000.00) as
exemplary damages.
'6-C. The cost of suit.
'SO ORDERED."
"Upon a motion for reconsideration filed by defendant FEBTC and
after due notice and hearing, the court a quo issued an order on
October 12, 1993, modifying the aforequoted decision, such that its
dispositive portion as amended would now read as follows:
'IN VIEW WHEREOF, the decision rendered last August
6, is modified, accordingly, to wit:

470
'1. The plaintiff and defendant shall jointly compute the
interest due on the P1,167,000.00 loan from April 18,
1985 until November 14, 1988 at 12% per annum.

Petitioner submits for our resolution the following issues:

"A.

'2. That the parties shall then add the result of the joint
computation mentioned in paragraph one above to the
P1,067,000.00 principal.

"Whether or not the Court of Appeals correctly ruled that the validity
of the tender of payment was not properly raised in the trial court and
could not thus be raised in the appeal.

'3. The result of the addition of the P1,067,000.00

principal and the interests arrived at shall then be
compared with the P1,450,000.00 money market
placement put up by the plaintiff with the defendant bank
if the same is still existing or has not yet matured.

"B.
"Whether or not the Court of Appeals erred in failing to apply settled
jurisprudential principles militating against the private respondent's
contention that a valid tender of payment had been made by it.
"C.

'4. The defendant shall cancel the mortgage.

'5. Paragraph eight of the lease contract between Allied
Bank and the plaintiff in which the defendant['s
predecessor], Pacific Banking gave its conformity (Exh.
'H') is hereby cancelled and deleted, so that the rental
should now be paid to the plaintiff.
'6. The defendant shall pay the plaintiff the sums:
'6.A. Fifteen [t]housand [p]esos as attorney's fees;

"Whether or not the Court of Appeals correctly found that the

transaction between petitioner and PaBC was an 'ineffective novation'
and that the consent of private respondent was necessary therefor.
"D.
"Whether or not the Court of Appeals erred in refusing to apply the
rate of interest freely stipulated upon by the parties to the respondent's
obligation.
"E.

'6.B. Cost of suit.'" 7

The CA Ruling
The CA sustained the trial court's finding that there was a valid tender of payment in the sum of
P1,450,000, made by Diaz Realty Inc. in favor of Far East and Trust Company. The appellate
court reasoned that petitioner failed to effectively rebut respondent's evidence that it so
tendered the check to liquidate its indebtedness, and that petitioner had unilaterally treated the
same as a deposit instead. IHaECA
The CA further ruled that in the computation of interest charges, the legal rate of 12 percent per
annum should apply, reckoned from July 9, 1988, until full and final payment of the whole
indebtedness. It explained that while petitioner's purchase of respondent's account from Pacific
Banking Corporation (PaBC) was valid, the 20 percent interest stipulated in the Promissory
Note should not apply, because the account transfer was without the knowledge and the
consent of respondent-obligor.
The appellate court, however, sustained petitioner's assertion that the trial court should not
have cancelled the real estate mortgage, inasmuch as the principal obligation upon which it was
anchored was yet to be extinguished. Further, the CA held that the lease contract was subject to
renegotiation by the parties.
Lastly, the court a quo upheld the trial court's award of attorney's fees, pointing to petitioner's
negligence in not immediately informing respondent of the purchase and transfer of its credit,
and in failing to negotiate in order to avoid litigation.
Issues

"Whether or not the Court of Appeals committed an irreconcilable

error in ordering the parties to re-negotiate the terms of the contract
while finding at the same time that the mortgage contract containing
the lease was valid.
"F.
"Whether or not the petition, as argued by private respondent, raises
questions of fact not reviewable by certiorari." 8

In the main, the Court will determine (1) the efficacy of the alleged tender of payment made by
respondent, (2) the effect of the transfer to petitioner of respondent's account with PaBC, (3)
the interest rate applicable, and (4) the status of the Real Estate Mortgage.
The Court's Ruling
The Petition 9 is not meritorious.
First Issue:
Tender of Payment
Petitioner resolutely argues that the CA erred in upholding the validity of the tender of payment
made by respondent. What the latter had tendered to settle its outstanding obligation, it points
out, was a check which could not be considered legal tender.

471
We disagree. The records show that petitioner bank purchased respondent's account from PaBC
in December 1986, and that the latter was notified of the transaction only on March 23, 1988.
Thereafter, Antonio Diaz, president of respondent corporation, inquired from petitioner on the
status and the amount of its obligation. He was informed that the obligation summed up to
P1,447,142.03. On November 14, 1988, petitioner received from respondent Interbank, Check
No. 81399841 dated November 13, 1988, bearing the amount of P1,450,000, with the notation
"Re: Full Payment of Pacific Bank Account now turn[ed] over to Far East Bank" 10 The check
was subsequently cleared and honored by Interbank, as shown by the Certification it issued on
January 20, 1992. 11
True, jurisprudence holds that, in general, a check does not constitute legal tender, and that a
creditor may validly refuse it. 12 It must be emphasized, however, that this dictum does not
prevent a creditor from accepting a check as payment. In other words, the creditor has
the optionand the discretion of refusing or accepting it.
In the present case, petitioner bank did not refuse respondent's check. On the contrary,
it accepted the check which, it insisted, was a deposit. As earlier stated, the check proved to be
fully funded and was in fact honored by the drawee bank Moreover, petitioner was in
possession of the money for several months.
In further contending that there was no valid tender of payment, petitioner emphasizes our
pronouncement in Roman Catholic Bishop of Malolos, Inc. v. Intermediate Appellate
Court, 13 as follows:
"Tender of payment involves a positive and unconditional act by the
obligor of offering legal tender currency as payment to the obligee for
the former's obligation and demanding that the latter accept the same.
xxx xxx xxx
"Thus, tender of payment cannot be presumed by a mere inference
from surrounding circumstances. At most, sufficiency of available
funds is only affirmative of the capacity or ability of the obligor to
fulfill his part of the bargain. But whether or not the obligor avails
himself of such funds to settle his outstanding account remains to be
proven by independent and credible evidence. Tender of payment
presupposes not only that the obligor is able, ready, and willing, but
more so, in the act of performing his obligation. Ab posse ad actu non
vale illatio. 'A proof that an act could have been done is no proof that
it was actually done.'"
In other words, tender of payment is the definitive act of offering the creditor what is due him
or her, together with the demand that the creditor accept the same. More important, there must
be a fusion of intent, ability and capability to make good such offer, which must be absolute
and must cover the amount due. 14
That respondent intended to settle its obligation with petitioner is evident from the records of
the case. After learning that its loan balance was P1,447,142.03, it presented to petitioner a
check in the amount of P1,450,000, with the specific notation that it was for full payment of its
Pacific Bank account that had been purchased by petitioner. The latter accepted the check, even
if it now insists that it considered the same as a mere deposit. The check was sufficiently
funded, as in fact it was honored by the drawee bank. When petitioner refused to release the

mortgage, respondent instituted the present case to compel the bank to acknowledge the tender
of payment, accept payment and cancel the mortgage. These acts demonstrate respondent's
intent, ability and capability to fully settle and extinguish its obligation to petitioner.
That respondent subsequently withdrew the money from petitioner-bank is of no moment,
because such withdrawal would not affect the efficacy or the legal ramifications of the tender
of payment made on November 14, 1988. As already discussed, the tender of payment to settle
respondent's obligation as computed by petitioner was accepted, the check given in payment
thereof converted into money, and the money kept in petitioner's possession for several
months. HSTAcI
Finally, petitioner points out that, in any case, tender of payment extinguishes the obligation
only after proper consignation, which respondent did not do.
The argument does not persuade. For a consignation to be necessary, the creditor must have
refused, without just cause, to accept the debtor's payment. 15 However, as pointed out earlier,
petitioner accepted respondent's check.
To iterate, the tender was made by respondent for the purpose of settling its obligation. It was
incumbent upon petitioner to refuse, or accept it as payment. The latter did not have the right or
the option to accept and treat it as a deposit. Thus, by accepting the tendered
check and converting it into money, petitioner is presumed to have accepted it as payment. To
hold otherwise would be inequitable and unfair to the obligor.
Second Issue:
Nature of the Transfer of Respondent's Account
Petitioner bewails the CA's characterization of the transfer of respondent's account from Pacific
Banking Corporation to petitioner as an "ineffective novation." Petitioner contends that the
transfer was an assignment of credit.
Indeed, the transfer of respondent's credit from PaBC to petitioner was an assignment of credit.
Petitioner's acquisition of respondent's credit did not involve any changes in the original
agreement between PaBC and respondent; neither did it vary the rights and the obligations of
the parties. Thus, no novation by conventional subrogation could have taken place.
An assignment of credit is an agreement by virtue of which the owner of a credit (known as the
assignor), by a legal cause such as sale, dation in payment, exchange or donation
and without the need of the debtor's consent, transfers that credit and its accessory rights to
another (known as the assignee), who acquires the power to enforce it, to the same extent as the
assignor could have enforced it against the debtor. 16
In the present case, it is undisputed that petitioner purchased respondent's loan from PaBC. In
doing so, the former acquired all of the latter's rights against respondent. Thus, petitioner had
the right to collect the full value of the credit from respondent, subject to the terms as
originally agreed upon in the Promissory Note. HCSEcI
Third Issue:
Applicable Interest Rate

472
Petitioner bank, as assignee of respondent's credit, is entitled to the interest rate of 20 percent
in the computation of the debt of private respondent, as stipulated in the August 26, 1983
Promissory Note executed by the latter in favor of PaBC. 17
However, because there was a valid tender of payment made on November 14, 1988, the
accrual of interest based on the stipulated rate should stop on that date. Thus, respondent
should pay petitioner-bank its principal obligation in the amount of P1,067,000 plus accrued
interest thereon at 20 percent per annum until November 14, 1988, less interest payments given
to PaBC from December 1986 to July 8, 1988. 18 Thereafter, the interest shall be computed at
12 percent per annum until full payment.
Fourth Issue:
Status of Mortgage Contract
The Real Estate Mortgage executed between respondent and PaBC to secure the former's
principal obligation, as well as the provision in the Contract of Lease between respondent and
Allied Bank with regard to the application of rent payment to the former's indebtedness, should
subsist until full and final settlement of such obligation pursuant to the guidelines set forth in
this Decision. Thereafter, the parties are free to negotiate a renewal of either or both contracts,
or to end any and all of their contractual relations.
WHEREFORE the Petition is hereby DENIED. The assailed Decision of the Court of Appeals
is AFFIRMED with the following modifications: Respondent Diaz Realty Inc. is ORDERED to
pay Far East Bank and Trust Co. its principal loan obligation in the amount of P1,067,000, with
interest thereon computed at 20 percent per annum until November 14, 1988, less any interest
payments made to PaBC, petitioner's assignor. Thereafter, interest shall be computed at 12
percent per annum until fully paid.
SO ORDERED.
Melo, Vitug, Gonzaga-Reyes and Sandoval-Gutierrez, JJ., concur.
||| (Far East Bank & Trust Co. v. Diaz Realty Inc., G.R. No. 138588, [August 23, 2001], 416
PHIL 147-162)

473

FIRST DIVISION
[G.R. No. 116805. June 22, 2000.]

application of payment is expressly indicated, the payment shall be applied to the obligation
most onerous to the debtor. In this case, the unpaid rentals constituted the more onerous
obligation of the respondent to petitioner. As the payment did not fully settle the unpaid rentals,
petitioner's cause of action for ejectment survives. The Court, therefore, granted the petition
and reversed the decision of the Court of Appeals. TEaADS

MARIO S. ESPINA, petitioner, vs. THE COURT OF APPEALS

and RENE G. DIAZ, respondents.

Remulla & Associates for petitioner.

Rene G. Diaz for private respondent.

SYNOPSIS
On November 29, 1991, petitioner, owner of a Condominium Unit, and private respondent,
lessee of said unit, executed a Provisional Deed of Sale whereby the former sold to the latter
the aforesaid condominium unit. They agreed that the amount of P100,000.00 shall be paid
upon execution of the contract and the balance to be paid through postdated checks. However,
after the initial downpayment, the checks issued by private respondent in payment of six
installments all bounced and were dishonored upon presentment for the reason that the bank
account was closed. Consequently, on July 26, 1992, petitioner cancelled the Provisional Deed
of Sale by a notarial notice of cancellation. Nonetheless, private respondent continued to
occupy the premises as lessee, but failed to pay the rentals due. On October 28, 1992,
petitioner accepted payment from private respondent in the amount of P100,000.00. On
February 13, 1993, petitioner gave private respondent a notice to vacate the premises and to
pay his back rentals, but private respondent failed to do so. On February 24, 1993, petitioner
filed with the Municipal Trial Court of Antipolo, Rizal an action for unlawful detainer against
private respondent. The MTC ruled in favor of petitioner. On appeal, the Regional Trial Court
affirmed in all respects the decision of the MTC. Private respondent appealed to the Court of
Appeals. The Court of Appeals reversed the appealed decision. Hence, this petition for review
on certiorari.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS; EXTINGUISHMENT; NOVATION; WHEN TAKES
PLACE; CANNOT BE PRESUMED BUT MUST BE CLEARLY PROVED; PROVISIONAL
DEED OF SALE DID NOT NOVATE THE EXISTING LEASE CONTRACT BETWEEN
PARTIES IN CASE AT BAR. The question is, did the provisional deed of sale novate the
existing lease contract? The answer is no. Novation must be clearly proved since its existence
is not presumed. "In this light, novation is never presumed; it must be proven as a fact either by
express stipulation of the parties or by implication derived from an irreconcilable
incompatibility between old and new obligations or contracts." Novation takes place only if the
parties expressly so provide, otherwise, the original contract remains in force. In other words,
the parties to a contract must expressly agree that they are abrogating their old contract in favor
of a new one. Where there is no clear agreement to create a new contract in place of the
existing one, novation cannot be presumed to take place, unless the terms of the new contract
are fully incompatible with the former agreement on every point. Thus, a deed of cession of the
right to repurchase a piece of land does not supersede a contract of lease over the same
property.
2. ID.; ID.; ID.; APPLICATION OF PAYMENT; UNLESS EXPRESSLY INDICATED,
PAYMENT SHALL BE APPLIED TO OBLIGATIONS MOST ONEROUS TO DEBTOR;
UNPAID RENTALS CONSIDERED MORE ONEROUS OBLIGATION OF RESPONDENT
TO PETITIONER. Unless the application of payment is expressly indicated, the payment
shall be applied to the obligation most onerous to the debtor. In this case, the unpaid rentals
constituted the more onerous obligation of the respondent to petitioner. As the payment did not
fully settle the unpaid rentals, petitioner's cause of action for ejectment survives. Thus, the
Court of Appeals erred in ruling that the payment was "additional payment" for the purchase of
the property.

According to private respondent, the Provisional Deed of Sale novated the existing contract of
lease.
Novation takes place only if the parties expressly so provide, otherwise, the original contract
remains in force. Where there is no clear agreement to create a new contract in place of the
existing one, novation cannot be presumed to take place, unless the terms of the new contract
are fully incompatible with the former agreement on every point. Thus, a deed of cession of the
right to repurchase a piece of land does not supersede a contract of lease over the same
property.
The Supreme Court did not agree with respondent's contention that petitioner's subsequent
acceptance of payment effectively withdrew the cancellation of the provisional sale. Unless the

DECISION

PARDO, J p:
The case before the Court is an appeal from a decision of the Court of Appeals 1 reversing that
of the Regional Trial Court, Antipolo, Rizal, 2affirming in all respects the decision of the

474
Municipal Trial Court, Antipolo, Rizal, 3 ordering respondent Rene G. Diaz to vacate the
condominium unit owned by petitioner and to pay back current rentals, attorney's fees and
costs.
The facts, as found by the Court of Appeals, are as follows:
"Mario S. Espina is the registered owner of a Condominium Unit No.
403, Victoria Valley Condominium, Valley Golf Subdivision,
Antipolo, Rizal. Such ownership is evidenced by Condominium
Certificate of Title No. N-10 (p. 31, Rollo). cdphil
"On November 29, 1991, Mario S. Espina, the private respondent as
seller, and Rene G. Diaz, the petitioner as buyer, executed a
Provisional Deed of Sale, whereby the former sold to the latter the
aforesaid condominium unit for the amount of P100,000.00 to be paid
upon the execution of the contract and the balance to be paid through
PCI Bank postdated checks as follows:
"l. P400,000.00
Check No. 301245
January 15, 1992
"2. P200,000.00
Check No. 301246
February 1, 1992
"3. P200,000.00
Check No. 301247
February 22, 1992
"4. P200,000.00
Check No. 301248
March 14, 1992
"5. P200,000.00
Check No. 301249

"Subsequently, in a letter dated January 22, 1992, petitioner informed

private respondent that his checking account with PCI Bank has been
closed and a new checking account with the same drawee bank is
opened for practical purposes. The letter further stated that the
postdated checks issued will be replaced with new ones in the same
drawee bank (p. 63, Rollo). llcd
"On January 25, 1992, petitioner through Ms. Socorro Diaz, wife of
petitioner, paid private respondent Mario Espina P200,000.00,
acknowledged by him as partial payment for the condominium unit
subject of this controversy (p.64, Rollo).
"On July 26, 1992, private respondent sent petitioner a "Notice of
Cancellation" of the Provisional Deed of Sale (p. 48, Rollo).
"However, despite the Notice of Cancellation from private
respondent, the latter accepted payment from petitioner per
Metrobank Check No. 395694 dated and encashed on October 28,
1992 in the amount of P100,000.00 (p. 64, Rollo).
"On February 24, 1993, private respondent filed a complaint docketed
as Civil Case No. 2104 for Unlawful Detainer against petitioner
before the Municipal Trial Court of Antipolo, Branch 1.
"On November 12, 1993, the trial court rendered its decision, the
dispositive portion of which reads:
'WHEREFORE, in view of the foregoing consideration,
judgment is hereby rendered ordering the defendant and
all persons claiming rights under him to vacate unit 403 of
the Victoria Golf Valley Condominium, Valley Golf
Subdivision, Antipolo, Rizal; to pay the total arrears of
P126,000.00, covering the period July 1991 up to the
filing (sic) complaint, and to pay P7,000.00 every month
thereafter as rentals unit (sic) he vacates the premises; to
pay the amount of P5,000.00 as and attorney's fees; the
amount of P300.00 per appearance, and cost of suit. cda
'However, the plaintiff may refund to the defendant the
balance from (sic) P400,000.00 after deducting all the total
obligations of the defendant as specified in the decision
from receipt of said decision.

April 4, 1992

'SO ORDERED.' (Decision, Annex "B"; p. 27, Rollo)

"6. P200,000.00

"From the said decision, petitioner appealed to the

Regional Trial Court Branch 71, Antipolo, Rizal. On April
29, 1994, said appellate court affirmed in all respects the
decision of the trial court." 4

Check No. 301250

April 25, 1992
(pp. 59-61, Rollo).

On June 14, 1994, petitioner filed with the Court of Appeals a petition for review.

475
On July 20, 1994, the Court of Appeals promulgated its decision reversing the appealed
decision and dismissing the complaint for unlawful detainer with costs against petitioner
Espina.
On August 8, 1994, petitioner filed a motion for reconsideration of the decision of the Court of
Appeals. 5
On August 19, 1994, the Court of Appeals denied the motion. 6
Hence, this appeal via petition for review on certiorari. 7
The basic issue raised is whether the Court of Appeals erred in ruling that the provisional deed
of sale novated the existing contract of lease and that petitioner had no cause of action for
ejectment against respondent Diaz. cdphil
We resolve the issue in favor of petitioner.
According to respondent Diaz, the provisional deed of sale that was subsequently executed by
the parties novated the original existing contract of lease. The contention cannot be sustained.
Respondent originally occupied the condominium unit in question in 1987 as a lessee. 8 While
he occupied the premises as lessee, petitioner agreed to sell the condominium unit to
respondent by installments. 9 The agreement to sell was provisional as the consideration was
payable in installments.
The question is, did the provisional deed of sale novate the existing lease contract? The answer
is no. The novation must be clearly proved since its existence is not presumed. 10 "In this light,
novation is never presumed; it must be proven as a fact either by express stipulation of the
parties or by implication derived from an irreconcilable incompatibility between old and new
obligations or contracts." 11 Novation takes place only if the parties expressly so provide,
otherwise, the original contract remains in force. In other words, the parties to a contract must
expressly agree that they are abrogating their old contract in favor of a new one. 12 Where
there is no clear agreement to create a new contract in place of the existing one, novation
cannot be presumed to take place, unless the terms of the new contract are fully incompatible
with the former agreement on every point. 13 Thus, a deed of cession of the right to repurchase
a piece of land does not supersede a contract of lease over the same property. 14 In the
provisional deed of sale in this case, after the initial down payment, respondent's checks in
payment of six installments all bounced and were dishonored upon presentment for the reason
that the bank account was closed. 15 Consequently, on July 26, 1992, petitioner terminated the
provisional deed of sale by a notarial notice of cancellation. 16 Nonetheless, respondent Diaz
continued to occupy the premises, as lessee, but failed to pay the rentals due. On October 28,
1992, respondent made a payment of P100,000.00 that may be applied either to the back
rentals or for the purchase of the condominium unit. On February 13, 1993, petitioner gave
respondent a notice to vacate the premises and to pay his back rentals.17 Failing to do so,
respondent's possession became unlawful and his eviction was proper. Hence, on February 24,
1993, petitioner filed with the Municipal Trial Court, Antipolo Rizal, Branch 01 an action for
unlawful detainer against respondent Diaz. 18

Now respondent contends that the petitioner's subsequent acceptance of such payment
effectively withdrew the cancellation of the provisional sale. We do not agree. Unless the
application of payment is expressly indicated, the payment shall be applied to the obligation

most onerous to the debtor. 19 In this case, the unpaid rentals constituted the more onerous
obligation of the respondent to petitioner. As the payment did not fully settle the unpaid rentals,
petitioner's cause of action for ejectment survives. Thus, the Court of Appeals erred in ruling
that the payment was "additional payment" for the purchase of the property. LLpr
WHEREFORE, the Court GRANTS the petition for review on certiorari, and REVERSES the
decision of the Court of Appeals. 20 Consequently, the Court REVIVES the decision of the
Regional Trial Court, Antipolo, Rizal, Branch 71, 21 affirming in toto the decision of the
Municipal Trial Court, Antipolo, Rizal, Branch 01. 22
No costs.
SO ORDERED.
Davide, Jr., C.J., Puno, Kapunan and Ynares-Santiago, JJ., concur.
||| (Espina v. Court of Appeals, G.R. No. 116805, [June 22, 2000], 389 PHIL 524-531)

476

SECOND DIVISION

SYLLABUS

[G.R. No. L-33157. June 29, 1982.]

1. CIVIL
LAW;
CONTRACTS;
INTERPRETATION;
CONTEMPORANEOUS AND SUBSEQUENT ACTS SHOULD BE CONSIDERED.
The indemnity agreement and the stock assignment must be considered together as
related transactions because in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered (Article 1371, New
Civil Code). Thus, considering that the indemnity agreement connotes a continuing
obligation of Lopez towards Philamgen while the stock assignment indicates a complete
discharge of the same obligation, the existence of the indemnity agreement whereby
Lopez had to pay a premium of P1,000.00 for a period of one year and agreed at all times
to indemnify Philamgen of any and all kinds of losses which the latter might sustain by
reason of it becoming a surety, is inconsistent with the theory of an absolute sale for and
in consideration of the same understanding of Philamgen. There would have been no
necessity for the execution of the indemnity agreement if the stock assignment was really
intended as an absolute conveyance. Hence there are strong and cogent reasons to
conclude that the parties intended said stock assignment to complement the indemnity
agreement and thereby sufficiently guarantee the indemnification of Philamgen should it
be required to pay Lopez's loan to Prudential Bank.

BENITO H. LOPEZ, petitioner, vs. THE COURT OF APPEALS

and THE PHILIPPINE AMERICAN GENERAL INSURANCE
CO., INC.,respondents.

SYNOPSIS
On June 2, 1959, petitioner obtained a loan of P20,000.00 from Prudential
Bank payable in one year with an interest of 10% per annum. Petitioner posted a surety
bond to secure his full and faithful performance of his obligation under the promissory
now with the Philippine American Insurance Company (Philamgen) as his surety. In
return for the undertaking of Philamgen under the surety bond, petitioner executed on the
same day an indemnity agreement and a deed of assignment of shares of stock in favor of
the said company, endorsing in blank and delivering the stock certificate to the latter. The
assignment of shares was made due to a commitment made by determinate third parties to
the surety that in case petitioner defaults in payment said third parties would buy the
shares from the surety and the proceeds will be paid to the bank. When the obligation
became due, and petitioner failed to pay, Philamgen paid the loan and subsequently sued
petitioner for reimbursement. The trial court after hearing dismissed the complaint
finding that the transfer of stock in the name of Philamgen was absolute and had
extinguished petitioner's obligation under the indemnity agreement. On appeal, the Court
of Appeals held that the stock assignment made in favor of the surety was a pledge,
intended as a security for the payment of the obligation of petitioner to the surety. In this
petition for review, petitioner claims that the transfer of shares was a dacion en pago; and
that there was novation of the indemnity contract when the surety and the determinate
third parties agreed that the latter would buy the shares of stock from the former so that
the bank obligations of petitioner could be paid from the proceeds.
The Supreme Court held that considering that the indemnity agreement
connotes a continuing obligation of petitioner towards the surety while the stock
assignment indicates a complete discharge of the same obligation, the existence of the
indemnity agreement is inconsistent with the theory of an absolute sale for and in
consideration of the same undertaking of the surety, and strong and cogent reasons exist
to conclude that the surety and petitioner intended the stock assignment as a pledge; that
the assignment of stock is not a dation in payment since the obligation of the petitioner
towards the surety has not matured at the time the same was executed; and that there was
no novation of the obligation by substitution of debtor since it was not established nor
shown that petitioner would be released from responsibility.
Appealed decision AFFIRMED in toto.

2. ID.; ID.; STOCK ASSIGNMENT IN CASE AT BAR IS PLEDGE;

REQUISITES SATISFIED. The facts and circumstances leading to the execution of
the stock assignment, Exhibit C, and the admission of Lopez prove that it is in fact a
pledge. The appellate court is correct in ruling that the following requirements of a
contract of pledge have been satisfied: (1) that it be constituted to secure the fulfillment
of a principal obligation; (2) that the pledgor be the absolute owner of the thing pledged;
and (3) that the person constituting the pledge has the free disposal of the property, and in
the absence thereof, that he be legally authorized for the purpose. (Article 2085, New
Civil Code).
3. ID.; ID.; DATION IN PAYMENT; PRESUPPOSES A MATURED
OBLIGATION. Petitioner's "sale, assignment and transfer" unto the surety of the
shares of stock, coupled with their endorsement in blank and delivery, is not dation in
payment, because the debt or obligation of the petitioner to his surety has not matured
when petitioner "alienated" his 4,000 shares of stock to his surety. Petitioner's obligation
would arise only when he would default in the payment of the principal obligation (the
loan) to the bank and the surety had to pay for it. Such fact being adverse to the nature
and concepts of dation in payment, the same could not have been constituted when the
stock assignment was executed. Moreover, there is no express provision in the terms of
the stock assignment between the surety and the petitioner that the principal obligation
(which is the loan) is immediately extinguished by reason of such assignment.
4. ID.; ID.; ID.; IN CASE OF DOUBT, PLEDGE IS PRESUMED. In case
of doubt as to whether a transaction is pledge or a dation in payment, the presumption is
in favor of pledge, the latter being the lesser transmission of rights and interests.
5. ID.; ID.; NOVATION. Under Article 1291 of the New Civil Code,
obligations may be modified by: (1) changing their object or principal condition; (2)
substituting the person of the debtor; (3) subrogating a third person in the rights of the

477
creditor. And in order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the old and
the new obligations be on every point incompatible with each other. (Article 1292,
N.C.C.) Novation which consists in substituting a new debtor in the place of the original
one, may be made even without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor gives him the rights
mentioned in Articles 1236 and 1237. (Article 1293, N.C.C.)

DECISION

the PRUDENTIAL BANK & TRUST COMPANY, Manila,

Philippines, in the amount of PESOS TWENTY
THOUSAND ONLY (P20,000.00), Philippine Currency, and
for value received, the ASSIGNOR hereby sells, assigns, and
transfers unto THE PHILIPPINE AMERICAN GENERAL
INSURANCE CO., INC., Four Thousand (4,000) shares of
the Baguio Military Institute, Inc. standing in the name of
said Assignor on the books of said Baguio Military Institute,
Inc. represented by Certificate No. 44 herewith and do
hereby irrevocably constitutes and appoints THE
PHILIPPINE AMERICAN GENERAL INSURANCE CO.,
INC. as attorney to transfer the said stock on the books of the
within named military institute with full power of
substitution in the premises." 2

GUERRERO, J p:

With the execution of this deed of assignment, Lopez endorsed the

stock certificate and delivered it to Philamgen.

On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the

amount of P20,000.00 from the Prudential Bank and Trust Company. On the
same date, he executed a promissory note for the same amount, in favor of the
said Bank, binding himself to repay the said sum one (1) year after the said date,
with interest at the rate of 10% per annum. In addition to said promissory note,
he executed Surety Bond No. 14164 in which he, as principal, and Philippine
American General Insurance Co., Inc. (PHILAMGEN) as surety, bound
themselves jointly and severally in favor of Prudential Bank for the payment of
the sum of P20,000.00.

It appears from the evidence on record that the loan of P20,000.00

was approved conditioned upon the posting of a surety bond of a bonding
company acceptable to the bank. Thus, Lopez persuaded Emilio Abello,
Assistant Executive Vice-President of Philamgen and member of the Bond
Underwriting Committee to request Atty. Timoteo J. Sumawang, Assistant VicePresident and Manager of the Bonding Department, to accommodate him in
putting up the bond against the security of his shares of stock with the Baguio
Military Institute, Inc. It was their understanding that if he could not pay the
loan, Vice-President Abello and Pio Pedrosa of the Prudential Bank would buy
the shares of stocks and out of the proceeds thereof, the loan would be paid to
the Prudential Bank.

On the same occasion, Lopez also executed in favor of Philamgen an

indemnity agreement whereby he agreed "to indemnify the Company and keep it
indemnified and hold the same harmless from and against any and all damages,
losses, costs, stamps, taxes, penalties, charges and expenses of whatever kind
and nature which the Company shall or may at any time sustain or incur in
consequence of having become surety upon the bond." 1 At the same time,
Lopez executed a deed of assignment of 4,000 shares of the Baguio Military
Institution entitled "Stock Assignment Separate from Certificate", which reads:
"This deed of assignment executed by BENITO
H. LOPEZ, Filipino, of legal age, married and with residence
and postal address at Baguio City, Philippines, now and
hereinafter called the 'ASSIGNOR', in favor of the
PHILIPPINE AMERICAN GENERAL INSURANCE CO.,
INC., a corporation duly organized and existing under and by
virtue of the laws of the Philippines, with principal offices at
Wilson Building, Juan Luna, Manila, Philippines, now and
hereinafter called the 'ASSIGNEE-SURETY COMPANY'
WITNESSETH
"That for and in consideration of the obligations
undertaken by the ASSIGNEE-SURETY COMPANY under
the terms and conditions of SURETY BOND NO. 14164,
issued on behalf of said BENITO H. LOPEZ and in favor of

On June 2, 1960, Lopez' obligation matured without it being settled.

Thus, the Prudential Bank made demands for payment both upon Lopez and
Philamgen. In turn, Philamgen sent Lopez several written demands for the latter
to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with said
demands. Hence, the Prudential Bank sometime in August, 1961 filed a case
against them to enforce payment on the promissory note plus interest.
Upon receipt of the copies of complaint, Atty. Sumawang confronted
Emilio Abello and Pio Pedrosa regarding their commitment to buy the shares of
stock of Lopez in the event that the latter failed to pay his obligations to the
Prudential Bank. Vice-President Abello then instructed Atty. Sumawang to
transfer the shares of stock to Philamgen and made a commitment that thereafter
he (Abello) and Pio Pedrosa will buy the shares of stock from it so that the
proceeds could be paid to the bank, and in the meantime Philamgen will not pay
the bank because it did not want payment under the terms of the bank. 3
Due to said commitment and instruction of Vice-President Abello,
Assistant Treasurer Marcial C. Cruz requested the transfer of Stock Certificate
No. 44 for 4,000 shares to Philamgen in a letter dated October 31, 1961. Stock
Certificate No. 44 in the name of Lopez was accordingly cancelled and in lieu

478
thereof Stock Certificate No. 171 was issued by the Baguio Military Institute in
the name of Philamgen on November 17, 1961.
The complaint was thereafter dismissed. But when no payment was
still made by the principal debtor or by the surety, the Prudential Bank filed on
November 8, 1963 another complaint for the recovery of the P20,000.00. On
November 18, 1963, after being informed of said complaint, Lopez addressed
the following letter to Philamgen:
"Dear Mr. Sumawang:
This is with reference to yours of the 13th instant
advising me of a complaint filed against us by Prudential
Bank & Trust Co. regarding my loan of P20,000.00. In this
connection, I would like to know what happened to my
shares of stocks of Baguio Military Academy which were
pledged to your goodselves to secure said obligation. These
shares of stock I think are more than enough to answer for
said obligation." 4
On December 9, 1963, Philamgen was forced to pay the Prudential
Bank the sum of P27,785.89 which included the principal loan and accumulated
interest and the Prudential Bank executed a subrogation receipt on the same date.
On March 18, 1965, Philamgen brought an action in the Court of
First Instance of Manila (Civil Case No. 60272, "The Philippine American
General Insurance Co., Inc. vs. Benito H. Lopez") for reimbursement of the said
amount. After hearing, the said court rendered judgment dismissing the
complaint holding:
"The contention of the plaintiff that the stock of
the defendant were merely pledged to it by the defendant is
not borne out by the evidence. On the contrary, it appears to
be contradicted by the facts of the case. The shares of stock
of the defendant were actually transferred to the plaintiff
when it became clear after the plaintiff and the defendant had
been sued by the Prudential Bank that plaintiff would be
compelled to make the payment to the Prudential Bank, in
view of the inability of the defendant Benito H. Lopez to pay
his said obligation. The certificate bearing No. 44 was
cancelled and upon request of the plaintiff to the Baguio
Military Institute a new certificate of stock was issued in the
name of the plaintiff bearing No. 171, by means of which
plaintiff became the registered owner of the 4,000 shares
originally belonging to the defendant.
"It is noteworthy that the transfer of the stocks of
the defendant in the name of the plaintiff company was made
at the instance of Messrs. Abello and Pedrosa, who promised
to buy the same from the plaintiff. Now that these shares of
stock of the defendant had already been transferred in the
name of the plaintiff, the defendant has already divested
himself of the said stocks, and it would seem that the remedy
of the plaintiff is to go after Messrs. Abello and Pedrosa on

their promise to pay for the said stocks. To go after the

defendant after the plaintiff had already become the owner of
his shares of stock and compel him to pay his obligation to
the Prudential Bank would be most unfair, unjust and
illogical for it would amount to double payment on his part.
After the plaintiff had already appropriated the said shares of
stock, it has already lost its right to recover anything from
the defendant, for the reason that the transfer of the said
stocks was made without qualification. This transfer takes
the form of a reimbursement of what plaintiff had paid to the
Prudential Bank, thereby depriving the plaintiff of its right to
go after the defendant herein." 5
Philamgen appealed to the Court of Appeals raising these
assignments of errors:
I
"The lower court erred in finding that the
evidence does not bear out the contention of plaintiff that the
shares of stock belonging to defendant were transferred by
him to plaintiff by way of pledge.
II
"The lower court erred in finding that plaintiff
company appropriated unto itself the shares of stock pledged
to it by defendant Benito Lopez and in finding that, with the
transfer of the stock in the name of plaintiff company, the
latter has already been paid or reimbursed what it paid to
Prudential Bank.
III
"The lower court erred in not finding that the
instant case is one where the pledge has abandoned the
security and elected instead to enforce his claim against the
pledgor by ordinary action." 6
On December 17, 1970, the Court of Appeals promulgated a decision
in favor of the Philamgen, thereby upholding the foregoing assignments of
errors. It declared that the stock assignment was a mere pledge; that the transfer
of the stocks in the name of Philamgen was not intended to make it the owner
thereof; that assuming that Philamgen had appropriated the stocks, this
appropriation is null and void as a stipulation authorizing it is a pactum
commissorium; and that pending payment, Philamgen is merely holding the
stock as a security for the payment of Lopez' obligation. The dispositive portion
of the said decision states:
"WHEREFORE, the decision of the lower court is hereby reversed,
and another one is hereby entered ordering the defendant to pay the plaintiff the
sum of P27,785.89 with interest at the rate of 12% per annum from December 9,
1963, 10% of the P27,785.89 as attorney's fees and the costs of the suit." 7

479
The motion for reconsideration with prayer to set the same for oral
argument having been denied, Lopez brought this petition for review on
certiorari presenting for resolution these questions:
a) here, as in this case, a party "sells, assigns and transfers" and
delivers shares of stock to another, duly endorsed in blank, in consideration of a
contingent obligation of the former to the latter, and, the obligations having
arisen, the latter causes the shares of stock to be transferred in its name, what is
the juridical nature of the transaction a dation in payment or a pledge?
b) Where, as in this case, the debtor assigns the shares of stock to the
creditor under an agreement between the latter and determinate third persons that
the latter would buy the shares of stock so that the obligations could be paid out
of the proceeds, was there a novation of the obligation by substitution of
debtor? 8
Philamgen failed to file its comment on the petition for review on
certiorari within the extended period which expired on March 19, 1971. This
Court thereby resolved to require Lopez to file his brief. 9
Under the first assignment of error, Lopez argues in his brief:
"That the Court of Appeals erred in holding that
when petitioner 'sold, assigned, transferred' and delivered
shares of stock, duly endorsed in blank, to private respondent
in consideration of a contingent obligation of the former to
the latter and the obligation having thereafter arisen, the
latter caused the shares of stock to be transferred to it, taking
a new certificate of stock in its name, the transaction was a
pledge, and in not holding instead that it was a dation in
payment." 10
Considering the explicit terms of the deed denominated "Stock
Assignment Separate from Certificate", hereinbefore copiedverbatim, Lopez
sold, assigned and transferred unto Philamgen the stocks involved "for and in
consideration of the obligations undertaken" by Philamgen "under the terms and
conditions of the surety bond executed by it in favor of the Prudential Bank" and
"for value received". On its face, it is neither pledge nor dation in payment. The
document speaks of an outright sale as there is a complete and unconditional
divestiture of the incorporeal property consisting of stocks from Lopez to
Philamgen. The transfer appears to have been an absolute conveyance of the
stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00
to Prudential Bank. While it is a conveyance in consideration of a contingent
obligation, it is not itself a conditional conveyance.
It is true that if Lopez should "well and truly perform and fulfill all
the undertakings, covenants, terms, conditions, and agreements stipulated" in his
promissory note to Prudential Bank, the obligation of Philamgen under the
surety bond would become null and void. Corollarily, the stock assignment,
which is predicated on the obligation of Philamgen under the surety bond, would
necessarily become null and void likewise, for want of cause or consideration
under Article 1352 of the New Civil Code. But this is not the case here because
aside from the obligations undertaken by Philamgen under the surety bond, the

stock assignment had other considerations referred to therein as "value

received". Hence, based on the manifest terms thereof, it is an absolute transfer.
Notwithstanding the express terms of the "Stock Assignment
Separate from Certificate", however, We hold and rule that the transaction
should not be regarded as an absolute conveyance in view of the circumstances
obtaining at the time of the execution thereof.
It should be remembered that on June 2, 1959, the day Lopez
obtained a loan of P20,000.00 from Prudential Bank, Lopez executed a
promissory note for P20,000.00, plus interest at the rate of ten (10%) per cent
per annum, in favor of said Bank. He likewise posted a surety bond to secure his
full and faithful performance of his obligation under the promissory note with
Philamgen as his surety. In return for the undertaking of Philamgen under the
surety bond, Lopez executed on the same day not only an indemnity agreement
but also a stock assignment.
The indemnity agreement and the stock assignment must be
considered together as related transactions because in order to judge the
intention of the contracting parties, their contemporaneous and subsequent acts
shall be principally considered. (Article 1371, New Civil Code). Thus,
considering that the indemnity agreement connotes a continuing obligation of
Lopez towards Philamgen while the stock assignment indicates a complete
discharge of the same obligation, the existence of the indemnity agreement
whereby Lopez had to pay a premium of P1,000.00 for a period of one year and
agreed at all times to indemnify Philamgen of any and all kinds of losses which
the latter might sustain by reason of it becoming a surety, is inconsistent with the
theory of an absolute sale for and in consideration of the same undertaking of
Philamgen. There would have been no necessity for the execution of the
indemnity agreement if the stock assignment was really intended as an absolute
conveyance. Hence, there are strong and cogent reasons to conclude that the
parties intended said stock assignment to complement the indemnity agreement
and thereby sufficiently guarantee the indemnification of Philamgen should it be
required to pay Lopez' loan to Prudential Bank.
"The character of the transaction between the
parties is to be determined by their intention, regardless of
what language was used or what the form of the transfer was.
If it was intended to secure the payment of money, it must be
construed as a pledge; but if there was some other intention,
it is not a pledge. However, even though a transfer, if
regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by a
contemporaneous writing declaring it to have been a deposit
of the property as collateral security. It has been said that a
transfer of property by the debtor to a creditor, even if
sufficient on its face to make an absolute conveyance, should
be treated as a pledge if the debt continues in existence and is
not discharged by the transfer, and that accordingly, the use
of the terms ordinarily importing conveyance, of absolute
ownership will not be given that effect in such a transaction

480
if they are also commonly used in pledges and mortgages
and therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and unambiguous
language or other circumstances excluding an intent to
pledge." 11
We agree with the holding of the respondent Court of Appeals that
the stock assignment, Exhibit C, is in truth and in fact, a pledge. Indeed, the facts
and circumstances leading to the execution of the stock assignment, Exhibit C,
and the admission of Lopez prove that it is in fact a pledge. The appellate court
is correct in ruling that the following requirements of a contract of pledge have
been satisfied: (1) that it be constituted to secure the fulfillment of a principal
obligation; (2) that the pledgor be the absolute owner of the thing pledged; and
(3) that the person constituting the pledge has the free disposal of the property,
and in the absence thereof, that he be legally authorized for the purpose. (Article
2085, New Civil Code).
Article 2087 of the New Civil Code providing that it is also the
essence of these contracts (pledge, mortgage, and antichresis) that when the
principal obligation becomes due, the things in which the pledge or mortgage
consists may be alienated for the payment to the creditor, further supports the
appellate court's ruling, which We also affirm. On this point further, the Court of
Appeals correctly ruled:
"In addition to the requisites prescribed in article
2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession of
the creditor, or of a third person by common agreement. (Art.
2093, N.C.C.) Incorporeal rights, including shares of stock
may also be pledged (Art. 2095, N.C.C.) All these requisites
are found in the transaction between the parties leading to the
execution of the Stock Assignment, Exhibit C. And that it is
a pledge was admitted by the defendant in his letter of
November 18, 1963, Exhibit G, already quoted above, where
he asked what had happened to his shares of stock 'which
were pledged to your goodselves to secure the said
obligation'. The testimony of the defendant-appellee that it
was their agreement or understanding that if he would be
unable to pay the loan to the Prudential Bank, plaintiff could
sell the shares of stock or appropriate the same in full
payment of his debt is a mere after-thought, conceived after
he learned of the transfer of his stock to the plaintiff in the
books of the Baguio Military Institute."
We also do not agree with the contention of petitioner that
"petitioner's 'sale, assignment and transfer' unto private respondent of the shares
of stock, coupled with their endorsement in blank and delivery, comes exactly
under the Civil Code's definition of dation in payment, a long recognized and
deeply rooted concept in Civil Law denominated by Spanish commentators as
'adjudicacion en pago'"

According to Article 1245 of the New Civil Code, dation in payment,

whereby property is alienated to the creditor in satisfaction of a debt in money,
shall be governed by the law of sales.
Speaking of the concept of dation in payment, it is well to cite that:
"Dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of the
obligation. (2 Castan 525; 8 Manresa, 324) The property
given may consist, not only of a thing, but also of a real right
(such as a usufruct) or of a credit against a third person.
(Perez Gonzales & Alguer: 2-I Enneccerus, Kipp & Wolff
317). Thus, it has been held that the assignment to the
creditor of the interest of the debtor in an inheritance in
payment of his debt, is valid and extinguishes the debt.
(Ignacio vs. Martinez, 33 Phil. 576)
"The modern concept of dation in payment
considers it as a novation by change of the object, and this is
to our mind the more juridically correct view. Our Civil
Code, however, provides in this article that, where the debt is
in money, the law on sales shall govern; in this case, the act
is deemed to be a sale, with the amount of the obligation to
the extent that it is extinguished being considered as the
price. Does this mean that there can be no dation in payment
if the debt is not in money? We do not think so. It is precisely
in obligations which are not money debts, in which the true
juridical nature of dation in payment becomes manifest.
There is a real novation with immediate performance of the
new obligation. The fact that there must be a prior agreement
of the parties on the delivery of the thing in lieu of the
original prestation, shows that there is a novation which,
extinguishes the original obligation, and the delivery is a
mere performance of the new obligation.
"The dation in payment extinguishes the
obligation to the extent of the value of the thing delivered,
either as agreed upon by the parties or as may be proved,
unless the parties by agreement, express or implied, or by
their silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished. (8 Manresa 324; 3 Valverde 174 fn.)
"Assignment of property by the debtor to his
creditors, provided for in article 1255, is similar to dation in
payment in that both are substitute forms of performance of
an obligation. Unlike the assignment for the benefit of
creditors, however, dation in payment does not involve
plurality of creditors, nor the whole of the property of the
debtor. It does not suppose a situation of financial
difficulties, for it may be made even by a person who is
completely solvent. It merely involves a change of the object

481
of the obligation by agreement of the parties and at the same
time fulfilling the same voluntarily. (8 Manresa 324)." 12
Considering the above jurisprudence, We find that the debt or
obligation at bar has not matured on June 2, 1959 when Lopez "alienated" his
4,000 shares of stock to Philamgen. Lopez' obligation would arise only when he
would default in the payment of the principal obligation (the loan) to the bank
and Philamgen had to pay for it. Such fact being adverse to the nature and
concept of dation in payment, the same could not have been constituted when the
stock assignment was executed. Moreover, there is no express provision in the
terms of the stock assignment between Philamgen and Lopez that the principal
obligation (which is the loan) is immediately extinguished by reason of such
assignment.
In case of doubt as to whether a transaction is a pledge or a dation in
payment, the presumption is in favor of pledge, the latter being the lesser
transmission of rights and interests. Under American jurisprudence.
"A distinction might also be made between
delivery of property in payment of debt and delivery of such
property as collateral security for the debt. Generally, such a
transfer was presumed to be made for collateral security, in
the absence of evidence tending to show an intention on the
part of the parties that the transfer was in satisfaction of the
debt. This presumption of a transfer for collateral security
arose particularly where the property given was commercial
paper, or some other 'specialty' chose of action, that
conferred rights upon transfer by delivery of a different
nature from the debt, whose value was neither intrinsic nor
apparent and was not agreed upon by the parties." 13
Petitioner's argument that even assuming, arguendo that the
transaction was at its inception a pledge, it gave way to a dation in payment
when the obligation secured came into existence and private respondent had the
stocks transferred to it in the corporate books and took a stock certificate in its
name, is without merit. The fact that the execution of the stock assignment is
accompanied by the delivery of the shares of stock, duly endorsed in blank to
Philamgen is no proof that the transaction is a dation in payment. Likewise, the
fact that Philamgen had the shares of stock transferred to it in the books of the
corporation and took a certificate in its name in lieu of Lopez which was
cancelled does not amount to conversion of the stock to one's own use. The
transfer of title to incorporeal property is generally an essential part of the
delivery of the same in pledge. It merely constitutes evidence of the pledgee's
right of property in the thing pledged.
"By the contract of pledge, the pledgor does not
part with his general right of property in the collateral. The
general property therein remains in him, and only a special
property vests in the pledgee. The pledgee does not acquire
an interest in the property, except as a security for his debt.
Thus, the pledgee holds possession of the security subject to

the rights of the pledgor; he cannot acquire any interest

therein that is adverse to the pledgor's title. Moreover, even
where the legal title to incorporeal property which may be
pledged is transferred to a pledgee as collateral security, he
takes only a special property therein. Such transfer merely
performs the office that the delivery of possession does in
case of a pledge of corporeal property.
xxx xxx xxx
"The pledgee has been considered as having a lien
on the pledged property. The extent of such lien is measured
by the amount of the debt or the obligation that is secured by
the collateral, and the lien continues to exist as long as the
pledgee retains actual or symbolic possession of the property,
and the debt or obligation remains unpaid. Payment of the
debt extinguishes the lien.
"Though a pledgee of corporation stock does not
become personally liable as a stockholder of the company, he
may have the shares transferred to him on the books of the
corporation if he has been authorized to do so.
"The general property in the pledge remains in
the pledgor after default as well as prior thereto. The failure
of the pledgor to pay his debt at maturity in no way affects
the nature of the pledgee's rights concerning the property
pledged, except that he then becomes entitled to proceed to
make the security available in the manner prescribed by law
or by the terms of the contract, . . ." 14
In his second assignment of error, petitioner contends that the Court
of Appeals erred in not holding that since private respondent entered into an
agreement with determinate third persons whereby the latter would buy the said
shares so sold, assigned and transferred to the former by the petitioner for the
purpose of paying petitioner's obligation out of the proceeds, there was a
novation of the obligation by substitution of debtor.
We do not agree.
Under Article 1291 of the New Civil Code, obligations may be
modified by: (1) changing their object or principal condition; (2) substituting the
person of the debtor; (3) subrogating a third person in the rights of the creditor.
And in order that an obligation may be extinguished by another which substitute
the same, it is imperative that it be so declared in unequivocal terms, or that the
old and the new obligations be on every point incompatible with each other.
(Article 1292, N.C.C.) Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the creditor. Payment
by the new debtor gives him the rights mentioned in Articles 1236 and 1237.
(Article 1293, N.C.C.)
Commenting on the second concept of novation, that is, substituting
the person of the debtor, Manresa opines, thus: LexLib

482
"In this kind of novation, it is not enough to
extend the juridical relation to a third person; it is necessary
that the old debtor be released from the obligation, and the
third person or new debtor take his place in the relation.
Without such release, there is no novation; the third person
who has assumed the obligation of the debtor merely
becomes a co-debtor or a surety. If there is no agreement as
to solidarity, the first and the new debtor are considered
obligated jointly." (8 Manresa 435, cited in Tolentino,
Commentaries and Jurisprudence on the Civil Code of the
Philippines, Vol. IV, p. 360)
In the case at bar, the undertaking of Messrs. Emilio Abello and Pio
Pedrosa that they would buy the shares of stock so that Philamgen could be
reimbursed from the proceeds that it paid to Prudential Bank does not
necessarily imply the extinguishment of the liability of petitioner Lopez. Since it
was not established nor shown that Lopez would be released from responsibility,
the same does not constitute novation and hence, Philamgen may still enforce
the obligation. As the Court of Appeals correctly held that "(t)he representation
of Mr. Abello to Atty. Sumawang that he and Mr. Pedrosa would buy the stocks
was a purely private arrangement between them, not an agreement between
(Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second
assignment of error must be rejected.
In fine, We hold and rule that the transaction entered into by and
between petitioner and respondent under the Stock Assignment Separate From
Certificate in relation to the Surety Bond No. 14164 and the Indemnity
Agreement, all executed and dated June 2, 1959, constitutes a pledge of the
40,000 shares of stock by the petitioner-pledgor in favor of the private
respondent-pledgee, and not a dacion en pago. It is also Our ruling that upon the
facts established, there was no novation of the obligation by substitution of
debtor.
The promise of Abello and Pedrosa to buy the shares from private
respondent not having materialized (which promise was given to said respondent
only and not to petitioner) and no action was taken against the two by said
respondent who chose instead to sue the petitioner on the Indemnity Agreement,
it is quite clear that this respondent has abandoned its right and interest over the
pledged properties and must, therefore, release or return the same to the
petitioner-pledgor upon the latter's satisfaction of his obligation under the
Indemnity Agreement.
It must also be made clear that there is no double payment nor unjust
enrichment in this case because We have ruled that the shares of stock were
merely pledged. As the Court of Appeals said:
"The appellant (Philam) is not enriching himself
at the expense of the appellee. True, the stock certificate of
the appellee had been in the name of the appellant but the
transfer was merely nominal, and was not intended to make
the plaintiff the owner thereof. No offer had been made for
the return of the stocks to the defendant. As the appellant had
stated, the appellee could have the stocks transferred to him

anytime as long as he reimburses the plaintiff the amount it

had paid to the Prudential Bank. Pending payment, plaintiff
is merely holding the certificates as a pledge or security for
the payment of defendant's obligation."
The above holding of the appellate court is correct and We affirm the
same. LLpr
As to the third assignment of error which is merely the consequence
of the first two assignments of errors, the same is also devoid of merit.
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision
of the Court of Appeals is hereby AFFIRMED in toto, with costs against the
petitioner.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion Jr., Abad Santos, De
Castro and Escolin, JJ., concur.
||| (Lopez v. Court of Appeals, G.R. No. L-33157, [June 29, 1982], 200 PHIL 150-168)

483

FIRST DIVISION
[G.R. No. 124554. December 9, 1997.]
ETERNAL
GARDENS
MEMORIAL
PARK
CORPORATION, petitioner, vs. COURT OF APPEALS and
NORTH PHILIPPINE UNION MISSION OF THE SEVENTH
DAY ADVENTISTS, respondents.

Ruperto G. Martin & Associates and Donardo R. Paglinawan for petitioner.

Quasha, Ancheta, Pea & Nolasco for NPUM.

SYNOPSIS
In a land development agreement, Eternal Gardens Memorial Park Corporation (EGMPC)
undertook to develop a parcel of land owned by the North Philippine Union Mission of the
Seventh Day Adventists (NPUM) into a memorial park subdivided into lots. Later, the Maysilo
Estate and the heirs of Vicente Singson Encarnacion claimed ownership over the land. EGMPC
filed an action for interpleader against Maysilo Estate and NPUM before the Regional Trial
Court of Kalookan City, while the Singson heirs filed an action for quieting of title against
EGMPC and NPUM before the same court. In the consolidated cases. the trial court in the
interpleader case dismissed the claims of the intervenors and declared the titles of NPUM
valid. On review. before the Court of Appeals the trial court's decision in the interpleader case
was affirmed, and the trial court's decision in the quieting of title case in favor of the Singson
heirs was reversed and set aside. On petition for review, the Supreme Court settled with finality
the ownership of the property to NPUM and remanded the case to the Court of Appeals for
mutual accounting. The Court of Appeals referred, with concurrence of the parties, the
accounting of the parties' respective obligations to its accountant. On January 15, 1996, the CA
in a resolution approved the report of the Court's accountant. EGMPC received a copy of this
Resolution on January 22, 1996. On February 2, 1996, EGMPC filed its Motion for
Reconsideration. On April 18, 1996, EGMPC received the appellate court's resolution of April
12, 1996 denying its Motion for Reconsideration. On April 29, 1996, EGMPC filed a motion
for extension of time to file its Petition for Certiorari and Prohibition' and concurrently paid the
legal fees. On May 27, 1996, EGMPC filed the instant recourse contending that the appellate
court, in appointing an accountant to make the computations. delegated judicial function.
NPUM, on the other hand, questions the timeliness of the petition.

EGMPC's Motion for Extension of Time to File a Petition Review was timely filed on April 29,
1996, such motion having been filed eleven days from receipt of the appellate court's denial of
its motion for reconsideration. Supreme Court Circular No. 10 dated August 28, 1986 on
modes and periods of appeal provides the in the event a motion for reconsideration is filed and
denied, the period of fifteen days begins to run again from notice of denial.
No judicial function was exercised by the accountant who was designated by the court "to
receive, collate and analyze the documents to be filed by the parties." She was not asked to rule
on the admissibility of the evidence. While it may be true the report, when adopted by the
appellate court, became part of its decision, judicial power lies, not with the official who
prepared the report, but with the court itself which wields the power of approval or rejection.

SYLLABUS
1. REMEDIAL LAW; ACTIONS; APPEALS; PERIOD TO APPEAL WHERE A MOTION
FOR RECONSIDERATION IS FILED. Supreme Court Circular No. 10 dated August 28,
1986 on modes and periods of appeal provides thus: (5) APPEALS BY CERTIORARI TO
THE SUPREME COURT. In an appeal by certiorari to this Court under Rule 45 of the Rules
Court, Section 25 of the Interim Rules and Section 7 of PD 1606, a party may file a petition for
review on certiorari of the judgment of a regional trial court, the Court of Appeals or the
Sandiganbayan within fifteen days from notice of judgment or the denial of his motion for
reconsideration filed in due time, and paying at the same time the corresponding docket fee
(Section 1 of Rule 45). In other words, in the event a motion for reconsideration is filed and
denied, the period of fifteen days begins to run again from notice of denial (See Codilla vs.
Estenzo, 97 SCRA 351; Turingan vs. Cacdad, 122 SCRA 634). A motion for extension of time
to file a petition for review on certiorari may be filed with the Supreme Court within the
reglementary period, paying at the same time the corresponding docket fee.
2. ID.; ID.; ID.; ID.; FILING OF PETITION ON THE ELEVENTH DAY FROM DENIAL OF
MOTION FOR RECONSIDERATION, TIMELY; CASE AT BAR. EGMPC received a
copy of the January 15, 1996 Resolution on January 22, 1996. Twelve days from such receipt,
or on February 2, 1996, EGMPC filed its Motion for Reconsideration. On April 18, 1996,
EGMPC received the appellate court's Resolution of April 12, 1996 denying its Motion for
Reconsideration. On April 29, 1996, or eleven days from its receipt of the denial of its motion
for reconsideration, EGMPC filed a motion for extension of time to file its "Petition for
Certiorari and Prohibition" and concurrently paid the legal fees. We find that EGMPC's Motion
for Extension of Time to File a Petition for Review was timely filed on April 29, 1996, such
motion having been filed eleven days from receipt of the appellate court's denial of its motion
for reconsideration.
3. ID.; RULES OF COURT; LIBERALLY CONSTRUED IN THE INTEREST OF JUSTICE.
As the Court stated in Delsan Transport Lines, Inc. vs. Court of Appeals, where the Court
was liberal in its application of the Rules of Court in the interest of justice: "It cannot . . . be
claimed that this petition is being used as a substitute for appeal after that remedy has been lost
through the fault of petitioner. Moreover, stripped of allegations of grave abuse of discretion,

484
the petition actually avers errors of judgment rather than of jurisdiction which are the subject
of a petition for review."
4. ID.; ID.; FORUM SHOPPING; ABSENT WHERE THE RELIEFS SOUGHT ARE NOT
IDENTICAL. We next consider whether, as asserted by NPUM, EGMPC's petition must be
summarily dismissed on the ground of forum shopping. NPUM points to EGMPC's Opposition
and/or Comment to the Report of the Court of Appeals dated May 31, 1996 filed in G.R. No.
73794 vis-a-vis its Petition for Review in the instant case, and the two Urgent Motions for the
Issuance of a Temporary Restraining Order filed in G.R. No. 73794 and in the instant case.
NPUM asserts that the reliefs sought by EGMPC in its opposition and in its petition are
'identical." We disagree. The petition here seeks the setting aside of the Court of Appeals'
January 15, 1996 and April 12, 1996 Resolutions. The Opposition in G.R. No. 73794, on the
other hand, sought the nullification of the May 31, 1996 Report and as a corollary, for the
instant case to be "allowed or tolerated." The opposition and the petition do not seek to
provoke from this Court the resolution of a same issue, the evil which Revised Circular No. 2891 and its companion Administrative Circular No. 04-94 address. We read the opposition in
G.R. No. 73794 as a complement to the petition here, to which it makes categorical and
express reference. We consider it as merely a matter of discourse and emphasis that Eternal
Gardens reiterated its case in the later pleading. Regarding the motions for the issuance of a
temporary restraining order filed by EGMPC on January 10, 1997 in the instant case and on
January 17, 1997 in G.R. No. 73794, we consider the exigency which may have prompted
EGMPC to file the motions in both cases. The trial court in the case of origin, acted favorably
on NPUM's motion for the issuance of a writ of execution, the basis of which is the alleged
finality of the appellate court's January 15, 1996 Resolution. The trial court ruled that the
instant case denominated as an original action for certiorari "does not interrupt the course of
the principal action [G.R. No. 73794] nor the running of the period in the proceeding." To not
stay the execution considering the trial court's ratiocination would render moot EGMPC's
remedy in the instant case.
5. CRIMINAL LAW; PERJURY; CERTIFICATION UNDER OATH THAT THERE IS NO
OTHER CASE PENDING IN ANY COURT OR TRIBUNAL WITH THE SAME ISSUES IN
THIS CASE; NO CRIMINAL LIABILITY WHERE IT DOES NOT APPEAR THAT THE
PARTY WAS TO PURSUE TWO CASES CONCURRENTLY. NPUM also contends that
EGMPC has committed perjury, pointing to the certification under oath filed by EGMPC,
through its President Gabriel O. Vida, where he states "that there is no other case pending in
any court or tribunal in the Philippines, with the same issues in .this case . . .." Again, we
disagree. It does not appear that EGMPC was to pursue the two cases concurrently. EGMPC
filed this new petition, and did not assail the appellate court's resolution under G.R. No. 73794,
as in fact the Court has informed the parties that no further pleadings were to be entertained in
G.R. No. 73794 after remand to the Court of Appeals.
6. REMEDIAL LAW; COURT OF APPEALS; WITH AUTHORITY TO DESIGNATE AN
ACCOUNTANT TO RECEIVE, COLLATE AND ANALYZE DOCUMENT TO BE
SUBMITTED BY THE PARTIES. Under the Revised Internal Rules of the Court of
Appeals, that court has the authority to receive evidence and perform any and all acts necessary
for the resolution of factual issues raised in cases falling within its original jurisdiction. For the
proper disposition of the case, the appellate court, under the above-quoted authority, designated
an accountant "to receive, collate and analyze the documents to be filed by the parties."
7. ID.; ID.; ID.; COURT RETAINS JUDICIAL POWER. While it may be true that the
report, when adopted by the appellate court, became part of its decision, judicial power lies, not

with the official who prepared the report, but with the court itself which wields the power of
approval or rejection. Under American jurisprudence, the rule is thus It would seem on
principle that a commissioner, master or referee appointed by a court to aid it in the
adjudication of a particular case is not a court when performing the functions assigned to him,
although the court may adopt his conclusions in its decision . . .. It has, for instance, been held
that a statute giving the Supreme Court of a state the power to appoint commissioners thereof
whose duty shall be, under such rules and regulations as the court may adopt, to assist it in the
performance of its functions, and in disposing of undetermined cases before it, is not
unconstitutional or open to the objection that the commissioners are vested with judicial power,
since the commissioners merely report facts found and conclusions reached, and the court
retains the power to decide which is the only judicial power. It has also been pointed out that a
chancellor does not, by referring a matter to a commissioner, delegate his judicial function to
him. The commissioner is appointed for the purpose of assisting the chancellor, not to supplant
or replace him, and the findings of a commissioner are merely advisory and not binding on the
court.

8. CONSTITUTIONAL LAW; BILL OF RIGHTS; DUE PROCESS; NOT DENIED WHERE

A PARTY WAS GIVEN EVERY OPPORTUNITY TO PRESENT ITS CASE. EGMPC also
contends that it was deprived of due process because it "was not given reasonable opportunity
to know and meet the claim of [NPUM] as its counsel was not able to cross-examine the
American Accountant of [NPUM]." The contention is without merit. Contrary to EGMPC's
claim, it was given every opportunity to present its case. At the outset, the parties were asked
by the appellate court to submit documents for accounting. NPUM made full utilization of the
modes of discovery, asking the appellate court to subpoena documents and testimonies, and
requesting admissions from EGMPC regarding documents it (EGMPC) had in its possession,
documents which emanated from the corporation itself, and either sent to NPUM as
communiqus, such as the Letter of Mr. Vida dated April 4, 1980 to Pastor Bienvenida Capule
of NPUM stating inter alia that for 1978, EGMPC sold 2,805 memorial lots and that during the
first quarter of 1980 the corporation sold 2,418 lots, totalling 10,730, or documents available to
the general public, as in the Price Lists, or filed with government offices, specifically the
Securities and Exchange Commission and the Bureau of Internal Revenue. EGMPC cannot
claim that it was denied the forum to confer with NPUM and NPUM's accountant. The
appellate court had arranged conferences for the parties and their accountants to allow them to
discuss with each other and with Ms. Angelo. Even Ms. Angelo in her Letter dated November
10, 1995 covering her second and final report spoke of such a conference.
9. CIVIL LAW; OBLIGATIONS AND CONTRACTS; PARTIES BOUND BY THEIR
STIPULATIONS. EGMPC lastly contends that it is not liable for interest. It claims that it
was justified in withholding payment as there was still the unresolved issue of ownership over
the property subject of the Land Development Agreement of October 6, 1976. The argument is
without merit. EGMPC under the agreement had the obligation to remit monthly to NPUM
forty percent (40%) for its net gross collection from the development of a memorial park on
property owned by NPUM. The same agreement provided for the designation of a
depository/trustee bank to act as the depository/trustee for all funds collected by EGMPC.
There was no obstacle, legal or otherwise, to the compliance by EGMPC of this provision in
the contract, even on the affectation that it did not know to whom payment was to be made.

485
10. ID.; ID.; CONSIGNATION; RATIONALE. Consignation produces the effect of
payment The rationale for consignation is to avoid the performance of an obligation becoming
more onerous to the debtor by reason of causes not imputable to him.
11. ID.; ID.; ID.; FAILURE TO CONSIGN AMOUNTS DUE RENDER PARTY LIABLE
FOR INTEREST. For its failure to consign the amounts due, Eternal Gardens' obligation to
NPUM necessarily became more onerous as it became liable for interest on the amounts it
failed to remit.

DECISION

Later, two claimants of the parcel of land surfaced Maysilo Estate and the heirs of a certain
Vicente Singson Encarnacion. EGMPC thus filed an action for interpleader against Maysilo
Estate and NPUM, docketed as Civil Case No. 9556 before the Regional Trial Court of
Kalookan City, Branch 120. The Singson heirs in turn filed an action for quieting of title
against EGMPC and NPUM, docketed as Civil Case No. C-11836 before Branch 122 of the
same court.
From these two cases, several proceedings ensued. One such case, from the interpleader action,
culminated in the filing and subsequent resolution of G.R. No. 73794. In G.R. No. 73794,
EGMPC assailed the appellate court's resolution requiring "petitioner Eternal Gardens [to]
deposit whatever amounts are due from it under the Land Development Agreement with a
reputable bank to be designated by the respondent court." 4
In the Decision of September 19, 1988, the court ruled thus:

KAPUNAN, J p:
This case is the derivative of G.R. No. 73794, which was decided by the Second Division of
this Court on September 19, 1988. 1
The antecedents are as follows: 2
Petitioner EGMPC and private respondent NPUM entered into a Land Development
Agreement dated October 6, 1976. Under the agreement, EGMPC was to develop a parcel of
land owned by NPUM into a memorial park subdivided into lots. The parties further agreed
(d) THAT the FIRST PARTY shall receive forty (40%) percent of the
gross collection less Perpetual Care Fees (which in no case shall
exceed 10% of the price per lot unless otherwise agreed upon by both
parties in writing) or Net Gross Collection (NGC) from this project.
This shall be remitted monthly by the SECOND PARTY in the
following manner: (i) Forty (40%) percent of the NGC, plus (ii) if it
becomes necessary for the FIRST PARTY to vacate the property
earlier than two years from the date of this agreement, at the option of
the FIRST PARTY, an additional amount equivalent to twenty (20%)
percent of the NGC as cash advance for the first four (4) years with
interest at twelve (12%) percent per annum which cash advance shall
be deductible out of the proceeds from the FIRST PARTY's 40% from
the 5th year onward. The SECOND PARTY further agrees that if the
FIRST PARTY shall desire to have its projected receivables collected
at the 5th year, the SECOND PARTY shall assist in having the same
discounted in advance. cda
The P1.5 million initial payment mentioned in the Deed of Absolute
Sale, covering the first phase of the project, shall be deducted out of
the proceeds from the FIRST PARTY's 40% at the end of the 5th year.
Subsequent payments made by the SECOND PARTY on account of
the stated purchase price in said Deed of Absolute Sale shall be
charged against what is due to the FIRST PARTY under this LAND
DEVELOPMENT AGREEMENT. 3

PREMISES CONSIDERED, (a) the petition is DISMISSED for lack

of merit; (b) this case (together with all the claims of the intervenors
on the merits) is REMANDED to the lower court for further
proceedings; and (c) the Resolution of the Third Division of this
Court of July 8, 1987 requiring the deposit by the petitioner (see
footnote 6) 5 of the amounts contested in a depository bank STANDS
(the Motion for Reconsideration thereof being hereby DENIED for
reasons already discussed) until after the decision on the merits shall
have become final and executory.
Entry of judgment was made on April 24, 1989. 6
Sometime thereafter, the trial court rendered decisions in Civil Case Nos. 9556 (interpleader)
and C-11836 (quieting of title). These decisions were appealed to the Court of Appeals, and the
appeals were consolidated.
The appellate court rendered judgment in the consolidated case on December 17, 1991 as
follows: (a.) the trial court's decision in Civil Case No. 9556 was affirmed insofar as it
dismissed the claims of the intervenors, including the Maysilo Estate and the titles of NPUM to
the subject parcel of land were declared valid; and (b.) the trial court's decision in Civil Case
No. C-11836 in favor of the Singson heirs was reversed and set aside. 7
From the consolidated decision, the Singson heirs, Maysilo Estate and EGMPC each filed with
this Court their petitions for review on certiorari. The petition filed by the Singson heirs
docketed as G.R. No. 103247-48 was denied for failure to comply with Circular No. 2891, 8 and entry of judgment made on July 27, 1992, G.R. No. 105159 filed by the Maysilo
Estate was denied for failure of petitioner to raise substantial legal issues, 9and entry of
judgment made on August 19, 1992, G.R. Nos. 103230-31 filed by EGMPC was denied for
failure to comply with Circular No. 19-91, 10and entry of judgment made on July 20, 1993.
EGMPC's other petition, this time under Rule 65, docketed as G.R. Nos. 107646-47 was
dismissed for having been filed out of time and for lack of merit.
Following these, the Court, through the Third Division, issued a Resolution dated December 1,
1993 in G.R. No. 73794, thus:
WHEREFORE, considering that the ownership of the property in
dispute has now been settled with finality, the Court sees no further

486
legal obstacle in carrying out the respective covenants of the parties
to the Land Development Agreement. . . . In respect to the mutual
accounting required to determine the remaining accrued rights and
liabilities of said parties, the case is hereby remanded to the Court of
Appeals for proper determination and disposition.

application to develop, sell and maintain a first class

private cemetery part situated in Baesa, Kalookan City on
the 23 has property of PUC of NPUM. EGMPC's
application calls for the development of 31,326 lawn type
memorial lots for underground and above ground
interment, and 20,808 garden and family/estates memorial
lots for above ground interment, or a total of 52,134
memorial lots.

All other incidental motions involving G.R. No. 73794, still pending
with this Court, are hereby, declared MOOT and are NOTED
WITHOUT ACTION. 11
In compliance with the Supreme Court resolution, the Court of Appeals proceeded with the
disposition of the case, docketed therein as CA G.R. SP No. 04869, and required the parties to
appear at a scheduled hearing on June 16, 1994, "with counsel and accountants, as well as
books of accounts and related records, to determine the remaining accrued rights and liabilities
of said parties." 12
Citing the following provision of the land development agreement:
(e) THAT the SECOND PARTY shall keep proper books and
accounting records of all transactions affecting the sale of said
memorial lots, which records shall be open for inspection by the
FIRST PARTY at any time during usual office hours. The SECOND
PARTY shall also render to the FIRST PARTY a monthly accounting
report of all sales and cash collections effected the preceding month.
It is also understood that all financial statements shall be subject to
annual audit by a reputable external accounting firm which should be
acceptable to the FIRST PARTY. 13
the appellate court required EGMPC to produce at the scheduled hearings the following
documents:
(a) statements of monthly gross income from the year 1981,
supported by copies of the contracts/agreements of the sale
of lots to buyers/customers; and

(b) summary statements, by month, of the forty per cent (40%) share
in the "net gross" income under the land development
agreement between the parties. 14
The accounting of the parties' respective obligations was referred to the Court's Accountant, Ms
Carmencita Angelo, with the concurrence of the parties, to whom the documents were to be
submitted. 15
NPUM prepared and submitted a Summary of Sales and Total Amounts Due based on the
following documents it likewise submitted to the court: 16
A-1 Land Development Agreement executed between NPUM and
EGMPC on October 6, 1976.
A-2 Submittal of requirements filed by EGMPC to the Securities and
Exchange Commission dated July 26, 1976 re: its

A-3 EGMPC Daily Sales Report which shows that from 1978, 1979,
1980 and 1981 EGMPC has sold 19,237 memorial lots
with gross sales amounting to P52,421,879.70.
A-3a Machine copy of EGMPC Daily Sales Report dated December
29, 1979 showing that in 1978 it sold 2,805 memorial lots
valued at P5,591,716.40 and in 1979 it sold 5,503
memorial lots valued at P11,943,631.00.
A-3a-1 Weekly Sales Report of EGMPC corresponding to the period
December 26 to 31, 1979, showing cumulatively as of said
date it has sold a total of 5,503 memorial lots from January
1 to December 29, 1979.
A-3a-2 Sales Report of EGMPC for the period February 12 to 18,
1980.
A-3a-4 Letter of Gabriel O. Vida, Executive Vice President and
General Manager of EGMPC, dated April 9, 1980, to
Pastor Bienvenido Capuli stating among others that for the
year 1978, EGMPC has sold 2,805 memorial lots and in
the first quarter of 1980 from January 1 to April 2, it has
sold 2,418 memorial lots, for a total gross sales of 10,730
memorial lots.
A-3b EGMPC Daily Sales Report which show that from 1978 up to
December 9, 1980 it has sold a total of 15,253 memorial
lots with sales value of P38,085,299.40.
A-3b-1 Are supporting sales records and/or weekly sales
A-3b-2 reports of EGMPC in relation to Exhibit 'A-3b.'
A-3b-3
A-3b-4
A-3b-5
A-36-6
A-3b-7

487
A-4 Audited Financial Statement of EGMPC for 1985 which it filed
with the Securities and Exchange Commission on April
16, 1986 pursuant to the reportorial requirements of the
SEC, with accompanying balance sheet and statement of
income and expenses, consisting of five (5) pages.

D-1 INC. effective February 18, 1983.

A-5 Actual Gross Profit Rate of EGMPC for the year 1985 which
shows that it sold 3,623 memorial lots valued at
P25,299,601.20.

E-1 INC. effective January 23, 1984.

A-6 Machine copy of Assumptions to Projected Cash Flow and

Income Statements prepared by EGMPC with assumptions
that the 52,000 memorial lots would be sold and that 15%
of total sales per year are cash sales and 85% are on
installment and that installment sales are payable over a
period of 60 months at 12% interest per annum.
A-7 Formula for Computation of Interest Income for Lots Sold on
Installment.
A-8 Sales Price Analysis based on Lawn Class Memorial Lots for the
period 1978 to 1988, inclusive.
A-8a Price list issued by EGMPC effective December 1, 1977.
A-9 Computation of interest due for use of NPUM share.
A-9a Letter dated April 11, 1983 of Alfonso P. Roda, President of
PUC of NPUM showing summary of gross collections
from memorial lots sales starting January 1978 up to June
1982, inclusive, per computation given to PUC by
EGMPC.
A-9b Are validating documents consisting of accounting ledgers

D-2
E Price List of Memorial Lots of HIMLAYANG PILIPINO,

E-2
F Price List of Memorial Lots of HIMLAYANG PILIPINO,
F-1 INC. effective July 9, 1984.
F-2
G Price List of Memorial Lots of HIMLAYANG PILIPINO,
G-1 INC. effective March 1, 1985.
G-2
H Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
effective July 1, 1987.
I Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
effective January 4, 1989.
J Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
effective August 2, 1989.
K Price List of Memorial Lots of HIMLAYANG PILIPINO,
K-I INC. effective February 4, 1990.

A-9c in support of the computations given by EGMPC to PUC

L Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.

effective February 2, 1991.

A-9d as mentioned in Dr. Roda's Letter dated April 11, 1983.

M Price List of Memorial Lots of HIMLAYANG PILIPINO,

A-10 Promissory Note of EGMPC dated April 6, 1976 issued to

NPUM for a loan of P720,000 for which EGMPC agreed
to pay 12% interest per annum.

M-1 INC. effective October 2, 1991.

B Price List of Memorial Lots of HIMLAYANG PILIPINO,

B-1 INC. effective February 3, 1981.
C Price List of Memorial Lots of HIMLAYANG PILIPINO,
C-1 INC. effective March 15, 1982.
C-2
D Price List of Memorial Lots of HIMLAYANG PILIPINO,

N Price List of Memorial Lots of HIMLAYANG PILIPINO,

N-1 INC. effective February 5, 1992.
O Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
effective October 9, 1992.
P Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
effective January 15, 1993.
Q Price List of Memorial Lots of HIMLAYANG PILIPINO, INC.
effective February 16, 1993.

488
R Price List of Memorial Lots of HIMLAYANG PILIPINO,
R-1 INC. effective March 16, 1993.
S Price List of Memorial Lots of HIMLAYANG PILIPINO,
S-1 INC. effective September 15, 1993.
T Price List of Memorial Lots of MANILA MEMORIAL
T-1 PARK effective January 1, 1985.
T-2
T-3
T-4
U Price List of Memorial Lots of MANILA MEMORIAL
U-1 PARK effective June 1, 1991.
U-2
U-3
U-4
V Price List of Memorial Lots of MANILA MEMORIAL
V-1 PARK effective November 2, 1991.
V-2
V-3
V-4
W Price List of Memorial Lots of HOLY CROSS
W-1 MEMORIAL PARK effective December 1, 1987.
W-2
W-3
It appears that EGMPC did not submit any document whatsoever to aid the appellate court in
its mandated task. Thus, in a Resolution dated January 19, 1995, the appellate court declared:
. . . (1) that Eternal Gardens Memorial Park Corporation has waived
its rights to present the records and documents necessarily for
accounting, which records they were specifically required to preserve
under the parties' Land Development Agreement; and (2) that it will
now proceed "to the mutual accounting required to determine the
remaining accrued rights and liabilities of the said parties . . ."

ordered by the Supreme Court in its Resolution of December 1, 1993

(p. 7, rec.), and that the Court will proceed to do what it is required to
do on the basis of the documents submitted by the North Philippine
Union Mission of the Seventh Day Adventists only. 17
Ms. Angelo submitted her Report dated January 31, 1995, to which the appellate court required
the parties to comment on. 18
EGMPC took exception to the appellate court's having considered it to have waived its right to
present documents. 19 Considering EGMPC's arguments, the court set a hearing date where
NPUM would present its documents "according to the Rules [of Court], and giving the private
respondent [EGMPC] the opportunity to object thereto." 20
Subsequently, NPUM asked for and the appellate court issued a subpoena duces tecum and
subpoena ad testificandum to EGMPC's President, Mr. Gabriel O. Vida requiring him to
produce the following documents:
1. Copies of Deeds of Sale corresponding to each memorial lot sold
subject of the Land Development Agreement between the
parties;
2. Lists of all memorial lots sold under or affecting the said Land
Development Agreement with an indication of the
types/kinds of memorial lots and the corresponding prices
at which each was sold and the dates when each lot was
sold;
3. Lists of all the owners of the memorial lots affected by the Land
Development Agreement;
4. Copies of all the annual audits made by the external accounting
firm pursuant to provision (a) of the Land Development
Agreement;
5. Copies of all audited financial statements of ETERNAL from 1978
to the present;
6. Copies of all monthly accounting reports of all sales and cash
collections regarding all the memorial lots sold under the
Land Development Agreement pursuant to provision (e) of
the said Land Development Agreement;
7. The name/s of the Depository/Trustee Bank/s which acted as the
depository/trustee of funds collected by ETERNAL
pursuant to provision (f) of the subject Land Development
Agreement;
8. All other accounting books and records on all transactions affecting
all the memorial lots covered under the Land Development
Agreement;
9. List of all the corporate officers and employees of ETERNAL from
1975 up to the present whose duties and responsibilities

489
involved the recording of all sales and other transactions
and the safekeeping of such records relating to the sale of
the memorial lots subject of the Land Development
Agreement. 21
NPUM also filed a Request for Admission of the documents it had earlier submitted to the
Court annexed to the Summary of Sales and Total Amounts Due, addressed to Mr.
Vida. 22 EGMPC, however, filed a Denial to the Request for Admission, alleging that it was
without knowledge or information of the documents, except for the Land Development
Agreement of October 6, 1976. 23
NPUM then reiterated its request for and was granted by the appellate court, a subpoena duces
tecum and subpoena ad testificandum, this time addressed to the Chief of the Records Division
of EGMPC. 24 NPUM further filed a Motion for Production, Inspection and Photocopying of
Documents and Books of Accounts of EGMPC, in particular:
1. Master Development and/or Operational Plan of Eternal Gardens
for Memorial Park at Baesa, Metro Manila subject of the
Land Development Agreement.
2. Inventory of memorial lots developed and sold by Eternal under the
Land Development Agreement and the type of memorial
lots developed and sold, i.e., whether lawn type, family
estate type, garden estate type and the number of each type
developed and sold.

3. List of buyers and owners of memorial lots sold under the Land
Development Agreement and the corresponding sales
contracts.
4. Records of number of memorial lots sold on installment terms, and
those sold on cash basis.
5. Sales and marketing records as to the number of memorial lots
effected by the Land Development Agreement sold in each
of the following years: 1978, 1979, 1980, 1981, 1982,
1983, 1984, 1985, 1986, 1987, 1988, 1989, 1990, 1991,
1992, 1993, 1994 and 1995.
6. Monthly accounting records of collections from sales of memorial
lots under the Land Development Agreement from 1978 to
1995, inclusive.
7. Year-end audited financial statements of Eternal Gardens Memorial
Park Corporation from 1977 to 1995, inclusive.
8. Price list of Eternal's memorial plot lots affected by the Land
Development Agreement covering the period 1977 to
1995.

9. List of accredited and/or authorized agents, brokers, salesmen, and

sales counsellors of Eternal from 1977 to 1995 and their
addresses.
10. Records of collections representing 10% of the gross collections
on each memorial lot sold under the Land Development
Agreement, for perpetual care fees and constituting a trust
fund to secure perpetual care of the memorial park
affected by the Land Development Agreement. 25
Later, NPUM filed a second Request for Admissions addressed to Mr. Vida. He was asked to
make the following admissions:
1. That the auditor retained by Eternal Gardens Memorial Park Corp.
to audit and examine its financial position, and which
prepared Eternal's audited financial statements, for the
years 1982, 1983 and 1984 was the auditing and
accounting firms of Josue, Arceo & Co., CPAs, with office
at the 2nd Floor, Roman R. Santos Building, Plaza Goeti,
Manila.
2. That the auditor retained by Eternal Gardens Memorial Park Corp.
to audit and examine its financial position, and which
prepared Eternal's audited financial statement for the
Fiscal years 1985 and 1986 was Roseller A. Ditangco,
CPA, with offices at No. 6, Plata Street, Tugatog,
Malabon, Metro Manila.
3. That the auditor retained by Eternal Gardens Memorial Park Corp.
to audit and examine its financial position, and which
prepared Eternal's audited financial statements for the
Fiscal years 1987, 1988, 1989, 1990, 1991, 1992 and
1993, was Bernardino T. Dela Cruz, CPA with offices at
No. 9, Interior II, K-8th Street, Kamuning, Quezon City.
4. That true and faithful copies of the audited financial statements of
Eternal Gardens Memorial Park Corp. for the Fiscal years
1981 to 1993, inclusive, specifically those referred to in
paragraphs 1, 2 and 3 of this Request, were submitted to
and filed with the Bureau of Internal Revenue as an
integral part of Eternal's Income Tax Returns, as well as
with the Securities and Exchange Commission in
compliance with the reportorial requirements of the said
Securities and Exchange Commission.
5. That each of the following documents, exhibited with and attached
to this request, are true and faithful copies of the original
and genuine documents, thus:
a. Annex "A" (inclusive of sub-markings from Annexes
"A-1" to "A-9") is the audit report prepared by
the accounting firm of Josue, Arceo & Co.,

490
(CPAs), of the financial position of Eternal
Gardens Memorial Park Corp. at 3, December
1982;
b. Annex "B" (inclusive of sub-markings from Annexes
"B-1" to "B-3") is the audit report prepared by
the accounting firm of Josue, Arceo & Co.,
(CPAs) of the financial position of Eternal
Gardens Memorial Park Corp. at 31 December
1983;
c. Annex "C" (inclusive of sub-markings from Annexes
"C-1" to "C-6") is the audit report prepared by
the accounting firm of Josue, Arceo & Co.
(CPAs) of the financial position of Eternal
Gardens Memorial Park Corp. at 31 December
1984;
d. Annex "D" (inclusive of sub-markings from Annexes
"D-1" to "D-3") is the audit report prepared by
Roseller A. Ditangco, CPA of the financial
position of Eternal Gardens Memorial Park
Corp. at 31 December 1985;
e. Annex "E" (inclusive of sub-markings from Annexes
"E-1" to "E-8") is the audit report prepared by
Bernardino T. Dela Cruz, CPA; of the financial
position of Eternal Gardens Memorial Park
Corp. at 31 December 1987;
f. Annex "F" (inclusive of sub-markings from Annexes "F1" to "F-7") is the audit report prepared by
Bernardino E. Dela Cruz, CPA, of the financial
position of Eternal Gardens Memorial Park
Corp. at 31 December 1989;
g. Annex "G" (inclusive of sub-markings from Annexes
"G-1" to "G-9") is the audit report prepared by
Bernardino T. Dela Cruz, CPA, of the financial
position of Eternal Gardens Memorial Park
Corp., at 31 December 1990;
h. Annex "H" (inclusive of sub-markings from Annexes
"H-1" to "H-13") is the audit report prepared
by Bernardino T. Dela Cruz, CPA, of the
financial position of Eternal Gardens Memorial
Park Corp., at 31 December 1991;
i. Annex "I" (inclusive of sub-markings from Annexes "I1" to "I-8") is the audit report prepared by
Bernardino T. Dela Cruz, CPA, of the financial

position of Eternal Gardens Memorial Park

Corp. at 31 December 1992;
j. Annex "J" (inclusive of sub-markings from Annexes "J1" to "J-7") is the audit report prepared by
Bernardino T. Dela Cruz, CPA, of the financial
position of Eternal Gardens Memorial Park
Corp. at 31 December 1993. 26
Meanwhile, EGMPC failed to present the documents required by the subpoena. It further filed
a Denial and/or Objection to the Requests for Admission on the ground that it could not make
comparison of the documents with the originals thereof. 27
On November 10, 1995, Ms. Angelo submitted her Report. 28
In a Resolution dated January 15, 1996, the Court of Appeals approved the report of Ms.
Angelo, finding this "to be a just and fair account of what Eternal Gardens and Memorial Park
owes to the petitioner North Philippine Union Mission of the Seventh-Day Adventists, and
accordingly orders the former to pay and turn over to the latter the amounts of
P167,065,195.00 as principal and P167,235,451.00 in interest . . ." 29
EGMPC filed a Motion for Reconsideration, which was denied for lack of merit by the
appellate court in a Resolution dated April 12, 1996. 30
On April 29, 1996, EGMPC filed a Motion for Extension of Time to File Petition for Certiorari
and Prohibition with this Court, docketed as G.R. No.124554, seeking the review of the
appellate court's Resolutions dated January 15, 1996 and April 12, 1996. 31 The Court granted
this motion for extension, 32 and on May 27, 1996, EGMPC filed the instant petition. 33
It appears, however, that in a Report dated May 31, 1996 in CA-G.R. SP No. 04869, the Court
of Appeals informed the parties that its January 15, 1996 Resolution had attained finality
considering the following:
The respondent Eternal Gardens Memorial Park received copy of the
[January 15, 1996] resolution on January 22, 1996 and, after twelve
(12) days from its receipt or on February 2, 1996, filed a motion for
reconsideration thereof. This Court denied Eternal Garden's motion
for reconsideration in a resolution promulgated April 12, 1996, a copy
of which it received on April 18, 1996. After eleven (11) days from
receipt of the resolution denying its motion for reconsideration, or on
April 12, 1996 (sic), it filed a motion for extension to file a petition
for review with the Supreme Court.
It is quite clear that after the denial of its motion for reconsideration,
Eternal Gardens had only three (3) days left of the reglementary
period to file a petition for review, or only up to April 12, 1996, but
Eternal Gardens allowed that period to lapse, and then filed its motion
to extend to file its petition on April 29, 1996 which is eight (8)
days beyond the period of finality of the resolution sought to be
reviewed by the Supreme Court. Consequently, the resolution of
January 15, 1996 had attained finality before Eternal Gardens filed its
motion to extend before this Honorable Court. 34

491
Entry of judgment was made on June 6, 1996. 35

We restate the material dates thus:

Following the above incidents, on June 20, 1996, EGMPC filed in G.R. No. 73794 an
"Opposition and/or Comment to the Report of the Court of Appeals dated 31 May 1996" with
the prayer:

EGMPC received a copy of the January 15, 1996 Resolution on January 22, 1996. Twelve days
from such receipt, or on February 2, 1996, EGMPC filed its Motion for Reconsideration. On
April 18, 1996, EGMPC received the appellate court's Resolution of April 12, 1996 denying its
Motion for Reconsideration. On April 29, 1996, or eleven days from its receipt of the denial of
its motion for reconsideration, EGMPC filed a motion for extension of time to file its "Petition
for Certiorari and Prohibition" and concurrently paid the legal fees. LibLex

. . . to disregard and nullify the Report of the Court of Appeals dated

May 31, 1996 and at the same time allow or tolerate the First Division
of the Honorable Supreme Court to resolved (sic) the petitioner
Eternal Gardens Petition for Certiorari against the Court of Appeals
and NPUM with G.R. No. 124554. 36
In retort to EGMPC's opposition, also in G.R. No. 73794, NPUM filed on June 11, 1996 an
Omnibus Motion (a) to dismiss the petition in G.R. No.124554, or (b) to consolidate the two
petitions, and (c) for the issuance of a writ of execution. NPUM contended that as a
consequence of the appellate court's resolutions in CA G.R. SP No. 04869 having attained
finality, a writ of execution may be issued under G.R. No. 73794, and EGMPC could no longer
file a separate petition such as that docketed as G.R. No. 124554. 37
In its Comment filed on July 17, 1996, in G.R. No. 124554, NPUM prayed for the denial of the
petition for "being frivolous and dilatory", citing EGMPC's violation of Circular No. 04-94 on
forum shopping, in reference to its (EGMPC's) pleadings filed in G.R. No. 73794. NPUM
pointed out that the reliefs sought by EGMPC in G.R. No. 124554 were "identical" to those in
its Opposition And/Or Comment to the Report of the Court of Appeals dated 31 May 1996
filed in G.R. No. 73794. 38
On December 26, 1996, the Regional Trial Court of Kaloocan City, Branch 120, issued an
Order in the case of origin, Civil Case No. 9556, granting NPUM's motion for execution of
judgment. 39 A writ of execution was subsequently issued by that trial court on January 7,
1997. 40
Because of the trial court's issuance of the writ of execution, on January 10, 1997, EGMPC
filed in G.R. No. 124554 an Urgent Motion for Restraining Order And/Or Injunction and
Motion for Contempt of Court. EGMPC prayed that "pending resolution of the petition to
promptly issue a restraining order and/or injunction against Judge Jaime Discaya of the RTC
Br. 120 of Kalookan City in Civil Case No. 9556 . . ." 41

EGMPC also filed in G.R. No. 73794 on January 17, 1997 an Urgent Motion for Restraining
Order And/Or Injunctive Relief with the same prayer as in its Urgent Motion filed in G.R.
No. 124554. 42
In G.R. No. 124554, the Court granted EGMPC's motion and issued a temporary restraining
order against the trial court's order dated December 16, 1996 and writ of execution dated
January 7, 1997. 43
In a Resolution dated January 27, 1997 issued in G.R. No. 73794, the Court denied for lack of
merit EGMPC's Urgent Motion. 44
The threshold question here is whether Eternal Gardens timely filed its petition for review from
the Court of Appeals' January 15, 1996 and April 12, 1996 Resolutions.

We find that EGMPC's Motion for Extension of Time to File a Petition for Review was timely
filed on April 29, 1996, such motion having been filed eleven days from receipt of the
appellate court's denial of its motion for reconsideration. Supreme Court Circular No. 10 dated
August 28, 1986 on modes and periods of appeal provides thus:
(5) APPEALS BY CERTIORARI TO THE SUPREME COURT
In an appeal by certiorari to this Court under Rule 45 of the Rules of
Court, Section 25 of the Interim Rules and Section 7 of PD 1606, a
party may file a petition for review on certiorari of the judgment of a
regional trial court, the Court of Appeals or the Sandiganbayan within
fifteen days from notice of judgment or of the denial of his motion for
reconsideration filed in due time, and paying at the same time the
corresponding docket fee (Section 1 of Rule 45). In other words, in
the event a motion for reconsideration is filed and denied, the period
of fifteen days begins to run again from notice of denial (See Codilla
vs. Estenzo, 97 SCRA 351; Turingan vs. Cacdad, 122 SCRA 634).
A motion for extension of time to file a petition for review on
certiorari may be filed with the Supreme Court within the
reglementary period, paying at the same time the corresponding
docket fee. 45
While the petition filed by EGMPC purports to be one of certiorari under Rule 65 of the
Revised Rules of Court, we shall treat it as having been filed under Rule 45, considering that it
was filed within the 15-day reglementary period for the filing of a petition for review on
certiorari. As the Court stated in Delsan Transport Lines, Inc. vs. Court of Appeals, where the
Court was liberal in its application of the Rules of Court in the interest of justice. "It cannot . . .
be claimed that this petition is being used as a substitute for appeal after that remedy has been
lost through the fault of petitioner. Moreover, stripped of allegations of 'grave abuse of
discretion,' the petition actually avers errors of judgment rather than of jurisdiction which are
the subject of a petition for review." 46
The May 31, 1996 Report of the Court of Appeals informed the parties that the January 15,
1996 Resolution had attained finality, erroneously applying the rule applicable to petitions for
review filed with the Court of Appeals from a final judgment or order of the regional trial
court. 47
We cannot and do not in the instant case vacate and set aside the May 31, 1996 Report. The
report is not before this Court on review. We must however, within the milieu of this case,
regard the report impertinent by the fact of EGMPC having timely filed its motion for
extension of time to file its petition on April 29, 1996. cdrep

492
We also consider that the consequences of the issuance of the report, that is, the entry of
judgment in the appellate court and the writ of execution issued by the trial court in the case of
origin, inextricably affect the resolution of the instant case. Hence, the rationale for our
restraining order of January 15, 1997.
We next consider whether, as asserted by NPUM, EGMPC's petition must be summarily
dismissed on the ground of forum shopping. NPUM points to EGMPC's Opposition and/or
Comment to the Report of the Court of Appeals dated May 31, 1996 filed in G.R. No.
73794 vis-a-vis its Petition for Review in the instant case, and the two Urgent Motions for the
Issuance of a Temporary Restraining Order filed in G.R. No. 73794 and in the instant case.
NPUM asserts that the reliefs sought by EGMPC in its opposition and in its petition are
"identical." We disagree. The petition here seeks the setting aside of the Court of Appeals'
January 15, 1996 and April 12, 1996 Resolutions.
The Opposition in G.R. No. 73794, on the other hand, sought the nullification of the May 31,
1996 Report and as a corollary, for the instant case to be "allowed or tolerated."
The opposition and the petition do not seek to provoke from this Court the resolution of a same
issue, the evil which Revised Circular No. 28-91 and its companion Administrative Circular
No. 04-94 address. We read the opposition in G.R. No. 73794 as a complement to the petition
here, to which it makes categorical and express reference. 48 We consider it as merely a matter
of discourse and emphasis that Eternal Gardens reiterated its case in the later pleading.
Regarding the motions for the issuance of a temporary restraining order filed by EGMPC on
January 10, 1997 in the instant case and on January 17, 1997 in G.R. No. 73794, we consider
the exigency which may have prompted EGMPC to file the motions in both cases. The trial
court in the case of origin, acted favorably on NPUM's motion for the issuance of a writ of
execution, the basis of which is the alleged finality of the appellate court's January 15, 1996
Resolution. The trial court ruled that the instant case denominated as an original action for
certiorari "does not interrupt the course of the principal action [G.R. No. 73794] nor the
running of the period in the proceeding." 49 To not stay the execution considering the trial
court's ratiocination would render moot EGMPC's remedy in the instant case.
NPUM also contends that EGMPC has committed perjury, pointing to the certification under
oath filed by EGMPC, through its President Gabriel O. Vida, where he states "that there is no
other case pending in any court or tribunal in the Philippines, with the same issues in this case .
. ." 50
Again, we disagree. It does not appear that EGMPC was to pursue the two cases concurrently.
EGMPC filed this new petition, and did not assail the appellate court's resolution under G.R.
No. 73794, as in fact the Court has informed the parties that no further pleadings were to be
entertained in G.R. No. 73794 after remand to the Court of Appeals. 51
EGMPC next asserts that the Resolution of the Third Division dated December 1, 1993
ordering the remand to the Court of Appeals of the case for accounting "changed, modified and
reversed" the September 19, 1988 Decision of the Second Division which ordered the remand
of the case to the trial court. EGMPC contends that the Third Division "is in violation of the
constitution which provides that no doctrine or principle of law laid down in a decision en
banc or in division may be changed, modified or revised by the Court except when sitting en
banc." 52

EGMPC had raised the very same issue in its Motion for Reconsideration 53 of the December
1, 1993 Resolution. The Court, in its Resolution dated February 14, 1994 had denied the
motion with finality for lack of merit.
Needless to say, the argument raised by EGMPC is utterly without consequence. At the time
the September 19, 1988 Decision was rendered, the two civil cases interpleader and quieting
of title were still pending. What was brought before the appellate courts and subject of G.R.
No. 73794 were mere incidents, and not the judgment of the trial court; thus, the remand to the
trial court for further proceedings on the merits of the case. The December 1, 1993 Resolution
was issued after the issue of ownership of the subject parcel of land was already resolved with
finality. What was left for the courts to do was to have an accounting done of the rights and
liabilities of EGMPC and NPUM, thus, the remand to the Court of Appeals.
We now consider the merits of the case.
The gist of EGMPC's contentions is that it owes the amount of only P35,000,000.00 less
advances and not P167,065,195.00 as principal and P167,235,451.00 in interest as computed
by Court Accountant Carmencita C. Angelo. 54
EGMPC first contends that the appellate court, in appointing an accountant to make the
computations, delegated judicial function, such as to determine the admissibility of
evidence. 55
Under the Revised Internal Rules of the Court of Appeals, that court has the
d. Authority to receive evidence and perform any and all acts
necessary for the resolution of factual issues raised in cases falling
within its original jurisdiction.
For the proper disposition of the case, the appellate court, under the above-quoted authority,
designated an accountant "to receive, collate and analyze the documents to be filed by the
parties." 56
No judicial function was exercised by Ms. Angelo. She was not asked to rule on the
admissibility of the evidence. The documents were duly marked during the hearing of July 19,
1995, for the consideration of the appellate court, which alone had the power to decide. Ms.
Angelo's role in the proceedings was to prepare a report, which she did, culling from the
documents submitted to her. While it may be true that the report, when adopted by the
appellate court, became part of its decision, judicial power lies, not with the official who
prepared the report, but with the court itself which wields the power of approval or rejection.
Under American jurisprudence, the rule is thus

It would seem on principle that a commissioner, master or referee

appointed by a court to aid it in the adjudication of a particular case is
not a court when performing the functions assigned to him, although
the court may adopt his conclusions in its decision . . . It has, for
instance, been held that a statute giving the supreme court of a state
the power to appoint commissioners thereof whose duty shall be,
under such rules and regulations as the Court may adopt, to assist it in
the performance of its functions, and in disposing of undetermined

493
cases before it, is not unconstitutional or open to the objection that the
commissioners are vested with judicial power, since the
commissioners merely report facts found and conclusions reached,
and the court retains the power to decide which is the only judicial
power. It has also been pointed out that a chancellor does not, by
referring a matter to a commissioner, delegate his judicial function to
him. The commissioner is appointed for the purpose of assisting the
chancellor, not to supplant or replace him, and the findings of a
commissioner are merely advisory and not binding on the court. 57
EGMPC also contends that it was deprived of due process because it "was not given reasonable
opportunity to know and meet the claim of [NPUM] as its counsel was not able to crossexamine the American Accountant of [NPUM]. 58
The contention is without merit.
Contrary to EGMPC's claim, it was given every opportunity to present its case. At the outset,
the parties were asked by the appellate court to submit documents for accounting. NPUM made
full utilization of the modes of discovery, asking the appellate court to subpoena documents
and testimonies, and requesting admissions from EGMPC regarding documents it (EGMPC)
had in its possession, documents which emanated from the corporation itself and either sent to
NPUM as communiqus, such as the Letter of Mr. Vida dated April 4, 1980 to Pastor
Bienvenido Capule of NPUM stating inter alia that for 1978, EGMPC sold 2,805 memorial
lots and that during the first quarter of 1980 the corporation sold 2,418 lots, totalling
10,730, 59 or documents available to the general public, as in the Price Lists, or filed with
government offices, specifically the Securities and Exchange Commission and the Bureau of
Internal Revenue.
EGMPC cannot claim that it was denied the forum to confer with NPUM and NPUM's
accountant. The appellate court had arranged conferences for the parties and their accountants
to allow them to discuss with each other and with Ms. Angelo. Even Ms. Angelo, in her Letter
dated November 10, 1995 covering her second and final report spoke of such a conference, to
wit:
In compliance with your instructions in the last conference-meeting
with the party-litigants in Case CA-G.R. No. SP No. 04869 held last
August 30, 1995, the undersigned together with the representatives of
the North Philippine Union Mission (NPUM) and the Eternal Gardens
Memorial, Inc. had a discussion on the computations made by each of
the party of the amount due to the North Philippine Union Mission
which were submitted to the Court. 60
It was not even imperative that EGMPC cross-examine the accountant who prepared EGMPC's
computation, and there was no denial of due process without such cross-examination. This
computation was merely to aid Ms. Angelo, who was to make her own independent
computation from the documents submitted to her.
EGMPC also asserts that "substantially if not all records, documents and papers submitted by
the private respondent NPUM to the Court's Accountant which eventually became the basis of
the report and Resolution of January 15, 1996 of the public respondent Court, were not genuine
and not properly identified by the persons who were supposed to have executed the same

including the alleged financial statement of Eternal Gardens allegedly issued by the Securities
and Exchange Commission (SEC)." 61
From the transcript of stenographic notes of the proceedings in the appellate court, we find that
EGMPC acquiesced to the use of the documents submitted by NPUM, including the financial
statements, even actively participating in the discussion of the contents of such documents.
EGMPC's main objection was only on how the entries in these documents were to be
interpreted, for example, on how payments towards the perpetual care fund would be
credited. 62 EGMPC did not object even when counsel for NPUM read into the records the
contents of the documents. 63
It even appears that after Ms. Angelo came up with her first report, EGMPC's counsel
expressed that it was "amenable to that computation." 64 In that report, Ms. Angelo had
stressed that "[s]ince the Eternal Gardens Memorial Park, Inc. did not submit to the Court any
documents pertaining to the computations of the 40% share of the North Philippine Union
Mission of the Seventh Day Adventists, then we have no other recourse but to base the
computation on the available figures and on the other documents as presented by the petitioner
[NPUM]." 65
EGMPC lastly contends that it is not liable for interest. It claims that it was justified in
withholding payment as there was still the unresolved issue of ownership over the property
subject of the Land Development Agreement of October 6, 1976. 66
The argument is without merit. EGMPC under the agreement had the obligation to remit
monthly to NPUM forty percent (40%) of its net gross collection from the development of a
memorial park on property owned by NPUM. The same agreement provided for the
designation of a depository/trustee bank to act as the depository/trustee for all funds collected
by EGMPC. 67 There was no obstacle, legal or otherwise, to the compliance by EGMPC of
this provision in the contract, even on the affectation that it did not know to whom payment
was to be made.
Even disregarding the agreement, EGMPC cannot "suspend" payment on the pretext that it did
not know who among the subject property's claimants was the rightful owner. It had a remedy
under the New Civil Code of the Philippines to give in consignation the amounts due, as
these fell due. 68 Consignation produces the effect of payment. 69
The rationale for consignation is to avoid the performance of an obligation becoming more
onerous to the debtor by reason of causes not imputable to him. 70 For its failure to consign the
amounts due, Eternal Gardens' obligation to NPUM necessarily became more onerous as it
became liable for interest on the amounts it failed to remit.
Notably, EGMPC filed an interpleader action, "the essence of which, aside from the disavowal
of interest in the property in litigation on the part of the petitioner, is the deposit of the property
or funds in controversy with the court." Yet from the outset, EGMPC had assailed any court
ruling ordering the deposit with a reputable bank of the amounts due from it under the Land
Development Agreement. In G.R. No. 73794, 71 the Court made the following discourse on the
disavowal of EGMPC of its obligations, thus:
In the case at bar, a careful analysis of the records will show that
petitioner admitted among others in its complaint in Interpleader that
it is still obligated to pay certain amounts to private respondent; that it
claims no interest in such amounts due and is willing to pay whoever

494
is declared entitled to said amounts. Such admissions in the complaint
were reaffirmed in open court before the Court of Appeals as stated in
the latter court's resolution dated September 5, 1985 in C.A. G.R. No.
04869 which states:
'The private respondent (MEMORIAL) then reaffirms
before the Court its original position that it is a
disinterested party with respect to the property now the
subject of the interpleader case. prLL
'In the light of the willingness, expressly made before the
court, affirming the complaint filed below, that the private
respondent (MEMORIAL) will pay whatever is due on the
Land Development Agreement to the rightful
owner/owners, there is no reason why the amount due on
subject agreement has not been placed in the custody of
the Court.'
Under the circumstances, there appears to be no plausible reason for
petitioner's objections to the deposit of the amounts in litigation after
having asked for the assistance of the lower court by filing a
complaint for interpleader where the deposit of aforesaid amounts is
not only required by the nature of the action but is a contractual
obligation of the petitioner under the Land Development Program.
As correctly observed by the Court of Appeals, the essence of an
interpleader, aside from the disavowal of interest in the property in
litigation on the part of the petitioner, is the deposit of the property or
funds in controversy with the court, it is a rule founded on justice and
equity: 'that the plaintiff may not continue to benefit from the
property or funds in litigation during the pendency of the suit at the
expense of whoever will ultimately be decided as entitled thereto.'
The case at bar was elevated to the Court of Appeals on certiorari
with prohibitory and mandatory injunction. Said appellate court found
that more than twenty million pesos are involved; so that on interest
alone for savings or time deposit would be considerable, now
accruing in favor of the Eternal Gardens. Finding that such is
violative of the very essence of the complaint for interpleader as it
clearly runs against the interest of justice in this case, the Court of
Appeals cannot be faulted for finding that the lower court committed
a grave abuse of discretion which requires correction by the
requirement that a deposit of said amounts should be made to a bank
approved by the Court.

Petitioner would now compound the issue by its obvious turnabout,

presently claiming in its memorandum that there is a novation of
contract so that the amounts due under the Land Development
Agreement were allegedly extinguished, and the requirement to make
a deposit of said amounts in a depository bank should be held in
abeyance until after the conflicting claims of ownership now on trial
before Branch CXXII RTC-Caloocan City, has finally been resolved.

All these notwithstanding, the need for the deposit in question has
been established, not only in the lower courts and in the Court of
Appeals but also in the Supreme Court where such deposit was
required in the resolution of July 8, 1987 to avoid wastage of funds.
Even during the pendency of G.R. No. 73794, EGMPC was required to deposit the accruing
interests with a reputable commercial bank "to avoid possible wastage of funds" when the case
was given due course. 72 Yet, EGMPC hedged in depositing the amounts due and made
obvious attempts to stay payment by filing sundry motions and pleadings.
We thus find that the Court of Appeals correctly held Eternal Gardens liable for interest at the
rate of twelve percent (12%). The withholding of the amounts due under the agreement was
tantamount to a forbearance of money. 73
CONSIDERING THE FOREGOING, the Court Resolved to DENY the petition. The
Resolutions dated January 15, 1996 and April 12, 1996 are AFFIRMED. The temporary
restraining order issued by this Court on January 15, 1997 is LIFTED.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ ., concur.
||| (Eternal Gardens Memorial Park Corp. v. Court of Appeals, G.R. No. 124554, [December 9,
1997], 347 PHIL 232-266)

495

SECOND DIVISION
[G.R. No. 150913. February 20, 2003.]
SPOUSES TEOFILO and SIMEONA RAYOS, and GEORGE
RAYOS, petitioners, vs.
DONATO
REYES,
SATURNINO
REYES, TOMASA R. BUSTAMANTE and TORIBIA R.
CAMELO, respondents.

Villamora A. Tolete for petitioners.

as full settlement of the obligation, or in the alternative, a declaration by the court of the
validity of the consignation. While it was held that the approval of the court or the
obligee's acceptance of the deposit is not necessary where the obligor has performed all
acts necessary to a valid consignation such that court approval thereof cannot be doubted,
the ruling is, however, applicable only where there is unmistakable evidence on record
that the prerequisites of a valid consignation are present, especially the conformity of the
proffered payment to the terms of the obligation which is to be paid. In the instant case,
there was no clear and preponderant evidence that the consignation of P724.00 satisfied
all the requirements for validity and enforceability. Mamerto Reyes likewise vehemently
contested the propriety of the consignation. Petitioners, therefore, cannot rely upon sheer
speculation and unfounded inference to construe the Decision of the then Court of First
Instance as one impliedly approving the consignation and perfecting the redemption of
the three parcels of land. Thus, the Court held that the failure of the petitioners to comply
with the requirements rendered the consignation ineffective.

Floro T. Abelon for private respondents.

SYNOPSIS
Petitioner assailed the decision of the Court of Appeals which affirmed in
toto the Decision of the Regional Trial Court of Alaminos, Pangasinan declaring void the
separate Deeds of Absolute Sale executed by Francisco Tazal in favor of Blas Rayos, and
to spouses Teofilo and Simeona Rayos and by Blas Rayos to the same spouses, all
encompassing the three parcels of land sold under the Deed of Sale with Right to
Repurchase in favor of Mamerto Reyes, predecessor-in-interest of the respondents. In its
Decision, the trial court declared the respondents, heirs of Mamerto Reyes, as absolute
owners of the subject property and ordered petitioner-spouses to vacate and surrender the
subject lot in favor of the respondents. It rationalized that petitioners did not present any
evidence to prove that they and their predecessor-in-interest were able to repurchase the
property within the period of redemption.
Among others, petitioners argued that the consignation of P724.00 in the civil
case provides the best evidence of the repurchase of the subject property and had the full
effect of redeeming the properties from respondents and their predecessors-in-interest.
The Court denied the petition and affirmed the decision of the Court of
Appeals affirming in toto the decision of the court a quo, except for the sole modification
to delete and set aside the award of damages. The Court found no evidence to prove that
petitioners paid at any time the repurchase price for the three parcels of land in dispute
except for the deposit of P724.00 in the then Court of First Instance which, however, fell
short of all the acts necessary for a valid consignation and discharge of their obligation to
respondents. First, petitioners failed to offer a valid and unconditional tender of payment.
Consignation and tender of payment must not be encumbered by conditions if they are to
produce the intended result of fulfilling the obligation. Here, petitioners' tender of
payment of P724.00 was conditional upon his waiver of the two-year redemption period
stipulated in the deed of sale with right to repurchase. Second, petitioners failed to notify
respondents of the intention to deposit the amount with the court. The consignation as a
means of payment is void without any announcement of the intention to resort to
consignation first being made to the persons interested in the fulfillment of the obligation.
Third, petitioners failed to show the acceptance by the creditor of the amount deposited

SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF
OBLIGATIONS; CONSIGNATION; PREREQUISITES TO BE EFFECTIVE; NOT
COMPLIED WITH IN CASE AT BAR. In order that consignation may be effective the
debtor must show that (a) there was a debt due; (b) the consignation of the obligation had been
made because the creditor to whom a valid tender of payment was made refused to accept it;
(c) previous notice of the consignation had been given to the person interested in the
performance of the obligation; (d) the amount due was placed at the disposal of the court; and,
(e) after the consignation had been made the person interested was notified thereof. In the
instant case, petitioners failed, first, to offer a valid and unconditional tender of
payment; second, to notify respondents of the intention to deposit the amount with the court;
and third, to show the acceptance by the creditor of the amount deposited as full settlement of
the obligation, or in the alternative, a declaration by the court of the validity of the
consignation. The failure of petitioners to comply with any of these requirements rendered the
consignation ineffective. AaDSTH
2. ID.; ID.; ID.; CONSIGNATION AND TENDER OF PAYMENT; MUST NOT BE
ENCUMBERED BY CONDITIONS IF THEY ARE TO PRODUCE THE INTENDED
RESULT OF FULFILLING THE OBLIGATION; CASE AT BAR. Consignation and tender
of payment must not be encumbered by conditions if they are to produce the intended result of
fulfilling the obligation. In the instant case, the tender of payment of P724.00 was conditional
and void as it was predicated upon the argument of Francisco Tazal that he was paying a debt
which he could do at any time allegedly because the 1 September 1957 transaction was a
contract of equitable mortgage and not a deed of sale with right to repurchase. The ostensible
purposes of offering the amount in connection with a purported outstanding debt were to evade
the stipulated redemption period in the deed of sale which had already expired when the tender
of payment was made and Civil Case No. A-245 was instituted, and as a corollary, to avail of
the thirty (30)-day grace period under Art. 1606 of the Civil Code within which to exercise the
right to repurchase. Mamerto Reyes was therefore within his right to refuse the tender of

496
payment offered by petitioners because it was conditional upon his waiver of the two (2)-year
redemption period stipulated in the deed of sale with right to repurchase.
3. ID.; ID.; ID.; CONSIGNATION; WITHOUT ANY ANNOUNCEMENT OF THE
INTENTION TO RESORT TO CONSIGNATION FIRST BEING MADE TO THE PERSONS
INTERESTED IN THE FULFILLMENT OF OBLIGATION, THE CONSIGNATION AS A
MEANS OF PAYMENT IS VOID; CASE AT BAR. Moreover, petitioners failed to prove in
Civil Cases Nos. A-245 and A-2032 that any form of notice regarding their intention to deposit
the amount of P724.00 with the Court of First Instance had been served upon respondents. This
requirement is not fulfilled by the notice which could have ensued from the filing of the
complaint in Civil Case No. A-245 or the stipulation made between Francisco Tazal and
Mamerto Reyes regarding the consignation of P724.00. The latter constitutes the second notice
required by law as it already concerns the actual deposit or consignation of the amount and is
different from the first notice that makes known the debtor's intention to deposit the amount, a
requirement missing in the instant case. Without any announcement of the intention to resort to
consignation first being made to the persons interested in the fulfillment of the obligation, the
consignation as a means of payment is void.
4. ID.; ID.; ID.; ID.; APPROVAL OF THE COURT OR THE OBLIGEE'S ACCEPTANCE OF
THE DEPOSIT IS NOT NECESSARY WHERE ALL THE PREREQUISITES FOR
VALIDITY THEREOF ARE PRESENT; CASE AT BAR. To be sure, while it has been held
that approval of the court or the obligee's acceptance of the deposit is not necessary where the
obligor has performed all acts necessary to a valid consignation such that court approval
thereof cannot be doubted, Sia v. Court of Appeals clearly advises that this ruling is applicable
only where there is unmistakable evidence on record that the prerequisites of a valid
consignation are present, especially the conformity of the proffered payment to the terms of the
obligation which is to be paid. In the instant case, since there is no clear and preponderant
evidence that the consignation of P724.00 satisfied all the requirements for validity and
enforceability, and since Mamerto Reyes vehemently contested the propriety of the
consignation, petitioners cannot rely upon sheer speculation and unfounded inference to
construe the Decision of the Court of First Instance as one impliedly approving the
consignation of P724.00 and perfecting the redemption of the three (3) parcels of land.
5. ID.; ID.; ID.; ID.; COURT'S DECLARATION THAT THE CONSIGNATION HAS BEEN
PROPERLY MADE WILL RELEASE THE DEBTOR FROM LIABILITY; CASE AT BAR.
It should be recalled that one of the requisites of consignation is the filing of the complaint
by the debtor against the creditor. Hence it is the judgment on the complaint where the court
declares that the consignation has been properly made that will release the debtor from liability.
Should the consignation be disapproved by the court and the case dismissed, there is no
payment and the debtor is in moraand he shall be liable for the expenses and bear the risk of
loss of the thing. To sanction the argument of petitioners and in the process excuse them from
their responsibility of securing from the trial court in Civil Case No. A-245 a categorical
declaration that the consignation of P724.00 had complied with all the essential elements for its
validity would only dilute the rule requiring absolute compliance with the requisites of
consignation. It also disturbs a steady and stable status of proprietary rights, i.e., ". . . el
acreedor tan solo, y no el juez, puede autorizar la variacion que para los derechos de aquel
suponga la que se intente en el objeto, cuantia o forma de las obligaciones," since parties are
left guessing on whether the repurchase of the properties had been effected. In a broader sense,
this uncertain state will only depress the market value of the land and virtually paralyze efforts
of the landowner to meet his needs and obligations and realize the full value of his land.

6. ID.; ESTOPPEL AND LACHES; ESSENCE; PRINCIPLE NOT APPLICABLE TO CASE

AT BAR. Moreover, we do not think that respondents' causes of action in Civil Case No. A2032 are now barred by estoppel and laches: The essence of estoppel and laches is the failure
or neglect for an unreasonable and unexplained length of time to do that which by exercising
due diligence could or should have been done earlier; it is the negligence or omission to assert
a right within a reasonable time warranting a presumption that the party entitled to assert it
either has abandoned or declined to assert it although there is no absolute rule as to what
constitutes staleness of demand as each case is to be determined according to its particular
circumstances. In the instant case, it was prudent and discerning for respondents and their
predecessor-in-interest Mamerto Reyes that they deferred any action against petitioners, i.e.,
Civil Case No. A-2032, to recover ownership and possession of the three (3) pieces of real
estate, until the finality of judgment in Civil Case No. A-245. For patiently electing not to
inundate our courts of justice with cases the outcome of which may well depend upon the then
pending civil suit, respondents cannot now be penalized by barring their complaint in Civil
Case No. A-2032 on the equitable grounds of estoppel and laches.
7. ID.; SALES; ISSUE OF GOOD FAITH AND BAD FAITH OF BUYER IS RELEVANT
ONLY WHERE SUBJECT OF SALE IS REGISTERED LAND AND THE PURCHASER IS
BUYING THE SAME FROM THE REGISTERED OWNER WHOSE TITLE TO THE LAND
IS CLEAN. We also find no reason to disturb our findings upon petitioners' assertion that
they were purchasers of the three (3) parcels of land in good faith and for value. As we held
in David v. Bandin, "the issue of good faith or bad faith of the buyer is relevant only where the
subject of the sale is registered land and the purchaser is buying the same from the registered
owner whose title to the land is clean . . . in such case the purchaser who relies on the clean
title of the registered owner is protected if he is a purchaser in good faith for value." Since the
properties in question are unregistered lands, petitioners as subsequent buyers thereof did so at
their peril. Their claim of having bought the land in good faith, i.e., without notice that some
other person has a right to or interest in the property, would not protect them if it turns out, as it
actually did in this case, that their seller did not own the property at the time of the sale.
8. ID.; ID.; BURDEN OF PROVING THE STATUS OF A PURCHASER IN GOOD FAITH
AND FOR VALUE LIES UPON HIM WHO ASSERTS THAT STATUS; CASE AT BAR.
At any rate, petitioners failed to discharge their burden of proof that they were purchasers of
the three (3) parcels of land in good faith. For, as we ruled in Embrado v. Court of Appeals, the
burden of proving the status of a purchaser in good faith and for value lies upon him who
asserts that status, which is not discharged by simply invoking the ordinary presumption of
good faith, i.e., that everyone is presumed to act in good faith, since the good faith that is here
essential is integral with the very status which must be established. In the proceedings a quo,
what is evident is the admitted fact of payment made by Mamerto Reyes as respondents'
predecessor-in-interest of the taxes on the properties prior to and at the time when the contracts
of sale in favor of petitioner-spouses were perfected, which undoubtedly confirms the
precedence of respondents' possession of the parcels of land in question. This situation should
have compelled petitioners to investigate the right of respondents over the properties before
buying them, and in the absence of such inquiry, the rule is settled that a buyer in the same
circumstances herein involved cannot claim to be a purchaser in good faith.
9. ID.; ID.; ID.; DOUBLE SALES; RULE NOT APPLICABLE ABSENT GOOD FAITH ON
THE PART OF PURCHASER OF UNREGISTERED LAND. The absence of good faith on
the part of petitioner-spouses Teofilo and Simeona Rayos in purchasing the three (3) parcels of

497
unregistered land precludes the application of the rule on double sales enunciated in Art. 1544
of the Civil Code. In any event, even if we apply Art. 1544, the facts would nonetheless show
that respondents and their predecessor-in-interest registered first the source of their ownership
and possession, i.e., the 1 September 1957 deed of sale with right to repurchase, held the oldest
title, and possessed the real properties at the earliest time. Applying the doctrine of "priority in
time, priority in rights" or "prius tempore, potior jure," respondents are entitled to the
ownership and possession of the parcels of land in dispute. aCIHcD
10. ID.; DAMAGES; ACTUAL DAMAGES; CANNOT BE AWARDED ABSENT PROOF
THEREOF. Finally, on the issue of damages, we agree with petitioners that respondents
failed to prove their entitlement to actual damages for litigation expenses of P20,000.00,
attorney's fees of P10,000.00 and exemplary damages of P50,000.00 plus costs. No evidence to
prove actual damages was offered in Civil Case No. A-2032 since the parties therein submitted
the case for decision on the basis of their respective memoranda, hence no actual damages can
be awarded.
11. ID.; ID.; EXEMPLARY DAMAGES; AWARD THEREOF UNWARRANTED ABSENT
CLEAR AND CONVINCING PROOF THAT A PARTY ACTED IN A WANTON,
FRAUDULENT, RECKLESS, OPPRESSIVE OR MALEVOLENT MANNER. In the same
manner, there is no clear and convincing showing that petitioners acted in a wanton, fraudulent,
reckless, oppressive, or malevolent manner to warrant the imposition of exemplary damages in
respondents' favor. In any event, exemplary damages cannot be adjudicated in the instant case
since there is no award of moral, temperate or compensatory damages.
12. ID.; ID.; ATTORNEY'S FEES; MERE FILING OF A COMPLAINT DOES NOT IPSO
FACTO ENTITLE A PARTY TO AN AWARD THEREOF. Similarly, we cannot award
attorney's fees since there is no stipulation to grant the same nor were exemplary damages
awarded or were improperly imposed as in the instant case. It is appropriate to stress that the
mere filing of a complaint does not ipso facto entitle a party to attorney's fees since this act is a
means sanctioned by law to protect rights and interests even if found subsequently to be
unmeritorious.

DECISION

BELLOSILLO, J p:
AT STAKE IN THIS PETITION FOR REVIEW is the ownership of three (3) parcels of
unregistered land with an area of approximately 130,947 square meters situated in Brgy. Sapa,
Burgos, Pangasinan, the identities of which are not disputed.
The three (3) parcels were formerly owned by the spouses Francisco and Asuncion Tazal who
on 1 September 1957 sold them for P724.00 to respondents' predecessor-in-interest, one
Mamerto Reyes, with right to repurchase within two (2) years from date thereof by paying to
the vendee the purchase price and all expenses incident to their reconveyance. After the sale
the vendee a retro took physical possession of the properties and paid the taxes thereon. 1

The otherwise inconsequential sale became controversial when two (2) of the three (3) parcels
were again sold on 24 December 1958 by Francisco Tazal for P420.00 in favor of petitioners'
predecessor-in-interest Blas Rayos without first availing of his right to repurchase the
properties.
In the meantime, on 1 September 1959 the conventional right of redemption in favor of
spouses Francisco and Asuncion Tazal expired without the right being exercised by either the
Tazal spouses or the vendee Blas Rayos.
After the expiration of the redemption period, Francisco Tazal attempted to repurchase the
properties from Mamerto Reyes by asserting that the 1 September 1957 deed of sale with right
of repurchase was actually an equitable mortgage and offering the amount of P724.00 to pay
for the alleged debt. 2 But Mamerto Reyes refused the tender of payment and vigorously
claimed that their agreement was not an equitable mortgage. 3
On 9 May 1960 Francisco Tazal filed a complaint with the Court of First Instance of
Pangasinan against Mamerto Reyes, docketed as Civil Case No. A-245, for the declaration of
the 1 September 1957 transaction as a contract of equitable mortgage. He also prayed for an
order requiring defendant Mamerto Reyes to accept the amount of P724.00 which he had
deposited on 31 May 1960 with the trial court as full payment for his debt, and canceling the
supposed mortgage on the three (3) parcels of land with the execution of the corresponding
documents of reconveyance in his favor. 4 Defendant denied plaintiff's allegations and
maintained that their contract was a sale with right of repurchase that had long expired.
On 22 June 1961 Francisco Tazal again sold the third parcel of land previously purchased by
Mamerto Reyes to petitioner-spouses Teofilo and Simeona Rayos for P400.00. On 1 July 1961
petitioner spouses bought from Blas Rayos for P400.00 the two (2) lots that Tazal had sold at
the first instance to Mamerto Reyes and thereafter to Blas Rayos. Curiously, these contracts of
sale in favor of petitioner-spouses were perfected while Civil Case No. A-245 was pending
before the trial court.
On 26 September 1962 the parties in Civil Case No. A-245 submitted a stipulation of facts
upon which the Court of First Instance would decide the case. They admitted the genuineness
and due execution of the 1 September 1957 deed of sale with right of repurchase although they
were in disagreement as to its true character. They also acknowledged the consignation of
P724.00 in the Court of First Instance on 31 May 1960 and the payment of taxes by Mamerto
Reyes on the three (3) parcels of land from 1958 to 1962. 5
On 5 January 1963 the trial court in Civil Case No. A-245 rejected the contention of Francisco
Tazal that the deed of sale executed on 1 September 1957 was an equitable mortgage but held
that Tazal could nonetheless redeem the three (3) parcels of land within thirty (30) days from
finality of judgment by paying to Mamerto Reyes the purchase price of P724.00 and all
expenses to execute the reconveyance, i.e., the expenses of the contract and the necessary and
useful expenses made on the properties as required by Art. 1616 of the Civil Code. The
dispositive portion of the trial court's decision reads

WHEREFORE, the Court, hereby renders judgment declaring the

contract . . . entered into by the plaintiffs and the defendant and
captioned 'Deed of Sale with Right to Repurchase' as a true sale with
right to repurchase . . . and not an equitable mortgage . . . and

498
declaring the plaintiffs entitled to repurchase the property in question
within thirty (30) days from finality of this decision, without
pronouncement as to cost. 6
Mamerto Reyes appealed the Decision to the Court of Appeals, 7 which in turn elevated the
appeal to this Court 8 since only questions of law were involved. 9 When Mamerto Reyes died
in 1986, petitioner-spouses Teofilo and Simeona Rayos wrested physical possession of the
disputed properties from Reyes's heirs.
On 16 May 1990 this Court considered the case closed and terminated for failure of the parties
therein to manifest their interest to further prosecute the case. On 20 June 1990 the judgment in
Civil Case No. A-245 became final and executory.
Subsequent to the finality of judgment in Civil Case No. A-245 petitioner-spouses did nothing
to repurchase the three (3) parcels of land within the thirty (30)-day grace period from finality
of judgment since, according to them, they believed that the consignation of P724.00 in the
civil case had perfected the repurchase of the disputed properties.
On 6 July 1992 respondents as heirs of Mamerto Reyes executed an affidavit adjudicating to
themselves the ownership of the parcels of land and declared the properties in their names for
assessment and collection of real estate taxes. On 19 January 1993 respondents registered the 1
September 1957 deed of sale with right of repurchase with the register of deeds.
On 8 July 1993 respondents filed a complaint for damages and recovery of ownership and
possession of the three (3) parcels of land in dispute against herein petitioner-spouses Teofilo
and Simeona Rayos and petitioner George Rayos as administrator thereof before the Regional
Trial Court of Alaminos, Pangasinan. 10 It was respondents' theory that neither petitioners nor
their predecessors-in-interest Francisco Tazal and Blas Rayos repurchased the properties before
buying them in 1958 and 1961 or when the judgment in Civil Case No. A-245 became final
and executory in 1990, hence the sale of the three (3) parcels of land to petitioner-spouses did
not transfer ownership thereof to them.
Petitioners argued on the other hand that the consignation of P724.00 in Civil Case No. A-245
had the full effect of redeeming the properties from respondents and their predecessor-ininterest, and that respondents were guilty of estoppel and laches since Mamerto Reyes as their
predecessor-in-interest did not oppose the sale to Blas Rayos and to petitioner-spouses Teofilo
and Simeona Rayos. The parties then filed their respective memoranda after which the case
was submitted for decision.
On 15 November 1996 the trial court promulgated its Decision in Civil Case No. A-2032
finding merit in respondents' claim for damages as well as ownership and possession of the
disputed parcels of land from petitioners. 11 The court declared void the separate deeds of
absolute sale thereof executed by Francisco Tazal in favor of Blas Rayos and to spouses Teofilo
and Simeona Rayos and by Blas Rayos to the same spouses, and ordered herein petitioners and
Francisco Tazal to vacate and reconvey the lands to respondents as heirs of Mamerto Reyes
and to pay actual damages for litigation expenses in the sum of P20,000.00, attorney's fees of
P10,000.00, and exemplary damages of P50,000.00 plus costs. The court a quorationalized that
petitioners did not present evidence to prove that they and their predecessor-in-interest were
able to repurchase the property within the period of redemption set forth by the Court of First
Instance in Civil Case No. A-245. 12 Petitioners appealed the Decision to the Court of
Appeals. 13

On 31 May 2001 the appellate court promulgated its Decision affirming in toto the judgment
appealed from. 14 The Court of Appeals held that the deposit of P724.00 on 31 May 1960 in
Civil Case No. A-245 was done belatedly, i.e., after the two (2) year-period from 1 September
1957, the date of the sale as stated in the deed of sale between the spouses Francisco and
Asuncion Tazal and Mamerto Reyes, and did not cover the entire redemption price, i.e., the
selling price of P724.00 plus the expenses of executing the contract and the necessary and
useful expenses made on the properties. The appellate court further ruled that estoppel and
laches did not bar the cause of action of respondents as plaintiffs in Civil Case No. A-2032
since Mamerto Reyes as their predecessor-in-interest actively resisted the claim of Francisco
Tazal in Civil Case No. A-245 to treat the 1 September 1957 sale as an equitable mortgage and
to authorize the redemption of the parcels of land in dispute beyond the two (2)-year period
stipulated in the sale with right to repurchase. Hence, the instant petition for review.
Petitioners argue that the consignation of P724.00 in Civil Case No. A-245 provides the best
evidence of the repurchase of the three (3) parcels of land; that the consignation was admitted
by Mamerto Reyes himself in the stipulation of facts and approved implicitly by the Court of
First Instance when it held the 1 September 1957 transaction as a contract of sale with right of
repurchase; that respondents failed to prove the existence of other expenses, i.e., the expenses
of the contract and the necessary and useful expenses made on the properties, required by Art.
1616 of theCivil Code to be paid in addition to the purchase price of P724.00 so that petitioners
may validly exercise the right to repurchase the real estate; that Mamerto Reyes as respondents'
predecessor-in-interest was guilty of estoppel and laches for not seeking the annulment of the
contracts of sale in favor of Blas Rayos and petitioner-spouses Teofilo and Simeona Rayos;
that petitioner-spouses are buyers in good faith and for value of the three (3) parcels of land;
and finally, that there is no legal basis for awarding damages since Civil Case No. A-2032 was
decided solely on the basis of the parties' memoranda and not upon any evidence offered.
It appears that petitioners hinge their arguments upon the validity of the consignation of
P724.00 and accept the proposition that if the consignation is declared void the subsequent
sales to Blas Rayos and petitioner-spouses would be ineffective to transfer ownership of the
disputed parcels and concomitantly would vest respondents with the ownership and possession
thereof.
On the other hand, respondents maintain that the absence of an express or at least discernible
court approval of the consignation of P724.00 in Civil Case No. A-245 prevented the
repurchase of the parcels of land in question; that the deposit of only P724.00 did not cover all
the expenses required by Art. 1616 of the Civil Code for a valid repurchase of the properties;
that Mamerto Reyes as their predecessor-in-interest was not guilty of estoppel and laches in not
filing a complaint to annul the contracts of sale in favor of Blas Rayos and petitioner-spouses
Teofilo and Simeona Rayos since during that time Civil Case No. A-245 was pending before
the courts; that petitioner-spouses are not buyers in good faith and for value since they knew
that the parcels of land had been previously sold to Mamerto Reyes and that, in any event, the
rule protecting buyers in good faith and for value applies only to transactions involving
registered lands and not to unregistered lands as in the instant case; and finally, that the award
of damages is amply supported by their pleadings in the trial court.
We deny the instant petition for review and affirm the decision of the court a quo, except for
the sole modification to delete and set aside the award of damages. There is no evidence to
prove that petitioners paid at any time the repurchase price for the three (3) parcels of land in
dispute except for the deposit of P724.00 in the Court of First Instance which however fell

499
short of all the acts necessary for a valid consignation and discharge of their obligation to
respondents.
In order that consignation may be effective the debtor must show that (a) there was a debt due;
(b) the consignation of the obligation had been made because the creditor to whom a valid
tender of payment was made refused to accept it; (c) previous notice of the consignation had
been given to the person interested in the performance of the obligation; (d) the amount due
was placed at the disposal of the court; and, (e) after the consignation had been made the
person interested was notified thereof. 15
In the instant case, petitioners failed, first to offer a valid and unconditional tender of
payment; second, to notify respondents of the intention to deposit the amount with the court;
and third, to show the acceptance by the creditor of the amount deposited as full settlement of
the obligation, or in the alternative, a declaration by the court of the validity of the
consignation. The failure of petitioners to comply with any of these requirements rendered the
consignation ineffective. 16
Consignation and tender of payment must not be encumbered by conditions if they are to
produce the intended result of fulfilling the obligation. 17In the instant case, the tender of
payment of P724.00 was conditional and void as it was predicated upon the argument of
Francisco Tazal that he was paying a debt which he could do at any time allegedly because the
1 September 1957 transaction was a contract of equitable mortgage and not a deed of sale with
right to repurchase. The ostensible purposes of offering the amount in connection with a
purported outstanding debt were to evade the stipulated redemption period in the deed of sale
which had already expired when the tender of payment was made and Civil Case No. A-245
was instituted, and as a corollary, to avail of the thirty (30)-day grace period under Art. 1606 of
the Civil Code within which to exercise the right to repurchase. 18 Mamerto Reyes was
therefore within his right to refuse the tender of payment offered by petitioners because it was
conditional upon his waiver of the two (2)-year redemption period stipulated in the deed of sale
with right to repurchase.

Moreover, petitioners failed to prove in Civil Cases Nos. A-245 and A-2032 that any form of
notice regarding their intention to deposit the amount of P724.00 with the Court of First
Instance had been served upon respondents. This requirement is not fulfilled by the notice
which could have ensued from the filing of the complaint in Civil Case No. A-245 or the
stipulation made between Francisco Tazal and Mamerto Reyes regarding the consignation of
P724.00. The latter constitutes the second notice required by law as it already concerns the
actual deposit or consignation of the amount and is different from the first notice that makes
known the debtor's intention to deposit the amount, a requirement missing in the instant
case. 19 Without any announcement of the intention to resort to consignation first being made
to the persons interested in the fulfillment of the obligation, the consignation as a means of
payment is void. 20
It is also futile to argue that the deposit of P724.00 with the Court of First Instance could have
perfected the redemption of the three (3) parcels of land because it was not approved by the
trial court, much less accepted by Mamerto Reyes or his heirs, herein respondents. The
dispositive portion of the Decision in Civil Case No. A-245, which reads ". . . the Court,
hereby renders judgment declaring the contract . . . entered into by the plaintiffs and the
defendant and captioned 'Deed of Sale with Right to Repurchase' as a true sale with right to

repurchase . . . and not an equitable mortgage .. . and declaring the plaintiffs entitled to
repurchase the property in question within thirty (30) days from finality of this decision . . . "
plainly rejected the complaint for lack of merit and necessarily also the consignation done
pursuant thereto. This conclusion is buttressed by the directive of the trial court in the body of
the Decision that Francisco Tazal "may still exercise the right to repurchase the property in
question by returning to the [Mamerto Reyes] the purchase price of P724.00 plus all expenses
incident to the reconveyance within the period of thirty (30)-days from the time this decision
becomes final . . . " 21 The obvious reference of this statement was the stipulation made by the
parties therein that "the defendant [Mamerto Reyes] has been paying the taxes on said
properties from 1958 to 1969 . . ." 22 where the taxes paid constituted necessary expenses that
petitioners had to reimburse to respondents' predecessor-in-interest aside from the P724.00
earlier deposited by Tazal.
To be sure, while it has been held that approval of the court or the obligee's acceptance of the
deposit is not necessary where the obligor has performed all acts necessary to a valid
consignation such that court approval thereof cannot be doubted, Sia v. Court of
Appeals 23 clearly advises that this ruling is applicable only where there is unmistakable
evidence on record that the prerequisites of a valid consignation are present, especially the
conformity of the proffered payment to the terms of the obligation which is to be paid. 24 In
the instant case, since there is no clear and preponderant evidence that the consignation of
P724.00 satisfied all the requirements for validity and enforceability, and since Mamerto Reyes
vehemently contested the propriety of the consignation, petitioners cannot rely upon sheer
speculation and unfounded inference to construe the Decision of the Court of First Instance as
one impliedly approving the consignation of P724.00 and perfecting the redemption of the
three (3) parcels of land.
It should be recalled that one of the requisites of consignation is the filing of the complaint by
the debtor against the creditor. Hence it is the judgment on the complaint where the court
declares that the consignation has been properly made that will release the debtor from liability.
Should the consignation be disapproved by the court and the case dismissed, there is no
payment and the debtor is in mora and he shall be liable for the expenses and bear the risk of
loss of the thing. 25
To sanction the argument of petitioners and in the process excuse them from their
responsibility of securing from the trial court in Civil Case No. A-245 a categorical declaration
that the consignation of P724.00 had complied with all the essential elements for its validity
would only dilute the rule requiring absolute compliance with the requisites of
consignation. 26 It also disturbs a steady and stable status of proprietary rights, i.e., ". . . el
acreedor tan solo, y no el juez, puede autorizar la variacion que para los derechos de aquel
suponga la que se intente en el objeto, cuantia o forma de las obligaciones," 27 since parties
are left guessing on whether the repurchase of the properties had been effected. In a broader
sense, this uncertain state will only depress the market value of the land and virtually paralyze
efforts of the landowner to meet his needs and obligations and realize the full value of his land.
Moreover, we do not think that respondents' causes of action in Civil Case No. A-2032 are now
barred by estoppel and laches. The essence of estoppel and laches is the failure or neglect for
an unreasonable and unexplained length of time to do that which by exercising due diligence
could or should have been done earlier; it is the negligence or omission to assert a right within
a reasonable time warranting a presumption that the party entitled to assert it either has
abandoned or declined to assert it although there is no absolute rule as to what constitutes

500
staleness of demand as each case is to be determined according to its particular
circumstances. 28
In the instant case, it was prudent and discerning for respondents and their predecessor-ininterest Mamerto Reyes that they deferred any action against petitioners, i.e., Civil Case No. A2032, to recover ownership and possession of the three (3) pieces of real estate, until the
finality of judgment in Civil Case No. A-245. For patiently electing not to inundate our courts
of justice with cases the outcome of which may well depend upon the then pending civil suit,
respondents cannot now be penalized by barring their complaint in Civil Case No. A-2032 on
the equitable grounds of estoppel and laches.
We also find no reason to disturb our findings upon petitioners' assertion that they were
purchasers of the three (3) parcels of land in good faith and for value. As we held in David v.
Bandin, "the issue of good faith or bad faith of the buyer is relevant only where the subject of
the sale is registered land and the purchaser is buying the same from the registered owner
whose title to the land is clean . . . in such case the purchaser who relies on the clean title of
the registered owner is protected if he is a purchaser in good faith for value." 29 Since the
properties in question are unregistered lands, petitioners as subsequent buyers thereof did so at
their peril. Their claim of having bought the land in good faith, i.e., without notice that some
other person has a right to or interest in the property, would not protect them if it turns out, as it
actually did in this case, that their seller did not own the property at the time of the sale.
At any rate, petitioners failed to discharge their burden of proof that they were purchasers of
the three (3) parcels of land in good faith. For, as we ruled in Embrado v. Court of
Appeals, 30 the burden of proving the status of a purchaser in good faith and for value lies
upon him who asserts that status, which is not discharged by simply invoking the ordinary
presumption of good faith, i.e., that everyone is presumed to act in good faith, since the good
faith that is here essential is integral with the very status which must be established.
In the proceedings a quo, what is evident is the admitted fact of payment made by Mamerto
Reyes as respondents' predecessor-in-interest of the taxes on the properties prior to and at the
time when the contracts of sale in favor of petitioner-spouses were perfected, which
undoubtedly confirms the precedence of respondents' possession of the parcels of land in
question. This situation should have compelled petitioners to investigate the right of
respondents over the properties before buying them, and in the absence of such inquiry, the rule
is settled that a buyer in the same circumstances herein involved cannot claim to be a purchaser
in good faith.
The absence of good faith on the part of petitioner-spouses Teofilo and Simeona Rayos in
purchasing the three (3) parcels of unregistered land precludes the application of the rule on
double sales enunciated in Art. 1544 of the Civil Code. 31 In any event, even if we apply Art.
1544, the facts would nonetheless show that respondents and their predecessor-in-interest
registered first the source of their ownership and possession, i.e., the 1 September 1957 deed of
sale with right to repurchase, held the oldest title, and possessed the real properties at the
earliest time. Applying the doctrine of "priority in time, priority in rights" or "prius tempore,
potior jure," respondents are entitled to the ownership and possession of the parcels of land in
dispute.
Finally, on the issue of damages, we agree with petitioners that respondents failed to prove
their entitlement to actual damages for litigation expenses of P20,000.00, attorney's fees of
P10,000.00 and exemplary damages of P50,000.00 plus costs. No evidence to prove actual

damages was offered in Civil Case No. A-2032 since the parties therein submitted the case for
decision on the basis of their respective memoranda, hence no actual damages can be
awarded. 32 In the same manner, there is no clear and convincing showing that petitioners
acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner to warrant the
imposition of exemplary damages in respondents' favor. 33 In any event, exemplary damages
cannot be adjudicated in the instant case since there is no award of moral, temperate or
compensatory damages. 34

Similarly, we cannot award attorney's fees since there is no stipulation to grant the same nor
were exemplary damages awarded or were improperly imposed as in the instant case. 35 It is
appropriate to stress that the mere filing of a complaint does not ipso facto entitle a party to
attorney's fees since this act is a means sanctioned by law to protect rights and interests even if
found subsequently to be unmeritorious.
WHEREFORE, the instant Petition for Review is DENIED. The assailed Decision of the Court
of Appeals in CA-G.R. CV No. 55789 affirming in toto theDecision of the Regional Trial
Court, Branch 54, Alaminos, Pangasinan in Civil Case No. A-2032, i.e., declaring void the
Deeds of Absolute Sale executed by Francisco Tazal in favor of Blas Rayos, and by the latter in
favor of Teofilo Rayos, and by Francisco Tazal in favor of Teofilo Rayos dated 22 June 1961,
all encompassing the three (3) parcels of land sold under the Deeds of Sale with the Right to
Repurchase, insofar as they authorized the transfer of ownership and possession thereof to
petitioner-spouses Teofilo and Simeona Rayos; proclaiming respondents Donato Reyes,
Saturnino Reyes, Tomasa R. Bustamante and Toribia R. Camelo who are heirs of Mamerto
Reyes as absolute owners of the property in question free from all liens and encumbrances;
and, ordering petitioner-spouses Teofilo and Simeona Rayos, petitioner George Rayos and
Francisco Tazal and/or their agents or representatives to vacate and surrender the parcels of
land in favor of respondents Donato Reyes, Saturnino Reyes, Tomasa R. Bustamante and
Toribia R. Camelo, are AFFIRMED with the SOLE MODIFICATION that the award of actual
damages for litigation expenses, attorney's fees and exemplary damages plus costs is
DELETED and SET ASIDE. No costs. SaICcT
SO ORDERED.
Mendoza, Quisumbing, Austria-Martinez and Callejo, Sr., JJ., concur.

||| (Rayos. v. Reyes, G.R. No. 150913, [February 20, 2003], 446 PHIL 32-53)

501

THIRD DIVISION
[G.R. No. 57630. March 13, 1992.]
CLARA BADAYOS petitioner, vs. THE COURT OF APPEALS
and Spouses MAXIMO LISONDRA and CONRADA
GABISAN,respondents.

Teodoro V. Cabilan for petitioner.

SYLLABUS
1. CIVIL LAW; CONTRACTS; WHEN TERMS THEREOF ARE CLEAR AND LEAVES NO
DOUBT UPON THE INTENTION OF THE CONTRACTING PARTIES; RULE. The rule
in this jurisdiction is 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 stipulations shall control.
2. ID.; SPECIAL CONTRACTS; SALE; CONVENTIONAL REDEMPTION; ABSENCE OF
EXPRESS AGREEMENT TO EXERCISE THEREOF; RULE; CASE AT BAR. It is to be
noted, however, that while the parties agreed on the period within which the right may not be
exercised or will be deemed suspended, they did not specify the period within which such may
be exercised thereafter. This suspension remains valid as long as Article 1606 of the Civil Code
is not violated. While the counting of this four-year period shall begin from the execution of
the contract, where the right is suspended by agreement until after a certain time, event or
condition, the period shall be counted from the time such right could be exercised, but not
exceeding ten (10) years from the execution of the contract. Applying this provision to the
instant case, the period to repurchase the property must be deemed to be four (4) years from 9
March 1975 or until 9 March 1979. Since petitioner consigned the repurchase price on 11
August 1975, a fact private respondents did not deny, this Court declares that this consignation
operated as a valid offer or tender of the redemption price. It must be emphasized that
consignation was not necessary for the reason that the relationship that existed between
petitioner and private respondents, in respect to the right of redemption, was not one of debtorcreditor. Petitioner was exercising a right, not discharging an obligation, hence a mere tender of
payment is sufficient to preserve the right of a vendor a retro.

DAVIDE, JR., J p:
We are primarily tasked with the determination of the proper period within which the right to
repurchase, granted under the questioned pacto de retro sale, may be exercised. cdrep
The factual antecedents of the case are not disputed.
On 9 March 1973, petitioner executed in favor of private respondents spouses a Deed of Sale
With The Right to Repurchase over her undivided half portion of Lot No. 3493 of the TalisayMinglanilla Estate located at Tabunok, Talisay, Cebu for a consideration of Seven Thousand
Four Hundred Pesos (P7,400.00); the sale was made subject to the following stipulation:
"That it is the essence of this contract that the vendor, Clara Badayos
has the right to repurchase the above described property after two (2)
years from and after the execution of this contract for the same
amount of SEVEN THOUSAND FOUR HUNDRED PESOS
(P7,400.00)." 1
Two (2) years after the execution of the document in question, or specifically on 17 April 1975,
private respondents filed with the then Court of First Instance (now Regional Trial Court) of
Cebu an action, docketed as Civil Case No. 14516, to consolidate ownership over the property
in question; it is alleged therein that "the two years (sic) period from March 9, 1973 had
already elapsed but defendant never repurchased the said property in violation of the contract
of pacto de Retro Sale." 2
In her Answer With Counterclaim, petitioner, as defendant, alleges, inter alia, that: (1) the
document in question is actually an equitable mortgage intended to secure her loan of
P4,000.00 from private respondents who charged an interest of P3,400.00; (2) after the
expiration of the two-year period counted from 9 March 1973, she approached the private
respondents to request for an extension of time within which to pay the obligation, which was
granted, as she was waiting for the approval of the loan of her daughter in the amount of
P30,000.00 with the Philippine National Bank; (3) she owns the property in question and is in
possession thereof, enjoying its fruits, and paying the taxes thereon; (4) the piece of land,
located in the commercial district of Tabunok, Talisay, Cebu, is classified as residential and has
a commercial value of P100.00 per square meter; and (6) the private respondents are lessees
thereof, paying rentals of P18.00 only annually, for a term of 20 years to expire in 1976." 3
In their Reply, private respondents deny that the document in question is an equitable mortgage
and that they had granted the petitioner an extension of time within which to pay her
obligation. cdll
On 21 July 1975, the trial court issued a pre-trial order setting the case for trial on the merits
and stating that the "parties and counsels did not submit any stipulation of facts but relies on
their pleadings." 4

DECISION

On 11 August 1975, petitioner filed a manifestation informing the trial court that on 4 August
1975, she consigned the amount of P7,400.00 with the Clerk of Court in favor of the private
respondents as payment of her obligation and/or redemption of the property in question; thus,
the case has become moot and academic and should be dismissed. 5

502
Acting on the manifestation, the trial court issued on 2 September 1975 an Order granting the
petitioner five (5) days within which to submit a motion to dismiss and the private respondents
five (5) days from receipt of said motion to interpose their opposition thereto. 6

Thereafter, on 17 March 1977, private respondents filed a Rejoinder to Motion to Dismiss

asking for a trial on the merits and alleging that the grounds relied upon for a dismissal are
matters of defense. 15

In her motion to dismiss filed on 4 September 1975, petitioner contends that:

On 27 May 1977, the trial court dismissed the complaint in an Order stating that:

". . . the right of Clara Badayos to pay her obligation or to redeem the
property in question occurred after March 9, 1975, and under this
state of things, the right of Clara Badayos to pay her obligation or
redeem the property has not yet elapsed or expired when she
consigned or consignated the amount of P7,400.00 with the Clerk of
Court, on August 4, 1975, or even up to the present. Considering that
there is no period fixed within which to pay after March 9, 1975, the
law comes in and fixed the period which is four (4) years from the
date of the contract, as provided for in Art. 1606 of the New Civil
Code . . .
xxx xxx xxx
. . . even granting in gratia argumenti that the right to pay the
obligation or to redeem the property has thus elapsed, such rights will
be reborn within 30 days after final judgment. So, clearly, . . . there is
no more point to proceed with the trial of the case at bar, and the case
should therefore be dismissed." 7
Private respondents opposed the motion to dismiss arguing that since the pre-trial order has
long become final, the petitioner has lost her right to redeem or repurchase the property and is
thus estopped from changing her position that the pacto de retro sale is an equitable mortgage
and not a sale with the option to repurchase. 8
On 13 January 1976, the trial court ordered the petitioner to file an amended answer based on
her new stand as presented in the motion to dismiss. 9
On 21 January 1976, petitioner filed an Amended Answer With Counterclaim incorporating her
new stand that the complaint should be dismissed because she has already consigned the
P7,400.00 repurchase price with the trial court on 4 August 1975, well within the period
prescribed by the document in question. 10
On 26 February 1976, private respondents filed an Opposition to Admission of Amended
Answer contending that petitioner must take a definite stand as to whether she considers the
document in question as a contract of sale with option to repurchase or a contract of
mortgage. 11
The trial court, on 25 March 1976, admitted petitioner's Amended Answer With Counterclaim
and required private respondents to file a reply thereto. 12
In their Reply, private respondents contend that petitioner should be considered as having
waived her right to repurchase the property as a result of her failure and refusal to exercise
such right despite numerous demands. 13
On 3 November 1976, petitioner filed with the trial court a manifestation that she is reinstating
and refiling her 4 September 1975 Motion to Dismiss. 14

"A (sic) reading of the deed in question it is very clear and in certain
terms as shown in the 4th paragraph of said contract that the right to
repurchase the property shall occur after two years from and after the
execution of the contract for the same amount of P7,400.00 counted
from March 9, 1973.
It appears that defendant's former theory was that the contract was not
a deed of sale with the right to repurchase but an equitable mortgage.
Later, however, she changed her theory and admitted the allegations
in the complaint for consolidation to right of ownership but the right
to exercise the right to repurchase was not within two years, but after
two years from execution thereof.
Hence, as she is now willing to repurchase the property the defendant
argued, and the Court concurs, that the condition of the contract is
that the defendant has the right to repurchase for the same amount the
half (sic) portion of this Lot No. 3493 after two years from March 9,
1973, effectively on August 11, 1975 a little over two years from
March 9, 1973 she (sic) consigned the same amount of P7,400.00 as
repurchase price in favor of the plaintiffs thru the Clerk of Court and
now asks for the dismissal of the case as she has opted to exercise the
right to repurchase within the terms and contents of the contract.
The Court further concurs with the defendant's arguments that even if
the complaint is decided in favor of the plaintiffs consolidating their
title and under Art. 1606 of the Civil Code, the defendant has still 30
days from final judgment to exercise the right to repurchase and
failure to exercise the same the execution of the judgment may follow
for the sale of the property at public auction to cover the judgment
debt.

Finding the motion

GRANTED." 16

to

dismiss

meritorious,

the

same

is

Their motion 17 for the consideration of this Order having been denied for lack of
merit, 18 private respondents appealed to the Court of Appeals, which docketed the case as
C.A.-G.R. No. 62677-R.
In its decision promulgated on 4 May 1981, the Court of Appeals reversed the appealed Order
principally on the ground that since petitioner abandoned her theory of equitable mortgage, she
should have exercised her right of redemption within two (2) years from 9 March 1973, or on
or before 9 March 1975. Since she failed to do so, she lost that right. The appellate court held:

503
"As found by the court below in the disputed order of May 27, 1977,
the defendant changed the theory of her case in the amended answer
from one of an equitable mortgage to one of a deed of sale with right
of repurchase, and contended that her right to repurchase the subject
land has not yet expired when she consigned on August 11, 1975 the
sum of P7,400.00, pursuant to the penultimate paragraph on the
contract. Such being the case, and without any objection from the
defendant-appellee, the issue as to the nature of the transaction is
settled, it is a deed of sale with right to repurchase.
The facts show that the defendant failed to redeem the land on May 9,
1975, which is the expiration date of the two-year period from the
execution of the contract on March 9, 1973. This is admitted by the
appellee in both her answer and amended answer. We cannot over
emphasis (sic) this point. And this fact is confirmed by the fact that
the defendant requested for an extension of time to redeem the land.
This too is admitted (sic) by the appellee in her amended answer. But
the plaintiffs did not grant the request of the appellee but filed instead
the present suit on April 17, 1975.
It appearing that the appellee had failed to redeemed (sic) the subject
property as stipulated in the contract, it follows that the action for
consolidation of ownership of the subject land is tenable. The fact that
defendant consigned the redemption price in court does not cure the
defect because the consignation was effected after the defendant had
incurred (sic) delay." 19
Petitioner sought reconsideration of the foregoing decision but the same was denied. 20
Hence, the petitioner filed the instant petition for review on certiorari on 25 August 1981.
Petitioner contends that she neither changed nor abandoned her theory that the contract in
question is an equitable mortgage but merely alleged alternative defenses, including the
defense that if the contract is a true sale with right to repurchase, then there is nothing more to
litigate in view of her exercise of the right to repurchase; granting even that the contract is a
true sale with right to repurchase, she still had the time to exercise her right; the dismissal of
the case by the trial court was justified because it became moot and academic; and that there is
no procedural or substantive justification for the Court of Appeals to declare the private
respondents as the lawful owners of the property by consolidation, without any trial on the
merits.
To the mind of this Court, the principal issue is whether or not petitioner was able to
repurchase the property in question within the period stipulated in the deed of sale with right to
repurchase. The fourth paragraph of said deed expressly provides:
"That it is the essence of this contract that the vendor, Clara Badayos
has the right to repurchase the above described property after two (2)
years from and after the execution of this contract for the same
amount of SEVEN THOUSAND FOUR HUNDRED PESOS
(P7,400.00)." 21
The respondent Court interpreted this provision to mean that the two-year period shall
commence from the date of the execution of the contract,i.e., from 9 March 1973, and that the

right must be exercised within that period. This is not correct. The petition then is impressed
with merit.
The foregoing stipulation is clear and needs no further interpretation; hence, its literal meaning
is binding. It simply means that petitioner can redeem the property in question "AFTER TWO
(2) years from and after the execution of the contract," NOT WITHIN two (2) years from such
execution. Since the contract was executed on 9 March 1973, petitioner can redeem the
property only after 9 March 1975. The rule in this jurisdiction is 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 stipulations shall control. 22
It is to be noted, however, that while the parties agreed on the period within which the right
may not be exercised or will be deemed suspended, they did not specify the period within
which such may be exercised thereafter. This suspension remains valid 23 as long as Article
1606 of the Civil Code is not violated. Said Article reads:
"The right referred to in article 1601, in the absence of an express
agreement, shall last four years from the date of the contract.
Should there be an agreement, the period cannot exceed ten
years. . . ."
While the counting of this four-year period shall begin from the execution of the
contract, 24 where the right is suspended by agreement until after a certain time, event or
condition, the period shall be counted from the time such right could be exercised, but not
exceeding ten (10) years from the execution of the contract. 25 Applying this provision to the
instant case, the period to repurchase the property must be deemed to be four (4) years from 9
March 1975 or until 9 March 1979. Since petitioner consigned the repurchase price on 11
August 1975, a fact private respondents did not deny, this Court declares that this consignation
operated as a valid offer or tender of the redemption price. It must be emphasized that
consignation was not necessary for the reason that the relationship that existed between
petitioner and private respondents, in respect to the right of redemption, was not one of debtorcreditor. Petitioner was exercising a right, not discharging an obligation, hence a mere tender of
payment is sufficient to preserve the right of a vendor a retro. 26
The foregoing renders unnecessary discussions on the other secondary issues raised.
WHEREFORE, the petition is GRANTED. The challenged decision of the respondent Court in
C.A.-G.R. No. 62677-R, promulgated on 4 May 1981, is hereby SET ASIDE and the Order of
the trial court of 27 May 1977 in Civil Case No. R-14516 is hereby REINSTATED and
AFFIRMED.
Costs against private respondents.
IT IS SO ORDERED.
Gutierrez, Jr., Feliciano, Bidin and Romero, JJ. concur.
||| (Badayos v. Court of Appeals, G.R. No. 57630, [March 13, 1992])

504

SECOND DIVISION
[G.R. No. 111238. January 25, 1995.]
ADELFA PROPERTIES, INC., petitioner, vs. COURT OF
APPEALS, ROSARIO JIMENEZ-CASTAEDA and SALUD
JIMENEZ,respondents.

Bayani L. Bernardo for petitioner.

Lucas C. Carpio, Jr. for private respondents Jimenezes.
Danilo B. Benares for Emylene S. Chua.

SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; CONTRACT TO SELL;
CONTRACT OF SALE; DISTINGUISHED. The distinction between the two
contracts is important for in a contract of sale, the 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. 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. Thus, a deed of sale is considered absolute in nature where
there is neither a stipulation in the deed that title to the property sold is reserved in the
seller until the full payment of the price, nor one giving the vendor the right to
unilaterally resolve the contract the moment the buyer fails to pay within a fixed period.
(Pingol, et al. vs. Court of Appeals, et al., G.R. No. 102909, September 6, 1993, 226
SCRA 118)
2. ID.; ID.; ID.; CONSTRUED; APPLICATION IN CASE AT BAR. 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 the parties is a
contract to sell, and not an option contract or a contract of sale. There are two features
which convince the Court that the parties never intended to transfer ownership to
petitioner except upon full payment of the purchase price. Firstly, the exclusive option to
purchase, although it provided for automatic rescission of the contract and partial
forfeiture of the amount already paid in case of default, does not mention that petitioner is
obliged to return possession or ownership of the property as a consequence of nonpayment. There is no stipulation anent reversion or reconveyance of the property to
herein private respondents in the event that petitioner does not comply with its obligation.

With the absence of such a stipulation, although there is a provision on the remedies
available to the parties in case of breach, it may legally be inferred that the parties never
intended to transfer ownership to the petitioner prior to completion of payment of the
purchase price. In effect, there was an implied agreement that ownership shall not pass to
the purchaser until he had fully paid the price. Article 1478 of the Civil Code does not
require that such a stipulation be expressly made. Consequently, an implied stipulation to
that effect is considered valid and, therefore, binding and enforceable between the parties.
It should be noted that under the law and jurisprudence, a contract which contains this
kind of stipulation is considered a contract to sell. Moreover, that the parties really
intended to execute a contract to sell, and not a contract of sale, is bolstered by the fact
that the deed of absolute sale would have been issued only upon the payment of the
balance of the purchase price, as may be gleaned from petitioner's letter dated April 16,
1990 wherein it informed private respondent that it "is now ready and willing to pay you
simultaneously with the execution of the corresponding deed of absolute sale." Secondly,
it has not been shown that there was delivery of the property, actual or constructive, made
to herein petitioner. The exclusive option to purchase is not contained in a public
instrument the execution of which would have been considered equivalent to delivery.
(Article 1498, Civil Code) Neither did petitioner take actual, physical possession of the
property at any given time. It is true that after the reconstitution of private respondents'
certificate of title, it remained in the possession of petitioner's counsel, Atty. Bayani L.
Bernardo, who thereafter delivered the same to herein petitioner. Normally, under the law,
such possession by the vendee is to be understood as a delivery. (Article 1501, Civil
Code). However, private respondents explained that there was really no intention on their
part to deliver the title to herein petitioner with the purpose of transferring ownership to
it. They claim that Atty. Bernardo had possession of the title only because he was their
counsel in the petition for reconstitution. The Court has no reason not to believe this
explanation of private respondents, aside from the fact that such contention was never
refuted or contradicted by petitioner.
3. ID.; ID.; INTERPRETATION; CASE AT BAR. The important task in contract
interpretation is always the ascertainment of the intention of the contracting parties and that
task is, of course, to be discharged by looking to the words they used to project that intention in
their contract, all the words not just a particular word or two, and words in context not words
standing alone. (Fernandez vs. Court of Appeals, et al., G.R. No. 80231, October 18, 1988, 166
SCRA 577) Moreover, judging from the subsequent acts of the parties which will hereinafter
be discussed, it is undeniable that the intention of the parties was to enter into a contract to sell.
In addition, the title of a contract does not necessarily determine its true nature. (Cruz, et
al. vs. Court of Appeals, et al., G.R. No. 50350, May 15, 1984, 129 SCRA 222) Hence, the fact
that the document under discussion is entitled "Exclusive Option to Purchase" is not
controlling where the text thereof shows that it is a contract to sell.
4. ID.; ID.; OPTION; CONSTRUED. An option, as used in the law on
sales, is a continuing offer or contract by which the owner stipulates with another that the
latter shall have the right to buy the property at a fixed price within a certain time, or
under, or in compliance with, certain terms and conditions, or which gives to the owner
of the property the right to sell or demand a sale. It is also sometimes called an
"unaccepted offer." An option is not of itself a purchase, but merely secures the privilege
to buy. It is not a sale of property but a sale of the right to purchase. It is simply a contract
by which the owner of property agrees with another person that he shall have the right to

505
buy his property at a fixed price within a certain time. He does not sell his land; he does
not then agree to sell it; but he does sell something, that is, the right or privilege to buy at
the election or option of the other party. Its distinguishing characteristic is that it imposes
no binding obligation on the person holding the option, aside from the consideration for
the offer. Until acceptance, it is not, properly speaking, a contract, and does not vest,
transfer, or agree to transfer, any title to, or any interest or right in the subject matter, but
is merely a contract by which the owner of property gives the optionee the right or
privilege of accepting the offer and buying the property on certain terms. An agreement is
only an "option" when no obligation rests on the party to make any payment except such
as may be agreed on between the parties as consideration to support the option until he
has made up his mind within the time specified. An option, and not a contract to
purchase, is effected by an agreement to sell real estate for payments to be made within a
specified time and providing for forfeiture of money paid upon failure to make payment,
where the purchaser does not agree to purchase, to make payment, or to bind himself in
any way other than the forfeiture of the payments made.
5. ID.; CONTRACT; DEFINED. A contract, like a contract to sell,
involves a meeting of minds between two persons whereby one binds himself, with
respect to the other, to give something or to render some service. Contracts, in general,
are perfected by mere consent, which is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. The offer
must be certain and the acceptance absolute.
6. ID.; ID.; OPTION; DISTINGUISHED. The distinction between an
"option" and a contract of sale is that an option is an unaccepted offer. It states the terms
and conditions on which the owner is willing to sell his land, if the holder elects to accept
them within the time limited. If the holder does so elect, he must give notice to the other
party, and the accepted offer thereupon becomes a valid and binding contract. If an
acceptance is not made within the time fixed, the owner is no longer bound by his offer,
and the option is at an end. A contract of sale, on the other hand, fixes definitely the
relative rights and obligations of both parties at the time of its execution. The offer and
the acceptance are concurrent, since the minds of the contracting parties meet in the terms
of the agreement. The test in determining whether a contract is a "contract of sale or
purchase" or a mere "option" is whether or not the agreement could be specifically
enforced.
7. ID.; SPECIAL CONTRACTS; SALES; ACCEPTANCE; RULE. The
rule is that except where a formal acceptance is so required, although the acceptance must
be affirmatively and clearly made and must be evidenced by some acts or conduct
communicated to the offeror, it may be made either in a formal or an informal manner,
and may be shown by acts, conduct, or words of the accepting party that clearly manifest
a present intention or determination to accept the offer to buy or sell. Thus acceptance
may be shown by the acts, conduct, or words of a party recognizing the existence of the
conduct of sale.
8. ID.; ID.; EARNEST MONEY; RULE. It is a statutory rule that
whenever earnest money is given in a contract of sale, it shall be considered as part of the
price and as proof of the perfection of the contract (Article 1482, Civil Code). It
constitutes an advance payment and must, therefore, be deducted from the total price.
Also, earnest money is given by the buyer to the seller to bind the bargain.

9. ID.; ID.; ID.; OPTION MONEY; DISTINGUISHED. There are clear

distinctions between earnest money and option money, viz.: (a) earnest money is part of
the purchase price, while option money is the money given as a distinct consideration for
an option contract; (b) earnest money is given only where there is already a sale, while
option money applies to a sale not yet perfected; and (c) when earnest money is given,
the buyer is bound to pay the balance, while when the would-be buyer gives option
money, he is not required to buy.
10. ID.; ID.; TENDER OF PAYMENT; CONSIDERATION; CONSTRUED.
The 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. (Vda. de Zulueta, et
al. vs. Octaviano, et al., G.R. No. 55350, March 28, 1983, 121 SCRA 314). Besides, a
mere tender of payment is not sufficient to compel private respondents to deliver the
property and execute the deed of absolute sale. It is consignation which is essential in
order to extinguish petitioner's obligation to pay the balance of the purchase price. The
rule is different in case of an option contract (Nietes vs. Court of Appeals, et al., L-32875,
August 18, 1972, 46 SCRA 654) or in legal redemption or in a sale with right to
repurchase, (Francisco, et al. vs. Bautista, et al., L-44167, December 19, 1990, 192
SCRA 388) wherein consignation is not necessary because these cases involve an
exercise of a right or privilege (to buy, redeem or repurchase) rather than the discharge of
an obligation, hence tender of payment would be sufficient to preserve the right or
privilege. This is because the provisions on consignation are not applicable when there is
no obligation to pay. A contract to sell, as in this case involves the performance of an
obligation, not merely the exercise of a privilege or a right. Consequently, performance or
payment may be effected not by tender of payment alone but by both tender and
consignation.
11. ID.; ID.; EXTRAJUDICIAL RESCISSION; WHEN JUSTIFIED; CASE
AT BAR. Petitioner no longer had the right to suspend payment after the disturbance
ceased with the dismissal of the civil case filed against it. Necessarily, therefore, its
obligation to pay the balance again arose and resumed after it received notice of such
dismissal. Unfortunately, petitioner failed to seasonably make payment, as in fact it has
failed to do so or even to deposit the money with the trial court when this case was
originally filed therein. By reason of petitioner's failure to comply with its obligation,
private respondents elected to resort to and did announce the rescission of the contract
through its letter to petitioner dated July 27, 1990. That written notice of rescission is
deemed sufficient under the circumstances. Article 1592 of the Civil Code which requires
rescission either by judicial action or notarial act is not applicable to a contract to sell.
(Albea vs. Inquimboy, et al., 86 Phil. 477 (1950); Alfonso, et al. vs. Court of Appeals, et
al., G.R. No. 63745, June 8, 1990, 186 SCRA 400). Furthermore, judicial action for
rescission of a contract is not necessary where the contract provides for automatic
rescission in case of breach, (Palay, Inc., et al. vs. Clave, et al., G.R. No. 56076,
September 21, 1983, 124 SCRA 638) as in the contract involved in the present
controversy. This Court is not unaware of the ruling in the University of the Philippines
vs. De los Angeles, etc., L-28602, September 29, 1970, 35 SCRA 102 that the right to
rescind is not absolute, being ever subject to scrutiny and review by the proper court. It is
the Court's considered view, however, that this rule applies to a situation where the
extrajudicial rescission is contested by the defaulting party. In other words, resolution of
reciprocal contracts may be made extrajudicially unless successfully impugned in court.
If the debtor impugns the declaration, it shall be subject to judicial determination (Palay,
Inc., et al. vs. Clave, et al., supra). Otherwise, if said party does not oppose it, the

506
extrajudicial rescission shall have legal effect (Zulueta vs. Mariano, etc., et al., L-29360,
January 30, 1982, 111 SCRA 206).

"3. In case of default on the part of ADELFA PROPERTIES, INC. to

pay said balance in accordance with paragraph 2 hereof, this option
shall be cancelled and 50% of the option money to be forfeited in our
favor and we will refund the remaining 50% of said option money
upon the sale of said property to a third party;

DECISION

"4. All expenses including the corresponding capital gains tax, cost of
documentary stamps are for the account of the VENDORS, and
expenses for the registration of the deed of sale in the Registry of
Deeds are for the account of ADELFA PROPERTIES, INC."

REGALADO, J p:
The main issues presented for resolution in this petition for review
on certiorari of the judgment of respondent Court of Appeals, dated April 6, 1993, in
CA-G.R. CV No. 34767 1 are (1) whether of not the "Exclusive Option to Purchase"
executed between petitioner Adelfa Properties, Inc. and private respondents Rosario
Jimenez-Castaeda and Salud Jimenez is an option contract; and (2) whether or not there
was a valid suspension of payment of the purchase price by said petitioner, and the legal
effects thereof on the contractual relations of the parties.
The records disclose the following antecedent facts which culminated in the
present appellate review, to wit: cdasia
1. Herein private respondents and their brothers, Jose and Dominador
Jimenez, were the registered co-owners of a parcel of land consisting of 17,710 square
meters, covered by Transfer Certificate of Title (TCT) No. 309773, 2 situated in Barrio
Culasi, Las Pias, Metro Manila.
2. On July 28, 1988, Jose and Dominador Jimenez sold their share consisting
of one-half of said parcel of land, specifically the eastern portion thereof, to herein
petitioner pursuant to a "Kasulatan sa Bilihan ng Lupa." 3 Subsequently, a "Confirmatory
Extrajudicial Partition Agreement" 4 was executed by the Jimenezes, wherein the eastern
portion of the subject lot, with an area of 8,855 square meters was adjudicated to Jose and
Dominador Jimenez, while the western portion was allocated to herein private
respondents.
3. Thereafter, herein petitioner expressed interest in buying the western
portion of the property from private respondents. Accordingly, on November 25, 1989, an
"Exclusive Option to Purchase" 5 was executed between petitioner and private
respondents, under the following terms and conditions:
"1. The selling price of said 8,655 square meters of the subject
property is TWO MILLION EIGHT HUNDRED FIFTY SIX
THOUSAND ONE HUNDRED FIFTY PESOS ONLY
(P2,856,150.00);
2. The sum of P50,000.00 which we received from ADELFA
PROPERTIES, INC. as an option money shall be credited as partial
payment upon the consummation of the sale and the balance in the
sum of TWO MILLION EIGHT HUNDRED SIX THOUSAND ONE
HUNDRED FIFTY PESOS (P2,806,150.00) to be paid on or before
November 30, 1989;

Considering, however, that the owner's copy of the certificate of title issued to
respondent Salud Jimenez had been lost, a petition for the re-issuance of a new owner's
copy of said certificate of title was filed in court through Atty. Bayani L. Bernardo, who
acted as private respondents' counsel. Eventually, a new owner's copy of the certificate of
title was issued but it remained in the possession of Atty. Bernardo until he turned it over
to petitioner Adelfa Properties, Inc. cdasia
4. Before petitioner could make payment, it received summons 6 on
November 29, 1989, together with a copy of a complaint filed by the nephews and nieces
of private respondents against the latter, Jose and Dominador Jimenez, and herein
petitioner in the Regional Trial Court of Makati, docketed as Civil Case No. 89-5541, for
annulment of the deed of sale in favor of Household Corporation and recovery of
ownership of the property covered by TCT No. 309773. 7
5. As a consequence, in a letter dated November 29, 1989, petitioner informed
private respondents that it would hold payment of the full purchase price and suggested
that private respondents settle the case with their nephews and nieces, adding that ". . . if
possible, although November 30, 1989 is a holiday, we will be waiting for you and said
plaintiffs at our office up to 7:00 p.m." 8 Another letter of the same tenor and of even date
was sent by petitioner to Jose and Dominador Jimenez. 9 Respondent Salud Jimenez
refused to heed the suggestion of petitioner and attributed the suspension of payment of
the purchase price to "lack of word of honor."
6. On December 7, 1989, petitioner caused to be annotated on the title of the
lot its option contract with private respondents, and its contract of said with Jose and
Dominador Jimenez, as Entry No. 1437-4 and entry No. 1438-4, respectively.
7. On December 14, 1989, private respondents sent Francisca Jimenez to see
Atty. Bernardo, in his capacity as petitioner's counsel, and to inform the latter that they
were cancelling the transaction. In turn, Atty. Bernardo offered to pay the purchase price
provided that P500,000.00 be deducted therefrom for the settlement of the civil case. This
was rejected by private respondents. On December 22, 1989, Atty. Bernardo wrote
private respondents on the same matter but this time reducing the amount from
P500,000.00 to P300,000.00, and this was also rejected by the latter.
8. On February 23, 1990, the Regional Trial Court of Makati dismissed Civil
Case No. 89-5541. Thus, on February 28, 1990, petitioner caused to be annotated anew
on TCT No. 309773 the exclusive option to purchase as Entry No. 4442-4.
9. On the same day, February 28, 1990, private respondents executed a Deed
of Conditional Sale 10 in favor of Emylene Chua over the same parcel of land for
P3,029,250.00, of which P1,500,000.00 was paid to private respondents on said date,

507
with the balance to be paid upon the transfer of title to the specified one-half
portion. LLphil
10. On April 16, 1990, Atty. Bernardo wrote private respondents informing the
latter that in view of the dismissal of the case against them, petitioner was willing to pay
the purchase price, and he requested that the corresponding deed of absolute sale be
executed. 11 This was ignored by private respondents. cdasia
11. On July 27, 1990, private respondents' counsel sent a letter to petitioner
enclosing therein a check for P25,000.00 representing the refund of fifty percent of the
option money paid under the exclusive option to purchase. Private respondents then
requested petitioner to return the owner's duplicate copy of the certificate of title of
respondent Salud Jimenez. 12 Petitioner failed to surrender the certificate of title, hence
private respondents filed Civil Case No. 7532 in the Regional Trial Court of Pasay City,
Branch 113, for annulment of contract with damages, praying, among others, that the
exclusive option to purchase be declared null and void; that defendant, herein petitioner,
be ordered to return the owner's duplicate certificate of title; and that the annotation of the
option contract on TCT No. 309773 be cancelled. Emylene Chua, the subsequent
purchaser of the lot, filed a complaint in intervention.
12. The trial court rendered judgment 13 therein on September 5, 1991
holding that the agreement entered into by the parties was merely an option contract, and
declaring that the suspension of payment by herein petitioner constituted a counter-offer
which, therefore, was tantamount to a rejection of the option. It likewise ruled that herein
petitioner could not validly suspend payment in favor of private respondents on the
ground that the vindicatory action filed by the latter's kin did not involve the western
portion of the land covered by the contract between petitioner and private respondents,
but the eastern portion thereof which was the subject of the sale between petitioner and
the brothers Jose and Dominador Jimenez. The trial court then directed the cancellation
of the exclusive option to purchase, declared the sale to intervenor Emylene Chua as
valid and binding, and ordered petitioner to pay damages and attorney's fees to private
respondents, with costs. LLpr
13. On appeal, respondent Court of Appeals affirmed in toto the decision of
the court a quo and held that the failure of petitioner to pay the purchase price within the
period agreed upon was tantamount to an election by petitioner not to buy the property;
that the suspension of payment constituted an imposition of a condition which was
actually a counter-offer amounting to a rejection of the option; and that Article 1590 of
the Civil Code on suspension of payments applies only to a contract of sale or a contract
to sell, but not to an option contract which it opined was the nature of the document
subject of the case at bar. Said appellate court similarly upheld the validity of the deed of
conditional sale executed by private respondents in favor of intervenor Emylene Chua.
In the present petition, the following assignment of errors are raised:
1. Respondent Court of Appeals acted with grave abuse of
discretion in making its finding that the agreement entered into by
petitioner and private respondents was strictly an option contract;
2. Granting arguendo that the agreement was an option
contract, respondent Court of Appeals acted with grave abuse of
discretion in grievously failing to consider that while the option

period had not lapsed, private respondents could not unilaterally and
prematurely terminate the option period;
3. Respondent Court of Appeals acted with grave abuse of
discretion in failing to appreciate fully the attendant facts and
circumstances when it made the conclusion of law that Article 1590
does not apply; and
4. Respondent Court of Appeals acted with grave abuse of
discretion in conforming with the sale in favor of appellee Ma.
Emylene Chua and the award of damages and attorney's fees which
are not only excessive, but also without bases in fact and in law. 14
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
the parties is a contract to sell, and not an option contract or a contract of sale.
I
1. In view of the extended disquisition thereon by respondent court, it would
be worthwhile at this juncture to briefly discourse on the rationale behind our treatment
of the alleged option contract as a contract to sell, rather than a contract of sale. The
distinction between the two is important for in a contract of sale, the 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.
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. Thus, a deed of sale is considered
absolute in nature where there is neither a stipulation in the deed that title to the property
sold is reserved in the seller until the full payment of the price, nor one giving the vendor
the right to unilaterally resolve the contract the moment the buyer fails to pay within a
fixed period. 15
There are two features which convince us that the parties never intended to
transfer ownership to petitioner except upon full payment of the purchase price. Firstly,
the exclusive option to purchase, although it provided for automatic rescission of the
contract and partial forfeiture of the amount already paid in case of default, does not
mention that petitioner is obliged to return possession or ownership of the property as a
consequence of non-payment. There is no stipulation anent reversion or reconveyance of
the property to herein private respondents in the event that petitioner does not comply
with its obligation. With the absence of such a stipulation, although there is a provision
on the remedies available to the parties in case of breach, it may legally be inferred that
the parties never intended to transfer ownership to the petitioner prior to completion of
payment of the purchase price. cdasia
In effect, there was an implied agreement that ownership shall not pass to the
purchaser until he had fully paid the price. Article 1478 of the Civil Code does not
require that such a stipulation be expressly made. Consequently, an implied stipulation to
that effect is considered valid and, therefore, binding and enforceable between the parties.
It should be noted that under the law and jurisprudence, a contract which contains this
kind of stipulation is considered a contract to sell.

508
Moreover, that the parties really intended to execute a contract to sell, and not
a contract of sale, is bolstered by the fact that the deed of absolute sale would have been
issued only upon the payment of the balance of the purchase price, as may be gleaned
from petitioner's letter dated April 16, 1990 16 wherein it informed private respondents
that it "is now ready and willing to pay you simultaneously with the execution of the
corresponding deed of absolute sale."
Secondly, it has not been shown that there was delivery of the property, actual
or constructive, made to herein petitioner. The exclusive option to purchase is not
contained in a public instrument the execution of which would have been considered
equivalent to delivery. 17 Neither did petitioner take actual, physical possession of the
property at any given time. It is true that after the reconstitution of private respondents'
certificate of title, it remained in the possession of petitioner's counsel, Atty. Bayani L.
Bernardo, who thereafter delivered the same to herein petitioner. Normally, under the law,
such possession by the vendee is to be understood as a delivery. 18 However, private
respondents explained that there was really no intention on their part to deliver the title to
herein petitioner with the purpose of transferring ownership to it. They claim that Atty.
Bernardo had possession of the title only because he was their counsel in the petition for
reconstitution. We have no reason not to believe this explanation of private respondents,
aside from the fact that such contention was never refuted or contradicted by petitioner.
2. Irrefragably, the controverted document should legally be considered as a
perfected contract to sell. On this particular point, therefore, we reject the position and
ratiocination of respondent Court of Appeals which, while awarding the correct relief to
private respondents, categorized the instrument as "strictly an option contract."
The important task in contract interpretation is always the ascertainment of the
intention of the contracting parties and that task is, of course, to be discharged by looking
to the words they used to project that intention in their contract, all the words not just a
particular word or two, and words in context not words standing alone. 19 Moreover,
judging from the subsequent acts of the parties which will hereinafter be discussed, it is
undeniable that the intention of the parties was to enter into a contract to sell. 20 In
addition, the title of a contract does not necessarily determine its true nature. 21 Hence,
the fact that the document under discussion is entitled "Exclusive Option to Purchase" is
not controlling where the text thereof shows that it is a contract to sell. cdasia
An option, as used in the law on sales, is a continuing offer or contract by
which the owner stipulates with another that the latter shall have the right to buy the
property at a fixed price within a certain time, or under, or in compliance with, certain
terms and conditions, or which gives to the owner of the property the right to sell or
demand a sale. It is also sometimes called an "unaccepted offer." An option is not of itself
a purchase, but merely secures the privilege to buy. 22 It is not a sale of property but a
sale of the right to purchase. 23 It is simply a contract by which the owner of property
agrees with another person that he shall have the right to buy his property at a fixed price
within a certain time. He does not sell his land; he does not then agree to sell it; but he
does sell something, that is, the right or privilege to buy at the election or option of the
other party. 24 Its distinguishing characteristic is that it imposes no binding obligation on
the person holding the option, aside from the consideration for the offer. Until
acceptance, it is not, properly speaking, a contract, and does not vest, transfer, or agree to
transfer, any title to, or any interest or right in the subject matter, but is merely a contract
by which the owner of property gives the optionee the right or privilege of accepting the
offer and buying the property on certain terms. 25

On the other hand, a contract, like a contract to sell, involves a meeting of

minds between two persons whereby one binds himself, with respect to the other, to give
something or to render some service. 26 Contracts, in general, are perfected by mere
consent, 27 which is manifested by the meeting of the offer and the acceptance upon the
thing and the cause which are to constitute the contract. The offer must be certain and the
acceptance absolute. 28
The distinction between an "option" and a contract of sale is that an option is
an unaccepted offer. It states the terms and conditions on which the owner is willing to
sell his land, if the holder elects to accept them within the time limited. If the holder does
so elect, he must give notice to the other party, and the accepted offer thereupon becomes
a valid and binding contract. If an acceptance is not made within the time fixed, the
owner is no longer bound by his offer, and the option is at an end. A contract of sale, on
the other hand, fixes definitely the relative rights and obligations of both parties at the
time of its execution. The offer and the acceptance are concurrent, since the minds of the
contracting parties meet in the terms of the agreement. 29
A perusal of the contract in this case, as well as the oral and documentary
evidence presented by the parties, readily shows that there is indeed a concurrence of
petitioner's offer to buy and private respondents' acceptance thereof. The rule is that
except where a formal acceptance is so required, although the acceptance must be
affirmatively and clearly made and must be evidenced by some acts or conduct
communicated to the offeror, it may be made either in a formal or an informal manner,
and may be shown by acts, conduct, or words of the accepting party that clearly manifest
a present intention or determination to accept the offer to buy or sell. Thus, acceptance
may be shown by the acts, conduct, or words of a party recognizing the existence of the
contract of sale. 30
The records also show that private respondents accepted the offer of petitioner
to buy their property under the terms of their contract. At the time petitioner made its
offer, private respondents suggested that their transfer certificate of title be first
reconstituted, to which petitioner agreed. As a matter of fact, it was petitioner's counsel,
Atty. Bayani L. Bernardo, who assisted private respondents in filing a petition for
reconstitution. After the title was reconstituted, the parties agreed that petitioner would
pay either in cash or manager's check the amount of P2,856,150.00 for the lot. Petitioner
was supposed to pay the same on November 25, 1989, but it later offered to make a down
payment of P50,000.00, with the balance of P2,806,150.00 to be paid on or before
November 30, 1989. Private respondents agreed to the counter-offer made by
petitioner. 31 As a result, the so-called exclusive option to purchase was prepared by
petitioner and was subsequently signed by private respondents, thereby creating a
perfected contract to sell between them. cdasia
It cannot be gainsaid that the offer to buy a specific piece of land was definite
and certain, while the acceptance thereof was absolute and without any condition or
qualification. The agreement as to the object, the price of the property, and the terms of
payment was clear and well-defined. No other significance could be given to such acts
than that they were meant to finalize and perfect the transaction. The parties even went
beyond the basic requirements of the law by stipulating that "all expenses including the
corresponding capital gains tax, cost of documentary stamps are for the account of the
vendors, and expenses for the registration of the deed of sale in the Registry of Deeds are

509
for the account of Adelfa Properties, Inc." Hence, there was nothing left to be done
except the performance of the respective obligations of the parties.
We do not subscribe to private respondents' submission, which was upheld by
both the trial court and respondent Court of Appeals, that the offer of petitioner to deduct
P500,000.00 (later reduced to P300,000.00) from the purchase price for the settlement of
the civil case was tantamount to a counter-offer. It must be stressed that there already
existed a perfected contract between the parties at the time the alleged counter-offer was
made. Thus, any new offer by a party becomes binding only when it is accepted by the
other. In the case of private respondents, they actually refused to concur in said offer of
petitioner, by reason of which the original terms of the contract continued to be
enforceable. prcd
At any rate, the same cannot be considered a counter-offer for the simple
reason that petitioner's sole purpose was to settle the civil case in order that it could
already comply with its obligation. In fact, it was even indicative of a desire by petitioner
to immediately comply therewith, except that it was being prevented from doing so
because of the filing of the civil case which, it believed in good faith, rendered
compliance improbable at that time. In addition, no inference can be drawn from that
suggestion given by petitioner that it was totally abandoning the original contract.
More importantly, it will be noted that the failure of petitioner to pay the
balance of the purchase price within the agreed period was attributed by private
respondents to "lack of word of honor" on the part of the former. The reason of "lack of
word of honor" is to us a clear indication that private respondents considered petitioner
already bound by its obligation to pay the balance of the consideration. In effect, private
respondents were demanding or exacting fulfillment of the obligation from herein
petitioner. With the arrival of the period agreed upon by the parties, petitioner was
supposed to comply with the obligation incumbent upon it to perform, not merely to
exercise an option or a right to buy the property.
The obligation of petitioner on November 30, 1993 consisted of an obligation
to give something, that is, the payment of the purchase price. The contract did not simply
give petitioner the discretion to pay for the property. 32 It will be noted that there is
nothing in the said contract to show that petitioner was merely given a certain period
within which to exercise its privilege to buy. The agreed period was intended to give time
to herein petitioner within which to fulfill and comply with its obligation, that is, to pay
the balance of the purchase price. No evidence was presented by private respondents to
prove otherwise. cdasia
The test in determining whether a contract is a "contract of sale or purchase"
or a mere "option" is whether or not the agreement could be specifically
enforced. 33 There is no doubt that the obligation of petitioner to pay the purchase price
is specific, definite and certain, and consequently binding and enforceable. Had private
respondents chosen to enforce the contract, they could have specifically compelled
petitioner to pay the balance of P2,806,150.00. This is distinctly made manifest in the
contract itself as an integral stipulation, compliance with which could legally and
definitely be demanded from petitioner as a consequence.
This is not a case where no right is as yet created nor an obligation declared,
as where something further remains to be done before the buyer and seller obligate
themselves. 34 An agreement is only an "option" when no obligation rests on the party to
make any payment except such as may be agreed on between the parties as consideration

to support the option until he has made up his mind within the time specified. 35An
option, and not a contract to purchase, is effected by an agreement to sell real estate for
payments to be made within a specified time and providing for forfeiture of money paid
upon failure to make payment, where the purchaser does not agree to purchase, to make
payment, or to bind himself in any way other than the forfeiture of the payments
made. 36 As hereinbefore discussed, this is not the situation obtaining in the case at bar.
While there is jurisprudence to the effect that a contract which provides that
the initial payment shall be totally forfeited in case of default in payment is to be
considered as an option contract, 37 still we are not inclined to conform with the findings
of respondent court and the court a quo that the contract executed between the parties is
an option contract, for the reason that the parties were already contemplating thepayment
of the balance of the purchase price, and were not merely quoting an agreed value for the
property. The term "balance," connotes a remainder or something remaining from the
original total sum already agreed upon. cdasia
In other words, the alleged option money of P50,000.00 was actually earnest
money which was intended to form part of the purchase price. The amount of P50,000.00
was not distinct from the cause or consideration for the sale of the property, but was itself
a part thereof. It is a statutory rule that whenever earnest money is given in a contract of
sale, it shall be considered as part of the price and as proof of the perfection of the
contract. 38 It constitutes an advance payment and must, therefore, be deducted from the
total price. Also, earnest money is given by the buyer to the seller to bind the bargain.
There are clear distinctions between earnest money and option money, viz.: (a)
earnest money is part of the purchase price, while option money is the money given as a
distinct consideration for an option contract; (b) earnest money is given only where there
is already a sale, while option money applies to a sale not yet perfected; and (c) when
earnest money is given, the buyer is bound to pay the balance, while when the would-be
buyer gives option money, he is not required to buy. 39
The aforequoted characteristics of earnest money are apparent in the so-called
option contract under review, even though it was called "option money" by the parties. In
addition, private respondents failed to show that the payment of the balance of the
purchase price was only a condition precedent to the acceptance of the offer or to the
exercise of the right to buy. On the contrary, it has been sufficiently established that such
payment was but an element of the performance of petitioner's obligation under the
contract to sell. 40
II
1. This brings us to the second issue as to whether or not there was valid
suspension of payment of the purchase price by petitioner and the legal consequences
thereof. To justify its failure to pay the purchase price within the agreed period, petitioner
invokes Article 1590 of the Civil Code which provides:
"ART. 1590. Should the vendee be disturbed in the possession or
ownership of the thing acquired, or should he have reasonable
grounds to fear such disturbance, by a vindicatory action or a
foreclosure of mortgage, he may suspend the payment of the price
until the vendor has caused the disturbance or danger to cease, unless
the latter gives security for the return of the price in a proper case, or

510
it has been stipulated that, notwithstanding any such contingency, the
vendee shall be bound to make the payment. A mere act of trespass
shall not authorize the suspension of the payment of the price."cdasia
Respondent court refused to apply the aforequoted provision of law on the
erroneous assumption that the true agreement between the parties was a contract of
option. As we have hereinbefore discussed, it was not an option contract but a perfected
contract to sell. Verily, therefore, Article 1590 would properly apply. llcd
Both lower courts, however, are in accord that since Civil Case No. 89-5541
filed against the parties herein involved only the eastern half of the land subject of the
deed of sale between petitioner and the Jimenez brothers, it did not, therefore, have any
adverse effect on private respondents' title and ownership over the western half of the
land which is covered by the contract subject of the present case. We have gone over the
complaint for recovery of ownership filed in said case 41 and we are not persuaded by the
factual findings made by said courts. At a glance, it is easily discernible that, although the
complaint prayed for the annulment only of the contract of sale executed between
petitioner and the Jimenez brothers, the same likewise prayed for the recovery of therein
plaintiffs share in that parcel of land specifically covered by TCT No. 309773. In other
words, the plaintiffs therein were claiming to be co-owners of the entire parcel of land
described in TCT No. 309773, and not only of a portion thereof nor, as incorrectly
interpreted by the lower courts, did their claim pertain exclusively to the eastern half
adjudicated to the Jimenez brothers.
Such being the case, petitioner was justified in suspending payment of the
balance of the purchase price by reason of the aforesaid vindicatory action filed against it.
The assurance made by private respondents that petitioner did not have to worry about
the case because it was pure and simple harassment 42 is not the kind of guaranty
contemplated under the exceptive clause in Article 1590 wherein the vendor is bound to
make payment even with the existence of a vindicatory action if the vendee should give a
security for the return of the price.
2. Be that as it may, and the validity of the suspension of payment
notwithstanding, we find and hold that private respondents may no longer be compelled
to sell and deliver the subject property to petitioner for two reasons, that is, petitioner's
failure to duly effect the consignation of the purchase price after the disturbance had
ceased; and, secondarily, the fact that the contract to sell had been validly rescinded by
private respondents. cdasia
The records of this case reveal that as early as February 28, 1990 when
petitioner caused its exclusive option to be annotated anew on the certificate of title, it
already knew of the dismissal of Civil Case No. 89-5541. However, it was only on April
16, 1990 that petitioner, through its counsel, wrote private respondents expressing its
willingness to pay the balance of the purchase price upon the execution of the
corresponding deed of absolute sale. At most, that was merely a notice to pay. There was
no proper tender of payment nor consignation in this case as required by law. LLjur
The 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. 43 Besides, a mere tender of payment is not sufficient to compel private
respondents to deliver the property and execute the deed of absolute sale. It is
consignation which is essential in order to extinguish petitioner's obligation to pay the
balance of the purchase price. 44 The rule is different in case of an option contract 45 or

in legal redemption or in a sale with right to repurchase, 46 wherein consignation is not

necessary because these cases involve an exercise of a right or privilege (to buy, redeem
or repurchase) rather than the discharge of an obligation, hence tender of payment would
be sufficient to preserve the right or privilege. This is because the provisions on
consignation are not applicable when there is no obligation to pay. 47 A contract to sell,
as in the case before us, involves the performance of an obligation, not merely the
exercise of a privilege or a right. Consequently, performance or payment may be effected
not by tender of payment alone but by both tender and consignation.
Furthermore, petitioner no longer had the right to suspend payment after the
disturbance ceased with the dismissal of the civil case filed against it. Necessarily,
therefore, its obligation to pay the balance again arose and resumed after it received
notice of such dismissal. Unfortunately, petitioner failed to seasonably make payment, as
in fact it has failed to do so up to the present time, or even to deposit the money with the
trial court when this case was originally filed therein. cdasia
By reason of petitioner's failure to comply with its obligation, private
respondents elected to resort to and did announce the rescission of the contract through its
letter to petitioner dated July 27, 1990. That written notice of rescission is deemed
sufficient under the circumstances.Article 1592 of the Civil Code which requires
rescission either by judicial action or notarial act is not applicable to a contract to
sell. 48Furthermore, judicial action for rescission of a contract is not necessary where the
contract provides for automatic rescission in case of breach, 49 as in the contract
involved in the present controversy.
We are not unaware of the ruling in University of the Philippines vs. De los
Angeles, etc. 50 that the right to rescind is not absolute, being ever subject to scrutiny and
review by the proper court. It is our considered view, however, that this rule applies to a
situation where the extrajudicial rescission is contested by the defaulting party. In other
words, resolution of reciprocal contracts may be made extrajudicially unless successfully
impugned in court. If the debtor impugns the declaration, it shall be subject to judicial
determination. 51 Otherwise, if said party does not oppose it, the extrajudicial rescission
shall have legal effect. 52
In the case at bar, it has been shown that although petitioner was duly
furnished and did receive a written notice of rescission which specified the grounds
therefore, it failed to reply thereto or protest against it. Its silence thereon suggests an
admission of the veracity and validity of private respondents' claim. 53 Furthermore, the
initiative of instituting suit was transferred from the rescinder to the defaulter by virtue of
the automatic rescission clause in the contract. 54 But then, the records bear out the fact
that aside from the lackadaisical manner with which petitioner treated private
respondents' letter of cancellation, it utterly failed to seriously seek redress from the court
for the enforcement of its alleged rights under the contract. If private respondents had not
taken the initiative of filing Civil Case No. 7532, evidently petitioner had no intention to
take any legal action to compel specific performance from the former. By such cavalier
disregard, it has been effectively estopped from seeking the affirmative relief it now
desires but which it had theretofore disdained. LLphil
WHEREFORE, on the foregoing modificatory premises, and considering that
the same result has been reached by respondent Court of Appeals with respect to the
relief awarded to private respondents by the court a quo which we find to be correct, its
assailed judgment in CA-G.R. CV No. 34767 is hereby AFFIRMED.

511
SO ORDERED.
Narvasa, C.J., Puno and Mendoza, JJ., concur.
||| (Adelfa Properties, Inc. v. Court of Appeals, G.R. No. 111238, [January 25, 1995], 310 PHIL
623-652)

512

THIRD DIVISION
[G.R. Nos. 106467-68. October 19, 1999.]
DOLORES LIGAYA DE MESA, petitioner, vs. THE COURT OF
APPEALS, OSSA HOUSE, INC. AND DEVELOPMENT BANK
OF THE PHILIPPINES, respondents.

Caguioa Law Office for petitioner.

Duane A. X. Santos for private respondent.
Farcon Gabriel Farcon & Associates for private respondent.

SYNOPSIS

Petitioners Dolores Ligaya de Mesa owns several parcels of land which were mortgaged to the
Development Bank of the Philippines (DBP) as security for the loan she obtained from the
bank. Failing to pay all her mortgage debts, all her mortgaged properties were foreclosed and
sold at public auction. In all said auction sales, DBP was the winning bidder. Petitioner
requested DBP that she be allowed to repurchase her foreclosed properties. In the meantime,
petitioner sold the foreclosed properties to private respondent OSSA House Inc. (OSSA), under
a "Deed of Sale with Assumption of Mortgage," under the condition that the latter was to
assume the payment of the mortgage on installment basis. DBP granted petitioner's request to
repurchase the foreclosed properties. Private respondent OSSA paid DBP the first to eight
quarterly installments in the total amount of P137,593.31, which installment payments were
applied to petitioner's obligation with the DBP. After OSSA paid the eighth quarterly
installment, petitioner notified private respondent OSSA that she was rescinding the Deed of
Sale with Assumption of Mortgage in favor of the latter on the ground that OSSA failed to
comply with the terms and conditions of their agreement. OSSA offered to pay the difference
between the purchase price and the mortgage obligation to DBP after deducting the down
payment as stipulated in the Deed of Sale with Assumption of Mortgage, but petitioner refused
to accept such payment. OSSA filed a complaint for consignation against the petitioner. DBP,
likewise, refused to accept the 9th quarterly installment paid by OSSA, forcing the latter to file
against DBP and petitioner a case for specific performance and consignation. The two cases
were eventually consolidated upon petitioner's motion. The trial court rendered a decision
declaring the consignation of OSSA proper and valid and ordered de Mesa and DBP to
withdraw and receive said payments due them which OSSA had consigned with the court.
Petitioner appealed to the Court of Appeals. The appellate court modified the trial court's
decision declaring the consignation valid only as far as petitioner de Mesa is concerned and
ordered de Mesa to receive the said amount consigned with the court and pay DBP the said
amount. Petitioner de Mesa filed a motion for reconsideration but was denied. Hence, the
present petition. Petitioner insisted that what she sold to respondent OSSA was merely the right
to redeem the foreclosed properties and not the foreclosed properties themselves.
The Supreme Court affirmed the decision of the Court of Appeals. The Court ruled that the
terms of the "Deed of Sale with Assumption of Mortgage" are clear and leave no doubt as to
what was sold thereunder. Nowhere is it provided in the deed, as the petitioner insisted that
what she sold to respondent OSSA was merely the right to redeem the mortgaged properties
and not the foreclosed properties themselves. According to the Court, the contract was so
explicit and unambiguous that it does not justify any attempt to read into it any supposed
intention of the parties, as the said contract is to be understood literally, just as they appear on
its face. cEDIAa

SYLLABUS
1. CIVIL LAW; CONTRACTS; INTERPRETATION OF CONTRACTS; THE CONTRACT
UNDER SCRUTINY IS SO EXPLICIT AND UNAMBIGUOUS THAT IT DOES NOT
JUSTIFY ANY ATTEMPT TO READ INTO IT ANY SUPPOSED INTENTION OF THE
PARTIES, AS THE SAID CONTRACT IS TO BE UNDERSTOOD LITERALLY, JUST AS
THEY APPEAR ON ITS FACE. When the words of a contract are plain and readily
understood, there is no room for construction. As the agreement of the parties are reduced to

513
writing, such agreement is considered as containing all its terms and there can be, between the
parties and their successors-in-interest, no evidence of the terms of the written agreement other
than the contents of the writing. In the case under consideration, the terms of the "Deed of Sale
with Assumption of Mortgage Debt" are clear and leave no doubt as to what were sold
thereunder. Nowhere is it provided in the contract as the petitioner insists, that what she sold to
respondent OSSA was merely the right to redeem the mortgaged properties and not the
foreclosed properties themselves. On the contrary, the very words of the contract reveal that the
subject of the sale were "all the properties described in items I, II, III of the First Whereas
Clause." Indeed, the contract under scrutiny is so explicit and unambiguous that it does not
justify any attempt to read into it any supposed intention of the parties, as the said contract is to
be understood literally, just as they appear on its face. Petitioner capitalizes on the following
prefatory clause of the contract, to wit: "WHEREAS, the VENDOR (defendant De Mesa) is the
registered owner with a preferential right of redemption of the following mortgaged properties
with the Development Bank of the Philippines, more particularly described as follows":
However, not the slightest indication can be gleaned from the abovequoted provision that the
subject of the "Deed of Sale with Assumption of Mortgage" was petitioner's right of
redemption. The said provision merely speaks of the preferential right of the latter to redeem
the real properties involved.

procedural requirements of consignation are deemed substantially complied with in the present
case.

2. ID.; ID.; ID.; THE RECOGNITION OF BOTH THE PREFERENTIAL RIGHT OF THE
PETITIONER TO REDEEM THE MORTGAGED PROPERTIES AND THE SALE OF THE
SAME PROPERTIES TO PRIVATE RESPONDENT IS IN ORDER, AS IT WOULD
HARMONIZE AND GIVE EFFECT TO ALL THE PROVISIONS OF THE "DEED OF SALE
WITH ASSUMPTION OF MORTGAGE" UNDER CONTROVERSY. The court discerns
no inconsistency between the contract's recognition of the preferential right of petitioner to
redeem the mortgaged properties, and the sale of the said properties to respondent OSSA.
Petitioner can validly redeem subject properties and still recognize the sale thereof to the
respondent corporation because nothing therein is contrary to law, morals, good customs,
public order or public policy. Besides, it is a well-settled doctrine that in the construction of an
instrument where there are several provisions, or particulars, such a construction is, if possible,
to be adopted as will give effect to all. Thus, the recognition of both the preferential right of the
petitioner to redeem the mortgaged properties and the sale of the same properties to respondent
OSSA is in order, as it would harmonize and give effect to all the provisions of the "Deed of
Sale with Assumption of Mortgage" under controversy. As aptly ruled by the respondent court,
the grant by DBP of petitioner's request to repurchase the mortgaged properties redounded to
the benefit of respondent OSSA, the sale of the said properties having been previously agreed
upon by the petitioner and respondent OSSA.

Petitioner Dolores Ligaya de Mesa owns several parcels of land in Makati, Pasay City, Cavite,
and General Santos City 3 which were mortgaged to the Development Bank of the Philippines
(DBP) as security for a loan she obtained from the bank. Failing to pay her mortgage debt, all
her mortgaged properties were foreclosed and sold at public auction held on different days. On
April 30, 1977, the Makar property was sold and the corresponding certificate of sale inscribed
on March 10, 1978. On August 25, 1977, the Naic, Cavite property was sold and the certificate
of sale registered on the same day. On August 30, 1977, the two (2) parcels of land in Makati
were sold at public auction and the certificate of sale was inscribed on November 25, 1977.
And on January 12, 1978, the three (3) parcels of land in Pasay City were also sold and the
certificate of sale was recorded on the same date. In all the said auction sales, DBP was the
winning bidder.

3. ID.; ID.; ID.; FOR REASONS OF EQUITY, THE PROCEDURAL REQUIREMENTS OF

CONSIGNATION ARE DEEMED COMPLIED WITH IN THE PRESENT CASE.
Petitioner next argues that there was no notice to her regarding OSSA's consignation of the
amounts corresponding to the 12th up to the 20th quarterly installments. The records, however,
show that several tenders of payment were consistently turned down by the petitioner, so much
so that the respondent OSSA found it pointless to keep on making formal tenders of payment
and serving notices of consignation to petitioner. Moreover, in a motion dated May 7, 1987,
OSSA prayed before the lower court that it be allowed to deposit by way of consignation all the
quarterly installments, without making formal tenders of payment and serving notice of
consignation, which prayer was granted by the trial court in the Order dated July 3, 1982. The
motion and the subsequent court order served on the petitioner in the consignation proceedings
sufficiently served as notice to petitioner of OSSA's willingness to pay the quarterly
installments and the consignation of such payments with the court. For reasons of equity, the

DECISION

PURISIMA, J p:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court
questioning the Decision 1 of the Court of Appeals 2 dated March 31, 1992 in CA-G.R. Nos.
19145 and 19146, which modified the decision of Branch 138 of the Regional Trial Court of
Makati in Civil Case Nos. 41059 and 42381.
The antecedent facts are as follows:

In a letter dated May 29, 1978, petitioner de Mesa requested DBP that she be allowed to
repurchase her foreclosed properties.
On October 23, 1978, Mrs. de Mesa, under a "Deed of Sale with Assumption of
Mortgage," 4 sold the foreclosed properties to private respondent OSSA under the condition
that the latter was to assume the payment of the mortgage debt by the repurchase of all the
properties mortgaged on installment basis, with an initial payment of P90,000.00 representing
20% of the total obligation.

On October 23, 1978, private respondent OSSA remitted to DBP the initial payment of
P90,000.00, in addition to the amount of P10,000.00 previously paid to the petitioner. cdrep
On February 22, 1979, DBP granted petitioner's request to repurchase the foreclosed properties
such that in March 1979 a "Deed of Conditional Sale" was executed under which DBP agreed
to sell the said properties to the petitioner for the sum of P363,408.20, P90,000.00 of which
was to be paid as initial payment and the balance in seven (7) years on a quarterly amortization
plan, with a first quarterly installment of P15,475.17.

514
Private respondent OSSA paid DBP the first to eight quarterly installments from April 11, 1979
to May 8, 1991, in the total amount of P137,595.31, which installment payments were applied
to petitioner's obligation with DBP pursuant to the Deed of Conditional Sale.
On March 11, 1981, petitioner de Mesa notified private respondent OSSA that she was
rescinding the Deed of Sale with Assumption of Mortgage she executed in favor of the latter on
the ground that OSSA failed to comply with the terms and conditions of their agreement,
particularly the payment of installments to the Development Bank of the Philippines, the
discharge and cancellation of the mortgage on the property listed in item IV of the first whereas
clause, and the payment of the balance of more or less P45,000.00 to petitioner, representing
the difference between the purchase price of subject properties and the actual obligation to the
DBP.
On April 11, 1981, OSSA offered to pay the amount of P34,363.08, which is the difference
between the purchase price of P500,000.00 and the mortgage obligation to DBP of
P455,636.92, after deducting the downpayment of P10,000.00 stipulated in said Deed of Sale
with Assumption of Mortgage, but the petitioner refused to accept such payment. So, on April
28, 1981, OSSA brought a Complaint for Consignation against the petitioner, docketed as Civil
Case No. 41059 before the then Court of First Instance of Rizal, Branch XV, and at the same
time, deposited the amount of P34,363.08 with said court.
On August 5, 1981, DBP refused to accept the 9th quarterly installment paid by OSSA,
prompting the latter to file against DBP and the petitioner, on August 11, 1981, Civil Case No.
42381 for specific performance and consignation, with the then Court of First Instance of
Pasig, Rizal, depositing in said case the amount of P15,824.92.
On October 21, 1981, upon petitioner de Mesa's motion, Civil Case Nos. 41059 and 42381
were consolidated before the then Court of First Instance of Rizal, Branch XV, Makati, Metro
Manila, now Regional Trial Court of Makati City , Branch CXXXVIII (138).
In an Order dated July 23, 1982, the lower court allowed OSSA to deposit with the Court a
quo by way of consignation, all future quarterly installments without need of formal tenders of
payment and service of notices of consignation. Correspondingly and over the period of time
stipulated, OSSA deposited with the lower court the 10th to the 20th installments in the
aggregate amount of P172, 562.11.
After trial, the lower court came out with a Decision for the private respondent OSSA, holding
thus:
'WHEREFORE, premises considered, judgment is hereby rendered
(a) declaring the consignation made by plaintiff as proper and valid
and ordering defendants Dolores Ligaya de Mesa and Development
Bank of the Philippines to withdraw and receive said payments due
them which plaintiff has consigned with the Court;
(b) Ordering defendant Development Bank of the Philippines to
furnish plaintiff with a statement of payments and balance, if any, still
due from defendant de Mesa after applying all payments already
received, including the amounts placed under consignation;
(c) Upon payment by the plaintiff of the balance if any, still due on
the properties, defendant Development Bank of the Philippines shall

execute a Deed of Absolute Sale in favor of the plaintiff over the

properties subject matter of the Deed of Absolute Sale with
Assumption of Mortgage executed by and between plaintiff and
defendant de Mesa;
(d) Ordering plaintiff to pay defendant de Mesa the difference, if any,
between the agreed purchase price of P500,000.00 and the payments
made to the defendant Development Bank of the Philippines, less the
P10,000.00 down payment already paid and the P34,363.08
consigned with the Court; and
(e) Ordering defendant de Mesa to pay plaintiff the sum of
P10,000.00 as attorneys fees.
SO ORDERED.' 5
The petitioner appealed to the Court of Appeals which handed down on March 31, 1992, its
decision modifying the challenged decision, as follows:
"WHEREFORE, the decision appealed from is hereby MODIFIED:
(a) declaring the consignation made by OSSA as proper and valid as
far as de Mesa is concerned, and ordering de Mesa to receive the said
amount consigned with the court and pay DBP with the said amount;
(b) ordering DBP to furnish de Mesa with a statement of payments
and the balance, if any, still due from de Mesa after applying all
payments already received, including the amounts paid under
consignation;
(c) ordering de Mesa to furnish OSSA with a copy of the statement of
payments described in the preceding paragraph, and the balance
appearing therein, if any, shall be paid by OSSA for the account of de
Mesa;
(d) ordering DBP to execute a Deed of Absolute Sale in favor of de
Mesa over the properties subject of the Deed of Conditional Sale;
(e) ordering Ossa to pay de Mesa the difference, if any, between the
agreed purchase price of P500,000.00 and the payments made to
DBP, less the P10,000.00 down payment and the P34,363.08
consigned with the court;
(f) ordering de Mesa thereafter, to execute a Deed of Absolute Sale in
favor of OSSA over the properties subject of the Deed of Sale with
assumption of Mortgage; and
(g) ordering de Mesa to pay OSSA the sum of P10,000.00 as and for
attorney's fees.
No pronouncement as to costs.
SO ORDERED." 6

515
On May 5, 1992, petitioner interposed a motion for reconsideration of the aforesaid decision,
theorizing that:
"I
THIS COURT ERRED WHEN IT HELD THAT WHAT WAS SOLD
UNDER THE 'DEED OF SALE WITH ASSUMPTION OF
MORTGAGE' WERE THE PROPERTIES LISTED THEREIN AND
NOT MERELY THE RIGHT OF REDEMPTION DESPITE THE
TESTIMONIES OF BOTH CONTRACTING PARTIES THAT
WHAT SOLD AND BOUGHT WAS MERELY THE RIGHT OF
REDEMPTION.
II
THIS COURT ERRED IN HOLDING THAT DE MESA'S
REQUEST TO REPURCHASE THE FORECLOSED PROPERTIES
FROM DBP REDOUNDED TO THE BENEFIT OF OSSA HOUSE,
INC.
III
THIS COURT ERRED IN HOLDING DE MESA IN ESTOPPEL.
IV
THIS COURT ERRED IN RULING THAT THE MANDATORY
REQUIREMENTS OF THE CIVIL CODE ON CONSIGNATION
CAN BE WAIVED BY THE TRIAL COURT." 7
With the denial of her aforestated motion for reconsideration, petitioner found her way to this
Court via the present petition, raising the issues:
(i) Whether or not the requirements of Articles 1256 to 1261 can be
'relaxed' or 'substantially complied with'.
(ii) Whether or not the Court can supplant its own reading of an
ambiguous contract for the actual intention of the contracting parties
as testified to in open court and under oath.
(iii) Whether or not petitioner de Mesa can be held in estoppel for the
acts of the DBP.

considered as containing all its terms and there can be, between the parties and their
successors-in-interest, no evidence of the terms of the written agreement other than the
contents of the writing. 8
In the case under consideration, the terms of the "Deed of Sale with Assumption of Mortgage
Debt" are clear and leave no doubt as to what were sold thereunder. It provided as follows:
"WHEREAS, the VENDOR has agreed to sell to the VENDEE
(plaintiff Ossa House, Inc.), and the VENDEE has agreed to purchase
from the VENDOR, all the properties described in Items I, II, and III,
of the First Whereas Clause, for the price and under the terms
hereinafter contained;
NOW, THEREFORE, for and in consideration of the premises and the
sum of TEN THOUSAND PESOS (P10,000.00), the receipt whereof
is hereby acknowledged, and the assumption by the VENDEE of the
total mortgage obligation of the VENDOR has sold, transferred, and
conveyed, and by these presents does sell, transfer and convey, unto
the said VENDEE, its administrators and assigns, free from all liens
and encumbrances except as noted herein, the parcels of land
hereinabove described in Items I, II, and III, together with all the
buildings and improvements thereon;
The VENDEE does hereby assume the payment of the mortgage
obligations by repurchase of all the properties mortgaged on
installment, with an initial payment of P90,000.00 representing
payment 20% of the total obligation; and consequently, the within
sale is subject to the mortgage in favor of the Development Bank of
the Philippines;"
Nowhere is it provided in the aforequoted provisions, as the petitioner insists, that what she
sold to respondent OSSA was merely the right to redeem the mortgaged properties and not the
foreclosed properties themselves. On the contrary, the very words of the contract reveal that the
subject of the sale were "all the properties described in items I, II, III of the First Whereas
Clause."
Indeed, the contract under scrutiny is so explicit and unambiguous that it does not justify any
attempt to read into it any supposed intention of the parties, as the said contract is to be
understood literally, just as they appear on its face. 9
Petitioner capitalizes on the following prefatory clause of the contract, to wit:

Article 1370 of the New Civil Code, reads:

"ARTICLE 1370. 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.
xxx xxx xxx"
When the words of a contract are plain and readily understood, there is no room for
construction. As the agreement of the parties are reduced to writing, such agreement is

"WHEREAS, the VENDOR (defendant De Mesa) is the registered

owner with a preferential right of redemption of the following
mortgaged properties with the Development Bank of the Philippines,
more particularly described as follows:"
However, not the slightest indication can be gleaned from the abovequoted provision that
the subject of the "Deed of Sale with Assumption of Mortgage" was petitioner's right of

516
redemption. The said provision merely speaks of the preferential right of the latter to redeem
the real properties involved.
Furthermore, the court discerns no inconsistency between the contract's recognition of the
preferential right of petitioner to redeem the mortgaged properties, and the sale of the said
properties to respondent OSSA. Petitioner can validly redeem subject properties and still
recognize the sale thereof to the respondent corporation because nothing therein is contrary to
law, morals, good customs, public order or public policy. Besides, it is a well-settled doctrine
that in the construction of an instrument where there are several provisions, or particulars, such
a construction is, if possible, to be adopted as will give effect to all. 10 Thus, the recognition of
both the preferential right of the petitioner to redeem the mortgaged properties and the sale of
the same properties to respondent OSSA is in order, as it would harmonize and give effect to
all the provisions of the "Deed of Sale with Assumption of Mortgage" under controversy.
As aptly ruled by the respondent court, the grant by DBP of petitioner's request to repurchase
the mortgaged properties redounded to the benefit of respondent OSSA, the sale of the said
properties having been previously agreed upon by the petitioner and respondent OSSA.
Petitioner contends that she is not estopped from questioning DBP's application to her account
of OSSA's initial payment of P90,000.00 as well as the first to eight quarterly installments. It
bears stressing, however, that the remittance of the said payment was made in implementation
of the provisions of their contract. The belated claim of the petitioner, which was not given
credence by the trial court, that she objected to the application by DBP to her account of all the
remittances of OSSA is tainted with bad faith as this is an attempt to renegade against her
contract with respondent OSSA. Besides, the issue of whether or not petitioner objected is a
question of fact that has already been settled by the trial court which best performs the matter
of assigning values to the testimony of witnesses, 11 and whose findings are accorded great
weight especially when affirmed by the Court of Appeals 12 , as in the case at bar.
Petitioner next argues that there was no notice to her regarding OSSA's consignation of the
amounts corresponding to the 12th up to the 20th quarterly installments. The records, however,
show that several tenders of payment were consistently turned down by the petitioner, so much
so that the respondent OSSA found it pointless to keep on making formal tenders of payment
and serving notices of consignation to petitioner. Moreover, in a motion dated May 7, 1987,
OSSA prayed before the lower court that it be allowed to deposit by way of consignation all the
quarterly installments, without making formal tenders of payment and serving notice of
consignation, which prayer was granted by the trial court in the Order dated July 3, 1982. The
motion and the subsequent court order served on the petitioner in the consignation proceedings
sufficiently served as notice to petitioner of OSSA's willingness to pay the quarterly
installments and the consignation of such payments with the court. For reasons of equity, the
procedural requirements of consignation are deemed substantially complied with in the present
case. 13
Petitioner also insists that there was no valid tender of payment because the amount tendered
was P34,363.08, not P51,243.26, and assuming ex gratia argumenti that it was the correct
amount, the tender thereof was still not valid, the same having been made by check. This
claim, however, does not accord with the records on hand. Thus, the Court of Appeals
ratiocinated:
"The 'Deed of Sale with Assumption of Mortgage', was for a
consideration of P500,000.00, from which shall be deducted de
Mesas's outstanding obligation, with the DBP pegged as of May 10,

1978, by the parties themselves, at P455,636.92. This amount of

P455,636.92 owing DBP, is what OSSA agreed to assume. What
remained to be paid de Mesa was P44,636.08, but OSSA made an
advance payment of P10,000.00, hence the remaining amount payable
to de Mesa is P34,363.08, which OSSA tendered in cash (Exhibits 'X',
'BB' and 'CC')." 14
It is thus beyond cavil that the respondent OSSA tendered the correct amount, the tender of
which was in cash and not by check, as theorized by petitioner.
Premises studiedly considered, the Court is of the ineluctable conclusion, and so holds, that the
Court of Appeals erred not in affirming the decision of the trial court of origin.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals in
CA-G.R. Nos. 19145 and 19156 dated March 31, 1992 AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
Melo, Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.
||| (De Mesa v. Court of Appeals, G.R. Nos. 106467-68, [October 19, 1999], 375 PHIL 432447)

517

FIRST DIVISION

TRENT, J p:
The basis of this action is a written contract, Exhibit A, the pertinent
paragraphs of which follow:

[G.R. No. 9935. February 1, 1915.]

YU
TEK
&
CO., plaintiff-appellant, vs.
GONZALEZ, defendant-appellant.

BASILIO

Beaumont, Tenney & Ferrier for plaintiff.

Buencamino & Lontok for defendant.

SYLLABUS
1. EVIDENCE; PAROL EVIDENCE TO VARY TERMS OF WRITTEN
INSTRUMENT. A written contract provided that the defendant was to sell to the
plaintiff 600 piculs of sugar. The defendant sought to prove by parol evidence that it was
the understanding of the parties that the sugar was to be procured from the defendant's
growing crop. There was nothing in the writing which could be construed to limit the
agreement to the defendant's own crop of sugar. Held, That the evidence in question was
incompetent as varying the terms of the writing.
2. SALES; REQUISITES OF CONTRACT; CONSIDERATION. A
contract of sale is not perfected until the parties have agreed upon the price and the thing
sold. A contract whereby a party obligates himself to sell for a price a certain specified
quantity of sugar of a given quality, without designating any particular lot of sugar, is not
perfected until the quantity agreed upon has been selected and is capable of being
physically designated and distinguished from all other sugar.
3. ID.; ID.; LOSS OF THE THING DUE. Until thus segregated or
appropriated, the vendee does not assume the risk of loss as provided in article 1452 of
the Civil Code.
4. ID.; ID.; LIQUIDATE: DAMAGES. The contract provided that upon
failure to make delivery within a specified time the vendor should pay the sum of P1,200
by way of indemnity for loss and damages. The P1,200 were liquidated damages and
must be enforced according to the terms of the contract.

DECISION

"1. That Mr. Basilio Gonzalez hereby acknowledges

receipt of the sum of P3,000 Philippine currency from Messrs. Yu Tek
& Co., and that in consideration of said sum he obligates himself to
deliver to the said Yu Tek & Co., 600 piculs of sugar of the first and
second grade, according to the result of the polarization, within the
period of three months, beginning on the 1st day of January, 1912,
and ending on the 31st day of March of the same year, 1912.
"2. That the said Mr. Basilio Gonzalez obligates himself to
deliver to the said Messrs. Yu Tek & Co. of this city the said 600
piculs of sugar at any place within the said municipality of Santa
Rosa which the said Messrs. Yu Tek & Co. or a representative of the
same may designate.
"3. That in case the said Mr. Basilio Gonzales does not
deliver to Messrs. Yu Tek & Co. the 600 piculs of sugar within the
period of three months, referred to in the second paragraph of this
document, this contract will be rescinded and the said Mr. Basilio
Gonzalez will then be obligated to return to Messrs. Yu Tek & Co. the
P3,000 received and also the sum of P1,200 by way of indemnity for
loss and damages."
Plaintiff proved that no sugar had been delivered to it under this contract nor
had it been able to recover the P3,000. Plaintiff prayed for judgment for the P3,000 and in
addition, for P1,200 under paragraph 4, supra. Judgment was rendered for P3,000 only,
and from this judgment both parties appealed.
The points raised by the defendant will be considered first. He alleges that the
court erred in refusing to permit parol evidence showing that the parties intended that the
sugar was to be secured from the crop which the defendant raised on his plantation, and
that he was unable to fulfill the contract by reason of the almost total failure of his crop.
This case appears to be one to which the rule which excludes parol evidence to add to or
vary the terms of a written contract is decidedly applicable. There is not the slightest
intimation in the contract that the sugar was to be raised by the defendant. Parties are
presumed to have reduced to writing all the essential conditions of their contract. While
parol evidence is admissible in a variety of ways to explain the meaning of written
contracts, it cannot serve the purpose of incorporating into the contract additional
contemporaneous conditions which are not mentioned at all in the writing, unless there
has been fraud or mistake. In an early case this court declined to allow parol evidence
showing that a party to a written contract was to become a partner in a firm instead of a
creditor of the firm. (Pastor vs. Gaspar, 2 Phil. Rep., 592.) Again, in Eveland vs. Eastern
Mining Co. (14 Phil. Rep., 509) a contract of employment provided that the plaintiff
should receive from the defendant a stipulated salary and expenses The defendant sought
to interpose as a defense to recovery that the payment of the salary was contingent upon
the plaintiff's employment redounding to the benefit of the defendant company. The

518
contract contained no such condition and the court declined to receive parol evidence
thereof.
In the case at bar, it is sought to show that the sugar was to be obtained
exclusively from the crop raised by the defendant. There is no clause in the written
contract which even remotely suggests such a condition. The defendant undertook to
deliver a specified quantity of sugar within a specified time. The contract placed no
restriction upon the defendant in the matter of obtaining the sugar. He was equally at
liberty to purchase it on the market or raise it himself. It may be true that defendant
owned a plantation and expected to raise the sugar himself, but he did not limit his
obligation to his own crop of sugar. our conclusion is that the condition which the
defendant seeks to add to the contract by parol evidence cannot be considered. The rights
of the parties must be determined by the writing itself.
The second contention of the defendant arises from the first. He assumes that
the contract was limited to the sugar he might raise upon his own plantation; that the
contract represented a perfected sale; and that by failure of his crop he was relieved from
complying with his undertaking by loss of the thing due. (Arts. 1452, 1096, and 1182,
Civil Code.) This argument is faulty in assuming that there was a perfected sale. Article
1450 defines a perfected sale as follows:
"The sale shall be perfected between vendor and vendee
and shall be binding on both of them, if they have agreed upon the
thing which is the object of the contract and upon the price, even
when neither has been delivered."
Article 1452 reads: "The injury to or the profit of the thing sold shall, after the
contract has been perfected. be governed by the provisions of articles 1096 and 1182."
This court has consistently held that there is a perfected sale with regard to the
"thing" whenever the article of sale has been physically segregated from all other articles
Thus, a particular tobacco factory with its contents was held sold under a contract which
did not provide for either delivery of the price or of the thing until a future time.
McCullough vs. Aenlle & Co. (3 Phil. Rep., 285). Quite similar was the recent case of
Barretto vs. Santa Marina (26 Phil. Rep., 200) where specified shares of stock in a
tobacco factory were held sold by a contract which deferred delivery of both the price
and the stock until the latter had been appraised by an inventory of the entire assets of the
company. In Borromeo vs.Franco (5 Phil. Rep., 49) a sale of a specific house was held
perfected between the vendor and vendee, although the delivery of the price was withheld
until the necessary documents of ownership were prepared by the vendee. In Tan
Leonco vs. Go Inqui (8 Phil. Rep., 531) the plaintiff had delivered a quantity of hemp into
the warehouse of the defendant. The defendant drew a bill of exchange in the sum of
P800, representing the price which had been agreed upon for the hemp thus delivered.
Prior to the presentation of the bill for payment, the hemp was destroyed. Whereupon, the
defendant suspended payment of the bill. It was held that the hemp having been already
delivered, the title had passed and the loss was the vendee's. It is our purpose to
distinguish the case at bar from all these cases.
In the case at bar the undertaking of the defendant was to sell to the plaintiff
600 piculs of sugar of the first and second classes. Was this an agreement upon the
"thing" which was the object of the contract within the meaning of article 1450, supra?
Sugar is one of the staple commodities of this country. For the purpose of sale its bulk is
weighed, the customary unit of weight being denominated a ''picul.'' There was no

delivery under the contract. Now, if called upon to designate the article sold, it is clear
that the defendant could only say that it was "sugar." He could only use this generic name
for the thing sold. There was no "appropriation" of any particular lot of sugar. Neither
party could point to any specific quantity of sugar and say:
"This is the article which was the subject of our contract."
How different is this from the contracts discussed in the cases referred
to above! In the McCullough case, for instance, the tobacco factory
which the parties dealt with was specifically pointed out and
distinguished from all other tobacco factories. So, in the Barretto
case, the particular shares of stock which the parties desired to
transfer were capable of designation. In the Tan Leonco case, where a
quantity of hemp was the subject of the contract, it was shown that
quantity had been deposited in a specific warehouse, and thus set
apart and distinguished from all other hemp.
A number of cases have been decided in the State of Louisiana, where the
civil law prevails, which confirm our position. Perhaps the latest is Witt Shoe Co. vs.
Seegars & Co. (122 La., 145; 47 Sou., 444). In this case a contract was entered into by a
traveling salesman for a quantity of shoes, the sales having been made by sample. The
court said of this contract:
"But it is wholly immaterial, for the purposes of the main
question, whether Mitchell was authorized to make a definite contract
of sale or not, since the only contract that he was in a position to
make was an agreement to sell or an executory contract of sale. He
says that plaintiff sends out 375 samples of shoes, and as he was
offering to sell by sample shoes, part of which had not been
manufactured and the rest of which were incorporated in plaintiff's
stock in Lynchburg, Va., it was impossible that he and Seegars & Co.
should at that time have agreed upon the specific objects, the title to
which was to pass, and hence there could have been no sale. He and
Seegars & Co. might have agreed, and did (in effect) agree, that the
identification of the objects and their appropriation to the contract
necessary to make a sale should thereafter be made by the plaintiff,
acting for itself and for Seegars & Co., and the legend printed in red
ink on plaintiff's billheads ("Our responsibility ceases when we take
transportation Co's. receipt 'In good order") indicates plaintiff's idea
of the moment at which such identification and appropriation would
become effective The question presented was carefully considered in
the case of State vs. Shields, et al. (110 La., 547, 34 Sou., 673) (in
which it was absolutely necessary that it should be decided), and it
was there held that in receiving an order for a quantity of goods, of a
kind and at a price agreed on, to be supplied from a general stock,
warehoused at another place, the agent receiving the order merely
enters into an executory contract for the sale of the goods, which does
not divest or transfer the title of any determinate object, and which
becomes effective for that purpose only when specific goods are
thereafter appropriated to the contract; and, in the absence of a more
specific agreement on the subject, that such appropriation takes place
only when the goods as ordered are delivered to the public carriers at
the place from which they are to be shipped, consigned to the person

519
by whom the order is given, at which time and place, therefore, the
sale is perfected and the title passes."
This case and State vs. Shields, referred to in the above quotation are amply
illustrative of the position taken by the Louisiana court on the question before us. But we
cannot refrain from referring to the case of Larue & Prevost vs. Rugely, Blair & Co. (10
La. Ann., 242) which is summarized by the court itself in the Shields case as follows:
". . . It appears that the defendants had made a contract for
the sale, by weight, of a lot of cotton, had received $3,000 on account
of the price, and had given an order for its delivery, which had been
presented to the purchaser, and recognized by the press in which the
cotton was stored, but that the cotton had been destroyed by fire
before it was weighed. It was held that it was still at the risk of the
seller, and that the buyer was entitled to recover the $3,000 paid on
account of the price."
We conclude that the contract in the case at bar was merely an executory
agreement; a promise of sale and not a sale. As there was no perfected sale, it is clear that
articles 1452, 1096, and 1182 are not applicable. The defendant having defaulted in his
engagement, the plaintiff is entitled to recover the P3,000 which it advanced to the
defendant, and this portion of the judgment appealed from must therefore be affirmed.
The plaintiff has appealed from the judgment of the trial court on the ground
that it is entitled to recover the additional sum of P1,200 under paragraph 4 of the
contract. The court below held that this paragraph was simply a limitation upon the
amount of damages which could be recovered and not liquidated damages as
contemplated by the law. "It also appears," said the lower court, "that in any event the
defendant was prevented from fulfilling the contract by the delivery of the sugar by
conditions over which he had no control, but these conditions were not sufficient to
absolve him from the obligation of returning the money which he received."
The above quoted portion of the trial court's opinion appears to be based upon
the proposition that the sugar which was to be delivered by the defendant was that which
he expected to obtain from his own hacienda and, as the dry weather destroyed his
growing cane, he could not comply with his part of the contract. As we have indicated,
this view is erroneous, as, under the contract, the defendant was not limited to his
growing crop in order to make the delivery. He agreed to deliver the sugar and nothing is
said in the contract about where he was to get it.
We think this is a clear case of liquidated damages. The contract plainly states
that if the defendant fails to deliver the 600 piculs of sugar within the time agreed on, the
contract will be rescinded and he will be obliged to return the P3,000 and pay the sum of
P1,200 by way of indemnity for loss and damages. There cannot be the slightest doubt
about the meaning of this language or the intention of the parties. There is no room for
either interpretation or construction. Under the provisions of article 1255 of the Civil
Code contracting parties are free to execute the contracts that they may consider suitable,
provided they are not in contravention of law, morals, or public order. In our opinion
there is nothing in the contract under consideration which is opposed to any of these
principles.

For the foregoing reasons the judgment appealed from is modified by

allowing the recovery of P1,200 under paragraph 4 of the contract. As thus modified, the
judgment appealed from i9 affirmed, without costs in this instance.
Arellano, C.J., Torres, Carson and Araullo, JJ., concur.
Johnson, J., dissents.
||| (Yu Tek & Co. v. Gonzalez, G.R. No. 9935, [February 1, 1915], 29 PHIL 384-392)

520

FIRST DIVISION

DECISION

[G.R. No. 46843. June 30, 1939.]

IMPERIAL, J p:
REYNALDO LABAYEN and TEODORO LABAYEN, plaintiffsappellants, vs. TALISAY-SILAY MILLING CO., defendant-appellee.

Vicente J. Francisco for appellants.

Nolan & Manaloto and Jose Nava for appellee.

SYLLABUS
1. ACTION TO ANNUL A JUDGMENT; EXTRINSIC OR COLLATERAL
FRAUD; "RES JUDICATA.". It appears that the facts upon which the plaintiffs base
the fraud now invoked by them have been already submitted and resolved in the first
case, and the court, after hearing the parties, held that they were true, hence it rendered
judgment in favor of the defendant. An action to annul a judgment, upon the ground of
fraud, will not lie unless the fraud be extrinsic or collateral and the facts upon which it is
based have not been controverted or resolved in the case where the judgment sought to be
annulled was rendered (Anuran vs. Aquino and Ortiz, 38 Phil., 29; Javier vs. Paredes and
Gregorio, 52 Phil., 910). That the testimony upon which a judgment has been based was
false or perjured is no ground to assail said judgment, unless the fraud refers to the
jurisdiction. (Scotten vs. Rosenblum, 231 Fed., 357; U. S. vs. Chung Shee, 71 Fed., 277;
Giffen vs. Christ's Church, 48 Cal. A., 151; 191 P., 718; Pratt vs. Griffin, 22" Ill., 349; 79
N. E., 102.) The testimony which is stigmatized as false and perjured was considered by
the court before rendering its decision, and it came to the conclusion that it was true and
believable, for which reason it made the same the basis for its holding that the defendant
did not construct the railway because the land of the hacienda was very rugged and the
curves and grades made the construction thereof impossible. After that holding it is not
now proper to question the veracity of said testimony in a collateral proceeding,
otherwise there would be no end to controversies submitted and decided by the court.
Unless the fraud goes directly to the jurisdiction of the court, the facts in which it consists
must be extrinsic or collateral in order that fraud may be a ground to annul a judgment
which has already become final.
2. COMPLAINT; DEMURRER. In view of the allegations of the amended
complaint, Held: That the court did not err in sustaining the demurrer interposed to the
second cause of action because it is evident that the allegations thereof are, at least, vague
and uncertain and the defendant is entitled to have the appellants amend their amended
complaint so as to make the allegations thereof more categorical, intelligible and specific,
to the end that it set out a real cause of action to which the defendant, in turn, may
interpose an answer with such special defenses as it may have in its favor.

The plaintiffs take this appeal from the order of the Court of First Instance of
Occidental Negros, dated June 12, 1937, sustaining the demurrer to the amended
complaint, filed on May 4, 1937, and granting ten days to the plaintiffs to amend the said
pleading, with notice that should they fail to do so within the said period, the same will
be dismissed, with costs.
The amended complaint alleges as first cause of action the following: that the
plaintiffs on or before August 27, 1919 until the year 1928, were the undivided owners of
the hacienda known as Dos Hermanos, situated in the municipality of Talisay, Occidental
Negros, consisting of lots Nos. 1229 and 1327 of the cadastre of the said municipality,
described in original certificates of title Nos. 9982 and 9286; that on August 27, 1929, the
plaintiffs and the defendant entered into a milling contract the pertinent pacts and
conditions of which reads:
xxx xxx xxx
"PACTS TO WHICH THE CENTRAL BIND ITSELF
"THIRD: That it shall construct and shall thereafter make
or cause to be made everything needed for the conversation in good
condition, and shall operate during the period of this agreement,
without any expense on the part of the planter or planters, a fixed
railway, of steam or motor, or both, for the use of the plantation or
plantations in the transportation of sugar cane, sugar, fertilizer and
goods which the planter may need for his land, for his land, for his
use, for that of his family and that of his employees, and shall make
the principal line or a branch thereof, as the case may be, to reach a
point of the plantation to be hereafter described which shall be not
more than one mile from the boundaries of the said plantation, as the
configuration of the land, its curves and grades will permit; it shall
provide the said railway with locomotives or motors and wagons in
sufficient number to expedite the transportation of sugar cane, sugar,
fertilizer and goods aforementioned, and it shall likewise construct a
branch of the railway connecting the principal line, factory and
warehouses and the aforementioned pier, and it shall also
conveniently equip with switches or otherwise the yard of the factory
near the sugar mill. All the steam locomotives shall be provided with
spark arresters. The railway shall consists of a line or way
conveniently and properly designated so that, as far as possible all the
planters may derive equal benefits therefrom; the right of way for the
principal line of the railway shall be three and one-half (3 ) meters
wide on each side measuring from the center of the line, and the
branches, deviations, and curves shall be more if necessary.

521
xxx xxx xxx
"EIGHTH. It shall receive all the sugar cane planted by
the planter or planters, well cut off, completely clear of leaves,
conveniently loaded on the wagons of the Central at those points
along the line of its railway or branches thereof, as the case may be,
on such days and time as the Committee of Planters may agree upon,
taking into account the crops of the planters and the kind of sugar
cane to be milled, and shall transport the said sugar cane to the
factory free of charge.
"The Central shall have the right to refuse the sugar cane
which is unclean, sour or burned. In case of delivery of sugar cane not
sufficiently clean or cut off, but which otherwise complies with the
other required conditions, the Central shall make a certain per cent
reduction from its weight subject to the determination of the Central
and the Committee of Planters; and in case of disagreement on this
matter, the Central shall clean or take off the leaves of the sugar cane
in two wagons to determine the exact amount to be deducted from the
weight of all the sugar cane in question, and the expenses occasioned
by said cleaning shall be charged against the delinquent planter.
"The burned sugar cane, after twenty-four (24) hours from
the time of burning, shall be accepted by the Central only upon
special agreement between the Central and the Committee of Planters,
who shall fix the conditions whereby the same should be milled and
the sugar divided.
xxx xxx xxx
"TENTH. It shall grind, crush, and mill the said sugar cane
and, through the proper procedure of fabrication, shall convert the
sugar which it guarantees to extract in its mills on an average of
not less than ninety-two per cent (92%) for each sugar crop in
centrifugal sugar of high grades, generally known as sugar A and B,
and it shall guarantee an average of ninety-six (96) grades in said
sugar class A; and it shall guarantee an average polarization of ninetythree (93) grades in said sugar class B.
"The Committee of Planters and the Central, upon
agreement, shall determine the class or classes of sugar to be made by
the factory.
"OBLIGATIONS OF THE PLANTER
"FIRST. That during a period of thirty (30) years, from the
time he is notified by the Central that it is ready to receive him, he
shall deliver to said Central, properly cut and clear of leaves, all the
sugar cane planted, cultivated and produced upon his said lands and
haciendas.
"That the planter who signs this contract, states and
guarantees to the Central that he is the absolute owner of the
following parcel of land, situated in the Municipality of Talisay,

Province of Negros Occidental, described in this contract as "the

plantation" or "the plantations" known as lots Nos. (1229) one
thousand two hundred twenty-nine and (1327) one thousand three
hundred twenty-seven of the Talisay Cadastre, Province of Negros
Occidental, P. I.
"The delivery of the sugar cane shall be made on the
wagons of the railway of the Central at the places and time agreed
upon by the Manager of the Central and the Committee of Planters."
that pursuant to the said contract the plaintiffs planted on the hacienda Dos Hermanos
during the agricultural year 1920-1921 thirty-five lacsasof sugar cane to be milled by the
defendant; that in the following agricultural year, 1921-1922, the plaintiffs also planted
3,000 lacsas of sugar cane on the same hacienda, also to be milled and converted into
centrifugal sugar by the defendant; that the defendant, in violation of the milling contract,
did not construct the railway until a convenient place on the hacienda Dos Hermanos, as a
result of which the sugar cane produced during the said agricultural years were not
brought to and milled by the defendant's central; that for this reason the plaintiffs suffered
a loss amounting to P28,620 for the recovery of which they brought civil case No. 3789
of the Court of First Instance of Occidental Negros; that in said case judgment was
rendered absolving the defendant and sentencing the plaintiffs, upon the defendant's
counterclaim, to pay the latter the sum of P12,114; that the said judgment was appealed to
this court (G. R. No. 29298) and here affirmed (Labayen vs. Talisay-Silay Milling Co., 52
Phil., 440); that on the execution of the judgment in favor of the defendant in said case
and on foreclosure of the mortgage of the hacienda Dos Hermanos, the sheriff sold the
same at public auction and adjudicated it in favor of the defendant; that immediately after
it became the owner of the hacienda, the defendant constructed the railway which, at the
trial of the case, it had maintained was impossible to construct due to the curves and
grades found on the hacienda, thereby showing that the defense which it put up to this
effect was false and fraudulent; that the judgments of the Court of First Instance of
Occidental Negros and of the Supreme ,Court rendered in the said case were obtained by
the defendant through fraud consisting in the false testimony given by the witnesses who
testified in the case; that said witnesses falsely testified that the railway could not be
constructed on the hacienda Dos Hermanos because the curves and grades existing
thereon made it materially impossible, knowing that said statements were untrue and
false; that as a result of the judgments fraudulently obtained by the defendant, the
plaintiffs have suffered damages in the sum of P70,000. As second cause of action of the
amended complaint the following facts were alleged: that in the milling contract, through
the false representations of the officers of the defendant, the latter induced the plaintiffs
to empower it to obtain a loan from any institution and to secure it by the mortgage of the
hacienda Dos Hermanos, promising to give the plaintiffs a bonus after the loan had been
paid and the mortgage released; that the plaintiffs have been informed, and so allege in
their amended complaint, that the defendant, armed with said power, obtained a loan
from a bank which it guaranteed by the hacienda Dos Hermanos and that,
notwithstanding the payment and release of the mortgage, the defendant has refused and
still refuses to pay them the offered bonus to be later determined at the trial. On the
strength of the facts alleged in the two causes of action, the plaintiffs asked that judgment
be entered in their favor: declaring null and void the judgment rendered by the Court of
First Instance of Occidental Negros as well as that rendered by this court affirming the
former; that the defendant be sentenced to pay the sum of P70,000; that the hacienda Dos
Hermanos be ordered returned to the plaintiffs, without prejudice to the payment by the

522
latter to the defendant of the indebtedness in its favor; that the defendant be ordered to
pay to the plaintiffs the bonus to which they are entitled, plus the costs.
The defendant interposed a demurrer to the amended complaint and alleged,
with respect to the first cause of action, that the allegations thereof do not constitute a
cause of action in favor of the plaintiffs and against the defendant, and that according to
the facts alleged, the question raised was already res judicata as it has been decided in a
former case; and with respect to the second cause of action, it alleged likewise that the
allegations thereof do not constitute a cause of action in favor of the plaintiffs.
In their sole assignment of error, the plaintiffs-appellants contend that the
court erred in sustaining the demurrer interposed to the amended complaint, and in
support of the assigned error, they argue that there is no res judicata; that the nullity of
judgments should not be resolved by the general rule regarding fraud in procedure, but by
the rule of equity; that the perjury of the witnesses who testified in the first case and the
other findings made by the court are not a bar to the declaration of nullity of the decision
rendered in the former case; and that the allegations contained in the second cause of
action constitute a cause of action.

As to the first cause of action of the amended complaint, the only question to
decide is whether or not the fraud invoked by the appellants was raised, controverted and
decided by the court in the first case. If it was, it is res judicata and cannot serve as a
ground to annul both the decision of the trial court and that of this court affirming it.
According to the allegations of the amended complaint the fraud consisted in the perjury
committed by the witnesses for the defendant who stated that the railway was not
constructed on the hacienda Dos Hermanos because on the land were found curves and
grades which made its construction materially impossible. This was the special defense
put up by the defendant in that case and was the question submitted to the court and the
latter resolved it in favor of the defendant. It, therefore, appears that the facts upon which
the plaintiffs base the fraud now invoked by them have been already submitted and
resolved in the first case, and the court, after hearing the parties, held that they were true,
hence, it rendered judgment in favor of the defendant. An action to anull a judgment,
upon the ground of fraud, will not lie unless the fraud be extrinsic or collateral and the
facts upon which it is based have not been controverted or resolved in the case where the
judgment sought to be annulled was rendered (Anuran vs. Aquino and Ortiz, 38 Phil., 29;
Javier vs. Paredes and Gregorio, 52 Phil., 910). That the testimony upon which a
judgment has been based was false or perjured is no ground to assail said judgment,
unless the fraud refers to the jurisdiction. (Scotten vs. Rosenblum, 231 Fed., 357; U.
S. vs. Chung Shee, 71 Fed., 277; Giffen vs. Christ's Church, 48 Cal. A., 151; 191 P., 718;
Pratt vs. Griffin, 223 Ill., 349; 79 N. E., 102.) The testimony which is stigmatized as false
and perjured was considered by the court before rendering its decision, and it came to the
conclusion that it was true and believable, for which reason it made the same the basis for
its holding that the defendant did not construct the railway because the land of the
hacienda was very rugged and the curves and grades made the construction thereof
impossible. After that holding by the court it is not now proper to question the veracity of
said testimony in a collateral proceeding, otherwise there would be no end to
controversies submitted and decided by the court. Unless the fraud goes directly to the
jurisdiction of the court, the facts in which it consists must be extrinsic or collateral in
order that fraud may be a ground to annul a judgment which has already become final.
For these reasons, we conclude that the contention of the plaintiffs-appellants, upon these
questions, is unsound.
The second cause of action of the amended complaint is made to consist in
that the appellants received the information that the defendant, making use of the power
which they conferred upon its mortgaged the hacienda Dos Hermanos to a bank, and after
discharging said mortgage by paying the loan, it refused to pay them the bonus which it
had promised. It has not been alleged that the appellants personally knew the execution of
the mortgage; all that is affirmed is that they had received an information and they made
the allegation upon such information; neither has it been alleged that the mortgage has
been formally executed and registered according to law, wherefore, it appears that the
mortgage, as thus alleged, is not valid from the legal standpoint. Taking these allegations
into account, we are of the opinion that the court did not err in sustaining the demurrer
interposed to the second cause of action because it is evident that the allegations thereof
are, at least, vague and uncertain and the defendant is entitled to have the appellants
amend their amended complaint so as to make the allegations thereof more categorical,
intelligible and specific, to the end that it set out a real cause of action to which the
defendant, in turn, may interpose an answer with such special defenses as it may have in
its favor.

523
In view of the foregoing, the appealed order is affirmed, with the costs of this
instance to the plaintiffs-appellants. So ordered.
Avancea, C. J., Villa-Real, Diaz, Laurel, Concepcion, and Moran, JJ. concur.
||| (Labayen v. Talisay-Silay Milling Co., G.R. No. 46843, [June 30, 1939], 69 PHIL 289-295)

524

FIRST DIVISION
[G.R. No. L-3717. March 5, 1908.]
FELIX
VELASCO, plaintiff-appellant, vs.
MASA, defendant-appellee.

MARTIN

S. Laguda, for appellant.

M. Mina, for appellee.

SYLLABUS
1. FINDING OF FACT. The findings of the court below upon questions of
fact based upon the preponderance of evidence, should be sustained in the second
instance, unless it is proven that the court erred in its conclusions or in weighing the
evidence, in violation of section 273 of the Code of Civil Procedure.
2. POSSESSION OF PRIVATE DOCUMENT EVIDENCING DEBT;
PRESUMPTION. Possession by the debtor of a private document proving a debt,
raises the presumption that the creditor voluntarily delivered the document to him, unless
the contrary is proven by said creditor, upon whom rests the burden of overcoming the
presumption, inasmuch as presumptions established by law exempt those favored thereby
from producing further proof.
3. VOLUNTARY SURRENDER OF PRIVATE INSTRUMENTS OF
CREDIT. The voluntary return of an instrument of credit of a private character implies
the gratuitous remission of the debt, the extinction of the obligation to pay, and a waiver
of the right of action for its recovery.

DECISION

TORRES, J p:
On the 2d of December, 1902, Felix Velasco filed a complaint against Martin
Masa asking that, without prejudice to the criminal action which he might bring,
judgment be entered ordering the defendant to pay 2,804 pesos, with interest thereon at
the rate of 12 per cent per annum from the 1st of July, 1899, until the full payment of the

principal, losses and damages, and the costs of the proceedings. He alleged that on the 1st
of July, 1898, Martin Masa received from him as a loan, in the pueblo of San Remegio,
the said amount, payable on the same day in July the following year. The debt, he alleged,
was set forth in a private document signed by the debtor, but that the defendant, Masa,
taking advantage of the conditions then prevailing on account of the late revolution, and
by means of coercion and trickeries exercised with respect to his wife, managed to obtain
possession of the document of indebtedness while the plaintiff was detained as a prisoner
in the jail at the capital of Antique; that one year and some months after the condition of
things had become normal, he filed his claim before the provost court for the robbery of
the said document, but, as said court considered that it had no jurisdiction in the
premises, the plaintiff presented an information to the Court of First Instance, a certified
copy of whose decision is annexed; and that between the plaintiff and the defendant
interest at the rate of 12 per cent had been agreed upon, which was to be added to the
principal at the end of the year if the defendant was unable to pay the same.
The defendant in his answer denied all the main points of the complaint,
inasmuch as the aforesaid document, which was the subject of the same, had been
voluntarily handed over to him through Luis Ocsea; that said document did not call for
2,804 pesos but for 1,000 pesos, with interest of 20 per cent per annum, and was signed,
not in the year cited in the complaint but in 1889; that he admitted the third paragraph of
the complaint regarding the claim presented, not to the provost court but to the then
provincial governor, and subsequently to the Court of First Instance, charging the
defendant with the robbery, by means of threats, of the said document of indebtedness for
2,804 pesos, from which charge the defendant was acquitted for the reason that it was
proven that the same had been delivered to the latter for reasons of gratitude, as stated in
the judgment, a copy of which is attached to the complaint; the defendant therefore asked
that the complaint be dismissed with costs against the plaintiff.
After the foregoing answer was presented the defendant demurred to the
complaint and asked that his motion be granted, and that the complaint be dismissed with
costs against the plaintiff, alleging that the judgment rendered by the court on the 7th of
March, 1902, was, in the form of a certified copy, attached to the complaint as a part
thereof; that the said judgment being of executory character was not subject to appeal, for
which reason the defendant believed that neither the court nor any other tribunal had
jurisdiction over the defendant in connection with the document referred to in the
complaint wherein no facts are alleged which might constitute a cause of action. On the
13th of July, 1903, the said demurrer was overruled by the court, to which the defendant
excepted.
Upon evidence being adduced by both parties and their exhibits attached to
the record, the court, on the 4th of November, 1905, entered judgment dismissing the
complaint against Martin Masa without any special ruling as to costs, to which judgment
the plaintiff excepted and moved for a new trial on the ground that the conclusions stated
in the decision were openly and manifestly contrary to the weight of the evidence; this
motion was overruled by the court, and the plaintiff excepted thereto. Another motion
made by the defendant, asking that the bill of exceptions presented by the plaintiff be
disallowed, was likewise overruled, the defendant excepting thereto.
If it is true that a document was executed by the defendant, Martin Masa, on
the 1st of July, 1898, wherein was set forth the loan of 2,804 pesos payable on the same

525
date in the following year and which the plaintiff, Felix Velasco, had granted him, it is
also true that, after the outbreak of the insurrection against Spain in the Province of
Antique, a sequel to that in Manila, and on a certain day in the month of December of
said year 1898, if not by order of the plaintiff, yet with his approval, the said document of
indebtedness was voluntarily returned to the defendant by the wife of the creditor,
renouncing the debt and waiving, for reasons of gratitude toward the debtor, the right to
collect the same.
The fact that the aforesaid document was spontaneously returned was
considered by the judge as duly substantiated by the preponderance of the evidence
offered by the defendant, inasmuch as no satisfactory proof had been submitted by the
plaintiff to show that the defendant had obtained the document by means of coercion and
trickery exercised with respect to his wife at a time when he was confined in the jail at
the capital of Antique.
Under section 273 of the Code of Civil Procedure, the court or tribunal may,
in determining the preponderance or superior weight of evidence on the issues, consider
all the facts and circumstances of the case, the witnesses' manner of testifying, their
means and opportunities of knowing the facts to which they testify, the probability or
improbability of their testimony, their interest or want of interest, and also their personal
credibility, and the number of witnesses, though the preponderance of proof may not
necessarily rest with the greater number.
The record contains no reason or legal cause showing that, when this litigation
was decided, the Court of First Instance ignored or failed to bear in mind the provisions
of the section of the Code of Procedure cited above, because the conclusions arrived at by
the said court, deduced from the facts considered by it as duly proven, are, according to
the rules of sound criticism and good sense, adjusted to the law and to the merits of the
case.
While in the criminal proceedings it could not be proved that Martin Masa had
obtained possession of said document through violence or intimidation, and for such
reason he was acquitted of the charge of robbery, so also in the present action, whereby it
is pretended to collect the amount stated in the document, it has not been proved that the
defendant, Masa, managed to obtain delivery thereof from the wife of the plaintiff by
means of coercion or trickery as alleged.
The conclusion stated by the judge in the judgment appealed from, that the
return of the document made by the wife of the plaintiff to the defendant debtor, through
Luis Ocsea, was voluntary, and that she did it by orders from the plaintiff creditor,
according to the testimony of the defendant's witnesses, appears to be founded upon and
properly sustained by the evidence and other merits of the case, and it is not possible to
hold that the said conclusion is openly and manifestly contrary to the weight and
preponderance of the evidence, nor that the court erred when arriving at such conclusion,
inasmuch as such an affirmation would find no basis or support in the proofs offered by
the plaintiff nor in the other data furnished by the record. Therefore, there is no
reasonable ground to reject the conclusion of the court in the judgment appealed from.
Assuming that the document of indebtedness was voluntarily returned to the
debtor, the question at issue would be, Whether the debt was legally renounced, and if the
creditor has thereby waived his right to recover the amount from the defendant debtor?
The first paragraph of article 1187 of the Civil Code [and articles 1188 and
1189] provide that

"A remission may be made either expressly or by

implication.
"ART. 1188. The surrender, made voluntarily by a creditor
to his debtor, of a private instrument proving a credit, implies the
renunciation of the action which the former had against the latter.
"If in order to invalidate this renunciation, it should be
claimed that it is illegal, the debtor and his heirs may support it by
proving that the delivery of the instrument was made by virtue of the
payment of the debt.
"ART. 1189. Whenever the private instrument from which
the debt appears should be in the possession of the debtor, it shall be
presumed that the creditor delivered it of his own will, unless the
contrary is proven."
It is an unquestionable fact, duly proven at the trial, that the instrument
proving the debt now claimed passed to the possession of the debtor and for this reason,
unless the contrary be proven, it must be presumed, in accordance with the provisions of
law, that the delivery of the instrument was voluntarily made, and that this fact implies a
renunciation of the action which the creditor had for the recovery of his credit. It should
be noted that the document returned to the debtor is of a private nature, the only case
subject to the provisions of the above-quoted articles of the Civil Code, so that a tacit
renunciation of the debt may be presumed, in the absence of proof that the document was
delivered for some other reason than a gratuitous waiver of the debt and the complete
extinction of the obligation to pay.
The doctrine established by the supreme court of Spain, when applying the
above-mentioned articles of the Civil Code, confirms the rule laid down. Among others,
the court in the decision of the 19th of October, 1897, states that
"In order that the presumption juris tantum established by
this article (1189) may be applicable, it is necessary as the preceding
one (1188) provides, that the delivery of the private document
proving the credit, made by the creditor to the debtor, be a voluntarily
act of the former."
It has already been said that, according to article 1189 of the code, the
possession by the debtor of a private document proving a debt supposes and creates the
presumption that the creditor delivered it voluntarily, unless the contrary is proven, and
no such proof has been offered by the plaintiff upon whom the burden rests to destroy the
said presumption.
Article 1250 of the Civil Code provides:
"Presumptions established by law exempt those favored
thereby from producing any further proof."
And article 1251 of the same code reads:
"Presumptions established by law may be destroyed by
proof to the contrary, except in the cases in which it is expressly
prohibited."

526
Therefore, considering that the delivery of the document, made by the
plaintiff's wife to the defendant Masa, through Luis Ocsea, was approved, though tacitly,
by the said plaintiff creditor, for the reasons stated in the judgment appealed from, and no
proof appearing in the record that the delivery of the document was not voluntarily made,
it appears from the whole of the foregoing that the debt now claimed was remitted for
reasons of gratitude and in acknowledgment of the services rendered by the debtor to the
plaintiff creditor, and that the latter has implicitly waived its recovery, and if thereafter he
filed a complaint against the defendant it was evidently due to some trouble which
subsequently arose between them, thus putting an end to a long friendship which existed
between them.
In view of the foregoing, and accepting the conclusions of the judgment
appealed from, it is our opinion that the same should be affirmed, with the costs of this
instance against the appellant. So ordered.
Arellano, C. J., Mapa, Johnson, Carson, Willard and Tracey, JJ., concur.
||| (Velasco v. Masa, G.R. No. L-3717, [March 5, 1908], 10 PHIL 279-285)

527

FIRST DIVISION
[G.R. No. 9806. January 19, 1916.]
LEONIDES LOPEZ LISO, plaintiff-appellee, vs.
MANUEL TAMBUNTING, defendant-appellant.

Silvestre Apacible for appellant.

Gibbs, McDonough & Blanco for appellee.

SYLLABUS
1. EVIDENCE; PRESUMPTION; RECEIPT AS PROOF OF PAYMENT.
Number 8 of section 334 of the Code of Civil Procedure provides, as a legal presumption,
"that an obligation delivered up to the debtor has been paid;" article 1188 of the Civil
Code prescribes that the voluntary surrender, by a creditor to his debtor, of a private
instrument proving a credit, implies the renunciation of his right of action against the
debtor; and article 1189 of the same Code likewise prescribes that whenever the private
instrument which evidences the debt is in the possession of the debtor it shall be
presumed that the creditor delivered it of his own free will. Nevertheless, pursuant to the
last cited article, this presumption cannot stand, when from the evidence it appears that
the evidence of the obligation was not returned to the debtor, but was sent to him solely
for the purpose of collecting the debt, and that the creditor's purpose was not to leave the
instrument evidencing the credit in the possession of the debtor, if the latter did not
forthwith pay the amount mentioned therein.

DECISION

ARAULLO, J p:
These proceedings were brought to recover from the defendant the sum of
P2,000, amount of the fees, which, according to the complaint, are owing for professional
medical services rendered by the plaintiff to a daughter of the defendant from March 10
to July 15, 1913, which fees the defendant refused to pay, notwithstanding the demands
therefor made upon him by the plaintiff.

The defendant denied the allegations of the complaint, and furthermore

alleged that the obligation which the plaintiff endeavored to compel him to fulfill was
already extinguished.
The Court of First Instance of Manila, after hearing the evidence introduced
by both parties, rendered judgment on December 17, 1913, ordering the defendant to pay
to the plaintiff the sum of P700, without express finding as to costs. The defendant, after
entering a motion for a new trial, which was denied, appealed from said judgment and
forwarded to this court the proper bill of exceptions.
The first question raised by this appeal relates to the amount or value of the
fees which the defendant was ordered to pay.
In the judgment appealed from, the medical services rendered by the plaintiff
to the defendant's daughter are given in detail, in accordance with the statement Exhibit
A, presented by the plaintiff. The latter claimed the sum of P2,000 as the reasonable
value of his services. The court, after discussing the matter of the service rendered and
after taking into account that the plaintiff, as soon as he had finished rendering them,
asked for compensation in the sum of P700 only, and furthermore, holding that it was in
no wise proven that, because said amount was not paid the plaintiff was entitled to
recover from the defendant, by means of these proceedings, the sum of P2,000, held that
the reasonable value of said services could only be worth said P700. We agree with this
finding of the trial court.
The second question raised by this appeal involves the question of whether the
defendant has really paid the plaintiff, as he claims to have done, the sum of P700 before
mentioned, that is, whether the obligation alleged in the complaint has already been
extinguished.
The receipt signed by the plaintiff, for P700, the amount of his fees he
endeavored to collect from the defendant after he had finished rendering the services in
question (which receipt was presented by the defendant at the trial as (Exhibit 1) was in
the latter's possession, and this fact was alleged by him as proof that he had already paid
said fees to the plaintiff.
With respect to this point, and as the trial court very correctly said in the
judgment appealed from, the testimony given by both the plaintiff and the defendant, as
well as by their respective witnesses, is entirely contradictory.
The court, after hearing the testimony, reached the conclusion that,
notwithstanding that the defendant was in possession of the receipt, the said P700 had not
been paid to the plaintiff.
After a careful examination of the evidence we find no reason whatever for
changing or modifying this finding of the court below. The trial judge had the plaintiff
and the defendant and their witnesses before him, he heard them make their respective
statement and was in a position to know which of them was telling the truth and to
determine on which side the preponderance of the evidence lay.
It is true that number 8 of section 334 of the Code of Civil Procedure provides
as a legal presumption "that an obligation delivered up to the debtor has been paid."
Article 1188 of the Civil Code also provides that the voluntary surrender by a creditor to

528
his debtor, of a private instrument proving a credit, implies the renunciation of the right
of action against the debtor; and article 1189 prescribes that whenever the private
instrument which evidences the debt is in the possession of the debtor, it will be
presumed that the creditor delivered it of his own free will, unless the contrary is proven.
But the legal presumption established by the foregoing provisions of law
cannot stand if sufficient proof is adduced against it. In the case at bar the trial court
correctly held that there was sufficient evidence to the contrary, in view of the
preponderance thereof in favor of the plaintiff and of the circumstances connected with
the defendant's possession of said receipt Exhibit 1. Furthermore, in order that such a
presumption may be taken into account, it is necessary, as stated in the laws cited, that the
evidence of the obligation be delivered up to the debtor and that the delivery of the
instrument proving the credit be made voluntarily by the creditor to the debtor. In the
present case, it cannot be said that these circumstances concurred, inasmuch as when the
plaintiff sent the receipt to the defendant for the purpose of collecting his fee, it was not
his intention that that document should remain in the possession of the defendant if the
latter did not forthwith pay the amount specified therein.
By reason of the foregoing, we affirm the judgment appealed from, with the
costs of this instance against the appellant. So ordered.
Arellano, C. J., Torres, Johnson, Moreland, and Trent, JJ., concur.
||| (Liso v. Tambunting, G.R. No. 9806, [January 19, 1916], 33 PHIL 226-229)

529

FIRST DIVISION
[G.R. No. 8926. July 24, 1915.]
PAULINA
SOCHAYSENG, plaintiff-appellee, vs.
TRUJILLO, defendant-appellant.

ANDRES

Vicente Rodriguez for appellant.

Recaredo Ma. Calvo for appellee.

SYLLABUS
1. HUSBAND AND WIFE; DISSOLUTION OF PARTNERSHIP;
CONJUGAL PARTNERSHIP PROPERTY. Principles laid down in the decision of
Amancio vs. Pardo (13 Phil. Rep., 297) reaffirmed.
2. ID.; ID.; ID. When a conjugal partnership is dissolved by the death of
the wife, the surviving husband, and not the administrator appointed in the proceedings
for the settlement of the estate, is entitled to the possession of the property of the conjugal
partnership, until he has liquidated its affairs.
3. ID.; ID.; SETTLEMENT OF PARTNERSHIP AFFAIRS AND OF WIFE'S
ESTATE ARE SEPARATE PROCEEDING. It is an error to settle the affair of a
conjugal partnership, dissolved by the death of the wife, in the special proceedings for the
settlement of the wife's estate. By issuing orders intended for that purpose, a judge errs,
since he is not authorized to make such a settlement in those proceedings.

DECISION

ARELLANO, C.J p:
On November 14, 1911, Paulina Sochayseng filed a written complaint
wherein she alleges that the defendant is the widower of her daughter, Marcela Yatco y
Sochayseng; that the latter died on June 25, 1911, without leaving any legitimate heir
other than the plaintiff; that her said daughter, five months prior to her death and while
sick, left her husband's house, with his knowledge and consent, and removed to that of
the plaintiff for the purpose of being attended by the latter during her sickness; that the

attendance, care, and subsistence of Marcela Yatco, during her stay in plaintiff's house,
cost the latter the sum of P410, and that upon her death, her burial expenses amounted to
P320, both of which amounts were paid by plaintiff; that at the time of the death of
Marcela Yatco, the conjugal partnership between her and the defendant was the owner of
a piece of real estate valued at P1,000, which property is now in defendant's possession;
that defendant has not paid plaintiff the whole nor any part of the P730 which the latter
expended for the purposes above specified; and that, despite the time that has elapsed
since the death of Marcela Yatco, the defendant has not liquidated the affairs of the
conjugal partnership. For the foregoing reasons plaintiff prayed that defendant be
sentenced to pay her the sum of P730, with the costs of the suit, and, furthermore, that he
be ordered to proceed with the settlement and partition of the conjugal partnership estate.
In his written answer defendant admitted all the facts alleged in the complaint,
excepting those expressly or tacitly denied in his special defense. In this latter he set forth
that his wife left his house without his knowledge or consent; that he requested her on
several occasions to return and live with him again, but did not succeed in persuading her
so to do on account of plaintiff's opposition; and that, during the time his wife was living
in her mother's house, he sent her P12 a month for her support. In a cross-complaint
defendant demanded that plaintiff deliver to him certain articles belonging to the conjugal
partnership, valued at P615. Subsequently defendant filed an additional answer wherein
he alleged that the claim for P730, presented by plaintiff, should have been made to the
commissioners of appraisal appointed in the proceedings for the settlement of the
intestate estate of Marcela Yatco. He therefor prayed the court to dismiss the said claim.
At trial, evidence was introduced by both parties. Among the exhibits
presented by the defense appears defendant's appointment as administrator of the estate
left by the deceased Marcela Yatco.
On March 11, 1912, the lower court rendered judgment in which it held that
the causes of action therein set forth should have been presented in the proceedings for
the administration and distribution of the estate of Marcela Yatco, and dismissed the
complaint.
Plaintiff filed her exception to this ruling and moved for a new trial on the
ground that the dismissal was contrary to law.
By an order of April 20, 1912, the court quashed its aforesaid ruling and
directed that the defendant proceed with the settlement of the conjugal partnership affairs
in accordance with section 7, title 3, book 4 of the Civil Code. The defendant entered an
exception to this order (p. 46 of the record).
On May 11, 1912, defendant filed with the court a copy of the inventory
which, as administrator of the intestate estate of Marcela Yatco, he had presented in the
proceedings relative to the administration and distribution of the said estate. This
inventory appears on pages 12 and 13 of the bill of exceptions.
On August 2 the court ordered defendant to file an inventory of the property of
the conjugal partnership in conformity with article 1419 of the Civil Code. To this ruling
defendant excepted.

530
Complying with the aforementioned order, defendant presented the inventory
and proposed settlement of the property of the conjugal partnership that appear on pages
15 to 19 of the bill of exceptions.
On December 14, 1912, the court rendered final judgment in the case wherein
he held that the total value of the conjugal partnership property amounted to P1,615, and
said: "From this sum of P1,615 there must first be paid the value of the property brought
into the partnership by Marcela Yatco at her marriage, which, as we have seen, amounts
to P1.490. Once this sum of P1,490 has been paid, there will remain of the property of the
conjugal partnership only the sum of P125, and out of this the debts, charges and
obligations of the conjugal partnership will be paid, in accordance with article 1422 of
the Civil Code. After payment of the said debts, charges and obligations, should there still
be anything left, the capital brought in by the husband at marriage shall be paid, pursuant
to article 1423 of the same Code, and what remains, if any, will be the conjugal property,
which shall be divided in accordance with the laws governing the subject."
Defendant excepted to this judgment and at the same time moved for a new
trial on the ground that the judgment was contrary to law and openly at variance with the
evidence. This motion was overruled by the court; defendant excepted thereto and, by bill
of exceptions, has brought the case before the Supreme Court.
In his brief the defendant makes the following and only assignment of error:
"In view of the nature of plaintiff's claim, the court erred in annulling its judgment of
March 11, 1912, and in continuing the hearing thereof after pronouncing final judgment
on December 14 of the same year, 1912, entirely excluding the proceedings relative to the
administration of the estate left by the deceased Marcela Yatco y Sochayseng, instituted
by her widower, the defendant Andres Trujillo."
The lower court did not incur such error. The matter involved is a claim for
expenditures to the benefit of a married woman. During her lifetime a third person
furnished her subsistence which amounted to P410 in value, and at her death defrayed her
funeral and burial expenses, amounting to P320, both sums aggregating P730. The first of
these debts is not a personal and exclusive one of the said married woman; it pertains to
the marriage or the conjugal partnership. The widower must pay it out of the property of
the conjugal partnership. Were this claim to be adjusted in the special proceedings for the
settlement of the estate of this married woman, which estate is composed of the property
she left at her death, her husband, now the widower-spouse, would be exempted from the
payment of this debt and this would not be just, because the debt is one that lies
principally against him as the legal administrator of the partnership property acquired
during the marriage.
The surviving spouse is obliged upon the death of the other to settle the
conjugal partnership. In this settlement a deduction should be made of the debts incurred
during the marriage, and what remains should be divided into two parts, the part
corresponding to the deceased spouse, together with his own property, being that which
should be submitted to the probate court in the special proceedings for the settlement of
the wife's estate. The decision of this court in the case of Amancio vs. Pardo (13 Phil.
Rep., 297) is based upon this principle. It says: "When a conjugal partnership is dissolved
by the death of the wife, the surviving husband, and not the judicial administrator
appointed in the proceedings for the settlement of the estate, is entitled to the possession
of the property of the conjugal partnership until he has liquidated its affairs.

"It is an error to settle the affairs of a conjugal partnership,

dissolved by the death of the wife, in the special proceedings for the
settlement of the wife's estate."
The record shows that the property acquired during the marriage amounts to
P2,603, according to the inventory presented by the husband, and to this plaintiff agrees
(p. 76 of the record); that, in accordance with the inventory, the wife's paraphernal
property is valued at P1,490 (p. 73); that plaintiff is willing that from this total a
deduction be made of P615, "the value of the property which the deceased Marcela Yateo
took away with her upon leaving the conjugal home" (p. 113). Hence, the paraphernal
property is reduced to P875, and deducting this amount from the whole estate, worth
P2,603, there remains the sum of P1,728. The law provides: "After the dowry and the
parapherna of the wife have been paid, the debts, charges, and obligations of the
partnership shall be paid." (Civil Code, art. 1422.)
"The conjugal partnership shall be liable for:
xxx xxx xxx
"5. The support of the family . . ." (Civil Code, art. 1408.)
The amount claimed for the subsistence of the deceased amounting to P410, is
of this nature. Deducting it, therefore, from the P1,728, there remains P1,318. The law
likewise provides that, with regard to the other property of the debtor, the following
credits are preferred:
"2. Those due
xxx xxx xxx
"(b) For the funeral expenses of the debtor . . . and also
those of his wife and of his children under their parental authority
should they have no property of their own." (Civil Code, art. 1924.)
As the deceased left property of her own, it is improper to deduct the P320
demanded for her funeral expenses. So, as this sum cannot be paid out of the remaining
funds, which amount to P1,318, this remainder "shall constitute the assets of the conjugal
partnership." (Civil Code, art. 1424.)
It is this remainder that should be divided equally between the wife, now
deceased, and the surviving husband, the share of each spouse being P659.
The important feature of this case is the part thereof which relates to the
demand for the settlement of the legal conjugal partnership and the collection of a debt
owed by the same. The trial court held that there was an amount payable for subsistence
furnished by plaintiff to defendant's deceased wife.
This credit, which is admitted in this decision, must be paid by the defendant.
But, by the settlement made, it has been shown that, out of the property
acquired during marriage, the estate of the deceased is entitled to P875 as paraphernal
property and to P659 as community property, that is, to a total amount of P1,534, which
forms the assets of the estate of the deceased Marcela Yatco.

531
This amount of P1,534 should have been claimed in the special proceedings
which it appears have been commenced in the same court, as case No. 9348. This is the
only hereditary property of the deceased Marcela Yatco. In these special proceedings
there should be presented, if proper, the claim of P320 for the funeral expenses of the
deceased, to which preference should be given as prescribed by section 735 of the Code
of Civil Procedure: "1. The necessary funeral expenses."
But of course we must not lose sight of the provision of article 1192 of the
Civil Code: "Whenever the characters of creditor and debtor are merged in the same
person, the obligation is extinguished."
However, as the matter involved pertains, not to probate proceedings, but to
the settlement of an intestate estate in which there is only one interested party of legal
age, who is the herein plaintiff; and the demand for the part of the community property to
which the deceased was entitled, and for her paraphernal property, being a matter which
properly pertains to an action for the settlement of the legal conjugal partnership property,
apparently such demand is not allowable and it must be held that the estate of the
deceased Marcela Yatco is entitled to P659, as community property, and P875, as
paraphernal property, or to the total sum of P1,534. From this must be deducted the other
part of the credit demanded, to wit, P320, for the funeral expenses of the said deceased,
which must be paid, not by the husband, but by the heir.
In the present action final judgment should be rendered decreeing that
defendant pay to the plaintiff (a) P875. as the paraphernal property of his deceased wife,
Marcela Yatco; (b) P659, as her one-half of the community property; and P410, as the
debt owed by him as the legal administrator of the community property for the cost of the
subsistence to which the deceased was entitled, making a total of P1,944.
Plaintiff will collect the P410 under her personal right as a creditor of the
defendant, like any third person who might have furnished that subsistence, and the
remaining P1,534 as the legitimate heir of the deceased Marcela Yatco.
The right, if to such he is entitled, is reserved to the defendant, in his capacity
of surviving widower, to bring the proper action for the share allowed him by law as legal
usufructuary. As this action is not one for the partition of an inheritance, but for
settlement of the community property of the marriage, no finding can be made herein
with respect to such a right.
We therefore conclude that we should, as we hereby do, sentence the
defendant to pay to the plaintiff P1,944, without special finding as to costs. The judgment
appealed from is thus modified and affirmed. So ordered.
Torres, Johnson, Carson and Araullo, JJ., concur.
||| (Sochayseng v. Trujillo, G.R. No. 8926, [July 24, 1915], 31 PHIL 153-160)

532

FIRST DIVISION

neither take possession thereof nor sell it pursuant to the conditions of its mortgage
contract.

[G.R. No. 43608. July 20, 1937.]

3. ID.; ID.; ID.; MERGER OF THE RIGHTS OF CREDITOR AND

DEBTOR. After the steamship Yusingco had been sold by virtue of the judicial writ
issued in civil case No. 41654 for the execution of the judgment rendered in favor of V.
M., the only right left to the plaintiff was to collect its mortgage credit from the purchaser
thereof at public auction, inasmuch as the rule is that a mortgage directly and
immediately subjects the property on which it is imposed, whoever its possessor may be,
to the fulfillment of the obligation for the security of which it was created (article 1876,
Civil Code); but it so happens that it can not take such steps now because it was the
purchaser of the steamship Yusingcoat public auction, and it was so with full knowledge
that it had a mortgage credit on said vessel. Obligations are extinguished by the merger of
the rights of the creditor and debtor (articles 1156 and 11922, Civil Code).

THE YEK TONG LIN FIRE & MARINE INSURANCE CO.,

LTD., plaintiff-appellant, vs.
PELAGIO
YUSINGCO
ET
AL., defendants.VICENTE MADRIGAL, appellant.

Duran & Lim for plaintiff.

Salvador E. Imperial for defendant-appellant.

SYLLABUS
1. PREFERENCE OF CREDITS; THE CREDIT OF A CREDITOR,
DECLARED IN A JUDGMENT AS ASSIGNEE OF THE RIGHT TO RECOVER THE
COST OF THE REPAIRS MADE ON A VESSEL BY A COMPANY ENGAGED IN
SAID BUSINESS, IS SUPERIOR TO THE CREDIT OF THE MORTGAGE
CREDITOR IN A MORTGAGE CONSTITUTED ON SAID VESSEL. The defendant
and appellant V. M. enjoys preference in the payment of his judgment credit with the
proceeds of the sale of the steamship Yusingco, by virtue of the assignment to him of the
credit of the Earnshaw Docks & Honolulu Iron Works for repairs made on said vessel,
because it is so provided not only in article 1922 of the Civil code but also in article
1926, rule 4, thereof, notwithstanding the preference referred to in rule 1 of the latter
article, which provides that credits secured by a pledge exclude all others to the extent of
the value of the thing pledged, inasmuch as the plaintiff's credit is not secured by pledge
but by mortgage, so much so that the mortgage deed executed in its favor contains a
clause to the effect that if the proceeds of the sale of the steamship Yusingco, in case it is
sold by reason of default in the performance of the conditions thereof, should be
insufficient, the plaintiff could collect its credit on other property of the debtors.
2. ID.; ID.; FORECLOSURE OF MORTGAGE. When the plaintiff
attempted to foreclose the mortgage constituted in its favor, first by filing its third party
claim in civil case No. 41654 wherein the writ of execution, by virtue of which the
steamship Yusingco was sold at public auction, was issued, its only right with respect to
said vessel was to sell it judicially or extrajudicially in accordance with law, upon default
in the performance of the conditions of the mortgage contract entered into between it and
the owners thereof, in order to apply the proceeds of the sale to its mortgage credit
against said owners, or at least against P. Y., if such proceeds are sufficient (Bachrach
Motor co. vs. summers, 42 Phil., 3), and if insufficient, to collect the balance thereof on
other property belonging to said defendants (Exhibit C, page 3). The
steamship Yusingcowas then in custodia legis and, under the circumstances, it could

DECISION

DIAZ, J p:
The plaintiff, Yek Tong Lin Fire & Marine Insurance Co., Ltd. and the
defendant Vicente Madrigal appealed from the judgment of the Court of First Instance of
Manila, ordering
(a) the defendant Pelagio Yusingco to pay the plaintiff the sum of P17,590.85
with interest thereon at 12 per cent per annum from august 10, 1932, until fully paid, plus
the sum of P4,500 as attorney's fees and the costs of the suit;
(b) the defendant Vicente Madrigal to turn over to the plaintiff the amount of
money received by him in October, 1932, from his codefendant provincial sheriff of
Surigao, and
(c) absolving said sheriff from the complaint.
The appeal of the defendant Vicente Madrigal according to him, is based on
the ground that the lower court committed the following alleged errors:
"I. In holding that the claim of the plaintiff, as mortgagee,
is superior to his, as assignee of the preferred credit of Earnshaw
Docks & Honolulu Iron works, which had made some repairs on the
steamship Yusingco;
"II. In ordering him to turn over to the plaintiff the amount
of money received by him from the defendant provincial sheriff of
Surigao, named Protolico P. Egay, which formed a part of the
proceeds of the auction sale of the steamship Yusingco, and

533
"III. In denying his motion for a new trial based upon his
allegation that the decision is contrary to law and the evidence taken."
The plaintiff's appeal, in turn, is due to the fact that, according to it, the lower
court erred in absolving the defendant provincial sheriff of Surigao, and in denying its
motion for a trial based on the ground that the decision, in so far as it absolves said
sheriff from the complaint, is not supported by the evidence and is contrary to law.
The facts pertinent to the case, as inferred from the stipulation submitted to
the lower court by the parties and from the same evidence taken during the trial, may be
summarized as follows:
The defendant Pelagio Yusingco was the owner of the
steamship Yusingco and, as such, he executed, on November 19, 1927, a power of
attorney in favor of Yu Seguioc to administer, lease, mortgage and sell his properties,
including his vessels or steamship (Exhibit N). Yu Seguioc, acting as such attorney in fact
of Pelagio Yusingco, mortgaged to the plaintiff Yek Tong Lin Fire & Marine Insurance
Co., Ltd., with the approval of the Bureau of Customs, the steamship Yusingco belonging
to the defendant, to answer for any amount that said plaintiff might pay in the name of the
defendant on account of a promissory note for P45,000 executed by it, upon receipt of
said sum as loan from the China Banking Corporation, on September 25, 1928, and on
account of a guaranty in the sum of P20,000 subscribed by it in favor of said bank on the
17th of said month and year, the deed, Exhibit A, having been executed to that effect, in
absolute conformity with the Chattel Mortgage Law.
One year and some months later, or in February, 1930, and in April, 1931, the
steamship Yusingco needed some repairs which were made by the Earnshaw Docks &
Honolulu Iron Works upon petition of A. Yusingco Hermanos which, according to
documentary evidence of record, was co-owner of Pelagio Yusingco. The repairs were
made upon the guaranty of the defendant and appellant Vicente Madrigal at a cost of
P8,244.66.
When neither A. Yusingco Hermanos nor Pelagio Yusingco could pay said
sum to the Earnshaw Docks & Honolulu Iron Works, the defendant and appellant Vicente
Madrigal had to make payment thereof with the stipulated interest thereon, which was at
the rate of 9 per cent per annum, on March 9, 1932, because he was bound thereto by
reason of the bond filed by him, the payment them made by him having amounted to
P8,777.60. On said date, but after the credit of the Earnshaw Docks & Honolulu Iron
Works, for the repairs made by it on the steamship Yusingco had already been paid, said
company assigned its credit against A. Yusingco Hermanos to the defendant and appellant
Vicente Madrigal, by executing to that end the instrument Exhibit 5, which was duly
registered in the Bureau of Customs. Some days later, when said defendant discovered
that he was not to be reimbursed for the repairs made on the steamship Yusingco, he
brought an action against his codefendant Pelagio Yusingco and A. Yusingco Hermanos
to compel them to reimburse, thereby giving rise to civil case No. 41654 of the Court of
First Instance of Manila, entitled "Vicente Madrigal, plaintiff, vs. Pelagio Yusingco and
A. Yusingco Hermanos, defendants" (Exhibit 6), which resulted in a judgment favorable
to him and adverse to the Yusingcos, as the latter were ordered to pay him the sum of
P3,269.66 plus the interest thereon at 9 per cent per annum from February 27, 1930, and
also to pay him the sum of P4,975 plus interest thereon at said rate of 9 per cent per
annum from May 6, 1931, with the costs of the suit. It was provided in the judgment that
upon failure of the Yusingcos to pay the above-stated amounts to Vicente Madrigal, a writ

of execution would be issued in order to have the steamship Yusingco sold at public
auction for the purpose of satisfying said amounts with the proceeds thereof.
Inasmuch as neither the defendant Pelagio Yusingco nor A. Yusingco
Hermanos paid the amount of the judgment rendered in civil case No. 41654, in favor of
the defendant and appellant Vicente Madrigal, the latter sought and obtained from the
Court of First Instance, which tried the case, the issuance of the corresponding writ of
execution (Exhibit 8). However, before the sale of the steamship Yusingco, by virtue of
the writ of execution so issued, was carried out, the plaintiff and appellant filed with the
defendant sheriff a third party claim demanding said ship for himself, alleging that it had
been mortgaged to him long before the issuance of said writ and, therefore, he was
entitled to the possession thereof. The defendant sheriff then informed the defendant and
appellant Vicente Madrigal that if he wished to have the execution sought by him carried
out, he should file the indemnity bond required by section 451 of Act No. 190. This was
done by Vicente Madrigal, but in order to prevent him and the sheriff from proceeding
with the execution, the plaintiff and appellant instituted this case in the court of origin
and asked for the issuance of a writ of preliminary injunction addressed to said two
defendants to restrain them from selling the steamship Yusingco at public auction. The
writ of preliminary injunction, which was issued on august 19, 1932, was later dissolved,
the defendant and appellant Vicente Madrigal having filed a bond of P5,000. This left the
preliminary injunction unimpaired and valid for the sale of the steamship Yusingco at
public auction. For this reason, said ship was sold at public auction on September 19,
1932, and was purchased, under the circumstances, by the plaintiff and appellant itself,
which the highest bidder, having made the highest bid of P12,000 (Exhibit 8). Of said
amount, the defendant sheriff turned over P10,195 to Vicente Madrigal in payment of his
judgment credit, distributing the balance in the manner stated in Exhibit 9. It is said sum
of P10,195 which the lower court ordered Vicente Madrigal to turn over to the plaintiff.
In addition to the foregoing facts, it should be stated that when the defendant
and appellant Vicente Madrigal instituted said civil case No. 41654 against Pelagio
Yusingco and A. Yusingco Hermanos in March, 1932, the steamship Yusingco was
already in the possession of PelagioYusingco in the port of Surigao (Stipulation of Facts,
paragraph VI).
It should be added further that the payments made by the plaintiff on account
of the credit of the China Banking Corporation against Pelagio Yusingco, by virtue of the
deed of mortgage executed by the latter in favor of said plaintiff, through an attorney in
fact, encumbering the steamship Yusingco, amounted to only P16,190.83 plus P700 as
insurance premium, which are still less than that adjudicated to the plaintiff by the lower
court.
The parties seem to believe that the important if not the only question to be
decided is whether or not the credit of the plaintiff, as mortgage creditor of Pelagio
Yusingco, is superior to that of Vicente Madrigal, as judgment creditor of said Pelagio
Yusingco and A. Yusingco Hermanos. If the plaintiff is to be believed, it seems clear that
as they (the plaintiff, Pelagio Yusingco, Vicente Madrigal, and A. Yusingco Hermanos)
are merchants, the provisions of the Code of commerce should govern their acts (article
2, Code of Commerce). The plaintiff contends that if Vicente Madrigal enjoyed any
preferred right at all, it could have been no other than that based upon article 580 of said
Code. The pertinent part of said article reads:

534
"In all judicial sales of vessels for the payment of
creditors, the said creditors shall have preference in the order stated:
xxx xxx xxx
"8. The part of the price which has not been paid the last
vendor, the credits pending for the payment of material and work in
the construction of the vessel, when it has not navigated, and those
arising from the repair and equipment of the vessel and its
provisioning with the victuals and fuel during its last voyage.
"In order that the credits provided for in this subdivision
may enjoy the preference they must appear by contracts recorded in
the registry of vessels, or if they were contracted for the vessel while
on a voyage and said vessel has not returned to the port of her
registry, they must be made under the authority required for such
cases and entered in the certificate of registry of the said vessel."
Basing its opinion upon the foregoing provision of law, the plaintiff contends
that as the repairs made on the steamship Yusingco were not for averages suffered during
its last voyage, the defendant Vicente Madrigal cannot invoke preferential right for
having paid for them as guarantor. Granting this to be true, it does not follow that the
plaintiff is entitled to recover from said Vicente Madrigal what the latter received from
the defendant provincial sheriff of Surigao, by virtue of the execution of the judgment
rendered in his favor. Neither does it follow that said defendant (Vicente Madrigal) has
no other right of action against Pelagio Yusingco and A. Yusingco Hermanos for the
recovery of what he had paid for them, particularly when the Earnshaw Docks &
Honolulu Iron Works , which has performed the repairs in question, assigned to him the
credit it had against them. There is no doubt that under the provisions of article 1922,
paragraph 1, of the Civil Code, the Earnshaw Docks & Honolulu Iron Works was entitled
to recover the cost of said repairs (International Banking Corporation vs. Corrales, 10
Phil., 435; Bank of the Philippine Islands vs. Walter A. Smith & Co., 55 Phil., 533),
inasmuch as the steamship Yusingco, before as well as at the time of its sale at public
auction by virtue of a judicial writ, was in the possession of the owners thereof, Pelagio
Yusingco and A,. Yusingco Hermanos, debtors of the plaintiff. If the Earnshaw Docks &
Honolulu Iron Works had such right, naturally the defendant and appellant Vicente
Madrigal later had such right, to the same extent as the former, by virtue of the
assignment made to him after he, as guarantor, paid the obligation contracted by the
Yusingcos with the Earnshaw Docks & Honolulu Iron Works for the repair of said vessel.
This is necessarily so because the assignee is entitles to exercise the right and prosecute
all actions belonging to the assignor (articles 1212 and 1528, Civil Code; section 114, Act
No. 190).
When the plaintiff attempted to foreclose the mortgage constituted in its favor,
first by filing its third party claim in civil case No. 41654 wherein the writ of execution,
by virtue of which the steamship Yusingco was sold at public auction, was issued, its only
right with respect to said vessel was to sell it judicially or extrajudicially in accordance
with law, upon default in the performance of the conditions of the mortgage contract
entered into between it and the owners thereof, in order to apply the proceeds of the sale
to its mortgage credit against said owners, or at least against Pelagio Yusingco, if such
proceeds are sufficient (Bachrach Motor Co. vs. Summers, 42 Phil., 3), and if sufficient,
to collect the balance thereof on other property belonging to said defendants (Exhibit C,
page 3). The steamship Yusingco was then in custodia legis and, under the circumstances,

it could neither take possession thereof nor sell it pursuant to the conditions of its
mortgage contract.
After the steamship Yusingco had been sold by virtue of the judicial writ
issued in civil case No. 41654 for the execution of the judgment rendered in favor of
Vicente Madrigal, the only right left to the plaintiff was to collect its mortgage credit
from the purchaser thereof at public auction, inasmuch as the rule is that a mortgage
directly and immediately subjects the property on which it is imposed, whoever its
possessor may be, to the fulfillment of the obligation for the security of which it was
created (article 1876, Civil code); but it so happens that it can not take such steps now
because it was the purchaser of the steamship Yusingco at public auction, and it was so
with full knowledge that it had a mortgage credit on said vessel. Obligations are
extinguished by the merger of the rights of the creditor and debtor (articles 1156 and
1192, Civil Code).
The conclusion arrived at by this court is that the defendant and appellant
Vicente Madrigal enjoys preference in the payment of his judgment credit with the
proceeds of the sale of the steamship Yusingco, by virtue of the assignment to him of the
credit of the Earnshaw Docks & Honolulu iron works, because it is so provided not only
in article 1922 of the Civil Code but also in article 1926, rule 4, thereof, notwithstanding
the preference referred to in rule 1 of the latter article, which provides that credits secured
by a pledge exclude all others to the extent of the value of the thing pledged, inasmuch as
the plaintiff's credit is not secured by a pledge but by a mortgage, so much so that the
mortgage deed executed in its favor contains a clause to the effect that if the proceeds of
the sale of the steamship Yusingco, in the case it is sold by reason of default in the
performance of the conditions thereof, should be insufficient, the plaintiff could collect
its credit on other property of the debtors (Exhibit C, page 3).
Rule 4 of the above-cited article 1926 reads: "In all other cases the value of
the personal property shall be applied pro rata to the payment of the credits which enjoy
special preference with respect to such property," and a vessel is personal property, as
stated in the case of Philippine Refining Co. vs. Jarque (61 Phil., 229). Said rule refers to
the credits stated in said article 1922 (12 Manresa, Civil Code, 706).
Having arrived at this conclusion, it becomes unnecessary to pass upon the
other errors assigned by the parties, particularly if it is taken into consideration that the
plaintiff-appellant has to date taken no action against the defendant sheriff for the
recovery of the damages it claims to have suffered, upon the indemnity bond filed by the
defendant and appellant Vicente Madrigal, in accordance with section 451 of Act No.
190, as amended by Act No. 4108 on December 6, 1933. Under said Act No. 4108
(section 2), all rights of action against indemnity bonds must be filed within the
inextensible period of 120 days effective said date, December 6, 1933.
Wherefore, the appealed judgment is modified, reversing it in so far as it
orders the defendant and appellant Vicente Madrigal to turn over to the plaintiff and
amount of money paid him by the provincial sheriff of Surigao from the proceeds of the
sale of the steamship Yusingco, and affirming it in so far as it absolves said sheriff from
the complaint, with the costs to the plaintiff-appellant. so ordered.
Avancea, C. J., Villa-Real, Abad Santos, Laurel and Concepcion, JJ., concur.

535
||| (Yek Tong Lin Fire & Marine Insurance Co., Ltd. v. Madrigal, G.R. No. 43608, [July 20,
1937], 64 PHIL 473-483)

536

THIRD DIVISION
[G.R. No. 74027. December 7, 1989.]
SILAHIS
MARKETING
CORPORATION, petitioner, vs. INTERMEDIATE
APPELLATE
COURT and GREGORIO DE LEON, doing business under the name
and style of "MARK INDUSTRIAL SALES", respondents.

Jaime V. Villanueva for petitioner.

Tinga, Fuentes, Tagle & Malate for private respondent.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; COMPENSATION; REQUISITES.
It must be remembered that compensation takes place when two persons, in their own right, are
creditors and debtors to each other. Article 1279 of the Civil Code provides that: "In order that
compensation may be proper, it is necessary: [1] that each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other; [2] that both debts
consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated; [3] that the two debts be due; [4] that they
be liquidated and demandable; [5] that over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to the debtor."
2. ID.; ID.; ID.; TAKES EFFECT BY OPERATION OF LAW. When all the requisites
mentioned in Art. 1279 of the Civil Code are present, compensation takes effect by operation
of law, even without the consent or knowledge of the creditors and debtors.
3. ID.; ID.; ID.; CANNOT EXTEND TO UNLIQUIDATED CLAIMS. Article 1279
requires, among others, that in order that legal compensation shall take place, "the two debts be
due" and "they be liquidated and demandable." Compensation is not proper where the claim of
the person asserting the set-off against the other is not clear nor liquidated; compensation
cannot extend to unliquidated, disputed claim existing from breach of contract.

DECISION

FERNAN, C.J p:

Petitioner Silahis Marketing Corporation seeks in this petition for review on certiorari a
reversal of the decision of the then Intermediate Appellate Court (IAC) in AC-G.R. CV No.
67162 entitled "De Leon, etc. v. Silahis Marketing Corporation", disallowing petitioner's
counterclaim for commission to partially offset the claim against it of private respondent
Gregorio de Leon for the purchase price of certain merchandise. llcd
A review of the record shows that on various dates in October, November and December, 1975,
Gregorio de Leon (De Leon for short) doing business under the name and style of Mark
Industrial Sales sold and delivered to Silahis Marketing Corporation (Silahis for short) various
items of merchandise covered by several invoices in the aggregate amount of P22,213.75
payable within thirty (30) days from date of the covering invoices.
Allegedly due to Silahis' failure to pay its account upon maturity despite repeated demands, de
Leon filed before the then Court of First Instance of Manila a complaint for the collection of
the said accounts including accrued interest thereon in the amount of P661.03 and attorney's
fees of P5,000.00 plus costs of litigation.
The answer admitted the allegations of the complaint insofar as the invoices were concerned
but presented as affirmative defenses; [a] a debit memo for P22,200.00 as unrealized profit for
a supposed commission that Silahis should have received from de Leon for the sale of
sprockets in the amount of P111,000.00 made directly to Dole Philippines, Incorporated by the
latter sometime in August 1975 without coursing the same through the former allegedly in
violation of the usual practice concerning sale of merchandise to Dole Philippines, Inc.; and [b]
Silahis' claim that it is entitled to return the stainless steel screen covered by Exhibits '6Amanda '6-B' which was found defective by its client, Borden International, Davao City, and to
have the corresponding amount cancelled from its account with de Leon.
In a decision dated August 25, 1978, 1 the lower court confirmed the liability of Silahis for the
claim of de Leon but at the same time ordered that it be partially offset by Silahis' counterclaim
as contained in the debit memo for unrealized profit and commission. Judge Bienvenido C.
Ejercito of said court held:
"There is no question that the defendant received from the plaintiff
the items contained in Exhs. 'A' to 'F'. The only question is whether or
not the defendant is entitled h set off against the claim of the plaintiff
the amount contained in the debit memo of the defendant, Exh. '1',
and whether or not the defendant is entitled to return the steel wire
mesh which was returned to them by Borden Philippines, as shown by
Exhs, '6-A' and '6-B'. The Court believes that the defendant is
properly chargeable for the amounts of the unpaid invoices set forth
in the complaint. However, the Court also believes that the plaintiff is
also properly chargeable for the debit memo of P22,200.00, Exh. '1'.
This is because it was proven by the defendant from the testimonies
of Isaias Fernando, Jr. and Jose Joel Tamon that contrary to the
agreement between plaintiff and defendant that the latter was to serve
the account of Dole Philippines in Davao, the plaintiff made a direct
sale of sprockets for P111,000.00 which thereby deprives the
defendant of its corresponding commission for P22,200.00 which the
defendant would have otherwise made if the plaintiff had followed its

537
previous arrangement with the defendant. However, as to the
counterclaim of the defendant for a cancellation of the amount of
P6,000.00 for defective stainless screen wire purchased and intended
for Borden International, Davao City, the Court believes that it is
much too late now to present said claim because the purchase was
made and delivered as early as December 22, 1975 and the proposed
return to the defendant by Borden was made on April 1, 1976 only.
The Court is not ready to award damages to any of the parties. After
deducting the amount of P22,200.00, which is the unpaid commission
of the defendant from the principal total amount of the unpaid
invoices of the plaintiff of P22,213.75, the unpaid balance in favor of
the plaintiff is P13.75. The claim for interest and attorney's fees of the
plaintiff may be offset against the interest and attorney's fees of the
defendant.
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendant ordering the defendant to pay to the
plaintiff the amount of P13.75, with interest at 12% per annum from
the date of the filing of the action on July 1, 1976 until fully paid,
without pronouncement as to costs.
"SO ORDERED." 2
De Leon appealed from the said decision insofar as it directed partial compensation and its
failure to award interest on his principal claim as well as attorney's fees in his favor. In a
decision dated March 17, 1986, 3 respondent Intermediate Appellate Court 4 set aside the
decision of the lower court and dismissed herein petitioner's (therein defendant-appellee's)
counterclaim for lack of factual or legal basis. The appellate court found that there was no
agreement, verbal or otherwise, nor was there any contractual obligation between De Leon and
Silahis prohibiting any direct sales to Dole Philippines, Inc. by de Leon; nor was there
anything in the debit memo obligating de Leon to pay a commission to Silahis for the sale of
P111,000.00 worth of sprockets to Dole Philippines although in the past, the former did supply
certain items to the latter for delivery to Dole Philippines, Incorporated. LLjur
Hence, in this petition for review on certiorari, the central issue is whether or not private
respondent is liable to the petitioner for the commission or margin for the direct sale which the
former concluded and consummated with Dole Philippines, Incorporated without coursing the
same through herein petitioner.
We have carefully gone over the record of this case particularly the debit memo upon which
petitioner's counterclaim rests and found nothing contained therein to show that private
respondent obligated himself to set-off or compensate petitioner's outstanding accounts with
the alleged unrealized commission from the assailed sale of sprockets in the amount of
P111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes place when two persons, in their own right, are
creditors and debtors to each other. Article 1279 of the Civil Code provides that: "In order that
compensation may be proper, it is necessary: [1] that each one of the obligors be bound
principally, and that he be at the same time a principal creditor of the other; [2] that both debts
consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated; [3] that the two debts be due; [4] that they

be liquidated and demandable; [5] that over neither of them there be any retention or
controversy, commenced by third persons and communicated in due time to the debtor." cdll
When all the requisites mentioned in Art. 1279 of the Civil Code are present, compensation
takes effect by operation of law, even without the consent or knowledge of the creditors and
debtors. 5 Article 1279 requires, among others, that in order that legal compensation shall take
place, "the two debts be due" and "they be liquidated and demandable." Compensation is not
proper where the claim of the person asserting the set-off against the other is not clear nor
liquidated; compensation cannot extend to unliquidated, disputed claim existing from breach of
contract. 6
Undoubtedly, petitioner admits the validity of its outstanding accounts with private respondent
in the amount of P22,213.75 as contained in its answer. But whether private respondent is
liable to pay the petitioner a 20% margin or commission on the subject sale to Dole
Philippines, Inc. is vigorously disputed. This circumstance prevents legal compensation from
taking place.
The Court agrees with respondent appellate court that there is no evidence on record from
which it can be inferred that there was any agreement between the petitioner and private
respondent prohibiting the latter from selling directly to Dole Philippines, Incorporated.
Definitely, it cannot be asserted that the debit memo was a contract binding between the parties
considering that the same, as correctly found by the appellate court, was not signed by private
respondent nor was there any mention therein of any commitment by the latter to pay any
commission to the former involving the sale of sprockets to Dole Philippines, Inc. in the
amount of P111,000.00. Indeed, such document can be taken as self-serving with no probative
value absent a showing or at the very least an inference, that the party sought to be bound
assented to its contents or showed conformity thereto. Cdpr

In fact the letter written by private respondent's lawyer dated March 5, 1975 7 in reply to
petitioner's letter dated February 19, 1976 transmitting its Debit Memo No. 1695 8 further
strengthens private respondent's stand that it never agreed to give petitioner any commission on
the direct sale to Dole Philippines, Inc. by its company because said letter denied any
utilization of petitioner's personnel and facilities at its Davao Branch in the transaction with
Dole Philippines, Inc. which would otherwise lend a basis for petitioner's monetary claim.
WHEREFORE, in view of the foregoing, the questioned decision of respondent appellate court
is hereby AFFIRMED.
SO ORDERED.
Gutierrez, Jr., Feliciano and Cortes, JJ., concur.
Bidin, J., took no part.
||| (Silahis Marketing Corp. v. Intermediate Appellate Court, G.R. No. 74027, [December 7,
1989], 259 PHIL 489-494)

538
SECOND DIVISION
[G.R. No. 138669. June 6, 2002.]
STEVE TAN and MARCIANO TAN, petitioners, vs. FABIAN
MENDEZ, JR., respondent.

Singson Valdez & Associates for petitioners.

Solicitor General for respondent.

SYNOPSIS
Petitioners were convicted for violation of BP Blg. 22. In this appeal, petitioners alleged
payment through compensation or offset to preclude their prosecution.
Petitioner Marciano admitted drawing the subject check as payment for an obligation. He knew
then that there was no sufficient funds to cover the same and thus, when presented for
payment, the check was dishonored. The Court ruled that all the elements of BP Blg. No. 22
are present. Further, the law has made the mere act of issuing a bum check a malum
prohibitum. Therefore, even if there had been payment, through compensation or some other
means, there could still be prosecution for violation of BP Blg. 22.

SYLLABUS
1. CRIMINAL LAW; BOUNCING CHECKS LAW; ELEMENTS. The law enumerates the
elements of B.P. Blg. 22 to be (1) the making, drawing, and issuance of any check to apply for
account or for value; (2) the knowledge of the maker, drawer, or issuer that at the time of issue
he does not have sufficient funds in or credit with the drawee bank for the payment of the
check in full upon its presentment; and (3) the subsequent dishonor of the check by the drawee
bank for insufficiency of funds or credit or dishonor for the same reason had not the drawer,
without any valid cause, ordered the bank to stop payment. EAcCHI
2. ID.; ID.; PROSECUTION PROPER EVEN IF THERE HAD BEEN PAYMENT. The law
has made the mere act of issuing a bum check a malum prohibitum, an act proscribed by
legislature for being deemed pernicious and inimical to public welfare. The gravamen of the
offense under this law is the act of issuing a worthless check or a check that is dishonored upon
its presentment for payment. Thus, even if there had been payment, through compensation or
some other means, there could still be prosecution for violation of B.P. 22. We find that no
reversible error was committed by the courts a quo in finding petitioners guilty of violation
of B.P. 22.

539
3. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF TRIAL COURT, RESPECTED.
It bears stressing that the issue of whether or not the obligations covered by the subject
check had been paid by compensation or offset is a factual issue that requires evaluation and
assessment of certain facts. This is not proper in a petition for review on certiorari to the
Supreme Court. We have repeatedly held that this Court is not a trier of facts. The jurisdiction
of this Court over cases elevated from the Court of Appeals is confined to the review of errors
of law ascribed to the Court of Appeals, whose findings of fact are conclusive absent any
showing that such findings are entirely devoid of any substantiation on record. On this aspect,
the Court of Appeals affirmed the findings of the trial court that the alleged compensation is
not supported by clear and positive evidence. These factual findings should be accorded
respect and finality as the trial court is in the best position to assess and evaluate questions of
fact. These findings will not be disturbed on appeal in the absence of any clear showing that
the trial court overlooked certain facts or circumstances that would substantially affect the
disposition of the case.
4. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF
OBLIGATIONS; COMPENSATION; WHEN PROPER. We also note that no compensation
can take place between petitioners and respondent as respondent is not a debtor of petitioners
insofar as the two checks representing collections from the Baao ticket sales are concerned.
Article 1278 of the Civil Code requires, as a prerequisite for compensation, that the parties be
mutually and principally bound as creditors and debtors. If they were not mutually creditors
and debtors of each other, the law on compensation would not apply. In this case, the
memorandum shows that some unencashed checks returned to respondent to allegedly offset
the dishonored check were from the Baao ticket sales which are separate from the ticket sales
of respondent. Respondent only acted as an intermediary in remitting the Baao ticket sales and,
thus, is not a debtor of petitioners. Interestingly, petitioners never alleged compensation when
they received the demand letter, during the preliminary investigation, or before trial by filing a
motion to dismiss. Moreover, if indeed there was payment by compensation, petitioners should
have redeemed or taken the checks back in the ordinary course of business. There is no
evidence on record that they did so. HSCATc
5. CRIMINAL LAW; BOUNCING CHECKS LAW; SC ADM. CIRC. NO. 12-2000; RULE
OF PREFERENCE IN THE IMPOSITION OF PENALTIES; ELUCIDATED. Supreme
Court Administrative Circular No. 12-2000, as clarified by Administrative Circular No. 132001, established a rule of preference in imposing penalties in B.P. 22 cases. Section 1 of B.P.
22 imposes the following alternative penalties for its violation, to wit: (a) imprisonment of not
less than 30 days but not more than one year; or (b) a fine of not less than but not more than
double the amount of the check which fine shall in no case exceed P200,000; or (c) both such
fine and imprisonment at the discretion of the court. The rationale of Adm. Circular No. 122000 is found in our rulings in Eduardo Vaca vs. Court of Appeals and Rosa Lim vs. People of
the Philippines. We held in those cases that it would best serve the ends of criminal justice if,
in fixing the penalty to be imposed for violation of B.P. 22, the same philosophy underlying the
Indeterminate Sentence Law is observed, i.e. that of redeeming valuable human material and
preventing unnecessary deprivation of personal liberty and economic usefulness with due
regard to the protection of the social order. To be sure, it is not our intention to decriminalize
violation ofB.P. 22. Neither is it our intention to delete the alternative penalty of imprisonment.
The propriety and wisdom of decriminalizing violation of B.P. 22 is best left to the legislature
and not this Court. As clarified by Administrative Circular 13-2001, the clear tenor and
intention of Administrative Circular No. 12-2000 is not to remove imprisonment as an
alternative penalty, but to lay down a rule of preference in the application of the penalties
provided for in B.P. 22. Where the circumstances of the case, for instance, clearly indicate

good faith or a clear mistake of fact without taint of negligence, the imposition of a fine alone
may be considered as the more appropriate penalty. This rule of preference does not foreclose
the possibility of imprisonment for violators of B.P. 22. Neither does it defeat the legislative
intent behind the law. Needless to say, the determination of whether the circumstances warrant
imposition of a fine alone rests solely upon the judge. Should the judge decide that
imprisonment is the more appropriate penalty, Administrative Circular No. 12-2000 ought not
to be deemed a hindrance. In this case, we note that petitioners had exerted efforts to settle
their obligations. The fact of returning the unencashed checks to respondent indicates good
faith on the part of petitioners. Absent any showing that petitioners acted in bad faith, the
deletion of the penalty of imprisonment in this case is proper.

DECISION

QUISUMBING, J p:
Petitioners filed this petition for review on certiorari seeking to set aside the decision 1 dated
January 22, 1999 of the Court of Appeals, Thirteenth Division, in CA-G.R. CR. No. 20030,
which affirmed the decision 2 of the Regional Trial Court of Iriga City, Branch 37, convicting
petitioners of violation of Batas Pambansa Blg. 22, otherwise known as the Bouncing Checks
Law. They were sentenced to suffer the penalty of six months imprisonment and to indemnify
private complainant the sum of P58,237.75 with legal interest from date of judicial demand.
Also assailed in this petition is the Court of Appeals' resolution 3 dated May 13, 1999 denying
petitioners' Motion for Reconsideration.
The facts, as culled from records, are as follows:
Petitioners Steve Tan and Marciano Tan are the owners of Master Tours and Travel Corporation
and operators of Philippine Lawin Bus Co., Inc., while respondent Fabian Mendez, Jr. is the
owner of three gasoline stations in Iriga City, Ligao, Albay, and Sipocot, Camarines Sur.
Petitioners opened a credit line for their buses' lubricants and fuel consumption with
respondent. At the same time, the latter was also designated by petitioners as the booking and
ticketing agent of Philippine Lawin Bus Co. in Iriga City.
Under such arrangement, petitioners' drivers purchased on credit fuel and various oil products
for its buses through withdrawal slips issued by petitioners, with periodic payments to
respondent through the issuance of checks. On the other hand, respondent remitted the
proceeds of ticket sales to petitioners also through the issuance of checks. Sent together with
respondent's remittance are the remittances of the ticket sales in the Baao Booking office,
which is managed separately and independently by another agent, Elias Bacsain.
Accordingly, petitioners issued several checks to respondent as payment for oil and fuel
products. One of these is FEBTC check no. 704227 dated June 4, 1991 in the amount of
P58,237.75, as payment for gasoline and oil products procured during the period May 2 to 15,
1991. Said check was dishonored by the bank upon presentment for payment for being drawn
against insufficient funds.

540
Respondent sent a demand letter dated June 21, 1991 to petitioners demanding that they make
good the check or pay the amount thereof, to no avail. Hence, an information for violation
of B.P. 22 was filed against petitioners, upon the complaint of respondent, before the RTC of
Iriga City, Branch 37, as follows:
That on or about the 4th day of June 1991, in Iriga City, Philippines,
and within the jurisdiction of this Honorable Court, the above-named
accused having purchased from Shellhouse Iriga, Iriga City, owned
and managed by Atty. Fabian O. Mendez, Jr., fuel and other oil
products in the amount of FIFTY EIGHT THOUSAND TWO
HUNDRED THIRTY SEVEN and 75/100 (P58,237.75) PESOS,
Philippine currency, and that in payment thereof, the said accused
knowing fully well that they had no sufficient funds or credit with the
drawee bank, conspiring and confederating with each other, did, then
and there, willfully, unlawfully and feloniously, issue and make out
Far East Bank and Trust Company-Binondo Check No. 704227,
payable to the order of Shell house Iriga, dated June 4, 1991 in the
amount of P58,237.75, and delivered to herein private complainant
Atty. Fabian O. Mendez, Jr., in Iriga City and upon its presentment
for payment to the drawee bank, the same was dishonored and refused
payment for the reason "Drawn Against Insufficient Funds" and
despite repeated demands, accused failed and refused and still fails
and refuses to make the necessary deposit with said bank sufficient
money to cover the said check or to pay the said Atty. Fabian O.
Mendez, Jr., the value of the check in the amount of P58,237.75, to
the latter's damage and prejudice in the aforesaid amount, plus other
form of damages as may be proven in court.

Baao offices that were earlier sent by respondent. After the alleged offset, there remains a
balance of P226,785.83. 7 The memorandum 8 states:
June
10,
1991
To Atty. Fabian Mendez:
We just would like to inform your good office that we are sending
you back the following checks to be offset to our gasoline account:
Returned check June 07 P58,237.75
Of PLBC for gasoline 235,387.33
2
9
3
,
6
2
5
.
0
8
Your check:
Sales Iriga May 29-31 P17,373.00

CONTRARY TO LAW. 4

June 1-5 28,057.55

Petitioners pleaded not guilty during arraignment and trial ensued.

Baao June 3-4 5,375.00

At the trial, the prosecution presented FABIAN MENDEZ, JR., the private complainant, and
MULRY MENDEZ. They testified that FEBTC check no. 704227 and other checks in the
amount of P235,387.33 were dishonored upon presentment for payment to the bank and that
they called petitioners' attention regarding the matter. They sent a demand letter to petitioners
asking them to make good the check or pay the value thereof, but petitioners did not heed the
request. Instead, petitioners told respondent Fabian to wait a while. After respondent initiated
this case, petitioners attempted to settle the same along with other cases pending in other courts
in Iriga City. They asked for more time to settle their obligations because they were still
waiting for a tax credit certificate in the amount of P517,998 to be issued by the Ministry of
Finance, that they would use to settle the cases. 5

May 28-June 2 16,033.70

On the other hand, the defense presented petitioner MARCIANO TAN and ISIDRO TAN as
witnesses. In his testimony, Marciano averred that he cannot be held liable for violation of B.P.
22 because the amount subject of the check had already been extinguished by offset or
compensation against the collection from ticket sales from the booking offices. He presented a
memorandum 6 dated June 10, 1991 showing the return to respondent of various unencashed
checks in the total amount of P66,839.25 representing remittance of ticket sales in the Iriga and

6
6
,
8
3
9
.
2
5
Balance to be paid for schedule P 226,785.83
E
S
T
E

541
B
A
N
T
A
N
On cross-examination, Marciano admitted to have drawn the subject check to pay private
respondent's gasoline station and that it was not covered by sufficient funds at the time of its
issuance due to uncollected receivables. 9 Upon query by the court, he claimed that he did not
talk to private complainant and could not tell if the latter agreed to offset the checks with the
remittances. 10
ISIDRO TAN, petitioners' brother, corroborated Marciano's claim of offset. He also admitted
speaking with Mulry Mendez regarding the proposed settlement of the case which, however,
was not accepted by respondent. 11
On rebuttal, respondent disputed petitioners' claim of payment through offset or compensation.
He claimed that the amount of the four unencashed checks totaling P66,839.25 could not have
offset the amount of the dishonored checks since petitioners' total obligations at that time had
already reached P906,000. 12 Moreover, even if compensation took place, it should have been
applied to an alleged earlier obligation of P235,387.33. Respondent also claimed that
compensation did not take place as there was no application of payment made by the
petitioners in their memorandum dated June 10, 1991. 13
After trial, the trial court convicted petitioners for violation of B.P. 22. The dispositive portion
of its decision reads:
WHEREFORE, the Court finds both accused, as drawers of the check
in question, guilty of the violation of Batas Pambansa Blg. 22, as
principals thereof, without attendant mitigating or aggravating
circumstance, and hereby sentences both accused to suffer the penalty
of imprisonment of Six (6) Months, to indemnify the private
complainant jointly and severally, the sum of P58,237.75 with legal
interest from date of judicial demand, and to pay the costs.
SO ORDERED. 14
On appeal, the Court of Appeals affirmed the conviction of petitioners, thus:
WHEREFORE, the assailed decision being in conformity with law
and the evidence, the same is hereby AFFIRMED. Costs against
appellants.
SO ORDERED. 15
Hence, this petition. Petitioners raise the following errors:
I
THE HONORABLE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THE FACT OF PAYMENT BY
OFFSETTING PRIOR TO THE DEMAND LETTER SENT BY

RESPONDENT DESPITE THE ABUNDANCE OF EVIDENCE

PROVING THE SAME.
II
SINCE THE HONORABLE COURT OF APPEALS FOUND
OFFSETTING CONTENTIOUS IT SHOULD HAVE ACQUITTED
PETITIONERS ON THE GROUND OF REASONABLE DOUBT.
III
THE HONORABLE COURT OF APPEALS ERRED IN
CONCLUDING THAT ASSUMING THAT THERE WAS
OFFSETTING THE PETITIONERS ARE NONETHELESS GUILTY
BECAUSE PAYMENT DOES NOT ABATE THE CRIME OF
VIOLATION OF B.P. 22.
Briefly, the following are the issues for our resolution:
1. Whether or not petitioners can be held liable for violation of B.P. 22 or the Bouncing Checks
Law; and
2. Whether or not payment through compensation or offset can preclude prosecution for
violation of B.P. 22.
The law enumerates the elements of B.P. Blg. 22 to be (1) the making, drawing, and issuance
of any check to apply for account or for value; (2) the knowledge of the maker, drawer, or
issuer that at the time of issue he does not have sufficient funds in or credit with the drawee
bank for the payment of the check in full upon its presentment; and (3) the subsequent dishonor
of the check by the drawee bank for insufficiency of funds or credit or dishonor for the same
reason had not the drawer, without any valid cause, ordered the bank to stop payment. 16
We find all the foregoing elements present in this case. Petitioner Marciano admitted that he
drew the subject check as payment for the fuel and oil products of respondents. He knew at that
time that there were no sufficient funds to cover the check because he had uncollected
receivables. 17The check was thus dishonored upon presentment to the bank for payment.
The law has made the mere act of issuing a bum check a malum prohibitum, 18 an act
proscribed by legislature for being deemed pernicious and inimical to public welfare. 19 The
gravamen of the offense under this law is the act of issuing a worthless check or a check that is
dishonored upon its presentment for payment. Thus, even if there had been payment, through
compensation or some other means, there could still be prosecution for violation of B.P. 22. We
find that no reversible error was committed by the courts a quo in finding petitioners guilty of
violation of B.P. 22.
In their defense, petitioners principally rely on the principle of compensation or offset under
the civil law to avoid criminal prosecution. Essentially, they argue that they could not be held
liable for violation of B.P. 22 because the amount covered by the subject check had already
been paid by compensation or offset through other checks issued by respondent as remittances
of ticket sales for petitioners' bus company.
It bears stressing that the issue of whether or not the obligations covered by the subject check
had been paid by compensation or offset is a factual issue that requires evaluation and

542
assessment of certain facts. This is not proper in a petition for review on certiorari to the
Supreme Court. We have repeatedly held that this Court is not a trier of facts. 20 The
jurisdiction of this Court over cases elevated from the Court of Appeals is confined to the
review of errors of law ascribed to the Court of Appeals, whose findings of fact are conclusive
absent any showing that such findings are entirely devoid of any substantiation on record. 21
On this aspect, the Court of Appeals affirmed the findings of the trial court that the alleged
compensation is not supported by clear and positive evidence. The trial court noted that the
total amount of the two checks issued by petitioners is P293,625.08 while the total amount of
the returned checks amounted to only P66,939.75. No application of payment was made as to
which check was to be paid. These factual findings should be accorded respect and finality as
the trial court is in the best position to assess and evaluate questions of fact. These findings will
not be disturbed on appeal in the absence of any clear showing that the trial court overlooked
certain facts or circumstances that would substantially affect the disposition of the case. 22
As found by the trial court, petitioners' defense of compensation is unavailing because
petitioners did not clearly specify in the memorandum dated June 10, 1991 which dishonored
check is being offset. Applying Article 1289 23 in relation to Article 1254 24 of the Civil
Code, the unencashed checks amounting to P66,839.25 should have been applied to the earlier
dishonored check amounting to P235,387.33 which is more onerous than the subject check
amounting to only P58,237.75.
We also note that no compensation can take place between petitioners and respondent as
respondent is not a debtor of petitioners insofar as the two checks representing collections from
the Baao ticket sales are concerned. 25 Article 1278 of the Civil Code 26 requires, as a
prerequisite for compensation, that the parties be mutually and principally bound as creditors
and debtors. 27 If they were not mutually creditors and debtors of each other, the law on
compensation would not apply. 28 In this case, the memorandum shows that some unencashed
checks returned to respondent to allegedly offset the dishonored check were from the Baao
ticket sales which are separate from the ticket sales of respondent. Respondent only acted as an
intermediary in remitting the Baao ticket sales and, thus, is not a debtor of petitioners.
Interestingly, petitioners never alleged compensation when they received the demand letter,
during the preliminary investigation, or before trial by filing a motion to dismiss. Moreover, if
indeed there was payment by compensation, petitioners should have redeemed or taken the
checks back in the ordinary course of business. 29 There is no evidence on record that they did
so.

Finally, while we sustain the conviction of petitioners, we deem it appropriate to modify the
penalties imposed. We delete the penalty of imprisonment and in lieu thereof, we impose upon
petitioners a fine amounting to double the value of the subject check, with subsidiary
imprisonment in case of insolvency or non-payment.
Supreme Court Administrative Circular No. 12-2000, as clarified by Administrative Circular
No. 13-2001, established a rule of preference in imposing penalties in B.P. 22 cases. Section 1
of B.P. 22 imposes the following alternative penalties for its violation, to wit: (a) imprisonment
of not less than 30 days but not more than one year; or (b) a fine of not less than but not more
than double the amount of the check which fine shall in no case exceed P200,000; or (c) both
such fine and imprisonment at the discretion of the court.

The rationale of Adm. Circular No. 12-2000 is found in our rulings in Eduardo Vaca vs. Court
of Appeals 30 and Rosa Lim vs. People of the Philippines. 31 We held in those cases that it
would best serve the ends of criminal justice if, in fixing the penalty to be imposed for
violation of B.P. 22, the same philosophy underlying the Indeterminate Sentence Law is
observed, i.e. that of redeeming valuable human material and preventing unnecessary
deprivation of personal liberty and economic usefulness with due regard to the protection of
the social order.
To be sure, it is not our intention to decriminalize violation of B.P. 22. Neither is it our
intention to delete the alternative penalty of imprisonment. The propriety and wisdom of
decriminalizing violation of B.P. 22 is best left to the legislature and not this Court. As clarified
by Administrative Circular 13-2001, the clear tenor and intention of Administrative Circular
No. 12-2000 is not to remove imprisonment as an alternative penalty, but to lay down a rule of
preference in the application of the penalties provided for in B.P. 22. Where the circumstances
of the case, for instance, clearly indicate good faith or a clear mistake of fact without taint of
negligence, the imposition of a fine alone may be considered as the more appropriate penalty.
This rule of preference does not foreclose the possibility of imprisonment for violators of B.P.
22. Neither does it defeat the legislative intent behind the law. Needless to say, the
determination of whether the circumstances warrant the imposition of a fine alone rests solely
upon the judge. Should the judge decide that imprisonment is the more appropriate penalty,
Administrative Circular No. 12-2000 ought not to be deemed a hindrance. 32
We are not unaware of the importance of checks in commercial transactions. In commercial
parlance, they have been widely and fittingly known as the substitute of money and have
effectively facilitated the smooth flow of commercial transactions. Thus, the pernicious effects
and repercussions of circulating worthless checks are simply unimaginable. It is for this reason
that B.P. 22 was enacted by the legislature, to penalize individuals who would place worthless
checks in circulation and degrade the value and importance of checks in commercial
transactions.
Nevertheless, while we recognize the noble objective of B.P. 22, we deem it proper to apply the
philosophy underlying the Indeterminate Sentence Law in imposing penalties for its violation.
The gist of Administrative Circular No. 12-2000 is to consider the underlying circumstances of
the case such that if the situation calls for the imposition of the alternative penalty of fine rather
than imprisonment, the courts should not hesitate to do so.
In this case, we note that petitioners had exerted efforts to settle their obligations. The fact of
returning the unencashed checks to respondent indicates good faith on the part of petitioners.
Absent any showing that petitioners acted in bad faith, the deletion of the penalty of
imprisonment in this case is proper. 33
WHEREFORE, the petition is DENIED and the Decision of Court of Appeals in CA-G.R. CR
No. 20030, is AFFIRMED with MODIFICATION. Petitioners are ordered to indemnify
respondent in the amount of P58,237.75 with legal interest from date of judicial demand. The
sentence of imprisonment of six months is SET ASIDE and in lieu thereof, a FINE in the
amount of P116,475.50 34 is imposed upon petitioners, with subsidiary imprisonment not to
exceed six months in case of insolvency or non-payment. 35
Costs against petitioners. HSaIET
SO ORDERED.

543
Bellosillo, Mendoza, De Leon, Jr. and Corona, JJ., concur.
||| (Tan v. Mendez, Jr., G.R. No. 138669, [June 6, 2002], 432 PHIL 760-774)

544

ECOND DIVISION
[G.R. No. 114823. December 23, 1999.]
NILO B. DIONGZON, petitioner, vs. COURT OF APPEALS and
PEOPLE OF THE PHILIPPINES, respondents.

Capco Ponce Campanilla Mallares Campanilla Law Office for petitioner.

Novero Novero and Associates Office for respondents.

SYNOPSIS
Appellant was convicted by the trial court for violation of B.P. Blg. 22 for having issued three
(3) checks which were dishonored when presented. On appeal, however, he claimed that his
partial payment and written undertaking to pay for the balance of the check constituted a
novation which thereby extinguished his obligation. The Court of Appeals rejected his
contention but did not subject him to subsidiary imprisonment in case of insolvency. TaEIAS
In affirming appellant's conviction, the Supreme Court held that there was no novation in this
case because a change in the mode of paying the obligation was not a change in any of the
objects or principal conditions of the contract. Novation cannot be presumed but must be
expressly intended by the parties.
And even if there was a novation, petitioner's liability under B.P. Blg. 22 was not thereby
extinguished because the gravamen of the offense is the issuance of worthless checks.
Novation is not a mode of extinguishing criminal liability.
The Supreme Court, however, held that subsidiary imprisonment in case of insolvency to pay
the fine for violation of special laws may be imposed, notwithstanding the absence of such
provision in said laws.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; NOVATION; NOT A MODE OF

EXTINGUISHING CRIMINAL LIABILITY. As the Court of Appeals held, novation is not
a mode of extinguishing criminal liability and criminal liability, once incurred, cannot be
compromised. Indeed, there was no novation, and even if there was, petitioner's liability
under B.P. Blg. 22 was not thereby extinguished. As held by this Court, novation "may prevent
the rise of criminal liability as long as it occurs prior to the filing of the criminal information in
court." In other words, novation does not extinguish criminal liability but may only prevent its
rise.
2. ID.; ID.; ID.; REQUISITES. It is well-settled that the following requisites must be
present for novation to take place: (1) a previous valid obligation; (2) agreement of all the
parties to the new contract; (3) extinguishment of the old contract; and (4) validity of the new
one.
3. ID.; ID.; ID.; ID.; NOT MET IN CASE AT BAR. These requisites, particularly the third,
were not proven in this case. As the Court of Appeals held, the transaction became a personal
undertaking of the petitioner when he received the goods for delivery but made no delivery
thereof either to the credited dealer or to the credit rider. Petitioner had an existing obligation to
pay the value of the goods for which the check was issued. This obligation was not
extinguished when the check was dishonored and a new agreement was reached by the two
parties to pay in cash its value. The change in the mode of paying the obligation was not a
change in any of the objects or principal conditions of the contract. As Tolentino states, neither
acceptance of partial payment nor change of place or manner of payment involves novation.
For novation cannot be presumed but must be expressly intended by the parties.
4. ID.; ID.; ID.; THEORY DOES NOT APPLY WHERE OFFER TO PAY BY DEBTOR AND
ACCEPTED BY CREDITOR TURNED OUT TO BE AN EMPTY PROMISE. The Court
thus held that the novation theory does not apply where the offer to pay by the debtor, and
accepted by the creditor, turns out to be merely an empty promise. In this case, the balance of
the check was never paid, as witness Anacleto B. Palisoc testified. cAHDES
5. CRIMINAL LAW; B.P. 22 (BOUNCING CHECK LAW); ESSENCE. Indeed, the
gravamen of the offense of violating B.P. Blg. 22 is the issuance of worthless checks. In this
case, petitioner admitted issuing the check which when presented was dishonored. Though he
promised to pay its value when it was dishonored, the fact remains that at the time it was
presented to the drawee bank, it was not sufficiently funded. Petitioner, as the drawer of the
check, is presumed to have knowledge of the insufficient funds, and his failure to pay the value
of the check within five banking days from notice of dishonor did not dispute this presumption.
On this, the Court of Appeals correctly affirmed the trial court.
6. ID.; SUBSIDIARY IMPRISONMENT; IMPOSED IN CASES OF INSOLVENCY TO PAY
FINE FOR VIOLATION OF SPECIAL LAWS. This Court has, on several occasions,
imposed subsidiary imprisonment in case of insolvency to pay the fine for violation of special
laws, notwithstanding the absence of such provision in said laws. In Llamado v. Court of
Appeals, we imposed subsidiary imprisonment on petitioner who was convicted of
violatingB.P. Blg. 22. DAaHET

545
DECISION

the same or pay the value thereof up to the present time, to the
damage and prejudice of the said offended party in the amount of Two
Hundred Ninety Eight Thousand One Hundred Nineteen Pesos &
75/100 (P298,119.75), Philippine Currency.

MENDOZA, J p:

Act contrary to law.

Before us is a petition seeking a review of the decision and resolution of the Court of
Appeals 1 in CA-G.R. No. 08094 affirming the conviction of herein petitioner of violation
of B.P. Blg. 22, the Bouncing Checks Law, by the Regional Trial Court, Branch 43, Bacolod
City. LLjur

Bacolod City, Philippines, 15 December 1981.

The information in this case charged

That sometime in August 1981, in the City of Bacolod, Philippines,
and within the jurisdiction of this Honorable Court, the herein
accused with intent to gain and by means of false pretenses or
fraudulent acts executed prior to or simultaneously with the
commission of the fraud knowing that at the time of issue he did not
have deposit in or credit with the Allied Banking Corporation,
Bacolod Branch, and/or after such issue, failed to keep sufficient
funds or to maintain a credit to cover the full amount thereof, did,
then and there willfully, unlawfully and feloniously make out, draw,
issue and deliver to the herein offended party Filipro, Inc.,
represented herein by its Area Sales Manager, Anacleto Palisoc, the
following checks, to wit:
1. ABC Check No. 540295881-E postdated
September 15, 1981 P36,874.00
2. ABC Check No. 540295880-E postdated
September 16, 1981 P130,597.75
3. ABC Check No. 540295899-E postdated
October 3, 1981 P130,647.75
or a total sum of Two Hundred Ninety Eight Thousand One Hundred
Nineteen Pesos & 75/100 (P298,119.75) in payment of his
accountabilities with said offended party; after said offended party,
however, deposited said checks with its depository bank, upon
presentment for payment therefor within a period of ninety (90) days
from the date appearing thereon, the same were dishonored by the
drawee bank for reasons that accused's signature differs from
specimen on file and/or he had insufficient funds deposited with the
Allied Banking Corporation, Bacolod Branch; that despite such notice
of such dishonor and repeated demands for the redemption, payment
and/or any arrangements for payment in full of such checks within
five (5) banking days after receipt of such notice, said accused
deliberately refused and continue(sic) to refuse and fail(sic) to redeem

Three witnesses Anacleto B. Palisoc, area sales manager of Filipro, Inc., Linda Nicolas,
cashier of Allied Banking Corporation (ABC), and Rogelio Azures, supervising document
examiner of the National Bureau of Investigation (NBI) testified for the prosecution. On the
other hand, petitioner Nilo B. Diongzon testified in his own behalf.
The facts are summarized in the following portion of the decision of the Court of Appeals:
[A]ccused was a sales supervisor of Filipro Incorporated (now Nestle
Philippines, Inc.). As such, he had authority to allow the withdrawal
of Filipro products from its warehouse for delivery to its dealers or
customers, to receive payment therefor and remit the same to Filipro
through its depository bank at Bacolod City.
Due to the finding by Filipro accounting department that some
delivery orders signed by the accused seemed questionable as the
quantities ordered "were unusually big and seemed abnormal,"
Anacleto Palisoc, area sales manager, was authorized to conduct an
investigation of the accused's withdrawal of goods and remittance of
payments. Palisoc went to Bacolod City and contacted the dealers
who were supposed to have ordered the goods. Certain dealers,
namely: Queensland, Queendies, and Cokins denied having received
the goods listed in the delivery orders signed by the accused.
Whereupon, the accused approached Rene Garibay, sales
representative, and offered his assistance in the collection of
payments for the outstanding delivery orders. The next day the
accused presented to him (Garibay) three checks in payment of the
items listed in the invoices allegedly issued to Queensland,
Queendies, and Cokins. These checks were (1) ABC Check No.
540295881-E, postdated September 15, 1981 for P36,874.00 (Exh.
A); (2) ABC Check No. 540295880-E postdated September 16, 1981
for P130,597.75 (Exh. B); (3) ABC Check No. 540295899-E
postdated October 3, 1981 for P130,647.75 (Exh. C). prcd
The three checks were deposited with the Security Bank and Trust
Company (Bacolod Branch), Filipro's depository bank. However,
upon presentment to the drawee bank (Allied Banking Corporation,
Bacolod Branch), the three checks were dishonored. The first two
checks were dishonored because of the apparent difference between
the drawer's signatures thereon and those in the bank's files. The third
check was dishonored for insufficiency of funds.
After the checks were dishonored, Palisoc and Garibay conferred with
the dealers of Queensland and Queendies. The latter claimed that they

546
did not issue the checks nor receive the goods under the delivery
orders signed by the accused. When confronted about this matter, the
accused acknowledged responsibility and promised to settle the same.
He also admitted having issued the three checks under his account
No. 006873 with the Allied Banking Corporation (Bacolod Branch).
He explained that he resorted to credit riding, a practice whereby
other dealers were allowed to use the existing credit line of the
authorized dealers in order to avail of Filipro's goods without cash
payments. According to the accused, he practiced this technique
which was unofficially allowed by the company in order to achieve
Filipro sales targets. He claimed that certain goods covered by
delivery order No. 793192 with invoice No. 756445 in the amount of
P125,971.40 intended for delivery to Reboton store were actually
delivered to another dealer, UN Merchandising; that he issued his
checks for the payment of accounts of the dealers, to whom the goods
were delivered, with the understanding that he would hold on to those
checks while waiting for their payments; and that he did this to
accommodate the dealers.

During trial, petitioner initially denied that the signatures appearing in the first two checks
were his. Then he argued that the three checks were not issued "on account" or "for value" as
required in B.P. Blg. 22. Later, however, he admitted that he issued the third check to replace
the second check which, he insisted, he did not issue. 2
The trial court saw through petitioner's conflicting claims and held him guilty of violating B.P.
Blg. 22.
On appeal, petitioner raised the same defenses he presented during trial. In addition, however,
he claimed that the information charged more than one offense and that the issuance of the
third check as replacement for the second check constituted novation which thereby
extinguished his obligation. The Court of Appeals rejected petitioner's contentions and
affirmed his conviction. However, it held that because B.P. Blg. 22 is a special law and does
not contain a provision for subsidiary imprisonment, petitioner was not subject to subsidiary
imprisonment in case of insolvency. The dispositive portion of the appellate court's decision
reads:
WHEREFORE, the appealed decision is hereby affirmed with
modification in its dispositive portion in the sense that the appellant
should not be ordered to suffer subsidiary imprisonment in case he
fails to pay the fine of P80,647.75 by reason of insolvency. With
costs de oficio.
SO ORDERED.
Petitioner filed a motion for reconsideration wherein he abandoned the defenses he raised in
the trial court except that of novation. He argued that novation took place as a result of the
partial payment he made and the written undertaking he had executed to pay for the balance of
the check. His motion was, however, denied by the Court of Appeals. Hence, this petition for
review on certiorari. dctai

Petitioner argues that because of the incompatibility between the last check (Exh. C) and the
partial payment and written undertaking he executed, there was a novation of his original
obligation so that any incipient criminal liability which he might have had under the former
obligation was thereby avoided.
Petitioner raises this issue for the first time on appeal. As already stated, his contentions in the
trial court were: (1) that the two checks which had been dishonored had not been issued by him
as shown by different signatures they contained, and (2) that since the checks had not been
issued "on account" or "for value," an essential element of the crime defined in B.P. Blg.
22 had not been established. It was only after the trial court had rejected these defenses and
found petitioner guilty that petitioner advanced the theory of novation in his Supplemental
Brief in the Court of Appeals.
This defense was rightfully ignored by the Court of Appeals in its decision affirming
petitioner's conviction. As the Court of Appeals held, novation is not a mode of extinguishing
criminal liability and criminal liability, once incurred, cannot be compromised. 3 Indeed, there
was no novation, and even if there was, petitioner's liability under B.P. Blg. 22 was not thereby
extinguished.
It is well-settled that the following requisites must be present for novation to take place: (1) a
previous valid obligation; (2) agreement of all the parties to the new contract; (3)
extinguishment of the old contract; and (4) validity of the new one. 4
These requisites, particularly the third, were not proven in this case. As the Court of Appeals
held, the transaction became a personal undertaking of the petitioner when he received the
goods for delivery but made no delivery thereof either to the credited dealer or to the credit
rider. 5Petitioner had an existing obligation to pay the value of the goods for which the check
was issued. This obligation was not extinguished when the check was dishonored and a new
agreement was reached by the two parties to pay in cash its value. The change in the mode of
paying the obligation was not a change in any of the objects or principal conditions of the
contract. As Tolentino states, neither acceptance of partial payment nor change of place or
manner of payment involves novation. 6 For novation cannot be presumed but must be
expressly intended by the parties.
The Court of Appeals denied petitioner's motion for reconsideration on the ground, inter alia,
that the written undertaking was not presented as evidence. The records of the trial court show,
however, that the existence of the written undertaking was actually admitted by the prosecution
during trial, 7 although, for some reason, it was not formally offered in evidence by the
prosecution. However that may be, whether the written undertaking was presented or not, the
fact remains that there was no novation in this case.
Nor is novation a mode of extinguishing criminal liability. As held by this Court, novation
"may prevent the rise of criminal liability as long as it occurs prior to the filing of the criminal
information in court." 8 In other words, novation does not extinguish criminal liability but may
only prevent its rise.
Petitioner claims that the new agreement took effect prior to the filing of the information in
court on December 15, 1981. He argues that, therefore, there could not have been any criminal
liability under B.P. Blg. 22.
The argument is untenable. The fact is that the supposed new agreement never took effect as
petitioner never complied with his undertaking. InLlamado v. Court of Appeals, 9 a similar

547
issue arose. An agreement to partially pay the dishonored check was made, but the accused
failed to comply with his promise. This Court ruled: dctai
[T]he "novation theory" recognized by this Court in certain cases
does not apply in the case at bar. While private complainant agreed to
petitioner's offer to pay him 10% of the amount of the check on
November 14 or 15, 1983 and the balance to be rolled over for 90
days, this turned out to be only an empty promise which effectively
delayed private complainant's filing of a case for violation of B.P.
Blg. 22against petitioner and his co-accused.
The Court thus held that the novation theory does not apply where the offer to pay by the
debtor, and accepted by the creditor, turns out to be merely an empty promise. In this case, the
balance of the check was never paid, as witness Anacleto B. Palisoc testified. 10
Indeed, the gravamen of the offense of violating B.P. Blg. 22 is the issuance of worthless
checks. In this case, petitioner admitted issuing the check which when presented was
dishonored. Though he promised to pay its value when it was dishonored, the fact remains that
at the time it was presented to the drawee bank, it was not sufficiently funded. Petitioner, as the
drawer of the check, is presumed to have knowledge of the insufficient funds, and his failure to
pay the value of the check within five banking days from notice of dishonor did not dispute
this presumption. On this, the Court of Appeals correctly affirmed the trial court.
But we think it was error for the appellate court not to impose subsidiary imprisonment in case
of insolvency on the ground that there is no provision in B.P. Blg. 22 allowing for such penalty.
This Court has, on several occasions, imposed subsidiary imprisonment in case of insolvency
to pay the fine for violation of special laws, notwithstanding the absence of such provision in
said laws. 11 In Llamado v. Court of Appeals, 12 we imposed subsidiary imprisonment on
petitioner who was convicted of violating B.P. Blg. 22.
WHEREFORE, premises considered, the decision of the Court of Appeals is AFFIRMED with
the modification that subsidiary imprisonment be imposed in case of insolvency to pay the fine
of P80,647.75.
SO ORDERED. cda
Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.
||| (Diongzon v. Court of Appeals, G.R. No. 114823, [December 23, 1999], 378 PHIL 10901099)

548

EN BANC
[G.R. No. L-26115. November 29, 1971.]
CARLOS
SANDICO,
SR.,
and
TEOPISTO
P.
TIMBOL, petitioners, vs. THE HONORABLE MINERVA R.
INOCENCIO PIGUING, Judge of the Court of First Instance of
Pampanga, and DESIDERIO PARAS, respondents.

Lorenzo G. Timbol for petitioners.

Abel de Ocera for respondent Desiderio Paras.

SYLLABUS
1. REMEDIAL LAW; CIVIL PROCEDURE; JUDGMENT; SECTIONS 9 AND 10 OF RULE
39, DISTINGUISHED. Section 9 refers to a judgment directing the performance of a
specific act which the said judgment requires the party or person to personally do because of
his personal qualifications and circumstances. Section 10 refers to a judgment requiring the
execution of a conveyance of land or the delivery of deeds or other documents or the
performance of any other specific act susceptible of execution by some other person or in some
other way provided by law with the same effect. Under Section 10, the court may designate
some other person to do the act ordained to be done by the judgment, the reasonable cost of its
performance chargeable to the disobedient party. The act, when so done, shall have the same
effect as if performed by the party himself. In such an instance, the disobedient party incurs no
liability for contempt. Under Section 9, the court may resort to proceedings for contempt in
order to enforce obedience to a judgment which requires the personal performance of a specific
act other than the payment of money, or the sale or delivery of real or personal property.
2. ID.; ID.; ID.; ID.; RECONSTRUCTION AND REOPENING OF IRRIGATION CANAL IN
CASE AT BAR FALLS WITHIN SECTION 10 NOT SECTION 9 OF RULE 39. An
examination of the case at bar makes it apparent that the same falls within the contemplation of
Section 10, and not of Section 9 as the petitioners contend. The reconstruction and reopening
of the irrigation canal may be done by some other person designated by the court, at the cost of
the respondent. In fact, the respondent, in his attempt to rebuild the irrigation canal, contracted
the services of one Gerardo Salenga. Accordingly, in conformity with the appellate court's
judgment as further mutually interpreted by the parties themselves, the court a quo, because of
the failure and refusal of the respondent to restore the irrigation canal to its former condition
and to reopen it, should have appointed some other person to do the reconstruction, charging
the expenses therefor to the said respondent.
3. CIVIL LAW; OBLIGATIONS AND CONTRACTS; NOVATION; ABSENCE OF NEW OR
MODIFIED OBLIGATION IN CASE AT BAR. Novation results in two stipulations one

to extinguish an existing obligation, the other to substitute a new one in its place. Fundamental
it is that novation effects a substitution or modification of an obligation by another or an
extinguishment of one obligation by the creation of another. In the case at hand, we fail to see
what new or modified obligation arose out of the payment by the respondent of the reduced
amount of P4,000 and substituted the monetary liability for P6,000 of the said respondent
under the appellate court's judgment. Additionally, to sustain novation necessitates that the
same be so declared in unequivocal terms clearly and unmistakably shown by the express
agreement of the parties or by acts of equivalent import or that there is complete and
substantial incompatibility between the two obligations.
4. |REMEDIAL LAW; CIVIL LAW PROCEDURE; EXECUTION OF JUDGMENTS;
COURTS WITH INHERENT POWER TO QUASH WRITS OF EXECUTION PREVIOUSLY
ISSUED. Courts have jurisdiction to entertain motions to quash previously issued writs of
execution because courts have the inherent power, for the advancement of justice, to correct the
errors of their ministerial officers and to control their own processes. However, this power,
well circumscribed, to quash the writ, may be exercised only in certain situations, as when it
appears that (a) the writ has been improvidently issued, or (b) the writ is defective in substance,
or (c) the writ has been issued against the wrong party, or (d) the judgment debt has been paid
or otherwise satisfied, or (e) the writ has been issued without authority, or (f) there has been a
change in the situation of the parties which renders such execution inequitable, or (g) the
controversy has never been submitted to the judgment of the court, and, therefore, no judgment
at all has ever been rendered thereon. In the instant case, the payment of the judgment debt by
the respondent, although in a reduced amount but accepted by the petitioners as "in full
satisfaction of the money judgment," warrants the quashal of the alias writ.
TEEHANKEE, J., concurring:
CIVIL LAW; OBLIGATION AND CONTRACTS; AMBIGUITY CONSTRUED AGAINST
PARTIES RESPONSIBLE THEREFORE. It seems to me that any ambiguity in the receipt
of August 31, 1964 prepared by Atty. Dalmacio P. Timbol as counsel for petitioners as
judgment creditors in Civil Case No. 1554 of the Court of First Instance of Pampanga, to
which respondent as judgment debtor had signed his agreement, must be construed against
petitioners as the parties responsible for the ambiguity. The condition or clause provided in the
said receipt vis, "that portion of the final judgment rendered in the said case ordering
him (respondent Paras) to reconstruct the irrigation canal in question shall be complied with
by him immediately" is ambiguous being premised on an erroneous statement of fact.

DECISION

CASTRO, J p:
On April 16, 1960 the spouses Carlos Sandico and Enrica Timbol, and Teopisto P. Timbol,
administrator of the estate of the late Sixta Paras, obtained a judgment in their favor against

549
Desiderio Paras (hereinafter referred to as the respondent) in civil case 1554, an action for
easement and damages in the Court of First Instance of Pampanga. On appeal, the Court of
Appeals affirmed and modified the judgment, as follows:
"IN VIEW WHEREOF, judgment affirmed and modified; as a
consequence, defendant is condemned to recognize the easement
which is held binding as to him; he is sentenced to pay plaintiffs the
sums of P5,000.00 actual, and P500.00 exemplary damages, and
P500.00 attorney's fees; plus costs in both instances." 1
Thereafter, upon remand to the court a quo of civil case 1554, the Sandicos and Timbol
(hereinafter referred to as the petitioners) moved for the issuance of a writ of execution to
enforce the appellate court's judgment which had acquired finality. Acting upon the motion, the
court a quoissued a writ of execution on July 22, 1964. This writ the provincial sheriff served
upon the respondent on August 22, 1964.
Meanwhile the petitioners and the respondent reached a settlement, finally agreeing to the
reduction of the money judgment from P6,000 to P4,000. Thus, the respondent, on August 5,
1964, paid the petitioners the sum of P3,000; he made another payment in the amount of
P1,000 as evidenced by a receipt issued by the petitioners' counsel. This receipt is hereunder
reproduced in full:
"P1,000.00
"RECEIVED from Mr. Desiderio Paras the sum of ONE
THOUSAND PESOS (P1,000.00), Philippine Currency, in full
satisfaction of the money judgment rendered against him in Civil
Case No. 1554 of the Court of First Instance of Pampanga, it being
understood that the portion of the final judgment rendered in the said
case ordering him to reconstruct the irrigation canal in question shall
be complied with by him immediately.
"City of Angeles, August 31, 1964.
"(SG
D.)
DAL
MA
CIO
P.
TIM
BOL
"Cou
nsel
for
Plain
tiff
in
Civil
Case
No.
1554

"I AGREE:
(SGD.) DESIDERIO PARAS"
Subsequently, the petitioners sent the respondent a letter dated November 5, 1964 demanding
compliance by the latter with the portion of the judgment in civil case 1554 relative to the
reconstruction and reopening of the irrigation canal.
On February 12, 1965 the provincial sheriff returned the writ of execution issued on July 22,
1964 unsatisfied.
Upon failure and refusal of the respondent to rebuild and reopen the irrigation canal, the
petitioners, on March 3, 1965, filed with the court a quo,with Judge Minerva R. Inocencio
Piguing (hereinafter referred to as the respondent judge) presiding, a motion to declare the said
private respondent in contempt of court, pursuant to the provisions of section 9, Rule 39 of the
Rules of Court. Opposing the motion, the respondent alleged recognition by him of the
existence of the easement and compliance with the appellate court's judgment, stating that he
had dug a canal in its former place, measuring about one-and-a-half feet deep, for the
petitioners' use.
On September 8, 1966 the respondent judge issued an order denying the petitioners' motion to
declare the respondent in contempt of court, ruling that
". . . it appears from the dispositive part of the decision that the
defendant was only ordered to recognize the easement which is held
binding as to him and to pay the plaintiffs the sums of P5,000.00
actual, and P500.00 exemplary damages.
"Apparently, it is clear from the dispositive part of the decision that
there is nothing to show that the defendant was ordered to reconstruct
the canal."
On September 16, 1965 the petitioners moved for the issuance of an alias writ of execution to
enforce the judgment of the Court of Appeals. This motion the respondent judge granted in an
order dated September 25, 1965. On November 3, 1965. the respondent moved to set aside the
saidalias writ, alleging full satisfaction of the money judgment per agreement of the parties
when the petitioners received the sum of P4,000 in August, 1964 as evidenced by the receipt
dated August 31, 1964.
The respondent judge then issued an order dated November 11, 1965 directing the provincial
sheriff to suspend the execution of the alias writ until further orders, On February 3, 1966 the
respondent judge issued an order re-calling, and directing the quashal of, the alias writ of
execution. The respondent judge stated in her order that the agreement of the parties "novated"
the money judgment provided for in the decision of the Court of Appeals, ruling that the said
decision.

". . . which is sought now to be executed by this Court, has already

been fully satisfied as to the money judgment and nothing more is left
to be executed from the aforesaid Decision as it does not allege (aside

550
from money judgment) any other condition except for the defendants
to recognize the easement therein."
With their subsequent motion for reconsideration denied by the respondent judge, the
petitioners, on May 27, 1966, filed with this Court the present petition 2 for certiorari seeking
to set aside (1) the order of the respondent judge dated September 8, 1965 denying their motion
to declare the respondent in contempt of court in civil case 1554, and (2) the orders of the
respondent judge dated February 3, 1966 and March 30, 1966 granting the respondent's motion
to set aside the alias writ of execution issued in the same civil case, on the ground that the
respondent judge acted in excess of jurisdiction or with grave abuse of discretion.
Here tendered for resolution are the following issues:
(1) Whether the respondent judge correctly construed the judgment of the Court of Appeals as
not requiring the respondent to reconstruct and reopen the irrigation canal, and consequently,
whether the said respondent judge acted in excess of jurisdiction or with grave abuse of
discretion in denying the petitioners' motion to declare the respondent in contempt of court for
failing and refusing to comply with the appellate court's judgment; and
(2) Whether the payment by the respondent to the petitioners of the amount of P4,000
extinguished the money judgment, and, consequently, whether the respondent judge acted in
excess of jurisdiction or with grave abuse of discretion in ordering the recall and quashal of
the alias writ of execution.
1. Anent the first issue, the petitioners argue that although the dispositive portion of the
appellate court's judgment omitted any directive to the respondent to reconstruct and reopen
the irrigation canal, the Court of Appeals' order requiring recognition of the easement on the
part of the said respondent suffices to make him aware of his obligation under the judgment.
The only way of recognizing the easement, the petitioners continue, consists in performing
positive act the reconstruction and restoration of the irrigation canal to its former condition.
Moreover, to understand the full intendment of the dispositive portion of the judgment
directing the respondent "to recognize the easement" necessitates reference to a statement in
the decision of the Court of Appeals that reads:
". . . the result of this must be to justify the conclusion prayed for by
the plaintiffs that the easement should be held to be existing and
binding upon defendant and he should be held to have acted without
authority in closing the canal which should be ordered reopened."
On the other hand, the respondent alleges that there is no ambiguity in the phraseology of the
portion of the Court of Appeals' judgment condemning him to recognize the easement. Said
decision requires him only to "recognize" the easement and in compliance therewith, he gives
the petitioners permission to reconstruct and reopen the irrigation canal themselves. Neither the
decision a quo nor that of the appellate court orders him to reconstruct and reopen the
irrigation canal.
The agreement reached by the petitioners and the respondent in August, 1964 relative to the
judgment of the appellate court which had acquired finality and the interpretation by the parties
themselves of the said judgment, specifically its dispositive portion, as embodied in the receipt
dated August 31, 1964, constitute the considerations of prime importance in the resolution of
the first question. No doubt exists that the parties entered into the agreement, fully aware of the
judgment of the appellate court ordering the respondent to comply with two obligations, to wit,

payment of a sum of money and recognition of the easement. The receipt evidencing the
agreement, aside from providing for the reduction of the money judgment, provides for the
reconstruction of the irrigation canal. Such constitutes the interpretation accorded by the parties
to that part of the dispositive portion of the appellate court's judgment condemning the
respondent to recognize the easement. This stipulation one wherein the respondent clearly
recognizes his obligation "to reconstruct the irrigation canal" embodied in precise and clear
terms in the receipt binds the said respondent, a signatory to the said receipt, and requires from
him full compliance. We thus fail to perceive any reason to sustain the contention of the
respondent that he has no obligation at all to reconstruct and reopen the irrigation canal, a
position utterly inconsistent with his agreement with the petitioners as embodied in the receipt
dated August 31, 1964.
The record, however, shows that the respondent exerted efforts to reconstruct the portion of the
irrigation canal running through his land by digging a canal about one meter wide and about
one-and-a-half feet deep. This partial reconstruction of the irrigation canal the petitioners
admit. Still, the petitioners demand the reconstruction of the irrigation canal to its former
condition measuring four meters wide, five feet deep, and one hundred and twenty-eight
meters long contending that the rebuilt canal serves no useful purpose because the water
passing through it overflows, which overflow ultimately causes the destruction of the canal
itself. Nonetheless, we believe that need to give full force and effect to the existence of the
easement demands that the respondent reconstruct the irrigation canal to its condition before he
closed and destroyed the same. After all, the respondent himself in his answer dated June 16,
1959 filed with the court a quo admitted the original dimensions of the irrigation canal as four
meters wide and one-hundred and twenty-eight meters long. The respondent's attempt to
rebuild the irrigation canal, partially and not in conformity with the dimensions of the original
one, does not constitute satisfactory and substantial compliance with his obligation to
recognize the easement per the appellate court's judgment and to reconstruct the irrigation
canal pursuant to his agreement with the petitioners in August, 1964.
Due to the respondent's failure and refusal to reconstruct and reopen the irrigation canal, the
petitioners sought to declare him in contempt of court, under the provisions of section 9 of
Rule 39 of the Rules of Court. The respondent judge, however, believing that the appellate
court's judgment required the respondent merely to recognize the easement without doing any
positive act of reconstruction and reopening of the irrigation canal, dismissed the petitioners'
motion to declare the respondent in contempt of court. In doing so, the petitioners allege, the
respondent judge acted in excess of jurisdiction or with grave abuse of discretion. The
petitioners thus ask us now to annul the order of the respondent judge denying their motion to
declare the respondent in contempt of court or, by way of alternative, to declare the respondent
in contempt of court and to punish him accordingly.
The petitioners predicate their stand mainly upon the provisions of section 9 of Rule 39 of the
Rules of Court. Said section reads:
"Sec. 9. Writ of execution of special judgment. When a judgment
requires the performance of any other act than the payment of money,
or the sale or delivery of real or personal property, a certified copy of
the judgment shall be attached to the writ of execution and shall be
served by the officer upon the party against whom the same is
rendered, or upon any other person required thereby, or by law, to
obey the same, and such party or person may be punished for
contempt if he disobeys such judgment."

551
Section 9 applies to specific acts other than those covered by section 10 of the same rule.
Section 10 pertinently provides:
"See. 10. Judgment for specific acts; vesting title. If a judgment
directs a party to execute a conveyance of land, or to deliver deeds a
other documents, or to perform any other specific act, and the party
fails to comply within the time specified, the court may direct the act
to be done at the cost of disobedient party by some other person
appointed by the court and the act when so done shall have like effect
as if done by the party . . . ."
Section 9 refers to a judgment directing the performance of a specific act which the said
judgment requires the party or person to personally do because of his personal qualifications
and circumstances Section 10 refers to a judgment requiring the execution of a conveyance of
land or the delivery of deeds or other documents or the performance of any other specific act
susceptible of execution by some other person or in some other way provided by law with the
same effect. Under section 10, the court may designate some other person to do the act
ordained to be done by the judgment, the reasonable cost of its performance chargeable to the
disobedient party. The act, when so done, shall have the same effect as if performed by the
party himself. In such an instance, the disobedient party incurs no liability for
contempt. 3 Under section 9, the court may resort to proceedings for contempt in order to
enforce obedience to a judgment which requires the personal performance of a specific act
other than the payment of money, or the sale or delivery of real or personal property.
An examination of the case at bar makes it apparent that the same falls within the
contemplation of section 10, and not of section 9 as the petitioners contend. The reconstruction
and reopening of the irrigation canal may be done by some other person designated by the
court, at the cost of the respondent. In fact, the respondent in his attempt to rebuild the
irrigation canal, contracted the services of one Gerardo Salenga. Accordingly, in conformity
with the appellate court's judgment as further mutually interpreted by the parties themselves,
the court a quo, because of the failure and refusal of the respondent to restore the irrigation
canal to its former condition and to reopen it, should have appointed some other person to do
the reconstruction, charging the expenses therefor to the said respondent.

2. As to the second question, which relates to the money judgment, the petitioners vehemently
insist on their right to recover an additional sum of P2,000 the alleged unsatisfied portion of
the appellate court's judgment requiring the respondent to pay to the petitioners the total
amount of P6,000 corresponding to damages and attorney's fees. The petitioners allege that
their agreement with the respondent in August, 1964, reducing the amount due from the
respondent, constitutes neither waiver of their claim for the sum of P2,000 nor novation of the
money judgment provided for in the Court of Appeals' decision. They state that their agreement
with the respondent reduced the amount of the money judgment, subject to the condition that
the latter reconstruct and reopen the irrigation canal immediately. This, they argue, does not
constitute alteration of the appellate court's judgment.
For his part, the respondent contends that his payment of the sum of P4,000, received and
acknowledged by the petitioners through their counsel as "in full satisfaction of the money
judgment" in civil case 1554, extinguished his pecuniary liability. Thus, when the petitioners,
notwithstanding the admitted payment of the judgment debt in the lesser amount of P4,000,

still sought to enforce the money judgment for the full amount of P6,000 through an alias writ
of execution, the court a quo, in recalling and quashing the alias writ previously issued, acted
correctly and within its authority.
Parenthetically, the petitioner's application for the issuance of the alias writ of execution dated
September 16, 1965, the alias writ of execution dated September 29, 1965, and the levy on
execution and the notice of sheriff's sale, both dated October 21, 1965, all refer to the amount
of P6,000 and make no mention whatsoever of the true status of the judgment debt. On this
point, the respondent charges the petitioners with concealing from the court a quo the true
amount, if any, still due from him, And in effect, he alleges, the petitioners apparently seek the
payment of the judgment debt twice. The petitioners, however, emphasize that they demand
payment of only the balance of P2,000. To rebut the respondent's charge of concealment, they
state that they informed the Court a quo that the respondent already paid them the sum of
P4,000. Furthermore, they allege that another lawyer, a former associate of their counsel,
prepared their motion for the issuance of the alias writ of execution, received the alias writ and
delivered the same to the sheriff. Impliedly, therefore, they attribute the inconsistency
regarding the amount still allegedly due from the respondent to the former associate of their
counsel.
Reverting to the second question, the appellate court's judgment obliges the respondent to do
two things: (1) to recognize the easement, and (2) to pay the petitioners the sums of P5,000
actual and P500 exemplary damages and P500 attorney's fees, or a total of P6,000. The full
satisfaction of the said judgment requires specific performance and payment of a sum of
money by the respondent.
We adjudge the respondent's judgment debt as having been fully satisfied. We see no valid
objection to the petitioners and the respondent entering into an agreement regarding the
monetary obligation of the latter under the judgment of the Court of Appeals, reducing the
same from P6,000 to P4,000. The payment by the respondent of the lesser amount of P4,000,
accepted by the petitioners without any protest or objection and acknowledged by them as "in
full satisfaction of the money judgment" in civil case 1554, completely extinguished the
judgment debt and released the respondent from his pecuniary liability.
Both the petitioners and the respondent take exception to the respondent judge's ruling that
their agreement of August, 1964 to reduce the judgment debt, as evidenced by the receipt
herein before adverted to, "novated" the money judgment rendered by the appellate court.
Novation results in two stipulations one to extinguish an existing obligation, the other to
substitute a new one in its place. 4 Fundamental it is that novation effects a substitution or
modification of an obligation by another or an extinguishment of one obligation by the creation
of another. In the case at hand, we fail to see what new or modified obligation arose out of the
payment by the respondent of the reduced amount of P4,000 and substituted the monetary
liability for P6,000 of the said respondent under the appellate court's judgment. Additionally, to
sustain novation necessitates that the same be so declared in unequivocal terms clearly and
unmistakably shown by the express agreement of the parties or by acts of equivalent import
or that there is complete and substantial incompatibility between the two obligations. 5
Neither do we appreciate the petitioners' stand that, according to their agreement with the
respondent, their assent to the reduction of the money judgment was subject to the condition
that the respondent reconstruct and reopen the portion of the irrigation canal passing through

552
his land immediately. The petitioners even state that the receipt of August 31, 1964 embodies
this condition.
The terms of the receipt dated August 31, 1964, we find clear and definite. The receipt neither
expressly nor impliedly declares that the reduction of the money judgment was conditioned on
the respondent's reconstruction and reopening of the irrigation canal. The receipt merely
embodies the recognition by the respondent of his obligation to reconstruct the irrigation canal.
And the receipt simply requires the respondent to comply with such obligation "immediately."
The obligation of the respondent remains as a portion of the Court of Appeals' judgment. In
fact, the petitioners themselves, in their letter dated November 5, 1964, sent to the respondent,
demanding that the latter reconstruct the irrigation canal immediately, referred to the same not
as a condition but as "the portion of the judgment" in civil case 1554.
Consequently, the respondent judge, when she granted the motion of the respondent to set aside
the alias writ of execution and issued the order dated February 3, 1966 recalling and quashing
the said alias writ, acted correctly. Courts have jurisdiction to entertain motions to quash
previously issued writs of execution because courts have the inherent power, for the
advancement of justice, to correct the errors of their ministerial officers and to control their
own processes. However, this power, well circumscribed, to quash the writ, may be exercised
only in certain situations, as when it appears that (a) the writ has been improvidently issued, or
(b) the writ is defective in substance, or (c) the writ has been issued against the wrong party, or
(d) the judgment debt has been paid or otherwise satisfied, or (e) the writ has been issued
without authority, or (f) there has been a change in the situation of the parties which renders
such execution inequitable, or (g) the controversy has never been submitted to the judgment of
the court, and, therefore, no judgment at all has ever been rendered thereon. 6 In the instant
case, the payment of the judgment debt by the respondent, although in a reduced amount but
accepted by the petitioners as "in full satisfaction of the money judgment," warrants the
quashal of the alias writ.
ACCORDINGLY, judgment is hereby rendered, (1) declaring that the respondent judge did not
act in excess of jurisdiction or with grave abuse of discretion in issuing the order dated
February 3, 1966 (granting the respondent's motion to set aside the alias writ of execution, and
recalling and quashing the said alias writ) and the order dated March 30, 1966 (denying the
petitioners' motion for reconsideration of the order dated February 3, 1966); and (2) remanding
the case to the court a quo with instructions that the respondent court (a) conduct an ocular
inspection of the irrigation canal passing through the respondent's land to determine whether or
not the said canal has been rebuilt in accordance with its original dimensions; (b) in the event
that the said canal fails to meet the measurements of the original one, order the respondent to
reconstruct the same to its former condition; and (3) in the event of the respondent's further
refusal or failure to do so, appoint some other person to reconstruct the canal in accordance
with its original dimensions, at the cost of the said respondent, pursuant to section 10 of Rule
39 of the Rules of Court. Without pronouncement as to costs.
Concepcion, C.J., Makalintal, Zaldivar, Fernando, Barredo, Villamor and Makasiar, JJ., concur.
Reyes, J.B.L., J., concurs in the result.

Separate Opinions

TEEHANKEE, J., concurring:

I concur in the result. It seems to me that any ambiguity in the receipt of August 31, 1964
prepared by Atty. Dalmacio P. Timbol as counsel for petitioners as judgment creditors in Civil
Case No. 1554 of the Court of First Instance of Pampanga, to which respondent as judgment
debtor had signed his agreement, must be construed against petitioners as the parties
responsible for the ambiguity.
The condition or clause provided in the said receipt viz, "that the portion of the final judgment
rendered in the said case ordering him (respondent Paras) to reconstruct the irrigation canal in
question shall be complied with by him immediately" (emphasis supplied) is ambiguous being
premised on an erroneous statement of fact. Besides the money part of the judgment, all that
the said judgment ordered respondent was "to recognize the easement which is held binding as
to him."
Accordingly, I submit that in the proceedings below with the remand of the case, respondent
should in fairness be permitted to present competent evidence to clarify his contention at bar
"that he has no obligation at all to reconstruct and reopen the irrigation canal" (main opinion, at
p. 5), which, as noted in the main opinion, is a "position utterly inconsistent" with his alleged
agreement to do so, as stated in the receipt of August 31, 1964 which alleged agreement was
in turn based on the erroneous premise that the judgment in question ordered him to reconstruct
the irrigation canal. If there were in fact an agreement or recognition on respondent's part to
reconstruct the irrigation canal immediately, notwithstanding that he was not so sentenced
under the final judgment, competent evidence should likewise be permitted in the proceedings
below to determine the nature and extent of his agreement and undertaking.
||| (Sandico, Sr. v. Piguing, G.R. No. L-26115, [November 29, 1971], 149 PHIL 422-436)

553

SECOND DIVISION
[G.R. No. L-29280. August 11, 1988.]
PEOPLE'S BANK AND TRUST COMPANY, plaintiffappellee, vs. SYVEL'S INCORPORATED, ANTONIO Y. SYYAP
and ANGEL Y SYYAP, defendants-appellants.

Araneta, Mendoza & Papa for plaintiff-appellee.

Quasha, Asperilla, Zafra, Tayag & Ancheta for defendants-appellants.

SYLLABUS

(Brief for Appellee, p. 14). Hence, the attachment sought on the ground of actual removal of
property is justified where there is physical removal thereof by the debtor, as shown by the
records.
5. ID.; ID.; ID.; ID.; PRINCIPLE THAT EVERY PERSON IS PRESUMED TO INTEND THE
NATURAL CONSEQUENCES OF HIS ACTS; APPLICABLE IN CASE AT BAR. Intent
to defraud may be and usually is inferred from the facts and circumstances of the case; it can
rarely be proved by direct evidence. It may be gleaned also from the statements and conduct of
the debtor, and in this connection, the principle may be applied that every person is presumed
to intend the natural consequences of his acts. In fact the trial court is impressed "that not only
has the plaintiff acted in perfect good faith but also on facts sufficient in themselves to
convince an ordinary man that the defendants were obviously trying to spirit away a portion of
the stocks of Syvel's Incorporated in order to render ineffectual at least partially any judgment
that may be rendered in favor of the plaintiff."
6. CIVIL LAW; DAMAGES; AWARD THEREOF NOT WARRANTED IN THE ABSENCE
OF BAD FAITH OR MALICE. Appellants having failed to adduce evidence of bad faith or
malice on the part of appellee in the procurement of the writ of preliminary attachment, the
claim of the former for damages is evidently negated. In fact, the allegations in the appellee's
complaint more than justify the issuance of the writ of attachment.

1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; NOVATION; DEFINED. Novation

takes place when the object or principal condition of an obligation is changed or altered. It is
elementary that novation is never presumed; it must be explicitly stated or there must be
manifest incompatibility between the old and the new obligations in every aspect (Goni v. CA,
144 SCRA 223 [1986]; National Power Corp. v. Dayrit, 125 SCRA 849 [1983]).
2. ID.; SPECIAL CONTRACT; REAL ESTATE MORTGAGE; NOVATION DID NOT TAKE
PLACE IN CASE AT BAR. In the case at bar, there is nothing in the Real Estate Mortgage
which supports appellants' submission. The contract on its face does not show the existence of
an explicit novation nor incompatibility on every point between the "old" and the "new"
agreements as the second contract evidently indicates that the same was executed as new
additional security to the chattel mortgage previously entered into by the parties. Moreover,
records show that in the real estate mortgage, appellants agreed that the chattel mortgage "shall
remain in full force and shall not be impaired by this (real estate) mortgage."
3. REMEDIAL LAW; JUDGMENTS AND EXECUTION; WRIT OF ATTACHMENT;
GRAVE ABUSE OF DISCRETION NOT COMMITTED IN THE ISSUANCE THEREOF.
In the determination of the legality of the writ of attachment by the Court of First Instance of
Manila, it is a well established rule that the grant or denial of a writ of attachment rests upon
the sound discretion of the court. Records are bereft of any evidence that grave abuse of
discretion was committed by respondent judge in the issuance of the writ of attachment.
4. ID.; ID.; ID.; ISSUANCE THEREOF JUSTIFIED. Evidence adduced during the trial
strongly shows that the witnesses have personal knowledge of the facts stated in their affidavits
in support of the application for the writ. They testified that Syvel's Inc. had disposed of all the
articles covered by the chattel mortgage but had not remitted the proceeds to appellee bank;
that the Syvel's Stores at the Escolta, Rizal Avenue and Morayta Street were no longer operated
by appellants and that the latter were disposing of their properties to defraud appellee bank.
Such testimonies and circumstances were given full credit by the trial court in its decision

DECISION

PARAS, J p:
This is an appeal from the decision dated May 16, 1968 rendered by the Court of First Instance
of Manila, Branch XII in Civil Case No. 68095, the decretal portion of which states:
"IN VIEW OF THE FOREGOING, judgment is rendered sentencing
all the defendants to pay the plaintiff jointly and severally the sum of
P601,633.01 with interest thereon at the rate of 11% per annum from
June 17, 1967, until the whole amount is paid, plus 10% of the total
amount due for attorney's fees and the costs of suit. Should the
defendants fail to pay the same to the plaintiff, then it is ordered that
all the effects, materials and stocks covered by the chattel mortgages
be sold at public auction in conformity with the provisions of Sec. 14
of the Chattel Mortgage Law, and the proceeds thereof applied to
satisfy the judgment herein rendered. The counterclaim of the
defendants, upon the evidence presented and in the light of the
authorities above cited, is dismissed for lack of merit.
"SO ORDERED."
(pp. 89-90, Record on Appeal; p. 15, Rollo).

554
The facts of the case based on the statement of facts, made by the trial court in its decision as
cited in the briefs of both parties are as follows:
"This is an action for foreclosure of chattel mortgage executed in
favor of the plaintiff by the defendant Syvel's Incorporated on its
stocks of goods, personal properties and other materials owned by it
and located at its stores or warehouses at No. 406, Escolta, Manila;
Nos. 764-766 Rizal Avenue, Manila; Nos. 10-11 Cartimar Avenue,
Pasay City; No. 886 Nicanor Reyes, Sr. (formerly Morayta), Manila;
as evidenced by Annex 'A.' The chattel mortgage was duly registered
in the corresponding registry of deeds of Manila and Pasay City. The
chattel mortgage was in connection with a credit commercial line in
the amount of P900,000.00 granted the said defendant corporation,
the expiry date of which was May 20, 1966. On May 20, 1965,
defendants Antonio V. Syyap and Angel Y. Syyap executed an
undertaking in favor of the plaintiff whereby they both agreed to
guarantee absolutely and unconditionally and without the benefit of
excussion the full and prompt payment of any indebtedness to be
incurred on account of the said credit line. Against the credit line
granted the defendant Syvel's Incorporated the latter drew advances in
the form of promissory notes which are attached to the complaint as
Annexes 'C' to 'I.' In view of the failure of the defendant corporation
to make payment in accordance with the terms and conditions agreed
upon in the Commercial Credit Agreement the plaintiff started to
foreclose extrajudicially the chattel mortgage. However, because of
an attempt to have the matter settled, the extra-judicial foreclosure
was not pushed thru. As no payment had been paid, this case was
eventually filed in this Court.
"On petition of the plaintiff based on the affidavits executed by Mr.
Leopoldo R. Rivera, Assistant Vice President of the plaintiff bank and
Atty. Eduardo J. Berenguer on January 12, 1967, to the effect, among
others, that the defendants are disposing of their properties with intent
to defraud their creditors, particularly the plaintiff herein, a
preliminary writ of attachment was issued. As a consequence of the
issuance of the writ of attachment, the defendants, in their answer to
the complaint set up a compulsory counterclaim for damages.
"After the filing of this case in this court and during its pendency
defendant Antonio v. Syyap proposed to have the case settled
amicably and to that end a conference was held in which Mr. Antonio
de las Alas, Jr., Vice President of the Bank, plaintiff, defendant
Antonio V. Syyap and Atty. Mendoza were present. Mr. Syyap
requested that the plaintiff dismiss this case because he did not want
to have the goodwill of Syvel's Incorporated impaired, and offered to
execute a real estate mortgage on his real property located in Bacoor,
Cavite. Mr. De las Alas consented, and so the Real Estate Mortgage,
marked as Exhibit A, was executed by the defendant Antonio V.
Syyap and his wife Margarita Bengco Syyap on June 22, 1967. In that
deed of mortgage, defendant Syyap admitted that as of June 16, 1967,
the indebtedness of Syvel's Incorporated was P601,633.01, the

breakdown of which is as follows: P568,577.76 as principal and

P33,055.25 as interest. Complying with the promise of the plaintiff
thru its Vice President to ask for the dismissal of this case, a motion to
dismiss this case without prejudice was prepared, Exhibit C, but the
defendants did not want to agree if the dismissal would mean also the
dismissal of their counterclaim against the plaintiff. Hence, trial
proceeded.
"As regards the liabilities of the defendants, there is no dispute that a
credit line to the maximum amount of P900,000.00 was granted to the
defendant corporation on the guaranty of the merchandise or stocks in
goods of the said corporation which were covered by chattel
mortgage duly registered as required by law. There is likewise no
dispute that the defendants Syyap guaranteed absolutely and
unconditionally and without the benefit of excussion the full and
prompt payment of any indebtedness incurred by the defendant
corporation under the credit line granted it by the plaintiff. As of June
16, 1967, its indebtedness was in the total amount of P601,633.01.
This was admitted by defendant Antonio V. Syyap in the deed of real
estate mortgage executed by him. No part of the amount has been
paid by either of the defendants. Hence their liabilities cannot be
questioned." (pp. 3-6, Brief for Appellee; p. 26, Rollo)
In their brief, appellants assign the following errors:
I
The lower court erred in not holding that the obligation secured by the
Chattel Mortgage sought to be foreclosed in the above-entitled case
was novated by the subsequent execution between appellee and
appellant Antonio V. Syyap of a real estate mortgage as additional
collateral to the obligation secured by said chattel mortgage.

II
The lower court erred in not dismissing the above-entitled case and in
finding appellants liable under the complaint.
III
The lower court erred in not holding that the writ of preliminary
attachment is devoid of any legal and factual basis whatsoever.
IV
The lower court erred in dismissing appellants' counterclaim and in
not holding appellee liable to appellants for the consequent damages
arising out of a wrongful attachment. (pp. 1-2, Brief for the
Appellants, p. 25, Rollo)
Appellants admit that they are indebted to the appellee bank in the amount of P601,633.01,
breakdown of which is as follows: P568,577.76 as principal and P33,055.25 as interest. After

555
the filing of the case and during its pendency, defendant Antonio V. Syyap proposed to have the
case amicably settled and for that purpose a conference was held in which Mr. Antonio de las
Alas, Jr., Vice President of plaintiff People's Bank and Trust Company, defendant Antonio V.
Syyap and Atty. Mendoza were present. Mr. Syyap requested that the plaintiff dismiss this case
as he did not want to have the goodwill of Syvel's Incorporated impaired, and offered to
execute a real estate mortgage on his real property located in Bacoor, Cavite. Mr. de las Alas
consented, and so the Real Estate Mortgage (Exhibit "A") was executed by defendant Antonio
Syyap and his wife Margarita Bengco Syyap on June 22, 1967. Defendants did not agree with
plaintiff's motion to dismiss which included the dismissal of their counterclaim and filed
instead their own motion to dismiss (Record on Appeal, pp. 68-72) on the ground that by the
execution of said real estate mortgage, the obligation secured by the chattel mortgage subject
of this case was novated, and therefore, appellee's cause of action thereon was extinguished.

investigators sent to the field and not on the personal knowledge of the affiants. Such
contention deserves scant consideration. Evidence adduced during the trial strongly shows that
the witnesses have personal knowledge of the facts stated in their affidavits in support of the
application for the writ. They testified that Syvel's Inc. had disposed of all the articles covered
by the chattel mortgage but had not remitted the proceeds to appellee bank; that the Syvel's
Stores at the Escolta, Rizal Avenue and Morayta Street were no longer operated by appellants
and that the latter were disposing of their properties to defraud appellee bank. Such testimonies
and circumstances were given full credit by the trial court in its decision (Brief for Appellee, p.
14). Hence, the attachment sought on the ground of actual removal of property is justified
where there is physical removal thereof by the debtor, as shown by the records (McTaggert v.
Putnam Corset Co., 8 N.Y. S 800 cited in Moran, Comments on the Rules of Court, 1970 Ed.,
Vol. 3, p. 7).

In an Order dated September 23, 1967, the motion was denied for not being well founded
(record on Appeal, p. 78). Cdpr

Besides, the actuations of appellants were clearly seen by the witnesses who "saw a Fiat
Bantam Car Fiat Car, a small car and about three or four persons hurrying; they were
carrying goods coming from the back portion of this store of Syvel's at the Escolta, between
5:30 and 6:00 o'clock in the evening." (Record on Appeal, pp. 45-46). Therefore, "the act of
debtor (appellant) in taking his stock of goods from the rear of his store at night, is sufficient to
support an attachment upon the ground of the fraudulent concealment of property for the
purpose of delaying and defrauding creditors." (4 Am. Jur., 841 cited in Francisco, Revised
Rules of Court, Second Edition, 1985, p. 24).

Appellants contention is without merit.

Novation takes place when the object or principal condition of an obligation is changed or
altered. It is elementary that novation is never presumed; it must be explicitly stated or there
must be manifest incompatibility between the old and the new obligations in every aspect
(Goni v. CA, 144 SCRA 223 [1986]; National Power Corp. v. Dayrit, 125 SCRA 849 [1983]).
In the case at bar, there is nothing in the Real Estate Mortgage which supports appellants'
submission. The contract on its face does not show the existence of an explicit novation nor
incompatibility on every point between the "old and the "new" agreements as the second
contract evidently indicates that the same was executed as new additional security to the chattel
mortgage previously entered into by the parties.
Moreover, records show that in the real estate mortgage, appellants agreed that the chattel
mortgage "shall remain in full force and shall not be impaired by this (real estate) mortgage."
The pertinent provision of the contract is quoted as follows:
"That the chattel mortgage executed by Syvel's Inc. (Doc. No. 439,
Book No. I, Series of 1965, Notary Public Jose C. Merris, Manila);
real estate mortgage executed by Angel V. Syyap and Rita V. Syyap
(Doc. No. 441, Page No. 90, Book No. I, Series of 1965, Notary
Public Jose C. Merris Manila) shall remain in full force and shall not
be impaired by this mortgage (par. 5, Exhibit 'A,' emphasis ours)."
It is clear, therefore, that a novation was not intended. The real estate mortgage was evidently
taken as additional security for the performance of the contract (Bank of P.I. v. Herrige, 47
Phil. 57).
In the determination of the legality of the writ of attachment by the Court of First Instance of
Manila, it is a well established rule that the grant or denial of a writ of attachment rests upon
the sound discretion of the court. Records are bereft of any evidence that grave abuse of
discretion was committed by respondent judge in the issuance of the writ of attachment. cdphil
Appellants contend that the affidavits of Messrs. Rivera and Berenguer on which the lower
court based the issuance of the writ of preliminary attachment relied on the reports of credit

In any case, intent to defraud may be and usually is inferred from the facts and circumstances
of the case; it can rarely be proved by direct evidence. It may be gleaned also from the
statements and conduct of the debtor, and in this connection, the principle may be applied that
every person is presumed to intend the natural consequences of his acts (Francisco, Revised
Rules of Court, supra, pp. 24-25), In fact the trial court is impressed "that not only has the
plaintiff acted in perfect good faith but also on facts sufficient in themselves to convince an
ordinary man that the defendants were obviously trying to spirit away a portion of the stocks of
Syvel's Incorporated in order to render ineffectual at least partially any judgment that may be
rendered in favor of the plaintiff." (Decision; Civil Case No. 68095; Record on Appeal, pp. 8889).
Appellants having failed to adduce evidence of bad faith or malice on the part of appellee in
the procurement of the writ of preliminary attachment, the claim of the former for damages is
evidently negated. In fact, the allegations in the appellee's complaint more than justify the
issuance of the writ of attachment. LLphil
PREMISES CONSIDERED, this appeal is DISMISSED for lack of merit and the judgment
appealed from is AFFIRMED.
SO ORDERED.
Melencio-Herrera and Sarmiento, JJ., concur.
Padilla, J., no part; was counsel for plaintiff-appellee bank.
||| (People's Bank and Trust Co. v. Syvel's Inc., G.R. No. L-29280, [August 11, 1988], 247 PHIL
209-217)

556

FIRST DIVISION
[G.R. No. 126713. July 27, 1998.]
ADORACION E. CRUZ, THELMA DEBBIE E. CRUZ and
GERRY E CRUZ, petitioners, vs. COURT OF APPEALS and
SPOUSES ELISEO and VIRGINIA MALOLOS, respondents.

Redentor G. Liboro for petitioner.

Vicente P. Fernando for private respondents.

SYNOPSIS

Delfin I. Cruz and Adoracion Cruz were spouses and their children were Thelma, Nerissa,
Arnel and Gerry Cruz. Upon the death of Delfin I. Cruz, his surviving spouse and children
executed a notarized deed of partial partition (DPP) by virtue of which each one of them was
given a share of several parcels of land all situated in Taytay, Rizal. A day after the execution
of the DPP, the same parties executed a Memorandum of Agreement (MOA) wherein they
covenanted and agreed among themselves that they shall alike and receive equal shares from
the proceeds of the sale of any of the lot or lots allotted to and adjudicated in their individual
names by virtue of the DPP. The DPP was subsequently registered and title were issued in their
names. The annotation pertaining to the MOA was carried in each of the title. The spouses
Nerissa Cruz-Tamayo and Nelson Tamayo were sued by the spouses Eliseo and Virginia
Malolos for a sum of money in the Court of First Instance of Rizal (Quezon City). The Tamayo
spouses, after trial, were condemned by the trial court to pay a sum of money to the Malolos
spouses. After the finality of the decision, a writ of execution was issued. Enforcing said writ,
the sheriff of the court levied upon the land in question and thereafter sold the properties in an
execution sale to the highest bidders, the Malolos spouses. Accordingly, the sheriff executed a
certificate of sale. Nerissa Cruz-Tamayo failed to exercise her right of redemption within the
statutory period and so the final deed of sale was executed by the sheriff conveying the lands to
the Malolos spouses. The Malolos couple asked the Nerissa Cruz-Tamayo to give them the
owners duplicate copy of the seven (7) titles of the lands in question but she refused. The
couple moved the court to compel her to surrender said titles to the Register of Deeds of Rizal
for cancellation. The motion was granted, but Nerissa was adamant. She did not comply with
the order so the Malolos couple asked the court to declare said titles null and void. At this
point, petitioners entered the picture by filing in said court a motion for leave to intervene and
oppose the Maloloses' motion. They alleged that they are co-owners of the lands in question.
The lower court rendered a decision for private respondents from which the defendants
appealed to the Court of Appeals. The appellate court ruled in favor of herein private
respondents, holding that the DPP was not materially and substantially incompatible with the
MOA. The DPP conferred absolute ownership of the parcels of land in issue on Nerissa CruzTamayo, while the MOA merely created an obligation on her part to share with the petitioners
the proceeds of the sale of the said properties. Hence, the present petition.
The Supreme Court found no reversible error committed by the Court of Appeals. The Court
ruled that the MOA does not novate, much less cancel, the earlier DPP. The MOA falls short of
producing a novation, because it does not express a clear intent to dissolve the old obligation as
a consideration for the emergence of a new one. Petitioners also failed to show that the DPP
and the MOA are materially and substantially incompatible with each other. The DPP granted
title to the lots in question to the co-owner to whom they were assigned, and the MOA created
an obligation on the part of such co-owner to share with the others the proceeds of the sale of
such parcels. There is no incompatibility between the two contracts. The MOA cannot be then
construed as a repudiation of the earlier DPP. DITEAc
Petition denied.

SYLLABUS

557
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF
OBLIGATIONS; NOVATION. Novation, one of the modes of extinguishing an obligation,
requires the concurrence of the following: (1) there is a previous valid obligation; (2) the
parties concerned agree to a new contract; (3) the old contract is extinguished; and (4) there is a
valid new contract. Novation may be express or implied. Article 1292 of the Code provides:
"In order that an obligation may be extinguished by another which substitutes the same, it is
imperative that it be so declared in unequivocal terms [express novation], or that the old and
the new obligations be on every point incompatible with each other [implied novation]."
2. ID.; ID.; ID.; ID.; THE MEMORANDUM OF AGREEMENT SUBSEQUENTLY
EXECUTED BY THE PARTIES DOES NOT NOVATE MUCH LESS, CANCEL THE
EARLIER DEED OF PARTIAL PARTITION; NO INCOMPATIBILITY BETWEEN THE
TWO CONTRACTS. The MOA falls short of producing a novation, because it does not
express a clear intent to dissolve the old obligation as a consideration for the emergence of the
new one. Likewise, petitioners fail to show that the DPP and the MOA are materially and
substantially incompatible with each other. Petitioners admit that, under the MOA, they and the
Tamayo spouses agreed to equally share in the proceeds of the sale of the lots. Indeed, the DPP
granted title to the lots in question to the co-owner to whom they were assigned, and the MOA
created an obligation on the part of such co-owner to share with the others the proceeds of the
sale of such parcels. There is no incompatibility between these two contracts. Verily, the MOA
cannot be construed as a repudiation of the earlier DPP. Both documents can exist together and
must be so interpreted as to give life to both.
3. ID.; ID.; ID.; ID.; NO CO-OWNERSHIP IS CREATED IN THE MEMORANDUM OF
AGREEMENT; REASONS. The very provisions of the MOA belie the existence of a coownership. First, it retains the partition of the properties, which petitioners supposedly placed
in co-ownership; and, second, it vests in the registered owner the power to dispose of the land
adjudicated to him or her under the DPP. These are antithetical to the petitioners' contention. In
a co-ownership, an undivided thing or right belongs to two or more persons. Put differently,
several persons hold common dominion over a spiritual (or ideal) part of a thing, which is not
physically divided. In the present case, however, the parcels of land in the MOA have all been
partitioned and titled under separate and individual names. More important, the MOA
stipulated that the registered owner could sell the land without the consent of the other parties
to the MOA. Jus disponendi is an attribute of ownership, and only the owner can dispose of a
property. Contrary to petitioner's claim the annotation of the MOA in the certificate of title did
not engender any co-ownership. Well-settled is the doctrine that registration merely confirms,
but does not confer, title. It does not give the holder any better title than what he actually has.
As earlier observed, the MOA did not make petitioners co-owners of the disputed parcels of
land. Hence, the annotation of this document in the separate certificates of title did not grant
them a greater right over the same property.
4. ID.; GENERAL PRINCIPLES OF LAW; ESTOPPEL; PETITIONERS ARE BARRED
FROM CLAIMING CO-OWNERSHIP OF THE LANDS IN ISSUE. Under the principle of
estoppel, petitioners are barred from claiming co-ownership of the lands in issue. In estoppel, a
person, who by his deed or conduct has induced another to act in a particular manner, is barred
from adopting an inconsistent position, attitude or course of conduct that thereby causes loss or
injury to another. It further bars him from denying the truth of a fact which has, in the
contemplation of law, become settled by the acts and proceedings of judicial or legislative
officers or by the act of the party himself either by conventional writing or by representations,
express or implied or in pais. In their transactions with others, petitioners have declared that
the other lands covered by the same MOA are absolutely owned, without indicating the

existence of a co-ownership over such properties. Thus, they are estopped from claiming
otherwise because, by their very own acts and representations as evidenced by the deeds of
mortgage and of sale they have denied such co- ownership.
5. REMEDIAL LAW; EVIDENCE; ADMISSIBILITY; THE TRANSACTIONS RELATING
TO THE OTHER PARCELS OF LAND ENTERED INTO BY PETITIONERS IN THE
CONCEPT OF ABSOLUTE OWNERS ARE ADMISSIBLE IN EVIDENCE AND FALLS
UNDER THE EXCEPTIONS TO THE RES INTER ALIOS ACTA RULE. Petitioners argue
that transactions relating to the other parcels of land they entered into, in the concept of
absolute owners, are inadmissible as evidence to show that the parcels in issue are not coowned. The Court is not persuaded. Evidence of such transactions falls under the exception to
the rule on res inter alios acta. Such evidence is admissible because it is relevant to an issue in
the case and corroborative of evidence already received. The relevancy of such transactions is
readily apparent. The nature of ownership of said property should be the same as that of the
lots in question since they are all subject to the MOA. If the parcels of land were held and
disposed by petitioners in fee simple, in the concept of absolute owners, then the lots in
question should similarly be treated as absolutely owned in fee simple by the Tamayo spouses.
Unmistakably, the evidence in dispute manifests petitioners' common purpose and design to
treat all the parcels of land covered by the DPP as absolutely owned and not subject to coownership.
6. ID.; CIVIL ACTIONS; NO CONCURRENCE OF THE ELEMENTS OF RES JUDICATA;
CASE AT BAR. The elements of res judicata are: (1) the former judgment was final; (2) the
court which rendered it had jurisdiction over the subject matter and the parties; (3) the
judgment was on the merits; and (4) the parties, subject matters and causes of action in the first
and second actions are identical. The RTC of Quezon City had no jurisdiction to decide on the
merits of the present case or to entertain questions regarding the existence of co-ownership
over the parcels in dispute, because the suit pending before it was only for the collection of a
sum of money. Its disquisition on co-ownership was merely for the levy and the execution of
the properties of the Tamayo spouses, in satisfaction of their judgment debt to the private
respondents. Perhaps more glaring is the lack of identity between the two actions. The first
action before the RTC of Quezon City was for the collection of money, while the second before
the RTC of Antipolo, Rizal, was for partition. There being no concurrence of the elements
of res judicata in this case, the Court finds no error in Respondent Court's ruling. No further
discussion is needed to show the glaring difference between the two controversies. DSETac

DECISION

PANGANIBAN, J p:
Contracts constitute the law between the parties. They must be read together and interpreted in
a manner that reconciles and gives life to all of them. The intent of the parties, as shown by the
clear language used, prevails over post facto explanations that find no support from the words
employed by the parties or from their contemporary and subsequent acts showing their

558
understanding of such contracts. Furthermore, a subsequent agreement cannot novate or change
by implication a previous one, unless the old and the new contracts are, on every point,
incompatible with each other. Finally, collateral facts may be admitted in evidence when a
rational similarity exists between the conditions giving rise to the fact offered and the
circumstances surrounding the issue or fact to be proved.
The Case
Before us is a petition for review on certiorari seeking to nullify the Court of Appeals (CA)
Decision 1 in CA-GR CV 33566, promulgated July 15, 1996, which reversed the Regional
Trial Court (RTC) of Antipolo, Rizal; and the CA Resolution 2 of October 1, 1996, which
denied petitioners' Motion for Reconsideration. dctai
Petitioners Adoracion, Thelma Debbie, Gerry and Arnel (all surnamed Cruz) filed an action for
partition against the private respondents, Spouses Eliseo and Virginia Malolos. On January 28,
1991, the trial court rendered a Decision which disposed as follows: 3
"WHEREFORE, judgment is hereby rendered for the plaintiffs and
against the defendants-spouses
1. Ordering the partition of the seven parcels of land totalling 1,912
sq. m. among the four (4) plaintiffs and the defendants-spouses as
follows:
a. Adoracion E. Cruz (1/5) 382 sq. m.
b. Thelma Debbie Cruz (1/5) 382 sq. m.
c. Gerry E. Cruz (1/5) 382 sq. m.
d. Arnel E. Cruz (1/5) 382 sq. m.
e. Spouses Eliseo and
Virginia Malolos (1/5) 382 sq. m.
to whom Lot No. 1-C-2-B-2-B-4-L-1-A with an
area of 276 sq. m. covered by TCT No. 502603
and a portion of Lot No. 1-C-2-B-2-B-4-L-1-B
covered by TCT No. 502604 to the extent of 106
sq. m. adjoining TCT No. 502603.
2. Ordering the parties herein to execute a project or partition in
accordance [with] this decision indicating the partition of the seven
(7) parcels of land within fifteen (15) days upon receipt of this
judgment.
3. Ordering defendants-spouses to pay plaintiffs herein P5,000.00 as
and for attorney's fees;

4. Costs of suit."
On appeal, Respondent Court reversed the trial court thus: 4
"WHEREFORE, finding the appeal to be meritorious,
We REVERSE the
appealed
decision
and
render
judgment DISMISSING the complaint without prejudice however to
the claim of plaintiff-appellees for their shares in the proceeds of the
auction sale of the seven (7) parcels of land in question against
Nerissa Cruz Tamayo pursuant to the Memorandum Agreement.
Cost against the plaintiff-appellees."
As earlier stated, reconsideration was denied through the appellate court s challenged
Resolution: 5
"WHEREFORE, for lack of merit, the Motion for Reconsideration
is DENIED."
The Antecedent Facts
The facts of this case are undisputed. The assailed Decision relates them as follows: 6
"Delfin I. Cruz and Adoracion Cruz were spouses and their children
were Thelma, Nerissa, Arnel and Gerry Cruz. Upon the death of
Delfin I. Cruz, [his] surviving spouse and children executed on
August 22, 1977 a notarized Deed of Partial Partition (Exhibit 2) by
virtue of which each one of them was given a share of several parcels
of registered lands all situated in Taytay, Rizal.
The following day, August 23, 1977, the same mother and children
executed a Memorandum Agreement (Exhibit H) which provided:
'That the parties hereto are common co-owners proindiviso in equal shares of the following registered real
properties, all situated at Taytay, Rizal, Philippines, . . .
xxx xxx xxx
That sometime on August 22, 1977, a Deed of Partial
Partition was executed among us before Atty. Virgilio J.
Tamayo, Notary Public on and for the Province of Rizal,
per Doc. No. 1776; Page No. 14; of his Notarial Register
No. XLIX, Series of 1977;
xxx xxx xxx
That as a result of said partial partition, the properties
affected were actually partitioned and the respective shares
of each party, adjudicated to him/her;
That despite the execution of this Deed of Partial Partition
and the eventual disposal or sale of their respective shares,

559
the contracting parties herein covenanted and agreed
among themselves and by these presents do hereby bind
themselves to one another that they shall share alike and
receive equal shares from the proceeds of the sale of any
lot or lots allotted to and adjudicated in their individual
names by virtue of this deed of partial partition.'
That this Agreement shall continue to be valid and
enforceable among the contracting parties herein up to and
until the last lot covered by the Deed of [P]artial
[P]artition above adverted to shall have been disposed of
or sold and the proceeds thereof equally divided and their
respective shares received by each of them."
This Memorandum Agreement was registered and annotated in the
titles of the lands covered by the Deed of Partial Partition.
Subsequently, the same parties caused the consolidations and
subdivisions of the lands they respectively inherited from the late
Delfin I. Cruz Per Deed of Partial Partition. After that they registered
the Deed of Partial Partition and subdivision plans and titles were
issued in their names. In the case of Nerissa Cruz Tamayo, the
following titles were issued to her on her name: TCT No. 502603
(Exhibit A), TCT No. 502604 (Exhibit B), TCT No. 502605 (Exhibit
C), TCT No. 502606 (Exhibit D), TCT No. 502608 (Exhibit E), TCT
No. 502609 (Exhibit F), TCT No. 502610 (Exhibit G), hereinafter
called the lands in question. Naturally, the annotation pertaining to the
Memorandum Agreement was carried in each of said seven (7) titles
and annotated in each of them.
Meanwhile, the spouses Eliseo and Virginia Malolos filed Civil Case
No. 31231 against the spouses Nerissa Cruz-Tamayo and Nelson
Tamayo for a sum of money. The Court of First Instance of Rizal,
Branch XVI (Quezon City) rendered a decision on June 1, 1981 in
favor of Eliseo and Virginia condemning the spouses Nerissa and
Nelson Tamayo to pay them P126,529.00 with 12% interest per
annum from the filing of the complaint plus P5,000.00 attorney's fee.
After the finality of that decision, a writ of execution (Exhibit J) was
issued on November 20, 1981.
Enforcing said writ, the sheriff of the court levied upon the lands in
question. On June 29, 1983, these properties were sold in an
execution sale to the highest bidders, the spouses Eliseo and Virginia
Malolos. Accordingly, the sheriff executed a Certificate of Sale
(Exhibit K) over
'. . . all the rights, claims, interests, titles, shares, and
participations of defendant spouses Nerissa Tamayo and
Nelson Tamayo. . .'
Nerissa Cruz Tamayo failed to exercise her right of redemption within
the statutory period and so the final deed of sale was executed by the

sheriff conveying the lands in question to spouses Eliseo and Virginia

Malolos. The Malolos couple asked Nerissa Cruz Tamayo to give
them the owner's duplicate copy of the seven (7) titles of the lands in
question but she refused. The couple moved the court to compel her
to surrender said titles to the Register of Deeds of Rizal for
cancellation. This was granted on September 7, 1984. But Nerissa
was adamant. She did not comply with the Order of the court and so
the Malolos couple asked the court to declare said titles as null and
void.
At this point, Adoracion Cruz, Thelma Cruz, Gerry Cruz and Arnel
Cruz entered the picture by filing in said lower court a motion for
leave to intervene and oppose [the] Maloloses' motion. The Cruzes
alleged that they were co-owners of Nerissa Cruz Tamayo over the
lands in question.
On January 18, 1985, said court issued an Order modifying the Order
of September 7, 1984 by directing the surrender of the owner's
duplicate copies of the titles of the lands in question to the Register of
Deeds not for cancellation but for the annotation of the rights, and
interest acquired by the Maloloses over said lands.
On February 17, 1987, Adoracion, Thelma, Gerry and Arnel Cruz
filed Civil Case No. 961-A for Partition of Real Estate against
spouses Eliseo and Virginia Malolos over the lands in question.
As already stated in the first paragraph of this Decision, the court a
quo rendered a decision in favor of the plaintiffs from which the
defendants appealed to this court. . . ."
Ruling of the Court of Appeals
For Respondent Court, the central issue was: "Did the Memorandum of Agreement [MOA]
(Exhibit H) 7 revoke, cancel or supersede the Deed of Partial Partition [DPP] (Exhibit 2)?" 8 If
so, then petitioners and Spouses Tamayo were co-owners of the land in issue, and partition
should ensue upon motion of the former; if not, then the latter are its absolute owners and no
partition should be made.
Respondent Court resolved the above question in the negative for the following reasons:
First, the DPP was not materially and substantially incompatible with the MOA. The DPP
conferred absolute ownership of the parcels of land in issue on Nerissa Cruz Tamayo, while the
MOA merely created an obligation on her part to share with the petitioners the proceeds of the
sale of said properties.
Second, the fact that private respondents registered the DPP was inconsistent with the
allegation that they, intended to abandon it. Indeed, had they meant to abandon it, they would
have simply gathered the copies of said document and then torn or burned them.
Third, petitioners were estopped from claiming co-ownership over the disputed properties
because, as absolute owners, they either mortgaged or sold the other properties adjudicated to
them by virtue of the DPP.

560
Hence, this petition. 9

Assignment of Errors
In their Memorandum, 10 petitioners submit the following assignment of errors:
"A. Respondent Court erred in ruling that the Memorandum of
Agreement (Exhibit 'H') does not prevail over the Deed of
Partial Partition (Exhibit 2).
B. Respondent Court erred in ruling that petitioners can only claim
their right to the proceeds of [the] auction sale.
C. Respondent Court erred in ruling that petitioners are in estoppel by
deed.
D. Respondent Court erred in ruling that the registration of the deed
of partial partition precluded the petitioners from
abrogating it.
E. Respondent Court erred when it completely ignored the finality of
the order of the Regional Trial Court of Quezon City,
Branch LXXXVI as embodied in the decision of the
Regional Trial Court of Antipolo, Rizal, Branch 71."
In fine, the resolution of this petition hinges on the following issues: (1) whether the DPP was
cancelled or novated by the MOA; (2) whether the MOA established, between petitioners and
the judgment debtor, a co-ownership of the lots in question; (3) whether petitioners are barred
by estoppel from claiming co-ownership of the seven parcels of land and (4) whether res
judicata has set in.
The Court's Ruling
The petition is bereft of merit. It fails to demonstrate any reversible error on the part of the
Court of Appeals.
First issue: No Novation or Cancellation
In their Memorandum, petitioners insist that the MOA categorically and unmistakably named
and covenanted them as co-owners of the parcels in issue and novated their earlier agreement,
the Deed of Partial Partition.
Petitioners claim that the MOA clearly manifested their intention to create a co-ownership.
This is particularly evident in Exhibit 1-B, which provides:
"That despite the execution of this Deed of Partial Partition and
eventual disposal or sale of their respective shares, the contracting
parties herein covenanted and agreed among themselves and by these
presents do hereby bind themselves to one another that they shall
share and receive equal shares from the proceeds of the sale of any lot
or lots allotted to and adjudicated in their individual names by virtue
of this deed of partial partition."

The Court disagrees. The going provision in the MOA does not novate, much less cancel, the
earlier DPP. Novation, one of the modes of extinguishing an obligation, requires the
concurrence of the following: (1) there is a previous valid obligation; (2) the parties concerned
agree to a new contract; (3) the old contract is extinguished; and (4) there is a valid new
contract. 11 Novation may be express or implied. Article 1292 of the Code provides: "In order
that an obligation may be extinguished by another which substitutes the same, it is imperative
that it be so declared in equivocal terms [express novation], 12 or that the old and the new
obligations be on every point incompatible with each other [implied novation]."
Tested against the foregoing standards, petitioners' stance is shattered to pieces. The stipulation
that the petitioners and Spouses Tamayo were co-owners was merely the introductory part of
the MOA, and it reads: 13
"That the parties are common co-owners pro-indiviso in equal shares
of the following registered real properties, all situated at Taytay,
Rizal, Philippines. . . ."
xxx xxx xxx
That sometime on August 22, 1977, a Deed of Partial Partition was
executed among us before Atty. Virgilio J. Tamayo, Notary Public in
and for the Province of Rizal, per. Doc. No. 1796; Page No. 14; of his
Notarial Register No. XLIX, Series of 1977;" cdtai
Following the above-quoted stipulation is a statement that the subject parcels of land had
in fact been partitioned, but that the former co-owner intended to share with petitioners
the proceeds of any sale of said land, 14 viz.:
"That [as] a result of said partial partition, the properties affected
were actually partitioned and the respective shares of each party,
adjudicated to him/her;
That despite the execution of this Deed of Partial Partition and the
eventual disposal or sale of their respective shares, the contracting
parties herein covenanted and agreed among themselves [and] to one
another that they shall do [sic] hereby bind themselves to one another
that they shall share alike and receive equal shares from the proceeds
of the sale of any lot or lots allotted to and adjudicated in their
individual names by virtue of this deed of partial partition;
That this Agreement shall continue to be valid and enforceable among
the contracting parties herein up to and until the last lot covered by
the deed of partial partition above adverted to shall have been
disposed of or sold and the proceeds thereof equally divided and their
respective shares received by each of them.
xxx xxx xxx."
The MOA falls short of producing a novation, because it does not express a clear intent to
dissolve the old obligation as a consideration for the emergence of the new one. 15 Likewise
petitioners fail to show that the DPP and the MOA are materially and substantially
incompatible with each other. Petitioners admit that, under the MOA, they and the Tamayo

561
spouses agreed to equally share in the proceeds of the sale of the lots. 16Indeed, the DPP
granted title to the lots in question to the co-owner to whom they were assigned, and the MOA
created an obligation on the part of such co-owner to share with the others the proceeds of the
sale of such parcels. There is no incompatibility between these two contracts.
Verily, the MOA cannot be construed as a repudiation of the earlier DPP. Both documents can
exist together and must be so interpreted as to give life to both. Respondent Court aptly
explained: 17
"The Deed of Partial Partition conferred upon Nerissa Cruz Tamayo
absolute ownership over the lands in question. The Memorandum of
Agreement merely created an obligation on the part of absolute owner
Nerissa Cruz Tamayo to share [with] the appellees with [sic] the
proceeds of the sale of said properties.
The obligation of the owner of a piece of land to share [with]
somebody with [sic] its fruits or the proceeds of its sale does not
necessarily impair his dominion over the property much less make the
beneficiary his co-owner thereof."
All in all, the basic principle underlying this ruling is simple: when the text of a contract is
explicit and leaves no doubt as to its intention, the court may not read into it any other
intention that would contradict its plain import. 18 The hornbook rule on interpretation of
contracts gives primacy to the intention of the parties, which is the law among them.
Ultimately, their intention is to be deciphered not from the unilateral post factoassertions of one
of the parties, but from the language used in the contract. And when the terms of the
agreement, as expressed in such language, are clear, they are to be understood literally, just as
they appear on the face of the contract.
Indeed, the legal effects of a contract are determined by extracting the intention of the parties
from the language they used and from their contemporaneous and subsequent acts. 19 This
principle gains more force when third parties are concerned. To require such persons to go
beyond what is clearly written in the document is unfair and unjust. They cannot possibly delve
into the contracting parties' minds and suspect that something is amiss, when the language of
the instrument appears clear and unequivocal.
Second Issue: No Co-ownership in the MOA
Petitioners contend that they converted their separate and individual ownership over the lands
in dispute into a co-ownership by their execution of the MOA and the annotation thereof on the
separate titles.
The Court is not convinced. The very provisions of the MOA belie the existence of a coownership. First, it retains the partition of the properties, which petitioners supposedly placed
in co-ownership; and, second, it vests in the registered owner the power to dispose of the land
adjudicated to him or her under the DPP. These are antithetical to the petitioners' contention. In
a co-ownership, an undivided thing or right belongs to two or more persons. 20 Put differently,
several persons hold common dominion over a spiritual (or ideal) part of thing, which is not
physically divided. 21 In the present case, however, the parcels of land in the MOA have all
been partitioned and titled under separate and individual names. More important, the MOA
stipulated that the registered owner could sell the land without the consent of the other parties

to the MOA. Jus disponendi is an attribute of ownership, and only the owner can dispose of a
property. 22
Contrary to petitioner's claim, the annotation of the MOA in the certificate of title did not
engender any co-ownership. Well-settled is the doctrine that registration merely confirms, but
does not confer, title. 23 It does not give the holder any better title than what he actually has.
As earlier observed, the MOA did not make petitioners co-owners of the disputed parcels of
land. Hence, the annotation of this document in the separate certificates of title did not grant
them a greater right over the property.
Third Issue: Estoppel by Deed
Respondent Court found that several deeds of sale and real estate mortgage, which petitioners
executed when they sold or mortgage some parcels adjudicated to them under the DPP,
contained the statement that the vendor/mortgagor was the absolute owner of the parcel of
residential land and that he or she represented it as free from liens and encumbrances. On the
basis of these pieces of evidence, Respondent Court held that petitioners were estopped from
claiming that there was co-ownership over the disputed parcels of land which were also
covered by the DPP. Petitioners contend that Respondent Court, in so ruling, violated the
res inter alios acta rule.

Petitioners' contention is untenable. Res inter alios acta, as a general rule, prohibits the
admission of evidence that tends to show that what a person has done at one time is probative
of the contention that he has done a similar act at another time. 24 Evidence of similar acts or
occurrences compels the defendant to meet allegations that are not mentioned in the complaint,
confuses him in his defense, raises a variety of irrelevant issues, and diverts the attention of the
court from the issues immediately before it. Hence, this evidentiary rule guards against the
practical inconvenience of trying collateral issues and protracting the trial and prevents surprise
or other mischief prejudicial to litigants. 25
The rule, however, is not without exception. While inadmissible in general, collateral facts may
be received as evidence under exceptional circumstances, as when there is a rational similarity
or resemblance between the conditions giving rise to the fact offered and the circumstances
surrounding the issue or fact to be proved. 26 Evidence of similar acts may frequently become
relevant, especially in actions based on fraud and deceit, because it sheds light on the state of
mind or knowledge of a person; it provides insight into such person's motive or intent; it
uncovers a scheme, design or plan; or it reveals a mistake. 27
In this case, petitioners argue that transactions relating to the other parcels of land they entered
into, in the concept of absolute owners, are inadmissible as evidence to show that the parcels in
issue are not co-owned. The Court is not persuaded. Evidence of such transactions falls under
the exception to the rule on res inter alios acta. Such evidence is admissible because it is
relevant to an issue in the case and corroborative of evidence already received. 28 The
relevancy of such transactions is readily apparent. The nature of ownership of said property
should be the same as that of the lots in question since they are all subject to the MOA.. If the
parcels of land were held and disposed by petitioners in fee simple, in the concept of absolute
owners, then the lots in question should similarly be treated as absolutely owned in fee simple
by the Tamayo spouses. Unmistakably, the evidence in dispute manifests petitioners' common
purpose and design to treat all the parcels of land covered by the DPP as absolutely owned and
not subject to co-ownership. 29

562
Under the principle of estoppel, petitioners are barred from claiming co-ownership of the lands
in issue. In estoppel, a person, who by his deed or conduct has induced another to act in a
particular manner, is barred from adopting an inconsistent position, attitude or course of
conduct that thereby causes loss or injury to another. 30 It further bars him from denying the
truth of a fact which has, in the contemplation of law, become settled by the acts and
proceedings of judicial or legislative officers or by the act of the party himself, either by
conventional writing or by representations, express or implied or in pais. 31
In their transactions with others, petitioners have declared that the other lands covered by the
same MOA are absolutely owned, without indicating the existence of a co-ownership over such
properties. Thus, they are estopped from claiming otherwise because, by the very own acts and
representations as evidenced by the deeds of mortgage and of sale, they have denied such coownership. 32
Fourth Issue: No Res Judicata On Co-ownership
Petitioners argue that the Order (Exhibit J) 33 dated January 18, 1985, issued by the RTC of
Quezon City, Branch 86, which had long become final and executory, confirmed their coownership. Thus, they claim that Respondent Court's reversal of the ruling of the RTC of
Antipolo, Rizal, is a violation of the rule on res judicata.
This contention is equally untenable. The elements of res judicata are:(1) the former judgment
was final; (2) the court which rendered it had jurisdiction over the subject matter and the
parties; (3) the judgment was on the merits; and (4) the parties, subject matters and causes of
action in the first and second actions are identical. 34
The RTC of Quezon City had no jurisdiction to decide on the merits of the present case or to
entertain questions regarding the existence of co-ownership over the parcels in dispute, because
the suit pending before it was only for the collection of a sum of money. Its disquisition on coownership was merely for the levy and the execution of the properties of the Tamayo spouses,
in satisfaction of their judgment debt to the private respondents.
Perhaps more glaring is the lack of identity between the two actions. The first action before the
RTC of Quezon City was for the collection of money, while the second before the RTC of
Antipolo, Rizal, was for the partition. There being no concurrence of the elements of res
judicata in this case, the Court finds no error in Respondent Court's ruling. No further
discussion is needed to show the glaring difference between the two controversies.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED. Cost
against petitioners. LLpr
SO ORDERED.
Davide Jr., Bellosillo, Vitug and Quisumbing, JJ ., concur.
||| (Cruz v. Court of Appeals, G.R. No. 126713, [July 27, 1998], 354 PHIL 1036-1056)

563

THIRD DIVISION

by the creation of a new obligation that takes the place of the former; it is merely modificatory
when the old obligation subsists to the extent it remains compatible with the amendatory
agreement.

[G.R. No. 126712. April 14, 1999.]

LEONIDA C. QUINTO, petitioner, vs.
PHILIPPINES, respondent.

PEOPLE

OF THE

Torres Torres and Associates for petitioner.

The Solicitor General for respondent.

SYNOPSIS
Petitioner Quinto took some jewelries from private complainant Amelia Cariaga for selling
purposes. After 6 months, however, Quinto failed to return the jewelries or pay the value
thereof. Hence, a case of estafa was filed against Quinto as a result of which she was
convicted, affirmed by the Court of Appeals. cdasia
Quinto admitted that she took some jewelries from Cariaga but she sold the same to Mrs.
Camacho and Mrs. Ramos. Unfortunately however, both were unable to pay the whole amount
and promised to pay the balance in installment to Cariaga. Petitioner thus alleged that the
agreement between her and Cariaga was effectively novated when the latter consented to
receive payment on installments directly from Mrs. Camacho and Mrs. Ramos.
The changes alluded to by petitioner consists only in the manner of payment. There was really
no substitution of debtors since Cariaga merely acquiesced to the payment but did not give her
consent to enter into a new contract. Thus, Cariaga's acceptance of Ramos and Camacho's
payment
on
installment
basis
cannot
be
construed
as
a
case
of
either expromision or delegacion sufficient to justify the attendance of extinctive novation.
Further the defense of novation cannot avoid the incipient criminal liability for Estafa to which
Quinto was found guilty of. It is a public offense which must be prosecuted and punished by
the State on its own. And pursuant to Art. 315, 1st paragraph of the Revised Penal Code, as
amended byPresidential Decree 818, the proper penalty here is an indeterminate penalty of
from 2 years, 8 months and 1 day prision correccional to 7 years and 1 day of prision mayor.

SYLLABUS
1. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF
OBLIGATIONS; NOVATION; KINDS; ELUCIDATED. Novation, in its broad concept,
may either be extinctive or modificatory. It is extinctive when an old obligation is terminated

2. ID.; ID.; ID.; ID.; ID.; EXTINCTIVE NOVATION; ELUCIDATED. An extinctive

novation results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the creditor
(subjective or personal). Under this mode, novation would have dual functions one to
extinguish an existing obligation, the other to substitute a new one in its place requiring a
conflux of four essential requisites, (1) a previous valid obligation; (2) an agreement of all
parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the
birth of a valid new obligation.
3. ID.; ID.; ID.; ID.; HOW EFFECTED; EXPRESSLY OR IMPLIEDLY. Novation is never
presumed, and the animus novandi, whether totally or partially, must appear by express
agreement of the parties, or by their acts that are too clear and unequivocal to be mistaken. The
extinguishment of the old obligation by the new one is a necessary element of novation which
may be effected either expressly or impliedly. The term "expressly" means that the contracting
parties incontrovertibly disclose that their object in executing the new contract is to extinguish
the old one. Upon the other hand, no specific form is required for an implied novation, and all
that is prescribed by law would be an incompatibility between the two contracts. While there is
really no hard and fast rule to determine what might constitute to be a sufficient change that
can bring about novation, the touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations.
4. ID.; ID.; ID.; ID.; ID.; IMPLIEDLY; ELUCIDATED. There are two ways which could
indicate, in fine, the presence of novation and thereby produce the effect of extinguishing an
obligation by another which substitutes the same. The first is when novation has been explicitly
stated and declared in unequivocal terms. The second is when the old and the new obligations
are incompatible on every point. The test of incompatibility is whether or not the two
obligations can stand together, each one having its independent existence. If they cannot, they
are incompatible and the latter obligation novates the first. Corollarily, changes that
breed incompatibility must be essential in nature and not merely accidental. The
incompatibility must take place in any of the essential elements of the obligation, such as its
object cause or principal conditions thereof; otherwise the change would be merely
modificatory in nature and insufficient to extinguish the original obligation.
5. ID.; ID.; ID.; ID.; ID.; ID.; NOT IN CASE AT BAR. The changes alluded to by petitioner
consists only in the manner of payment. There was really no substitution of debtors since
private complainant merely acquiesced to the payment but did not give her consent to enter
into a new contract.
6. ID.; ID.; ID.; ID.; SUBSTITUTING THE PERSON OF THE DEBTOR;
FORMS; EXPROMISION AND DELEGACION; ELUCIDATED. There are two forms of
novation by substituting the person of the debtor, depending on whose initiative it comes from,
to wit: expromision and delegacion. In the former, the initiative for the change does not come
from the debtor and may even be made without his knowledge. Since a third person would
substitute for the original debtor and assume the obligation, his consent and that of the creditor
would be required. In the latter, the debtor offers, and the creditor accepts, a third person who

564
consents to the substitution and assumes the obligation, thereby releasing the original debtor
from the obligation, here, the intervention and the consent of all parties thereto would perforce
be necessary. In either of these two modes of substitution, the consent of the creditor, such as
can be seen, is an indispensable requirement.
7. ID.; ID.; ID.; ID.; ID.; ID.; ID.; NOT PRESENT IN CASE AT BAR. It is thus easy to see
why Cariaga's acceptance of Ramos and Camacho's payment on installment basis cannot be
construed as a case of either expromision or delegacion sufficient to justify the attendance of
extinctive novation. Not too uncommon is when a stranger to a contract agrees to assume an
obligation; and while this may have the effect of adding to the number of persons liable, it does
not necessarily imply the extinguishment of the liability of the first debtor. Neither would the
fact alone that the creditor receives guaranty or accepts payments from a third person who has
agreed to assume the obligation, constitute an extinctive novation absent an agreement that the
first debtor shall be released from responsibility.
8. CRIMINAL LAW; ESTAFA; ELUCIDATED; APPLICATION IN CASE AT BAR.
Article 315 of the Revised Penal Code defines estafa and penalizes any person who shall
defraud another by "misappropriating or converting, to the prejudice of another, money, goods,
or any other personal property received by the offender in trust or on commission, or for
administration, or under any other obligation involving the duty to make delivery of or to
return the same, even though such obligation be totally or partially guaranteed by a bond; or by
denying having received such money, goods, or other property." It is axiomatic that the
gravamen of the offense is the appropriation or conversion of money or property received to
the prejudice of the owner. The terms "convert" and "misappropriate" have been held to
connote "an act of using or disposing of another's property as if it were one's own or devoting it
to a purpose or use different from that agreed upon." The phrase, "to misappropriate to one's
own use" has been said to include "not only conversion to one's personal advantage, but also
every attempt to dispose of the property of another without right." Verily, the sale of the pieces
of jewelry on installments in contravention of the explicit terms of the authority granted to her
is deemed to be one of conversion. Thus, neither the "theory of delay in the fulfillment of
commission" under that of novation posed by petitioner, can avoid the incipient criminal
liability. The criminal liability for estafa already committed is then not affected by the
subsequent novation of contract, for it is a public offense which must be prosecuted and
punished by the State in its own conation.
9. REMEDIAL LAW; EVIDENCE; FINDINGS OF APPELLATE COURT, RESPECTED.
This Court fails to see any reversible error, let alone any grave abuse of discretion, in the
appreciation of the evidence by the Court of Appeals which, in fact, hews with those of the trial
court. Indeed, under the circumstances, this Court must be deemed bound by the factual
findings of those courts.
10. CRIMINAL LAW; ESTAFA; PROPER PENALTY. Article 315, 1st paragraph, of the
Revised Penal Code, as amended by Presidential Decree No. 818, provides that the penalty
of prision correccional in its maximum period to prision mayor in its minimum period, if the
amount of the fraud is over 12,000 but does not exceed 22,000 pesos, and if such amount
exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum
period, adding one year for each additional 10,000 pesos; but the penalty which may be
imposed shall not exceed twenty years. In such case, and in connection with the accessory
penalties which may be imposed and for the purpose of the other provisions of this Code, the
penalty shall be termed prision mayor or reclusion temporal, as the case may be. SAaTHc

DECISION

VITUG, J p:
Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules
of Court is the decision of the Court of Appeals, promulgated on 27 September 1996,
in People of the Philippines vs. Leonida Quinto y Calayan, docketed CA-G.R. CR No.
16567, which has affirmed the decision of Branch 157 of the Regional Trial Court (RTC),
National Capital Judicial Region, Branch 157, Pasig City, finding Leonida Quinto y
Calayan guilty beyond reasonable doubt of the crime of Estafa.
Leonida Quinto y Calayan, herein petitioner, was indicted for the crime of
estafa under Article 315, paragraph 1(b), of the Revised Penal Code, in an information
which read:
"That on or about the 23rd day of March 1977, in the
Municipality of Makati, Metro Manila, Philippines and within the
jurisdiction of this Honorable Court, the above-named accused,
received in trust from one Aurelia Cariaga the following pieces of
jewelry, to wit:
One (1) set of marques with briliantitos
valued at P17,500.00
One (1) solo ring (2 karats & 30 points)
valued at P16,000.00
One

(1)
diamond
ring
valued at P2,500.00

(rosetas)

with a total value of P36,000.00 for the purpose of selling the same
on commission basis and with the express obligation on the part of
the accused to turn over the proceeds of sale thereof, or to return the
said jewelries (sic), if not sold, five (5) days after receipt thereof, but
the accused once in possession of the jewelries (sic), far from
complying with her obligation, with intent of gain, grave abuse of
confidence and to defraud said Aurelia Cariaga, did then and there
wilfully, unlawfully and feloniously misappropriate, misapply and
convert to her own personal use and benefit the said jewelries (sic)
and/or the proceeds of sale or to return the pieces of jewelry, to the
damage and prejudice of the said Aurelia Cariaga in the
aforementioned amount of P36,000.00.
"Contrary to law." 1
Upon her arraignment on 28 March 1978, petitioner Quinto pleaded not
guilty; trial on the merits thereupon ensued. cdlex

565
According to the prosecution, on or about 23 March 1977, Leonida went to
see Aurelia Cariaga (private complainant) at the latter's residence in Makati. Leonida
asked Aurelia to allow her have some pieces of jewelry that she could show to
prospective buyers. Aurelia acceded and handed over to Leonida one (1) set of marques
with briliantitos worth P17,500.00, one (1) solo ring of 2.30 karats worth P16,000.00 and
one (1) rosetas ring worth P2,500.00. Leonida signed a receipt (Exhibit "A") therefor,
thus:
"RECEIPT
Pinatutunayan ko na tinanggap ko kay Gng. Aurelia B.
Cariaga (ang) mga alahas na nakatala sa ibaba, upang aking ipagbili
sa pamamagitan ng BIGAY PALA o Commission at Kaliwaan
lamang. Ako'y hindi pinahihintulutan (na) ipagbili ang mga ito ng
Pautang. Pinananagutan ko na ang mga alahas na ito ay hindi ko
ipagkakaloob o ipagkakatiwala sa kanino pa man upang ilagak o
maipagbili nila, at ang mga ito ay ako ang magbibili sa ilalim ng
aking pangangasiwa at pananagutan sa halagang nakatala sa ibaba. At
aking isasauli ang mga hindi na maipagbili sa loob ng 5 days (sic)
araw mula sa petsa nito o sa kahilingan, na nasa mabuti at malinis na
kalagayan katulad ng tanggapin ko sa petsang ito.
MGA URI NG ALAHAS
1 set marques with titos 17,5000.
1 solo 2 karats & 30 points 16,000.
1 ring Rosetas brill 2,500.
Makati, March 23, 1977
(Sgd.)" 2
When the 5-day period given to her had lapsed, Leonida requested for and was granted
additional time within which to vend the items. Leonida failed to conclude any sale and,
about six (6) months later, Aurelia asked that the pieces of jewelry be returned. She sent
to Leonida a demand letter which the latter ignored. The inexplicable delay of Leonida in
returning the items spurred the filing of the case for estafa against her. llcd
The defense proffered differently. In its version, the defense sought to prove
that Leonida was engaged in the purchase and sale of jewelry. She was used to buying
pieces of jewelry from a certain Mrs. Antonia Ilagan who later introduced her (Leonida)
to Aurelia. Sometime in 1975, the two, Aurelia and Leonida, started to transact business
in pieces of jewelry among which included a solo ring worth P40,000.00 which was sold
to Mrs. Camacho who paid P20,000.00 in check and the balance of P20,000.00 in
installments later paid directly to Aurelia. The last transaction Leonida had with Mrs.
Camacho involved a "marques" worth P16,000.00 and a ring valued at P4,000.00. Mrs.
Camacho was not able to pay the due amount in full and left a balance of P13,000.00.
Leonida brought Mrs. Camacho to Aurelia who agreed to allow Mrs. Camacho to pay the
balance in installments. Leonida was also able to sell for Aurelia a 2-karat diamond ring
worth P17,000.00 to Mrs. Concordia Ramos who, unfortunately, was unable to pay the
whole amount. Leonida brought Mrs. Ramos to Aurelia and they talked about the terms

of payment. As first payment, Mrs. Ramos gave Leonida a ring valued at P3,000.00. The
next payment made by her was P5,000.00. Leonida herself then paid P2,000.00.
The RTC, in its 25th January 1993 decision, found Leonida guilty beyond
reasonable doubt of the crime of estafa and sentenced her to suffer the penalty of
imprisonment of seven (7) years and one (1) day of prision mayor as minimum to nine
(9) years of prision mayor as maximum and to indemnify private complainant in the
amount of P36,000.00.
Leonida interposed an appeal to the Court of Appeals which affirmed, in its
27th September 1996 decision, the RTC's assailed judgment.
The instant petition before this Court would have it that the agreement
between petitioner and private complainant was effectively novated when the latter
consented to receive payment on installments directly from Mrs. Camacho and Mrs.
Ramos.
The petition is bereft of merit. cdll
Novation, in its broad concept, may either be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new obligation that
takes the place of the former; it is merely modificatory when the old obligation subsists to
the extent it remains compatible with the amendatory agreement. An extinctive novation
results either by changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the rights of the
creditor (subjective or personal). 3 Under this mode, novation would have dual functions
one to extinguish an existing obligation, the other to substitute a new one in its
place 4 requiring a conflux of four essential requisites: (1) a previous valid obligation;
(2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the
old obligation; and (4) the birth of a valid new obligation. 5
Novation is never presumed, 6 and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts that are too
clear and unequivocal to be mistaken. 7
The extinguishment of the old obligation by the new one is a necessary
element of novation which may be effected either expressly or impliedly. 8 The term
"expressly" means that the contracting parties incontrovertibly disclose that their object
in executing the new contract is to extinguish the old one. 9 Upon the other hand, no
specific form is required for an implied novation, 10 and all that is prescribed by law
would be an incompatibility between the two contracts. While there is really no hard and
fast rule to determine what might constitute to be a sufficient change that can bring about
novation, the touchstone for contrariety, however, would be an irreconcilable
incompatibility between the old and the new obligations. 11
There are two ways which could indicate, in fine, the presence of novation
and thereby produce the effect of extinguishing an obligation by another which
substitutes the same. The first is when novation has been explicitly stated and declared in
unequivocal terms. The second is when the old and the new obligations are incompatible
on every point. The test of incompatibility is whether or not the two obligations can stand
together, each one having its independent existence. If they cannot, they are incompatible
and the latter obligation novates the first. 12Corollarily, changes that breed
incompatibility must be essential in nature and not merely accidental. The incompatibility
must take place in any of the essential elements of the obligation, such as its object, cause

566
or principal conditions thereof; otherwise, the change would be merely modificatory in
nature and insufficient to extinguish the original obligation. LLphil

an extinctive novation absent an agreement that the first debtor shall be released
from responsibility. 18

The changes alluded to by petitioner consists only in the manner of

payment. There was really no substitution of debtors since private complainant merely
acquiesced to the payment but did not give her consent 13 to enter into a new contract.
The appellate court observed:

Petitioner's reliance on Candida Mariano vs. People 19 is misplaced. The

factual milieu in Mariano would indicate a clear intention on the part of the parties to
release the accused from her responsibility as an agent and for her to instead assume the
obligation of a guarantor. Unfortunately for petitioner in the case at bar, the factual
findings of both the trial court and the appellate court prove just the opposite which is
that there has never been any animus novandi between or among the parties.

"Appellant, however, insists that their agreement was

novated when complainant agreed to be paid directly by the buyers
and on installment basis. She adds that her liability is merely civil in
nature.
"We are unimpressed.
"It is to be remembered that one of the buyers, Concordia
Ramos, was not presented to testify on the alleged aforesaid manner
of payment.
"The acceptance by complainant of partial payment
tendered by the buyer, Leonor Camacho, does not evince the intention
of the complainant to have their agreement novated. It was simply
necessitated by the fact that, at that time, Camacho had substantial
accounts payable to complainant, and because of the fact that
appellant made herself scarce to complainant. (TSN, April 15, 1981,
31-32) Thus, to obviate the situation where complainant would end up
with nothing, she was forced to receive the tender of Camacho.
Moreover, it is to be noted that the aforesaid payment was for the
purchase, not of the jewelry subject of this case, but of some other
jewelry subject of a previous transaction. (Ibid. June 8, 1981, 1011)" 14

Article 315 of the Revised Penal Code defines estafa and penalizes any person
who shall defraud another by "misappropriating or converting, to the prejudice of
another, money, goods, or any other personal property received by the offender in trust or
on commission, or for administration, or under any other obligation involving the duty to
make delivery of or to return the same, even though such obligation be totally or partially
guaranteed by a bond; or by denying having received such money, goods, or other
property." It is axiomatic that the gravamen of the offense is the appropriation or
conversion of money or property received to the prejudice of the owner. The terms
"convert" and "misappropriate" have been held to connote "an act of using or disposing
of another's property as if it were one's own or devoting it to a purpose or use different
from that agreed upon." The phrase, "to misappropriate to one's own use" has been said to
include "not only conversion to one's personal advantage, but also every attempt to
dispose of the property of another without right." 20 Verily, the sale of the pieces of
jewelry on installments in contravention of the explicit terms of the authority granted to
her in Exhibit "A" (supra) is deemed to be one of conversion. Thus, neither the theory of
"delay in the fulfillment of commission" nor that of novation posed by petitioner, can
avoid the incipient criminal liability. In People vs. Nery, 21 this Court held: LLjur
"It may be observed in this regard that novation is not one
of the means recognized by the Penal Code whereby criminal liability
can be extinguished; hence, the role of novation may only be either to
prevent the rise of criminal liability or to cast doubt on the true nature
of the original basic transaction, whether or not it was such that its
breach would not give rise to penal responsibility . . ."

There are two forms of novation by substituting the person of the debtor,
depending on whose initiative it comes from, to wit:expromision and delegacion. In the
former, the initiative for the change does not come from the debtor and may even be
made without his knowledge. Since a third person would substitute for the original debtor
and assume the obligation, his consent and that of the creditor would be required. In the
latter, the debtor offers, and the creditor accepts, a third person who consents to the
substitution and assumes the obligation, thereby releasing the original debtor from the
obligation; here, the intervention and the consent of all parties thereto would perforce be
necessary. 15 In either of these two modes of substitution, the consent of the creditor,
such as can be seen, is an indispensable requirement.16 cda

The criminal liability for estafa already committed is then not affected by the subsequent
novation of contract, for it is a public offense which must be prosecuted and punished by
the State in its own conation. 22

It is thus easy to see why Cariaga's acceptance of Ramos and Camacho's

payment on installment basis cannot be construed as a case of
either expromision or delegacion sufficient to justify the attendance of extinctive
novation. Not too uncommon is when a stranger to a contract agrees to assume an
obligation; and while this may have the effect of adding to the number of persons liable,
it does not necessarily imply the extinguishment of the liability of the first
debtor. 17 Neither would the fact alone that the creditor receives guaranty or accepts
payments from a third person who has agreed to assume the obligation, constitute

Article 315, 1st paragraph, of the Revised Penal Code, as amended

by Presidential Decree No. 818, provides that the penalty of " prision correccional in its
maximum period to prision mayor in its minimum period, if the amount of the fraud is
over 12,000 but does not exceed 22,000 pesos, and if such amount exceeds the latter sum,
the penalty provided in this paragraph shall be imposed in its maximum period, adding
one year for each additional 10,000 pesos; but the total penalty which may be imposed
shall not exceed twenty years. In such case, and in connection with the accessory
penalties which may be imposed and for the purpose of the other provisions of this Code,
the penalty shall be termed prision mayor or reclusion temporal, as the case may be."

Finally, this Court fails to see any reversible error, let alone any grave abuse
of discretion, in the appreciation of the evidence by the Court of Appeals which, in fact,
hews with those of the trial court. Indeed, under the circumstances, this Court must be
deemed bound by the factual findings of those courts.

567
In the leading case of People vs. Gabres 23 this Court ruled:
"Under the Indeterminate Sentence Law, the maximum
term of the penalty shall be 'that which, in view of the attending
circumstances, could be properly imposed' under the Revised Penal
Code, and the minimum shall be 'within the range of the penalty next
lower to that prescribed' for the offense. The penalty next lower
should be based on the penalty prescribed by the Code for the offense,
without first considering any modifying circumstance attendant to the
commission of the crime. The determination of the minimum penalty
is left by law to the sound discretion of the court and it can be
anywhere within the range of the penalty next lower without any
reference to the periods into which it might be subdivided. The
modifying circumstances are considered only in the imposition of the
maximum term of the indeterminate sentence. cdasia
"The fact that the amounts involved in the instant case
exceed P22,000.00 should not be considered in the initial
determination of the indeterminate penalty; instead, the matter should
be so taken as analogous to modifying circumstances in the
imposition of the maximum term of the full indeterminate sentence.
This interpretation of the law accords with the rule that penal laws
should be construed in favor of the accused. Since the penalty

prescribed by law for the estafa charge against accused-appellant

is prision correccional maximum to prision mayor minimum, the
penalty next lower would then be prision correccional minimum to
medium. Thus, the minimum term of the indeterminate sentence
should be anywhere within six (6) months and one (1) day to four (4)
years and two (2) months while the maximum term of the
indeterminate sentence should at least be six (6) years and one (1) day
because the amounts involved exceeded P22,000.00, plus an
additional one (1) year for each additional P10,000.00." 24
The penalty imposed by the trial court, affirmed by the appellate court, should
accordingly be modified.
WHEREFORE, the assailed decision of the Court of Appeals is AFFIRMED
except that the imprisonment term is MODIFIED by now sentencing petitioner to an
indeterminate penalty of from two (2) years, eight (8) months and one (1) day of prision
correccional to seven (7) years and one (1) day of prision mayor. The civil liability of
appellant for P36,000.00 in favor of private complainant is maintained. Costs against
petitioner. LLpr
SO ORDERED.
Romero, Panganiban, Purisima and Gonzaga-Reyes, JJ., concur.
||| (Quinto v. People, G.R. No. 126712, [April 14, 1999], 365 PHIL 259-272)